CommScope, Inc. Q2 2008 Earnings Call

Tag : UBS Accounting Software

CommScope, Inc. ( CTV )
Q2 FY08 Earnings Call
July 29, 2008, 05:00 PM ET
Executives
Philip Armstrong - VP, IR and Corporate Communications
Jearld L. Leonhardt - EVP and CFO
Frank M. Drendel - Chairman and CEO
Brian D. Garrett - President and COO
Analysts
George Notter - Jefferies & Co. Inc.
Amir Rozwadowski - Lehman Brothers
Kim Watkins - JPMorgan
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
Amitabh Passi - UBS
Kenneth Muth - Robert W. Baird & Co
Presentation
Operator
Good afternoon, my name is Christa and I will be your conferenceoperator today. At this time I would like to welcome everyone tothe CommScope Second Quarter 2008 Earnings Release Conference Call.All lines have been placed on mute to prevent any background noise.After the Speakers' remarks there will be a question-and-answersession. [Operator Instructions]. Thank you.
Mr. Armstrong you may begin your conference.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
Thank you. Good afternoon and thank you for joining us on thiscall. Frank Drendel, CommScope's Chairman and Chief ExecutiveOfficer; Brian Garrett CommScope's President and Chief OperatingOfficer; and Jearld Leonhardt CommScope's Chief Financial Officerjoin me on the call.
During this conference call we may make forward-looking statementsregarding our financial position, plans and outlook that are basedon information currently available to management, managements'beliefs and a number of assumptions concerning future events.
Forward-looking statements are not a guarantee of performance andare subject to a number of uncertainties and other factors whichcould cause the actual results to differ materially from thosecurrently expected. For more detailed description of factors thatcould cause such a difference, please see the press release weissued today and CommScope's filings with Securities and ExchangeCommission.
In providing forward-looking statements. the company does notintend and is not undertaking any duty or obligation to updatethese statements as a result of new information, future events orotherwise. Also please note that all dollar figures and percentagesare approximations. After we review second quarter results andFrank makes some closing comments, we'll open the lines forquestions. Joe?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Thank you, Phil. This afternoon I will review the second quarterresults. And before turning the call over to Frank, I'll also coverour current outlook for the third quarter of 2008, as well as thefull year. Today CommScope announced second quarter results for theperiod ended June 30, 2008.
This is our second quarterly conference call after making thetransformational acquisition of Andrew Corporation which weacquired in late December 2007. We reported second quarter sales of$1.1 billion today and net income of $40 million or $0.50 perdiluted share.
Reported net income includes after tax charges of $23 million forrestructuring and acquisition related costs, $18 million for theamortization of purchased intangibles; $3 million for purchasedaccounting adjustments related to inventory, and a benefit of $4million related to the settlement of tax audit. Excluding theseitems adjusted second quarter 2008 earnings were $80 million or $1per diluted share.
Sales more than doubled on a year-over-year basis as a result ofthe Andrew acquisition. Sales increased 2% on a combined basis thatincludes Andrew's actual sales for the second quarter of '07. Theyear-over-year sales growth was primarily driven by increasedinternational sales which was comfortably affected by changes inforeign exchange rates. North American sales declinedyear-over-year due to lower domestic wireline and broadband salesand due to the divestiture of the Satellites Communications orSatCom product line in the first quarter of this year.
Excluding the favorable impact of changes in foreign exchange ratesof $35 million and adjusting for the divestiture of the SatComproduct line, sales growth was 1% year-over-year on a combinedbasis. Sales increased 8% from the first quarter of 2008, whichreflected positive international seasonal trends as well as themodest sequential sales improvement in North American sales.
Antenna, Cable and Cabinet Group or ACCG segment sales increased 7%year-over-year to $500 million primarily due to stronginternational sales as wireless operators continued to invest inexpanding and upgrading their networks. Increased domestic wirelesssales in the quarter were offset by lower sales to wirelineoperators. Wireline product sales declined mainly due to slowerdeployment of legacy DSL networks by our customers and due to theeffect of lower average selling prices as expected for ourIntegrated Cabinet Solutions. However, we continue to seeopportunities as wireline carriers upgrade and build nextgeneration networks.
We've extended our cabinet portfolio with a new line of cabinetsfor our fiber-to-the-premise applications as well as fuel cellsolutions for standby power for wireless cell site. We continue toexperience strength in our wireless business across all majorregions particularly in the emerging markets. For example, sales tocustomers in India and Africa grew by more than 20% year-over-yearin the quarter. We believe the emerging market demand is drivenprimarily by 2G coverage needs for Voice Systems and Services.
In more materials markets, demand is being driven by capacity needsas carriers deploy 3G networks capable of handling increased datarate. Our enterprise segment sales rose 2% year-over-year to $243million driven by higher international sales volumes.
Despite a challenging North American market and toughyear-over-year comparison due to an exceptionally strong year agoquarter, we delivered solid enterprise results. Operating income inthe quarter grew 14% sequentially supported by double-digitinternational sales growth and continued expansion in the datacenter market as well as the shift towards higher performancesolutions.
