Belden Inc (BDC) 2006 Q1 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.

[OPERATOR INSTRUCTIONS]

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

Thank you, Julie. Good morning everyone, thank you for joining us today for the first quarter earnings conference call at Belden CDT. With me here in St. Louis today are John Stroup, President and CEO of Belden CDT, and Stephen Johnson, our Interim Chief Financial Officer and Treasurer.

I hope each of you has a copy of our press release. It can be found on our Web site, beldencdt.com, or if you would 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 does not assume any responsibilities to do so as a result of new information or future developments.

Please review today's press release and our annual report on Form 10-K, which we filed on March 16, 2006 for a more complete discussion on the factors that could have an impact on the company's actual results.

This morning, John will open our conference call with some general comments about the business and the first quarter, then Stephen will review the first quarter financial results and some balance sheet and cash flow items, and John will speak about our outlook for the remainder of 2006, and finally, we will open up the line for questions.

So at this time, let's turn to our President and CEO, John Stroup. John?

Thanks Dee. Let me begin by saying we're pleased with the results of the first quarter. Our revenue of 321.9 million is an increase of 12.4% over the first quarter a year ago, and reflects organic growth of 13.7% offset by the unfavorable 1.3% impact of currency.

The biggest contributor to the year-over-year revenue increase was pricing, which accounted for more than 10% of the increase. This reflects price increases throughout 2005 and to some extent, in 2006. Volume contributed a little over 3% of the increase in consolidated revenue, although this varied significantly among different parts of the company.

Our adjusted operating margin improved 330 basis points from 5.8% of sales in the first quarter of 2005 to 9.1% in the first quarter of 2006. We attribute this to several factors.

First, share gains and price realization in some of our stronger businesses, improved pricing practices in the networking category, rising demand, especially in the industrial market, cost reductions enacted in 2005, including plant closings, improved factory utilization and cost absorption resulted from both the 2005 actions and rising demand, and having offset inflation in our SG&A costs with additional cost reductions. All of these factors contributed to the improvement in operating results in the first quarter of 2006.

Demand in the wide ranging mix of markets that makes up our industrial category was robust. Examples of strength included instrumentation applications in the oil and gas industry, the food industry, power plants, pulp and paper mills, and automobile plants. Our Alpha business, for example, is an industrial cable supplier that has a market position highly differentiated on product quality and service and they had an excellent quarter with respect to both growth and margin expansion.

We experienced strong volume and improved pricing throughout Asia, reflecting I believe the strength of our brands and improvement in our sales representation over the past year. Volume decreased year-over-year in Europe. This decline in volume reflects the discontinuation in 2005 of some unprofitable product lines, some distributor buy ahead in the fourth quarter to take advantage of rebates, and a weak quarter with Deutsche Telecom for weather-related reasons.

Partially offsetting these factors was the strengthening industrial climate, which resulted in improved sales for both Belden Industrial Cables and our HEW Specialty Cables. HEW, our unit in Germany, also won some OEM business in North America this quarter, working with the local Belden sales force.

Revenue in the North America networking market was up slightly, with volume down and pricing up. Pricing is going to focus this quarter, so let's turn to that subject. Pricing that we enacted in the fourth quarter in North America in industrial, electronics, and specialty markets have been effective.

And as you recall, when we spoke to you in February, we said that in the networking category, our behavior had been contributing to sub-optimal pricing and that improvement in that regard was a top priority. During February, we changed our pricing behavior for both the Belden and Mohawk brands.

We tightened up control of discounting by changing the level of authority for such decisions in the organization. We set firm parameters for pricing. We raised the floor product by product and tightly enforced these levels for all new price quotations, and we changed the basis for sales compensation from revenue to contribution. And we have provided additional incentives for system sales, connectors, and higher category cables.

During this corrective action phase, we have been tracking key metrics weekly at the senior management level. Product shifts in the first quarter were affected by price commitments we had made in the fourth quarter. Despite that, we saw sequential improvement and profitability as a result of these new commercial policies. Just after the end of the first quarter, we announced further double-digit price increases in networking to take effect immediately.

These prices were intended not just to catch up with steeply rising copper costs, but also to raise margins in our networking business to a more acceptable level. We have had good support from our channel partners in this effort and it appears that our recent pricing actions are sticking in the market.

We have put in place a deliberate and disciplined process so that we can react quickly in this environment of volatile material costs. We are continuously reviewing a number of integral metrics regarding networking sales and pricing.

