CommScope Inc. Q1 2009 Earnings Call Transcript

CommScope Inc. (CTV)

Q1 2009 Earnings Call

April 28, 2009 5:00 pm ET

Executives

Brian Garrett - President and COO

Jearld Leonhardt - CFO

Ted Hally - EVP of our Antenna, Cable and Cabinets Group

Phil Armstrong - SVP of IR

Analysts

Ken Muth - Robert W. Baird

Jeff Beach - Stifel Nicolaus

Simon Leopold - Morgan Keegan

George Notter - Jefferies

Amir Rozwadowski - Barclays Capital

Amitabh Passi - UBS

Blair King - Avondale Partners

Steve Ferazani - Stephens Incorporated

Presentation

Operator

Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the CommScope's First Quarter 2009 Earnings Release Conference Call. (Operator Instructions).

I'd now like to turn today's conference call over to Phil Armstrong, Senior Vice President of Investor Relations. Sir, you may begin your conference.

Phil Armstrong

Good afternoon. Thank you for joining us on this call. Before we get started, we and the entire CommScope team would like to publicly extent our condolences to Frank Drendel, CommScope's Chairman and Chief Executive Officer on the recent loss of his wife. Marilyn (Pinky) Drendel passed away last week after a long and courageous battle with multiple sclerosis. Frank will not participate on the call today, but he expects to be back full time with us soon.

Joining me on the call today are Brian Garrett, CommScope's President and Chief Operating Officer and Jearld Leonhardt, CommScope's Chief Financial Officer.

Last quarter we began a program of introducing some of our general managers to the financial community. Today, we also have with us Ted Hally, Executive Vice President of our Antenna, Cable and Cabinets Group.

Please note that during this conference call, we may make forward-looking statements regarding our financial position, 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 a more detailed description of factors that could cause such a 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 is not undertaking 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 detailed reconciliations of GAAP to adjusted results can be found in the press release we issued today and on our website.

After we review first quarter results, and our outlook for the second quarter, we will open up the lines up for questions. Jearld?

Jearld Leonhardt

Thank you, Phil. Today, CommScope announced first quarter results for the period ended March 31, 2009. We reported first quarter sales of $742 million and net loss of $21 million or $0.29 per share. Reported net loss includes after tax charges of $15 million for the amortization of intangibles, $9 million loss on the extinguishment of debt, and $8 million in restructuring and other special items.

Excluding the special items, adjusted first quarter 2009 earnings were $11 million or $0.14 up diluted earnings per share. Sales declined 26% year-over-year, primarily due to the overall weakness in the global economy. Sales in all segments were negatively affected by the significant economic downturn, decreased capital spending by telecommunications service providers, and by reductions in customer distributor inventories.

The year-over-year sales comparison was also affected by the negative impact of changes in foreign currency exchange rates of $27 million, and the divestiture of the unprofitable Satellite Communications or SatCom product line in early 2008.

Antenna, Cable and Cabinet Group, or ACCG, segment sales declined 32% year-over-year to $326 million, primarily due to lower sales in North America and Europe, somewhat offset by higher sales in Asia.

The largest portion of the decline in North American sales can be attributed to lower wireline cabinet sales as major US carriers slowed spending and reduced inventory levels. Approximately 12% of the decrease in year-over-year sales in ACCG sales resulted from the negative impact of foreign currency exchange rates.

Despite the difficult results in the North America and Europe markets, there were pockets of strength. The Asia Pacific region was up on a year-over-year basis due to growing markets, such as India and China, which I will highlight in just a moment.

We can expect to see improvements in the second quarter in North America as carrier budgets have been finalized and inventory levels have been reduced at OEMs. We also expect North American wireline cabinet business to improve on the sequential basis.

I'm going to cover our other wireless segment, Wireless Network Solutions or WNS. WNS segment sales decreased 12% year-over-year to $159 million. This sales decline was largely due to the restructuring of an unprofitable relationship with the major OEM, the divestiture of the unprofitable SatCom business in early 2008, and the negative effect of foreign currency exchange rates which accounted for about one-third of the decrease in year-over-year sales in WNS.

The bright spot in WNS during the quarter was the strengthening of the North American network solutions sales, which include location services systems, network optimization analysis and consulting services, as well. For example, we won some important mobile location service projects during the quarter with our geometrics registered MLC product line.

Geometric accommodates a variety of location-based services including fleet management, mobile commerce, E911, public safety, and security among others. Another bright spot for WNS was the significantly higher sales and orders in the Asia Pacific region, due primarily to expanding business opportunities serving the Chinese wireless operators.

Let me take a moment to highlight some of our overall wireless opportunities in Asia Pacific. We believe there are deep roots in the Asia Pacific region and large manufacturing presence in China and India, provide a competitive advantage. As you may know, wireless infrastructure is a focal point of the China's economic stimulus.

In China, we are the leading supplier of wireless communication infrastructure for metro and railway projects and have won numerous other coverage in capacity systems for landmark projects, such as the National Center for the Performing Arts, the Ministry of Environmental Protection Building, the Beijing-to-Tianjin railway, the Beijing Subway, and Shanghai Metro among others.

