Belden Inc (BDC) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden CDT Inc. conference call. Just as a reminder, this conference is being recorded. At this time, you are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to Mr. Richard Reece, Vice President of Finance and Chief Financial Officer of Belden CDT. Please go ahead, sir.

Thank you, operator, and good morning to everyone, and we want to thank you as well for joining us today for the second-quarter earnings conference call of Belden CDT. With me here in St. Louis today is the Baker Cunningham, our President and CEO. I hope that each of you has a copy of our press release. If not, it can be found our website, BeldenCDT.com, or if you would like a copy faxed to you, please call Linda at 314-854-8000.

During the call today, we will make certain forward-looking statements. I would like to remind you that any forward-looking information we provide is given 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 our Annual Report on Form 10-K filed on March 31, 2005, for a more complete discussion of factors that could have an impact on the Company's actual results.

This morning, Baker has a few comments regarding our recent quarter. Then I will review the second-quarter financial results, including some of the elements of the balance sheet and cash flow. After that, Baker will discuss our business outlook, and then we will open the lines up for any questions that you may have. Baker?

Thanks, Ricky, and good morning, everyone. Well, we had a nice solid second quarter that met our expectations, both for sales and for operating profits. We experienced particularly strong demand in North America for our video, sound and security products. This strength is reflective of new products in this family, the expansion of channel and increased emphasis on targeted customers. Growing demand for video surveillance and access control products has benefited us directly.

Other bright spots in our markets were industrial products in Canada, where we won some sizable projects, and networking in Europe, where development at the Belden IBDN business is progressing well. Offsetting these strengths is weakness in the European electronics market, largely because of the soft economy for manufacturing.

Our operating profit at 7.5% of sales shows continued improvement sequentially and year-over-year, mainly due to the merger integration work we've been engaged in for the past year. The anniversary of the merger of Belden and CDT was July 15. As you may recall, we identified a number of specific cost reduction actions we could take to generate a savings of $25 million. Well, that was our first estimate. We later raised that to $35 million.

Europe is an example of how we have improved our profitability through merger integration activities. We've not had much market improvement in Europe. In fact, through pruning of some of the less profitable products, our revenue compared with pro forma combined revenue of a year ago is actually lower. But our profits have improved significantly.

We closed one European plant and we made a number of manufacturing capacity moves. The merger gives us a lot more options about how and where we manufacture. We have improved our manufacturing process flow through the Kaizen process and the sharing of best practices. We've been able to the reduce indirect labor. We are in the early stages of implementing a shared service concept, including standardizing on a common software system. This will provide additional savings, particularly in SG&A costs.

And we are continuing to negotiate purchase savings, for example, in communications services and logistics and the outsourcing of certain non-core processes. In North America, we closed two plants and made a number of other production moves that have benefited both of our segments. We closed the plant at Essex Junction, Vermont. One of the products made in Vermont was a high-temperature cable utilizing a form of Teflon known as PTFE. At the time of the merger, we had three locations making PTFE products in North America. Today, we have one. That is Nogales, Mexico.

Some of the other products made in Essex Junction moved to Richmond, Indiana. In turn, we relocated production of data networking cable to the Fort Mill, South Carolina plant.

We've increased our flexibility in manufacturing in the networking segment by setting up each of our networking plants to produce multiple configurations and brands of cable, when needed, including the printing and packaging, so that we can take advantage of capacity wherever we happen to have it.

Still in process this year is the implementation of common software systems across all of North American networking operations. Once installed, it will enable us to make further improvements in our manufacturing and order processing efficiency. The networking segment also benefits from sharing some proprietary manufacturing processes between plants, and that work is still in progress.

We completed the closure of a second plant in North America, the Montrose plant in Auburn, Massachusetts during the quarter and sold or relocated the equipment. The most attractive capabilities of this underutilized facility were shifted to our Nogales, Mexico plant.

The net effect of the plant closings and other manufacturing moves is that we are at a fairly advantageous level of capacity utilization. In North America, nearly all of our plants are operating at efficient levels, by which I mean they are staffed for five-day, 24-hour production, and busy enough that they need to have a little overtime as well.

The increased capacity utilization is more the results of manufacturing realignment than of any major increase in volume. Capacity utilization in Europe, although lower than in North America, has also improved over the past year as a result of rationalizing capacity.

