CommScope Holding Company Inc (COMM) 2008 Q3 法說會逐字稿

Good afternoon. My name is Anita, and I will be your conference Operator today. At this time, I would like to welcome everyone to the CommScope third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS). Thank you. I will now turn the call over to Mr. Phil Armstrong. Sir, you may begin the conference.

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 are joining me on call.

During this call we may make forward-looking statements regarding our financial position, plans and outlook that are based on information currently available to Management, Managements 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 actual results to differ materially from those currently expected.

For more detailed description of factors that could cause such a difference, please see the press release we issued today and CommScope's filings with the Securities and Exchange Commission. 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, future events or otherwise. Also please note that all dollar figures and percentages are approximations.

Before I turn it over to Jearld , I want to remind you about the upcoming CommScope financial Analyst conference which we plan to host on Thursday, November 6th in Richardson, Texas. Management will conduct formal presentations from 8:30 a.m.- 11:30 a.m. Central Time followed by afternoon tours of selected Research and Development facilities located in Richardson. Institutional investors who are interested attending can contact me or Mark [Hugerich] for registration details. Please see the information in our press release today for additional information.

Now, I'll turn it over to Jearld and Frank to discuss third quarter

Thank you, Phil. This afternoon, I will review our third quarter results, before turning the call over to Frank, I'll also cover our outlook for the fourth quarter 2008.

Today, CommScope announced third quarter results for the period ended September 30, 2008. This is our third quarterly conference call after making the transformational acquisition of Andrew Corporation which we acquired in late December 2007. We reported third quarter sales of $1.06 billion and net income of $85 million or $1.05 per diluted earnings per share. The reported net income includes after-tax charges of $18 million for the amortization of purchased intangibles and $3 million for restructuring, one-time costs and purchase accounting adjustments. These special charges were somewhat offset by $6 million of after-tax benefits related to the impact of aligning certain CommScope and Andrew employee benefit policies.

In addition, the consolidation of CommScope and Andrew entities in Brazil allowed the Company to recognize a $5 million tax benefit for the expected use of tax assets related to a portion of the Brazilian net operating losses. Excluding these items, adjusted third quarter for 2008 earnings were $94 million or $1.17 per diluted share for the year or for the quarter. Now, sales more than doubled year-over-year primarily as a result of the Andrew acquisition. Sales decreased 7% on a combined basis that includes Andrew 's actual sales for the third calendar quarter of 2007. The Company's ongoing efforts to eliminate unprofitable product lines affected the year-over-year sales comparison, primarily in the wireless network solution segment.

Excluding the favorable impact of changes and foreign exchange rates of $22 million, and adjusting for the divestiture of the satellite communications or Satcom product line, sales declined approximately 7% year-over-year on a combined basis. Antenna, cable and cabinet group segment sales decreased 2% year-over-year to $495 million. Significantly lower wireline sales were substantially offset by higher wireless sales. Wireline sales declined primarily due to a weaker demand for cabinet and apparatus products by major US telecommunication service providers. The Company expects continued weakness in the fourth quarter as carriers manage capital spending and inventory levels. However wireline sales are expected to recover in the first quarter of 2009.

Despite the slowdown, CommScope expanded its leadership positions in engineering environmentally secure enclosures and initiated a number of field trials with major OEMs outside of North America for potential wireline, wireless and fuel cell applications. The wireline weakness was substantially offset by strengthen ACCG wireless products which increased 7% year-over-year. ACCG wireless sales continued to be robust in emerging markets with Asia Pacific and other American regions or other Americas region up double digits year-over-year, including the positive effect of changes in foreign exchange rates. Sales of microwave products for backhaul applications continued to be strong in the quarter.

On a combined basis, in spite of lower overall sales volume of wireline products, ACCG segment adjusted operating income rose year-over-year primarily due to ongoing integration and cost management efforts along with a favorable sales mix. Despite the current market uncertainty, we believe 2G coverage needs for voice services in emerging markets and capacity requirements associated with growing data demands of 3G and 4G networks in more mature markets, will drive long term growth.

Enterprise segment sales decreased 2% year-over-year to $ 237 million primarily as a result of a slowdown in the North American enterprise market. Moderate growth continued on a year-over-year basis in all major regions outside of North America. And these sales represented essentially half of enterprise sales in the quarter.

