泰科電子 (TEL) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Tyco Electronics Fourth Quarter Earnings Call. At this time all lines are in a listen-only mode. Later, there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions) As a reminder this conference is being recorded. I'll now turn the conference over to Vice President, Investor Relations, John Roselli. Please go ahead, sir.

Thank you and good morning. Thank you for joining our conference call to discuss Tyco Electronics fourth quarter results for fiscal year 2008, our outlook for the first quarter of fiscal year 2009, and our thoughts on the full year. 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've included there. In addition, we will use certain non-GAAP measures in our discussion this morning 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 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.

Thanks, John. Good morning, everyone. Given the current challenging economic environment, we're going to focus the majority of this call on our current business conditions and give you a flavor of what we're seeing right now. And also, importantly, talk about the actions we're taking to improve the Company in 2009 and beyond.

Just looking back for a minute, our Q4 performance overall was in line with our outlook and although in our economic -- electronic components segment which is about 75% of the Company, conditions in most end markets, especially automotive, began to weaken later in the quarter in this segment and automotive is about 40% of our component segment. We were able to offset this with continued strong execution in our telecommunications business. This enabled us to deliver $0.69 of earnings per share which was up 19% over last year's fourth quarter. In addition, during the quarter, as you know, we initiated the next major phase of our restructuring program which includes the closure of three automotive plants in Western Europe and that is tracking right now.

We also had another good cash flow quarter with free cash flow of $476 million and we completed the divestiture of two businesses for cash proceeds of $469 million. These two resulted in total cash generation of approximately $900 million in the quarter.

For the full year, our free cash flow was $1.4 billion and in addition to this, we had $600 million from divestitures and our free cash flow exceeded adjusted net income for the year. We also continued to return excess capital to our shareholders through dividends and share repurchase. During the fourth quarter, we purchased 12.5 million shares for approximately $400 million and we also spent another $100 million on share repurchases so far this year.

Overall in 2008, we made good progress in terms of strengthening our business portfolio, improving our operating margins, and strengthening our leadership.

As we look forward and frankly we're experiencing right now, it's clear that 2009's going to be a much tougher year due to the global economic slowdown. Back when we gave our fourth quarter outlook in July we were anticipating some slowdown in the consumer related market starting in our components segment. Very late in the quarter we began to see further weakening of orders in these markets and in October the order trends got significantly worse.

Specifically, our electronic component segment orders in October were down 20% year over year with our international automotive business especially hard hit. Based on all the information we have, we now estimate that global automotive production levels in the industry could be down about 20% in the quarter. And in the European market, which is our largest, the slowdown has been especially severe and we expect our sales to be down close to 35% organically in the first quarter. As a point of reference, they were down 7% in Q4 and up 4% for the full year. So, this has been a pretty sudden drop. We also expect a decline in the Asia-Pacific region and the US market continues to be very weak.

As a result of all this, we now expect our automotive revenue to be down approximately 25% on an organic basis in Q1 and this is pretty clear, this is not only end demand related, but it's an adjustment in the inventory and the supply chain as well.

For the balance of the component segment, we expect to be down 5% to 10% organically and overall in the segment we expect an organic growth or decline of approximately 15% in the first quarter.

In the balance of our businesses -- and I'll touch on each of them in a minute -- we see business roughly flat in Q1. In our network segment which is about 15% of the total Company revenues or $2 billion on an annual basis, we expect revenues to be flat with last year with growth in the energy market offset by decline in the communication service provider and buildings networks markets. FX is being cut back in those markets. In the Undersea Telecom business we'll likely be down about 5% year over year for the first quarter but this was expected. Last year in the first quarter, we were ramping our big Trans-Pacific Express job. We've now completed that job. On the positive side, the backlog continues to be strong at $1.1 billion. We can continue to see a fair amount of good activity in this market.

In our wireless segment, we haven't assumed any revenues related to the state of New York project and we'll talk more about that later. We expect overall revenues in the first quarter to be about flat with the prior year.

Based on these trends, our Q1 sales are expected to be in the range of $2.9 billion to $3 billion which is a decline of 16% to 19% overall, 12% to 15% on an organic basis. With this level of sales we expect adjusted earnings per share in the range of $0.24 to $0.28 compared to adjusted EPS of $0.62 in the prior year.

This outlook does include an estimated loss of $0.10 per share related to a mark to market adjustment of currency hedging activity. Terrence will take you through this in more detail in a few minutes. If you exclude that loss for a minute, our core operating earnings are going to be in the $0.34 to $0.38 range at a volume of $2.9 billion to $3 billion and the decline in our profitability from last year's first quarter is really all volume related.

So, as you know, as we sort through these times, our focus is in three key areas. One is to continue to stay strong in the market. Two is to reduce costs, to improve profitability through the year, and of course, three is to maintain our strong balance sheet. Let me just talk a little bit about each of these.

With respect to our market position, during the last year we sharpened the focus on our product development efforts and we launched significant platforms in a variety of key markets. This has been a real key part of our strategy as we refined our portfolio, moved out of businesses and products that really weren't attractive and redeployed those engineering resources on critical platforms like backplane connectors and engine control unit connectors, just to name a couple.

But I think we've mentioned to you before, we also are well into revamping our indirect market channels. They're becoming -- they are important channels for us. We believe they're going to become even more important and our goal is to be able to expend revenues through these channels over time. And in general, while things are tough right now, we believe our broad and deep market presence and our long track record with our customers in conjunction with our financial strength is more valuable than ever to customers who want to make sure they have suppliers they can count on.

