Belden Inc (BDC) 2007 Q3 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. Please go ahead ma'am.

Thank you, Jeff. Good morning, everybody. Thank you for joining us today for the third 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, it's just investor.belden.com. 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 place, or just call us at 314-854-8000.

During the call today management will make some 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 the 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 begin with comments about the performance of the business in the third quarter. Gray will review some additional segment analysis and financial results, and then John will speak about our outlook for the remainder of 2007, and discuss updates to our financial targets arising from our strategy review that took place over the past few months. And then 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. Our third quarter results reflect significant year-over-year improvement. And we're pleased that they were achieved in a period when considerable investments are being made to improve our global manufacturing cost structure.

After adjusting for a number of favorable non-recurring items related to asset divestments, previously announced restructuring action, and tax matters operating income increased 47% to $63.5 million, and earnings per share increased 43% to $0.77. These results are a combination of improvement in our core business and another strong quarter from our acquired businesses.

I'd like to begin with some analysis of our revenue growth. This quarter marked the return of positive organic growth for the enterprise. After adjusting for acquisitions, divestiture and currency we delivered organic growth of 4.1%. This compares favorably to negative organic growth of 1% in the first half of 2007.

As we had expected the product portfolio actions taken in the second half of 2006 (inaudible) impact on this quarter's year-over-year organic growth performance. Because the organic growth of our acquired businesses is not included in this figure it only represents the growth of the legacy Belden business. And it's towards the low end of the range we expected. As a reminder we expect the legacy cable business to grow 4 to 6% over the cycle.

If I drill down a little further though our largest segment Belden Americas grew 9% organically in the quarter. Although we did make some progress with backlog reduction as manufacturing capacity expanded in the quarter, our organic growth could have been stronger had our lead times been at more typical levels.

Belden Europe and our specialty segment did not grow and we attribute that to the continuing effects of product repositioning that affected those segments more profoundly as we went through our product portfolio work over the past year.

Turning now to the acquired businesses. The full year 2007 Belden growth rate of LTK, Hirschmann and Lumberg Automation is in excess of 12%, which is stronger than we anticipated at the time of the acquisition this spring. Our approach to improving the growth of our business has been first, to take necessary actions to improve our profitability through our product portfolio actions and the manufacturing restructuring. So we can then invest the savings in profitable growth. The business we acquired are in faster growing markets than our original business. And they are performing well in those markets. So they immediately improve our growth profile. But we are also investing in share capture; a subject I will return to later.

Our book-to-bill ratio for the quarter moderated to just a little over 1.0 instead of the 1.1 we reported in the first two quarters of the year. If you have been following this story that we have a number of manufacturing restructuring actions going on in 2007. Demand has been stronger than we expected when we accelerated some of these actions and as a consequence our lead times and backlog have increased especially in Belden Americas.

The consolidated book-to-bill ratio of 1.0 indicates that we are now shipping at or just above the current level of demand. We are especially pleased with the sequential improvement in our legacy Belden Asia-Pacific business. This part of our business had revenue growth of 14% year-over-year, and a book-to-bill in the quarter of 1.2. But their orders grew more than 50% year-over-year.

In the first quarter our Asia shipments were weak because we had made significant changes to our sales resources in the region. We made the right investment and the team is beginning to deliver the results. They still need the benefit of manufacturing localization, which we are working on in order to get the service levels and lead times they need. But are go-to-market actions are clearly gaining traction.

Our key to profitably satisfying our demand of course is completing the manufacturing restructuring actions we have underway. Good progress was made in the third quarter and we're pleased with the capacity footprint we will have entering 2008. Our new plant in Nogales, Mexico began shipping to customer demand this quarter as planned. They are still ramping up. We now have 23 (inaudible) plants and 27 extruders in place and 11 of them are now running making both coaxial and twisted pair cables. We've had our lean manufacturing experts involved in the start-up so we think this plant will be very effective as it gets up to speed.

We will cease manufacturing operations at our Montreal facility at the end of this month. And our Tompkinsville facility is ramping down and will discontinue manufacturing by year-end. We are on course to eliminate the fixed manufacturing costs associated with those two facilities by year-end. Over and above the fixed cost we've had a great deal of inefficiency in manufacturing this year as we concurrently remove capacity in certain locations and expand in others. So as we look at heading to 2008 we expect to see the benefit from these restructuring activities.

