Belden Inc (BDC) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Incorporated Conference call. Just a reminder, this call is being recorded. At this time, you are in 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 of Investor Relations at Belden. Please go ahead, ma'am.

Thank you, Katie. 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 of Finance and Chief Financial Officer.

Some logistics. We have a few slides on the web. To see those, please go to investor.belden.com and sign onto the webcast. There's no www. It's just investor.belden.com. If you need a copy of our press release, you'll find it in that same place.

During the call today, management will make certain forward looking statements. I would like to remind you that any forward looking information we provide is given in reliance upon the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. The comments we will make today are management's best judgment based on information currently available. Our actual results could differ materially from any forward looking statements that we might make. However, the company does not intend to update this information to reflect developments after today, and disclaims any legal obligation to do so.

Please review today's press release and our annual report on Form 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 first quarter. Gray will review some additional financial results and segment analysis, and then John will speak about our outlook for the business for the remainder of 2008, and then finally we'll open up the line for questions.

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

Thank you, Dee. Good morning everyone. We are pleased to announce another quarter of strong earnings growth. On an adjusted basis, earnings per share increased 37% and operating income increased 27%. At the same time, we realized the benefits of our new global portfolio. As a reminder, we made three strategic acquisitions in 2007 that expanded our connectivity position and increased our revenue outside the United States.

As I will discuss, this change is helping us navigate through a more challenging domestic market. The organic growth of the Legacy Belden business was about 1%, as our mix of revenue continues to shift further away from North America toward Europe and Asia. I'd like to begin today by first addressing the situation in North America where we experienced some challenges in the first quarter, and then turn our focus to the other regions where we had some very good results.

In the North American markets we experienced the low single digits revenue growth we expected in the parts of the business that are most attractive to us, but gave up more volume than we had anticipated in some of the more commodity sensitive portions of the market. We had expected organic growth in the two segments based in North America to be approximately 3%. Instead, organic growth was negative in the combined Belden Americas and specialty segments by about 3%. The different is about $12 million in revenue.

The North American market is now more challenging than it was one year ago. We have not achieved anticipated sales for some product lines where we have raised prices to recover higher material costs, partly because some of the competition has chosen to simply absorb the additional cost and receive lower margins on such product sales.

We believe that in the less differentiated product lines such as our lower category data cable and high metal content industrial cables, where all of the manufacturers are facing commodity cost pressures, including not only the inflation in copper, but also in compounds, fuel, and freight, that neither industry pricing or demand is very stable. We estimate that about one-fourth of our North American revenue is in this category of less differentiated products with higher metal content and more competitive pricing.

The increased pricing pressure was most intense in our North American networking business where our revenue compared negatively year-over-year. Networking is about 24% of our global business, but it's 38% of our combined North American volume. Within networking, as you know, we draw a distinction between the more attractive products such as higher category cables and connectivity, versus the less attractive products, which would be mostly Category 5E cable.

Today our mix is about 50/50. Our attractive networking products grew at or above what we perceive to be the market growth rate of upper mid single digits, but we had a negative volume comparison in the less attractive networking products. In this area, we saw competitive price maneuvers by certain manufacturers who may have been struggling with their capacity and unable to flex their cost structure.

As you would expect, we were raising prices to offset rising commodity costs. Our broadcast, sound, and security products all displayed strong growth in the quarter. Industrial volume grew slightly year-over-year, however some of our lower spec industrial products produced in our Canada factory fell in volume due to the same competitive price pressures we experienced within our networking business, which were exasperated by having our costs in Canadian dollars.

With ongoing market volatility, we move to drive cost out of the business, and accordingly we launched the countermeasures we had prepared for such a situation. We continue to improve the performance of our plant in Nogales, Mexico. We estimate that we achieve $3 million of manufacturing cost savings in North America. On an annualized basis, this represents more than half of our $26 million savings in production cost that we have promised for 2008.

In December, we had already initiated the voluntary separation program and we have elected not to backfill the vacated positions for now. We had about 100 salaried associates leave under the program with most of them exiting at the end of March. We moved ahead with the closing of our Connecticut plant. That's a smaller plant and not easy to flex, so it made sense to move the production to the new Nogales plant. The process will take about two quarters to complete and we've indicated that it will be 2009 before we have net savings from the transfer.

Elsewhere, we reduced our workforce to meet the lower demand. I'm trying to give you a full picture of the North American situation because I know that's a concern for many of you, but let me just remind you of how much revenue diversification we have accomplished over the past two years. We've increased the portion of connectivity and active components in our mix from 8% to 23%.

We've changed the geographic mix of our sales from 69% North America to less than 48%, and by selling our telecom cable operation and acquiring businesses with industrial and consumer OEM emphasis, we've decreased our reliance on the networking and communication sector from 40% to 24%.

Let me now turn to Europe. The organic growth for our Legacy Europe business was 2.6% in the first quarter. Remember, we sold our KDP telecom and assembly operations in 2007 and the first quarter of 2008 respectively, so you need to adjust the baseline for first quarter growth by about $11 million. We are very pleased to report that this group gave us an operating margin of 10.7% aided by our HEW business in Germany, which correct the operating issues that were holding us back in the fourth quarter.

