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Executives

Kevin McCarty – Director, Investor Relations

Patrick J. Byrne - President, Chief Executive Officer & Director

Robert J. Driessnack - Chief Financial Officer & Senior Vice President

Michael A. Wills - Senior Vice President, Global Sales & Services, Intermec Technologies Corporation

Analysts

Tavis McCourt – Morgan Keegan

Chris Quilty – Raymond James & Associates

[Andrea Yong – Thomas Weisel Partners]

Reik Read – Robert W. Baird & Co., Inc.

Christopher Marangi – Gabelli & Company

Jeremy Grant – Stanford Group Company

Andrew Abrams – Avian Securities

Intermec Inc. (IN) Q4 2008 Earnings Call February 5, 2009 5:00 PM ET

Operator

Welcome to Intermec’s third quarter 2008 earnings call. All lines are in listen only throughout the duration of today’s conference call until the question-and-answer session. Today’s conference call is also being recorded. If anyone has any objections you may disconnect at this time. Now I will turn the call over to your first speaker for today, Mr. Kevin McCarty, Director of Investor Relations.

Kevin McCarty

Welcome to Intermec’s fourth quarter fiscal year 2008 earnings release conference call. With me on the call today is Intermec’s President and Chief Executive Officer, Patrick Byrne; Chief Financial Officer, Bob Driessnack; and joining us on the phone is Mike Wills, our Senior Vice President of Global Sales and Service.

In a moment Pat will discuss our key trends and highlights, Bob will provide a summary of our operating performance and guidance and then subsequent to those discussions we will begin our question-and-answer period. Now let me quickly cover our Safe Harbor statement.

Today’s discussions may include predictions, estimates or other information that might be considered forward-looking under the Private Securities Litigation Reform Act of 1995. Some of the statements we make today may be considered forward-looking including but not limited to Intermec’s expected financial performance as well as Intermec’s strategic and operational plans along with additional examples that are set forth in today’s earnings release.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise or publicly release the results of any revision of these forward-looking statements.

For a more detailed description of the risk factors that may affect our results please refer to our SEC filings including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Copies can be obtained by visiting the SEC or by visiting the Investor Relations section of our website.

With that it’s now my pleasure to turn it over to Pat.

Patrick J. Byrne

First I’d like to introduce Bob Driessnack. Bob is our new Chief Financial Officer joining us in January. His extensive leadership experience in building global finance organizations and profitable operating models will make a big contribution to Intermec going forward. Mike Wills, our Senior Vice President for Global Sales and Service will also be available during the Q&A portion of this call.

Bob will be reviewing our fourth quarter financial results as well as how we will be managing the business during this period of market uncertainty and slowdown in order to keep our costs and spending in line with our target business model and continue to generate cash. Our goal is to position the company for continued growth and profitability when the markets recover and to focus and win in the short term as well.

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

Our goals for 2209 are very clear, focus the Intermec team on winning in markets that are spending in 2009 by delivering superior value to customers and partners, keep the new products on track and build a long term operating model and cost structure in place to generate operating leverage and long term shareholder return.

Looking at Q4 we delivered $221 million of revenue and $0.15 EPS in Q4 which was within our guidance from three months ago. Revenue was strong in North America but significantly slowed internationally. The decline in Europe, Middle East and Africa, currency and business impacted our gross margins which otherwise made solid progress.

The Q4 EPS results reflect a combination of operating results and foreign tax benefits resulting from our manufacturing outsourcing strategy. Operating cash flow was strong at $29 million in the fourth quarter and continued the track record of results in operating cash generation. The company has strong liquidity with over $200 million in cash and cash equivalents and no debt.

For fiscal 2008 we had record revenue of $891 million which is 5% growth compared to 2007. EPS grew 45% compared to 2007 and even more net of restructuring of $6 million for the year. During Q4 we made major progress in our manufacturing outsourcing initiative. Approximately 65% of the hardware revenue in Q4 came directly from Venture Corporation to our distribution channel during the quarter and we anticipate being complete with this transition in the first quarter.

We expect to see the gross margin benefits of the manufacturing outsource initiative on a volume and mix adjusted basis starting in the first half of 2009. The Intermec and Venture teams have done an excellent job in this transformation. Our long term target business model continues to target 43% gross margin but in the near term we have several factors that are affecting our product gross margins including lower hardware revenues, currency effects and regional mix.

We also met our objectives in service depot consolidation in Q4 and our North America service margins should begin reflecting these benefits. Both a manufacturing and service consolidation should enable us to lower our costs in 2009. We will stay focused on further lowering our total supply chain costs during the year and we believe the streamlined manufacturing and service depot model gives us a strong platform for further progress.

Based on the current economic environment we anticipate making further cost reductions mostly in the SG&A areas in order to bring expenses in line with expected revenues. Bob will cover these objectives. Turning now to the regional results, in North America our performance continued to be strong in Q4 with an 11% quarterly growth rate and 17% for the full year both compared to the prior year periods.