There are two more things I would like to cover with you before I turn the call over to Gray. The sale of the KDP telco operation in the Czech Republic and the people moves that we made in the third quarter. We closed the sale of our KDP telecommunications cable operation in the Czech Republic on July 2. The selling price was about $26 million and we recorded a gain of $7.8 million on the transaction. This transaction was the third divestiture in a series and marks the completion of a process that began in 2004, for Belden to exit the outside plant cable business.

In 2004, Belden sold its Phoenix, Arizona business and closed one of the largest cable plants in the world. In early 2006, we sold the Manchester, UK operation. Now in 2007, we have sold our last remaining telephone cable operation. This business was not a good strategic fit for us because of a customer concentration, lower value add, and the lack of growth opportunities.

We made several important people moves at the senior level this quarter. First of all Naresh Kumra has assumed responsibility for LTK, the acquired business in China along with the Belden Asia-Pacific business. Naresh has been co-leading the acquisition integration steering committee but now he has direct responsibility for LTK as well as Belden in the region. At the same time we hired Peter Leung as the general manager of LTK. Peter is an executive with extensive experience managing (inaudible).

But beyond Naresh and Peter we have created a very capable and experienced team bringing in new talent in finance, HR, marketing, and logistics to support the growth of both LTK as well as Belden in the region. Another important move was appointing Louis Pace as president of our specialty products division. Louis was our vice president of business development, who left the successful completion of three acquisitions in the second quarter. The specialty division has made great strides in the past year. They worked very hard on product portfolio management. They have a good start in implementing lean methods and they have done a great job in augmenting capacity for Belden Americas.

Louis will now be leading the specialty division companies to make similar progress on both organic and inorganic growth opportunities. Another significant change was hiring Dr. Wolfgang Babel who joined our organization in September and will be leading Hirschmann and Lumberg businesses. He's experienced and knowledgeable with respect to industrial automation and he possesses all the skills we were looking for when searching for this very important leadership position.

It was a few months ago that we announced that Peter Sheehan will be leading our global marketing function. Prior to that Peter had been our Belden Americas division president. I call attention to this change once again because Peter's chartered to lead our organic growth initiatives, which will be very important to us in 2008. He is redeploying and adding resources to provide global focus on our largest customers, vertical markets, and our key channel partners.

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

Thank you, John. And good morning everyone, and thank you for joining us this morning. I would like to start my comments with some analysis of revenue from the perspective of our served vertical markets. Then we will walk down the income statement with expanded comments on the tax provisions of the Company, review the segment operating results, and finally comment on cash flow and working capital performance.

If you turn to slide five. The pie chart on the right depicts our revenues by vertical, the left our geographic diversity. We continue to analyze the enterprise revenue in five served vertical markets. In the third quarter the most significant of these is our participation in the industrial market, the new very strong industrial connectivity brands of Lumberg automation and Hirschmann have complemented our existing leadership Belden and Alpha brands such that this vertical now represents 43% of Belden's revenue in the third quarter, up from just over 40% in the quarter ago.

Networking and communications remains our second largest vertical market, now comprising around 25% of our revenues, down from approximately 30% of our revenue last quarter. The KDP outside plant telecom cable operation in the Czech Republic has been included in this vertical thus the divestiture of KDP in the quarter is the compelling factor for the reduced relative revenue in this market.

Again this quarter I would like to offer a little more color on our shifting participation in the networking market. Our third-quarter results as John mentioned for both 2006 and 2007 are better aligned for comparison purposes as both periods' results reflect much of our decisions to manage the portfolio. Away from lower margin commodity cable business.

This quarter sales fell in our networking business by about 3% year-over-year that is the net result. We continue our focus on higher value-added products and solutions in the portfolio, which include higher bandwidth cable, fiber, wireless, fiber and copper connectivity, and cable management system. Organic growth in this attractive subset of the networking vertical was up about 18% year-over-year. Which reflects the opportunities for product portfolio and solutions approach is generating for the Company.

The video sound and security market is 14% of total revenue and the transportation and defense vertical is about 4. In these two markets we experienced excellent year-over-year growth above 15%.

The consumer electronics and consumer OEM markets served by LTK was about 14% of our revenue this quarter. The business is entering its peak revenue season, which starts in August and September and runs through the remainder of the year as expected LTK booked very strong orders in Q3.

To continue with the results of our operations, in the third quarter the GAAP results were excellent at $0.99 of earnings per diluted share. These results include three favorable items that are non-recurring but also highlight our continuing intention to manage our assets and the balance sheet with a lean orientation.

