Belden Inc (BDC) 2006 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to this morning's Belden Incorporated conference call. Just a reminder this call is being recorded. At this time you are in listen-only mode. Later we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS].

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

Thank you, Jodie. Good morning, everyone. Thank you for joining us today for the fourth quarter earnings conference call at Belden. With me here in St. Louis today are John Stroup, President and CEO of Belden; and Gray Benoist, Vice President, Finance and Chief Financial Officer. Some logistics. We have put a few slides on the web today so if you have not already done so, please open the slides at investor.belden.com. There's no www in that address. Just investor.belden.com, and if you open the Webcast before 9:15 you may need to refresh your browser to see the slides. If you need a copy of our press release, you'll find that in the same place or if you would like a copy faxed to you, please call Linda at 314-854-8000. We're 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 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 10K 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 briefly discuss the recent acquisition announcement, then Gray will review the fourth quarter financial results including some balance sheet and cash flow items. John will speak about our outlook for 2007 and finally, we'll open up the line for questions.

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

Thank you, Dee. Good morning, everyone.

We are extremely pleased with the progress made in 2006. Our financial results are solid. We made good progress on each of our strategic priorities, and we have a terrific start on each of the four long term financial objectives established and communicated in August 2006. For the quarter, on an adjusted basis, earnings per share increased 48%, and we are exiting the year at an operating income percentage of nearly 10%. Even more remarkable in my view is that we achieved these results while executing a massive manufacturing restructuring and significant inventory reduction. For the year, on an adjusted basis, earnings per share increased 74% and our operating income margin improved 230 basis points. These results were achieved by our hard-working associates with the help of a strong portfolio of brands, products, and channel partners.

In August 2006, we shared with you four 3-year objectives established for the organization. I would like to update you on our progress with each. First, operating margin. Our goal is to increase it from 8% to 12% or better. We ended 2006 at 10% adjusted. We are expecting operating margin between 10.8% and 11.5% in 2007, and we are on track to meet or achieve our ultimate goal by 2009. Second, return on equity. Our return on equity goal is 13 to 15%. In 2005, our adjusted ROE results were 7.4% and in 2006, our performance improved to 11.8%. That goal of 13% or better is well within our sights. Third, organic growth. Our goal for organic revenue growth is 5 to 7% excluding the impact of raw material costs. Our 2006 growth defined in this manner exceeded 7%. Our fourth goal is that free cash flow will exceed net income. In 2006, we generated free cash flow of more than $100 million, about 150% of net income.

Now I'd like to share with you our progress with the strategic priorities identified to deliver further improvement in the four items just discussed. If you would turn to slide four, you'll see the pyramid diagram we use to depict our strategic plan. Looking first at our product portfolio management initiative. Our variable margin, adjusted for the copper spot rate, improved markedly because of more effective product positioning. This may not be entirely sustainable given the recent move in copper prices, but it is strong evidence of our good work with product portfolio management and a very positive indicator for 2007. As Gray will explain later in the call, our temporary manufacturing inefficiencies mean that our gross margin does not yet fully reflect this improvement.

We have been especially active in managing our networking category. We've made substantive changes in our pricing, sales compensation and overall focus. As a result, products like category six, fiber, and central office cables grew more than 5% quarter-on-quarter, and more than 10% year-on-year, on a copper adjusted basis. For the less attractive and less profitable products in networking, our copper adjusted revenue declined 20% year-over-year and the sales we retained were at better margins. The networking business was 44% of our revenue in 2005, and now in the fourth quarter of 2006, it was below 40% of revenue but a much better contributor. We like our results in the industrial market which has above average profitability for us and is our largest vertical market after networking. That's been an area of growth in 2006. Our European business had another good quarter, not quite as profitable as in the third quarter, but still reflecting good progress in applying the portfolio management approach and working on their cost structure.

Our management of talent has improved and penetrated through the organization. Incentive programs have been modified to reward top performers, and our recruiting is generating high quality new entrants at all levels of the organization. Regional manufacturing is an area of focus we have talked with you about several times last year. During the fourth quarter, we broke ground on our new facility in Nogales, and we announced additional actions associated with our manufacturing footprint. This second phase of manufacturing restructuring was announced nearly six months earlier than originally expected. We anticipate recognizing the benefits of our 2006 announcements in the fourth quarter of 2007. Our acquisition of LTK addresses the significant gap we had previously in Asia.

