Belden Inc (BDC) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden First Quarter Earnings Conference Call. Just a reminder this call is being recorded. [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, Malea. Good morning, everyone, and thank you for joining us today for the first 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.

[Inaudible] we have put a few slides on the web today, so if you've not already done so please open the slides at investor.belden.com/medialist.cfm. There's no www in front of that. Just investor.belden.com/medialist.cfm, and if you opened the webcast more than 15 minutes ago you may need to refresh your browser. If you need a copy of our press release, you'll find that in the same area, or if you'd like a copy faxed to you, please call Pam 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 the light of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. The comments we will make today are management's best judgment based on information currently available. Our actual results could differ materially from any forward-looking statements that we might make. However, the Company does not intend to update this information to reflect developments after today and disclaims any legal obligation to do so.

Please review today's press release and our annual report on Form 10-K 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 recently announced planned acquisition of Lumberg Automation Components, then Gray will review the first quarter financial results, including some balance sheet and cash flow items and discuss the recent recapitalization of the Company.

John will speak about our outlook for 2007, 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?

Thank you, Dee. Good morning, everyone. In a year when execution is especially important, we are off to a good start. For the quarter, on an adjusted basis, earnings per share were $0.49, an increase of 36%. We posted 12% operating income margin, a level we had targeted to achieve by 2009, so we are nearly two years ahead of schedule on this measure.

Even more remarkable, in my view, is that we achieved these results in a quarter with fewer shipping days in the midst of executing our significant regional manufacturing strategy and while again this quarter reducing inventory. In a quarter where cap ex was higher than usual because of the investment in our Nogales facility, free cash flow was $30 million, well in excess of net income, which is one of our four financial goals.

Today I'd like to share with you our progress with respect to regional manufacturing, the continuing impact of product portfolio management, the trends in orders and sales, and an update on our recent acquisitions and our planned acquisition of Lumberg Automation Component.

Looking first at regional manufacturing, please turn to Slide 4. During the first quarter, we ceased operations and sold our manufacturing facility in Fort Mills, South Carolina, reduced production at both our Wheeling, Illinois and Montreal, Quebec, Canada facilities, while significantly wrapping up our output at both the Mohawk facility and Leominster, Massachusetts and at our Bedrock site in Richmond, Indiana. Closing the capacity gap with productivity at these sites delivered approximately 200 basis points of sequential improvement in first quarter manufacturing margin, an improvement we have been expecting with respect to our plans albeit three months ahead of schedule. I must thank the operations teams and manufacturing associates of Belden around the world for their hard work, flexibility, and cooperation during a time of great challenge.

Our new manufacturing site in Nogales, Mexico remains on schedule for third quarter production. Many steps have been implemented to accelerate establishment of this capacity. Most notably, we have hired the operations management team for the location and have installed training production lines in our existing Nogales site to best prepare our associates for the third quarter ramp.

Additionally in the quarter, we completed the site selection for a new manufacturing facility in Shanghai, China to accommodate the continuing growth of LTK and the localization of Belden products in the region. We expect this factory to be online in 2008.

In summary, we have a great deal of change going on in our manufacturing around the world continuing throughout 2007. This presents a continuing challenge with respect to our working capital goals and will demand continued strong execution to maintain the quality, delivery, and availability that characterize our Company.

Next, product portfolio management. The active management of our networking category has resulted in substantive changes in our results. Products of focus, such as Category 6, Bonded Pair, Fiber, Central Office Cables, and Connectivity, grew more than 19% quarter-on-quarter on a copper adjusted basis. For the less attractive products in networking, our copper adjusted revenue declined 16% year-over-year, which is actually a slight improvement from our experience in the second half of 2006 where the decline was 20%. We have seen a slight increase in category cable sales as some customers have returned to the Belden brands in the first quarter at an attractive price level. We are obviously very happy to have them back.

Year-over-year sales of connectivity products in the first quarter increased approximately 50% and orders are up over 100% year-over-year. For Belden as a whole, first quarter sales adjusted for foreign currency and copper were a negative 3.6% year-on-year. Networking sales were down 9%, however, industrial and video sound security sales were up 5% each on a copper adjusted basis. We had very strong order intake in the first quarter with a book to bill, a ratio of new orders to current quarter sales exceeding 1.1 led by strong order rates in the Belden brand.

