漢威聯合 (HON) 2008 Q4 法說會逐字稿

Hello, and welcome to the Intermec's third (sic) quarter 2008 earnings call.

(OPERATOR INSTRUCTIONS) Today's conference is also being recorded.

If anyone has any objections, you may disconnect at this time.

And now I will turn the call over to your first speaker for today, Mr.

Kevin McCarty, Director of Investor Relations.

Sir, you may begin.

Good afternoon, everyone, and welcome to Intermec's fourth quarter fiscal year 2008 earnings release conference call.

With me on the call today are Intermec's President and Chief Executive Officer Patrick Byrne, Chief Financial Officer Bob Driessnack, and joining us by phone, Mike Wills, our Senior Vice President of Global Sales and Service.

In a moment, Pat will discuss our key trends and highlights; Bob will provide a summary of our operating performance and guidance; and then subsequent to those discussions we will begin our question-and-answer period.

Now let me quickly cover our Safe Harbor statement.

Today's discussions may include predictions, estimates, or other information that might be considered forward-looking under the Private Securities Litigation Reform Act of 1995.

Some of the statements we make today may be considered forward-looking, including but not limited to Intermec's expected financial performance, as well as Intermec's strategic and operational plans, along with additional examples that are set forth in today's earnings release.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward-looking statements reflect our opinion only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

For a more detailed description of these risk factors that may affect our results, please refer to our SEC filings, including our Annual Report on Form 10-K and our quarterly reports on Form 10-Q.

Copies of these reports can be obtained from the SEC or by visiting the Investor Relations' section of our website.

With that, it's now my pleasure to turn the call over to Pat.

Thanks, Kevin, and good afternoon, everyone.

First, I'd like to introduce Bob Driessnack.

Bob is our new Chief Financial Officer joining us in January.

His extensive leadership experience in building global finance organizations and profitable operating models will make a big contribution to Intermec going forward.

Mike Wills, our Senior Vice President for Global Sales and Service, will also be available during the Q&A portion of this call.

Bob will be reviewing our fourth quarter financial results, as well as how we will be managing the business during this period of market uncertainty and slowdown in order to keep our costs and spending in line with our target business model and continue to generate cash.

Our goal is to position the Company for continued growth and profitability when the markets recover and to focus and win in the short-term as well.

Recently, we have seen a significant market uncertainty and a slowdown in business levels and we will be making adjustments to bring the business in line with the expected revenue levels.

Our goals for 2009 are very clear.

Focus the Intermec team on winning in markets that are spending in 2009 by delivering superior value to customers and partners, keep the new products on track, and build a long-term operating model and cost structure in place to generate operating leverage and long-term shareholder return.

Looking at Q4, we delivered to $221 million of revenue and $0.15 EPS in Q4; both within our guidance from three months ago.

Revenue was strong in North America but significantly slowed internationally.

The decline in Europe, Middle East and Africa currency and business impacted our gross margins which otherwise made solid progress.

The Q4 EPS results reflect a combination of operating results and foreign tax benefits resulting from our manufacturing outsourcing strategy.

Operating cash flow was strong at $29 million in the fourth quarter and continued a track record of results in operating cash generation.

The Company had strong liquidity with over $200 million in cash and cash equivalents and no debt.

For fiscal 2008, we had record revenue of $891 million, which is 5% growth compared to 2007.

EPS grew 45% compared to 2007, and even more a net of restructuring of $6 million for the year.

During Q4 we made major progress in our manufacturing outsourcing initiative.

Approximately 65% of the hardware revenue in Q4 came directly from Venture Corporation to our distribution channel during the quarter, and we anticipate being complete with this transition in the first quarter.

We expect to see the gross margin benefits of the manufacturing outsource initiative on a volume and mix-adjusted basis starting in the first half of 2009.

The Intermec and Venture teams have done an excellent job in this transformation.

Our long-term target business model continues to target 43% gross margin, but in the near-term we have several factors that are affecting our product gross margins, including lower hardware revenues, currency effects and regional mix.

We also met our objectives in service depot consolidation in Q4 and our North America service margins should begin reflecting these benefits.

Both the manufacturing and service depot consolidation should enable us to lower our costs in 2009.

We will stay focused on further lowering our total supply chain costs during the year and we believe the streamlined manufacturing and service depot model gives us a strong platform for further progress.

Based on the current economic environment, we anticipate making further costs reductions; mostly in the SG&A areas in order to bring expenses in line with expected revenues.

Bob will cover these objectives.

Turning now to the regional results; in North America our performance continued to be strong in Q4 with an 11% quarterly growth rate and 17% for the full year.

Both compare to the prior-year periods.

Growth in the region was due to multiple factors, including the Systems and Solution business in larger direct accounts, value-added resellers and distribution.

The CM3 Rugged Mobile Computer continued strong results in key applications in field service and transportation and logistics.

In addition to CK3 [and Premise] Rugged Mobile Computer, a new product launched in the second half of 2008 exceeded our launch objectives and helped fuel North America growth.

The CK3 with advanced imaging technologies, smaller-lighter form factor and excellent application support from our partners represents underserved addressable markets for Intermec, including food distribution, warehousing and retail applications.

Another growth driver for North America were sales to the United States Governmental, Department of Defense, under the AIT-3 contract.

We anticipate bidding the AIT-4 contract in 2009, and we believe we are well positioned to capture our fair share of this business.

The indirect channel with 66% of sales in North America in Q4 with strong direct sales results in Q4 as well, our go-to-market paths are winning in North America.

