Belden Inc (BDC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this mornings Belden Inc. conference call. Just a reminder this call 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 one on your touch-tone phone. Your questions will be taken in the order they are received. If you are in the question cue and would like to withdraw your question, simply press the pound key. I would now like to turn the call over to Mr. Richard Reece, Vice President of Finance and Chief Financial Officer of Belden. Please go ahead.

Thank you Carrie and good morning. And I would like to thank all of you for joining us today for the Belden CDT earnings conference call. With me here in St. Louis today is Baker Cunningham, our President and CEO. If you need a copy of our press release, please check our website at www.beldencdt.com. Or if you need a copy faxed to you, please call Mary Lou at 314-854-8054. I need to remind you that any forward-looking statements we provide are 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 obligations to do so. Please review today's press release, our 10 Q's filed on October 26 for the second quarter, Belden's 2003 annual report on Form 10-K, and the Belden 8-K filed May 25th 2004. CDT's 10K and the merger perspectives on Form S-4 filed by CDT for a more complete discussion of the factors that could have an impact on the company's actual results.

With our press release, in addition to the income statements, we have provided a supplementary schedule that shows results for the quarter on a pro forma basis. As if Belden and CDT had been combined for the full quarter ended September 30th, 2004, and the full quarter in the prior year. This schedule also shows pro forma adjusted results for the quarter, excluding the merger related items and the charges for severance and other restructuring activities.

We believe this information is helpful to investors in understanding how the company evaluates the performance of the business, and gives visibility to important trends. We will try to make it clear in our comments when we are talking about results as reported, and when we are talking about the adjusted pro forma results. This morning, Baker will make some comments about our markets, and the progress we're making with the Belden CDT merger integration. Then I'll review some of some of the highlights of the quarter's financial results and clarify some of the complexities. Then Baker will discuss our revenue outlook and finally, we'll be happy to open the lines up for questions. Baker?

Well thanks Reece. I want to give you an update on the Belden CDT merger, but first let me talk about the quarter and some of the factors that enabled to us deliver a very solid results.

One key factor is that most of our markets showed improvement on a year over year basis. Taking the electronic segment first, sales were up about 20% year over year on a pro forma basis. That is, as if we had all the Belden and CDT sales included for the whole quarter from July 1.

The revenue increase comes from both higher volume and prices. The video sound and security markets, for example, had a strong quarter, including shipments of broadcast cable for the political convention.

In addition, we're having increasing success with commercial integrators for video surveillance projects. Our products are being installed in a national chain of retail stores, and a major urban public school district.

In the transportation and defense markets, where we lead with the Thermax (ph) brand, we recently entered into a multi-year contracts to supply cable, were live television capability being installed in certain commercial aircraft and for special light weight heat resistant cables for F-18 fighter jet.

In the industrial market, we're also experiencing nice year over year growth in instrumentation and signal and control cables. As a result of increased capital spending by industry. All of these markets benefited from price increases we implemented earlier in the year.

As a result of positive price, increased volume, and the benefit of synergies, our North American electronic business posted operating margins in the low teens. Excluding charges and merger related items. Revenue in our European electronics business is up about 12% year over year. Adjusted to equalize the number of business days in the quarter, and omitting the recently discontinued product lines, that we announced earlier.

The legacy Belden European electronic business did realize some of the price increase in the third quarter, that eluded us in the second quarter. And allowed to us breakeven in the period. The CDT European businesses are more profitable, so Europe overall made a positive contribution to the electronics segment. With mid single digit operating margins. Excluding the charges and merger costs.

Turning to the networking business, revenue in the networking segment, increased about 7% year over year on a pro forma basis. Our operating margin in the networking segment excluding the charges and the cost of the merger was over 7% and reflects the realization of higher pricing. In North America networking, we're folding together elements from both Belden and CDT to present a comprehensive product offering to our customers.

Nordex has been a provider of high performance and the EN-com) activity solution, with a very strong market share in Canada, and a foot hold in the U.S., Europe and Asia. Belden has been a leading supplier of high performance data cable.