We are also a key supplier of site solutions, including base station antennas, power amplifiers, and feeder cable, to major OEMs as well as China Unicom and China Telecom. During the first quarter, we increased production significantly to support Chinese orders.

While the ongoing Phase 1 and Phase 2 projects may be lumpy quarter-to-quarter, we believe we are strongly positioned to benefit from this ongoing opportunity. Another bright spot for CommScope in Asia is India. India continues to post staggering wireless subscriber growth, announcing nearly 16 million new subscribers in the month of March.

The Indian market remains robust, but there are some challenges that will likely restrain our growth. These include the delay of 3G auctions due to the pending government elections, ongoing competition, and the negative effect of the lower rupee.

While some of the large incumbent Indian operators have become somewhat more cautious, five new GSM licenses have been awarded, and these new operators are awarding contracts and starting rollouts. Overall, it remains a strong market for CommScope and we look forward to ongoing growth.

Now, as always, we're focused on those opportunities in Asia and around the globe where we can utilize technology and competitive advantage to provide us with reasonable returns. While we are pleased with our performance in the Asia Pacific region, we believe one of the key strength of CommScope is its geographic and market diversity.

We are equally focused on the development of wireless site solutions for 4th generation or 4G networks around the globe. We've been warded multiple projects by numerous operators and OEMs for the development of products for use in 4G networks, both long-term evolution, or LTE, and WiMAX.

Andrew Solutions continues to develop new cabinet and tower-based solutions including filters, amplifiers, antennas, repeaters, and fully integrated base station RF offerings for multiple customers covering various LTE frequencies.

We have begun delivering initial products to customers for evaluation, in anticipation of being market ready when LTE begins initial trials and deployment in the next few quarters. Now, broad deployment of LTE is expected to commence in major markets in 2010-2011.

Enterprise segment sales declined 32% year-over-year to 144 million as a result of challenging global business conditions. Sales declined in all major regions as the global recession calls to slow down an information technology spending. Sales were also negatively affected in the quarter as CommScope's distribution partners significantly reduced inventory levels.

We believe that roughly half of the Enterprise sales decline year-over-year can be attributed to reduction in channel inventories. While some Enterprise projects have been delayed or canceled, we're seeing a fairly healthy level of potential project activity. We also believe that inventory levels are nearby. As a result, we expect to see a more traditional seasonal increase as we move into the second quarter.

Broadband segment sales declined 16% year-over-year to $114 million, primarily due to lower international sales, particularly in Europe and Central and Latin America. In addition, sales of North American operators were lower year-over-year mainly due to the continued weakness in residential construction.

On a consolidated basis, non-US sales declined 24% year-over-year to $384 million or 52% of total company sales, while US sales fell 29% year-over-year to $360 million. On a consolidated basis, customer orders booked in the first quarter of 2009 were $779 million. Our book-to-bill ratio was 1.05 times for the quarter.

Gross margin for the first quarter of 2009 was 23% and includes $4 million of intangible amortization and $3 million of litigation charges in cost of sales. Excluding these items, gross margin would have been 24%. SG&A expense for the first quarter was $101 million, down $33 million, or 25% year-over-year, primarily due to cost reduction efforts, including workforce reductions, the impact of lower sales volume, and the suspension of cash bonus programs.

Operating income in first quarter of 2009 was $9 million, compared to $28 million for the comparable 2008 period. The decline resulted primarily from lower manufacturing volumes, due to lower sales as well as initiatives to reduce our inventory levels.

First quarter operating income was also negatively affected by warranty and restructuring charges. The benefits of lower raw material costs were not fully realized due to the higher cost inventory that was on in at the beginning of the year, and some of the purchases commitments that we had coming into the year.

Now, these factors were somewhat offset by lower operating costs, which included ongoing cost reduction measures, and the suspension of cash bonus programs. Despite lower sales volumes, the company reported significant improvement in WNS and Broadband operating performance year-over-year.

Now excluding $25 million for the amortization of purchased intangible assets, $9 million of restructuring costs and $3 million in litigation charges, adjusted operating income in the first quarter was $45 million, or 6% of sales. This compared to adjusted operating income of $112 million in the first quarter a year ago.

Now, turn to cash flow, the balance sheet and liquidity measures. Despite significantly lower operating results in the quarter, cash flow from operation increased 7% year-over-year to $85 million. We achieved solid cash flow in part by reducing inventory substantially. This benefit was somewhat offset by reduction in accounts payable and other liabilities.

Capital spending in the first quarter was $14 million. CommScope retired $206 million of debt during the first quarter. The company repaid $180 million of its senior secured term loans during the quarter, including 172 million for the excess cash flow payment provision under the senior secured credit facilities.

The company negotiated the conversion of 24 million in face value of 1% convertible senior subordinated debentures in exchange for 1.7 million shares of CommScope's common stock. Now March 20th, the company paid $176 million to redeem the remaining 1% debentures.

To finance the redemption of these debentures, CommScope issued $100 million of 3.5% convertible senior subordinated debentures and borrowed $75 million under its senior secured revolving credit facility. Under the terms of the new 3.5% debentures, the company may effectively induce conversion by terminating the holder's right to convert at the closing stock price exceed 150% of the original conversion price for 20 days out of a 30-consecutive trading day period.