In the cost improvement area, we're focused on two key actions -- expand and accelerate the footprint restructuring. In addition to the previously announced restructuring plan, we intend to take additional actions, primarily in our components segment where we have excess capacity. You know this has been a cornerstone of our three year strategy to reduce our manufacturing capacity. There's been a lot of activity going on in this area and we're going to take advantage of these times to pull some other things in. The actions we have underway right now are on track to our plan. We expect the actions that we implemented in '07 and '08 to give us about an incremental savings of approximately $40 million in 2009, the current year we just started. The savings from the actions we will introduce in 2009 really won't begin to show up until 2010, but they're going to be earlier than originally planned because we're going to start them earlier.

The other key focus of cost improvement is to reduce our overhead. We expect to cut our SG&A costs by about $100 million on an annualized basis and we'll begin to see some of those savings in Q2 and hit the run rate in Q3 and Q4 this year. Again, the approach we're taking here is structural. For example, a couple weeks ago we decided to combine two of our similar businesses to take advantage of synergies in the market with technology and especially in the supply chain needs or areas that are on our three year improvement plan and because of current circumstances we've accelerated.

We also expect to see some margin improvement from lower commodity costs as we recapture some of the costs we were unable to pass on when commodity prices were increasing. We estimate a current rate and certainly the commodities are still volatile. That meta pricing, this could benefit us at $75 million for the year. Again, most of this benefit will be in the second half of the year as we work off current inventory levels.

So, the way to think about all this is when you net all this out and if you assume the current level of sales and because we don't have a lot of visibility right now, but here's how we're thinking about the Company. At the current level of sales, driving these cost improvements, making sure we manage very well this price commodity spread and at current exchange rates and commodity cost levels, we would expect that we could deliver $1.70 to $1.80 per share for the whole year and that excludes the mark to market adjustment of $0.10.

So, I'll add a little more to this later on, but let me turn the call now to Terrence who's going to cover our Q4 segment and overall financial performance in more detail.

Thanks, Tom, and good morning, everyone. As Tom said, let me start with reviewing the segment performance in quarter four.

In our component segment, our sales grew 3% in the quarter, but we were down 2% organically. Also, from a regional perspective, we did see all of our regions had single digit sales declines in the quarter and that was really driven by the consumer related end markets that we serve in the components segment which comprise about two-thirds of the segment's total sales.

In the automotive market we were flat overall but we were down 6% organically. On an organic basis, in Europe we saw our sales decline 7% and at the beginning of the quarter we said we expected this to be relatively flat, but as we went through the quarter, we saw a significant decline in September as OEMs announced additional production cuts and this led to a reduction in inventories at many of our tier one customers.

In Asia, we did have sales growth of 17% and within China, sales grew 17%. And as Tom mentioned, we do expect Asia to have an organic sales decline in quarter one, close to double-digit. And in North America in quarter four, sales declined 26% in the quarter and we expect a similar decline in quarter one.

In the computer market, our sales declined 11% while in the communications market, our sales grew 4% organically. On the infrastructure side of the communications market, our sales grew 2% while on the mobile phone side our interconnect products grew 10% which was essentially in line with overall production. We do believe based upon our market share gains over the past few years we will continue to grow at this point with unit volumes.

In the industrial markets of the component segment, we grew 13% on an organic basis reflecting continued strong demand for our solar products. During the quarter we did see the industrial equipment market slow as order rates were basically flat and the softening we saw particularly in Europe in connection with the slowing macro economic environment. In the aerospace and defense market we grew 9% organically and we expect to have continued growth here in quarter one.

When you look at operating income on an adjusted basis for the segment, it was flat year over year and the adjusted operating margin decreased 50 basis points to 13.6%. This decline of 50 basis points was driven by volume, particularly related to the automotive and computer markets.

Turning to our network solutions segment, sales grew 7% on a reported basis and 3% organically. Sales to the building networks markets grew 6% organically and as we stated on the last call, we've been seeing the order trends in this market slowing and expect quarter one organic sales to be basically flat year over year. In the energy market, our sales grew 5% in the quarter. We experienced growth in all regions with solid growth in emerging markets more than offsetting some softness in the distribution products are in.

And finally, our sales to the communication service provider market declined 4%, really continuing the trend we've been seeing. As we discussed last quarter, we have seen a slowdown in US carrier spending and continued softness in Europe and these two combined together contributed to the decline. The customers in this space remain cautious with their capital investments overall, but are expected to continue to invest in fiber to the home and broadband wireless projects.

Adjusted operating margin in the network segment declined 210 basis points to 12.7%, continuing the trend that we've seen for the past few quarters. Lower productivity levels in this segment and a lower margin sales mix caused by the revenue decline in the communication service provider markets drove the margin decline.

In our Undersea Telecommunications segment, sales grew 42% organically in the quarter and we substantially completed the Trans-Pacific Express project. We expect revenues in the range of $280 million to $290 million in the first quarter and approximately $900 million for the full year. Adjusted margins in the Undersea segment improved year over year to 13.6%, reflecting the higher volumes and in the first quarter we expect margins similar to quarter four.

And finally in our wireless system segment our sales grew 6% organically and our adjusted operating margin improved by 50 basis points to 17.6%. The margin improvement was largely due to the federally mandated rebanding efforts of a customer which benefited both current and prior year sales. We expect quarter one sales to be consistent with the prior year levels and the single-digit operating margin due to the low sales level and expected program mix.

Now let me give you a quick update on the state of New York wireless project. We remedied all the technical deficiencies outlined in the letter to (Paul) issued by the state in August and on October 16th we certified the primary region ready for testing by the state. The state has begun their testing of the system here just this past week on November 3rd and we'll wait to hear from the state on their testing results.

