泰科電子 (TEL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Tyco Electronics first quarter earnings call. At this time, all phone participants are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Vice President of Investor Relations, John Roselli. Please go ahead, sir.

Thanks, Gail. Good morning and thank you for joining our conference call to discuss Tyco Electronics first quarter results for fiscal year 2009 and our outlook for the second quarter. 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 cautionary statements that we have 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. I'm going to give you an overview of our performance and some headlines of what's going on in the business and then I'll turn it over to Terrence Curtin, who will walk you through our Q1 results in detail and provide you a status of the cost actions we're taking in response to current conditions. It's a bit of an understatement, I guess, but this is clearly a tough business environment. And for sure, in many ways, unprecedented and it doesn't feel good, frankly. But despite the circumstances, and I'll talk a little bit about this more later on, I'm glad we're in the kind of Company that we're in that has financial strength, that's a leader, and besides driving cash and getting the cost out, the other key area we're focusing on is making sure that we really do come out with some competitive advantage after all of this and I'll touch on some of the things we're doing in this regard further in the call.

Let me talk about the first quarter. We expected a tough first quarter when we were on the call with you three months ago and it turned out to be even tougher than we thought as a result of continuing weakening demand through the quarter. Most of this weakness was in our components segment, where approximately two thirds of our sales are related to consumer markets and this is the area that was hit most significantly in Q1. We saw and we continue to see weakness across virtually all our markets served by our components segment and it's in all regions of the world. The Asia is just as soft as Europe right now. In Q1, sales in this segment were down 25% year-over-year and orders were down 34%. Based on the current order levels, we expect the component segment sales to decline in the neighborhood of 40% in Q2.

This is an additional 15% decline from our Q1 revenue levels. (inaudible - technical difficulty) where sales were down (inaudible - technical difficulty) and we expect them to be down about 40% in Q2. As you can see across our components business, the weaknesses is very broad-based. We do have areas like aerospace and medical that are holding up okay, but in our big markets, computer, appliance, automotive, business is very soft. Now, it is clear that we're being impacted by both end user demand and inventory reductions by our customers. And this is -- this inventory reduction is pretty much occurring in every end market. Just to give you a little bit of a flavor, in our European automotive business our sales were down 36% organically in Q1. That compared to European new car sales and production being down in the range of 20% to 25%.

So everybody in the chain is aggressively trying to adjust their inventories, not only in line with the current low levels of demand, but everybody's trying to preserve their liquidity situation. So this is -- we're definitely in the middle of that and we're feeling the effects of that in a big way and we do expect those inventory adjustments to continue through the second quarter. In our other three segments, Networks, Wireless and Undersea, which serve primarily industrial and infrastructure markets and account for about 30% of our revenue, sales declined organically 6%. Now, these are longer cycle markets in nature and we would expect less volatility in demand, but we are seeing our customers being increasingly cautious there in their spending levels in the current environment. Let me touch on each of them a little bit. In our Networks segment, sales will be down about 10% year-over-year in Q2.

Within the energy and telecom businesses, within that segment, sales will be down slightly. Again, demand is holding up And in our building networks business we're going to be down about 20% and we saw those trends in the building networks business start last quarter. Our Undersea Telecom and our Wireless segments will be about flat with last year. And in Undersea and Wireless, order rates continue to remain pretty solid. Overall, with this kind of demand environment and the inventory correction going on, Q2 is going to be weaker than Q1. We currently expect that our Q2 sales will be in the range of $2.4 billion to $2.5 billion. This is a 32% to 35% decline from last year's $3.7 billion and it's a sequential revenue decline of about 11% to 14%. Now, we're not sure how long this situation's going to last. I'm not sure anybody is out there.

But we are taking a number of actions both to shore things up in the short-term as well as to make sure that we come out with better leverage when the business starts growing and fundamentally we are very focused on improving our competitive position. It's not just about cost. We're also focusing on making sure we strengthen our competitive position. So let me go through a few of the things -- a few things, why I feel -- a few reasons why I feel, despite the current circumstances, continue to feel very good about our prospects. As the world leader in interconnect, we're continuing to invest in new technologies and we're also focused on improving our engineering productivity, so better solutions, faster, more products, those are very key to growing in this business. The long-term drivers of our markets are still attractive.

Of course, they don't feel so great right now, but when you step back and you look at what drives this business, which is fundamentally smarter electronics in almost every application in the world, it's a good business to be in. These electronics enable new features. We all know about the drive for energy efficiency and alternative energy solutions. There's higher data speeds required in virtually all of our products, so this kind of fundamental dynamic, while slowing down right now, really plays to our strength because of the significant amount of resources we have in sales, marketing and engineering around the world. It's also a time when customers need to know that their key suppliers are financially viable and not only that they're going to be here for the short-term, but that they can continue to invest in innovation in years to come and I think there's no question that our customers can count on us for that.

And we are seeing a little bit of evidence out there that the customers are starting to look to their strongest suppliers for new programs and we're making sure we're going to be in a position to take advantage of that. We also continue to make organizational changes to strengthen our Company for the long-term. We're taking four businesses with high growth potential, our aerospace, medical, touch systems and circuit protection businesses, which are currently part of our Electronic Components segment, and are moving them into a newly created Specialty Products group. That's not the most creative name in the world, but the purpose of this move is to increase the focus on growth in these businesses and we have recently included a new leader to run this group. These businesses represent about $1.6 billion of annual revenue.

We have a range of products in these businesses and we expect that these will be high growth for us as things begin to return to normal. And in the second quarter we'll begin to report this Specialty Products group as a separate new segment to give you more insight into what's going on there. In addition, in other areas of organization, as I discussed on the last call, we have combined two of our largest interconnect businesses within Electronic Components, what we used to call our computer and communications business and our global industrial business. We put them into one business late last calendar year. That merger, so to speak, is going very well and we expect to get significant improvements in operating leverage, technology and market scale out of this. Let me talk about our cost and productivity improvement plans. As you know, before we launched (inaudible - technical difficulty)

We're going to actually move to a different location. We understand there's a lot of static on the other end. So if you could just bear with us for a couple of minutes, we'll be back on.

