Belden Inc (BDC) 2011 Q1 法說會逐字稿

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 Frank Milano. Please go ahead, sir.

Thank you, Cindy. Good morning, everyone. And thank you for joining us today for Belden's first quarter 2011 earnings conference call. My name is Frank Milano and I serve as the director of Investor Relations at Belden. With me here this morning is John Stroup, President and CEO, Gray Benoist, senior Vice President and Chief Financial Officer and Hank Dirksen, Vice President and Treasurer.

John will provide a strategic overview of our business, Gray will provide a detailed review of our financial and operating results, and Hank will be available for the question and answer portion of this call. We issued our earnings release earlier this morning and we have prepared a slide presentation that we will be referencing on this call. Both the release and the presentation are available online at investor.belden.com. Please note that there is no www in that web address, just investor.belden.com.

Turning to slide 2 in the presentation, during this call management will make certain forward-looking statements. I would like to remind you that any forward-looking information we communicate is given in reliance based 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 and based on information currently available. Actual results could differ materially from any forward-looking statements that we make and the Company disclaims any obligation to update this information to reflect future developments after this call. For a more complete discussion of factors that could have an impact on the Company's actual results, please review today's press release and our annual report on form 10-K.

Turning to slide 3, during this call management will reference certain non-GAAP financial information. In accordance with regulation G, we have provided reconciliations of the most closely associated GAAP financial information to the non-GAAP financial information we communicate. Those reconciliations are in the appendix of the presentation and have been posted separately to the Investor Relations section of our web site.

I will now turn the call over to our President and Chief Executive Officer, John Stroup. John?

Thank you, Frank, and good morning, everyone. I am pleased to report a solid start to our 2011 fiscal year and I want to express my appreciation to all of our associates for this quarter's strong performance. In addition to the obvious improvements to our financial results, there are a number of extremely positive things happening at Belden which make me look forward to the future.

Please turn to slide 4 for a review of our first quarter highlights. Earnings growth was 53% year-over-year and revenue growth was 20%. From a portfolio perspective, there were several noteworthy accomplishments and we have highlighted two of them here. With the first quarter acquisitions of Polaron, a leading Brazilian cable manufacturer and ICM, a broadcast connectivity company based in Denver, Colorado. Polaron expands our presence into Brazil, another strategically important emerging growth market and ICM enhances our broadcast connectivity business. Gray and I will provide additional insight into each of these acquisitions later in this call.

Please turn to slide 5 for a review of our first quarter income statement. Total revenue growth was 20%. After adjusting for the effects of currency and acquisitions, year-over-year organic revenue growth was 12%. After adjusting for higher copper costs and the deliberate portfolio actions that we took this quarter to exit unattractive business within our consumer electronics vertical, revenues increased approximately 10%. Gross margin was 28.3% and operating margin was 9.1% this quarter, compared to 28.7% and 8.1% respectively in the first quarter last year.

Despite 100 basis point improvement in operating margins, we are battling, in the near term, the effects of rising commodity prices such as copper, silver, and higher petroleum based products which impact Belden's income statement sooner than our competition due to our category leading inventory turnover. As our competitors eventually and inevitably recognize these costs in their income statements, market prices will adjust upwards and our margins will improve. In addition, margins are expected to improve as we work through the up-front integration costs associated with our recent acquisitions.

Gray will provide more detail on year-over-year margin performance in his section of today's call. Excluding the affects of acquisitions, operating expenses increased 2.5%, or less than half the rate of our copper adjusted revenue growth. This half rate convention is an important element of our plan for operating margin expansion.

Please turn to slide 6 for review of our key performance indicators. Related to margin expansion, property plant and equipment turnover, which is a good indicator of capacity utilization, increased to 6.4 up from 5.5 in the first quarter of last year. This performance is just shy of our record 6.8 achieved in the second quarter of 2008.

On the surface, it might appear that we have lost some ground on inventory turnover. One of the better measures for proficiency with lean enterprise techniques. However, our results include the impact of absorbing the recent acquisitions, which have not yet benefited from our approach and commitment to lean. We look forward to having them join us on our lean journey and to see their working capital improvements favorably affect our free cash flow metric which we expect will be in excess of net income for the full year .

