CommScope Holding Company Inc (COMM) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CommScope Third Quarter 2004 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time if you have a question please press the "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded Monday, November 1, 2004.

I would now like to turn the conference over to Mr. Phil Armstrong, Vice President of Investor Relations. Please go ahead sir.

Thank you. Good afternoon and thank you for joining us on this call. Frank Drendel, CommScope's Chairman and Chief Executive Officer, Brian Garrett, CommScope's President and Chief Operating Officer and Jearld Leonhardt, CommScope's Chief Financial Officer, join me on the call.

During this conference call, we may make forward-looking statements regarding our financial position, plans and outlook that are based on information currently available to management, management's beliefs and a number of assumptions concerning future events. Forward-looking statements are not a guarantee of performance, and are subject to a number of uncertainties and other factors, which could cause the actual results to differ materially from those currently expected. For more detailed description of factors that can cause such a difference, please see the press release we issued today and CommScope's filings with the Securities and Exchange Commission particularly the Exhibit 99.1 the CommScope's periodic report. In providing forward-looking statements, the Company does not intend and is not undertaking any duty or obligation to update these statements as a result of new information, future events and otherwise. Also please note that the pro forma sales information for the third quarter of 2003 is based on the historical results of the Connectivity Solutions business that is operated and publicly-reported by Avaya Inc and therefore may not be indicative of the actual results of the Connectivity Solutions segment as operated by CommScope. After Jearld Leonhardt review this third quarter results, we will open it up for questions. Jearld?

Thank you, Phil. Today CommScope announced third quarter results for the period ended September 30, 2004, which includes results of Connectivity Solutions business quite earlier this year and the reported sales of $309 million and net income of $15 million or 27 cents per diluted share for the third quarter.

We reported sales in two segments -- cable segment, which is CommScope's legacy business and the Connectivity Solutions segment, which is our recent acquisition. In the press release we issued today we included a sales summary that provides actual and pro forma sales by segment and by major product category. Over -- year-over-year sales discussion that product will be made on a proforma basis; for the third quarter sales rose approximately 7% year-over-year to $309 million and more positively affected by price increases for selective products. CommScope's cable segment sales rose approximately 11% year-over-year to $165 million, an increase in all major product categories. We expected lower broadband sales in the second half of 2004 compared to the first half of '04 because we anticipated lower sales to our largest domestic broadband customer and lower sales in fiber optic cable. While broadband video sales decreased about 2% sequentially they were up 6% year-over-year primarily due to higher international sales as well as unexpected sales from customer construction related to hurricane damage.

The Connectivity Solutions segment sales rose approximately 3% year-over-year and 1% sequentially to $152 million due to strong sales of SYSTIMAX Solutions products. SYSTIMAX Solutions sales increased 10% sequentially and 15% year-over-year. Total international sale is relatively stable at $94 million and represented about 30% of total Company sales. We are pleased with our continued progress in the enterprise market, which we serve with our industry leading SYSTIMAX, new product brands. Overall, sales to the Enterprise market rose 17% year-over-year in the third quarter, which we believe resulted from improved project business and the positive impact of previously announced price increases for our products.

We are confident about our longer term opportunities in the Enterprise market because of our ongoing technical innovation end-to-end solutions across a broad product portfolio and our reputation for quality and reliability. With regards to the other markets we served sales have been somewhat volatile. Our wireless sales were roughly flat sequentially, but continued to outpace industry growth with an increase of nearly 50% year-over-year.

The ExchangeMax business continues to be affected by the competitive market environment for telephone, central, office products. Our integrated Cabinet Solutions business had lower sales sequentially and year-over-year primarily due to large customer, a large customer nearing completion of the current plan project.

