泰科電子 (TEL) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome the Tyco Electronics reports fiscal fourth quarter results and 2008 outlook conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. John Roselli. Please go ahead.

Good afternoon. Thank you for joining our conference call to discuss Tyco Electronics' fourth quarter results for fiscal year 2007, and the press release issued earlier this afternoon. With me today is our Chief Executive Officer, Tom Lynch, and our Chief Financial Officer, Terrence Curtin.

During the course of this call we will be providing certain forward-looking information. We ask you to look at today's press release and read through the forward-looking cautionary statements that we have included there.

In addition, we will use certain non-GAAP measures in our discussions this afternoon, and we ask you to read through the sections of our press release that address the use of these items. The press release and all the related tables can be found on the Investor Relations portion of our website at TycoElectronics.com.

Now let me turn the call over to Tom for some opening comments and a review or our performance by end market.

Good afternoon to everyone. Let me cover some key highlights and then Terrence will take you through the financials in detail. I would characterize our fourth quarter as a good finish to our fiscal year. Sales of $3.6 billion represented organic sales growth of 8%, and compared to our guidance of 3 to 5%. This improvement was due primarily to continued momentum in our undersea telecom business, coupled with stronger international growth in several of our key markets. This more than offset continued weakness in many of our U.S. markets, which we have been experiencing most of the year.

Our operating margin, adjusted for restructuring and other items, was 13.7%, which was our highest level of the year. However, this is still down about 1 point compared to last year due to end market sales mix and lower production levels in the U.S.

Free cash flow was $545 million, an increase of 25% over the prior year. The increase was primarily due to an inventory reduction of six days sequentially and three days year-over-year.

On the strategic front, we made good progress on our footprint restructuring. In Q4 we initiated four new actions, two in Europe and two North America, and incurred costs of $59 million on these and other actions initiated earlier in the year. For the full year we initiated 11 manufacturing site closures and incurred costs of $107 million, which was a significant acceleration of our expectations coming into the year.

We also announced an agreement to sell our Power Systems business in early October, which is the first divestiture since our separation from Tyco International. Along with the product pruning we are doing in our computer business, these actions account for about $600 million of sales, and are the first major steps toward divesting or exiting up to 15% of our total sales.

Lastly, we put in place the majority of our long-term debt structure. We announced a $750 million share repurchase program, and declared our first quarterly dividend of $0.14. Overall we were very pleased with our progress in the quarter.

Let me now talk about our Q4 performance in several key end markets. First, in our Electronic Components segment sales grew 8% in the quarter or 4% organically. By region our sales grew 10% in Asia and 4% in Europe, and this more than offset a 3% sales decline in North America.

On an organic basis our sales to the automotive market grew 7% in the quarter. Asia continued to grow at double-digit rates with very strong growth in China, where we believe we are growing in excess of market rates. In Europe, our largest region with annual sales of more than $2 billion, we had a solid quarter with 5% growth. These two regions offset a 2% decline in the U.S.

In the computer market our sales declined 4% as a result of our efforts to prune low margin products. We are making very good progress with this effort. Excluding this pruning, our sales were up 7%, largely due to increased demand for notebook computers.

In the communications market, which includes infrastructure equipment and mobile phones, total growth was 12%. In the infrastructure market, which is about 60% of our communications sales, sales grew 5%, with strength in Asia offsetting continued softness in North America and Europe. In the mobile phone market, sales growth was 28% for our interconnect products. And as you know, this has been a very key focus area for us, and we continue to introduce new products, win new projects, and broaden our customer base. And importantly we continue to improve our margins in this market.

In the industrial machinery market we saw continued strength with 9% growth. Growth was especially strong in international markets, particularly in the industrial automation and solar submarkets.

In the appliance market sales were essentially flat year-over-year with 9% growth in Asia offsetting an 8% decline in the U.S., where we continue to be impacted by the soft housing market.

In our aerospace and defense market sales grew 8% in the quarter, with strong demand in the commercial aerospace segment as the primary driver. And finally, in the consumer electronics market our sales grew 8% due to continued success in the subsegments we're targeting, specifically gaming consoles, flat-panel TVs and digital cameras.

Let me now talk about our network solutions segment, where sales grew 13% on a reported basis and 7% organically. On an organic basis growth in the building networks market was 17%, fueled by continued strong global demand as businesses continue to upgrade their information technology to enable more bandwidth intensive applications. This market has been strong all year. In addition, we continue to benefit from higher pricing on copper cabling product. This accounted for about half of our growth.

