Belden Inc (BDC) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to this morning's Belden Incorporated conference call. Just a reminder, this call is being recorded. At this time, you are in listen-only mode. Later, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS)

Now at this time I'd like to turn the call over to your host, Ms. Dee Johnson, Director, Investor Relations, at Belden. Please go ahead, ma'am.

Thank you, Tricia. Good morning, everyone. Thank you for joining us today for the second quarter earnings conference call at Belden. With me here in St. Louis today are John Stroup, President and CEO of Belden, and Gray Benoist, Vice President, Finance, and Chief Financial Officer.

Some logistics, we have slides on the web. To see those, go to investor.belden.com and you can sign onto the webcast there. They are also posted, so you can print them. There is no www, it's just investor.belden.com, and if you have a copy of our press release, you'll find that on the website, as well.

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 second 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 we will open 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. Would you turn to slide three, please? Today, we reported record adjusted earnings per share of $0.97 for the second quarter. Adjusted net income grew 14.5% to $45.8 million and earnings per share grew even faster, at 23% year-over-year, due to our share repurchase activity.

As we said in our press release, this performance is driven by our improved business portfolio and a number of margin improvement initiatives we pursued over the past two years. Turning to slide four, our portfolio now includes a richer mix of highly engineered products, including our industry-leading Hirschmann Industrial Ethernet solution, our industrial connectivity business under both the Lumberg and Hirschmann brands and our growing enterprise connectivity business.

We continue to diversify ourselves geographically, with now 30% of our revenue in EMEA, 20% in Asia and only 40% in the United States. And we have a better mix of vertical markets, having exited the telecom cable business completely and bringing more products and marketing resources to bear on attractive verticals like industrial automation. In addition to our improving revenue mix, we have focused attention and resources on margin expansion initiatives across the manufacturing and commercial teams.

We restructured our North American cable manufacturing footprint in 2006 and 2007, building a new plant in Mexico and closing five plants in the United States and Canada, programs that are providing significant savings, as planned. We are now two years into the implantation of Lean enterprise methods in our business, both in manufacturing and in the back office.

The benefits of Lean includes increased productivity. Lean underlies our category leadership in productivity and inventory utilization. We are continuously working on the management of our product portfolio. This quarter, LTK, a $300 million business, has improved their operating margins by about 100 basis points year-over-year through improved product positioning. Throughout Belden, there are many daily product portfolio management decisions that optimize operating margin dollars at the expense of low-quality revenue.

Turning to slide five, second quarter revenue grew 8.7% sequentially and 1.2% year-over-year. Adjusting for acquisitions, divestitures and currency translation, our organic growth was negative 2.4%. Belden Americas and the Specialty Products division, our two North American segments, experienced strong sequential growth of 8%, but not as strong as their sequential growth one year ago, which was about 18%.

We had an exceptionally strong 2007 second quarter in North America, due to strong demand and to the backlog we had carried over from the first quarter. This made for a difficult year-over-year comparison in this quarter.

We again faced tough price competition in certain lower-spec industrial products, a recurrence of the competitive situation we talked about in the first quarter. This small category was off 23% for us sequentially, as we did not meet competitive pricing to hold on to volume at unacceptable margins.

Organic growth in Europe of 7% was led by exceptional strength in our industrial Ethernet and industrial connectivity productivity product groups, due to solid end markets, the secular trend in industrial Ethernet and a healthy European economy.

The German machine builders, who are important customers for our Lumberg industrial connectors, continued to perform very well. We are winning some important spec positions with marquis global customers for our industrial solutions, combining Ethernet switches, connectors and copper and fiber cables in one solution. These wins I am speaking of represent future sales, not sales of the second quarter, but we are more confident than ever in the execution of our industrial solution strategy.

In our Asia segment, organic growth was 6% and included the impact of aggressive portfolio actions at LTK, as planned. Our capacity in Asia is better utilized for the localization of Belden products and growth of higher-value LTK products. In the first half of 2008, for example, organic growth in Asia for Belden Networking Solutions has been 47%.

Turning to slide six, I'd like to spend a few minutes talking about the acquisition of Trapeze Networks. The transaction, which we announced in June, closed about 10 days ago. We held a special conference call, which is still on our website, if you'd like to hear the details.

Two of the most powerful ideas in Belden's strategy are that there's more value for both the customer and our company in solutions, rather than components, and that we will best serve our customers if we can offer solutions in all media, copper, fiber and wireless, so that we're not defending one technology versus another, but rather can really listen to what our customers want and respond accordingly.

We've been talking to our customers about wireless for the past 18 months. We took the time necessary to understand the most appropriate solution and sought out the best. What we found in Trapeze is the wireless LAN company with the greatest technical capability and the most secure, scalable network management systems.

We paid $133 million, which was roughly 1.9 times 2008 forecasted shipments, and compares favorably to the valuation, for example, of Aruba. A number of investors have told us they wish the timing of this had been different, but we believe that we would have paid more than twice this price a year ago, and that the timing actually favored Belden.

We know our enterprise customers are interested in having Belden provide a wireless solution along with our copper and fiber solutions, and we believe that the longer term we will see much greater integration of wired and wireless network management solutions in which Trapeze will excel.

