Belden Inc (BDC) 2003 Q1 法說會逐字稿

Good day, and welcome to this morning’s Belden Incorporated conference call. Just a reminder, today’s conference is being recorded. At this time you are in a listen-only mode. Later we will conduct a question and answer session. If you would like to ask a question please press star 1 on your telephone. Your questions will be taken in the order they are received. If you are in the question queue and would like to withdraw your question, simply press the pound key. I would like to now turn the conference over to Mr. Richard Reese, VP of Finance and CFO of Belden. Please go ahead, sir.

Thank you and good morning and welcome to Belden’s First Quarter 2003 Conference Call. With me here today are Baker Cunningham, our chairman, president and CEO; Peter Wickman, president of Belden’s electronics division, and Bob Matz, president of Belden’s communications division. Baker, Pete, Bob and I will be happy to answer your questions at the end of our prepared remarks. If you need a copy of our press release please check our website at Belden.com.

I need to remind you that any forward-looking statements that we provide are made in reliance on the Safe Harbour provisions of the Securities Litigation Reform Act of 1995. Comments we make today are management’s best judgment based on information currently available. Our actual results could differ materially from any forward looking statements that we might make. However, the company does not intend to update this information to reflect developments after today and disclaims any legal obligation to do so. Please review today’s press release and the 2002 annual report and our form 10K for a more complete discussion of factors that could have an impact on the company’s actual results.

This morning, we will proceed as we usually do. Baker will make some comments about our market and events of the recent quarter. I will review our financial statements including segment results and cash flow, and then Baker will talk about the outlook for the coming quarters. Finally, we will open up the lines for your questions. Now I will turn the conference over to Baker.

Well good morning everybody, and thanks a lot for joining us today. We thought we would have a tough year in 2002, and we did, but clearly the pressure really hasn’t let up in 2003. While business is still not very robust, our electronics segment appears, on average, to have stabilized somewhat on a sequential basis. We believe that inventory trimming within our electronic distribution channel contributes to the lack of growth in North America. We do closely monitor distributor inventories, but there is a lag in our data in the timing of the data we get. So we concluded some of our distributors may have ended last year with a little more inventory than they really wanted, and they have burned off that excess inventory in January and February.

European sales in the segment were off in local currency, but because of the weak dollar European sales were up in dollar terms, giving us a flat year over year revenue comparison for the entire segment. This segment is a good profit contributor -- well not bad anyway, for a business 25 percent off of its peak volume. As you know, we have a number of strategic actions underway this year. We announced in January that we were discontinuing certain product lines, and we took a significant charge for that.

The adjustments we are making to our product line allow us to close our electronic cable plants in Australia and Germany. We expect to capture savings within this segment of about $7m this year, although that is all going to be in the second half. That work is on track.

We have yet to see an improvement in data networking demand and we are still awaiting a catalyst for our entertainment markets to take off. On kind of a personal note, I did go shopping for a new TV set a couple of weeks ago, and frankly the $10,000 to $12,000 price tag for a true HDTV forced me to buy a perfectly adequate $500 analogue TV. So I guess we are going to have to wait a little longer for consumers to snap up all those digital TVs to drive the demand for increased studio spending on HDTV wiring.

Our industrial markets have been fairly strong, partly because of additional new products we keep rolling out, like our data top industrial product line. This is also the market where we proved our home choice products for residential automation systems. And some of our industrial products go into things like airport security systems and building security systems, both areas that have had some good activity lately.

Our biggest concern is the level of demand in our communications segment. Major communications customers are still sitting on their wallets and holding back on their spending for copper cable, and apparently for most other things as well. We have re-examined our assumptions about the market drivers and we still conclude that the fundamental need for systems maintenance remains unchanged.

We believe that spending by the major communications companies is being constrained by balance sheet rebuilding and other corporate objectives rather than being driven primarily by operating considerations. The depth and duration of the cuts by our customers are not consistent with past cycles, and frankly we are somewhat astonished that demand continues to fall. Based on the input from our customers, we are not expecting a recovery this year, but we are not expecting double digit declines, either.