By combining the two, we were able to launch the Belden IBDN product line on September 1st. This is a high end system solution, that incorporates Nordex's kind(ph) activity products, with your choice of Belden bonded pair or un-bonded pair cables.

We're starting to get customer orders, as well as distributors stocking orders for this line. We also have the Mohawk brand for open architecture solutions that is very well regarded with strong industry relationships.

In Europe, we include our telecom cable business in this segment along with the data networking products from both Belden and CDT Incidentally, our European telecom business enjoyed a seasonally robust third quarter. Our Asia Pacific sales group rounds out the operations included in the networking segment.

Just a further comment on pricing, if I may. I know some of are you are wondering where Belden and CDT is in the most recent round of industry price increases. We implemented a price increase on July 1 for the Mohawk brand, and also, recently announced increases for the West Penn and Alpha brands.

Our Belden brand led strongly in the first quarter with two well publicized back to back price increases in North America. I think our year over year margin improvements speaks to the fact, that we've been successful in recovering the increases in material costs through our pricing. I would like to say that we're committed to continuing to at least recovering increases in material costs through appropriate pricing action.

Now let me take a couple minutes to talk about our progress in integrating the company, since the merger was completed on July 15th. As you know, we've made two separate announcements in August and September, regarding plant closings and other restructuring actions. We're closing the Belden plant in Essex junction, Vermont, and absorbing its production into other facilities.

We've also announced that we're closing the former C.D.T. plants in Auburn, Massachusetts, and Skelmersdale, England.

In addition there are some smaller restructuring actions underway. We're folding Barsel (ph) into Thermax, and we've closed a small distribution location of Manhattan wire products. We also reorganized our sales and distribution offices in Asia to eliminate duplicate expenses.

Altogether, we've announced changes that will reduce our workforce of 6,000 people by about 10%, over the next couple quarters. So we feel that these were aggressive moves that will make a difference in our future cost structure.

People have been asking whether we're planning any other plant closings. And my answer is, that those, that we have already announced will be sufficient to achieve the projected savings, included in the $25 million in merger synergies, that we've talked about before. Of course, we're always evaluating our capacity needs in light of market conditions, and will take the necessary actions that are appropriate.

Another aspect of the merger integration is less visible to the outside world, is how well our blended organization is working together. An excellent example of this is our networking business. Just six weeks after the merger, our team of Belden and CDT managers was able to launch the Belden IBDN end to end cabling solution at the Seattle Big Sea Show. This required a coordinated marketing and product engineering effort, to create and roll out this new systems offering.

We also had to train and deploy a joint field sales force directed specifically at the networking market. And distributors are rewarding us with stocking orders, and we've won a couple of new projects. Meanwhile, the manufacturing and engineering managers in the networking division are meeting regularly, sharing progress on projects they're working on, talking about their engineering staffing capabilities and needs, and hashing out technical issues. This is completely a division-led process, where they've embraced the idea of sharing best practices and are aggressively pursuing it.

Then of course, as we said before, there's been a lot of cooperation across the company on sourcing and cost reduction. For example, Belden's plant in Richmond, Indiana, is now providing drawn copper to CDT's West Penn operation. Likewise, the Belden plant in Cobra, Ontario is drawing copper wire for Nordex.

In CDT's etching(ph) plant in the in the Czech Republic, is making communication cables to help Belden's Manchester U.K. plant service British Telecom. So the work of integrating Belden and CDT and making it into one strong company, Belden CDT, is well underway on many fronts.

And with the successful first quarter of operations now under our belts, we're more confident than ever, that this is a natural combination that will benefit all of our shareholders.

Now, let me turn the call back over to Ricky.

Thank you Baker, As Baker said, we had an excellent quarter. But from an accounting standpoint, it was very complicated. So I would like to walk you through the financial statements and make sure everybody is understanding what we've presented. Beginning with the income statement, our GAAP results reflects the results of Legacy Belden for the entire 13 weeks of the quarter, and the results of Legacy CDT for the period from July 16th through September 30th, or about 11 weeks. In our supplementary schedule, we have added in the stub period for CDT from July 1 to July 15, to get a pro forma income statement showing how the quarter would have looked if we had been merged for the entire period.

