Belden Inc (BDC) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden, Incorporated conference call. Just a reminder -- this conference is being recorded. At this time, you are all in a listen-only mode. Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference ever to Mr. Richard Reece, Vice President of Finance and Chief Financial Officer of Belden. Please go ahead, sir.

Thank you, Peter. Good morning, and welcome to Belden's third-quarter 2003 conference call. With me here in St. Louis today is Baker Cunningham, our Chairman, President and CEO, and Baker and I will be happy to answer your questions at the end of our prepared remarks. If you a copy of our press release, please check our Website at Belden.com.

I need to remind you that any forward-looking statements we provide are made in reliance upon the Safe Harbor provision of 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 of 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 our financial statements, including segment results and cash flow, and then Baker will talk about the outlook for the coming quarter. And at the conclusion, we will open up the lines for questions.

I'll now turn it over to Baker.

Thanks, Ricky. Good morning, everyone. Thank you so much for joining us this morning. As you probably learned from our press release, we are noting a couple of milestones this quarter. For one, we have finalized a new three-year agreement with British Telecom, and they are our major European telecom customer. This agreement replaces the existing agreement that was due to expire at the end of the year. Under this agreement, Belden will continue as the exclusive supplier of copper telecom cable to British Telecom in the United Kingdom. For another milestone, we recently finalized a new three-year revolving credit facility. However, we don't really have anything borrowed under this facility, other than rolling some existing letters of credit under it.

But I'd like to talk about some other milestones on other projects we've been working hard to accomplish.

At the end of 2002, we announced plans to discontinue some legacy product lines that had become unattractive and non-strategic for us, and to adjust our production capacity to reflect both product line changes and the lower market demand that we have been experiencing. This resulted in decisions to close three manufacturing plants. The first was a telecom cable plant in Canada. We ceased production there in June, serving that plant's demand from our other facilities. And now, at the end of the third quarter, we have completely emptied the plant and are out of there entirely, and also shedding the associated overhead expenses.

In the electronics segment, we announced plans earlier this year to close two plants, one in Australia and one in Germany. In Australia, we have ceased all production and disposed of much of the equipment, and downsized our leased floorspace to a level consistent with our ongoing requirements as a distribution center for the Australian market. In Germany, the timetable is to cease production at the end of 2003. The European products that we discontinued weren't made in Germany; there were made in the Netherlands. But, because the German plant is much smaller, that's the one that's being closed. Therefore, during the third quarter, we moved three of the four production lines from Germany to the Netherlands, with all the associated costs and inefficiencies, which I think Ricky is going to try to quantify for you in a minute. The fourth production line is the one involved in the management buyout that we're working on. The largest volume among the discontinued products is the deflection coil business, which you might recall is a product that goes into television sets. We are in the process of selling that product line, and have moved the equipment out of our Benlo (ph) plant to the buyer's location. Once that equipment is proved to be running product that meets customer specifications, we can finalize the sale and book the gain. Deflection coils represented about $13 million in sales in 2002. We've sold about $9 million so far in 2003. Therefore, the revenue impact of the discontinued product lines in 2003 is fairly minor, and the full impact will appear in 2004.

We also entered quarter four with two of the three plant closings completely behind us. The annualized savings from the three plant closings is estimated at $10 million, and we'll be enjoying more of those savings over the next couple of quarters. Along with these actions, our employment levels have also been reduced, from a peak of over 6,000 in 2001 to a little under 4,000 people today. That's a reduction a more than one-third, and it has occurred gradually over the last two years. As we mentioned in the press release, this quarter, we have made some additional reductions in the salaried ranks of our North American electronics business, and incurred severance charges of $2.4 million. This is difficult, both for the people who lost their jobs and for those are still working, so I think we have to commend our people for the great progress we had made in all these restructuring actions.