While our communications segment revenue increased about 3.8 percent sequentially, if you adjust for the acquisition, year over year segment volume was down 15 percent, and adjusted for the acquisition again down 25 percent year over year. At this level we are not getting the cost absorption in our big [Pannings] plant that we need to get that operation to break even. We do continue to look for ways to cut costs at [Pannings].

Also, we are pushing to accelerate the closing of the Kingston, Ontario plant that we acquired in October of last year and to consolidate that volume into our other plants. We are well along in that process of closing the Kingston plant. We expect to have the final production runs in this plant in mid-June.

In Phoenix, the good news is that we are not only looking for cost reduction ideas, we are finding cost reduction opportunities. I saw a terrific example of this when I visited there earlier this month. In this case, one of our machine operators made a suggestion to her supervisor, and together they worked out a way to not only solve the operator’s immediate problem but also to make other changes that ended up with an 8 percent cost reduction on that product line. That could be worth several hundred thousand dollars per year to us.

Another concern is the cost of certain raw materials. We, as well as our competitors, have experienced a quick succession of vendor price increases on polyethylene compounds that are derived from natural gas. These increases began in March, so the effect on our P&L is minor in the first quarter. We do pass these material costs along in our product pricing, but depending on the product and the market there is some lag in the recovery timing in recovering these additional costs through pricing.

With the prices of oil and natural gas moderating a little from the recent highs, we are seeing a little bit of a price rollback on polyethylene and we hope to see more, but this is an area of uncertainty in the coming quarter.

Overall, I have to admit that we had a challenging environment in the first quarter. Now I would like to turn it back over to Rick here, our CFO, to review the financial results.

Thank you, Baker. Revenues for the first quarter of 2003 was $196.3m. This is down 5.2 percent year over year, and down 1.4 percent sequentially. We had an operating loss of $166,000 compared to an operating profit of $5.6m or 2.7 percent of sales in the first quarter of 2002.

The negative comparison is due to the communications segment, as the electronics segment’s operating profit was essentially flat comparably to prior year.

After interest expense of $3.2m, and a tax benefit of $1.1m, we had a net loss in the first quarter of 2003 of $2.3m, or 9 cents per share. This compares with a net profit of $1.2m or 5 cents per share in the first quarter of 2002.

EBITDA, or earnings before interest, tax, depreciation and amortization, for the first quarter of 2003 was $9m, or 4.6 percent of sales. This compares with EBITDA a year ago of $15.3m or 7.4 percent of sales.

Let’s now look at the results by our two segments. First the electronics segment. It had revenues of $137m in the first quarter, and as Baker and I previously said, that is essentially flat compared with a year ago, and 3.9 percent lower sequentially. The segments operating profit was $7m, or 5.1 percent of external sales. This is comparable to the operating profit of the first quarter a year ago which was $6.8m or 5 percent.

EBITDA for the electronics segment was $12.6m, or 9.1 percent of external customer sales, compared with $13.1m, or 9.4 percent in the prior year. So at first glance, the electronics segment’s first quarter results suggest essentially flat sales and flat operating earnings compared with the prior year. But upon analysis, there are some meaningful puts and takes which we should bring out.

First, in real terms sales were down about $7.5m or over 5 percent if you exclude the currency impact. Second, last year’s earnings were burdened with about $3m in severance cost. Third, we, like virtually all companies, experienced increased pension, medical and insurance costs in the first quarter of 2003 versus 2002, which in this weak market we have not been able to fully recover in price. Fourth, our continuous improvement programs and focus on improving efficiencies have resulted in productivity savings and reduced spending on controllable costs.

So in summary, electronics segment demand was down about 5 percent in real terms compared to a year ago, and on an apples to apples basis, earnings were off due to the lost margin on these lower sales and the increased benefits cost. These were partially offset by tightly controlled spending and certain productivity gains.

