CommScope Inc. Q4 2008 Earnings Call Transcript

CommScope Inc. (CTV)

Q4 2008 Earnings Call Transcript

February 26, 2009; 5.00 pm ET

Executives

Jerald Leonhardt - Executive Vice President of Finance and Administration and Chief Financial Officer

Frank Drendel - Chairman & Chief Executive Officer

Brian Garrett - President & Chief Operating Officer

Hally Edward - Executive Vice President and General Manger

Phil Armstrong - Vice President of Investor Relations and Corporate Communications

Analysts

Amitabh Passi - UBS

Amir Rozwadowski - Barclays Capital

Kim Watkins - JP Morgan

George Notter - Jeffries & Co.

Jeff Beach - Stifel Nicolaus

Simon Leopold - Morgan Keegan

Ken Muth - Robert Baird

Steve Ferazani - Stevens Inc

Presentation

Operator

Good afternoon. My name is Abigail and I will be your conference operator today. At this time I would like to welcome everyone to the CommScope fourth quarter 2008 earnings release. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Mr. Phil Armstrong, you may begin your conference.

Phil Armstrong

Thank you. Good afternoon and thank you for joining us on this call. Frank Drendel, CommScope’s Chairman and Chief Executive Officer; Brian Garrett, CommScope’s President and Chief Operating Officer; Jerald Leonhardt, CommScope’s Chief Financial Officer; and Hally Edward, Executive Vice President and General Manager of the WNS Group join me on the call.

Please note that during this call we may make forward-looking statements regarding our financial position, the plans and outlook that are based on information currently available to management, management’s beliefs and a number of assumptions concerning future events.

Forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors which could cause the actual results to differ materially from those currently expected. For more detailed description of factors that could cause such difference, please see the press release we issued today and CommScope’s filings with the Securities and Exchange Commission. In providing forward-looking statements, the company does not intend and does not undertake any duty or obligation to update these statements as a result of new information, future events or otherwise.

Also, please note that all dollar figures and percentages are approximations and that detailed reconciliations of GAAP to adjust results can be found in the press release we issued today and on our website. After we review fourth quarter results and Frank makes closing comments, we will open up the lines for question. Jerald

Jerald Leonhardt

Thank you Phil. This afternoon I will review our fourth quarter and full year 2008 results. Before turning the call over to Frank, I’ll also cover our outlook for the first quarter of 2009. Today CommScope announced fourth quarter results for the period ended December 31, 2008.

We reported fourth quarter sales of $862 million and a net loss of $342 million or $4.86 per share. The reported net loss includes after tax charges of $360 million for the impairment of goodwill and intangible assets; $18 million for the amortization of purchased intangibles and $9 million for restructuring and net other special items. Excluding these special items, suggested fourth quarter 2008 earnings were $44 million or $0.55 of diluted earnings per share.

Sales increased substantially year-over-year, primarily as a result of the Andrew acquisition and out on a combined basis that include Andrew’s actual sales for the fourth quarter of 2007, sales decreased 15%, excluding the negative impact of changes in foreign currency of $25 million and adjusting for the divestitures of satellite communications or SatCom product line, sales declined 10% year-over-year on a combined basis. Sales declined mainly due to the challenging business environment in the second half 2008.

Antenna, Cable and Cabinet Group or ACCG segment, sales declined 12% year-over-year to $386 million, primarily due to significantly lower North American wireline sales. Wireline sales declined nearly 50% from the year ago quarter, as major U.S. telecom providers slowed spending on environmentally securing closures. This North American decline more than offset robust wireless sales increases in the Asia Pacific region.

Enterprise segment sales declined 11% year-over-year to $194 million, as a result of challenging global business conditions and reductions in North American channel inventories. Despite lower overall enterprise sales volumes, sales of industry leading SYSTIMAX GigaSpeed extend rose by nearly 20% year-over-year.

Broadband segment sales declined 13% year-over-year, to a $133 million, as weakness in residential construction continued to negatively affect both volume and product mix. Wireless network solutions or WNS segment sales decreased 24% year-over-year to a $150 million. The WNS year-over-year sales decline was largely due to the divestiture of the unprofitable SatCom business which was sold in the first quarter of 2008. Excluding SatCom sales of $21 million in the year ago quarter, WNS sales declined 16% year-over-year.

The WNS sales comparison was also negatively affected by the restructuring of an unprofitable relationship with the major OEM. On a consolidated basis customers orders booked in the fourth quarter of ‘08 were $753 million. Our book-to-bill ratio was 0.87 times for the quarter.

Gross margin for the fourth quarter of 2008 was 27.2% and includes $3.9 million of intangible amortization. Excluding this item, gross margin would have been 27.7%. SG&A expense for the fourth quarter of 2008 was $112 million or 13% of sales. Excluding the merger related alignment of certain employee benefit policies; SG&A declined 4% sequentially.