Then we indicated what the adjusted performance looked like, excluding the merger related items and the severance and restructuring charges. Since we believe these adjusted pro forma results are more comparable year over year, and a better indication of trends in our business. I will be emphasizing the pro forma and the adjusted results and unless I note, otherwise, I'll be speaking about the results of continuing operations.

Our total pro forma revenue increased 14.7% year-over-year, to $303.8 million. Pricing, volume and currency all contributed to the year-over-year revenue increase, and in that order. Gross profit on an adjusted pro forma basis was 24.1% of revenue and improvement of 120 basis points, from a year ago, which demonstrates as Baker was saying, that our pricing is keeping up with the material costs. Our adjusted pro-forma operating profit was $27.2 million or 9% of sales. That's an increase of $11.7 million or 75% over the prior year adjusted pro forma operating profit, which was 5.9% of sales.

The adjusted pro forma EBITDA earnings before interest tax depreciation and amortization for the quarter was $37.8 million, or 12.4% of revenue. As we said in our plant closing announcements, as we exit some unprofitable product lines and close certain plants, we expect to lose at least some of the $60 million of revenues of those businesses. But since these businesses that had been unprofitable or marginally profitable, the net effect would be favorable on operating profit dollars and especially on the margin percentage.

Sales of the discontinued CDT operations were about $11 million in the third quarter. The charges for closing Legacy CDT plants are covered in the purchase accounting for the merger. Not in the quarter's results. You can review the purchase accounting in the A.K.A. we filed on September 29th.

One of the requirements of purchase accounting is that we had to write up the CDT inventory to fair market value. So as that opening inventory was sold during the quarter, and beyond, it has much reduced gross profit. The amount of the write up of inventory was $3.7 million, and of that amount, the impact on the third quarter income statement was $2.2 million. We have included that as one of the adjusted items in arriving at adjusted pro forma results for the quarter. This was, of course, a non-cash item.

The other merger related items that we show as adjusting items are all related to compensation, including retention in integration awards, the immediate investing of restricted stock and cash payments under change of control agreements, and cashing out our employee stock purchase plan which was terminated as a result of the merger. These items totaled $7.1 million for the quarter or about $0.11 per share.

The cash portion of these costs are about $3.9 million. The charges for severance and other restructuring activities were $19.6 million before taxes are about $0.30 per share.

And the cash portion of these charges is about $10 million. As we liquidate the working capital and fixed assets of the businesses being closed, we expect to recoup most of the cash costs of the plant closings. When we announce the merger, we indicated that we could achieve $25 million in synergies. At this time, we are a little ahead of schedule with the purchasing savings and some of the SG&A costs and that has contributed to our improved operating margin performance this quarter.

With the plant closing work now getting underway, we have launched all of the initiatives that makeup the $25 million in synergy savings. We expect that as we exit the year 2004, we will be benefiting from a run rate of savings of about half of the $25 million total. Before we leave the income statement, I'll give you a geographic breakdown of the third quarter revenue.

The geographic distribution of sales, and this is based on the GAAP revenue of the continuing operations, was as follows - US and Canada made up 59% of sales. Europe was 32% and the rest of the world, 9%. Now I would like to turn to some selected balance sheet and cash flow items.

On September 1, we paid down a trench(ph) of the private placement notes that came to $64 million. Using some of our accumulated cash as we had earlier indicated was our plan. Our debt now consists of $136 million and private placement notes with an average interest rate of about 7% and $110 million in convertible debentures, cocoas, with a 4% coupon. There is another trench of the note, $15 million, maturing in August 2005. And additional maturities in each of the next few years.

We concluded the third quarter with $152.4 million of cash. Our estimate of full year depreciation for 2005 is about $42 million. And although we have not completed our detailed planning for 2005, you can likely expect the capital expenditures will remain at about half the level of depreciation for at least next year.