As of the close of business today, CommScope stock had exceeded the 250% termination threshold of $15.10 per share for the last 14 trading days. In the events of early conversion termination, noticed by the company, holders will receive an interest make hold payment or unpaid interest in addition to the common shares underlying the debentures.

Clearly, we experienced a difficult first quarter. However, while business conditions remained challenging, and visibility is limited, we expect significant improvement in second quarter results and continue to believe we maintain compliance with our financial covenants during 2009.

For the second quarter of 2009, we expect revenue of $800 million to $850 million. Adjusted operating income is expected of $100 million to $125 million excluding intangible amortization, restructuring and other special items, and a tax rate of 33% to 36%, that is, 33% to 36%, on adjusted pre-tax earnings is expected.

Now, as we indicated earlier this year, we expect operating performance to improve in the second quarter for five main reasons. First, we expect benefit from higher sales and production volume as we move into the historically stronger second quarter. We believe that we have experienced the majority of inventory reductions by our customers and business partners. We believe that sales and orders will now more closely track actual and user demand.

Second, we also expect to benefit from lower raw material costs. During the first quarter, the benefits of lower raw material costs were not fully realized due to the higher cost inventory that was on-hand at the beginning of the year and some of the purchase commitments that we had coming into the year.

Third, we expect to see improved North American wireless and wireline spending as many budgets and annual bill plans have now been finalized.

Fourth, we expect to see continued benefits from our leading wireless position in growth markets, such as India and China.

And finally, we expect the benefit from ongoing cost reduction. We continue to activity work to lower operating costs through spending controls, workforce reductions, restructuring and other cost reduction measures, including the recently announced suspension of 2009 cash bonuses.

While we work on improving operating performance, we're also focused on lowering interest expense and reducing debt. So despite a difficult first quarter, we remain optimistic. While the overall business environment remains volatile, we believe that we're taking the appropriate steps for a successful 2009.

Maintaining compliance with financial covenants of our senior secured credit facility remains a high priority before us in 2009. As I have explained, we are planning to do so by managing our business carefully, while reducing our debt.

Now, I'll turn it over to Brian Garrett for his comments. Brian?

Brian Garrett

Jearld, thank you. And as always, a special thanks to the global employee team of this company. From a high in the third quarter of '08, with revenues in excess of $1 billion and operating margin north of 14%, we've rode into the (inaudible) and the global economic meltdown. During which, this team has kept focused, working diligently against the plans we established and have continued to deliver.

From Q3 ending, we bottomed in the January-February timeframe, off substantially in revenue, and with operating losses, only to recover in March to revenue rates consistent with our second quarter guidance and operating margins in the mid-teens.

Our employees have dropped inventory some $80 million in this quarter alone, $50 million of which is in finished goods and WIP. They have delivered above plan results in synergy growth, some $27.5 million delivered in the Q, as well as cost reductions. They have largely held pricing and delivered major account wins worldwide and they surrendered wage increases in '09 bonuses to help us assure long-term global leadership.

Like some other global economic trauma, we believe we've seen the bottom. I'd like to particularly congratulate the WNS and broadband teams who delivered strong year-over-year operating income performance in the Q, despite lower sales. I can tell all of you on the call that all approximately some 13,000 CommScope employees have focused on and committed to covenant compliance for the remainder of this year, by generating profitable sales and expanding EBITDA, whey we reduced debt and interest expense.

As an added note, we are pleased to have ranked number 554 in the Fortune 1000 based on calendar year 2008 revenues of just over $4 billion. We were the 6th largest public company in the network and other communications equipment industry grouping of which we are very proud.

With that, operator, I'll turn it over and we'll accept questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our next question comes from Ken Muth with Robert W. Baird.

Ken Muth - Robert W. Baird

Okay. Thanks. Just wanted to see kind of go through a little bit more detail the assumptions you have made on the compliance issues, debt covenants?

Jearld Leonhardt

Ken, we'll eventually get this fixed. Excuse us. Let's try it again.

Ken Muth - Robert W. Baird

Can you hear me now?

Jearld Leonhardt

Yes, we can.

Ken Muth - Robert W. Baird

Okay. On the debt covenants assumption you make with staying in compliance, could you just go through what you think you need to do in the way of the actual operating margin and operating profit assumption as well as the debt assumed to be paid down for the next few quarters?

Jearld Leonhardt

This is Jearld. We have great cash flow in the first quarter for that quarter, which has typically been our weakest when opted in the past. We generated $85 million of cash flow from operations in the quarter, which was actually an improvement over last year. So we felt good about that. We used obviously that cash flow to pay down debt in large part, along with our existing cash at the end of the year, did some restructuring of our convertible debt with a new $100 million issue, and then redeeming the old issues.

So, it was an active quarter for us in terms of financing activity and the results were very helpful for us in paying down debt. In total, we reduced that $200 million and ended the quarter with a little under $300 million of cash on our balance sheet. So we liked the position we are. So, we think we do have opportunity, both to lower debt further as we look ahead. And at the present time, we will gauge that based on business conditions.

Our quarterly flow of business from here on out should suggest that the second quarter should be stronger than the first course and operating performance and stronger still in the third quarter would be an early expectation.

