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Brightpoint, Inc. (NASDAQ:CELL)

Q1 2009 Earnings Call

May 8, 2009 8:00 am ET

Executives

Anurag Gupta - Senior VP Global Strategy, Investor Relations

Robert Laikin - Chairman of the Board, CEO Robert Laikin

Anthony Boor - Executive VP, CFO, Treasurer

J. Mark Howell - President of Brightpoint Americas

Michael Koehn Miland - President Europe, Middle East & Africa

Analysts

Ittai Kidron - Oppenheimer

Mike Walkley - Piper Jaffray

Brian Modoff - Deutsche Bank

Jim Suva - Citi

Matthew Hoffman - Cohen and Company

Bill Choi - Jefferies & Co

Matt Thornton - Avian Securities

Greg Burns - & Co

Andrew - Credit Suisse

Operator

Welcome to Brightpoint's Quarterly Earnings Release Conference Call to discuss the results of the first quarter ended March 31, 2009. This call is being recorded. (Operator Instructions)

Brightpoint would like to remind its shareholders that there is a toll free 24 hour Investor Relations line. The number for that is 1-877-IIR-CELL. That's 1-877-447-2355. At this time, I'll turn the call over to Anurag Gupta, Senior Vice President of Global Strategy, and Investor Relations at Brightpoint. Please go ahead, sir.

Anurag Gupta

Good morning, and welcome to Brightpoint's quarterly earnings release conference call to discuss the results of the first quarter ended March 31, 2009.

With me today are Robert Laikin, Brightpoint’s Chairman of the Board and Chief Executive Officer and Tony Boor, the Company's Executive Vice President, CFO and Treasurer. In addition, J. Mark Howell, President of Brightpoint Americas and Michael Koehn Miland, President of Brightpoint - Europe, Middle East and Africa are available for the question-and-answer session.

Please be aware that certain statements made during this call that are not historical may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. A variety of risks and uncertainties that could cause the Company's actual results to differ from the results implied or expressed in such forward-looking statements.

Please refer to the cautionary statements and risk factors in the company's earnings release and Company's filings with the Securities and Exchange Commission. These cautionary statements and risk factors are incorporated into this conference call by reference.

This presentation is being made on the 8th of May, 2009. The content of this presentation contains time-sensitive information that may only be accurate as of the date hereof. If any portion of this presentation is rebroadcast, retransmitted, or redistributed at a later date, Brightpoint will not be updating the material that is contained herein.

Before we begin, I want to remind everyone that details outlining our GAAP to non-GAAP P&L reconciliations can be found in our Investor Relations Website.

A replay of today's call will be archived for 15 days on the Company's Web site beginning approximately two hours after the call has ended.

I will now turn the call over to Robert Laikin, the Company's Chairman of the Board, and Chief Executive Officer. Bob?

Robert Laikin

Thank you, Anurag. I'm pleased with our first quarter results in what has been an extremely challenging economic environment. We've made good progress in several key areas including debt and spending reductions, cash conversion cycle days, and operating cash flow.

We will continue to focus on the fundamentals of our business, including reducing our debt and spending, generating positive cash flow, ramping up the recently awarded deals and winning new business globally, building cost efficient, customized logistics capabilities in Europe, exiting programs and/or countries that do not meet our ROIC and our ROTC criteria, in building capabilities and business models around the smartphone trend.

We handled 19 million wireless devices in the first quarter. This was approximately a 15% sequential decline, which was slightly less than the estimated industry decline of approximately 18% to 20%. This is a testament to our business model, which we believe allows us to be more resilient than the overall wireless handset market.

As the most effective and efficient logistics service provider in the wireless handset industry, we are seeing a significant number of requests from major network operators, MVNO's and manufacturers who are looking to turn their current fixed cost models to variable cost models that drive costs out of their supply chain.

Revenue in the first quarter was $709 million, a decrease of 30% sequentially. This sequential revenue decrease was primarily caused by continued weakness in the overall wireless market resulting from the global economic downturn. The decrease in our Americas division revenue was driven by sales mix shift toward our lower revenue and higher margin logistics business in the quarter. On an as adjusted basis, our income from continuing operations was $4.2 million or $0.05 per diluted share for the first quarter.

As difficult as it was in the first quarter for all companies in all industries, our overall financial performance was satisfactory. Tony, will provide more details on our financial results in his prepared remarks. Last night, we announced an update to our 2009 spending and debt reduction plan that was originally announced on February 9, 2009. Tony will provide more details on this update in his prepared remarks.

I believe these actions will allow Brightpoint to emerge as a stronger company as a global economy begins to recover. I'm very proud of the entire Brightpoint team's focus on the execution of our strategic plan. Our company is well-positioned for the future. I would like to thank all Brightpoint employees worldwide for their dedication and hard work in the first quarter of 2009 and I look forward to their continued execution of the plan to achieve our goals.

Now, I will turn it over to Tony.

Anthony Boor

Thank you, Bob. For further details on the items discussed in this call, please refer to our webcast presentation available on brightpoint.com and yesterday's press release.

Overall, I'm pleased with the financial performance and progress on key initiatives during the quarter. We were able to deliver as adjusted EPS of $0.05 despite the extremely challenging economic conditions. Revenue declined 30% from the fourth quarter, which was primarily driven by a decrease in distribution units sold. Clearly, our distribution business has been negatively impacted by the current economic conditions.