During the quarter, we completed the sale of the Montrose plant. We also closed the sale of our real estate in Phoenix, Arizona, the site of Belden's former communications business, which we exited in 2004. Those two parcels netted cash in $23.1 million.

Subsequent to the end of quarter, we sold two more parcels of real estate, the Skelmersdale plant in the United Kingdom and the former Belden plant in Germany that we closed in 2003. The cash proceeds of selling the Skelmersdale and Montrose plants more than offset the cash severance costs of those operations. Of course, the proceeds from the sale of the Phoenix and German properties were a straight add to cash since they were shut down in prior years.

I'd like to touch on one other subject, and that is our share repurchase program. As you know, in May, the Board authorized share repurchases of up to $125 million, and we began purchasing in early June, getting about 700,000 shares through the end of the second quarter. We are now over 1.25 million shares purchased and we used about $26 million of cash. Unless we have an opportunity to pick up some blocks over the next few months, the current authorization will last well into next year at the rate we're currently going.

At this point, I would like to turn it back over to Ricky for the review of some of the financial highlights.

Thank you, Baker. Beginning with our consolidated results, revenue for the second quarter of 2005 was $337.7 million, an increase of 8.3% compared with pro forma combined revenue a year ago and a 9.2% increase sequentially. Contributing to this year-over-year increase is around 2.5% for currency effects.

The year-over-year comparison was also helped by the fact that we had an easier comparison because last year's pro forma second quarter was weaker due to the pull-up of demand from the second quarter to the first quarter, ahead of last year's announced price increases.

Gross profit adjusted for merger-related costs improved to 22.3% compared with an adjusted pro forma gross profit a year ago of 21.6%. This improvement of over $8 million in gross profit is largely due to the merger synergy savings. SG&A costs, adjusted for the items we mentioned in the press release, were $50.2 million or 14.9% of sales, an improvement from year-ago adjusted pro forma SG&A of 15.7%.

Our adjusted operating profit was $25.3 million or 7.5% of sales, compared with 18.4 million or 5.9% pro forma a year ago. Only about 200,000 of the merger-related costs in the second quarter fell into the cost of goods sold line. All of the rest is SG&A expense.

We have now completed the amortization of backlog, the depreciation of short-lived assets and expensing the step-up in inventory resulting from the merger. With the plant closures now completed, we have the overwhelming majority of the merger-related costs behind us.

Net interest expense for the quarter was $2.6 million, compared with a pro forma net interest expense a year ago of $4.3 million. We have changed our effective tax rate slightly, from 35% to 34.5%, reflecting minor changes in the mix of jurisdictions in which we have income. We continue to see opportunities through tax planning strategies to further reduce our effective tax rate, but we don't expect the benefit of those possible actions in the current year.

Income from continuing operations in the second quarter was $10.5 million GAAP or $0.21 per diluted share, and adjusted for the special items, $14.6 million or $0.29 per diluted share. We purchased about 700,000 shares in the quarter, as Baker said, but because the purchases began late in the quarter, they did not have a very large effect on weighted-average shares outstanding. Our average shares per diluted EPS were 53,472,000, including about 6.1 million shares dilution from the convertible debentures. The dilutive effect of the convertible debentures in the quarter was about $0.027 per share.

Let's turn to the segment results. We revisited our methodology for reporting segment operating profit. We heard from several investors and analysts that our previous methodology was confusing and made it more difficult to decipher trends and to compare our results to peers. We heard you, and, frankly, agree. We believe this new methodology will allow each of us to meet our objectives.

As we discussed on our April call, we want our accounting to encourage intracompany sourcing by measuring operating business units' results using the full corporate margin on products sourced from another business unit within the Company. This results in recognition of a portion of the margin by both operating units. We currently -- we used to, I mean --eliminate this duplicate margin in the corporate consolidation. We have now refined the elimination process such that all the intrasegment profit elimination is done before we present our segment results.

Therefore, we are still accomplishing all business objectives and now our reported segment results we believe realistically reflect each segment's performance and should be more comparable to our peers.

We're also stating our segment margins as a percentage of total sales, including sales to affiliates. Previously, we calculated the margin as a percentage of external customer sales only. But because we now attribute margin to intrasegment sales, we feel that this change provides a more appropriate relationship.

Hopefully, these refinements eliminate the confusion and meet your objectives. Now, let's look at these new and improved segment results.