Despite a challenging North American market, the Company continues to see a positive shift in mix towards higher bandwidth applications which represent roughly three quarters of our total enterprise [cost per] sales. In addition, sales of cutting edge 10-gigabit solutions such as our SYSTIMAX GigaSpeed extend, are typically are less sensitive to changes in commodity prices. As a result of our global leadership, broad customer base, favorable product mix and cost management, the enterprise operating income increased year-over-year despite lower sales volume. While the enterprise market is clearly being affected by the global economic slowdown, we believe that there will continue to be ongoing global opportunities as enterprise works to meet the growing bandwidth requirements of applications such as video conferencing, collaborative software, IP based security platforms, public safety and intelligent buildings.

Offsetting the weakness in some areas, we are seeing new opportunities in the government, healthcare and education markets among others. In fact we recently won major jobs with multiple agencies of the United States government. Broadband segment sales declined 1% to $159 million on a year-over-year basis. International growth was more than offset by weakness in the North American market which was primarily attributable to the slowdown in residential construction. The lower sales volume and an unfavorable product mix negatively affected the Broadband segment adjusted operating income.

Wireless Network Solutions or WNS segment sales decreased 25% year-over-year to $175 million in the third quarter of 2008. The WNS year-over-year sales decline was primarily due to the divestiture of the Satcom business which was sold in the first quarter of 2008. Satcom business had sales of $27 million in the year ago quarter. The WNS sales comparison was also affected by restructuring the arrangement that had been in place to supply Nokia Siemens network with custom filter production.

In addition, during the second quarter, we sold certain un profitable network act -- at our optimization assets rather that had been acquired in Andrews acquisition of Xenacom Limited. As a result of these changes, WNS segment operating income improved significantly despite lower sales volumes. Overall for the Company, customer orders booked in the third quarter of 2008 were $1.02 billion, down 6% from the year ago quarter on a combined basis. Our book-to-bill ratio was slightly less than one for the quarter.

Gross margin for the third quarter of 2008 was 27.9% and includes $4 million of intangible amortization and $2 million of purchase accounting adjustments primarily related to inventory. Excluding these items, adjusted gross margin would be 28.4%. Our SG&A expense for the third quarter of 2008 was $109 million or 10.2% of sales and includes a special benefit of approximately $10 million related to the alignment of certain employee benefit policies between CommScope and Andrew. Excluding this benefit, SG&A would have been 11.2% of sales and was down 2% from the second quarter of 2008.

Total amortization of purchased intangible assets for the quarter was $28 million of which $4 million is reflected in cost of sales. Amortization relates primarily to the Andrew acquisition. Operating income in the third quarter of 2008 was $128 million, excluding intangible amortization, purchase accounting adjustments, acquisition related expenses, restructuring costs and benefit adjustments, third quarter adjusted operating income was $150 million. Adjusted operating income on a comparative basis rose approximately 19% year-over-year primarily due to improved performance from the WNS and ACCG segments.

CommScope Integration and synergy activities are ahead of schedule and the Company now expects total merger savings to be approximately $115 million in 2009. Nearly $60 million of these savings are expected to be achieved in 2008. Increased synergy expectations include the recently announced plans to consolidate certain antenna and cable production within the ACCG and Enterprise segments into existing, pardon me, existing facilities. The total cost savings are expected to come from a combination of procurement savings, reduced labor cost, rationalization of duplicate locations, streamlining overhead, and integration of infrastructure and building upon best practices in technology and manufacturing.

On a sequential basis, the other expense line item improved significantly due to favorable moves in foreign exchange rates and a combination of actions taken to reduce foreign exchange exposures. Specifically we took steps to minimize exposure to non-local currency assets and liabilities in certain non-US entities to help mitigate the volatility. Regarding taxes, the consolidation of CommScope and Andrew entities in Brazil allowed us to recognize a $5 million tax benefit in the quarter related to a partial release of tax valuation allowances on net operating losses from prior years. In addition, the Company's effective tax rate reflects benefits derived from significant operations which are outside of the United States, which are generally taxed at rates lower than the US statutory rate.

The geographic mix of taxable earnings had a significantly positive impact on the 2008 effective tax rate. Now as a result of the recent financial turmoil, cash flow, liquidity and credit metrics have become a key focus for many investors. They've always been important to CommScope. Here is some background on CommScope's balance sheet. In connection with the Andrew acquisition, CommScope entered a $2.5 billion senior secured credit facility that were comprised of first a seven year, $1.35 billion term loan, a six year, $750 million term loan, and a $400 million revolving credit facility.