Turning to Lean. We made terrific progress with staffing and tool development in support of our Lean Enterprise initiative. In addition to adding a well-experienced Lean Director, we have increased the department's headcount to a total of five with plans for nine by year-end. We are well-positioned in 2007 to attack cycle times and make sustainable improvement in quality, delivery, productivity, and inventory turnover. While we're on the subject of lean, I would like to point out that we've reduced our inventory by an impressive $49 million in the fourth quarter, following on a $17 million reduction in the third quarter, and you see the impact in the accumulation of cash which rose to $254 million at year-end. Remember, we set a goal of improving our inventory turns by one turn a year. From four turns a year to five turns would require a $60 million inventory reduction. We have already accomplished one full turn of improvement since June. We do not yet have in place the cycle time reductions that will sustain this improvement, but this is nevertheless a terrific achievement on part of our associates. We now have a goal of improving another full turn by December 2007.

We have an emphasis on emerging markets, and copper corrected sales in our Asia Pacific segment have increased 17% year-over-year. But the acquisition of LTK, in addition to the fine business that it contributes in its own right, will be a good platform for our future -- for our further growth in China and Asia. At the top of our pyramid, we are interested in extending our portfolio further into air, light, and connectivity. Sales of connectivity products in the United States increased 50% year-over-year from a small base. Our historical stronghold in networking connectivity is Canada, where sales also increased as was the case in all regions. Our Belden Wireless Solution has been successfully introduced, and we had customer sales and distributer stocking orders in the fourth quarter. And at the Big C show in January along with our skinny 10 gig cable, we introduced several new cable management products to address customer desire for improved density in the data center. The acquisition of Hirschmann Automation and Control will of course add a significant amount of industrial connectivity to our portfolio.

We won't have time to cover everything we want to tell you about the acquisitions today, so we'll be convening another conference call next week to go into more detail. Today, we'll just give you the highlights. Turning to slide five, I would like -- first like to discuss briefly our acquisition of Hirschmann Automation and Control. HAC is based in Germany, and they design and manufacture industrial connectivity. They are a well-respected supplier of industrial connectors to German OEMs, and they have the leading global market position in rail mounted, industrial ethernet switches. About 75% of HAC's revenue is in Europe where the adoption of industrial ethernet is farther along than elsewhere. The short-term opportunity is for Belden to help increase HAC sales in North America and Asia. Longer term, our vision is to develop an integrated industrial solution for our customers. This is a well-managed and profitable company with about $250 million in revenue in 2006, growing at about 8 to 10% per year. As you factor this into your Belden model, remember we won't close until around the end of the first quarter so figure on three quarters. Considering where we think our capital structure will be after these acquisitions, we expect HAC to be accretive in 2007 by approximately $0.11. Turning to slide seven, I'm happy to announce that we're acquiring LTK Wiring, a Hong Kong-based manufacturer of electronic cable. LTK is a highly respected brand, and the company has strong relationships as a supplier to numerous companies manufacturing in China. Their manufacturing quality is very good as it has to be to work with companies like Sony, [Waway] and Nintendo. LTK will be an excellent base for localizing production of Belden products and improving Belden's penetration of desirable markets in China and throughout Asia. LTK's revenue in 2006 was about $220 million, and they are growing at 12 to 15% a year. On a three quarters basis, we expect the acquisition of LTK to be accretive to Belden's earnings by approximately $0.08 in 2007.

And now I'm going to turn the call over of to Gray Benoist, our CFO. Gray?

Thank you, John, and good morning.

I have a vivid recollection, John, of five months ago you indicating that Belden would be an exciting place to work. I clearly had no idea how exciting. Let's turn to the fourth quarter and our financial results. Beginning with the consolidated statement of operations. Revenue for the quarter was 378.8 million, an increase of 14.3% year-over-year. Favorable currency translation contributed 2.3% year-over-year growth, so resulting organic growth was 12%. Sequentially, revenues declined 1.8%, reflecting continuing product portfolio management actions. As John mentioned, third and fourth quarter portfolio management traction, especially in our networking served market, is taking hold, squeezing out inventory, and eliminating less attractive products in the process. Because of this, year-on-year metals adjusted growth was flat, but we grew very well on the industrial served market and can see this improvement most notably in the European segment results. In the fourth quarter of 2006 we announced additional restructuring actions in North America, including the cessation of manufacturing at our Montreal facility and our smaller Dearborn operation in the Chicago area. The team is now in the process of shut down and product transfer of the four North American plants, the two just announced in December, plus the two announced back in June -- Fort Mill, South Carolina, and Tompkinsville, Kentucky -- and the additional footprint reduction announced for our Venlo, Netherlands, facility in September. All five of these actions will be accomplished by mid 2007 and will be in the third quarter or fourth quarter financial performance for the enterprise. Add to this our tremendous progress in inventory reduction John spoke about where we're over the near term correction phase. We are producing a lot less than we are selling, and we have experienced short-term manufacturing inefficiencies, where margins suffer slightly until the capacity is taken off line.