Our two-tier distribution business in North America grew well in 2008, compared to 2007, and we believe this position of strength, size, momentum will enable us to reach more customers and partners in 2009.

We expect this will be important as we anticipate the business composition to include a higher volume of smaller deals in 2009 during the current economic environment.

Technology refresh projects should also support our base business during the recession, provided there's a compelling return on investment.

Customers are focused on projects that lower operating costs and inventories in their supply chain.

The Intermec ROI story is strong since our solutions typically generate six to nine months return by helping customers achieve these cost-saving objectives.

Overall, we have solid momentum in North America and will continue to focus on winning in segments that are spending while continuing to build a profitable channel business.

The success in 2008 in North America also provides a very important model for profitable growth for Intermec international businesses going forward.

Our international businesses were down in Q4, both due to currency and project slowdowns and delays, especially in Western Europe.

We are seeing growth in Eastern Europe, Middle East and Brazil, where we're building customer and partner engagements and anticipate continued growth in 2009.

Our distribution business is growing throughout Latin America as we've engaged in the two-tier distribution model.

The majority of the Latin America quarterly decline from last year was expected, since a single $9 million Enterprise deal was in the Q4 2007 numbers.

I am confident we are building the business throughout Latin America for long-term growth and we have an excellent and experienced team throughout the region.

Moving forward, our objective is to focus and win; mobilizing the Intermec and partner teams, both in North America and internationally on segments in the economy that will be spending in the year.

On a domestic and global basis, this included consumer staples, food processing, safety, distribution and retail, and it also includes government, utilities and energy, selected healthcare and infrastructure investments.

Longer term, the Postal and Corps Transportation Logistics applications are also significant, because the adoption of Mobile IT solutions is still building and there's a transformation occurring from data collection to mobile business process optimization.

In addition, we are engaged in the important EMEA postal opportunities and are well positioned based on the excellent progress Royal Mail and other postal agencies.

The momentum we have built in the channel and leveraging the Wide Area Network and Enterprise connectivity for mobility solutions is key for the Company and partners.

The CN3 success, the early CK3 adoption, and our planned 2009 new products, both in computers and printers, will focus on these applications and the compelling return of the Intermec solution.

In addition, our strong and profitable service and technology refresh offerings enable us to add value to both Intermec and competitors' install base when the return on investment is compelling.

I'll turn the call over now to Bob to review fourth quarter results in some detail, as well as to outline our target business model on spending.

Thank you, Pat.

Intermec's fourth quarter revenue of $221 million represented a 13% decline over the prior year's fourth quarter.

On a constant currency basis, revenues declined 8% year-over-year.

Fourth quarter GAAP earnings per share were $0.15 compared to $0.27 in the comparable quarter of 2007.

Included in the $0.15 GAAP earnings was the impact of restructuring and transition costs of $3.2 million, or approximately $0.03 per share in the fourth quarter of 2008.

Full-year 2008 revenue of $891 million was 5% growth over fiscal year 2007.

For the full year, currency had a favorable impact of about 1%.

2008 was a strong year and these revenues represented a record for Intermec.

Full year 2008 GAAP earnings per share from continuing operations were $0.58, an increase of $0.18, or 45%, over 2007.

Included in the $0.58 of GAAP earnings was the impact of restructuring and transition-related costs of approximately $7.7 million, or $0.08 per share.

Fourth quarter revenues on a regional basis were as follows.

In North America, our largest region, revenues grew a very strong 11%.

Europe, Middle East and Africa, or EMEA, decreased 31% in the quarter; $9 million of the decrease, or 11 percentage points of the decline, were due to currency.

Latin American revenues were down 50% versus a very strong tough comparable as Pat mentioned.

And Asia-Pacific, our smallest region, declined 21%.

Geographically for the full year 2008 revenues in North America grew very strongly and were up 17%.

EMEA revenues were virtually flat.

Latin America and Asia-Pacific revenues were down 25% and 12%, respectively, all compared to fiscal year 2007.

Reviewing our product line performance, System and Solutions revenues decreased 11% over the fourth quarter of 2007 to $139 million.

Print and media revenues of $43 million declined 22%, and service revenues of $39 million were down 8% over the prior-year quarter.

Total gross margin was 39.2% in Q4, as compared to 40.7% a year ago, representing a 150 basis point decrease.

For the full year 2008, gross margin of 39.8% represents a 130 basis point improvement over fiscal year 2007.

Fourth quarter product-related gross margin was 38.5%, a 200 basis point decline from the year-ago margin of 40.5%.

In the quarter, our product gross margins were impacted primarily by currency and a less favorable geographic mix from EMEA, which has historically delivered a higher-than-average gross margin level.

Transition-related costs of $800,000 also impacted gross margins.

For the full year 2008 we delivered stronger product gross margins, which improved 170 basis points to 39.3%.

Service gross margins were 42.7% in the fourth quarter, an increase of 120 basis points compared to 41.5% in the prior-year quarter.

For the full year service gross margin of 42.4% was down slightly, 20 basis points versus 2007.

Operating expenses for the current quarter, including restructuring costs of $2.4 million, totaled $79.6 million or 35.9% of revenues.

This compared to $77.6 million, or 30.6% in the prior-year quarter.

Other operating expenses combining R&D and SG&A, but excluding the restructuring costs just mentioned, were $77.2 million compared to the $77.6 million in fourth quarter 2007.

