Belden Inc (BDC) 2009 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 Gray Benoist. Please go ahead, sir.

Thank you, Ben. Hello and good morning, everyone. My name is Gray Benoist. And I'm the CFO of Belden. Thank you for joining us today for our first quarter 2009 earnings conference call at Belden. Joining me on the call today from here in St. Louis is John Stroup, President and CEO of Belden.

First, some logistics -- we have put a few slides on the web. To see these, please go to investor.belden.com, and sign on to the webcast. There is no www in that address, just investor.belden.com. Also, if you need a copy of our press release, you'll find it in that location.

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 Provisions 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 first quarter, after which I will review some additional financial results and segment analysis. Then John will speak about our outlook for the business. And finally, we will open up the line for questions.

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

Thank you, Gray, and good morning everyone. The economic environment during the first quarter proved to be as challenging as we expected. However, we are pleased with our overall performance.

Our cost-reduction programs are off to a strong start, and we are beginning to see the benefits of our organic growth initiatives. Further, our ability to generate positive operating cash flow, due in part to our Lean Enterprise Initiatives, gives us confidence that we are well positioned to capture opportunities as they present themselves during this period of economic turmoil.

Moving more specifically to our results, our fiscal first quarter is seasonally our slowest. Therefore, a year-over-year comparison would normally be the best. However, given the severity of the downturn we experienced in Q4, a discussion on a sequential basis is more meaningful.

Please refer to slide three. Revenue during the first quarter on a consolidated basis was $328.5 million, compared to $417.3 million during the fourth quarter of 2008. Excluding the impact from acquisitions, divestitures and the effect of currency translation, organic revenue declined sequentially by 21.6%. But when adjusting for seasonality and days in the quarter, the organic contraction was 11.5%. Despite declining revenue, we delivered adjusted operating margins of 4.9%, 7.7% excluding the wireless segment, and expanded margins in both the Americas and Asia segments.

As indicated during our fourth quarter of 2008 conference call, we expected to face significant headwinds during the first quarter. And as a result, we implemented a significant restructuring program. As we progressed through the first quarter, it became apparent that we would need to take additional actions, primarily within our EMEA segment. Our actions have resulted in cost savings of $6 million during the first quarter. And we are on track to exceed our goal of $30 million in cost savings for 2009.

We continue to monitor macroeconomic indicators. And while some have come off their lows, they still suggest a prolonged period of weakness. Despite recently monthly up-ticks in PMI, the overall reading of 36.3 for the month of March is well below 50, which is the reading that indicates an expanding manufacturing sector.

Similarly, the Architectural Building Index rose 8.4 points in March to close at 43.7, the first time since September 2008 that the mark was above 40. Additionally, the ABI New Projects Increase Score was 56.6, an increase from the February score of 49.5, which provides cautious optimism that we will see an improvement in overall billings within a few months.

Internationally, the European economy is in trouble. The most recent data for Europe's biggest exporter in the continent's largest economy, Germany, revealed that its economic decline is accelerated. Overall exports were down 23% in February compared to a year ago. The steep decline in German exports during the first two months of 2009 represents the most dramatic collapse since the 1950s. This had a direct impact on our European segment during the quarter, and also provided the impetus for the recent corrective actions we have undertaken, which I will discuss with you in greater detail in a few moments.

Macroeconomic factors undeniably impacted our business. However, our internal efforts on driving organic growth and reducing costs through the adoption of lean principles have served to offset some of the downward pressure we experienced in the first quarter. To drive organic growth, our global sales and marketing initiatives include a key priority to improve our relationships with our primary channel partners by working more closely with them on greater opportunities. In fact, where we have dedicated resources with our channel partners, we are experiencing better-than-average growth.

Some additional examples of our organic growth initiatives include our global accounts team is up and running and working directly with end users within our enterprise, broadcast and industrial verticals. We have broadened our product offering to our major channel partners, thereby creating leverage for our Trapeze, Hirschman and Lumberg brands. Through our strategy deployment methodology, we are improving our sales force process and effectiveness. Through our structured process of lean daily management and value stream alignment, we are able to focus our resources on the critical issues and drive improvements. It is part of a culture of continuous improvement that engages all of our associates in the problem-solving process. As a result of adopting a lean mindset, we have become more nimble and more focused on eliminating waste.

A combination of our continued Lean Initiatives and our focus on reducing inventories generated over $25 million in adjusted free cash flow. We do this as a tremendous accomplishment, especially given the seasonality associated with the first quarter of the year.

Now I'd like to spend a few moments looking at the performance of the individual segments and our end markets during the first quarter. Turning to slide four, you can see the breakdown of revenue by our different vertical markets, geographies and product lines. Over three-quarters of our revenue is generated from the industrial and enterprise vertical markets. Sequential growth within each of our primary vertical markets proved challenging due to several factors.

First, we exited Q4 at a much lower order rate than we entered it. Revenues throughout the quarter cascaded downwards, thereby skewing the comparison with the first quarter. For a truer comparison, we would need to look at the rate of the business at the end of Q4, and compare those levels to our performance throughout the first quarter.