Now let’s turn to the communications segment. This segment had revenues of $59.3m in the quarter, including $7.1m from the acquired Kingston business. Segment revenue, as Baker said, was down 15 percent in total year over year, and down 28 percent year over year if you back out the acquisition and the currency impact. Revenue was lower in both Europe and in North America, but the decline was sharper in North America. Sequentially, the communications segment revenues increased 5 percent if you exclude the revenues of the acquisition of the October 31st last year Kingston business, the sequential increase in segment revenue was 4 percent.

The operating loss for the communications segment was $4.3m or 7.3 percent of sales. This compares with operating income of $1.7m or 2.4 percent of sales in the first quarter of 2002.

The U.K. business had positive operating profit in this quarter, as it always has. All of the loss was in North America. Despite excellent cost reduction work over the past three years which has lowered our breakeven point substantially, and even despite the added revenue from Kingston, we are not yet making a profit in North America at these very low volumes. They are off about 50 percent from a peak in the year 2000.

Spot market pricing is still very competitive, although it seems to have moderated somewhat in the last few weeks as the cable suppliers try to price to recover their increased material costs. Also, this segment like the electronics segment is experiencing increases in fringe benefit costs, primarily in pension and medical as well as certain insurances, which are hurting results.

EBITDA for the communications segment was negative by $900,000 or 1.5 percent of sales, compared with positive EBITDA a year ago of $5m or 7.1 percent of sales.

Now I will give you a geographic breakdown of sales for the quarter. United States and Canada accounted for 67 percent of the first quarter revenues. This compares to 70 percent a year ago. U.S. and Canadian sales in the quarter were 9 percent lower than a year ago. Absent the acquisition, U.S. and Canadian sales would have been 14 percent lower than a year ago. Europe made up 24 percent of the quarter’s revenues, compared to 21 percent a year ago and were up 6 percent year over year in dollar terms. But, without the favourable currency effect, European sales in the first quarter were off 12 percent year over year. The rest of the world, which for us is primarily Asian Pacific, made up 9 percent of our sales for both periods and was flat year over year.

Now turning to our balance sheet and cash flow. Cash flow from operations was a healthy $16.7m, or 66 cents per share. We had good control of working capital, including reductions in inventory and receivables which were partially offset by the strength of the Euro. We have made inventory reductions with a particular focus in trying to improve our return on capital. The Kingston acquisition added more than $15m to our communications segment inventory, which we will work to burn off over the course of this year as we complete the consolidation. Our electronics division is turning inventory six to seven times per year and we believe can improve on that as well.

Overall, our target is to reduce inventory in 2003 by about 15 percent, or $25m from where we ended 2002 which will of course improve our free cash flow. Our capital spending for the quarter was $4.2m which is lower than our historical trend, and by comparison is less than half of depreciation. We are planning for capex for the year to be less than $25m and depreciation and amortization to be about $36m.

Free cash flow in the quarter, which is cash from operations minus capital expenditures and dividends was $11.2m, or 44 cents per share. We increased our cash from $19.4m to $30.9m during the quarter and our debt, which is composed entirely of long-term private placement notes, stands at $202.6m. Debt net of cash is now 36 percent of total capitalization, down from 39.7 percent a year earlier. The first set of our private placement debt is not due until September 2004, almost a year and a half away, and the amount due is $64m.

During April, we reduced our line of unsecured credit with a bank group. The total facility was $100m and we reduced it to $75m. Since we have nothing drawn on it and don’t foresee a need to draw on it, we felt very comfortable with a lesser amount and saved a little money in fees. We are currently talking with our bank group about replacing our current revolving credit line which expires in June, 2004, with a form of credit more appropriate for our current situation and foreseeable needs. Thank you, and I would now like to turn it over to our chairman, Baker Cunningham.