Now we reported an operating loss of $342 million in the fourth quarter of 2008, mainly due to a charge for the impairment of goodwill and intangible assets. Excluding this charge, amortization of purchased intangible assets, restructuring and other special items, adjusted operating income in the fourth quarter of 2008, rose to $95 million or 11% of sales. On a comparative basis, adjusted operating income rose 13% year-over-year, primarily due to improved performance in our wireless business.

In the fourth quarter of 2008, the company recorded a pretax non-cash charge of $397 million for the impairment of goodwill and other purchased intangibles. Of this total, $274 million was recorded in the WNS segment and a $123 million was recorded in the ACCG segment. These charges resulted from increasing the estimated cost of capital used in the analysis and from reductions in the expectations of future cash flows for a certain reporting units, primarily due to ongoing challenging market conditions.

Now I will turn to cash flow, the balance sheet and some liquidity measures. In the fourth quarter 2008, we generated a $108 million of cash flow from operations. While we reported solid cash flow in the quarter, it was lower than we expected, lower cash flow resulted from a number of factors.

While accounts receivable declined, DSO or day sales outstanding increased sequentially by more than seven days and inventory decline less than expected due to lower sales. Accounts payable and accrued liabilities also declined more than anticipated, related largely to VoIP.

Capital spending in the fourth quarter was $22 million. For calendar year 2008 cash flow from operations was $362 million, up 51% year-over-year, primarily due to the Andrew acquisition. Total capital spending was $58 million. We ended the year with $412 million in cash and cash equivalents. Our December 31, 2008 total long term debt outstanding, including current maturities was $2 billion, down more than $500 million year-over-year.

As you may recall, in late December we amended the terms of our seniors secured credit facility, to allow us owner prior to March 23, 2009, to make cash payments of up to $200 million to prepay, redeem or purchase our 1% convertible senior subordinated debentures.

This amendment also stipulated that if you use more than $100 million in cash, in settling our convertible debt, that are revolving credit facility would be reduced on a dollar-for-dollar basis. As part of the agreement, we made a prepayment on the term loans of $150 million on December 26, 2008.

Regarding the convertible debentures, in February, we agree with certain holders to exchange shares of our common stock for their debentures. Through February 26, we had had issued a total of $1.7 million shares for $24 million worth of aggregate principle amount of debentures. We also recently announce that the debentures will be called for reduction on March 20, 2009. Approximately $176 million of the debentures currently remain outstanding.

Turning to our outlook, we expect the ongoing demand for bandwith and the increasing global demand for wireless services to be key drivers for CommScope in 2009. However we do expect challenging business conditions early in the year. Our ability to forecast has been negatively affected by the global economic turmoil, uncertainties in financial credit markets, currency fluctuations and the mighty cost volatility and as a result we plan to provide specific financial guidance only for the first quarter of 2009.

Our expectations for the first quarter are revenue of $720 million to $770 million; adjusted operating income of $25 million to $45 million, excluding special items; significant non-cash charges for any induced conversion of our convertible debt; a tax rate of 31% to 34% adjusted pre-tax earnings; a net loss on a US GAAP basis and solid cash flow from operations.

We expect lower than normal seasonal sales volumes in the first quarter due to the difficult business environment and as disturbers and OEMs continue to reduce inventory in the channel. Lower sales volume is the primary driver of lower operating income in the quarter and while many costs have declined, we must first use our higher cost inventory and work off the hedge metal position that we had at December 31, before we get the full benefit of these lower costs.

We expect the adjusted tax rate in 2009 to be higher than 2008 as we provide for incremental US tax costs, associated with the planned repay creation of a portion of 2009’s foreign earnings. However we have substantial federal net operating loss and forward tax credit carry forwards; that is foreign tax credit carry forwards that should mitigate the impact of the repatriations on the cash taxes.

While we expect a slow start to the year, we believe that our results should improve substantially in the seasonally strong second and third quarters. We expect business conditions to improve for five main reasons: First, ongoing demand for wireless infrastructure in growth markets.

We expect significant sales and support of China 3G billed outs through a solid position with OEMs as well China Unicom, China Telecom and China Mobile. We have recently seen strong wireless order rates, some of which has been driven by the China 3G bills. These opportunities could be substantial in 2009.

We also expect ongoing opportunities in India and other growth markets. For example, India added a record 15.4 million wireless subscribers in January. We continue to be a leading supplier in India and have significant growth opportunities in Africa and Latin American as well.

Second, we also expect strengthening sequential demand for wireless infrastructure in North America. Several leading North America wireless customers are expected to increase spending as they upgrade coverage related to mergers and roaming agreements and increase their capacity to manage to grow in wireless data, driven by smart devices such as the 3G iPhone.

In the enterprise segment, number three, we expect some large government sector projects which have been delayed, to begin in the second quarter. Four, while we anticipate weak wire line sales in the first quarter, we expect improvement as we move into the second and third quarters of 2009.

Finally or number five we expect the benefit from the normal historical seasonality. In addition to those, as sales improve, we also expect greater benefit from incremental cost reduction synergies related to the manufacturing consolidations that we have gone about, that were announced last year, as well as new profit improvement programs.

