Belden Inc (BDC) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Inc. conference call. Just a reminder, this call is being recorded. At this time, you are in a listen-only mode. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Ms. Dee Johnson, Director, Investor Relations, of Belden.

Thank you, Melissa. Good morning, everybody. 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 Gray Benoist, Vice President, Finance, and Chief Financial Officer. Some logistics. You can open our slides at investor.Belden.com. There is no ww in that, it's just investor.Belden.com. If you opened to 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 it in that same place. We had some trouble with our phones last week, which we think we have fixed, but if you phone us today and do not get a person on a line, please send me an e-mail at Dee.Johnson@Belden.com and we will call you back.

During the call today management all 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 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 misinformation 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.

So this morning John will begin with comments about the performance of the business in the second quarter, including segment results. Gray will review some additional revenue analysis and financial results, and then John will speak about our outlook for 2007. And finally, we will open up the line for questions. At this time, let's turn it to our President and CEO, John Stroup.

Thank you, Dee. Good morning, everyone. The operating performance of our business continued to improve this quarter and each of the three recently-acquired businesses is off to a good start.

If you would please turn despite three, for the -- on an adjusted basis, earnings per share were $0.79, an increase of 55%. Our operating margin was 12.2%. Just to give you in apples-to-apples comparisons, our pre-existing business without the acquisitions had adjusted operating profit of 13.5%, an increase of 350 basis points from a year ago. The acquired businesses were accretive in the quarter at a level exceeding our previously-expressed expectations and our new geographic mix of business has generated a lower effective tax rate of 35% year-to-date, compared with our previous estimate of 37%.

Second-quarter revenue grew 34% year-over-year to $550 million, including $149 million in sales from the three businesses we acquired during the quarter. Excluding the effects of acquisitions and currency, our organic growth was slightly negative as a result of the strategic decisions are made in 2006 to better manage our product portfolio mainly through pricing to trim away lower-margin product sales. We have estimated the revenue impact of those actions at $80 million to $100 million per year.

Much of the operating margin expansion we have experienced in the first half of 2007 is the direct result of this pruning, pricing, and positioning. At midyear we have now anniversaried this effect, so revenue comparisons will be more straightforward in the second half of the year.

I would like to talk about each of the acquired businesses in a moment, but first, I would like to drill down to the results of the historical business by segment. The improvement in operating profit extends to every reporting segment of the business. Belden America's operating profit, adjusted for restructuring costs, was 18.9% of total sales. That it is up 210 basis points year-over-year. The Specialty segment had an operating margin of 18.3%, up 660 basis points year-over-year. They have come a long way largely by repositioning the Mohawk networking cable business and through solid organic growth in our Thermax aerospace business.

In Europe, the segment revenue of $181 million includes about $78 million of revenue from the Hirschmann Automation and Lumberg Automation businesses. The total segment operating margin was 8.9% after setting aside the short-term purchase accounting effect. Excluding the acquired businesses, Europe's operating margin was 8.7% for the second quarter. As you recall, Europe was barely more than a break-even business a year ago.

We set a goal for Europe to exit 2007 with double-digit operating margins and we are pleased with our progress toward the goal. This progress represents more than two years of hard work by the entire team in the form of portfolio actions, productivity gains through shared services, and manufacturing cost improvement through regional manufacturing and lean efforts.

Our Asia segment reported revenue of $87 million, the majority of which was from the acquired LTK business. The revenue of the traditional Belden business in Asia was $16.3 million in the second quarter, up 4% year-over-year and up 38.4% sequentially, with an operating margin of 13.8%, up 430 basis points year-over-year. As we noted on our first-quarter call, our Belden Asia business stumbled a bit in the first quarter, but after corrective actions, their order rate has improved and we expect that business is poised to grow faster than the rest of our portfolio.

Turning to slide four, the acquired businesses, I just returned from a long trip which we conducted business reviews at LTK, Hirschmann Automation, and Lumberg Automation. First, LTK. Every interaction just proves again what a solid, well-managed business LTK is. To refresh your memory, LTK Wiring is a Hong Kong-based business with China manufacturing that Belden acquired on March 27 this year. Their sales are largely in consumer electronics and OEM markets and their strengths include manufacturing, logistics, engineering, and an extensive commercial network throughout China.