Also, because we have a much larger sales force than Trapeze has, we are confident we can accelerate Trapeze sales growth around the world. Belden meets with a lot of enterprise customers, and we have now turned loose the Belden sales force to drive wireless leads to Trapeze.

The purchase price represents about eight months of Belden cash flow, a moderate-size investment in what we think will be one of the central pillars of our strategy over the long term.

Because of a large tax net operating loss at Trapeze, the deal is cash neutral to Belden in 2008 and cash positive in 2009. There is an accounting situation that makes Trapeze dilutive to EPS on a GAAP basis, but that's accounting dilution, rather than economic dilution. The President of Trapeze, Jim Vogt, will report to me directly and we put incentives in place for Trapeze management, based on achievement of EBITDA goals. Our integration plans are already in motion and I remain confident in our ability to successfully execute.

Now, moving on to manufacturing, I'd like to give you an update on two other changes we've had underway, and those are the planned closure of Connecticut plant and the move into our new plant in Suzhou, China.

We are on target to wind down production in our Connecticut plant and vacate the lease facility by September 1st. Most of the production from the Connecticut plant will move to Nogales, Mexico. The Nogales plant has already built every item number that it's assuming in this move. Because the Nogales plant is well along in its efficiency ramp up and there are no equipment moves required, this will be a much easier transition than we experienced in 2007.

Nevertheless, there may be some third-quarter costs associated with the disruption of this move before the fixed-cost savings start to help us in the fourth quarter. As we said when we announced the plan to close this plant, we are not expecting any net benefit from the closure in 2008, but we are planning for about $5 million of savings in 2009.

The new plant under construction in Suzhou, China, is a larger plant that will replace our LTK Shanghai plant with additional space and capacity to accelerate the localization of manufacturing of Belden-branded products. We will be moving equipment and people a short distance and we anticipate a relatively smooth transition to the new location.

Production of LTK products will begin in the new facility in October and production of Belden products will begin to ramp in December. Because of the increased freight expense we are presently incurring in transporting cable to China, we believe this move is essential to having the necessary cost structure to compete in this growing market.

Equally important will be improving availability and lead times for Belden in Asia that will make us a more effective supplier. And now I'm going to turn the call over to Gray for more discussion of the business results. Gray?

Thank you very much, John, and 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 second quarter, then turn to the segment results, followed by cash flow, asset management and working capital.

Second quarter revenue of $556.3 million, was an increase of 1.2% year-over-year. Primarily, a strengthened euro created a translation benefit of $28 million in our year-over-year sales. In the calculation of organic growth, we need to make certain additional adjustments. The second quarter of 2007 includes sales generated from the Czech telecom operation and the Czech assembly businesses, both of which we sold last year.

Also, the second quarter of 2008 must be adjusted for Lumberg Automation, which we did not own until May 2007. Taking these elements into consideration, year-over-year organic revenue growth was negative 2.4% in the quarter. Sequential revenue growth, however, was 8.7%.

Let's take a look at our revenue mix on slide eight, please, but starting on the left. Revenue in the United States was 41%, Canada, 6%, Europe, 27%, and Asia, 21%, continuing our intended diversification of regional revenue towards a better-balanced geographical representation of our served markets, as we've been discussing over the past year.

A pie chart on the right depicts revenue by vertical market. Revenue in the industrial market expanded to 45% of total revenue. Sales in this vertical grew both sequentially and year-over-year, driven by excellent performance in the Hirschmann and Lumberg brands, which more than offset the challenges we are addressing in North America with respect to low-end industrial cable products.

The networking vertical was 26% of our revenue. Revenue growth in the attractive segment of this vertical, represented by fiber, Cat 6 and above cable and connectivity, grew in many of our geographies, but most notably in Asia. The video, sound and security market is about 12% of total revenue. The transportation and defense vertical remains at 4% and the consumer electronics and consumer electronics and consumer OEM market served by LTK was about 13% of our revenue again this quarter.

Our adjusted results are on slide nine. In the second quarter, GAAP earnings per diluted share were $0.89. We had several nonrecurring items which affected these results. As we mentioned in our press release, we incurred a one-time pension and settlement expense of $1.8 million, pretax, with respect to last year's restructuring of our Canadian operations.

Activity related to the closing of our Connecticut plant announced in the first quarter and which we are in the process of closing here in the first quarter, and which we are in the process of closing here in the third quarter, we incurred severance expenses of about $900,000 and an accelerated depreciation adjustment of about $700,000 in the quarter. We also had about $600,000 of expense in Europe for severance and other restructuring costs in that segment.

I would like to focus the remainder of my comments on adjusted results without these charges. For your benefit, reconciliations between GAAP and adjusted results have been provided as part of today's press release and are also available at the end of today's slide presentation.

Gross profit margin was 30.3% in the second quarter, representing an expansion of 100 basis points, sequentially, and 110 basis points year-over-year. Adjusting for certain cost reclassifications between COGS, R&D and SG&A we discussed last quarter, the year-over-year improvement in gross margin was 80 basis points. John talked about the many drivers of margin expansion, which include the richer product mix, with excellent performance at Hirschmann and Lumberg in the quarter.

Margin expansion was widespread, with Belden Americas, Europe and Asia all generating year-on-year margin expansion, with lower year-on-year margins recorded in our specialty business.

