Belden Inc (BDC) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden conference call. Just a reminder, today's call is being recorded. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Dee Johnson, Director of Investor Relations. Please go ahead.

Thank you, Ashley. Good morning, everyone, and thank you for joining us today for the second-quarter earnings conference call at Belden. With me here in St. Louis today are John Stroup, President and CEO of Belden, and Stephen Johnson, our interim Chief Financial Officer and Treasurer. I hope that each of you has a copy of our press release. It can be found on our website, Belden.com, or if you would like a copy faxed to you, please call Linda at 314-854-8000. We are podcasting our conference call, so if you want to listen to this again later, you can download it from our website.

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 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 for a more complete discussion of factors that could have an impact on the Company's actual results.

This morning John will discuss the events of the quarter, and then Stephen will review the second-quarter financial results, including some balance sheet and cash flow items. 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. Good morning, everyone. Let me start by saying that we're pleased with the results this quarter. Before talking about the financial results, however, I want to bring you up-to-date on some of the things we have been working on. You probably saw our press release earlier this week. We relaunched our Belden brand and introduced the brand line, Sending All the Right Signals. As we worked through our strategic planning process, it was clear that it was time to position our Company and the Belden brand as providers of signal transmission solutions. We are the top of mind brand across all our markets when people think of cable solutions.

In the networking market, we have a very exciting structure cabling solutions in both fiber and copper, which includes cables, connectors, cable management products and more. With the reorganization of the Company earlier this year and now the inclusion of connectivity and cable management products in the new Belden master catalog, I think we're positioned to better represent these solutions in the marketplace and increase awareness of the breadth of our capability.

Now I would like to talk about our management team. I made three changes to our my direct staff this quarter. Dick Kirschner was promoted to Corporate Vice President of Manufacturing. Dick is a Belden manufacturing leader with more than 25 years experience in the Company, and he is leading two very important initiatives -- our original manufacturing strategy and the implementation of lean enterprise models.

In parallel with the strategic planning team, Dick and a team of associates have been working on our capacity plans and regional manufacturing strategy. As a result, we announced earlier this quarter plans to establish a new plant in Nogales, Mexico and to close our plants in Fort Mill, South Carolina and Tompkinsville, Kentucky. We will transfer most of the production from these two plants in South Carolina and Tompkinsville to the Nogales plant upon completion of the new facility and will outsource the remainder of their production.

I also had the opportunity this quarter to appoint a new President for our Asia-Pacific business. Naresh Kumra, who joined Belden in March as Vice President of Business Development, has moved into the leadership role in Asia. Naresh brings a lot of energy to the prospect of growing our presence in China and India, areas that are strategically important to us. To fill the business development role vacated by Naresh's appointment, I appointed another reason hire, Louis Pace, who has a background in strategic growth initiatives. Louis is working on implementing sustainable processes for developing a pipeline of internal and external investment opportunities, evaluating and prioritizing these opportunities and execution and integration of growth initiatives.

I would like to give you an update on our strategic plan that I spoke to you about last quarter and our method for execution. We presented the strategic plan to the Board of Directors in late May, and the Board received our plan with enthusiasm. In early June we convened an extended leadership group from across the Company to kick off our process for execution. We call it strategy deployment. This process is a descendent of Hoshin planning from the famous Toyota production system, and similar versions of it are used by many successful companies, including my former employer, Danaher. It is a methodology that drives an organization to develop and implement sustainable processes that deliver the desired results. Until both are accomplished, the process and the results, the objective has not been met.

It also ensures alignment throughout the organization as top-level priorities taken directly from our strategic plan are cascaded to the point of impact in the form of action plans with clear ownership and accountability. Progress in each of the action plans is reviewed monthly, and we implement countermeasures for any action plans that fall short of expectation. All of the action plans have not been developed, but work on some of the initiatives actually started earlier in the year while the strategy was still in development.

I will be talking more about the strategic plan at our August 4th investor meeting in New York. If you are interested in that and have not already registered, please give us a call.