And while the term loans are variable-rate debt, we fixed the interest rate on $1.5 billion of the total $2.1 billion in term loans through an interest rate swap. The swap amount declines over time to $1.3 billion in 2009, $1 billion in 2010, and $400 million in 2011. We think this was a reasonable way to manage exposure to interest rate risk. Now at the end of the third quarter the weighted average effective interest rate on outstanding borrowings including the effect of the interest rate swap and amortization of associated loan fees was 6.25%.

Regarding cash management, we continue to improve our working capital metrics. Day Sales Outstanding declined in the second quarter by about two days, while inventory levels fell by more than $30 million sequentially. Overall in the third quarter of 2008, we generated $132 million of cash flow from operations. We used $105 million to repay outstanding debt as a step in our plan to reduce leverage. After this payment, we ended the quarter with nearly $500 million of cash and cash equivalents and our revolving credit facility remains fully in place and undrawn.

As we've seen in the past, we expect our strongest cash flow generation of the year during the fourth quarter and expect to generate more than $200 million of cash flow from operations. We also continue to manage capital spending carefully. We expect $20 to $30 million of capital spending in the fourth quarter and a total of $55 to $65 million for calendar year 2008.

So, our liquidity remains strong and we are fully in compliance with our credit facility covenants and we expect to continue generating significant cash flow from operations. With this cash flow, we intend to prudently invest in our business and use the excess cash flow to further reduce debt and reduce interest expense. We have updated our fourth quarter outlook based on the current business conditions. For the fourth quarter we expect revenue of $875 million to $925 million. Adjusted operating income of $80 million to $100 million excluding special items. A tax rate of 24% to 26% on adjusted pre-tax income. More than $200 million in cash flow from operations, and capital expenditures as stated between $20 and $30 million.

Now, with this updated guidance, here is our view of the full calendar year 2008. Revenue of $4.03 billion to $4.08 billion. Adjusted operating income of $495 million to $515 million excluding special items. A tax rate of 26% to 28% on adjusted pre-tax income. More than $ 450 million of cash flow from operations, and capital expenditures of $55 to $65 million for the year.

Our fourth quarter outlook reflects significantly lower sales expectations for wireline cabinets and also a seasonal volume reduction in the sales of other product areas and a sequentially negative sales impact of foreign exchange coming from the stronger dollar. We expect operating income to be affected by the lower volume, somewhat offset by lower commodity and other costs. Clearly, the current global financial crisis has created unprecedented volatility and made our customers more cautious as we are.

The ongoing global economic uncertainty and commodity cost volatility have also made forecasting much more difficult. As a result, CommScope does not intend to provide specific financial guidance for calendar year 2009 at this time. Now, despite these challenges we firmly believe in the strength and diversity of our business model and expect to create value for our shareholders and our customers and our other stakeholders over the long term.

Now, I'll turn it over to Frank Drendel for his comments. Frank? Frank?

Thank you, Jearld. First of all congratulations to all the CommScope employees for a solid solid third quarter in spite of a difficult business environment. I'm pleased with our performance and our execution in this challenging market.

Adjusted operating income rose 20% year-over-year. We're delivering the synergies; the cost reductions are on target. We have a great team of Managers. We delivered the synergies and are continuing to deliver the synergies. Our team of Managers are the best in the world. We have the greatest products in the world. We're a worldwide Company with worldwide products and worldwide operating synergies. In the long term we have the best of the best and I am very very proud of the synergies and the opportunities we have going forward.

And with that, operator, we'll be glad to offer the opportunity for questions and answers for everyone. So I'll turn it over to the questions, please.

Certainly, sir. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Amir Rozwadowski with Barclays International. Sir your line is open.

Thank you for taking the question. Good afternoon folks.

Good afternoon.

Perhaps we can start with the current pricing environment. I know that or you had suggested in the past that part of the synergies that you were hoping to get with Andrew was the ability to affect some pricing increases in the marketplace. Can you talk about how or what impact the current macro environment has on that strategy?

Amir, Brian Garrett. Good afternoon.

Good afternoon, Brian.

Amir, let me kind of rephrase the question. The strategy as it related to aluminum wasn't so much about raising prices in the market. It's all about giving the market an alternative to copper and by converting it willingly converting customers to aluminum, it would permit us to expand margin. Now, we did say and for clarity to the extent that we can do that, it gives us an opportunity to push since we've got two solutions, it gives us an opportunity to push copper pricing up more aggressively than we otherwise would have. So maybe a restatement of your premise there.