So, we think all those things should be helpful, as we look ahead to managing covenant compliance, as we measure where we're at today, and our EBITDA cushion that we have, which is almost $70 million to 80 million, about $80 million approximately EBITDA cushion on compliance that we have today. So, we feel we're in pretty good condition or shape to move forward and maintain compliance through the balance of the year.

Ken Muth - Robert W. Baird

A quick follow-up on that. If you would kind of come in the midpoint of your Q2 guidance for your operating income assumption, and have your normal seasonality for Q3, would that be enough to stay in compliance?

Jearld Leonhardt

Well, our expectations around compliance would encompass a midpoint of our current guidance, yes, for the second quarter.

Ken Muth - Robert W. Baird

Okay. And then just a follow-up on the Enterprise division. You talked about some kind of bottoming out and kind of Q1 timeframe in the way of reducing inventories to the channel system as well as maybe some hiccups. Where are you seeing kind of the demand stabilization? Is it still more kind of the high end data centers? Is it more generic than that?

Jearld Leonhardt

Data centers remain an important part of the business, Ken, but, there's still in that 25% to 30% range. You might think, if we didn't know otherwise, that data center became a much, much larger percentage of our business over the course of this downturn, but has not been the case. They remain stroke, but that have not become the overwhelming part of the business.

If you look at what happened in sales into the distribution channel during the quarter, it was off substantially on a year-over-year basis. Our sales out of the channel is approximately half that amount. And so obviously, that's a representative of the impact that destocking has had, channel destocking on the business in the first quarter.

So if the other benchmark we have, Ken, is that if you look at our pipeline, it's the number of projects, I'll say the dollar value of projects that we brought into the pipeline in the first quarter of '09 is essentially identical to the first quarter of '08.

So, if distribution inventories have largely bottomed, and that's not a bad assumption, not to say there could be some more, but it's not a bad assumption. There's not a large uptake in project cancellations. There's a reason to believe that this business will grow out of the low that we saw in Q1.

Ken Muth - Robert W. Baird

Great, thank you. I'll pass it on.

Operator

Our next question comes from Jeff Beach with Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

I'd like you to expand a little bit more on India and China, specifically with India and with this strong new subscriber growth and then you talked about a couple of the hurdles with delaying some auctions and other things.

I think I remember back at the last Investor Day, you were talking about delivering 3000 kits a month into India, and I just wonder, is the number up now because of subscribers are up, and is that going to continue to grow?

And then over on China, when you were running through the components that you delivered, you didn't mention antennas. I was wondering if you're delivering full kits into China similar as into India and whether that includes antennas?

Jearld Leonhardt

Okay. Jeff, I'll turn this over to Ted and let him have the first shot at it. He's closest.

Ted Hally

Jeff, hi, it's Ted Hally. Just to talk about India first, India continues to be an exciting market, very competitive. I think Jearld covered the point, what we're seeing in Indian is the 3G license, so moss of the ads you're seeing would be 2G customers and we expect that pace to be still good for the rest of the year.

In India, in the quarter, you're seeing a lot more activity with some new operators, mentioned one Tata where we've actually shipped antennas and won some awards, and we expect that growth on those new operators to continue through the year, the established operators one party has slightly pulled back on its CapEx, so there's a lot of movement in the Indian marketplace.

We continue to serve primarily from my product portfolio which is the antenna business and cable business. The antenna business in India is very active rest technology, is a technology that last year we saw volumes go up in India, and that's continuing through this year.

On the cable side, it's a little more competitive. While we continue to play in India, we will play where we can expect some margin, and some customers you'd see in commodity E-bidding, where really with copper declining throughout the last quarter and into beginning of this quarter, but that's not put us in a favorable position.

So, we are continuing to focus on our introduction of aluminum products to the Indian customers and that will take some time as they technically (inaudible) us and then introduce us into their network. We have one large customer in India that takes our HELIAX 2.0 aluminum today.

So, to go on to China; maybe an oversight, but I guess one of the things we're very pleased with in China. I don't aware with the China Telecom last year, we were the only non-indigenous supplier of antennas, and we expect China Telecom to come out with some more bids this year and continue that.

With China Unicom, they made a decision early this year to select multiple suppliers in the antenna business and Andrew CommScope was the only non-indigenous in the top three. So they make decisions based on percentage split, and then you go out and sell to the various regions. We are through the first phase of that, just tailing off on the first shipment, and a Phase 2 has already been discussed by Unicom, which we expect the decision in the second quarter.

Jearld Leonhardt

I may add some more background on China Unicom, Jeff. As Ted mentioned, we're one of the top three, and those three in aggregate are approximately 75% of the supply to Unicom. So, this is a big statement.

And when you look at Unicom in the context of that total China market, they are the largest in terms of the number of sites that are going to be installed in '09, some 80,000 sites with an associated 3G budget of nearly $12 billion. So, we’ve positioned ourselves very well with Unicom, and have strong expectations moving forward.

Jeff Beach - Stifel Nicolaus

Thank you.

Operator

Our next question comes from Simon Leopold with Morgan Keegan.

Simon Leopold - Morgan Keegan

Thank you very much. I want a couple of quick housekeeping questions. First one with on the tax rate guidance. It's a little bit higher than what you had talked about in the previous quarter. If you could shed some light on what's changed there?