Revenue growth in the region was due to multiple factors including the systems and solution business in larger direct accounts, value added resellers and distribution. The CN3 rugged mobile computer continued strong results in key applications in field service and transportation and logistics. In addition the CK3 in-premise rugged mobile computer a new product launched in the second half of 2008 exceeded our launch objectives and helped fuel North America growth.

The CK3 with advanced imaging technologies, smaller lighter from factor and excellent application support from our partners represents underserved addressable markets for Intermec including food distribution, warehousing and retail applications. Another growth driver for North America were sales to the United States government Department of Defense under the AIT 3 contract.

We anticipate bidding the AIT 4 contract in 2009 and we believe we are well positioned to capture our fair share of this business. The indirect channel of 66% of sales in North America in Q4 with strong direct sales results in Q4 as well our go to market paths are winning in North America.

Our two tiered distribution business in North America grew well in 2008 compared to 2007 and this position of strength, size, momentum will enable us to reach more customers and partners in 2009. We expect this will be important as we anticipate the business composition to include a higher volume of smaller deals in 2009 during he current economic environment.

Technology refresh projects should also support our base business during the recession provided there’s a compelling return on investment. Customers are focused on projects that lower operating costs and inventories in their supply chain. The Intermec RLI story is strong since our solutions typically generate six to nine months return by helping customers achieve these cost savings objectives.

Overall we have solid momentum in North America and will continue to focus on winning in segments that are spending while continuing to build a profitable channel business. The success in 2008 in North America also provides a very important model for profitable growth for Intermec international businesses going forward. Our international businesses were down in Q4 both due to currency and project slowdowns and delays especially in Western Europe.

We are seeing growth in Eastern Europe, Middle East and Brazil where we’re building customer and partner engagements and anticipate continued growth in 2009. Our distribution business is growing throughout Latin America as we’ve engaged in the two tier distribution model. The majority of the Latin America quarterly decline from last year was expected since a single $9 million enterprise deal was in the Q4 2007 numbers.

I’m confident we are building the business throughout Latin America for long term growth and we have an excellent and experienced team throughout the region. Moving forward our objective is to focus and win mobilizing the Intermec and partner teams both in North America and internationally on segments, in the economy that we’ll be spending in the year.

On a domestic and global basis this includes consumer staples, food processing safety distribution and retail and it also includes government utilities and energy, selected healthcare and infrastructure investments. Longer term the postal and core transportation logistics applications are also significant because the adoption of mobile IT solutions is still building and there’s a transformation occurring from data collection to mobile business process optimization.

In addition we are engaged in the important AMEA postal opportunities and are well positioned based on the excellent progress at Royal Mail and other postal agencies. The momentum we have built in the channel and leveraging the wide area network and enterprise connectivity for mobility solutions is key for the company and partners.

The CN3 success, the early CK3 adoption and our planned 2009 new products both in computers and printers will focus on these applications and the compelling return of the Intermec solution. In addition our strong and profitable service and technology refresh offerings enable us to add value to both Intermec and competitors’ installed base when the return on investment is compelling.

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

Robert J. Driessnack

Intermec’s fourth quarter revenue of $221 million represented a 13% decline over the prior year’s fourth quarter. On a constant currency basis revenues declined 8% year-over-year. Fourth quarter GAAP earnings per share were $0.15 compared to $0.27 in the comparable quarter of 2007. Included in the $0.15 GAAP earnings was the impact of restructuring and transition costs of $3.2 million or approximately $0.03 per share in the fourth quarter of 2008.

Full year 2008 revenue of $891 million was 5% growth over fiscal year 2007. For the full year currency had a favorable impact of about 1%. 2008 was a strong year and these revenues represented a record for Intermec. Full year 2008 GAAP earnings per share from continuing operations were $0.58 an increase of $0.18 or 45% over 2007.

Included in the $0.58 of GAAP earnings was the impact of restructuring and transition related costs of approximately $7.7 million or $0.08 per share. Fourth quarter revenues on a regional basis were as follows, in North America our largest region revenues grew a very strong 11%. Europe, Middle East and Africa or AMEA decreased 31% in the quarter. $9 million of the decrease or 11 percentage points of the decline were due to currency.

Latin American revenues were down 50% versus a very strong tough comparable as Pat mentioned and Asia Pacific our smallest region declined 21%. Geographically for the full year 2008 revenues in North America grew very strongly and were up 17%. AMEA revenues were virtually flat. Latin America and Asia Pacific revenues were down 25% and 12% respectively all compared to fiscal year 2007.

Reviewing our product line performance system and solution revenues decreased 11% over the fourth quarter of 2007 to $139 million. Printer and media revenues of $43 million declined 22% and service revenues of $39 million were down 8% over the prior year quarter. Total gross margin was 39.2% in Q4 as compared to 40.7% a year ago representing a 150 basis point decrease.

For the full year 2008 gross margin of 39.8% represents a 130 basis point improvement over fiscal year 2007. Fourth quarter product related gross margin was 38.5% a 200 basis point decline from the year ago margin of 40.5%. In the quarter our product gross margins were impacted primarily by currency and a less favorable geographic mix from AMEA which has historically delivered a higher than average gross margin level.

