CommScope Holding Company Inc (COMM) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CommScope fourth quarter 2004 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we'll 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 is conference is being recorded, Friday, February 25, 2005. I would now like to turn the conference over to Phil Armstrong, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning and thank you for joining us on the call. Frank Drendel, CommScope's 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 the 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 other results to differ materially from those currently accepted. For a more detailed description of factors that could cause such a difference, please see the press release we issued this morning and CommScope's filings with the Securities and Exchange Commission, particularly exhibit 99.1, the CommScope's periodical [INAUDIBLE - poor audio]. In providing forward-looking statements, the company does not intend and does not undertake any duty or obligation to update these statements as a result of new information of future events and otherwise. Also, please note that all of the dollar figures and percentages we'll talk about today are approximations. After Jearld Leonhardt reviews fourth quarter results we will open the lines up for questions. Jearld?

Thank you, Phil. CommScope today announced fourth quarter results for the period ended December 31, 2004, which includes the results of the Connectivity Solutions business acquired in January of 2004, from Avaya Inc. Company reported sales of $296 million and a net loss of $7 million or $0.13 per share for the fourth quarter. Reported net loss includes special, after-tax charges of $9 million related to the organizational and cost reduction initiatives at the Omaha, Nebraska, manufacturing facility. Excluding this charge, adjusted earnings were $2 million or $0.04 per diluted share. Please refer to the supplementary schedule called reconciliation of GAAP earnings per share to adjusted results that was in our press release for a quantitative reconciliation for the fourth quarter and 2004 calendar-year results.

We reported sales in two segments. The cable segment, which is CommScope's business to the connectivity -- CommScope's business prior to the Connectivity Solutions acquisition and the Connectivity Solutions segment, which we acquired in January of 2004. 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. All of our year-over-year sale discussion that follows will be made on a pro forma basis. Using the historical financial information for Connectivity Solutions as operated by Avaya Inc. during January 2004 and all of calendar-year 2003.

Fourth quarter sales rose 3 percent year-over-year to $296 million and were positively affected by higher prices for most products, improved international business, and continued expansion in the enterprise market. CommScope's fourth quarter cable segment sales rose 6 percent year-over-year to $163 million, an increase in all major product categories. Despite lower fourth quarter domestic broadband video sales, overall broadband sales rose year-over-year due to strong international growth. We believe that the domestic cable TV market has become more stable in the second half of -- of 2004. One way to gauge the overall domestic environment is to review our calendar-year 2004 sales. While sales to Comcast were down meaningfully year-over-year, as expected, sales to other major operators you are were essentially stable. In contrast, our international broadband business continues its recovery and posted strong year-over-year growth.

We also continued to expand our presence in the wireless market. Wireless sales rose 12 percent year-over-year in the fourth quarter and 9 percent from the third quarter of 2004. Looking at the Connectivity Solutions segment, robust SYSTIMAX solution sales created the year-over-year growth. SYSTIMAX solutions sales increased 15 percent year-over-year with solid domestic and international growth, but were substantially offset by lower sales with Integrated Cabinet Solutions, or ICS, sales and ExchangeMAX product sales. We're pleased with our continued expansion in the enterprise market, which we serve with our industry-leading SYSTIMAX and new product brands. Our overall enterprise sales decreased 11 percent sequentially as expected in the -- in the traditionally shorter fourth quarter, sales to the enterprise market rose 15 percent year-over-year. We believe that the improved project business and the positive impact of price increases were the main drivers of the growth.

We remain optimistic about future enterprise long-term opportunities as well. Our ongoing technical innovation and our ability to provide a broad range of high-quality end-to-end solutions is the source of our optimism. For example, during the fourth quarter, SYSTIMAX solutions introduced GigaSPEED X10D, a rev -- a revolutionary copper cabling system that is capable of supporting 10 gigabit internet. We believe that GigaSPEED X10D is the most advanced unshielded twisted pair cabling solution available in the market today.

With regards to the other product groups in the Connectivity Solutions segment, sales were down substantially year-over-year in the fourth quarter. The ExchangeMAX business continuing to be affected by a difficult competitive market environment for the cell telephone central office products. Fourth quarter ExchangeMAX sales were down 34 percent year-over-year. While fourth quarter ICS sales were down 31 percent year-over-year, they did improve nearly 20 percent from the third quarter. We expect ICS sales to improve significantly in 2005 because we believe major domestic communication service providers will upgrade their networks for additional broadband services such as video and high-speed data.