Turning now to items below the operating line, our net interest expense was $39 million in the quarter which was down versus last year reflecting lower net debt levels as well as a little bit of a higher interest rate on our floating rate debt. In quarter one, we expect interest to be about $40 million. Our income tax expense was $50 million in the quarter, resulting in a GAAP effective tax rate of 32% which was also our adjusted effective tax rate. The adjusted rate was slightly lower than where we guided as we benefited from the tax planning initiatives that we just completed here in 2008.

For the first quarter, our tax rate is expected to jump up to 40% due to the mark to market currency loss that Tom mentioned and I'll discuss shortly. However, excluding this item, we expect our adjusted effective tax rate to be 33% for the quarter. Our cash taxes paid in the quarter were $64 million and our cash tax on adjusted income was 13%. For the year, our adjusted cash tax rate was 19% which is in line with our expected long-term cash tax rate of 20%.

Other income on an adjusted basis was $15 million and we expect approximately $13 million in quarter one. During the quarter, we recorded impairment charges of $137 million consisting of a goodwill impairment of $103 million and the long live asset impairment up $34 million. The goodwill impairment was related to our application tooling business which is included in our component segment. This impairment was incurred as part of our annual goodwill assessment which we do every July and was driven by slower future growth expectations for this business. I know we haven't talked a lot about this business. This business provides application tooling solutions that are used to apply our products primarily to the automotive and appliance markets.

The long live asset impairment of $34 million was primarily due to the signing of an agreement to sell our battery assembly business in the electronic component segment. The impairment charge was required to write down the carrying value of the business to the expected sales price of $30 million. In 2008, this business had approximately $135 million of revenue and we expect this sale to close in the middle of fiscal 2009 once we complete certain regulatory procedures.

Now let me cover a few other items before I turn it back over to Tom. With respect to our share repurchases, we spent $400 million to repurchase 12.5 million shares in the quarter and at the end of the quarter we had $700 million remaining on our repurchase program. We have continued to repurchase shares and bought another 5.7 million shares in the month of October. Our plan continues to be to use our excess cash to repurchase shares. We will, however, at times carry a little bit more cash based upon current credit and economic conditions which could result in a slower pace of repurchases than what you saw in quarter four, but we are still committed to returning the excess capital we generate back to shareholders. And lastly, as Tom mentioned, our quarter one outlook includes a $0.10 negative impact due to currency related losses.

In October we were impacted by extreme movements in the currency markets. We do use currency derivatives to manage our currency exposures in various countries, and gains and losses are recorded using mark to market accounting. Typically we've experience $0.01 or $0.02 plus or minus due to mark to market accounting every quarter, but in October, the extreme movement in Easter European currencies where currency has devalued over 20% in the month of October is causing us to take a mark to market loss of approximately $50 million which has little tax benefit and this is for the positions we have open for the entire year.

If you assume current exchange rates remain at the current levels, we expect that the losses incurred on the currency derivatives will be offset by lower operating costs later in the year and certainly these markets remain volatile and we are carefully managing through our remaining exposures.

So, with that, let me now turn the call back over to Tom.

Thanks, Terrence. Before we go to Q&A, I just wanted to summarize what we just talked about.

No question, these tough economic times and although we can't predict when demand will return to normal levels, we can and we will and we are accelerating our efforts to continue to improve the Company. A few key points here. We're staying with our strategy, which as you know, was built around three key things; strengthen our portfolio, build better leverage our broad and deep technology capabilities, streamline the business and improve our operating margins to 15% plus when a more normal growth environment returns and we have not taken our eye off that target. We also expect to strengthen our market position by increasing our focus on the customer and expanding the rate of new product introductions. We have the wherewithal to do that.

We're taking advantage of the slowdown to continue to improve our cost structure, especially in our component segment and more specifically in our automotive business. And lastly, we'll continue to maintain our strong financial position by continuing to generate strong cash flow and using the cash wisely rather to return capital to shareholders or add to our portfolio if some opportunistic strategic investment presents themselves.

So, this is a rough time right now, but this Company's more focused, I really believe we're more capable now than we were a year ago and the whole management team knows our goal is to continue to strengthen things and be better and stronger when this thing turns around.

So, with that, let's open it up for questions, please.

Thank you. (Operator Instructions) Our first question is from Amit Daryanani with RBC Capital Markets. Go ahead, please.

Thanks. Good morning, guys.

Good morning, Amit.

Just one quick question, Tom. I know you talked about conceivably hitting $1.70 to $1.80 EPS in '09. I realize it's not guidance. But when you kind of think about that EPS number, what sort of sales number are you thinking about to hit that EPS line?

Amit, the model, if you will, is based upon the current sales level. Hopefully the current sales level will be the lowest level of the year. But we don't really have a whole lot of visibility. What we've said to ourselves is, "Look, let's not assume some miraculous recovery here. Let's assume, for the purposes of the cost structure point of view, this is where it's going to be to drive more change and more cost improvement through the Company." So, you could think of it as $12 billion of revenue.

Got it. That's really helpful. And then I guess, Terrence, given all the risks, especially on the automotive side of things right now, could you just maybe talk about any concerns on the AR, the aging of AR? Is there also an inventory obsolescence? And if you may wind up having to take some write offs on that front?

Let me take those separately. First off, on the AR side, our aging is actually very good. It's actually improved. We do have -- if you look at our business overall, our largest customer is less than 4% of sales. That would be the same concentration in receivables. We will continue to monitor it, certainly with the macro economic but right now we feel very good with the aging.