Transition related costs of $800,000 also impacted gross margins. For the full year 2008 we delivered stronger product gross margins which improved 170 basis points to 39.3%. Service gross margins were 42.7% in the fourth quarter an increase of 120 basis points compared to 41.5% in the prior year quarter. For the full year service gross margin of 42.4% was down slightly 20 basis points versus 2007.

Operating expenses for the current quarter including restructuring costs of $2.4 million totaled $79.6 million or 35.9% of revenues. This compared to $77.6 million or 30.6% in the prior year quarter. Other operating expenses combining R&D and SG&A but excluding the restructuring costs just mentioned were $77.2 million compared to the $77.6 million in fourth quarter 2007.

Included in these costs were about $2.5 million of currency translation related expenses, $800,000 higher medical costs and $800,000 asset impairment charges for real estate held for sale. These were largely offset by lower incentive compensation costs and savings from our business shutdown the last two weeks of the year. Also within SG&A selling expense was down year-over-year in the quarter beginning to demonstrate our model changes.

However on a volume adjusted basis it did reflect higher commission based costs primarily in North America where we had such a strong year. Moving to tax during the quarter we recorded a favorable tax credit adjustment of approximately $4 million. This benefit resulted from the company’s new manufacturing structure and higher future foreign income expectations.

As a result our fourth quarter 2008 effective tax provision was a benefit of $900,000 which lowered our full year effective tax rate to approximately 28%. The recording of this credit resulted in an approximately $0.06 benefit to GAAP earnings per share in both the quarter and the year. Looking at the balance sheet we had a solid finish managing our receivables which were down well in excess of the revenue change.

We are very focused on the management of and the oversight of inventories as we transition to the outsource model. Total net inventories were up about $4 million year-over-year but declined about $6 million sequentially from the third quarter as we saw some benefit of our new model. As of December 31st our cash and cash equivalents totaled $221 million. Net cash provided by operating activities was $29 million for the fourth quarter of 2008 and $67 million for the full year.

This represents a cash conversion ratio of 189% for fiscal year 2008 which is calculated using operating cash flow divided by net income. I will remind you earlier this year we repaid $100 million of debentures and as Pat mentioned we ended the year with no debt and in a very solid liquidity position. As we look into 2009 the current state of the global economy is very challenging.

Assessing the true level of demand in our end markets is difficult in the current economic and financial environment. Visibility in our near term outlook is challenging. Our financial forecast for the first quarter 2009 reflects this limited visibility, ongoing economic slowdown and weaker foreign currencies. Revenues are expected to be within a range of $150 million to $170 million.

Earnings per share are expected to be within a range of minus $0.15 to minus $0.25 per diluted share which includes the expected impact of the restructuring announced in January 2009. The restructuring costs are expected to be $9.8 million to $10.8 million or $0.10 to $0.11 per diluted share.

We anticipate the effective tax rate for the full year of 2009 to be approximately 36% and our earnings per share guidance assumes a diluted share count of approximately 62 million shares for the first quarter. Pat spoke about the business outlook but he asked me to provide some more specific comments on how we will manage our operating expenses going forward.

For a number of quarters now we have been focused on tightened expense management. In early 2009 we accelerated those efforts by reducing our global workforce by approximately 150 full time positions or 7% of our workforce and we expect to record a charge of $9.8 million to $10.8 million in the first quarter as mentioned.

Upon completion of this reduction the company expects to achieve an annual labor related savings of approximately $14 million to $16 million. The majority of these reductions are in selling, general and administrative areas. This reduction is consistent with our strategic intent of improving global operational efficiency and was appropriate in view of the uncertain global economic conditions.

Unfortunately the economic outlook has not improved and remains uncertain in Q1. We will not cling to a false hope that the economic situation will recover in the near term. For fiscal year 2008 our operating expense excluding restructuring was 34% of revenue and is just above our target business model of 33%.

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

We are leading with the reduction to the salaries of our senior officers of 10% and have reduced the cash compensation of the non-employee members of our Board of Directors. This reduction is in place through 2009. We will provide more specific details of the developing cost reduction plans and progress during our first quarter call currently scheduled for late April.

In addition to expenses we will remain intensely focused on cash and working capital management. The company has shown a strong ability to generate cash and with no debt on our balance sheet the company is in solid financial health. We are committed to maintaining and improving the turnover of our accounts receivable.

We are also targeting a more than 20% reduction in inventories as we progress through 2009 and realize the benefits of our new manufacturing model. The continued strength of our balance sheet will allow us to take the necessary steps to realign the company’s cost structure to our target business model matched with our expected revenue levels. Our goal is clear.

We will be aggressive to drive market share and growth in key areas but we will be very realistic in how we size the business in line with the economic situation and our expectations. We continue to target a longer term expense ratio of approximately 33% of revenues on a consistent basis. When the business cycle recovers we will be well positioned with a scalable, profitable business model that will continue to generate strong operating cash flow.