Over the next few quarters, we expect to see the improvement in manufacturing costs and gross profit margins that accompanies the significant actions we have taken, consistent with our regional manufacturing strategy. As a result of these restructuring actions and those in Europe, we incurred 18.5 million of pre-tax charges in the quarter for asset impairment, severance, and accelerated depreciation. In the fourth quarter of 2005, we had charges of 10.1 million for severance, accelerated depreciation, merger integration, and executive succession. To provide a better sense of our operational execution, I'm going to focus on adjusted results without these charges for the remainder of my remarks. A reconciliation between GAAP and the adjusted result is provided as part of today's press release.

Gross profit was 89.7 million or 23.7% of sales in the quarter, so 50 basis point improvement from a year ago and an 80 basis point lower sequentially. Last quarter, we advised you that our planned inventory reduction will create significant headwind against Q4 and Q1 gross margin improvement. Given the magnitude of the inventory reduction in the fourth quarter, 49.5 million, we're pleased with the relatively good gross margin level in fourth quarter, reflecting product portfolio management improvements and stabilized [comp] costs. Selling, general and administrative expenses were 52.1 million or 13.7% of revenue compared with 50.4 million or 15.2% of revenue in the prior year quarter. This is an improvement of 150 basis points year-on-year. So a reflection, I must commend the efforts of segment management associated with cost control as we experienced a reduction in Q4 year-on-year SG&A spending in each of our segments, with the exception of Asia, where we're continuing to increase our investment in sales to position us for regional growth. Also recall as part of our Q4 restructuring action was also taken in SG&A. This is part of our efforts to remain flexible and to improve performance.

Operating income was 37.6 million in the fourth quarter, that's an increase of 27% year-over-year, comparison is made more challenging by the fact that a year ago quarter, Belden received a special payment of $3 million under a minimum purchase contract, which did not reoccur this year. If you set aside that special item, operating income increased 41% year-on-year. Interest expense for the quarter was 2.5 million, and interest income was 2.5 million. The net interest amount was less than $100,000 of expense for the quarter. As we discussed in the third quarter earnings call, many steps are currently in process associated with the recapitalization of the enterprise, but now, with the pending acquisition, transactions will be disclosed in the near future. Pre-tax income from continuing operations was 37.9 million compared with 27 million a year ago, an increase of 40.4%. During the fourth quarter, we purchased the interest of the minority partner in HEW. HEW is our high temp and industrial business in Germany for $6.8 million. This move helps further the integration of our European operations.

Income tax expense was 15 million in the adjusted results, 39.5% of pre-tax income for the quarter. This brings the effective tax rate for the year to 36.9%. We have been forecasting a rate of 36%, but because of the jurisdictions where our income occurred, the actual rate was slightly higher. Our income tax expense was about 1.3 million higher in the fourth quarter than the analysts would have modeled at 36%. Weighted average shares outstanding for the calculation of diluted earnings per share for the fourth quarter were 51.1 million, an increase of 600,000 shares sequentially, and increased year-over-year because of the options exercised and options in the money. Diluted earnings per share on an adjusted income from continuing operations for the fourth quarter was $0.46. This is up 48% compared with $0.31 in the fourth quarter of 2005. Full year adjusted earnings per diluted share were $1.88, compared with $1.08 a year ago. This is a 74% increase. John's first year and my first five months with Belden have been exciting. We've launched a number of great ideas and programs that Belden's fully capable of executing. We have strong results for 2006 and believe we've laid a very strong foundation for 2007, both with our acquisitions in strategically important markets with new products and higher sales growth potential, and in the execution of operational excellence through a better incentivized salesforce, an even healthier balance sheet, and much more efficient manufacturing cost structure.

And now I'd like to turn to the segments on page nine. And I will continue my talk with respect to adjusted results. Our largest segment, Belden Americas, had external revenue of 204.6 million in the fourth quarter, an increase of 18.2% year-over-year compared with the fourth quarter of 2005 and flat sequentially. Industrial revenue and broadcast revenue as mentioned earlier are continuing areas of strength for the segment again this quarter. Belden America's operating profit, adjusted for severance and impairment charges, was 34.7 million or 15.8% of total revenue. Just a reminder, total revenue includes our sales to affiliates or cross-segment sales, if you would prefer, and provides the best basis for calculating the operating margin percentage of each business. For the year, external revenue of Belden Americas segment was 54% of consolidated revenue and their operating margin was an excellent 16.4%.

External revenue of the Specialty Products group was 60.9 million off 5.9% from a year ago due to the targeted actions of product portfolio management directed at greater profitability, especially in the Mohawk brand networking business. The portfolio proven as manifest in fourth quarter operating income for the segment which was 7 million or 10.1% of sales, up 6.1 million or 8 -- 8.6% of sales a year ago, again on lower volume and lower volume sequentially. For the year, the specialty segment grew 7.1%, and operating income grew 28.7%. It was a very challenging year in specialty, but the results speak for themselves, an excellent result under very difficult circumstances. Specialty represents 18% of the Belden total revenue for the year.