Despite strong operating margins, we are disappointed with our Asia revenue in the first quarter. The significant overhaul and expansion of our commercial resources in the region, as well as new channel partner selection in China, created this current quarter gap in performance. We are already seeing signs of improvement, and we expect to see the results in the second half.

Turning to Slide 5, I would like to discuss briefly our planned acquisition of Lumberg Automation Components. Lumberg Automation is based in Germany, and they design and manufacture industrial connectivity for the global factory automation market. They are a well-respected supplier of industrial connectors to a broad base of leading equipment OEMs, and they are an ideal compliment to the HAC business.

The product portfolio consists of standard and customized solutions in industrial connectors, high performance core sets, and field bus communication components. Lumberg Automation is a business with 2006 revenues around $75 million and approximately 300 employees generating operating margins and free cash flow consistent with the portfolio of Belden businesses. We expect Lumberg Automation to be accretive by $0.04 in 2007 and this accretion is included in our updated annual guidance.

A brief update on our status with the two acquisitions we closed just after the end of the first quarter. The financial results of LTK and HAC, although not included in our first quarter results, were encouraging. Our integration planning for LTK began well in advance of the financial closing and continued with a very productive session in Hong Kong the last week of March. We remain focused on supporting the growth of the current LTK business model, localizing Belden production, and leveraging LTK's substantial knowledge of the China market to improve penetration in Belden's core vertical segments.

We had our first significant integration meeting with the management at Hirschmann Automation and Control the first week of April. It was clear from this session that an outstanding product portfolio is not all that comes with this fine company. We were delighted with the breadth and quality of people at HAC, and it is exciting to think about this team being a part of the Belden family.

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

Thank you very much, John. Now, let's turn to the financial results of the first quarter beginning with the consolidated statement of operations. And I would like you to refer, please, to Slides 6 and 7.

Revenue for the quarter was $336.7 million, an increase of 4.6% year-over-year. Favorable currency translation contributed 1.6% year-over-year growth so the resulting organic growth was 3%. As John mentioned during the second half of 2006 and continuing through the first quarter of 2007, our effective portfolio management activity, especially in our networking serve market, resulted in year-on-year metals adjusted growth that was in the aggregate negative 3.6%. But within the networking business, certain product groups that we continue to de-emphasize posted year-on-year declines of 16%. Actually, about 4% less degradation than we experienced in the second half of 2006.

This intentional decline masks the metal adjusted organic growth we experienced in the rest of the business of 2.4% but by continued improvement the European segment and our industrial market. Q1 marked the first time industrial market sales exceeded network market sales in the aggregate.

The resulting GAAP-based operating income increased to $37.2 million in the first quarter of 2007 from $19.1 million in the fourth quarter of 2006 and from $27 in the first quarter of 2006. We incurred $3.2 million pre-tax and severance charges, asset impairment, adjusted depreciation charges, and a loss on the sale of tangible assets associated with these previously announced restructuring activities in North America and Europe. In the first quarter of 2006, the Company incurred pre-tax charges of $2.4 million for severance, accelerated depreciation associated with the European restructuring.

To provide a better sense of our operational execution, I'm going to focus the remainder of my comments on adjusted results without these charges. A reconciliation between GAAP and adjusted results is provided as part of today's press release. Gross profit was $92.2 million or 27.4% of sales in the quarter. This is a 410 basis point improvement from a year ago and a 370 basis point improvement sequentially. We experienced margin expansion both year-on-year and sequentially in all of our reporting business segments including Asia despite a year-on-year revenue decline in that segment.

As we discussed in the fourth quarter earnings call, we have anticipated a 150 to 250 basis point margin expansion dependent upon three operational and technical factors taking hold. First, [inaudible] layers of prior period inefficient manufacturing variances being expensed through the income statement. Second, normalizing the dynamic and irregular productivity we have experienced resulting from the re-alignment of global manufacturing, and third, the right sizing of global manufacturing capacity to facilitate our planned reductions in inventory.

In the first quarter, [inaudible] roll-off and plant productivity were better than anticipated driving margin. Aligning our capacity has improved, but remains an issue until the third quarter and the initiation of production in Nogales.

Selling, general, and administrative expenses were $51.7 million or 15.4% of revenue compared with $45.7 million or 14.2% of revenue in the prior year quarter higher by 120 basis points year-on-year and 170 basis points higher sequentially. However, in dollar spend, consolidated SG&A has remained relatively flat at around $52 million per quarter since Q2 2006, and our first quarter spending is consistent with our budget.

