Belden Inc (BDC) 2009 Q2 法說會逐字稿

Welcome to this morning's Belden Inc. conference call. Just a reminder this conference is being recorded at this time you are in listen-only mode. Later we will conduct a question and answer session. (Operator Instructions)

I would now like to turn the call over to Mr. Gray Benoist of Belden, Chief Financial Officer. Please go ahead.

Thank you. Hello. Good morning everyone. My name is Gray Benoist and I am the CFO of Belden. Thank you for joining us today for our second quarter 2009 earnings conference call at Belden. Joining me on the call today here in St. Louis is John Stroup, President and Chief Executive Officer 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 will find it there.

If you will turn to slide two 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 managements 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 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 lines for questions. So at this time let's turn to our President and CEO, John Stroup, John?

Thank you, Gray, good morning everyone. Turn please to slide three. Given the continued challenging economic atmosphere we are pleased with our results from the second quarter which were highlighted by our strong cash flow and ability to generate on an adjusted basis 8.5% operating margins and 11% operating margins excluding our wireless segment. This level of profitability is consistent with our average performance in 2008. These achievements in combination with our strong cash position and solid balance sheet provide an excellent foundation that continues to enhance our competitive position in our various markets.

During the first half of 2009 we were focused on increasing operating margins through the execution of our announced restructuring initiatives of December 2008 and March 2009. Our second quarter results benefited from these programs and we are currently one full quarter ahead of our stated objective to achieve $36 million in cost savings for 2009. Given these favorable results we are increasing our full year cost savings estimates related to these programs from $36 million to $38 million. These savings include our recently announced decision to cease production at one of our Leominster, Massachusetts facilities, the final element of our December 2008 global restructuring program.

Revenues in the quarter of $345 million grew 5% sequentially as we continued to see the improvements in organic growth through share capture programs directly attributable to our efforts in both improving the effectiveness of our channel programs and increasing our resources on global accounts. We clearly saw new business wins from our global sales and marketing focus this quarter. However, from a macroeconomic perspective the environment remains challenging and our visibility in the future is murky. Although some macro indicators that we follow have shown improvement most are still at or near historic lows and indicate that the U.S. and European manufacturing is still contracting albeit at a slower rate. The most recent PMI and AVI figures both remain below 50, 44.8 and 37.7 respectively.

Interestingly the Institute for Supply Management noted that aggressive inventory reductions have continued and they believe this is an indication that destocking activity is at or near the end of its cycle in most manufacturing industries. Conversations with our largest channel partners and OEMs suggest that their inventory reduction activities are somewhere between 80 and 90% complete. And therefore we expect to see reduced destocking activity in the third quarter.

Let's spend a few moments discussing the performance of our individual segments. During our first quarter earnings call I indicated that our European business was not meeting expectations and as a result I assume leadership of this segment and worked with the European team to implement additional restructuring activities as a means to get this segment back on track. As a part of those initiatives we restructured the sales team and realigned manufacturing by relocating a portion of our connector manufacturing capacity in Germany to other facilities in Eastern Europe. We also improved our product portfolio in the second quarter with the divestiture of HEW. The German based HEW business primarily manufactured cable for onboard automotive applications, a vertical segment that has tremendous cyclicality and customer concentration. As such we put in motion and executed during the quarter the sale of the business through an amicable management led buyout while retaining valuable real and intellectual property.

On a sequential basis Europe increased operating profits approximately 180% and expanded operating margins by 460 basis points. I am confident that the segment will be able to achieve double-digit operating margins by the end of 2009. Although the European team has made quick and substantial progress I do not intend to lead this segment indefinitely. We are currently conducting the search for a permanent replacement but until the candidate with the right set of experiences and capabilities surfaces I am taking this opportunity to ensure that the complex European business, the home of our world clash Hirschmann industrial ethernet product line and the leading industrial connectivity brand Lumberg is properly aligned and the foundation built to deliver on both our strategic goals and our daily tactical execution.

To expand on the Hirschmann industrial ethernet product group the global business performed exceptionally well with revenues expanding over 10% sequentially after adjusting for currency. Despite the challenging environment facing so many industrial markets. Additionally through our global accounts program, new brand label opportunities for industrial ethernet are emerging or have been finalized which will improve our organic growth prospects in the future as we participate in channels and applications not currently served by our existing channels and direct sales efforts.

Our industrial connector business reported improved results while our European wire and cable business reported significant improvement in operating margins sequentially, outperforming its key competitors. While these performances are a results of the restructuring efforts, improved go to market programs and lean thinking the European segment has not yet reached its full potential.

Within our Asia Pacific segment we have made significant progress in our efforts to expands the Belden brand locally. Second quarter sales grew 25% sequentially while doubling our localization of branded product. Together this resulted in 150 basis points sequential improvement in Asia's operating margins. Although our legacy Belden branded business is performing well and we are seeing signs of economic improvement in China and Southeast Asia the consumer electronics market has continued to underperform. The global economic situation has had a negative impact on the purchase of higher end consumer electronics which in turn has adversely impacted the demand for specialized cable. As a result our LTK business is dealing with lower volumes and unfavorable mix in a highly competitive pricing victim. Several quarters of continued business pressure may be experienced in our LTK business. However, the Asia team has taken the necessary action to say maintain an acceptable level of profitability despite these headwinds.