Now the that ICS sales are up to a pre-extent year-over-year for the nine months ended September 30, and we see opportunity over the longer-term. We anticipate improving -- ICS sales over the next year because we expect major domestic communication service providers will, upgrade their networks for additional broadband services such as video and high speed data. For the quarter cable segment orders were $158 million and Connectivity Solutions segments orders were $145 million. Overall our external orders booked in the third quarter of 2004 were $303 million for consolidated book-to-bill ratio of slightly less than one. Broadband book-to-bill was roughly one-times for the third quarter, while the enterprise booked to bill was below one time. We expect to see a slow down sequentially in line with traditional seasonal trend. Over all enterprise sales were expected to be 15-20% lower sequentially, but up modestly year-over-year. The Company's overall gross margin for the third quarter was 25.2%. This compares to a gross margin of 20.6% in the third quarter 2003 and an adjusted gross margin of 20% in the second quarter of 2004; gross margin rose sequentially, primarily due to higher sales prices in a more favorable product mix. Are we are pleased with our gross margin progress we have not fully recovered higher material cost in earlier in the year and expect to see additional increases especially for plastics and metals. As a result and as previously announced we intend to increase pricing for selective products in amounts ranging from 3% to 9% with implementation generally beginning January 1, 2005.

Looking at SG&A, our total SG&A for the quarter was $52 million or about equal with the SG&A in the second quarter of 2004. Research and development expense for the quarter was 7.4 million or roughly or about 2.5% of sales. We intend to continue to find our fund that it's the strong R&D efforts. Effective tax rate for the third quarter was approximately 16%. This effective tax rate reflects the recognition of certain [symbol] adjustments mainly related to a higher level of international activities and lower tax rate jurisdiction resulting from the acquisition of Connectivity Solutions, that we currently expects an effective tax-rate of approximately 27-30% for the fourth quarter of 2004.

Now I will turn to cash flow and the balance sheet items. Net cash provided by operating activities in the quarter was $40 million, which is the strongest quarterly cash flow in more than 3 years. Performance was driven primarily by improved operating results and better receivables performing. Depreciation, and amortization was approximately $15 million in the quarter, which included about $3 million of intangible amortization and differed [clienting] fee amortization was about $600,000.

Capital expenditures were about $3 million in the quarter. We continue to mange our capital expenditures closely, but expect up to $7 million that capital expenditures in the fourth quarter primarily related to cost reduction projects and our construction of a new broadband facility in Asia. Overall we expect capital spending of approximately $12-15 million for calendar year of 2004.

At September 30th 2004 long-term debt including current maturities was $322 million or about 42% of book capital structure. CommScope ended the third quarter of 2004 with $179 million in cash and cash equivalents of 29% from second quarter ending balance which was 139 million.

As previously announced Connectivity Solutions manufacturing Inc., and indirect manufacturing subsidiary of CommScope has adopted organizational and cost-reduction initiatives at its Omaha, Nebraska site. Meanwhile our operation intends to improve its organizational alignment to improve the costs focused on the different products produced there and create more efficiency in its manufacturing process. We expect the initiatives to be substantially in place by mid-year 2005.

The incremental pre-tax cash cost to this plan is projected to be roughly $10-15 million with as much as half of the cost expected to be recorded in the fourth quarter of 2004, but the balance to be incurred in 2005. The principal costs of this plan are expected to be incurred for process improvement, including facility redesign and employee related expenses. In addition, as work processes are modified at CSMI they may identify fixed assets that are no longer needed. We may consider disposing these assets including curb losses on disposable about $10 million. Annualized pre-tax savings resulting from the plan are currently projected to be $20-25 million once the initiatives are in place.

Looking ahead to the fourth quarter we expect to see the impact of seasonality on our sales especially for our enterprise product. Over the last five years CommScope's legacy enterprise business declined nearly 20% on an average from the third quarter to the fourth quarter. For the fourth quarter of 2004 we currently expect sales of about $270-285 million. Excluding cost associated with the Omaha initiatives, we expect fourth quarter gross margin to be approximately 23.5%-24.5% depending upon sales volume. Gross margin is lower than our previous guidance due to primarily to the lower expected sales volume and higher expected material cost in the fourth quarter.