Remember, this was a break even business two years ago when we set a challenging goal of getting the business to 10% operating margin by the end of 2007. Although we are one quarter late in delivering on that goal, we are proud of our achievement and excited about the future growth prospects of this business.

It's our expectation that our Europe Legacy business and the Europe segment as a whole will remain in the double digit operating margins for the remainder of the year. Our European operations are now integrated and the entire segment has been placed under the leadership of Wolfgang Babel who joined us in 2007 to manage the Hirschmann and Lumberg Automation businesses.

Let's now turn our attention to the Belden Asia business, which reported record results in the first quarter. The Legacy business grew 78% organically compared to the first quarter of 2007. Overall, growth within this business has been very strong recently, 10% in the third quarter, 50% in the fourth quarter, and now 80%. Bookings continued strong in the first quarter.

The sales team is improving every day and selling to end user customers, and shifting our mix to include more systems and connectivity. Although the comps are getting tougher, we still have aggressive growth expectations for this business, but it is closer to 20% rather than these remarkable recent figures. Additionally, the Legacy business in Asia is maintaining operating margins in the high teens and they have yet to capture the benefits of local production that will become available to them when we complete the new LTK plant later this year and can manufacture more of our Belden products in China.

Our acquisitions from 2007 continue to perform at or above expectations. We are making good progress with the integration of our Hirschmann and Lumberg businesses, and we've had some good examples of U.S. commercial wins through the synergy of our Belden sales force.

Overall, our operating margin in the first quarter was 10% compared with 12% in the first quarter a year ago. This is reflective of our business mix. With LTK having operating margins around 9%, Europe growing to 28% of our total revenue, and North America representing less of the mix, our operating margin has a much different composition compared with the prior year. However, this geographic margin mix change is accompanied by a natural countermeasure in the form of lower tax rates in non-U.S. jurisdictions.

So you see our affective tax rate coming in below 30% and that's precisely reflective of this geographic shift in revenues and profit. We generated $24 million in free cash flow in the first quarter and our ending cash balance was $197 million. We repurchased approximately 900,000 shares using $36 million. We remain committed to the repurchase of our stock and see it as a great opportunity.

However, we also have a very active acquisition funnel and will continue to use our cash efficiently as we evaluate opportunities that we believe are a strategic fit to our long-term growth strategy. I was very pleased to announce during the first quarter that Steve Biegacki has joined us as Vice President, Global Sales and Marketing. Steve was formerly at Rockwell Automation and has highly relevant experience in solution selling, globalizing the sales and marketing function, and organizing a vertical market approach, exactly the mission we have set for ourselves.

I believe the addition of Steve to our team will help us greatly in the execution of all our go to market initiatives. And now I'm going to turn the call over to Gray for more discussion of the business results. Gray?

Thank you, John. Good morning, everyone and thank you for joining us this morning. I'll begin my comments with a discussion of the consolidated results of operations for the quarter, followed by the segment results, then cash flow, asset management, and then working capital.

Starting with revenue, first quarter revenues of $511.8 million was an increase of 52% year-over-year. The 2007 acquired businesses contributed $167 million and currency translation was $15.3 million. The Czech teleco and assembly businesses we divested last year and at the beginning of this quarter generated $10.6 million of revenue in the first quarter of 2007.

Taking these elements into consideration, year-over-year organic revenue growth, as John mentioned, was 1% for the quarter. If I could ask you to turn to slide seven, please. The geographic mix of revenue as planned continues to shift towards Europe and Asia. Year over year, this change is striking. In the first quarter of 2008, 41% of our revenue was in the United States whereas a year ago the U.S. contributed 58%. In Canada, although revenue dollars are about the same as a year ago, the proportion of consolidated revenue attributable to this market has fallen from over 10% in Q1 2007 to about 7% now.

Europe's sales were 28% of first quarter revenue, Asia-Pac, 19%, and the rest of the world around 5%. We are achieving our targeted geographic revenue diversification, and thus benefiting from faster economic growth rates in the emerging markets at a time when this approach helps insulate us from some of the uncertainty in the U.S. economy.

The pie chart on the right depicts our revenue by vertical market. The vertical mix is little changed from the fourth quarter, but like the geographic mix, significantly different year-over-year. The industrial market continues to grow and is now 47% of our total revenue. The networking vertical at 24% of our revenue is unchanged sequentially, but down from approximately 39% a year ago.

The video, sound, and security market continues at about 12% of total revenue. This includes about $1.5 million in first quarter sales in Asia for the Beijing Olympic venue. The transportation and defense vertical remains at about 4%. The consumer electronics and consumer OEM market served by LTK was about 13% of our revenue this quarter. We continue with the results of operations. In the first quarter, GAAP results were earnings of $0.27 per diluted share. These results include a number of non-recurring items, which I will quickly discuss.

As we previously announced, and as John mentioned, we're executing the plan to close our plant in Manchester, Connecticut, consolidating that production volume with other facilities, primarily within our new Nogales plant, and writing off and disposing of excess manufacturing equipment and capacity. This resulted in an asset impairment charge of $11.5 million pre-tax.

Secondly, for the voluntary separation program announced in December, we paid first quarter severance charges of $6.5 million. There were about 100 people who accepted the separation package, and as they exited the organization in March, we have elected to leave many of these positions vacant by realigning and consolidating responsibilities, enabling cost control.