Secondly, as I discussed earlier, first quarter revenue is typically lower than quarters two, three and four due to seasonality.

Finally, although we are neutral to copper in the short run, if you recall, copper prices fell precipitously during the fourth quarter, creating downward price pressure. And although pricing has become more competitive, it has not yet become irrational.

Over the past three years, we have invested through our regional manufacturing and lean orientation to be a cost leader in the industry. This hard-earned advantage enables our business to be well positioned to maintain margins during times of difficulty and expand margins more rapidly as our markets stabilize and recover.

Turning now to our individual segments, we are pleased by the performance of our Americas segment, which now includes our former specialty products division. The ability of this segment to demonstrate significant margin expansion during a challenging period highlights our successful cost-reduction initiatives. We are encouraged by the stabilization of order rates throughout North America following the dramatic reduction in orders we experienced during the fourth quarter of 2008. However, although it is difficult to quantify, our Q1 revenue was negatively impacted by inventory reductions at many of our smaller channel partners and OEM customers. We expect this trend to continue as they make understandable corrections to inventory balances in the face of lower demand that may be with us for some time.

Similar to our Americas segment, operations within Asia also benefited from stabilized order rates during the first quarter. Additionally, it was a great pleasure to open our largest manufacturing facility outside North America in Suzhou, China. This plant at full capacity can generate over $220 million in annual revenue. The Suzhou plant is a symbol of our strong belief in the continuing growth of the Asian economies and our unwavering commitment to expand our presence in China.

The plant also serves to further two of our strategic initiatives for the Asia segment. First, deliver a localized product portfolio, increasing our share in China. Secondly, by localizing the Belden brand, we strengthen our local supply chain, increase our marketing flexibility in the demanding Asia market, and we can leverage our outstanding LTK manufacturing and engineering expertise.

Turning to the wireless segment and our new addition, Trapeze, we estimate the global enterprise wireless land market contracted on the order of 10% to 15% sequentially. Despite this decline, direct sales of Trapeze brand of products showed strong sequential growth of 21%.

However, the OEM business did not perform as well in the first quarter due to several events. The bankruptcy of Nortel, Trapeze's largest customer, and the uncertainty of their future significantly impacted their sales in the quarter. Also, inventory levels at Nortel and other OEM accounts were adjusted downward in reflection of the market decline. Although progress is being made, Trapeze still has a lot to improve upon.

We have introduced our strategy deployment process, and we are confident that this structured approach will yield improved results. The segment's commercial productivity -- that is the amount of gross margin dollars produced for every dollar spent on sales and marketing -- is our primary metric of business improvement. Our expectation is for this number to improve on a sequential basis and for Trapeze to meet our corporate average of 4.75. Thus far, the business had averaged 1.0. By leveraging the Belden market access model, we expect to see steady improvement in this metric. And I am pleased to report that our first quarter results include examples of project wins through this approach.

We remain impressed with the quality and competitiveness of the Trapeze product line. As you may have seen on April 21st, the United States Patent Office awarded Trapeze two breakthrough wireless networking patents. The patents advance the Company's position in nonstop wireless networking, and cover technologies that allow customers to deploy and manage access points in their networks more easily and at a lower cost. Our investment in R&D yields technology that reinforces our position as an innovator and leader in the wireless networking for the enterprise market.

This brings us to our European operations. First quarter results from our European segment were disappointing. Although our assumptions for the 2009 macroeconomic environment were generally on target, the environment in Europe has proven to be more challenging than expected. Because the German economy depends greatly on exports, the severe downturn in the United States and Asia has led to a sudden and dramatic economic contraction.

The most visible example is the severe downturn in automobile sales. Although we have very little business tied directly to the automotive industry, the ripple effect throughout Germany and Europe is meaningful. Given the current state of affairs, we expect the European economy will be in a malaise for an extended period of time.

Irrespective of the environment in which we operate, the bottom line is that we are not happy with the current performance of the business. And as a result, we have taken several additional restructuring actions specific to this segment, above and beyond what was announced during the fourth quarter.

As many of you have probably seen, we announced the relocation of connector manufacturing production in Germany to other facilities in Eastern Europe. This move is expected to be completed by September 2009.

Additionally, Wolfgang Babel, the former President of Belden Europe, Middle East and Africa, has left the Company. Until a replacement for Wolfgang has been identified, I will lead this segment.

We recognize that it is more expensive and takes longer to implement cost-control measures in Europe. Therefore, the resulting benefits will take a bit longer to realize.

With that, I'm now going to turn the call over to Gray for a more in-depth discussion of the business results. Gray?

Thank you, John. I'll begin my comments with a discussion of the consolidated results of operations for the quarter, followed by the segment results, cash flow, working capital and asset management, comments with respect to our revolver debt, our debt covenants and the recently announced amendment to the bank agreement, and conclude with a summary of our current restructuring activities.

Consolidated revenue in the first quarter was $328 million, a sequential decrease of 23%. Volume declined across all geographies and within all of our served vertical markets. Revenue year over year declined by 35.8%, with unfavorable currency translation of $19 million, or 3.7%. Copper costs and their influence over pricing, and thus revenue, makes comparisons challenging. But after adjusting year-over-year revenue for the impact of copper, the acquisitions of Trapeze and the sale of our multimedia connector business in the Netherlands that we completed in the fourth quarter, metals adjusted organic growth was a decrease of 26.3% year over year, and a decrease of 10.7% sequentially.

