漢威聯合 (HON) 2009 Q1 法說會逐字稿

Good afternoon and thank you for standing by.

All participants will be able to listen only until the question-and-answer session of today's conference.

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

If you have any objections, you may disconnect at this time.

I would now like to turn the conference over to Mr.

Kevin McCarty, Director of Investor Relations.

Sir, you may begin.

Good afternoon, everyone, and welcome to Intermec's first quarter fiscal year 2009 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.

In a moment Pat will discuss our quarterly overview, and Bob will provide a summary of our operating performance and guidance.

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 those 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 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 opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release those results of any revision to those forward-looking statements.

In addition, we will describe certain non-GAAP financial measures.

These should be considered, in addition to and not in lieu of, comparable GAAP financial measures.

Please refer to today's earnings release which shows our reconciliation from GAAP to non-GAAP net earnings.

For a more detailed description of our 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 those reports can be obtained by contacting the SEC or our 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.

Bob Driessnack, our CFO, will be reviewing the financial results in some detail, as well as the further steps we are taking to lower our break-even point.

I'll be providing an overview of the quarter, and then later after Bob's comments, providing more details on the markets and an outlook for our business.

Intermec delivered first quarter operating results in line with guidance provided in February and did a solid job in managing cash.

First quarter 2009 sales started out slowly, but have grown since then to a stable level of business.

It has not yet recovered to what demand looked like a year ago and the visibility into the length of the sales cycle is still poor.

Our total sales funnel size has grown compared to a quarter ago, especially in mobilities' applications.

Our regional performance in Q1 was mixed and the improvement of our international sales results is a key priority.

North America continues to be our largest and best performing region.

First quarter was also characterized by spending discipline inside the Company and we were able to capture the benefits of cost-reduction initiatives, resulting in both sequential and year-over-year OpEx reductions.

This combined with good management of our working capital enabled us to stay cash-flow positive on an operating cash basis in the quarter.

Gross margins declined in the quarter due to a number of factors which Bob will detail.

Gross margin improvement remains a priority going forward and those cost-reduction initiatives are on track.

We are substantially complete now with the transfer of manufacturing to Venture Corporation and we expect to see the benefits from this cost reduction in the coming quarters.

As we reduce our expenses going forward, we have a few key priorities that we are staying focused on in order to make the reductions in a way that builds the business rather than weakens it.

Our primary objective is to keep the new products on track, and along with focused Sales & Marketing initiatives, to build market momentum and win the business in our target markets.

I will add a few more comments on this in my wrap-up and will turn it now over to Bob to review the financial performance in some detail.

Thank you, Pat.

Intermec's first quarter revenue of $163 million represented a 25% decline over the prior-year's first quarter.

On a constant currency basis, revenues declined 20% year-over-year.

First quarter loss per share was $0.17 compared to earnings of $0.13 in the comparable quarter of 2008.

Included in the $0.17 loss was the impact of restructuring costs of $8.6 million or approximately $0.09 per share in the first quarter of 2009.

First quarter revenues on a regional basis were as follows.

In North America, our largest region, revenues decreased 9%.

Europe, Middle East and Africa, or EMEA, decreased 50% in the quarter; $8 million or 10 percentage points of the decline were due to currency.

Latin American revenues were down 20% and Asia-Pacific declined 18%.

Reviewing our product line performance, Systems and Solutions' revenues decreased 26% over the first quarter of 2008 to $93 million.

Printer and Media revenues of $36 million declined 34%, and Service revenues of $34 million were down 9% over the prior-year's quarter.

Total gross margin was 36.3% in Q1 as compared to 40.3% a year ago, representing a 4 percentage point decrease.

First quarter product-related gross margin was 35.2%, a 4.8 percentage point decline from the year-ago margin of 40%.

In the quarter, our product gross margins were impacted primarily by lower volumes by the impact of currency in EMEA and a less favorable product-related mix.

Service gross margins were 40.6% in the first quarter, a decrease of 1.1 percentage points compared to 41.7% in the prior-year quarter.

The decline was due to lower volumes.

Operating expenses, excluding restructuring costs, were $66.9 million, or 11% below the $75.2 million reported in the first quarter of 2008.

Our tightened efforts and structured oversight of our discretionary and indirect expenses, combined with the initial reductions from the business restructuring announced in January, drove the reduced expense levels.

I would like to take a moment to provide some details about our ongoing cost reduction and expense-focused plans.

We are focused on tight expense controls and reducing the level of expenses to be in line with lower, near-term volume expectations, while continuing to target our long-term business model.

At the same time, we are aiming our spending on two new products and winning where the markets are strongest across our product development, marketing and sales organizations.

We are using deeper inside skein from customers to enhance the effectiveness of our investments and open innovation without outside resources to leverage the dollars invested.

In addition to the labor-related savings from business restructuring that we announced in 2008 and January 2009, we are driving costs lower by attacking many areas of discretionary and indirect spending.

This is being accomplished through vendor negotiations and simplification and streamlining of our processes.