First was the gain on the sale of assets, two items. A pre-tax gain of $7.8 million on the sale of the telecom assets in the Czech Republic, plus a gain of $700,000 on the sale of our Wheeling, Illinois facility. The gain on the Czech assets is not subject to tax. These together yielded earnings of $0.15 per diluted share. Secondly, we had a small favorable adjustment to restructuring reserves of $400,000 in the quarter. The third item was the recording of a tax benefit of $3.1 million resulting from a change in the income-tax rate in Germany enacted during the quarter. The German statutory rate has been reduced from 37% to 30% causing a reduction in our differed tax liability resulting in a one-time gain of $0.06 per share for the quarter.

For comparative purposes, last year in the third quarter 2006, the Company incurred pre-tax charges of $7.7 million for severance expense and asset impairment related to our restructuring actions. And reported a favorable one-time tax benefit of $4.7 million.

I will focus the remainder of my comments on the adjusted results without these gains and charges. A reconciliation between the GAAP and adjusted results has been provided as part of today's press release. And it is also available at the end of today's slide presentation file.

Gross profit was 28% of sales in the quarter an improvement of 350 basis points year-over-year. As John said, we know that further improvement in gross margin is forthcoming as we near completion of our manufacturing restructuring. The benefits will be realized through the elimination of redundant fixed costs, reduction in efficiencies we [probably] experience with the product transfer phase of the project, and the shift to lower cost production locations.

As in the second quarter we have continued to prioritize customer satisfaction, delivery, and control of order leads times during this challenging process of production relocation. Selling, general and administrative expenses were $93.7 million or 16.7% of revenue compared with $51 million or 13.2% of revenue in the prior year quarter. An increase of $42.7 million.

The current quarter expense includes the SG&A and the R&D of the acquired businesses and includes the amortization of certain intangible assets of the acquired businesses as well. Our results also include discretionary spending for strategic initiatives, three of which I would like to highlight. our lean implementation for which we have hired and continue to hire top-notch experienced people from outside the Company to provide leadership, training, and know-how for the advancement of our lean transformation. Second top grading, we are continually upgrading our talent hiring the best people we can find and in some cases helping transition people out of the Company who are not meeting expectations. And third we're investing in our go-to-market activities an area in our strategic deployment that John will discuss later this morning.

Turn to slide six if you would please. Depreciation and amortization in the adjusted results for the quarter were $13.4 million. The depreciation and amortization associated with the acquisition purchase accounting was about $2.5 million the third quarter. The valuation of the acquired assets of our second quarter acquisitions are still subject to final adjustments. But we generally expect the amortization to be at this level going forward.

Gross capital expenditures were $30.4 million in the quarter with nearly half of this investment occurring to finalize construction in Mexico. However, asset sales drove a reduction in our net PP&E of about $4 million quarter-to-quarter.

Income tax expense was $18.9 million in the adjusted result or 33% of pre-tax income for the quarter. Which was significantly lower than our tax guidance of 36%. This lower tax rate is primarily due to the continuing increase in profitability in tax jurisdictions in which we have (inaudible) Netherlands, and to a lesser extent Germany.

Note that the third quarter tax rate of 33% includes the benefit of lower effective tax rate on year-to-date pre-tax income for the quarter. Which brings our year-to-date effective rate to 34.2% in the adjusted results. Our full-year outlook for the effective tax rate is 34.5%, as we believe (inaudible) and is sustainable in the near term.

Also this quarter, we initiated a share repurchase program. We have an authorization to buy back shares up to $100 million, and during the quarter, we spent $10.6 million to repurchase 220,500 shares at an average cost of $48.19.

We have discretion as to whether or not we will spend the authorization in its entirety, depending on competing interests of our cash and our desire to manage the enterprise to the targeted 30 to 40% debt-to-debt-plus-equity ratio.

Average diluted shares for the third quarter were 50.1 million, and for the year to date 50.9 million. We are using a flat 50 million shares in modeling the fourth quarter for our annual guidance, but the actual diluted share figure may be different as influenced by share repurchases and any stock option exercise activity.

Okay, turn to segment results for a moment. The Belden Americas segment, as John mentioned, had external revenues of $231.6 million and an increase of 10.7% compared with the year-ago period. Segment operating income, adjusted for the gain on the sale of the Wheeling, Illinois facility, and the $400,000 restructuring adjustment, was $43.8 million, or 17.5% of total segment revenue, which includes inter-company sales; up 120 basis points year-over-year.