If I could have you turn to slide four, adding a little more depth to John's earlier comments on the distribution of revenue, the geographic mix of revenue is shown on the left. Revenue in the United States was 47%, Canada 7%, Europe 25% and Asia 16%. Revenue by geography shifted again this quarter, as in the fourth quarter, towards our US-based businesses as market weakness in Europe and Asia has been more pronounced.

The pie chart on the top depicts revenue by vertical market. We include the revenues of Trapeze Networks within the enterprise vertical, and this vertical expanded to 33% of our overall revenue, up from 29% of revenue last quarter and 28% a year ago.

Although we have experienced an increase in competition at the lower end of the Enterprise product offerings, we continue to witness greater global stability in the high end of the Enterprise market, comprised of Cat 6-and-above cable, fiber and copper connectivity and Trapeze products. Based on channel information and our own project data, we are confident that we are capturing share in these desirable market segments.

The industrial market accounts for 45% of our business in total. While we're seeing stability in the high-end industrial Ethernet product families and in some limited verticals like alternative energy, the remainder of the industrial vertical is experiencing a significant cyclical global decline. This decline is most evident in Europe, where our business, anchored by the German economy and their export activity, is reflective of the world situation.

John mentioned in his comments, and I reiterate here, that the Company is taking the necessary actions, albeit time-consuming and complex, to right-size our businesses in Europe to meet this near-term challenge without losing sight of the industrial cycle and assuring our readiness to capture market growth when the market conditions stabilize.

The video, sound and security vertical remains unchanged at 12% of our business. But the consumer OEM business at 6% and transportation and defense vertical at 4% are markets that have declined more rapidly than the market in general. Our sales to automotive OEMs are down 66% year on year. And sales by LTK to our consumer OEMs are down 49%.

As John mentioned, we developed a better understanding of how the current global inventory de-stocking situation impacts our businesses. One of the conclusions we have reached is that the LTK business, serving the consumer electronics vertical, has experienced the most severe de-stocked inventory impact due to the multiple distribution steps in the out-bound supply chain, coupled with long lead times to market given the delivery logistics from China. If this is in fact the case, we are watchful for a nearer-term recovery for LTK as inventory levels normalize and truer end consumer demand is placed on our China manufacturing operations.

If I could have you turn to slide five, please, in the first quarter, GAAP results were a net loss of $0.70 per diluted share. We incurred restructuring charges of $55 million pretax in the quarter, as we continue the implementation of our global restructuring actions announced at the end of 2008. Eighteen million dollars of this charge related to projects previously communicated in the fourth quarter. And we have taken additional restructuring actions within Europe that were above and beyond those included in our December 2008 restructuring plan, resulting in a charge of $35 million.

I will review the restructuring plans and status in greater detail later in this discussion. I would like to focus the remainder of my comments on adjusted results without these charges. For your benefit, a reconciliation table 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.

Gross profit margin was 31.1% in the first quarter, a sequential expansion of 340 basis points and a 180 basis point increase from the first quarter of 2008. Our ability to expand margins in a period of significant volume contraction is a good example of good pricing and copper management discipline coupled with taking actions early to flex both our variable and semi-variable costs in our US and Asia manufacturing operations. As a result, gross profit margins expanded, both sequentially and year over year, in both of these segments.

We have not been able to flex our cost structure as successfully in Europe, hence our recent set of new restructuring actions. The combination of right-sizing production, assuring we have the capacity to meet rising demand when it occurs, while displaying disciplined pricing and commodity management are the essential ingredients to margin maintenance across all of our businesses.

SG&A expenses in the first quarter were $67 million or 20.5% of revenue, compared to $82 million in the fourth quarter and $87 million in the first quarter of 2008. Excluding the results of our wireless segment, SG&A expenses were $61 million or 19.1% of revenue in the quarter, compared to $73 million and $87 million in Q1. Currency translation had a favorable impact of about $2 million to SG&A year over year. Excluding this translation impact, SG&A was $18 million lower year over year. The Company reduced SG&A expenses $15 million sequentially, and when adjusted for the Trapeze acquisition, $26 million year over year.

The cost containment achieved in concert with the manufacturing resizing was accommodated through the global restructuring actions initiated in the fourth quarter, accompanied by disciplined cost controls on company-wide discretionary spending. Tight cost management is a continuing focus that allows the Company to continue the essential R&D investments in both Trapeze and Hirschman INET products, and increasing our resource and investments in global sales and marketing programs. The view of the market is murky, but there's clear evidence of share gains with Belden cable products and the Trapeze branded wireless land family of products through these initiatives.

With respect to investments in R&D, the first quarter expense was $15 million, or 4.5% of revenue. Excluding the results of the wireless segment, R&D expenses were $9 million in this quarter, compared with $9 million in the fourth quarter and $9 million a year ago.