R&D is expected to be around 2.5-3% of sales and with regard to SG&A we expect a modest sequential rise to the $52-54 million range for the fourth quarter. Keep in mind, the cost initiatives intending price increases are not expected to provide any benefit in the fourth quarter of 2004. But as we move towards 2005 we expect to see a positive impact on our margins, on new prices as well as the benefits from the initiatives at Omaha. Also please note that as a result of our recent decision by the emerging issues task force of our Financial Accounting Standards Board changes are expected to the [accounting] treatment for contingently convertible debt in determining net income per share assuming dilution. These changes are expected to be effective in the fourth quarter of 2004 and we will require restatements of [previously] reported amounts. Based upon this guidance CommScope expects to reflect any dilutive affect on net income per share assuming dilution from its existing $250 million 1% senior subordinated convertible debentures due 2024 for the period subsequent to their March 2004 issuance.

Under the new rule shares issuable upon conversion of these debentures should be included in the calculation of net income per share assuming dilution if diluted even if they are not in the money and the conversion contingencies have not been met. Had the new accounting requirement been applied during the third quarter of 2004; net income per share assuming dilution would have been 23 cents per share. This calculation reflect an additional, approximately 11.5 million shares in the shares outstanding for the quarter and reduce pre-tax interest expense on approximately 968 million, -- I am sorry $968,000. The Company is currently evaluating potential modifications to the debentures, which if adopted would reduce the dilutive impact of the debentures. No assurance can be given that any such modifications will be pursued by the Company or agreed to by the debenture holders.

Now we will be glad to answer your questions about these issues. Alistair (phonetic) we will take some questions now.

Thank you. Ladies and gentlemen if you like to register a question please press the "1" followed by the "4" on your telephone. You'll hear three-tone prompt to acknowledge your request. If your question has been answered and want to withdraw your registration please the "1" followed by the "3". If you are using a speakerphone please lift your handset before entering your request; one moment please for the first question. Our first question comes from the line of Steve Kamman with CIBC. Please go ahead sir.

Hi folks, sorry, can you hear me?

Not very well Steve, -- not

Give me a second, hopefully that's a little bit better.

That's a little bit better.

Alright, I apologize I am on a cell. Just wanted to check in on the particularly on the Avaya business, any sense on whether or not those guys may or may not have continued to run on some of their September-to-September fiscal year, I am just trying to figure out in terms of looking out the next quarter whether or not some of the weakness just had to do with them, like that way to put it sort of muscle memory seasonality from when they are running more on a strong September quarter than rather that [sulkening] to a strong December?

Any number -- Steve, Brian here -- any number of speculation that I would say precisely that speculations we really had no knowledge, but one as you state the influence of their year ending timing, you know, and secondly, as we move into calendar fourth quarter whatever impact the pending sale of the Company and the announced sale of the Company in that period would have on sales; but there are number of items that make comparisons on a year-over-year basis difficult in both third and fourth quarter.

Okay it makes some sense and then the only other thought as we have seen copper prices come down a little bit. Just any thought in terms how the pricing comes through in the first quarter and what your sense is on the overall kind of on the raw material side of the environment?

Well, the major copper impact comes into our enterprise business, as you know, for both SYSTIMAX and unit price product lines. We announced today price increases of 4-6% effective shipments for all existing in new orders effective December 1. The timing to the point of your question will be delayed; -- I mean product, it's going into a channel for inventory, obviously, albeit new pricing but at year-end I would not expect that there will be any inventory building to the contrary. At the same time -- excuse me, -- Bob, my train is [inaudible], I am sorry.

Just the inventory domain, actually that was my kind of -- my last question was sort of inventory in the channel, just kind of what your sense is in terms of trend there?

Well, inventory in the third quarter rose and so our expectation is that inventory will decline in the fourth quarter, we create [notes] incentives for them to build their inventory at year-end. I think in part for our reductions our forecasted reductions of revenues in that segment sequentially in the fourth quarter.

Okay then it should take about a quarter for that price to really flow through the end customer, is that fair?

Yeah, to put the point I dropped, thank you very much Steve, yes, I would expect because of project business and other activities on large major bills that are at fixed prices will sometimes hold pricing for the duration of that bill. Our experience on price increases announced in the first quarter of last year took several months for them to flow through in entirely.