Ladies and gentlemen, once again, please remain on the line, your host line will be reestablished momentarily.

Thank you for holding. We apologize for that. We had a serious static issue in the previous room we were using. We're going to resume now. Tom's going to start at the beginning and we'll go through it. Please bear with us if you did hear clearly. Thanks.

Thanks, everyone. I will speed it up a little bit on the first part of this. Apologize for that. I guess when it rains it pours. So as I was saying, we expected a tough first quarter and it certainly turned out to be tougher than we thought as a result of continued weakening in demand throughout the quarter. And this was especially felt in our component segment where approximately two thirds of our sales are related to consumer markets and in the first quarter it was the consumer related businesses that were hit the hardest. In Q1, sales in the segment were down 25% year-over-year and orders were down 34%. Based on this rate of orders, we expect component segment sales to decline about 40% in Q2. This is an additional 15% decline from our Q1 revenue levels and of course our, as would you imagine, our automotive business, which is our largest business, is also going to be down about 40% in Q2. It was down 31% organically in Q1.

Now, it's pretty clear that this is a combination of weak end demand, coupled with significant inventory corrections going on. Everybody in the supply chain is trying to get their inventory in-lines and shore up their liquidity as fast as possible, so that's exacerbating the inventory declines. And to give you a little bit of a flavor for this, European new car sales and production in our first quarter were down in the 20% to 25% range and our volume was down 36%. So, clearly, an inventory, a significant inventory piece. We're also seeing the same kind of adjustments in mobile phones and the computer end markets. And we do expect this trend is going to continue through the quarter, through the second quarter. In our other three segment, Networks, Wireless and Undersea, which serve primarily industrial and infrastructure markets and account for about 30% of our revenues, sales declined 6% organically.

These markets are longer cycle in nature and we would expect less volatility in demand but our customers are clearly being cautious in their spending levels, because of the uncertain environment. Let me talk a little bit in more specifics about these segments. In our Networks segment, sales will be down about 10% year-over-year in Q2. And energy and telecom will be down slightly. And in enterprise, which is our building networks business, we'll be down about 20%. In the Undersea and Telecom -- in the Undersea, Telecom and Wireless segments order levels so far are holding up and we expect revenue to be about flat with last year. So when you take all this into account, the weak demand environment, the inventory correction going on, Q2 is going to be a weaker quarter than Q1. We currently expect that our Q2 sales will be in the range of $2.4 billion to $2.5 billion. This is a decline of about 32% to 35% from last year's $3.7 billion and it's a sequential decline in the range of 11% to 14%.

Now, as I mentioned earlier, these are clearly really difficult times and our business is definitely right in the middle of all these tough times. But when I step back and look at the Company from a distance, there's a lot of good things going on in the Company and the fundamentals, once we get through this, which seems -- you wonder when that's going to happen, are pretty strong. I want to share just a few things why I remain really bullish about our Company. First and foremost, we're the leader in the interconnect industry. We continue to invest in new technologies and we're also focusing on improving engineering productivity. We need to continue to drive new solutions for the customers. Even though demand is way down, they need solutions that are integral to their architectures in the future. The long-term market drivers are still attractive.

Doesn't feel that way right now but, again, the demand for smarter electronics, which enable new features, energy efficiency or alternative energy solutions, and higher data speeds in almost all applications, to name a few, isn't going to slow down and this plays to our strength with our 5,000, 6,000 sales folks out there calling on customers and our roughly 7,000 engineers designing products and introducing products into our factories. And in a time like this, it's really important that customers know that their key suppliers are financially viable and continue to invest. And in this regard, we're beginning to see some early evidence that the key customers are looking more to their strongest suppliers for new programs and we will be prepared to capitalize on that. We also continue to make organization changes to strengthen our Company for the long-term.

We've recently taken four businesses with high growth potential, our aerospace, medical, touch systems and circuit protection business units, which are currently part of our Electronic Component segment, and are moving them into the newly-created Specialty Products group. The purpose of this move is to increase the focus on growth in these businesses and we've also recently recruited a new leader from outside the Company to run this group. Today, these businesses represent about $1.6 billion of annual revenue and they all have attractive growth characteristics and very nice product offerings and this is a group of businesses that we have high expectations for. And we'll begin to report them as a separate segment in Q2. In addition, as I discussed on the last call, we've combined two of our largest interconnect businesses within Electronic Components, computer communications and industrial, into one in order to better leverage our operating technology and market scale.

And the way to think about this new business is it's principally an interconnect business, now that we've taken some of these other more niche businesses out of it and put them into Specialty Products. Let me touch briefly and Terrence will cover this a little more later on on our cost and productivity programs. As you know, when we launched almost two years ago, this was a key focus of us to restructure the Company, especially our manufacturing footprint, so that we could increase our operating leverage. We've made good progress on the footprint simplification efforts. By the end of this fiscal year we expect to have less than 100 manufacturing facilities and that represents a decrease of about 25% from where we were at the beginning of fiscal 2007. Admittedly, the benefits of these actions are a little hard to see right now because at the rate at which the volume is declining is overwhelming it a bit, but we're making good progress there in both taking the cost out and simplifying the business.

And the key to these actions or really the goal of all these actions is to make sure that we can get to 12% operating margins at about a $12 billion sales level, which then will enable us as sales, normal sales growth comes back, to continue to move towards our 15% operating income goal. We have not taken our eye off that. It's going to take a little bit longer, obviously, because of what's going on in the global economy. I still believe that in the mid-term, that's the right target for our Company. And last but certainly not least on this regard, we have a strong balance sheet and I expect us to continue to generate solid cash flow, even at these low business levels. We did use cash in Q1, but this is typically our weakest quarter as we come off our year-end and frankly, we're still chasing the business down from a production standpoint so our inventory grew in the quarter.