But the conversion to aluminum is continuing and we've got particularly in Asian markets and in South America for having -- we're having good success and it represents today's substantial part of the total sales. The strategy I think early on is working from the standpoint of margin. We are able to demonstrate substantially better margins in our smooth wall products than corrugated copper. So we're happy with the strategy that we put forward to everyone and hope to continue to expand on it.

Great. That's very helpful, and then if I may, just switch gears a bit to the wireless side of your house. Certainly we've seen some healthy growth this quarter. Perhaps a little bit more clarity in terms of the puts and takes there and how you see that business going forward in terms of the demand environment.

Well, as it relates to pricing broadly, we've got strong demand globally in our antenna space, BSAs. And we are as we speak, we're pressing for price increases in that segment. We've got strong backlog and good competitive position, so now is the time to be pushing for price increases. Globally, in our microwave products we're seeing strong demand.

I think we spoke in the second quarter about a very strong growth top line, even stronger growth than operating margins in those segments. And barring seasonality, now remember ACCG and WNS for that matter have seasonality just like all of our other products do. So much of what you see in the guidance in the fourth quarter is the traditional downturn that we've seen in all of our businesses into Q4 moving on into Q1.

Amir, it's Frank. If you have a chance to come to the conference, we are going to show a major program in [Heliax] 2.0 which shows a complete program of both copper and aluminum. Complete product line introduction across the world with a single connector opportunity that works on both cable products. No one in the world has this product offering and it's a major major offering to the worldwide sales force. We would love for you to see it and if you can't come, please go online and watch the presentation because it's a major offering to promote both copper and aluminum.

Great. Thank you very much, gentlemen, for the additional color.

Thank you, Amir.

Your next question comes from the line of Tim Long of Banc of America. Sir, your line is open.

Thank you. Just a few quick ones here. First, could you just talk a little bit about linearity in the quarter, just curious to see if things tended to get worse towards the end of the quarter and then let's just answer that and then I have one or two others.

Well, I'm thinking across all of the product lines and all of the segments of the business. I think linearity was good. From memory, I can't see any standouts either way. I'm sure you're more concerned or questioned about big downturns over the course of the quarter, but the answer is No.

Okay.

And if you looked at our book-to-bill for the quarter, it's hovering around one, slightly less, and so no big, obviously we're spending a lot of time right now looking at the horizon, but there was nothing extraordinary visible over the course of the quarter.

Tim, I'd say our cabinet business actually did weaken some through the third quarter. It started very strong, but did weaken in the third quarter and obviously is having a lingering impact into the fourth quarter.

Good point, Jerald, and we may want to expand on that later on with other questions.

Yes, the follow-up there is what gives you the confidence in rebound in Q1?

Tim, I think the question, if you go to the AT&T earnings release and you go to Comcast earnings release, both of them say that their view is that the most competitive environment they have seen yet in the customer to customer releases is the view that AT&T has the most effective competitive offering for video. So our belief is AT&T has getting traction with video connectivity and data connectivity in the industry and that's both of them presenting in their earnings release. So it's our belief they will pick up in the first quarter.

Okay, great and then just the last one here. You mentioned a positive mix for enterprise in the quarter. Could you just bring us back to what you've generally seen in that business in past economic down cycles? Is that something that we risk not only top line but mix change? How does that normally happen and what are customers talking about there in that regard? Thank you.

Well, Tim, Brian Garrett again. We did pretty good in the downturn. We did very good in the downturn last time. And then I would say if there is one or in the current environment, I would say we're better positioned. And what's different substantially is the higher mix of category six and 6A. You go back to Year 2001, the market was substantially a 5E market where we had many many competitors.

And you look at what happened in the quarter on a year-over-year basis, our category six and 6A was growing, has grown 20% plus at the expense of the commodity 5E. And so when we're competing in the Category six and 6A space, the number of competitors that we have fit on one hand and our win ratios are much higher. So going forward, in this environment competitively speaking we're in a much much stronger position than we were in the past.

Okay, so you normally don't see people trade down on technology because the economy is tight?

You never say never.

Yes.

Certainly to the degree it is substantially less. I don't think, you look at our list of accounts globally, they aren't people who are going to downgrade their IT capability to save some percentage of materials.

And if you look through it, Tim, there's no question, you'd be a fool to stay here in front of this audience and say that banking and investment banking isn't a challenged. But the other major major verticals are government. There will be so much money flushed into government for expansion. Medical, no matter who gets elected, medical is going to be big for us and education are the other three major verticals. So clearly, if you look at what happens after the election, those will be accelerated for improving the economy.

Okay, great. Thank you very much.

Thanks, Tim.