We have taken additional steps to reduce cost and balance our workforce with customer demand. Since November of 2008, we have implemented net reductions in the workforce totaling more than 500 employees, and implemented a wage and salary freeze in the first quarter.

Now, while we worked to manage costs, we also expect to benefit from lower debt levels and lower cash interest expense in 2009. We intend to repay more than $150 million of term debt in March and will likely make other debt payments during the year, including the convertible debt redemption.

In 2009, we have also less fixed rate debt, because the notional amount of our interest rate swap declined $200 million in January. We currently have $1.3 billion of our term loans fixed in an effective rate of 4.13% plus and that is a credit spread of 225 to 250 basis points. The remaining $527 million is based on much lower variable Libor rates, plus the applicable spread as well.

Now, for example the current one month LIBOR rates are less than 0.5%, and the current three month LIBOR rates are less than 1.3%, both of those are before the applicable credit spread. Now if rates remain stable, we expect overall cash interest to be significantly less than the $135 million paid in calendar year 2008. So despite near term challenges, we remain optimistic.

Maintaining compliance with the financial covenants of our senior secured credit facility remains a high priority for us in 2009 and as I’ve outlined here, we plan to do so by managing our business carefully while continuing to reduce our debt.

Now, I will turn it over to Frank Drendel for his comments.

Frank Drendel

Thank you, Jearld. First I would like to congratulate all 15,000 CommScope employees for a solid year, despite the economic crisis. We successfully integrated two industry leaders into a single company, CommScope and Andrew, the best of the best.

Despite all these challenges we delivered $60 million in merger synergies. We increased operating income by more than 20%. We increased cash flow by more than 50% and we reduced the debt by $500 million. No one has our assets, our position and our worldwide footprint.

Global customers continue to fight to take a flight to quality in working with an industry leader such as ourselves. There is no question we have near term challenges, the covenant compliance and others. I firmly believe CommScope is strategically positioned for long term success and we will work through these items.

We have an outstanding set of assets, a profitable business model and a long, long history of solid cash flow. CommScope is the best positioned to supply the cutting edge, broadband infrastructure total world. Nothing has changed in the current and long term demand for bandwidth growth.

Finally, I want to remind you that this management team has been through many industry cycles. The current environment we’re in is nothing compared to the 2000 and 2001 dot com buzz. Our customers are much stronger and they’re worldwide.

We also began with this call, a program to introduce our general managers to the investment community. Eddy Edwards joined us on this call today to answer some of the questions which you might have on WNS.

With that operator we’ll be glad to answer your questions.

Questions-and-Answers Session

Operator

(Operator Instructions) Your first question comes from Amitabh Passi with UBS. Your line is open.

Amitabh Passi - UBS

Thank you. Can you guys hear me?

Frank Drendel

Yes sir, we can.

Amitabh Passi - UBS

My first question was when you guys pre-announced your fourth quarter results; I think you had a statement in the press release saying that you have a 2009 business plan that will keep you compliant with your credit facility and financial covenants.

I’m just trying to understand what you have in mind, because just based on the fourth quarter and first quarter ’09, EBITDA numbers, it just seems like you have to probably pay down debt by another $500 million to $600 million to ensure compliance by the third quarter 2009. So, I’m trying to understand how you’re thinking about the ‘09 business plan.

Jearld Leonhardt

We’ll respond to it. I think we outlined a number of things in the materials I covered that talked about why we expect a significantly improved operating performance in periods beyond the first quarter. So those types of things are incorporated largely into our thought process and our plans that we have for the year.

Additionally we will be paying down significant debt here in the first quarter; $150 million of convertible debt will be reduced as well and it doesn’t preclude us from doing additional debt reductions later in the year.

Also our interest, we expect it to be significantly lower in 2009 versus 2008 and partly because of the rates, but in large part because of the reduction in debt that we have had; we’ve reduced debt more than $500 million this year. So those are the factors that we incorporated into our planning, relative to our covenant compliance.

Amitabh Passi - UBS

Okay and then just on the first quarter operating income guidance. It just appears lower than I would have expected based on your revenue guidance and I apologize if you touched on this. Is there some other factor that is sort of contributing to the sort of depressed operating margin level? I mean it look like your fourth quarter, you’re enterprise, you’re broadband, all had pretty decent margins, so I’m just trying to understand if there’s some other factor at play there?

Jearld Leonhardt

Well, the cost structure is certainly rolling out a little slower. I think we ended 2008 with a little higher inventory levels than we would have thought and volume is largely the main reason margins are declined or lower than they might expect in the first quarter Amitabh.

We’re going to have to absorb some of our 2008 costs on the lower volumes, which is impacting profitability of the business in the first quarter, but we think that will substantially be absorbed beyond here in the first quarter.

Amitabh Passi - UBS

Jearld, do you have any chance or any way of quantifying what that impact might be just from the inventory?

Jearld Leonhardt

Well, we can talk about various raw materials that are substantially less; for instance our benefits and plastic costs are expected to be substantially improved during the first quarter. It didn’t start the first quarter, but as we roll into the quarter, those should improve, but first we have to absorb inventories and plastics and metals and other things that we had at the end of the year, which were at higher costs.