That concludes my formal remarks. I will now turn it back to Pat.

Patrick J. Byrne

As we move forward in this period of uncertainty and slowdown we will be making investment choices consistent with our strategic intent and target business model. Our objective is to be the trusted advisor for customers and partners implementing enterprise class mobile business solutions with next generation technologies.

The long term market for Intermec solutions is promising as customers are adopting these technologies to lower costs and inventories while improving productivity and customer service. I have met with many customers recently and these discussions confirm to me both the market opportunity and the power of the Intermec value proposition.

Intermec has good market momentum and strong market customer and partner engagement. We believe we can leverage the North America model to improve long term growth in the international markets as I mentioned. During these economic times customers value this engagement model and focus from Intermec. I am confident we are building for future industry leadership and shareholder return.

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

Kevin McCarty

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Tavis McCourt – Morgan Keegan.

Tavis McCourt – Morgan Keegan

First I imagine every first quarter’s got limited visibility for you guys and this year especially but can you remind us how steep the linearity is in terms of revenues in Q1 so we can get a sense of just how important March is for this quarter? In giving your guidance, I presume you’re stripping out any kind of large direct deals but in your talking to your direct sales force, what is your sense in terms of willingness for companies to do larger deployments as the year progresses?

Patrick J. Byrne

I’ll make some comments and then I’d like to turn it to Mike since he’s obviously engaged with customers a lot. My take is that customers are focused in using this technology to lower costs and inventories. The returns need to be near end, they need to be six to nine months. They need to be very much based upon their practical cost reduction initiatives.

We are engaged in a number of significant size projects. If I look at the underlined bookings rates that are coming in the level of business that we’re seeing as we exited 2008 and going into 2009, there aren’t as many larger deals, it’s more smaller ones, it’s technology upgrades but the engagement still stays strong on the larger deals. Mike, do you want to make some comments?

Michael A. Wills

I also think you had another question nested in there which I’ll circle back around to which is sensitivity to the linearity Q1. As Pat mentioned both in his prepared comments and just now our funnels right now show a clear difference in terms of the composition of big deals versus smaller scale.

Not only just in investigation of our funnels in watching that transition occur and also sitting down with customers and talking to them about capital expenditures are going clearly they’re aimed at much smaller scale projects, much faster ROIs six months and under if possible and the priorities of what they’re aiming at, Tavis, have changed.

The rank order of what they’re trying to identify and how they spend their cap ex spending and IT have reordered as well. Clearly in a lot of the sectors that we focus on around the world inventory reduction and inventory management is at the top of the stack now. There’s always a mix of priorities that they focus on but the top one across the board right now is inventory management and managing their cash flow inside their organization.

So utilizing our technologies to help them in that endeavor on inventory management is clearly now the top priority, still focused on labor cost reductions, raw material reductions and management as well but inventory management came out across the board as the top priority in these smaller scale projects.

The other question, Tavis, I think you had about the linearity, clearly first quarter and history proves it, first quarter is typically of the four quarters our lightest quarter but you take that with the context and the background of the uncertainty of this economic condition, we are just taking that input along with what our customers are telling us for the read of the year and it paints an uncertain outlook certainly for the next 90 days or more.

Tavis McCourt – Morgan Keegan

A follow up, Mike, in terms of when you talked to customers about potentially bigger deployments, is there a sense that we’d like to do this, we’ll wait until the economy recovers or is it batten down all the hatches, forget about for this year?

Michael A. Wills

Tavis, it’s both. What we’re seeing mostly is deferrals of the decision but when we actually see the projects still ROIing we’re seeing them break them up into smaller phases, smaller deployments where the affordability is still there inside the context of their newly reduced cap ex budgets but they can also vet the fact that if they’re estimating a five or a six month ROI they’re actually getting it to help build momentum into 2010.

It’s a mixed bag depending on the kind of application. I would say the majority of them are sizing the projects downward as opposed to just a flat out cancellation.

Tavis McCourt – Morgan Keegan

Bob, in terms of the operating costs you mentioned some of the restructuring you’re taking and I just want to make sure my math is somewhat correct. When we look at a quarterly operating cost run rate as we exit Q1, should we be looking at something in the low 70s range?

Robert J. Driessnack

That’s a great question and I think what we’ve looked at is if you look at our expenses in the fourth quarter of about $79 million all in, $79 million, $80 million, excluding restructuring in the first quarter we think we’ll be at about the $70 million range and then you have the restructuring on top of that.

So we’re looking at about 10% out of our ongoing expenses near term and the restructuring added back.

Operator

Our next question will come from Chris Quilty – Raymond James & Associates.

Chris Quilty – Raymond James & Associates

I noticed in your script, Pat, you mentioned that in areas you were expecting growth you specifically excluded transportation which has historically been your fastest growing segment. Can you give us a sense of what you’re seeing on the ground in the segment that leads you to exclude that from the near term growth contributor and what do you think it takes to get a turnaround in that segment of your business?