Total international sales rose 21 percent year-over-year to $110 million in the quarter. Sales increased in all regions of the world, with particular strength in Asia-Pacific rim, Central and South America. International sales accounted for 37 percent of total company sales in the quarter. For the quarter, cable segment orders were $152 million and Connectivity Solutions segment orders were $155 million, for an overall total of $307 million and a consolidated book to bill ratio slightly more than one times. Broadband book to bill was below one, which is typical for the fourth quarter. Enterprise book to bill was above one.

Gross margin for the fourth quarter of 2004 rose to 22.8 percent, compared to 20.2 percent in fourth quarter of 2003. Gross margin increased year-over-year primarily due to the acquisition of Co -- of the Connectivity Solutions business. Gross margin was higher than our January 24 guidance, but was down from the third quarter of 2004 level of 25.2 percent, primarily due to the lower sales and manufacturing volumes and unfavorable sales mix and higher material costs. Lower manufacturing volumes negatively affected gross margins for the quarter as a result of continuing efforts to reduce inventory. While overall inventory was down slightly from September, finished goods inventory was down about $7 million sequentially. During the quarter, we also experienced higher sequential sales for our -- sequential costs, that is, for plastics and other polymers as well as certain metals.

Sales mix negatively affected gross margins ratios sequentially as well in three main ways. A lower propor -- a lower proportion of SYSTIMAX solution sales, a higher ratio of international sales, and a greater proportion of SYSTIMAX sales coming from lower-performing products. While the fourth quarter sales mix was different than the third quarter, we do not believe it indicates any fundamental change in customer purchasing patterns. The SG&A cost for the quarter was $54 million and reflects higher spending for Sar -- Sarbanes-Oxley related compliance efforts, introduction of new products and employees salesman incentive compensation and other ops. Research and development expense for the quarter was $9 million or about 3 percent of sales. Fourth quarter R&D reflects increased expenses for the development of GigaSPEED X10D, our 10 gigabit copper cabling solution.

Connectivity Solutions Manufacturing Inc., an indirect wholly owned manufacturing subsidiary of CommScope, continues to implement the previously announced organizational and cost reduction initiatives at its Omaha facility. These initiatives are expected to be substantially in place by mid-year 2005. .Primary components of the CSMI restructuring initiatives are first, a reorganized management structure that creates more focused stand-alone management organizations for cable, apparatus and cabinets. Second, a reengineered and simplified business practices model and manufacturing processes as well. And third, a reduced number of management, production and support personnel. As a result of these initiatives, CommScope incurred 14 million in pre-tax restructuring costs during the fourth quarter of 2004, which includes $7 million of non-cash costs primarily related to equipment impairment. CSMI is also developing a plan for under-utilized real estate. During the first half of 2005, we expect to recognize additional pre-tax restructuring costs of 4 to $6 million related for completing these initiatives. Annualized savings resulting from the restructuring plan are projected to be 20 to $25 million once the initiatives are fully in place.

Now I'll turn for cash flow and balance sheet items. Net cash provided by operating activities in the quarter was $10 million, which included 3 million in cash costs related to the previously announced organizational and cost reduction initiatives at the Omaha facility. Depreciation and amortization was $15 million in the quarter which included about $4 million of intangibles amortization. Capital spending was about $5 million in the quarter. On December 31, 2004, long-term debt including current maturities declined to $310 million, down 12 million from the third quarter and was 41 percent of book capital structures. CommScope ended the year with 178 million in cash and cash equivalents.

While we had some challenges in 2004, we believe we made significant strategic progress during the year. We established a global leadership position in the enterprise market through our acquisition of Connectivity Solutions. We improved liquidity and financial flexibility through a $250 million principle amount, 1 percent convertible debt-off. We restructured our relationship with [INAUDIBLE] and exchanged our ownership in [INAUDIBLE] while reducing our outstanding shares by 7.7 million through this transaction. We introduced new solutions and products for the enterprise market including Uniprise air seed wireless solution and the revolutionary GigaSPEED X10D 10G copper technology. We announced major cost reduction initiatives at the Omaha facility, which we expect will create significant annualized savings once they're fully in place.

Excluding special items we more than doubled our operating income and improved our operating margin to 4 percent of sales. Earnings per share without special items grew by 142 percent year-over-year. We generated more than $100 million in cash from operations during the year. We achieved these objectives during the year where we essentially doubled the size of the company and utilized significant resources to comply with new regulatory requirements and faced extraordinary increases in raw material costs. Overall, we believe 2004 was a good year for CommScope and we believe that our long-term outlook is positive.