Well, as we look out to the second quarter there are a number of issues that are clouding our ability to accurately forecast earnings. Perhaps the most important is the sales outlook. In recent quarters, past ordering patterns have been unreliable predictors of the immediate future, that is especially true in our communications segment. Historically we would expect to see a seasonal pick up in the second quarter of about 10 percent sequentially. That didn’t happen last year, we hope it is going to happen this year and so far April is looking reasonably good.

Second, as I mentioned, we are in the middle of three plant closings. As production winds down, efficiency and absorption rates tend to throw off unfavourable operating variances. Even though the severance and most shut down costs have been accrued, the variances couldn’t be accrued and this will dampen the incremental benefit we would normally expect from incremental sales.

Also, the timing of the actual cash outflow depends on how well we can maintain our planned schedules. Third, raw material prices, especially the high carbon-based plastic resins, now that the war in Iraq is pretty well won, perhaps energy prices will drop. So far the price of natural gas, the primary stock, is still in our net range of $5.50 to $6.00 per million cubic feet, and that compares to less than $2.50 in MCF a couple of years ago.

The timing of our ability to pass these higher costs on in the form of increased prices is a little uncertain, but there are signs that pricing may be firming. We also have renewal discussions ongoing with both Bell Canada and British Telecom. The BT contract expires in November, so the impact either way will be limited for 2003. Our discussions with Bell Canada, on the other hand, were initiated shortly after the ownership of the Canadian business was transferred to Belden last year. We are optimistic that we will be successful in renewing both of these long-term relationships, because we have provided excellent quality and service to both customers. If we are successful with Bell Canada this will trigger a cash contingency payment to the company from whom we purchased the Canadian business, although the payment won’t affect the P&L, it will be a cash outflow.

Naturally, given the weak performance of our communication business, we are looking for additional cost-savings opportunities, and it is likely we will be taking additional actions to reduce output that could benefit the full-year results, but could have some negative impact on the immediate quarter.

So assuming our revenue forecast works out to be more or less correct and that we have accurately predicted raw material costs such as polyethylene, and the product phase outs and plant closings proceed as forecast, and indications are that they will, and BT and Bell Canada go as we expect, we should see improvements in operating profits in net income. Given our starting point, however, unless we see an unexpected surge in orders, it is not assured that we can get consolidated net income into the black in the second quarter. Our best guess, as of today, is that we will be from breakeven to a few cents negative per share in the second quarter.

As we move into the second half of the year, we expect to reap the rewards of the actions we have taken and continue to take. The absence of costs from the plant closures and the product line phase outs, we believe should add about $10m to the operating income line in the second half, even if there is no improvement in market conditions.

That completes my prepared remarks, and now back to Rick.

Thank you, Baker. I now would like to ask our operator to come back on and remind everyone of the process to ask any questions that you may have.

Thank you. (Operator instructions) Our first question will come from Ms. Devlin Lander, with Morgan Joseph.

Hi, I was just curious. You talked about raw material price increases and you talked about pricing firming. Did you actually implement a price increase?

Good morning Devlin. We have, late in the quarter, we have increased in areas - not across the board, unfortunately, but in the areas where we believe that we will get it and that is certainly in the spot market and telecom, we have seen the opportunity to raise prices. We’ve raised it in certain of our electronic product lines, specifically many of the industrial products that they manufacture there as well as some of the other speciality cables and hopefully in those areas it will at least recover the raw material increases, but I should stress that we have not been able to increase it across the board, either because of long-term contracts or some of the weakness in those markets.

Okay, and then can you quantify how much the $25m -- I mean, I guess it is kind of hard given you don’t know where volumes can be, but in the second quarter can you quantify how much the inventory reduction is hurting the bottom line?