Jearld Leonhardt

Well, in terms of our guidance, Simon, I think the most critical factor is always our mix of where income is coming from. It has the biggest impact on actual tax rates as we try to develop our forecast, and record our actual results. So perhaps or consequence of a little higher US mix in some areas from the first quarter could be higher rates for the year. We do expect US improvement as we move through the year.

Also, we expect to repatriate most of our 2009 earnings in reflecting that in our tax rates for 2009. So, that also has resulted in a slightly higher rate than what we had been reporting previously.

Simon Leopold - Morgan Keegan

That's actually what I was suspecting. So, that's very helpful. Then if you could just go back to the pro forma earnings for this quarter, I assume the diluted share count you would be using is about 80.7 million. Just want to check on the interest add back for that calculation?

Phil Armstrong

Yes. It's about just a little under $0.5 after tax, you'd add back to net income.

Simon Leopold - Morgan Keegan

Okay. Now, more big picture. Looking at the forecast for operating income, couple of moving parts there, but probably the most obvious one is the gross margin and you've talked about a number of reasons why it could improve, but rough math suggests you need about 400 basis points sequential improvement to get to the kind of operating income and just want to first find out, is that right? And if you could kind of break down what are the elements that get you that kind of improvement?

Jearld Leonhardt

I'll let Phil do the math here while I speak, Simon. The part that really impacted the performance, obviously, volume and absorption of fixed overhead is a big part, but you got to remember that from a manufacturing perspective, the impact is a lot bigger than just the reported sales.

To the extent that we moved finished good and write-down asset inventory value, in a sense you think about $50 million of inventory, rough guess is that would be the equivalent of $70 million, $75 million worth of revenue that we didn't get to produce.

So, a big, big part of the margin is going to come through overhead absorption. The other big whammy in the first quarter and the tail end of the fourth quarter is this raw material subject. So, materials that came into the New Year that were at substantially higher costs than our standards that we had and subsequently we generated large manufacturing variances in COGS. So, you put all those pieces together, and it generates big, big numbers.

Simon Leopold - Morgan Keegan

And the 400 basis points make sense though?

Phil Armstrong

The bulk of the improvement comes in gross margins when you think about it.

Simon Leopold - Morgan Keegan

And a 400 basis point sequential move is in the realm of what we're talking about then, correct?

Jearld Leonhardt

Well, just a simple operating leverage, just saying what runs at a slightly different, Simon, is that the operating leverage is even greater than the revenue would indicate, as we’ve moved production levels back up. Production levels were very low in the first quarter as we reduced inventories in the period.

And those production levels at steady inventory states and rising revenue rates will be much, much higher and that will have a very positive impact on factory utilization. The second point was, a lot of the higher priced cost of material, have now flowed and worked their way through the P&L.

So, that plus ongoing cost reduction, we've been cutting cost regularly ever since the acquisition a year ago. We're seeing benefits of that every month, every quarter. We have new cost reduction benefits coming online, and those are getting more material to our benefit as we move ahead.

So, it is the bringing together of all those things which we think should provide substantially improved results, both in gross margin and operating margin in the second quarter.

Simon Leopold - Morgan Keegan

Okay. Looking at the ratios for the debt covenants, could you update us on where you stood for the March on the leverage ratio and the interest coverage ratio?

Brian Garrett

We haven't fully reported these results yet with our lenders, but we were on a preliminary basis, I think, we were at 3.27 on the leverage, and 4.44 on the interest coverage at the end of the second quarter.

Simon Leopold - Morgan Keegan

Great. And I think two more quick ones. One 10% customers, any annexure may be?

Jearld Leonhardt

I don't believe anyone made it…

Brian Garrett

We had on 11% accounts receivable, I think, but no 10% customers.

Simon Leopold - Morgan Keegan

Great. And then also, you highlighted Asia, we talked about India and China again. How big are these markets for you this quarter? In terms of percent of sales?

Brian Garrett

Growing. They are substantial. I'll tell you, the China business, I'll give you a benchmark, to lead you nowhere but if you get a sense of what’s happening in Chine. The China business is up 80% year-over-year, Simon, and up 60% sequentially, so you know, it's having a, you know, measurable impact on the performance of the business.

Simon Leopold - Morgan Keegan

And India still kind of a high single digit percent?

Brian Garrett

India has been running, has been running consistently. Yes, it has.

Simon Leopold - Morgan Keegan

Great. Thank you.

Brian Garrett

Yes, Simon, I'll tell you one more thing about your, go back to your gross margin, your margin question. You know we don't talk about gross margins, but you know, we do want everyone to feel, comfortable is not the right world, understand all the parts that are moving that come from where we were in the first quarter to where we are guiding in the second quarter.

One thing that I can tell you is that if you look at the standard line, took all, just, disregard all the variances that happened in the first quarter as a result of this upheaval, the standard gross margins in the second quarter are not substantially different than they were in the first quarter.

And so you know, to get to where we want to be, and where we are guiding, it isn't requiring a huge change in pricing or mix. It really is as Jearld said it’s about gross margin, and the reduction of all of the variances that came into the first quarter. And in my comment section there, wrap-up, you know, where we were in March is where we need to be for the second quarter. So if, if we stay at the current pace, we feel comfortable with the guidance that we provided.