We are not satisfied with where we are, but we are encouraged by the progress we made in the first quarter and that which we expect in the second quarter. Since our March 31 action, copper has continued to rise, up from $2.50 to $3.40, or another 35%, so we have taken additional actions.

We announced last week a further double-digit price increase in the networking category to become effective on May 2nd, beyond the increase we enacted on March 31st. Yesterday, we informed customers of the double-digit price increase for Belden Brand Industrial and Specialty Products in North America, effective May 8th. The volatile cost environment is challenging, but we have the policies and practices in place to address the issues raised by such volatility.

You might also recall that in February, we announced a reorganization which was intended to leverage the strength of the Belden brand and provide a more focused approach to the market. We put Belden Electronics and Belden Networking back together in February, and the market has accepted this change very well. When end customers have projects that require, for example, data network, security systems, audio/video cable, it makes sense that the customer and the distributor should turn to Belden to supply it all.

We have the broadest product line of any cable company in the world. We're already seeing more of that integrated approach take hold. Another key benefit of this change is that in the process of reorganizing, we have restored P&L visibility at the point of impact, which is leading us to make better decisions in a more timely manner.

Also in the quarter, we announced that we sold our UK Copper Telecommunications Cable business to a private equity group. As you know, the primary customer for this business was British Telecom. The buyers have a contract with BT and they are retaining the employees, so this worked out well on a number of fronts.

On April 3rd, we announced the closure of our manufacturing plant in Orebro, Sweden. We'll be putting in place a service center that will provide sales, customer support, and engineering, and we will carry some inventory locally. The production will be relocated to our other European locations with similar capabilities. A minor portion of Orebro's production will be outsourced. This moves us forward in our European restructuring plan announced last fall.

As you recall, in the first quarter, we closed the wire-drawing mill that was located in our Venlo, Netherlands plant. We have implemented a European shared service center and streamlined our management structure. Although we are on track with the restructuring plan, we announced in September we are far from satisfied with the results we are generating and we have a great deal of work to do in this region. We need to improve our cost structure. We need to manage our portfolio businesses better, and we need to improve our pricing policies.

We nevertheless view the prospect of improved European profitability as one of the most important things we can do to create additional value for our shareholders.

To sum up, the year is off to a good start. We are pleased with the performance of our high-quality businesses. We are encouraged by the eearly results of our actions in the networking category, however, there is more to do to improve our performance in Europe and in networking globally. These continue to be areas in which I focus my personal attention.

I'll turn this over now to Stephen Johnson, our Interim Chief Financial Officer and Treasurer. Stephen?

Thank you, John. Let me begin my prepared remarks with some comments about the income statement for the quarter.

Once again, revenue for the first quarter of 2006 was 321.9 million. This of course excludes the revenues generated by our former UK telecommunications operation, which we now classify as a discontinued operation in all periods shown. As John indicated, revenue increased 12.4% compared with 286.3 million a year ago.

This increase reflects organic growth of 13.7%, net of unfavorable currency translation of 1.3%. We incurred 2.4 million of pretax charges in the quarter for severance and accelerated depreciation associated with our European restructuring. These charges belong solely to the European segment. The split between cost of goods sold and SG&A for these charges was 1.6 million and .8 million, respectively.

In the first quarter of 2005, we had charges of 2 million for severance, restructuring and merger-related costs.

For the remainder of my remarks, I'm going to speak about results for these 2 quarters as adjusted to exclude these charges. Our gross margin increased from 22.1% of revenues during the first quarter of 2005 to 23.3% of revenues for the first quarter of 2006.

This favorable quarter-over-quarter performance reflects the beneficial impact of price increases enacted in 2005 and early 2006, improved factory utilization and cost reduction actions undertaken in 2005. Selling, general and administrative expenses were roughly flat year-over-year.

Cost reductions, largely generated in Europe, approximately offset the impact of inflation on these expenses. Operating income was 29.4 million or 9.1% of revenue, a significant increase compared with 5.8% in the first quarter of 2005, and roughly flat compared with fourth quarter, 2005 operating income of 29.6 million or 8.9% of revenue.

Interest expenses for the quarter, net of interest income, was 2.8 million. Note that this amount includes $200,000 of unamortized costs associated with the asset back revolving credit facility that we replaced in January with a secured cash flow facility. Pretax income from continuing operations was 26.3 million.

Our effective tax rate for the quarter on the results as reported was 37.6%, however, because most of the European restructuring charges and accelerated depreciation are in jurisdictions in which no tax benefit is currently available, the effective tax rate on adjusted results for the quarter is 35%.

