Belden Inc (BDC) 2003 Q2 法說會逐字稿

Good day every one and thank you for standing by. Welcome to this morning Belden Incorporated Conference Call. Just as a reminder today's conference call is being recorded. At this time you are in a listen-only mode and later we will conduct a question-and-answer session. If you would like to ask a question, please press the "*" key followed by the digit "1" on your touchtone telephone. Your questions will be taken in the order that they are received and if you are in the question queue and would like to withdraw your question, simply press the "#" key. I would now like to turn the conference to Mr. Richard Reece, Vice-President of Finance and Chief Financial Officer, Belden. Please go ahead sir.

Thank you Lisa and good morning and I would like to welcome each of you to the Belden second quarter 2003 conference call. With me here today at St. Louis are Baker Cunningham; our Chairman, President and CEO and Peter Wickman, President of our Belden's Electronic Division. Baker, Pete 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 do need to remind you that any forward-looking statements we provide or made in reliance upon the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The comments we will 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 on Form 10-K for a more complete discussion on factors that could have an impact on the company's actual results. This morning Baker will make some comments about our markets and events of the recent quarter. Then I will review financial statements including the segment results and cash flow and then Baker will sum up by going through the outlook for the coming quarters. At that point we'll open up the lines for any questions that you may have. So, now I'll turn over to our Chairman, Baker Cunningham.

Thanks Ricky and good morning everyone. We certainly appreciate you are joining us. That was certainly good to see an up turn in our sales sequentially even though it was somewhat of a mixed results. We had strong seasonal rebound in our communications segment for sales increased about 29% compared with the first quarter. This sequential increase reflects much stronger purchasing from SBC communications and our other North American customers. Frankly, SBC and others appeared to have health spending in the first quarter, well below their budgeted levels and are now catching up with it about what we expected for the first half. Year-over-year in the first half the big US customers are still spending less then they spent a year ago. Our year-over-year revenue increase in the communications segment is attributable to the market share gains, we have made by bringing on Bell Canada is a customer in our acquisition last fall of the NORCOM business and by penetrating the distribution business, which is reaching a level equivalent to bringing on another major customer. These and the effect of currency account for the significant year-over-year sales improvement in communications. I would like to caution you not to conclude that we are seeing "the recovery" in telecom spending. In electronics we did not -- we really didn’t get the seasonal pick up that we were hoping for, except for a few bright spots such as improved demand for alarm and security cables.

Sales in our electronics end markets were lower than a year ago. The industrial market for example was down slightly for the quarter year-over-year and down a bit sequentially, but still better than last year on a year-to-date basis. Entertainment was down slightly year-over-year and up slightly sequentially. Networking was flat year-over-year, but saw some improvement sequentially. So we are not in a position to tell you that the tide is decisively turned in any of these markets. As you know, we announced the discontinuation of several products earlier this year and these transitions are going well. We have entered into an agreement to sell certain assets and technology of our deflection coil business, which could yield $1.3m gain. We have already received the case, but we do need to meet certain technical performance conditions once the equipment is set up at the acquiring facility before we can recognize the gain. We are also working with certain management in Germany to enable them to buy part of that operation. This is a -- if this transaction works out well, it's certainly going to benefit -- Belden by preserving about 40 jobs and helping us avoid additional severance expense. We are also pursuing divestiture of other ideal assets to further benefit our cash flow. As a result of the product line adjustments, we are now in the process of rationalizing our production facilities and I am pleased to tell you that we are on schedule with that activity.

Productions ceased at our Kingston, Ontario facility at the end of June and our other plants have picked up that production, and is successfully serving Canadian and other customers formerly served by that plant. We have also stopped producing at our Australia plant and most of the headcount reductions associated with these actions have now taken place. We paid out $5.4m of severance during the quarter. We still have some equipment to relocate, some final approved severance to pay, but we have essentially completed those two actions. Still in process is the planned closing of our plant in Germany. We have reached an agreement with the Works Counsel and employees there. It turned out to be a little bit more expensive than we had originally envisioned but based on some recent court decisions in Germany it became clear that it was the type of settlement we needed to come to. Now having reached agreement we're on schedule to close out manufacturing in Germany by the end of 2003.