Turning now to the quarter results. Both our revenue and earnings this quarter exceeded our expectations. We had year-over-year revenue growth of 31.5%, organic growth contributed approximately 30%, and currency translation contributed 1.3%. As we said in our press release, that's about 10% growth in volume and 20% growth from pricing. The topline growth was strongest in our most profitable segment, Belden Americas, with total revenue increasing 44% year-over-year and operating income rising to 16.9% excluding restructuring charges.

Our industrial markets have continued to be a very strong source of volume growth, especially for Belden America. Both our Belden and Alpha brands have a great deal of equity and strong market share in the industrial market.

All of our business units have implemented price increases during the second quarter. In addition to across the board price increases to stay abreast of material cost increases, we have reviewed a lot of our terms and conditions of sale and made sure that our business practices such as the way we handle project quotes are appropriate to avoid undermining our profitability in this environment.

In addition to across the board actions, we have been implementing a product lifecycle management process. This is one of the initiatives in our strategic plan. Product lifecycle management is the sustainable process of management products from cradle to grave. It includes reviewing our sales in detail by business, by product, by region, by vertical market and by customer understanding exactly where we need to improve our margins and then determining the best course of action. It might be a price increase. It might be discontinuing a product. It might be a change of source or a change in the way we work with the customer to reduce our selling costs. This is a tool we will use continuously. It has been applied successfully at Mohawk, one of the companies in our Specialty Products division, and we're deploying it vigorously in Europe as well.

Despite some good work in this area already, the major causes of our strong quarterly performance were not price increases but rather two other factors. Our ability to leverage our manufacturing overhead and SG&A cost structure in an environment of real volume increases and the cost reductions implemented in the postmerger period, notably the three plant closings that occurred a year ago this quarter. It is worth noting that compared to one year ago we generated 20 million of additional operating income on real volume growth of approximately 30 million.

Two other considerations affected our second-quarter results. First, all our inventory accounting is on a FIFO basis. That means the oldest costs flow out through the P&L each quarter. We benefited by 6 to $8 million because of the difference between the copper costs flowing out with sales and the cost of copper implied in our current pricing.

Second, in pursuit of our goal to better manage all aspects of working capital and especially to reduce our reliance on finished goods inventory, we standardized our inventory management worldwide, particularly our parameters for excess and obsolete inventory reserves. Because of this change, we recognized a charge of 8.2 million in the quarter to increase our inventory reserves. Stephen will have more to say about these matters in his remarks.

Now I am going to turn the call over to Stephen Johnson, our interim CFO.

Thank you, John. I would like to begin with a brief review of the consolidated statement of operations for the quarter ended in June.

Revenue for the quarter was 409.6 million. As John said, the year-over-year change in revenue was 31.5% compared with revenue of 311.4 million in the second quarter of 2005. The sequential increase in revenue was 27.2% compared with the first quarter. We incurred 4.3 million of pre-tax charges in the quarter for asset impairment and severance. Of this amount, 2.5 million was related to the recently announced plans to close two North American plants which effects the Belden Americas segment. And 1.8 million was associated with the ongoing restructuring work in Europe, which, of course, affects the European segment. The asset impairment charge is shown on a separate line in the income statement. 1.4 million of the European restructuring charges were in cost of goods sold and the remaining 400,000 in SG&A. In the second quarter of 2005, we had charges of 6.5 million for executive succession, severance and merger-related costs.

For the remainder of my remarks, I'm going to speak about results as adjusted to exclude these charges. You will find a reconciliation of our GAAP results to these adjusted results in the schedules that accompany our press release.