If I could ask you to please go to slide six, interest expense for the first quarter was $7 million. And our interest coverage ratio was 4.2 times. During the quarter, we announced an amendment to our revolving credit facility. The amendment, among other things, revises the definition of consolidated EBITDA.

Under the revised definition of EBITDA, which is detailed out on slide seven, we may adjust our reported earnings in computing EBITDA for first, share-based compensation expenses; secondly, the change in deferred margin on revenues from the wireless segment; and finally, certain cash restructuring charges already recognized in 2008 and up to an additional $20 million in cash restructuring charges that may be recognized in 2009. In total, the amendment increases our cost of borrowing under the credit agreement by 100 basis points and provides us additional flexibility in managing our liquidity, which is of paramount importance given the ongoing economic environment.

As a result of the amendment, the Company's debt-to-EBITDA leverage ratio at the end of the first quarter was 2.66, compared to 2.95 from the prior quarter. The Company incurred approximately $1.5 million in arrangement, attorney and consent fees in connection with the amendment.

Our current status relative to our revolver debt covenants is included on slides eight and nine.

Income tax expense during the quarter was $3 million, and the adjusted results are 30.3% of pretax income for the quarter. The adjusted tax rate is consistent with our expectations, though it is higher than the 2008 adjusted tax rate due to the inability at this time to benefit for net operating losses on which we have recorded valuation allowances. Adjusted net income for the first quarter was $7 million, and adjusted earnings per diluted share $0.16.

If I could have you turn to slide ten, I'll discuss segment results. External revenue of the Belden Americas segment, which now includes our specialty business, was $182 million. Affiliate sales were $8 million. Including affiliate sales, total shipments of Belden Americas decreased 20.5% sequentially and 31.3% year over year. Adjusted operating income for Belden Americas was $30 million or 15.6%, a sequential increase of 380 basis points. Expanded gross profit margins and strong cost controls, coupled with share gains in several desirable market segments, provides a good indication of the general strength of our largest business segment.

The Europe segment's external revenue was $88 million in the first quarter, a 16.1% decline sequentially and a 45.5% decline year over year. Operating income of the EMEA segment was $3 million or 2.5% of total revenue. This compares with results of $5 million or 4.2% of revenue in the fourth quarter of 2008, and $22 million or 11.9% of revenue from the first quarter of 2008. The EMEA segment results reflect continued weakness in the automotive vertical and industrial cable and connector markets, and the deteriorating economic environment in Germany. The underlying business model in Europe remains sound, and double-digit operating income has been proven. Returning to this level of performance is a near-term target of the new European leadership team.

The Asia-Pac segment had first quarter external revenues of $46 million, a decrease of 40.4% sequentially and a 50.7% decline from the previous year, which was due to the decline to both China industrial and enterprise demand coupled with a weak consumer vertical. As discussed earlier, we believe the LTK business experienced significant de-stocking of consumer electronics-related inventories. Despite these headwinds, the segment operating income was $5 million or 11.3% of revenue, down from $9 million in the previous quarter and $11 million in the previous year.

For our wireless segment, we continue to make every effort to ensure the transparency of results within this segment, especially given the complexities associated with the GAAP requirements to recognize revenue associated with vendor-specific objective evidence, and have broken out the deferred revenue impact in our financial statements. We continue to make progress on institutionalizing processes, managing the documentation and establishing business practices to achieve the SOE in a timely fashion. The wireless segment had non-GAAP revenues of $12 million and an adjusted operating loss of $8 million in the first quarter.

If I could have you turn to slide 11 please, the company had $224 million in cash at the end of first quarter -- $155 million is in depository accounts, which are used in the day-to-day operations of the business, and $69 million is in short-term investment accounts, primarily invested in government issues. Free cash flow in the first quarter was $3 million, comprised of net operating cash flow of $13 million, less capital expenditures of $10 million. This marks the ninth consecutive quarter of positive operating cash flow. Depreciation and amortization was $13 million in the quarter.

At the end of the first quarter, we had $590 million in outstanding debt, $240 million bearing interest at 3% under our revolving credit facility and $350 million bearing 7% interest in our senior subordinated notes. In addition to the cash on the balance sheet, the Company had $101 million in additional liquidity available under its revolving credit facility.

If I could ask you to go to slide 12, inventory turns in the first quarter were 5.4, down sequentially compared to 5.9 turns in the fourth quarter and lower than the 5.6 turns we experienced in the first quarter of 2008. Absolute inventory decreased $35 million sequentially as a function of reduced commodity costs and improved inventory management. Working capital turns at 5.9 this quarter were down sequentially compared to 6.9 turns, but up year over year compared to 5.7 turns. We continue to stress the fundamentals of Lean, and remain committed to be a one-turn improvement in working capital again in 2009.

Property plant and equipment turns were 4.4, lower than the 5.1 turns in the fourth quarter and 6.2 turns in a year-ago period. We expect the capital in real estate markets to remain soft throughout 2009, but remain committed to our goal of balancing our 2009 capital budget expenditures with asset-light activities to minimize the increase in fixed asset investments of the Company.