Thirdly, we incurred restructuring charges of $5.6 million pretax, associated with the reorganization and consolidation of our European segment, enhancing its productivity and future organizational effectiveness. Fourth, we sold and leased back our newly constructed Nogales, Mexico plant. Because of currency fluctuations, we incurred a loss on this transaction of about $1 million.

We booked a discrete tax charge of $2.25 million resulting from the enactment of tax rate changes in non-U.S. jurisdictions. The lowering of tax rates, most notably in Germany drove the need to adjust our deferred tax assets and liabilities associated with the first quarter true up of purchase accounting, most notably with respect to the Hirschmann acquisition.

I will focus the remainder of my comments on adjusted results without these charges. For your benefit, a reconciliation between GAAP and adjusted results has been provided as part of today's press release and is also available at the end of today's slide presentation. If I could have you review the adjusted results on slide 8. Gross profit margin was 29.3% in the first quarter, an expansion of 60 basis points from the fourth quarter and 60 basis points higher than the average of our post-acquisition consolidated gross profit percentages from quarters, two, three, and four last year.

As we will address more thoroughly in the SG&A discussion, there is a reclassification that gives us a benefit of 40 basis points in gross margin in the first quarter. However, on our seasonally lower Q1 revenue and facing rising commodity costs beyond just copper, our gross profit performance is clearly starting to show the progress that we have expected. Sequential improvement in gross profit was recorded in most of the business units with the notable exception of the specialties division, where appropriately, our most significant counter measures were enacted As John noted earlier, the European Legacy business within the European division showed a 300 basis point improvement in sequential gross profit in the quarter based on stabilizing manufacturing and executing on a focused sales strategy, actions that we discussed in our fourth quarter conference call. If I could ask you to please reference slide 9.

2008 marked several changes to our reporting of SG&A and we hope will provide better, more meaningful disclosure of information going forward. The first change is to identify our R&D spend on a new line in the income statement. Our investment in new products and technology has become exceptionally important. It is a focus area of the company. Previously, elements of R&D had been included in both cost of goods sold and SG&A expense.

Additionally, we have aligned 100% of the company's finance, HR, IT, legal, and administration costs into SG&A where, depending on the businesses, some portion of these costs have been previously recorded in cost of goods sold. We are now classifying 100% of the company's distribution center activities into COGS. Again, depending on the business, some of these costs have been classified as SG&A previously.

We are very pleased to have our financial statements better identify these areas of investment and cost, and to present better SG&A metrics, providing us all more insight into these areas. And that reclassification from costs of goods sold to SG&A and R&D was $1.9 million in the first quarter, a 40 basis point increase in gross profit and a corresponding 40 basis point increase in the combination of R&D and SG&A expense.

First quarter SG&A and R&D expenses were $98.5 million. This is down $5.7 million sequentially and down $9.1 million sequentially when adjusted for the reclassifications I just reviewed and the Q1 FX impacts resulting from a stronger Euro. Other income in the quarter, which is income from our manufacturing joint ventures in China was $1.2 million, favorable to the guidance of $1 million that we discussed in February.

Turn to income taxes and you can reference slide 10. Income tax expense was $13.4 million in the adjusted results or 29.4% of pre-tax income for the quarter. This is a lower effective tax rate than we had earlier predicted in our outlook and reflects the change in our geographical distribution of operating earnings. Going forward we expect this distribution of earnings to remain relatively constant for the year, and therefore we're adjusting our 2008 outlook for the effective tax rate from 32% to 30%.

We continued our share repurchase program, as John had mentioned, in the first quarter, buying back 900,000 shares for a total outlay of $36.3 million and our average diluted shares for the first quarter were $48.4 million. I also note that management has remaining share repurchase authorization of $32 million.

Now, I'd like to turn to the segment results. External revenue of the Belden America segment was $186.3 million, flat compared with a year ago quarter. Interdivisional sales were $19.8 million, a significant year-over-year increase driven by strong demand in Asia. Including the interdivisional sales, total shipments of Belden Americas increased 4.3% year-over-year.

Segment operating income adjusted by $4.8 million for the VSP severance charges and the loss on the sale of Nogales was $36.1 million, or 17.5% of total segment revenues compared with 18.3% in the first quarter of 2007. The specialty product segment's external revenue in the first quarter was $53.4 million, which is lower by 5.7% compared with the first quarter a year ago. The year-over-year change was driven by our Mohawk business, which was required to manage through a very difficult competitive situation in some less attractive networking products as John discussed earlier.

The division's revenue from affiliates increased 47.7% compared with a year ago, but was lower sequentially, reflecting the successful ramp of production at the Nogales plant, now able to effectively supply an increasing proportion of our North American requirements. The operating profit of the specialty segment adjusted by $14.2 million for the asset impairment and VSP severance charges was $7.1 million, or 9.9% of total revenue compared with 14.9% operating margins in the prior year quarter.

The European segment's external revenue was $184.6 million in the first quarter, including $101.1 million from the businesses acquired in 2007. The Legacy Belden portion of the segment grew 2.6% organically after adjusting for the Czech businesses sold during 2007 and 2008. Operating income of the European segment was $21.7 million, or 11.4% of total revenue after adjusting for the restructuring charges of $4.8 million.