Please turn to slide 7 for a review of our first quarter revenue mix. From a product perspective, there was significant improvement in our portfolio as connectivity and networking grew to 30% of total revenue, up 600 basis points from last year. This improvement was based on strong organic growth and the affect of multiple acquisitions. Networking revenue increased 45% year-over-year and grew 26% organically. Connectivity revenue increased 63% year-over-year and grew 18% organically. From a geographic perspective, the effect of our recent acquisitions can be seen in the 300 basis point expansion in the US year-over-year, to 46% of total revenues in the first quarter this year.

Please note that these results do not yet include any contribution from our Polaron acquisition. Polaron has an established brand reputation for high quality products. And we will utilize their existing manufacturing capacity to localize production of our portfolio of Belden branded products. From a vertical markets perspective, our industrial business increased 200 basis points to 54% of total. Based on growth rates in excess of 20% in each of our three geographic reporting segments. Revenue from broadcast in markets as a percentage of total increased 400 basis points to 16%, compared to 12% in the first quarter last year.

Please turn to slide 8 for a look at our segment revenues. In the Americas, the improvements in our portfolio were significant. As a percentage of revenue, we realized a 1,000 basis point improvement in connectivity and networking revenue year-over-year to 24% of total revenues this quarter, with year-over-year growth rates of more than 100% in each platform. In EMEA, connectivity and networking increased to 58% of total revenue this quarter, up 200 basis points year-over-year.

Connectivity and networking revenue grew 25% and 15% year-over-year respectively. These growth rates reflect continued strength of our German machine builders exports to China and other emerging markets. We have consistently referenced our EMEA results as an early indicator of what we expect for our consolidated performance over the long run. EMEA's portfolio is almost equally weighted, with 42% of revenues from cable, 31% from networking and 27% from connectivity. Based on the strong mix of higher margin connectivity and networking products, we generated 13.5% operating margin in our EMEA business this quarter, which serves to illustrate that our consolidated operating margin targets of 13% to 15% are well within reach.

We expect the higher organic growth rates associated with connectivity and networking plus strategic acquisitions will propel us to achieve this level of performance on a consolidated basis. I mentioned earlier that we took deliberate actions this quarter in our consumer electronics business to strengthen our portfolio in Asia Pacific. Our emphasis has been to grow our networking and connectivity businesses faster than average and improve our mix of cable products.

With an increased emphasis on the application of our market delivery system in the Asia region, we are seeing the early signs of an expected trend. This quarter, networking and connectivity increased 59% and 11% respectively. These actions improved the mix of connectivity and networking to 20% of total revenues, up 500 basis points year-over-year.

That completes my portion of the call. I will now ask Gray to provide additional insight into our results for the quarter.

Thank you, John, and good morning, everyone. This is Gray Benoist, and I am Belden's CFO. I will start my comments with our GAAP results, coupled with a comment on the Company's reporting of continuing versus discontinued operations, followed by an income statement review, a discussion of our segment results, the balance sheet and close with our cash flow performance.

If I could have you please turn to slide 9. First quarter revenue totaled $461.6 million, up 20% year-over-year. Income from continuing operations totaled $22 million or $0.46 per diluted share. Up 53% compared to 30 cents in the year ago period. Our first quarter 2011 results were not adjusted for any GAAP to non-GAAP items.

GAAP revenue and income from continuing operations in the prior periods exclude Trapeze networks, which, as we reviewed on the fourth quarter earnings call, is accounted for in our GAAP results within discontinued operations. Our historical non-GAAP results include Trapeze and other adjustments. Year-over-year and sequential comparisons will be made based on our non-GAAP results from the prior period.

The full reconciliation of GAAP to non-GAAP results is provided in the appendix of today's slide presentation that has been posted separately to the Investor Relations section of our web site. If I could have you please turn to slide 10. Non-GAAP year-over-year first quarter revenue growth was 17%. After adjusting for the effects of currency, acquisitions and divestitures, organic revenue growth was 12%.

First quarter revenues included approximately $2.5 million in favorable currency translation with essentially all of this benefit generated by the year-over-year strength of the Canadian dollar. Gross margins decreased 220 basis points year-over-year and declined 150 basis points sequentially. After adjusting for currency, acquisitions and copper costs, year-over-year and sequential gross margins both declined only 90 basis points. First quarter gross profit margins were impacted, as John described earlier, by higher non-copper commodity costs.