On the inventory side, we ended the year in the high 70s on the inventory days. Certainly our quarter one results are being impacted by absorption. So, we are focused, being sensitive to the inventory levels and we will be. Our goal is to work that down in these soft times and you're seeing that in the P&L. Due to, especially in automotive, probably being our lowest days level, right now we don't see risk, but we have to monitor it closely.

Got it. And then just final question. I'll hope off after that. Just given the incremental softness, could you update us on your divesture plans at this point and are you inclined to potentially divest more assets given the market softness?

We had a big September. We closed the deals that you know had been in the process. We felt fortunate. We got them in under those rapidly blasting credit conditions. For those two businesses, got almost $500 million. We just announced the deal to sell a small part of our business, a battery -- we're a very, very niche player in that market and very subscale. And we've been working for awhile to sell that business. We've got somebody there.

We're continuing to work through the portfolio. I think the bigger part of the focus right now is particularly to get out of products that just don't fit that came with acquisitions years ago and we've been nipping away at those things in the computer business, things in the appliance business. So, I'd say you could expect to see another couple hundred million this year. That would be the way to think about it.

Definitely.

Thanks a lot, guys.

Thank you, Amit.

Thank you. Next we go to Jim Suva with Citigroup. Please, go ahead.

Great. Thanks very much. Could you just clarify a little bit on the automotive side? I believe you said auto down 25% Q1 organically with Europe down 35%? I think that was for Q1, for the 35%. And then Asia expect close to double-digits. For Asia, do you mean close to double-digits as a little bit above 10% or a little bit below 10%?

Right now it's sitting right at 10%, Jim, with the biggest declines being in Japan. A small decline in China and a larger decline in broader Southeast Asia.

Okay. How much visibility as far as lead time do you have in that area?

In Asia?

Yes.

The leads times are about the same. They're all JIT, give us quarters, release orders weekly. Can change orders within the week. They don't usually change the total dollar value of orders, but you can get change in mix. Other models, shipments. So, it's not a lot of lead time.

Great. And then as a quick follow-up, the $1.70 to $1.80 hypothetically speaking for that scenario, I know you mentioned for Q1 it includes absolutely nothing for your guidance that includes the New York contract. The $1.70 to $1.80, does that include New York contract coming in?

No. It doesn't.

Okay. And that's about $0.04 per year, correct?

New York?

It will depend on how they accept the regions, Jim. Previously we said this coming year could be up to $100 million and about $0.03 to $0.04 but it will depend on how regions are accepted in there. So, I think that $0.03 to $0.04 would be the high end.

Yes. That would be two regions.

Great. Thank you very much.

You're welcome.

We have a question from Matt Sheerin with Thomas Weisel Partners. Go ahead, please.

Yes. Thanks. Tom, you talked about some inventory issues at automotive customers, which is fairly obvious. But could you be more specific about the extent of those inventory problems? How much is out there both in terms of component inventory and how long will it be for the supply chain to work through that? And as a follow-up to that, looking at the March quarter, I believe you're normally flat to up sequentially in that business. Shouldn't we assume though, given the environment plus the inventory issue that you would be down sequentially?

Let me take the inventory one. There's not a lot of hard data on that yet, Matt. Why we feel it's inventory, if you look at -- and these come on a lag basis. So, for example, we don't have October data yet of new car registration in Europe, which is probably the best leading indicator that the industry has. In September they were down 8%. Now, we suspect October is going to be a lot worse, but we haven't seen that yet and that's what's driving the customers to adjust quickly.

The other reason we suspect there's a significant inventory adjustment is we wouldn't expect demand would fall this fast. And just to give you a couple of data points, the first nine months of the year, as bad as the US car market and it's more than just the big three, but end US car sales were down -- they were down 10% the first nine months of the year. Went down over 30% in October. The old theory of what happens in the US eventually goes to Europe you'd expect maybe similar declines with a lag effect. I know that's an over simplification.

But Europe also has some dynamics that prop it up a little, make it a little stronger than the US. There's the Eastern European markets which are emerging and growing. So, you have demand there. Now, that's slowed down, but you have a fundamental sort of a long untapped demand there. And you have a significant amount of cars in Western Europe or company cars which are tied to compensation arrangements. So, you have a little more stability there. And in Western Europe there's some less dependence on credit to buy cars than there is in the US.

So, when we look at it that way, say, "Gee, would we expect Europe to go down as hard and fast as the US?" Maybe not. That's all kind of supposition. And then if you lay that against what we're actually seeing in the order releases, our conclusion is there's a significant inventory adjustment here, but we're not sure where demand is going to end up in Europe and we wouldn't expect our European business to be down for 35% for too long, but we don't have any hard data of recent trends.

Then the second question was -- we normally do expect we'll see a pickup in seasonality in Q2. Our think our visibility typically has run 5%-ish. Our visibility is pretty limited right now. Now, the big shutdowns that are going on are going on over the holidays. Most of the shutdowns will end in early January. We typical lead six to eight weeks on our production ahead of that. So, if they're starting to ramp up again, we should start to see our orders pick up late in this quarter if the past holds true. I think the caveat is today's environment, we're not sure what historical trends hold true. But if you did look over history, we would normally see a pick up. The shut downs are longer which is making this quarter more pronounced down for us, a harder down for us. So, we would expect a little bit of priming. If they're coming back, we should start to see some order activity late in this quarter.