Your next question comes from the line of Amitabh Passi of UBS. Your line is open.

Hi, thank you. My first question has to do with the balance sheet. And Jearld, help me understand if I'm looking at this correctly. If I look at the implied EBITDA for the fourth quarter versus the interest expense, I get a ratio that's substantially below the 3.75 that I think is stipulated in your covenants. So just wondering is that the right way to be thinking about this? Maybe you can shed additional color in terms of how to think about some of the ratios implied in the covenants versus the performance right now.

Yes, well, fourth quarter is not the right, if you're just annualizing a quarter, the fourth quarter would never be the right quarter to annualize, as it is typically our lowest or second lowest quarter of the year, so we -- usually it goes down seasonally. The interest expense or the interest rate, interest coverage test is based on trailing 12 months of cash interest compared to our EBITDA and so it's a two part equation, if you will, or division.

So I would not annualize the fourth quarter. I think it would be better to expect, I think we can expect things looking historically to be better and no, I do not think that will be a problem certainly on your term in terms of passing that test.

And then perhaps just elaborating on that, can you just help us understand if indeed you were to trip any one of the covenants, I mean what are the implications?

Well, that's hypothetical and speculation, Amitabh, but we have credit agreements, they have covenants, we're in compliance with all of our covenants, we feel good about our position in terms of our relationship with our lenders, we had $500 million in cash.

We haven't drawn down our revolver, we got companies all over drawing down revolvers to even come close to meeting their covenant. I mean, Amitabh this is so off the charts. We could sell our enterprise business in a heart beat and pay the whole damned Company off.

Okay. And perhaps if you could also just remind me, what is the minimum amount of cash that you think you need for the business? Like I know you could drawn down -- you've got $500 million. I mean what level are you comfortable with?

Well if you'd asked me back in September I'm not so sure. Joking a little bit about the financial situation which wasn't all that funny. But we can operate on a lot less than $500 million, Amitabh. And again cash and our liquidity and cash flow are a big part of the whole deleveraging strategy that we haven't changed in any way from the time we acquired the business and took on the debt. This Company has always been a good cash flow Company.

We are going to generate somewhere around $400 million of free cash flow this year and we expect to use our cash first as I said to meet our needs for investment in the Company which are relatively light right now, ut to pay down debt as reasonably quickly as we can. And if you look at the way that our interest rate swaps amortize, you might get some indication of how quickly we expect that we can pay down debt in the future.

Okay, cool. I just have a couple quick ones here on your business segments. I was just wondering are you beginning to get any rolling forecasts from your carrier customers for your cabinets that gives you some incremental confidence that business could re bound in the first quarter for '09? I mean is there anything substantially more with respect to order intake that gives you that extra confidence?

Well a little bit of history. Remember last year, we had a lot of uncertainty about what the fourth quarter was going to be and a lot of it has to do each year with where their spending is and what they want to do with inventories. And we're in a period, Amitabh where there is a desire to pull channel inventories down substantially. And that impact of that is what we're going to feel largely in the fourth quarter. At the same time we're having those discussions, we're having discussions with ramping, the rate at which they want deliveries, in the first quarter, which are greater than, it's a rate greater than we've ever delivered.

And so it's a big ramp and it's one that we can't entertain. So I'm just giving you a sense of the desire to get back on track in terms of our customers desire to get back on track in the front end of next year. So we'll work something out for first and second quarter of next year that's both acceptable to us in terms of scaling back up and meeting their demands for construction. So that nature of conversation gives us a good bit of confidence in terms of what '09 is going to look like.

And just my final question. Any sense of you can give us what you've assumed in terms of foreign exchange headwinds for the fourth quarter revenue guidance?

Yes. We've had, we have assumed some FX headwinds in the revenue guidance, Amitabh . Probably 2% to 3%, something in that range noticeable. And the earlier question that Tim had asked, we did see some trending obviously of that in the third quarter as the dollar started to get stronger, it did have some negative effect on revenue in the third quarter on a sequential basis or on a

Okay, thank you. I'll jump back in queue.

Your next question comes from the line of Jeff Beach of Stifel Nicolaus. Sir your line is open.

Good afternoon, all.

Good afternoon, Jeff.

A couple of questions. There were references made through the segments to good growth outside of the US. Can you just talk specifically about Europe and trends in Europe for your different products?

