CommScope Holding Company Inc (COMM) 2008 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the CommScope fourth quarter 2008 earnings release. Thank you. Mr. Phil Armstrong, you may begin your 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, Chief Operating Officer, and Jearld Leonhardt, CommScope's Chief Financial Officer, and Eddy Edwards, Executive Vice President and General Manager of W&S Group, join me on the call. Please note that during this conference call we may make forward-looking statements regarding our financial position, plan and outlook that are based on information currently available to management, management's beliefs and a number of assumptions concerning future events.

Forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors which could cause the actual results to differ materially from those currently expected. For more detailed description of factors that could cause such a difference, please see the press release we issued today and CommScope filing with the Securities and Exchange Commission. And providing forward-looking statements, the company does not intend and is not undertaking any duty or obligation to update these statements as a result of new information, future events other otherwise. Also please note that all dollar figures and percentages are approximations, and that detailed reconciliations of GAAP to adjusted results can be found in the press release we issued today and on our website. After we review fourth quarter results and Frank makes closing comments, we will open up the lines for questions. Jearld?

Jearld. Thank you Phil. This afternoon I will review our fourth quarter quarter and full year 2008 results. Before turning the call over to Frank, I will also cover our outlook for the first quarter of 2009. Today CommScope announced fourth quarter result for the period ended December 31, 2008. We reported fourth quarter sales of $862 million, and a net loss of $342 million or $4.86 per share. Reported net loss includes after tax charges of $360 million for the impairment of good will and intangible assets, $18 million for the amortization of purchased intangibles, and $9 million for restructuring and net other special items. Excluding these special items, adjusted fourth quarter 2008 earnings were at $44 million or $0.55 of diluted earnings per share. Sales increased substantially year-over-year, primarily as a result of the Andrew acquisition.

However, on a combined basis that included Andrews actual sales for the fourth quarter 2007, sales decreased 15%. Excluding the negative impact of changes in foreign currency of $25 million, and adjusting for the divesture satellite communications or SatCom product line, sales declined 10% year-over-year on a combined basis. Sales declined mainly due to the challenging business environment in the second half of 2008. Antenna, Cable and Cabinet Group or ACCG segment, sales declined 12% year-over-year to $386 million primarily due to significantly lower North American wire line sales. Wire line sales declined nearly 50% from the year ago quarter, as major US telecom providers slowed spending on environmentally secured enclosures.

This North American decline more than offset robust wireless sales increases in the Asia Pacific region. Enterprise segment sales declined 11% year-over-year to $194 million, as a result of challenging global business conditions, and reductions in North American channel inventories. Despite lower overall enterprise sales volumes, sales of industry leading SYSTIMAX, GigaSPEED, Extend rose by nearly 20% year other year. Broadband segment sales declined 13% year-over-year to $133 million, as weakness in residential construction continued to negatively effect both volume and product mix.

Wireless network solutions or Wnet segment sales decreased 24% year-over-year to o$150 million dollars. The Wnet's year-over-year sales decline was largely due to the divesture of the unprofitable sat come business which was sold in the first quarter 2008. Excluding SatCom sales of $21 million in the year ago quarter, Wnet sales declined 16% year-over-year. The Wnet sales comparison was also negatively affected by the restructuring of an unprofitable relationship with a major OEM. On a consolidated basis, customers orders booked in the fourth quarter of '08 were $753 million. Our book to bill ratio was 0.87 times for the quarter. Gross margin for the fourth quarter of 2008 was 27.2%, and includes $3.9 million of intangible amortization. Excluding this item, gross margin would have been 27.7%.

SG&A expense for the fourth quarter 2008 was $112 million, or 13% of sales. Excluding the merger related alignment of certain employee benefit policies, SG&A declined 4% sequentially. Now, we reported an operating loss of $342 million in the fourth quarter of 2008, mainly due to a charge for the impairment of good will and intangible assets. Excluding this charge, amortization of purchased intangible assets restructuring and other special items, adjusted operating income in fourth quarter 2008 rose to $95 million, or 11% of sales. On a comparative basis, adjusted operating income rose 13% year-over-year, primarily due to improved performance in our wireless business. In the fourth quarter of 2008, the Company recorded a pre-tax non-cash charge of $397 million, for the impairment of good will and other purchased intangibles.

Of this total, $274 million was recorded in the WNS segment and $123 million was recorded in ACCG segment. These charges resulted from increasing the estimated cost of capital used in the analysis, and from reductions in the expectations of future cash flows for certain reporting units, primarily due to ongoing challenging market conditions. Now, I will turn to cash flow, the balance sheet and some liquidity measures. In the fourth quarter 2008, we generated $108 million of cash flow from operations. While we reported solid cash flow in the quarter, it was lower than we expected. Lower cash flow resulted from a number of factors. While accounts receivable declined, DSO or date sales outstanding, increased sequentially by more than seven days, and inventory declined less than expected due to lower sales. Accounts payable and accrued liability also declined more than anticipated related largely to volume.