Our electronics segment had external customer revenue of $197.6 million in the second quarter and affiliate revenues of $23.9 million. Excluding the merger-related items, the segment's operating profit was 12.6% of sales. On an apples-to-apples basis, this was an improvement from 10.5% in the first quarter of 2005. This sequential margin improvement reflects greater synergy savings and benefits from increased revenues.

The networking segment had $140.1 million of external customer revenue and $4.1 million of affiliate revenues for the second quarter. Adjusted operating profit for the segment was 6.3% for the quarter, an improvement from first-quarter operating margins on a comparable basis of 5.7%. This sequential improvement again reflects synergy savings and higher revenues.

The telecom business, both on the European continent and with British telecom, which is in our networking segment, were stronger than we expected after a weak first quarter.

Before I move onto the balance sheet and cash flow, I will give you a quick geographic breakdown of sales. The geographic mix of revenue was almost unchanged from the first quarter of this year. The U.S. and Canada again made up 60% of sales, Europe was 31% and the rest of the world, mainly Asia-Pacific, 9%.

Now turning to some selected balance sheet and cash flow items. Cash at the end of the second quarter was $220.5 million, an increase of $31.7 million from year-end 2004. In addition to the cash flow from operations, the real estate sales generated $23.1 million of cash flow. On the other hand, we used $14.7 million during the quarter to repurchase shares. Depreciation during the quarter was $9 million and capital spending was 7.8 million. Our forecasted depreciation for the year 2005 is $38 million, and we continue to forecast about 25 to $30 million in capital expenditures.

Since we have anniversaried the date of the merger, we've essentially finalized all the purchase accounting on the CDT assets and assumed liabilities. This refinement of estimates yielded a modest increase in goodwill of about $4 million from the amount at December 31, 2004. As I stated earlier, we have completed almost all of the integration activities that required spending. We're very pleased, and believe that it is a testimony to the talents and hard work of our employees that in just one short year we have completed all these integration activities, resulted in exceeding our original expectation of synergies resulting from this merger.

We still have some work left, such as completing some migration to common information systems, taking down manufacturing lines we have relocated and fully sharing best practice techniques. But we are poised to exit the year at the full $35 million annual savings rate.

With that, I would now like to turn the conference back over to our CEO, Baker Cunningham.

Thanks, Ricky, and as we said in our press release, our revenue outlook for the year remains as it has been -- that is, an increase of 5 to 10% compared with the combined revenues of 2004. We said 5% of the increase would come from pricing and anything above 5% would be the result of volume growth. But the price increases we are implementing in several of the business units early in the third quarter will probably exceed 5% revenue growth through pricing.

Our volume growth year-over-year in the first two quarters has been pretty modest, and to date, about 2.5% of the revenue growth year-over-year is due to currency exchange rates. Therefore, we currently anticipate very little increase in unit volume from the current level. We believe our markets are still recovering, albeit at a slower pace than last year, when the manufacturing sector, especially in the U.S., was rebounding from the prolonged downturn that began in the middle of 2000.

Our outlook reflects this continued recovery in the United States, dampened by weakness in Europe's recovery and a seasonal downturn in the fourth quarter for our European communications business.

Additionally, as we continue our strategy of migrating the Belden networking cable brand to the Belden IBDN system solution, we expect during the transition that we might not fully participate in the recovery of this market. I'm encouraged by the traction we're gaining with our system, literally throughout the world, and I believe our strategy will result in greater market share and increased profitability. The very positive reception we've received for the early launch in the year of our 10GX solution we believe is accelerating this transition.

Our price increases are making up for the increased spending on raw materials. But, as always happens in times of rising material prices, there is a lag. Subject to this lag, we believe we are generally offsetting the material cost dollars. Even in markets where there is not an announced list price increase, we are experiencing improved pricing realization as day-to-day competitive activity adjusts to the cost environment.

Since our price increase is generally recovering only the higher material cost, both revenue and cost of goods sold are increasing by similar amounts, mathematically resulting in downward pressure on the margin percentage. Fortunately, the merger synergies are on track and delivering the expected savings. It's largely for this reason we're forecasting significant continued improvement in our operating margins.

The cost savings are having the greatest impact in Europe and in the North American networking business, which have historically been lower-margin businesses for us. Our outlook for the second half is for 9 to 9.5% operating margins, with the fourth quarter slightly better than the third quarter. This is a further significant margin improvement compared with the first half of 2005 and compared with last year.