Again, it gets a little difficult to quantify. All of it kind of depends on the sales, obviously. If sales come in stronger it is a lot easier to bring the inventory down, and if sales continue to trail off. But, we tend to run period type costs that seem fixed in the short-term in the 12 to 15 percent range that, absent other action, you would have that kind of negative absorption on those types of costs. But you also would tend to increase that number by some direct labour, generally fully match the direct labour if it is just a short-term period that you are bringing it down, but obviously we try to do extended plant shutdowns or extended vacation periods to reduce the direct labour component, so it could go north of that. But I would say at a minimum, you are looking at 12 to 15 percent of that $25m number, assuming everything else is equal, which as I said before is a big variable. At least that number, it could go slightly up from that if we are not able to match the direct labour’s reductions with the production.

And then just one more question. Are you seeing kind of mixed results from your different [R-Bot] customers, or are they all kind of up or down the same amount?

Devlin, as you might imagine, it is mixed. Let me turn it over to Bob and he can add a little more colour to that.

I think what we see from the [R-Bot] customers is they are all down, but some are down more than others, so it is definitely a mixed situation.

Okay, great. Thank you so much.

Our next question will come from Steven Fox with Merrill Lynch.

Good morning. Can you talk a little bit about, when you look at the profit picture for this quarter, it sounds like you have some exogenous events going on, but you are still expecting a sales growth sequentially of about 10 percent. If you exit out some of those things, is it safe to assume you could make a few pennies per share? If you took out like, materials say, and the plant closures.

Oh I think certainly, if we had that kind of revenue growth and didn’t have the drag that the shutdown of the plants add and the lag in recovery and the increase in raw material costs, at that revenue level I think we would be in the black, Steve.

Then, if you peeled the onion on the revenues by division, what type of sequential improvement should we be looking at?

I would say slightly more in communications because of the more dramatic seasonality and then slightly less for electronics. So if you are fixated on the 10 percent, we would hope a little more than that in communications and a little less than that in electronics, but you are talking several percentage points, you know -- three, four, five percentage points either side, not more dramatic than that.

Then lastly, if you guys could talk a little bit about the communications business going into the summer, I know you don’t have a lot of visibility, but it sounds muted. Seasonal trends in the June quarter - should we expect the same in the summer, and if that is the case, when will this business become profitable in your view?

I will let Bob talk a little more, but I will emphasis we have seen the seasonality muted in the last year and at least March came in a little less than we would have hoped, given the historical seasonal pick up. So we would agree that at least here towards the end of April has been muted, although there has been some seasonal pick up its been muted. I will let Bob comment a little further.

What we are seeing on the seasonality is yes, they are going into April where we were seeing the seasonal improvement. Last year at this time we were seeing a decline, which was a little bit abnormal, so we are getting back to some historical trend, however we are not getting back to historical levels of spending. It is hard to predict, going forward into the third quarter, what it would look like. Indications are that there will be the improved seasonality, but it may not be as dramatic as some prior years.

Is there a breakeven point for the communications business you can point to yet, or is that hard to say?

We continue to bring it down. I think it is a little hard to say until we complete the shutdown at Kingston and get all that in line, but we were certainly hoping even at these low levels to be breakeven at the EBITDA line. We obviously didn’t accomplish that in the first quarter, somewhat due to the added cost of the shutdown in Kingston and somewhat just do to the fall off in demand more dramatic than we thought. I think we, even at these levels, once we get those factors behind us, still we can get EBITDA breakeven. Getting to operating earnings breakeven, we are certainly going to work hard to get there even at these levels, but a little volume pickup would sure be nice.

Thank you very much.

(Operator instructions) We have no further questions standing by on our question roster. I would like to turn the conference back to our speakers for additional or closing comments.

Thank you very much operator. I want to thank everyone again for joining us today on the conference call. We do appreciate your interest and support during this extended weakness we are experiencing in our markets. If you have any further questions, certainly feel free to give me a call, I will be in today, or give Dee Johnson a call. The number is on the press release that we sent out. Thank you very much, and have a good morning.

Thank you for your participation on today’s conference call. You may disconnect at this time.