One of our key internal performance metrics is focused on the management of SG&A as a percent of copper adjusted sales and we expected improved performance in this area while continuing the expansion of our investments in regional, global sales resources, and product development.

Interest income and interest expense netted to $200,000 net income in the quarter. However, we incurred a one-time pre-tax charge of $2 million in the quarter for the early retirement of our $62 million private placement notes in February. I'm looking forward to reviewing the re-capitalization actions that we have concluded a little later in these remarks.

We are quite pleased to see our operating income increase by 37.8% from $29.4 million in the prior year quarter to $40.5 million in the first quarter and the expansion of operating margins to 12% in the quarter equaling our 2006 strategic plan target and showing expansion of 290 basis points year-on-year and 210 basis points sequentially.

While our [inaudible] copper costs flowing through the income statements were slightly later in Q1 than Q4, it's about $0.25, from $3.10 to $2.85 per pound, the gross profit benefit of approximately $5 million sequentially was more than matched by tactical pricing moves and some closely managed major project credits that are determined on a case-by-case basis. Therefore, traction around regional manufacturing lean in capacity management are the factors responsible for the achievement of the improved margins.

Income tax expense was $14.2 million in the adjusted results, 36.7% of pre-tax income for the quarter, consistent with our tax guidance. Weighted average shares outstanding for the calculation of diluted earnings per share for the first quarter were 51.7 million shares, an increase of 600,000 shares sequentially and an increase of 2.4 million shares year-over-year because of the increase in stock options outstanding. Diluted earnings per share on adjusted income from continuing operations for the first quarter were $0.49. This is up 36% from $0.36 in the first quarter of 2006.

Let's turn to the segments. I will continue to talk in terms of adjusted results. Our largest segment, Belden Americas, had external revenue of $186.3 million in the first quarter. This was an increase of 4.4% year-over-year compared with the first quarter of 2006. Industrial market revenue and broadcast market 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 $36.2 million or 18.3% of total revenue, an expansion of 260 basis points sequentially and 210 basis points year-on-year for the segment. Just a reminder that total revenue at the segment level includes sales to affiliates, or cross-segment sales if you prefer, and this is our basis for calculating the operating margin percentage of each business.

External revenue of the Special Products Group was $56.7 million, up 1.8% from a year ago due to the targeted actions of product portfolio management directed at greater profitability, especially in the Mohawk brand in the networking business. The portfolio improvement is manifest in first quarter operating income for the segment, which was $10.3 million, 14.9% of sales, up from $6.6 million or 10.4% of sales a year ago, again, on lower volume.

As John discussed earlier when reviewing our first quarter book to bill ratios, first quarter orders were very strong across the specialty business portfolio. Our Europe segments, external revenue was $81.9 million for the first quarter, up 12.2% year-over-year. Our operating profit in Europe was 6.1% for the quarter compared with 1.7% a year ago reflecting the continued sustained improvement resulting from a strong industrial market in Europe and manufacturing cost reduction. The Europe segment's operating margin continued the favorable trend that began in the second half of 2006. Our target of Europe exiting 2007 with at least 10% operating profit remains the plan of record, and the last three quarters results' are very encouraging with respect to accomplishing this goal.

Our Asia Pacific segment's external revenues were $11.8 million for the first quarter, off 7.8% year-over-year and 31.6% sequentially. John discussed the overhaul in sales operations that contributed to the situation. However, the Asian markets in general in all verticals continues to provide the regional growth opportunity for which we are investing. Operating income of the segment was $1.5 million or 12.9% of sales for the quarter up 160 basis points year-over-year.

For Belden Consolidated operations, the geographic configuration of revenue in the quarter was follows. Revenue in the United States and Canada made up about 68% of the total, in Europe 22%, and the rest of the world 10%. This reflects a slight chip year-over-year towards international sales, which, of course, we're about to radically shift in the second quarter when we include the operations of LTK wiring, Hirschmann Automation, and Lumberg Automation Components.

I'd now like to turn to some selected balance sheet and cash flow items. We generated about $40 million of cash from operations in the first quarter, which helped drive our ending cash balance to $603 million, which also includes the net receipts from the bond sale, up from $254 million at year end. In addition to cash from operations, other sources of cash in the first quarter included the sale of facilities in Fort Mills, South Carolina, and Essex Junction, Vermont, reflecting our focus on improved PP&E efficiency.