We can also take some satisfaction in the inventory reduction that has been accomplished. We told you earlier that we would generate -- in order to generate cash, we would try to reduce our inventories by $25 million. Our actual inventory reduction already exceeds that goal. We've reduced inventories more than $36 million, net of currency translation effect, by holding production output below market demand levels since the first of the year. And you can see the results in the accumulation of cash on our balance sheet, now over $62 million. We expect this cash to be the principal source of funds to repay a $64 million tranche of our long-term debt, which matures in September of 2004.

While we've maintained strong focus on cost reductions and cash flow, we have certainly not forgotten the importance of maintaining our leadership in developing innovative new products. For example, our Home Choice brand of multimedia control cables for home entertainment, home automation, climate control and security, is showing good traction in the marketplace. We also have various initiatives to expand our new-generation line of cables, such as applying our easy-to-install banana peel technique to access control applications in commercial buildings, the closed circuit over twisted pair or CCTP product initiative for economical networking of surveillance cameras, and initiatives to meet new fire safety standards, including limited combustability, zero halogen and maintaining circuit integrity during fire. In addition, we have introduced our bell (ph) coil packaging for customers who prefer an easy-to-use shrink-wrapped coil of wire, and that saves packaging costs compared to using a reel in a box, it saves space so that technicians can fit more cable into the truck, and it leaves less trash to haul away from the job site.

So, looking at the restructuring, the inventory reductions, the continuous innovation, I think we are in pretty good shape. Now, all we need some health in the markets, and I'm happy to say that we are beginning to be more optimistic in certain of our markets, especially in North American electronics. The year-over-year revenue comparisons in our electronics business, as a whole, and in North American in particular, are still negative. But sequentially, our North American business did improve about 4 percent. The industrial market is the main area of strength. The data networking market is still weak, and the entertainment and other markets are more or less flat.

You know, we tend to take a pretty conservative outlook, and this sequential improvement alone would not be enough to signal the beginnings of a recovery for us. Other signs of improvement are orders that we're seeing in October, and they continue to be pretty good. We have also gotten some project business. In the past few quarters, we have seen a lot of projects that we quoted on, but almost nothing turned into orders. In the third quarter, we won a $1 million project from Tandy Corporation -- that's RadioShack -- for the cable in their headquarters building. We also got an order for the Coyote Arena. That's the new home of the NHL team in Phoenix, Arizona. We also take it as a positive sign that copper prices have been rising -- now over 90 cents a pound, and that compares to about a 60 to 70 cent range when overall demand was falling. The higher use of copper and higher metal prices pricing is an economic signal in and of itself but, more importantly, we can pass these material costs through in our pricing, for the most part. And overall, our pricing is more positive than negative, for a change. You add all this up, and we're feeling more confident in our North American electronics market than we have for some time.

Now, I'll turn it back to our CFO, Ricky Reece, for a review of the financial results.

Thank you, Baker. Revenue for the third quarter of 2003 was $207.6 million, or a 4 percent increase over the third quarter a year ago. But if you subtract the effects of our late 2002 acquisition, which contributed revenue of 7.9 million in the quarter, and the effects of currency translation, which also added 6.2 million to revenues, then revenues would be lower year over year by 3 percent. This quarter's revenue decreased sequentially by 3 percent, compared with the second quarter of 2003. The results are flat sequential revenues in the electronics segment and an 8.2 percent sequential drop in the communications segment. Our operating profit was $2.3 million, or 1.1 percent of sales. This includes severance charges of 2.5 million related to the severance costs for some employment reductions that occurred in our North American electronics business, and a bad debt of $600,000 that relates to the bankruptcy of an electronic cable distributor in Asia. In the past, under different accounting rules, companies would take a big, inclusive restructuring charge and would not have to explain repeated charges in quarter after quarter. Under under today's rules, it's much more pay-as-you-go. We are required to have charges specifically identified, as well as meet other tests, so you can see much more frequent recording of charges. When we highlight these charge, we're not trying to tell you that they didn't happen or don't matter; they matter quite a bit, and they do occur from time to time. We're just trying to help everyone figure out what the underlying trends are across time, and how our results compare to expectations. Attached to our press release are supplemental schedules adjusting our GAAP results for these special items to help you reconcile to our underlying results.