Well, it's Europe as you might expect I'd say across-the-board has not been a high growth region for us. And if you look at ACCG in the quarter, year-over-year would essentially be flat. And if we looked into the enterprise space, we would see growth and I'm looking for a quick number here. In sales, look at it two ways. Sales into the channel, we grew 8% roughly and that's the number that we would report. Sales out of the channel was a little more modest something in the neighborhood of 3% to 4%. Somewhere in the neighborhood of 3% to 4%, Jeff. Okay?

Yes. Second, the sales decline in the fourth quarter, you've got quite a leverage and I haven't worked it out yet but it appears as though you're seeing a bigger than usual decline on the volume you're looking at in op income. And I just wondered if there were any other factors involved besides lower volume, some impact from currency, anything else involved?

Well, maybe Jearld would like to talk about that. There's one of the big variables in there is FX.

Yes.

Maybe you want to talk to that and I'll come back and talk about some of the other volumes.

Well, volume is the biggest single piece, Jeff, but again , we have very modest expectations in our cabinet business again which is impacting sales and operating income as well, it's the biggest volume item if you will of decline. So that FX has some effect on revenue and has a beneficial effect on cost of sales. It does lower margin a little bit, if it stays proportional in those areas. It also lowers period overhead. So it's a mixed bag but net- net, it is a small negative or a negative in the

Yes, I think what I was going to say, Jearld, the reason I mentioned FX, I think if you backed out the FX impact the sequential change three to four this year would essentially be at the average of what '06 and '07 was.

Okay.

So you could look at one year and say that it's different , look at it over two years and it's not atypical with what we've done with the average of '06 and

All right last question, you said you might come back to it. I didn't know if that would mean you'd specify this but can you give us an idea how much the cabinet sales were down in the third quarter and if it's looking to be about that kind of a decline in the fourth quarter?

The answer is Yes to both of those. We did, and I'm talking units now, and I think that will give you some insight. But it was in the third quarter on a year-over-year basis, it was down substantially, and more than 25% and then going into the fourth quarter, it will be over 25% again. So it is a substantial impact and but we've got customers who have desires to reduce channel and inventories and we don't like it but we're sympathetic with it. And we have a great amount of confidence to Frank's point in terms of their business model going forward. And our commercial discussions with them in terms of their demands for '09 are encouraging. So there's not a lot of concern there on our part.

All right, thank you.

Your next question comes from the line of Kim Watkins of JPMorgan. Ma'am, your line is open.

Great. Thank you. Again looking at your guidance, it implies -- I calculate at the mid point about a 10% operating margin for the fourth quarter. And taking into consideration some earlier comments about profitability in the enterprise segment kind of holding up given the mix changes there. Can you just talk us through the different businesses and where you think they're most sensitive to a decline in volume? And then secondly, what do you assuming or do you expect to get a substantial benefit from the lower raw material costs or does that flow through more in Q1?

Well, Jerald, you may want to chime in here, but let me give you, because we really don't talk a whole lot in terms of profitability by product line. But in terms of the sensitivity to volume, one of the key things that happened in the third quarter was a couple of our larger under performing businesses did very well. And it was, these are businesses that are under repair, if you will. They've done an extraordinary job in getting them to profitability in the third quarter and I'm speaking largely to filters and power amps.

These businesses need scale, so subsequently they're very sensitive to volume. And so where they were profitable in the third quarter, they're going to be probably unprofitable in the fourth quarter. So those things are going to be big swings. And as it relates to the rest of the business, it's going to be a mix and you've got the right formula. Volume is going to work against us to the extent that things are produced by contract manufacturing we're advantaged and materials in the quarter broadly will work to our advantage.

Sure. Kim, to the extent there's some negative FX impact, that would be more against ACCG and the WNS business wireless businesses do much more non-US dollar revenue than either our enterprise or Broadband business who does very little that is not de nominated in US. So some areas though we do have cost in F X outside the particularly in enterprise, but in both cost outside the US that could be helpful with a stronger dollar in terms of the operating cost input. So but ACCG and WNS would be those impacted most by foreign exchange.

WNS has almost no commodity considerations. ACCG would benefit over time with lower copper cost obviously and lower aluminum cost over time but it would take some time obviously for those costs to move through the P&L or move through the inventory and into the P&L.

Okay, so if commodity costs kind of stay where they are now, it's more of a benefit to you in Q1 than it would be in Q4?

That would be my expectation right now.

Okay. In terms of looking at your customers and thinking about the credit crunch that we've seen, have you seen any direct impact in terms of constricted access to capital impacting purchase decisions?