Operator

Our next question comes from George Notter with Jefferies.

George Notter - Jefferies

Hi thanks very much I had a few questions on cost structure. As you guys exited last year [aggregate] $60 million merger synergies if those memories there with me, headed a $115 million at the end of this year. Where are you, I know those manufacturing synergies are what's driving that but give us an update there if you can?

Brian Garrett

Well we finished the year, your numbers are good, I think we delivered 63, run rate at the year end was something like 90 and our guideline to you for '09 ending was 126 I got it here in my notes. And so I told you we did about 20, 28 in the quarter, right where we want to be.

George Notter - Jefferies

Got it. And then talking about raw materials, last quarter you mentioned that you gave us the price point or I guess aggregate cost for the Q4 copper costs I'm wondering if you could just give us that same number for Q1, and then give us a sense of where that's going in the future?

Ted Hally

Garrett and I have to do some homework you know what we got that in front of us.

Brian Garrett

Sure, copper has been somewhat volatile, you know, having get started here around as low as a $50, moved up to as high as 220. So that’s still a fair degree of volatility. I think current levels are.

Ted Hally

$2.

Brian Garrett

Less than $2 in the $90 range now, so you know, $2 sort of number is sort of where I think a good part of our first quarter would have been our procurements at we are confident first quarter we are low, because again the low volumes that we are producing here in the first quarter and so you know, looking ahead procurements will be more like current prices.

George Notter - Jefferies

Sorry, I guess I'm confused. I believe it was $2.50 back in Q4. I guess I was wondering what that number was in Q1, did you just say it was in the $2 range?

Brian Garrett

To the extent that we bought, but we bought very we didn't buy a lot of copper, again, in the end of quarter.

Jearld Leonhardt

Maybe that's something we can close the loop on.

George Notter - Jefferies

Got it. Okay that’s fine. And then I guess related to that, I'm wondering if you guys are seeing negative impact associated price decreases in your businesses that are aligned with copper and aluminum, RF cable, enterprise structure cabling, obviously there has been a fair amount of discussion about whether you'd see those pricing decreases. What's the status there? Thanks.

Jearld Leonhardt

Largely, George, across all businesses, there has been very, very little price movement over the course of the first quarter. The one exception is largely in 50 owned cables, and in the quarter, pricing in aggregate moved mid-single digits, or less and I would say we're basically back to pricing levels where we were same period last year.

Operator

Next question comes from Amir Rozwadowski with Barclays Capital

Amir Rozwadowski - Barclays Capital

Thank you very much for taking the question, good afternoon, gentlemen.

Phil Armstrong

Hi Amir.

Amir Rozwadowski - Barclays Capital

Just continuing along those that gross margin line of questioning. Brian, in speaking about sort of the pricing actions or lack there, should we expect ongoing improvement in sort of your gross margin line through the course of the year?

Brian Garrett

On a gross margin, absolutely. For lots of reasons. And but you know we have been public that you know pricing always likes cost and the commodity cost the team has done an exceptional job in resisting or slowing pricing pressures. I think its fair to assume that in the second quarter we are going to incur additional price deceases in the wireless space, in the cable spaces I'm talking about primarily, and will come under added pressure in the enterprise space as well.

Amir Rozwadowski - Barclays Capital

Okay. But do you think there's a probability or possibility I would say as we get some sequential improvement through the course of the year that you folks could come close to sort of historical levels of gross margin, I should say return to historic levels of gross margins of the business?

Brian Garrett

I think the answer is clearly yes.

Amir Rozwadowski - Barclays Capital

Okay.

Jearld Leonhardt

I think just two things. Looking back in history, but just look at the first quarter here and look at the improvement in operating margin that the WNS business had, in the first quarter and the broadband business, both businesses were above 10% adjusted operating margin in the quarter, and we think that was, that was a good indication of the benefits of cost reduction and restructuring activities that have been going on in the businesses, and their discipline in operating those businesses and its being reflected in operating income. So those are already higher than periods of, in the past.

Amir Rozwadowski - Barclays Capital

Great. And then if we look at your sales guidance of a sequential pick up in sales around your constructive commentary on the wireless purchasing environment and certainly some, it seems like there's perhaps some snap back in the spending in the enterprise segment. How should we think about, sort of what's leading sort of that or which of the businesses are really leading that sequential pickup in sales in the second and third quarter?

Brian Garrett

Well, we're going to see growth in the ACCG space. The first quarter I think we were held back by a very slow start in North America.

Jearld Leonhardt

A non-seasonal low start, which we expect to start in the second quarter and carry through to the third quarter. And then the other piece, of course is enterprise and these two are of course the two largest pieces of the business. So you know, small change there will make a big dollar impact, not as a dollar magnitude, but certainly in terms of percentage growth, you know, the sequential improvement in wireline is large as well.

Operator

Our next question comes from [Amitabh Passi] with UBS.

Amitabh Passi - UBS

Hi. Thanks guys. First of all please convey our condolences to Frank.

Jearld Leonhardt

We will. Thank you.