The Legacy Belden portion of the segment, as John mentioned earlier, generated a 10.7% operating margin, achieving a goal that we established several quarters ago of managing the business's performance to double digit operating profit. The Asia-Pacific segment had first quarter external revenues of $87.6 million, of which $66 million was attributable to LTK. The Legacy Belden Asia-Pacific business experienced year-over-year revenue growth of over 80%, 78% organically.

In the Asia-Pacific segment as a whole, operating income was $8.9 million, or 10.2% of revenue, reflecting seasonally lower sales for LTK and very good high teens operating margins in the Legacy business. Free cash flow in the first quarter was $23.8 million and operating cash flow was $30.7 million, our eighth straight quarter of positive operating cash flow. Depreciation and amortization was $13.8 million in the quarter.

With respect to capital expenditures and our asset light objectives, in 2007 you recall we incurred $64 million of capital expenditures and sold $38 million of assets, resulting in net capital expenditures of $26 million. In the first quarter of 2008, the execution continues with capital outlays of $6.9 million, offset by $23 million of asset sales for net capital expenditures of a negative $16 million.

Additionally, assets and working capital were sold in the first quarter as we exited the cable assembly businesses in Dutch and Czech Republic, a follow on transaction of our sale of the Dutch and Teleco business in the third quarter of 2007. As I mentioned, we used $36.3 million for repurchase of shares during the quarter and our ending cash balance was $196.8 million.

If I could ask you to turn to slide 11 please. First quarter 2008 working capital turns were 5.7, down 0.3 turns from the fourth quarter, up 1 turn favorable to prior year. We had modestly good performance in DSO and DPO, however inventory turns degraded from Q4 levels of 6.6 turns to 5.6 turns, as we held finished goods inventory at the end of Q1 to fill demand that did not materialize in time to ship in the quarter. Year-on-year inventory turns improved 0.5 turns from 2007 Q1.

As a result, our net use of cash for working capital was $11 million in the quarter, which I view as creating greater opportunity for operating cash flow improvements throughout the remainder of the year. At this time, I'd like to turn it back to our CEO, John Stroup, for a few remarks about our 2008 outlook. John?

Thank you, Gray. I want to share with you some of the information and the thought process that has gone into our current outlook. Despite falling short of our own revenue goal for the quarter, we did build approximately $20 million of backlog and had a book to bill ratio of 1.04. During the first quarter, our North America channel partners reduced their inventory by approximately $10 million, while their daily sell through rates showed good momentum throughout the quarter.

Additionally, our expectations for the second quarter and full year are based on our normal, seasonal pattern, and no change in the current U.S. demand profile. We bridge from our first quarter performance to our full year outlook by looking at revenue, seasonality, and cost reduction action. Our first quarter revenue is typically $50 million to $75 million lower than quarters two, three, and four due to seasonality. Leverage of this volume will expand margins by about 200 basis points depending on mix.

Additionally, making good on the remaining elements of our 2008 annual cost reduction pledge of $26 million, provides additional expansion. We are maintaining our revenue outlook at $2.2 billion to $2.3 billion but the composition of that revenue will be shifted toward revenue outside the United States. Based on this updated revenue composition, we are expecting full year operating margins to be between 12% and 13%. This geographic mix creates the benefit of a more favorable effective tax rate for the year.

To reflect the completion of the first quarter, we are narrowing our full year outlook for earnings per share. Our previous range was $3.45 to $3.75. We now estimate this range to be $3.45 to $3.65. At the midpoint of the range, we will have EPS growth year-over-year of 24%.

Thanks to all of you on the call for your interest in Belden. This concludes our prepared remarks. We now have some time for your questions. Our operator, Katie, will remind you of the procedures for asking your questions.

Thank you. (OPERATOR INSTRUCTIONS) Mr. Stroup, your first question is from Celeste Santangelo with Merrill Lynch.

Regarding your comments on the --.

Celeste, could you speak up? We couldn't hear you.

I just wanted to clarify on your comments on the pricing environment in North America for the network and cable business, is that strictly on the lower end products? You're not seeing anything on the higher end categories?

Celeste, it's far more pronounced at the low end. I wouldn't say that we aren't seeing some pressure on the high end, but there's clearly a very big difference between what we're seeing on the lower category 5E open architecture product line than what we are seeing on the end-to-end solutions under our Belden brand. It's a pretty big difference.

And then could you talk about the demand environment generally in North America for networking, what you're seeing on the high end versus low end?

We saw actually pretty good performance on the high end in the networking category, but we saw it improve throughout the quarter, Celeste. March was much better than January and February, and we're also seeing improved sell through information as I mentioned before, in March compared to January and February.

So the start of the quarter was fairly weak both in terms of shipments as well as sell through, and we've seen that improve. And as we said before, the lower end product line, the product that's more sensitive to pricing is the area where we had more difficulty.

Okay, and then just looking at the operating margin targets now, as you go through the year to get to the 12% to 13%, just assumes a little more aggressive ramp. Could you talk about how you get there? Basically I want to know how dependent that is on the macro environment.

You talked about a lot of internal initiatives and things that are going on that are going to get you there, but I just want to know how dependent it is on the macro environment and how much improvement do you have built into that to account for what's going on in North America in networking pricing?