No. I think fortunately most of our customers are fairly fairly strong in the credit markets. If you consider the telecommunications based business structure of our industry, most of them have fairly strong cash flow, look at Verizon, AT&T, maybe a little weaker in the worldwide customer base but not substantially so. Verizon, AT&T, Comcast, tremendous cash flow this quarter.

Even on the enterprise side, I guess that's where I was thinking.

(Inaudible - multiple speakers)

Yes, Kim, Frank's exactly right. Our end customers, the people that we promote to and team with, obviously these are the global 100, global 500, a little concern there. But as you know materials move through our distribution channels to integrators and so when you're talking to the execs at Graybar, and Anixter, obviously they're mindful of those integrators and their credit basis. But I don't think their standing will be restrictive to getting done what the end customers want to accomplish.

True. Kim, I think talking for FX again but the stronger dollar makes our US denominated sales a little higher priced in non-US markets. So that's something we're monitoring and but as Brian said, so far not significant pushback in those fronts.

Okay, and last question which is more housekeeping, the 10% customers this quarter?

Anixter should be. We'll look it up.

I think that's the only one.

Okay, thank you.

Yes.

Your next question comes from the line of George Notter of Jefferies. Sir, your line is open.

Hi, thanks. I wanted to ask about commodity costs and pricing relationships. If I go back to July, you guys are raising pricing in many areas of your business, copper was I think around 3.65 or 3.70 a pound and going higher. So wondering if those price increases have stuck and also wondering, what point do you see some pushback from the customer base with commodities now having fallen almost 50% since then, in many cases? Do those customers come back and get pricing concessions from CommScope? How does that dynamic work? Thanks.

George, full spectrum of activities. In the enterprise space, I would say largely at the moment, pricing is holding. Our value proposition again isn't metals and I think our distribution partners are likewise motivated not to be changing prices at the moment. I wouldn't take it off the table going forward, but at the present, there's not a lot of pushback in this category six and 6A space.

In the ACCG space, in cable, I think we'll come under pressures and we'll likely see people wanting to re auction if you will demand in large buys. That's not unrealistic and I would just say that we're going to be advantage there again by our aluminum strategy. And in the large value proposition that we have worldwide and then I mentioned in the antenna space, we're in the process of actually executing a price increase. So we've got the full spectrum of activity under way.

Got it. And then how about on the coaxial cable piece of the business?

In the cable television space?

Yes.

Pricing is stable. We mentioned in the last call we were going to initiate an additional price increase which we have largely executed in North America.

Got it. Great. Thanks very much.

Operator? I think we have time for about two more questions.

Very good, sir. Your next question comes from the line of Kenneth Muth of Robert Baird. Sir your line is open.

Hi, thanks. Just a quick follow-up on George there. If the pricing would remain pretty much like you're talking, Brian, would you anticipate your margin profile to be better in the following year?

Wow, that would be a great assumption. You're saying if nothing else changed, and we could hold pricing, sure our margins would expand on lower commodities. Am I missing something?

No. I just wanted to see if I'm missing something there because it sounds like in two out of the three categories you intend to keep pricing around the same levels.

Well I'm just saying that's where we currently are and I also said I wasn't going to take things off the table. It really has a lot to do with these commodities about how low they go and how long they stay down there. And think about the enterprise space. The first place where you'd expect to see that, Ken, is for the producers of 5E product. They're selling a cable, they aren't selling solutions and it's more for the contractor market. And so some people start to see price erosion there first if these commodity costs stay down.

I'm just saying, our proposition, that's not our proposition and we're currently not seeing it, but it's unreal. I'm not being unrealistic here. If copper goes down to $1.60 or stays sub $2 and stays there for an extended period of time, we'll be under pricing pressure. But we will have harvest -- the longer we keep pricing where we are, the greater the opportunity to expand margins.

Okay. And then Jearld, on the balance sheet just trying to do the net debt kind of calculation here on the totals. It looks like you've paid down about $246 million roughly, I don't know if that's right. But with your cash flow dynamics , has there been cash charges this year when you've had some layoffs or where did kind of rest of the money go in this

I'm not sure I fully understand your question, Ken, but yes, we had some debt, the Andrew convertible debt was still outstanding, largely at the first of the year most of that was paid off within the first few weeks of the first part of the year. We've had a few payments beyond that, some mandatory very small payments that go with our term loans, some payments along acquisitions. We've had $35 million so far this year in CapEx. So yes, and we've had a few one-time expenses. That's also true, Ken, but I think our cash flow segment should be able to help you sort that out.

Yes. I just wanted to see if there -- I mean next trying to figure out if more of your cash flow would go towards debt repayment and debt retirement than this year because you had maybe some extraordinary items.