Sales to the communications service provider were up 7%, which was our first positive growth quarter of the year, coming off a very strong 2006. This growth was to driven by reacceleration in the rollout of broadband fiber networks by certain large carriers. This is a market where sales can fluctuate at times, but should have very good growth characteristics in the years ahead.

In the energy market our sales grew 4% in the quarter, with strong international growth offsetting a decline in the U.S. This is another market that should provide solid growth for us going forward due to the need for upgraded energy infrastructure around the world.

In our wireless systems segment sales were flat in the quarter, as it has been much of the year. The wireless networks business grew 3%, but this was offset by a decline of 6% in our commercial product business due to weakness in the U.S. and European wireless infrastructure markets.

On the State of New York -- with respect to the State of New York project, which as you recall was a big public safety award we received two years ago, we are continuing to make solid progress there. Construction on the first two regions is essentially complete, and the system is now being tested by state officials. Pending completion of the testing a final acceptance by the state, we expect to record our first revenues from this project in the second half of our fiscal year.

Finally, our undersea telecom segment had another very strong quarter, growing 122% from the construction of the large trans-Pacific project awarded earlier this year. Our customer has moved a little faster than originally expected and we have been able to keep up with them.

Now let me turn the call back over to Terrence.

Good afternoon everyone and thanks for joining our call today. Since Tom covered our revenue trends, let me go through several income statement items, and then I will review cash flow and a few other matters. First, our operating margin on a GAAP basis was 12.2%, which includes restructuring and separation costs, as well as a gain on sale of real estate in our wireless segment, and a small insurance recovery related to Tyco International's class-action settlement.

Our margin adjusted to exclude these items was 13.7%, which is down 100% -- 100 basis points year-over-year, but up 20 basis points sequentially. Similar to the prior two quarters our margins have been down versus the prior year due to a combination of a lower margin sales mix, mostly driven by the sales momentum in our undersea telecom segment, and lower production levels, particularly related to the North American markets in our Electronic Components segment.

As you know, we have a major focus on margin improvement and the three key elements are focusing our portfolio, streamlining our manufacturing footprint, and improving our productivity.

Next, our net interest expense was $43 million in the quarter. At current interest rates, and assuming an average cash balance of around $500 million, and a debt balance of $3.5 billion, we expect our net interest expense to be about $50 million per quarter in 2008. We also had other income of $13 million in the quarter. This is entirely related to our tax sharing agreement with Tyco International and Covidien. Under the agreement we record the accretion of interest on our shared tax liabilities as income tax expense. The other two companies will reimburse us for the portion of their interest, and the accrual is recorded as other income. We expect approximately $10 million of other income per quarter related to this agreement in 2008.

On the tax rate side, our income tax expense was $146 million in the quarter, and this results in a GAAP tax rate of 35%. Our cash tax rate in the quarter was 16%. The tax rate on our adjusted income was 36%. For 2008 we are initially planning for 34% tax rate, but we believe we can take this rate down by about 1 point over the course of the year with the planning initiatives that we have underway. As we previously indicated, our goal is to reduce this 34% tax rate by 2 to the 3 points over the next several years.

On a net income from continuing operations basis, earnings per share was $0.53 on a GAAP basis. Adjusting for the items I mentioned previously, which negatively impacted EPS by $0.06, our earnings per share was $0.59.

Turning now to cash flow. We had a very strong quarter with cash from operations of $655 million and free cash flow of $545 million. The fourth quarter is typically a strong cash flow quarter for us, and this year certainly followed suit.

The cash flow performance was due primarily to our inventory performance. Specifically, inventory days were 72 in the quarter, a reduction of six days sequentially and three days year-over-year. This has been an area of focus for us, and now we have our inventory down to more normal levels. We will typically step up modestly in the first quarter, and we expect to be in the mid 70 day range going forward.

Also on cash flow, our gross capital expenditures were $145 million in the quarter, which is down slightly from last year, but remained in line with our long-term capital investment needs of 4 to 5% of sales. Our net capital expenditures were $110 million due to the proceeds from the sale of real estate in our wireless segment.

Now lastly, two other matters I want to cover. First, in the fourth quarter we declared our first quarterly dividend, and we also announced that our Board had authorized a $750 million share repurchase program. We anticipate that we will complete the repurchase program in fiscal 2008.