Well, if you bridge our Q1 to full year, Celeste, I think what you'll find is if we achieve the revenue outlook that we've expressed, the operating margin that we would get from that would generate most of the improvement of 10% up to that 12% to 13%. And then what we've done is we have looked at our forecast by region differently now than we did previously.

So we have baked in the fact that the U.S. economy is going to be weak. We believe it'll be weak through the year and we're relying more heavily from strength outside of the United States as we prepare our forecast.

So clearly volume is a big part of the expansion and operating income from 10% up to that 12% to 13% range, but we have in fact changed our expectations as to where that revenue comes from. Our European business is strong. Our Asia business is strong and we counted on the U.S. business just being weaker than what we would have thought at the start of the year.

Great, thanks.

We'll go next to Matt McCall with BB&T Capital Markets.

Thanks. Good morning everybody. Let's see, first on the European outlook, you mentioned weakness expected in North America and most of that's in data networking. What's your exposure to networking in Europe?

It's not nearly as high. Our networking business in Europe as a percentage of total revenue, I think is less than 10%. It's lower for two reasons, right. One is that with our Hirschmann and Lumberg businesses, which are connectivity businesses primarily focused in the industrial market, that's a big chunk of our business in Europe. And secondly, our European cable business has not had as much networking business as a percentage of total as our U.S. business did.

What about the connectivity side? You talked about for the company as a whole. What about the percent in the U.S. markets, North American markets, and then in Asia?

I'm sorry. Say that again, Matt.

The connectivity part of your business, the mix of those products within the U.S. markets and then in Asia.

Our connectivity business in the U.S. is substantially lower as a percentage of total revenue than it is in Europe. The same is true in Asia, which we've always thought was a good revenue opportunity for us. In North America, connectivity again is less than 10% of our total business. We continue to stay very focused on growing our Hirschmann and Lumberg business in the United States.

And in Asia, in total again it's going to be far less than 10% because of the LTK business. So the area that we have the most exposure to networking is in the United States.

One of the last comments made was that you held some inventory for demand that did not materialize. I think, Gray, you said this. Was this a result of -- and then John I think you just talked about tends improving in March. Was that just timing of those shipments, or what was the issue there?

Yeah, we purposely entered the year with more inventory than we did a year earlier because of what we had experienced the year before, and we wanted to have a situation where, if demand were strong out of the gate, we were prepared to deal with it appropriately. As it turns out, demand was not that strong coming into January and therefore we had more inventory in January than what we would normally want to have, and we've begun to bring that down.

And you're right, Matt, I did say that we saw improvement in March compared to January and February in North America, which is encouraging to us, but we're still remaining fairly cautious about what the North American market environment's going to look like.

Okay, and a couple more. I was surprised to hear you say that the margins in the Legacy Asia business were in the high teens, yet you've yet to see the benefit of manufacturing your products in Asia. Did I hear that correctly and what's the outlook once for margins in that Legacy business once you move the production to Asia?

Well, you did hear that correctly. We're in fact experiencing high double digits in Asia on our Legacy business, even though we are not yet producing locally, and we try to be real consistent about the fact that the benefits to us are really, two. One is we get shorter lead times in the market, which is very important for our customers, and we think will allow us to continue the high organic growth rates that we've seen. Perhaps not as high as what we've seen recently, but something on or about 20%.

And then that cost benefit, of course, is going to either show up in increased margins or accelerated top line growth as we look at targeting markets that previously we were just not cost competitive in. So we're really excited about how our business is performing in Asia right now, and we're really excited with the notion of them having local production to become even more competitive.

Okay, thank you. I'm going to hop off and hop back in the queue. Thank you.

We'll go next to Jeff Beach with Stifel Nicolaus.

Good morning. A couple of things. Starting with North America, if you could remove the negative impact from CATV and look at the rest of the business, what would we see in the first quarter and a general outlook for the remainder of the year from everything else?

Well, the CATV weakness that we saw was the biggest part of the performance issues that we had in the specialty division, Jeff, and if you were to remove that, I think you would see a little bit of weakness in our industrial product lines out of our Canada factory as well. And then I would say the remaining part of the business performed actually quite well. We had sort of mid single digit growth rates in those business. Margins were fairly constantly or expanding and we saw sequential improvement in our cost structure of about $3 million.

So those parts of the businesses performed quite well. It was just those other areas we talked about. I'm not sure I can bridge you maybe exactly the way you want to, but I'm trying to give you as much as qualitative comments as I can.

Okay, looking out into the second quarter and beyond, are we going to see significantly less impact from this weak CATV market?

I think our expectations are that sequentially the situation would remain the same, that we would not see significant deterioration, but nor are we making significant improvement sequentially. And so if we were to see improvement in that area, then that would be helpful to us.

But really what we're counting on, Jeff, is that from Q1 to Q2 and for the rest of the year, we will see our normal up tick in seasonal volume. We will see our business in Asia and Europe continue to perform as it has been. We'll get normal follow through on that incremental volume, and we'll continue to make progress on our cost structure.

I have a couple of questions. The next one is, you had weakness and made the decision to close a plant in Connecticut during the quarter, correct?

That's correct.