The Company's Lean enterprise initiatives and continuous effort in product portfolio management have driven sustainable improvements. With respect to the regional manufacturing rationalization program and our commitment to deliver $26 million in annual savings in 2008, the second quarter results included an incremental $3 million in additional savings sequentially and $6 million year-over-year.

If I could have you turn to slide 10, please, we'll discuss SG&A. Second quarter SG&A expenses were $88.6 million, or 15.9% of revenue. In comparison to 2007, as you might recall, we were not breaking out R&D expense as we do today and going forward. Thus, prior-year SG&A includes R&D expenses of that period.

And on an apples-to-apples comparison, SG&A is flat in dollar terms, sequentially and year-over-year. We note that currency translation added $6 million to SG&A year-over-year. Furthermore, we continue to invest in our newly created global sales and marketing organization, as well as other strategic initiatives, an increase of $2 million this quarter compared to a year ago.

The current challenging global economic environment demands continuing cost vigilance in both manufacturing and back office operations, and the second quarter results were achieved by establishing good cost controls in all of the segments.

R&D expense was $10 million in the second quarter, compared with $9.1 million the first quarter of 2008 and $8.2 million a year ago. Investments in new product development in Hirschmann remains a critical differentiator for their product families and an increase in overall R&D spend is consistent with their technology and attractive growth profiles that they pursue.

I will mention that our R&D investments in advanced technology will expand further in the third quarter with the inclusion of Trapeze, another technology-driven business.

Other income in the quarter, which represents the income from non-consolidated manufacturing and marketing joint ventures in China was $2 million. We had indicated in expectation of non-operating income about $1 million per quarter, so $2 million of income this quarter is an especially good position, based on the growing and substantial crane business in China, but not a level we expect to repeat regularly.

On slide 11, we will discuss interest expense and income taxes. Interest expense for the quarter includes a $1.9 million charge related to interest payable in Canada levied by the local tax authorities with respect to the unfavorable resolution of tax contingencies Belden inherited from the pre-acquisition periods of the former CDT operations in Canada.

GAAP requires that these interest charges run through the income statement. The tax payment with respect to these unfavorable resolutions, as well as the interest on such tax for pre-acquisition periods, totaled $5.3 million and were accounted for under purchase accounting and increased the goodwill we have recorded associated with the acquisition of CDT by Belden in July of 2004.

Income tax expense was $19.5 million in the adjusted results, or 29.9% of pretax income for the quarter. The effective tax rate on our year-to-date adjusted result was 29.7% and consistent with our expectations.

We continued to reflect the impact of lower tax rates on income earned in jurisdictions outside the United States. This impact has become more material to the Company with our 2007 acquisitions of Hirschmann and Lumberg operations in Germany and the LTK operations in Hong Kong in China. Our full-year outlook for the effective tax rate remains unchanged, at 30%.

On slide 12, we have comments with respect to the share repurchase. During the 2008 second quarter, the Company repurchased 854,000 shares of its common stock at an average price of $37.51 for a total outlay of $32 million. During the first two quarters of 2008, we repurchased 1.7 million shares of our common stock at an average price of $38.96, for a total outlay of $68.3 million.

This completes the share repurchase program authorized in August of 2007. Under this program, Belden repurchased 2.4 million shares of its common stock at an average price of $41.14, for a total outlay of $100 million. Our average diluted shares for the second quarter were 47.5 million shares.

I'd like to discuss segment results. If I could ask you to turn to slide 13, please. External revenue of the Belden Americas segment was $200.1 million, increasing 7.4% sequentially, but 9.8% lower than a year ago, and our divisional sales were 19.4 million. Including the inter-divisional sales, total shipments of Belden Americas were 219.5 million.

Segment operating income, adjusted by 2.1 million for the Canadian restructuring pension charge and a small loss on disposable equipment from one of the plants closed in 2007 mentioned earlier, was $42.3 million, or 19.3% of total segment revenues, compared with 18.9% for the second quarter of 2007.

Americas segment year-over-year margin expansion in the quarter reflects the business's realization of the savings associated with the regional manufacturing efforts, initiated in 2007 and continued in -- excuse me, initiated in 2006 and continued in 2007 and the improved contribution of our Nogales operation in Mexico.

The Specialty Products' external revenue in the second quarter was $59.7 million, which is lower by 7.6% compared with the second quarter a year ago. The division's revenue from affiliates was $18.2 million, which was flat sequentially, and lower by $5 million, or 21% compared to a year ago. Actions taken in the Mohawk brand to correct pricing and address competitive issues helped enable sequential revenue growth of 11.6% and operating profits adjusted by 1.6 million for restructuring charges to expand to 11.7 million, or 15.1% of revenue, an improvement of 520 basis points sequentially, compared with 9.9% in our first quarter.

The EMEA segment's external revenue was $199.3 million in the second quarter, a 13% increase year-over-year and an 8% increase sequentially. Affiliate revenue of $5.6 million was flat in both comparisons. Operating income at the EMEA segment was $27 million, or 13.2% of total revenue after adjusting for the restructuring charge of $600,000. This is a 180-basis point improvement sequentially and a 430-basis point improvement year-over-year.