Real estate sales created a cash inflow of $6.7 million and the exercise of employee stock options brought in about $25 million. Depreciation and amortization during the quarter were approximately $9 million and capital expenditures were $11 million including construction costs in Nogales.

I'd like to turn to Slide 8 please. We introduced two key performance indicators, or KPIs in the fourth quarter that we plan to report to you regularly. These are ratios you can calculate right from our published financials, and I would like to define them for you here again.

The first of these is inventory trends. We are calculating that as current quarter cost of [inaudible] annualized divided by quarter ending net inventory. As you can see, we have raised our inventory turns from 3.8 as of a year ago to 5.1 turns in the recent quarter reflecting our inventory reduction achievement. For our working capital terms measure, we again used most recent quarter cost of [inaudible] annualized and divide that by net inventory plus net receivables, minus accounts payable and accrued liabilities.

Working capital turns have improved from 3.7 turns a year ago to 4.7 turns in the first quarter, again driven by inventory improvement. We are on target for the one turn improvement we provided in our annual guidance.

I'm very pleased to conclude my remarks today with a short discussion on the many steps we have completed associated with the recapitalization of the enterprise. First, we completed the successful sale of $350 million in ten years senior subordinated bonds at a fixed rate of 7%. We believe the rate to be very favorable, even in a very good market for high yield notes. We retired $62 million in private placement notes to improve our flexibility and remedy the technical default we discussed during our first quarter earnings all.

Additionally, we expanded our revolving line of credit from $165 million to $225 million necessary to support a growing company. And on April 20, we concluded the successful exchange of our convertible debenture in which we inserted a net share settlement feature that indelibly defines the $110 million face value of these notes as debt payable in cash rather than in shares where it had been a fully diluting element of our EPS calculation in our first quarter and prior period financials.

On a pro forma basis, after the closure of LTK, Hirschmann, and Lumberg Automation, we estimate the corporation will be operating at a conservative 1.6 debt to EBITDA ratio with debt to debt plus equity at 34%. We are especially pleased with the corporate credit risk ratings we received from [Moody's BA2] with a positive outlook and from Standard & Poor's BB plus with a stable outlook.

I now would like to turn back to John Stroup, our CEO, for some comments about our updated outlook for 2007. John?

Thank you, Gray. Order patterns in the first quarter are very supportive of accomplishing our year-on-year 4% organic growth target for the Legacy Belden business. Additionally, we have reviewed the first quarter performance of HAC and LTK, which are not part of our first quarter reporting and these newly acquired businesses are demonstrating sales growth above the levels provided in our earlier guidance.

With these acquisitions completed and with the planned acquisition of Lumberg Automation expected to close in early May, we now expect total sales over $2 billion in 2007. Our previous revenue guidance for 2007 was between $1.9 and $2 billion.

Our previous guidance for operating profit for the year was to be in the range from 10.8 to 11.5% inclusively for the whole portfolio. Our first quarter results are encouraging, and we are now guiding for operating margins to exceed 11% and could range to our multi-year target of 12%. I remind everyone that our operating margin guidance includes the estimated affect of purchase accounting for the three acquisitions, details of which will be discussed in our second quarter results.

We expect gross interest expense to be $22.5 million in total for the remaining three quarters of 2007. There is no change in our expected effective tax rate for 2007, which is 37%, and we expect earnings per share to be in the range of $2.50 to $2.70 excluding any severance charges and other restructuring charges that may occur from already announced actions. This is an increase from our previous guidance of $2.40 to $2.65.

I'd like to thank our associates once again for all that we accomplished in the first quarter of 2007 and thank you for your interest and support of Belden. This concludes our remarks. We now have some time for your questions. Our operator, Malea, will remind you of the procedures for asking your questions.

[OPERATOR INSTRUCTIONS.]

We'll start with Celeste Santangelo from Merrill Lynch.

Good morning.

Good morning, Celeste.

Hey, Celeste.

Just looking at the full year outlook, John, you just talked about, you know, full year operating margins of 11 to 12%, which, you know, looked a little conservative to what you just did in Q1, and I understand you talked about the purchase accounting, but can you quantify the impact of the purchase accounting?

We have an estimate associated with the inventory turns right now, most notably, Celeste, and it's somewhere in the range of, you know, $8 to $12 million impact on an annual base that we've now folded into this current guidance.