Okay thanks very much.

Thank you Steve.

Our next question comes from the line of Daniel Ernst with Hudson Square Research. Please go ahead sir.

Yes, good afternoon couple of question I might, first on the guidance for the fourth quarter, I would say it's a slightly softer both on sales and margin than we expected a few weeks ago and, obviously, there is seasonality in here and general economic weaknesses. Do we expect this is kind of the low order mark for both sales and margins; -- can we base going forward for the price increases for the margins to take back up the 25% range and then sales due, head back into the $300 million range going into 2005? And then secondly, in related kind of looking at the Avaya type -- the enterprise focused customers, what kind of visibility do you have in that market, you said that you were confident of your longer term [inter-profits] opportunity what specific visibility do you have and what systems do you now have in place to track that whether the diverse stage is relative to your cable customers? Thank you.

Number of points there. Let me talk about your questions related to fourth quarter guidance, margins and visibility; the revision that Jearld mentioned on revenue in the fourth quarter from that that we gave just a few weeks ago with largely because of our SYSTIMAX and where we reported that typically in our CommScope businesses over the past 5 years revenues in the fourth quarter have averaged down 20% sequentially, in earlier models that we have done and as late as a month ago we had not anticipated like performance in the SYSTIMAX brands and so what you've seen in the current provision is largely due the change in our outlook for SYSTIMAX in the fourth quarter, expecting it to perform much like historical CommScope LAN business. Margins -- my perspectives are much like, I think what are you suggesting and that is the fourth quarter -- in the enterprise base fourth quarter should be a low for us. The price increase we feel very comfortable with in the first quarter to the extent that we might see copper softening in the first part of next year would all lead to improvements from forecasted fourth quarter periods in margins, but I will say, you know, in the third quarter margins in the 25% range were very encouraging for us. I mean for several quarters; 5 or 6 year more we've often been asked when we saw we will be able to regain margins to historical 25% levels and we were highly encouraged and motivated by the results in the third quarter.

As it relates to the visibility, I will finish with that. We do have a very comprehensive program of [funnel man] management for all of our projects within the enterprise business for both the SYSTIMAX brand and the unit price brand and we track those diligently. The variable that always is encountered though is the delay of projects, which is as you would expect totally subject to customer control.

And Dan, this is Jearld, I might add as to the seasonality that our broadband business historically, which CommScope was before this acquisition was largely -- or predominately broadband, largest piece. It's low point seasoning was typically the first quarter of the year. That is not the case with the enterprise business from the land business that we operated, the low point tradition was the fourth quarter in the year and so, since we are now more of an enterprise company than broadband company, we are seeing that impact a little more dramatically.

Right, of course, sum up -- on the price increase, it's just trying to gain where we are heading to on margins; I mean how we -- are you rather attempting to keep up with really just inflations so that you are keeping the stats somewhere between 24.5 and 25% and you -- with these price increases not attempting to due getting margin expanse in but rather keep some former [inaudible] and then with the price increases, you know, given that they have been rather successive over the course of this year. Is there a potential here of prior substitution to lower grade products that might carry lower margin and often lower ticket prices?

Well, I will say largely it's always our objective to recover cost and margin. The reality of the world is we may not always be able to do that depending upon market and geography.

And we have you know announced here in the last few weeks a $20 million cost reduction initiative related Omaha, so you know we do have a number of factors all should it impact margin not just selling price changes or raw material cost; but you know we have a strong history as a company of a lot of cost reduction activity and this is part of our culture and I think we will continue to work on cost reduction activities. Commodity pricing is more out of our control so.

Right, but -- okay just a last question since you mentioned restructuring; when we spoke a few weeks ago you gave I think the exact range of what the industrial cost to you of achieving that cost reductions in terms of down sizing and severance pay etc, so when we talked last time you didn’t have a sense of how it was going to breakout in terms of having to pay severance and to fund pensions, but you gave a [thinner] breakdown a few weeks later so is it safe to assume this is pretty much of a fully [baked] number in terms of restructuring charges?

