Belden Inc (BDC) 2005 Q3 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 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. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Dee Johnson, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Matt. Good morning, everyone. Thank you for joining us today for the third-quarter earnings conference call at Belden CDT. With me here in St. Louis today are John Stroup, the new President and CEO of Belden CDT, and Ricky Reece, Vice President in Finance and Chief Financial Officer.

I hope that each of you has a copy of our press release. It can be found on our website, BeldenCDT.com. Or if you would look like a copy faxed to you, please call Linda at 314-854-8000.

During the call today, management 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 provision 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 of the Company's actual results.

This morning, John has a few introductory comments. Then, Ricky will review the third-quarter financial results, including some of the elements of the balance sheet and cash flow, and we will discuss our business outlook. And finally, we'll open up the line for questions.

So at this time, I am pleased to introduce John Stroup. John?

Thanks, Dee. Good morning, everyone. It is a great pleasure for me to be here with you today, and I'm looking forward to meeting many of you in person over the next few months. As you probably know, I joined the Company only about a week ago on October 31. I trust that you'll understand if I cannot answer some of your questions in this first teleconference call.

I feel fortunate to be here because Belden CDT has so many strengths in place already. The Company has a lot of talented and experienced people, some wonderful premium brands and a long-standing customer preference in most of our markets. We have strong relationships with our channel partners and suppliers. We've already taken big steps to rationalize our capacity and improve our manufacturing effectiveness. And we are one of the most profitable companies -- our industry. We have a strong balance sheet with healthy cash flow. We have an extremely capable Board that is supportive of management's plans to grow profitably. In summary, we have the necessary resources to do great things. I look forward to being part of the team that develops and executes our vision for the future.

Over the next few weeks, I will be visiting many of our Company locations and meeting with associates, customers, distributors and suppliers. Although I have a lot of experience with manufacturing and worldwide industrial marketing, there's much more I need to learn about Belden CDT. As soon as possible, we will begin a formal strategic planning process that will sort out our priorities. We have a lot of work to do among ourselves before we can articulate a new vision to the world.

I'm going to leave it to Ricky to discuss the results of the quarter. But there are just a couple of things that I would like to say about the business before we do that.

I'm obviously pleased to see the improvement in operating earnings sequentially and year over year, reflecting the cost reduction activity since the merger. It represents a sustained effort and a significant achievement, which gives us a strong foundation to leverage going forward. I support the recently-announced actions to improve our profitability in Europe and the decision to exit the telecom business in the United Kingdom. Ricky will discuss our status on these matters when he talks about the quarter.

I also support the share repurchase program that's going on. It is the right thing to be doing with our cash right now while we sort out our strategic options. Finally, I'm pleased with our year-over-year organic growth performance, especially with our networking segment that has made good improvement from earlier in the year.

At this point, we will turn to Ricky for a review of the quarter results. Ricky?

Thank you, John. Beginning with our consolidated results, revenue for the third quarter of 2005 was $342.4 million, an increase of 12.7% from the pro forma revenue a year ago. This was 11.8% organic growth and 0.9% from currency exchange rates. The main driver of an organic revenue growth this quarter was volume. We got several percentage points of increased price realization. But we got much more out of the underlying unit volume. The volume improvement occurred throughout North America; in the European communication and networking markets; and was strongest of all in the North American networking market, which experienced just over 20% year-over-year volume growth.

Our October 3 price increases in our major North American business units appears to be sticky. And we feel in those areas, we were caught up with material prices as of the beginning of October. In Europe, we are successfully implementing price increases, but we're still lagging the increases in material costs there.

With the higher volumes and the consolidation of our manufacturing space, we are experiencing improved capacity utilization. Some North American operations have now gone to 7-day schedules, and others are making plans to go to 7 days on bottleneck operations.

Gross margin, excluding charges mentioned in the press release, was 22.6% of sales. The adjusted SG&A was $47 million or 13.7% of sales -- the best quarter since the merger in both absolute dollars and percentage terms.

Our adjusted operating profit was $30.3 million, an increase of more than $5 million both year over year and sequentially. In percentage terms, operating profit was 8.9% of sales, up from 7.9% a year ago and better sequentially from the 7.5% in the second quarter. This reflects significant progress in capturing the synergies from the 2004 merger. As you recall, we expected to capture net pretax savings of $35 million per year, experiencing about 5 million in 2004 growing to 25 million of savings in this year with the full 35 million savings in 2006. Part of the savings you see reflected in the operating margin, and part of it you see in the near absence of losses in the discontinued operations.