Our Europe segment's external revenue was 96 million for the fourth quarter, up 19.9% year-over-year and flat sequentially. Our operating profit in Europe was 6.4% for the quarter compared with 1% a year ago, reflecting sustained improvement resulting from portfolio management activity of a very strong industrial market in Europe, manufacturing cost reductions, and a continuing and expanding shared service philosophy. For the year, Europe was 24% of our consolidated sales and generated an operating margin of 4.4%. The operating margin results for the first half of 2006 were less than 2%, and the second half of the year averaged better than 6.5, continuing the favorable trend displayed in our Q3 results. Our target of having Europe exit 2007 with at least 10% operating profit at year-end after the full year, or at the year end exit rate, remains the plan of record, and the last two quarters' results are very encouraging with respect to accomplishing this goal.

The Asia-Pac segment had a very strong fourth quarter. Revenue grew 26.2% year-over-year to 17.3 million compared with 13.7 million a year ago. Operating income of the segment was 2.5 million or 14.7% of sales for the quarter. That's an increase of over 100% year-over-year from 1.1 million and a near doubling for the segment for the quarter. For the year, the segment's operating profit margin for 10.7% and the segment comprised 4.3% of consolidated revenue. For Belden consolidated operations, the geographic configuration of revenue in the quarter was as follows -- Revenue in the United States and Canada made up 66% of the total, in Europe 23%, and the rest of the world 11%. This reflects a continuing slight shift towards Asia, which of course we are about to accelerate significantly in the second quarter, 2007, after we close on the pending acquisition of LTK. Roughly speaking, after the two acquisitions, rest of world and Asia will likely provide about 20% of our consolidated revenue for 2007 and Europe approximately 28%, very nicely balancing our global market profile.

Now turning to some selected balance sheet and cash flow items. We generated about 70 million of cash from operations in the fourth quarter and about 130 million for the year, which drove our ending cash balance to 254 million, up from 191 million in September 30th and 135 million at the prior year-end. We experienced a remarkable result associated with the inventory reduction goal, and we had to -- we had targeted to reduce inventory by about 15 million per quarter to improve one full turn per year. This quarter, as John said, we took inventory down 49.5 million which is a huge achievement and was accomplished across each business segment and across each inventory category, raw material, finished goods, there was a slight increase in WIP. Nice timing for the Company to pull 50 million out of inventory when we need 455 million for acquisitions. 10% of our purchase price, in theory, could be funded just out of our inventory change. That's not the way we're going to fund it, though.

Other sources of cash in the fourth quarter were a result of our focus on improve -- improving our PP&E efficiency, most notably in real estate, where we created cash in flow of 4 million with the sale of the Fort Mill facility in South Carolina. We also brought in $5 million associated with the exercise of employee stock options. Depreciation and amortization during the quarter were approximately 9 million and capital expenditures were 11. On slide ten -- excuse me. Pardon me. In recent years Belden's CapEx has been approximately 2/3 of depreciation. As I mentioned in our third quarter call, we'll be driving an asset light orientation to the management of our PP&E; however, in 2007 we do have two major capital projects. A plant currently under construction in Nogales, Mexico, and a new plant near Shanghai that will take over production from one of the existing LTK plants. Therefore, our gross capital budget in 2007 reflects these one-time investments [and is] 60 million. I say gross because it's net of any actions associated with asset light.

John presented some information regarding where we are with respect to our three year strategic financial goals. I'm going to add two key performance indicators which, along with ROE, we plan to report to you regularly. These simple ratios -- these are simple ratios you can calculate from our published numbers, and I'd like to spend a moment defining them for you. On slide ten, the first of these is inventory turns. We are calculating that as current quarter cost of goods sold annualized divided by the quarter ending inventory, and as you can see, we've raised our inventory turns from 4.1 turns as of a year ago to 5.7 turns in the most recent quarter, reflecting the inventory reduction achievement we've been spending some time talking about. Lean thinking focuses on inventory as the most critical measure of operational excellence. For our working capital turns measure, we again used most recent quarter cost of goods sold annualized and divide that by net inventory plus net receivables minus accounts payable and accrued liabilities. Working capital turns have improved from 4.5 turns a year ago to 5.3 turns in the fourth quarter of 2006 driven by the inventory improvement. Lastly, our return on equity calculation, we are using adjusted income from continuing operations divided by average shareholders equity. The improvement here from 7.4% in 2005 to 11.8% in 2006 is a real step forward to our performance goal of 13 -- 13 to 15%.