Sales in the quarter of our system SYSTIMAX GigaSPEED X10D gigabitper second Copper Solutions, increased substantiallyyear-over-year. While we have seen a year-over-year slowdown indomestic spending, we expect on going data center strength andbelieve that enterprises will continue to upgrade their local areanetworks to handle bandwidth intensive applications such as videoconferencing, collaborative software, IP based security platformsand intelligent buildings.
Broadband segment sales of $164 million were essentially flatyear-over-year while international sales increased. The NorthAmerican market continues to reflect the slowdown in residentialconstructions and some what cautious spending by measure in
MSOs.
However, broadband sales did increase 21% sequentially due to amodest improvement in spending as well normal seasonal trend.Broadband results for the quarter reflect restructuring charges of$22 [ph] million related to the plant closing of the Jaguariuna,Brazil and Seneffe, Belgium facilities, which we announced duringthe second quarter.
Broadband results for the quarter also include product warrantycharges of $3 million related to an isolated manufacturing defects.Excluding only the restructuring charges, broadband operatingincome more than doubled sequentially.
Our wireless network solutions, our WNS segment sales decreased 5%year-over-year to $185 million. WNS results include sales relatedto the SatCom product launch which was divested in the firstquarter of 2008. SatCom revenue was $3 million in the June 2008quarter however, as a result of transition services. But was $23million in the June 2007 quarter.
Excluding telecom revenue in both periods, WNS revenue grew 6%year-over-year. The WNS segment was positively affected byinternational wireless operator investments in the deployment ofnew wireless networks and covered solutions in developingcountries.
We are particularly pleased with the operating improvement in theWNS segment, excluding special items, we improved WNS results froman operating loss of $1 million in the first quarter to anoperating profit of $12 million in the second quarter of 2008.
Overall for the company, customer orders booked in the secondquarter of 2008 was $1.1 billion, down 2% from the year ago quarteron a combined basis, but up 3% sequentially. Our book-to-bill ratiowas 1.0 times for the quarter.
Gross margin for the second quarter of 2008 was 28.6% and includes$5 million of purchase accounting adjustments related to inventory,as well as $4 million of intangible amortization reflected in costof sales. Excluding these items, gross margin would have been29.4%.
SG&A expense for the second quarter of '08 was a $132 million or12% of sales, while research and development was $34 million forthe quarter or 3% of sales. Total amortization of purchaseintangibles for the quarter including amounts and cost of sales was$29 million. The amortization relates primarily to the Andrewacquisition.
Operating income in the second quarter of 2008 was $98 million,excluding purchase accounting adjustments intangible amortizations,acquisition related expenses and restructuring cost, second quarteradjusted operating income was $154 million, up 37% sequentially.
On a comparative basis year-over-year adjusted operating incomerose 32% primarily due to improved performance from the ACCGEnterprise and WNS segment, somewhat offset by weaker broadbandperformance. Excluding special items, operating income for thesegments was, beginning with ACCG $85 million or 17% of sales.Enterprise $43 million or 18% of sales. Broadband $14 million or 8%of sales. And WNS $12 million or 7% of sales.
We are also pleased to announce that CommScope's integrationactivities are ahead of schedule. And the company remains confidentthat it can achieve or exceed its merger related cost reductiontargets.
As previously disclosed and excluding a one-time transition cost,we expect total merger related savings of $90 million to $100million in calendar year 2009. We expect $50 million to 60 millionto be achieved in calendar year 2008.
The total cost savings are expected to come from a combination ofprocurement savings, rationalization of locations, streamliningoverhead, integration of infrastructure and building upon bestpractices in technology and manufacturing.
In addition, CommScope recently announced plans to consolidatecertain and tenant cable production within its ACCG and Enterprisesegments into other existing facilities.
Changes come... as the changes that is some of which are subject toemployee consultation processes now under way will affectfacilities in England, Scotland, Australia and the Czech Republic.And are expected to resolve in a net reduction of at least 85employees across the company. In total, little more than 700existing jobs would be affected by these planned actions, with themajority of these positions potentially relocated to other existingcompany locations.
When plans are finalized and approved later this year, the companyplans to provide expected savings and costs from theconsolidations. The savings from these new initiatives areincremental to the previously announced synergy range. The companyexpects to incur restructuring charges to support the changes butalso anticipates significant benefits from the actions undertakenwhen fully implemented by late 2009.
And before I turn to cash flow and balance sheet items, I want tomention an issue that may create greater variability in ourresults, namely increasing international sales. CommScope isexperiencing a robust growth in emerging markets as it continuesmarketing its solutions globally.
For the first time in our history sales outside the U.S. representmore than half of our total sales, with international sales risingto 54% of total country sales for the second quarter of 2008. Nowwe are pleased with this growth and believe that the geographicdiversity is one of CommScope's major strength.