We realized savings in the first quarter in areas such as insurance, travel, meeting events and professional services' fees, which will generate savings throughout 2009 as well.

In addition, we completed negotiations which did not benefit the first quarter directly, but which will result in several million dollars of additional cost savings over the balance of the year in areas such as computer infrastructure, outsourced R&D and public relations.

And we are continuing this focused effort in additional areas that will drive an increasing benefit.

As part of our overall focus on costs and to align our cost structure with near-term revenue expectations, today we announced a plan to reduce our global workforce by approximately 12%.

This action supports the Company's strategic intent of improving our operational efficiency, balanced by our realistic assessment of the ongoing global economic recession.

These reductions are expected to result in $22 to $25 million in annualized cost savings.

This amount is in addition to the annualized savings of $14 to $16 million that we expect to realize from the business restructuring plan announced in January of 2009.

Our restructuring costs for the most recent action are expected to be in a pre-tax range of $15 to $17 million.

The Company expects to record approximately $10 to $11 million of total restructuring charges in the second quarter of 2009.

We expect that the balance of the charges will be recorded in 2009.

We anticipate that substantially all of these costs will be cash expenditures.

In 2008, the Company's break-even point was approximately $760 million, which we calculated by dividing 2008 operating expenses of $302 million, excluding restructuring charges, by the full-year gross margin of 39.8%.

In the first quarter despite pressures on gross margin yield, the annualized breakeven using the same approach has been reduced to approximately $735 million.

This was driven by the combined benefits of the business plans and cost reduction actions undertaken beginning in 2008 and early 2009.

The plans announced today, in combination with the full benefit of the previous actions, we believe will drive a breakeven point for the Corporation that is more than $150 million below the 2008 level.

Our objective is to be profitable in 2009 even if the economy does not recover.

We expect that when the economy recovers and the markets pick up we will realize strong operating leverage.

On the margin strategy, we have a number of areas we are focused on as we have outlined.

These include rigorous management of the Channel profitability disciplines, gaining benefit of our outsourcing initiative now that it is substantially completed, and continuing to streamline the end-to-end supply chain.

Looking at the balance sheet, we continue to manage receivables well during the quarter, which declined $31 million from the 2008 year-end levels.

Our daily sales outstanding is 8 to 10 days on average better than the same period in the prior year.

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

Total net inventories declined about $9 million and were down $23 million year-over-year, as we realized the initial benefits of our new model.

In the first quarter, we generated positive cash flow, including the impact of $4.3 million of payments related to restructuring costs.

At quarter end, our cash and cash equivalents totaled $216 million.

In addition to our heightened expense management, we remain focused on cash and working capital management.

We are focusing our capital spending on new products and system efficiencies with spending reduced 37% year-over-year.

The Company has shown a strong ability to generate cash and with no debt on our balance sheet the Company continues to be in a solid financial position.

As we look to the second quarter of 2009, the current state of the global economy continues to show significant weakness and uncertainty.

Assessing the true level of demand in our markets remains difficult and visibility into our near-term outlook continues to be challenging.

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

Revenues are expected to be within a range of $150 to $165 million.

Earnings per share are expected to be within a range of -$0.11 to -$0.18 per diluted share, including the expected impact of the restructuring announced in January and April of 2009.

The restructuring costs are expected to be $10 to $11 million, or $0.10 to $0.11 per diluted share.

This amount includes approximately $1 million from the January announced actions, and approximately $9 to $10 million from the actions announced today.

Adjusting for the impact of restructuring charges, our earning on a non-GAAP basis are expected to be -$0.01 to -$0.08 per diluted share.

We anticipate the effective tax rate for the second quarter to be approximately 37%.

Our earnings per share guidance assumes a diluted share count of approximately 61.6 million shares for the second quarter.

Going forward, we continue to target a longer-term expense ratio of approximately 33% of revenues on a consistent basis.

We are committed to continued tight management of working capital.

The strength of our balance sheet allows us to take the necessary steps to realign the Company's cost structure with near-term expected revenue levels.

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

Our goal remains clear.

We will be aggressive to drive market share and growth in key areas, focus our spending efficiently and effectively with a view toward the longer term, and remain realistic in how we size the business in lien with the current economic situation.

That concludes my formal remarks.

I will turn it back to Pat.

Thanks, Bob.

I will now highlight what we are seeing in the market in our key priorities going forward.

I spent considerable time with customers and partners in the last several months, both in the U.S.

and internationally with recent trips to Europe, Middle East, Latin America and Asia.

There are a few key trends in the business I wanted to highlight.

First, the larger Enterprise deals have either slowed or been scaled back due to recessionary pressures.

The majority of Intermec's Systems and Solutions business is dependent on the Enterprise deployments and this had an impact on Q1 on our Systems and Solutions business, as well as some of our Printer businesses.

To achieve our objectives, therefore, we are focused on the run-rate business through the Channel, and I made progress on this during the last two quarters.

In Q1, we added approximately 150 new partners to our global Channel program in order to extend our reach in the markets.