The results within our wireless segment were mixed again this quarter as organic sales growth in Trapeze branded products was offset by a poor portion in our brand label business. According to the most recent Gartner dataquest report Trapeze Networks increased its market share by more than 30% on Trapeze branded products during the first quarter of 2009. We saw a continuation of this trends through the quarter and expect Trapeze will report additional growth for the third quarter. Although our Trapeze branded products division has demonstrated continued success our brand label business which has been affected by the global economic downturn and the financial difficulties of our largest customer Nortel has underperformed. While we did not envision these two events when we purchased Trapeze we are actively managing their impact on this segment and taking the appropriate steps to improve the operating results. As we discussed last quarter one of our goals is to improve Trapeze's commercial productivity so that it meets our corporate average.

During the second quarter Trapeze's commercial productivity improved 10% while meaningful it is insufficient to generate the desired results. This is an important goal for us as we use commercial productivity as one of our primary metrics of business health and for Trapeze it is a fundamental element for profitability. The level of margin expansion demonstrated by the Belden America segment during the second quarter would be considered very solid under normal circumstances but it's even more outstanding given the difficult market environment in which they are operating. Second quarter external revenues were up 2.5% sequentially. However, operating income increased nearly 30%. We were able to achieve these results through our restructuring initiatives, commitment to lean principals and implementation of lean daily management processes across a greater number of our manufacturing cells in this segment.

To get a little more granular our manufacturing cells are designed to material pull principal, keyed to customer orders and no longer billed to go a stock location. This process helps to limit the amount of finished goods inventory and as a result inventory turns improved nearly one turn sequentially on a quick turn basis while we maintained our high level of customer service. In addition to the ongoing evolution of our lean processes our go to market strategy yielded positive results as we closed business with a number of global accounts, expanded our U.S. and Canadian market share through our channel partner programs and improved both our enterprise and industrial quoting and lead generation processes.

Gray is going to talk about the balance sheet in much greater detail in a few moments but I wanted to highlight that during the second quarter we generated $48 million in free cash flow and ended the quarter with a cash balance of $275 million. Additionally. during the quarter we announced $200 million in new senior subordinated debt at a yield of 9.75%. To put this into proper context when compared to the other North American financing deals that were completed in June and early July, only eight were priced in the single digits and none were inside 9%. Of the eight others that priced in the single digits three were senior secured notes and five were senior notes. Belden was the only Company to price a senior subordinated note in the single-digit range. The new note combined with our 2007 offering has provided us with $550 million in capital at a blended average time to maturity of nine years and at a blended interest rate of 8%.

The new financing combined with our proven ability to generate cash even under difficult economic conditions provides us with sufficient liquidity to opportunistically acquire small bolt on cable and connector companies that are consistent with our long-term strategic plan and our are very near term accretive. We believe that opportunities of this nature exist and that we are well-positioned to take advantage of them.

Before I turn the call over to Gray it should be noted that our success would not have been possible without the patience and hard work from all our associates worldwide. All restructurings are difficult as they involve realigned responsibilities and organizational change. But the determination and dedication of our associates throughout this process has allowed to us deliver results both earlier and better than originally expected. And we sincerely appreciate their efforts. 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. Good morning again everyone. I'll begin my comments with a discussion of the GAAP results for the quarter. I will then discuss our consolidated results of operations for the quarter which will include an update on our capital structure and the impact of the new senior subordinated notes offering. Then I will walk through segment results, cash flow, working capital and asset management, and close my remarks with comments about our global restructuring initiative and cost saving measures. In the second quarter GAAP revenue was $344 million, and the Company reported a net loss of $0.10 per diluted share. We incurred restructuring charges of $24.9 million pretax in the quarter as we continued the implementation of our global restructuring actions. $17.7 million of this charge is related to the additional restructuring actions taken in Europe that we announced during the first quarter. These actions were in addition to those announced in the December 2008 restructuring plan.

Additionally charges associated with the recent announcement of the closure of one of our Leominster, Massachusetts manufacturing facilities will be reflected in our third quarter and subsequent reporting. I will review the restructuring plans and status in greater detail in a few moments.

I would like to focus the remainder of my comments on the 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.

As we continue on slide three, please. Consolidated revenue in the second quarter was $345 million, a year over year decline of 38%. Year over year organic revenue declined 35.6% after adjusting for acquisitions, divestitures and $19 million of unfavorable currency translation. Sequentially revenues grew by 4.9% but were impacted by currency translation and divestitures resulting in organic sequential revenue growth of 3.6%.

Turning to slide four for a breakdown of our revenues within the quarter. The geographic mix of revenue is shown on the left. Revenue in the United States was 43%, Canada 9%, Europe 23%, and Asia 19%. Revenues were down in the U.S. on a sequential basis. However, overall North American sales advanced as the Canadian market delivered strong results through the Americas team focus on strategic channel management programs specific to the Canadian industrial vertical. Modest market recovery in China resulted in our Asia market sales increasing nearly 20% from the first quarter, propelling our geographic contribution in Asia to 19% of total sales.

The pie chart on the top depicts revenue by vertical market, the enterprise vertical which includes our wireless segment dropped slight to 32% of our overall revenue relatively unchanged from 33% of revenue last quarter and up from 27% a year ago. The industrial market grew to 46% of our business in the second quarter, up from 45% in the previous quarter as we experienced share gains from our strategic channel management programs. Our other served verticals remain unchanged from the previous quarter with video sound and security at 12%, consumer OEM at 6%, and transportation and defense at 4%. As noted in the previous quarter we continued to see both transportation of defense and consumer OEM markets decline more rapidly than the market in general. Our sales to automotive OEMs were down 73% year on year and sales by LTK to our consumer OEMs were down 48%.