The asset impairment charges of $12.8 million are shown separately on the income statement and are of course non-cash charges. In addition to those, we had severance charges of $0.9 million that affected cost of goods sold and $1.8 million of severance charges and merger-related costs in SG&A for the quarter. We expect to incur additional charges in the fourth quarter of 2005 and continuing in 2006 related to the restructuring actions in Europe.

Net interest expense for the quarter was $2.2 million compared with pro forma net interest expense a year ago of $3.7 million. Net interest expense has been falling because we have been paying off the private placements notes as they fall due, including a $15 million payment in the third quarter of 2005 and because of increased interest income on higher cash equivalents.

Our effective tax rate for the year absent the impairment and other special charges is now 34%, which is slightly lower than what we were using in previous quarters, reflecting changes in the mix of jurisdictions in which we have income.

Income from continuing operations in the third quarter adjusted for the special items was $18.4 million or $0.37 per share. This was a little better than the expectation that we shared with you on September 29 and reflects strong revenue in the last week of the quarter. As of the end of September, we had repurchased approximately 2.5 million shares of common stock for about 51.7 million total cost. This is the total activity from the beginning of the program in late May. Our average shares for diluted EPS was 52,213,000, including about 6.2 million shares dilution from the convertible debentures. The convertible debentures were dilutive to our income adjusted for the special items by about $0.034 a share in the quarter.

Let's turn to segment results. Our electronic segment had external customer revenue of $199.5 million in the third quarter and affiliate revenues of 20.3 million for a total of $219.8 million. Excluding the severance charges and merger-related items, the segment's operating profit was 13.3% of sales, a sequential improvement from 12.6% in the second quarter. This margin increase reflects increased gross profits in North America and synergy savings in SG&A, partially offset by weaker performance in Europe.

The networking segment had external customer revenues of $142.9 million and affiliate revenues of 4 million in the third quarter. The North American networking segment had more than a 20% organic revenue improvement year over year, driven mainly by volume and improved mix.

We are recovering our North American market share. The market share took time to adjust to our new branding after the merger, and we are steadily improving our mix. Not only are we seeing a continuing migration to higher category cables, we are also gradually improving the proportion of higher margin connectivity in our mix. Connectors and other non-cable components are now probably less than 15% of our networking sales, and we see the potential for that to move up to closer to 50% of our Belden IBDN brand over the long run. So while we were pleased that our segment operating margin improved to 7.3% -- a blend of North America which is higher than that -- in Europe, which is lower, we see that it can go quite a bit higher with further mix improvement over the next couple of years.

We are also seeing nice growth of our networking systems solution in Europe, although from a small base. And we had another good sales quarter with British Telecom, while we continue discussions with that customer about how to exit the telecom market in the United Kingdom.

The geographic mix of revenue was shifted slightly towards North America because of the stronger growth in the US. The US and Canada made up 62% of sales; Europe was 30%; and the rest of the world, mainly Asia-Pacific, 8%.

I would like to take this opportunity to add some more color on our European business. Europe is a significant market for us with annual revenue of over $400 million. However, about 100 million of this revenue is telecom business with BT, which we currently plan to exit during the long-term trends -- due to the long-term trends of lower volume and falling prices. The remaining European business is very similar to our North American business in the mix of products and markets. Unfortunately, the relative profitability in Europe is less for us and frankly for other companies in our industry because of several factors -- one, more imbalance of excess supply versus demand; two, higher fixed costs and less labor flexibility; and three, greater social resistance to raising prices to recover inflationary increases in cost.

We're making good progress, addressing these structural issues. As we exit more commoditized, slower growth markets; move production to lower cost, more flexible manufacturing regions; outsource some more non-core functions to make our costs more bearable; and exercise diligence in improving our cost structure in both production and SG&A.

Our efforts are yielding improvements. But we have more to do. The additional rationalization program we announced on September 29 should greatly benefit our performance once completed. Our sales volume has been relatively healthy. Our challenge and now our focus are to reduce our costs and improve our price realization. We remain confident that Europe can be an attractive market for us.

Now turning to some selected balance sheet and cash flow items. Cash at the end of the third quarter was $177.9 million, lower sequentially due to the share repurchase activity and the paydown of a $15 million tranche of notes in September. Depreciation and amortization during the quarter was $9 million, and capital spending was $5.6 million. We expect our full-year 2005 depreciation to be approximately $37 million and CapEx for the full year approximately $28 million.