Included in these costs were about $2.5 million of currency translation-related expenses; $800,000 higher medical costs; and $800,000 asset impairment charges for real estate held for sale.

These were largely offset by lower incentive compensation costs and savings from our business shutdown the last two weeks of the year.

Also within SG&A, selling expense was down year-over-year in the quarter beginning to demonstrate our model changes.

However, on a volume-adjusted basis, it did reflect higher commission-based costs primarily in North America where we had such a strong year.

Moving to tax; during the quarter we recorded a favorable tax credit adjustment of approximately $4 million.

This benefit resulted from the Company's new manufacturing structure and higher future foreign income expectations.

As a result, our fourth quarter 2008 effective tax provision was a benefit of $900,000, which lowered our full-year effective tax rate to approximately 28%.

The recording of this credit resulted in an approximately $0.06 benefit to GAAP earnings per share in both the quarter and the year.

Looking at the balance sheet, we had a solid finish managing our receivables, which were down well in excess of the revenue change.

We are very focused on the management of and oversight of inventories as we transition to the outsource model.

Total net inventories were up about $4 million year-over-year, but declined about $6 million sequentially from the third quarter as we saw some benefit of our new model.

As of December 31, our cash and cash equivalents totaled $221 million.

Net cash provided by operating activities was $29 million for the fourth quarter of 2008 and $67 million for the full year.

This represents a cash conversion ratio of 189% for fiscal year 2008, which is calculated using operating cash flow divided by net income.

I will remind you earlier this year we repaid $100 million of debentures and, as Pat mentioned, we ended the year with no debt and in a very solid liquidity position.

As we look into 2009, the current state of the global economy is very challenging.

Assessing the true level of demand in our end markets is difficult in the current economic and financial environment.

Visibility into our near-term outlook is challenging.

Our financial forecast for the first quarter of 2009 reflects this limited visibility, ongoing economic slowdown and weaker foreign currencies.

Revenues are expected to be within a range of $150 million to $170 million.

Earnings per share are expected to be within a range of minus $0.15 to minus $0.25 per diluted share, which includes the expected impact of the restructuring announced in January 2009.

The restructuring costs are expected to $9.8 million to $10.8 million, or $0.10 to $0.11 per diluted share.

We anticipate the effective tax rate for the full year of 2009 to be approximately 36%; and our earnings per share guidance assumes a diluted share count of approximately 62 million shares for the first quarter.

Pat spoke about the business outlook, but he asked me to provide some more specific comments in how we will mange our operating expenses going forward.

For a number quarters now we have been focused on tightening expense management.

In early 2009, we accelerated those efforts by reducing our global workforce by approximately 150 full-time positions, or 7% of our workforce, and we expect to record a charge of $9.8 million to $10.8 million in the first quarter as mentioned.

Upon completion of this reduction, the Company expects to achieve an annual labor-related savings of approximately $14 million to $16 million.

The majority of these reductions are in selling, general and administrative areas.

This reduction is consistent with our strategic intent of improving global operational efficiency and was appropriate in view of the uncertain global economic conditions.

Unfortunately, the economic outlook has not improved and remains uncertain in Q1.

We will not cling to a false hope that the economic situation will recover in the near-term.

For fiscal year 2008 our operating expense, excluding restructuring, was 34% of revenue and is just above our target business model of 33%.

The economic uncertainty may make this difficult in the near-term, but we will strive to achieve this by controlling spending across many areas, including discretionary and indirect spending, through vendor negotiations and further simplification and streamlining of our workforce, as well as reduction of structural costs as required.

We are leading with a reduction to the salaries of our senior officers of 10% and have reduced the cash compensation of the non-employee members of our Board of Directors.

This reduction is in place through 2009.

We will provide more specific details of the developing cost-reduction plans and progress during our first quarter call currently scheduled for late April.

In addition to expenses, we will remain intensely focused on cash and working capital management.

The Company has shown a strong ability to generate cash, and with no debt on our balance sheet, the Company is in solid financial health.

We are committed to maintaining and improving the turnover of our accounts receivable.

We are also targeting a more than 20% reduction in inventories as we progress through 2009 and realize the benefits of our new manufacturing model.

The continued strength of our balance sheet will allow us to take the necessary steps to realign the Company's cost structure to our target business model, matched with our expected revenue levels.

Our goal is clear.

We will be aggressive to drive market share and growth in key areas, but we will be very realistic in how we size the business in line with the economic situation and our expectations.

We continue to target a longer-term expense ratio of approximately 33% of revenues on a consistent basis.

When the business cycle recovers, we will be well positioned with a scalable, profitable business model that will continue to generate strong operating cash flow.

That concludes my formal remarks.

I will now turn it back to Pat.

Thanks, Bob.

As we move forward in this period of uncertainty and slowdown, we will be making investment choices consistent with our strategic intent and target business model.

Our objective is to be the trusted advisor for customers and partners implementing Enterprise costs, mobile business solutions with next-generation technologies.

The long-term market for Intermec solutions is promising as customers are adopting these technologies to lower costs and inventories while improving productivity and customer service.

I have met with many customers recently and these discussions confirm to me both the market opportunity and the power of the Intermec value proposition.

Intermec has good market momentum and strong market customer and partner engagement.

We believe we can leverage the North America model to improve long-term growth in the international markets as I mentioned.

During these economic times, customers value this engagement model and focus from Intermec.

I'm confident we are building for future industry leadership and shareholder return.

I'd like to turn it now to the Q&A section of the call.