I'd like to have you return to slide three, please. Gross profit margin was 33.1% in the second quarter, a sequential expansion of 200 basis points and a 280 basis points increase in the second quarter of 2008. Gross profit margins were assisted by a non-recurring benefit from first quarter copper purchases of about 80 basis points. However, even after adjusting for this benefit the second quarter gross profit percent is the highest in our recent history. These outstanding results were delivered through cross management and the expanding benefits of the global restructuring plan, and improved results were delivered in each of our operating segments. SG&A expenses in the second quarter were $67 million or 19.4% of revenue which is a decrease as a percent of sales of 110 basis points sequentially compared to $67 million in the first quarter. But an increase of 390 basis points year over year from the $86 million spend in the second quarter of 2008.

Excluding the results of our wireless segment SG&A expenses were $61 million or 18.3% of revenue in the quarter, a decrease of 80 basis points from the first quarter of 2009, and an increase in percent of sales of 280 basis points from the prior year period. Currency translation had a favorable impact of about $4 million year over year. Excluding acquisitions, divestitures and this translation impact, SG&A was $20 million lower year over year. This is a reduction of about 25%. Effective cost management across all of our businesses and functions continues to be an area of focus which allows the Company to prioritize investments in R&D in both Trapeze and Hirschmann industrial ethernet products and increasing resources and investments in global sales and marketing programs. While the broad view of the market continues to be uncertain we still see clear evidence of share gains with Belden cable products and the Trapeze branded wireless LAN family of products through these initiatives.

With respect to investments in R&D, second quarter expense was $14 million or 4.1% of revenue. Excluding the results of the wireless segment R&D expenses were $9 million compared with $9 million in the first quarter and $10 million a year ago.

I can have you turn to slides five, six and seven, we have supporting information on our long-term debt and our debt covenants. At the end of the second quarter we had $590 million outstanding debt, $240 million bearing interest at 3.2% under our revolving credit facility and $350 million of senior subordinated notes at 7% interest rate. The remaining availability under our revolving credit facility was $101 million, interest expense in the second quarter was $9 million, and our interest coverage ratio was 4.8 times. The Company's debt to EBITDA leverage ratio at the end of the second quarter was 3.11 compared to 2.66 from the prior quarter.

On the first day of the third quarter we completed the issuance of $200 million in senior subordinated notes offering due 2019 with a coupon interest rate of 9.25% and an effective interest rate of 9.75. Net proceeds were used to repay amounts drawn under our revolving credit facility. At this time we also amended and extended our revolving credit facility. The term of the facility was extended by two years to January 2013 and the size of the facility was reduced to $250 million currently and will be reduced again to $230 million in January 2011.

After the new debt issuance we have $590 million of total debt outstanding consistent of $544 million in senior, net senior subordinated notes at a blended interest rate of about 8% and $46 million drawn under the revolving credit facility. Liquidity availability of the revolving credit facility has increased from $101 million to $194 million. Income tax expense was $5.4 million in the adjusted results, or 25.2% of pretax income for the quarter. The effective tax rate on our year to date adjusted results was 26.9%. We continue to expect our full year outlook for effective tax rate to be in the 30% range which includes the anticipated impact of recording certain valuation allowances. Adjusted net income for the second quarter was $15.8 million adjusted earnings per diluted share were $0.34.

If I could have you turn to slide eight, please, we will discuss segment results. External revenue of the Belden America segment was $186.7 million, affiliate sales were $10.9 million, including affiliate sales total revenue of Belden Americas increased 3.9% sequentially but declined 33.1% year over year. Adjusted operating income for Belden America was $38.2 million, or 19.3%, a sequential increase of 370 basis points. As John mentioned our focus on maintaining strong cost controls coupled with share gains in several desirable market segments resulted in a segment posting results in the high-end of any quarterly operating margins on record.

The EMEA segments external revenue was $86 million in the second quarter, a 2.1% decline sequentially and a 49.8% decline year over year. Operating income of the EMEA segment was $7.1 million or 7.1% of total revenue, compared with $2.5 million or 2.5% of revenue in the first quarter of 2009. And $25 million or 12.8% of revenue from the second quarter 2008. The Asia Pac segment had second quarter external revenues of $58 million, an increase of 24.6% sequentially but a decline of 45.7% from last year, due in large part to the weak consumer electronics vertical. As discussed earlier, the LTK business continues to experience significant headwinds within its consumer electronics space. However, LTKs efforts to expands local manufacturing the Belden brands has yielded positive results and this can be seen in the segments operating income of $7.4 million or 12.8% of revenue of 150 basis points sequentially but down 210 basis points from prior year.

In our wireless segment we continue to ensure the transparency of results especially given the complexities associated with the GAAP requirements to recognize revenue associated with vendor specific objective evidence and as such we continue to identify the deferred revenue impact within our financial statements. Deferred revenue increased $831,000, while deferred cost of sales had an increase of $193,000 in the second quarter. The net benefit to cash flow and the corresponding deferral of gross profit for GAAP is equal to $638,000. This is the net impact to our GAAP results in the second quarter related to Trapeze revenue recognition. This translates to a negative impact to our reported GAAP results of $0.01 a share in the quarter related to VSOE. The wireless segment had adjusted revenues of $14 million and adjusted operating loss of $7 million in the second quarter.