Today we also provided updated financial guidance for calendar year 2005. Our expectations for the year are revenues of 1 to 2 -- 1.2 rather. Let me start over. Revenues of 1.2 billion to 1.3 billion. An operating margin of 5 to 5.5 percent, excluding special charges. We expect Omaha restructuring costs to be 4 to $6 million to complete the previously announced initiatives. We think our tax -- effective tax rate will be between 28 and 32 percent for the year. We expect depreciation and amortization of around $60 million for the year. Capital spending of approximately $30 million or less is expected for 2005. And we expect higher working capital -- capital, which we expect to grow proportionally with sales.

We updated our November 2004 guidance because we now believe that raw material and SG&A -- A costs will be somewhat higher than our earlier projections. We intend to work diligently to offset higher costs and improve the performance of underperforming product lines. Current analyst consensus estimates -- that is current analysts consensus estimates for the full year are generally in line with our revised 2005 expectations. It's important to note that historically our sales and our operating performance have been somewhat seasonal. Performance is typically weakest in the first and fourth quarters and strongest in the third and second quarters. Consistent with this pattern, we expect the first quarter of 2005 to have the lowest sales and operating margins of the year, with expected sales ar -- around 280 million to $300 million and operating margin in the 1 to 2 percent range excluding special charges. However, as expected sales volumes increase, we continue, however, as -- as expected sales volumes increase and we continue the Omaha restructuring program, we believe operating margins should improve significantly in the second and third quarters of 2005. Assuming a relatively stable raw material environment. Now we will be glad to answer your questions. Myra?

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press 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 Steven Fox from Merrill Lynch. Please proceed with your question.

Hi. Good morning. Couple questions. First of all, I'm not sure where you were talking about Uniprise during the -- the breakout you gave. Where was that included in the results? And if you can give us an idea of how that brand is performing?

Steve, Uniprise would be part of our LAN business and -- and the cable segment.

You're -- you're still including it in cable?

That's -- that's correct. In terms of segment reporting for 2004.

Okay.

It was up by 23 perce --

22 percent.

22 percent.

Okay. That's year-over-year?

Yes.

Okay. And then --

For -- for the full year.

Okay. And then for the second question would be, if you look at your 4 percent margins for the past 12 months, for 2004, can you give us a sense of what the margins were at the core CommScope operations versus the recently acquired Avaya business?

Yes. The Avaya businesses generally have better margins than the ACS Connectivity business generally has better margins or gross margins certainly than -- than core broadband business.

But include --

And that trend continued.

Right. But the flip of that, Steve, is -- is clearly our ExchangeMAX business and the cabinet business in '04 had substantially worse gross margins than SYSTIMAX or any of the legacy CommS -- CommScope businesses.

Right. So, when you add it all up and look at the Avaya businesses over the last 12 months, was the margin above or below the 4 percent your reported on the corporate average?

It was -- don't have a number in front of us, Steve. Expectation would be above.

Okay. Thank you.

Thank you. Our next question comes from the line of Stephen Kamman from CIBC World Markets. Please proceed with your question.

Howdy. Just the Uniprise business, I know you gave the year-on-year growth. But, obviously, coming from a very low base, just any sense on how -- how large that's become on an absolute dollar basis? And what's the margin impact been on that business? Have you been able to sustain the margins? I know you were -- you were hoping to do that. Just how -- how has that played out in the early stages?

The -- lo -- looking at the full year numbers under LAN, we've got 114 million for -- for '04. That was -- and the full year number that was given in terms of growth, was the 22 percent number that Jearld referenced. Margins in the business have been attractive, relative to corporate averages. And as the year has progressed, we've seen more and more adoption of our Connectivity offering that go we started in the second quarter of '04 after the ACS acquisition.

And you -- you've felt you've done all right in terms of cannibalizing the -- the -- the -- the SYSTIMAX business versus Uniprise that's -- that's held sort of as you expected?

You would say not cannibalizing the system [INAUDIBLE].

Yes.

Yes. The two -- the strategy has gone very well in terms of the relationship between the two. Two separate sales organizations that I would say largely are in different segments with very little overlap. And the -- the other encouragement that we have is that I -- I would say the interrelationship between the businesses from a management perspective continues to improve and become more sophisticated. I think -- I think we related to you -- Frank related to you really at the outset at the acquisition, and there really is an opportunity as each of these sales organizations engage potential customers to identify whether their likely pro forma SYSTIMAX or Uniprise customers. And then direct the right product and sales organizations to those customer needs. And that process has continued to improve.

Okay. One other question on that. On the ExchangeMAX and the cabinets business, could you give us any sense on what their impact was on kind of bottom line? I'm assuming it was a negative impact. Or put it the other way. If we'd -- if we'd strip those business out -- out of the '04 results, what would your results look like? Again, just kind of some dollar sense or percentage impact just so we can figure out kind of what the business underlying was ?