At the same time we are staying very engaged on the larger Enterprise deployments in anticipation of the market recovery.

Mobile IT investments where the cellular network is leveraged as an Enterprise IT platform, remains a top operational IT investment priority for customers.

These technologies enable them to lower costs, improve their customer experience and improve the productivity of their mobile workforce.

Intermec has a strong value proposition to enable constant implementation.

The sales funnel is building and is stronger in April than it was in January.

We believe we are well positioned for winning the business as the markets recover.

The second trend is that applications are broadening for Intermec.

Our traditional strength and direct store delivery in transportation and logistics is being complemented with more opportunities in state and local government, public sector, food retail, field service and healthcare product distribution and mobile healthcare delivery.

This increases our address to markets as Mobile IT becomes mainstream in many sectors of the economy.

The reason for this broadening of applications and industries is because Intermec's products and solution capability, along with our partners, reaches more applications.

The business processes in a wide range industries are being fundamentally altered by mobile enablement.

The extended reach of the application for the technologies and the Intermec value proposition will provide, we believe, significant long-term growth opportunities for our Company in the future.

Third, technology refreshes a customer priority.

The older install base of products is coming closer to the end-of-service life and customers are looking for migration paths to new technologies.

Intermec's new products, including the recently-introduced CK3 and Premise Rugged Mobile Computer, are providing compelling value for these technology refresh projects.

Our engagements with customers and partners are focused on providing a clear path to new technologies, especially during the current economic environment.

We anticipate that these three factors built on a foundation of strong customer and Channel-partner engagement and innovative new products, will enable Intermec to win even during the current recession and to be well positioned for the market recovery.

Next, I want to make some comments on the regional performance and outlooks.

North America is our largest region, and based upon industry data we have outgrown the market during 2008, and we continue to have strong momentum in both Channel and Enterprise selling.

Even though the amount of Enterprise business is lower, there are still some good examples of wins in the region.

During Q1 we had success in Field Mobility with a significant order from leading overnight parcel and field delivery company for our 6,000 CN3 products for route management applications.

With a launch of the CK3 in the fourth quarter of last year, we also had several successes with in-premise applications, including Voice Picking solutions.

On the public sector side, we are engaged in the AIT-4 contract and believe we are well positioned to be one of the selected vendors.

This is a multiyear, several $100 million opportunity in the United States Department of Defense and we anticipate a decision in the next few months.

The trends I mentioned earlier are important for the North America region with a focus on Channel sales, new mobility applications and technology refresh.

Our Printer business was down in the region, but part of this was a tough comparison to last year Q1 when stocking orders were growing in distribution.

We have a clear focus on building the Channel program and sales results in Printers in North America.

We expect North American sales to be slightly down sequentially in Q2, as we shift some long-term contract revenue in Q1 that we don't expect to recover in Q2.

I am confident that the sales and marketing activities underway, when combined with our new products, will continue to build the business in the region as the year progresses.

Turning now to Europe, Middle East and Africa; as Bob has outlined, a significant decline in our business this quarter compared to last year was partially due to currency, but was also impacted by the recession, competitive pricing and the major slowdown in industrial segments.

The currency decline also had a significant impact on gross margins in EMEA.

The results in EMEA were below our expectations and we are taking aggressive actions to improve the revenue and margin results going forward.

We expect to see sequential improvement in the coming quarters as the funnel converts to results, as well as the Channel programs and Printers and Systems and Solutions gain more traction.

EMEA is a large sales region for Printers and decline in the region had a significant impact on the Printer sales results in the quarter.

In EMEA, there were some Enterprise wins in Q1, including a $2 million win for the newly-introduced CK3 in-premise terminal with a leading French food retailer to be rolled out over the next few months.

Intermec was also awarded an in-cab computing application with a major transportation company as they migrate from 700 Series products to new technologies.

We anticipate this being a 5,000-unit deployment.

In the area of Field Mobility, Intermec continues to leverage the success in postal interrelated applications with a key win of leading European home delivery specialists utilizing over 7,500 couriers.

We anticipate the deployment in the second half of 2009.

I was recently in Saudi Arabia and Dubai and reviewed the excellent work our team and partners are doing with customers in distribution; distribution customers, postal and public sector applications.

Our recent announcement of the CN3 win at Saudi Post is a very innovative combination of mobile computing, RFID and customer IT investments.

We expect to improve our results in EMEA after a weak Q1 and our team will be working with our Channel partners and major accounts to capture the business across a wide range of Mobility and Printer opportunities.

In Latin America and Asia-Pacific, our revenue decline was driven by the market conditions as capital spending declined in Enterprises.

The Latin American economies, for example, are significantly dependent upon exports and raw material production into consumer goods so they have slowed capacity expansion during the recession.

In Latin America, we made good progress in the first quarter in the Channel of Scan Source, and we are building a more broad-based business.

The Channel results are improved significantly from a year ago and contributed to the base run-rate business.

In Latin America, we had important wins in local governmental and utilities to complement our historical strengths in direct-store delivery and transportational logistics.