Great.

Angela, could you please provide our callers with the instructions on how to queue for this section.

Thank you.

Yes sir.

(OPERATOR INSTRUCTIONS).

It looks like our first question will come from Tavis McCourt with Morgan Keegan.

Your line is open, sir, one moment.

This is Tavis.

Can you guys hear me?

We sure can, Tavis.

Great.

First, I guess, I imagine every first quarter has got limited visibility for you guys and this year especially, but can you remind us how steep the linearity is in terms of revenues in Q1 so we can kind of get a sense of just how important March is for this quarter?

And in giving your guidance, I presume you're stripping out any kind of large direct deals.

But in talking to your direct sales force, I mean what is your sense in terms of willingness for companies to do larger deployments as the year progresses?

I'll make some comments.

This is Pat and then I'd like to turn it to Mike, since he's obviously engaged with customers a lot.

My take is that customers are focused on using this technology to lower costs and inventories.

The returns need to be near in.

They need to be six to nine months.

They need to be very much based upon those sort of practical cost-reduction initiatives.

We are engaged in a number of significant-sized projects.

If I look at the underlined bookings' rates that are coming in, the level of business that we're seeing as we exited 2008 and going into 2009, there aren't as many larger deals.

It's more smaller ones.

It's technology upgrades, but the engagement still stays strong on the larger deals.

Mike, do you want to make some comments?

Sure.

Tavis, this is Mike.

I also think you had another question nested in there which I'll circle back around to, which is sensitivity to linearity Q1.

But, as Pat mentioned both in his prepared comments and just now, our funnels right now show a clear difference in terms of the composition of big deals versus smaller scale; not only in just investigation of our funnels in watching that transition occur.

Also, sitting down with customers and talking to them about capital expenditures are going; clearly they're aimed at much smaller-scaled projects, much faster ROIs, six months and under, if possible.

And the priorities of what they're aiming at, Tavis, have changed.

The rank order of what they're trying to identify and how they spend their CapEx spending in IT have reordered as well.

Clearly, in a lot of the sectors that we focus on around the world, inventory reduction and inventory management is at the top of the stack now.

There's always a mix of priorities that they focus on, but the top one across the board right now is inventory management and just managing their cash flow inside their organizations.

So utilizing our technologies to help them in that endeavor on inventory management is clearly now the top priority.

Still focused on labor cost reductions, raw material, reductions in management as well, but inventory management came out across the board as the top priority in these smaller-scale projects.

The other question, Tavis, that I think you had about the linearity.

Clearly, first quarter and history proves it.

First quarter is typically of the four quarters our lightest quarter.

But, you take that with the context and the background of the uncertainty of this economic condition, we are just taking that input along with the what our customers are telling us for the read of the year and it paints an uncertain outlook, certainly for the next 90 days or more.

And then I guess a follow up, Mike, in terms of the -- when you talk to customers about potentially bigger deployments, is there a sense that, "Hey we'd like to do this.

We'll wait until the economy recovers." Or, is it batten down all the hatches; forget about it for this year?

Tavis, it's both.

What we're seeing mostly is deferrals of the decision, but when we actually see the projects still ROI-ing; we're seeing them break them up into smaller phases; smaller deployments where the affordability is still there inside the context of their newly-reduce CapEx budgets.

But they can also -- it's also the fact that if they're estimating a five or a six-month ROI, they're actually getting it to help build momentum into 2010.

It's a mixed bag depending on the kind of application.

I would say the majority of them are sizing the projects downward as opposed to just a flat out cancellation.

That's helpful, thanks.

And Bob, in terms of the operating costs, you mentioned some of the restructuring you're taking and I want to make sure my math is somewhat correct.

When we look at kind of a quarterly operating cost run-rate as we exit Q1, should we be looking at something in kind of the low $70s range?

Tavis, that's a great question and I think -- what we've looked at is, if you look at our expenses in the fourth quarter of about $79 million all in; $79 million, $80 million, excluding restructuring in the first quarter we think we'll be at about the $70 million range.

And then you have about -- the restructuring on top of that, so we're looking at about 10% out of our ongoing expenses near-term and then the restructuring added back.

Thanks, Bob, that's helpful.

Our next question comes from Chris Quilty with Raymond James & Associates.

Your line's open.

Thank you, gentlemen, can you hear me?

We sure can, Chris.

Great.

I noticed in your script there, Pat, you mentioned that in areas you were expecting growth you specifically excluded transportation, which as historically been your fastest growing segment.

Can you give us a sense of what you're seeing on the ground in the segment that leads you to kind of exclude that from the near-term growth contributor, and what do you think it takes to get a turnaround in that segment of your business?

Yes.

I think that -- we are engaged in transportation, but as you know, Chris, that's where a lot of our growth has come from.

The CN3 is broadly adopted.

One of the things that's interesting is the CN3 now has significant volume and installed base and has reached a level of maturity as a platform and with its software and partners working on it.

And as you know, we're driving a lot of growth through engagement with the value-added resellers.

And so what they're looking at is, even though the sort of broad-based transportation logistics industry as a segment may not be growing, they're actually leveraging the technologies into things like -- you wouldn't say as a T&L application, but it's actually food delivery and the distribution systems; the warehousing; the customer service associated with that.

So, my first comment is that the T&L application of a mobile IT solution out into the transportation networks goes significantly beyond the T&L and industry that you'd identify as kind of distinct market segment because the application is more broadly based.