It was an excellent quarter for cash flow despite the severance payout we generated $24.4m of cash from operations. That’s nearly $1 a share. And free cash flow that is after capital spending and dividends was $16.2m. We are accumulating cash with an eye towards paying down our long-term debt next year when the first trance of our private placements nodes come due in September 2004. The biggest source of this quarter's cash flow was inventory reduction. Our communication segment managed to burn off quite a bit of inventory with the seasonal improvement in demand. We still have an opportunity for further reductions, but we are pleased with our progress year-to-date. Now, I would like to ask Ricky Reece, our CFO to review the financial results for the second quarter. Ricky.

Thank you Baker. Revenues for the second quarter of 2003 was $214.1m, a 3.1% increase over the second quarter a year ago, but if you have subtract the effects of our late 2002 acquisition, which contributed revenues of $9.7m in the quarter, and the effects of currency translation, which also added $9.7m to revenues, then revenues would have been lower year-over-year by 6.3%. This quarter's revenue was a sequential increase of 9% over the first quarter of 2003 with nearly all of that seasonal boost coming from the communication segment. I'll talk more about the revenue patterns later, as we discuss each segment.

There was a net loss for the quarter of $753,000 or 3 cents per fully diluted share on a GAAP basis. These results included severance charges related to the previously announced plant closing. As Baker mentioned, we arrived at an agreement with the union in Germany which keeps us on track to close that plant by the end of the year, but we have more cost than the original charge taken in the fourth quarter of 2002. Our Australian severance also was higher than the original charge taken last year. The additional second quarter severance and related charges were $2.5m. We also had an asset impairment charge of $352,000 related to the same actions. These charges together amounted to about 8 cents per share after tax.

We have included supplementary schedules at the end of the press release. So you can see the break-out of these charges by type of expense. Operating profit was $2.5m or 1.2% of sales without the charges. Operating profit would have been $5.3m or 2.5% of sales compared with $10.4m or 5% of sales in the second quarter a year ago. EBITDA, (Earnings Before Interest Tax Depreciation and Amortization) for the second quarter of 2003 was $11.5m or 5.4% of sales compared with EBITDA a year ago of 20.2m or 9.7% of sales.

Turning to year-to-date results, revenues for the six months of 2003 was $410.3m which is a 1.1% lower than revenue in the first six months of 2002 of $414.8m. Revenue was lower despite the effects of the acquisition, which added $16.9m year-to-date, and the currency translation effects which helped the first six months of 2003 by $18.7m. Operating profit for the first six months of 2003 was $2.4m, including the second quarter charges, compared with operating income of $16m in the first six months of the prior year. We have a net loss for the first six months of $3.1m or 12 cents per share compared with net income of $5.9m or 24 cents per share in the first six months of 2002. These results for the first half of 2003 include the charges mentioned totaling $2.8m. Without the charges, the net loss for the first six months would be 4 cents per share. The effective annual income rate -- income tax rate we are using has changed from 32% to 24% because with lower estimated pre-tax earnings, the effect of the permanent deductions is greater and because we may not be able to utilize for net operating loss carry forwards. So, the second quarter tax expense represents a truing up of taxes to reflect the revised annual rate.

Let's now look at the results by segment for the second quarter. The electronic segment had revenues of $137.7m in the second quarter, which was 5.3% lower than a year ago, despite the favorable effects of currency translation, which helped the segment sales by 8.1m in the current quarter. Segment revenues in the second quarter were essentially flat compared with the first quarter up by just about $700,000. Electronics operating profit were $7.1m or 5% of external sales. However, the severance and impairment charges, $2.8m in total, fell entirely within this segment. Excluding these amounts, operating profit for electronics would be $9.9m or 7.2%. This adjustment -- this adjusted amount compares favorably with the first quarter operating profit of 7m or 5%, but its lower year-over-year compared with 14.9m or 10% a year ago. The causes of the unfavorable year-over-year comparison or currency translation affects caused our lower margin European business to be a somewhat larger factor in the segments total assets -- the total sales, I am sorry. Lower volumes in Europe, in North America created negative operating leverage and we have a certain amount of price pressure that continues. EBITDA of our electronic segment was $12.7m or 8.9% of external customer sales, compared with 21.4m or 14.4% of sales in the prior year. Absent the charges, EBITDA would have been 15.5m or 11.3% of sales.