And finally, to summarize our restructuring activities, if I could have you please turn to slide 13. Our actions to date include the closure of four sites, three of which are connectivity manufacturing locations and a fourth that performs cable manufacturing; the resizing of global sales and administrative functions; and finally, the impairment of assets in US and German cable and connectivity manufacturing operations.

During the fourth quarter call, we anticipated a first quarter cost reduction benefit of $3 million. We are pleased to have exceeded this forecast by an additional $3 million, which contributed significantly to the expansion of our gross profit margins in the quarter. For the full year 2009, we have increased our estimated savings from $30 million previously to $36 million, or $6 million, $8 million, $10 million and $12 million per each successive quarter in 2009. Additionally, we have raised our annualized expected run rate benefit to $60 million, up from $50 million previously.

All restructurings are difficult as they involve realigned responsibilities, organizational change and exiting associates, with the redistribution of work for those that remain. We are very pleased with the determination and dedication our associates have displayed throughout this process and their ability to deliver results, both earlier and better than originally expected.

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

Thank you, Gray. If you could now turn to slide 14, please, as Gray discussed, as a part of our effort to better manage our capital structure, on March 24th we announced an amendment to our credit facility. The amendment provides the Company with the additional capital flexibility to take advantage of opportunities in the market as they present themselves for accretive tuck-in acquisitions. Opportunities of this kind could be plentiful when contemplating consolidation, geographic expansion and further product and vertical market diversification, as many businesses may struggle in today's economic reality.

We have a hopeful but realistic view for 2009, and believe that while markets are stabilizing, inventory corrections will persist in the near term. As such, we will be vigilant in the execution of our cost-reduction initiatives as we work through this difficult environment. Under normal conditions, we would be discussing our expected seasonal up-tick from Q1 to Q2. However, given the existing global slowdown, we are unsure about the magnitude of that effect this year. Until our visibility improves, we will continue to provide guidance on a quarter-by-quarter basis.

For the second quarter of 2009, we expect adjusted revenue and diluted earnings per share to be in a range of $340 million and $350 million, and $0.25 and $0.30, respectively.

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

Thank you. (Operator Instructions) We will take our first question from Matt McCall with BB&T Capital Markets.

Thanks. Good morning, everybody.

Good morning.

Hey. Hi, Matt.

Let's see, Gray, I think you provided some detail about the metal adjusted performance. I think that was at the corporate level. Any volume -- any more volume commentary you can provide across this segment? And then maybe some insight into what volume level is baked into the guidance on the top line?

Right. So for the first question, with respect to some sort of shadowing of what we think the real metal adjusted organic growth rate was, the number we selected was 26.3% decline. And that compares to the 35.8% that's in our reported results. And modify that by the 3.7% associated with FX, and that difference is the copper impact we believe is in -- just incumbent in the price reductions that are created by the decline in copper amount.

We're not going to spread that out by each one of the business groups. But perhaps offline we'll do a little work to determine exactly where -- in which business groups there was a greater impact. But for the most part, you could just spread that equally across each one of the segments.

In the guidance for the first-to-second-quarter bridge, there's a modest increase in revenue. And that is volume related. And that's directly related to our initiatives associated with global sales and marketing.

John commented that the seasonality effect is just uncertain at this juncture. But we are confident that we are getting traction around our share in channel management programs. So the up-tick in volume right now has more to do with traction around those particular programs than any seasonality or clearly any recovery in the market.

Okay. That's helpful. And that leads kind of to the next question. John, you mentioned that to look at the order patterns quarter over quarter would not be as helpful as maybe looking at the order patterns end of Q4 and throughout Q1. So would Gray's comments indicate that those have roughly been indicative of flat seasonal patterns or no seasonal pickup?

Yeah, I think -- I think if you look at what we exited the fourth quarter at in December, it was significantly lower than what we entered Q4 with in October. I think I made the comment before that November was about 10% lower than October. December was another 10% lower than November. So if you look at Q4 in total, it doesn't really tell the picture. We exited at a much lower rate.

If you take that exit rate and then you look at the typical seasonality that we typically see from Q4 to Q1, the business behaves fairly well. In fact, there were areas where we actually think we picked up some share, particularly in the Americas business. So given all that, I think we feel very good about our revenue performance in the first quarter.

What we're not certain of, though, is whether or not there's going to be that typical seasonal up-tick from Q1 to Q1. But we have been feeling much better about a stabilizing order book that we've now seen for the last three months, which makes us feel more comfortable that the environment is more stable, and that the cost actions that we've taken are going to get the desired results.

Okay. And then on the -- you referenced de-stocking. I think you specifically talked about some of those smaller customers. As you compare the pace of perceived or actual de-stocking, small versus large customers, it sounds like more of the pressure's on the small side. But are you -- are you watching some of those smaller either channel partners or customers? Do you have any concerns about the financial viability of any of your key relationships?

No. On the -- on the -- on the key significant relationships, we have a great deal of confidence that those companies are well positioned and they'll manage effectively through this downturn. So we really don't have any concern about them. There are some smaller distributors that understandably have to be a little bit more cautious and have to be a little bit more mindful in how they manage their working capital. And as a result, I think some of our smaller distributors were more aggressive in their inventory reductions in the first quarter than, say, some of the larger partners that we have.