Finally, as Tom mentioned, we reached an agreement to sell our Power Systems business for $100 million in cash. We expect the transaction to close by the end of this quarter, or early next quarter, and we expect to record a book gain from this sale in discontinued operations.

Now let me turn the call back over to Tom.

I will cover the outlook for 2008 and the first quarter now. For the full year we expect our business, excluding the undersea telecom business segment and the State of New York, to grow about 4 to the 6%, primarily due to continued growth in our international markets, partially offset by essentially flat sales in the U.S. Including undersea telecom we expect our sales to grow 6 to 8% organically, as well as including the State of New York.

We also expect very strong growth in the undersea telecom business in the first quarter, and that growth rate will then begin to taper off over the balance of the year as the construction on the trans-Pacific network we're building comes to an end.

Our full year of earnings per share from continuing operations is expected to be in the range of $2.23 to $2.33 per share, and this includes about $0.17 per share of restructuring costs. On an adjusted basis, we expect earnings per share of $2.40 to $2.50 per share, which is an increase of 10 to 15% over last year. This increase is due to the higher sales levels and improved operating margin as we continue to make progress on our strategic initiatives, as well as a slight benefit from our share repurchase activity.

It is important to note that our revenue and EPS guidance is based in our current portfolio and does not factor in any significant divestitures. As you know, this is an area we are continuing to look at, so we're not in a position to divulge any more details on that at this point.

For the first quarter we expect our business to grow 4 to 6% organically, with the exception of our undersea telecom business, where we again expect a very, very strong growth quarter. Including undersea, we expect organic growth of 10 to 12%, plus about 4% of currency.

We expect our earnings per share from continuing operations to be in the range of $0.51 to $0.53, which includes restructuring and separation costs of approximately $0.05 per share. On an adjusted basis, this is $0.56 to $0.58 per share compared to $0.50 last year, or an increase of 12 to 16%. We expect our first quarter adjusted operating margin to be flat to slightly higher than last year's 13.1%. The sequential decline in margin is due to the seasonality in our networks and wireless segment. As a result the first quarter is typically the lowest margin quarter of the year.

Before I open up for questions, let me quickly recap our call today. We had a good solid fourth quarter. Just as important, we feel we made very good progress on our strategic initiatives. And I feel we're positioned for solid double-digit earnings growth in 2008. So with that we will open it up for questions. Operator, if can you please open lines.

(OPERATOR INSTRUCTIONS). Yuri Krapivin, Lehman Brothers.

The first question is on your margin improvement. In fiscal '08 you provided margin guidance for the fourth quarter. Where at do you expect to have your exit margins in fiscal '08?

We're not going to give specific guidance, but you should expect some solid improvement in the margin.

Then a question on the divestiture of the Power Systems business. You noted that you expect to book a gain on this sale. Is there any net operating loss for the tax purposes related to that divestiture?

This is Terrence. On your question, we do have a deferred tax asset related to the basis and power systems, so when we actually do sell it, while our NOL will go up, it will not be an increase in our deferred tax assets, so it is really just a reclassification. There is no real added tax benefit from it. But we will be able to utilize the loss. It is will continue to benefit our cash taxes going forward.

Finally, can you talk a little bit about raw material costs? Specifically in your public filings you disclosed your purchases of copper and gold. Can you maybe talk a little bit about how much you spend on resin? And also can you discuss if you have any hedging policy in place for gold and copper?

The majority of our -- by far our largest raw material purchase is copper. Copper rates, if you go back to the third quarter -- our fiscal third quarter of last year, have really been around $3.20 to $3.50 per pound rate. So they have somewhat stabilized. We do some hedging. Typically not that long-term. We are hedged a little bit in Q1 and a little bit in Q2. We don't hedge on the gold site. Overall I would say in Q4 and Q1 we didn't really see any measurable impact from the headwinds from gold. We are able to offset that with other productivity initiatives.

Thanks for your comments then. Congratulations on a strong quarter.

Steven Fox, Merrill Lynch.

A couple of questions. First of all, Tom, maybe a little bit of color what you are expecting from a certain market standpoint in the December quarter from either just vis-s-vis normal seasonality versus maybe some trends that were positive and could reverse or vice versa?

And then secondly, on the undersea cabling business, is there any other potential projects behind the current major one, or is it going to go back to where it was say a year and a half ago?

Let me answer your first part of that question on seasonality and Q1 trends. In our wireless business and in our networks business, Q4 is typically -- Q1 is typically our weakest quarter. In the networks business that has to do with especially the outside work. And about 75% of that business is North America and Europe, so there is definitely a slowdown due to weather. If you look back over time that business would typically slow down 8 to 10% sequentially.