Okay. And then just looking at the networking cable trends, it seemed like they were pretty strong in Q1 and just -- you talked about some customers coming back to the Belden brand. Can you talk about what was behind the demand turns? How much of that were customers coming back and how much were just underlying trends being better than expected?

Well, Celeste, I think that in the Mohawk business especially we've seen that business recover perhaps a little bit better than we had first anticipated. Obviously, we were very focused on that business making it a better performing business and more profitable, and I think we did have some customers that decided to purchase from other companies when we made some of those pricing actions. And we've begun to see some of that business come back, and I think they've come back because they recognized that the service we were able to deliver them was such that those prices were, in fact, worthy of the service that we could offer the customers.

I think what we've seen is, and we've been encouraged by, is that the areas of products that we're focused on, which are the high bandwidth cable, the system orientation, including connectivity and fiber, we see those businesses growing fat or faster than the market in general, and as we discussed earlier we're seeing growth rates anywhere from 16% and order rates as much as 50%. I think that a smaller portion, probably more like 3 to 4% of the business growth is coming from customers coming back. I think I referenced earlier that we saw a 16% decline year-over-year and in the second half last year we saw about a 20% decline, so we think maybe 3 to 4% of that growth, Celeste, is customers coming back. The other would be underlying market trends.

Okay. Great. Thanks.

Thank you.

Thank you.

And our next question comes from Matt McCall with BB&T Capital.

Good morning, everybody.

Hey, Matt.

Hi, Matt.

Hi.

Let's see. Talked about the overhaul and the sales operations in Asia. Maybe I missed the color there. I heard, Gray, I heard you mention it, but, John, you spoke about it earlier. Maybe provide a little more color about what's going on in Asia and why you expect it to improve.

Yeah, Matt. We're making some pretty significant changes in our commercial approach in Asia right now. A year ago, if you looked at our organization, even a quarter or two quarters ago, the organization was very orientated towards networking bulk cable sales, and that included our channel partners. And, of course, we've had more of a focus on systems and solutions and on high bandwidth capability and also on industrial and broadcast, so we made some very aggressive changes in our people and our organization in those areas, especially in China and in India.

And as we went through and did that, what we saw was immediately less focus on the Legacy business and some time required to ramp up on the business that was a focus for us in the future. One of the KPIs we look at internally is sales funnels. We look very carefully at what our sales funnels are and that's a weighted average of the amount of business that we're currently working on. We've seen those numbers start to improve already and that gives us greater confidence, but we'll see improvement in the second half. We also measure close rates and other internal metrics, but there's no question we were disappointed with the results that we had in the first quarter on a top line point of view in Asia.

I think additionally -- I think we had some pricing strategies in Asia with the benefit of hindsight that might have been a little bit too aggressive in certain categories, so I have been spending more of my time with the Asia team trying to get comfortable with the -- not just the pricing strategies, but also the commercial changes that we're making and I feel good that we're doing the things we should and I expect the results to improve in the second half, but as I said in my prepared remarks, we had hoped to do better in the first quarter in that area.

So, you keep mentioning the second half. Sounds like the second quarter's going to be continued struggles. It looks like the year-over-year growth comp is tougher in Q2, so are we looking at organic or core business or core business growth or core business total revenue in that same $11 to $12 million? Is that the expectation?

Well, Matt, you know, what we said at the start of the year was that the first half was going to be tough on the Belden Legacy business for comparables on top line because the actions that we took in product portfolio management really took hold in the third quarter. So, for us to do 4% organic growth for the year, we're going to obviously have to do much better in the second half, 7 or 8% given the fact that the first quarter results are as they have been and the second quarter's going to be a tough comp as you suggested.

But the good news, Matt, is the order intake rate for us in the first quarter is very comfortable with the organic rates necessary in the second half to achieve that 4%. So, I think you're right. I think 4% will be a tough comp on the top line. Second half should ease up a little bit. The order book is very strong right now for us. It gives us a lot of confidence in addition to the improved execution. So, when I say I expect to see improvement in the second half, that's my way of saying that I would like to see improvement in the second quarter, as well, but I need probably a little bit of time to get through some of these issues and make good on my commitments.

Okay. Okay. If I missed this, I apologize, but the -- discussing the Europe segment, the margins in the Europe segment, obviously up year-over-year. I'm looking at some seasonal patterns that would make me understand why the margin's down. Is the target still in that 11 to 12% range, I think it's 10 to 12% that you stated, by the end of this year?