But this inventory correction I don't think is over yet. Because I think what's happening is, although some of the larger distributors have in fact reduced their inventory on a gross basis, if you do it on a turns basis, they're probably still behind where they were before. And they're in a difficult, I think, situation now, because they're trying to determine whether or not Q2 is going to have a seasonal pickup or not. And, therefore, they might be holding still a little bit more inventory than what they need to hold.

So we feel like the inventory correction will probably continue through the second quarter. And we did, in fact, bake that into our guidance.

Okay. And then two quick ones. The -- Gray commented that the near-term target is to get back to double-digit margins in Europe. And, John, I know you're spearheading that effort. Do you -- is the near-term target to get there -- can you get there just on the cost savings alone? Or do you need a pickup back in volume? You spoke near term, so I didn't know what the expectations were.

I think in today's volume levels, we can get there by the end of the year. I think that that's absolutely a target that we can hold ourselves accountable to.

Okay. And then a final one, and I'll hop off. The R&D number at $16 million was a little higher than we expected. Should we expect that same level? I know that Trapeze was a big part of that year over year. But is that the same -- is that a nice run rate going forward?

I think that that's probably a little high. I think that we spent a little bit more in the first quarter on R&D in Europe than I think we probably should have. And now there's a little bit more focus on cost control in all areas of Europe, including R&D. So it would be my expectation that our run rate in Q2 would be at or below where it was in Q1.

Okay. Thank you, all.

You're welcome.

And we will take our next question from Jeff Beach with Stifel Nicolaus.

Yes, good morning, John and Gray.

Hi, Jeff.

Hello, Jeff Beach.

Yeah, back on the question of expanding a little bit on inventories, can you review what you see as the inventory in the channels, and then your own Belden inventories by some of these end markets? You hit a little bit of it going through your commentary. But could you do it in one kind of shot here? And then, you did reduce your inventories in the first quarter. Was there unabsorbed plant overhead from that action?

Well, Jeff, first of all, we do monitor the inventory situation as best as we can. And clearly, we have better visibility with certain partners and customers than we do with others. But I think what Gray said earlier is true. I think probably the most significant inventory correction we probably have experienced is within the consumer electronics vertical that is supplied by LTK. That's a very long supply chain. There's a lot of different partners between us and the end customer. And I think we saw a significant inventory reduction in LTK in the fourth quarter. I think we saw some of it in Q1. And it wouldn't surprise me if we saw some up-tick from that in the second quarter at LTK.

As we look at our Americas business, which is where most of our channel inventory sits, what we saw was that most of our distributors did in fact reduce their inventory from the fourth quarter to the first quarter. But on a turns basis, they're not taking enough inventory out to be normalized to where they were back in the third quarter. So if you look at their turns, Jeff, in Q3, and then you compare Q4 and Q1, although they're taking inventory out, they haven't been able to flex it with their sales quickly enough. So that's why, Jeff, we're still cautious about the fact that there could still be some inventory correction within the channel partners here in the second quarter.

With regard to your comment on unabsorbed cost, it's true whenever you have a reduction in inventory, you are in fact straining your manufacturing environment from a fixed cost absorption point of view. There's no question about it. And I think that the fact that we took inventory out in the first quarter probably did create a little more headwind on the gross margin line. And it's our expectation, Jeff, that we'll continue to focus on inventory reduction. And so, whether or not we'll be able to take as much out in Q2 as we did in Q1, I'm not sure. But it's clearly our expectation that our manufacturing team will absolutely continue to focus on inventory reduction in addition to achieving the cost reduction target that we identified for the second quarter.

All right, thanks. And just as a follow-up, could you expand a little bit more on what's occurring in terms of demand between your Gigabit enterprise and your Cat 5, and give us an idea where that shift is occurring right now and a little bit about the profitability? I assume Cat 6 Plus is doing much better.

Well, Jeff, we're still seeing -- although the trend has probably slowed a little bit because of the market environment -- we're still seeing our high-end bandwith products grow at a faster rate than we are in the lower end. Some of that's market. Some of that's us. In fact, we feel as though our share within the high end, more specifically 10 Gig, is going to create real advantages for us going forward, because it's a higher share than what we have in the category in total.

Our profitability in Enterprise was actually quite good in the first quarter in North America. And that was both in the Belden brand and in the Mohawk brand. So I'm pleased with actually how our Enterprise business performed in the first quarter. I think we've made really good progress on that.

And just an overriding statement, I think if you look at our financial results, I think you would agree that the performance that we delivered in the first quarter within our Americas segment is quite remarkable, given the revenue decline that they've experienced due to market conditions. And then part of that's cost control. Part of that is the team really made some meaningful share captures sequentially from Q4 to Q1. So we're really proud of how that team executed in the first quarter.

Right. Thanks a lot.

Thanks, Jeff.

And we will take our next question from Gary Farber with CL King.

Yeah, thank you. I just had a few questions on your cost structure. Can you give out what a -- for SG&A what is sort of the run rate, sort of a just an operating number exclusive of any kind of charges that go through there? And then on the gross profit or gross margin number, the $17 million adjustment, can you just discuss what exactly is in that number and the adjusted number?