I'd now like to turn it back to John Stroup, our CEO, for some comments about our outlook for 2007. John?

Thank you, Gray.

2007 will be a year of execution for Belden. All of our effort in product portfolio management, lean enterprise, and regional manufacturing will contribute to our results. We are a stronger Company with the addition of HAC and LTK, and they will be immediately accretive in 2007. We plan to close on the two acquisitions around the end of the first quarter so we are assuming they are included in our results for three quarters of 2007. On that basis, we expect our total sales to be between 1.9 and 2 billion. This implies a growth rate for the base Belden business of not more than 4%. It is supplemented, however, by adding in higher growth businesses like HAC and LTK. Our outlook for operating profit for the year is in the range from 10.8 to 11.5%, inclusively for the entire portfolio. This would be a continued improvement from our 10.1% in 2006 and on the path toward our target of 12% or better. The acquisitions will not materially change the operating profit structure of Belden's consolidated results. Because of the nature of the respective businesses, HAC does have higher gross margins, but they also have higher SG&A. LTK has lower gross margins, but they also have lower SG&A. But they both produce operating profit in the same neighborhood as Belden. With the two acquisitions, we will obviously be making some changes to our capital structure. We expect that after these changes, the ratio of debt to debt plus equity will be in the range of 30 to 35%.

We expect our effective tax rate to be 37% in 2007, and we expect earnings per share to be in the range of $2.40 to $2.65, excluding any severance charges and other restructuring charges that may occur from already announced actions. In September, when we announced restructuring actions in Europe, we said you should expect an impairment charge of 2 to 4 million in a future quarter regarding certain equipment in the Netherlands. We now expect that this charge will be incurred in the first quarter of 2007. We will continue to have severance cost each quarter for the several manufacturing restructuring actions underway.

I'd like to thank our associates once again for all that we accomplished in 2006, and thank you for your interest and support of Belden. This concludes our remarks. We now have some time for your questions. Our operator, Jodie, will remind you of the procedures for asking your questions.

[OPERATOR INSTRUCTIONS]. Celeste Laurenzano, Merrill Lynch.

Good morning.

Good morning, Celeste.

Quick question on the two acquisitions. Could you talk about how each of the -- the material content for the products for each acquisition differ from Belden today? And then just shifting to LTK, if you can talk about the competitive environment there and do they compete with China-based companies for these products?

Okay. Celeste, I'm going to -- I'm going to keep my remarks fairly brief because as I said next week we're going to go into more detail, but in the case of HAC, this is a Company that has been in industrial connectivity for a long time. It mates up very nicely with our cable business at Belden in terms of certain markets, and then, of course, they're also the global leader in rail mounted industrial ethernet switches which we think is also terrifically helpful as we penetrate the industrial market. And then they also have a minor business in the area of safety devices for mobile [frames], so that business clearly brings a lot of capability and adjacent products around connectivity that we think's going to be very helpful in our global penetration of the industrial market. In the case of LTK, LTK has done a very nice job of establishing themselves uniquely in the region of working with companies throughout Asia on new product concepts, largely OEMs. These are typically very well-known OEMs like some of the ones that we mentioned, and also then helping that Company establish manufacturing in China, so they've done a nice job of very good innovative products that allows them to compete better with some of the other companies in China. They do compete somewhat with local Chinese companies, but remember, LTK's manufacturing's all in mainland China, not in Hong Kong. It's all in mainland China, and it's clear to us from the very exhaustive work we did that their level of quality and service is significantly better than a lot of the other companies in China that we're aware of, so we're -- we couldn't be more happy to have both of them as part of the Company.

Okay. And then I guess wasn't clear on my first question. I guess I was looking at the raw material content of -- of some of these new -- the product lines and how they compare with Belden today.

Yes, hi, Celeste. This is Gray. Clearly, the business at LTK is a wire and cable business, so it has a profile that's fairly similar to Belden's, so it has significant metals content, copper, most notably, as well as the PVC associated with the -- the jacketing. So I would say it has a similar mix to ours. HAC on the other hand, is far more electronics-oriented and has a high material content with respect to electronic componentry and the engineering value add associated with that product family is very, very high. So I would say that HAC is very dissimilar to the majority of Belden's traditional operations.

Great. Thanks.

Sure.

And then looking at the networking cable mix, aside from the initiatives that Belden's been taking to focus on the higher end products, can you talk a little about what you're seeing in the industry overall regarding mix and then maybe some of the drivers for that business in '07?