So, there are T&L projects that we're engaged in some of them are significant.

They're in pilot phase.

But there is this effect of -- and we anticipate those to be key opportunities later on this year.

There is this scaling back of projects in this capacity that people are evaluating about how much is really needed in kind of the T&L segment as an addressable market.

But I really do think and believe that the CN3 with its adoption, the CK3 enables that core application which we built high volume on in the previous one to two years to be a now more broad-based industry and contributor.

Okay, specific question on your targeting a 20% reduction in your inventory, which is I guess a lot of what your customers are doing also.

How much of that is simply related to the transfer of the manufacturing to Venture and the move to indirect channel versus specific policies that you might have instituted regarding stocking levels?

I'll take a run at that and then Bob can comment as well.

The majority of this inventory reduction is as a result of a simplified supply chain and not as many nodes in our internal supply chain.

It's really the operational efficiency gained by a simplified and streamlined supply chain.

This is one of the core objectives of our outsourcing and transformation strategy is to end up with less working capital in the supply chain.

Bob, do you want to add to that comment?

Yes.

I think the thing I would add is, if there's not a lot left to transfer, so the majority -- there will be a little bit that is due to the final transfer.

But the biggest issue, or the biggest opportunity is Venture will now be pulling from the inventories that we've moved to them and so the operational improvements will drive most of that 20% reduction.

Okay, and can you give us qualitatively both how far you're along in that process?

You know, is it 80% or 60%.

And second of all, when you look at the gross margin benefit, which is something we've been tracking, again how well you think you're progressing on that front.

So I think we're just now beginning the inventory pull.

So the way this works is that the products get transferred but we still own the inventory.

Now, Venture starts pulling on the inventory through an agreement that we have with them as part of the contract.

So that's really just beginning now, that reduction of inventory through the simplified supply chain.

One other thing that I should note is that the Q4 performance in terms of delivering the revenue, you know, this was during a transition quarter and so the team made significant progress on that.

In terms of the product gross margins, we will be beginning to make progress on that again, a volume-adjusted and mix-adjusted basis in the first half of 2009 as I outlined.

Okay and since they're pulling your inventory, presumably you don't have quite the gross margin benefit once they suck that down and then start sourcing independently and using their scaled purchasing and perhaps lower pricing that the market may have allowed.

That's right, so Chris, in our guidance that we've provided, we've modeled this effect of them pulling our inventory, and then as that mix shifts from our inventory to their inventory you start to see the benefit of the lower supply chain costs coming into the product gross margins.

Okay and not to hog the time, but one final question.

can you talk to us about foreign exchange headwind; what's in your expectations; plans for hedging or not; and which markets are most impacted geographically?

Chris, that's a pretty -- I think it's pretty lively in many places around the world right now.

Obviously, Europe is our largest region and would be a key focus area, but we'd also look into a couple of the key Latin American countries, Canada and Asia.

We saw about a 5-percentage point impact on our revenues in the fourth quarter.

Fourth quarter to first quarter a little bit of a change, but when you look back kind of year-over-year first quarter of last year '08 to the first quarter '09, it may be a similar impact to what we saw in the fourth quarter in terms of the impact on revenues.

From a cost standpoint, obviously we had a little bit of a benefit on our expense structure.

We're looking at, I think our hedging practices and programs right now, we have had some impacts in the past, and with the volatility we'll be looking very, very carefully and closely at this area to determine the right things to do going forward.

Our next question comes from [Andy Yong] with Thomas Weisel Partners.

Your line's open.

Hi, good afternoon.

I have a couple of quick questions.

You mentioned that sales in North America remained pretty strong in the fourth quarter.

Can you give us some color in terms of what drove the strength in the market given the pretty significant decline in economics in North America?

Sure, Andy, this is Mike.

Basically, it's a composition.

Let me first of all rule out any kind of major deals of any kind of magnitude, as we completing actually in the front of Q4 a rollout for a large field service operation which will have a press release on here shortly in the next couple of weeks.

I'm unfortunately unable to talk to it specifically today.

Outside of that large Enterprise account, the composition of the growth was really made up mainly of grassroots business through our channel partners and through distribution accompanied by a very strong launch, as Pat mentioned during the prepared remarks, of the CK3 which found its way into a number of different both historically core verticals for us, but also some new opportunities for us with CK3 being positioned as a very strong in-premise device; food retail, food processing as Pat had mentioned earlier, as well as our traditional core markets of warehousing and manufacturing and in some selected services' markets.

We found our way into utilities.

Duke Energy was taking on a very small project with us in their utility yards and managing a lot of their assets.

But we see a very bright future for CK3 in the in-premise, or in-yard-type applications.

But mainly, Andy, it was really built as I mentioned of just grassroots, core business, small scale, small project size; mainly fed through distribution in our channel partners.

Okay-okay, and then looking at your guidance it seems to indicate 20% to 30% year-over-year decline in sales in the first quarter.

Can you also give us some color in terms of why there is any particular reason why the decline given you had a pretty robust North American business, which I think accounts for almost like 45% to 50% of your overall sales?

Sure, Pat, I'll give a couple of comments on that and if you'd like to add some.

Andy, as we exited fourth quarter, all of the business metrics in every one of our regions began to signal a downturn in terms of the kind of demand that we certainly entered the quarter with.

It was not specific to any particular region other than probably earlier in the quarter beginning in EMEA.

The major economies in Europe, Middle East and Africa, especially Western Europe as Pat had mentioned earlier, began to turn down.