In the wireless business the fourth quarter is always strongest because most of our radio business, or our public safety business, is with U.S. governmental entities of one form or another, and their years typically end at the end of September, so you'll see -- we always experience a surge in volume. That is dialed into our outlook.

In the components business this year I don't think we are going to see too much seasonality. We are probably going to be roughly flat in the quarter. And regarding the undersea telecom business, there is a number of jobs being bid out there. There's not anything really of this magnitude. This was a real big one. There is definitely more bidding activity I would say then a year ago, and it does take awhile for those to come to fruition, and the deals to get agreed to. And then typically where a lot of this work is it for the customers to get funding. So I would say we have a better outlook on that business than we did six months or nine months ago, but I wouldn't expect it come close to where we are in the first quarter.

Can you just expand a little bit on the comment about flat seasonality in the quarter. What are you attributing that to as opposed to years past?

In respect to the components business?

Yes, I'm sorry, in the components business.

We had pretty -- we don't have that much seasonality in the components business. There's a little bit, and probably the most pronounced piece of it is in our automotive business. But that is not Q4 to Q1 phenomenon. In that consumer-related businesses we will get a little bit of left with the Christmas holidays.

We see the automotive business being relatively flat. I think generally the industrial business doesn't really have that much seasonality to it or our aerospace business, and those are going to continue relatively at the rate they have been at. When you add it all up across uur whole components business, you don't see -- maybe a slight decline Q4 to Q1, but no significant change in levels.

Just two quick number questions. Terrence, on the CapEx for fiscal '08, can you give us a little help on that? And then where was R&D for the -- where did R&D and up for the full year fiscal '07?

First, on the CapEx, we are still going to be in that 4 to 5% range that we have quoted of revenue. So from our viewpoint we still believe that is the appropriate level to be at. I will highlight Tom did mention the State of New York. The State of New York program, that does, as we spend on that, that goes into inventory. I think it would be reasonable to use about a $50 million to $70 million number for our investment into that program next year, but that is outside of CapEx.

On your R&D question, this year we spent just slightly above $600 million, which is around 4.6% of sales, including engineering, the way we look at it. From that viewpoint our RD&E in '07 was slightly above $600 million.

Ajay Kejriwal, Goldman Sachs.

I am wondering if you could give us your assumptions for copper and gold that you have embedded in the guidance -- 1Q guidance and full year 2008 guidance?

When we look at it, I think it is fair to assume that where Tom quoted the range has been going around the mid-$3s is what we use for copper. Gold, we did have in a little bit of a lower rate then where it is at. I would assume around $700 per pound rate on gold -- I mean Troy ounce, sorry.

So to clarify, you made $3.50 assumption --.

That is going to be the $3.50 on copper, $700 a Troy ounce on gold.

In that context maybe if you could talk about what is your outlook on pricing? Are you still looking at 2 to 3% as you did earlier this year, or do you expect pricing to decline more at the 4 to 5% range?

I think right now what we see is pricing in the 2 to 3% range. I don't think we see any dramatic change. We're still selectively looking at price increases whenever we can, but I also don't really expect this to be -- if commodity costs stay where they are, this would be a year where we would see much price increase.

Just a couple of questions on the end markets. On the communication services provider market beginning declining last couple of quarters. Organic growth of 7%. I am wondering if you could comment on how much of that was related to the lifting of the strike? And how we should be thinking about growth there in the next couple of quarters?

Our view is over time that business should grow in the 6 to 8% range. Two years ago -- '05 and '06 -- it was going in double-digit range. It slowed down quite a bit for us in '07. Some of that was related to a couple of big customers in Europe slowing down. They are starting to come back online, and the order rates we are seeing right now support a 7, 8% -- 6 to 8% growth rate for that segment right now. So I would say '08 really feels like a returning to more normal levels.

The 7% is sustainable and not really related to that lifting of the strike?

No, that's right. It is more back to a normal level. The last couple of years saw some very high-growth, one year around the World Cup in Europe, and in Germany in particular. And then last year the flip side of that was that particular customer's growth slowed down to more normal levels, and then you had the strike on top of it. So barring any unusual items like that, I would expect us to be in that 7% growth range.

Lastly, you commented on the energy portion of the network solutions decline in the U.S. Maybe if you could elaborate on that, what are the trends you are seeing there, and what was the reason for decline?