Weighted average shares outstanding for the calculation of diluted earnings per share for the first quarter were 49.3 million. This amount includes the 6.1 million shares attributable to our convertible notes.

Diluted earnings per share on adjusted income from continuing operations for the first quarter were $0.36. This was double our diluted EPS from adjusted continuing operations a year ago of 18 cents.

In prior years, before the effective date of FAS 123R, the applicable GAAP accounting literature did not require the recognition of an expense for the award of stock options. GAAP did require the recognition of an expense for restricted stock and for stock appreciation rights. We utilized all 3 of these forms of equity compensation. The results for the quarter, as well as the guidance John will provide in a few moments, include expenses associated with our outstanding options.

These expenses reflect the application of the provisions of FAS 123R. We estimate the total expense for equity-based compensation for 2006 will be about 4.7 million or $0.07 a share. A portion of this amount, 2.9 million, is attributable to restricted stock and stock appreciation rights.

We would have recognized an expense for these forms of equity-based compensation on a GAAP for prior years. The part of the estimated full year expense that we will recognize as a result of the adoption of FAS 123R is 1.8 million or between $0.02 and $0.03 per diluted share for the year.

We will of course provide information on the assumptions we have used in computing the expense associated with our equity-based compensation programs in the footnotes of the financial statements included on our Form 10-Q for the first quarter of 2006, which we will file on or before May 5th.

Now, if you've had time to review the schedules attached to the press release, you will notice that we have made a change in our segmentation. We alerted you in February that this was to be expected. These segments reflect our current organizational structure and more clearly display the geographies in which we do business.

Our North American businesses are presented in 2 segments, Belden Americas and Specialty Products. These businesses make up about 73% of revenues for the quarter. The revenues of these businesses grew more than 20% year over year. Europe and Asia/Pacific are the other 2 segments.

While revenue in Asia was only 4% of our total revenues for the quarter, it reflects growth of more than 16%. Revenue in Europe, adjusting both the current and prior year quarters for the absence of the UK telecommunications business, was about 23% of the quarter's total, a decrease of approximately 7.5% as we have discontinued the sale of certain low-margin products. Adjusted for charges, our operating profit improved year over year in all geographies, but most significantly in our North American businesses.

Now, let me turn to some selected balance sheet and cash flow items. Cash at the end of the quarter was 153.2 million. This is an increase of 18.6 million compared to cash of 134.6 million at December 31, 2005. The proceeds from the sale during the quarter of our UK telecommunications business are the primary reasons for this increase in cash.

Cash at the end of the 2006 first quarter is less than the 190.3 million at the end of the 2005 first quarter. This is a result of our 2005 share repurchase program. As you may remember, we repurchased between June and December of 2005, 5.2 million shares for $109.4 million.

Depreciation and amortization during the quarter was 9.6 million in the results as reported. This amount includes 1.3 million of accelerated depreciation associated with the European restructuring.

Capital expenditures for the quarter were approximately 3.1 million, a relatively slow start compared with our current 2006 full year plan of 25 to 30 million.

Cash flow from operations includes the impact of a 10.8 million contribution during the quarter that we made to our pension plan in the United Kingdom in connection with the sale of our telecommunications business there. Adjusting for this use of cash, cash flow from operations was approximately a negative 2 million.

The primary factor affecting this performance was an increase in working capital. The increase of receivables from the end of the fourth quarter to the end of the first quarter is not without historical precedent nor is an increase in inventory levels for these periods. But about half the increase in inventory is attributable to the increase during the quarter in raw material prices. The other half is attributable to performance.

As the implementation of more disciplined pricing practices in our strategic planning efforts consume less of senior management time, we will redirect this time to address the level of our working capital during the remainder of the year and beyond.

On a more positive note, debt to total capitalization at quarter end was approximately 23.9%, down slightly from 24.5% at December 31, 2005. Debt, net of cash, to total capitalization was 9.6%, again down from 11.9% at December 31, 2005. As you may remember, all of our 231 million in debt is at fixed rates.

As such, our interest expense has not increased and will not increase in an environment of rising interest rates. On the contrary, our interest expense, net of interest income, should decline in such an environment. Our gross interest expense remains fixed, but our interest income increases as the interest rates on our idle cash increase.