If we could turn to slide nine. The Company had $275 million in cash at the end of the second quarter, $183 million is in depository accounts that are used in the day-to-day operations of the business, and $92 million is in short term investment accounts primarily invested in government issues. Free cash flow in the second quarter was $48 million, comprised of nine operating cash flow of $56.7 million less capital expenditures of $8.8 million. This marks our tenth consecutive quarter of positive operating cash flow. Depreciation and amortization was $13.6 million in the quarter.

I'd like to have you now turn to slide ten. Inventory turns in the second quarter were 6.1, up sequentially compared to 5.4 turns in the first quarter and slightly higher than the 6 turns we experienced in the second quarter of 2008. Absolute inventory levels decreased $26 billion sequentially. Working capital turns of 7.3 this quarter not only represents a 1.4 turn improvement sequentially and a 1.6 turn improvement year over year but they are also at the highest level in recent Company history. We continue to stress the fundamentals of lean and the results in the second quarter will help us deliver on the commitment to a one turn improvement in working capital in 2009.

Property, plant and equipment turns were 4.6 turns higher than the 4.4 turns in the first quarter but lower than the 6.8 turns in the year ago period. We expect the capital and the real estate markets to remain soft throughout 2009 but remain opportunistic to balance our 2009 capital budget expenditures with asset light activities, minimizing any increase in fixed asset investments of the Company.

A summary of our restructuring activities is on slide 11. With the inclusion of our recently announced actions at one of our Leominster, Massachusetts facilities, we have identified all of the restructuring actions we formulated in our December 2008 plan. During the first quarter call we forecasted second quarter cost reduction benefits of $8 million. We are pleased to have exceeded this forecast by an additional $2 million bringing our quarter results to $10 million in savings. These savings 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 $36 million previously to $38 million with a forecast of $10 million and $12 million for the third quarter and fourth quarter savings respectively.

Lastly, on May 19, 2009, the Board of Directors of the Company unanimously approved a reduction in annual compensation for each Independent Director for the remainder of 2009 by $20,000. This reduction follows the Board's earlier decision in February to defer an increase in Director compensation that the Compensation Committees independent compensation consultant had recommended to assure that competitive compensation was in place. In each case our Board wanted to demonstrate in response to the unprecedented global economic conditions their solidarity with management. Company associates and shareholders have experienced salary freezes, staff reductions and a lower stock price. At this time I would like to turn it back to our CEO, John Stroup for a few remarks about our outlook. John.

Thank you, Gray. Now if you could please turn to slide 12. We are encouraged by our performance in the second quarter but are maintaining a realistic view for the third quarter. We expect seasonality factors in both our Belden Americas and European businesses to be more pronounced than typical due to extended shutdowns at our customers as they continue to focus their efforts on cost and inventory reduction. Because of our global go to market initiative we expect to offset most of the seasonality with revenue from share capture programs. Guiding our revenue outlook to be largely unchanged from the second quarter.

In Asia, we expect that our localization efforts will continue to drive share growth and improve overall topline results but that LTK will continue to face pressure as we do not anticipate a significant improvement in the high-end consumer electronics in the near future. Given the general level of economic uncertainty we will continue to provide guidance on a quarter by quarter basis. For the third quarter of 2009 we expect adjusted revenue and diluted earnings per share to be in a range of $335 million and $345 million, and $0.20 and $0.25 respectively. This guidance is consistent with our second quarter guidance after taking into consideration the incremental quarterly interest expense of $0.05 a share. Finally, we are committed to maintaining our current level of cash flow generation and expect free cash flow generation in the third quarter to be in excess of net income.

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 will remind you of the procedures for asking your questions.

(Operator Instructions) Your first question is from Shawn Harrison with Longbow Research. Please go ahead.

Hi, good morning. Just following up on the last commentary regarding guidance, the incremental margins here to maybe a slight downside seasonally in the Americas region as well as EMEA seem very large. It historically hasn't been that way but to kind of get to the implied EPS guidance suggests significant negative operating leverage here in the short term. Maybe if you could speak to a little bit about how we get to the lower EBIT margin or lower EBIT dollars sequentially to roll into the guidance?

Yes, Shawn, as Gray mentioned in his remarks our Q2 did benefit slightly from the non-recurring benefit of lower copper cost in our income statement as copper increased in the quarter. So as you compare sequentially from Q2 to Q3 you've got about a $2 million benefit in Q2. In the third quarter we are expecting that the shut down in Americas and in Europe of some of our larger customers is going to be more significant than what we have typically seen. We've heard from a number of customers that they are going to extend their shut down period. In Europe as you probably know, August tends to be a very light month, in Southern Europe, it's almost nonexistent, in Northern Europe it's a little less intense. A lot of our customers have said they are going to take their two-week shut down to three or four weeks. We are hearing the same thing in the United States and particularly anything related to automotive. We are expecting that the third quarter is going to be a more pronounced seasonality that as you say is typically not the case. I think if you take into consideration that $2 million that was in our Q2 results is non-recurring on the effect of our FIFO accounting, and the fact that we are going to see a little bit more seasonality in Q3, I think the margin is a little bit easier to get to. As you said the fact that it's predominantly in the United States and Europe is going to have a blended margin impact of probably around 40% on the variable margin.

Okay. And I guess the follow-up question to that would be not liking for December quarter guidance but in terms of if you see a snap back to more normalized production rates, the incremental margins to the upside should be very similar as well?