Absolutely. That's absolutely the target. And we should have a business that is exiting the year in that 10 to 12%, and I've got a lot of confidence in what that team's doing right now. I think they're absolutely working on the right things. They have done a very nice job in improving the portfolio of the business. They've done a very nice job on the cost structure, and it wouldn't surprise me at all if they didn't get to that number a little bit sooner than the fourth quarter. I think they're pretty motivated to show me they can get there before Q4.

Okay. And then one clarification. The last comment, I think, was about gross interest expense for the remainder of the year at 22.5. By gross, that's actually the interest income that you had recognized on that line, correct?

That's correct, yes.

Okay. Okay. Just wanted to clarify. Thank you all very much.

Thanks, Matt.

Thank you, Matt.

[OPERATOR INSTRUCTIONS.]

Our next question comes from Kevin Sarsany from Next Generation.

Hey, guys.

Hey, Kevin.

Good morning.

I guess a clarification on, you know, I think somebody else asked the margin trend for the year and your outlooks. Now, is the 11%, I mean that -- now that you're at 12% when you add Hirschmann and LTK and Lumberg, that automatically brings it down, correct?

I'd say it's all in the same neighborhood, Kevin, but it's slightly down because the sales, in LTK most notably, are a significant portion of that addition and their margins are slightly lower.

Okay. And I guess on the gross margin line you had very good, you know, increase in the margin and it looks to me like you're pretty close to your $60 million inventory reduction on that slide you talked about. Are you going to be less aggressive on that and capacity just by that, you know, switch increases?

Well, I think we got -- you know, we did such a great job with inventory reduction in the latter half of 2006 that I think it's been our expectation that that was going to temper a little bit here in early 2007. We did reduce inventory again in the first quarter of 2007. Obviously, whenever we pull inventory out because of real cycle time reductions, we celebrate that as a success. If inventory's coming out because of an execution issue or as it relates to some of the things we're dealing with on the regional manufacturing, then that's a different issue for us to deal with.

I think that, for us, inventory reduction is going to be a real challenge in 2007 because we have so many moving pieces right now. We've obviously taken a lot of cost out of our manufacturing structure right now, and as we bring up Nogales, it would not be unexpected for us to have more inventory than normal during that transition period to make certain we properly protect our customers from what internally can be a fairly significant challenge, so as I said in my remarks, I think the inventory reduction through the year is going to be a tough challenge, but it's going to be something that we still have in sight and we're going to continue to work on achieving the objective that we stated.

And on a different subject, both on cap ex, what do you expect, you know, with the Shanghai and Nogales to spend in cap ex this year or going forward?

I think we had said that the cap ex budget in 2007 was $30 million.

That was not. So the gross cap ex budget was $60, and that includes the full anticipated expenditures for both Shanghai, as well as Nogales, and then back to my comments, Kevin, with respect to the fact that we're not happy with PP&E metrics associated with $60 million worth of 2007 cap ex, and therefore, we're trying to look at it, as John mentioned, we'd like to look at it as net. All right? And the net is expected to be at $30 million and that's what we've committed to ourselves, and you can see the first piece of that here in the first quarter when we sold off the two sights in Fort Mill and in Essex Junction and netted about $7 million. And I'd like to think that as being a netting item that says our gross cap ex in the first quarter was 11, but our net was only 4, as we disposed of as we should have for cash excess assets.

Okay. My head is swimming, but I'll move on to something else. On the cap ex, on the industrial automation, you made two acquisitions, I think Legacy Belden had some presence in that. It looks to me like it's about 15% of revenue, which is a pretty big bet. Are you done buying in industrial automation and then also take that one step further. Germany is a hotbed for industrial automation companies. Germany's economy is doing well. Can you talk about the environment regionally [inaudible] industrial automation?

We like the industrial space a lot. And we like it because it is usually a mission critical application, which is our area focus. Our products really matter to customers. We really like the trends in industrial Ethernet. That's obviously why we bought Hirschmann, but I think we like it even more as we get to know the business better. So, if there are good companies that can be added to the portfolio that can make a difference to our Company strategically, then we'd be highly interested in them.

As it relates to Germany, yeah, the market is good right now. German OEMs are doing very well right now. German OEMs are gaining share globally, and that's why we so much like the presence that we have in Germany. We're really very well positioned right now. We've got a great situation in China with the acquisition of LTK, which gives us great market coverage on the end factories of these companies in China, and then we have great relationships with the OEMs in Germany through Hirschmann and now with Lumberg. We really have a nice presence, so we like that market a lot. And we like the fact that industrial [inaudible] is, as Greg mentioned, larger as a percentage of our total business than networking is just because we think it's an area of, for us, to more easily differentiate ourselves and command higher margin, so we like the business.