Okay. Thanks. As a follow-up, even at the current run rate that you're at, you're looking at revenues for fiscal '09 down in the $2 billion range or so. Can you talk about cost cutting? You were specific about the SG&A coming out. But could you be more specific about the plant consolidation efforts that are going on? Has that accelerated? And what kind of numbers are we looking at there?

We did, just to give you a little history, we initiative 13 in '07 and they're just about done. We initiated 10 that were bigger in '08. These were less plants. but bigger plants, more conversion costs. Of course, the big three being in Western Europe in September. Right now, what we're working through is what do we do next? So, we wouldn't expect to see any benefit realistically in '09 from the next wave if we could pull some things in. But our plan is to expand it and pull it in. That's what we're working on right now.

How many facilities are you at now?

We have 23 that are offline or taken offline and another 12 that went with our divestiture. We're getting down around 100 level.

Thank you.

Thank you. We'll go next to Steven Fox with Merrill Lynch. Please, go ahead.

Hi. Good morning. Couple questions. I was wondering first of all if we could dig into sort of the incremental change in the margins. It looks like quarter to quarter you probably have like in the components business a high 20s type of incremental margin on a basis point discussion. It looks like it went down about 100 basis points. You said it was mainly volume driven. But there must've been other puts and takes in there. I was wondering if you could just dig into the component margin a little bit more? And also talk about it going forward where that would be based on similar commentary?

Steve, when you say quarter on quarter, are you talking sequentially?

Yes. Sequentially, just looking at the electronic components business.

I would say there's -- really the primary effect is it is volume because of what the sharpest decline was in our automotive business which is a higher fixed cost business than our other markets that we serve. So, if you do look at it, it was a little bit higher than we typically run because we were out of balance. That, sequentially, without currency or automotive business was down about 15% Q3 to Q4 and that did create some absorption problems that we saw in the quarter that made the flow through a little bit heavier.

Was there any positive offset? Are we really -- ? If you hadn't been taking some cost actions, would that number would have looked

It could've looked slightly worse. But from that viewpoint, Steve, it's mainly volume. The other numbers are smaller compared to it.

Then going forward, Terrence, when you look at Q1, it's all volume related. What would be the other offset you could get?

Really, when you look at components in Q1 and if you think about it, our component segment annually has about $2 billion of fixed conversation costs which is about $500 million on the quarter. And losing that 15% of sales that Tom walked you through does create absorption pressure against that $500 million which, you know, however you want to run it. It's about $75 million and layering that on top of the volume, the sales margin is what you get there. It does come in to be a heavier fall down in about the 40% range due to the absorption that we're seeing.

Then just two other quick questions. The SG&A line showed a pretty good cost control is going on in the quarter. Where do you see that for this quarter. And lastly on the battery assembly business you mentioned, what kind of served markets was that going into and is that now a discontinued business for next quarter?

Let me take the SG&A one first, Steve. On the SG&A, as Tom said, we are putting cost containment in and we will also be looking at headcount take out in that. So, from that viewpoint, that's the $100 million that Tom said. We would expect that to start clicking in more in quarter two than quarter one since we're in the middle of it. I would expect quarter one to be similar to quarter four, slightly down as we'll get some impact, but not huge.

On the batteries business, this basically was a cell pack assembly business that came with an acquisition years ago. It serves primarily cell and cell phone, as well as computer applications and it's a mid-single digit margin over there. We will not be treating it as a discontinued operation due to its small size. It will just be something we'll highlight to you, but it will stay in the results.

Got it. Thank you.

Thanks, Steve.

Thank you. Next we have Shawn Harrison with Longbow Research. Please, go ahead.

Hi. A few questions. For the December quarter, what in terms of copper are you assuming in terms of, I guess, a price per pound basis?

Right now, Shawn, that's right around $3.00. We have said, you know we do have a fixing program and we have fixed about 50,000 pounds now. So, right now we're assuming about a $3.00 copper and we will also but burning off inventory, obviously.

Okay. So, more of say late March quarter, June quarter in terms of seeing kind of the below $2.00 type of -- ?

I meant to say 50 million pounds. Not 50,000.

Okay. But more late March quarter, early June quarter for that sub $2.00?

We're definitely going to have bleed through between the inventory and what we fix.

Okay. Secondly, just on the tax rate, what are you assuming for the full year? I know it's 33% this quarter. But what do you think you could get that down to, maybe exiting the year?

Right now with where we are, 33% is a fair assumption for the year right now.

Okay. I guess cash flow generation, CapEx, are you pulling it in your year over year? Maybe what should we expect as kind of a quarterly run rate this year given kind of the depressed revenue outlook?

We're going to -- our goal is to keep CapEx in proportion to revenue. So, capacity related CapEx is being scrutinized, as you can imagine. It's very hard right now. We've given our targets to reduce CapEx at least in line with the sales decline. New project CapEx, which is about half of what we spend in our total capital. So, if we win a project, we need to buy the tooling to go with that. We're going to continue to pursue that. We don't want to discourage any business at the right profit levels for us. But we'll definitely be down in CapEx.

Okay. Then just finally, going back to the inventory discussion in the automotive business, what are the lengths of shut downs you're seeing this year and I guess looking at maybe something that could be two to three X normal, shouldn't you see some snap back to an extent in the March quarter just as they maybe normalize production to an extent, but maybe have some additional shutdowns?

We know that there are some European auto makers, for example, that are going to do up to five weeks. It's unusual. They might take generally two, 2.5 weeks. That's not unusual, to shut down over the whole holiday season. I think those are still being rolled out. We would expect, and we kind of alluded to that earlier that all things being equal, I don't know if that's fair in this time right now, but, yes, there should be a snap back. But we've got to see the data before we'd want to talk to it because it's been so abrupt on the downturn, one could argue that while you should see a little bit more a kick back up front on the up turn. We're certainly going to be prepared for that. But we're managing our inventory and our cost structure very closely as well.