LTK sales in the second quarter of over $70 million indicate a growth rate that is greater than our initial expectation. Our colleagues at LTK have been quick to adopt our strategy deployment methods and are keen on getting lean enterprise methods in place quickly, as well. Because of the excellent top line, LTK is likely to exceed our initial accretion estimates of $0.08 for the last three quarters of 2007.

Turning to the two European acquisitions, Lumberg Automation is a wonderful and innovative business that designs, manufactures, and markets connectors and connector assemblies primarily for automation machine builders. This is the business we acquired at the end of April, so it is in our results for two-thirds of this quarter. We spent time at Lumberg working on our industrial conductivity strategy and some of the synergies available with the connectivity business at Hirschmann.

With Lumberg, our acquired business has a very strong design and development function, but the division we bought did not bring with it much back office support. So we are working out how to leverage our existing back office infrastructure in Europe.

At Hirschmann Automation and Control, acquired on March 26, there are three business groups, ICON, the industrial connector business, INET, the industrial ethernet business, and ECS, electronic control systems. We focused mainly on the industrial ethernet in our discussions at Hirschmann and I am confident that our talented colleagues there have a good understanding of the market opportunity and are making the appropriate investments for growth. Taken together, the European acquisitions had second-quarter revenues of $78 million and met our expectations for accretion.

Moving to slide five, I would like to turn now to the execution of our regional manufacturing strategy. We announced last year our plans to build a new plant in Nogales, Mexico and cease operation at four other North American locations. When we made the last of those decisions in early December, we were experiencing a short period of shallower order growth. So we moved ahead a little earlier with plant rationalizations than we might otherwise have done. Orders came back strong before December was over and have continued strong all this year, necessitating a delay of some of these plant actions as we focus our energy and capacity on meeting customer demands and reducing order leadtime.

Our book-to-bill ratio in the second quarter, just as in the first quarter, was about 1.1 as we continued have extended order leadtimes in a number of our product areas. The Nogales plant is scheduled to come online during the third quarter, which should allow us to work off the backlog and significantly improve our leadtimes.

But because we have protracted the closing of other plants in interest customer service, we are continuing to incur duplicate fixed manufacturing costs for longer than originally anticipated. We now expect that the savings from the manufacturing restructuring will occur in 2008.

We have also been planning a new LTK Belden plant in Suzhou to be completed in the second half of 2008. This plant will not only take over the volume for our current LTK Shanghai plant with room for expansion, it will also accelerate the localization of production for Belden brand products in Asia. I am pleased to report that our Board of Directors approved the capital spending for this plant in May and that we are proceeding with this plan.

Our lean implementation continues to gather momentum. So far, about 500 of our 7000 associates worldwide have had some hands-on exposure to lean throughout weeklong Kaizen events. We have had some very successful Kaizens that have resulted in better product flow, a higher level of customer satisfaction, reduction in manufacturing setup times, improvement in production throughput, and reduction of work-in-process and finished goods inventory.

All of our businesses have conducted manufacturing Kaizen events and we have also applied the tools to working process improvements in customer service and financial reporting. Absent the impact of acquisitions, our working capital turns improved 0.2 of a turn sequentially and are nearly one full turn better than a year ago.

Now just one final item before I turn this over to gray. In July, we sold the last piece of our business that was involved in copper outside plant telecom cables. That portion of our operation in the Czech Republic was sold to a private buyer in Germany earlier in July and will be part of our discussion of third quarter results. This completes the execution of the decision made in 2004 for Belden to exit the outside plant telecom business, a market with limited growth potential, high customer concentration, and lower value-ad than the businesses in our strategic core.

Now I am going to turn the call over to Gray Benoist, our CFO.

Thank you, John. Good morning to everybody. John has covered our consolidated revenue and operating profit and has commented on segment profitability. I would like first to round out our discussion of the top line with a few comments about the vertical markets. Then I will follow that some additional comments about our operating results.

The acquisitions we have completed combined with the portfolio decisions we have made have significantly changed the mix of our addressed markets. If I could have you turn to slide six. The pie chart on the rights depicts our revenue by vertical market.