Capital spending in fourth quarter was $22 million. For calendar year 2008, cash flow from operations was $362 million, up 51% year-over-year, primarily due to the Andrew acquisition. Total capital spending was $58 million. We ended the year with $412 million in cash and cash equivalents. Now, December 31, 2008, total long-term debt outstanding, including current maturities was $2 billion. Down more than $500 million year-over-year. As you may recall in late December, we amended the terms of our senior secured credit facility to allow us owner -- on or prior to March 23, 2008, to make cash payments up to $200 million, to pre-pay or redeem or purchase our 1% convertible senior subordinated debentures. The amendment also stipulated that if we use more than $100 million in cash in settling our convertible debt, that our revolving credit facility would be reduced on a dollar for dollar basis. As part of the agreement, we made a pre-payment on the term loans of $150 million on December 26, 2008.

Regarding the convertible debentures, in February we agreed with certain holders to exchange shares of our common stock for their debentures. Through February 26th, we had issued a 1.7 million shares, for $24 million worth of aggregate principal amount of debentures. We also recently announced that the debentures would be called for redemption on March 20, 2009. Approximately $176 million is debentures currently remain outstanding.

Turning to our outlook, we expect the ongoing demand for bandwidth and increasing global demand for wireless services to be key drivers for CommScope in 2009. However, we do expect challenging business conditions early in the year. Our ability to forecast has been negatively affected by the global economic turmoil, uncertainties in financial credit markets, currency fluctuations and commodity cost volatility. As a result we plan to provide specific financial guidance only for the first quarter 2009. Our expectations for the first quarter are revenue of $720 million to $770 million, adjusted operating income of $25 million to $45 million, excluding special items, significant non-cash charges for any induced conversion of our convertible debt. A tax rate of 31 to 34% on adjusted pre-tax earnings, a net loss on a US GAAP basis, and solid cash flow from operations.

We expect lower than normal seasonal sales volumes in the first quarter due to the difficult business environment, and as distributors and OEMs continue to reduce inventory in the channel. Lower sales volumes is the primary deriver of lower operating income in the quarter. And while many costs have declined, we must first use our higher cost inventory, and work off the hedge metal position that we had at December 31, before we get the full benefit of these lower costs. We expect the adjusted tax rate in 2009 to be higher than 2008, as we provide for incremental US tax costs, associated with planned repatriation of a portion of 2009's foreign earnings. However, we have substantial federal net operating loss in forward tax credit carry forwards, or that is foreign tax credit carry forwards that should mitigate impact of repatriations on the cash taxes. While we expect a slow start to the year, we believe our results should improve substantially in the seasonally strong second and third quarters. We expect business conditions to improve for five main reasons.

First, ongoing demand for wireless infrastructure in growth markets. We expect significant sales and support of China 3G build outs through our solid positions with OEMs, as well as China Unicom, China Telecom and China Mobile. We have recently seen strong wireless order rates, some of which is being driven by the China 3G builds. These opportunities could be substantial in 2009. We also expect ongoing opportunities in India and other growth markets. For example, India added a record 15.4 million wireless subscribers in January. We continue to be a leading supplier in India, and have significant growth opportunities in Africa and Latin American as well. Second, we also expect strengthening sequential demand for wireless infrastructure in North America. Several leading North America wireless customers are expected to increase spending, as they upgrade coverage related to mergers and roaming agreements and increase their capacity to managed the growth in wireless data driven by smart devices such as the 3G iphone.

In the enterprise segment, number three, we expect some large government sector projects, which have been delayed to begin in the second quarter. For while we anticipate weak wire line sales in the first quarter, we expect improvement as we moved into the second and third quarters of 2009. Finally, or number five, we expect to benefit from the normal historical seasonality. Now in addition to those, as sales improve, we also expect greater benefit from incremental cost reduction synergies, related to the manufacturing consolidations that we have gone about, that were announced last year as well as new profit improvement programs. We have taken additional steps to reduce costs and balance our workforce with customer demand. Now, since November of 2008, we have implemented net reductions in the workforce totaling more than 500 employees, and implemented a wage and salary freeze in the first quarter. Now, while we worked to manage costs, we also expect the benefit from lower debt levels and lower cash interest expense in 2009.