And the reality is as we stare at first quarter, the trend has continued to basically mirror what we saw coming out of fourth quarter and it is just a -- it literally is a drawdown in both the large projects being deferred and time-fused out in the longer selling cycles, as well as on a little bit more of a modest basis, Andy, a turndown on our grassroots run-rate business.

Although we're not seeing that decline as severe as we are seeing in the deferral of our large projects.

So we would normally see to be a healthy participation of our normal revenue stream.

Okay.

One final question which is, do you see any change given the current economic conditions; tougher, competitive environments, normal type of pricing enrollments in your end market?

No, we're not seeing that, Andy.

I knew that question obviously was going to come up today and it's a logical conclusion at some point in a prolonged economic cycle.

We are not seeing that.

You know, we just basically are taking a read, as all of us are as participants in this marketplace, from signals of our customer demand right now.

Okay, great.

Thank you very much.

Our next question comes from Reik Read with Robert Baird & Co.

Your line's open.

Hey, good afternoon, guys.

I'd like to go back to the operating expenses if I could?

If I strip out all of the extras that you guys talked about in terms currency and the asset impairment, I come up with roughly $74 million, which is still a slight sequential increase versus the third quarter and yet revenues are down.

Can you help me understand why that number should be up with down revenues?

Yes, let me comment and then Bob.

This is Pat.

We had a strong, really Q4 concluding a strong year in North America, which added selling costs in Q4.

So the actions we've taken to lower our overall SG&A at the end of the quarter was really in order to get our expenses in line with that.

So we've -- it really is kind of the flexibility of the cost structure and the -- even though the revenues were down, if you look at the mix and how the selling costs did not scale with the revenue being down for the quarter.

But there were some other G&A costs as well in the quarter from additional IT spending that we were putting in place in order to put together our global ERP system.

So there were some other items along their lines.

Bob, did you want to add any comments to that?

Yes, Reik, I think that's good and I think you were even trying to take it back to the third quarter of last quarter which I haven't looked at as closely.

But I think the items you excluded obviously are logical.

You know, we're looking to drive our expenses down.

I think as we mentioned we want to target sort of longer-term run-rate and we're continuing to work on all of those.

So it's the -- I think the near-term scalability that Pat talked about that's really got us in the range that we're in.

The other thing I would just add, Reik, is that in the third quarter there was some expense credits associated with R&D spending, if you go back and look at that.

So, that was a favorable item in Q3 of last year.

And with respect to the headcount, has that begun and was there benefit in the fourth quarter, or do you expect to get more of that in the first quarter?

Yes, so there was no benefit in the fourth quarter.

We've begun to see that benefit in the first quarter.

Those announcements were made and began those changes in the beginning of the first quarter.

Okay and then, Bob, I just wanted to go back and make sure I understood your comments before.

If you include those benefits on an apples-to-apples basis, i.e.

revenue is flat, that $74 million looks more like $70 million and then volume comes down and you could extrapolate some kind of cost operating expense down from there?

Is that correct?

I think that's directionally correct, but I think again I'll take you back.

Looking at the flexibility and the scalability of the model right now is sort of, I think, what we're looking at how we address.

Okay and then if I could just go back to -- I want to try this question in a different angle.

The midpoint of the guidance is down 25.

Historically, this quarter is down more like 15.

Given that 10% delta, can you describe to me how much is coming from currency; how much is coming from business declines and where do you see the biggest incremental negative in terms of either a product or a geography?

Let me answer that and then, Bob, you can add as to currency.

I think that the most important impact here that we're really studying hard is what's happening with Europe.

And we started to see this significant slowdown in Western European business.

That was during Q4.

We also, of course, had the currency impact during Q4.

But that 31% decline compared to Q4 of '07, that momentum carries into Q1, so that's 30% of our business that's sort of at a rate of declining 30%.

Now obviously we've got a lot of work in place to address this decline, but that's the single largest impact.

It's a substantial portion of our business and we've seen that decline already in Q4.

Do you want to comment on the currency impact?

Yes, I think in the currency -- in the fourth quarter we saw about 5 points overall for the Company.

I mentioned specifically in Europe it's about 11 points of the decline was due to currency.

It was a similar impact in the rest of the international businesses in the fourth quarter and when you kind of roll that forward to the first quarter I think the picture looks roughly the same.

Obviously, the beginning and end points are a little bit different.

The mix where revenues come from may alter a little bit, but I think that's directionally what we would expect in the first quarter as far as the impact.

Okay and then just, Pat, to follow up on what you were saying, really Europe has been the biggest problem area.

Is that mostly in Systems and Solution, or is there some printer weakness there as well?

Yes.

There really is in this business as well as larger deals, it's also in printer media as well Systems and Solution.

In fact, I didn't comment on printer and media through my prepared remarks, but we saw meaningful progress in North America in printers through the year; printer and media.

On Q4, we started to see impact in printers and media in Q4, but the European effect was across on both different size deals, base business we call it as run-rate, as well as on Systems and Solution but also in printers.

The fixed printer business is especially important there and that's where we saw the decline.

Okay and then just one last question, just on the service business.

Given that your revenues had been pretty good throughout 2008 from a product standpoint, does that translate into the service business at least being relatively stable in the next couple of quarters?

And then given the fall, would you expect that to decline?

Yes.

The Service business is a very important business for us.

We're focused on service renewal and attachment rate.

The sales of our mobile computers are very strong.