I would also like to update our guidance on the effective tax rate. At the current level of income, we believe our tax rate for the full year 2004 and the fourth quarter of 2004 will be approximately 25%. However, because of net operating loss carried forwards, we do not expect to pay out cash for US income taxes, at least through next year. There will be only some local and non US cash taxes being paid.

For our earnings per share calculation, we have had to consider whether the cocoa's, the convertible debentures, are deluded or note. This quarter they were anti-deluded for GAAP. So they are not in the denominator for EPS. If we should get into the range where they are diluted, you would back out the interest expense, tax effected for the bond, and that would increase - That increase in income would offset some of the delusion from an including the additional approximately 6.1 million shares if treated as if converted. I would now like to turn it back over to Baker to talk about the outlook.

Well as we said a quarter ago, we believed our fourth quarter revenue would be relatively flat compared with the third quarter and sequentially flat revenue is still our expectation.

Our third quarter GAAP revenue from continuing operations was $281 million. This was at the lower end of our expectations for two main reasons. First, the extent of the discontinued operations was more than we originally assumed. And we have hit a plateau in our networking market. Fortunately, our operating performance is pretty good despite being at the low end of the sales range. If you add in the stub period of CDT for July 1st through July 15th, pro forma revenue for the third quarter was about $304 million.

Our outlook and expectation is that our total revenue in the fourth quarter will be in the range of $300 to $310 million. This is a little bit lower than the range we gave earlier, partly due to softness we are seeing in the networking market. We don't expect our operating income on an adjusted pro forma basis to be as strong in the fourth quarter is what we just experienced in the third quarter.

First, we had a favorable tax event that will not recur. Secondly, we have five more days in our fourth quarter than in our third quarter. So those flat sales represent a little bit lower rate of sales on a per day basis.

Also, we incur most of our period costs on the basis of the number of days, so we have more fixed costs and flat sales. We expect to have a decent fourth quarter but we don't foresee repeating the 9% operating margins just now.

There is still a merger costs and charges that will flow through fourth quarter so we are electing not to try to give specific GAAP earnings guidance at this time.

That completes my remarks so back to back to Ricky.

Thank you, Baker. We're now prepared to take any questions that you may have and I would like to turn it back over to our operate Kerry who will remind you of the procedures for asking your questions.

Thank you

[Operator Instructions]

And Mr. Reese, your first question will come from Steven Fox of Merrill Lynch.

Hi good morning, two questions for your, first of all Baker you said that networking cable has hit a plateau. Are you talking about a seasonal plateau or do you think that the, you've had a cyclical downturn in the business?

And then secondly, from an expense standpoint, can you give us an idea of how much cost you think you could take out of the business in the fourth quarter? I know you don't want to provide specific EPS guidance, but in term of cost reduction plan that would be helpful.

OK, well first of all, on the networking, as you may recall, with the run-up in prices, earlier in the year, we had an extremely strong first part of the year. And it seems to have sort of flattened out from that.

So how much of that was buying ahead, versus -- seasonal versus a cyclical downturn, it was a little hard to determine precisely. My personal opinion is that what we're seeing is really, there has been a lot of changes going on in the segment of the market, both with our company and some of our competition and while that's all sorting out, I think perhaps there's been a little caution on the part of the distributors as to which way they are going to commit. I don't see if there is anything terribly significant at the moment certainly in the next couple of quarters, it will unfold how this is going to work. I think it tends to be more of a seasonal temporary plateauing but we'll have to just wait and see.

Steve, on the expense savings, the good news is we did start recognizing the savings, roughly $5 million we had projected for the second half of this year, quicker than we assumed so we did better in the third quarter than I think our initial expectations were.

For now, the fourth quarter, I'm not anticipating taking it up from that $5 million second half rate. So we were looking at a little more than the middle of that range in the fourth quarter, given that we thought it would improve throughout the quarter. So somewhere above $2.5 million but below the $5 million would be an answer of the savings compared to pro forma historical results of Belden CDT, sequentially just modest continued improvement, the bigger savings will come as we start recognizing the benefits from the consolidation of their plants which won't be until probably mid next year.

