Belden Inc (BDC) 2011 Q2 法說會逐字稿

Welcome to this morning's Belden Incorporated Conference Call. Just as a reminder, this call is being recorded. At this time, you are in a listen-only mode, and later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the call over to Mr. Frank Milano. Please go ahead, Sir.

Thank you, Ryan. Good morning, everyone. And thank you for joining us today for Belden's Second-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 of Finance.

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. The press release and the presentation are available online at investor.belden.com. And please note 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 provide is given in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The comments we will make today are Management's best judgment based on information currently available.

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 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 website.

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 with our second-quarter results, and I want to thank all of our associates for their commitment and execution of our strategic priorities, which include the global deployment of our market delivery system, lean enterprise, and talent management initiatives.

I'm also pleased with the work that's been done to integrate our 4 recent acquisitions. We are in each case either on track or ahead of schedule

Please turn to slide 4 for a review of our second-quarter highlights. Earnings growth was 60% on a year-over-year basis. At $38.8 million, we generated free cash flow in excess of net income in the second quarter. And we ended the period with $329 million in cash and cash equivalents.

Double-digit operating margin, which was 10.9% in the second quarter, was a significant highlight for the quarter.

And this morning we announced another $150 million share repurchase authorization by our Board of Directors. This is our third share repurchase authorization during my tenure as Belden's President and CEO, and it is a clear indication of the Board's confidence in our business and in our ability to execute the strategic plan.

Our increased guidance will be discussed at the conclusion of our prepared remarks.

Please turn to slide 5 to review the second quarter income statement. Revenues totaled $536.3 million, up 31% year over year. This quarter's results included all 4 of the acquisitions that were transacted in the fourth quarter of 2010 and the first quarter of 2011. Adjusting for those acquisitions and the effects of currency fluctuations, organic revenue growth was 17%. Adjusting for changes in copper costs, revenues increased approximately 11%. This growth includes some increased inventory levels at a few of our channel partners.

Gross margin was 29.2%, up 90 basis points sequentially and up 60 basis points compared to the second quarter of 2010.

Operating margin was 10.9% this quarter, our highest quarterly performance since the second quarter of 2008. On a year-over-year basis, operating margin was up 130 basis points, and sequentially, operating margin was up 180 basis points.

After adjusting for cooper, foreign exchange, and acquisitions, year-over-year gross margin and operating margin increased 200 basis points and 210 basis points respectively. This was due principally to leverage from increased volume, and as expected, we also benefitted from favorable mix due to our richer product portfolio.

Turning to slide 6, I will review our key performance indicators. On a sequential basis, inventory turnover improved more than 1 full turn to 7.5 in the second quarter, approaching the year-ago record performance of 7.8. Some of this improvement came from the successful execution of our lean enterprise initiative at our newly acquired businesses, which we had anticipated on last quarter's call.

PP&E turns were a record 7.4 in the second quarter. This is more than 1 full turn improvement year over year, and more than a half a turn over previous high of 6.8 in the second quarter of 2008. This record level of fixed asset leverage is the direct result of our previous footprint actions, coupled with our ability to effectively satisfy increased demand.

Please turn to slide 7 for our revenue mix. Compared to the prior year, the percentage of revenue from our connectivity and networking platforms is up 500 basis points. In addition to strong organic growth in both platforms, with connectivity up 16% and networking up 25%, the portfolio also benefited from the acquisitions made in the past several quarters.

On an end market basis, the most significant year-over-year change is broadcast, where the percentage of revenue increased 300 basis points to 15% of total.

Because we experienced another strong quarter of growth in the industrial end market, 31% year over year, industrials remained unchanged as a percentage of total at 53%.

Although our enterprise end markets grew 21% year over year, the percentage of total revenue declined to 25%.

The deliberate portfolio actions we took last quarter to reduce exposure to the consumer electronic end market is represented in the 100 basis points decline in that portion of our business.

That completes my portion of today's call. I will now ask Gray to provide additional insight into our second-quarter financial performance. Gray.

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, followed by an income statement review, a discussion of our segment results and the balance sheet, and close with our cash flow performance. If I could ask you to turn to slide 8, please.