On a more positive note, our integrated logistics service line of business has proven to be much more resilient. The units handled in our logistics services business were down only 10% from the fourth quarter. The stability in our ILS business is driven by a good mix of ILS customers within our North American, Australian, and New Zealand operations.

We were able to deliver strong gross margins of 8.8% for the first quarter. Our higher gross margins were primarily driven by shift in mix, resulting from lower distribution revenue and relatively stable ILS revenue. In addition, we achieved strong ILS margins resulting from the impact of spending reductions and efficiency gains within our North American operations.

Looking forward, I expect our gross margin to be sustainable near this current level, assuming the mix between distribution and logistics remains unchanged. However, I would expect our overall consolidated gross margin to come down as distribution volumes begin to recover. I am hopeful, however, that we will be able to partially offset this potential decline in overall improvements in our distribution margins going forward.

We had continued success in the quarter relating to our cash generation and debt reduction initiatives. We generated operating cash flows of $35.8 million during the quarter. Renegotiation on terms and sale of aged inventory drove the positive cash flow for the quarter.

We ended Q1 with $138 million in total debt, which was a reduction of approximately $38 million from year-end. More importantly, we have made significant progress towards reducing our average daily debt. As you may recall, our average daily debt peaked in Q1 of 2008 at $513 million but we were able to reduce our average daily debt to 333 million by the fourth quarter of last year. I am very pleased that we were able to further reduce our average daily debt by another $117 million to an average daily debt number of $216 million during the first quarter of 2009.

We continue to make very good progress towards this initiative in the beginning of the second quarter with an average daily debt of only $170 million for the month of April. Bob and I had previously announced targeted reduction in average daily debt for 2009 of $100 million to $150 million. Our success in the first quarter already puts us squarely within the targeted reduction range for the year.

Therefore, I am revising our estimated debt reduction and now anticipate having an average daily debt of less than $100 million during the fourth quarter of 2009. This represents an additional $116 million reduction in average daily debt, compared to the first quarter of this year, including the anticipated impact of normal seasonal increases in working capital and debt.

During April, we made additional payments on our term debt of approximately $35 million, reducing our total outstanding term debt to $100 million. As a result, we will not be required to make a principal payment on our US or Europe term debt until September of 2011.

SG&A expenses in the first quarter decreased by nearly $7 million from the fourth quarter of 2008. This decrease in SG&A is substantially all related to our previously announced spending reduction and cost avoidance initiatives.

Based on our progress through the first quarter of 2009, I believe we are well on track to realize the previously stated spending and cost avoidance targets.

With we continue to focus on optimizing our European operating and financial structure, which will result in additional opportunities to improve our financial performance in the European region. Our primary objective is to leverage Brightpoint's core customized logistics capabilities that have been developed and implemented in the Americas and Asia-Pacific divisions over the past 10 years, and to transition these state-of-the-art capabilities, IT systems, and logistics processes, to our operations in Europe.

Our main strategic component of this plan will revolve around consolidating our current warehouse facilities, and creating strategically located hubs or centers of excellence. By creating centers of excellence, in the European region, we will streamline our operations with a goal to become a low cost service provider of these logistics services in the European region.

This streamlined structure will allow our vendors and customers to take costs out of their supply chains. Through these centers of excellence, we will be able to service the entire continent of Europe more effectively and efficiently.

We are also making good progress on our shared services model where we will centralize certain business support or back office functions to be shared across all of our properties in the region.

Our shared services center, along with standardization across the European region, will result in efficiencies, enhancements and best practices necessary to meet the cost and effectiveness of objectives. In addition, we expect to exit certain programs, channels, and or countries that do not meet our ROIC target of 15%.

We currently expect to incur some additional material charges as a result of exiting underperforming programs, channels, or countries in the European region and we will provide updates on these activities and related estimated charges as appropriate throughout the year.

The ultimate motivation for implementing all of these initiatives discussed above is to achieve our adjusted operating margin goals of no less than 2.5% on an as adjusted basis, as well as our targeted ROIC goal of no less than 15%.

I would like to thank all of our employees worldwide for their continuing contributions to our successful performance during these very difficult and challenging economic times. And I would also like to thank you for joining us today.

We will now open up the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer

Thanks. And congratulations on good results. Tony, wanted to focus a little bit on the SG&A. You've done a great job and big step-downs over there. I guess the question is, how much further do you think you can push this down?

Where do you think you get to a normalized run rate? And can you give us a little bit more color on sort of what are the incremental activities you can take from this point to reduce this? It seems like a lot of the low-hanging fruit has been done. Sort of what is left for you to do?

Anthony Boor

Thanks, Ittai. The SG&A from a run rate perspective right now, we're forecasting, we would drop down as low as probably $50 million in Q2, and then I would expect that we would have a slight increase in Q3 and Q4 because of normal seasonality, and the elimination of some of the cost avoidance, or termination of some of the cost avoidance initiatives that we had in the first half. And so you might think of that increasing back up to the $52 million to $53 million range.

As far as other operating efficiencies, et cetera, I would certainly hope that if in fact we do decide to exit certain programs because they don't return the right -- don't give us the right return, than we would very quickly exit the direct and indirect costs associated with those programs, so that again would have an impact on SG&A, as a result.