I would -- I'm going to give you a working number of 30 to $35 million, negative impact on '04 operating income.

It would have been roughly the same as it -- as we included in our pro forma's a year ago on -- on slightly less sales.

Okay.

You know, approximately 120 to $125 million in sales and 30 to $35 million dollar loss.

And operating income, that's on the EBIT line pre-tax, correct?

That's right. Pre-tax. Correct.

Right.

Just -- just -- just definitionallly making sure. Last thought. Ten gig, how's that rollout going? And -- and kind of any early indications there?

Much better than our expectations. And -- you followed, hopefully, most of our press releases. We're getting early adoption in Europe. We will -- I'm getting a little premature here with permission. But, on Monday we will publicly announce Sun Microsystems in London as adopting our 10G [INAUDIBLE]. Our first public disclosure of a customer out of Avaya. And I -- and I will also say that largely throughout Europe, it will have a significant impact on first quarter sales. Potentially as much as 10 percent of SYSTIMAX sales in the first quarter, EMEA will be the 10G product.

In the U.S., we currently have a --a number of projects under construction. The one I think that I can talk about publicly is Calamos Investments in -- in Naperville. Their new corporate headquarters under construction. And they have elected our 10G copper solution for their corporate headquarters. So, I -- I would say broadly much the response to the product, the technology, all aspects of it have been much bigger than we had anticipated even a quarter ago.

And margins there are still substantially above corporate average, correct?

Margins in that new product are attractive. Yes they are.

Okay. Last question, I'll let you go. China plant. Just any incremental update there?

China's on -- on plan. We -- all person -- you know, the -- the management team has been on site for two quarters, approximately. Employees are in training. And we will conduct our -- probably our first sales early in the third quarter of this year.

Thanks very much.

Thank you. The next question comes from the line of Daryl Armstrong from Salomon Smith Barney. Please proceed with your question.

Hi, this is actually Dan Moon for Daryl Armstrong. How are you?

Hi Dan.

Hi Dan.

Just a quick question on the -- on your hedging strategy for the raw materials. Could you just elaborate a a little bit on your strategy for '05? For example, how much you're thinking about buying forward and -- and basically what your strategy -- strategy is there?

Yes, Dan. We -- we have started out this year with metals that had a pretty high rate. We do -- we never get farther than -- than 3 to 6 months. We try to keep a balanced book, if you will, relative orders. But we don't have very large backlogs. We're not -- we're not a -- a large backlog business. So -- so it is relatively short-term in its outlook, 3 to 6 months. It's never 100 percent. So, changes that we see in the commodity markets would be -- would have an impact on our -- on our financial results.

In terms of strategy, essentially unchanged from our historical strategy on the procurement of metal commodities.

That's right.

Okay. And then what you say it's never 100 percent, but, substantially you mean about -- I'm assuming 70, 80 percent range? Is that -- is that pretty reasonable?

Well, it depends --- depends on the -- on the -- on [INAUDIBLE - two people speaking]

Aluminum, I guess.

Right. Copper and aluminum. You know -- for -- for copper and aluminum, it would essentially be less than 90 days coverage at any particular time. Probably averaging about 60.

Okay. Just a couple more questions, if you don't mind. Just in terms of the inventory again. You said that the finished goods inventory was down. But, it was pretty much flat sequentially. Could you gi -- give a little more color on that as well?

Well, one of the things -- I -- I think the -- yes, roughly a little less than 1 million down sequentially. Seven plus million down in finished goods. And that was offset by increases and in raw materials and whip in the quarter. We are in the midst of a -- a substantial ramp up of our cabinet business in Omaha. And the requirements of that ramp up was to provide, you know, added raw materials and whip.

Okay. Thank you. A few more quick questions. One, I remember at the analyst day, that you said regarding 10G, that you probably wouldn't aggressively market that until the second half of '05 or -- or 2006 even. Give than you're seeing such strong demand, do you have any plans to -- to change that strategy? Or do you still -- are you still thinking along the same lines?

I -- I don't recall of any statements where we mentioned that we were not going to substantially market it until the second quarter.

I -- I guess, I mean, the -- the production. I thought you had said that it wouldn't be in, I guess, in full -- full-out production until later -- later this year. And maybe I heard that incorrectly.

You didn't hear that today. I -- I will -- I will tell you to the extent that demand is greater than our expectations. We are having to adjust our production plans.

Okay.

Globally we're moving capacity around to provide more near-term capacity for the 10G products.