Our strength is really in Europe and we're not nearly as strong in the U.S. That is an opportunity for us. About 6 to 8 months ago we began to retool our go to market approach in the U.S. And I think that clearly we have had some growing pains with that. We are starting to see some more positive signs around the order rate there. But our stronghold is in Europe, and we're trying to get stronger in the U.S. But I would say a little bit disappointed in our U.S. performance in '07 there.

Matt Sheerin, Thomas Weisel Partners.

One quick question regarding your sales, and I may have missed this. But can you tell us the specific impact that FX had on your revenue growth in the quarter?

In the quarter it was 3%. We guided 2 to 3. But it was at the high-end of the range, it was about $120 million of topline.

That is in our organic growth schedule. You can find the exact number there.

But does that organic growth versus the actual number also include some of the discontinued ops -- some of the areas where you are getting out of like the PC business, for instance?

No, it does not. Actually that organic growth, that negative sales is in organic growth. The entire difference between actual and the organic is FX.

Then, Tom, you talked about softness in the Americas continuing. Do you have a sense of whether demand there has stabled on some of your end markets, or perhaps getting worse? And do you believe that you are holding share against competitors?

We have been hit especially hard there this year in the U.S. automotive portion of that, which has been down pretty significantly, as you know, as well as our housing related businesses. We do expect that, while we don't expect growth in the U.S. next year, we do expect it to level off from where it has been in '07. I don't think it is -- I don't think is a share issue, not anything that we can see.

Just lastly, on the plant closures, which sounds like you are a little bit ahead of schedule, can you tell us where we are in terms of the restructuring and what is left in terms of number of plants that you hope to take out?

I can't get into the specifics of the number of plants, as I am sure you can probably appreciate, there's a lot of sensitivities we need to have before we give any specifics. But I would say, as we have mentioned before, we were looking at a $400 million to $500 million investment to do that. We're a little ahead of the pace. I wouldn't say it is enough to actually get excited about. I think we're going to move the margin up -- the improvement up a couple of quarters. We were able to add a couple of locations in Q4. A lot more to do there.

Brian White, Jefferies & Co.

I'm wondering if you can talk a little bit about the order pattern in your electronic components business? If you look at September, then October, and really how November has trended, have you seen any softness in that as we moved into November?

It is Terrence. When we look at it really from a booking level, bookings have remained very consistent with quarter four since year-end. So we continue to see that the bookings run at the same rate. Really to Tom's point on our outlook, we continue to see nice order growth in Asia and in Europe. The Americas is flat to slightly down. So it remains very consistent with what we have been seeing. So no trend difference than what we have seen in Q4.

Can maybe you update us on what percent of your production is in low-cost right now? I know you had a goal of 50%. You are around 35%. Maybe where you are now and where you expect to finish '08?

It is a little bit more than 35%, but it is not going to change much in the quarter of course. It takes a little bit time to get there. We have about -- we have actually 50 to 60% of our employees in low-cost, but about 35% of our production. I would expect we would be in the 40ish range by the time we exit '08. It accelerates as you begin to move more plants and get the cumulative effect.

For example, we initiated plant closures, but in many cases we're still producing there, albeit less than we were three months or six months ago. But it takes a while to transition the entire production out of a plant. I feel like we're definitely tracking to the plan that we laid out before.

Shawn Harrison, Longbow Research.

Just a quick clarification. The gold numbers in your model, was that $700 for 2008 that you have baked in or was that kind of your assumption for the fourth quarter?

No, that is for 2008.

Shawn Harrison Second question has to deal with just further product pruning. Should we expect more in 2008, similar to what occurred in the June quarter?

Yes.

Shawn Harrison Is similar --.

It is an ongoing program.

Shawn Harrison An ongoing program more focused in on the Electronic Components business than anywhere else?

Largely in the Electronic Components business, yes.

Shawn Harrison Then my final question, with revenues in the undersea telecom business likely to fall off in the back half of the fiscal year, should we expect margins to stay in the high single digits or trickle down back towards kind of mid single digit type of range?

I think when you look at undersea telecom, undersea telecom will not go down to Tom's earlier point where it was historically after the telecom bubble. We do still expect growth out of that business next year. I think we could expect as it goes back in the trans-Pacific programs over in the mid to high single digits.

Amit Daryanani, RBC Capital Markets.

Just a question, sequentially expecting margins to go down by 50, 60 basis points. And I believe you are attributing that to softness in the wireless and networking segment in line with seasonality, is that right?