The Asia-Pacific segment had second quarter external revenues of $97.3 million, a sequential increase of 11.2% and up 11.5% year-over-year, even with the aggressive portfolio management actions that impacted sales but raised operating margins at LTK.

Segment operating income was 11.3 million, or 11.6% of revenue, representing operating margin expansion compared with 10.2% in the first quarter and 10.1% a year ago. We are proud once again to be the broadcast cable of choice for the Beijing Summer Olympics, which occasioned several million dollars of revenue in each of the last three quarters.

Turning to the balance sheet, and on slid 14 we'll talk about cash flow and working capital.

In our continuous efforts to improve Belden's disclosure and transparency, we have included a consolidated cash flow statement as part of today's press release, previously not available until the filing for our Form 10-Q. Accordingly, your analysis of our results and the questions you may have in specific financial areas can now be addressed directly through this statement, questions, for example, such as our level of pension funding or the period's FAS-123R expense or our quarterly provision for inventory obsolescence or our exact share repurchase activity.

From this statement, free cash flows in the second quarter was $32.6 million, including operating cash flow of $43.9 million. Depreciation and amortization expenses were $13.7 million in the quarter.

With respect to capital expenditures and our asset-light objectives, in the first half of 2008, the execution of this program resulted in CapEx spending of $18.2 million, offset by $25.2 million in asset sales for net capital expenditures of a negative $7 million. The ending cash balance for the second quarter was $189.7 million. This reflects a decrease in cash of $7.2 million from the prior quarter due to the net use of cash for the completion of the share repurchase program.

An additional use of cash was the payment of a Canadian tax liability of $5.3 million, related to the tax periods predating the 2004 Belden-CDT merger. We also provided a bridge loan to Trapeze for $2.5 million, which was repaid at the time of closing.

On page 15, we have some key performance indicators.

Second quarter 2008 working capital turns were 5.7, flat versus the first quarter and down 0.7 turns to prior year. Days sales outstanding improved slightly sequentially, however, a slight degradation in days payable offset this gain. Inventory turns showed sequential improvement of 0.4 turns and 0.10 turns year on year, primarily driven by implementation of Lean management tools in the Asia-Pacific segment. As a result, our net use of cash for working capital was $17.6 million in the quarter, creating greater opportunity for improved operating cash flow throughout the remainder of the year.

We've added PP&E turns, which is property, plant and equipment, to our key performance indicator slides. PP&E have reached 6.8, an improvement of more than one full turn in the past year, as a result of our focus on fixed asset utilization and improvement to ROIC.

Before I close my remarks, I'd like to discuss one additional matter. We've announced our intention to redeem our 4% subordinated convertible notes on July 31st. We anticipate that this call for redemption will cause our note holders to render their notes for conversion, since the value to be received in the case of conversion, a value of 6,250,710 shares of the Company's stock, is in excess of the value they would receive in the case of a redemption, which is $110 million principal, plus accrued and unpaid interest.

We anticipate that the notes will be surrendered for conversion before the end of the day on July 30th. Recall that in the 2007 second quarter, the Company inserted a net share settlement feature into the [notary]. This feature obligates the Company to pay the note holders a $110 million principal amount of the notes in cash in the case of conversion. The remainder of the value of the notes will be satisfied with the shares of the Company's common stock.

The number of the shares the Company will issue upon conversion is a function of the volume-weighted average trading price of those shares over a 20-day period, beginning on the second day following the day the notes are surrendered for conversion. We will have completed the redemption or conversion of all these notes no later than the end of August.

The financial results of the Company have included the shares issuable upon conversion in the computation of diluted earnings per share since the third quarter of 2004. The impact of the net share settlement feature on diluted earnings per share has been taken into account since the second quarter of 2007.

As a result, we do not anticipate that the actual issuance of these shares in the course of the conversion of the notes will have a material impact on what our diluted earnings per share would have been otherwise.

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. In June, when we announced the acquisition of Trapeze Networks, we confirmed our outlook for our existing business and updated our view only for the effect of the acquisition. The picture remains the same today. Like others, we find the macroeconomic environment to be uncertain. However, we remain confident in our ability to execute in times of slow economic expansion.

We are maintaining our revenue outlook at $2.2 billion to $2.3 billion. We expect that our operating margin will be between 11% and 12%, adjusted for charges and that adjusted EPS will be between $3.15 and $3.35. We are currently engaged in our annual strategic planning exercise and I'm looking forward to sharing an update with you in the fall after we've discussed the plan with our Board of Directors.

Many of our investors have expressed support for the idea of further share repurchase activity. That's certainly something we consider, but we are unlikely to make a decision on such a course of action outside the context of our overall Board review of the strategic plan and our priorities for use of cash.

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, Tricia, will remind you of the procedures for asking your questions.

Thank you, Mr. Stroup. (OPERATOR INSTRUCTIONS).

Mr. Stroup, your first question will come from Matt McCall with BB&T Capital Markets.

Thank you. Good morning, everybody.

Hi, Matt.

Hi, Matt.

I think some of the comments, I just wanted to follow-up on some of the comments about -- you talked about the Americas and Specialty. You gave a lot of detail about what's going on in Specialty. It sounds like there's still some pricing pressures there. I guess I do want to get an update on your expectations there for the rest of the year. I was, I guess, hopeful that some of that would have deteriorated, or at least eased, as we progressed through Q2.