Net income was $833,000 in the third quarter of 2003, or 3 cents per share. This was the result of a pre-tax loss of $753,000 and a tax benefit in the quarter of 1.6 million. We had to book this tax benefit to bring the year-to-date tax provision in line with year-to-date results again. You are probably scratching your head at our effective tax rate for the year to date of 53.5 percent. The effective tax rate of the tax benefit year to date is different from the statutory rates because, at our close to breakeven loss, the permanent differences between tax accounting and GAAP make a bigger percentage change than they would if we had more losses or more income. Our adjusted results for the third quarter, excluding the restructuring charges and bad debt, are operating earnings of $5.4 million or 2.6 percent of sales; EBITDA or earnings before tax, depreciation and amortization of $14.1 million, or 6.8 percent of sales; and EPS of 11 cents per diluted share. I suspect many of you may want to know what tax rate to use in modeling our results for the full year or for the coming quarter. I would advise you to use 32 percent.

Turning to the year-to-date results, revenues for the first nine months of 2003 were $617.9 million, compared with revenues of 614.3 million in the first nine months of 2002. Currency translation helped the 2003 year-to-date revenues by $25 million, and the NORCOM acquisition helped the period by $24.7 million. So, without those two benefits, year-to-date sales would be off 7.5 percent from the prior year. Operating profit for the first nine months of 2003 was $4.7 million, including total severance charges of 4.9 million, asset impairment charges of 400,000 and bad debt charges of $600,000. In the first nine months of the prior year, operating profit was 23.2 million, and that included bad debt charges of 1.9 million, severance charges of 4 million and a benefit of 2 million from the settlement of a class-action suit about copper futures.

The net loss for the nine months of 2003 was $2.2 million, compared with net income of 8.6 million in the same period a year ago. Our adjusted results year to date -- again, excluding the restructuring charges and bad debt and other unusual items -- are operating earnings of $10.5 million or 1.7 percent of sales, EBITDA of $37.4 million or 6.1 percent of sales, and EPS of 7 cents per diluted share. EBITDA for the trailing 12 months was $54.8 million, again adjusted for the nonrecurring items.

As we discussed in the press release, we have been holding back production below the level of demand to reduce our inventory and help our cash flow, but this has a negative effect on earnings because of the underabsorption of fixed costs and liquidation of previous years' higher-cost LIFO layers. We estimate the effect of this underabsorption and LIFO liquidation will be a reduction of earnings per share of about 15 to 20 cents per share for the full year, of which about half has already been incurred. So in future periods, when we are no longer trying to reduce inventory, we would expect to see our earnings power increase by 15 to 20 cents per share per year from this factor alone.

Let's look at the results by segment for the third quarter. The electronics segment had revenues of $137.5 million in the third quarter of 2003, off 3.2 percent from revenues of 142.1 million in the third quarter of 2002, despite the fact that the euro and other currencies benefited sales by $5.5 million. Operating profit for the electronics segment was $7.8 million, or 5.7 percent of sales in the third quarter of 2003, compared with operating profit of 10.5 million or 7.3 percent of sales in the same quarter a year ago. The severance charges we mentioned, 2.5 million, and the bad debt charge of 600,000 both occurred in this segment. And without those charges, their operating profits in the third quarter of 2003 would have been 10.9 million or 7.9 percent of sales.