Outside of that, I think we probably made most of the efficiencies or seeing most of the efficiencies we're going to get, other than those that we will gain from leverage, but again on total dollar amount as unit volumes come back and the economy improves, I would expect SG&A would increase.

Ittai Kidron - Oppenheimer

With respect to Europe, Bob, and maybe even Michael, when we look at that business, clearly that region is under a lot of pressure right now. How do you -- can give us little bit more color on the steps you're taking to change the business model over there and how do you envision that transition to go let's say over the next couple of years?

Robert Laikin

I would say that we are in the process of talking to our major suppliers and analyzing and evaluating the existing programs we have with our customers. At the end of the day, we are going to operate this company as a very disciplined company. We're going to look for minimum financial returns, and I will turn it over to Tony to talk about the returns that we're going to expect, and if it is at the expense of top line, we're fully ready to do that.

Our business is going to be managed based on handsets handled, and if you look in the first quarter, our handsets were down sequentially, only 15%, and the market was down more than that. So we focus on growing handsets handled quicker than the market, and that's where our focus is, and as far as the specific financials, I will turn it over to Tony.

Anthony Boor

So Ittai, I think the targeted number which we've communicated publicly, is that we want to get to an as adjusted operating margin for the entire company of no less than 2.50% to 3%, and ROIC of 15%. And that goes similarly for each of the region, so we expect each region to deliver at least those minimal financial metrics. And so that's what we will be targeting for the EMEA region.

As far as some of the opportunities for delivering those improved financial metrics, obviously the centers of excellence that we've discussed in the press release and in the earnings release will be a critical part of that, as we consolidate the warehouse and distribution facilities, and add automation and technologies, we expect that we will obviously gain leverage and efficiencies and also be able to offer better service to our customers and suppliers, as a result, for all of Europe.

Obviously, the shared service center will have an impact to help with the financial metrics. I think all of the initiatives that Bob spoke about where we certainly hope to be able to renegotiate the terms and conditions with our customers, and suppliers, to meet those required metrics, if we're not successful in that, then obviously we will exit those programs that don't make sense.

And again I think by delivering better faster, lower cost solutions to the European region through those enhanced systems and capabilities that will be provided by the centers of excellence, we'll be able to deliver those results.

Robert Laikin

And, Ittai, I want to make it real clear, we are not exiting Europe. We are investing in Europe. We're just investing in a different manner. And we think that the efficient model that we've built and proven that works in the US for customers, suppliers, and for Brightpoint, we think apply in Europe so we're going to take look what works here and we're going to ship it over there, and give a real low-cost solution in a time where people are listening. So, all of our partners in Europe are listening, and I think it's a positive result of a horrible economy. So we're looking for good things next year, and beyond.

Anthony Boor

And I think, Ittai, this is Tony. We would hope, and the message we want to get across is, again, we're consolidating warehouse and distribution facilities, and back office administrative type functions. And we would hope to be able to provide a service out of those consolidated, very automated, very efficient facilities to a bigger business footprint across Europe. So, we actually expect to grow our business footprint and not shrink it.

Ittai Kidron - Oppenheimer

Well, I am just trying to reconcile that with your guidance. It sounds like you've kind of done all you can on the OpEx and its pretty much going to be plus, minus $1 million kind of going forward from where it is. So, all of these incremental steps you're taking now in Europe and consolidating facilities, where would that benefit come? Is it mainly a gross margin driver? Is that the way to think about it?

Anthony Boor

Actually, when I think I was -- when I spoke before, about the SG&A, that's more so on a shorter-term basis. I think the shared service center concept and the centers of excellence will most certainly drive our costs down another incremental amount.

Until we finalize the planning for those opportunities, I can't give you a more specific number as to what the impact will be, nor can I break it down, what will be the impact of gross margin versus SG&A, but we would certainly expect to gain some incremental efficiencies from the centers of excellence and shared service centers, which would drive our spending down.

Ittai Kidron - Oppenheimer

And lastly, with regards to your 2.5% to 3% operating margin target, can you at the very least say whether the US, Latin America, and Southeast Asia are at that level, or maybe you can rank them from high to low right now?

Robert Laikin

The Americas region certainly exceeds those targets. Again, we have a very large mix of logistics there and Mark and his team have done a wonderful job from an efficiency and cost-cutting standpoint. You can see in the 10-Q that will have the operating percentages broken out.

Asia-Pacific, we had some difficulties in the quarter, in Singapore, with our distribution business there. And then we had some difficulties in India as well, which we hope are behind us for Q2. So I would typically expect that Asia-Pacific would be at those -- certainly at that operating margin percentage. Asia-Pacific for certain because of their cash conversion cycle deliver a much higher ROIC than the 15%, as does the Americas. So right now the only region that we're really are falling short of our target is the EMEA region.

Operator

We’ll take our next question from Mike Walkley with Piper Jaffray.

Mike Walkley - Piper Jaffray

Great. Thank you and congratulations on the execution on the cost side. I just wanted to ask a question on a competitive landscape and the health of your end market retail partners, with the tough macro environment, and tough access to credit, can you discuss if you're seeing any change in the competitive environment in terms of distributors you compete with in different regions?

Also, are you also, with your large end retail customer, are some of them struggling going out of business and would that explain some softness in terms of the overall sales for you guys?