Yeah. Hi, Gary.

Hey.

The narrative on SG&A I think was fairly descriptive. So we -- I'm going to just tie back to that narrative. Last year's first quarter was $87 million. That would've been a level of SG&A spending that would be normalized associated with our business activity. In the first quarter of 2009, we were at $67 million. And that includes the addition of Trapeze. So what you're seeing is a two-step phenomenon. Number one, we have restructured the business and removed systemic SG&A. Best example of that I think is just a merger between specialty and the Americas division, which eliminated a full layer of overhead structure associated with the management of one of our segments. There are many other examples like that where we took a systematic approach to remove resources and reconfigure our business to be more effective. That goes across all -- not just the administrative functions, but the sales functions as well.

Then there is an element of our spend that is "discretionary." The portion that's discretionary could be as simple as our travel expenses or as complicated as the model for outsourcing some of our functions, like the investor relations function, as an example, right to third parties, and then cutting back associated with those contracts. So given that we've got discretion around an element of our cost structure, and we have controls in place associated with those spendings, we were able to flex down our cost accordingly.

Now is that sustainable? No, I don't think so. And I don't think we'd want to sustain at $67 million. I think it's a great place to be right now that allows us to be able to generate a level of at least reasonable performance. But some level of discretionary spending will return into the business. However, the systemic piece, the reorganization piece, has been exited through restructuring.

The portion that'll return to the business, will it return this year or next year?

It could return whenever the demand and the volume is at a level where there's comfort that we can relax somewhat to get our work done in a more efficient or effective manner.

But in the current demand environment, it would -- is it a reasonable assumption to say that this is sort of the run rate of it, $67 million?

At this point in time, we feel pretty comfortable that keeping a focus on cost control is our best approach.

Yeah.

So the answer to that is yes.

I think that's right. If I could just add one thing to Gray's comments, it's important to recognize that there are still investments being made in our strategic priorities. Most notably in the global sales and marketing initiative that we have underway, we're still making year-over-year incremental investments in that program, because we believe that it's important to the long-term viability of the Company. We're also making them in our Lean Enterprise Initiative year over year, as well. The way we're funding that, however, is by taking aggressive cost reductions where we think it's appropriate so that we can continue to make investments in our strategic initiatives, but do so by being very vigilant on cost control, as Gray said.

So any up-tick in SG&A expense is absolutely directly in our control. And we will meter that very, very carefully. And I think you can take from the guidance that we gave in Q2 that we are not going to be a company that's going to bank on a miracle recovery for how we absorb a cost structure that we don't think is appropriate. So we'll watch it very carefully. And if we feel as though there are real signs of economic recovery, then we will make investments in a prudent way.

Right. And then just on the gross profit, what exactly is in that adjusted number?

There's 17 -- there's a $17 million adjustment to gross profit, which all relates to severance costs, most of which were incurred in Europe during the quarter associated with this next phase of restructuring. The restructuring was specifically focused on connector manufacturing efficiency. And the severance charges were significant associated with the actions that we took.

And there'll be more of those to run through gross profits during the course of the year? Or is that pretty much it?

No, that's pretty much it. It's a statutory reduction. And therefore, 100% of the amount that's due under severance is accounted for in the quarter of the decision making.

So is it fair to infer that the gross -- the adjusted gross margin is actually what you could sort of run the business at?

It's what the business was normalized at for the first quarter. It's not necessarily where we intend to run it. We'd like to expand margins even greater, Gary.

Right. But it's a reasonable starting point.

It's a starting point which I think you should utilize. Right? When you're thinking about our business, yes.

Right. And then just one last question on the cost restructuring, the $36 million in savings. Does that -- is that exclusive of the second round of restructuring announced like a week or so ago? Or that includes it?

That's inclusive of this last round of restructuring.

Okay. All right, thank you.

You're welcome.

And our next question comes from Keith Johnson with Morgan Keegan.

Good morning.

Hey, Keith.

Just a couple questions, maybe starting with copper. I know you've talked about inventories and the channel and that sort of thing. But copper had a lot of volatility I guess in the first quarter, starting at some very low levels and working its way up. Is there a way you could put some color around maybe, I guess, where you think or how you think the channel is reacting? I guess I've heard comments around price through the first quarter was fairly disciplined. You guys, I think, explained that comment earlier, particularly on the higher end. And then the other comments I've heard is that the channel and manufacturers are still dealing with some high-cost inventory of copper. Is that working its way off to the point that we may see, as we get over into Q2, the pricing dynamics start resetting to a lower copper environment again? Or how do you guys think about that?

Well, I think that it's not an easy thing to be able to predict. But let me try to characterize for you what we think is happening and what we think is likely to happen in the future. As you said, there was a significant decline in copper in the fourth quarter. And as we described our fourth quarter results, we were clear about the fact that our results were significantly effected by high-cost copper running through our income statement and lower prices in the fourth quarter in reaction to that lower copper rate.

I think in general, our channel partners have done a good job managing their inventories, managing their pricing as they purged some of the older, higher cost of copper. I think we've done a pretty good job of that as well. And clearly, in the first quarter we had a benefit sequentially from the fact that we didn't have a huge disconnect like we did in fourth quarter between our pricing policies and strategies and our costs on our income statement.