Turning to the communication segment. This segment had revenues of $76.3m in the quarter, up 22.6% from year ago revenue of 62.3m. This quarter's revenue included 9.7m from the acquired Kingston business. Revenue was also helped by market share gains in the distribution portion of the North American communication cable market and by currency translation. These three factors more than off set continued year-over-year declines in purchases by most major communication customers, including British Telecom and SBC. Sequentially, the communication segment revenues increased 28.8%. This is largely a seasonal phenomena and may also be a result of the volatility of telecom demand. It currently appears that this level of demand is sustainable for the third quarter, again largely due to seasonal factors. The operating loss for the communication segment for the quarter improved slightly to 1.5m or 2% of sales, compared with the loss of 1.8m of 2.8% of sales a year ago. The communication segment made a positive 1.8m of EBITDA which was 2.4% of sales, similar to EBITDA a year ago of $1.5m also 2.4% of sales. The communications segment was the primary contributor to our second quarter inventory reductions helped by the seasonally higher demand and the shutdown of the Kingston plant.

I would like now to turn to a breakdown of revenue by geographic region. The United States and Canada accounted for 70% of first quarter revenues, the same as a year ago. US and Canada sales were 3% higher than they were a year ago driven by higher Canadian sales due to the acquisition. Absent the acquisition, US and Canada sales would have been 3.6% lower than a year ago. Europe made up 21.3% of the quarter's revenues, compared with 21.5% a year ago and were 2% year-over-year in dollar terms, but without the favorable currency effects, European sales in the first quarter were off 15.7% year-over-year. The rest of the world, primarily Asia Pacific, made up 8.8% of our sales for the second quarter of 2003 similar to a year ago and these sales were up 5% year-over-year.

Now turning to our balance sheet and cash flow. We had another very good quarter for cash generation. Cash flow from operations was at $24.4m or 97 cents per share. Year-to-date cash flow from operations is $41.1m or $1.64 per share. We've reduced our inventory by $15.9m in the quarter excluding the effects of currency or 19.9m year-to-date which is well along the way towards our goal of $25m inventory reduction for the year. Capital spending was $6.9m for the quarter and $11.1m year- to- date, and we continue to estimate total CAPEX for the year will be between $20-25m. Depreciation and amortization were $9m for the quarter. Free cash flow which is cash from operations less capital spending and dividends was $16.2m for the quarter and $27.4m year-to-date.

Cash on our balance sheet was $48.4m and debt was $202.9m at the end of the second quarter. As you know all of our debt is in the private placement notes for a total of $200m. The small amount above $200m reflects the value of the interest rate swap agreement on some of these notes. The first trench of this debt $64m comes due next year in September 2004 and unless our circumstances change significantly, we don’t plan to replace much of that debt, so we are accumulating the necessary cash to pay most of it off. We cancelled our unsecured line of credit during June. We had nothing drawn on this facility. We are negotiating with our Bank group for a secured credit facility that would increase our financial flexibility as it would actually give us more ability to borrow, but we do not foresee a need to use the line of credit in the near future. We have received commitments from nearly all of the Bank group members and we expect to have the line in play shortly. Debt net of cash is now 32.9% of total capitalization down from 38.2% a year earlier. If you are to look in the last two years, we have reduced our net debt by $117m or 43%. That brings our debt to adjusted EBITDA to just under 3.5 times. I will now like to turn it back over to our CEO, Baker Cunningham.

Thanks Ricky. Well, as we highlighted in our press release, our expectation for revenue in the third quarter is that both segments will come in roughly equal to the second quarter. This outlook includes the anticipated labor strike at our customer verizon, which would obviously be detrimental, and if the strike were to be avoided, it could be a positive for us. With the reduction in overhead that we are now beginning to enjoy from the two plant closures, we should begin to get some improvement in our cost structure to better align it with demand, and we should see some savings in the third quarter. So even though, we are looking at flat revenue we expect to see further improvement in the bottom line. As we take our inventory down further, we might dip into the LIFO layers and have to release some of the LIFO reserve which would offset some of these savings.