What kind of disruption -- were you prepared immediately to shift that production into Mexico and take up the slack? Was there disruption to operations in making that decision and following through on it, and will it continue to drag results?

It did not affect our first quarter results. We did not see disruption in that factory that affected our results in any way in the first quarter. We do expect, though, as we transition out of that factory in the second and third quarters of this year, that we will in fact see a certain amount of disruption as we do normally.

Those usually come in the form of some overlap of cost, some productivity issues on the ramp up, sometimes a little bit higher strap on the ramp up as we've seen in the other factory transition. But we've considered all that, Jeff, in our full year outlook.

Recent pricing moves with copper up, do you feel like in most of your product lines you've been able to recoup copper or even maintain margins?

Jeff, I would say in the product lines that are in fact much more highly differentiated like we see in broadcast, high end networking products, most of our industrial products, we have in fact been able to pass on prices to offset copper. It's really only those more commodity based products where we had struggled to do so.

Thanks a lot. I'll get back in the queue as well.

We'll take our next question from Lavon Von Redden with Hockey Capital.

Good morning. A quick question related to the CATV side of the business. I just wanted a couple pieces of clarification. As you saw throughout the quarter, did you get a sense that this weakness or I guess additional pressure that you saw in the CATV side, did it ameliorate or did it continue? What kind of happened as it progressed through the quarter?

Lavon, I would say it's been fairly steady through the quarter. We saw it earlier in the first quarter. In January we saw it. It didn't get any better throughout the quarter. I don't really have expectations that it's going to get better any time soon.

I think that we're in a situation where demand is a little bit weak in that category and I think manufacturers are making independent judgments about whether or not they want to keep their volume up and absorb that additional cost, or they want to bring their prices up. And so we're obviously looking at it every single day to make certain we're making the right choices, and we'll continuously evaluate that. But I would say the situation's been relatively stable.

Which leads me to the next part of that question. Was it a function mostly of demand, or was there also additional capacity?

I don't think anybody brought on additional capacity. I think it's the demand came down from the established capacity levels and it happened at the same time that copper was going up. And I think those two things together made it more challenging in that category.

And one point of clarification for the guidance. Obviously you talk about your revenues following their normal seasonal patterns, and you also talked about CATV. Are you expecting the CATV category as a whole to kind of get a little better as normally they would, I would assume, on a seasonal basis? Or are you expecting that to remain weak as it is kind of now?

We've incorporated seasonality into all of our product lines, but then we've adjusted them individually based on the competitive environment we see.

Thank you.

We'll go next to Mr. Rob Crystal with Goldman Sachs.

Hi John, I had a question on the margin progression in terms of Q1. Maybe it's the bottom and sort of how do margins progress, and I guess normally, and I guess Q4 is probably softer as well.

Hi, Rob. I think that we would expect to see pretty good expansion from Q1 to Q2 because of the additional volume. And then I think our cost reductions would continue throughout the year and see it improve. The expectation we have is that we make good improvement on our cost structure in the first quarter. So as we incorporate that additional volume in Q2, we would see nice progression and operating income margin in the second quarter.

And then I would say it would improve somewhat in the third and fourth quarter.

I guess, and I don't know if you have this handy, but if historically Q1 margin might be -- just picking a number -- 7%, then Q2 and Q3 you see 200 to 300 basis points of sequential improvement. Have you looked at it that way before?

Well, what we've looked at is we've looked at the patterns that we've normally seen. It's a little bit difficult for us to express in our financials today because of all the acquisitions coming in and out, but Rob here would be my sense.

Normally what we see is that when we get the incremental volume from first to second quarter, and as we said, that's normally around $50 million, we would expect to see the normal variable margin on that incremental volume, and we would see very modest growth in our fixed cost structure to be able to produce that volume.

And so if you look at the full year bridge, if you take our first quarter results and you annualize that number, and you look at the incremental volume required to get to our full year guidance, and you look at 35% fall through on that volume, which is our typical fall through rate, you'll see just about 200 basis points of improvement in operating margin.

Perfect. Thank you, John.

(OPERATOR INSTRUCTIONS) We'll go next to Tom Price with Halogen Investments.

Hi, good morning. Two questions. One, could you clarify a little bit about your CAPEX guidance for the year at $60 million and reconcile that versus how you presented it in the first quarter?

The guidance remains at $60 million. A lot of it, Tom, is relative to the new construction of the facility in China. It's a fairly significant construction. The total budget's over $30 million associated with the new site. It's in Huizhou. So the majority of the capital budget at its gross level is still within that $60 million target.

That's why I sort of wanted to have the conversation about gross versus net. Again, they're realigned when you look at the cash flow statement. They're not lined up on the same line, so one does apply to pre-cash flow and the other is not. But I like to look at them as net, and that's why the comment around first quarter that we really had negative CAPEX. And it's consistent with the way we've been managing the budget for the last year as well.

So the $60 million is a gross cash flow.

$60 million is gross and our first piece of the net adjustment was the first quarter activity at $23 million.

And then my second question is just kind of more of a medium term view of Belden and specifically related to the comments about what old Belden looked like, and what the new one looks like as far as the percentage of the company connectivity in North America and the lower margin networking exposure.