As we have said before, within electronics, our North American margins are currently better than those in Europe. And Europe was affected this quarter by additional expenses of over $0.5 million related to moving equipment, returning workers and other inefficiencies that go along with the product curtailment, plant closings and restructuring. In North America, if we had not had the severance charge, that group would be above 10 percent operating margins again. Since they were a major contributor this quarter to the inventory reduction, and accordingly experienced a certain amount of cost underabsorption and LIFO liquidation, we feel confident that this specific business can continue to have operating margins above 10 percent going forward. When the restructuring costs in Europe are behind us, we should see improvements in operating margins for the segment as a whole. Turning to the communications segment, sales of the communications segment for the third quarter of 2003 was $70 million, up 22 percent from sales of 57.4 million in the third quarter a year ago. Sales to British Telecom were better than a year ago, and sales to major North American customers were up modestly. The year-over-year comparison benefited from acquisition revenues of $7.9 million and currency translation effect of $700,000. The operating loss of the communications segment was $3.1 million for the quarter, compared with a loss of 600,000 in the same quarter a year ago. This operating loss deepens because of a number of factors. Demand has been shifting away from the high high pair count cables that our North American plant has optimized for, towards lower pair count products, in which we are currently less efficient. The distribution business that we have increased does have lower margins because of the nature of the orders and service requirements. The rising costs of raw materials, especially copper, while in most cases in this segment is passed on contractually to the customer, have a lag effect. We catch up when the prices stabilize, but in the short run, it can be a drag on margins. And finally, the volatility of customer demand further exacerbates our efficiency problems.

I would like, now, to turn to a breakdown of revenues by geographic region. The United States and Canada accounted for 70 percent of third-quarter revenues, down from 72 percent a year ago. U.S. and Canadian sales were 1 percent higher than they were a year ago, while higher Canadian sales and a stronger Canadian dollar offset lower sales in the U.S. electronics markets. Absent the acquisition, U.S. and Canada sales would have been 4 percent lower than a year ago. Europe made up 21.5 percent of the quarter's revenues, compared with 19.9 percent a year ago, and European sales were up 12 percent year over year in dollar terms. Without the favorable currency effects, European sales in the third quarter were up about 1 percent year over year. The rest of the world, primarily Asia/Pacific, made up 8.7 percent of our sales for the third quarter of 2003, similar to a year ago, and these sales were up 9.3 percent year over year, and still up 5.9 percent if you exclude the favorable effect of currency translation.

Now, turning to our balance sheet and cash flow, we have paid out cash severance costs of $6.1 million in the third quarter and $15.3 million year to date, which flowed through our cash from operations. Even with this outflow, positive cash flow generated by operations was 17.9 million for the third quarter of 2003, or 70 cents per share. Year-to-date cash flow from operations is $58.9 million or $2.34 per share. As Baker said previously, a driving factor in cash flow and cash accumulation has been our inventory reduction initiative. Our days sales in inventory are down to 58 days from 72 days at year end 2002. Capital spending was 2.8 million for the quarter and $14 million year to date. Total CapEx for the year should be below $20 million. Depreciation and amortization were 8.8 million for the quarter and 26.9 million year to date. Free cash flow, which is cash from operations less capital spending and dividends, was $13.8 million for the quarter and $41.1 million year to date. We believe cash flow is a meaningful number, as it represents cash available to pay down debt or to reinvest in the business. Cash stands at $62.1 million, and debt was $202.3 million at quarter end. You can see that the first tranche of our private placement note, $64 million, is now reflected as the current portion of long-term debt. Between the accumulated cash and the new revolving credit facility, we feel very secure in our ability to meet our financial obligations and continue to reduce our financial leverage over the next few years. We don't prepay the long-term notes because of the onerous make-hole (ph) provisions. We calculate net debt, debt less cash, as a percentage of total capitalization to illustrate how far we can reduce our leverage if we were to be able to prepay the notes. Net debt to total cap is now 30.8 percent, compared with 37.4 percent at year end 2002. Net debt to adjusted 12-month trailing EBITDA is 2.6 times.

I'd now like to turn it back to our Chairman, Baker Cunningham, for the outlook.