I made reference earlier to our new revolving credit facility. This is $165 million facility. This facility incorporates 2 primary financial covenants, a fixed charge coverage ratio and a debt to EBITDA ratio. For 2006, this facility provides for a maximum 4-to-1 debt to EBITDA ratio and a minimum 1.1 to 1 fixed charge coverage ratio. As of the end of the 2006 first quarter, our fixed charge coverage ratio is 3.2 and our debt to EBITDA ratio is 1.5. Clearly, should we need to access this source of capital in the near future, our financial performance would provide us access to the full extent of this line of credit.

Let me now turn it back to John Stroup, our CEO, for some comments about our outlook for 2006.

John?

Thanks, Stephen. We were pleased with the results of the first quarter. We believe our policies and practices for managing our pricing in this volatile material cost environment are better now than they were three months ago. We believe the assertive actions we took recently in the networking category have had the desired effect. Our revenue outlook is also helped by strong trends in industrial capital expenditures and IT. We continue to look for growth of 3 to 5% in unit volume, based on market demand.

This growth rate will be helped in some cases by market share gains, but held back in some other areas where profit improvement is required and where our pricing policies will put pressure on unit volume. As for the price component of revenue growth, given the volatility in the copper market, it is impractical to try to forecast this. We intend to stay on top of the cost-price dynamic as the year progresses, but we cannot well predict where that will take us.

Given our strong start, we are raising our EPS outlook for the year. We expect 2006 EPS to be between $1.55 to $1.70. This outlook includes incremental option expense from the adoption of FAS123R, but excludes severance charges and accelerated depreciation associated with the European restructuring program and any other similar charges that might occur this year, and assumes a 37% full-year [audio gap] and a spending. The plant closing took place at mid year of 2005, so the related savings will provide more benefit in the first and second quarter comparisons than they do the third and fourth quarter.

For the second quarter, we believe earnings per share will improve compared with the first, but because of the volatility of material costs, we are expressing a fairly wide range, from $0.37 to $0.42 per share. Our game plan is that in the healthy, profitable businesses we invest and focus on growing our share, and in the less-healthy businesses, including Europe and the worldwide networking category, we continue to focus on commercial strategies and pricing policies with a much higher priority on expanding gross margin dollars than on preserving or growing the revenue line.

I'm looking forward to a time later this summer when we can share with you the vision resulting from our strategic planning process. I don't want to get too far ahead of the process, but if you've read our annual report, you know some of the levers we are looking at to drive profitable growth. Some of these are longer-term actions, such as increasing our presence in faster-growing regions of the world, such as Asia and Eastern Europe, working on our cost structure and our flexibility by readdressing our manufacturing footprint and continuing to extend our world-class brands by adding adjacent products to our offerings. We see a lot of opportunity.

This concludes our remarks. I'm looking forward to your questions. Our operator, Julie, will remind you of the procedures for asking your questions.

Julie?

[OPERATOR INSTRUCTIONS].

We'll take our first question from Jeff Beach with Stifel Nicolaus.

Yes, good morning, John. That was an excellent quarter that you just reported.

Thanks, Jeff.

Just to help us as we're shifting from I'll call it product segments to geographies and we're looking at the highest margin now in this recovery, can you describe between electronics and networking what happened from the fourth quarter into the first quarter? I'm particularly interested in whether you were able to advance the electronic margin from what is already high and whether you were able to hold or improve the networking margin sequentially here?

Yes, Jeff, as you know, some of the information as it relates to segmentation that we had done previously, we're not reporting publicly, but let me just try to address your question. We're obviously very pleased with what we were able to do in this quarter with our electronic business. We saw some nice share gains in parts of our business that are healthy levels of profitability. I think we've done a nice job with how we work with some of our better channel partners.

And I am encouraged with what we did sequentially with our networking business. As we talked to you guys in February, the networking business was certainly an area of primary focus. We had a business that in the fourth quarter was roughly breakeven on a global basis after you adjust it for some of the restructuring charges, and we did see improvement sequentially to modest profitability, and I think we feel good about that, that we were able to see some improvement so quickly. As I said, there's still more for us to do there, but I think the actions that we took in he quarter are starting to take hold.

We've got internal metrics that have been positive now for a while, and I think we've got the right people focused on the right problems and we feel good that we're starting to see some improvement.

All right, and just as a follow-up, I haven't been able to calculate out the margin, the operating margin, in your second quarter guidance, but it's a very good number. And it suggests, I'm assuming that you have confidence your pricing will be able to recoup higher copper costs. Is that correct?

Yes. We've been very close, as I said in the prepared remarks, we've been very focused on improving the process that we use for not just monitoring but having effective commercial practices with respect to pricing, and our Q2 guidance does in fact assume that we're going to be able to do that. As I said in my prepared remarks, there's some actions we've taken already. We took one yesterday, for example, where we did in fact communicate a price increase in our industrial business.