It is that coupled with another significant increase in the undersea telecom business, which even at this level, although the margins are better than historic levels, they are still below our average margin level. And where are the declines seasonally is in networks and wireless. In networks it is largely in our carrier-based business and our energy business which are higher -- the highest gross margins in that segment. And in the wireless it is in the radio business, which is the highest gross margin in the segment. All three of those are above-average margins.

Got it. I guess I was just looking at the network and wireless business. It looks like operating margin is about 13.2% this quarter on those two segments combined, versus 13.7 on a corporate basis. So I would imagine as long as your component business continues to grow you should see some margin enhancement rather than a big drop-off.

We should expect margin enhancement as it grows, but it is going to be relatively flat Q4 to Q1 in components.

The other thing I would add to what Tom said, almost half of our organic growth, the 10 to 12% we quoted, is coming out of the undersea telecom business. That is a pressure point the other way.

Just the 6 to 8% -- or I guess 4 to 6% fiscal '08 growth that you guys gave, is there any FX impact built into that number or is that absolute unit growth?

That is absolute pure organic, no FX.

I just want to clarify this. I want to make sure I heard this right. But you expect to complete an entire buyback by fiscal '08, and that is built into the '08 EPS guidance?

Correct.

Just finally, given the cash flow generations you guys had, and expect to continue having, do you think it is sustainable to keep doing a $700 million, $750 million buyback every year?

I think as we have stated previously, with the amount I have quoted on cash and debt in the prepared remarks, we have always said, if we do not have strategic uses for our cash, we would look at returning that to shareholders. Number one is we do have a strategic use for that cash? If we don't, then we would do something like a share buyback. If we do don't have a strategic use, I think that is resembled to assume.

Carter Shoop, Deutsche Bank.

A couple of longer-term strategic questions. Can we first talk about pruning of the portfolio? We're about two quarters out following the spin, and we have divested maybe 5, 6, 7% of that 15% of the total portfolio pruning. Do we think it is going to be a relatively linear approach to divesting the other 8, 9, 10% of the portfolio, i.e., 5% or so each year, or could we see it dramatically ahead of that schedule?

What we have said before, and I think we're probably a little bit ahead of schedule, but not enough to come off it as to try to get most of that done in the first 18 months.

Fair enough. Then as a second question, could we talk a little bit about what we have done so far, about five months into the new Company here in regards to accelerating some of the -- accelerating growth in some of the underpenetrated, high-growth markets?

Sure. That has been a priority for more than just the last five months. We're clearly -- probably the one we're making the best progress in is in the mobile device business. We have expanded the customer base there. We have expanded our productline there. And we had another high growth about 28% in the quarter. I feel like we're making very good progress there. We're making solid progress in the consumer electronics piece where we have been more targeted in terms of the products we want to go after there. All in all, I think we're making -- I would rate our progress as solid there.

Energy is a business where we have we believe a global leading position, but it is a pretty fragmented market. And as I mentioned earlier, pretty good -- a very strong position in Europe. We're not going to be high-growth there. Building some momentum in Asia. And a little behind where we would like to be in the U.S. market candidly. To mention a few.

Aerospace and defense, I think we're getting our share, given the productline we have. Clearly the markets out there we're benefiting from that. I don't think there's any significant share gain on our part in that particular market. So there is three or four of the key ones there.

Great. That is helpful. As a last question, can you talk a little bit about the component outlook for fiscal year '08, maybe highlight some of the different end markets within components that you think will be above the average growth rate, and some divisions that would be a little bit below that average growth rate?

Sure. I mean right now we would see automotive as being a little bit slower than last year. It was pretty strong. That is a bit of a mix. Europe will be a little bit slower. The U.S. will get more back to equilibrium. That is our assumption there. And it remains to be seen but Q1 is certainly tracking to that.

Our computer business will be up a little bit year-over-year. A big part of that is because we went through the pruning last year, so we don't really see high-growth in computer. I think we're starting to see a little bit of a pick up in the communication space and even in infrastructure I mean, and we have introduced in a lot of new products there. I expect that growth to be a little better there.

On the other hand I think things will be a little bit slower in the industrial equipment, aerospace and defense and appliance. Not materially, but certainly just a little bit slower. Appliances, we see is going to continue to be kind of a flat to slightly down market.

Just one clarification. In regards to the computer market, is that pruning completely behind us now?

For the most part. A lot of it. But we've got maybe another three or four months to go there.