For the first quarter, SG&A expense was $74.9 million or 16.2% of revenue, down 130 basis points sequentially and down 230 basis points year-over-year. The sequential and year-over-year percentage improvements provide context to first quarter operating leverage, which was central to expanded year-over-year operating margins. R&D expense was $13.6 million or 3% of revenue, up 40 basis points sequentially and down 80 basis points year-over-year.

Based on the general level of improvement we are seeing in the business, we continued to make strategic investments in the first quarter in our market delivery system, talent management and lean enterprise initiatives. And we expect that circumstances will be such that we can continue to do so as the year progresses.

I would like to call your attention to the first quarter's effective tax rate which was 27.6% versus 23.3% last year. The higher year-over-year effective rate was primarily a result of increased US profitability, which shifted the jurisdictional mix of our earnings unfavorably. The tax rate had an unfavorable $0.02 impact on this quarter's EPS compared to the year ago period. For modeling purposes, we suggest 28% effective tax rate for 2011. The 28% effective tax rate is incorporated in the guidance that John will communicate in just a few moments.

John walked through the product platform revenues for each of the segments and to reinforce his remarks, I want to call your attention to the supplemental product group information that accompanies today's earnings release and is included in the appendix in today's slide presentation. This new disclosure is part of our ongoing effort to improve transparency and add clarity in our quarterly reporting. I hope you find this disclosure helpful and understand the importance of product mix to each of our segments and assist you in the assessment of the Company's future growth potential.

Additionally, this quarter, we changed the reporting of operating income by segment to include the full allocation of corporate expenses. Previously, we reported separately. The cost allocation and the resulting business segment presentation of performance provides a truer picture of the operating profit the Company is delivering through our segments.

We believe this alignment of costs a segment will be helpful as both a good benchmark to external comparables, as well as an indicator of progress toward the accomplishment of our strategic profitability goals. If I could have you please turn to slide 11 for segment results. In our America segment, external revenues totaled $277 million, affiliate sales were $12.1 million and total revenues were $289.1 million.

First quarter external revenues increased 14% sequentially and increased 27% year-over-year. First quarter operating income was $31.5 million or 10.9%, down 160 basis points year-over-year. The decline in operating margin reflects higher copper costs, higher non-copper commodity costs and the impact of lower operating margins for the acquisitions due to initial integration costs and purchase accounting.

In our EMEA segment, external revenues totaled $103.7 million, affiliate sales were $22.7 million and total revenues were $126.4 million. First quarter external revenues increased 12% sequentially and increased 15% year-over-year. First quarter operating income was $17.1 million or 13.5%, which was up 190 basis points year-over-year, reflecting good leverage of the European cost structure.

In our Asia Pacific segment, external revenues totaled $80.9 million and total revenues were $81 million in the first quarter. Revenues decreased 3% sequentially and increased 7% year-over-year. Operating income was $6.4 million or 7.9% in the first quarter, an increase of 30 basis points year-over-year, reflecting improved product mix as a result of product portfolio actions in the consumer vertical market.

If I could now have you turn to slide 12, I'll review our first quarter acquisitions. Polaron is a very well established manufacturer of industrial cable located in Sao Paulo, Brazil. The company is focused on attractive end markets and applications, possesses a respected brand and delivers high quality of products across their portfolio. The business has trailing 12-month revenues of approximately $30 million and establishes a stronger Belden presence in one of the faster growing markets in the world. Based on the impact of purchase accounting and acquisition integration expenses, we expect Polaron to be break even in 2011 and accretive to EPS in 2012.

The Polaron acquisition was completed at quarter end and therefore, there was no effect on our first quarter income statement. However, a preliminary opening balance sheet is reflected in the company's consolidated first quarter balance sheet and from a cash flow perspective, closing funds were finalized in the second quarter. And first quarter accrued liabilities include $30 million for this acquisition.

If I could have you turn to slide 13. As John mentioned, ICM is a US Corporation located in Denver, Colorado, which possesses strong brands and technology and is an important addition to our industry-leading broadcast portfolio of products. ICM is the second acquisition we have closed in the broadcast connector space in the past 4 months. We paid $22 million for the company, which has trailing 12-month revenues of approximately $15 million. Based on the impact of purchase accounting, and the initial acquisition integration expenses, we expect ICM to be break even on EPS basis in 2011 and be accretive to 2012 results.