Okay. And a final question, just on the balance sheet. I think, Terrence, you alluded to requiring a slightly higher cash balance going forward given kind of the uncertainty in the credit markets. Is there a dollar amount you want to peg to?

No. I wouldn't say we require it. It's just being a little bit more cautious with the credit markets right now. So, I think it really will be around, Shawn, what are we seeing in the credit markets, just to make sure we do have a very strong balance sheet? Our strategy and our philosophy has not changed on cash, but just with what's going on, some markets have been a little bit disruptive, such as commercial paper, that at times we may have a little bit more cash than we've had in the past. But our core requirements have not changed in the $500 million to $600 million to run the business.

Okay. Thank you very much.

Thanks, Shawn.

Thank you. We'll go next to Ajay Kejriwal with Goldman Sachs. Go ahead, please.

Thank you. Good morning. Could you talk about the ForEx losses a little bit? Are these related to production outs in the US? Or are these cash flow hedges? And I don't remember if you called these out in the past, but how much did you benefit in '08 from any mark to market gains if at all?

Ajay, it's Terrence. First of all, in '08, it would probably be net -- I think it was around $0.02. If you look by quarter, in some quarters it was $0.01 hit or $0.02 positive. So, it was much smaller in magnitude on the mark to market. And that is why we didn't call it out.

When you look at what's occurring here, this really relates specifically to our Eastern European operations where they are meant to be cash flow hedges, but we have mark to market accounting. We have about $500 million of exposure to the three major places in Eastern Europe where we have production. Hungary, the Czech koruna, as well as, Polish zloty. And those currencies in October devalued significantly. And we do hedge out up to a year on those.

So, really, what we're really taking here is 12 months worth of hit in this quarter and like I said in my statements, if rates stay where they are, we will recover that later in the year, assuming business levels stay in line with what we've hedged. It is a cash flow hedge.

Got it. And I'm assuming you have other hedges in place that would prevent any further losses on these contracts or if currency continues to move the way they've done in the past and of course that's a long assumption, have you taken any actions post that?

On these we have done some actions to make sure we cap these losses where I told you to. But from that standpoint, we still do hedge our currencies due to the amount of exposure we have outside the dollar. But these three currencies in Eastern Europe were the three that caused the impact to what we saw due what happened to them in October.

Got it. Outside of these contracts, could you remind us how much ForEx helped you in '08 on the top line and operating income line?

If you look at ForEx in last year, Ajay, it helped us by about $800 million and it helped us by about $0.08 a share.

Okay. Assuming rates remain where they are, I'd imagine FX is a headwind. Could you give us some sensitivity around what FX could be on a year on year basis in '09?

If you look at quarter one, our guidance is saying that that's going to impact our growth by about 400 basis points which is about $150 million. If you take a Euro at a high 120 rate, which is the largest currency, we expect that year on year that will be a $700 million headwind to the top line perspective. And then as we told you last year, that typically falls through at a lower rate, so it will be about a $0.07 to $0.08 impact on EPS year on year.

Got it. Just on that $1.70 to $1.80 range for the year implies sequential improvement. Obviously you talked about your expectation for European auto. Can you maybe talk about any other end markets where you expect things to improve versus the first quarter?

That range doesn't really contemplate much improvement. What you'll see is that we'll probably run a little lower in our Undersea Telecom business. It's still, as Terrence said, we still expect to run at about a $900 million rate which is better than what we had thought a couple months ago, because the backlog has filled in a little bit. That will be down slightly. Wireless in the first quarter is always our lowest quarter. It comes off usually a strong fourth quarter because we coincide with the government's fiscal year end. So, there's usually a pop in the fourth quarter and then a decline in the first quarter. So, we would expect the increase in wireless to offset the increase in Undersea. And for this model, as I like to call it, this $3 billion run rate that you see kind of running at the rate we're at. Now, obviously we know it's going to be different from that, but in terms of how we're modeling it, the way to think about these variables and the actions we're taking, think about it that way. There's no assumption that we get some massive further deterioration in many of our businesses or recovery.

Got it. Thank you.

No problem. Thank you.

Thank you. We'll go next to William Stein with Credit Suisse. Go ahead, please.

Thanks. I'm wondering as it relates to the credit environment, are you seeing anything happen with suppliers or competitors that would create either a bigger problem on the supplier side or a opportunity to either take share or acquire a competitor potentially on the cheap?

I would say we're not seeing anything totally obvious yet, but we definitely have our eyes open for opportunities. Of course, we'll be careful about it, but not anything big yet. Nothing's really popped. There's a few that we keep our eye on. Customer-competitors that we keep our eye on. And there's, as Terrence said, we're not seeing anything to scare us in the rate at which we're getting paid but there's clearly our list that we're in more contact with than normal to track how they're doing. But fundamentally, if it stays like this, I guess I would expect a little bit of a shake out and I think that can play to our advantage.

And then putting that aside, I know acquisitions are always kind of a longer-term part of the Company strategy. Any update or comments on what that pipeline looks like or whether those deals are more of less likely given the current credit environment?

The pipeline, the areas that we're looking at are still the same. The markets will define the most attractive, probably the one that, it really is the top of our list, is energy. We are fairly broad in the energy business and we think there's an opportunity to expand both organically and inorganically there. We are starting to increasingly build our pipeline there. There would be a -- I think would be -- would like to make some moves this year. Not big ones. But more technology and capability moves this year, if the right opportunity is available at an attractive price. We are clearly continuing to build that pipeline in that regard.