Yes, they should. The actions that we've taken here over the last six months are fundamental and they are meaningful. And as we experience higher volumes through an economic recovery, we are going to see similar leverage as we talked about before. And we are well prepared for that. We've got plenty of capacity. We are well-positioned to take advantage of any upturn. As I mentioned earlier, we are very focused on making our own luck through good investments in our strategic share capture programs. We are well-positioned for it. But we remain a little bit cautious, Shawn, as it relates to the macro environment.

Then two quick follow-ups, do you believe the inventory destocking actions by your distributors will be complete by the December quarter? And then second, with a 30% tax rate for the full year does that imply a significant higher tax rate than 30% for the third and fourth quarters of 2009?

Let me take the first one, I will let Gray take the question on tax. As relates to the inventory destocking at our channel partners what I mentioned in my prepared remarks is we think through the second quarter we are probably about 80% complete and it's hard to predict whether or not they will be completely done at the end of the third quarter. But I think it's reasonable to expect that by the end of this year it will be behind us.

Then with respect to the tax rate, Shawn, that's true, yes, the higher effective rate in the second half to average out at the 30% is practical. The issue of course is the level of losses that we run at some of our subsidiaries associated with the restructuring and whether those losses can be tax effective and whether or not we will have to put up some evaluation allowances associated with the NOL, the non-cash related activity. However, for the effective tax rate we would have to forego the deferred tack benefit that would be associated with posting those losses in certain jurisdictions.

So maybe in aggregate 35% tax rate would be appropriate?

Something like that. We will take it and give you more precision as we move through the analytics with you later today.

Got you. Thank you very much.

Thank you.

And your next question comes from Jeff Beach with Stifel Nicolaus. Please go ahead.

Yes, good morning. Congratulations on a good quarter.

Thank you, Jeff.

Thank you, Jeff.

A couple of questions. First, the HEW that you just sold, can you give us an idea of the annual sales and profitability? Because I assume it's not in the third quarter at all.

Yes, Jeff, it's not. The revenue in the second quarter was--.

A little under $10 million.

About $10 million. And that, Jeff, was up substantially from where they were a year ago because as we mentioned the majority of their revenue is to automotive tier one and tier two. So they saw a significant decline in revenue year over year. Profitability in the second quarter I think we had two full months.

Was about 4%.

Yes, about 4% on that $10 million in revenue, Jeff, in Q2. And as we mentioned before, we were happy to make that move and no longer have it be part of our portfolio.

Okay. Second, you've commented on inventories as I understand it of your customers in the market, in North America and Europe. What about the inventory levels of your channel partners?

Well, we watch the inventory of our channel partners very closely, Jeff, and we saw further inventory reduction at our channel partners in the second quarter. And based on our calculations we think that most of our channel partners are probably about 80% in aggregate completed with their channel reduction activities for this new current level of demand. And if this current level of demand is to continue, we think that this remaining 20% would be completed over the next six months. And I would imagine that most of it would be completed in the next three months.

I apologize, I read that for your customers, not your channel partners. The last thing, could you provide some commentary on sales trends of some of the product lines specifically? I don't remember, I was taking notes, you were commenting on enterprise in North America and Europe and electronic in North America and Europe. I would be interested in some commentary on that.

Sure, well, since you asked, our enterprise business globally was up sequentially about 3%. And the products that we focus most of our attention in, which is the high bandwidth products, those product lines were actually up more than 3%. They were up somewhere around 5 to 6%. On a blended basis those products were up 3% globally. Our wireless business was up sequentially and year over year on the Trapeze branded products. So that business continues to grow and do well from a revenue point of view. Our industrial ethernet business was up sequentially, double digits sequentially in that business, so that was strong. And our industrial businesses especially North America was about flat, maybe down a little bit sequentially. And as Gray mentioned from a geographic point of view we saw good growth sequentially in Asia with our Belden brand of products but we continued to see significant headwinds on the consumer electronics business with the LTK brand. We did have a number of strategic product portfolios that did quite well from a revenue point of view sequentially and we have some that still are facing some economic headwinds.

Last question, cross your entire product lines globally, is there any particular areas where you are seeing I'll call it destructive price competition?

I would say that the pricing environment across all product lines and across all geographies is competitive but not in any way destructive, it's competitive. Every big order is being chased very aggressively by all people in the segment. And I think that as you might expect customers are taking advantage of the opportunity to make certain that they make really good decisions. And I think that we've taken the appropriate actions to first and foremost make certain we've got the right commercial resources and programs. We are leveraging our cost structure, Jeff, to our advantage. What I mean by that is there's no question that over the last three years there is nobody in our category that has been as proactive in really addressing cost particularly from a manufacturing point of view than Belden has and we are absolutely using that to our advantage and our team is being smart about how to leverage that cost structure to take share. But as it relates to pricing that would be difficult to understand or seem economically inappropriate I would say we've not seen that.

Thank you.

You're welcome.

Our next question comes from Matt McCall with BB&T Capital Markets. Please go ahead.

Thank you, ma'am, good morning.

Good morning.

Hey, Matt.

I think, Gray, you talked about $17.7 million of restructuring costs in Europe and I think one of the comments you said it was in addition to the plan. Just want to do understand make sure I've got all the benefits lined up. You helped us with the timing for the rest of the year. Is the incremental $2 million related to that in addition to the plan? Those actions? Or just help me understand what the additional $2 million was. And then as we look out into fiscal year '10 what does the, what's left from a cost savings standpoint based on what you've announced?