Amitabh Passi - UBS

I just had a couple of housekeeping questions. The first was backlog at the end of the quarter, around 434, somewhere in that range?

Jearld Leonhardt

We don't report that typically other than at the ends of the year.

Amitabh Passi - UBS

Okay. I got.

Jearld Leonhardt

First to bill is 1.05 for the quarter. So there would have been a slight improvement in backlog mathematically.

Amitabh Passi - UBS

Okay. And then, I don't know if you can tell, was book-to-bill greater than 1 across your segments?

Jearld Leonhardt

It was essentially one or better. In all segments.

Amitabh Passi - UBS

And then just around your guidance, there's a lot of discussion on the gross margin side. I just wanted to clarify on OpEx as we look at the second quarter. How should we think about OpEx either on a percentage of sales basis or absolute dollars? I mean would it be down sequentially again in absolute dollars or do you think you kind of level off at these levels?

Jearld Leonhardt

No, it would definitely be up. You might, repeat the question for me.

Amitabh Passi - UBS

Just OpEx for the second quarter.

Jearld Leonhardt

OpEx.

Brian Garrett

Oh, OpEx. I thought you said operating income.

Amitabh Passi - UBS

Yes.

Jearld Leonhardt

We had a lot of strange looks around the table. Yes, OpEx was performance in first quarter was down $33 million from year ago, and it's likely to be higher, because there are things tied to revenue production and that sort of thing that will lift that although we do have ongoing cost reduction efforts, and have very tight spending controls in the company currently. So, we will be working very hard to maintain an efficient period overhead structure as we move through the year.

Amitabh Passi - UBS

Okay. And then I just wanted clarification around the profitability for ACCG in the first quarter. I mean it looks like on adjusted basis operating income was less than 2%. Was all of that just driven by, you know, really sort of a large decrease in volumes or was there something else going on there?

Jearld Leonhardt

I think both your math and, is correct and your observation is correct about volume. I think volume is the most critical factor there. There were lesser things that had impact, but it was largely a function of volume and, you know, these residual cost issues that we've talked about earlier.

Brian Garrett

Yes, the cabinet business weighed very heavily on the business segments.

Amitabh Passi - UBS

Brian were operating profits still positive for the cabinet business?

Brian Garrett

I don't think we don't want to go to that granularity on a product line base.

Amitabh Passi - UBS

Okay. I just had a couple of more quick ones, cash flow from operations, Jearld as we're looking into the second quarter, do you think you could do any better than the first quarter? Would it be sort of down again sequentially?

Jearld Leonhardt

At this point, I doubt that we can match our inventory performance in the second quarter, although that remains to be seen and inventory performance was there I think payables will and receivables will both arise with volume. So I think we have an opportunity to minimize the working capital impact on increasing operating results in the quarter, if we can hold the line on inventories.

Amitabh Passi - UBS

Again, then just my final question, guys, as we think about your China business sequentially from 1Q to 2Q, looks like, and this is in the context of wireless I mean you certainly saw good growth of 60% sequentially from 4Q to 1Q. How do we think about going from the first to second quarter? I mean, obviously I suspect growth rates were moderate, but do you think you can do sort of double digit growth sequentially again in your China wireless business.

Brian Garrett

I think China's is going to be lumpy from here out. And as it has been, I mean, for the vast majority of '08.

Ted Hally

In many cases, we're addressing specific projects and each of the carriers of different time events, and as we respond, that's going to change, throughout the year, quarter by quarter. You have to look at it over a longer timeframe as we build a broader base of activities in China.

Brian Garrett

Yes, I mean, it's fair to say that in Unicom, Q1 was probably a peak bill period for them and its just a question of how their follow up projects come relative to other people's projects that Ted's referring to. So, we're going to see lumpiness on top.

Phil Armstrong

Operator, I think we have time for may be two more quick questions.

Operator

Our next question comes from Blair King with Avondale Partners.

Blair King - Avondale Partners

Hi, guys, thanks for taking my question.

Jearld Leonhardt

Certainly Blair.

Blair King - Avondale Partners

Just one, I'll just ask one quick one and pass it on and just follow-up to previous question, maybe I'll ask two quick ones. On the copper pricing, if my notes are right, I believe you guys had locked in 250 per pound copper pricing in the fall of '08, then subsequently $1.50 per pound pricing is it right for us to assume that now you're into that $1.50 per pound copper pricing?

Jearld Leonhardt

Blair, I don’t know any of those numbers.

Brian Garrett

Well I think what we're saying is that we did have some commitments in the price ranges that you are talking about the $2.50 area that did go into 2009 and carried over into 2008. I don't think we have made any substantial forward commitments in copper or in any of our business segments so far this year.

Blair King - Avondale Partners

Okay.

Brian Garrett

Certainly and, [this for] the copper.

Jearld Leonhardt

But you didn't represent the club base that wasn't a representation that our forward basis was 250. The average of our forward basis…

Brian Garrett

That's right. It was not our intent to do that.

Jearld Leonhardt

Okay. I just wanted to make sure we are clear on that.

Blair King - Avondale Partners

Yes, that's helpful got it. So there's no, there's no locked in copper pricing today for CommScope?