Going forward, there are opportunities in food retail, postal and government projects moving forward.

I am confident we are building momentum in the region in the Channel, while staying engaged with our major customers.

In Asia-Pacific, we recently won a significant deal at a large consumer package food distributor in the region and anticipate the rollout in the next several months.

This leveraged the global account plan that reaches to all regions with an integrated solution.

The key to growth in both regions will be the expansion of the Channel, and this is where we expect progress.

We anticipate expanding the Channel significantly in Asia-Pacific in the coming months, and my recent trip to China has made it clear to me that we can expect growth with both increased Channel capabilities and engagement with top Chinese infrastructure projects.

Recently in the region, we also won a significant deal at the Australia Sydney Airport for boarding pass printing.

Turning now to RFID, we continue to view RFID as a promising opportunity for our business.

More and more customers are becoming aware that significant cost savings and revenue can be achieved by deploying RFID systems and they identify Intermec as the clear leader in RFID solutions.

Recent market survey information show Intermec with a strong preference share leadership position when it comes to customer confidence in the implementation of RFID systems.

Current economic conditions are reinforcing our leadership position in RFID as customers, resellers and other industry partners seek the safety, reliability and essential services that Intermec uniquely provides.

In summary, our view of the overall market is that it is beginning to stabilize, but visibility remains limited on the sales funnel close rate.

We anticipate some market recovery later this year as the Enterprise business activities underway move into deployment.

But we are also taking actions now to lower our breakeven points in the event of prolonged recovery.

We also anticipate the introduction of compelling new products this year and continued progress in our Channel expansion and broader applications' reach.

We expect these top-line priorities will enable growth as the markets recover.

We expect better results in our Printer business as the year progresses.

The reduction in workforce that we announced today is consistent with lowering our breakeven point while building the operating model for the future.

We anticipate that these reductions will be implemented during the rest of 2009 and they represent difficult but required decisions to position the Company for consistent profitability and strong operating leverage with the markets' recovery.

Lowering the breakeven point while funding our growth initiatives are the focus of the management team at Intermec this year.

As I said earlier, we are keeping the new products on track and when combined with the Sales and Marketing initiatives with the Channel and with Enterprise engagements, we believe positions the Company for outperforming the markets.

I am confident of these business plans delivering strong, long-term shareholder returns and appreciate the support of our employees, customers, partners and investors.

This concludes my formal remarks and I will now turn it back over to Kevin for questions and answers.

Great.

Thanks, Pat.

Tamara, at this time we would like to open up our call for our question-and-answer period, please?

Thank you.

(OPERATOR INSTRUCTIONS) Our first question will come from Reik Read with Robert Baird.

You may ask your questions.

Hey, how are you guys?

Very good, thanks Reik.

I just wanted to make sure I understood what you were saying about breakeven.

I heard your say $735 million and you can reduce that by another $150, so that suggests by year-end you could be at $585 million breakeven.

Did I understand that correctly?

Reik, this is Bob.

I think the reference we started with kind of 2008 breakeven which was $760 million, and then indicated that we've made progress to $735 in the first quarter and annualized the first quarter.

So really, the $150 remains to the level that would come from the 2008 starting point.

Okay, and then once you complete all of the actions that you're taking and you get to that level, could you give us an idea of what the incremental contribution margin at the gross margin level might be?

Reik, I think with gross margin, you know, longer term we've always talked about a target of 43%.

Certainly, in near-term, economic pressures and currency declines have created a lot of headwind for us.

We're focused first and foremost on adjusting the cost structure to lower that breakeven point as you indicate.

Longer term, certainly we want to be profitable and drive the positive operating cash flow.

The balance of the year we expect to see improving gross margins driven by the realization of our manufacturing costs, diligent pricing process, proactive management of currency changes and the benefit of new products, which Pat talked a little bit about.

Longer term as the cycle recovers, as we realize those benefits and with the manufacturing transition now substantially complete, we'll make quite a bit of progress.

Our objective longer term remains to drive gross margins in the 43% range.

And I guess that's what I was getting at, is in the 2010 timeframe assuming that we're beyond kind of the current situation, is that with every incremental dollar of revenue is it something like 40% to 50% goes to that gross margin line on an incremental basis?

Well, I think we have to prove that we can achieve our target business model on a consistent basis, but certainly our objective remains unchanged.

Okay, and then with the incremental restructuring that you've announced today, or the headcount removal, how much of that is cost of sales and how much of that is in the operating expense area?

The majority of it is in the SG&A and/or operating expense areas.

There is some of it probably a couple million dollars that's in the cost of sales.

Okay.

And then you guys touched a little bit on this, but can you give us a sense for what you're seeing in the marketplace in terms of a bottom?

Are you kind of thinking that the second quarter is where it bottoms out, and more specifically, Pat, can you talk about Europe?

You talked about sequential improvement, but then you get into the third quarter and do you see normal seasonality of down there or do things start to pick up because of some of the wins that you talked about.

The way I think about that, Reik, is that -- think about it this way which is that January was particularly weak, and then we started to recover in the second part of the first quarter and that there is some funnel building.