But if business were to continue at the Q2 levels I would expect us to generate free cash flow in excess of $800 million, excluding cash restructuring outlays and that's $800 million for the year. A couple other topics, regarding our wireless business State of New York contract. On January 15th, the State notified us that they were terminating the contract for the state-wide wireless network. This wasn't a surprise, but we believe the State's termination is improper and we stand by the system we delivered. Just a note, we have more than 400 systems currently in use and operation and we continue to win new projects. Our backlog is at the strongest level it's ever been in this business and in just the last two weeks we've won three important new strategic projects with an initial value of about $100 million.

We also announced on January 14th that our Board had approved a proposed change of the Company's place of incorporation from Bermuda to Switzerland. This proposed move is subject to shareholder approval and if approved, we would expect this would become effective during the second calendar quarter. Now I'm going to turn it over to Terrence Curtin, our CFO, who will walk you through in more detail on our performance and then I'll come back to talk about our outlook and answer your questions.

Thanks, Tom, and good morning, everyone. Let me start by reviewing the sales performance by segment and end market, then I'll review our earnings margins, cost actions and a few other items. Starting with our largest segment, Electronic Components, sales declined 25% in the quarter and were down 22% organically. The decline was broad-based with EMEA and Asia being down approximately 25% and the Americas being down 16%. These decreases were in almost all end markets particularly hard-hit by the consumer related markets. Let me spend some time on the major consumer markets that we serve in the segment. In the automotive market, our sales declined 35% overall and 31% organically. This was worse than we expected coming into the quarter, as OEMs made deeper cuts in production to reduce vehicle inventory levels and this had a corresponding ripple effect throughout the entire supply chain.

We estimate that global production was down 20% to 25% in the quarter. From a geography perspective, our sales in Europe declined 36% organically, North America we experienced a 33% decline, and in Asia we declined 22%. We do expect a further drop in global production in quarter two, particularly in Asia, where OEM production levels are forecast to be down as much as 40% year-over-year. In two other important consumer markets, computer and mobile phones, our sales declined 30% organically, reflecting declines in both end unit demand coupled with supply chain adjustments. In the mobile area, despite the market slowdown, we continue to make good progress broadening our product offering and our customer base in this market. Now, let me cover the major industrial and infrastructure markets served by components. In the aerospace and defense market we grew 1% organically.

Sales to distributors, which account for approximately 40% of our sales in this market, were down much more than the overall market as we saw distributors aggressively reduce their inventory positions. Order rates have slowed, particularly in the commercial portion of this market, and we do expect revenues in quarter two to be slightly down organically on a year-over-year basis. On a positive note, we have increased our content on new Boeing and Airbus platforms and we expect to see the benefit from these wins later in our year. In the industrial equipment markets, which for us include traditional industrial equipment, HVAC and building equipment as well as the solar programs we talked about, our sales were down 9% on an organic basis. Demand for these solar products that we sell, we still continue to see growth there. However, we have seen the rates slow.

And then in the industrial equipment and commercial building side, these markets are certainly being impacted by the global slowdown and we do expect this to continue as people trim back on capital spending. And finally, in the communication infrastructure market sales declined 13% organically. We do see these sales being impacted by lower capital spending by both businesses and telecom operators. Now, let me turn to our Network Solutions segment where we had a sales decline of 11% on a reported basis and 2% organically. Sales to the energy market grew 3% organically in the quarter. We did experience solid growth in North America and emerging markets, which more than offset a continued slowing in EMEA. The structural changes that we made in our go to market organization in North America over the past two years we are now beginning to see the benefits as we're picking up share gain.

This North America market in the energy space has historically been an underpenetrated market for us. In the building networks market, our sales declined 5% organically. As we stated on the last call, order trends in this market have continued to slow as project delays have become more common, particularly projects related to new commercial construction. And as Tom mentioned, we expect sales in this market to decline further in quarter two. Finally, our sales to the communications service provider market declined 5% organically. While we continue to see customers select to invest in fiber to the home and broadband wireless projects, spending on upgrades and maintenance of existing networks we have seen slow. In our Undersea Telecommunications segment, as expected, sales declined 16% organically versus the prior year due to the construction of the large Trans-Pacific project last year, which is now complete.

New project activity has slowed from last year's base but remains solid. Our backlog in the segment remains over $1 billion and we continue to expect full year sales of approximately $900 million. For quarter two we expect sales in this segment to be similar to quarter one levels. And finally, in our Wireless System segment our sales grew 5% organically and we continue to build backlog, as Tom mentioned. Now, let me talk about our operating income and margins. Overall, we had a loss from operations of $21 million on a GAAP basis. This loss included $78 million of restructuring costs, $111 million of charges related to the termination of our New York wireless project and $17 million of litigation items. Adjusting for these items, our operating income was $185 million in the quarter and our adjusted operating margin was 6.6% compared to 13.9% in the prior year.

The decline is driven almost entirely by our component segment due to the significant sales decline, as well as approximately $50 million of hedging losses related to certain Eastern European currencies, which I discussed on the last earnings call. These currency losses impacted our margin by 180 basis points. If you adjust for these hedging losses, our operating margin was 8.4%, which is down 550 basis points over prior year. If you look at gross margin, our adjusted gross margin was 22% compared to 25% in the prior year. Just to remind you, our research, development and engineering expenses of approximately $150 million per quarter, and that runs about 5% of sales at these revenue levels, are included in gross margin. The main driver of the decline in gross margin was the 22% organic sales decline we experienced in our component segment.

In our other three segments, gross margins were flat with the prior year. Specifically, lower volumes reduced our gross margin by approximately 400 basis points. We were able to recover about 100 basis points through the cost actions, but were not able to keep up with the pace of the volume decline. To give you a sense of the actions we were able to execute in the quarter, we reduced our manufacturing related headcount by 8,000 employees and total headcount by about 9,000 by the end of the first quarter. The reductions were through a combination of elimination of temporary workers, attrition, and a reduction in force. We do have additional actions in process and we'll continue to reduce our manufacturing costs where we can to adjust to the volume levels. Our current expectation is that we will reduce our headcount by approximately 20% for actions that we are taking.