J. Mark Howell

A couple of things. On the competitive landscape, I think because of the strength of our balance sheet and our market position, in terms of market share in a difficult environment, we were probably benefiting from that. We've seen a consolidation of distribution partners with some of our key suppliers as they look to more credit worthy distributors to support their lines. So we benefited, we think we've increased our shares as a result of that.

On the retail side, some of the more important lines that we carry, prepaid, all-you-can need program, fixed-fee all-you-can-need programs and pay-in-advance programs, they are actually growing as a result of the economic conditions. And those are kind of the three primary product lines that are driven through retail.

So as a category, amongst mass retailers, wireless is actually doing well, given the type of tariff programs that are sold through the mass retail.

Anthony Boor

I think, Mike, I might add from an EMEA standpoint, we were certainly negatively impacted in the quarter end in the fourth quarter of last year. From a retail perspective, we've seen some real credit crisis impact in Eastern Europe, as well as in Western Europe, across some of the retailers, and has definitely had an impact on our business there. Maybe I will lead to Michael to add to that.

Michael Koehn Miland

Hi, Mike. It is Michael Koehn Miland. What we clearly see at the moment is also opportunities from manufacturers in many regions as competitors are struggling. So we see new programs develop, and that could turn out to be an advantage for us.

Mike Walkley - Piper Jaffray

Okay. Great. And maybe for Bob, just building on that, how do you see some of these opportunities in terms of your pipeline, helping your topline, and also if you maybe you could update us on some of the trends you're seeing in terms of the global macro and inventory levels. Some of the OEMs have suggested that inventories cleared quite nicely in Q1. How do you view the overall end market demand and channel?

Robert Laikin

I will attack the last part of your question first. The inventory in the global channel is of an historic low, its somewhere in the three week to three and half week range. So, inventories have been sold down significantly. And the manufacturers as well as most of our customers have taken inventory down and the pendulum has probably swung a little bit too far closer to three weeks.

The real question will be for Q2, is as demand starts picking back up, which manufacturers will have the ability to turn their factories back on, should Q2 be closer to up 5 to 10 versus up flat to 5. I think that it will have a positive impact on ASP, because there will be no incentive for manufacturers to lower prices if they're selling everything that they're making. As far as the first part of your question, which was...

Mike Walkley - Piper Jaffray

Some of the opportunities we might see here?

Robert Laikin

The pipeline opportunities, right, sorry. Our development pipeline is strong. Its been strong this entire year. I think that we will always announce new business when we enter into the official contracts and sign them. We're not going to give any specifics today. But I will tell you as we -- as Michael said, as the competitors are getting weak, we are seeing a lot of opportunities from manufacturers in several international regions.

The reason that we haven't jumped into every opportunity is what I touched on earlier, which is we're very disciplined in looking at each opportunity from a risk standpoint, whether its a country risk, a financial risk, and then making sure it fits within the financial targets that Tony outlined. And we have walked away from some opportunities this year that in previous years of growing for the sake of growing, we decided, you know what, unless it is a good deal for Brightpoint, we're really not interested in it.

Even though there have been some great top line growth opportunities and we're just not -- we're not going to look at these high risk, low margin deals and we're still negotiating several of them, just because the manufacturers are looking for someone to take over for the partner they have had that they are having tremendous financial issues.

Mike Walkley - Piper Jaffray

Very good. Very helpful. Tony, just one last question and then I will past it on. On your new European strategy for your shared services center, do you already have these locations, the ones have you in place and you're shutting down some other ones, or will you need to acquire new leased facilities, and how should we think about maybe capital spending as it relates to this plan?

Anthony Boor

I wouldn't expect it would be a significant outlay. It will be leasehold improvements. We will lease the facility. We're at the stage now where we're trying to make a final determination of what will be moved into the shared service center, but the expectation is that we would have one shared service center that would manage the back-office functions for all of the EMEA region, and possibly some of the back-office functions for Latin America as well, if we determine that that is feasible with the time zone differences.

But we would enter into a fairly short term lease on office space, is what it would be, and the only real CapEx would be outlay for leasehold improvements and some computer equipment, et cetera.

Operator

We’ll take our next question from Brian Modoff with Deutsche Bank.

Brian Modoff - Deutsche Bank

Couple of things, first, on the cost of goods sold side, on your value-added services logistics business, do you think that range you've been in the high 30s, low 40s for the last several quarters, is that's kind of the range you think you can stay at, at this point?

Anthony Boor

If the mix of the business holds and the volumes hold, we would expect to be able to sustain those kind of margins. We've seen some real improvements in the margin within logistics because of the efforts of marketing team from a costs containment, or actually costs reduction and efficiency standpoint, as well as some improvements within the Asia-Pacific region relating to their ILS business.

Brian Modoff - Deutsche Bank

Tony, can you get me rundown geographically revenues by the main regions?

Anthony Boor

Revenues for the quarter, for the Americas, was $157 million, Asia-Pacific $183, Europe $369, and then handsets wireless devices were $13.06 million for the Americas, $2 million for Asia-Pacific, and $3 million roughly for Europe for a total of 18.7.

Brian Modoff - Deutsche Bank

Okay. Great. Then Bob, kind of talk through, how do you see, obviously you think inventories are low end demand. How do you see the overall environment? What are you seeing pricing wise? You indicated you thought maybe pricing would be better this quarter? What are your views on overall pricing? And then mix. Can you give your views on what would you see the mix out there is being?