No, I would not make any additional assumptions to the ones you made --- when we -- than we gave this couple of weeks ago, Dan, we are still in the process of finalizing this and we will make appropriate announcements as we finalize these and hopefully narrow this range a little bit more.

Okay, thank you very much.

Our next comes from the line of Steven Fox with Merrill Lynch. Please go ahead.

Hi, can you hear me?

Yes Steve.

Yes Steve.

Hi. Just a couple of quick questions first of all, looking back to the third quarter that CommScope brand in performed nearly as well as the Avaya brand, how much is that related to the rebranding efforts and can you just comment on that real quick?

Steve, I can just say that’s largely due to the nature of project activity. I think in the second quarter you are talking about sequential performance?

Yes I am.

Second quarter I think clearly had to be benefited by early inventory builds, of the channel builds, of the new product line and the third quarter and moving forward we will see more and more of the results of project business closely, so couple of dynamics happening there, but when we look at our year-over-year performance in that segment; 25 points of year-over-year, we like where we are independent of the sequential comparison.

Okay and then secondly, just looking at the broadband business looking solid into the fourth quarter; can you give any more specifics about how you look to perform seasonally, sequential change in sales?

I think our current outlook is that we will probably perform better than historical performance and the assumption there and again the emphasis of assumption -- the assumption is that the announced price increase will stimulate some year-end buying,.

Okay, great thank you very much.

You bet.

You bet Steve.

Our next question comes from the line of Daryl Armstrong with Smith Barney. Please go ahead.

Hi. Thank you very much and I have three questions. The first one the guidance that you gave for the tax rate with the [snap bag] would that suggest that you are expecting to see a shift in terms of overall revenue mix more to the domestic side and if so wouldn’t that be accretive to your gross margin?

Not sure I can make that comparison for you Daryl. We, obviously, have re-looked at our tax rate; the third quarter is a period when we borrow our prior year's tax return. We look at all the items there, there are some items that have to be true up based on that we have some benefits in the third quarter related to some of those items related to credits, some international sales activity and research and development and those type of things, which we are not expecting to see that again in the fourth quarter and the season are the mix to more international it's having more of a long-term affect on our tax rates. We were one-time with 37%. We have been guiding and reporting a couple of quarters of 31, now we are between 27 and 30; so those are -- we have got more of the affect and we will continue to have some anomalies from time to time in our tax rate, so that longer term the international impact is having the beneficial tax rate.

Okay. But the third quarter was more of a true up more so than anything else and then second of all, in terms of commodity prices particular relevant to oil and polyethylene pricing, I am sure that you guys sort of think about your margin and then you are able to even let you sustain them within a certain range of oil prices I guess, to put it bluntly. Could you give us some type of sense in terms of how much oil prices can come down or oil prices could go up before you would actually expect your margins to sort of move out demand and what's your currently managing now. Any color that you could provide there would be helpful and then I have one last question.

Daryl, we largely -- this was [kept on] unusual. What we largely disconnect the relationship between polyethylene and $1 for a barrel of oil and it's not a very good correlation, we have tried many, many times and part of that is that not all of the polyethylene, all of the monomers produce from oil, from some of them comes out of natural gas. It's influenced by a large number of variables that are hard to correlate. You know the only thing I could tell you is the larger, obvious, macro and that is when oil is up long-term polyethylene prices come, but certainly in the context of a quarter or even any shorter period of time, it's been near impossible for us to correlate to.

Plus impacts on the transportation costs and potentially energy costs can all be impacted by those changes.

Okay so the number of variables that go into that.

Yes.

And then finally in terms of the inventory levels on your balance sheet, given a slight picture you are moving into a seasonal and weaker part, seasonal -- weeks a part of the year, well another surprise that those inventories can come down a little bit this quarter. Can you just try to give me some color in terms of how you guys think about managing the inventories there this point in time?