We intend to repay more than $150 million of term debt in March, and will likely make other debt payments during the year including the convertible debt redemption. In 2009, we have also less fixed rate debt, because the notional amount of our interest rate swap declined $200 million in January. We currently have $1.3 billion of our term loans fixed in an effective rate of 4.13% plus, and that a credit spread of 225 to 250 basis points. The remaining $527 million is based on much lower variable Libor rates plus the applicable spread as well. Now, for example, the current one month Libor rates are less than a 0.5%, and the current three-month Libor rates are less than 1.3%, both of those are before the applicable credit spread. Now if rates remain stable, we expect overall cash interest to be significantly less than the $135 million paid in calendar year 2008. So despite near term challenges we remain optimistic. Maintaining compliance with the financial covenants of our senior secured credit facility remains a high priority for us in 2009. And as I've outlined here, we plan to do so by managing our business carefully while continuing to reduce our debt. Now, I will turn it over to Frank Drendel for his comments.

Thank you Jearld. First I would like to congratulate all 15,000 CommScope employees for a solid year despite the economic crisis. We successfully integrated two industry leaders into a single company, CommScope and Andrew, the best of the best. Despite all these challenges we delivered $60 million in merger synergies. We increased the operating income by more than 20%. We increased cash flow by more than 50% and reduced the debt by $500 million. No one has our assets, our position and our worldwide footprint. Global customers continue to fight, take a flight to quality in working with an industry leader such as ourselves. There is no question we have near term challenges, the covenant compliance and others. I firmly believe that CommScope is strategically positioned for long-term success, and we will work through these items. We have outstanding set of assets, a profitable business model and a history, a long long history of solid cash flow.

CommScope is the best position to supply the cutting edge broadband infrastructure total world. Nothing has changed in the current and long-term demand for bandwidth growth. Finally, I want to remind you that this management team has been through many industry cycles. Current environment we're in is nothing compared to the 2000 - 2001, dot.com bust. Our customers are much stronger and they're worldwide. We also begin with this call, a program to introduce our general managers to the investment community. Eddy Edwards joined us on this call today to answer some of the questions you might have on WNS. And with that operator, we will be glad to answer your questions.

(Operator Instructions). Your first question comes from Amitabh Passi with UBS. Your line is open.

Thank you. Can you guys hear me.

Yes, sir.

Yes, we can.

You know my first question was, when you guys pre-announced your fourth quarter results, I think you had a statement in the press release saying that you have a 2009 business plan that will keep you compliant with your credit facility financial covenants. And I'm just trying to understand what you have in mind, because just based on the fourth quarter and first quarter '09 EBITDA numbers it just seems like you have to probably pay down debt by another $500 to $600 million to ensure compliance by third quarter 2009. I'm trying to understand how you're thinking about the '09 business plan.

I'll talk, we'll respond to it. I think we outlined a number of things in the, in the materials I covered that talked about why we expect a significantly improved operating performance in periods beyond, beyond the first quarter. And so with that, those, those types of things are incorporated largely into our thought process, and our plans that we have for the year. Additionally we will be paying down significant debt here in the first quarter, $150 million of convertible debt will be reduced as well. And it doesn't preclude us from doing additional debt reductions later in the year. Also our, our interest and is significantly less or is, is lower. We expect it to be significantly lower in 2009 versus 2008. And partly because of the rates and, but in large part because of the reduction in debt that we've, that we have had. We've reduced debt more than $500 million this year. So those are the factors that we incorporated into our planning relative to our covenant compliance.

Okay. And then just on the first quarter operating income guidance. Is just appears lower than I would have expected based on your revenue guidance and I apologize if you've touched on this. Is there some other factor that is sort of contributing to the sort of depressed operating margin level it look like your fourth quarter you're enterprise, you're broadband all had pretty decent margins. I'm just trying to understand if there's some other factor at play there?

Well, the cost structure is, is certainly rolling out a little slower, I think we ended 2008 with a little higher inventory levels than we would have thought, and volume is largely the main reason margins are declined or lower than, than they might expect in the first quarter Amitabh. we're going to have to absorb some of our 2008 costs on the lower volumes, which is impacting, impacting profitability of the business in the first quarter. But we think that will substantially be absorbed beyond here in first quarter.

Do you, Jearld do you have any chance are any way of quantifying what that impact might be just from the inventory?

Well, we can talk about, you know, various raw materials that are substantially less, for instance our benefits and plastic costs are expected to be substantially improved during the first quarter. It doesn't start the first quarter, but as we roll into the quarter, those, those should improve. And but first we have to absorb inventories and plastics and metals and other things that we had at the end of the year which were at higher costs.

Got it. And just my final question and I'll step back in the queue. As far as China 3G you talked about that have you started booking orders? Or is it is you're expectation you will start seeing orders any sense that you can give us the opportunity your expecting?