International sales growth has helped mitigate the effects of theslowing United States economy. Additionally, the shift ingeographic mix of taxable earnings has also helped us reduce ouroverall tax rate. Excluding special items, our overall tax rate forthe second quarter was about 30%. This reduction compared to theexpected statutory rate of 35% boosted diluted earnings per shareby about $0.07 in the quarter.
However, along these positive impacts... along with these positiveimpacts comes increased exposure related to foreign currencyexchange rates as well as higher accounts receivable due to thehigher DSOs associated with international sales.
Our second quarter results somehow reflect the more volatile natureof our increasing globalization.
Now with that diagram I'll now turn to cash flow and balance sheetitems. Net cash provided by our operating activities was $42million for the quarter, which reflects a significant increase inaccounts receivable resulting from the higher international sales.
Total depreciation and amortization expense was $53 million for thesecond quarter while capital expenditures in the quarter totaled$11 million. As we look ahead, we expect operating performance tobe stronger in the second half of '08 than in the first half of theyear. However, economic conditions and rising raw material costremain a concern.
So for the third quarter we expect sales to rise to $1.08 billionto $1.13 billion up modestly year-over-year on a combined basis.And adjusting up and... therefore adjusted operating income to riseto $150 million to $170 million excluding the restructuring andtransition costs as well as purchase accounting adjustments relatedto the fair value write-up of inventory and intangibles which ofcourse, results in increased charges for inventory andamortization.
This adjusted operating income range represents growth of 19% to35% from the adjusted combined basis in the year ago quarter. Wehave updated calendar year of 2008 guidance based on actual resultsand our current outlook.
We expect revenue of $4.15 billion to $4.25 billion which isslightly better... slightly tighter range compared to our previousguidance of $4.1 billion to $4.3 billion. We raised calendar yearadjusted operating income range slightly to a new range of $540million to $580 million excluding restructuring and transitioncosts as well as purchase accounting adjustments.
This operating income target assumes that the company will be ableto successfully recover costs that are associated with the risingraw material costs that we've seen. Our previously adjustedoperating income guidance was $525 million to $575 million for theyear. We expected overall tax rate of 31% to 33% based primarily onthe assumption of stronger international income.
This is lower than our previous guidance of 34% to 36%. We expect81 million weighted average fully diluted shares outstanding. Weexpect full year cash flow from operations of approximately $500million, reflecting higher accounts receivable and we expectcapital expenditures of $60 million to $70 million for the fullyear compared to our previous estimate of $80 million to $90million and we continue to expect significant cash and non-cashrestructuring costs.
Overall, we are very pleased with our second quarter performanceand assuming relatively stable business conditions and currencyexchange rates. We believe we are in good position to achieve our2008 goal.
We have a strong global portfolio and continue to expect theongoing global demand for bandwidth to drive the beat [ph] forinfrastructure solutions, even in uncertain economic times. We willcontinue to focus on executing our integration strategy. Deliveringthe synergies we outlined in positioning the company for along-term profitable growth. We recently announced new globalmanufacturing changes, that we believe will provide significantadditional savings once they are completed in late 2009.
Now I'll turn it over to Frank Drendel for his comments.
Frank M. Drendel - Chairman and Chief Executive Officer
Thank you, Jearld. Thank you very much for joining us today on thecall. I want to congratulate all the CommScope and Andrew employeesfor an outstanding execution on the second quarter. The teamscontinue to generate substantial performance and privilege and agreat execution. The adjusted operating income rose 30%year-over-year.
And the teams are continuing to live with the synergies and costreductions that we targeted. And we have a great team of managersin the industry leading products. Overall, I am very, very pleasedwith this quarter's performance. And I think we continue to showthe effective integration of CommScope and Andrew as one companybetter together.
I continue to believe to omit or exceed the synergy plans for theyear and create a long-term profitable growth company. And withthat operator we will turn it over to you for the calls.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
Christa?
Question And Answer
Operator
[Operator Instructions]. Your first question comes from the line ofGeorge Notter with Jefferies.
Frank M. Drendel - Chairman and Chief Executive Officer
Hello, George.
George Notter - Jefferies & Co. Inc.
Hi, guys, thanks very much. I want to ask a quick question ontop-line. You have tightened the range here you were at $4.1billion to $4.3 billion. I think going back to last quarter youguys had suggested that depending on how the pricing increases areflowing through to customers, they flow through well you could kindof push people towards the higher end of that range, here you aretightening that range I guess I'm trying to figure our what the newguidance implies about the success you are having or not having onpassing... pricing increases through to customers?
Brian D. Garrett - President and Chief Operating Officer
George, this is Brian, good afternoon to you. Today the success ofthe price increases that we announced in the April timeframe,largely have gone well. The impact in the enterprise market anddigital broadband, I will say largely won't be felt until thecurrent quarter. And so I will also say in wireless its beendifficult from a global perspective.
But in entirety, I think, we are pretty well pleased with theresponse that we've got. Maybe counter to the nature of yourquestion is, we continue to see the potential for rising costs inthe second half of the year. And the discussions for further priceincreases are on the table currently, inclusive of fuel chargesthat were transportation charges that we're bringing in theselected markets.