If I could now have you turn to slide 14, I'll review a few balance sheet highlights. Cash and cash-equivalents totaled $323.1 million at the end of the first quarter, down from $358.7 million as of December 31, 2010. Inventory turnover was 6.4 turns this quarter, down from 6.9 turns in the fourth quarter. The unfavorable impact to inventory turns associated with the increased inventory of the acquisitions was 0.3 turns. Additionally, we grew inventory to support the increase in sales volume we expect in Q2. Which is reflective through a very strong first quarter book-to-bill above 1.05.

Working capital declined to 8.8 turns in the first quarter, compared to 10.5 turns in the fourth quarter, with the impact of the acquisitions resulting in a 1 turn decline in the quarter. We view lower initial working capital performance of the acquired companies as a great opportunity to apply lean tools and techniques and accelerate cash ROIC on these investments. That principle was unchanged at $550 million and our leverage ratio was 2.18 times at the end of the quarter, which is favorable to our target leverage ratio of two and a half times. Interest expense was $11.8 million, compared to $12.9 million in the year-ago period. Our interest coverage ratio was 4.7 times, compared to 4.3 times in the fourth quarter, and 3.4 times in the first quarter of 2010.

If I could have you turn to slide 15, please. We closed a new five-year revolving credit facility earlier this week. The new revolver expands our borrowing capacity to $400 million up from $230 million under the old facility. In addition to the increase in available borrowing, the new revolver provides improved flexibility and is more supportive of our long-term inorganic and near-term liquidity needs.

The facility has the following key attributes. First, the Company and its subsidiaries can draw on the facility in foreign currency and service the draw with local subsidiary cash flows. Secondly, the leverage covenants are significantly more favorable to the Company. And finally, the borrowing rates are favorable compared to the old facility. With our strong cash position, and the $400 million available under the revolving credit facility, we estimate that the Company has over $550 million of current available liquidity.

Turning to slide 16, I'll briefly discuss our cash flow highlights. Cash flow from operating activity was negative $15.6 million dollars, net capital expenditures totaled $5.7 which included $1.1 million of inflow from the disposal of real estate assets. Free cash flow was negative $21.3 million in the first quarter compared to a negative $18.4 million in the year-ago period. We fully expect to achieve our annual goal of free cash flow in excess of net income for the full year of 2011.

That completes my prepared remarks. I would now like to turn this call back to our CEO, John Stroup, for closing remarks regarding our 2011 outlook for the second quarter and the full year. John?

Thank you, Gray. Please turn to slide 17 for our outlook of the second quarter and full year results. Based on the strength of our first quarter performance, including a book-to-bill ratio in excess of 1.05, our outlook for the second quarter is for revenue of between $510 million and $515 million and earnings from continuing operations of between $0.58 and $0.61. For the year, we expect revenues of between $1.96 billion and $2 billion and earnings from continuing operations of between $2.15 and $2.30.

This outlook incorporates minor disruptions to our business resulting from the earthquake in Japan and turmoil in the Middle East and North Africa. That concludes our prepared remarks. Cindy, please open the call to questions.

(Operator Instructions) Mr. Milano, our first question will come from Shawn Harrison with Longbow Research.

Hi, good morning, everybody. Just wanted to touch in on Asia, if you could talk about how much revenue was pruned? And then also, the sequential drop in EBITDA margins as well, just the factors behind that.

So, Shawn, on the top line, the pruning we did on the portfolio for the business, the consumer electronics business year-over-year, was just about $10 million roughly year-over-year. And then on margins, I will let Gray will answer the sequential margin question that you have for Asia.

The degradation was fairly limited, but in the fourth quarter we did have the benefit of an improved cost structure in product cost associated with the timing and FIFO. So fourth quarter was improved slightly, and the fast inventory turns, we have the highest inventory turns of the Company in Asia. They had the detriment associated with recognizing that cost of goods sold more fully in the first quarter.

So, as pricing comes around, that will begin to -- I guess you'll see some margin recovery.