The business is sort of plateauing and starting to build.

The funnel is building faster than the results right now in terms of delivering the sales.

But, so I think it went down kind of at the end of the year.

It's picking back up.

It's now reached somewhat of a level of a plateau.

If you look at the sequential numbers, what we're saying is that sequentially it'll be roughly flat where we delivered 163 in Q1, 150 to 165 in Q2; Europe up sequentially; Latin and North America down sequentially.

And then I really anticipate that in the second half we'll start to see some improvement on new products and marketing initiatives, but also the recession will be one quarter closer to being done.

And so we do anticipate the second half being stronger.

If you look at last year, Q1 and Q2 were the same last year, in that they were both $217 million.

Now, Q3 was higher because we had the Royal Mail revenue was in there.

And so I think this year we expect some growth in the second half.

We have not forecasted the whole year and we don't give annual guidance, but based upon those activities I outlined that's what we're looking for.

What I do have to say is the visibility is limited and capital spending is still being very heavily scrutinized by our customers, so what I'm doing is projecting something that is still pretty uncertain out there.

Okay, and then, Pat, just one more question on you announced today a number of new application areas that you're going after.

Can you talk a little bit about how you're going to do that from a knowledge standpoint?

Do you have guys internally that have that domain capability, or is that something you're going to rely on the Channel a little bit more for?

Yes, so those things that I've outlined, we - I would say two things.

One was that our team is very engaged with the partners to make sure that we, together with the partners, can create these kind of application solutions.

So there's a very high level of engagement and responsiveness between our teams.

It is not a hands-off enterprise.

It's not a hands-off engagement, but we are relying on the Channel.

I talked about increasing the number of Channel partners and the Channel partners are identifying these opportunities.

Sometimes they are leading them; sometimes we've identified them; and then we bring the Channel partner into that.

I would say that the bulk of this will be led by the Channel.

Okay, and then just in terms of the timing of these new things, I assume that those processes are underway.

When would you start to see some meaningful impact from a revenue standpoint?

Well, I think we have begun those.

You know, these things have a natural sort of incubation cycle.

I would expect us to see some of those results in the second half.

Okay, great.

Thank you very much.

You're welcome.

Thank you.

Our next question comes from Eli Lustgarten with Longbow Securities.

You may ask your questions.

Good afternoon.

Good afternoon, Eli.

A couple of question; one you talk about generating cash flow.

Do you have free cash flow target for 2009 in this kind of environment of what you'd like to be able to generate in free cash flow for a ballpark estimate?

I think we're not really giving guidance full-term, or for the year, Eli, on cash flow.

I mean we said that we want to focus on positive operating cash flow to make sure that's solid.

Capital expenditures, I think on the last call we said we'd be roughly flat with the prior year really focused, in my comments on new products and system efficiencies.

And so I think the conclusion you could draw from that is that we're certainly targeting positive free cash flow.

Okay.

In your description of all the problems in the marketplaces, one of the things that is not mentioned is financing ability in the system.

Is that inherently implied, or have you not heard much, or the financing, you know, the lack of being able to finance anything or capital availability have been a major problem in this kind of product?

Do you have any feel for that?

Yes.

As I've engaged with customers and partners and we look at our DSOs and what our receivables look like, and I engage with customers, it isn't so much that there's a big cash squeeze so much as there's a lot of cash preservation.

So, I would say that the partner network is hanging there and some partners with more cash than others.

But in general, just strict availability of cash to fund it isn't so much the thing as wanting to preserve the cash because of the still limited visibility about when the markets will recover.

And do you have a breakdown of sales by region?

Where was North America and Europe, Latin America?

In essence a changeover of the actual sales dollars?

Right, so we -- Bob, can you cover that?

Why don't you take a minute to do that, Bob, and we'll get back to that somewhere between questions.

We'll just do the quick math here.

Okay and going on, and in your discussion about change in market, I guess in probably in price and stuff is that North America was only down 9%, which is sort of in this environment I haven't heard a number that small in probably two weeks or so.

Yes.

Well, as you look out through the rest of the year, I know it's hard to forecast, but it doesn't sound like you expect North America's decline to be much more than a double-digit number this year at any one time.

Is that a fair statement of what you're looking at?

You're not looking over 7% to 9% in this quarter becoming 25% or 30% next quarter or something like that?

Well, the second half of the year the comparisons get tougher, right, because we grew throughout last year.

It is the place where we've got the strongest momentum.

As I said, we do expect in Q2 to see a modest sequential decline just because of the things that we shipped.

We had a very, very strong year last year; 17% growth, record year for North America sales.

And so, we're working very hard.

We have a robust funnel, a very focused team and lots of opportunities, but of course we're facing a big headwind in the recession.

So, I don't think I would be able to provide overall guidance for the year in North America.

Bob, do you want to cover some of the percentage numbers?

Eli, I think what we said, you know, North America was down about 9%.

The current year is between $100 and $105 million.

That's certainly the largest region.