Amitabh, this is Brian, good afternoon. Yes, we have seen orders, and, the first quarter kind of picking up a little bit on Jearld is a quarter of substantial transition. And of course, what you see in the guidance is what the quarter looks like as an average. The comparison of the January and March are substantially different. And of course, you don't have the benefit of seeing that, and so the orders are coming in, both from the carriers and from our OEM relationships for subsystems. The task that we have right now is, is expanding capacity, ramping capacity quickly. We will benefit in the -- in the latter half of the first quarter in revenue and margin as a result of the China 3G deployment, and we will see the full benefit of that activity in the second quarter.

Yes Amitabh. It's Jearld again, I did exclude or didn't mention that a lot of the cost reductions that we have, excuse me, undertaken here through restructuring activity and head count reductions those kind of things, sorry I've got a little cold, have, will not impact, fully the first quarter, but will be in quarters later than the first quarter. And I think, again, we're seeing the residual of those, of those costs that have not fully played out yet..

Amitabh, this is Frank Drendel -- he will -- I will like to introduce Eddy Edwards he can give us further clarity on what we're seeing in international markets. China, India, his business has been showing some substantial increase in orders.

Amitabh, hello, what we're seeing, I think in the WNS business after the Chinese Yew Year thing got very busy. We see during the balance of February and, and starting in, in March it's going to be, as Brian said, ramping up is, is going to be the challenge, not, not orders. So it's, we have a full plate that we see right now, both from the WNS side and as well as the, antenna business.

All right. Thank you. I'll step back in the queue.

You bet.

Thank you.

Your next question comes from Amir Rozwadowski with Barclays Capital your line is open.

Thank you very much. Gentlemen, in the prepared comments you folks alluded to, sort of benefiting from normal seasonality in the business. I was wondering, how we should think about sort of that seasonal lift based on your visibility right now? And also, we've heard from other vendors in the marketplace certainly carriers are holding their spending patterns closer, playing them more on a quarter by quarter basis. I was wondering if you could give us a little bit of color, what you're seeing at the moment, if there is a little bit more, either stability in some of the order outlook that you folks are seeing? Thank you.

Amir, Brian, I'll take the first pass at that. No, I would agree with your proposition. And that is, historically, particular with the carriers, we would have the benefit of looking at programs for an entire year. And clearly today that visibility within their companies and subsequently to us is substantially less. So in most cases we've got currently, we have good, one quarter visibility, but, infrequently do we have two quarters out. Did that cover it for you?

Yes. Yes. That's helpful, and then just in terms of seasonal lift, you know, historically we've seen a variation in terms of what that seasonal trend has been on a quarter over quarter basis. I mean, should we expect similar seasonal patterns or perhaps some more muted seasonal patterns in the second quarter?

I think it could actually be greater, whether, whether the ramps for the accelerations could be greater than normal seasonality because I think our first quarter levels are somewhat muted by the environment that we're in today. And we can see a lot of business activity in front of us as Brian said, and Eddy said a lot has to do how quickly we can ramp up to respond to good order activities we've seen in our, in several of our wireless product lines. And that's in front of us, and in our cable TV business, clearly that's, that has always been seasonal. And I wouldn't be surprised, typically the second or the third quarter are very close to being the peak quarters of the year. So we could see a very large ramp coming from what I think is a, a less than seasonally weak first quarter, to a stronger second quarter, and a very strong third quarter as we move through the year on that seasonal pattern. And as, as some of these programs start to roll in.

It's Frank. On the broadband group we're seeing substantial interest in improvement due to the digital switch out from the carriers and the broadcasters to digital. A lot of marketing is is going on from the cable operators to hookup subscribers, so if you've been watching the operator's numbers they haven't been that bad. So they're looking toward a potential opportunity for additional subscriber connections over the next two quarters.

A lot of customers have been cautious with inventory. I think it's been reflected in our sales that there's a lot of caution in inventory, which means that there aren't tremendous amounts of inventory from our view in the channel out there, so as thing do, do turn up, we should, we should see that very quickly.

Great. Thank you, and then Phil you mentioned that the magnitude of some of these restructuring or cost initiatives primarily aren't, or shouldn't fully be felt in the first quarter, but we should start to see them progressing through the course of the year. How should we think about sort of the size of these cost reductions? Is there a number on a quarterly basis you folks are targeting or the way we should think about it? .

Well, not a specific number that we're prepared to get today Amitabh, I think we have been -- reducing -- I'm sorry Amitabh was the first. My apologies. That we, not a specific number that we can share with you today. Most of these activities were more in right sizing and should be beneficial to our mixed overhead largely, and, and reducing some of our variable costs as well.

Okay. Thank you for the incremental color, gentlemen.