We analyze revenue in five different verticals. The largest is now the industrial markets, which is just over 40% of our revenues. This includes cable products branded Belden, Alpha, HEW, and Thermax, together with the Hirschmann Automation's leading offering in industrial ethernet and the revenue contribution from our two new very strong industrial conductivity brands, Lumberg and Hirschmann.

This is a broad vertical category. It is centered in factory automation, but extends to many harsh environmental applications and infrastructure projects that require ruggedized network solutions. Among the notable opportunities in the market is the worldwide adoption and implementation of industrial ethernet beyond its current strength in Europe and the unique set of complete solutions we are able to provide to link the industrial information environments to the enterprise network.

Networking and communications is our second-largest market, comprising just under 30% of our revenue. This is down from over 40% just one year ago. The market includes cable and connectivity for data centers and data networks, plus a smaller amount of volume in areas like CATV broadband serving the enterprise market and telecom central office cabling solutions. We have repositioned ourselves in the enterprise market to emphasize solution selling, reinforcing our brand propositions, and have deemphasized the bulk commodity cable center.

The third market we serve is video, sound, and security, at just under 15% of total revenues, which includes the outstanding brand position of Belden in the broadcast and education and production market and West Penn, with a leading position in sound and security.

Sales into the transportation defense vertical our about 4% of revenues is experiencing very strong growth. Our newest vertical, consumer electronics and consumer OEM is about 10 to 12% of our revenue and is made up entirely of the LTK business, most of which is in China, but LTK has a strong Asia brand and exports into Southeast Asia and South Korea.

Now a little more color on our shifting participation in the networking market. As John indicated, this is an area where we have managed to weigh low margin businesses and successfully pursued higher value opportunities. Sales fell in our networking business by about 11% year on year. That is the net result as we are increasing business in a higher value-added product segments and decreasing sales in lower-margin business, most notably bulk cat 5E cable. Our networking opportunities of focus today are solutions-oriented, including higher bandwidth cable, fiber, wireless, lots of conductivity, and cable management systems.

Our Belden branded network conductivity revenue, although still a small portion of our total sales, was up about 70% year over year, which follows on the great first-quarter result we reported in this area. The aggregate basket of the more attractive networking solutions revenue was up 18% year over year, while our more-commoditized category cable revenue was off, as predicted, about 23%. We are pleased with our progress in this area and believe our margin expansion is an excellent proof point of the successful repositioning of networking at Belden.

Now to continue with the results of operations, in the second quarter, we incurred $2.9 million pretax in severance charges, asset impairments, and adjusted depreciation charges all within the Belden America's segment related to previously-announced restructuring. We also incurred $12.29 of pre-tax non-recurring purchase accounting expense related to the acquisitions. In the second quarter of 2006, the Company incurred pretax charges of $4.3 million for severance expense and accelerated depreciation associated with restructuring actions in both Europe and Belden Americas.

To provide a better sense for our operational execution, I will focus the remainder of my comments on adjusted results without these charges and without the one-time purchase accounting impact. A reconciliation between GAAP adjusted result has been provided as part of today's press release.

Gross profit was 29.2% of sales in the quarter, an improvement of 630 basis points year over year and 180 basis points sequentially. The traditional Belden (technical difficulty) has improved gross margins year on year by 550 basis points, resulting from the continuation of portfolio management and shedding of inefficient FIFO layers in inventory highlighted in our first-quarter results. Our traditional businesses' gross profit margins improved sequentially by 100 basis points.

With respect to the acquired businesses, aggregate adjusted gross profit margins were 31.2%, richer than our traditional businesses and consistent with our expectations. John commented earlier on our current status of regional manufacturing. I would like to add that aligning capacity did contribute much of the 100-basis-point sequential improvement we realized in our traditional business results.

Selling, general, and administrative expenses were $93.6 million, or 17% of revenue, and $52.6 million, or 12.8% of revenue in the prior year quarter. This is an increase of $41 million. The amount attributable to the acquired business was $32 million. SG&A in the connectivity companies includes R&D at a much greater level of investment than we have the cable business. This is the fuel for their future. We also incurred short-term non-recurring costs of $4 million in the quarter for certain corporate initiatives, including the funding of the net share settlement, investing in the acquisition integration costs, and some unusual costs associated with significant people changes under our talent management initiative.