Turning to our outlook for the fourth quarter and beyond, our revenue outlook for the fourth quarter is relatively flat with the third quarter. We expect revenue to benefit from our October price increases, and we continue to look for mix improvements in the networking market. Offsetting these positive factors is expected seasonally low volume in the UK telecom market.

Speaking of telecom, there's not much new in our talks with British Telecom since September 29 when we disclosed that we had informed BT of our intentions to exit the UK telecom market. We continue to service this customer as their exclusive copper telecom cable provider at the same pricing that has prevailed all year. We believe they are actively examining their supply options. And of course, we're exploring our strategic options for this business and the Manchester, UK facility. But there are no developments to report at this time.

We expect that our fourth-quarter operating margin, excluding any further restructuring charges, will be between 8 and 9% of sales, excluding $3 million we expect to recognize related to the sales incentive agreement with a private label customer. This will be the last year of income under that agreement.

For 2006, we expect revenue will increase because of both price increases to offset rising material costs and increased volume. Operating margin will reflect the continued mix enrichment in the networking market, which will include the migration to higher bandwidth cables and more 10 gigabit projects and the increasing proportion of connectivity in our mix. The year 2006 will also benefit from the full-year realization of the merger synergies.

For your models, we expect 2006 depreciation expense to be about $37 million, CapEx to be about $30 million, and the effective tax rate 34%. Notice on the balance sheet that we have a larger tranche, about $60 million of our notes to pay down in September 2006.

We have continued our share repurchase program into the fourth quarter. If we are able to continue purchasing every market day this year, we will be very close to exhausting the entire $125 million authorization at year end. So this in addition to improvements in operating earnings will help our earnings per share.

That completes our prepared remarks. I would like to turn the call back over to our operator, Matthew, who will remind you of the procedures for asking your questions.

(OPERATOR INSTRUCTIONS). Jeff Beach, Stifel Nicholas.

Two things, one minor. Can you tell us what the selling days were in the second quarter, the third quarter and the upcoming or the current quarter you're in?

I can get that data. I don't have it off the top of my head, Jeff.

Is the fourth-quarter selling days lower? Do you remember?

The fourth quarter will be slightly higher. Obviously, you got some holidays in there. But we extend our accounting calendar, which is a 4-4-5 calendar for the revenue cutoff through the end of the calendar year. So we tend to pick up a few days; I don't have the exact number. But we will have a few days. But of course those will be pretty slow days between Christmas and New Year's historically.

Second, on the rising costs versus the prices, you had indicated in your remarks that you felt you were caught up in North America in October. But there's still quite a bit of higher price -- higher cost coming I think over the next several months. Do you think the pricing you are anticipating or putting into effect right now, do you think you will kind of hold even with your costs over the next say the fourth quarter and into the first quarter of next year?

Good question. You heard me right. The price increases we've put in effective October 3 here in North America were designed to recapture the material cost increases we had experienced up to that time. Copper has continued to rise somewhat since that date as well as we are beginning to see some realization of increased cost on some of the resins and plastics that we purchase. We're looking now at what additional pricing action we may need to take to recover that, not only here in North America but in Europe, and are prepared as we have strategically always indicated we are -- is to pass through any inflationary raw material costs we incur.

And one other question -- can you give us a rough idea of capacity utilization in North America and Europe for each of the segments?

Yes. If I look at the networking segment here in North America, we are operating -- based on the 5-day process we tend to measure our utilization -- we are now up into the 90%, low 90 to mid 90 with bottleneck operations as I mentioned on the call, having to go to 7 days to address the increase in not only footage volume but also the slower speeds we need to run some of the higher bandwidth products.

In Europe, on the networking side, we're not quite as full. We are more in the mid 80 percentile there on networking.

Turning to electronics, it's a little bit harder to generalize there because we have a broad spectrum of products that run on somewhat unique equipment. But in total in North America, we're now up into the upper 80% on a 5-day operation -- probably approaching 90% on 5 day -- and again have certain operations where we are seeing strong demand, such as security cables, some of our in-flight entertainment products. We have taken those to 7 day to meet the demand.