Europe was down about 50%, including the impact of currency, just about $40 million, plus or take.

Latin America and Asia together are about $20 million give or take a little bit and they were collectively down about 18% to 20% for the quarter.

That's close enough.

And in the funnel you're describing, most of -- you were just implying that most of the opportunities that are in this large funnel is North America?

No-no-no.

I was answering your specific question about North America sales.

We have a strong funnel generation, a demand generation in funnel activities in all our regions.

What I was responding to was, was the fact that North America was only down 9% and how do we keep the results going forward.

And so you have good funnel generation in North America.

Can you talk a little bit about Europe because Europe's the one that has been in freefall and it sounds like the freefall is sort of coming to an end, or at least there's enough activity to give some hope.

Is that what you're saying?

What I'm saying is that in Europe, the decline since say third quarter; if you look at our third quarter results and then our fourth quarter results and our first quarter results, is a more significant percentage decline.

The business activity there has also stabilized.

It isn't going down anymore, but it went down further and it hasn't quite recovered the same recovery rate, although the recovery rate has been modest in, say North America, it hasn't quite recovered at the same rate maybe in the last couple of months.

So it's a steeper decline, a longer recovery, I think is the way to look at that.

It's a clear area of focus for us to achieve better results in Europe and we have a very focused team to do that, but I do think that the percentage declines we're not the only ones that are seeing very significant year-on-year declines in Europe, especially when currency is taken into account.

I just had a quick question.

One, when would we expect the crossover between cost of restructuring and the benefits of the restructuring?

Does that happen in the fourth quarter or earlier than that, or do we have to wait until next year before we get the benefits of restructuring or being greater than the cost of restructuring?

Really, a lot of these savings start to come in, in the second half of this year.

We'll start to see the benefits of those.

These numbers that we talked about for savings are really annualized, so you'd see the full benefit of those in 2010.

But will we see a positive contribution between the cash outlays and the cost by the fourth quarter, because that's sort of what you're implying?

Certainly, our objective and our current belief is that by the fourth quarter we'll have positive momentum there.

Yes, and another thing, there is no financing issue, covenants or any violations, anything that you're near on anything and you don't have much debt to worry about.

From a pension standpoint is there any -- would your pension contribution have to go up?

Do you have anything you have to do on a pension fund?

And actually some of the details on the pension will be in our 10-Q, which we expect to issue just in the next couple of days, so that may answer your questions there.

I think on liquidity and on covenants, no, we have no debt on our balance sheet.

We do have a line of credit.

No issue with covenants or anything there.

All right, thank you.

Thank you.

You're welcome.

Thank you.

Our next question comes from Tavis McCourt with Morgan Keegan.

You may ask your questions.

Thanks, I have a couple.

But where I wanted to start was just on the restructuring and headcount reduction.

I was wondering if you could kind of go through on a function basis where the headcount reductions are coming from and kind of philosophically how do you know when you're cutting fat versus cutting muscle that might take away from the strategic position of the Company.

Yes, let me cover that.

So we don't disclose what functions are in the headcount reductions.

But let me just really answer your second question, which is it's very important that we position the Company and strengthen the Company during these difficult choices.

So we have a very clear picture about exiting this recession as a stronger Company.

So the first thing we've got to do is make sure that the infrastructure is streamlined and simplified.

These are the G&A functions and the end-to-end supply chain is streamlined and simplified so that we have a more responsive, more real-time organization.

And we believe we can do that, especially with our Channel -- with our supply chain partners.

Another key aspect of our strategy is we're focused on building Channel sales, and what that means is that the relative investments between Marketing and Sales starts to shift more towards Marketing as selling cost goes down.

Now, obviously our goal is to grow the business overall, but we are repositioning the investments and focusing on making sure that we're engaging with the Channel partners as a significant growth opportunity and has positioned the Company going forward.

So that isn't just reductions, it's really realigning the cost structure in alignment with our strategic intent.

As we look at the new products, we have several very important principles underway here.

The first one is that we are focusing on our unique core competencies.

We're making technology investments in innovative, unique, differentiated, really breakthrough state-of-the-art products with a deep commitment to making sure that we are leading the industry with innovative new products on a regular basis.

And then we focus on our core competencies and then we embrace open innovation with our development partners so that we can actually accelerate how fast we can do new products and they can contribute more and more to the future revenue streams.

I believe the Company needs to have strong new products when the recession abates and when the market is recovering.

It's the new technologies that will drive the growth of the Company.

So with keeping these new products on track, looking to how we do development in a way that is very aggressive on state-of-the-art platform work and open innovation, and then making sure that we have strong end-to-end supply chain, Channel engagement, and Best in Class operational processes.

Okay, that's helpful.

And you described with a little bit of excitement kind of what you planned to do in the Asia-Pacific region and seeing some opportunity to grow that business.

Can you kind of frame that in terms of maybe where the business has been in the past, where it's fallen to, and to what degree?

You know, how big is the market opportunity in that region as you look at it?

Well, the business is around 5% of our revenue is in Asia-Pacific.