Amitabh Passi - UBS

And just my final question and I’ll step back in the queue. As far as China 3G you talked about that have you started booking orders or is it is you’re expectation you will start seeing orders any then maybe any sense that you can give us of the opportunity you’re expecting?

Brian Garrett

Amitabh, this is Brian and good afternoon. Yes, we have seen orders and the first quarter kind of picking up a little bit on Jearld, is a quarter of substantial transition and of course what you see in the guidance is what the quarter looks like as an average. The comparison of the January and March are substantially different and of course you don’t have the benefit of seeing that.

So the orders are coming in, both from the carriers and from our OEM relationships for subsystems. The task that we have right now is expanding capacity, ramping capacity quickly. We will benefit in the latter half of the first quarter in revenue and margin as a result of the China 3G deployment, and we will see the full benefit of that activity in the second quarter.

Jearld Leonhardt

Amitabh, it’s Jearld again. I did exclude or didn’t mention that a lot of the cost reductions that we have undertaken here through restructuring activity and head count reductions, those kind of things, will not impact fully the first quarter, but will be in quarters later than the first quarter and I think, again, we’re seeing the residual of those costs that have not fully played out yet.

Frank Drendel

Amitabh, this is Frank Drendel. I’d like to introduce Eddy Edwards at this point, maybe he can give us further clarity on what we’re seeing in the international markets, China, India and his business has been showing some substantial increase in orders.

Eddy Edwards

Amitabh, hello. What we’re seeing, I think in the WNS business after the Chinese New Year thing got very busy. We see during the balance of February and starting in March, as Brian said ramping up is going to be the challenge, not orders. So we have a full plate that we see right now, both from the WNS side and as well as the antenna business.

Amitabh Passi - UBS

All right, thank you. I’ll step back in the queue.

Frank Drendel

Thank you.

Operator

Your next question comes from Amir Rozwadowski with Barclays Capital; your line is open.

Amir Rozwadowski - Barclays Capital

Thank you very much. Gentlemen, in the prepared comments you folks alluded to sort of benefiting from normal seasonality in the business. I was wondering, how we should think about sort of that seasonal lift based on your visibility right now?

Also, we’ve heard from other vendors in the marketplace, certainly carriers are holding their spending patterns closer, playing them more on a quarter-by-quarter basis. I was wondering if you could give us a little bit of color. What you’re seeing at the moment if there is a little bit more either stability in some of the order outlook that you folks are seeing? Thank you.

Brian Garrett

Amir, Brian here, I’ll take the first pass at that. I would agree with your proposition and that is, historically, in particular with the carriers, we would have the benefit of looking at programs for an entire year and clearly today that visibility within their companies and subsequently to us is substantially less. So currently we have good, one quarter visibility, but infrequently do we have two quarters out. Did that cover it for you?

Amir Rozwadowski - Barclays Capital

Yes, yes, that’s helpful and then just in terms of seasonal lift, historically we’ve seen a variation in terms of what that seasonal trend has been on a quarter-over-quarter basis. I mean should we expect similar seasonal patterns or perhaps some more muted seasonal patterns in the second quarter?

Jearld Leonhardt

I think it could actually be greater or the ramps for the accelerations could be greater than normal seasonality, because I think our first quarter levels are somewhat muted by the environment that we’re in today and we can see a lot of business activity in front of us. As Brian said and Eddy said, a lot has to do how quickly we can ramp up to respond to good order activities we’ve seen in several of our wireless product lines, so that’s in front of us.

In our cable TV business, clearly that has always been seasonal and I wouldn’t be surprised, typically the second or the third quarter are very close to being the peak quarters of the year. So we could see a very large ramp coming from what I think is a less than seasonally weak first quarter, to a stronger second quarter and a very strong third quarter as we move through the year on that seasonal pattern, and as some of these programs start to roll in.

Frank Drendel

It’s Frank. On the broadband group we’re seeing substantial interest in improvement due to the digital switch out from the carriers and the broadcasters to digital. A lot of marketing is going on from the cable operators to hookup subscribers. If you’ve been watching the operator’s numbers, they haven’t been that bad. So they’re looking toward potential opportunity for additional subscriber connections over the next two quarters.

Brian Garrett

A lot of customers have been cautious with inventory. I think it’s been reflected in our sales that there is a lot of caution in inventory, which means that there aren’t tremendous amounts of inventory from our view in the channel out there. So as thing do turn up, we should see that very quickly.

Amir Rozwadowski - Barclays Capital

Great, thank you. Then Jerald, you had mentioned that the magnitude of some of these restructuring or cost initiatives shouldn’t fully be felt in the first quarter, but we should start to see them progressing through the course of the year. How should we think about sort of the size of these cost reductions? Is there a number on a quarterly basis you folks are targeting on the way we should think about it?

Jearld Leonhardt

Well, not a specific number that we’re prepared to get today Most of these activities were more in right sizing and should be beneficial to our fixed overhead largely and reducing some of our variable cost as well.