Robert Laikin

I would say the overall market, April has been probably a normal April. I don't think April for the whole was a barn-burner, but it also wasn't a horrible month by any means. I think that many companies whether you're an operator in MVNO or retailer have all taken this very disciplined approach to managing their inventory, managing their marketing, their subsidy, their commission programs and it's a good healthy balance of marketing towards the replacement cycle.

Customer and the new customer and the normal churn competition that happens. So, pricing has been relatively flat on the ASP side. For the consumer, I think the story is you can go into a store and buy a Rim product, buy one get one free, for $49 to $99, and you can guy an iPhone for $199, and you can get a non-smartphone for free. So it's a great environment for the consumer.

The way we look at it, Brian is, there is 4 billion wireless subscribers globally. The replacement cycle was slowed down significantly last year due to the economy. Most people who replaced their device are replacing their devices with smartphones, if they don't have a smartphone. If they already have a smartphone, we believe in a less than 5% of people downgrade from a smartphone to a non-smartphone.

So I think as the replacement cycles increase, as the economies come back later this year, or at the latest next year, we think there is going to be a huge backlog of smartphone buyers coming to the market. I think the companies that are well positioned with smartphones today, might or might not be the leaders a year or two years from now.

So, for example, today everyone wants to talk about Apple and Rim and Palm and Samsung and Nokia and HTC, and what will be interesting is later this year, or next year, when a lot of Android phones come out, will companies like Motorola who are focused on smartphones and Android specific smartphones, if their products are well received, they will likely to take some market share.

There might be other companies and manufacturers who enter the market with Android devices as well that could take an opportunity to take some market share. We're building our business around smartphones going from 20% to 25% or 30% this year of all devices to 75% or more over the next three to five years. We're aligning with we believe will be the smartphone leaders. We think if you're not a smartphone manufacturer three years from now, you probably can't even compete in this industry.

Brian Modoff - Deutsche Bank

Thank you very much. Good luck with the quarter.

Operator

We will take our next question from Jim Suva with Citi.

Jim Suva - Citi

Great. Thanks, guys and congratulations on the profitability, it's quite impressive. Bob, a question for you, understanding the dynamics of Europe are challenging to meet your disciplines, financial targets. Can you help us quantify about how much of sales there are under consideration for divesting and then also, in conjunction with that kind of a time line?

Would this be a two quarter assessment for identifying and exiting those business or with Europe the labor changes and the consultations with the governments and labor does it make it actually more of a bit of a longer, kind of a four quarter process that you're going through? And is it a straight exit or is there a chance that you can negotiate better terms with some of these different businesses that you have going?

Robert Laikin

Jim, I'm going to turn most of your question over to Tony. I will reiterate, we do not plan on exiting Europe. We plan on investing in Europe for the opportunities that we see. We're just going to go about it differently than we're doing it today. Tony, do you want to add?

Anthony Boor

Let me take your question on this one. Obviously, at this point we're not ready and willing to disclose the level of granularity of the programs we will exit or what percentage of revenue, and that would be difficult to estimate anyways, because we're hopeful that our current negotiation efforts will be successful with the large number of those situations.

However, that being said, if we are unsuccessful in the negotiations, we anticipate that our overall profitability will actually increase in Europe as a result of exiting those underperforming programs, despite the expected decrease in unit volumes or revenues.

Now obviously that means, as I stated earlier, in response to one of the questions, we would have to quickly and decisively eliminate the direct and indirect costs associated with any terminated programs. From a timing perspective, to get the other piece of your question, we would expect to finalize negotiations over the next 30 days to 60 days.

We've been working on many of these for quite awhile now but we're kind of putting the stake in the ground or drawing the line in the sand and we would expect to make those final tough decisions in the next two months. As far as executing on those decisions, I would expect that that would happen between now and probably the third quarter, maybe worse case into the fourth quarter, but certainly before yearend, we would expect to have addressed all those necessary action plans.

Jim Suva - Citi

Great. As a quick follow-up, on the inventory levels we've heard across the industry about lower inventories across the channel for handset units. The question is, is there a chance that we're actually could be operating fundamentally at a newer level of inventory? Or do you think that there definitely has to be a snapback for inventory? Or do people adjust just how to deal with less inventory in the channel and in the stores?

Robert Laikin

I would say that the Brightpoint model has been built on having or a big component of our value proposition has been designing systems to drive days of inventory down for our partners, whether it's a retailer, an MVNO, or an operator, or even a manufacturer to help our partners to be more efficient. I think if you look at it, is this a whole change for our industry, I would look at it a little differently.

I would say all industries, whether you're selling computers or televisions or cars, global inventory levels have been shrunk to all-time lows. I think that's a very common theme across all industries. As it relates to our industry, I think that the main issue of why inventory levels will probably not stayed this low is we saw in the first quarter several markets where the manufacturer or the operator, the retailer would heavily promote new products that were launched and then within two to three weeks of the launch, consumers would go to the stores and there wouldn't be product.

It's so hard to get people to come, look at a new device, and then make the decision to get it, and when they don't have the product, I think that operators and manufacturers look at that as a horrible situation. You do have situations like with let's say the iPhone, when its launched, its part of their marketing scheme, where they want the buzz to be so strong that people have to have it, and if it sold out, they want it even more, but I think that's the exception, not the rule, and net-net, I think that these levels will go closer to four weeks than they are towards three weeks.