We believe that 10% of the market, roughly, is in Asia-Pacific, and so certainly there are new opportunities.

We're going to leverage the Channel to reach those.

We have a focus team to do that and so right now the business is sort of bumping along.

It goes up and down a little bit.

We believe that we can grow that business over time.

It does take building out the Channel and also making sure that the products have a good fit to that region.

So we've enhanced our local product development capability in Asia so that it can be tuned in to local market requirements.

So those combination of factors should give us opportunities over the longer term.

And then on the cost reductions, I just want to make sure and kind of understand what it means for a quarterly basis.

Should we look at those annualized cost reductions in totality versus where you were in Q408.

In other words, the operating costs in Q408 where it looks like they were about $77 million in that quarter.

Is that kind of starting point for these annualized cost savings from the two restructuring activities?

I think really the full year last year, the $302 million, which $77 is pretty consistent with that, is the starting point.

Okay.

That's helpful.

And then a final one on the guidance, it seems like the business improved a bit from a very weak January but the guidance was sequentially down in North America and you mentioned a reason for that and it kind of went over my head.

Was it drawdown of some backlog in North America?

Yes, we had some backlog that was long scheduled for long-term contracts and it was important in the quarter.

So as that doesn't repeat in Q2, and obviously we're working very hard on having a good funnel.

But the chief thin for me is that I've got to see the close rates accelerate.

The funnel activity is good and, I think, confidence is building, but we haven't really seen that and as I said it sort of reached a plateau.

It's sort of there and it hasn't really turned, and so I would expect we would see sequential improvement in Europe with some sequential decline.

And the overall picture means that it's relatively flat.

As I said, it's $150-$165.

our Q1 revenues are within that Q2 guidance.

Okay, thanks a lot.

You're welcome.

Thank you.

Our next question comes from Chris Quilty with Raymond James.

You may ask your question.

Thanks, gentlemen, I have only a couple of remaining questions here.

The receivables and, in fact, I guess even the inventories were a little bit better than I would have expected.

Anything unusual going on there?

Chris, this is Bob.

I think with the receivables, really if I go back to the beginning part of last year, the Company has had a pretty good dedicated focus and has a strong team managing both the credit and the collections that we gotten after very well.

Of course, part of that is helped with the lower volumes in the quarter, but our DSOs as I mentioned have also improved year-over-year.

No credit issues we've seen.

We're watching those things like a hawk.

On the inventory, we had stated our goal was to take 20% out for the full year and $9 million is a good step toward that.

We still have work to do and are focused very much on it, particularly with the transition of the model.

We will pay even closer attention than we already would.

Okay, and speaking of which, an update on the manufacturing transfer to Singapore, where you stand on that?

And I know this is an impossible question to answer, but if you excluded the volume-related declines that happens here in the quarter, is it your sense that you are still on plan with achieving all of the cost savings that you are targeting out of that manufacturing move?

Yes, there are two questions.

One is we are substantially complete; well over 90% of the revenue in the quarter came from our partner Venture.

We've also improved operationally, so it was already a very fast and excellent transition.

Having done this sort of thing before and achieved a lot of results in Q1.

And we are on track in the cost savings, so we'll track these again as Bob said "like a hawk" and the material cost savings as well as the labor savings that are associated with that contract.

And so we are on track in that, and the thing that we're watching, of course, are the things that impacted Q1.

The impact of currency, making sure that we maintain discipline on pricing and watch the pricing environment, the product mix, and of course the volume; but in terms of the core and manufacturing costs those are on track.

Okay, and you also talked earlier about the improved effort or increased effort into China and Asia-Pacific using partners, and yet as far as I know it's not as well of an organized region in terms of a traditional two-step model.

Clearly, Scan Source at least doesn't have a presence there.

So, how do you go about reaching that market, or do you have to use more of the traditional one-step approach into the reseller community.

We believe that there are opportunities for two-tier distribution development and we're working on those.

Right now, as you said, sort of the traditional and direct VAR relationships.

We're also developing two-tier distribution models.

We have nothing to talk about at this point, but that's insight as to a way to expand the Channel reach.

And final question, Royal Mail, now that you're deployed any feedback on how well that has been received by the customer; lessons learned; quality issues and where you are on Phase 2?

Yes, the deployment has been very successful.

We deployed over 25,000 Rugged Mobile Computers in a record time and it's been a very successful deployment.

All the feedback we've gotten from our partners and Royal Mail is it's been very successful.

The quality has been good.

The teamwork has been good.

They are beginning to really use it throughout their operations.

And so, that has helped us build postal business throughout Europe.

Some of the things I just mentioned about the home delivery win was positively affected by our Royal Mail results, because it's a relatively small community that talks a lot.

In terms of the Phase 2, right now the focus, I believe, is going to be on the Phase 1 and capturing the full benefit of Phase 1 and we're expecting to be engaged on sort of Phase 2 walk project.

But right now we're not counting on that much in 2009.

We see that more as a 2010 opportunity.

Okay, great.

Thank you, gentlemen.