And certainly that percentage will be higher in the manufacturing area than in the engineering, selling and G&A areas. The remaining reduction that we saw in operating margin was driven by negative leverage on our overhead structure. When you adjust for the currency losses that I mentioned previously, our adjusted SG&A was down approximately $20 million from the prior year, but up as a percentage of sales, as we were not able to reduce at the same pace as the sales decline. Our margins, both gross and operating, will be lower as we move into quarter two, as we see further volume declines and also we bring down our inventory levels. Now, let me talk about the State of New York restructuring and litigation charges we recorded in the quarter. Starting with the State of New York wireless contract, we recorded a $111 million charge related to the State's termination of the contract earlier this month.

The charge includes a $61 million impairment of the assets, basically the assets we had on our balance sheet for the system, as well as a $50 million core related to a payment to the State in January under a standby letter of credit. On restructuring, we incurred $78 million of charges, which related primarily to a reduction of the employees as part of our cost actions. And finally, in the quarter we incurred $17 million of charges related to litigation. Of this, $9 million related to our share of settlements for the Tyco International legacy shareholder litigation and the remaining $8 million related to a several year old product liability matter in our components segment. Now, looking at items below the operating line. Net interest expense was $36 million in the quarter, which was down versus last year reflecting lower net debt levels. Our other income and expense was an expense of $1 million, which was worse than our estimate of approximately $13 million of income.

The difference was due to one-time adjustment related to the tax sharing agreement with Tyco International and Covidien that negatively affected other income, but also reduced our income tax expense in the quarter. Our tax rate on adjusted income was 30% in the quarter. This rate is lower than guided, as the non-taxable negative effect of the hedging losses was offset by a positive onetime adjustment to tax expense that I mentioned previously in other income. For the second quarter, we expect a similar tax rate as quarter one. Our cash taxes paid in the quarter were $64 million and our cash tax rate on adjusted income was 43%. And this is significantly higher than our typical 20% rate, as cash taxes paid in the quarter really relate to prior year tax returns where we had much higher income levels. Now, let me talk about cash flow. Cash flow from operations was $33 million and free cash flow was a use of $79 million.

The decline in free cash flow compared to last year was primarily due to lower operating income and increased cash restructuring costs of approximately $40 million. Two areas I want to touch on are capital spending and inventory. On the capital side we reduced spending from the approximately $170 million per quarter run rate at the end of 2008 to $116 million in quarter one. We will continue to manage our capital spending at a lower rate and I expect it will be below $500 million in 2009, compared to the $619 million we spent in 2008. On inventory, the rapid deterioration in demand prevented us from reducing inventory in the first quarter. With our sales level at these lower amounts, we would expect to see further liquidation of our working capital over the next several quarters, including a reduction of inventories to get more in-line with current business levels.

And finally, with respect to share repurchase, we used $125 million to repurchase $6 million a share early in the quarter. We had approximately 600 million remaining on our share repurchase program at quarter-end. We have suspended the repurchase of shares due to the uncertainty in the current economic environment and we expect to resume the program once market conditions stabilize. Now, let me update you on the cost actions as we enter into the second quarter. Remember that on our last call we laid out cost improvement actions in three main areas, manufacturing simplification, secondly SG&A overhead, and thirdly, commodity tailwinds. In the manufacturing simplification area we're making good progress but these actions do take time to execute, particularly in Europe. We communicated that we expected $40 million in savings in 2009 from action taken in prior years and these savings continue to be on track.

On the SG&A front, we initiated $100 million of annualized cost reductions in the quarter. We expect to generate about another $10 million of savings from these actions in Q2 when compared to quarter one and we will reach the full quarterly run rate by quarter three. We also remain fully on track in this area. Finally, with respect to metals, we expected a full year tailwind of approximately $75 million from the decline in copper prices. This tailwind will now be diluted by lower production volumes. When we look at the current volume levels where we're at, the inventory reduction efforts, and considering the amount of copper that we fixed with our supply base coming into the year, full year savings would be approximately $25 million and would be achieved later in the year. Finally, for the second quarter, we expect to incur approximately $125 million of costs related to restructuring actions, including the initiation of two additional plant closures that we recently announced, one in the US and one in Europe.

The majority of this charge relates to headcount reductions as we continue to reduce both manufacturing and indirect headcount in-line with volume. We currently expect full 2009 costs to be about $250 million and we expect cash spending to also be approximately $250 million in 2009. And the cash spending component does include both current year actions and prior year actions. As Tom stated, the benefits of these actions in total should allow us to get back to an operating margin in the 12% plus range at a $12 billion annualized sales level. Now, let me turn it back to Tom.

Thanks, Terrence. I'm going to talk about Q2 and then wrap it up and we'll open it up for questions. As I covered earlier, we expect our Q2 sales will be in the range of $2.4 billion to $2.5 billion, which is a 32% to 35% decline from last year's $3.7 billion. And this sales decline, coupled with our efforts to reduce our inventory, will result in further reductions to our gross margins, as Terrence indicated. As a result, we expect the Electronic Components segment to have an adjusted operating loss in Q2. For the overall Company, we expect adjusted earnings per share in the range of $0.05 to $0.10 and when you include the impact of the restructuring costs this results in a GAAP loss of $0.10 to $0.15 per share. Now, while we're not giving full year guidance, I would expect if end demand in our customers' markets levels out, even at these low levels our sales should begin to recover sequentially in Q3 as inventories in the supply chain get back to a little more normal level, but clearly it's too early to tell to say this with confidence right now.