Jim Suva - Citi

Great. Thank you and again, congratulations on the profitability.

Operator

We’ll take our next question from Matthew Hoffman with Cohen and Company.

Matthew Hoffman - Cohen and Company

Again, nice work on the debt workdown, guys. You've substantially de-levered the company here, Bob. And if you look back two years, to the company before Dangard and CellStar, and you think about the reorganization or the restructuring you're doing in Europe, what did you gain by those acquisitions, especially as you look at the European operations? And what were the key things you got from those mergers that are you are going to be utilizing moving forward?

Robert Laikin

I think that Brightpoint struggled miserably trying to gain a foothold in Europe for 10-plus years. We pitched a lot of different solutions. And we just weren't successful with either the customers or the manufacturers. So I think that both the Dangard and the CellStar transactions allowed us to put together the first global footprint in our industry. And our job at the time was to use those transactions to first get agreements with manufacturers, and we were successful doing that with CellStar, it was Motorola in Latin America, and with Dangard it was Nokia across Europe.

RIM is a good example of what we gained, which has tremendous upside, it hasn't reaped its rewards yet, but it is early in the cycle. Brightpoint on a standalone basis would have never been able to enter into a global RIM relationship. And I think once you have the leading manufacturers willing to partner with you on a global basis, I think then you have to figure out how to build the right value proposition, so that you can then expand that to retailers and operators.

And our whole goal is to have a global footprint, have the manufacturers as partners, and then put our logistics capabilities across the globe, and once we're successful putting a true logistics footprint and having these centers of excellence in Europe than we also, as Tony said, have a shared service center going in there that can be leveraged for not only Europe but also for Latin America and potentially other markets.

What it ends up happening as you drive costs out of the supply chain, and you also offer a global logistics solution that gives the customized services and helps your partners with whatever their marketing opportunities are or just a better way to drive costs out of their supply chain from a an end-to-end basis.

So I think we accomplished several of the goals we were looking for, from a financial standpoint. If that was the only criteria we were looking at for both of those transactions, it would be a huge disappointment. But at the end of the day, we gained value out of what we did, and part of the reasons we entered into transactions were for strategic regions, real reasons and that's I guess the full answer for you.

Matthew Hoffman - Cohen and Company

Good. I want to make sure that as you talk about the restructuring through that point out that, the operations maybe restructured, but the relationships that you got with those acquisitions are going to continue. Is that an accurate assessment?

Robert Laikin

That's correct.

Matthew Hoffman - Cohen and Company

Good. Let's talk then about ASPs, you kind of hit on them. They were down pretty sharply quarter-on-quarter. But again, margins were nice and it's clear that you found a way to do business there. As you look at those ASPs and your inventory relative to those ASPs, were individual handset prices moving down incredibly fast, at a rapid rate in the first quarter? Is that really what led to the ASP's or was it just where were you doing your business in the low end mix?

Robert Laikin

Yeah. I would say there was little to no ASP pressure from the manufacturers. And it was primarily a mix issue.

Anthony Boor

And I think, Matt, the other thing was, there was just a limited number of launches of new converged devices as well in the first quarter, which didn't help the ASP's.

Matthew Hoffman - Cohen and Company

Great and congratulations guys.

Operator

We will take our next question from Bill Choi with Jefferies & Co.

Bill Choi - Jefferies & Co

Hi, guys. Can you hear me?

Robert Laikin

Yes.

Bill Choi - Jefferies & Co

So actually reading this 10-Q, there is a section about how in Asia-Pac, you had traders bringing in products from a different region and selling it there a prices cheaper than what you get typically in Singapore, from Nokia.

Can you just talk about where this inventory might have come from? And this is somewhat counter-intuitive and you guys are talking about inventory being pretty low globally and yet this is the kind of stuff that happens when there is excess inventory in a specific region. Just talk about what you might have seen there and that whether it's something like this could disrupt your business going forward?

Robert Laikin

Yeah. I would say its all related to currency fluctuations and it started in the fourth quarter, and had pretty material negative impact on our Singapore business, because traders in Europe were playing the FX arbitrage as well as end of year rebate programs, primarily or materially in Europe and exploiting those and shipping the products to the markets that were willing to buy high volume at the lowest possible price, which was the Singapore and Asia markets.

The manufacturers are well aware of it. They took some steps at the end of December and in January to slow that down. But the inventory that was already in the channel had to work its way through. And currencies were more stable, although not completely stable between the Euro and the dollar in the first quarter, but it did get better, and we think that when -- as the currencies stay stable and as the manufacturers enforce their rules of territorial integrity in Europe, we think that it is going to stop, and we should bounce back to the levels that we were at historically in the Singapore region.

Bill Choi - Jefferies & Co

One of the areas that -- one of the regions that manufacturers have mentioned as having some level of excess inventory is Latin America. Do you see anything like that going across anywhere to any regions, inventory from Latin America?

Robert Laikin

We don't see any inventory going from Latin America as being exported outside of Latin America, and there is a couple of reasons. One is most of the Latin America product is low end. And the rest of the world, most of the rest of the world isn't interested in it. And the manufacturers typically are incredibly disciplined and then enforce the rules in Latin America should some aggressive competitors start to try to export and exploit inefficiencies. And thirdly there wasn't a currency arbitrage opportunity.