Thank you, Chris.

Thanks, Chris.

Our next question comes from Ajit Pai with Thomas Weisel.

You may ask your questions.

Good afternoon.

Hi, Ajit.

Hi, Ajit.

A few quick questions.

I mean the first one is just the headcount reduction.

I think you talked about it being a small portion of that being in calls and then a big chunk of that from SG&A.

Could you give us a breakdown in SG&A?

Are some heads going to be gone from sales as well or is most of it G&A?

We won't disclose that.

There is some sales impact, but we won't be disclosing the breakdown between sales and G&A and Operations.

Got it, okay.

And then you discussed about manufacturing savings, etc., but pricing and the competitive dynamics, you've seen some consolidation with your customers.

You've seen a sharp drop off in orders, but has that impacted the pricing environment repeatedly?

Yes, there are some places where we are seeing more price pressure.

We saw some of this, of course, through the currency effect in Europe, but there are some regions and some competitors where there is more pricing pressure.

So we're watching that very carefully and certainly we saw some of that in Q1 and it's something that we're watching very carefully with our customers and our partners and in our upcoming new product lines.

Right, and then when you look at the sort of overall revenue levels of the Company, you are looking at Intermec having revenues that are comparable to 2002 right now.

So you know, the secular growth when you look at that hard number just being comparable of the first quarter of '02, do you know how much; like whether the unit volume has actually grown, whether it's the same, or whether the industry itself hasn't had much pricing fall.

Do you have some of those broad numbers.

Yes, we look at average sale price.

I can't or won't quote specifics here, but we look at average sale price in unit volumes and unit volumes were strong in 2008; stronger than 2007.

So we have seen unit volumes grow.

We're currently in sort of record recession here, so this is -- it'd be a hard year to say that this somehow part of the overall long-term secular growth of the industry.

But certainly in 2008 we saw unit volumes grow.

Right, but '09, like first quarter '09 versus like five years ago or eight years ago, are the volumes higher right now than they were then?

I can't answer that.

Ajit, this is Bob.

I don't have that data with me.

Okay, and then you talked about AIT-4 and your level of confidence that in the next couple of months you have a fairly shot at it.

But the past pattern was, I think you folks had AIT-1, then AIT-2 went to a competing team, and then you had AIT-3.

So, what gives you confidence that your product is actually competitive in the current sort of bid?

And also in addition to that the size; I think AIT-3 was disappointing in terms of level of scale and volume relative to AIT-2.

In terms of size and profitability, how does AIT-4 compare in your view?

So our view is that the AIT-3 incumbency is material to the contribution we can make to AIT-4.

We have a dedicated engaged team and have gotten good feedback, and so I don't think this is a we win the odd numbers and they win the even numbers thing.

I don't think that's really relevant.

I think what's relevant is leveraging our incumbency and technology and engagement directly with the customer.

And we've gotten good feedback on that.

In terms of the overall size of the AIT-4 contract, is that your question?

Yes.

The overall size of the AIT-4 contract we see as very significant.

It's several hundred million dollars is the total contract size.

And that includes the [AITC] hardware content and also other content, but it's a substantial opportunity over the next number of years.

Right.

Now, AIT-3 was supposed to be, you know, potentially could have been as high as $500 million.

Are we talking about something to the same order of magnitude?

Yes, that's right.

It's in that -- it's several hundred million dollars.

Okay, but you don't know, I mean it's a bid that's based on volume, on pricing?

Like, how is the pricing determined?

Is it like bailout, only $250 million [inaudible] and then do you still have to provide the same pricing?

Those details are really still being sorting out with the customer and how the individual winners will have -- what the pricing environment will be once the winners are established.

I think what we've got to do right now is focusing on winning and being part of the vendor set.

Got it.

And then the last question is about the applications you talked about.

What's different about the way you're approaching applications now relative to previously?

I think the key thing is that the -- well, there's two things.

One of them is what's happening in the industry, which is the cellular network is now available as an Enterprise IT platform.

And the form factor, performance and functionality of these products have crossed some chasms that make it so that they're extremely useful for enabling the productivity of the mobile worker.

So this is just a long-term growth trend associated with mobile enablement.

In terms of how we approach it, we have a very strong Windows mobile platform team that engages with software vendors and with our partners to be sure that we are the partner of choice and how quickly these solutions can be pulled together on a standard software platform.

And to the same question, are you seeing greater competition from Blackberry-like ruggedized sort of devices which are basically handhelds starting to get into your market, which has mobile forms that have gotten better at surviving shocks and have so many hundreds of applications and the volumes are significantly higher than yours.

Are you seeing any incremental competition where your device is sort of losing, not to your traditional competitors, but the best market?

That's something we keep an eye on, but we haven't seen that much in the competitive landscape.

Okay, thank you.

Thank you, Ajit,

Thank you, Ajit.

(OPERATOR INSTRUCTIONS) There are no further questions.

Great.

As always, we really appreciate everybody joining us on our call this afternoon.

That will conclude our call for today and have a great evening.

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