Well, the some other things that impacted us in inventories in the third quarter was our election to build inventories in support of all of the hurricane damage in Florida. We wanted to create a very high service model and we build inventories very early in that storm season. Our expectations may be to your point in the fourth quarter is that we will be pulling those inventories down through the remainder of the year and what’s you see is of course what we report on a net basis, on a gross basis in the quarter, we reduced inventories by nearly $20 million and opportunities, substantial opportunities still remains to reduce inventories in our traditional ECS businesses.

Okay and then one last upfront derivative question on that. To the extent that you draw down those inventories in fourth quarter; would there be a meaningful difference in terms of your manufacturing volumes or to the lines that actually make that cabling during the fourth quarter?

Yes, I mean to the extent that we pull inventories down it always has an influence on demand, on capacity demand.

Okay. Thank you very much.

Our next question comes from the line of Robert Jaworski with Jefferies and Company. Please go ahead.

Hi. How does the next year look in terms of CapEx and D&A and also is there any way to estimate how much of your Q1 sales moved to the current quarter because of those price increases you announced?

Yes, Robert, we have not provided any guidance for 2005 just to add we are still evaluating those issues and not prepared today to provide any 2005 guidance this time.

Okay, thank you.

Our next question comes from line of Larry Harris at Oppenheimer. Please go ahead

Yeah, thank you. Just wanted to -- I guess, confirm the guidance or the commentary from Jearld, regarding the impact of the new accounting ruling and how many shares and what sort of interest savings would there be per quarter?

Larry, the overall number of shares that are $250 million convertible bond issues, convertible into is approximate 11.5 million shares. And it has like 1% coupon rate and we have been amortizing I think about $10 million of expenses associated with that, which almost doubles the effective interest rate for that to something little less then 2%. It would be that interest that you would add back to earnings in that calculation on an after the tax basis and increase your share count by 11.5 million shares.

Great. And with respect to the inventories, you know, where are we in terms of say, reductions in inventories at ACS relative to the time of acquisition; how much of the inventory has come down and how much might be left to go?

Larry I do not have that number on top of me. A good estimate would be by year-end, something in the neighborhood of $40 million reduction on a net basis. And I think there is -- again those numbers they don't come to me, but there are certainly another $15-20 million opportunity moving forward.

Great. And I guess we have the analyst meeting coming up in the couple of weeks, can you give some sort of preview as to what you may be showing; will you be discussing the plans for Omaha in greater detail what can you expect?

Larry it's Frank Drendel, I am sorry I got little bit of cold, what we intend to do is show the entire breadth of the new CommScope and we won't be just talking heads of Georgia in the phone we are brining in, our top managers, our top research engineers, our top products -- all you know they will touch and feel all the products that we currently have, all the products we are looking at in the pipeline and R&D and the opportunities, the new opportunities that are coming out all these fiber to the [curve] and fiber to the ex-opportunities in [Tulsa]. So we intended to have almost a mini trade show for all the analysts and a chance for all of them to ask, to see the depth of this management team and the -- what's going on in our business.

Great, okay feel better.

Thank you.

Our next question comes from the line from the Alan Mitrani with Copper Beech Capital. Please go ahead.

Alright thanks guys, just a couple of housekeeping questions Jearld you mentioned that the you guys advertised some cost from the convert what the effective tax rate that I should use when I am figuring out my interest expense, I know it's 1% on 250, is it 1.9 that I should be using there, [prior allocating] amortization?

The effective tax rate is been around 30%, let's talk of numbers now and then and we said our fourth quarter numbers were 27-30 was our expectation -- thus I think that’s probably.

Well, I am sorry, I am asking the interest rate on the convert from an effective interest -- I am sorry I didn't mean it tax rate an affective interest rate on the convert when I am trying to figure out your interest expense had been using 1% on 250 million giving me an annual 2.5 million interest expense. It sounds like I guess, I didn’t count their other --still can be amortization?

Yeah they are 200,000 more a quarter of amortization of financing fees that could be added as --

Okay, thank you, that's helpful.

We are amortizing through this process

Okay also for the 300,000 plus of miscellaneous charges this quarter, to get to what an operating number is on net income if I exclude the acquisition related transition cost and then process R&D what tax rate should I use for those charges after tax?