The Specialty product segment's external revenue for the quarter was $60.6 million, slightly lower than the year-ago, by 2.7%. The division results reflect a more than doubling of inter-company shipments compared with the year-ago as the division capacity was shifted to satisfy customer demand in the Belden Americas segment. The operating profit of the Specialty segment was $14.6 million or 16.7% of total revenue, up 80 basis points from the prior-year quarter.

The European segment's external revenue was $171.8 million in the third quarter, including $88.4 million from the businesses acquired in the second quarter. Organic growth of the legacy Belden businesses was negative year-over-year, reflecting that the deliberate repositioning of lower margin products at the sacrifice of some volume and production relocation and efficiencies in the manufacturing realignment of Europe capacity.

Operating income of the Europe segment was $15.8 million in the third quarter, or 8.8% of total revenue. We expect that the legacy Belden Europe business will exit the year at double-digit operating profit as planned.

The Asia-Pacific segment had third quarter revenues of $97.6 million, of which $76.3 million was attributable to LTK. The legacy Belden Asia-Pacific business grew revenues 14% year-over-year and more than doubled its operating profit.

Free cash flow in the quarter was approximately $39 million, which brings year-to-date free cash flow to approximately $127 million, about 20% more than our year-to-date net income. For the sale of the Czech assets, the cash proceeds are payable to Belden in installments over the next few quarters.

I'd like to ask you to turn to slide 7. Inventory terms using the trailing cost-of-goods-sold methodology were 6.2 times, an improvement of -- from 5.9 terms last quarter. And working capital terms for the quarter were 5.8, sequentially lower compared with the 6.4 terms last quarter.

However, working capital terms have adjusted for the KDP divestiture-related receivable in the third quarter and the one-time acquisition-related payable for LTK in the second quarter improved slightly from 6 to 6.1 terms. The third quarter working capital also reflects higher LTK receivables as a result of their business seasonality, which accelerates in the period from September through the yearend.

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

Thank you, Gray. I'd like to alert you to the date of our analyst meeting, which will be December 12th in New York. So please save that date, December 12th. If you are a professional investor not already on Dee Johnson's e-mail list, and you're interested in attending, please just drop Dee a note or give her a call. At that time I expect to be able to share our initial guidance for 2008.

Now, turning to outlook, for 2007 our outlook is unchanged. As you can see on slide 8, we expect our full-year revenue to be something over $2.02 billion, and our earnings per diluted share, adjusted for the non-recurring items we discussed in our press release, could be between $2.85 and $2.95. We've just narrowed the range as we get closer to the end of the year.

I'd like to turn to our 3-year financial objectives now. We first laid out our financial objectives in June 2006 when we showed investors our strategic plan. We reviewed and refreshed the strategic plan this summer and presented it to our board this fall. We are happy to say that our strategic direction is largely unchanged.

We believe we have been working on the right things but the amount of energy we invest in some of the initiatives will increase or decrease. So we can continue to use the pyramid diagram that has been so useful with our associates and our investors in explaining what we're doing.

Please turn to slide 9. This is a refresher for many of you. The initiatives on the bottom are fundamental practices that we have put in place to strengthen the business. These include product portfolio management -- the process of managing our new product development process to make sure we are meeting our customers' needs, and positioning our products correctly according to their value.

We had a lot of repositioning to do at first, so this was an area of emphasis a year ago. Still important, but not as much, in the fourth round this year, brand management. We've made some good changes with our corporate identity and our flagship Belden brand in 2006 and 2007.

Talent management; we significantly improved our talent pool this year through acquisitions of quality organizations and the recruitment of key individuals in important positions. But it is still an area of intense focus for us in the next year and for some time to come.

On the second level, initiatives focused on improving our cost situation; lean enterprise and regional manufacturing. We have been making substantial investments in each and we expect the results to be evident in our 2008 income statement and balance sheets.

On the third level, work focused on growing our business; go-to-market initiatives, by which we mean both demand creation and channel management, and emerging markets -- the idea that we want to be more fully present in the faster growing regions of the world.

At the top of the pyramid is our focus on solutions. We say air, light and connectivity. Air and light mean that in addition to our additional strength in copper, we want to grow our capability in fiber as we have been doing for some time, and wireless transmission, which we launched in 2007. Connectivity means we bring more value to the customer when we present a complete signal transmission solution rather than a component.