Well, I think that what we saw in the latter half of 2006 anyway is that as prices came up and stabilized, there were some customers that were perhaps thinking more carefully about whether or not they upgrade to cat six for example, given the price difference between a cat five and a cat six solution, so we've been -- we've been pretty pleased that we've been able to improve our mix in an environment where that's a little bit perhaps more difficult for a customer to -- to justify in their own mind. I think that we feel like in 2007, our networking -- our networking business category is well-positioned for 2007, much, much better than we were a year ago, and I think we feel like that's a business that's going to contribute nicely in 2007 because we've done a lot of the difficult work already. We've got the right pricing in place, so we know it's going to be profitable. We've got, I think, the right sales incentive schemes in place. We've got good momentum and traction on connectivity so I would say we're pretty optimistic, Celeste, about that business in 2007.

Great and then just a quick question on the inventory work down. If you could talk about the impact on the earnings in Q4, if any?

Yes, hi, Celeste. It's Gray again. Well, there's a lag here that we talked about last quarter as well. The FIFO inventory methodology does in fact inventory many of those inefficiencies, so we're seeing here in cost of goods sold in Q4 is really our inefficiencies from Q3. And the majority of the inventory adjustment that we had in Q3 as you'll recall, 17 million and the tick down in volume from Q2 which was a very efficient quarter to us to Q3, really did mask those inefficiencies and those did show up. It's somewhere between 1.5 to 2, 150 to 200 basis points that we're looking at right now, and for Q1, the fourth quarter inefficiencies will continue as we've ramped down the production associated with this current inventory adjustment. So we're off about a quarter. We're turning our inventory a lot faster now, so the 5.7 turns as you look backwards is really meaningful now to get a lot of our actions incorporated within the quarter, because we'll have less of a FIFO impact and more of a current production quarter impact because of our turns improvement. And we're really encouraged about that so that we don't have this lag, and we get to our results a lot quicker.

Great. Thank you.

Sure.

Kevin Sarsany, Next Generation Research.

Hello, everyone.

Hi, Kevin.

My guess is a follow-up on that. Just on the inventory, the sequential downturn -- or sequential drawdown of about 50 million, you had talked about 15 million per quarter. Did you over shoot that?

[LAUGHTER]. Well, contrary to popular belief, Kevin, we actually don't have our hand on a dial here at St. Louis. Yes, we did much better than we expected, Kevin. And we're very pleased with it. My view on inventory reduction is as long as you're keeping the customer service metrics front and center, as top priority, all inventory reduction is positive. Now, we recognize that when you're taking inventory down as significantly as we do, that you're not absorbing your factory the way you would normally and therefore, your earnings per share might take a temporary hit, but in our view, that's an absolutely acceptable compromise or trade off, I guess I should say. We're very pleased with the improvement that our associates have made on inventory. It shows up in free cash flow generation. Obviously, we're going to work that cash, I think, better than we had in the past with the application of our strategic initiatives. So we did exceed our own expectations and I think setting ourselves up for a turn improvement in 2007 on this improved results is going to make 2007 even more difficult for us in terms of inventory reduction, but I'm very, very pleased with what our associates were able to do in the fourth quarter with inventory reduction, and I wouldn't change it for the world.

So going back to your 60 million per year, does that mean you're only shooting for 10 million this quarter or are you going to increase that?

Well, we're still going to create an expectation in our Company that we're going to try to get a one turn improvement and that one turn improvement is now off a jumping off point that's considerably better than what we thought it was going to be, and that's going to make our jobs more difficult than it would otherwise obviously, if we'd only gotten 15 million of improvement, that'd be a much easier job for us to do. But the thing that I'm encouraged by is that a lot of the efforts that we've begun in the area of lean, which includes cycle time reduction, have not yet really been fully applied throughout the enterprise. And so as we've made improvements in staffing and tool development here in the fourth quarter, I think we're well-positioned to in fact roll that lean initiative out effectively in 2007. So I think the inventory reduction will come from different actions in 2007 than it did in 2006, but we're going to still remain very focused, Kevin, on improving.

So, I remember doing back to the envelope when you were talking about reducing your production versus shipping, and I think my capacity utilization tick down was about 6%. Does that mean it was about 18% reduction in capacity utilization?

I'm just running the numbers in my head here, Kevin, but it's about 15%, right? So your number, I think is directionally correct.

Okay. And going back to your 150 to 200 basis point gross margin kind of drag in the quarter, and you put out a number 23.9%, that's pretty impressive to me.

No, the comment I recall making was that we were very pleased with the margin.

Yes.

That we were able to create in the quarter given the drag.

Okay. So the 150-200 is kind of -- you're looking at 23.9? Could you just add that back to it?

I think when you model for next year, there's -- to get to the 10.8 to 11.5 kind of range in OP, that margin improvement is a substantial piece of that.

Okay. Just quick on the 4% organic growth that you're talking about. Is price in there? Do you include any pricing in there?