Yes, I though it so, because you contrast with stating yourquestion about the top-line I think we're... we contrast thatGeorge with Jearld's comments about increasing internationalcontent in our business. And there is a higher degree ofuncertainty I think in our international business. And I will alsosay depending upon the market segment, as we move through thesecond quarter North America has not continued to respond favorablyas favorably certainly as it did in the first quarter. So you'vegot a mix of inputs that get us to the guidance that we have forH2.
George Notter - Jefferies & Co. Inc.
Got it, okay. So sound likes you have all those factors outmentally in terms of other translates into your full year guidance.And then just switching gears a little bit on the cost synergy sideI think last quarter you guys gave us a number of $9 million in Q1cost synergies. I guess it annualizes to $36 million. I guess I'mtrying to get an updated number on that through Q2 and how doesthat compare with the $50 million to $60 million guidance further?
Brian D. Garrett - President and Chief Operating Officer
Well Q2 the number was slightly north of $15 million, so that getsyou to the performance in that quarter was a $60 plus millionrun-rate. So, we've got confidence in delivering our $50 million to$60 million number that we committed to you at the outset. I'll saythat the one thing that happened in the quarter is you know thelargest bucket that we continued to talk about is supply chain.That bucket continues to grow.
The other thing that happened in the second quarter was the impactof changes that we made in our distribution centers and freightmanagement globally. That category... the new category if you will,that hit in the second quarter is now the second largest categoryin the total pile of synergies. And expectations for that continueto grow throughout the year. So truly that results that brings usto our pleasure and confidence in terms of what's happening andcreating synergies between these two companies.
George Notter - Jefferies & Co. Inc.
Okay. And then one last quick follow-up. So given that you areahead of plan for the year on synergies it looks like you'realready having near exceeded or exceeded the plan for synergies. Iguess I'm trying to understand how that feeds into your operatingincome guidance, the $540 million to $580 million for the fullyear. Its seems like?
Brian D. Garrett - President and Chief Operating Officer
Its depending upon what numbers you want to pick. I mean the goodnews is that operating income in the second half is going to be up$25 million to $30 million. That's what we're at.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Yes, looking at this point from a range George we're raisingrevenue guidance second half over the first half and we areactually raising operating income guidance more than revenue. Sothat implies that our margin is going to actually improve in thesecond half of the year, which is very consistent with all thethings, I think we've said before. So we're very pleased with theoutlook that we'll continue to improve our operating performancegiven the challenging economy broadly that's out there.
Frank M. Drendel - Chairman and Chief Executive Officer
George we review this in depth and everything that we said we plan.Brian came and set in ahead of plan. Our capital expenditures areadd or below plan. All the metrics are running the business or ator better than what we expected at the beginning of thistransaction. The issue we're facing is a very uncertain worldwidemarket and we're just trying to keep within the range and what wefeel is one of our correct low carriers [ph] at the market. Thecosts, the price increases, we're managing all those materialsvery, very well and we're getting the price increases and we're notafraid to put additional price increases into the market. Itslooking at the global economic situation and just trying to be ascautious as we can.
George Notter - Jefferies & Co. Inc.
Great, thanks very much. I will pass it on.
Frank M. Drendel - Chairman and Chief Executive Officer
Okay.
Operator
Your next question comes from the line of Amir Rozwadowski withLehman Brothers.
Amir Rozwadowski - Lehman Brothers
Good afternoon, gentlemen.
Frank M. Drendel - Chairman and Chief Executive Officer
Good afternoon, Amir.
Amir Rozwadowski - Lehman Brothers
Wanted to delve in a little bit into the enterprise side of thebusiness. It seems as though we've seen a pick down inyear-over-year growth in Q2 versus Q1. Could you give us a littlebit further color there? What are the factors and then particularlyhave you seen through the shift in the demand landscape?
Brian D. Garrett - President and Chief Operating Officer
Well the big part of enterprise this year is really softness inNorth America. Sequentially the business has done very well. And alot of concern coming into the year of what's going to happenthroughout the course of the year. The fact that we've got 15%top-line growth sequentially from the first quarter, I think speakswell to the diversity and the robustness of the segment for us.
But there is no doubt that our international part of the businessis performing at top-line much better than North America. So thatbeing said, if you look at the project activity that's going onglobally and one thing I'll say about our enterprise business oneof many is that its advantaged by an enormous direct salesorganization some 400 people that support this. And with that scaleyou can reach a lot of activity and look at what they have done interms of the creation of new project opportunities.
They have been able to grow that in excess of 200 over the level inthe first quarter. So activity in terms of projects are not slowingdown in the enterprise space. They're expanding. Now I will sayAmir that, the number of big projects numbers and projects that arebigger than $5 million or $10 million contrasted to prior year isprobably down but with this large sales organization globallypositioned what it means is they're picking up larger numbers ofsmaller projects.