I would think so. But more importantly, Shawn, I think it has more to do with the mix. What we're really counting on in Asia is the shift away from low end consumer electronics cabling and towards the high end. I think in John's comments, you can see that the growth rates, most notably in the networking, are the fastest in the Company in Asia. Hopefully, we'll see the benefits of a superior mix shift, both from the portfolio actions as well as the organic and inorganic growth associated with connectivity and networking.

I would also add to Gray's comments, Shawn, that we are increasingly putting more focus and emphasis on the capacity utilization locally on the higher and more attractive product lines, so there's more competition within the factory already for how we allocate capacity. And our focus on increasing and enhancing the portfolio showed up in this quarter's results.

Then just as a brief follow-up, will the two acquisitions recently completed be dilutive to earnings in the June quarter? And then in terms of accretion for next year, is it something maybe $0.04 to $0.06 in aggregate that could be the potential accretion in 2012 from the two deals?

Well first, for the second quarter neutrality is expected, so no dilution associated with second quarter results. Again, there's margin pressure associated with the acquisitions because neutrality on $15 million worth of top line always creates that stumbling block for at least one quarter or two quarter period. Then for next year, there is going to be a fairly significant accretion across the portfolio of acquisitions. Most notably, the purchase accounting which is non-recurring, the step up of both the elements in inventory as well as in backlog and most of the initial integration expenses are in the first couple of quarters.

In this particular case they're modest because of the size of the acquisition but they're still negative with respect to our performance. And we don't have the acquisition costs associated with the transaction itself. So, accretion with respect to some sort of EBITDA expectation should be what you would model. So, on $30 million of top line in Polaron and $15 million worth of tip line on ICM, $45 million at the top line in some relatively stable multiple of 10 or 11 times, that you should expect 2012 EBITDA to reflect that kind of multiple range. And with that being the case, that would be the model for accretion.

Okay. There's been no change to the accretion assumption since the deals completed late in 2010?

Neutrality for Garrett Com, $0.05 for LCM, the [Thomas and Betts] acquisition.

Thanks so much and congratulations on the quarter.

Thank you very much, Shawn.

We'll take our next question from Anthony Kure at KeyBanc.

Hey, good morning, guys. Couple quick questions. Can you just talk about the recent pricing actions, if any, in the last quarter, the fourth quarter and the first quarter if you took pricing actions additionally. And then, into the second quarter, did you see the need to also raise prices? And then a follow-up to that is how much of an impact would you estimate the negative price headwind was in the first quarter?

On the pricing, we're somebody that always tries to take a leadership position in how we address pricing. In fact, our general managers that run the businesses, we ask them to look at their income statement on a LIFO basis, even though Belden is of course a FIFO company. And that puts a lot of pressure on them early. And the feedback we get from them often is that it is difficult for them to pass on the price increases as quickly as they would like to, to recover that LIFO proxy. And even on the FIFO basis, it is a little bit difficult because many of the people they compete with are much, much lower inventory turnover than us and therefore it takes a little bit longer, but we've seen the prices come up as you would expect.

We've been able to successfully pass on price increases in the first and second quarter. And so as I said in my prepared remarks, we feel like the margin pressure that we saw in the first quarter on gross profit as a result of some of this PPB, that it's going to be alleviated in the second quarter.

So, for us, the margin pressure comes in two forms. One is the mathematics of additional revenue from copper in the denominator and no margin in the numerator. For us, that had about 150 basis points impact on gross profit in the first quarter. And then on the PPB side of it, both in terms of copper and other commodity items, it was somewhere less than $5 million of impact in the first quarter that we would start to see some of that come back later in the year.

Ok, thanks. And then given the book-to-bill was about 105 in the quarter, what historically -- has it been historically been over 1 during the first quarter?

Yes, we've got examples of all sorts of book-to-bill ratios. It's a hard question to answer. I would say that we're encouraged by our book-to-bill ratio right now. The strength of our order book seems to us to be better than normal.

I think from two perspectives, Tony. First of all, the top line exceeded our guidance. So, the first quarter actually we shipped more than what we were anticipating at the beginning of the quarter. And the order book was much stronger expanding backlog. It really does give us a lot of confidence with respect to second quarter guidance because we're carrying a little bit more backlog than we would traditionally carry at this juncture. Off of a very strong first quarter, top line quarter.