The networking business, we had done that at the start of April. We did another one, for it to be effective, in early May. So the operating margin in the second quarter does in fact assume that we're going to continue to be able to do that effectively.

All right, thanks.

Thank you, Jeff.

We'll take our next question from Kevin Sarsany with Foresight Research.

Hi, guys.

Hi, Kevin.

Let me see, where do you start here? I guess in the networking business. You talked about volumes being down year-over-year, correct?

That's correct.

And Anixter reported a couple days, a week ago or something like that, and they were talking the network business being about, organic, about 7 to 10%. And I'm just trying to figure out what's going on there. I mean, obviously in the quarter you lost share, but I'm wondering if it's either one of the new pricing or the new compensation and a culture shock, or is it market acceptance, or can you kind of shed some light on that?

I think from our point of view, we have split out volume from price, which together would be the organic number for year over year and sequential growth, and I'm not sure whether Anixter has made a point to separate those or not.

They said they got zero.

In what? In volume or --?

Price.

In price, okay.

In networking.

Got it. So I think what we're seeing is that we put an emphasis on trying to get our folks more focused on the category six, on the 10-gig, on the connectivity, on the high-value projects, and a number of category 5 projects that in the past we were supplying at highly unacceptable margins, we've walked away from some of that business. And, as a result, our volume has come down, but our gross margin dollars, not just percentage, but our gross margin dollars have in fact improved.

So I think for us part of it is a shift away from portions of the market where customers may not in fact volume some of the higher level of services and dependability and quality levels that we in fact do provide. But it was a deliberate move on our part.

I do think, additionally, because we've taken the lead on the significant change in pricing practices, I think we will see some recovery. We've seen it in other parts of the market, where there's an immediate reaction from the market, where they may shift to some other competitors, whereas competitors take other moves that may be similar to ours, we'll start to see that bounce back a little bit.

We monitor that closely, we watch that closely. I think as a management team, we've been pleasantly - not surprised, but pleased with in certain categories where we did take fairly aggressive actions where we thought customers might in fact abandon us for other alternatives, they've said, no, we're willing to pay the higher price because we really value what Belden has to offer.

I think it's product positioning.

Okay, no, I think that's the right thing to do. Now, would you say in 2Q that you expect volumes to be similar to the first quarter as you go through this transition, or are we going to see a pickup in volume and then you add price to it?

I think if you look just at volume, I think we've got the benefit of more days in Q2 than we have in Q1, so that's a positive impact. But I think that it wouldn't surprise me that if sequentially we see continued pressure on volume in the networking segment. The actions that we're taking and the way we're approaching the market, if I saw that on a days adjusted basis slightly soft sequentially, with the assumption of 3% to 5% in market growth, I wouldn't be concerned as long as we're moving the gross margin dollars up.

Okay, and then obviously what everybody was worried about going into this quarter, on the pricing versus copper and raw material costs, now, you put in a price increase in December which really didn't do much, put one in March, put one in May. Now, if I do the math either on an estimated pounds basis or a percentage of your COGs, raw material and kind of look at copper a year ago at $1.60 in the June quarter, look at it today and just do rough calculations - I'm just trying to come up with what do you need to do in price increases to kind of be net wash and I come up with about a 12.5% price increase year over year to offset copper price. Is that about in the ballpark?

Yes, you're pretty close.

Yes, and the good news, Asia, you segmented it out, it's only 4% of your revenue. What are your plans there? I assume since you segmented it out, there's something that you're really looking to there to do.

Yes, I'm bullish about our opportunities there. I'm bullish by the fact that we make reasonable margins already, with a relatively small scale and a manufacturing cost structure that's nowhere close to optimal. We're taking cable manufacture to the United States and Europe and shipping it across the ocean to Asia and we're having reasonable returns.

Growth rates are good. I think they'll continue to be good. I think a number of our end markets will continue to migrate to those areas, and I think you're going to continue to hear us talk about Asia in that regard.

Okay, very good. My last question, and I'll let everybody else ask questions now, I'm just wondering about the culture in Belden. With the new sheriff in town being you, you're doing a lot of changes. Just wondering how you feel the troops are doing and morale and what they think of what you're doing and the feedback you're getting.