I think to be fair, there were certain products that wouldn't be filled out. And, you know, we're working on filling out some of the additional product lines, some of the connectivity pieces. And it wasn't the aggressive marketing piece.

Right.

Right. Okay. And just real quick, an update on Sarbanes-Oxley?

The general update update or the -- the process still goes on for 2004 up until we file our -- our 10-K. But, you know, we have ic -- included the Connectivity Solutions business in our approach to Sarbanes-Oxley. So, it is our expectation that our management opinion that we'll give will -- will cover all of the businesses of CommScope, not excluding any. As we stand now, we're not aware of any material weaknesses at the present time.

Okay. Great. Thank you very much.

Yes, sir.

Thank you. The next question comes from the line of Larry Harris from Oppenheimer. Please proceed with your question.

Yes. Thank you. I was wondering what the potential might be for two items. One, further price increases given the -- the current cost of various raw materials. And the second, you know, you're willingness to consider some strategic options with respect to the ExchangeMAX business, given the 30 to 35 million in operating losses sustained last year by ExchangeMAX and cabinets?

Well, Larry, obviously on the -- on the price increases we continue to work with our customer base in both the enterprise business and the broadband businesses. And if the raw materials continue to accelerate, we'll continue to try and push pricing through in all of our businesses. On the strategic options with -- on all of our businesses, we're working with our employees and our management and they're all aware that they have to bring these products to profitability or we have so seek other options. Fortunately, we're seeing a substantial turnaround in the cabinet business due to the fact that the -- the locks (ph) -- the r-box (ph) are entering into the broadband businesses and taking fiber closer to the curb and closer to the customer. That requires a substantial improvement in the cabinetry businesses. And as ExchangeMAX, we're looking at that strategic alternatives for that business. And we continue to look at it.

Okay. Thank you.

And they're -- they're all under review, Larry.

Thank you. The next question comes from the line of Marcus Kupferschmidt from Lehman Brothers. Please proceed with your question.

Good morning guys.

Good morning Marc.

I just kind of want to start up with just something -- looking at 4Q results. If I remember correctly, the prerelease at the beginning of the -- the year talked about gross margins around 21.7 percent. Now, it looks like you're staying near 22.8 percent. What -- what's the difference between the two? And how should we think about that?

Sure, Marcus. On January 24, when we gave our preliminary guidance for our updated preliminary guidance for the fourth quarter, we were using the best information we had at that time. Since -- since that time, we did have a change in -- in our -- our understanding of our freight costs. Freight costs were actually lower than we'd thought they were going to be when we -- when we talked on January 24th. And that was too high and by as much as $3 million or in that range. And most of the improvement in the gross margin from January 24th to our fourth quarter results that we're reporting today came from that -- from lower freight costs.

Okay. So then if you think about the -- could you give us a sense of, you know, the sales end of being better than expected, gross margins still the light. What do you think the actual impact to the material costs -- the higher material costs were for the December quarter?

Yeah. I -- I -- I -- I think 1 to 2 -- or -- or 1.5 to 2 percent. Yes -- yes. 1 to 2 percent of -- of back-up. I think we're talking about 2 to $3 million of additional raw material costs. Couldn't do that math in my head on the gross margin too quick.

So 2 to $3 million of extra costs in the fourth quarter versus the third quarter due to higher material costs?

Right.

Than -- than we were expecting. That's right.

And what was the actual -- can you give us a sense of what was the actual increase quarter-to-quarter due to just the higher inflation and those costs?

Yeah. Hold on. I think we can. Are you speaking of SG&A or just the material costs inflation in -- or just -- in the fourth quarter?

Yes, kind of isolated [INAUDIBLE - multiple people speaking] your change in volumes? What's the actual?

About $3 million of higher material costs moved from Q3 to Q4 is -- is what -- what we believe it increased.

But, I thought we just said the material costs were 2, 3 million more than what you expected. I'm saying what was the total increase?

Well, I -- that -- think that means that we were expecting about $1 million increase and had about a $3 million increase.

Or $2 million delta.

Got it. Okay. Can -- can you talk just a little bit about -- you know, you talked about the '05 outlook potentially higher SG&A. Higher gross -- higher costs than what you were thinking. Can you give us a sense of kind of, you know, where do you think SG&A trends for the year? And can you give me a little bit more about where you think the gross margins go? So we can just try and get a better sense of all the moving parts within that operating margin guidance that you've now updated?

Higher -- starting with the SG&A, I -- I -- I think we -- as we said, our spending levels were higher in fourth quarter than we anticipated as well. And our starting appoints are -- are higher for both SG&A and raw material costs than we thought they were going to be earlier in the fourth quarter. So that -- those -- we do expect to -- to see higher costs in both these area as we stated over 2004. Just because our starting point is higher than-- than we expected it to be.