Second-quarter revenue totaled $536.3 million, up 31% year over year. Income from continuing operations totaled $34.9 million, or $0.72 per diluted share, up 60% compared to $0.45 in the year-ago period.

Our second-quarter 2011 results were not adjusted for any non-GAAP items. GAAP revenue and income from continuing operations in the prior-year period exclude Trapeze Networks, which as we reviewed on our previous earnings call, is accounted for in our GAAP results within discontinued operations.

If I can have you turn to slide 9, please. Our historical non-GAAP results include Trapeze and other adjustments. The full reconciliation of GAAP to non-GAAP results is provided in the appendix in today's slide presentation, and has been posted separately to the Investor Relations section of our website.

Non-GAAP year-over-year second-quarter revenue growth was 27%. After adjusting for the effects of currency, acquisitions, and divestitures, organic revenue growth was 17%.

Second-quarter 2011 revenues include approximately $19 million in favorable currency translation year over year, and approximately $7.5 million of favorable currency translation sequentially. The majority of the currency effect was associated with the euro, but there were meaningful currency impacts related to the Canadian dollar and the Chinese Yuan that were also favorable on both a sequential and on a year-over-year basis.

Gross margins decreased 110 basis points year over year, and increased 90 basis points sequentially. After adjusting for currency, acquisitions, and divestitures, and copper costs, gross margins increased 100 basis points year over year and increased 120 basis points sequentially.

Gross margins benefited from volume and mix, and on a year-over-year basis, we also realized the benefit of the 2009 restructuring that was completed in the second half of 2010.

Gross profit headwinds continued this quarter as costs were again higher in non-copper commodities, most notably resins and compounds. You may recall that we raised this topic on last quarter's earnings call.

The market pricing support necessary to mitigate this headwind improved in the second quarter, however not sufficiently to eliminate the year-over-year impact of non-copper commodity cost increases.

Second-quarter SG&A expense was $84.4 million, or 15.7% of revenue, an improvement of 50 basis points sequentially and an improvement of 180 basis points year over year. As John indicated, our second-quarter 2011 results include the 4 acquisitions we have recently completed, which is reflected in the higher dollar spend in SG&A in our income statement.

The sequential and year-over-year improvement in SG&A as a percent of revenue demonstrates the operating leverage we have in the business. As our end markets continue to normalize, we expect to continue to realize this leverage in our financial results.

Given the strength of our performance this quarter, we did make some incremental investments in our global sales and marketing efforts, primarily to sustain the long-term growth rates in our connectivity and networking platforms.

R&D expense was $14.5 million in this quarter, or 2.7% of revenue. Consistent with our remarks regarding SG&A, R&D expense increased in dollar terms and decreased 30 basis points sequentially and 50 basis points year over year as a percent of revenue.

The effective tax rate this quarter was 23.5% compared to 27.6% last quarter and 20.1% in the second quarter of last year. The effective tax rate benefited from several discrete tax items, which had a favorable $0.03 benefit to earnings performance this quarter.

For financial modeling of the third and fourth quarters of 2011, we suggest using a 28% effective tax rate, which will result in an annual rate of approximately 27% for the full year. The 28% effective tax rate in the third and fourth quarters is incorporated in our guidance that we will discuss in just a few moments.

If I could have you turn to slide 10, we'll discuss segment results by product platform. This supplemental product reporting was initiated last quarter. As you can see, the Company's product portfolio transformation towards a higher mix of connectivity and networking platform revenues was realized on a year-over-year basis in each of our three geographic segments. Portfolio transformation is one of the important drivers in achieving our stated multi-year goal of operating profits between 13% and 15%.

If I can have you turn to slide 11 for segment results. Consistent with the reporting methodology we adopted last quarter, segment results were reported including the full allocation of corporate administrative expenses.

In our Americas segment, external revenues totaled $325.7 million, affiliate sales were $11.5 million, and total revenues were $337.2 million.

Second-quarter external revenues increased 18% sequentially and increased 37% year over year. The sequential revenue growth includes the effect of the Polaron acquisition in Brazil, and the year-over-year growth rate includes the effect of the 4 acquisitions that were recently completed.