Well, I'd like to give you a clear and simple view of the fourth-quarter expectations and beyond, but there is no clear and simple view. So I'm going to just do the best I can. Since we believe that our North American communications business has resumed its former seasonal patterns, we expect revenue in the communications segment to be sequentially lower, compared with third-quarter segment revenues of $70 million. The acquisition of the Canadian business took place on October 31st of last year, so we will have three months instead of two months of revenue for the acquisition this year. That, along with the slightly improved orders from major customers and the initial distribution revenue, make us believe that the segment revenues will continue to be higher than the fourth quarter a year ago, which was $56.4 million.

In the electronics segment, orders for the beginning of the fourth quarter continue to look stronger, and we expect a small sequential increase in revenues -- not enough, however, to offset the seasonality in the communications segment. So we expect consolidated revenue to be slightly lower, sequentially.

Because we're now experiencing the savings from many of our restructuring actions, including the closing of two plants, we expect the trend in our underlying and recurring earnings to continue to improve. To speak plainly, we expect our adjusted earnings in the fourth quarter, aside from any charges, to be better than the third-quarter pro forma earnings of 11 cents per share. I would like point out this 11 cents is not a GAAP number. And I refer you to our press release for a reconciliation to the GAAP number.

The communications segment will benefit from income under the sales incentive agreement. This is compensation we expect to receive from a private-label customer. If the customer does not buy a certain volume of cable, they will owe Belden an amount we now estimate at $2.7 million, which we would recognize in the fourth quarter. This contract continues through 2005, and is a follow-on to the take-or-pay contract under which we had income in 2001 and 2002, so we do consider it a recurring item. And when we talk about the recurring part of our earnings, we are including this income.

There are a number of other factors that may affect our net income and earnings per share. Still open are two items we've talked about before, stemming from the restructuring actions. First, we sold 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 sales are fulfilled. That's worth about 4 cents a share, when and if it occurs. We're reasonably confident that it will occur, but we don't know whether it's going to be in the fourth quarter or sometime next year.

In a separate transaction, we are negotiating the sale of part of our business in Germany to a management-led buyout group. If this buyout were not to occur, we would have severance expense for an additional group of German employees, and we estimate that at about $2.8 million or 8 cents per share.

Aside from these two situations, we know that we will have some additional restructuring charges in the fourth quarter, but we cannot at this time quantify them. But they should be of roughly the same order of magnitude as the charges we have taken in the last few quarters. One other open item which will probably not be significant in the fourth quarter, but could affect future periods, depending on how it turns out, and that is we're still awaiting the outcome of the SBC wire contract. Remember, we mentioned last quarter that there are separate contracts for exchange cable, which is the main part of the business, and for service wire, which is the smaller part. Bids were entered for the wire contract during the third quarter but, as we expected, we don't know the outcome yet. This contract represents about $30 million of business per year, and could be granted to one supplier, preferably us, or it could be split among two or more supplies. But any impact from this contract should not materially impact our fourth-quarter results, either positively or negatively.

Well, that completes my remarks, and now I would like to turn it back to Rick.

Thank you, Baker. We now are prepared to take your questions. I'd like to turn the call over to our operator, Peter, who will remind you of the procedures for asking your questions.

(OPERATOR INSTRUCTIONS). Devlin Lander, Morgan Joseph.

Can you estimate what the year-over-year revenue would have been like on a metals-adjusted basis?

We don't calculate that. Clearly, the recent rise in copper is starting to benefit our sales, but it has only started happening because of the lag effect here late second quarter and in the third quarter. Copper is up, as many as you are aware, about 30 percent year over year, based on where it closed yesterday. Copper roughly represents around 20 percent or so of our sales dollars, so while there is a lag effect, that will give you some idea of how that may start benefiting our revenues, Devlin.

And in the telecom segment, is the headcount -- is that where you wanted to be now, or do you anticipate further reductions there?

In the communications segment?

Yes.

It all depends on demand. If the seasonal demand declines as we expect, we may need to continue to adjust the headcount to match that decline, both here as well as in our business in Europe. Obviously, if we see the orders continue to stay strong throughout the fourth quarter, then we won't need that. So we are fine, based on the current level of demand, but it obviously will flex up and down as we go forward, based on demand.