Thanks, Matt, let me try to summarize. There was two plans. There was a plan that was announced in December associated with the first phase of our restructuring. Then there was a second plan that we announced in March that was totally tailored towards the European marketplace. So there was really two plans. When we blend those plans together the savings associated with those plans as related to the $36 million, now $38 million with the 2009 savings.

The $17.7 million that was reflected in the second quarter really had to do with the impairments associated with HEW. So HEWs sale per se not necessarily related to the plans, we can think about it as independent of the plans, but the significant event in the second quarter was the impairment of those assets. We've continued to pledge at the run rate $60 million worth of annualized savings associated with the December plus the March plans. That said our quarterly run rate should reach $15 million at some juncture in 2010. Our exit rate that we are currently forecasting for the fourth quarter is $12 million. So you can see that 2010 has a potential or a hopeful or realistic benefit yet to be realized.

Then at some point are you talking, it should be a first half run rate, you should get that $15 million in first half?

It's really related to the Leominster announcement that we just made and I would say that the benefits associated with that are significant but they are protracted. The potential impact in the first half I think is unlikely but potential impact in the second half very likely.

Got it. Okay. And let's see, you've provided some detail into the differing, the different trends at LTK versus the Belden product in Asia. How big are each or were each in the quarter? I think you said $58 million. How much of that was the Belden product?

Of the growth rate, the Belden product grew about 30% in the quarter.

Grew 30% and what is it on a dollar basis?

Well, we don't breakdown below the segment level.

That's fine. And you helped us a little on copper, John, $2 million benefit in the quarter. The copper trends are similar so what am I missing? So we are seeing a consistent move up in copper this quarter from an accounting standpoint I'm missing something. It sounds like you should still see some price cost benefit in Q3 as well?

Well, Matt, remember in the second quarter we had the benefit of much lower cost copper that was purchased in the first quarter. So if you look at, if you look at a run short on copper prices I think what you will see is the difference between the acceleration or the rate, the slope of the copper from Q1 to Q2 is a lot more dramatic.

Okay, okay, so it's, so that entire $2 million benefit should go away or it will be less?

The way to look at it, Matt, this is Gray, is that in the months of February and March which is I will say the underlying copper rate, the effective the second quarter because of FIFO, our average purchase prices were around $1.90. And as we exited here in the fourth quarter for the May and June copper it was closer to $2.30. So the third quarter will have higher cost of goods sold associated with copper and you need to have the pricing and techniques in place associated with managing it which we do. But for the second quarter those two ending month purchases, February, March of lower benefited rates really were helpful in the second quarter as a one time benefit.

Got you. All right, then, sounds like the destocking commentary, correct me if I'm wrong was focused on some of the distribution partner channels. Gray, I think we spoke last quarter about some pretty aggressive destocking with LTKs customers and John, I know you talked about the continued weakness there, but is it still destocking? Is there still aggressive destocking going on there? Are you seeing any stabilization in that part of the business?

Matt, the math is pristine. But the length of the supply chain is incredibly long on the outbuying sections of the LTK business model. That being said we are hopeful that we will see by the fourth quarter a return to some normalized level of output at LTK. However, for the third quarter we are not currently guiding or anticipating that the destocking has concluded in the consumer electronics space for LTK.

Okay. Thank you. Last one and I'll hop off, the R&D assumption in your guidance we pulled it back to the $14 million level this quarter. What's the expectation going forward?

It will be about $14 million for Q3 and Q4 as well. Depending on the timing associated with the projects that get launched or concluded within the quarter. But the variations will be within a very narrow range.

Okay. Thank you, guys.

And our next question comes from Kevin Sarsany with Legends.

Hey, guys, hey, Gray, is that your car in the background honking?

Hey, Kevin.

How are you. Could you quickly tell me what the revenue and profits were for HEW?

Yes, I think what we said, Kevin, is for the second quarter revenue was around $10 million and operating profit was around 4%. That was for two months.

And the operating profit was what? I missed that.

4%.

All right. Now going back to the guidance, I guess one thing that still isn't perfectly clear but that's probably more me than you. It doesn't sound like you are expecting any incremental savings from the restructuring. Does that mean that the Hirschmann and Lumberg transfer has already hit and you are already seeing that in your numbers?

Well, the, you're right, the third quarter estimate of savings is identical to the savings in Q2 at $10 million. That's true. There are some things yet to be completed in Europe and some of those will have some benefit in the third quarter compared to the second quarter. But there is some timing of savings that we got in the second quarter that we think might offset that to some amount. In aggregate at this point we think the savings are going to be similar from Q2 to Q3 but there are some movement in the various pieces.

Sounds like the copper is going to go away but why wouldn't mix help you? When I look at your businesses, Asia, higher margin, North America seems to be doing okay if not better and then Europe continues to look pretty ugly but they are the lowest margin. Why wouldn't that help you on the margin?

Well, sequentially I think that the revenue mix from Q2 to Q3 is not going to be a lot different. What we are thinking is that the shut down at some of our customers in the United States is going to be a little bit more pronounced than typical. Same is true in Europe. Obviously our Americas business does have higher margins than our European business has. However, it's our expectation to narrow that gap, Kevin, as you know. We've been working hard to do that and I think we made good progress in the second quarter. But I would say that our expectation is that the revenue in the third quarter will be substantially similar to the second both in terms of total revenue as well as the mix.