Thank you Amir.

Your next question comes from Kim Watkins with the JPMorgan. Your line is open.

Thank you. Just wanted to ask a few questions about what kind of trends you're seeing in pricing. And to what extent you figured in potentially some either re-negotiation in prices, or potentially a price decline into the guidance for the first quarter? If you're seeing any of that yet or any requests by customers for reduced pricing or you, you expect it later in the year?

Kim, Brian. I would maybe we'll cover that by segment. I'll say surprisingly and fortunately in the enterprise space, we've not seen a major impact of pricing. And I think part of that is because, or largely is because of the solution nature of our sell and it's not a cable cell, it's a solution. And they're largely in the higher performing categories where, where competition is very limited. That being said, I wouldn't be accurate if I didn't say that there, there have been projects that have been pushed back to be repriced. But I would not characterize that as the rule at present. In the -- in the wireless space, it's largely a regional discussion, and there are pressures on pricing, particularly in cable, and they're more so than anywhere. And we're in the midst of that, and that's where our strategy where, you know the conversion of copper to aluminum comes through.

Kim, this is Eddy, on the WNS side, a lot that pricing is done as, as new products are introduced or for some period of time, and it's not as volatile as you see in the cable, the cable areas. And then in the, in building business, those are all project or mostly project related and they're done at the time the project's initiated. So we don't have that, I guess that ongoing commodity based pressure that you might see in other businesses.

Okay. Okay. Got you.. That's helpful. I guess I was thinking more along the lines of the businesses that are more directly tied to the commodity like the two you outlined Brian. The enterprise and the wireless cable. So is it accurate to assume then that in your guidance it's, in totally volume based, in terms of year-over-year decline as opposed to any assumption there for pricing?

That would be fair.

Okay.

The only other variable of course, would be the mix, but to my understanding we have not made major shifts in the outlook in mix.

Well, also Kim, there was, there is foreign exchange impact on the revenue line fairly significant year-over-year. I think $25 million in the fourth quarter was $25 million down year-over-year basis, and we'll probably see sequentially even into the first quarter a little more decline in that area.

And those effect, which segment the most? ACCG and WNS the most.

Okay. So approximately, you know, somewhere between 25 and $30 million year-over-year or possibly a little higher?

In a quarter.

Okay. And then I also wanted to ask about your converts. It looks like you converted approximately $25 million to stock here in February. To what extent are you actively going out and trying to convert more of that now into stock or you expect largely to pay the remaining balance in cash come the end of March?

Kim, we did put out the redemption call for our convertible debt, about a week ago, and, and so they have been called for redemption. We do have the ability to, to consider additional conversions, reducements to conversion between now and the call day. That's one of our options, and we'll consider that and keep our, all of our options open along that line.

Okay. And last question, linearity -- can you give us some insight into linearity this quarter? And Brian you kind of alluded to the fact, in first quarter you expect pretty back end loaded quarter. Can you just contrast that to perhaps what you saw in the last year and then also as I mentioned earlier, fourth quarter.

I mean, to Jearld's point, when we're talking about seasonality. I mean, it's really not about, I mean seasonality is an element but it's so much more in the first quarter of this year compared to prior years, because for all the reasons we've mentioned, the impact of China's deployment. lessening channel compression, numerous activities. No, it's going to be, if you look at the year-over-year comparisons, Q1 to Q2, I think they'll be atypical.

I would agree with that. I think you're seeing channel restocking, I think you're seeing all kind of looks at budgets. Now we are beginning to see what the real budgets are by the carriers worldwide. Clearly AT&T settled in, Verizon settling in, cable operators are settling. But that first and fourth quarter are atypical of anything, anything, any of us have ever seen, but the strength of our position in the marketplace is very clear to me. We are not losing market share anywhere.

Okay. Can you quantify at all, kind of on a monthly basis either the, for fourth quarter and first quarter what you expect?

Well, fourth quarter, there was obviously a weaker trend in December is always a weakest month in the fourth quarter. Seasonally and this year was probably a little more so because, because of the turmoil that we had, and the first quarter as January is typically the weakest month in that quarter, and moves up to there where March would typically be the strongest month in the quarter. That's for seasonal reasons, and I think you know, the slow down at the, at this time of year was slower than normal. And so I think at the roll out is going to be perhaps a little stronger than normal when things start improving.

Okay.

Kim, I do have one data point here looking at my notes it might be helpful to you and that was in December. This is in the enterprise space, our POS, our sales out of distribution, grew over October, November levels.

Okay.

So you know, it would, broadly it was, for the company was declining over the course of the quarter. But hopefully we found a, found a bottom or some, some bright news in December for the enterprise space.