For estimating, that our earnings per share for the third quarter will be between $0.05 and $0.10 per share, which is an improvement over both our GAAP and our pro forma earnings for the second quarter. There are a number of contingencies and uncertainties that could cause earnings to vary outside of this range and we detailed a couple of these in the press release. First, we are selling some equipment that was used in our deflection coil business. We can't book the gain on the sale until the technical conditions of the sale are fulfilled. That's worth about $0.04 a share when and if it occurs; second, in a separate transaction we're negotiating the sale of part of our business in Germany to a management lead buy-out group. If this buy-out does not occur we would have severance expense for an additional group German employees, and we estimate that at about $2.8m or 8 cents per share.

There are also two other items that could effect the year but are already beyond the third quarter. First, is a relatively small contract expiring with SBC Communications. We currently supply SBC both exchange cable and service wire. Service wire is the small wire that typically runs from the pole of pedestal to the residence. The exchange contract is by far the larger and more important of the two and it doesn’t expire until 2005. The smaller contract worth perhaps $30m a year expires in the fourth quarter of this year. We planned to aggressively pursue its renewal but given current market conditions we expect that biding is going to be spirited. There could no assurance that we will retain this business which is already generating below average margins.

And secondly in the fourth quarter, we do expect to receive compensation from a private label customer under sales incentive agreement. If the customer does not meet minimum purchase requirements they would all build up to $3m which we would recognize in the fourth quarter. The customer has made some purchases but not sufficient purchases to satisfy the agreement. So, we currently expect that about 2.5m of compensation will be due. This contract is related to the old take-or-pay contract that expired at the end of last year and which gave us compensation of several million dollars in the fourth quarter for each of the last two years. That completes my prepared remarks now back to you Ricky

Thank you Backer and I'll now ask our operator Lisa to remind you each of procedures for asking your questions.

Thank you, sir. Once again, if you do have a question during -- in the Q&A session today please press the "*" key followed by the digit "1" on your touchtone telephone. If you would like to withdraw a question please press the "#" key. And we will pause for just a moment to allow everyone a chance to signal. Now, we will take our first question from Devlin Lander with Morgan Joseph.

Hi how are you guys?

Doing good Devlin.

Good. I was just wondering in your stated guidance for this quarter you said you are expecting a moderate loss, were you including the $2.8m of severance charges or was the quarter a lot better than you had expected?

We were not including the severance charges in the original guidance and the quarter did turn out better than we had originally forecasted.

Okay great. And the inventory reduction in this quarter did it negatively affect earnings or not?

It does on two factors. One, we are beginning to dip into some prior inventory layers that have higher cost as we -- as many manufacturers continue each year to find ways to make product more efficiently, and we dip into those LIFO layers and then secondly, obviously as we reduced inventory we are producing at a rate lower than sales which results in less absorption in the factory than you would have had if you were not reducing inventory. So, they did have a negative impact in the quarter and will continue to negatively affect our results as we go throughout the year, Devlin, on a -- based on our --.

Can you quantify the negative effects or not?

On LIFO liquidation, that is very quantifiable. We are looking in -- based on the $25m reduction we are looking at, we are probably in -- I would say, looking at some schedules here probably in 10-15 cent affect of the 25m. Obviously, we have reduced it substantially already looking at another reduction going forward. The negative effect on the absorption is a little harder to quantify because a lot of other factors influence the productions. So, I would not want to try to give you a specific number there.

Okay and I know you are hesitant to say that things are getting better, but I mean what would you say that you think you have hit the bottom and things aren’t going to get worse?

I don’t know that we are ready to say that. We are feeling a little more comfortable. With the business as we have seen some stability, but I don’t know that we or any one else has ever been that good at picking the turn, and I don’t know that we are quite ready to say that we have hit the bottom. We have been seeing some false bottoms over the last several years, but we are seeing at least the rate of decline where we are seeing some declines at a slower rate and feel a little better about the business, but I don’t know that we are quite ready to say that we've reached the bottom.

[inaudible] having been through few of these downturns in the past going back even into the 70s and so forth. To my observation as you only know you hit the bottom when you are out for a couple of quarters and look back, same with the peaks and I think to illustrate that we had this debate and then the official end of the recession was actually in 2001 in here, if would asked any of us we would have said we are still on it, but its real hard to know when you are at one of these inflection points.

Okay. And on the electronic side, can you go in to little more detail about why that was down so much?