Europe unfortunately not seeing that level of utilization and hence some of the plant rationalization we're looking at there to address that. We're probably more in the 70 -- mid 70% of capacity -- equipment capacity, not all of that is man -- but equipment capacity utilization in the electronics business in Europe. When we take some of this capacity out, we should get that more up into the mid to upper 80s, which is where we would like to have it.

Richard Paget, Morgan Joseph.

You guys talked about good volume increases. And obviously, networking is doing pretty well. But more specifically in electronics, outside the security and in-flight which has done decently, if you could comment on volumes in more of the industrial cable and wire.

We are still seeing growth there, Richard, not quite as robust as we enjoyed late last year and earlier this year. I think some of the Feds' action is having some impact -- aren't slowing down some of the industrial spending that is going on. So we are still seeing growth here in North America in our broader industrial products beyond the security and all but not quite the rate we had before -- more in the lower single digits than we were enjoying the mid and upper before.

Broadcast, we're still seeing pretty good demand there. A lot of that is project driven as you know, and we are continuing to see pretty good project flow in Europe. We've got the Olympics coming up in Italy and Torino, and we are shipping for that project. So that is helping us in the broadcasting space.

Europe electronics, we're kind of flattish over there in terms of volumes seeing slight increase based on price but are not really seeing much increase in demand in electronics in the markets over in Europe.

So then in your outlook when you say you perceive the strengthening of major project business, is that mostly Olympics related? Or are there any other ones out there?

There is some Olympics on the electronics; we do have some other casinos, those types of projects where we are bringing security in. We've done reasonably well with some airports and some school projects. So it's a pretty broad spectrum of project activity that we are seeing that is benefiting the electronic business.

On the networking side, that has improved as well -- still not seeing the kai (ph) and the growth in non-residential construction that all of us in our industry would like to see and believe is coming. But we are seeing a healthier pipeline in projects. Again, some of them are more infrastructure projects -- airports, schools, military installations -- seeing some spending in networking projects throughout the world. The Middle East, certainly very strong for us at the moment. So projects are pretty broad reaching, Richard.

Then getting back to the costs, I know you guys have talked about the copper and the resins and the plastics. How much of an impact given the higher energy costs, whether it's natural gas to run your plants or transportation, has been impacting you guys?

The utilities, we certainly are seeing that. It's not something that's that significant to our operation. But we are having probably 20% or more increase in our utility costs, maybe a little bigger impact here with the winter coming. Most of our plants are in colder climates than in the areas where we have to air condition it, so we may see a little greater impact.

The bigger issue has been freight. Certainly, you are seeing that become more challenging. We have begun addressing that in how we charge for freight and what minimum order quantities we will incur the cost ourselves for freight. So we are making adjustments to try to recover some of the increase we're seeing in freight costs. Freight will run in the mid single digits as a percent of revenue for our industry. And we're certainly seeing meaningful increases there, not all of which we have been able to recover.

Then in terms of the European restructuring, I think back at the end of September, you said it was going to be around 23 million in costs. Is that still pretty much on schedule? And most of that all -- I guess the balance will occur in the fourth quarter?

The total number has not changed significantly. The how we are going to recognize that has changed from what we had originally anticipated when we came out with the announcement in September 29.

So it will be more asset write-down and less severance?

It will be more depreciation as opposed to asset write-down. The total asset impairment will be about the same. But as we get into the details of applying the relatively complicated accounting standards when you have asset sale for use, a bigger proportion of that write-down will need to be running through depreciation as we adjust the lives of the machinery and equipment and less through the impairment. The total hit to the earnings will be about the same, but it's going to stretch it out over a longer period of time.

The severance cost hasn't changed significantly from what we thought. Again, when we recognize that is dictated by the accounting rules based on when you announce it, when you reach agreement with the workers and so forth. And we are in discussions with the appropriate parties in the areas we're looking to downsize. So those will get spread out over the next several quarters, but the total amount hasn't really changed. The mix has changed some, and it will probably spread out a little further than we would have hoped back at September 29.

And then finally, if you could maybe just remind me exactly what that sales incentive agreement with the private label customer is?

Yes. This was an agreement that dates back when we bought the telecom business in Phoenix from an MBO. The MBO had negotiated back when they acquired the business and was in a lot more private label than we traditionally have done an arrangement with a customer to make product for them. And they had a take or pay, if you will, kind of an incentive in there that they had to purchase a certain amount of volume or make a payment for the shortfall in gross margin that would be realized on less volume purchases.