And then the second part of the question, in the Americas, as I look, maybe I'm looking at different comps than you were referencing, but it didn't look like the comps were that difficult from a year-over-year growth perspective last year, and so maybe provide a little bit more detail there and hopefully some detail across the end markets as to what was really behind the weakness.

Sure, Matt. First of all, I think we tried to say, anyway, that in the case of Mohawk, which was a business that struggled a bit in the first quarter with some of the issues around pricing, we did see significant improvement sequentially. I think Gray mentioned that we saw almost a 500-basis point improvement in operating margins in Mohawk --

Right.

-- from Q1 to Q2. So I think we feel quite good about the improvement in that business and I think that we're moving in the right direction. We did see some continued weakness, however, in the low-end industrial cable business in the second quarter. That was a continuation of what we saw in the first quarter. Our margins in that business have never been particularly good and, as certain companies have taken advantage of a weaker dollar, producing product in the United States and selling it in Canada, we have walked away from some business that just are at unacceptable margins. But, again, we saw sequential improvement in that business, as well.

As it relates to the revenue situation, what we're trying to help people understand, Matt, is that in the second quarter of 2007, there was a significant amount of revenue shift that was booked for delivery in the first quarter. We were unable to ship it in the first quarter because of the spike in demand and also because of some of the manufacturing moves that we were doing, and therefore our year-over-year comp was difficult in Belden Americas, especially. That was somewhat the case in Mohawk, as well, but especially the case in Belden Americas.

When you look at our growth sequentially, I think what you'll find is we had a fairly normal pattern this year, sequentially, and our pattern last year was fairly abnormal. We grew almost 18% sequentially last year from Q1 to Q2, which was not customary in our business. And I think if you look at not just our numbers, but maybe numbers of other people in our space, I think you would find something similar in terms of the sequential pattern that we saw this year being more normal to what we've seen in past years.

Okay, and then as it pertains to the end markets in the U.S., can you just add a little bit more there?

Yes, I think the end markets that we participate in the United States right now are fine. They're not growing at a great rate. We're not seeing the kind of growth rates that we saw a year ago, but we're also not seeing anything that would lead us to conclude that things are going to get really bad. We've continued to see really strong growth rates in product categories like industrial Ethernet, like industrial connectivity. We continue to see good strength in broadcasting. The networking business right now is, I would say, fairly flat across most of the segments that we serve.

But within the product categories, we're seeing strong growth in Cat 6 and above and, as we expected, the Cat 5 is growing more slowly, as people tend to use the higher network products. But our general view, Matt, of the year going forward is that we're going to continue to see pretty good strength outside of the United States. The United States is going to continue to be a little bit more difficult.

But I think as you see in our results here in the second quarter, most of what we're able to do here, and most of our execution in the second quarter, are things that we'd planned to do. So I think we're pretty pleased with the results we got in the quarter, given the fact that we don't have a lot of revenue tailwind right now.

Okay, and then one final question. I think you broke out some of the networking growth in Asia, specifically, or you spoke specifically about Belden Networking. Can you provide any more color about what's going on there, some of the successes outside of networking maybe in the industrial space, what you're seeing in Asia?

Well, the Asia business continues to perform very well. We didn't share with you the Belden branded growth, because it's a part of the segment, but the Belden branded growth in the second quarter in Asia was above 40% again this quarter. The other thing, Matt, that I did mention is that our networking systems business grew 47% in the first half compared to prior year. That's significant, because it represents, I think, our ability to sell systems effectively and I think it also is a good example of where our team in Asia has done a nice job of upgrading our commercial talent, so we thought it was worth noting.

The other thing I'd like to mention, Matt, is we've been making, I think, very good progress here in the last quarter with regard to how we serve the industrial market. I talked a little bit about a few wins we've gotten where we've been able to help customers come to the conclusion that they'd be better off buying the switch, the connector and the cable all from Belden, and I think we're going to continue to see traction with that initiative through the year.

That's exciting for us for all the things that we've talked about, but it's also exciting because we're really replicating the same initiative on the enterprise space by bringing together fiber, cable and connectors in wireless and so the integration of Trapeze now, in our view, is quite similar to where we were a year ago with Hirschmann, and we couldn't be more happy with the results of Hirschmann.

Okay, thank you all.

You're welcome.

And next question comes from Jeff Beach, Stifel Nicolaus.

Yes, good morning.

Good morning, Jeff.

And great quarter.

Thanks, Jeff.

Two things -- first of all -- well, actually, three questions. One is easy. Second quarter cost savings of $3 million, equal to cost savings of your $26 million of $3 million in the first quarter, was this below your expectation? Were you looking at cost savings ramping up through the year? And it sounds like you're still looking at the full 26, but rather than a ramp-up it's all hitting in the second half. Is this accurate or did it fall short of what you thought you would get?

No, Jeff, it was pretty much what we thought it would be. We had $3 million in the first quarter, which annualizes at $12 million. We had an additional $3 million in Q2.

Oh, Okay.

So that annualizes at $24 million in Q2, so we're really pacing exactly as we thought we would pace, and we remain very committed and confident to the $26 million for the year.