And really, just to summarize what I mentioned earlier, the strategy that we launched two years ago and the financial goals that we've set out, which were basically to strengthen our portfolio, position the business to grow consistently at 5% to 7%, and deliver a 15% operating earnings in fiscal 2010, are still the right goals for us. Obviously, the timeframe has changed because of what's been going on in the global economy. But we have not taken our eye off these goals. In the meantime, we're focused on four key areas. One, ensure our liquidity and strong financial position by reducing inventory and carefully managing our capital expenditures. Two, continue to invest in engineering and key technology. It's the bread and butter of the Company. And one of the real strengths of the Company, our staying power in these kind of times, is going to enable us to continue that. Although we will continue to drive efficiency in this area.

Three, as Terrence took you through, continue to aggressively reduce costs, especially discretionary costs and accelerate structural efficiency. That's the big thing we're doing. Obviously, we're not spending anything we don't have to, but beyond that, it's continuing to do things to make the Company more efficient from a structural point of view, like the org. changes I talked about, certainly the expanded manufacturing and footprint simplification. And then last but not least, very high priority, make sure we capitalize on opportunities as they arise. As I mentioned earlier, in these times our long history with our customers is more important than it's ever been and they know they can count on us. And we're out there, reminding them of that every day. And we're certainly not alone in this environment, but I remain confident that with our solid competitive and financial positions, we're going to be able to navigate through these times and we're going to emerge a stronger Company when business improves.

And I realize that's easy to say, but I feel like the things that we've been driving for the last 18 months to two years and that we're going to continue driving are paying off, it's hard to see in an environment when your sales are down 25% to 35%. Anyway, with that, we will open it up for questions. Apologize again for the technical problems we had at the end and we'll take all the questions.

(Operator Instructions). We'll go to Shawn Harrison with Longbow Research. Please go ahead.

Hi, good morning. Looking at some of the additional restructuring announcements, as well as that 12% EBIT margin target, that requires I guess $12 billion in sales. What would you believe consolidated EBIT margins would be at the current sales run rate if we level out here in the June quarter? How much some of these additional moves would flow into 2009 in terms of a dollar amount? And then would any of these moves get the Electronic Components business back to breakeven in the June quarter?

Let me take the first couple. Right now, with the actions we're taking, when we get through them all and they don't all hit this year, it's about $300 million worth of cost savings. We would expect to be in the neighborhood of a $200 million savings run rate as we end the year and what that would do is if volumes stayed at our Q2 level, put us in the mid-single digit adjusted operating earnings range. What was the last part of your question?

It was, I guess, just the incremental savings from some of the actions announced this quarter and then whether the Electronic Components business would be breakeven in the June quarter. It doesn't sound like it, at least from the initial commentary.

Shawn, on that, certainly right now Components is being hit very heavy with volume, as well as, as we go through and we reduce our inventories. So when you look at that, with the cost actions Tom laid out, it would be around breakeven. Where we're at, certainly, it will also be dependent upon how fast we take our inventory out.

Okay. In that $200 million savings run rate, how much of that is incremental this year from what we've already witnessed in, say, 2008?

All of that is incremental.

Okay. And then just given the fact that you suspended the share repurchase program, maybe priorities for cash usage right now, are you just willing to let it build on the balance sheet until things begin to stabilize and then you start up the program again or do you have acquisition potential you are looking at in this down market.

Let me talk about one part and then Tom can talk to the acquisitions. When you look at it, Tom mentioned $800 million of free cash flow if we stay at this level before restructuring cash. I mentioned there is about $250 million of restructuring cash that we will do as we go through these actions this year and then certainly we have our dividend, which is also -- runs about $290 million per year. So they will be the first two priorities, Shawn. Capital above that we will certainly retain as we go through this uncertain time. So they're the priorities right now. Tom, why don't you talk to -- .

That's absolutely right. It's maintain our liquidity, pay the dividend, but we continue to scan in these environments, because there are going to be, as I think we talked about it last quarter as well, more opportunities. We're going to be very selective, as we said, and up until now most of our efforts have been strengthening the portfolio through divesting. But clearly, we believe that there's a number of areas that we're going to want to make acquisitions in, but we have to make sure we do first things first.

I guess just following up on that, there's been no discussion on looking at the dividend then at this point in time?

No.

No.

Okay. Thanks a lot.

Thanks, Shawn.

We'll go to Brian White with Collins Stewart Please go ahead.

Good morning. I'm wondering if you could talk just a little bit more about the auto market in terms of the inventory levels that you see there. Also some of the plant shutdowns, what did you see in the December quarter? Is this carrying into the month of January?

Sure. There was unprecedented plant shutdowns over the holiday. Typically, many of the OEMs in the US and Europe will shut down for a couple weeks. I think the average was four to six weeks at virtually every major OEM in those two parts of the world. I'm sure you've read about what's going on in Japan with Toyota shutting down and doing furloughs, so it's pretty broad-based right now. It feels like inventory's about twice as high as most of our customers would like it now. The shutdowns are starting to bleed that off and then the harness makers and the cams, the folks who make the subsystems, we actually get spec'd in by the OEMs, but we sell through them. They're working their inventory down as well. This is going to -- as I said earlier, if demand were to stabilize now, it's going to still take through the rest of this quarter and into part of the third quarter to get inventory levels balanced. And when that happens, then you should see our revenue start to track with end demand.

And just on the restructuring, I just want to be clear, when the downsizing in the March quarter is finished, you're saying in the last two quarters you reduced your workforce by 25%?

20%.

20%.

Some of that will happen in Q3, but when you look at that we started the year right around 94,000 employees. You're basically going to have approximately 20,000 employees out. Certainly, heavier weighted in the manufacturing area as we bring down the manufacturing resources.

Okay. And where is it more heavily weighted in terms of region of the world?

Asia is by far, that's where we have the most of our labor intense production jobs, although there's some in the US. As you know, we've been adjusting the US footprint in the past for a while, so a little bit in the US, quite amount in Asia in Q1, a fair amount in Europe and Asia in Q2.

Thank you.

You're welcome.