I think that's all I have. Thank you.

Thank you. Then we'll go to Brian White with Collins Stewart. Go ahead, please.

Good morning. Just on the pricing environment with auto customers struggling here and everyone having a tough time, how do we think about pricing for fiscal '09 in the electronic components business?

I would expect, I think we're going to see more pricing pressure. A couple things going on. Commodity prices went up, obviously, we all fought to push as much of that on and we did about half of it. We got about half of that that we were able to recover. Our goal is to keep at least half as things go down. Certain commodities are still up year over year, especially energy, things like that, and they never really got passed through. But we would expect in an environment where folk's plants are less full, that there's going to be a little more aggressiveness, but by the same token, everybody in our industry has eaten a lot of this cost as it went on the way up. And I think we have a good case, we've been preparing ourselves both to in the higher cost environment to get more back and our erosion has come down significantly from historical levels, as well as be ready as commodity prices turn down as they have. We're going to see more pressure. I think we're very well prepared in the right way to keep as much as we can, but at the same time in our attractive business, we're not going to give up good business for a few points of price.

How do we think about pricing in the last downturn? What happened to pricing, like percentage wise? Do you have numbers?

I would say they're incomparable because when you look at very different end market dynamics, Brian, so when you look at what happened during the telecom bust in places like automotive pricing really did not change. The end market demand between the last downturn and this one that we're experiencing right now were very different.

Okay. So, maybe a mid-single digit decline in fiscal '09 is reasonable?

I think -- I do believe it's going to be less, stay less than the historical average.

Okay. And just on Undersea Telecom, is the trend specific finished? Is that project finished?

Basically finished. Yes. There's some --

Yes -- final touches on it, but it's essentially done.

Essentially done. Okay. Thank you.

You're welcome.

Next we have Carter Shoop with Deutsche Bank. Go ahead, please.

Good morning. I wanted to just walk through guidance here one more time. I feel like the top line guidance is for another seasonal pickup but at the same time you're saying that you expect to see a seasonal pickup in the March quarter. So, if we do see a seasonal pickup then would we expect to come in above the $1.70, $1.80 on the EPS line?

Carter, we're giving guidance for the first quarter and I know it smells like that for the year, but we're just really trying to put a model around those variables that help all of you think about the business sort of the same way we think about it.

We're not counting on a seasonal pickup in Q2. We're certainly hoping for it. But it's hard to say right now just because of all the uncertainty. This recent decline in Europe has been pretty sudden. It's pretty rapid. In a more normal environment, even in the down business, more normal environment, we would expect to see a seasonal pop. But that's why we're not really going beyond the first quarter at this point.

We'll have a better idea by the end of this quarter based on -- I mentioned earlier, as the auto makers come out of their shutdowns -- one, how fast do they come out them? What's the real end demand they're seeing? And how fast do they ramp up? We should see that in the latter part of this quarter.

That's helpful and I can appreciate how difficult it is to forecast in this environment. Looking at the guidance another way on the EPS line, at the midpoint for next quarter or this quarter, rather, we're at $0.26. If you add the $0.10 from the FX loss rolling off, you're at about $0.36 per quarter on a similar type of revenue run rate. To get to the midpoint of your full year guidance, we need to be hitting about $0.50 per quarter which translates into about $100 million in incremental operating profits per quarter.

So, that said, can you help us understand what some of the levers are and maybe rank them by what's going to have the biggest contribution to help you get to that $0.50 per quarter whether it be raw materials, restructuring, financial engineering, like buybacks or possibly -- I guess volume benefits wouldn't be there. But those three items. Between raw materials, restructuring, and financial engineering.

Yes. Those four items. Terrence, will give you a better --

Carter, how we're thinking about it, you're exactly right. To take a $0.36 on to -- get's you to around a mid 140 rate. Certainly the cost cutting that Tom articulated in his comments, we basically would say in the SG&A and overhead side would be the biggest component. The commodities. Tom mentioned $50 million to $75 million on that, on basically the recapture plus, obviously, some price give back. Also, prior restructuring actions. We would see another $40 million here incremental to what we saw last year. And then to your last point, how we're using our cash. Certainly our share count would come down as well. Your financial engineering would probably be the smallest of it. Those four components really are the major drivers and that does assume the $12 billion that Tom said. It's mainly around cost take out.

Would you expect -- I think you mentioned this before, but we'd expect most of that cost takeout to occur in the second half of the fiscal year?

On the SG&A side we expect to start seeing the savings next quarter. Certainly not the full quarter. The commodities, as we stated, would be later in the year. Prior restructuring, you know, would be the next three quarters, certainly bigger in the last half and the shares are throughout the year.

Great. One last question. Have you started to see any competition in the auto market from Asian competitors, Asian connector manufacturers?

Nothing significant, Carter. We clearly run into them as they've been working on the business, trying to get in there for a while. But not yet. Not in a significant way. If you think about ANI, for example.

Is that all, Mr. Shoop?

Yes. It is. Thank you.

Okay. Thank you. Then we'll go to AmitabhPassiwith UBS. Go ahead, please.

Thank you. Hi, guys. Can you hear me?

Yes, Amitabh. How are you?

Good. Thank you. Most of my questions have been answered. I just had a couple of clarification questions. I think the first one was as we think about the benefits from the restructuring, is it fair to assume that the benefit on your gross margin line is probably from the 30 to 40 basis points in '09. Is that sort of the range you're thinking of?