Okay, it was $3 million additional. All right. You probably don't have or willing to give margins on your acquired businesses, but particularly with Hirschmann and Lumberg, are you seeing --

They're very good.

Are you seeing better margins at those companies than overall Europe?

Yes. Let me answer it in two ways. First off, the gross profit of those two businesses, as we've described, are significantly greater than our cable businesses and our operating margins are now starting to trend up higher than our cable business, but remember, Jeff, our cable business two years ago was a breakeven business. Now it's a double-digit business, and our Lumberg and Hirschmann businesses are certainly north of double digit now, as well.

Those are businesses that we're very, very pleased with their results, compared with where they were a year ago.

And LTK, the product pruning moved up the profits sequentially, meaningfully, and I assume then year-over-year as well?

That's correct.

All right, last thing, just a little bit more on -- I think most of the concern this morning off of the press release was North America sales. Can you give us some flavor for year-over-year now comparisons, declines in Cat 5 and in low-margin industrial? Can you help a little bit there with magnitude in some way?

Sure. There are three things that I think are worth talking about. First of all, we've continued to see that the more desirable product lines, for example, the higher-end category products, as well as the more desirable industrial products, are growing at rates that we would expect and the lower-end products, ones that are not contributing at the same margin levels, like the low-end industrial cable like Cat 5, are either not growing or in some cases they're shrinking and in ways that are quite purposeful.

Secondly is, I think if you look at our year-over-year comps and you look at where we went sequentially from Q1 to Q2, I think you're going to find our sequential growth is very, very similar to the other companies within our category. In the second quarter last year, we had a lot of product that shipped that was scheduled to ship in the first quarter. We would have preferred to ship it in the first quarter of '07, but we were unable to, and that created a lot of shipments in the second quarter of '07 that were just mistimed.

The other thing that's worth noting is that we continued to see in the second quarter that our point of sale, or our sell-through data from our channel partners, is significantly higher than our sell-to channel partner data and we believe that's because our channel partners are more carefully managing their inventory right now than they did a year ago.

So, at some point, that begins to catch up. You can't have point-of-sale information that is in excess of the billing information or the billing data forever. So the fact that we're seeing strong point of sale, the fact that we're seeing strong sequential growth, certainly gives us reason to be confident in our top line.

All right, thanks a lot.

You're welcome.

We'll take our next question from Celeste Santangelo with Merrill Lynch.

Good morning.

Hi, Celeste.

Hi. So, looking at the outlook, given the numbers that you just put up from an operating standpoint, it looks like keeping the full-year outlook, it seems you're a little more cautious towards the back half of the year and I was wondering if there's something specific you can maybe point to, beyond just a general uncertain economic environment. Is there something you saw during the quarter that's giving you reason for increased caution?

No, no, there's nothing specifically that gives us reason to be cautious in the second half. I think that our view right now is that the macroenvironment that we're all living in right now is a little uncertain. It's certainly more uncertain in certain industries than others. I wouldn't want to be in the financial industry right now, for example.

But in our markets, we're still subject to the same macroenvironments that others are, and therefore we thought it was appropriate to confirm our guidance for the fully year, and we're obviously going to work as hard as we possibly can to do better than that, like we did in the second quarter.

Okay, and then last quarter, for North America it sounded like demand trended up as you exited the quarter and headed into Q2. Can you talk about the linearity in Q2 and then heading so far into Q3, in North America.

I didn't study it perhaps that closely, but I would say that there was a little bit of strength exiting the quarter from a point of sale information, but I wouldn't say it was overly pronounced. I would say we were relatively linear within the second quarter, nothing significant. It's not like we entered Q2 real weak and exited real strong.

So I think that the thing that we're focused on in North America, of course, is continuing to see sequential improvement, monitoring our sell-through data very closely with our channel partners and making sure we're doing the things necessary to gain share in the product categories we like and manage the operating margins and the gross margins in the product lines that are not strategic.

Great, thank you.

Thanks, Celeste.

And we'll go to Jon Braatz, Kansas City Capital.

Good morning, gentlemen. Good morning, Dee.

Hi, Jon.

Hi.

A couple of questions. Gray, when we talked on the conference call about Trapeze, you noted in there that there might be some non-recurrent amortization charges and some severance charges related to the acquisition. Have you been able to quantify that any more, give us a little insight as to what those charges might be?

Yes, Jon. If there's any actions associated with restructuring, those will be applied to purchase accounting and won't be an issue associated with our operating results. However, we will have a one-time charge associated with in-process R&D. It's right now under calculation. We're estimating it to be around $1.5 million.

Okay.

That will be a pro forma item in Q3.

Okay, fine. Okay. And how did you finance that acquisition? You ere somewhat -- you were looking at cash and borrowings. How did that all end up?

We utilized the revolver, Jon, so we drew down $133 million on the revolver to pay for Trapeze. The interest rate that we're getting on the revolver, interestingly, it's pegged to LIBOR, is actually underneath the convertible rate, so it's a fairly effective utilization of borrowing capacity.

Okay, great. John, the other thing I was going to mention is I read from other companies that there was a little bit of concern about the growth rates in Europe, things slowing there somewhat. Are you seeing anything that causes you a little bit of alarm -- some concern about the growth expectations when you look at the European business?