And were all of your big communications customers up year over year, or were some up and some down?

We were up with all of our major communication customers but one, and the one we were down with, we were down modestly, low- to mid- single digits. But our backlog was up. They had ordered some products in a different mix than they had in the past. So the order rate was slightly up, even though our sales were slightly down to this one customer. But all other customers, both orders and sales, were up year over year.

And then in the electronics segment, you said the datacom remains a wee bit down. Can you quantify that? And then also, on the industrial side, which piece of the industrial is improving?

Okay. First, on the networking piece, if I look year over year, we are down in the mid single-digit range in that market. As far as industrial, the greatest strength we are seeing, as you might imagine, would be in our security and alarm business, particularly given some of the new products that we're introducing, as well as some of the marketing initiatives that we've had there. Most of it is coming there, but generally, again, in North America, we're seeing some encouraging signs of some stability and strengthening across the board in the industrial -- not quite seeing that yet in Europe, but we are in North America. But security and alarm is a big driver for that.

(OPERATOR INSTRUCTIONS). Stephen Fox, Merrill Lynch.

Could you talk a little bit about the inventory issue again? You've done a good job of reducing your inventories. It sounds like you've brought them down more than you would have expected only a quarter or two ago. What are you targeting now? What types of products do you see excess inventories of?

Yes, we are ahead of the target. We had targeted to bring it down 25 million in the year, and already have brought it down 36. Of course, demand is a little softer than we had originally forecasted, so when look at the days we had targeted, Steve, or the percent of revenues, we are actually pretty much in line on that basis, a little bit ahead but pretty much in line. So we have tried to stay to the days and the percent of sales, as opposed to just the fixed $25 million target, and are pleased to see the operating units able to generally meet that. We are not looking at meaningful reductions, though, from here to the end of the year -- probably see minimal change in the fourth quarter because of our hope that the markets have stabilized and the seasonal trends have returned in communication. We'll do a little more level building during the winter season than we might have done during a period when revenues were declining. So you probably won't see a significant drop in the fourth quarter, although there may be a little bit. The areas we're targeting, for the most part, are communications. Our electronics business are pretty much in line, not only our own inventories but as well as the channel. We're seeing pretty controlled inventories at our distribution partners' sites, as well, but we still do see opportunity in communications, both here in the U.S. as well as Europe, and are focusing on doing as much as we can to bring that down a little bit more.

Stephen Fox And in terms of the communications business, Ricky, could you talk a little bit about where the losses would be this quarter? Have you reached a point now where, even on lower volumes, the losses don't have to get higher again? I'm excluding the Avia (ph) business, too, when I talk about that.

-- private-label company. We are looking at still trying to get overhead costs down in Phoenix so that we can reduce the losses and become profitable even at these depressed market demand levels. Some of the things we're looking at, Steve -- first, in the overhead reduction, we have negotiated lower rates for our property taxes there in Phoenix. That should be saving us about $650,000 a year, going forward. We are in the process of addressing some opportunities to reduce our utility costs by about $1 million a year, given the way we can reroute some of the flow of steam lines, as well as chilled water and so forth, given downsizing of production we have had there, to get some efficiencies. So we're looking at that. And the big thing we are addressing is in this move to more and more pair count cable -- can we improve our efficiency and cost? We absolutely think we can, and are focused on that. So still, opportunities to get the cost down and are focusing on that, even at these depressed levels of demand, compared to where they were as recent a two years ago.

(OPERATOR INSTRUCTIONS). Mr. Reece, there are no further questions at this time. Please continue, sir.

Thank you, Peter. I'd like to thank everyone for joining us today on the earnings conference call. We sincerely appreciate your interest in Belden, and hope you have a great day. Thank you.

Ladies and gentlemen, this concludes our conference call for today. You may now disconnect from the call, and thank you for participating.