Amir Rozwadowski - Lehman Brothers
So, if we look at through the year-over-year in the sequentialgrowth trend, previously you had commented that Brian thatpotential for growing that business in the range of 8% to 10% thisyear, how should we think about that given, now that we stand sortof half way through the year?
Brian D. Garrett - President and Chief Operating Officer
Yes, I think I'm going to look pretty funny when we get to the endof the year, to be honest with you Amir. Really North America hasbeen softer than my expectations. The international part of thebusiness is growing double digits and certainly living up to ourexpectations, but the part that's disappointing is North Americaand quite frankly the U.K. The U.K. is another one of very strongmarkets and in that particular part of the EMEA has been softerthan anticipation, the anticipation I had earlier in the year. 10Gactivity I'll tell you still remains strong. Again back to theproject focus. Globally the things that we see happening in thenumber of projects in 10G, in iPatch continue to strengthen and theresult of that is you know margins when you look at the operatingmargins of the business they continue to perform very strongly on ayear-over-year basis in light of what looks like adversity in theNorth American market. I mean the long-term picture for this marketcontinues to be robust.
Frank M. Drendel - Chairman and Chief Executive Officer
Amir, it's Frank. Clearly if you look at our performance comparedto any of our competitors in those first two quarters, we're doingvery, very well especially at the high end and the 10G and thehitech part of this thing continues to grow at double-digit rate.So again overall I think our position in this whole infrastructureis as best as it can be. We just have to get a little bit morestrength in the market.
Amir Rozwadowski - Lehman Brothers
That's very helpful gentlemen I appreciate that. If I may, just inswitching gears quickly and looking at the wireless landscape. Imean you've seen fair number of pairs, particularly the NorthAmerican report. A fairly healthy first half CapEx trend. How doyou view the purchasing environment for the back half of the year,given the number of bills that you're involved with?
Brian D. Garrett - President and Chief Operating Officer
I think its going you to be mixed depending upon what product linewe're speaking of Amir. Largely when we came into the year, westarted off with a very strong run-rate on a year-over-year basisperspective in North America and we projected essentially flatperformance throughout the remainder of the year. When you look atwhat happened in the second quarter in North America it was a mixof activity. We actually had a little bit of softening in the towerspace in terms of cable and antennas, but that was contrasted byjust thermo nuclear [ph] demand for back haul, for microwave. Soyou're seeing quite a diversity of activities in the North Americawireless segment.
Frank M. Drendel - Chairman and Chief Executive Officer
Amir clearly the carriers in North America are really lookingstrictly right now in enhancing capacities, while they decide ontheir long-term decision of LTE versus WiMAX or whatever, 4Gnetwork deploy and remember also said serving that spread basicallyout of the market right now while they recapitalize and look atwhat they are going to do and you haven't seen the closure of theClearwire WiMAX build. So all those partly towards the interviewbut certainly are very strong indications of how that should look.
Amir Rozwadowski - Lehman Brothers
That's very helpful. I'll pass along to someone else. Thank youvery much.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Thank you.
Operator
The next question come s from the line of Kim Watkins withJPMorgan.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Good afternoon.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
Kim, good afternoon
Kim Watkins - JPMorgan
Good afternoon everyone. Just wanted to dig a little bit into thewireless network solutions margins, it looked like prettysubstantial improvements there. Can you talk about some of themoving parts specifically the power amplifier business and thesolder business and how those are trending versus your expectationsand also where you are in terms of the decision process as towhether or not these are businesses that you think you can improveto acceptable levels or perhaps to that?
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
Kim, I would say relative to my expectations I'm immensely pleased.Eddy Edwards heads that team and they've done an extraordinary jobyear-to-date. The mixed activities again within WNS, the Wig or thein building coverage business continues to perform very, very well,top-line growth and excellent operating margins. The filterbusiness was profitable in the quarter which was quite a turnaroundfrom historical perspectives. Part of that obviously was justoperational focus, the other part of it clearly volume helps andthey had good volume in the second quarter. So the remaining issueas we go through the year and into '09 for filters is really what'sthe volume outlook for this business and in getting the businessscaled, can we scale the business competitively to that volume. Sothere has no... been no decision as it relates to filters but I'llsay the outlook right now is certainly much better than it was twoquarters ago. Outlook in terms of the retention of that business.
The power ramp business, Ken has good news and bad news. Thetraditional power ramps for OEM applications are doing very well,exceeding our expectations but that's outweighed by what I wouldsay under performance relative to expectations and MCPAs and thatwas the product line that was specifically directed. It's value isspecifically directed to North American Carriers in the '08 period.And our single largest opportunity in North America has elected todelay that. So we've got a mix of activity as it relates to powerramps and I'll just continue to say we're in a study mode. Mycommitment to all of you as to sort that subject out over thecourse of the third quarter and we're still in that mode.
Kim Watkins - JPMorgan
Okay, okay fair enough and so is it safe to say that power rampswere still unprofitable this quarter?
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
That's a fair assessment.