Yes. I think that the second half will not be as strong as the first half from a demand perspective in Europe. What we're seeing is the businesses that we have that are exposed to the broad economy in Europe are seeing a little bit of softening, like we saw in the United States. And then the product lines that we think can sort of power through because of the secular benefits of, like, industrial Ethernet, for example, we would expect to see those continue to grow and, of course, the mix of those product lines are favorable to us.

So I think generally, yes, we're going to see a little bit of weakness in Europe. By the way, it wouldn't surprise me if towards the end of the year we didn't see a little bit of weakness in Asia, as well. Again, it's comparative. They're still going to grow, I think, but I think that the economic problems that we're experiencing in the United States are going to spill over into other areas.

Okay, thank you, John.

And we'll take our next question from Nat Kellogg with Next Generation Equity Research.

Hi, guys. Nice quarter. Just a question, I know in the past you guys have talked about with innate organic growth some of it is just due to, John, as you said, trying to refocus product and stop selling some of our lower-margin products. So just wondering if you can give a little color on how much of the slowdown was sort of real slowdown from less demand for the product and then maybe a little color on how much of it you guys sort of refocusing your product and your sales effort to try and capture the sort of higher-margin sales.

Well, Nat, in rough terms, in the United States, we had somewhere between $10 million to $15 million in the second quarter of volume that we absolutely purposely moved out of the portfolio because the margins were not acceptable, and that was largely in our industrial category type products.

At LTK, I think that there was probably 10% of their top line that got moved out because the margins were not acceptable. And then I think the rest of the portfolio, if you look at it, again, the reason I kind of go back to sequential, is that those product lines sequentially grew very nicely and the difficulty on the year-over-year comp I think has more to do with 2007 than it has to do with 2008.

Again, 2007, we had a lot of product that shipped in the second quarter that was scheduled for the first. And then we did see continued inventory reduction in our channel partners in 2008. Obviously, at some point, that corrects itself and there'll be quarters where we will see the opposite happen. But those are the two big areas, Nat, where I think we saw portfolio management.

Okay, and I would expect that you guys would continue to keep that discipline going forward.

Yes, absolutely. The only caveat I would say, Nat, is in cases where we know that we've got a manufacturing cost structure that's going to improve because of the footprint actions that we've taken, we will hold onto that revenue, even if it might be at slightly lower margins, because we know we can realize acceptable margins in a relatively short period of time.

Okay, that's definitely helpful. And then if I look at I guess the back half of the year, you guys at one point -- I think it was maybe Q4, and not until Q4, but you did at one point have sort of a little bit elevated R&D spend with the Hirschmann sort of in the back half of last year? Is that correct? And I assume that that probably won't be repeated this year, although you guys are continuing to [entertain that].

You're right. In the fourth quarter, we did see a spike in R&D spending at Hirschmann. That's true. But I would say this. We do intend to continue to invest R&D dollars in the industrial Ethernet business, because we're seeing good growth rates and we're seeing real nice margin expansion. So we're going to spend our money wisely, but we're very focused on keeping costs under control and continued investments that we make in R&D are going to be very targeted in the areas where we think the life cycles are such that technology investment really matters.

So Hirschmann's a good example of that. Lumberg's a good example of that and of course Trapeze will be a good example of that.

Okay, that's great. And then just last one, a little housekeeping one, I think maybe for Gray. What was the Czech business? What did that contribute last year? Just trying to get a year-over-year sense of how much that was contributed?

I netted the numbers for you on the discussion, Nat, but I'll break them into two pieces. $17 million was the revenue associated with the Czech businesses.

Okay.

And the offset on Hirschmann timing for the April period was $6 million, so the net was $11 million, with respect to the adjustment to organic growth.

Okay, that's great. I sort of had a sense of what that Hirschmann was, but the Czech number is helpful. All right, great. Obviously, nice quarter, guys. That's all I've got and thank you guys very much.

Thanks, Nat.

(OPERATOR INSTRUCTIONS). We'll go to Kevin Sarsany with Galet.

Hey, guys. It's been a while.

Hi, Kevin.

Hey, Kevin. Welcome back.

Thank you very much. I have a question now, with the $26 million saving, you're pointing to 11% to 12% operating margin. I guess looking a little longer term, if you still have your goal of operating margin of 15% and at one point you talked about seven initiatives. I was wondering if you could kind of touch on some of those initiatives going into 2009 and those that are kind of in your control, such as manufacturing, consolidation, mix kind of things, versus volume.

Sure. Well, the initiatives are exactly the same. The things we're focused on are no different than what we spoke about a year ago or two years ago. Remember, the 11% to 12% of course includes the impact of Trapeze and of course includes this deferral of revenue. So on an apples-to-apples comparison, our operating margin would obviously be exiting higher, just as we saw in the second quarter, 12.5%.

The things, of course, that are in our control is manufacturing footprint, which we remain very, very confident with and pleased with our progress, our Lean initiative where we're beginning to see some of the productivity improvements from Lean that we expected, portfolio management, which showed up in the second quarter at LTK, Americas and other parts around the world.