Our next question comes from Steven Fox with Banc of America. Please go ahead.

Hi, good morning. A couple questions. First of all, just following up on the auto question. Can you give us a sense of where you stand in terms of sales split between -- that go directly to the OEM versus going to Tier 1 or harness makers? How much exposure do you have and how much inventory is that, which different level in the supply chain, do you think?

Most of our sales go to the harness makers and the cams through the Tier 1. We don't sell very much directly to the OEM, although the vast majority of what we do sell is spec'd in. So the way it works is we actually do the selling and the engineering early on in the architecture heavily with the OEM, but the shipments actually go to the harness makers who attach the connectors or to the Tier 1s, the Boschs of the world, who put the headers together.

So given that you're seeing more concern about those suppliers to the OEMs, for instance, Visteon, there's been talk about Visteon potentially filing for bankruptcy, can you talk about how you're protecting yourself since it is a more fragmented customer base. How do you feel about your receivables there?

Steve, it's Terrence. Number one, Visteon we have no exposure to.

Okay.

Taken actions previously with Visteon to make sure we manage our credit risk. Certainly, we're monitoring across all of our industries, not just automotive, our customers. But when you look at our receivables, certainly our largest customer, which is in the automotive space, is less than 4% of our receivables. Our receivables continue to be good. Collections are steady. But we're monitoring that actively and we have taken actions, like we did with Visteon, where appropriate. But it is really a day-to-day monitoring that we're doing in this environment to protect ourselves.

Great. That's very helpful. And then just two clarifications. Basically the restructuring that you just reviewed, there were two plant closing announcements. But there is -- would you characterize everything on plan? There's been no acceleration of the plans or it seems like everything is steady state with where you thought it would be about three months ago. Is that fair?

Right now, Steve, I would say it's on plan. As you know, at the end of the summer last year we announced three significant actions in Europe. Still working through those. They're on plan. These two additional ones we recently announced here and the bulk of the cost take-out right now is just getting production levels in-line with the current low levels of demand. Our intention is to accelerate some programs, if possible, that were originally intended in '10, 2010, until later this year, but we need to get through the five we've just announced in the last few months and the five that we were winding down before that. So we have about 10 actions that we're closing out as we speak.

Oaky, fair enough. And then just lastly, just some clarification on the decision to use -- reduce your exposure to the commercial paper market in the quarter.

Steve, on that, on commercial paper, that really, that reduction was done back in, right when the commercial paper was disrupted back in October.

Okay.

Actually, right after year-end and I believe we talked about it in the last call. When the market got disrupted and it was challenged, we did go into our credit facility for about $190 million. We are in the commercial paper market actively, but we have had, what we put in our credit facility we've maintained on to that. We still have access to the commercial paper market and we anticipate we will. We did bring down debt about $200 million in the quarter, as we are maintaining capital, as Tom talked about.

Okay. So that whole change on the cash flow all appeared in October when things were at the worst?

Correct.

Okay. That's helpful. Thank you.

Thank you.

We'll go to Matt Sheerin with Thomas Weisel Partners. Please go ahead.

Yes, thanks. I just want to ask a question regarding your revenue guidance and the confidence that you have. In fact, the range looks a little bit more narrow considering that it looks like it's going to be very back end loaded quarter. You talked about inventory reductions at your customers. So could you talk about the confidence that you have, what backlog looks like, what book-to-bill looks like, and the areas where the range, specifically in end markets, where the range should be a little bit wider?

If you look at our Components segment, where we're going to be down about 40%, clearly, that's the piece that's being hit hardest. That reflects the order rates we've been seeing. Things have -- the orders for the last few weeks coming out of the holiday time have settled in around where they were in November before the holiday time. I mean, there's not enough data points there to call it a trend, but I guess as much confidence as can you have in this environment and based, as well as based on what our backlog is. In our other businesses, the orders have softened, but they're holding up and we're looking at Wireless and Undersea being about flat.

That's all in the backlog for those two, so that's not really contingent on any orders really at all. And then in our Networks business, we're going to be down about 10%. So that's a little softer than Q4. So I think I feel reasonably confident. It's a pretty low level of business, being off 35%. If you look at the bell weather companies in the industries that we sell to, whether it's semiconductors or -- to compare to, handsets, automotive, their end demand isn't down that much. So a big part of this, as we mentioned earlier, is inventory correction but it's hard to call.

Sure. And have you seen -- so it sounds like you've seen at least a little bit of stabilization in terms of daily order run rates even though it is at a much lower level.

Yes, we have. So I'll feel a lot better if we have a couple more weeks like that. Coming -- really starting with the beginning of December, we hadn't seen that until this point. So that's what our forecast is based around.

Okay. Great. And then just as a follow-up, concerning the pricing environment, are you expecting customers to come out, you expecting lower ASPs once volume orders come back?

We're going to see more price pressure. I think there's more -- that certainly customers are, when you go see them, they talk about hey, in these environment, you need to give us lower prices. Our position is well the agreements we entered into with you were at volumes that were significantly higher, so as you know, especially in the interconnect business, every particular project or opportunity is its own negotiation. But our Q1 our pricing didn't deteriorate. It's pretty much held on and we're -- that's one thing that we're being very disciplined about. We have to play it out. We don't want to lose good business, for sure, so I would expect that there will be a little more price erosion, but as of yet, we haven't seen it and we haven't lost any new awards because we're not willing to drop price. But it's something you have to watch every day.

Okay. Thank you.

Thank you.

We'll go to Jim Suva with Citi. Please go ahead.

Thank you. Regarding your EPS outlook of $0.05 to $0.10, I understand that the inventory work down has a big impact. Maybe can you split out of how much inventory you expect to work down and what that did to EPS and/or margins for the March quarter? And do you think it will be all worked through in the March quarter or is this a multi-quarter work down that Tyco and the supply chain needs to work through.