Okay. Okay. Thanks, that is interesting. Thank you very much.

Yes, ma'am.

Thank you. (Operator Instructions). Your next question comes from George Notter, with Jeffries, you're line is open.

Hi, guys.

Hi.

I have a couple questions here. First I want to ask about manufacturing, cost synergies there. You know with the combination of the two sides of the company, any change in your outlook for the ultimate amount of synergies you can capture for 2009?

No. We, George, we put some numbers together and shared them with you last year. I mean, the teams comfortable that they'll deliver on that '09 commitment as they have in '08 and prior years. And I, I can't tell you that apart from synergies, the whole environment of cost reduction in the operating units is, is very, very strong right now, so everybody's got their oar's in the water.

Got it -- so the merger related piece of cost, you know synergies and --

Right.

Is still $115 million is that fair.

Yes. That's the target.

Okay. And then, anymore flavor on the amount of benefit you can get on lower commodity costs as we roll into Q1 and Q2. I guess I heard what you said certainly about having to bite down into the lower costs in -- in the lower cost inventory over time, but, anyway you could put some some details around that, quantify it, any flavor for it at all?

I'm looking at Jearld, I, I don't, George. It's, it's a complex model for me, and I can't give you any guidance on that.

Well, no, I can't give you a percentage or a dollar amount either, George, but they are substantial. It depends on the material. We can, we could talk about some, but plastics areas for instance, 20%, 25% is where the reductions coming in some some plastics. Very large numbers on a per pound basis coming in. Again, you know, we, we have to consume them to get the benefit of that. And we've been consuming our inventory and expect to be largely living on inventory the first quarter, so acquisition of those things there, copper we know is in the $1.50 range now. Last year averaged significantly higher than that. Well over 250 I think last year, and so, that, that will be beneficial once, once what we have is is moved through our P&L as well.

Do you know what the average for copper cost was for by any chance for Q4?

I don't have that number right now, George. We'll look for that and give it to you.

Fair enough. Thanks a lot, guys.

Your next question comes from Jeff Beach, with Stifel Nicolaus, you're line is open.

Yes good afternoon.

Hey Jeff.

Hey Jeff.

I guess, the biggest surprise for me in the financial report is the minimal reduction in the inventory levels in the fourth quarter. Seems like foreign currency and lower raw material cost could have accounted for a large amount of that. So it sounds like either business is a whole lot better than it looks here in the first quarter, or you've got a lot of inventory reduction to take ahead. Can you give us an idea how much inventory's might be down in the first quarter? And maybe what, what has been some of the problems with being able to take the levels down up till now?

Well, one of, first of all, say, yes, they did all right in the quarter, they took roughly $25 million out in the quarter. And they took $100 million out, Jeff, over the course of the year. SO largely I give accolades to our team. But one of the things that hurt us in our inventory performance in the fourth quarter was that, we closed down our enterprise facility in Australia. And it's the primary source of supply into our Asia Pac region. And in advance of that move, relocation we built inventories. Heading into the fourth quarter, for the fourth quarter and of course, that exercise ran into a major slow down. SO we, we have excesses of inventory in certain parts of the world. And and obviously we got to consume or redeploy those over, over the first half of '09. I'll say qualitatively we have a lot of opportunity to reduce inventory, and it is, there's a large cash focus in this corporation. And so we continue to organize to work on these inventory numbers. There will be substantial improvement from these levels over the course of '09.

Jeff, we clearly do expect to have lower inventories and lower receivables in the first quarter given the revenue numbers that we had, and or have guided to here, so we do expect lower numbers there. You know, metrics might not be quite as good, but because of the lower volumes, but, but they will still be pretty good I think, but so definitely lower inventory and receivables are expected.

Okay. The other question I had, you were describing, you know, potentially good demand for wireless in China beginning to come in and ramping up. Can you just focusing, first of all, I didn't hear any commentary, I'd like to hear a little bit about some of the market segments in Europe, what's happening in Europe. But equally outside of wireless in China, can you talk about some of your major markets in the emerging, in the emerging markets in, in wireless, enterprise some of that and give us a flavor what's going on outside of North America?

Well, I'll, I'll fill-in part. Eddy may have comment as relates to his WNS business, but if we, the outlook for Europe is not particularly strong for us, I'll say broadly in the wireless base. But if, you know, if you want to focus on emerging markets, clearly Southeast Asia is, remains an opportunity for us. And we've been very pleased with what's going on in Africa. And you it's certainly not our largest market, but growth rates are substantial, and funding in the outlook for growth in '09 is still available. You know, in the enterprise space, Europe's going to be tough for us, I think, Asia Pac's going to be tough for us in the enterprise market, Jeff. And so you know, strengths going to have to come from our multinational accounts that are based in the US, and the government. US Government, I'll say broadly all government's, and even though the outlook, much of what you read in terms of the outlook for the middle east growth will substantially be down in the middle east. But we still will have growth in that region.