Going forward, I would expect that the environment would be more stable with respect to pricing, given the fact that copper has sort of modulated at around $2. You're right, it went all the way down to $1.40, $1.45 in Q1. It kind of ticked back up to $2. But from what we can tell anyway, it seems as though the pricing environment is fairly rational, that people are pricing based on their cost structure. They're pricing based on their strategic initiatives and the things that they want to accomplish. And it doesn't appear, anyway to us, as if that's going to change in any meaningful way.

Clearly, it's a very competitive market. Everybody is very aggressive on being able to take share if they can and maintain share wherever possible. But I think, as I said earlier, we feel really good about where we are right now. Because we took, I think, some very important and significant actions starting three years ago to create a cost position that we thought would be a sustainable advantage. And so, when we're going after business in an aggressive way, we're doing so at margins to give us an acceptable level of return. And so far, it seems as though other people are doing the same thing.

And then I guess maybe just real quick switching back to Europe. But could you I guess give a little bit more color? I'm trying to understand, when I look at the European segment, the importance of Germany maybe on a revenue basis. Is there some way to kind of quantify that a little bit? Because I know a lot of the comments you guys made were around Germany and Europe.

On a direct basis, I think within our AMEA segment, Germany probably represents somewhere between 60% to 70% of our revenue in AMEA.

Okay.

But then on an indirect basis, it's probably more than that. What I mean by that is, as Germany goes, the rest of Europe tends to go.

Right.

And so we've got direct exposure in our industrial Ethernet business, our industrial connector business, some of our cable business. And clearly, the health of Germany is an important factor on the health of continental Europe. And we think, as we said earlier, that that situation is going to be difficult for some period of time.

All right. Thanks a lot.

Thank you.

And our next question comes from Shawn Harrison with Longbow Research.

Hi. Good morning. This is Joe Wittine calling in for Shawn. We're trying to juggle between--

Hey, Joe. Welcome to the call.

Hey, thank you very much. Hey, most of my questions have been answered here. But I wanted to kind of drill into the revenue guidance a little bit further if I could. It looks like guidance is up 5% sequentially at the mid point of the range. And just kind of looking at it from a business-by-business standpoint -- I guess a geographic segment standpoint, I recognize you're not giving that level of detail. But can you tell me if I'm off base here? It sounds like, from the commentary you gave, that Europe's in for another sequential decline, potentially a decent one here. And then in the -- switching to the Americas, it sounds like we're out of the woods there and you get the potential for a seasonal up-tick, albeit maybe not as strong as you typically see during the quarter. And then Asia should be up a little bit as well, it seems like, as the inventory corrections have kind of cleared up. So again, I appreciate your not giving that level of guidance. But can you tell me if I'm off base on any of those comments?

I think qualitatively you're on target.

Okay.

I mean, clearly our business is performing better right now in Americas than Asia. And if we were going to see a seasonal up-tick sequentially, I think it's more likely to occur in those businesses. And as we had in our prepared comments, we think that the economy in Europe may still be decelerating. So qualitatively, I think you're on the mark.

Great, thanks. And then secondly, I wanted to follow up on the restructuring. You guys give really good, I guess quantitative guidance going forward of the savings you expect to roll on. So I was just kind of curious of the -- how we should model the split in those savings between the cost of goods sold and SG&A line?

It depends on what you want to launch, Joe, as your starting point on SG&A. And I think the comment that we made in the discussion we had with Gary Farber earlier is germane or is (inaudible). And therein I would put all of the incremental savings now going forward into cost of goods sold, and sort of run rate out the expectation around SG&A at the new low water mark that we just established in the first quarter, with some assumptions around discretionary modulation, if you will, associated with some recovery of volume that's consistent with the 5% or 10% range that we're suggesting. So I think the majority of it, if not all of it, should be margin expansion.

Terrific. That's very helpful. And then just one quick last one, if I could, from an NOL perspective. What's the outlook for potentially getting some of those benefits? I know it's a kind of tough--

Oh boy, what a great question. In the US it's fairly good, because the US business is doing quite well and we have significant position still in the US that we can enjoy. But in Europe, especially in the Netherlands and in Germany, where both legal entities have NOL positions, the latest round of restructuring does not help us associated with the release of our benefit. Right? So like last year we were able to do so on a routine basis earlier in the year because of the health of the European business. We're not seeing that opportunity so far this year. So right now we are not forecasting the release of any of our valuation reserves associated with those positions. Though, if we could do so, the sums are fairly significant.

What's the best tax rate to model going forward maybe?

Again, the 30.3 is our expected annual rate.

Okay. Thanks a lot, guys.

Sure.

And there are no further questions at this time. Please continue.

Thank you, Ben. And thank you very much for everybody's participation in this morning's call and your very good questions this morning.

If we didn't get to you, please give us a call this afternoon. Thanks again for joining us on the Belden earnings conference call. We sincerely appreciate your interest. And we'd be happy to entertain a call for follow-up questions.

This concludes our call. And thank you very much.

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