Jim, let me talk to that and I'll handle that. If you look at the second quarter, we estimate right now that that will have about a 200 basis point impact on our margin as we work through our inventories. With what we're planning to, we will need probably more than a second quarter to work through it, to be fair. But the plans that we have in place right now would be about a 200 basis point impact on our gross margin at that 2.4 to 2.5 level that we quoted and I would anticipate if we stay at that 2, 5 level around, we would need more time to work through inventory to continue to bring it down and continue to liquidate the working capital.

Great. And then as a different topic, on these tax sharing agreements that you have, can you remind us of how long they continue to go on? There's been a tremendous amount of volatility in the other income line as well as the tax sharing agreement and when we have you reincorporate to the other jurisdiction, will that impact that at all?

Jim, on number one, let me take the second half of your question first. Moving to Switzerland from Bermuda doesn't change the tax sharing agreement. That relates to legacy Tyco liabilities that all three of us share. So just changing the jurisdiction of incorporation of our parent Company does not impact that. These relate to open tax matters that go back to 1997, up to basically the date of separation. So this will be ongoing for quite some time as we go through audits, both in the US and in other places. So you will see at times, like you've seen, some adjustments as matters are closed out or settled. What you saw in the quarter, our other income that we guided, about 13% came down to $1 million of expense. Almost the exact same corresponding effect was the benefit in our income tax expense. So net-net it had a very negligible impact on EPS. I think it was about $0.01. But you will have, just due to how the arrangement is set up, we will continue to have volatility through that for quite some time.

And as a housekeeping item, is there any precedence or have you been notified by Standard & Poor's about inclusion or exclusion of the S&P 500 for this change?

And our next question will come from William Stein with Credit Suisse. Please go ahead.

I'm going to wind up asking that one as well. But first, I'd like to focus on inventory. Was kind of surprised, I think it was down slightly but I think there was a $61 million write-down from the -- from State of New York, which would imply inventories, excluding that, actually grew in a quarter where sales were down pretty significantly sequentially. Can you help us understand how that happened?

Let me handle the first part here. Inventories grew about $100 million when you take out, what you said, State of New York, when you look at the face of the balance sheet. You have got to take that $61 million out. When you remove currency effects, it grew slightly over $100 million and it really was us trying to chase it down. When we started the quarter, we assumed we were going to be around $3 billion. That's where we were loaded to and then really late in the quarter is when it slipped. From that viewpoint, we built inventory which now we have to work out, like we talked about both in Q2, and if it stays at a lower level after that. So from that viewpoint, definitely inventory, when you look at the cash flow, is an area where when you look at working capital, we have to make ground up there based upon where the market ran away from us in quarter one.

I would add to that, Will, that we definitely cut production in Q1 versus Q4 of last year, but we didn't cut it enough, I think is just a simple way of saying it. We were planning for that higher sales level and we just didn't cut it enough. It's not an area that I think we shined on in the quarter.

Based on the current guidance for the March revenue, can you give us an idea of where you're targeting inventories to wind up?

Basically, we're shooting right now in the range of basically recovering about what we built in quarter one, to give you a range. Certainly, that varies by market and what we're trying to take out, but basically taking out what that build was in quarter one, which is in excess of $100 million and certainly if we can do more, we will.

Our goal is to -- we're being aggressive with it at the same time. Not only is demand down, but the demand we are getting is more volatile than we've seen it. Releases particularly from our biggest customers are changing quite dramatically from what the backlog is. So it's a challenging environment, but we're making progress on the inventory.

Just one follow-up, if I can, on the reincorporation. Can you give us a sense as to the timing on this, whether there's any impact on the P&L and whether you've considered that there may be change in the -- in your index membership?

Couple of things. Timing-wise, we did file our S4 with the SEC. They have to review that. So that is the process and as Tom mentioned, we would expect that we'll be able to complete that in our fiscal Q3 or calendar Q2, as Tom mentioned. So in that regard we're on track for that. When you look at impact to the financials, there really is none. When we did this move, we're moving to a place where we do have much more presence. It is in a big region. From that viewpoint, similar to what I answered with Jim on the index incorporation, we have not heard anything from S&P on that yet.

Thank you.

We'll go to Amit Daryanani with RBC Capital Markets. Please go ahead.

Thanks a lot. Just a question at least on the Electronic Components side on the auto degradation you guys saw, can you just talk about what the monthly trends were in the December quarter and how does the month of Jan look like so far?

October was worse than September, November was worse than October, and while we expected December to be worse than November, it was a lot worse. We saw really around the 10th or 15th of December on, just -- the orders were, even orders that were ready to ship, were put on hold, so it was pretty drastic and it was over close to 45% down in December. So January, as I mentioned earlier, is leveling off a little bit, but really we haven't seen enough to feel like it has bottomed out yet. I wouldn't argue that it hasn't either, but it's not materially better and the factories are just coming back on. The OEMs are really just coming back on line, so I think it's going to take, it's going to take several more weeks to sense where we really at with their end demand.

Got it. And then could you just maybe talk about how do we think about the wireless business at this point, post the State of New York decision, because my understanding was that sort of the only reason it was considered part of core operations because we had that program.

First of all, all along we viewed the wireless business as one of these parts of the portfolio with very high growth potential, because the reason we've been able to grow the business at double-digit rates and build the backlog and, even with the trials and tribulations of New York, have won significant businesses because we have really a state-of-the-art solution there that I think, especially in today's time, the need for interoperability is really very important and it's IP based. So it's really the only system that's being installed out there that is IP based, which very much gives public safety communications leaders a lot of flexibility. And our wireless team understands this. We need to have a high growth, high margin profile for this business in order for us to keep investing in it. But I am pleased with how -- we're all disappointed with the New York situation, but the team has plowed through there and continued to win important deals. So I think that's the most important thing for us right now is deliver on the other business we have and work through this dispute we have with New York.

Go ahead, sorry, Amit.

I just had one quick one now. In the last 10K it looks like the international pension plan is underfunded by $670 million or so. Could you just talk about any thoughts on topping that off or is there any issue we should be aware of with regard to the international pension plan at least?