The other thing I would add that isn't transparent is that we had stronger performance from a shipping point of view in the first 8 weeks of the quarter than we would typically see. Often in the first quarter, a lot of the activity happens in March, and we entered March in good shape.

Okay, and then, last question, I'm not sure if you mentioned this but how much was the headwind, would you estimate, in the first quarter from the acquisition, the accelerated acquisition activity. Could you give some magnitude there?

Well, directionally modest. Neutrality would be probably the best placeholder for guiding the conversation around your modeling, Tony. So, we had about $30 million worth of top line associated with the acquisitions that we did in the fourth quarter as well as in the first. Neutrality, the positioning of that in the first quarter, maybe slightly positive, but not enough to be able to move the dial.

So, that's the up-front piece that allowed us to accelerate the integration without affecting our financial performance. So I think we're really ahead of schedule on the integration. The performance of the businesses are at our expectations, not greater, not worse. And that the first quarter was a neutral level of performance on EPS.

Yes, and to add to Gray's comments, most of the improvement year-over-year comes from the fall through on the incremental revenue and the fact that we were able to maintain expense growth to less than half our real growth. So, as we talk to our investors continuously about operating margin expansion, the biggest lever, of course, is leverage on the incremental volume. I think we did a really good job commenting how we could get the leverage.

Ok, great, thank you, guys.

Thank you.

We'll take our next question from Gary Farber at CL King.

Yes, good morning. Just a few questions. Can you talk about when you originally came into the Company, made changes to the sales force that seemed to take on good traction. Can you speak to the acquisitions you're know integrating? Are there any changes you're making to the way they're making their sales forces or anything like that?

I would have two comments, Gary. The first would be that just as we formulated about two years ago, a sales team dedicated in the industrial market and the enterprise market, which we think had a lot to do with our accelerated organic growth, we have, actually, now created a dedicated broadcast sales force that's responsible for selling cable and connectors into those end markets. I would expect that we would see similar types of activities from that maneuver in the better cross selling, better pull-through, better penetration as a result of it.

And then the second comment would be is that our integration process of the new companies that have been acquired, is a lot more advanced and sophisticated than the ones we had in 2007 when we acquired Hirschman and Loomberg and LTK. And so we have a much more comprehensive approach. We looked at all aspects of the Belden business system, lean being an important one we commented on already. But we're already helping them with their market delivery system as well. I think we're going to see them execute better through better processes but we're also going to see the leverage we would expect by aligning our go to market system around the serve markets as opposed to product categories.

Okay. And then, also, can you speak to -- you still have a fair amount of capacity, how are you thinking about acquisitions going forward? How much just management capacity do you have to take on more? And if there is any particular geographies or end markets that look attractive to you?

I think our strategy is the same. We're very interested in adding quality connector and networking companies to our portfolio. We're also interested in expanding our positions in China, India and Brazil. So acquisitions are most likely going to be in those three categories.

And in terms of management capacity, I think that we're in good shape. We've got a much, much more extensive management team than we had three years ago and much of the integration of these companies is happening two levels below me. And that wasn't the case in 2007. So, we're blessed with a great management team. A lot of breadth and depth and capacity and capability. Much better business systems. And as a result of that, we're able to delegate a lot of that integration. It frees up a lot of senior leadership capacity to do more deals.

Right. Is there any particular geographies or areas that look interesting to you today?

Well, again, the three. I think that it is probably unlikely we would do anything immediately significant in Brazil given the acquisition we just did but we remain very bullish on China and as I mentioned before, if the right kind of opportunity came along in India, we would do it. We just haven't been successful so far.

Right. Okay. And then one last one. You gave favorable forward guidance for the quarter. I'm just wondering, is there anything in the month of April that stood out as far as an acceleration in demand in any particular end market or anything like that that's incremental to your guidance for the month of April?

April looks good.

Yes. Okay, thanks.

We'll take our next question from Matt McCall at BB&T Capital Markets.

Thank you. Good morning, everybody.

Good morning, Matt.

I think it was asked earlier, I didn't hear the answer though. The question was, what was the inflation or price cost impact in Q1 and as a follow-up to that, what would be implied in Q2?