Right. I mean - will, I mean, SG&A you think you reign it in through the year, though? Or do you think it just continues to increase from here? And, you know, best you can kind of bring it back to like $54 million kind of level?

Well, we -- we're not anticipating a -- a dramatic improvement in SG&A spending rates as we move through the year. But, we will continue work on it. And try to do it. The 404 cost is -- is still a question mark of -- of how it compares year-to-year. Our spending was very heavy in the second half of the year for that. And -- and that would continue into the first quarter this year very heavy spending on -- on 404 before it starts to lighten up in any -- any fashion. SO, we'll see how it -- how the -- the cycle is for 2005 and perhaps that spending can be improved over what it was in 2004.

I think on that note directly to SG&A. The -- the controllable costs we're working. The ones that management can control that are within our control. The uncontrollable costs are medical costs, things that are beyond any CEO's and general management costs and the Sarbanes costs. We're working through those. And -- and when we have those where we can manage them down a little bit we'll manage them downward. And then, of course, we have these businesses, these shoulder businesses that we continue to work and through it. So, obviously we understand that issue. And we're going to work that issue. But, the -- again, the regulatory pieces in this thing are just what they are.

Okay. And, just -- and kind of two other conceptual questions.

Yes, sir.

Coming out of the -- the initial release call we talked about, you know, having a high degree of confidence. There was no pull through in the fourth quarter ahead of pricing increases. So, assuming, you know, that's still your thoughts, and I'm -- I'm just curious for an update on that. You know, the fourth quarter sales still noticeably ahead of expectations. Yet you're, kind of, you're keeping the same '05 guidance. You know, I'm curious, are -- are you leaning one way or another within the guidance at this point giving that 4Q came out better than expected? Or, is there anything else you can give us to think about that?

Clearly, we're more confident about where the pricing is in the first -- January's pricing is clearly there. We're seeing it in the results. That helps you. You know, we're only 22 days -- January is in. 22 day into February. Be know that's pricing is in the numbers and is working. So that gives us some degree of confidence from that point of view. Clearly, the fourth quarter was disappointing to you and very disappointing to us. But there was some mix issues in there and there were some cost issues that came through at the very last end. What the dependence on the -- the '05 year that clearly depended on the projections we had on what happens to costs in the second half. And we'll have to work it. We have to continue to work it on a daily and -- and weekly basis. The good news is the traction in our enterprise businesses is stronger in these new products than we had expected -- in the 10G. The Uniprise and the -- and our SG&A cost basis uncontrollable pieces of Sarbanes we'll just have to deal with that one. The controllable part about SG&A is in the S cost is to continue to take forward our final sales and marketing in both the SYSTIMAX program and the Uniprise program and gaining these market share numbers, which we'll begin to see. Is a program that we truly believe in in gaining these market shares. So, those programs with the kind of margins that is exist in those products, should give us that traction.

Mark, it's Brian Garrett. I -- I would say one other thing. In -- in response to -- one element of your question. And that -- and that is first quarter from a revenue persh -- perspective, we've always told you historically is -- is the lowest or among the lowest. Contrary to that, in our enterprise space, we've also said that there is not a -- there are not incentives for our channel to buy product in the fourth quarter. Subsequently we should see an improvement in our enterprise business sequentially into the first quarter. And I will tell you that we -- we are seeing that activity as represented in the first quarter. The other -- the other positive statement as it relates to the guidance in the -- into the first quarter is that the -- the cabinet business, our environmental closure business, has -- has come on substantially strong in January and throughout the quarter. So, two of the segments, in particular, we should be seeing sequential growth.

All right. Great. Thanks.

Thank you. Ladies and gentlemen, as a reminder, to register a question, please press the 1, 4 on your telephone. The next question comes from the line of Curtis Jensen from Third Avenue Funds. Please go ahead.

Good morning.

Morning, Curtis.

Just a few questions. Jearld, could you remind me in -- the inventory accounting at Avaya, was that the same as your -- your own CommScope accounting? Has any -- anything changed there?

It is not -- in -- in big picture-wise it is -- it is the same. I think both of us used FIFO costs to value our inventories, certainly in -- to all U.S. operations. That's the case. But the methodologies, you know, to -- to track and to, you know, the use of standard costs systems and that sort of things are different between the two locations.

Also we could say that we had a substantially more rigorous treatment, conservative treatment of excess and obsolete. Do you agree?