Patrick J. Byrne

We are engaged in transportation, as you know Chris that’s where a lot of our growth has come from, the CN3 is broadly adopted. One of the things that’s interesting here is the CN3 now has significant volume and installed base and has reached a level of maturity as a platform and with its software and partners working on it and as you know we’re driving a lot of growth through engagement with value added resellers.

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

My first comment is that the T&L application of a mobile IT solution out into the transportation networks goes significantly beyond the T&L end industry that you have identified as a distinct market segment because the application is more broadly based. There are T&L projects that we’re engaged in and some of them are significant, they’re in pilot phase and we anticipate those to be key opportunities later on this year.

There is this scaling back of projects and this capacity that people are evaluating about how much is really needed in the T&L segment as an addressable market. But I really do believe that the CN3 with its adoption, the CK3 enables that core application which we’ve built high volume on in the previous one to two years to be now a more broad based industry and contributor.

Chris Quilty – Raymond James & Associates

Specific question on your targeting a 20% reduction in your inventory which is a lot of what your customers are doing also, how much of that is simply related to the transfer of the manufacturing to Venture and the move to indirect channel versus specific policies that you might have instituted regarding stocking levels?

Patrick J. Byrne

I’ll take a run at that and then Bob can comment as well. The majority of this inventory reduction is as a result of a simplified supply chain and not as many nodes in our internal supply chain. It’s really the operational efficiency gained by a simplified and streamlined supply chain. This is one of the core objectives of our outsourcing and transformation strategy is to end up with less working capital in the supply chain. Bob, do you want to add to that comment?

Robert J. Driessnack

Chris, I think the thing that I would add is that there’s not a lot left to transfer so there will be a little bit that is due to the funnel transfer but the biggest issue or the biggest opportunity is Venture will now be pulling from the inventories that we’ve moved to them and so the operational improvement will drive most of that 20% reduction.

Chris Quilty – Raymond James & Associates

Can you give us qualitatively both how far you’re along in that process? Is it 80% or 60%? Second of all when you look at the gross margin benefit which is something we’ve been tracking, again how well you think you’re progressing on that front?

Patrick J. Byrne

We’re just now beginning the inventory pull so the way this works is that the products get transferred but we still own the inventory. Now Venture starts pulling on the inventory through an agreement that we have with them as part of the contract. That’s really just beginning now, that reduction of inventory through the simplified supply chain.

One of the things that I should note is that the Q4 performance in terms of delivering the revenue, this was during a transition quarter so the team made significant progress on that. In terms of the product gross margins, we will be beginning to make progress on that again on a volume adjusted and mix adjusted basis in the first half of 2009 as I outlined.

Chris Quilty – Raymond James & Associates

Since they’re pulling your inventory presumably you don’t have quite the gross margin benefit once they suck that down and then start sourcing independently and using their scale purchasing and perhaps lower pricing that the market may have allowed?

Robert J. Driessnack

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

Chris Quilty – Raymond James & Associates

Not to hog the time, but one final question, can you talk to us about foreign exchange headwind, what’s in your expectations, plans for hedging or not and which markets are most impacted geographically?

Patrick J. Byrne

Chris, I think it’s pretty lively in many places around the world right now. Obviously Europe as our largest region would be a key focus area but we’d also look into a couple of the key Latin American countries, Canada and Asia. We saw about a five percentage point impact on our revenues in the fourth quarter.

Fourth quarter to first quarter, little bit of a change but when you look back year-over-year first quarter last year '08 to first quarter '09 it may be a similar impact to what we saw in the fourth quarter in terms of the impact on revenues. From a cost standpoint, obviously we get a little bit of benefit on our expense structure.

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

Operator

Our next question comes from [Andrea Yong – Thomas Weisel Partners].

[Andrea Yong – Thomas Weisel Partners]

I have a couple of quick questions, you mentioned that sales in North America remained pretty strong in the fourth quarter, can you give us some color in terms of what drove the strength in the market especially given the pretty significant decline in economics especially in North America?

Michael A. Wills

Let me first of all rule out any kind of major deals of any kind of magnitude size we were completing actually in the front end of Q4 a roll out for a large field service operation which we’ll have a press release on here shortly in the next couple weeks. I’m unfortunately unable to talk to it specifically today.

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

We found our way into utilities, Duke Energy was taking on a very small project with us in their utility yards and managing a lot of their assets but we see a very bright future for CK3 in the in-premise or in-yard type applications. Mainly, Andy, it was really built as I mentioned of just grass roots core business small scale, small project size mainly fed through distribution in our channel partners.

[Andrea Yong – Thomas Weisel Partners]

Looking at your guidance it seems to indicate a 20% to 30% year-over-year decline in sales in the first quarter, can you also give us some color in terms of is there any particular reason why declines given you have pretty robust North American business which I think accounts for almost 45% to 50% of your overall sales?

Michael A. Wills

Pat, I’ll give a couple of comments on that and if you’d like to add some. Andy, as we exited fourth quarter all of the business metrics in every one of our regions began to signal a downturn in terms of the kind of demand that we certainly entered the quarter with. It was not specific to any particular region other than probably earlier in the quarter beginning in AMEA the major economies in Europe, Middle East and Africa especially Western Europe as Pat had mentioned earlier began to turn down.