If you look at the total volume of mobile computers in 2008, it grew compared to 2007, and as you know we started to build that momentum back in the second half of 2007.

So that installed base represents a real opportunity for service renewal and attachment rates and I think the business will be -- you know, it's a very important business.

I think we'll be relatively stable and certainly what we're focused on is ensuring that we earn that service business off of our install base.

Is it likely, though, just given the weakness that you're seeing, at least for the first quarter with product revenue, that that could translate into a Service falloff maybe in the third or the fourth quarter of this year.

Well, I think -- Mike can comment on that.

He manages this business for us.

On the lag time between when the products get sold and when the service contract comes on is a year or two years' delay.

Mostly, this is on service contracts, so it's not time and material.

It's service contracts.

And so I think that the -- these are long-term contracts based on the cumulative size of the installed base.

So it's a relatively slower-moving function.

Mike, do you want to add to that?

Yes.

Reik, will quickly, I think your assumption that the Service business is in a stable mode is correct.

The logical conclusion is as customers, especially our installed base customers, those that are on their multi-generation experience with Intermec are deferring decisions.

The logical conclusion is, is that they are continuing to maintain their existing fleet under a Service relationship.

As they begin to feel a comfort level to go ahead and invest in any kind of scale with us, they'll enjoy not only obviously the new hardware business, but driving as Pat has already said, a heightened focus on attachment rates.

So, we can blunt any of that, that you refer to as the potential outcome in the back half of the year should the hardware business continue to grow on that kind of a trajectory.

So a focus right now on higher levels of attachment rates, but clearly harvesting a benefit right now as customers defer those decisions and continue existing Service contracts with us is, in fact, a benefit.

Great, thank you, guys.

You're welcome.

Our next question will come from Chris Marangi from Gabelli & Co.

Your line is open.

You got it.

Thank you.

Good afternoon, guys.

Good afternoon.

Two quick future questions for you.

First, you've got good market reception to your products and some valuable IT.

Is there anything that you can do different to better monetize that, either with a partner or through acquisitions?

And secondly, you've also got a strong balance sheet and have done a commendable job managing for cash.

I know we've talked share repurchases on occasion here in the past.

Anything that precludes you from beginning to buy back stock again and, particular Bob, I don't know what philosophy you bring on that?

Let me comment on the IT monetization.

We have a very successful track record of monetizing intellectual property.

We've made real progress and that business grows and some of it's deferred revenue as well, so that's just the way we account for it.

So, we have a very focused strategy there and we've made real progress.

And I think during this period of where the market is, there's going to be opportunities for us to look at the changing market landscape and our ability to monetize our intellectual property and look for opportunities.

And we'll be continuing to evaluate because this represents a significant opportunity for the changing technologies that'll matter over the next couple of years.

Bob, I'll turn it to you regarding our capital strategy.

Chris, good questions.

I think less important than probably my personal philosophy is sort of what does the Company need.

So, we're going to focus first and foremost on maintaining certain levels of liquidity, working capital management, make sure we have operating flexibility and that we've got the right things that we can invest in and react to for the Company.

Having not met in a formal Board meeting yet, I think it would be premature of me to comment on what plans for share repurchase would be.

My expectation would be we'd certainly look at that on an ongoing basis as part of our capital structured discussions and consider those things.

There is no repurchase plan in place today and so I think it'd be premature to speculate if we would add one in near-term.

Great.

Thank you.

Our next question comes from Jeremy Grant with Stanford Group.

Your line's open.

Thanks and good afternoon, a few questions.

I wondered if you could talk about obviously the Q1 outlook and it sounds like there is just a lot of bad signs coming in from all around the world, which is of course (inaudible) that we've seen.

Are there any sectors, any verticals I guess, that you seem to be doing better in still, or that are getting hit harder than others?

Well, I think Mike will comment on this.

I spent a bunch of time with customers in the last couple of months and the opportunities in food delivery, safety, distribution, food retail I think will be a meaningful opportunity for the Company.

Also, the use of these products now that they've reached a certain level of maturity, that is that the wide area of cellular network is now an IT platform, and that the products and applications and services available through that are significant.

That transition of these products into the wide area cellular network as an IT platform is going to be much more of a broad-based application now.

And so I think that's going to show up in a lot of customer service applications.

And I already made some comments about utilities and energy and selected healthcare; you know, home healthcare delivery and those kinds of things.

Again, that's one of the sort of field service applications.

Mike, you want to comment on what's driving the adoption right now?

I guess I'll add some additional comments, Jeremy, that as Pat mentioned there are some, at least for us as you guys know if you've tracked us long enough, some non-traditional areas of opportunity.

As we said in our prepared remarks, this year we are focused on finding where the spending is, in fact, occurring and establishing the best route to market; which is typically if it's especially outside of our core markets through our channel partners.

We are reaching into food service, food preparation processing in the retail side of food in this economic climate.

Healthcare to some degree, limited especially through partners.

Pat mentioned the utility sector, especially a field mobility-type applications in utilities.

But we've had some limited success in yard management in-premise type applications.

Petrol gas chemical applications as well, and Jeremy of course, as we've had many discussions with and you know all too well our presence in the public sector especially in the DoD branches through the AIT contract.

You know, North America grew in the fourth quarter 11% and for the full year 17% and those type of growth rates were commensurate with what we saw in our government channels.

And we expect although the spending may change in terms of the type of profile and where it goes, that there are opportunities and remain opportunities in the public sector outside of DoD, so we continue to explore those as well.

Very good.