We summarize our progress on these initiatives on the next slide, slide 10. I was pleased with our success in our operational initiatives. We gave ourselves full marks for the work we did in the past year on regional manufacturing, lean enterprise, and product portfolio management. These are the initiatives that have brought our operating margin performance up significantly year-over-year.

We are making substantial progress in cost structure improvements and expanding our margins through better product positioning. We also made improvements in our balance sheet.

In our growth initiatives, the report card is mixed. We made good progress in emerging markets and solutions. Certainly the acquisitions of LTK, Hirschmann, and Lumberg Automation were successful and contributed to our growth goals, but we didn't achieve all that we had in mind to institutionalize these growth disciplines.

We fell short of our goals in go-to-market initiatives. When we do this well, however, we'll be able to grow our business organically at a rate exceeding the growth of our end markets. Our commercial people spent a lot of energy on product positioning over the past year. We look forward to directing those resources more towards share capture as we have corrected the fundamental product positioning issues we had 1 year ago.

As we were launching the scrap plant over a year ago, the initial 3-year financial objectives we discussed were as shown on slide 11 -- organic growth from 5 to 7% over the cycle, operating margin 12%, free cash flow to exceed net income, and return on equity between 13 and 15%. We are closing in all these targets well ahead of our original schedule and we need now to update them.

Our new financial objectives are supported by our new 3-year strategic plan. Our vision for the year 2010 (inaudible) our organic growth profile has improved with the vision of the acquired businesses. Our focus on share capture in combination with the improved end-market growth profile has caused us to increase our organic growth target from a range of 5 to 7% to a range of 6 to 8% over the cycle. We expect to provide additional growth through acquisitions.

We plan to expand our operating margin to greater than 15% from the earlier goal of 12%. We will maintain the goal that free cash flow will exceed net income, and given these goals for operating income and free cash flow, it is fully expected that our return on equity will also improve. Our goal now for return on equity has increased to a range of 15 to 17%.

We believe that when these objectives are achieved, additional shareholder value will have been created. We will talk more about the strategic plan, our growth initiatives, and our financial objectives at our Analyst Day on December 12th.

I want to thank all our associates for working hard to take care of our customers and for achieving so many of our goals over the past year. And thanks to all of you on the call for your interest in Belden.

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

Jeff?

Thank you, sir. (OPERATOR INSTRUCTIONS) We will take our first question from Celeste Santangelo from Merrill Lynch. Please go ahead.

Hi, Celeste.

Hi, Celeste.

Just looked at the operating margins and what -- if you just looked at the midpoint of your full-year outlook it looks like -- that getting to that at least 12% for the year you've been talking about, you'd need operating margins for Q4 to approach more like 13%. Can you just talk about the progression maybe from Q3 to Q4 and how you expect to get there?

Yes, Celeste. I think our view of the full year has really not changed over the last 90 days. We think that we are going to be very well-positioned exiting the year to achieve the goals that we've talked about for 2008 and beyond.

You're right though, we're going to need to see operating profit expansion in the fourth quarter compared to the third. We do expect that we will. We do have a lot of costs in the third quarter associated with the inefficiencies that Gray and I talked about on the manufacturing restructuring.

These are all temporary, they are all things that come with massive restructuring that we had to expect it. So I think we feel very good about where the business is going in the long run, but we did have to absorb a lot of costs in the third quarter that we would expect to see improvement in the fourth.

So I think the math you did is probably right, the full-year guidance is what we thought it would be 90 days ago, and therefore, we're going to see that sort of sequential improvement in the fourth quarter we believe.

Great, thanks. And then just looking at the networking as a percentage of sales, went to 25% from 30%. Can you talk about how much was -- maybe break out how much was KDP and then how much was from product pruning or if there is anything else going on.

Yes, Celeste, this is Gray. The KDP quarter-on-quarter was about $12 million for the segment and now the going-forward participation of KDP will go to zero. So when you look on the year-to-year there was a structural change, about 100 -- about a 15% decline associated with the reductions in the KDP piece of the portfolio.

And then just one more looking at the high-end cable that was up 18% year-over-year, can you talk about what that looks like sequentially and maybe just what end demand looks like, that's driving that?