That completes my prepared remarks. Now back to you, Ricky.

All right. And now I would like to turn it over to our operator, who will remind you of the procedures for asking your questions.

(Operator Instructions). Jeff Beach, Stifel Nicolaus.

Good quarter. My questions, I guess two, revolve around your networking segment. Your volume in the second quarter up nicely over the first quarter, and a little lower profit margin on that. You would think it would leverage your results like in electronics. What's happening there? And then, will you expand more on the comments made about in the next couple of quarters not participating in the expansion I guess in demand for networking? I would like to understand that better.

Okay. First, on the profitability in the networking segment, as you point out, we are seeing some nice sequential improvement. On a daily basis, we're seeing some improvement as well. Our first quarter has fewer days than our second, so some of the improvement is a result of that. However, this is a market we're generally having a greater lag in recovering raw material increases. We continue to see copper and some other of the raw materials increase, and particularly in Europe, but also here in the United States, we're having a lag in that. We have announced some price increases in Europe in this product line here in the third quarter that will hopefully catch us up, Jeff, on some of that lag.

Frankly, here in the U.S., we're having a little more difficulty getting additional price on the list, but as Baker mentioned, we are being more judicious, if you will, on discounting that we may do on a day-to-day basis. But I think the margin not increasing or doing as well as you might have thought on the revenue increase is somewhat due to just more days and not as much a daily sale increase, as well as a lag on recovery of law raw materials, particularly copper.

Regarding the demand and not fully participating, this isn't totally unexpected for us, and it's pretty much confined just to the U.S. market. Here in the U.S., we are aggressively promoting the Belden IBDN line, which, as you know, is a full end-to-end solution, which supports a lot of benefits to us we believe strategically, both in being able to capture more volume, higher margins as well as being in a greater position for follow-on business.

That transition is going to take some time as we retool the sales force as well as the channel and convert people to thinking of Belden as a full end-to-end solution as opposed to a bulk cable manufacturer. We expect that will take a little time, and that is causing us, we believe, to lose a little bit of share during this transition.

Fortunately, the Mohawk brand, which we continue to market as an open architecture, is picking up a lot of the growth and offsetting some of this transitionary slowdown that we're having in U.S., and in Canada and Europe are doing extremely well, where the IBDN brand is catching -- well, obviously was already strong in Canada, but seems to be catching on a little quicker in Europe. So I would say where we are not fully participating is largely restricted to the U.S. market, but consistent with generally our expectation and certainly in line with our strategy.

(Operator Instructions). Richard Paget, Morgan Joseph.

You mentioned that your plants in North America, their capacity is running pretty well. You said Europe was somewhat behind, although improved. How much more does Europe need to improve? Are you going to be removing some capacity there or just going to wait for the economy to kind of come back and catch up?

I think in Europe, we don't have any current plans to take any more floorspace out of or capacity out in that area. Some of the additional capacity we have there is subject to the slower economy there. It is lagging, certainly the recovery that we have seen in the U.S., and we hope that eventually it will catch on, and we want to have the capacity to do that. But no plans at this time, Richard, to take out any more floorspace and capacity in that regard. We will continue to look at improvements to realign equipment and take out some lines if they are not efficient, but no major plans to adjust that. Hopefully, the market will pick up.

Okay, and then I'm looking at a breakdown of that 6.5 million in merger and executive succession costs. I think looking in the press release it breaks down about 400,000 in networking and 800,000 in electronics. So, the balance of that, is that all executive succession, or there are some other little pieces to it?

There are some other pieces to that, but virtually all of that would be related to the executive succession, including consultant fees and executive search firms and all of those types of things.

Mr. Reece, there are no further questions at this time. Please continue.

Well, we thank everyone for calling in this morning and listening to our results. We were very pleased with the quarter, and are optimistic that the outlook will continue to show some improvement, particularly in the U.S., and maybe pick up in Europe.

I understand there was some difficulty with people calling in today. If anyone got in late, please give us a call, and that was the reason our opening remarks were delayed. If you didn't get in in time and missed some of the call, please, we will be rebroadcasting it on the web-cast and you can access through our website. So thank you again for joining us, and everyone have a good day.

And again, that does conclude today's teleconference. Thank you for your participation and you may now disconnect.