I think that the year-over-year decrease reflected some strength that we saw in the first half of last year. We had a [inaudible] begin we had a good first quarter. We had our strongest quarter of the year actually in the second quarter of last year. And when we were at that point of course that we predicted we were at bottom only to find out that we weren't which is why it may be a little bit gunshot in making those kind of predictions today. Having said that, I think certainly we saw some strength in the second half -- the first half of last year that sell-off in the second half and what we are seeing basically is the continuation of that softening in demand that began in the second half of last year. The project business has been particularly soft and you know, where we really have our major market share on the networking side is on high-end project business and that business has been soft pretty much across the board. So that's the negative. I think that we are certainly seeing at this point in the electronic business that we have now had a number of months and a couple of quarters where we are seeing some stability and we may see some stronger growth in the first half of last year. And we may start -- again predicting whether we are at the bottom or not remains to be seen. But the business seems to be stable sequentially.

Okay that's great. Thank you very much.

If there is anyone else who would like to ask a question please press the "*" key followed by the digit "1" on your touch tone telephone. And we will pause for just a moment to allow everyone a chance to signal. I have one addition now with Dennis Cannel Rutabaga Capital Management.

Yes hi Ricky and Backer. Just a quick follow up on Europe. The weakness there is it pretty much just on the communication side or you feeling it as you know as profoundly on the electronics side as well.

We are seeing a pretty much across the board Dennis clearly communications we continue to be surprised at the further declines from British Telecom, which mix up fairly 75-80% of the communications business in Europe. We offset some of that by gaining some additional customers but continue to see further declines at BT and that's been frustrating for us. The other -- the electronic part of business though also has seen weakness. You've seen some negative influence from the pruning of the product lines we announced back in January. So, you will see a little bit of negative influence just due to exiting those product lines, has an added huge impact in the first half but it will, you know, probably reduce sales more in the second half as we totally exit those line. But just the general economy, particularly in Germany, which is a meaningful market for us, has been weak on the industrial front as well as in the data networking area. We have had some up ticks in some entertainment, but it's pretty much across the board, with just real spotty areas that I can look to that we've seen improvement. But I think its general; you know telecom and lack of industrial spending in Europe.

Okay. And generally speaking on a -- may be on a sequential basis is it -- it does sound like North America is kind of little bit -- you are getting a little bit affirming and may be a little traction in some of your markets, but in Europe sequentially is it still getting worse?

It has been. Telecom particularly has continued to get worse and we have a few other customers besides BT as I said that we've gained some share on. So the decline with existing customers has even been greater, but I can't say that we are really seeing traction. Networking is very soft there. Our industrial business is continuing to be pretty soft. So, I don’t think we are seeing quite the level of stabilizing in Europe that we are hopefully going to see here in the US.

Okay fair enough. And then one of the just quick thing on the SBC contract for the -- I guess the service wire. It doesn’t sound like a large contract. You mentioned that it is lower margin, but still for business that's operating way below its capacity levels. It's got to be important in terms of absorption, how -- I guess it sounds like it was about 10% of your -- or so of your communications business, if I heard correctly around 30m, I mean how -- what happens if you guys were to loose that or are there other costs you can take out to kind of offset that? And I would assume it would be -- all of those stuff would be coming out of your Phoenix plant?

It's that NORCOM out of Phoenix. We actually make some of that product in a plant in South Carolina as well. It is an important part of the business with as we say -- as we have indicated about 10% of total communication sales, obviously more of that of our North American business. It hasn't been very profitable for us as far as the cost that we can take out there. It is quite a bit the business. This business as Baker mentioned, it's much s smaller wire as opposed to the heavy exchange cable. So, it runs on different lines and actually somewhat segregated within the facility much of the production is, not all of them, much of it is. So, we could clearly get not only the direct cost but fairer percentage of the indirect cost out related to that business. So, the fixed business would be left with that we wouldn't be able to cover with that business, pretty much resolves down in the utilities, taxes, those types of fixed cost which deal on a totally under estimate their importance but don't see them as that great.

Haven't said that, we certainly haven't written off retaining that business. They actually last summer win-out in recorded a portion of the businesses they consolidated calls and we were successful in gain share in that process and feel we are very well positioned with SVC given our strong relationship on the exchange cable side. And certainly we will aggressively pursue it but if it does it makes sense for it economically to go to wherever the pricing might be. We are certainly aggressively getting the calls starting and I think then minimize the earnings effect it would have on our business.

Great, okay. Thanks a lot.

And Mr. Reece there are no further questions.