Well, again the growth rates sequentially was about the same, so we had about 18% in the second quarter as well as 18% here in the third quarter. So the demand is fairly good and constant. There is a little seasonality associated with our second quarter compared to our third quarter with respect to the legacy Belden businesses and of course the factory issues that that's faced. But the business relative to last year is on par for 18% growth.

All right. Thank you.

At this time we have one question remaining in the queue. (OPERATOR INSTRUCTIONS) We will now hear from Jeff Beach from Stifel Nicolaus for our next question.

Yes, good morning.

Hey, Jeff.

Hi, Jeff.

Question -- Celeste's question was about third quarter going to the fourth quarter. My question is second quarter to the reported results here. You saw sales higher in this quarter than the second quarter and operating profits a little bit lower. Can you be specific about within the division -- the product lines, the geographic markets where some of the drags were there in this quarter because there were also some good tailwinds from product pruning and consolidation and other things as well?

Yes, Jeff, most of the challenges we had in the third quarter did in fact relate to the restructuring actions that we talked about from a manufacturing footprint point of view. And therefore most of it happened within Belden Americas and also within Belden Europe where the restructuring has been most pronounced.

So sequentially we did see increases in cost to goods sold above and beyond volume increases as a result of those temporary inefficiencies. And as I said in my prepared remarks, in the fourth quarter Montreal will in fact no longer be in our cost structure. By the end of the year Tompkinsville will no longer be in our cost structure.

A lot of the training costs that we had in Nogales in the third quarter will also be removed from the income statement. So as it relates to the fundamentals of demand and mix, there's really nothing that's changed there. The business is running and performing the way it has been and the way we would expect it to perform, but in the third quarter we did need to absorb those temporary costs that we expected and we had incorporated properly into our full year guidance.

And we expect to see improvement sequentially in the fourth quarter.

Also, can you review from a product segment just generally a commentary about some of your key markets in North America and specifically in Europe? I hear from some companies Europe remains very strong and from other companies they see signs of some weakness in some countries. Can you talk a little bit about that?

Yes. Well, first of all, let me start with the areas that I think were quite positive. We're very pleased with the Belden Americas organic growth of 9% and that was in just about all the categories of their business. And by the way, I think we could have done better than 9% had we been able to perform from a capacity point of view. So I think we could have seen even better strength.

In Asia we saw 14% but orders were up 50% year-over-year. We like to think we're taking share but clearly end markets were helpful there as well.

I'd say from a challenge point of view on end markets, our legacy Belden Europe business has seen not the same robustness in the order book that we've seen in some of the other parts of the business. I think some of that's end market-related, Jeff. But our OEM business, particularly the businesses that we have in the connectivity area like Lumberg and Hirschmann, those business are still seeing strong orders.

So I would say from a macro point of view there is nothing we've seen, Jeff, that leads us to -- to be cause for concern. Some areas are stronger, some areas might be weaker, but nothing I would say that I've seen that's pervasive that would lead me to conclude that we should be adjusting our plans as a result to end markets changing significantly.

Can you again expand a little bit on some of your markets and specifically in North America and whether you're seeing any pockets of weakness develop?

Well, in North America, I would say that in North America general the order book has been fairly consistent. There has been strength in broadcasting, as Gray said, strength in our industrial business, I think, was mentioned as well. There has really been nothing that I can point to, Jeff, at this point that would say there has been a change in patterns.

All right, thank you.

And we do have an additional question in the queue and that will come from Matt McCall from BB&T Capital. Please go ahead; your line is open.

Thank you. Good morning, everybody.

Hey, Matt.

Hi, Matthew.

Let's see, first on the guidance, looking at the -- how we get from here to there, you talk about a 15% target on the margin line and you're talking about 6 to 8%. I know you've got a lot of cost-savings initiatives already underway or announced. Is it -- can we assume the 6 to 8% topline organically and the cost savings already announced, is that what's going to get you there, or are there other things that you're going to have to announce from either a cost savings standpoint or from a -- I don't know, a growth standpoint?

I would say that we have shared everything with you strategically that will get us to those numbers.

Okay.

Clearly the fall-through on the organic growth is a meaningful contribution to the expansion in operating margins. And the cost reductions that we've shared with you on already announced manufacturing footprint are also quite meaningful, and you can do the math and see where that gets us to.

Yes.

But clearly we are going to continue to drive productivity improvement with our lean manufacturing investments. We're going to continue to look at ways to expand our margins through a richer mix of our business.