And then I'd say an even greater focus than ever in the Company on bringing in high-quality organic growth. We brought on a new executive about 110 days ago who's got an outstanding set of experiences with regard to industrial markets and, in our strategic planning cycle this year, we're focused more than ever on generating high-quality organic growth that's going to have fall-through in our normal range of around 40%.

So in 2009, I think you're going to see a nice blend. You're going to see cost improvements, but I think in 2009 you probably see a little more emphasis on the benefits of organic growth than maybe you saw in 2007 or 2008, where it was a little bit more focused on cost.

Okay, the R&D spending you're doing at Hirschmann, is that legacy? I mean, it's ongoing, but is that part of trying to provide a full solution for industrial automation? And also, I guess looking forward, how does the Trapeze, or if it does, apply to industrial automation longer term?

Well, most of the engineering spend at Hirschmann right now is directed at making certain that their product line continues to be far in the lead in the markets that they serve. That's where Hirschmann has really always been very strong and the life cycles in those product lines of course are a lot shorter than they are with cable. So we need to continuously make investments in the product line to keep them competitive and to keep them in a leading position.

Going forward, however, I would expect that we would spend more R&D dollars on bringing together the Hirschmann switch and some of the industrial wireless opportunities that we see for our industrial initiatives.

So we've already had important meetings, constructive meetings, with our Trapeze team and with our Hirschmann team about how we can apply the wireless technology into markets beyond enterprise, including industrial, and we think we're uniquely positioned to do that, given the fact that we have a strong capability and awareness in both markets. I would say the money we're spending to bring together solutions in the industrial and enterprise market are probably most likely going to be in the sales and marketing area. So the spending that we have in Steve Biegacki's group, for example, around how to address the opportunities in those markets as a complete solution provider is where you might see more increase, say, for example, in 2009.

Okay, and just a last one, what is your mix of plants in low cost versus high cost?

Well, we have a metric that we track which is the percentage of associates in our manufacturing group that are in low-cost regions. And remember, when we acquired LTK, that metric skyrocketed because we have many of our associates in China. Many of those associates are manufacturing people.

So on an associate basis, Kevin, it's I think well in excess of 50%. On a production basis, I'm not exactly sure where it is right now, but again, it wouldn't surprise me if it isn't getting close to 50%. But why don't we follow up on that and get you a more detailed answer.

You got it. Thanks.

Thanks, Kevin.

We'll now go to Keith Johnson, Morgan Keegan.

Good morning.

Hi, Keith.

Hi, Keith.

Welcome.

Just a couple of quick questions. I guess first off, I know you've talked about a lot of the initiatives you have had to reduce costs within your manufacturing operation. Could you give us a little color on whether or not, or how much, you may have seen of inflationary pressures in your manufacturing operation, whether raw material and fuel and surcharges, that sort of thing?

Well, we've been fighting that very hard. In fact, we probably didn't do a good job of saying that all these savings came on top of combating cost increases in commodities. We talk a lot about copper, but we probably don't talk enough about our issues with petroleum-based products, not to mention the fact that our transportation costs are going up because of oil prices.

So our team I think has done a nice job of battling that and we did see increases in the second quarter, of course, with these effects of commodities. But our team has done a nice job of finding cost reductions to offset that and, as we look at our full-year outlook, we have in fact incorporated the effects, the negative effects of commodities, into our operating plan going forward and obviously we think we can combat them with other cost reductions.

Okay, so any way you quantify it in the quarter, maybe in a matter of basis points or something that did affect your margin?

I don't really know how to give you an accurate answer right now. I can just tell you that if I include the impacts of commodities around feedstock, petroleum feedstock, and I were to include transportation costs, they're significant enough that they could have negatively impacted our entire manufacturing segment in during the quarter, but our team was able to offset that. So I don't know how to give you an exact number. We could try to estimate it and get back to you, but it is material.

What about in this environment, the ability to try to get some of that back as you look to the rest of the year on the selling price side?

Well, our team has done a good job, I think, of quickly acting on price changes that are necessary to deal with these items. Clearly, most people are in fact aware of the rising price of oil, so when we help them understand that our transportation costs are going up because of that or our composite materials are going up because of that, they're understanding of it and as long as we just announce it in an orderly way, then we're able to pass on the price increases.

And I guess just one last question, just to make sure that I was understanding your guidance, could you give me an idea of kind of what the economic outlook is, I guess maybe by geography, in your guidance for the year?

Yes, I would say that the guidance that we've issued for the year is a no change to current environment, that we're going to see sort of a similar environment, macro wise, in the back half that we saw in the first half. We're not expecting that it's going to get better. We're also not expecting that it's going to get significantly worse.

I did comment already that we're starting to see a little bit of macro weakness in Europe, so we've incorporated some of that weakness into our forecast, but really our guidance is really focused on what we do and the markets that we serve and really just expecting that the environment is not going to change very much in either direction.

Okay, all right. Thanks a lot.

Thank you.

And there are no further questions in queue at this time.

Okay, that's great. Let me thank everyone again for joining us on the Belden earnings conference call. We appreciate your interest and you're welcome to give us a call at any time if you have follow-up questions. This concludes our call today.

Thank you, ladies and gentlemen. This concludes the call for today. You may disconnect from the call, and thank you again for your participation.