If I look forward and say you have -- it was at your analyst day in New York in which you kind of presented what you thought your buying capacity was. Could you kind of give me an update of how you see acquisitions out there and your view of what the new Belden would look like pro forma going forward?

Well, I think as it relates to geographic diversity we've made really good progress, and as I've noted in my comments, I think it's helping us already. So we're pleased with where we are there. Clearly, we would like Asia to be even a larger percentage of our total and I think we're pretty happy with where we are in Europe.

From a product breakdown point of view, we're clearly focused on expanding our connectivity product lines for a number of reasons. One is it just makes good sense in our ability to leverage our commercial situation. It makes us a lot more important to our customers. We like the behavior of the category more in terms of less pressure on commodity and so forth.

So I think you should expect that we will continue to add assets to the portfolio that do in fact improve and expand our percentage of product lines within connectivity, both passive and active component. And as I said, our funnel is full. We're working hard on those opportunities and if we can make sense from a valuation point of view on any of those good strategic targets, we would certainly follow through on them.

And just lastly, what size are we talking about, revenues or even assets that you need to buy?

Well, the acquisitions that we look at range in size. Some of them are small, $50 million or less. Some of them are substantially larger, $200 million, $300 million, but I think our view in December is absolutely unchanged in terms of our capacity to be able to buy companies, exactly the kind of companies we want to buy is unchanged, and our activity levels are very, very high.

We'll go next to Nat Kellogg with Next Generation Equity.

Hi, guys, just a couple questions. I know you guys all coming down the pike will have -- can you give us a sense of what the charges you might expect to see in Q2 and Q3 just so we can get a sense of what we're looking at?

There's, I think, about $2.5 million is what we'd expect right now in Q2 associated with the severance and stay pay on the announcements that we previously made. And I think there may be another $2 million associated with the pension issues that we discussed in the fourth quarter, associated with Montreal cessation of production. So I think we've got somewhere around $4 million of expected future charges in there.

That's helpful. So you've obviously down a lot in this quarter. And then I'm just wondering if you'd give us a little sense of seasonality for the business, LTK, Lumberg and Hirschmann for Q1 to Q2. Obviously this is sort of the first time we're looking at that and just what that looks like compared to sort of the Legacy Belden business, and if there's anything we should think of differently or similarly.

Well, the second quarter is a relatively strong quarter for almost all of our businesses. LTK because they're consumer electronics oriented, they tend to have a stronger Q3 and Q4 in anticipation of the Christmas time. And of course our European businesses sometimes see a little bit of a dip in the third quarter or the second quarter because of the summer months. But Q1 is typically the lowest quarter, especially for the cable business because of the weather related items in terms of the amount of construction that's being done.

So that's a fairly typical pattern. And as I said before, the LTK pattern is a little bit different and that sort of offsets some of that seasonality. But again, the seasonal pattern that we're expecting here is quite common.

I know just I have heard a couple of you -- I mean, a little bit more on the distribution side, but do you guys notice any effect from sort of Easter moving to Q1 versus normally Q2?

Well, some of our channel partners told us that they saw some of that and I think that if they did it's so minor that we wouldn't have seen it in our order rates from them to us. So it's really hard for me to comment on that. They're closer to it than we are. The good news for us, though, is we monitor their sell through data, and of course that's a much better leading indicator than our bookings' rates. And the sell through data did improve throughout the quarter, and that makes us feel more optimistic.

Appreciate that help. That's all I got for now.

We'll take a follow up from Matt McCall with BB&T Capital Markets.

Thanks, just a couple more. The R&D breakout's helpful. Can you give us an idea of what -- you gave us the Q1 but I guess the company's kind of apples and oranges, Q1 this year versus Q1 last year. What was Q2 to Q4 of last year? I'm sure I can find that, but more importantly what's the outlook for the rest of the year?

You're talking about just for R&D?

Sure.

Well, again, I think the first quarter is fairly indicative of what our expectations should be throughout the year. I think maybe there's going to be some slight variation associated with some additional investments, much like we incurred in the fourth quarter of last year. When opportunities exist where we can use discretionary spending in order to be able to manage a product or a technology opportunity, we will do so. Then we'll talk about it in these forums.

But right now I think the first quarter is fairly indicative, maybe slightly higher going forward, maybe $1 million higher.

And I think you mentioned that you didn't see any disruption from the Connecticut plant. I don't think you're seeing any benefit, obviously, there. Of the $26 million that you've highlighted that's going to help this year, was any of it recognized in Q1?

Yeah, we think there was about $3 million of improvement in the first quarter as a result of those actions that we've been discussing. And so on an annualized basis that would be about $12 million, which means we got a real good start for the $26 million for the year.

We had a good start and still a lot to do.

Then of the actions that you -- I know Connecticut specifically -- of the other actions that will potentially help '09, any idea of what the potential savings are expected to be in fiscal year '09?

Well, we did recently announce the start of the same exercise that we applied to regional manufacturing on the cable product to the connector business. Our first step was consolidating the Midlothian facility, which is in Maryland, which was part of the Lumberg acquisition, into our Tijuana facility.

So the first step of that consolidation is now underway and I think we're going to see other items and other activities associated with rationalization on the connectivity side, in addition to the cable side.

But Midlothian is going to take about a year to do.

But no quantification of '09?