As we look at our organic growth, by the way, a lot of our organic growth, we think, is going to come in businesses that have higher gross margins. And as we talked about over the last year, our good -- what we call our strong networking business is growing 18%, which had higher gross margins, whereas our weaker networking business is actually shrinking, which has a positive impact on the gross margin line as well.

But I think -- our business well, that even with everything that we've announced there is still lots of opportunity for cost reduction in the area of manufacturing. There -- we're nowhere near where we could be and I think that we see 15% as a very legitimate achievable target over the next 3 years. And if we can get there faster then that would be great.

I agree. And then, let's see -- the cost that you spoke about from a restructuring standpoint, some of the inefficiencies that hit -- I guess they're not necessarily restructuring per se, but they could be considered one-time in nature.

Were they already in the full-year guidance, in the expectations? Because obviously the mix on the -- at least my model was on the margin line and I don't think I had quite the level of pressure in there. It sounds like the full-year guidance, you move to the high end but -- so I guess, were you surprised by any -- anything in the quarter? Was it as expected from a inefficiency standpoint?

The quarter ended up being very much like what we thought it would be.

Okay.

We did in fact model all this into our full-year guidance, which is exactly why our full-year guidance has not changed.

Right.

But we knew that we'd have this temporary cost structure going through the third quarter. Our focus is always on customers first, long-term orientation, and if we get to spend a little bit more money in a temporary environment to make sure we take care of customers, we will always do that.

And in the third quarter we had inefficiencies that we had to take care of, and I think we feel very good that we're making the progress we need to, to relieve that in the fourth quarter and then in 2008.

And did you quantify some of those inefficiencies?

No, we haven't but I think that -- we've talked before about some of these expenses and in general terms I think you can say that we're probably at about 100 basis points of margin pressure right now in the third quarter as it relates to some of these temporary problems.

Okay. And then can you -- you mentioned a couple of the facilities. I think there are a couple more that are still slated to be closed is that correct or am I --

I think we've commented on all the ones that we've announced. So the ones I talked bout here today were Montreal and Tompkinsville. There are some others that were previously closed that we've already commented on.

Okay, okay, that's what I was thinking. Okay, I just wanted to make sure I had them all listed. Okay, thank you very much.

Okay, thank you.

Thanks, Matt.

We will now hear from [Matt Kellogg] with Next Generation for our next question. Please go ahead.

Hi, guys.

Hi, Matt.

Hi, John.

Welcome.

Thank you. I just -- you guys mentioned one point that there were some -- you could have done more, I think maybe in development there because --that there were some capacity issues. I'm just trying to get a sense of what sort of capacity constraints you guys may or may not be dealing with and where they might be highest and lowest and how that might affect CapEx spending going forward.

Well, they're all temporary. They really have nothing to do with our CapEx or our PP&E at this point. They're all temporary issues and they relate to the fact that we are concurrently bringing up capacity in Nogales, Mexico, which is already in our capital plan, and bringing down facilities that were in higher-cost regions.

Okay.

And so they really have no impact on our long-term capital plan. Everything that's happening as it relates to this capacity are things that we've spoken about previously and there's really no change.

Okay. And so it's more of an issue of basically just a timing thing where you had a new facility coming online and older facility shutting down and that gap in between?

That's exactly right.

Okay. And then just trying to get a sense of -- you guys were saying -- talking about moving to 15% operating margins over time. It sounds like a lot of talk on some more legwork to go on sort of on efficiencies in manufacturing. Am I correct in thinking you'll get more of that improvement on the gross margin line than leveraging SG&A or is it going to be more equal or --?

I think it's both. We're clearly going to leverage our SG&A line. We're -- as we grow our business organically I would expect that our topline is going to grow at least twice as fast as any increase in SG&A costs.

Okay.

I would expect that our top line is going to grow at least twice as fast as any increase in SG&A costs.

Okay.

But we are going to get leverage on SG&A but there is no question that there is an enormous amount of emphasis on gross profit expansion, through the cost structure that we are going to have entering in 2008 and our ongoing focus on lean manufacturing techniques which will always have an impact on productivity. So you should expect the 15% is going to come from leverage in both areas.

Okay.

Or from gross profit than SG&A but we're never going -- we are never going to not focus on SG&A leverage as well.

Okay. Great. I know that is very helpful. I appreciate it and that is all I got. Thanks, guys.

Thank you.

And there is one last question in the queue. And that will come from [Rob Ribbi] American Century Investors, please go ahead.