And talking about DoD, obviously, as potential catalysts, talking now of trying to move a lot of things out of Iraq, moving into Afghanistan, are you guys anticipating that you could get some boost out of that as they need more AIT equipment to support that?

I wouldn't categorize it as a boost.

If it follows the same profile that we enjoyed last year in terms of AIT spending, again inside that complementary bracket of what we saw in North America growth in aggregate, I think that's something that we can certainly count on in the near-team under the AIT provisions.

But as Pat mentioned during the prepared remarks, we're also positioning ourselves to respond favorably to the AIT-4 contract which the RFP is out.

It's on the street.

Evaluations will occur here in the first half and vendor selections will basically be in position as we exit the year.

Okay and one question on that and I jumped on the call a little late juggling a second earnings call, so sorry but I did miss some of this, but are they still talking about trying to select multiple vendors for the successor AIT-3?

They are, Jeremy.

There're a number of different changes in AIT-4 versus the past three contracts of which we've enjoyed two of those three as you know.

This is a multi-vendor award contract.

The timeline is a little shorter than previous in terms of the total fuse length of the contract.

The good news as well, though, is the spending levels that they expect to spend over this contract are higher than the estimates that they've had associated with AIT-1, 2 and 3.

But it is a multi-vendor type award and it is leaning a little more towards standard products.

So, all of things in our opinion bode favorably for our position right now.

Okay.

Any idea how many vendors they're targeting to actually make the award to on this one?

I have no idea, Jeremy, obviously more than one.

Our next question comes from Andrew Abrams from Avian Securities.

Your line's open.

Hi.

I was wondering if you could talk a little bit about the ramp up of the CK product and how it compares with the CN?

I realize the applications are probably a little different, but maybe you could give us some perspective on what you expect out of it and on at least some of what's happened so far?

And also, if you could just bring us up to date on the Royal Mail, I guess Phase 2, as to where that is and has anything changed on that side?

And then, I guess last just a quick update on the RFID business generally.

Sure.

Let me cover the first and third, and Mike will cover Royal Mail.

The CK3 has ramped very well.

It ramped faster than the CN3 ramp out of the first quarter block.

So from the time we introduced it to the first quarter of sales and shipments were faster than the CN3 ramp on its first quarter.

So we did a global launch and many partners out of the blocks would be able to add volume into these partners on a global basis, and the ramp is faster than the CN3.

But it's a significant addressable market because it's form, fit and function and price points and functionality.

On RFID, there continues to be pilot projects on this.

We are looking at how to connect our RFID technology to our significant install base of mobile computers.

Mobile computers is our largest business, growing very rapidly, and customers are looking for how to leverage that mobility visibility with using RFID technology for real-time asset tracking and that's where we're seeing a strong adoption.

We have some unique products there that connect our mobility solutions to RFID.

So Mike if you could answer the Royal Mail question?

Sure, absolutely.

Andrew, this is Mike.

As you know, Royal Mail, the first phase was really aimed at more of the parcel and package delivery segment, which was in many ways a new product and service offering from Royal Mail.

It was 25,000 CN3s that were successfully deployed as we wrapped up the year last year.

Those are in place and the operational analytics in terms of the metrics of how those units are working every day are meeting, if not slightly exceeding, Royal Mail's expectations.

So obviously, we're very pleased with that.

We continue to dialogue and plan with this client in terms of Royal Mail 2 or the carrier project.

This is actually putting a device that may be the same and it may be slightly different depending on the final application sets that they determine with us for all their postal carriers.

And the relative size of this is clearly larger than the first deployment.

We expect a decision in terms of vendor and device direction in 2009, and at that point beyond that it's tough, Andrew, to put any additional expectations on that particular phase of the project.

Okay, thanks.

I was just wondering on the CK3 if the increased ramp speed in the first couple of months of the device being out there, is that a function of the fact that everybody was familiar with the CN3 and at least you didn't have to go through the basic trial-and-error kind of system that you normally would have to do to get something approved?

I think the ramp is due to the fact that we had engaged with the partners at launch and we could ship and add volume on the day of first production availability.

So, those are the things.

A lot of partner engagement; a lot of familiarity with Intermec; progress in the channel; a great product available at good prices with good application support.

And that kind of launch velocity is the result of getting those three or four things right.

Got it.

Thank you very much.

Chris Quilty, your line's open.

Thanks, one more of my Royal Mail questions got answered.

You had last year a bunch of large Enterprise deals; I think there were around 8 of them, some of which got delayed and I think later captured.

A two-part question; one, are all those projects still underway, and number two, did you end up capturing them all in the end or did some of them just get cancelled or delayed extensively?

Chris, Mike.

I will tell you, and I remember the list like it was yesterday.

I would say, Chris, if my memory serves, about 80% or more of them we closed.

Some of that list, Chris, were broken into multiple phases.

However, the bulk of them we closed and shipped in the second half of 2008.

A very small portion of them were completely deferred, but of the 10 Enterprise projects I'd say two or three broken down into smaller phase-type projects.

So, our win rate, what we had identified and positioned the high probability for us, I'm proud of the team and our partner network for capturing those and bringing them through the sales cycle, and arguably from September on a tougher economic climate.

Great.

Thanks, gentlemen.

You're welcome.

There are no further questions at this time.

Great.

Thanks, Angela.

Once again, we appreciate everybody joining us on the call this afternoon.

That will conclude our call for today.

Have a great evening.

this will conclude today's conference call.

You may now disconnect.