Amir Rozwadowski - Barclays Capital

Okay, thank you for the incremental color, gentlemen.

Jearld Leonhardt

Thank you Amir.

Operator

Your next question comes from Kim Watkins with the JP Morgan; your line is open.

Kim Watkins - JP Morgan

Thank you. I just wanted to ask a few questions about what kind of trends you’re seeing in pricing and to what extent you figured in potentially some either re-negotiation in prices or potentially a price decline into the guidance for the first quarter? If you’re seeing any of that yet or any requests by customers for reduced pricing or you expect it later in the year?

Brian Garrett

Kim, Brian. Maybe we’ll cover that by segment. I’ll say surprisingly and fortunately in the enterprise space, we’ve not seen a major impact of pricing and I think part of that or largely is because of the solution nature of our sell and it’s not a cable cell, it’s a solution and they’re largely in the higher performing categories, where competition is very limited.

That being said, I wouldn’t be accurate if I didn’t say that there have been projects that have been pushed back to be re-priced, but I would not characterize that as the rule at present. In the wireless space, it’s largely a regional discussion and there are pressures on pricing, particularly in cable and they’re more so than anywhere and we’re in the midst of that and that’s where our strategy where the conversion of copper to aluminum comes through.

Eddy Edwards

Kim, this is Eddy. On the WNS side, a lot that pricing is done as new products are introduced or for some period of time and it’s not as volatile as you see in the cable areas. Then in the building business, those are all project or mostly project related and they’re done at the time the project’s initiated. So we don’t have I guess that ongoing commodity based pressure that you might see in other businesses.

Kim Watkins - JP Morgan

Okay, got you, that’s helpful. I guess I was thinking more along the lines of the businesses that are more directly tied to the commodity like the two you outlined Brian; the enterprise and the wireless cable. So is it accurate to assume then that in your guidance it’s totally volume based in terms of the year-over-year decline as opposed to any assumption there for pricing?

Eddy Edwards

That would be fair. The only other variable of course would be mix, but to my understanding, we have not made major shifts in the outlook in mix.

Jearld Leonhardt

Well, also Kim there was, there is foreign exchange impact on the revenue line fairly significant year-over-year. I think the fourth quarter was $25 million down on a year-over-year basis. We’ll probably see sequentially even into the first quarter a little more decline in that area.

Eddy Edwards

And those affect which segments the most?

Jearld Leonhardt

ACCG and WNS the most.

Kim Watkins - JP Morgan

Okay. So approximately some are between $25 million and $30 million year-over-year or possibly a little higher?

Eddy Edwards

In the quarter.

Kim Watkins - JP Morgan

Okay, and then I also wanted to ask about your converts. It looks like you converted approximately $25 million to stock here in February. To what extent are you actively going out and trying to convert more of that now into stock or you expect largely to pay the remaining balance in cash, coming at the end of March?

Jearld Leonhardt

Kim, we did put out the redemption call for our convertible debt about a week ago and so they have been called for redemption. We do have the ability to consider additional conversions, reducements to conversion between now and the call day. That’s one of our options and we’ll consider that and keep all of our options open along that line.

Kim Watkins - JP Morgan

Okay and last question, can you give us some insight into linearity this quarter and then I think Brian you kind of alluded to the fact that in the first quarter you expect a pretty back end loaded quarter. Can you just contrast that to perhaps what you saw in the last year and then also as I mentioned earlier in the fourth quarter.

Brian Garrett

Well, I mean to Jearld’s point, when we’re talking about seasonality, I mean seasonality is an element, but it’s so much more in the first quarter of this year compared to prior years, because for all the reasons we mentioned; the impact of China’s deployment, lessening channel compression, numerous activities. Now if you look at the year-over-year comparisons Q1 to Q2, I think they’ll be atypical.

Jearld Leonhardt

I would agree with that. I think you’re seeing channel de-stocking, we see all kinds of re-looks at budgets, but now we’re beginning to see what the real budgets are by the carriers worldwide. Clearly AT&T settled in, Verizon is settling in, the cable operators are settling in, but that fourth and first quarter were atypical; anything, any of us have ever seen, but the strength of our position in the marketplace is very clear to me. We are not losing market share anywhere.

Kim Watkins - JP Morgan

Okay. Can you quantify at all, kind of on a monthly basis for the fourth quarter and first quarter what you expect?

Jearld Leonhardt

Well fourth quarter, there was obviously a weaker trend and December is always a weakest month in the fourth quarter seasonally, and this year was probably a little more so because of the turmoil that we had, and in the first quarter, as January is typically the weakest month in that quarter and moves up to there where March would typically be the strongest month in the quarter. That’s for seasonal reasons, and I think the slow down at this time of the year was slower than normal and so I think the roll out is going to be perhaps a little stronger than normal when things start improving.

Brian Garrett

Kim, I do have one data point here. Looking at my notes it might be helpful to you and that was in December; now this is in the enterprise space, our POS, our sales out of distribution, grew over October, November levels. So broadly for the company it was declining over the course of the quarter, but hopefully found a bottom or some bright news in December for the enterprise space.