For the charges related to Omaha it would be broadly in the fourth quarter of same --sort f tax rate if I understood your question.

I am thinking the 305,000 extra this quarter, that's on the operating line that I would exclude as one timers the in process R&D any acquisition; should I just use what you said the 16, 18% tax rate for this quarter?

That would be reasonable, yes.

Okay and then with regards to the CapEx question that someone asked for next year, I know you are not giving exact numbers but I was under the assumption that you are still spending CapEx this year to help build the China facility, is that still on target? It seems like your CapEx number is relatively low if that’s happening, can you just give an update on that?

Alan, I am Brian Garrett. The project is on schedule and the facility-- the construction part of the facility will be completed in the first quarter of '05

And so when will it be online to be able to produce product?

Second quarter, it will begin producing product in the second quarter and ramping up obviously through the remainder of the year.

Now should that be a net positive to margins, once it's up and running given the China typically is lower cost?

Everything being equal that would be true. The other part of that strategy, two parts to the strategy, the mix is somewhat uncertain. One, either you take it into existing markets with higher margin or you go into other markets that you not have been able to participate in because of the unacceptable margins.

Okay and then two more --

What we will have is -- is a undefined mix of both of those scenarios.

Got it and then two more quick ones if I can. I didn’t really understand Jearld's answer regarding inventories, have you taken them down; was it you have taken a gross inventories down sequentially 20 million but net inventories were up 5, can you just bridge the gap for me?

The big part of that is there were just tremendous physical amount of inventories at that facility when it was required and there were substantial reserves for those inventories and so we have been as all part of simplifying that business disposing of a lot of inventory.

Okay that your gross inventories were not down 20 million sequentially quarter-to-quarter, it was a couple of quarters ago from the time you have acquired it is down?

No, my notes will show roughly $20 million.

Okay then you expect still for --- not since you have required it but it just in this last quarter?

Just in the -- over the course of the third quarter

Okay.

ending through September ending.

Got it and then it sounds that you are going to take inventories down, because your turns were pretty good they stayed -- I mean you were down you know it sort of 8.7 turns on inventories are still pretty good. Do you expect go get those back up to the 9-10 level in the fourth quarter?

No, we do not.

Okay.

And yeah those numbers are good numbers but in light of historical legacy CommScope numbers so those aren't the best numbers. Legacy business to be 12 and 13 type of numbers; so that gives you, you know --- that’s really our future expectations.

Okay but it sounds like you do expect to lower inventories in the fourth quarter and generate cash from that?

In dollars, yeah.

In dollars.

What the precise turns will be, I would say not substantially different then where we are today.

Okay and then if I can ask one last question on the sales, to everybody else's point. I just want --I appreciate, I guess that --it sounds like a few weeks ago when you were giving your sale guidance you hadn't been as aggressive and assuming SYSTIMAX was going to decline sequentially. Am I right in understanding that?

That’s exactly correct.

And what's changed in the last three weeks? Is it simply that you got better numbers; you got better indications from clients. And then if you can, maybe give us a detail on ICS and ExchangeMAX because those two seems to show weaker sales this quarter?

Quite largely, Alan it has a lot to do with the timing that we roll up this information from the field and, you know, not being --having the track record with SYSTIMAX, you know, we have been in continued reassessment of how this business is going to perform and so we -- it just been off late that we have elected to change our vision in terms of how that business is going to perform in the fourth quarter.

And you assume a pre-buy on some products, it sounds like in cable or you don’t assume a pre-buy in general?

--In cable television?

In any of your products. I guess you are raising prices on all your products, is that correct?

In cable television, yes, we are making assumptions in our forecast that there will be a pre-buy. Not so much in the enterprise based program.

So you are not assuming a pre-buy in these numbers?

That’s correct

Thank you.

[operator's instruction] There are no further audio question at this time.

I want to thank everybody for joining us today in this meeting and look forward to seeing you at the Analyst Meeting in New York.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.