The reality is as we stare at first quarter the trend has continued to basically mirror what we saw coming out of fourth quarter and it is literally is a draw down in both the large projects being deferred and time fused out into longer selling cycles as well as on a little bit more of a modest basis, Andy, it turned down on our grass roots run rate business although we’re not seeing that decline as severe as we are seeing in the deferral of our large projects.

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

One final question which is do you see any change given the current economic conditions, tougher competitive environment, tougher pricing environments in your end markets?

Michael A. Wills

No, we’re not seeing that Andy. I knew that question obviously was going to come up today and it’s a logical conclusion at some point in a prolonged economic cycle. We are not seeing that. We just basically are taking the read as all of us are as participants in this marketplace from signals of our customer demand right now.

Operator

Our next question will come from Reik Read – Robert W. Baird & Co., Inc.

Reik Read – Robert W. Baird & Co., Inc.

I’d like to go back to the operating expenses if I could. If I strip out all of the extras that you guys talked about in terms of currency and the asset impairment, I come up with roughly $74 million which is still a slight sequential increase versus the third quarter and yet revenues are down. Can you help me understand why that number should be up with down revenues?

Patrick J. Byrne

We had a strong Q4 concluding a strong year in North America which had a selling cost in Q4 so the actions we’ve taken to lower our overall SG&A at the end of the quarter was really an order to get our expenses in line with that. It really is the flexibility of the cost structure and even though the revenues were down, if you look at the mix and how the selling costs did not scale with the revenue being down for the quarter.

But there were some other G&A costs as well in the quarter, some additional IT spending that we were putting in place in order to put together our globally our P system. So there were some other items along their lines. Bob, did you want to add any comments to that?

Robert J. Driessnack

I think you were even trying to take it back to the third quarter of last year which I haven’t looked at as closely but I think the item that you excluded obviously are logical. We’re looking to drive our expenses down. As we mentioned we want to target a longer term run rate and we’re continuing to work on all of those. It’s the near term scalability that Pat talked about that’s really got us in the range that we’re in.

Patrick J. Byrne

The other thing that I would add, Reik, is that in the third quarter there was some expense credits associated with R&D spending if you go back and look at that. That was a favorable item in Q3 of last year.

Reik Read – Robert W. Baird & Co., Inc.

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

Patrick J. Byrne

There was no benefit in the fourth quarter. We begin to see that benefit in the first quarter. Those announcements were made and began those changes in the beginning of the first quarter.

Reik Read – Robert W. Baird & Co., Inc.

Bob, I wanted to go back and make sure I understood your comments before is that if you include those benefits on an apples to apples basis, i.e., revenue is flat, that $74 million looks more like $70 million and then volume comes down and you could extrapolate some kind of costs, operating expense down from there. Is that correct?

Robert J. Driessnack

I think that’s directionally correct but I think again I’ll take you back to looking at the flexibility and the scalability of the model right now is what we’re looking at how we address.

Reik Read – Robert W. Baird & Co., Inc.

I want to try this question at a different angle, the midpoint of the guidance is down 25%. Historically this quarter is down more like 15%, given that 10% delta can you describe to me how much is coming from currency, how much is coming from business declines and where do you see the biggest incremental negative in terms of either a product or a geography?

Patrick J. Byrne

Let me answer that and then Bob you can inaudible 00:'06:05] the currency. I think that the most important impact here that we’re really studying hard is what’s happening with Europe. We started to see this significant slowdown in Western European business that was during Q4. We also of course had the currency impact during Q4 but that 31% decline compared to Q4 of '07 that momentum carries into Q1.

That’s 30% of our business is at a rate of declining 30%. Obviously we got a lot of work in place to address this decline but that’s the single largest impact is a substantial portion of our business and we’ve seen that decline already in Q4. You want to comment on the currency aspect?

Robert J. Driessnack

In the fourth quarter we saw about five points overall for the company. I mentioned specifically in Europe it’s about 11 points of the decline was due to currency. There’s a similar impact in the rest of the international businesses in the fourth quarter and when you roll that forward to the first quarter I think the picture looks roughly the same.

Obviously the beginning and end points are a little bit different and the mix of where revenues come from may alter a little bit, but I think that’s directionally what we would expect in the first quarter as far as the impact.

Reik Read – Robert W. Baird & Co., Inc.

Pat, to follow up on what you were saying, really Europe has been the biggest problem area. Is that mostly in systems and solutions or is there some printer weakness there as well?

Patrick J. Byrne

It really is in base business as well as larger deals. It’s also in printer media as well as systems and solutions. I didn’t comment on printer and media through my prepared remarks but we saw meaningful progress in North America in printers through the year, printer and media. Q4 we started to see an impact in printers and media in Q4 but the European effect was across both different size deals base business I would call it as run rate as well as on systems and solutions but also in printers.

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

Reik Read – Robert W. Baird & Co., Inc.