Kim Watkins - JP Morgan

Okay. Thanks, that is interesting. Thank you very much.

Brian Garrett

Thank you.

Operator

Thank you. (Operator Instructions) Your next question comes from George Notter, with Jeffries; you’re line is open.

George Notter - Jeffries & Co.

Hi, guys. I have a couple questions here. First, I want to ask about manufacturing and the cost synergies there. You know with the combination of the two sides of the company, any change in your outlook for the ultimate amount of synergies you can capture for 2009?

Brian Garrett

No. George we put some numbers together and shared them with you last year. I mean the team’s comfortable; they’ll deliver on that ‘09 commitment as they have in ‘08 and prior years and I can tell you that apart from synergies, the whole environment of cost reduction in the operating units is very, very strong right now; so everyone’s got their oar’s in the water.

George Notter - Jeffries & Co.

So the merger related piece of synergies and construction is still $115 million, is that fair?

Brian Garrett

Yes. That’s the target.

George Notter - Jeffries & Co.

Okay and then anymore flavor on the amount of benefit you can get on lower commodity costs as we roll into Q1 and Q2. I guess I heard what you said certainly about having to bite down in the lower cost inventory over time, but anyway you could put some details around that, quantify it, any flavor for it at all?

Brian Garrett

I’m looking at Jearld. George it’s a complex model for me, and I can’t give you any guidance on that.

Jearld Leonhardt

Well, no, I can’t give you a percentage or a dollar amount either George, but they are substantial. It depends on the material; we could talk about some, but in the plastics areas for instance, 20%, 25% is where the reductions coming in and some plastics are very large numbers on a per pound basis coming in.

Again, we have to consume to get the benefit of that and we’ve been consuming our inventory and expect to be largely living on inventory in the first quarter, so acquisition of those things there. Copper we know is in the $1.50 range now. Last year it averaged significantly higher than that to well over $2.50 I think last year, and so that will be beneficial once what we have has moved through our P&L as well.

George Notter - Jeffries & Co.

Do you know what the average for copper cost was for by any chance for Q4?

Jearld Leonhardt

I don’t have that number right now, George. We’ll look for that and give it to you.

George Notter - Jeffries & Co.

Fair enough. Thanks a lot, guys.

Operator

Your next question comes from Jeff Beach, with Stifel Nicolaus; you’re line is open.

Jeff Beach - Stifel Nicolaus

Yes, good afternoon.

Frank Drendel

Hey Jeff.

Brian Garrett

Hey Jeff.

Jeff Beach - Stifel Nicolaus

I guess, the biggest surprise for me in the financial report is the minimal reduction in the inventory levels in the fourth quarter. It seems like foreign currency and lower raw material cost could have accounted for a large amount of that.

So, it sounds like either business is a whole lot better than it looks here in the first quarter or you’ve got a lot of inventory reduction to take ahead. Can you give us an idea how much inventory’s might be down in the first quarter and maybe what has been some of the problems with being able to take the levels down up till now?

Brian Garrett

Well, first of all, they did all right in the quarter. They took roughly $25 million out in the quarter and they took $100 million out Jeff over the course of the year. So largely I give accolades to our team, but one of the things that hurt us in our inventory performance in the fourth quarter was that, we closed down our enterprise facility in Australia and it’s the primary source of supply into our Asia Pac region.

In advance of that move, relocation we built inventories. Heading into the fourth quarter, for the fourth quarter and of course, that exercise ran into a major slow down. So we have excesses of inventory in certain parts of the world and obviously we’ve got to consume or redeploy those over the first half of ‘09.

I’ll say qualitatively, we have a lot of opportunity to reduce inventory, and there’s a large cash focus in this corporation and so we continue to organize to work on these inventory numbers. There will be substantial improvement from these levels over the course of ‘09.

Jearld Leonhardt

Jeff, we clearly do expect to have lower inventories and lower receivables in the first quarter, given the revenue numbers that we had and have guided too here, so we do expect lower numbers there. Metrics might not be quite as good because of the lower volumes, but they will still be pretty good I think. So definitely a lower inventory in receivables are expected.

Jeff Beach - Stifel Nicolaus

The other question I had, you were describing potentially good demand for wireless in China beginning to come in and ramping up. First of all, I didn’t hear any commentary; I’d like to hear a little bit about some of the market segments in Europe, what’s happening in Europe, but equally outside of wireless in China, can you talk about some of your major markets and the emerging in wireless enterprise some of that and give us a flavor of what’s going on outside of North America?

Brian Garrett

Well, I’ll fill in-part. Eddy may have a comment as it relates to his WNS business, but the outlook for Europe is not particularly strong for us, I’ll say broadly in the wireless space, but if you want to focus on emerging markets, clearly Southeast Asia remains an opportunity for us and we feel very pleased with what’s going on in Africa. It’s certainly not our largest market, but growth rates are substantial and funding in the outlook for growth in ‘09 is still available.