The $40 million that we mentioned would be. That $40 million is all gross margin.

Okay. I apologize. I missed that. And then just on the SG&A could we just clarify? I didn't quite get your commentary. As we think of SG&A in '09, are we looking at it more sort of flattish on a dollar basis or, I assume, it's against some benefit from restructuring actions. I'm just wondering how we should think about where SG&A trends for the full year?

Amitabh, what we plan is that we want to take out $100 million on an annualized basis off SG&A. And we'll start getting those benefits in the second quarter. And then obviously, ramping throughout the year. So, from that viewpoint, our view is it's going to go down.

Got it. And then just quickly on the industrial segment, you talked about your solar business. Can you give us any color in terms of how big that business is now or at least what the revenues were in this quarter or even on a relative basis what the year over year growth was for that particular sub-segment?

In '08 the growth almost doubled. It was very robust, approaching still a small business, approaching $100 million but three years it was in the rounding. It's ramped quickly. It's especially ramped in Europe where a number of the countries have subsidies for this. I think we're still very bullish on it. People are committed to it. I think the key is will it continue to ramp? We see that slowing down a bit. Subsidies are coming down a little bit. And of course, it does tend to fluctuate a little bit. Not too much with oil, as oil comes down. But still viewing it as a very high priority, high growth business for us.

Got it. And just my final question, perhaps to you, Tom. We sort of appear to be in unprecedented times. And I was just curious, coming back to the M&A question. Do you look at these sorts of times as an opportune moment for you to be perhaps slightly more aggressive, albeit cautiously, or selectively on the acquisition front or is this a time that you think you'll probably be much more cautious and you'd rather wait out the storm before you sort of get aggressive on the M&A front.

I think our strategy is really unchanged there. I think another way to answer that is we know the areas we want to get into that are our top priorities. We're aggressively pursuing them. They're more to round out the portfolio type areas in products, especially in technologies that augment what we already have and I think particularly the opportunities should be better for the small to mid sized opportunity that those companies that frankly could have a little bit more difficult circumstances right now.

So, I guess the short answer is we expect to be more aggressive but staying in line with our strategy, not suddenly widening our net to be opportunistic with this. Naturally we need opportunities to arise, but we focus on our strategy, these are the spots we want to go into and be more aggressive given the circumstances.

Got it. Thank you.

Thank you.

Thank you. And our next question is from (Brian Bergi) with Legal and General Investments. Please, go ahead.

Hi. Just a couple questions. Other than the corporate bond, do you have any debt outstanding either in the firm of commercial paper or bank line draws?

Yes. We do. If you look at our debt composition, our $3.2 billion on that. While we do have our bonds outstanding, we have about $150 million of other typical debt and at the end of the year we had $640 million of commercial paper. Our commercial paper balance is down. We have used some of the excess proceeds we've had on the divestitures as the market has been disruptive and we do go into our backup facility as cash is needed, because that backup facility was needed to backup the commercial paper. So, any disruption in the market, we do go into our backup facility.

How are you relative to your bank covenants right now? How much cushion do you have?

We're fine with the bank covenants.

Any statistics about where those covenants are and where the date is?

I do not have them with me but we are fine with our bank covenants. We can get that for you.

Okay. As far as anyone exposed to the automotive industry these days is taking, is getting a hard look from the rating agencies. Have you been contacted by the rating agencies? It seems like they're -- at least with some of the reaction to some of the names in the sector, I guess the need for more liquidity and cash balances, that kind of stuff is something that they highlight. Is that something that you've spoken with them recently about?

We always are in contact with the rating agencies to update them on our business. So, we are always in contact with them. I think you need to keep in the context our cash flow generation and we're more than an automotive Company.

No. Absolutely. But --

From that viewpoint, we just generated $500 million of free cash flow and we'll continue to update the credit rating agencies on what's going on with the business. But it's been normal contact.

Okay. And the last question is more of a philosophical one. I guess given the current state and the uncertainty in the market, you have a choice right now whether to keep the cash on the balance sheet or repurchase shares. I understand the stock prices, it looks fairly attractive now. But it seems that the equity markets are rewarding companies that have more liquidity in this environment. I guess I don't see the upside for continuing to repurchase shares if hypothetically the upside potentially of keeping cash is that as we start to come out of this, having a little bit more balance sheet to do acquisitions or something of that nature.

We've always indicated our strategy is to make sure as we generate excess capital, it either going to be for returning it to our shareholders or for strategic investments and we continue to balance that. We feel very comfortable with our liquidity position and our cash flow generation. We do balance those as we run the business every day.

And Terrence mentioned earlier, we're keeping a little more cash on the balance sheet just because of the credit situation, just to be prudent.

Any -- I know you've -- with the balance sheet is right now, but obviously the uncertainty in the market specifically with the revenue side of the equation, it seems to me that continuing to repurchase shares doesn't make sense.

I would say you also have to look at we have no significant debt due until 2013 as well.

Understood.

From that viewpoint, our debt is properly matured and we're going to continue based upon credit conditions and what's going on in the market, as I said. We'll be a little bit more cautious, but our philosophy has not changed.

Excellent. Keep up the good work. Thanks.

Keep our options are open. I'd say that's the way you should think about it. That's what we're doing.

Thank you.

Thank you.

Thank you. And, gentlemen, we have no further questions. Please, go ahead with any closing remarks.

Okay. Thank you for joining us today. Keith Kolstrom and myself will be around the rest of the day to answer any other questions you may have. Thanks and we'll look forward to talking to you.

Thanks, everyone.

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