Kim Watkins - JPMorgan
Okay and then I just wanted to switch over and talk a little bitabout the cabinet business. It sounded like from the commentary andthe results that that might have been a little bit weaker thanexpected particularly on the DSL side. Can you just talk about whatyou're seeing there and what you expect for the remainder of theyear?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Well the DSL is going away and one of the big providers of DSL ofcourse is AT&T and the DSL provisioning particularly in Bellsouthwas their only high bandwidth solution. Now with the deployment oflight speed, high speed data is integral to the whole wide speedperspective. So DSL as a subject in North America is largely goingaway and that is consistent with our expectation. And so when youstart making comparisons of what the performance was in the secondquarter of this year with the second quarter of prior year, you'vegot a substantial hurdle to replace what's happening with DSL in'07. If you look at specifically what's happening in light speed, Idon't think and I think what you read is likewise in terms of AT&Tannouncements. No one's blinking at AT&T, their plans fordeployment are being executed. And nothing that I know suggeststhat the second half will be any different than the first half.
If you look at the number of units that we've sold in the firsthalf of this year they are consistent with the number of units thatwe sold in the first half of last year, which I think speaks thestrength. And then, if you do a comparison quarter-to-quarter Iwill tell you that the number of units in the second quarter thisyear are down about 5% from the same period prior year. Some partof that, I think, clearly is a result of share loss which we'vealso anticipated.
Kim Watkins - JPMorgan
Okay. That's really helpful. And just one other more housekeepingquestion, any 10% customers this quarter?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Yes, we had a couple, I think annexure [ph] was there, and I'mtrying to think if Alcatel hit our list or not in this quarter.Still, we're doing a quick check here.
Kim Watkins - JPMorgan
Thank you.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
They were plus, there were a couple that were close Kim. Annexurewas 10%, Alcatel and the other likely sets were in that range. Idon't think they crossed the line there, little bit still in that 8to 11 range.
Kim Watkins - JPMorgan
Okay. Great. Thank you very much.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Yes, Ma'am.
Operator
Your next question comes from the line of Jeff Beach with StifelNicolaus.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Jeff?
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
Hello, and congratulations.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Thank you Jeff.
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
Yes, lot of my questions have been asked already, a couple ofthings. On the wireless businesses, this would be, I guess, boththe part in ACCG and WNS. Looking at the international, are youlooking at a strengthening trend looking out through the end ofthis year into next year? Maybe you can tell that by thebook-to-bill ratio, but I'm curious as to whether there's anacceleration occurring worldwide, and in the wireless?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Well, our book-to-bill, we can get a sense the next year.
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
Yes.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
And, we don't like backlog. I think you know that story. The...it's difficult to see a growing strength to be honest with you, inthe second half. There is a... there's tremendous demand right nowparticularly in India and in the wireless segment, and we'reresponding to that in the same to Latin America. We're respondingto that as best as we can with incremental capacity in the secondhalf. And there is real potential for growth in the second half ofour wireless business over the first half. And quite frankly,that's where we see the most ranks as a comparison sequentiallyinto the second half. It's just... things are so strong right now,it's hard to anticipate what's going to happen in '09 and we've notaddressed it yet, to be honest with you. So, Jeff I'll not commenton '09.
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
Okay. Second--
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
Jeff just hold a moment will you. Taking the international part outof it, if you stand back for a moment, and look at the buildrequirements for 700 megahertz, all those licenses have beengranted and paid for. If you look at both Verizon and AT&T's cashstatements we're making large payments on those frequencies. Ithink if I'm correct they had at least in some cases two, and mostcases a three year bill. So, at some point in the cycle within theforeseeable future, there has to be some additional domestic buildout to kind of catch up with what's happening in the rest of theworld.
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
Alright. Looking at the cost reductions, you said $15 million ofquarter, $60 million targeting $90 million to a $100 millionlooking out into next year. You have one, is there one segment ACCGthat will be the biggest beneficiary of all that or is it spreadout over other segments?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Well, I think clearly, just because of the scale, one the scale ofthe business, it would have to be ACCG. They're half of thecorporation and if you look at the activities that we're engagedACC&G .... ACCG is more often involved, so clearly by a segmentthey will be the largest beneficiary.
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
And last you had mentioned inter price up against tough comparisonsin the U.S. Can you give us an idea of more of if you were able tofactor out some of the strong comparisons last year. Give us anidea what the growth rate is in North American and may beinternationally enterprise?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
That would clearly just be a guess Jeff. I don't have a way ofbacking those big numbers out. Clearly it would be a single digittype of numbers something in the neighborhood of 5% in NorthAmerica. And our international experience year-to-date is north of10. So there is quite a disparity between the two.
As I mentioned in earlier comments I'm encouraged by the sequentialperformance. The fact of this business in this environment withoutthe benefit of price increase in the second quarter grew 15%sequentially and to me that tells me that at least on a goingforward basis from the beginning of '08, this market segment is notslowing down.