Good morning and thanks a lot for the detail you guys have provided on the called so far. I just want to try to dimension a little bit further the costs in this quarter because there is a couple of the other analysts have talked about your -- a little bit lie related to my margin expectation as well. Certainly, I understand the restructuring the Company is going through and the perspective on the long-term. So that is fine. But to the extent that you mentioned about 100 basis points of margin pressure. So is that primarily consolidated at the EBIT level that is not just gross margin that would also include some costs and SG&A.

Some costs and SG&A but it will be almost all in gross profit.

Okay, so all in all it's equal looking at Q4, I mean if you did 28 1 this quarter all else equal you should be right at about 29 or north in Q4 if most of these cost vanish, correct?

I think that is a fair assessment.

And then you would have a little bit -- hopefully a little bit of sequential growth as well as possibly some improvement in mix, which would also act as a little bit of a tailwind to that right?

Yes, I think --

Slight, slight I understand it would be slight but that should help.

If you look at the sequential business first of all we've got a -- our LTK business has got some seasonality to it. And they always -- they typically have a stronger second half. So that is going to be part of our improvement in revenues. But yes, but I think the bridge you are doing is on pace. We're going to see sequential improvement, we believe in the gross profit line for elimination some of these temporary costs and then leverage on revenue that should, obviously, incorporate to expanded margin as well.

I (inaudible) John to comment on this, is we may lose 10 or 20 basis points on mix because of LTK's strength and they are a little thinner on the margins -- and then we will make that up right.

On the leverage of the SG&A associated with that plan.

Okay, I understand that. What about just absolute SG&A dollars. What -- do you think quarter-to-quarter into Q4 they would be about flat or do you think you would see some growth in SG&A spending on an absolute level?

I think on an absolute level you would see some increase in SG&A. First of all the way our quarters work we have more days in the fourth quarter then we have in the third.

Okay.

So just as a result of that we are going to have a little bit more SG&A. And I think that there are some investments that we are making for the organic growth line that we think is very important, that we think that we can afford. And we are going to make those, where we think they are prudent and where they will get a good return.

Okay great. And then my second question is just that you look longer term on that three-year plan of marching towards 15%. How do you kind of feel that the cadence of realizing that will go over the next couple of years? In other words, do you think '08 is a year where you in eat into a substantial portion of that, or is it sort of a pro rata march over the three years, or is it more backend loaded? I am just trying to kind of get a perspective on how that will flow through in your plan?

I guess I could make a joke and say it would be perfectly linear, I'm not sure if you would agree with me.

I think it's hard to predict I would say this. We had a three-year goal to get to 12%. We got it done in a year. I don't know that we would do that again on this goal for 12 to 15. But clearly we are going to try to get there as fast as we can. We are not going to pace ourselves. We are going to try to get there as fast as we can. I think the thing we ought to think about and we will think about is making certain that we balance that expansion on operating income with very healthy organic growth. We want to see both. And what we're focused on, of course, is being able to increase the absolute operating income or net income dollars year-over-year, on a continuous basis. So we will make judgments and we're going to evaluate organic growth opportunities with margin expansion. But we think all those goals can be achieved in three years. And if we can get there sooner that is great.

Okay. Do you feel like you -- from your sales folks who come in and tell you about the opportunities that are around the world that if you wanted to you could push harder on spending and achieve that faster organic growth rate?

Well, I think some of it is clearly in our control. I mean, it's examples of business that we could take at low margins but we choose not to. And I don't think that we want to change that discipline. But clearly in our strategic plan we have identified a number of programs where we believe the investments will (inaudible) to grow and that we will in fact capture share. For us we talk an awful lot about global accounts. We talk a lot about how we work with our channel partners better and we have lots of opportunities now with Hirschmann and Lumberg and LTK to take advantage of the commercial synergies that we identified at the type of the acquisition. So we think we have got a long list of things to invest in that will stimulate topline growth and we are working on them. I will start -- I will continue working on them as soon as this call is done.

Okay. Well appreciate the hard work guys. And I think this morning's stock sell-off is an overreaction.

Okay.

(inaudible). Thank you.

Bye.

Gentlemen there are no further questions at this time. I would like to turn the call back to you Ms. Johnson for any additional or closing remarks.

Thank you Jeff. I must thank everybody once again for joining us on the Belden earnings conference call. We sincerely appreciate your interest. Please give us a call any time if you have follow-up questions. And this concludes our call today.

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