On a comparative basis, including the adjustment for the impact of foreign currency exchange, the increase in SG&A spending was 4% year over year. Also within the four legacy operating divisions, SG&A spending increased a modest 2% year over year, an increase that can be directly aligned to our increased investment in sales resources in Asia.

As you can imagine, we are exceptionally pleased with the efforts at the division level in adopting shared services, driving sales productivity, and implementing other lean back office initiatives centered on leveraging our SG&A structure.

The drivers of operating margin expansion in the second quarter year-over-year were clearly in gross margin. First and foremost, the management of our product portfolio tried to weed out low-margin sales or create real price improvements. Second, the benefits of our regional manufacturing strategy, again, the majority of which we have yet to realize.

If I could have you turn to slide seven. Depreciation amortization in the adjusted results for the quarter were $13.3 million, excluding the one-time amortization of the backlog and inventory step-up effects of purchase accounting, which we set aside in our adjusted results. The amortization of intangibles associated with the three acquisitions with about $2.5 million in the second quarter. This is a preliminary evaluation of the transactions and there could be adjustments to purchase accounting over the next few quarters, but we expect amortization at about the $2.5 million per quarter to remain a part of our cost structure going forward.

As you may recall, last quarter we provided a range estimate of $8 million to $12 million in purchase accounting costs. The current forecast is approximately that $8 million dollars in 2007 and approximates $10 million in future years.

Capital expenditures were $16.7 million in the quarter. The majority of that being the investment that continues in our manufacturing site in Nogales. Income tax expense was $20.5 million in the adjusted results, or 33.8% of pre-tax income for the quarter, which was significantly lower than our tax guidance of 37%. This lower tax rate was primarily due to increasing our profitability in the tax jurisdictions of which we have NOLs, most notably the Netherlands, in which no tax benefit of been previously reported. Note the second-quarter tax rate of 33.8% includes the benefits of a lower effective tax rate on year-to-date pre-tax income for the quarter, bringing our year-to-date effective rate to 35% in the adjusted results. Our full-year outlook for the effective tax rate is 36%.

During the second quarter, we successfully inserted a net share settlement feature into our $110 million convertible debenture. This brought our weighted average share count used in the calculation of second quarter diluted EPS, down to 50.9 million shares and we estimate of this accretive by approximately $0.01 in the second quarter. The net shares settlement will have the effective reducing the weighted average share count again in the third quarter by approximately 0.5 million shares. This benefit could be offset to some extent by shares issued from the exercise of stock options.

Free cash flow the quarter was approximately $60 million, which exceeds our operational goal of free cash flow in excess of net income by two times on a GAAP basis and 1.5 times our adjusted results. Strong earnings, fixed asset management, and as we will discuss next, great working capital management lead to a superior result and to an ending cash balance in excess of $90 million.

On to working capital. In addition to our return on sales, we are very actively managing improvements to our return on invested capital. To keep you abreast of our progress, we're regularly reporting working capital turns and inventory turns. If you could please turn to slide eight, within the legacy business, the three largest segments, Belden Americas, Europe, and Specialty, all reduced their net investment in working capital and improved their turns sequentially. The businesses acquired, taken together, have good working capital returns performance and improved our consolidated working capital and inventory turns measures.

Inventory turns, using trailing cost of goods sold, were 5.9 times. Working capital turns for the quarter were 6.4, improvements of 0.8 turns and 1.7 turns sequentially. I will note on working capital turns, we are carrying about $18 million of acquisition-related payables that are non-recurring. Without this onetime benefit, working capital turns with about six, a 1.5 turn improvement from a year ago.

On a final note, we did not sell any real estate in the second quarter, but with a sale of the Dutch and telecom operations in July, we continue to drive for improved efficiency in our physical assets. We look forward to reporting strong progress in this area in the third quarter anchored by this transaction.

At this time I would like to turn it back to our CEO, John Stroup, for a few remarks about 2007 outlook.

Thank you, Gray. Our revenue outlook for 2007 is essentially unchanged and that is the revenue will exceed $2 billion. The portfolio management actions that made the first-half revenue comparisons difficult are now behind us, so we expect to experience a more normal level of organic growth on an improved business model.

On the bottom line, everything we liked about the second quarter we believe is sustainable. The operating results of our historical business were strong and orders remain strong. The acquired businesses are meeting or exceeding our expectations and we believe we have a structural shift in our effective tax rate.