Our gross margin for the second quarter of 2006 was 22.9% compared with 23.3% of revenues for the second quarter of 2005. In general, our price increases have been sufficient to offset the increase in raw materials cost. While such increases protect our margin dollars, our margin percentage declines. Selling, general and administrative expenses were 12.9% of revenue in the second quarter of 2006 compared with 16% of revenue in the second quarter of 2005. Operating income was 41.1 million for the quarter or 10% of revenue compared with 22.9 million or 7.3% of revenue in the second quarter of 2005. The operating margin improved sequentially as well compared with 9.1% in the first quarter of 2006.

As John mentioned earlier, we recognized an 8.2 million charge during the second quarter in order to increase our excess and obsolete inventory reserve. The allocation of this charge among the segments is as follows. 1.5 million for the Americas division, 4.7 million for the Specialty Products division, and 2 million for the European division. In general, we have moved from reserving quantities in excess of two years sales to reserving quantities in excess of one year sales.

This change in our estimate of excess and obsolete inventory reflects a change in the Company's operating practices with respect to the management of working capital. It is consistent with the companywide oversight of production that our recently appointed Vice President of Manufacturing, Dick Kirschner, is bringing to our various operating units. This oversight in combination with the implementation of lean manufacturing techniques and practices should lead to consistently lower levels of inventory.

Also, further to John's comments about price increases in all of our operating units during the first two quarters of this year, much of the impetus for these increases came from the rapid rise in the cost of the raw material components of our products, most notably copper and petroleum-based compounds, and from the need for more effective pricing and or network networking product category in both Europe and North America.

Our revenue stream during the second quarter reflects the implementation of our price increases throughout the quarter.

In general, in light of the FIFO method of inventory evaluation we employ, our cost of goods sold recognized during the second quarter reflects the cost of products produced during January, February and March. Again, in general, the higher cost of product produced during April, May and June remains on our balance sheet at the end of the quarter. We estimate our second-quarter margins incorporate a benefit of between 6 million and 8 million associated with the differential between the cost of raw materials incorporated in the cost of goods sold and the cost of raw materials implicit in the prices reflected in the revenue stream recognized in our second-quarter income statement.

Now to complete the review of the income statement. Interest expense for the quarter was 3.7 million, and interest income was 1.6 million. Pre-tax income from continuing operations was 38.8 million, a 93% increase from the 20.1 million in the second quarter of 2005. Our effective tax rate for the quarter on the results as reported was 37.6%, the same as in the first quarter. However, because the European severance charges occurred in jurisdictions in which no tax benefit is currently available, the effective tax rate on adjusted rate results for the quarter is 35.9%. Weighted average shares outstanding for the calculation of diluted earnings per share for the second quarter were 50 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 second quarter were $0.51. This was approximately double our diluted EPS from adjusted continuing operations a year ago of $0.26.

Turning now to the results by segment. The Belden Americas segment had external revenue of 219.8 million, an increase of 44.4% compared with the second quarter of 2005. This segment made up 53.7% of the Company's consolidated revenue this quarter. The segment's operating profit adjusted for severance and impairment charges was 40.3 million or, as John indicated earlier, 16.9% of total segment revenue. Total segment revenue includes shipments to affiliates.

Revenue for the Specialty Products division was 73.6 million, an increase of 18.8% year-over-year and representing 18% of consolidated revenue. Operating profit for this segment was 9.5 million or 11.5% of sales compared with operating income in the second quarter of 2005 of 8.8 million or 13.3% of sales. In Europe external revenue in the second quarter of 2006 was 100.5 million, an increase of 19% from a year ago, all price driven and an increase of 37.6% compared with the first quarter of 2006.

Europe made up 24.5% of consolidated revenue for the quarter. Operating profit in Europe adjusted for the severance charges was 1.9 million or 1.8% of sales. These results masked somewhat the progress our team in Europe is making as they reflect, as I mentioned earlier, a $2 million adjustment to their excess and obsolete inventory served.

Our Asia segment made up 3.8% of consolidated revenue, and its revenue increased 22.1% year-over-year. The operating margin in Asia, 9.5% of revenue, was a significant improvement from the operating margin a year ago, which was 3.4% of revenue.