Brian Garrett

No. That we still do have commitments that were carried forward that were carried forward from 2008. And we filed our Q today by the way so some of this disclosure what our metal commitment position is like.

Ted Hally

I think it's around 50 million.

Jearld Leonhardt

Around 50 million.

Phil Armstrong

That we think was above mark but only the point is, this is Phil, if we are working through that we’ll get the benefits as we move forward in to Q2 or beyond.

Jearld Leonhardt

We're working through that with customers where we have annual requirements and annual needs.

Phil Armstrong

What I was saying is that we made no new commitments for forward copper pricing henceforth.

Blair King - Avondale Partners

Okay. Just that's helpful. Thanks. I appreciate it.

Phil Armstrong

Thank you.

Blair King - Avondale Partners

I have just one last quick question. Just given the lumpiness in the Asia-Pacific region and then the strong sequential increase in sales to China this quarter. Can you just put some color around how you guys think about the sequential increase and (inaudible) is in the third quarter for the top line?

Brian Garrett

Q3?

Jearld Leonhardt

We haven't, and obviously intentionally haven't provided any guidance for Q3. Yet, we'll say historically that our third quarter and second quarter revenue are often very close to the same number at historical seasonal trend. I think this year, hopefully there will be some cyclical improvement in revenues as the world recovers from the recession or at least the United States does, and some of our major customers up tick their spending. So there is, might be some opportunity for higher revenue in the third quarter than over the second quarter.

Operator

Our next question comes from Steve Ferazani with Stephens Incorporated.

Steve Ferazani - Stephens Incorporated

Hi, guys. Good afternoon. Thanks for taking the question.

Jearld Leonhardt

Sure Steve.

Steve Ferazani - Stephens Incorporated

Can you give us some sense on the Andrew corp. synergies, the remaining synergies that you have left sort of how they play out between cost of goods sold and OpEx?

Jearld Leonhardt

Well, the big things that have to happen to get to the goal towards the end of the year are really the operational consolidation activities, and those are the ones that we announced in the September time frame of last year. So this will be a factory consolidation. It will effect both fixed costs and end costs as well.

Steve Ferazani - Stephens Incorporated

Okay. Great.

Brian Garrett

Substantially. Let me put it versus OpEx, it’ll OpEx will be a very small part of it.

Steve Ferazani - Stephens Incorporated

Got you. And I guess as you looked forward, I mean it seems like you have got a little bit of a tailwind now in terms of at least the order trends and demand firming up a little bit. We're heading into two seasonally strong quarters.

Can you give us some sense for as you look beyond that, and obviously you have got to step up in the covenants coming in September, as you look beyond that into December, which is normally more of a seasonally down quarter for you guys.

How do you plan ahead for that? And you know, how do you keep some powder dry in terms of some potential buffer in order to sort of stay in compliance past September?

Brian Garrett

Sure. Our expectations would be that fourth quarter would be an improvement at this point our expectation is largely that fourth quarter should be an improvement year-over-year. That's an early indication. Largely because of cost structures again, significant cost reduction has taken place that was not reflected in the fourth quarter of 2008, that will be a part of 2009, and you know, again, we would expect to be operating at higher operating margins in the fourth quarter of '09 than we were in the fourth quarter of '08. Obviously, it's out there several quarters yet, but that would be our expectation at this time.

Steve Ferazani - Stephens Incorporated

Understand, and then just one last one from me. WNS, very nice up-tick in operating profits there, operating margins. Can you give us some feel for kind of the puts and takes in terms of what drove that? Was it mix or was it just some of the synergy work that you had done?

Phil Armstrong

Work with WNS.

Steve Ferazani - Stephens Incorporated

The uptake in WNS yeah what was the.

Brian Garrett

It was I think the good part of our WNS it was broad, you know there are lot of pieces to WNS. There are many, many companies and product lines in there, Steve, and it was a broad recovery, and you know, for the sub systems guys, it was really about volume increasing, largely into the OEMs, and profitability improvements in those businesses as well. The other part is Jearld mentioned it in his script, the geometrics, the MLC business is stronger. Our location management business largely is expanding, so full spectrum. WNS looked much better than certainly historical perspective. That was encouraging for us.

Steve Ferazani - Stephens Incorporated

And so it sounds like that's somewhat, that’s sounds like that's a sustainable up-tick in margins that you saw that we shouldn't, there's nothing that could potentially drive you back to third or fourth quarter levels.

Brian Garrett

It was a broad statement for WNS, I would say yes.

Steve Ferazani - Stephens Incorporated

Okay. Great. I know I said last question, but I had one more for you Alcatel-Lucent, had a nice frame agreement award announced this morning is that a potential positive for you guys?

Brian Garrett

That's good news for the CommScope team and shareholders.

Phil Armstrong

Thank you operator, that’s all the time we have questions for.

Brian Garrett

So I would just like to wrap up, say thanks to all of you again for coming into the call, our thanks to the team for what was really part of a tremendous turn around over the last four months. Their efforts have been extraordinary again and they are going to be well rewarded for it. And we look forward to having Frank back here next quarter. We wish him the best, and I'm sure you will all be seeing him here shortly. So again, thank you very much for joining us.

Operator

This concludes today's CommScope first quarter 2009 earning release conference call. You may now disconnect.

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