In light of these factors, we are again raising our earnings outlook for 2007. Our previous outlook for 2007 diluted EPS was a range from $2.50 to $2.70, excluding any restructuring charges that may occur from already-announced actions and the short-term purchase accounting effects. We now expect the 2007 diluted EPS adjusted for restructuring costs and short-term purchase accounting effects will be between $2.80 and $2.95. We expect our full-year operating margin to continue at or slightly better than the 12% with experience in the first half. Because we have delayed completion of some of our restructuring actions to deal with our order backlog, we are not counting on realizing the full benefit of our manufacturing restructuring by the end of 2007. That leaves some additional margin improvement for next year.

I would like to thank all our associates around the world for their hard work and all that they've accomplished in the first half of 2007. I want to thank all of you on the call for your interest in Belden.

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

(OPERATOR INSTRUCTIONS) Matt McCall, BB&T Capital Markets.

John, along the lines of the time of the -- I understand why you're pushing out those plant rationalization efforts. Maybe could you give us an idea of what the timing looks like for '08 or for recognition of some of the savings? Could you, again, quantify what the savings has been thus far and what you expect going forward?

Matt, I think our view is that these are benefits we will see in 2008 and I think we'll see them early in 2008. Obviously we will update 2008 guidance in the early part of the year, but I think this is just a very minor delay. I think I tried to be consistent with people that relocation of factories is difficult and when it is being done in a time of strong demand, it can be even more difficult.

So I think the fact that we are delaying its slightly does the goods sense, particularly in our customers' eyes, but I am confident we're going to see it in 2008. We had hoped at the start of the year we might see it at the end of 2007. We're obviously delighted that are results are a strong as they are without those benefits, so in 2008 we feel really good about having that tailwind for us in 2008.

Our view on the opportunity is unchanged from what we have announced previously, externally in terms of what kind of savings we would see. None of that has changed. We think that benefit is all still there. Nothing structurally has changed. It is just a matter of us doing it perhaps a little bit slower than would have liked.

Okay, so by the middle of next year those numbers should start to show or should be fully showing up in results?

Yes, we would hope to see them in our 2008 results.

Great, than just to clarify, I think you talked about a return of a normal level of organic growth for the legacy business. Remind me again what normal would mean in your eyes.

Matt, as you recall, at the start the year we gave some guidelines on a number of factors, including organic growth. We have structurally changed the portfolio of our business, as we have described as well. We now have a LTK in the family which is exposed to higher geographic growth. We have our Hirschmann and Lumberg business, which are exposed to the benefits of decentralized automation control and the industrial ethernet business. So we believe, for us, over the cycle this is a business that ought to be experiencing five to 7% organic growth. In the second, I think we're well-positioned to be able to do that.

Okay, then finally as we look out into '08, or I guess the way to approach this is to look at '07 and you have taken your growth expectations up, or your topline expectations up a little bit. Obviously this cyclical environment is still pretty solid, but maybe discuss some of the secular trends and as we move out into next year, or maybe even into this year, what part of that increase is related to cross selling some of these new products into the legacy Belden customer base?

Matt, in 2008 I do think we will see the benefits of commercial synergies associated with these acquisitions. We have not discuss them externally, but we're already internally starting to see some really good signs of where the Belden sales force has assisted either Lumberg or LTK or HAC penetrate in customers and channel partners in ways that they would not have been previously available to do. So we're pretty optimistic the 2008 topline is going to include some of the benefits, commercial benefits of these transactions.

As you may recall, both Lumberg and Hirschmann are considerably under penetrated in the United States and in Asia. We are really pretty excited with what we think that opportunity is going to be and of course LTK, technology has always been relatively limited Asia and we see some benefits there. We'll probably speak more to specifically when we do full-year guidance in 2008, but I think you should expect that our topline expectations in '08 are going to include us taking share based on these commercial positions that we now have.

Okay, then one last one. The margin opportunity, if you could talk about -- I know you had one slide that broke out the revenue by segment other than the reporting segments, but along the lines of data networking, industrial, if you look at the biggest opportunity, the biggest opportunity there still in the industrial -- in the networking environment and maybe where our margins, where could they go?