Well we certainly had a -- a different view than -- than ACS had maintained historically a -- a different methodology of how you calculate things like ex -- excess and obsolete when you determine fair market value of inventories. I'd say our -- our view there is -- is generally pretty conservative.

Okay. And I -- I don't know if I missed it. Did you -- did the company repurchase any stock in the fourth quarter?

No.

No.

Okay. And lastly, I -- I guess it's -- it's more philosophical. Just about a year ago at this time, you guys were talking about price increases, at least for the fluoropolymer based products and some of the enterprise and SYSTIMAX products. And, you know, pretty significant price increases. And just kind of looking back at the year, I'm just wondering now talking about more price increases, you know, how do I have confidence that -- that they're going to make a difference? I mean, I look at the year and -- and in some ways there is a lot of things accomplished, in other ways, you know, maybe there is some disappointments. But, it -- it -- it seems to me that the price increases are not sticking or not being affected. You know, something? What -- can you give me some sense of why I should have confidence that any price increases will the have intended effect and be carried out as -- as -- as you talk about them?

This is Brian. I -- I would characterize it a different way. I -- I think we have been largely successful in price increases. I mean, we -- we never receive all that we set out to do. But, I -- I -- I would give you the representation that we've largely been successful. The -- the proposition has been the rate and frequency at which we have been, over the course of '04 receiving cost increases, particularly in commodities, has outpaced the rate as which we've been able to move them -- move pricing into the market. So we're lagging. It's not a question of the ability -- the market's ability to accept these price increases. It's -- it's largely an issue of the rate at which it happens. And -- and we're trailing it. We trailed throughout the the year. And I -- I would tell you today we're still trailing that process.

What happened in the first quarter when we were seeing -- first quarter of '04, when we were seeing large increases in both copper and FEP, depending on the product line, it may have taken as much as four months or more to -- to benefit from the entirety of the announced price increases. The other thing that happens when you evaluate the -- the ability of a company to recover cost increases is that -- where I -- where I say that we've been successful in our price increases, there are areas geographically or by product line where we have not been able to increase prices. And we subsequently didn't even announce price increases in some of these smaller segments. And that works against us. But, when you look at the announcements that we made in the fourth quarter as it related broadly to all of our businesses, price increases in all of our businesses, we are seeing it in our enterprise business clearly. As best we can measure, we -- we -- we see it happening early on. Our other large segment, our digital broadband segment, we have good visibility to North American activity. And I would say that we like what we see early on there as well. In -- international will, I think, will always be a mixed bag for us. Because it's a -- it's a very fragmented market internationally in digital broadband.

Okay. Thanks. Good luck.

You bet. Thank you.

Thank you. The next question comes from the line of Alan Mitrani from Cooper Beach Capital. Please proceed with your question.

Hi. Thank you. One quick question. I -- it applies to the last question. Do you have a stock buyback program in place?

No.

You don't. Can you talk to us again, I know it comes up every quarter. But abour thoughts, it looks like you paid down your 11.75 million of debt. It seems like you're -- and you still had a lot of cash on your books even after the charges. Can you talk to us again about the potential for stock buybacks?

Well we've reviewed all of the programs, Alan. And we don't have a program approved by the board. And don't know that we have any plans to have one approved right now. I mean, it's not something that we're looking at at this point. And when we did the [INAUDIBLE] buyback, as you know, Alan, which brought back what 7.7 million shares. So, in a sense we've done our major buyback through that transaction.

Okay. Also can you -- did I hear you right. Are you considering strategic alternatives for ExchangeMAX?

No. I didn't said we're considering alternatives. I said we're working the issues with the management of those locations.

Okay. Got you. I understand. And lastly, on the -- can you give us your sense for on the specific coax cable size -- side of the house. Adelphia is it looks it coming close to getting bought. Do you expect that be a catalyst for you to be able to get orders on that side?

Well, I certainly expect that transaction to happen sometime in my lifetime. But that's been the process for a year and a half. And clearly, when that transaction takes place, both times in our sells we'll see an uptake in business because there's a lot of of of work to do on that issue. Again, you know, that -- that process has been in the works for a year and a half. And it may still take another 3 to 6 months to get it all tied up.

And -- and -- and your -- you -- you keep guidance for CapEx of 30 million Which is substantially above the 14 million you spent last year. I know you're spending -- you've been way under spending SD&A. How much of that is related to the Asian facility? When is that supposed to come online? And can you give us a sense of -- I know it was $30 million much less. Give us a sense of what some of the capital goes towards?