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
Okay, last question. I don't believe it's been asked, but the lowercabinet sales in North America in the second quarter, do you seethat trend continuing ahead?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
I'm thinking of the numbers. Again the second quarter of lastquarter was the peak quarter in terms of numbers of units incabinets and it will be...it will be a big number for us again inthis year. But there is not an expectation for a big uptake in thenumber of cabinets in the second half of the year relative to forthe Q2 run rate.
Jeffrey Beach - Stifel Nicolaus & Company, Inc.
All right. Thank you.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Yes sir. Thank you. Christa anyone else.
Operator
Your next question comes from line of Amitabh Passi with UBS.
Amitabh Passi - UBS
Hi. Can you hear me?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Yes go ahead.
Amitabh Passi - UBS
Thanks, my first question was just a clarification, you guys raisedthe midpoint of your operating income guidance from $5.50 to $5.60.I just wanted to make sure the new revised upward target, does thatinclude the incremental benefit you expect from you recentlyannounce footprint rationalization or would that all be incrementalto your new target?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
No, its not. I mean the additional plans that we have that we wantto renew with the counsels is not inclusive in these. Add it -- andwe really don't expect to have any significant benefits from thosejust announced actions this year or, so that's a 2009 to 2010subject.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
There will be some traction early in the year, but it will take theentirety of '09, to complete the list of activities.
Amitabh Passi - UBS
Got it. Okay thanks and then Brian perhaps for you, despite sort ofdecelerating trends in the enterprise segment, you guys havecontinued to hold operating margins at a fairly healthy level sortof in that 17% to 18% range and.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
You bet..
Amitabh Passi - UBS
And I think if memory serves me well. I believe 2Q'07, had some onetime benefit so that 20% perhaps was not represented over lastyear. Oblige for a minute and let's assume your enterprise salesend up sort of flat year-over-year 2008 over 2007 or perhapsslightly down. Do you enough leverage in your control to sort ofkeep margins in that 17% to 18% or do we need to start worryingabout sort of negative leverage to a large degree if indeed we seesome slight decline in sales?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Well my expectations are not further declined, but I'll expect yourpremise for discussion and so the one thing that works to ouradvantage is that the ongoing shift in terms of level of product orthe mix of 10G or the mix of category six, the mix of iPatch.The... I mentioned prior the level of activity that we see...increasing level of activity in those high performance, highermargin products. It's always difficult to anticipate mix, a coupleof quarters out. But my hope is that was the right word, if we sawsome decline in revenue in the second half, then it potentiallycould be offset by improving mix.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
And I think also we clearly have one of the best management teamswe have in this company runs that group and we have the biggestsales force in the world and so with us we are going to be seen.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
And lets now point out to the Brisbane closing that wasannounced... communicated a week ago that the enterprise businesswould benefit from the cost improvement there if that changes. Soit's an outgoing challenge of cost reduction and pricing. I thinkthe second half of this year, we will see higher raw material coststhan we experienced in the first half of the year. That is justgiven to where we are right now and those are significant of thescenario being able to raise our operating income ratio in oursecond half guidance in light of 100 basis points or more of rawmaterial cost increases as part of the challenges that we have thatcurrently cannot... the current economy is good.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Again that team is prepared and capable of implementing priceincreases and making the roll. The customer base we serve is thebest in the world.
Amitabh Passi - UBS
Sorry and did you provide a number for your cat 6 plus and cat 6Apenetration in the quarter? I think you've given that in the lastcouple of quarters?
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
We did in combination I think in the prior quarter. I think we weresomewhere between 75% to 80% and in this quarter I lookspecifically at it and it was at the 75% range. The 10G sales, theywere up 60% or so year-over-year. So again we're at the beginningof this cycle and our expectations are to continue to report strongyear-over-year growth in 10G.
Amitabh Passi - UBS
Got it and then just a couple of questions. You guys recentlyannounced what I thought was a pretty interesting new initiative.The Fiber Du prime [ph] cabinets, I am just wondering if you couldprovide any sort of an update in terms of where you are in terms ofcustomer interest. Could we see any incremental sales this year oris that again a '09 event. And then finally any update on theadoption of your aluminum, wireless scratched cables; have we seenany sort of incremental penetration there.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
I will take them in the reverse order. In terms of the aluminumactivity, it's all good news. I won't recite specifics for you butit continues to grow in terms of its participation in the combinedbusiness of legacy CommScope and legacy Andrew. I can say that wehave sales and/or field trials in essentially every region of theworld. So we are very happy with the strategy and I think as ourposition particularly in China moves forward, that product inparticular is going to play a more and more important role to ourcontinued success. The other part of the question was --
Amitabh Passi - UBS
Fiber du prime cabinet.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
So that was a... that was a new product launch. I'll say it's in anew space and it's somewhat speculative. The largest consumer ofthat particular product would be Verizon for files applications andclearly we're... we're way late into that market and we don't havelarge expectations specifically as it would relate to Verizon. ButI will say as the -- as the highlights and others begin to lookmore seriously at fiber as a home they're going to need enclosuresfor passive equipment and we want to make sure that we've got aproduct line suitable. It's all part of the larger strategy muchlike what we are doing in the cable television space withBrightPath. There is going to be increasing interest infiber-to-the-home. We're going to make sure we're positioned forthe hardware into all of these market segments.