Jeff, I think specifically in WNS and Africa, Brian mentioned, we are doing the 12 stadium for the World Cup in 2010, so that's underway. And Europe we, we don't see a real slow down. We have lots of projects underway and coverage solutions for tunnels and things like that. In the US, we've won significant geometric awards for E-911 and our MLC products globally so we are seeing take rate on some of the problem areas that we had that, that fits very well with what our plans are, and and see in the bottom line improve.

I make a comment Jeff, I mean, when you look at the business segments and just at a very high macro level the outlook for each of these businesses, the WNS business is really one of the real, real stars in '09 is, from the current perspective in terms of turn around top line and bottom line.

All right. Thank you.

Okay.

Your next question comes from Simon Leopold with Morgan Keegan, Your line is open.

Great. Thank you. I want to start out with a quick hopefully easy housekeeping question. In the release, you talk about the pro forma EPS at $0.55. If you can just walk us through the interest buy back and share count to get to that?

You want to respond to that, Phil?

Sure. Your trying to get, you've got to add back the convertible debt piece, is about $600,000 to add to the adjusted income and then divide by the shares outstanding.

And what's the share count you're using for that?

It would be about, about $80 million.

80.5 I think. 80.5.

Okay. Now in terms of looking at the, the guidance you've given for the operating income. If we were to assume that, that operating expenses are generally held flat, it does suggest that gross margins are now coming in perhaps below 25%. So I guess the first part of that is, okay am I doing my math correctly? And then if I am, can we try to get a better understanding of how much of that sequential drop in gross margin is tied to the cost of the inventory you need to burn off? and how much is mix and how much is the drop in volume? Thanks.

Yes. Well, I failed to mention mix in terms of our forecast, but it is a factor, again, the enterprise segment is a, the strongest operating profit segment at the gross margin line as well. So that area is probably a little weaker in our expectations than our areas. We talked about some of the ramping things that come up later in the year through government and that, and that sort of thing. But and some of the areas that are strengthening are not necessarily our most profitable businesses either. So, so we have had a, there is a little negative mix in terms of the impact on gross margin in the first quarter, I think from, from those two factors that are, or that factor, mixed factor.

Yes. Is my math correct on the 25%ish kind of number?

I --

I'm not following you.

I'm not following you.

Operating margin or gross?

The gross margin coming in around 25% for the March quarter.

Yes we haven't given gross margin guidance beyond, we've given our operating profit range that we expect. And that's between $45 million and $25 million, so we haven't, haven't provided additional guidance in that area beyond that.

Okay. The next thing is, looking at some of the emerging market opportunities that you've talked about, Africa, India, China. I'm trying to really think about a baseline level of where we starting as a percent of sales for each of those regions. And I think that would be useful if this is something you could give us through the course of the year to sort of help us track the progress?

Yes. Side on that may be something we could do offline. You know, talk to, to Mark. I certainly don't have those details with me.

Are like, can we sort of get a framework that at least the three together are on the order of 10% revenue, is that ballparkish enough?

Yes. 10 or 15, I mean depending on what all you want to include in there, yes.

Okay. Great.

Certainly India would be the largest piece, and China is, is as a percentage probably the largest growth, but in dollar growth, it wouldn't be the largest, but, yes in aggregate, think in terms of 10%, 15%

And also, remember, some of the OEM products are sold to and shipped to different locations, so you have to dig a little deeper to get that number.

Sure. Well, you probably have a better insight than I do is the hope. Just one last question, you did talk about the, your interest expenses coming down due to a lower debt balance and more favorable interest rate. Do you have the ability to, to give us some kind of range of what your thinking that the expense would be in the March quarter?

In the March quarter specifically? Well, give you some, some guidance here. The, we filed our it 10-K today and we do talk about liquidity, long-term debt and interest rates and that sort of thing in the 10-K. At rates that were in effect at the first of the year, around $100 million of interest expense would, would be the impact. Assuming we make all all of our mandatory payments under our credit facilities. And the interest rates that were in effect at that time were around $100 million for the full year of 2009.

Great thanks. Thank you.

First quarter obviously just because of timing of payments will be the highest quarter.

Okay. Thank you very much.

Yes, sir.

In the interest of time we'll take two final questions. The next from Ken Muth with Robert Baird. Your line is open.