Not yet. I mean we're still looking at opportunities for a more competitive footprint, always. And as Gray suggests, we're in the earlier stages of the connectivity product lines, not dissimilar to where we might have been with the cable 18 to 24 months ago.

And then, Gray, one question I had about the balance sheet. It looks like goodwill went up about $56 million from the end of the year and you mentioned a true up with one of the acquisitions. Is it related to that? Or what's behind that goodwill?

Well, there's two items in there. We have to restate the goodwill associated with FX and a lot of our goodwill is in Euro. The second is the true up of the purchase accounting. So there's two activities that adjusted goodwill in the quarter.

Okay, that's helpful. Thank you all.

We'll go next to Adam Brenner with Platinum Investments.

Hi, thank you very much for taking my question. I just wanted to ask you a little bit about the high end of the networking market, and you talked about trends being a little bit better there.

Can you just talk about price increases and how that took so far in the second quarter or maybe late in the first quarter? Thank you.

Sure, Adam. Yes, we are seeing better performance with the higher end cable. I think there's two reasons for that. I think one is, I think we're performing better. I think that our sales organization on the Belden brand, on end to end solutions is doing a good job. So I think we're at or above market in that category.

There is price pressure there, but I think that clearly customers view that buying decision differently and they're less sensitive to price, and of course we have fewer competitors that are really able to offer an end to end solution. So it's our expectation that the higher end of that category will behave more attractively from our point of view, and that we'll continue to make good progress on that.

That's a project based business and so we monitor our pipeline very closely, and the pipeline looks good. There have been some projects that have been slightly delayed, so we watch that very closely, but we're generally fairly positive about that end of the business.

And then maybe you could just talk a little bit about how much leverage you're willing to take on. You're running around 1 times net debt to EBITDA right now. In terms of buying back stock and doing acquisitions, how much room do you think you have, and how comfortable are you with the leverage?

We've got established guidance with respect to the expectations for leverage and targets that we've set for the enterprise. I'll give it to you in twofold. Somewhere between 30% to 40% debt to debt plus equity and somewhere around 2.5 times EBITDA range is a comfort level and a consistent level that we've expressed.

Thank you very much.

And we'll take a final question from Jeff Beach with Stifel Nicolaus.

Can you talk about where you are with the initiatives to combine industrial cables with connectivity and other electronics, both in the U.S. and Europe, and when you expect that to start making a contribution to Belden's numbers that are moving the needle?

Sure, Jeff. I think there's two primary initiatives that are underway. The first is that in Europe, Lumberg and our European cable business are working together now to offer solutions, connector with cable, and in the past Lumberg had done that with other vendors and we're now working to migrate that from what was that Legacy situation to one that would be a complete Belden solution.

And then secondly, I think we're beginning to make good traction, Jeff, on some of the commercial synergies in the U.S. with respect to industrial Ethernet products, leveraging the Belden sales organization. We've had a couple of commercial wins that I mentioned already. It's one of the top priorities for Steve Biegacki, the newest member of the senior leadership team, to really help us drive greater improvement in the year.

So I'm optimistic that we're going to see some of that this year and enough of it that we'll start to move the needle, Jeff, but in the first quarter results, the examples I gave you would not be significant to show up in the consolidated results.

Second, back on Mohawk and the weakness in CATV, you expect that to continue. Are you making significant cost reductions and changes to improve the profitability or reduce the negative impact there that will make a difference ahead?

Well, the decision that we took on our facility in Connecticut was in fact a factory that was dedicated to the production of Mohawk products. So that was one action that we took that will have a difference in the 2009 income statement.

As it relates to 2008, we're expecting that the environment's going to continue to be difficult, and we do expect them, however, to improve, as we do any business sequentially, and that improvement's going to have to come from some cost reduction on the factory floor in terms of better productivity and lower scrap. It's also going to have to come in some better commercial execution, which is going to be balancing the demand with the pricing better than I think we did in the first quarter.

So we are expecting some improvement sequentially, but it's not going to be enormous improvement because we think the environment's going to remain tough.

And last, just back a little bit more to the initiative of bringing Lumberg and Hirschmann products into system sales into Europe and the U.S. You mentioned Lumberg in Europe. What is Hirschman particularly doing and are you seeing expanded sales of their switches and some of their other passive electronics? Is that expanding into new markets?

Well, in the Hirschmann switch area, the industrial Ethernet piece, we have been focused in Asia and in the United States on trying to help them grow more quickly for two reasons. One is their share's lower in those markets, and secondly, we thought we were better positioned commercially to assist them in that area.

And we've already seen, Jeff, some examples in both markets of where we're seeing improvement. We won, for example, a major opportunity in India with the airport in Delhi where we're spec'ed in on all Belden cable connectors and industrial Ethernet switches. Clearly an opportunity that Hirschmann would not have had before, and we've had some other marquee wins in the United States where our Belden sales organization has been able to bring the industrial Ethernet products in.

So I think we're showing signs of improvement, signs of progress, I should say, but we think that there's still an awful lot more available to us in the future.

Thank you.

Thanks, Jeff.

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

Okay, I think we'll cut it off right there. Thank you very much everyone for joining us on the Belden Earnings Conference Call. We appreciate your interest. Please give us a call if you have any follow up questions. This concludes our call.

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