That private label customer has not been purchasing anywhere near the level that is required. Therefore, at the end of the year based on when that is totaled up, the gross margin that was lost out on is paid. So there will be $3 million recognized. Half of that have been prepaid under the agreement. So there will be 1.5 million additional payment we would expect to receive probably late January. And this will be the last year; this was a multi-year agreement and we are in the last year of that.

(OPERATOR INSTRUCTIONS). Celeste Laurenzano, Merrill Lynch.

Just could you expand a little on your comments regarding the market share improvement? Do you think there are more market share gains to be had over the next few quarters?

We certainly hope so. As you know, when we did the merger, the clear objective and strategy and one of the value creations from the merger was leveraging the Belden brand with a very solid product that CDT brought in the connectivity, the IBDN product. And as we rolled out that, I think we did lose some share as we were launching that back after the merger. And we are encouraged to see now beginning probably around August that we believe we are starting to recover some of that share loss. And the market is seeming to accept the product and the Indian solution that we have.

So we still see opportunities, Celeste, to increase our market share, not only on the cable side but especially on the connectivity side.

You talked about seeing the strongest volume improvement in North American networking cable. Where did you see the strongest improvement in pricing? I'm assuming that was also in North America but what products in particular?

Yes. It would be more the electronic products; although, we have seen pretty good traction on the networking. As you have heard in previous calls and in previous releases we've made in the last year, networking has been a little more challenging for us to recover the inflationary costs. That market seems to have improved I think with the volume as well as just the amount of raw material increases we have seen. So we did see pretty good price realization in the quarter on networking.

But it's still greater in electronics, where we have more differentiatable products in that market that enable us to more quickly recapture the raw material increases.

Then on the SG&A levels, what is a good run rate in dollars going forward from here?

Well, we are in the midst of doing our budgeting, so I can't give you a specific level. But if you look at where we are in the third quarter, Celeste, we still see some opportunity. We have not fully installed the ERP systems in several of the businesses, which were part of the merger synergies that we laid out, about the only part of the 35 million in synergies that we've not yet realized. And those should start coming active at the first of the year. We are delaying some of the implementation of those to the first of the year to not have a Sarbanes-Oxley Section 404 risk with installing them late in the year and not having sufficient time to ensure that they're working properly.

So I think you should see on absolute dollar terms everything else equal, some improvement in SG&A next year as we get the savings from some of these ERP systems. Other than that, nothing more to really comment in a specific way because we're still in the budgeting process for next year.

Jeff Beach.

You gave us pro forma sales for the quarter. Can you give us pro forma sales for the two segments?

For the year-ago quarter?

Yes, for the year-ago quarter.

If you have another question, ask it while we look. I think we have it, but I think we need to find it.

You're making this statement that you expect to see revenue or sales growth in 2006. Can you talk about some of the sales trends you see occurring as you go into 2006 in some of the end markets in North America and Europe? And is there any single market that you are worried about?

Not a lot of color I can provide, Jeff, there. But I'll give you some sense of what we're seeing. Certainly, as I mentioned before, we are seeing a slowdown in the rate of growth -- still seeing growth but a slowdown in the rate of growth in our factory floor-oriented industrial product lines. We continue to see a bit of a sluggish CATV market both here and in Europe. There, I would say flattish, not seeing the growth that we would have enjoyed earlier in the year and last year.

Other than those markets, we continue to think we will see modest growth, networking and security being probably the most dramatic, assuming the economy hangs in there and then slower in some of the broadcast, where we may have some tougher comparisons given the projects that we have been enjoying this year but are still looking a growth in that market based on trends we're seeing.

We'd never slip a CDT 2 weeks (indiscernible).

Kevin Sarsany, Foresight Research Solutions.

I am wondering if you could help me out understanding the pickup in the networking business. I'm just trying to get a feel for -- is it demand? Is it kind of the distribution resolution? Is it annualizing the -- I wouldn't call it lost -- but the Panduit and Crona and those guys moving to other suppliers? Or is it the upgrade cycle you're seeing from 5e to 6? And if you could comment on your 10G projects also appear.

(multiple speakers) It's all of the above. You did a good job of capturing all of the pieces, Kevin. We did kind of hit on all cylinders here in the third quarter in each of those areas -- still an opportunity to do better. But to give a little bit of a sense of the magnitude of each, I would say the biggest contributor to our 20% organic growth year over year has been the mix improvement into higher bandwidth products, which sell at a lot higher price per foot as well as us being able to sell more end-to-end solutions in the connectivity that goes along with the bulk cable. When you look at year ago -- was just the first quarter after the merger and were very much the emphases of rolling out. In fact, it was 6 weeks after the merger before we rolled out the Belden IBDN end-to-end solution product.