We have a pretty good progress, we think, in margins in the networking segment. I highlighted the specialty business. 18% operating profits, a big chunk of that improvement is our Mohawk business, which is a network business almost exclusively. So we are pretty pleased with the progress we made there. Of course, we're never completely satisfied in there is more work to do. Clearly the larger percentage of our total business, that is end-to-end solutions and connectivity, benefits us a lot.

But as I think about margin expansion opportunities, I have a hard time finding any of our businesses to do not have margin expansion opportunities. We got more connectivity that would be selling on the front-end side. I think we've got opportunity to harness our commercial leverage stronger than we have in the past. Of course the manufacturing cost reductions that we have talked about that we will see in 2008 really cut across all the businesses. So it is hard for me, Matt, to say that there is just one segment that is going to drive improvement. I am pretty optimistic that we're going to get it from all areas.

Okay, thank you very much.

Kevin Sarsany, Next Generation Research.

Quick question on that $4 million of costs, does not continue?

Is one-time for the quarter. It is not a recurrent cost structure item, Kevin, but the integration continues. So clearly for Q3 and Q4 we really raised the bar associated with other expectations were on the integration of the acquisitions. We're willing to spend what I will call smart money to make sure that the integrations go smoothly, so Q3 and Q4 will have some additional costs associated with that integration. But the other items, which were the unusual items associated with talent management as well as the funding of the net share settlement, are nonrecurring.

In your segment reporting here, where is that located, the $4 million? Is that the eliminations in finance and administration?

Yes, it is in the consolidation.

It is in the finance and administration.

Okay, that make sense. I guess what are you expecting from the acquisitions to contribute in the second half?

I will take a stab at that. Again, our first quarter with the acquisitions here in Q2, as John mentioned, were more accretive than what we had anticipated. The strength in LTK and sort of the harboring of an enormously powerful business model in both Lumberg and Hirschmann are true to the expectations that we put forth to the Board and to ourselves.

Our expectations are, at this in time, in the aggregate the acquisitions will outperform our level of original guidance for accretiveness. I think if you accumulated the accretiveness that we put forth, it was $0.23 for 2007 and right now, Kevin, we're thinking that there is a good opportunity that we will exceed that contribution.

Thank you for that, but I meant on the top line. That was good.

But you appreciated my response on it.

I did. I come up with about $300 million in the second half, so

With respect to the top line, I think that's fairly pretty straightforward. It was up $149 million here in Q2. That excludes one month of the Lumberg activity, so if you added that back, maybe we would be running a little bit closer to $155 million. We certainly do not expected to diminish from that level, so for your modeling purposes, somewhere around the $155 million to $165 million is probably a pretty good range to be utilizing for modeling purposes.

I guess my point, then, is it looks like if you exclude that and you kind of compare it to the second half, you're talking about 5% organic growth in the second half to reach $2 billion, which you said is going to exceed. Why if we are annualizing the Mohawk SKUs and all that stuff and your Belden brand is growing at 18% and industrial and consumer is a higher growth business, why wouldn't organic growth be a little bit higher?

Well, a couple thoughts. Remember the third quarter is always seasonally a lighter quarter in Europe, so the LTK and HAC -- excuse me, the HAC and the Lumberg business will have to deal with a little bit of seasonality in the third quarter compared to the second quarter. But as we said, we think that the topline will be above $2 billion and if order rates stay strong in the second half the way we saw it in the first and we're able to execute from a manufacturing point of view, I think there's an opportunity for us to do better than the $2 billion.

Are you still doing some of the SKU management at Mohawk or other brands?

We will do it forever or at least as long as I am here. But I would say, Kevin, that most of the real big work is behind us, and that is why moving into the third quarter we think that the topline comparisons will be a lot more straightforward for all of us as it relates to our ability to generate topline growth.

Okay, I guess -- one thing, your operating margins -- credit to you, you've already hit your long-term goal, all that good stuff, but your kind of guiding us to kind of similar type of second half margins when you have got organic growth picking up, better results for your acquisitions, and I would guess now your hit one turn in inventory, you're going to increase the utilization a little bit. The mix in Belden brand and probably connectivity and your acquired business and industrial, why wouldn't margins be a little higher?