I think John mentioned it was around $5 million worth in the first quarter, that's not copper headwind by the way, that's other commodity headwind. And again the changes in the dynamics and the commodity markets especially around petroleum, and as that relates to our cabling products with jacketing and the like, has created a short term disruption. But again, it's minor with respect to the overall business model. There's no resolution guided. I.e. that the continuation of that is still part of our current thinking and the ability that we can't offset it or improve our performance, quarter to quarter, could be potentially upside to our performance. But right now, there's no additional expectation other than continuing headwind for the next quarter.

And Gray, is there a mechanism much like you have for some of your -- I think you have for some contracts on the copper side? Copper goes up, you're able to raise prices with the escalators. Is there any mechanism that allows you to do that for these [resins] jacketing, things like that, that aren't commodity -- or aren't copper related?

I think I've mentioned in the past that only about 10% to 15% of our portfolio is really fixed pricing and that we have a lot of flexibility in our pricing model which is one of the techniques and tools that we utilize to neutralize copper in the business model. It's not to be locked down and turn ourselves into a commodity business. So, therefore, very little of our portfolio really has these primary escalations, which leaves us to negotiations. Much of our portfolio -- the discussion around copper is fairly straightforward and the discussions around other commodity-based cost changes are more unfamiliar to many of our end markets and therefore, it is just a little more time consuming to be able to get a good understanding of what's driving the increases in prices based on our current volatile environment. So, very little of our pricing is contractually pass-through.

Okay.

And then, I think, John, you mentioned that as your competitors start to face some of these rising costs, that you would be able to pass on costs, expand margins, so, this is also follow up to one of the earlier questions. You pushed through some pricing but it sounds like you have to wait for the others to really get back to where you need. Is that where I need to understand that or are the actions that you've taken thus far, that you just need the time to get those implemented?

Yes, so, what we face continuously in an environment of rising commodity prices is that we see the effects of those rising commodities sooner than many of the people we compete with, because our inventory turns are higher and so we've seen this over and over again. The market's acceptance of the price increases because of the competitive influence tends to lag slightly to our expense structure. And so we are and we have and we will continue to take the price actions we need to take to keep our margins where they need to be. And we have a great deal of confidence that we'll be successful in doing so.

Okay, just one clarification. In the guidance, are you assuming gross margin pressure sequentially, so versus the 28.3 you just reported, gross margins in the guidance expected to be up, down flat, what's the direction there?

I think Gray's point of view is from a commodity point of view, we've assumed neutrality and therefore margins would probably expand slightly on leverage of increased volume.

That's exactly right, John.

Perfect, thank you.

(Operator Instructions) We'll take our next question from Jeff Beach with Stifel Nicolaus.

Good morning, John and Gray.

Hi, Jeff.

Congratulations on a good quarter. I've got a couple of questions. One is in your appendix, if we do the simple math on your operating income for first quarter of 2010 versus what you reported, is all of that difference simply the allocated corporate or is there accounting changes and other things that would make that exercise not meaningful?

The only change, Jeff is the allocation of corporate, so rather than identifying what we traditionally called our finance and administrative expenses, F&A, those have been allocated into each one of the segments. Frank will work with you off-line with respect to that, the actual allocation methodology so you can update your models because again, it is transparent. It is merely a transition from what we had as corporate overhead and now [aligning] it where it belongs. It belongs in the business.

All right.

Fully transparent in terms of what their real profit potential is.

Ok. The other two questions I have are more on some of your growth. I think in the commentary, I may have missed it. But on your total Belden vertical markets, you talked about industrial growth of better than 20% in all your geographic markets. Can you tell us what the broadcast growth was and enterprise growth for the whole company?

Sure.

You're right. The industrial business grew year-over-year on a consolidated basis approximately 22%. Our enterprise business was up about 6.5%. Our broadcast business was up about 64%. Now broadcast, of course, is going to include the benefit of the acquisition.

Do you have a rough organic?

I don't have that in front of me. Jeff, I can't give you that right now. I probably could get it to you but I don't have it right here in front of me.

Okay. Then the third thing with this very strong growth occurring in the Americas with connectivity and networking, can you describe your go-to-market strategy in North America to achieve these results? And then what you estimate is your potential market and a goal in North America over some period of time to gauge. It sounds like you're in very early stages but it would be nice to put my arms around the opportunity there.