So the biggest portion of that is not raw footage as it is the mix improvement to higher bandwidth, which has higher price points per foot as well as enjoying much more connectivity. And that's true in Europe as well as here in North America. We've done extremely well off of a small base in Europe, probably doubling our revenue participation in Europe again off of a small base. But really pleased with the efforts that the team has done over in Europe, particularly in the UK and in the Middle East. But we are seeing some traction now on the continent as well as we deploy a few more resources to serve those markets. But the majority of it, Kevin, would be in the area of mix improvement and bandwidth.

As far as 10 gig projects, we continue to see projects. We believe we are getting our fair share of those. And encouragingly, we are getting follow-on on projects that we installed earlier in the year where they've come back and added more drops and more business, which is always encouraging to have repeat customers that the product is working and delivering what they have paid for. So good -- still, I would not suggest to you that it is a huge percentage of our mix. But it is a very improving part of the story as we look forward.

Could you comment on the -- depending how you want to define it -- the difference between selling cable profitability and selling a system? It sounds like the connectivity mix is increasing; you expect that to continue to increase. And I would assume that's going to be a pretty big driver of your margins.

Absolutely. There's a lot of benefits to selling the system. One of which, as you point out, is the gross margin improvement. Generally, you will see twice the gross margins on a connectivity part of a system versus just the boxes of cable. So to the extent we can move that 15% of our revenue dollars up closer to the 50%, which a project will be roughly equal in connectivity revenues and cable revenues. So as we participate more and more in the system and move towards that 50%, you can appreciate the margin expansion that that ought to generate.

Another benefit of selling an end-to-end solution is the follow-on business is a little more secure. When you just sell the component products, they're not quite as loyal when they do a move change and add to make sure they stay with the same cable and the same mix of components. If they've got a matched system that was warrantied and sold as a complete system, they tend to be more loyal when they do move change and adds to stay with that system. So the follow-on business is another benefit we see of this strategy of moving to more system sales.

Then a quick question on the electronics business. You touched on the broadcast. Security, we know is growing pretty well. Could you talk quickly about the CATV and what drives that? I believe that most of your business has dropped. So is that subscriber driven, or is that infrastructure?

Yes. Good question. As you rightly pointed out, our participation in CATV here in North America is almost exclusively the dropped cable, that last piece of the cable that goes from the back of the TV and connects to the wall or out to the junction box outside a home. We do not sell the complete system and therefore do not have very large participation with the big multi-system operators. Again, that is here in North America.

Therefore, it is driven more by commercial construction of hotels -- a hotel, we will tend to do better because it's not a MSO that's doing that; a stadium, where you got closed-circuit TV and so forth; schools. Those type of areas is where we will do better here in North America.

I would say the sluggishness we are seeing there is twofold -- one, not seeing as robust spending in that area and two, the price competition there I think we're seeing more imports in that part of the market. And we've not chosen to go to some of the price levels that might be required.

In Europe, which is a meaningful part of our CATV business, there, we do sell the complete system -- the fiber; the broad line or hard line coax, which is in the distribution level; and then the drop cable. And there, we've just seen much fewer subscriber, much less growth in Europe and have not enjoyed the market growth there. I think it's more a market situation than it is anything unique to Belden CDT.

And then I just have a couple of follow-ups on that. In European auto, how is that business going?

Automotive, is that what you--?

Yes.

It has been sluggish. We saw a pretty weak third quarter in the automotive. It's not a huge part of our business, but we do participate primarily in Germany with niche-type products that will go into a high-temperature or high-flex type applications. We don't make the broad wiring harnesses, so we are pretty niche. And I think like other people who participate in the automotive industry in Germany, we saw a pretty sluggish third quarter.

Could you comment on the BT profitability? It sounds like you're selling at pretty old prices with raw material costs going up. Is that profitable?

Yes, it is. There, we do get a contractual adder to pass through, not only copper but the compounding price increases. So we do recover that. That's a monthly adjustor that we get to the sales price. So even though it is older pricing, we are recovering the raw material. And actually in that market, the more current pricing is lower. We are seeing more competition because of lower demand. So having an old price in that market with the ability to pass on raw materials is a good thing.