Could you quantify the overall impact on a revenue basis over the past -- well, including this quarter (multiple speakers)?

I think it will be (multiple speakers] when all is said and done.

Jim Suva, Citigroup.

Thank you and congratulations everyone. On the stock buyback, I believe it was announced at the end of September. And so if am correct then this quarter would have seen absolutely no stock buyback because of the timing of that. And if that is the case, quarter to date as of yesterday or whatever have you been active in the market? And if so, if you can quantify that?

Due to the timing, you are right on. We were not able to execute anything to date under the program.

Where we sit today, is that still the case?

Yes.

Switching over, did I hear right about automotive flattish outlook? And was that sequentially or year-over-year?

Year-over-year.

Sounds good. Then finally last question, regarding SG&A --.

Let me clarify that for you. When I said that I mean -- I don't mean -- what I mean is growth will be about the same. A little bit down, a little slower growth than last year. About flat in the U.S. Still solid, but not quite as strong as it was in Europe. And continuing to be strong in Asia, fueled by the China market.

Sequentially regarding quarter over quarter from September to December though is it fair to say that we see an uptick in December just because of the holiday and production changeovers that we typically see in the September quarter?

We see it about flat.

Flattish, okay. My last question on SG&A, can you remind us of when is your annual employee salary increases, and what we should expect from a SG&A standpoint?

They roll throughout the year, depending upon country and so forth. From that viewpoint we typically have a 3% inflation factor. But that goes in over the year. You won't expect it all to hit in one bump.

For modeling purposes should we look at 11 to 12% of sales were should we do it more of a runrate of $425 million to -- or $420 million to $430 million per quarter?

I think it is fair to take that selling and general administrative line and just inflate it slightly throughout the year at an inflation rate.

Great. Thank you and congratulations.

Will Stein, Credit Suisse.

I would like to ask a little bit about the product portfolio pruning that has been discussed. You seem to have gotten a good price for the business that you are divesting, the Power Systems. I'm wondering out of what is left to prune from the portfolio, can you talk a bit about how much you think is going to be business that you essentially walk away from versus how much you wind up selling? And remind us as to how much you think the Company can generate from selling those businesses.

The lion's share would be divestitures as opposed to business that we just exit by not renewing a contract or discontinuing the productline or pricing our way out of it.

And expected pricing on let's say a price to sales or a price to EBIT basis?

I think -- let's keep it on sales. When you look at it and we have said, we believe it will be 30 to 40% of the sales value for the stuff we do sell, certainly crude similar to power. Power was a very low ratio due to it was losing money. There will be some that go the other way, but on a composite I think 30 to 40% of the sales value is reasonable.

Just one other quick one. Within the components business, can you talk about the competitive environment today? How is that tracking and what are you guys doing to improve your share?

It is always competitive. There are a lot of good companies that we come up against. I think the key for us is a robust new product pipeline. And I think that is the key in the industry. You have to be close to the customer. We have about 5,000 sales people out there, and we have about 8,000 people around the world supporting new product development. I think it is one of our strengths. We're very broad based across all the industries, and you've got to fight for every order.

Would you say your share in the components is relatively stable now, or how can we think about that relative to --?

I think overall, yes. Maybe we are inching up a little bit on the mobile phone side, and in a couple of various maybe we are inching down, but there is nothing really -- I don't think there's any significant share change. It takes a while for a positive or a negative share shift, because by the time you work with the customer, you get design in and it turns into revenue. When we look across, and we spend a lot of time trying to understand it, there's lots of literally thousands of competitors out there, but generally speaking I would say our share is about flat.

Jeff Walkenhorst, Banc of America Securities.

I'm wondering if you can give us the book to bill numbers for the year ago period? So the total, excluding the wireless and undersea, was 0.99, and total company was 0.93, what was it last in the year ago period?

We will have to get that for you. I don't have been here with me for fiscal '06. I don't have that.

Has it changed? Do you think it is kind comparable to where you sat last year in the overall demand environment?

We look at backlog, end of '06 versus end of '07 in the components and network solutions segment combined it is relatively flat where we came into the year versus where we ended the year.

How would you describe the overall supply chain and inventory out in the channel? Is it more normalized? You seen demand kind of pick up, and how much is going through distribution for Tyco?

We have about 15% that goes through distribution in total. I would say, no, we have not seen demand pick up. If anything, it is a little bit softer. It is not a recent trend, is has just been a little bit softer all year for us. We would have expected it to turn up by now, but it hasn't. So it is -- I would think of it as really kind of flattish for us during '07 in the channel our -- through distribution (multiple speakers).