Okay. And I guess the last comment is or question is, on your new business sounds like you are doing well, market share gains, good for you, what is the profit profile on that new business similar to your corporate average or could you comment on that?

Yes, I think it, it's probably very representative of the product categories that we are taking the share in. So, for example, on the new wins that we have in our industrial ethernet business these are much higher margins and are consistent with the business in total. On some of the industrial cable business where we are taking share that typically comes at lower margins. But, Kevin, remember that when we win a major industrial project that's going to turn into higher margin MRO business five, six, seven years from now. So the new business I would not say is coming at lower margin. It's really a matter of the blend or the mix of the product categories that we get the business in.

My last one I think I already said last one but this is my last one, wireless profits, can you comment on how you see that trending going forward, just is there any leverage you can pull to improve that? It just kind of seems like it has improved but I think you probably are in the same camp would like to see it get a little better.

Absolutely. We are not at all pleased with the level of performs out of our wireless business in the second quarter. It was our expectation when we acquired the business one year ago that we would be further along. Our issue of course is we didn't expect that our revenue with our brand label customers would be off so substantially, nearly 50% year over year. And that's made for a much more difficult challenge than any of us expected. Needless to say, there are more, and there is more that we need to do in that business in terms of making it more profitable. And we have plans for the third quarter that we will be executing to improve our commercial productivity and I think you are going to be hearing more from us throughout the quarter on what we will be doing there.

Okay. Thank you.

Thank you.

Our final question comes from [Lee Reading], Wells Fargo Securities. Please go ahead.

Hi, guys.

Hello, Lee.

I want to follow up on a few of those. On the savings side to confirm I think you said this in the past, the savings that you have marked up is coming through the gross margin area, right?

It's split about 50/50, Lee. So our historical improvement for the $10 million is about half in SG&A and half in cost of goods sold. On a going forward basis however for the remainder of the incremental $5 million that we will see when we accomplish run rate savings almost exclusively will be benefited to gross profit margin expansion.

Right, that's what I was referring to. Then on the adjustments, I got most of the adjustments on the back table that you had here but the 5.6 running through gross profit what was that attributed to? $5.6 million from when you adjust the gross margin here from getting 31% to 33% and when I look at the footnote it refers to it as other costs and I was just kind of wondering if you had more detail on what that $5.6 million was?

I'm pretty sure that that's the severance cost associated with the closure of our European facilities into cost of goods sold. I think most of them will be in [Shocks Mueller] which we associated in the first quarter and now the cost associated with that severance as the employees are removed from payroll, shows up in our second quarter adjustments.

Okay. Great. Then I guess the seasonality, you talk about the seasonality I guess weakening up here in Q3 because of the shutdowns and I guess also a little bit of channel destocking effect. Not looking for a particular number and I know you are not going to give it for Q4 but can you talk a little bit about the seasonality when you look forward from Q3 to Q4? It seems like you might not have the same shut down and you might be benefiting from destocking that's already happened today at that point?

I think that's true. I think what we typically see is natural seasonality in the third quarter in our European business. That's a very typical thing that we see and we are expecting that it's going to be a little bit worse this year than normal and we think there might be some in our Americas business this year that we don't typically see. And I think your point is correct that all other things being equal we would expect to see some improvement from Q3 to Q4 based on seasonality as well as some improvement on the ceasing of the inventory reductions at our channel partners.

And then last question here is just on divestitures and M&A in general. You talk about doing -- or there's potential for small bolt on out there accretive and so forth, just kind of looking at how you are evaluating that at this point? Is there something that you think is near term or is it more just as opportunities arise and then also in the divestiture side with the recent one are there other potential asset sales?

Well, we run an acquisition funnel process all the time and we work very hard to make certain that we are cultivating what we consider to be good opportunities all the time. And it's difficult to predict with any accuracy whether or not something would in fact happen in the near term. I would say this. As sellers begin to become more reasonable and realistic with regard to valuation and as we look at businesses that we think would be a really good fit to our business we feel really good about where we are right now to act on those. We've got a great balance sheet. We've got strong cash position. And I think most importantly we have the management team that is no longer distracted by the efforts of a restructuring because we got after it early. So if those opportunities present themselves you'll see us move quickly.

And then I guess anything on that potential divestiture of any other assets that you might need to sell out there?

I don't think there's anything that comes to minds. I think we like our portfolio. The fact that HEW is so concentrated in onboard automotive was obviously something that was not a good fit for us. But I think as you look across our portfolio we are happy with where we are.

Thanks very much, guys.

Thank you.

Mr. Benoist and Mr. Stroup it looks like we do have several more questions. Our next one comes from Nat Kellogg with Next Generation Equity Research.

Thanks for taking my call. Gray, just, I know I asked this but just curious about whether you guys are still on track to achieve VSOE by the end of the year, is that still the plan and is that still on target?

It's still the plan of record. There's been lots of additional conversations within the FASB associated with rev rec, the latest one is EITF 08-1 which has a very high probability of being enacted in September. If that is the case, VSOE requirements on the way we've currently configured Trapeze and the requirements of VSOE under 97.2 will be relaxed and we will be able to recognize revenue associated with EITF 08-1. We will see if that indeed does come to pass in December. I think there is a very high probability that is the case which makes the documentation requirements most notably. It's a defense of a third party transaction and a defense of a real live third party transaction which makes VSOE so challenging which is relaxed in the EITF 08-1, so that being the case, either under those two courses, either the ratification of the new rules or are embracing and delivering on VSOE. Right now we are feeling fairly confident that 2010 is going to be a good year for revenue recognition for Trapeze.