Now the geographic configuration of revenue for the quarter was as follows. Revenue in North America made up 68% of the total and Europe 23% and in the rest of the world 9%. This is a shift of about 2 percentage points to the United States and Canada and mainly from Europe and reflects strong growth in Belden Americas.

Just a few words about our networking product category. We made progress in this category during the second quarter as we did in the first quarter. Our operating profit percentage for this category increased another 300 basis points sequentially in the second quarter over the first quarter.

Now turning to some selected balance sheet and cash flow items. Cash at the end of the quarter was 195.8 million, an increase of 42.6 million from the end of the first quarter and an increase of 61.1 million since December 31, 2005. Depreciation and amortization during the quarter were 8.9 million, down from 12.4 million in the first quarter of 2006, a decrease reflecting the difference between the accelerated depreciation expense associated with our European restructuring actions recognized during the two quarters. Accelerated depreciation in the second quarter was negligible.

Cash flow from operations in the second quarter was $27.3 million, up sharply from an $11 million use of cash in operating activities in the first quarter. Capital expenditures for the quarter were 4.2 million, 7.3 million for the first half of the year. We anticipate full-year capital expenditures of between 20 to 25 million.

We had an inflow of 13.9 million in cash in the quarter from the exercise of stock options, 20.8 million for the first half of the year. Dividends paid during the quarter were 2.2 million, 4.3 million for the first half of the year.

At the end of the second quarter, leverage expressed in terms of debt to total capitalization remains low. Debt as a percentage of total capitalization was 22.7%. Debt out of cash was 4.3% of total capitalization. We will use some of our cash in the coming weeks to pay down the 59 million of notes that fall due August and September. On August 11 we will pay off $15 million tranche of private placement notes originally issued in 1997 and on September 1 a $44 million tranche of private placement notes originally issued in 1999. Following on the payment of these notes, debt as a percentage of total capitalization will be around 18%, and of course, debt out of cash will remain at 4.3% of total capitalization. Our leverage position expressed either in terms of debt to total capitalization or in terms of debt to EBITDA reflects a continuing strong balance sheet and the ability to secure any additional capital necessary to implement the operational aspects of our strategic plan.

One last note. As you may recall, we were not pleased with our working capital performance during the first quarter of the year. While we still have a long way to go to meet the objectives John has established for the Company in this area, we are nevertheless pleased that expressed in terms of turns both our inventory turns without taking credit for the increase in our inventory reserve and our overall working capital turns improved during the second quarter.

I will now turn it back to John Stroup, our CEO, for some comments about our outlook for 2006. John?

Thank you, Stephen. We expect general economic conditions in our served markets to remain healthy in the second half of the year. The material cost environment remains volatile. We will continue to be very deliberate about keeping our pricing at levels that will enable us to recover the full costs of raw material increases. Considering the progress that has been made in our European business in June and July in product lifecycle management processes and other initiatives, we expect further margin expansion in that segment in the third quarter.

Our outlook for the third-quarter diluted earnings per share from continuing operations is the range from $0.43 to $0.48 per share on a GAAP basis. At this time we expect that charges related to our previously announced restructuring actions in Europe and North America will be about a $0.01 per share. For the full year 2006 then, we expect diluted EPS from continuing operations on a GAAP basis to be between $1.62 and $1.72, and this estimate includes restructuring charges of $0.11 already incurred year-to-date, plus an estimated $0.02 in additional restructuring charges associated with the announced actions. Therefore, on an adjusted basis without the charges, our EPS for the full year would be between $1.75 and $1.85.

This concludes our remarks. We now have some time for your questions. Our operator actually will remind you of the procedures for asking your questions.

(OPERATOR INSTRUCTIONS). Celeste Laurenzano, Merrill Lynch.

I was wondering if you could just talk about the sequential increase in sales and maybe provide a breakdown of how much of that came from price versus unit growth?

Approximately one-third of our increase in period-over-period revenues came from volume. About two-thirds of it came from price, and the differential would be how much in dollars?