Well again some of that is a question about cash efficiency and we would hope that we could operate. One we would like to have a more stable credit environment and those type of things but we can operate on less cash than we have. So we have a great starting point in terms of the cash on hand, expect free cash flow of somewhere around $150 million or plus in the fourth quarter on top of that. So we're considering our deleveraging strategies and intend to act on them.

Great. All right, thank you very much.

Ken?

Yes.

You also have to remember, we have lots and lots of assets. I think people keep forgetting the scale and value of this Company. No one in the world has our asset base, so it's not just the cash flow, it's the assets we have.

Okay. Thank you very much.

All right, thank you, Ken.

Your final question today comes from the line of Simon Leopold of Morgan Keegan. Sir your line is open.

Thanks a lot. I was wondering if I was going to get in. Appreciate it.

Good afternoon, Simon.

Thanks. Wanted to see if you could touch on how this quarter, the fourth quarter, current quarter started out, whether you saw a dramatic change coming into the beginning of October with sort of the macro wheels coming off, how that's been performing relative to your expectations prior to that?

Well, that's kind of back to the question before about what we saw in terms of linearity throughout the quarter and I think Jearld got it right. I think things are pretty traditional if you will in terms of demand heading into the seasonality of the fourth quarter , the largest exception to that being a large adjustment in our outlook for cabinets in the

Right, and again, we have seen stronger dollar since the beginning of this quarter, the fourth quarter began. And as we said we try to factor that into the guidance that we gave you.

Great, and if you could touch on in terms of the fourth quarter what kind of assumptions are you making, let's call it around mix shifts. Which of your reporting segments maybe are a little bit better and which ones decline a little bit more sequentially?

Well, ACCG is nearly half the business. So it's going to be the most important piece of this all together. WNS sometimes is the most volatile, but it's not the biggest piece of the business and enterprise seems to see a bigger seasonal trend. So it's somewhat of a mixed bag, Simon.

Okay, and then just two more or less housekeeping questions. One is this quarter, the SG&A dropped quite a bit but looks like there's some one-time aspects. What are we thinking about SG&A levels now in terms of the post-restructured Company?

Well, we're not, we're glad to see the efficiency in our SG&A spend there, and a lot of our early synergies we're in the SG&A early. The wins that we have had were somewhere around I guess $40 plus million now through nine months and at least half of those or more came out of SG&A. And from here on out we'll probably see more synergies coming out of cost of sales than we will further SG&A. But we continue to work on it and hopefully we can improve the efficiency over what we are today.

We've collectively in this room, Brian, Jearld, and I and a lot of the Managers have run this Company for over 30 years and we've been through so many cycles, positive ones and negative ones and we will size this Company appropriately. But through those cycles we've always maintained that the best thing that you can do is don't downsize, up size the Sales and Marketing forces.

Through most of these downturns in the history of the Company, we've grown and grown market share when everybody else goes down, we go up. And I have every confidence that people will go to the leaders in these periods of downturn, and who do you want to do business with? Number three, number four, or number one? And I'm very comfortable we'll come out of this way ahead of all of our competitors.

And one last question I promise. Last quarter, you had mentioned India being a very strong region in comparison. Just if we can get an update of the trends of that business for you.

Still strong, Simon, and they reported a very very good third quarter. And the only caveat is not cautionary, it is just to remind you that there is seasonality there as there is elsewhere and expectations for the fourth quarter in aggregate will be, will likely be down from the third quarter.

Thank you for the segway there, Simon. We have Ben Cardwell who is our Asia-Pac sales leader for our wireless businesses speaking, one of the speakers at the Analyst meeting next week. And so you'll get an opportunity to ask him firsthand how India is performing.

And in closing, it's very very important that I personally extend an invitation to all of you on the call. Please, please, I know travel is tough and this is a very unusual environment, all of us are living in. If you can't come personally and review all of the R&D that's going on, all of the future products we're working on in this Company, come personally and visit the R&D centers in Richardson, please please try and come electronically and review all of the opportunity.

What this Company has in the pipeline for the next five years is outstanding, and this is a difficult time. But I remind you, what are you doing today that takes less telecommunications, less bits of data than you're doing yesterday and what are you going to do tomorrow that takes less? We will get through this as a country and it's going to take a lot more information in the future. So please, try and come and visit us. With that, operator, I think we will conclude.

Thank you, sir. At this time, I would like to thank everyone for joining the conference call. Today's conference has now concluded. And you may now disconnect your lines.