Let me take that, Amit. When you look at the international pension plan, you can't think about the international pension plans like we think about US plans. Most of these plans don't have trusts and they're not funded plans. So when you actually look at that, that's just how the plans are structured internationally. Certainly, it will be a commitment over time, but you don't do contributions to the vast majority of our international plan. Most of our funding relates to the US plan, which was previously fully funded and is now slightly underfunded based upon market movement, but the international plans we really wouldn't make contributions to of any substance.

All right. Thanks a lot, guys.

Thanks, Amit.

We have time for two more questions, please.

We'll go to Carter Shoop with Deutsche Bank. Please go ahead.

Good morning. Just a couple of quick clarifications and then one question. When you talked about the free cash flow goals of $800 million at existing levels, was that existing 1Q levels or where you expect to be in 2Q and if it's for where you are in 1Q, what's your expectations given what we know about 2Q.

It's for -- based on second quarter level, Carter.

Okay. Great.

The key is working off the working capital.

Right.

And then the clarification about inventory, were you saying that you expect to reduce inventory by the $100 million that you've built or in 2Q or is that in addition to the normal inventory reduction in conjunction with the sales decline.

It will be to basically burn off what we built in quarter one by the end of Q2 and then certainly we'll have to continue to go above that and some of that may come in Q2 or Q3.

So despite the sales decline, you expect inventory to only decrease by about $100 million.

It's about $150 million.

Okay. And lastly, why aren't we getting a little bit more aggressive here on the restructuring, given what we're seeing on the sales side? I know there's a lot of facilities in Europe where it takes 12 plus months to restructure, et cetera, but why aren't we trying to accelerate this sooner versus waiting until the second half of the year?

Well, we've added two more in the US. We have three under way in Western Europe, which is quite a lot, actually, at one time, because despite the volumes being down, we still have to be able to close the factories and the challenge there is it takes such a long time to work through it that you're always nip and tuck and then introduce those products into the receiving factory. Our intention, as I said earlier, is to, and I think we said it last quarter too, is to it is definitely along those lines, to bring more restructuring in, but we have to get these three done or substantially complete and we're making good progress. We're getting through a lot of the really critical milestones. You have to avoid the strikes and things like that and even with volume being as much as it's down, if we have, if we were to have a prolonged strike or something it would be pretty painful. We're making good progress there. Our intention is definitely to take advantage of the weakness out there and do more.

Would you say that management bandwidth at this point is the key bottleneck for more restructuring. Not necessarily just at the executive suite but in general.

It's risk reward. It's balancing risk reward. I don't want to have more than three Western European auto plants in a state of transition at once. I's very, very expensive if you have a problem and you don't deliver for the customers. It's expensive in your reputation and it's expensive in the penalties you could face and we've been avoiding that so far. We just really want to get further along on these and sort of be on the second, in the last quarter of the game, so-to-speak on these, and then continue to move aggressively, because that's our plan.

Okay. And last question, you talked about a 12% operating margin at a $12 billion run rate. Looks like for the second quarter you'll be at a roughly a $10 billion run rate. Would you be willing to comment on where that operating margin can go after the current restructuring is implemented at a $10 billion run rate?

Yes, for the balance of the year, on the second half of the year, as I indicated, I think about mid-single digits and then if we were to stay at $10 billion, obviously would have to do more and I would say you'd start moving up toward high-single digits.

Okay. Thank you very much.

We'll go to Amitabh Passi with UBS. Please go ahead.

Hi, thanks. I had a couple of clarifications and then just a couple of quick questions. The first one was, Terrence, I guess for you, the $0.05 to $0.10 guidance you gave for the second quarter for EPS, I just wanted to confirm that there's no incremental losses anticipated in relation to currency hedges.

No, none.

Okay. And then you might have given this, I missed it. I think you talked about a $250 million figure for full year '09 as far as your restructuring charges, cash restructuring charges. Did you give a number for the second quarter.

We did not. It is for the full year, certainly we are in the middle of executing. I would say the second quarter will be higher than about the $50 million we had in quarter one, but it will be how they execute out. So I believe right now it will be between $50 million and $100 million for quarter two.

Okay, great. Thanks. And then Tom, just for you. If indeed we were to see demand trends stabilizing a little bit, how do you envision sort of a potential restocking in the channel? Would you expect sort of a more gradual buildup as we progress through the rest of the year or could we potentially see a snapback for a quarter before sort of if we get back to a more gradual ramp.

I think it would be more gradual, given what everybody's going through and I think it's going to take a while for people to believe it's actually coming back. That's my own view.

Okay. And then just my final question, was hoping you could maybe help understand the dynamics in your communication equipment segment within Electronic Components and your com service provider segment within Network Solutions. One was down 5%, the other down 20%. Just any color in terms of the dynamics in those two areas.

Com equipment, that was down about 13% organically. Certainly, we are seeing on the com equipment side the inventory that we talked about in the channel and demand, we are seeing obviously the telco operator spending being down about 5%, projected, as well as businesses cutting back on capital. When you look at the communications service provider, what we saw in the quarter was slowing in US spending, but we did see some pickup in certain European carriers that for the past about year or so we have not seen and I would say the focus really is on fiber investment. So when you look at it, one is the com equipment would both have a business element as well as a telecom operator element, whereas the service provider is all telecom operator.

In the one portion of our Networks business that was down 20% is our enterprise or our building networks piece and that's a combination of new building construction really having slowed and especially we're feeling it in the financial services market as IT spending has been cut really way back in light of the circumstances in that market. So that's the one that was down 20.

Okay. Got it. Thank you.

Thanks a lot.

Thank you, Amitabh. Okay. With that, we'll wrap up the call. Once again we apologize for the technical difficulties. Keith Kolstrom and myself will be around all day to answer any follow-up questions. Thanks for joining us again and everyone have a good day.

Thanks, everyone.

Thank you.

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