I think for our purposes, there is always an opportunity perhaps to do better than what we expect and if our businesses were to continue on the same trajectory, we might actually see better results. But I think that a lot of the hard cost work that we have done, absent the manufacturing restructuring -- which we do not believe will see in the second half of 2000; we believe we will see that 2008 -- I think a lot of that has plateaued and then in the second half I think it is going to be more of a revenue generated margin expansion than it would be anything more than that. Now, Kevin, in 2008, however, as you know, we're going to expect a lot of benefits from the manufacturing cost savings. Therefore I think that more margin expansion is possible in 2008.

All right, I just -- if I recall correctly, when you're doing your inventory turn acceleration, I think we came up with a five to 7% capacity utilization reduction. Now if you're growing organically at 5%, I think -- plus you're probably pulling back a little bit. It just seems like the numbers could be higher and, you know what, from what you of guys have done, it probably will be higher. I'm just trying to get my arms around it in my modeling.

Let me try to address it this way. One is would certainly expect to get the fall-through on incremental volume, no question about that. We would also expect that if our inventory situation is stable that we would not have the same issues with absorption that we had previously, so you're right about that. I think that the thing that we're looking at right now is that there is duplicate costs in our manufacturing line associated with factories coming up and factories that have not yet fully come down, particularly our Nogales facility and our Montreal facility with cable production. Therefore we have some cost in our manufacturing structure that we believe will not be in place in 2008. We think we'll continue to see that in the second half of 2007. If we're able to execute better on that particular area, then I would agree with you that there could be more margin expansion.

Just a quick question on the Nogales. What is the net gain going to Nogales with labor versus landing costs?

I am trying to recall what we said in our guidance associated with the shutdowns of the Americas.

I don't have that with me.

Again, it is not nearly as profound as what we are going to see when we locate the manufacturing for Asia into the LTK manufacturing sites in China. There we talked about 1000-basis-point improvement. The improvement for the Americas in the specialty portfolios associated with manufacturing in Nogales is not nearly as profound, but it is significant and positive. To the number just doesn't come to the tip of my tongue, Kevin.

Okay --

We will look it up and we will get that out to you.

We will talk later, thank you.

(OPERATOR INSTRUCTIONS) Jeff Beach, Stifel Nicolaus.

Great quarter. Going back to your slides six with your verticals and looking at your traditional Belden business, if you can, to some degree, in the industrial, transportation and defense, and video, sound, and security, I am aware that there has been some portfolio management occurring in that sector. I think it is more the data networking, but can you give us a sense for what kind of end market -- what kind of growth you're seeing from your end markets trying to make some adjustment for the portfolio management in these, I will call it, industrial-related markets away from the data networking.

Jeff, your right. There have been some portfolio actions taken in these segments as well. Most notably in the industrial segment there were some areas that we took some actions on that we thought were appropriate. But we have seen strong growth in transportation and defense. That is our Thermax business. That business has done very well. Our video, sound, and security businesses do good as well.

In general we have seen books-to-bill rates now 1.1 for the last two quarters, so we're still seen strong demand in all of these segments. It is not just limited to one particular segment. So we're seeing good end market demand there and as we said before, if it had not been for the portfolio actions we took -- and you are correct, more of those were in networking than they were the other segments -- we would seen, I think, organic growth in these segments well within the 5 to 7% that we would have expected.

All right, then second thought, if you just even have a directional idea, if you're seeing more and more income coming outside of the U.S. are we likely going to see a lower tax rate in 2008?

There is a good chance. We know that the 36% we're guiding to right now is a structural change. John made that point. We would not have said that if we thought it had some sort of temporary notation aligned to it. We do have NOLs. There are several areas where we are trying to organize our thinking around how he can get to most utilization of those both for 2008 and beyond. I would encourage you think about how we think about it, and that is to try to maximize our position there. So I would be I guess disappointed if we do not continue to make some progress structurally associated with the opportunities that we put forth. But for guidance purposes, right now, I think 36% is a fairly good place to begin your analysis.

Thanks and again, another great quarter.

There are no further questions at this time. Please continue, Mr. Stroup.

Well, we thank everyone once again for joining us on our conference call. Do you have any final comments? Okay, we appreciate everybody's interest and please give us a call any time if you have follow-up questions. This concludes our call.

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