Bill Choi - Jefferies & Co

Touching on Europe a little bit, you guys are doing in terms of profitability quite well in other regions, except for Europe, it was a loss in the quarter, even if you add back the $4.6 million in charges. So as you talk about these centers of excellence, how many sites is this going to be and what do you think the fill rate will be by the end of the year, and generally how do you get to return of profit in that business and how soon?

Robert Laikin

Before I turn that over to Mark, I will underline and put in bold caps what Tony said earlier. We have minimal financial metrics that we expect all of our regions to hit, and Europe is included in that. So as it is detailed more on the centers of excellence, Mark, will address that in a very general way.

J. Mark Howell

Yeah. I think when we talk about centers of excellence, the real objective of what we're trying to do is to create the capabilities within the European region that we have in other parts of the world, so where particular facilities would be located or how many facilities, we are in the process of determining that now.

But the objective of that process is not just focused on cost reduction, or facility consolidation, but more capabilities through technology and infrastructure. Essentially, we can go out and market the types of services that have led to higher margins in other parts of the world. And in terms of a timeline, there is really no way to determine that at this point in time.

Anthony Boor

And I think I would add, Bill, this is Tony, one of the precursors to being able to put in the centers of excellence and shared service center was to get a consistent ERP platform in place for the EMEA region. If you recall, we had several disparate legacy systems.

I think we may have had seven different disparate systems across the EMEA region. We are making very good progress of installing our new consistent ERP platform. And I would expect by year end that we will have that consistent ERP platform in for the entire region, which will certainly make it much easier and much more conducive to put in shared service centers and these centers of excellence with their capabilities that we use elsewhere in the world.

Bill Choi - Jefferies & Co

So building these capabilities is possibly a negating factor of signing these logistics deals with operators in Europe currently?

Robert Laikin

I think we've learned over a 15-year history, we started in logistics in the US, in the mid '90s, and I think that if you don't build it, its difficult to win the business, and its a real balancing act between how much you want to invest versus -- how much you're willing to invest before you have the customer.

Our history has been once you have the brick and mortar in the IT systems set up, the rest of the cost is very nominal, and since we rent our facilities, the real cost for a competitor to get into that industry is the IT , the proprietary IT systems, and we've already spent tens of million of dollars, closer to a $100 million, building that and its proven because the companies we are doing business with today are in the US, are some of the same companies we're pitching and expect to pitch in Europe, and I think we have a lot of credibility with all of the major operators in Europe, because what we do in the US works.

Bill Choi - Jefferies & Co

Right. But what's the timing of it? So, when do you get this done which then follows with these logistics orders. Are we looking at this getting done this year and logistics orders coming in next year?

J. Mark Howell

I don’t think -- I think, Bill, from the standpoint of being able to win new logistics deals, I certainly would not expect this to be a precursor. We have logistics opportunities that we -- and services we currently provide in Europe now. We provide logistics services, and have for several years to T-Mobile in Europe and other operators and OEMs, and so I certainly don't see this is a barrier to winning new deals.

We're proposing when the process proposal process and/or later stages of proposal processes on several deals in Europe. I would view this more so as this gives us a better chance and an improved suite of services that we can offer. And would also make us stand out further from our competitors and would also reduce our cost structure and allow us to improve the supply chain of the OEMs and operators.

So I would look at it more so that it gives us more capabilities, enhances what we have to offer to the market. But we're definitely not precluded from winning logistics today. It just will make it easier.

Bill Choi - Jefferies & Co

All right. Love to see the logistics business translate to Europe that would be great. One final, just clarification here, I need. Tony, you mentioned $50 million in SG&A in Q2. Just clarifying on that, does that include or exclude stock comp?

Anthony Boor

Including, including. When we were at 50, just over 52 million for Q1, and I would expect that to decrease down to the 50 million range, and then Bill, we had, if you recall, we had some, what we call cost avoidance type item, we did not -- we made the decision not to pay out bonuses to staff in the first half of the year or the executive team for the entire year.

And we would expect that if the business, if we continued to deliver on our metrics that we would be accruing for bonuses in the second half of the staff, which would be part of that increase in the second half, and then as well seasonality for the second half of the year.

Bill Choi - Jefferies & Co

All right then 52 million to 53 million in Q3, Q4 type of range also includes stock comp?

Anthony Boor

Correct. And then, I think, one of the other big things that we're focused on obviously is the debt and you've seen the very positive impact we've had from that perspective, and we would certainly expect to generate positive cash flow in the last three quarters of this year, and certainly we are going to be focused on paying down our debt further as stated in the press release.

Operator

We’ll take our next question from Matt Thornton with Avian Securities.

Matt Thornton - Avian Securities

Hi, Good morning and congrats again on the quarter there. First just to pick up on that last conversation, just so I'm thinking clearly here, when we're talking about some of these hubs and the centers of excellence over here in Europe, this is really isn't just an efficiency play here, we're not scaling down here, we're actually getting more efficient. And this is a play the game business, and grow share. Am I thinking about that right? This isn't a down sizing, this is a scaling up for business and efficiencies, is that fair?

Robert Laikin

Yes. That's fair. We are really focused on bringing these advanced technologies, which are primarily IT driven, as well as automation, that will give us the opportunity to drive costs out of the European supply chain for operators, retailers, and MVNOs.