Well, obviously to be careful, because the feedback I get is the feedback I get, but I think there's been a uniform excitement around pace. I think that there's a lot of people that feel good about things that they felt for a long time might be opportunities for the business are being thought about, discussed, addressed, a lot of enthusiasm with regard to our strategic planning process. I think, actually, in three months time perhaps some increasing confidence with regard to how we go to market commercially, how we price.

I think the feeling in general within the organization is that of optimism. I think we feel like we have a lot of opportunities, and I think we're starting to migrate into a really healthy zone of how do we prioritize those and really pull the levers that we think we're going to get the greatest return on, knowing that we have many more ideas than we have the resources to implement, which I always like that sort of environment.

But I think it's a fairly upbeat mood here.

Okay, good. Thank you. Congratulations.

Thanks, Kevin.

Moving on, we'll take your next question from Celeste Laurenzano with Merrill Lynch.

Good morning.

Good morning, Celeste.

Looking at the operating margin improvement, you noted several factors that contributed to that. Can you just talk about, maybe quantify them? Was pricing the biggest factor there?

Pricing had certainly a positive impact, but remember that we also had to overcome a lot of cost wind in the pricing side. I'm not going to be able to break it down maybe in the detail that you want, Celeste, but I think they all had favorable impacts. There's no question that growth in some of our stronger businesses, like Belden, like Alpha, like Thermax, have a very positive impact on our operating margins because they're very healthy businesses.

Price was helpful, but in some businesses we're not able to recover more than the cost increases, which of course puts pressure on our operating margin percentages. I think that our factory utilization was very helpful. In aggregate, our utilization was about 80%. It ranges from 70 to 90, but it's above 80% across the business. We're benefiting from a lot of cost reductions that happened a year ago. We're operating on a much more efficient footprint than we were a year ago.

And, actually, Celeste, I think it's a good indicator, in my view, of how we can continue to expand the operating margin, given the fact that, as you know, we still have a relatively inefficient manufacturing operating footprint. And I know I feel good about the fact that in 12 months time we're able to see the operating margin expansion through in part better factory utilization, better factory footprint, and I think that bodes well for the future.

Great. And in looking at the pricing environment for networking, beyond the double-digit increase you've put in, you talked about having further work to do. Can you just expand on that?

Yes, I think our networking business, I want to make it clear that pricing is not the only thing we need to focus on in our networking business. I think that was the top priority and rightfully so, but I think there's more work for us to do. I think for example, Celeste, we have a much, much better product line than we're properly promoting in the industry.

As I get to understand our product line better and compare it and contrast it with those that we compete against, we have superior technology and many of our customers have come to realize that, and we're just not effectively marketing that to the masses the way that I think that we need to.

So I feel really good about our technology. I'm going to put a lot of pressure on our marketing folks to be doing a better job communicating that to the customers. I just think we have a better solution for a lot of people. I think our cost structure can improve. We still have an inefficient manufacturing footprint.

As you know, our percentage of volume and connectivity is not nearly as high as our competitors, and it should be, which has an enormous improvement on our gross margin line. So I think there's a lot of things we can do in this category to help. It was really just pricing as first priority.

Got you. And then, I guess as an add-on to that, you talked about your emphasis on category 6 and 10-gig. How is your 10-gig product running relative to your expectations?

Modest improvement in revenue, good activity on the sales funnel side, some nice reaction in the marketplace, but still a relatively small percentage of our total volume. I think as it relates to margin mix improvement in the quarter, we saw more impact from the category six portion of the total than we did from 10-gig, as you might imagine. So I would say at this point, not an enormous impact on the financial results and another good example of where we could see further improvement.

Great, thank you.

Thank you.

We'll take our next question from [Joanie Jensen] with McMahon Securities.

Hi, I just have a quick question about your convertible bond. When was your conversion ratio last changed to account for the dividend, and when do you expect that to occur again, assuming your dividend stays at $0.05 a quarter.

We would have adjusted the ratio, or the conversion price, in the fourth quarter of last year.

Okay.

And at our current rate, we would anticipate that it would be adjusted either in the fourth quarter of this year or the first quarter of the next, depending on where our stock price goes.

Okay, thank you so much.

You're welcome.

[OPERATOR INSTRUCTIONS].

It appears that we have no further questions at this time. I'd like to turn the call back over to the presenters.

Thank you, Julie. Let me thank everyone again for joining us on the Belden CDT earnings conference call. We sincerely appreciate your interest, and give us a call any time if you have follow-up questions. This concludes our call.

Thank you, ladies and gentlemen. This concludes our conference call for today. You may now disconnect from the call, and thank you for participating.