Hi, just kind of going through some of your other observations. You made some high level comments about kind of Q2, Q3. And just kind of curious as we've gone through earning seasons now. And heard from pretty much everybody you're among kind of the first to feel a little belt better of thing going on out there. Outside of your China comments, but just kind of anecdotally across the world and by different segments of enterprise and carrier spending there's not very many vendor coming through this season had as positive outlook for the next couple of quarter. Can you explain why you think things are going to tick up a little bit, when others aren't really there.

You mean, part of it is, just because the the first quarter is going to be a very difficult quarter for us. So probably one of the toughest that we've seen in a long time, and we have the benefit of this very strong orders, demand that we've seen in the, in the February time frame, which makes, makes us feel much better about where we're going to be in the second quarter.

If you recall for the time we started this business, we've operated on a 6 to 8-week backlog.

We said we'd see it go down first and we did. And we're going to see the recovery first and we are. Again, you can't predict what's going to happen for the rest of the year, but there is clearly strength in orders across all these sections. And so will it continue forever, who knows? But the carriers generally are the most secure in what they do on an annual basis, and they're dealing with us because our scaled strength. I feel comfortable that if it's out there, we're going to get it.

Yes.

Ken, we really, we really do, without getting into details, we see clear evidence in certain markets and product lines where we're acquiring customers that we have not historically had. We're improving account share, and just broadly, we characterize it as a flight to quality, and it is very tangible. You know what we see in North America wireless, isn't so much about what we think Capex is going to happen in the entirety of North America. As we do new opportunities that are being presented to us. So I'll tell you, we don't have good clarity the third quarter but there are some positive indicators to suggest that we can grow sequentially Q2 into Q3.

And of course, we've taken cost reductions we've frozen salaries we're doing everything we can at the cost line to make sure we generate the cash flow that's required to get through these issues that we have. It's a very, very valuable company, ladies and gentlemen. It's trading way below its replacement value.

And then just on the kind of Q1 outlook as well. I mean, some of the temper meant you have for Q1 is, any kind of thoughts you could share with us on kind of what is maybe inventory in the channel, and kind of working through some of that in the first quarter. To give that better up-take in Q2?

Well channel, channel inventory is as I mentioned largely is an enterprise subject. and there will continue to be inventory reduction in my opinion over the course of the first quarter. And so I'm hoping that that's the low point for the year in channel inventory. You know in the, we always have lots of questions about on the, on the wire line side of ACCG, which is our cabinet business. And we do see a reductions in inventory from the, excuse me from the fourth quarter into the first quarter. We see further channel inventory reductions going on into the second quarter. So in that particular segment, it's going to be, it's going to be into, into the second half before inventory is not a, an unfavorable variable to our revenue.

Okay. Thank you.

Okay.

Yes, sir.

Operator we'll take one more.

I'll turn it over to your final question.

Yes, ma'am.

From Steve Ferazani with Stevens& Corp your line is open.

Hi, guys, thank for taking the question. Just want to see if you might get a little more granular on the China 3G opportunity. If you look at your business opportunities, you know where do you feel, you see the most opportunity there, whether it be ACCG or WNS, any sort of color you can give us there?

It's both. This is Eddy, it's both. We're very well positioned in, from ACCG with both cable and antennas. We're the only non-indigenous supplier for cable and antennas both, so we're making a, a come back there. On the WNS side the more active products, we're very well positioned. It's more of an OEM sale and we're positioned with, with both domestic and, and non-domestic OEMs supplying all of the, all of the companies.

When you say domestic you mean China.

Chinese versus non-Chinese EOMs. So we're, we're selling to all of them, so we have work product trials going on with everybody for current sales and also for the, for the next generation as well.

Eddy you might speak to LTW and the announcement at the show.

We're well positioned there with the Verizon announcement, I think. We, we had a lot of, a lot of product with a different bidders, I guess. And so we, we're happy with how that turned out. And we look forward to, the balance of the year as the trials are underway into next year as, the implementations get into full swing.

And then I have guess just one last follow-up for me. With regard to the, to the fine a opportunity, you know how much of that product do you manufacturer in region versus, I guess, outside of, outside of China.

Most of it.

Most of in region.

Yes, sir.

Yes.

Okay. And Abigail, a follow-up, back up with one question that was asked earlier about copper. I think we were, we averaged probably probably about 250 a pound in the fourth quarter for copper procurements during that quarter. That was our average between spot and hedge positioned that we had. Of course, current prices are in the $1.50 range, so our first quarter cost in copper and cost of sales anywhere is going to be a number more like the fourth quarter than the first, than the current spot. Because we're still consuming inventory coming out of that, out that fourth quarter period, and, and but we'll be moving to lower cost presumably as we move through the year.

Thank you, ladies and gentlemen. With that we'll call it a day.

This concludes you're conference call for today. You may now disconnect.