Just I know this is hard to put some real numbers on it, I'm sure you guys have internally but on the call, but just given all the restructuring you guys have and sort of the operating leverages as things come back, I'm just getting a sense of capacity and capacity utilization and where do you guys feel like you are there and how much have you taken out of sort of fat and how much do you feel like you've had to cut a little bit and how you guys look at that as you go forward and eventually volume starts to come back through the plants? How do you add additional capacity? Obviously you guys have taken out a lot and obviously you've had it done in Nogales, but trying to balance those two things and think about how things look as we get into (inaudible) and hopefully things start to grow a little bit again.

Well, I think, Nat, there's a couple of things to keep in mind, first of all, you're right, some of the capacity that we have taken down we have replaced with lower cost capacity. And that would be something that some people may forget at times. That when we've taken capacity down in high cost regions we've replaced it with capacity in low cost regions. Just to remind you we invested $60 million the last two years on capacity in China and Mexico and we are certainly using that capacity.

The other point I would make is that if you look at most of our capacity reduction over the last six months it's not been in machinery or in footprint. It's been taking reductions in our headcount as appropriate given the decline in revenue. So today this is a blended average but I would say in total we are probably running at 60% of capacity right now as a Company and in sort of our perfect world we'd like to probably be around 80% because that gives us flexibility then to be able to respond quickly to peaks in demand. So I feel like our capacity is in very good shape and as we begin to see recovery of the macroeconomic environment we are going to see very, very good leverage.

That's helpful. Then just last question you guys mentioned Nortel. I'm curious if you guys could give a little bit more color on how the Nortel situation is affecting Trapeze and maybe how you guys see that being resolved over the next couple of quarters? I know they are sort of divesting different business units and whether that helps resolve some of the ambiguity around certain sales and whatnot?

Well, we are certainly watching the process very carefully. I should mention however that the issues that we have with Nortel have nothing to do with our relationship with Nortel. We have a very, very good relationship with Nortel. I think the issue they are having right now is because they are going through this process they have many customers that are understandably pausing temporarily to figure out what's going to happen before they place orders and as a result the business that Nortel is experiencing is significantly depressed. So we are in contact with Nortel continuously as you might expect. We think they are an outstanding partner. We think that they ought to be a part of our long-term future. That's our view. And we are hopeful that the transaction will complete quickly and depending on where the business goes I think there's a very good chance that that transition could be good for both Nortel and for us.

That's great. Thanks for taking my questions, guys, I will hop back in queue.

Okay, thanks.

We do have a follow up from Kevin Sarsany with Legends.

Sorry about that. I was actually going to ask something on the capacity utilization but that's covered. Anything, can you talk about pricing in your different end markets? [Anister] yesterday talked a little bit about it and they didn't go into much specifics and I haven't had a chance to talk to them. Could you talk about that at all? I mean obviously CAD 5 has been under pressure for awhile but it sounds like it's moving up a little bit. How are you viewing that in enterprise as well as industrial?

Kevin, I would say that pricing in general is competitive as you would expect given the significant decline in revenue in the markets year over year. It's competitive but it's certainly well within the boundaries of normalcy and clearly we always have to deal with adjustments to pricing as copper goes up and down, Q1 was a big adjustment period. Q2 was a little bit of an adjustment period but for now anyway I would say the pricing environment is clearly within the bounds of normalcy.

So you just mentioned your capacity utilization. What do you think the industry is at? Similar?

I think that there are probably some companies that are lower than us because they have are they haven't taken the same steps that we took. And I would suggest that probably most companies are at or below where we are at.

Okay. And last one is on acquisitions. Sounds like you are out there actively looking. Size I would assume is small. Anything on focus? Is it technology oriented? Is it consolidation? Is it entry into any new markets?

Well, our priorities are the same and that is that connector or cable products that would fill in gaps for our served verticals are of great interest to us as well as certain geographies where we think growth rates will be higher are of great interest to us. And clearly we are looking for opportunities where we can get a very quick benefit as it relates to our ability to leverage our capacity and leverage our management principles with the newly acquired business.

Good. Thank you, guys.

Thank you.

And our next question is a follow up from Matt McCall with BB&T Capital Markets.

Thanks, just one additional question. You talked a little bit about the -- or John you said there wasn't a lot of investment would you have to make on the cost of goods line if some volume came back, you have plenty of capacity. What about, I think you mentioned salary freezes. Some of these temporary, well, I guess the question is how much of the cost that you are taking out are structural, it sounds like it's the majority but how much is temporary and you could see some of those things come back as the topline stabilizes?

Well, there is some of that. There is no question. There are some actions that we've taken that are temporary in nature. They would include things like salary freezes for some of our associates. They would include the fact that we are currently accruing incentive compensation at a much lower rate than we would like to of course if we are in a more normal market. We put some spending freezes in certain areas that are temporary. So some of that is absolutely the case. And therefore we would not get 100% leverage on the way out. But I would suggest that and I haven't done the math on this but I would suggest that at least three quarters of the spending reduction that we've taken is permanent in nature.

Okay. That's helpful. Thank you.

If I could just interject right now. We will take one more call.

And, Mr. Stroup and Mr. Benoist, actually there are no further questions at this time. Please continue.

I think we will take no more calls. All right. Thank you very much everybody for your 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 would be happy to entertain a call for follow up questions. This concludes our call today. 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.