Now, in China, wages are going a lot in a lot of the coastal manufacturing areas. Are you seeing more automation going into that area because of the wages or is it just more manufacturing plants mean more automation?

Well, there's certainly talk in China about automation being more important because labor costs are increasing at a fast rate. I can't tell you, though, that I've seen evidence of it yet. Most of the automation that I see in China is for reasons other than labor cost. It's because of quality or miniaturization. You may have recently seen that Intel plans to make an enormous in the Dahlian area, which, by the way, is where one of our factories are. They're going to capitalize that equipment or that factory with very modern equipment not because of high labor costs, but because that equipment's required for the process.

But, there is more discussion in China now when I'm there about how labor costs are increasing, and I think the really good companies in China are going to be the ones that understand the productivity improvement is required to remain competitive and the days of relying exclusively on low labor costs is not the way you need to run your business moving forward. So, we've been really clear with LTK, and luckily for us the culture already exists in LTK that our productivity goals in China are exactly the same in any other area of the world. But, as it relates to our end markets, it just -- there's just a lot of factories that continue to go into the area, probably less for exporting than there used to be and probably more now to serve the growing demand of people in China for the sort of products that we're used to enjoying here in the United States and western Europe.

Okay. Thank you.

Thanks, Kevin.

Thanks, Kevin.

And our next question comes from [Noelle Delch] from Stifel Nicolaus.

Hi there.

Hi, [Noelle].

Hi, [Noelle].

Hi, [Noelle].

Hi. My first question was just kind of a housekeeping question. I think you had said that net interest expense this quarter had a $2 million charge net that related to the private placement of the note. Is that saying that without that charge interest income would've been about $2.2 million?

I conversed in two elements, [Noelle].

Okay.

The first element was that our net interest element was income of $200,000, and we incurred the one-time charge of $2 million for the liquidation of the private placement note. So, they are two separate line items in our reporting and done so to give you that kind of visibility to the interest element from the prepayment element.

Okay. And then secondly, just -- well, kind of looking at Hirschmann. I know that the industrial Ethernet technology is kind of well adopted in Europe, and I was wondering if you could talk about, you know, remaining growth opportunities in Europe and then kind of your plans to promote the technology in the U.S.

Well, the business is still growing in Europe. It's just not growing as fast as we believe it'll grow in the United States and in Asia. It's still a double-digit growth business in Europe. We have already had a series of what we thought were very productive integration sessions with Hirschmann in early April in Germany. We have another meeting scheduled next week here in the United States where we're going to get into more detail about what we'll be doing in the United States with the technology, and then we have a meeting in three weeks' time in Asia to talk about it there, as well.

Our view is that there's a lot we can be doing to help customers understand the benefits of industrial Ethernet so that they can adopt that technology more rapidly. We think we can help them understand that and clearly we've got opportunities, Hirschmann and Belden together, to deliver those products in a more efficient way than Hirschmann was able to in the past. Lead times were longer, access to information was not as clear as it could be, so we think there's a lot of very good opportunities for us, and we still think this is a market that can go from $150 million to half a billion in a relatively short order. And we like our share position and we would obviously like to increase it.

Okay. Thanks.

Thanks, [Noelle].

And we have a follow-up question from Kevin Sarsany.

Hi, Kevin.

Kevin?

Hello? Can you hear me?

We hear you, Kevin.

You talked about achieving your 2009 operating margin goal. What is your new 2009 goal?

You know, we've not really stated that yet, Kevin. I mean --

Higher than 11?

Certainly. We believe in continuous improvement in all metrics, including operating margin. You've heard me say a couple of times that I think we've got a portfolio that could be on or about 15% and my point of view on that is not unchanged.

Okay. That's it. I'll take everything else offline.

Okay.

And there are no further questions in the queue. I would like to turn the call back over to the speakers for any closing and additional remarks.

Great. Okay. Thank you once again for joining us on the Belden first quarter earnings conference call. We sincerely appreciate your interest. We know it's a very busy day with lots of calls. Please give us a call any time if you have follow-up questions, and this concludes our session today. Thank you. Bye.

This concludes the teleconference. Thank you for your participation.