We include any pricing that would be in excess of copper pass through, so that for us, when we talk about copper adjusted organic growth, it's real growth that would include price beyond any copper adjustments.

And is that also net of what you might do on your pruning and SKU optimization?

It is.

Okay. All right. And I guess my last one is you mentioned stabilized copper costs and historically, you guys always talk about the value adverse to copper, we're not a copper pass through company, we do value add engineering. So does that mean you think that you're going to be able to hold on to this pricing for awhile?

Well, we try to have a market based perspective on our pricing strategies, and our product life cycle management process or our product portfolio process includes very thorough review by SKU, by vertical, by geography in each of our SKUs where we are. And I think the team's done a very nice job of taking actions appropriately by product line that's necessary to get the organic growth we want and the margin expansion that we want. So I think the answer, Kevin, is that in some areas, we're not seeing any movement in prices and in other areas, we've seen where pricing maneuvers were necessary for us to remain competitive, but it's a very, very rifle shot approach. We're looking at it by product line, by geography, and it's market based. It's not distributor based, and it's not copper based. It's market based.

And I guess -- sorry, I said I was done, but the LTK acquisition and building of the Shanghai plant, is that because you made the acquisition or were you planning on doing it? And when you build it, is it just going to be moving LTK's product and equipment into there and serving the same market, or is that your platform that now you enterprise and industrial and other specialty electronics?

Well, we need that capacity because of LTK's growth rate and because of our localization plans in China, we need more capacity. Now, the capacity that we need will not necessarily be localized only in that facility. China's vertical markets are distributed geographically, so for example, in the north, which is a more important industrial marketplace, where LTK has a fine facility, we may, in fact, localize some of our industrial products in that area because it makes more sense logistically. And in the case of Shanghai, that might be a more logical place for the expansion of capacity in LTK's core business. We've actually gotten fairly far along in that capacity planning. We've been working on this transaction for quite awhile. We're very close with the management team, and I think you'll be -- you'll be pleased with what I think's a fairly well thought out capacity expansion.

So currently, you're serving that market by importing into it and your landed cost with logistics is much higher than you're probably going to be able to do it locally; correct?

That's absolutely correct.

All right. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS]. Matt McCall, BB&T Capital Markets.

Thank you. Good morning, everybody.

Hi, Matt.

I want to follow-up on that last question. I guess I want to -- well, I guess I want to make sure I'm looking at the organic growth and the assumptions with the two acquisitions correctly. It sounds like -- really with both acquisitions, it sounds like there's growth above and beyond the growth rates that you gave us that they have historically been growing. In your guidance, are you assuming -- are you assuming incremental growth opportunities or are those incremental growth opportunities with the acquisitions lumped in with that 4% organic growth?

We tried to -- Matt, this is Gray. We tried to separate it into its three elements, all right? So Belden is full Belden -- traditional Belden, so that's your base business at 4%.

Okay.

And then the growth rates for HAC and LTK, which we're ranging them right now, so for HAC, it's somewhere between 8 and 10 and for LTK, somewhere between 12 and 15. They have significantly better prospects with respect to additional penetration into their accounts, both locally in the case of LTK, as well as the expansion of HAC into a more global set of penetration. So when you do your modeling, it's the combination of the three growth rates that we now have, traditional Belden, the growth rate for HAC, and the growth rate for LTK, that puts us in the sweet spot with respect to our strategic intention, which is somewhere between 5 and 7 for the total enterprise.

Okay. So the 8 to 10 and the 12 to 15, that includes some level of incremental growth above and beyond what the existing companies were growing?

You mean synergistically?

Synergistically?

Well, more -- I think LTK gives you an opportunity to go in and maybe grow that business. I guess I'm trying to understand, is the 8 to 10 and the 12 to 15, is that the historical growth rate? And assuming Belden did not come in and buy these companies, would that be the growth rate that they would report in the future in your mind, or does that include the elements that -- yes, the growth elements that could come from the Belden ownership of these companies?

Those are the growth rates that we utilized when we analyzed the investments in these properties, so these were the traditional expectations and the new market plans associated with these companies.

Right.

That indeed we purchased.

Okay. The opportunities are included, that clears it up. And I think in the last few quarters, you've given some indication -- I hope I didn't miss it, I had to jump off of another conference call, but price versus -- price versus volume versus currency. Did you -- did you provide that detail?

Yes. We gave you the currency for the quarter and for the year.

Okay. I'll reference the transcript. And then I also noticed that you didn't give the quarterly guidance, just gave annual guidance. I guess that's a new policy, but can you give us some kind of idea of what the seasonality may look like this year's [templex] and some -- some of the restructuring benefits are going to show up in the second half and obviously, there's some -- there's some seasonality associated with the addition of the acquisitions, but from a seasonality standpoint, can you give us kind of a rough detail of what we could expect for the year?