One last question on the service business, given that your revenues had been pretty good throughout 2008 from a product standpoint does that translate into the service business at least being relatively stable in the next couple of quarters? Then given the fall would you expect that to decline?

Patrick J. Byrne

The service business is a very important business for us. We’re focused on service renewal and attachment rate. The sales of our mobile computers are very strong if you look at the total volume of mobile computers in 2008, it grew compared to 2007 and as you know we started to build that momentum back in the second half of 2007. That installed base represents a real opportunity for service renewal and attachment rates and it’s a very important business.

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

Reik Read – Robert W. Baird & Co., Inc.

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

Patrick J. Byrne

Mike can comment on that, he manages this business for us. The lag time between when the products get sold and when the service contract comes on is a year or two years delay. Mostly this is on service contracts so it’s not time and material, it’s service contracts. These are long term contracts based on the accumulative size of the installed base. It’s a relatively slower moving function. Mike, do you want to add to that?

Michael A. Wills

Reik, real quickly I think your assumption that the service business is in a stable mode is correct. The logical conclusion is as customers especially our installed base customers those that are on their multi-generation experience with Intermec are deferring decisions the logical conclusion is that they are continuing to maintain their existing fleet under a service relationship.

As they begin to feel a comfort level to go ahead and invest in any kind of scale with us they’ll enjoy not only obviously the new hardware business but driving as Pat has already said a heightened focus on attachment rates. So we can blunt any of that that you refer to as the potential outcome in the back half of the year should the hardware business continue to grow on that kind of a trajectory.

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

Operator

Our next question will come from Christopher Marangi – Gabelli & Company.

Christopher Marangi – Gabelli & Company

Two big picture questions for you, first you’ve got good market reception to your products and some valuable IT. Is there anything that you can do different to better monetize that either with a partner or through acquisitions? Secondly you’ve also got a strong balance sheet and done a commendable job managing for cash. I know we’ve talked about share repurchases on occasion here in the past. Anything that precludes you from beginning to buy back stock again?

In particular, Bob, I don’t know what philosophy you bring on that.

Patrick J. Byrne

Let me comment on the IT monetization. We have a very successful track record of monetizing intellectual property. We have made real progress and that business grows and some of it’s deferred revenue as well, that’s just the way we account for it. We have a very focused strategy there and we’ve made real progress.

I think during this period of where the market is, there’s going to be opportunities for us to look at the changing market landscape and our ability to monetize our intellectual property and look for opportunities we’ll be continuing to evaluate because this represents a significant opportunity for the changing technologies that will matter over the next couple years. Bob, I’ll turn it to you regarding our capital strategy.

Robert J. Driessnack

Chris, good questions. I think less important than probably my personal philosophy is what does the company need? We’re going to focus first and foremost on maintaining certain levels of liquidity, working capital management, make sure we have operating flexibility and that we’ve got the right things that we can invest in and react to for the company.

Having not met in a formal Board meeting yet I think it’d be premature of me to comment on what plans for share repurchase would be. My expectation would be we’d certainly look at that on an ongoing basis as part of our capital structure discussions and consider those things. There is no repurchase plan in place today so I think it would be premature to speculate if we would add one in near term.

Operator

Our next question will from Jeremy Grant – Stanford Group Company.

Jeremy Grant – Stanford Group Company

A few questions, wondered if you could talk about the Q1 outlook, it sounds like there’s a lot of bad signs coming in from all around the world which is of course consistent what we’ve been seeing. Are there any sectors, any verticals that you seem to be doing better in still or that are getting hit harder than others?

Patrick J. Byrne

Mike will comment on this. I spent a bunch of time with customers the last couple months and the opportunities in food, delivery, safety, distribution, food retail I think will be a meaningful opportunity for the company. Also the use of these products now that they’ve reached a certain level of maturity, that is that the wide area of cellular network is now an IT platform, and that the products and applications and services available through that are significant.

That transition of these products into the wide area cellular network as an IT platform is going to be much more of a broad based application now. I think that’s going to show up in a lot of customer service applications. I already made some comments about utilities and energy and selected healthcare, home health care delivery, those kinds of things. Again that’s one of the field service applications. Mike, do you want to comment on what’s driving the adoption right now?

Michael A. Wills

I’ll add some additional comments, Jeremy. As Pat mentioned there are some at least for us as you guys know if you’ve tracked us long enough, at least for us some non-traditional areas of opportunity and as we said in our prepared remarks this year we are focused on finding where the spending is in fact occurring and establishing the best route to market which is typically if it’s especially outside of our core markets through our channel partners.

We are reaching into food service, food preparation processing in the retail side of food in this economic climate, health care to some degree limited especially through partners. Pat mentioned the utilities sector especially field mobility type applications in utilities but we’ve had some limited success in yard management in-premise type applications.

Petro gas chemical applications as well. Jeremy of course as we’ve had many discussions and you know all to well our presence in public sector especially in the DOD branches through the AIT contract, North America grew in fourth quarter 11% and for the full year 17% and those type of growth rates were commiserate with what we saw in our government channels.