So we are well above our average European profitability on the BT business. The strategic reason to get out of that is not the short-term issue as it is more the long-term lack of opportunity we see there.

My last question is for John. I don't want to leave him out of this. Danaher is known for very good acquisition integration as well as manufacturing and applying the manufacturing capabilities to the back office and going -- and value selling. Can you -- I know you have only been there a week -- but can you kind of give us a feel for how you expect to kind of take all those good things that Danaher is known for and apply it to Belden?

Sure, Kevin. My focus right now over the next 60 days is to make certain that I'm doing the right amount of interaction with our businesses and our associates to truly understand it. But over the next 100 days, the team and I are going to be going through a fairly rigorous strategic planning process to make certain that we have agreement on our strategic priorities.

I believe acquisitions will be part of our future. I think it is an important part of how we can in fact grow the business. I think it's something we will look at very carefully though as it relates to acquisitions that make sense strategically that bring real value to the Company -- and make certain that we integrate it in a way that would be consistent with my past experiences.

Clearly, our focus is going to be making certain that we run our operations correctly, leanly. I think there's a lot of good operational principles that are in the business already. But I think there are still improvements that can be made both in terms of profitability as well as working capital and cash flow generation. So we are going to make certain that we have the right metrics in place and have a real process orientation to get sustainable improvements.

So clearly a lot of my background, a lot of my experiences at Danaher are relevant here. I'm going to do my very best to make certain that we implement them with the same level of aggressiveness that I experienced when I was at Danaher.

Thank you. Look forward to meeting you.

Me as well, Kevin.

Sean McMahon, Kennedy Capital Management.

Good quarter. Most of my questions have been answered. But I had one quick one about the connectivity side. This year or this quarter, you said 15% sales were from connectivity?

From a revenue standpoint, that's correct, Sean.

Within the segment.

What about last quarter?

Again, that's the segment numbers, not our total revenue. But of that segment -- yes, the prior quarter, it would've been closer to 11 or 12%.

Looking down the road, how long do you think until you guys can really kind of ramp this higher margin business? Can you ramp it to 30% next year? Can you give me kind of any insight?

That is something that we will be addressing with each of the units as we go through their budgets for next year. And we will have a better answer for you at that time. Clearly, we think there is an opportunity to try to quantify that. At this point, it would be a little premature, Sean.

But certainly, when we look at the market in total, the mix is there where we have a strong brand presence and a history of selling the system -- Canada being that market -- we enjoy that 50 to 50 plus percent of the revenue mix being connectivity. So strategically, we see no reason, given the very strong solution that we have, that we should not be able to start getting towards that market.

Now we are not abandoning the open architecture sale. We have a Mohawk brand that we participate in that market that is doing extremely well. So we want to continue to participate in the open architecture. There still are those end users and customers that prefer to mix and match, prefer connectors with various cables and so forth. And then we definitely want to continue to participate in that market. We are not abandoning that market by any means.

But where the Belden IBDN product is out there, we certainly see great opportunity to move it towards the market mix of 50/50. How quick we can do that, stay tuned and we will have more hopefully next time we talk.

Have you guys announced any kind of marketing initiatives to try to come market this new product, the IBDN system?

We have. We continue to add resources there in both collateral as we get out the brochures and the technical specs and the information to trade shows we actively participate in. We are working aggressively with our general partners in how we can better position it. The main thing that we're doing is getting the salespeople focused on going out and specking the projects in to identify where that we can get our products specified by the installer and integrators. And that requires training our salespeople to be a better technical salesperson for an end-to-end solution. Many of them are trained to sell bulk cable. And we now are needing to make them more knowledgeable of how to market the drops and how to sell an end-to-end solution.

And we're looking at additional add-ons to our product offering of non-cable wire management, other type of products to make that system sell a more complete solution. So a lot of marketing initiatives going on there. And I would expect that we will continue to make investments there because of the attractive returns we're seeing.

It appears there are no further questions at this time. Ms. Johnson, I would like to turn the conference back over to you for any additional or closing remarks.

Thanks. Let me thank everyone once again for joining us on today's Belden CDT earnings conference call. We sincerely appreciate your interest in Belden CDT. Please give us a call anytime if you have follow-up questions. This concludes our call.

That does conclude today's conference call. Thank you for joining us. Have a great day.