So, we've done a better job of growth in the Americas on networking than we have on connectivity would be my first comment, especially within the industrial sector. I think we still have opportunities on the industrial connectivity side. But on the networking side, I think we've done a lot of really good things that we've talked about previously with respect to leveraging our industrial presence in both directions, taking advantage of our networking presence, pulling through cable, taking advantage of our cable presence, pulling through networking, and with the acquisition of GarrettCom, we now have more capability. As we mentioned before, GarrettCom was much stronger in the power transmission and distribution vertical than Hirschman had been.

Now we've got another opportunity to leverage our growth. That's important now. In terms of the opportunity, it is sort of the best of both worlds. One is we're still under penetrated so even though we're the largest now in North America with the acquisition of GarrettCom, we're still at a market share position well below 30%. So that's fantastic and the market continues to grow.

The market is growing, high single digits every year. This is the gift that keeps giving, Jeff, in terms of growth rates and low share and really just a very strong position. I couldn't be more bullish on the opportunity for networking and the industrial segment in North America. On the connectivity side, we've made great progress in broadcast here recently with the acquisitions, our enterprise business continues to do well from an organic point of view, given where we started from.

On the industrial side, we still have a lot of opportunity. We've been pretty focused on our industrial connector business in Europe and we clearly have an opportunity to become more global in that business and I think we will. I think that toward the end of this year, and certainly into next year, we are going to make more progress with industrial connectors outside of Europe as we're able to become a more effective global business. And spend less of our time on operational matters which we really needed to do when the recession hit us in the fourth quarter of 2008.

Again, expanding a little bit, what's your market approach here to gain share? Are you using direct sales more than distributors? And then can you size let's say the current addressable market in North America for connectors and networking?

Well we use a combination of approaches. We have a very significant size direct sales force that's responsible for creating preference and specification wherever possible. They're a very important part of our go-to-market system. But we also have a lot of really important partners, distributors, systems integrators and OEM partners that are very important to our growth rates there. And we also have some examples of where we've done a better job of leveraging our distributor program as well.

So, Jeff, there is really examples of all three. And in terms of me helping size it in the industrial networking part of the business, like I said, we're below 30% market share in the United States. On the industrial connector side, it is far, far smaller than that. I don't have the numbers in front of me but our market share, I would guess, is less than 5% in North American industrial connectors. So, we have -- in both cases, I think we've got the portfolio and the go-to-market system to continue to drive growth.

Thank you.

Thank you.

We'll take a follow-up question from Shawn Harrison at Longbow Research.

Hopefully two brief follow-ups. The commentary earlier in the prepared remarks on growing R&D spend, how should we expect that to continue to grow as a percentage of revenues or incremental revenue growth?

I think, Shawn, that generally speaking, that half rate convention is a good rule of thumb for how we intend to grow our expenses. With one caveat in R&D. And that is the half rate convention needs to be appropriate or applied to the product category. So, to the extent that we're growing our networking business at significantly higher growth rates than our cable business, for example, and our R&D as a percentage of revenue is much faster, you're going to see that in our consolidated R&D spend it's going to grow faster than half rate on the consolidated basis. So, what I would suggest you think about is where's the R&D investments by the product category and using that half rate convention by product category I think is a good approach.

Okay. And then as a follow-up on the free cash flow guidance still being above net income, has the Cap Ex outlook changed for the year given the stronger sales and if you could -- if you were to give one, working capital days to exit the year that you're targeting?

So, on the Cap Ex, no, I don't see any change in our forecast to Cap Ex. We still think $30 million is a good number. And then in terms of working capital terms, we would expect to see our working capital terms improve by half a turn year-over-year, and that is going to come from continued focus on inventory turns. As I mentioned on my prepared remarks, our first quarter inventory turns include the recently acquired companies and as you can probably guess, their inventory turns are substantially lower than what Belden typically does. And of course, when we acquire those companies, that's one of the opportunities that we see. So, I feel like the working capital improvement and free cash flow for the full year, we have a high degree of confidence we'll hit both of those.

Okay, thank you very much.

Thank you.

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

Ok. Thank you, Cindy. We appreciate everyone's time and interest in Belden. We thank you for joining us on today's call. We do have an active IR calendar planned for the next several weeks. And if you would like to meet with us when we're on the road, please contact us. That concludes our call, have a nice day.

Thank you ladies and gentlemen this concludes our call for today. You may now disconnect from the call and thank you for your participation.