The -- Alan, the -- the -- the capital spending in '05 as it relates to the -- the China project is -- is relatively small. The biggest pieces of that happened in '04. And as mentioned earlier, the plans are for that facility to be in commercial production early in the third quarter of this year. When you look at the -- the number that says less than 30 million, the -- the biggest pieces are -- are clearly -- the single largest piece is just of the maintenance activities of the business ongoing. The other big element that I would single out is cost reduction activities. We have a -- a good track record historically. It's part of our culture in cost reduction. So there are -- there is a substantial chunk of money in there for automation and process control to lower costs broadly across all product lines.

Okay. And -- and lastly, it seems like even with your CapEx plans and your working capital going up, you should likely generate substantial free cash flow this coming year ny my math. Is that -- is that a fair statement?

We certainly expect to. We should be -- we always have been. And we have every intentions on doing a very effectively free cash flow company.

Thank you very much.

Yes, sir.

We'll take one more question, operator.

Thank you. Next question comes from the line of Kevin Sarsany from Langenberg and Company. Please go ahead.

Thank you. Can you hear me?

Yes. Yes.

I have a question on the cable side. You mentioned in the press and your comment that international is very strong. And when I look at the cable year-over-year growth, it was up 2 percent. Obviously it's, well, you come to the conclusion North America was down. Can you kind of talk about those two pieces of the business and what's going on and what you expect going forward during the year?

Well, I -- I think the bi -- biggest variable in those numbers that may -- may distort the picture is the impact of Comcast in the U.S. business. And broadly, let me best represent this for you. Broadly the North American cable television business is in a -- is in a stable maintenance mode. And among the early builders or during the buildout of the current HFC architecture, Comcast was probably the later entry into that process and subsequently the last one to largely complete their rebuilds and upgrade activity. So, during the course of '04, we experienced their slowdown in construction activities. And in the second of '04, would represent that Comcast largely was in a maintenance mode as is the remainder of the North American cable television industry.

And how does that compare with international growth? What -- what's going on internationally? That a buildout phase?

Largely I would say, yes. In Europe there was a lot of construction going on, particularly in the Iberian Peninsula and Eastern Europe. And spotted throughout Asia-Pacific, we are seeing a variety of projects. South America is smallest base of comparison, is also seeing expansion as, you know, as money becomes available into that segment.

Okay. One last quick question on -- on both segments in regard for price increase. I think everybody is trying to get a handle on it. And I'm not as smart as they are. But, can you give me the net effect of the price increases versus raw material, where it is today?

Versus?

I -- I think the question is -- is raw materials are up 8 percent, is pricing up 10 or is 8 to 8

Yes.

That's kind of the issue here.

Yes.

Well, I -- I would say, I don't have quantitative numbers for you. But, clearly, in the fourth quarter we lost ground.

We lost -- we lost.

We had no -- in the month of November and December, in particular, we experienced substantial raw material increases. The nu -- the numbers that Jearld gave you for the fourth quarter, the vast majority of them were experienced in the last two months of the quarter. The price increases that we announced in the fourth quarter, although they became effective late December, essentially had no impact on the quarter. Fourth quarter we lost ground.

But -- but

We talk about the first quarter, I think we'll see a -- we'll see a balance coming. We'll obviously be -- beginning to experience our -- our price increases into the market. There may be modest cost increases as well in the first quarter as well.

Is that for cable and your Connectivity segment? I mean it's --

That's across all segments.

Yes, sir, it's across all segments. Net net we expect to begin to have it recovered sales over cost. If that's the question.

In the first quarter. Yes. Okay.

In the first quarter.

All right. Thank you.

Yes, sir. If there are no other questions, ladies and gentlemen, I do appreciate the call. We are obviously very disappointed about the fourth quarter. Within the aggregate, 2004 was a very good year for CommScope. When you consider we doubled the size of the company, we integrated a very, very established world leader in Connectivity. We now lead the world in connectivity. We lead the world in -- in advanced 10G opportunity. We lead the world in HFC. We still have a lot of on our plate to correct and to fix. We have a lot of opportunity to correct some functional operations within the company. We are in an environment that I've never seen in 30 years with raw materials jumping all over the place in the world. In commodities that have gone up more in the last two years than have gone up in the last 30 years. So, it's a -- is an environment that takes every day operational excellence. But we have the best team. And we're committed to get our profitability back on track. We're still very strong cash -- operationally strong. And we're committed to get this thing in the condition that we all want it to be. So, again, thank you for being investors with us. And we look forward to working with you.

That -- that ends the call today.

Thank you. Ladies and gentlemen, that does conclude the conference call today. We thank you for your participation. And ask that you please disconnect your lines. Have a good day.

Thank you.