So the distribution has been relatively flattish, maybe a little bit softer than you expected. What about the direct book of business that you are seeing?

More strength there. That is where our organic growth is coming from, in the components business.

I want to just go back to the auto segment. I have had a lot of questions on that. And clearly outlines everyone is concerned about a weaker U.S. macroenvironment and what impact it may have, given Tyco's large exposure. But I know that you are pretty well diversified, larger Europe and Asian exposure. I think you generated organic growth of -- was it -- 7% for the current period -- or the September quarter. And you're talking about that remaining sort of flattish through fiscal '08. Does that mean we should look for organic growth of around 7%?

No, organic growth for the year was around 5%. I would expect our organic growth to be around there or a little bit less, but a change in mix between the regions. U.S. has been down this year, and the impact on us has really been -- we sell -- most of our automotive business is outside the U.S., but the impact in the U.S. has been really on our productivity and our absorption. While we have battled through the slowdown in the U.S., it is still in that negative impact to us from a profitability point of view year-over-year.

That probably hasn't changed all that much. Through the last several quarters it has probably been on the down trend.

That's correct.

Even if that continues through fiscal '08, you're still comfortable that you can see organic growth of around 4 to 5%?

Based on what we see today, yes. Because we do have such a broad base, and in Asia it has grown double-digit, and in China it has grown well above that, and we're very well-positioned there. Overall I would feel pretty comfortable with the 4 to 5% growth rate, as I see it right now.

That is helpful. Then how is the pricing in that particular end market today? Are you saying and a lot of pressure or is it relatively consistent with where it has been?

I would say it has been pretty consistent. There is always a lot of pressure, but I haven't seen any marked change in direction in more pressure, if that is your question.

So no change. Is a sort of a down maybe 5% per year type?

No, the automotive is typically in the 3ish range.

Where is the consumer electronics, maybe more --?

In the high single digit range.

On the computer segment where you have been walking away from some that business, so you expect that to continue for one more quarter. You mentioned that if you excluded the business that you walked away from, I think you said that that segment actually would have been up 7% year-on-year?

In Q4, yes.

That is because of strength --.

That is end market demand.

With respect to those components that you are selling into the notebook market, are those margins -- are they comparable with your corporate target, are they above or below or --?

No, the computer margins are lower than Company average.

Which I guess is not a big surprise. But is that -- I imagine that is an area where there is some pretty intense pressure from some of the Asian players.

Absolutely. That is one of the highest pressure -- price pressure areas. But there's also a fair amount of technology change that goes into there, which is why it is important for us to play in that.

Than I guess the last question related to that is you're comfortable that you're maintaining your share in that segment and/or gaining market share?

I think in computer when you take into consideration the pruning, our share is down.

Right, but by choice. But maybe in some of the more attractive portions of that business is your share relatively constant?

The best we can tell, yes. And especially in the socket area, the strategic socket area, I think we're holding our own there. But it is one of the most competitive end markets, and we're being much more selective. I would expect over time our share will gradually decline there, not $100 million a year as we have pruned out some of these productlines that we want to get out of, but that will be a market we continue to be very selective in.

Tom Dinges, JPMorgan.

Most questions have been answered. Just a quick one for Terrence, so I can understand the tax rate trajectory. 34 for the whole year, which implies we would probably start a little bit higher and then we would work down through the rest of the year to get to that 34% number.

And then also any expectations for you guys for cash flow in the first quarter of the year? Obviously you got a little bit better profitability compared to the year ago, and a little bit flattish to slightly up compared to this quarter. And I'm just wondering what your trajectory is maybe on working capital and so forth to get to the cash flow number for the quarter?

On your second part first, we're not going to give quarterly cash flow guidance. As we said over the long term, our free cash flow will approximate our net income, excluding the State of New York. From that viewpoint -- that is over the long-term. You know how cash moves. It can jump around a little bit for quarter one.

On the tax rate, the tax rate comment is not starting at a higher rate getting to 34. It is starting at 34 and then taking a point out over the year, to clarify my comments earlier.

That helps. Thank you.

I would now like to turn the conference back over to Mr. John Roselli.

Thanks everyone for joining the call tonight. Keith Kolstrom and myself will be around if you have any follow-up questions. I look forward to talking to everybody. Take care.

Thank you.

Thank you.

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