In the enterprise space, Europe’s going to be tough for us; I think, Asia Pac’s going to be tough for us in the enterprise market Jeff and so strengths going to have to come from our multinational accounts that are based in the US and the government, the US Government, I’ll say broadly all government’s.

Even though the outlook, much of what you read in terms of the outlook for the Middle East, growth will substantially be down in the Middle East, but we still will have growth in that region.

Frank Drendel

Jeff, I think specifically in WNS and Africa, as Brian mentioned we are doing the 12 stadium for the World Cup in 2010, so that’s underway. In Europe we don’t see a real slow down. We have lots of projects underway and coverage solutions for tunnels and things like that.

In the US, we’ve won significant geometric awards for E-911 and our MLC products globally. So we are seeing a take rate on some of the problem areas that we had that, that fits very well with what our plans are and seeing the bottom line improve.

Eddy Edwards

If I may comment Jeff, I mean when you look at the business segments at a very high macro level, the outlook for each of these businesses, the WNS business is really one of the real stars in ‘09, from the current perspective, in terms of turn around top line and bottom line.

Jeff Beach - Stifel Nicolaus

All right. Thank you.

Operator

Your next question comes from Simon Leopold with Morgan Keegan; your line is open.

Simon Leopold - Morgan Keegan

Great, thank you. I want to start out with a quick, hopefully easy housekeeping question. In the release you talk about the pro forma EPS at $0.55. If you can just walk us through the interest buy back and share count to get to that?

Frank Drendel

You want to respond to that, Phil?

Phil Armstrong

Sure, you’ve got to add back the convertible debt piece. It’s about $600,000 to add to the adjusted income and then divide by the shares outstanding.

Simon Leopold - Morgan Keegan

And what’s the share count you’re using for that?

Phil Armstrong

It would be about $80 million.

Jearld Leonhardt

80.5 I think.

Simon Leopold - Morgan Keegan

Now in terms of looking at the guidance you’ve given for the operating income, if we were to assume that operating expenses are generally held flat, it does suggest that gross margins are now coming in perhaps below 25%. So I guess the first part of that is, okay am I doing my math correctly? Then if I am, can we try to get a better understanding of how much of that sequential drop in gross margin is tied to the cost of the inventory you need to burn off, and how much is mix and how much is the drop in volume? Thanks.

Jearld Leonhardt

Yes. Well, I failed to mention mix in terms of our forecast, but it is a factor. Again, the enterprise segment is the strongest operating profit segment at the gross margin line as well. So that area is probably a little weaker in our expectations than other areas.

We talked about some of the ramping things that come up later in the year through government and that sort of thing and some of the areas that are strengthening are not necessarily our most profitable businesses either. So, there is a little negative mix in terms of the impact on the gross margin in the first quarter, I think from those two factors or that mixed factor.

Simon Leopold - Morgan Keegan

So is my math correct on the 25%ish kind of number?

Jearld Leonhardt

I’m not following you.

Simon Leopold - Morgan Keegan

The gross margin, coming in around 25% for the March quarter.

Jearld Leonhardt

Yes we haven’t given gross margin guidance; we’ve given our operating profit range that we expect and that’s between $45 million and $25 million. So we haven’t provided additional guidance in that area beyond that.

Simon Leopold - Morgan Keegan

The next thing is, looking at some of the emerging market opportunities that you’ve talked about, Africa, India, China, I’m trying to really think about a baseline level of where we’re starting as a percent of sales for each of those regions and I think that would be useful if this is something you could give us through the course of the year to sort of help us track the progress?

Brian Garrett

Yes, a side on that maybe something we could do offline, talking to Mark. I certainly don’t have those details with me.

Simon Leopold - Morgan Keegan

Can we sort of get a framework of at least the three together on the order of 10% revenue, is that ballparkish enough?

Brian Garrett

Yes, 10% or 15%, I mean depending on what all you want to include in there, yes.

Certainly India would be the largest piece and China as a percentage probably is the largest growth, but in dollar growth it wouldn’t be the largest, but yes in aggregate, I think in terms of 10%, 15%

Jearld Leonhardt

And also remember, some of the OEM products are sold to and then shipped to different locations, so you have to dig a little deeper to get that number.

Simon Leopold - Morgan Keegan

Sure. Well, you probably have a better insight than I do is the hope. Just one last question; you did talk about your interest expenses coming down due to a lower debt balance and more favorable interest rate. Do you have the ability to give us some kind of range of what you’re thinking that the expense would be in the March quarter?

Jearld Leonhardt

In the March quarter specifically, well to give you some guidance here, we filed our 10-K today and we do talk about liquidity and long-term debt and interest rates and that sort of thing in the 10-K. At rates that were in effect at the first of the year, around $100 million of interest expense would be the impact, assuming we make all of our mandatory payments under our credit facilities and the interest rates that were in effect at that time, were around $100 million for the full year of 2009. First quarter obviously, just because of timing of payments will be the highest quarter.

Simon Leopold - Morgan Keegan

Okay. Thank you very much.

Operator

In the interest of time we’ll take two final questions. The next from Ken Muth with Robert Baird; your line is open.