Matt Thornton - Avian Securities

And then Bob, could you give us an update quickly on where we stand and what you're seeing with a couple key accounts like Verizon and RIM number won last year and maybe walk us through progress and what you're seeing on the Greenfield front. I know you've had some push into Latin America but maybe you could just update on where we are on a couple of those items?

Robert Laikin

Yeah. I would say in Latin America, we're making very good solid progress with manufacturers and potential operators in that area. And I would expect 2009 will be a good year in Latin America relative to where we were starting the year.

As it relates to Verizon and Rim, clearly, the results that we've had todate are lower than what our expectations were. We will continue to work with both partners in the US. One of the top Dream operator partners is Verizon. And we want to figure out how to make that a successful relationship. On the manufacture side, Rim is another Dream partner, on a global basis.

So what we're going to do is we're going to continue to work with both partners to identify opportunities, whether it's in new regions or new channels within the region, and help drives more points of sale for them, leveraging our database of points of sales and customers today. Again, it's a great opportunity for us, but really, that's all the color I can give right now.

Matt Thornton - Avian Securities

Got you. And we can -- we till expect those two to be contributors in the back half of the deal, or is this going to be pushed out a little bit? Or I guess how can we think about them coming on board and making an impact?

Robert Laikin

Yeah, I would go back to what Tony's has been harping on this entire call, which is we're going to attempt to hit financial metrics with all partners, whether they are manufacturers or operators, or MVNOs or retailers in all regions, and our goal is to not trade dollars by driving handset unit growth and revenue, its on making a reasonable return for our shareholders and that will include every opportunity that we have today.

Matt Thornton - Avian Securities

Okay. And then one last question, Bob, just stepping back and thinking kind of big picture, and you touched on this a little bit, but how you balance or how you guys thinking about balancing.

On one hand maintaining extremely a disciplined focus on deals and not entering into again like you mentioned high risk, low margin kind of deals, and then on the flip side, still positioning yourself for more market share gains and growth, particularly to take advantage of, you know, let's face it, some weakened competition, and an eventual rebound in industry volumes.

I guess how do you balance that dynamic and how do you think about that here?

Robert Laikin

I would say, again, we are going to be financially disciplined. We think that the economy this year isn't going to turnaround significantly. And hopefully it will turnaround next year. And companies that extend credit on low margin business, or enter markets that have political risks, or banking risks, in certain countries, those companies, we don't think are going to be around, as we look two to three years from now.

We've seen competitors go into business propositions that we've walked away from the last two years, and we sit and shake our head and we say, you know what, if people are willing to do that, and think they're making money, we believe our expertise tells us that when we analyze these deals that they're not good opportunities for companies. We grew -- our sequential handset volume in Q1 was down less sequentially than the industry was during a period that we were incredibly disciplined.

So we think that we will continue to grow faster than the market in handsets handle, which we've done for the last five-plus years. We have a pipeline of business that is as full as it has ever been, with companies that understand that we are only going to do business where it makes sense. Companies want to do business with Brightpoint because we offer low cost, high value, high customization at the last possible time, where we think there isn't a global competitor out there that can offer what we offer.

On several of the deals that we were awarded this year and last year, we were not always the lowest cost. We would have situations where an ankle biter competitor would go in and offer a lower cost, but they had no track record or no experience to actually deliver what they were offering.

And I think that, when due diligence is done, which is typically done by a consultant, an independent consultant, Brightpoint wins nine out of 10 deals. In the one out of 10 deals that we lose, half of those deals, we walk away from, and half of those deals, it's not a legitimate bid process. So no matter what we could give the services anyway and some of these opportunities and wouldn't get the business.

Matt Thornton - Avian Securities

Got you. So we can have our cake and eat it too in terms of maintaining the discipline but still expecting to outpace the markets. That’s very helpful. And thanks a lot. Congrats again, guys.

Operator

We will go next to [Greg Burns] with Sidoti & Co.

Greg Burns - & Co

Hi, guys. I think it's all pretty much been covered, I tried to actually get out of the queue. So I will let you know.

Operator

We will take our last question from Deepak Sitaraman with Credit Suisse.

Andrew - Credit Suisse

Hi, guys, how is it going. This is actually [Andrew] on for Deepak.

Robert Laikin

Hi, Andrew.

Andrew

Hey, well, thanks for taking my question. I guess I'm the last one here. I am not sure if you mentioned this I hope not, I don't think so, but I was hoping you could give a quick update specifically on the wins that you've announced at Verizon and RIM. If there is anything else there we should -- any updates, I guess.

Robert Laikin

We have no updates except to say that we're focused on working with both of those leaders on identifying new opportunities, to find new channels and points of sale, and making those programs profitable for both parties, as well as rolling them out either across the market, or across the globe in the case of RIM.

Operator

Thank you, ladies and gentlemen. That will conclude today's question-and-answer session. Brightpoint would like to thank you for your participation in the first quarter 2009 earnings conference call. A replay of today's call will be archived for 15 days on the company's web site, beginning approximately two hours after the call has ended.

Brightpoint would like to remind shareholders that there is a toll-free 24-hour Investor Relations line. The toll-free number is 1-877-IIR-CELL. That is 1-877-447-2355. That concludes today's conference. You may now disconnect.

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Source: Brightpoint, Inc. Q1 2009 Earnings Call Transcript

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