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

Jeremy Grant – Stanford Group Company

Talking about DOD, obviously it’s a potential catalyst, talk now trying to move a lot of things out of Iraq, moving into Afghanistan. Are you guys anticipating that you could get some boost out of that as they need more AIT equipment to support that?

Michael A. Wills

I wouldn’t categorize it as a boost. They followed the same profile that we enjoyed last year in terms of AIT spending again inside that complementary bracket of what we saw in North America growth in aggregate, I think that’s something that we can certainly count on in the near term under the AIT provisions but as Pat mentioned during the prepared remarks, we’re also positioning ourselves to respond favorably to the AIT 4 contract which the RFP is out, it’s on the street, evaluations will occur here in the first half and vendor selections will basically be in position as we exit the year.

Jeremy Grant – Stanford Group Company

One question on that and I jumped on the call a little late juggling the second earnings call, so sorry if I did miss some of this. Are they still talking about trying to select multiple vendors for the successor contract to AIT 3?

Michael A. Wills

They are, Jeremy. There’s a number of different changes in AIT 4 versus the past three contracts of which we’ve enjoyed two of those three as you know. This is a multi-vendor award contract. The timeline is a little shorter than previous in terms of the total fuse length of the contract. The good news as well though is the spending levels that they expect to spend over this contract are higher than the estimates that they’ve had associated with AIT 1, 2 and 3.

It is a multi-vendor type award and it is leaning a little bit more towards standard product. So all of those things in our opinion bode favorably for our position right now.

Jeremy Grant – Stanford Group Company

Any idea how many vendors are targeting to actually make the awards due on this one?

Michael A. Wills

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

Operator

Our next question comes from Andrew Abrams – Avian Securities.

Andrew Abrams – Avian Securities

I was wondering if you could talk a little bit about the ramp up of the CK product and how it compares with the CN? I realize the applications are probably a little different, but maybe you could give us some perspective on what you expect out of it and at least some of what’s happened so far?

Also if you could just bring us up to date on the Royal Mail phase two as to where that is and has anything changed on that side? Last, just a quick update on the RFID business generally.

Patrick J. Byrne

Let me cover the first and third and Mike’ll cover Royal Mail. The CK3 has ramped very well. It ramped faster than the CN3 ramped out of the first quarter block. So from the time we introduced it to the first quarter of sales and shipment was faster than the CN3 ramped on its first quarter. We did a global launch and many partners out of the blocks would be able to ship at volume into these partners on a global basis and the ramp is faster than the CN3.

It’s a significant addressable market because it’s form, fit and function in price points and functionality. On RFID there continues to be pilot projects on this. We are looking at how to connect our RFID technology to our significant installed base of mobile computers. Mobile computers is our largest business growing very rapidly and customers are looking for how to leverage that mobility visibility with using RFID technology for real time asset tracking.

That’s where we’re seeing strong adoption. We have some unique products there that connect our mobility solutions to RFID. Mike, if you could answer the Royal Mail question.

Michael A. Wills

As you know Royal Mail the first phase was really aimed at more of the parcel and package delivery segment which was in many ways a new product and service offering from Royal Mail. It was 25,000 CN3’s that were successfully deployed as we wrapped up the year last year. those are in place and the operational analytics in terms of the metrics of how those units are working every day are meeting if not slightly exceeding Royal Mail’s expectations.

Obviously we’re very pleased with that. We continue to dialog and plan with this client in terms of Royal Mail 2 or the Carrier Project. This is actually putting a device that may be the same and it may be slightly different depending on the final applications that they determine with us for all their postal carriers. The relative size of this is clearly larger than the first deployment.

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

Andrew Abrams – Avian Securities

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

Patrick J. Byrne

I think the ramp is due to the fact that we had engaged with the partners at launch and we could ship at volume on the day of first production availability. Those are the things, a lot of partner engagement, a lot of familiarity with Intermec, progress in the channel, a great product available at good prices with good application support and that kind of launch velocity is the result of getting those three or four things right.

Operator

Chris Quilty – Raymond James & Associates.

Chris Quilty – Raymond James & Associates

One more of my Royal Mail question got answered. You had last year a bunch of large enterprise deals, I think there are around eight of them some of which got delayed and I think later captured. Two part question, one are all those projects still under way and number two did you end up capturing them all in the end or did some of them just get cancelled or delayed extensively?

Michael A. Wills

I will tell you and I remember the list like it was yesterday, I would say, Chris, that if my memory serves about 80% or more of them we closed. Some of that list, Chris, were broken into multiple phases, however the bulk of them we closed and shipped in the second half of 2008. A very small portion of them were completely deferred but of the ten enterprise projects I’d say two or three were broken down into smaller phased type projects.

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

Operator

There are no further questions at this time.

Kevin McCarty

Once again we appreciate everybody joining us on the call this afternoon. That will conclude our call for today. Have a great evening.

Operator

This will conclude today’s conference call. You may now disconnect.

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Source: Intermec, Inc. Q4 2008 Earnings Call Transcript
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