Well, again, I think we've mentioned that most of the traction associated with some of the manufacturing benefits need to be purged out of the system and therefore, there'll probably be some slight or more benefit associated with those actions in the second half than the first half. And then from an acquisition perspective, starting in the second quarter, where the pending transactions become closed transactions, the second quarter results will reflect the acquisitions of HAC and LTK for a full run rate performance factor.

Okay. All right. That is all I have. Congratulations on a good quarter and the two acquisitions. Those look great.

Thanks, Matt.

Jeff Beach, Stifel Nicolaus.

Yes, good morning, John and Gray, and great quarter.

Thanks, Jeff.

Two questions. One is, can you just generally discuss your outlook for the macro drivers -- end market drivers by your product line segments as opposed to geographies, just generally, like for instance, non-residential construction and industrial activity and run through some of the key drivers?

Jeff, the assumptions that we have right now based into our expectations are that the year will be good, but we're not expecting that end markets are going to be quite as robust as they were in 2006. We are expecting that we'll continue to see good, consistent demand in the industrial segment, and I think we feel good about our ability to continue to gain share there. We've got strong products, a lot of strong initiatives under way with our channel partners there. I think in the case of networking, the -- at the end of 2006, I think we were probably a little bit concerned that 2007 may not be as good of a year as it was in 2006, but I think that we're increasingly becoming a little bit more optimistic about that market in 2007. As you probably saw, Cisco just released some pretty strong expectations for 2007, so I would say, Jeff, in total, we're -- we've got a good feeling about our end markets in 2007, and we're going to work obviously very, very hard on the things that are in our control to make certain that we do as well as those end markets or even better.

All right. And second, would you discuss, generalized here, you may not have numbers in front of you but on your portfolio management where back at Investor Day you had laid out your entire products with, I believe, it was something on the order of -- I'm not sure if it was 20% or more of the products with unacceptable returns and you've been paring away at stuff. Can you give us just a rough estimate of where you are today in the product portfolio management, and what progress you might make during '07?

Sure. I'm going to -- I'm going to let Gray answer that question. I do think the slide you're talking about, though, was a Europe slide where we had segmented our European situation into different categories, unacceptable areas that need improvement and so fourth, so I think that might be the slide you're referring to.

Yes.

But let me have Gray give you a little update on where we are with the product portfolio.

I think I talked about it in terms of the fourth quarter and in John's comments as well with respect to the portfolio management and networking effect. Most notably around the Mohawk brand where we clearly are seeing the kinds of steps necessary to position them properly to make more money on lower volume. And I think it's really a powerful statement when you look at Mohawk relative -- quarter-on-quarter 2005 to 2006, that they can make more money on less volume, because of the portfolio actions and not just by a little. They're up 200 basis points associated with that performance on lower volume which is counterintuitive. And the reason it's counterintuitive is because of the elements that are underneath our powerful elements for a radical shift of where the value proposition can be extracted. When we look at the fourth quarter, another fun fact that came out in John's comments, if you would, Jeff, was the fact that the networking segment -- excuse me, the network market element is down 10% year-on-year in terms of the percentage of the total portfolio. So we started the year at 44% of our business in networking. Now it's 40, and the top line continues to grow, so you can sort of see there's a 10% proportional decline in our networking business associated with portfolio management, and so there's your sort of orientation of what's happening in the portfolio. We expect to at least continue to report out on what's happening within each one of the served markets, so you'll get a good sense for where that activity is either going to stabilize or continue to be directional. Fortunately, or unfortunately, depending on how you look at it, the served markets are going to change fairly radically when we do our second quarter earnings release with the inclusion of LTK and with Hirschmann. So we'll have to reorient at that point in time, but I think one of the most critical metrics that we have right now is the relative strength of industrial and the portfolio management activity and networking as expressed as a percentage of the portfolio.

Let me ask, then, a summary-type question. Do you think portfolio management in 2007 will deliver as much or more profit improvement as you saw in 2006 from your actions?

Jeff, I think that a lot of the hard work that we needed to do there is behind us. Not that there isn't always opportunities for more improvement. We really started the actions significantly in the second quarter, and so I think as we talk about our results, we're going to see year-over-year comps that are going to be fairly obvious in terms of organic growth and improved profitability as we put those actions in place, but I think that the majority of the hard work is behind us in the core part of our business.

All right. Thanks.

And there are no further questions at this time. Please continue.

All right, then. Let me thank everyone once again for joining us on the Belden earnings conference call. We sincerely appreciate your interest. Please give us a call if you have any follow-up questions. And this concludes our call for today. Thanks, everybody.

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