Thank you very much.

[Operator Instructions].

We'll go next to Jeff Beach with Stifel Nicolaus.

Yes good morning and great quarter.

Thank you, Jeff.

Can you review, expand a little bit more on this networking plateau, specifically how much of your business is driven by projects, construction generally is expanding and does this give you some confidence that next year will be better and then can you review on the electronic side a little bit of some of the drivers, what's occurring there? Such as in industrial, with some of these aerospace and military programs and some of the other key markets in the electronic side?

On networking first, projects historically, and I'm looking over a longer term rate, Jeff its probably been 50% or so of our business, and then about 50% being move change and ads. Here during trough of the last few years, the move change in ads has been a higher percentage, cause as you're aware, the project business has been very thinned, to say the least, for the last several years.

We have seen a pickup and you're certainly right. As we start seeing new construction and office building commercial, as well as government building, such as airports and hospitals and schools and areas like that, or other public sector areas, that will be good drivers for demand in us. And many are predicting that we shall see a pickup in that. The nonresidential construction certainly has lagged the recovery in our project business would reflect that it is not coming back quite as strongly.

The plateau we've seen as Baker said is a little bit still unclear. A lot of price action has been going on and I think it has influenced buying habits, particularly in the distribution channel and so forth. The yen market demand I don't think quite as lumpy as what we've seen on those of us who served distribution.

On the electronics business, what we are seeing is driver there, certainly the sound security business has been very robust in the last year or so. When we are bigger participant in that as emerged companies than the historic Belden was CDT has a very strong presence in the west Penn line as well as some of the other participants in that market. And we're doing very well and some of our channel partners have emphasized that and they are doing extremely well and getting out with the system integrators and promoting that product, and we tend to be one of the best beneficiaries of their initiatives. That is also true in some of the industrial areas.

We have seen pickup in capital spending, still lagging some of the other aspects of the recovery, but we are seeing a pick up. I think some of the stimulus this year with accelerated tax benefits and all have caused some of that and again, some of our channel partners have been aggressive in pursuing that market and we've been able to participate in that.

You mentioned in the aerospace defense now with the merged company, we participate in that. Still not a huge part of our business but we do participate and we're winning some projects and clearly there's been accelerated spending in the defense area and we're starting to see a pickup in the commercial aerospace market as well.

A combination of the market picking up and us being a bigger player in that market based on efforts that have been going on over the last several years to get specified on some of those areas. So aerospace and defense has been somewhat a driver. The sound security has been a strong driver. And then just the basic factory floor, industrial capital spending automation has been probably been the three main things generating that almost 20, or below the 20% year over year growth we saw on a pro forma basis in the third quarter.

And one follow-up. Can you give a best guess to a tax rate in 2005?

Yes. We are looking, assuming we can maintain these much more enjoyable profit levels than we've been seeing, we are looking in the 38%, 38 to 39% would be an effective tax rate once we get past some of these charges and severance in all of those items they are causing our earning to be lower and getting to lower tax rates so 38% to 39% as you start modeling beyond 2004 would be my estimate today.

And a minimal amount of that will be cash?

That's correct. I still do not see much tax payment through 2005. It may start becoming a US taxpayer again after that. But do not anticipate through 2005 at this moment being a US income tax payer.

Thanks.

And there are no further questions at this time.

Well, thank you very much Kerry and I appreciate everyone participating on the call.

We recognize it was a complex quarter in terms of all of the moving parts with the merger, as well as the activities we are taking to strengthen the company and improve our results going forward.

I suspect there may be some follow-up questions that some of you may have in trying to better understand the results that we've reported today. I hope you can sense, we were very pleased, not only quantitatively but qualitatively and how the merged businesses performing and will be happy to take your calls and make sure we can communicate that as effectively as possible.

Thank you again and have a great day.