Amitabh Passi - UBS
Thank you and good luck.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Thank you.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
Hey operator, I think we have got time for about one more question.
Operator
Your next question comes from the line of Ken Muth with RobertBaird.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Ken good afternoon.
Kenneth Muth - Robert W. Baird & Co
Good afternoon. Can you answer this one, on the wireless side youwere looking at underassessment, the pricing was clearly an issuethere and you guys have done just a great job with your other partof the business and increasing pricing. This one seems to be alittle bit more challenging. Can you just kind of give us someevidence of what's happened in that marketplace, may be why itsbeen little bit more challenging or kind of the headwinds you'reseeing?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
Well, I wouldn't say that we've been unsuccessful on raisingprices. It took a lot of things to take margins from where theywere to where they are today. Clearly operational discipline,product pruning, pricing has been part of that. Maybe you'repicking up on my earlier comment. I thought particularly in coppercables from a global perspective, we would have much strongersupport in the industry than what we're seeing. But that doesn'tsay we've not been able to raise pricing. In the WNS part of thebusiness, Ken, pricing has been a big, big part of the equation andwe are moving pricing into those product lines and its part of whyrevenues in WNS are not growing as quickly as other parts of ourbusiness. So, there is no giving back or giving up, I should say,in terms of our insistence on moving pricing into these traditionalAndrew product lines.
Kenneth Muth - Robert W. Baird & Co
And, just on the pricing again, could you... is it... have you hadmore than one price increase there in the wireless side?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
In the wireless side, as it relates to the ATCG business, there hasbeen one, and that was the one that we announced early in the firstquarter effective May.
Kenneth Muth - Robert W. Baird & Co
And does it... I know we talked about this before, but, I mean, youput out the release of it, but the actual execution seemed to bepretty kind of basically holding pricing flat. Is that not correct,or did you actually get a price increase?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
We announced prices in the 5% to 7% range, is my recollection. And,we have achieved less than that. But we have made gains.
Kenneth Muth - Robert W. Baird & Co
Okay.
Philip Armstrong - Vice President, Investor Relations and CorporateCommunications
The more important part of that subject is the success we're havingwith the aluminum incretion in taking copper share. And, obviously,part of the reason we're having trouble with the copper cable priceincrease, is the competition is looking through the aluminum pieceof that. So, long term, I still believe in our aluminum strategiesactually.
Kenneth Muth - Robert W. Baird & Co
And, could you just tell us Frank what is kind of your presumingthat, that historically it has been a pretty low contribution ofyour overall mix of cables?
Frank M. Drendel - Chairman and Chief Executive Officer
Well, I don't know. We don't like to see part of our business, Ken,it was 70% to 80% of our production.
Kenneth Muth - Robert W. Baird & Co
Frank, I'm talking about kind of the new kind of combined entitythough.
Frank M. Drendel - Chairman and Chief Executive Officer
Well, in the legacy Andrew basis, it was in the single-digits.
Kenneth Muth - Robert W. Baird & Co
Right. I got it.
Frank M. Drendel - Chairman and Chief Executive Officer
And so, we came into this proposition with a dilution of those twonumbers, and we've been able to grow it from that point. And theoutlook in terms of the number of customers and their geographicdisparity, in terms of the numbers that are evaluating theseproducts, is very encouraging that we'll continue to move thatnumber upward.
Kenneth Muth - Robert W. Baird & Co
Okay. And then, just last question on the enterprise sidedomestically here, do they kind of catch you a little bit offguard, about how things have maybe slowed throughout the quarter,what was kind of your linearity that you saw there?
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
I think it did not slow in quarter. The sequential performance wasup 15%. And so, no, and then I spoke earlier about what's happeningto the business in terms of new projects and accounts andactivities that are happening. So, I would take argument about yourassessment of the... particularly the North American marketsslowing over the course of the quarter.
Kenneth Muth - Robert W. Baird & Co
Okay. Great. Thank you.
Jearld L. Leonhardt - Executive Vice President and Chief FinancialOfficer
You bet again.
Frank M. Drendel - Chairman and Chief Executive Officer
With that, operator I think we'll call it a day. I want to thankeverybody for joining us, and all of the continued support we'regetting from shareholders and our employees. And, with that, we'llcall it.
Operator
This concludes today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are copyright Seeking Alpha. However,we view them as an important resource for bloggers and journalists,and are excited to contribute to the democratization of financialinformation on the Internet. (Until now investors have had to paythousands of dollars in subscription fees for transcripts.) So ourreproduction policy is as follows: You may quote up to 400 words of any transcript on the conditionthat you attribute the transcript to Seeking Alpha and either linkto the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THEAPPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OROTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE ANACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, ORINACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIOPRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANYRESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASEDUPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANYTRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'SAUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGSBEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.