Ken Muth - Robert Baird

Hi, I was just kind of going through some of your other observations. You made some high level comments about kind of Q2, Q3 and I’m just kind of curious as we’ve gone through earning seasons now and heard from pretty much everybody and you’re among kind of the first to feel a little belt better of thing going on out there.

Outside of your China comments, but just kind of anecdotally across the world and by different segments of enterprise and carrier spending, there’s not very many vendor out there that I can think of coming through this season that had as positive as an outlook for the next couple of quarter. Can you explain why you think things might tick up a little bit when others aren’t really there?

Brian Garrett

Part of it is just because the first quarter is going to be a very difficult quarter for us. So probably one of the toughest that we’ve seen in a long time and we have the benefit of this very strong orders, demand that we’ve seen in the February time frame, which makes us feel much better about where we’re going to be in the second quarter.

Frank Drendel

If you recall for the time we started this business we’ve operated on a six to eight week backlog. We said we’d see it go down first and we did and we’re going to see the recovery first and we are.

Again, we can’t predict what’s going to happen for the rest of the year, but there is clearly strength in orders across all these sections and so will it continue forever, who knows, but the carriers generally are the most secure in what they do on an annual basis, and they’re dealing with us because we are scaling strength and I feel comfortable, because if it’s out there, we’re going to get it.

Brian Garrett

Ken, without getting into details, we see clear evidence in certain markets and product lines where we’re acquiring customers that we have not historically had. We’re improving account share and just broadly we characterized it as a flight to quality, and it is very tangible.

What we see in North America wireless isn’t so much about what we think CapEx is going to happen in the entirety of North America. As we do new opportunities that are being presented to us. So I’ll tell you, we don’t have a good clarity to the third quarter, but there are some positive indicators to suggest that we can grow sequentially Q2 into Q3.

Frank Drendel

And of course we’ve taken cost reductions, we’ve frozen salaries, we’re doing everything we can at the cost line to make sure we generate the cash flow that’s required to get through these issues that we have. It’s a very, very valuable company ladies and gentlemen. It’s trading way below its replacement value.

Ken Muth - Robert Baird

And then just on the kind of Q1 outlook as well. I mean, some of the temperament you have for Q1 is, any kind of thoughts you could share with us on kind of what is maybe inventory in the channel and kind of working through some of that in the first quarter to give that better up-take in Q2?

Brian Garrett

Well channel inventory as I mentioned largely is an enterprise subject and there will continue to be inventory reduction in my opinion over the course of the first quarter. I’m hoping that that’s the low point for the year in channel inventory.

We always have lots of questions about on the wire line side of ACCG, which is our cabinet business and we do see reductions in inventory from the fourth quarter into the first quarter. We see further channel inventory reductions going on into the second quarter. So in that particular segment, it’s going to be into the second half before inventory is not a unfavorable variable to our revenue.

Ken Muth - Robert Baird

Okay. Thank you.

Operator

I’ll turn it over to your final question from Steve Ferazani with Stevens Inc.; your line is open.

Steve Ferazani - Stevens Inc

Hi guys, thank for taking the question. I just want to see if you might get a little more granular on the China 3G opportunity. If you look at your business units, where do you feel you see the most opportunity there, whether it be ACCG, WNS, any sort of color you can give us there?

Eddy Edwards

This is Eddy. We’re very well positioned in ACCG with both cable and antennas. We’re the only non-indigenous supplier for cable and antennas both, so we’re making a come back there. On the WNS side, the more active products, we’re very well positioned, it’s more of an OEM sale and we’re positioned with both domestic and non-domestic OEMs supplying all of the pal able companies.

Steve Ferazani - Stevens Inc

When you say domestic you mean China?

Eddy Edwards

Chinese versus non-Chinese EOMs. So we’re selling to all of them, so we have work product trials going on with everybody for current sales and also for the next generation as well.

Frank Drendel

Eddy you might speak to LTE, the announcement at the show.

Eddy Edwards

We’re well positioned there with the Verizon announcement, I think. We had a lot of product with different bidders I guess and so we’re happy with how that turned out and we look forward to the balance of the year as the trials are underway and into next year as the implementations get into full swing.

Steve Ferazani - Stevens Inc

And then I have guess just one last follow-up for me. With regard to the China opportunity, how much of that product do you manufacturer in region versus outside of China.

Eddy Edwards

Most of it.

Steve Ferazani - Stevens Inc

Most of it in region?

Frank Drendel

Yes, sir.

Jearld Leonhardt

That follow-up back up with one question that was asked earlier about copper, I think we averaged probably about 250 a pound in the fourth quarter for copper procurements during that quarter. That was our average between spot and hedge positions and of course current prices are in the $1.50 range, so our first quarter cost in copper and cost of sales anywhere is going to be a number more like the fourth quarter than the current spot, because we’re still consuming inventory coming out of that fourth quarter period and we’ll be moving to lower cost presumably as we move through the year.

Frank Drendel

Thank you, ladies and gentlemen. With that we’ll call it a day.

Operator

This concludes you’re conference call for today. You may now disconnect.

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