She was looking for sequential.

I'm sorry, sequential?

Yes.

We were roughly at 321 in the first quarter, and we were roughly at 409 in the second quarter. So that is what, 89 million. So you're looking at roughly 30 million in volume and 60 million in price.

Great, thanks. And if you can talk about pricing going forward, how many -- how much of the product price increases were just partial in Q2 that we have yet to see a full quarter benefit of?

We had price increases that were implemented during April, May and June throughout the operations. And so I would say in general we probably got half a quarter's worth of other impact.

(OPERATOR INSTRUCTIONS). Jeff Beach, Stifel Nicolaus.

Good morning and nice quarter. Europe, you saw a very strong increase in sales. Can you describe what happened in Europe, and then it did not look like there was much of a profit impact in the quarter?

The majority of our revenue increase in Europe was from price. As Stephen indicated, the improvement we saw in Europe is somewhat masked by the excess and obsolete reserve actions we took in the second quarter. If you exclude that, there was improvement in Europe. But I think that we feel good about a lot of things that happened in the quarter in Europe, not just on the cost side but some new initiatives with regard to some commercial actions as it relates to our product lifecycle management process that makes us feel confident that we are going to continue to see improvement throughout the year.

All right. And looking ahead at your third and fourth-quarter guidance, are you looking for the typical seasonality of business in Europe to offset other positive things that are -- the growth that is occurring in North America and Asia-Pacific?

Yes, I think in the third quarter, Jeff, there is probably two things. One is that yes, typically in the third quarter we see seasonality in Europe, and we would expect that to happen again.

And the other thing is that I think that some of the strength we saw in the second quarter we're trying to understand completely how much of that is sustainable. The second quarter was obviously a very good quarter from a revenue and order point of view. Although we think the second half will be very healthy, we think some of the real strong rates we saw in our Belden Americas business at this point we are just trying to be a little bit cautious about whether or not all that strength will continue.

All right. I'm probably missing some things here. There was a significant jump in cash. It looks like some came cash from operations, some from exercise of stock options. Is there anything else that was big in the quarter?

No, those would be the primary factors. We generated almost $14 million in cash from an option exercises. I don't anticipate that we will do that every quarter going forward. You know we have had a large increase in the price of the shares from the beginning of the year, and I thing many of our associates have taken an opportunity to exercise some of their options. We have had almost 1.2 million options exercised this year. So 20 million of our increase in cash of the 60 million from the beginning of the year is attributable to option exercises.

Errol Rodman, Rodman Capital Management.

Can you give us an idea as to what your balance sheet might look like a year or two from now and what kind of major financial changes you might want to implement during this time?

I think that the question for us is quite timely. Now that we've got the strategic plan process behind us, we are now working on that exact question of coming forward with what we believe would be the right structure for our balance sheet to properly support the operating strategic plan. I think we're going to be in a very good position probably this time next quarter to share details with you on that.

As Stephen said, we feel very good about the strength of our balance sheet. We know it is what we need to get things done operationally. But there is an opportunity certainly for us to restructure it in a way that might give us a little bit more leverage, that might make more sense.

But we are evaluating all options in terms of use of cash. Funding our operational strategic plan is the first priority. Good solid strategic acquisitions when they make sense would certainly be a candidate. We're certainly not ruling out the opportunity to do share repurchase again if that makes sense. So we are right in the throes of that, and we look forward to updating you in greater detail in probably next quarter this time.

(OPERATOR INSTRUCTIONS). [Alan McRainey], [Sullivan Lake Asset Management].

Thank you. The question was asked and answered.

Ms. Johnson, there are no further questions at this time.

All right. Thank you, Ashley. I want to thank everyone once again for joining us today on the Belden earnings conference call. We sincerely appreciate your interest. If you have not talked to us about an August 4 analyst meeting, you are welcome to give us a call and also with your follow-up questions.

This concludes our call today. Thanks.

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