Second-quarter operating income was $40.4 million, or 12%, up 110 basis points sequentially. The Americas segment benefited from pricing, volume, and mix. Additionally, the accretive effect of the 4 acquisitions added $0.01 of sequential EPS in the second quarter.

In our EMEA segment, external revenues totaled $115.5 million, affiliate sales were $27.5 million, and total revenues were $143 million.

Second-quarter external revenues increased 11% sequentially and increased 25% year over year.

Second-quarter operating income was $23.5 million, or 16.4%, which was up 290 basis points sequentially. This quarter's operating profit percent represents record performance for our EMEA segment.

In our Asia-Pacific segment, external revenues totaled $95 million, affiliate sales were approximately $400,000, and total revenues were $95.4 million.

Second-quarter external revenues increased 17% both sequentially and year over year. Consistent with the trend in previous quarters, the strong growth rates in Asia-Pacific continue to reflect increased sales of connectivity and networking products, in particular.

Operating income was $9.2 million, or 9.4% in the second quarter, up 170 basis points sequentially.

If I could have you turn to slide 12, I'll discuss the share repurchase program. As we indicated in today's earnings release, the Belden Board of Directors has authorized a new $150 million share repurchase program. Recall that we have completed two buybacks in recent years. The first was a $100 million repurchase of common stock in 2005, and the second was a $100 million repurchase in 2007.

This current $150 million program is open ended. You can see from this slide that we have ample liquidity to support this repurchase. Cash and cash equivalents totaled $329.3 million at the end of the second quarter.

Inventory turnover was 7.5 turns this quarter, up from 6.4 turns in the first quarter. Days sales outstanding was 62 days in the second quarter, a 3 day improvement from 65 days in the first quarter.

Accounts receivable collection will be an area of focus for us in the second half as we drive to achieve our stated goal for free cash flow in excess of net income for the year.

Working capital turnover was 8.1 turns this quarter, down from 8.8 turns in the first quarter. We expected lower working capital turns as a result of the 4 companies we acquired, and fully expect that the utilization of our lean tools on working capital improvements will generate accelerated cash ROIC on the investments.

Based upon our strong current cash position and the liquidity available under our unused credit facility, we currently have approximately $570 million of dry powder available to pursue M&A opportunities in combination with the share repurchase program we announced this morning.

If I could have you turn to slide 13 for a few cash flow highlights. Cash flow from operating activity was $46.8 million in the quarter, compared to $18.7 million in the year-ago period. Net capital expenditures totaled $8 million. Free cash flow was $38.8 million in the second quarter compared to $13.5 million in the second quarter of last year.

We do expect to achieve our stated goal of free cash flow in excess of net income for the full year, which imply free cash flow of approximately $95 million in the second half of 2011. This level is consistent with the $90 million of free cash flow we generated in the second half of 2010.

That completes my prepared remarks. I would now like to turn this call back to our CEO, John Stroup, for the outlook and his closing comments. John.

Thank you, Gray. Please turn to slide 14 for our outlook regarding the third-quarter and full-year 2011 results. Our outlook reflects the usual seasonality in our business in the third quarter. As a result, we forecast revenue between $505 million and $510 million, and we anticipate third quarter earnings from continuing operations of between $0.56 and $0.59 per diluted share.

For the year, we expect total revenue between $2.01 billion and $2.03 billion, and earnings from continuing operations of between $2.30 and $2.40 per diluted share.

That concludes our prepared remarks. Ryan, please open the call to questions.

(Operator Instructions) Gray Benoist, your first question is from Shawn Harrison with Longbow Research.

Hi. Good morning, everyone.

Hi, Shawn.

Hi, Shawn.

Really just wanted to I guess dig into the guidance in the context of some of the commentary that you maybe saw some customers building inventory. And then within that, how did order rates progress as you went throughout the quarter and into July versus kind of typical seasonality? Really looking to see if maybe some demand was pulled into the June quarter or if you're seeing any pockets of weakness right now.

Shawn, this is John. So as I mentioned, there was a little bit of inventory build in the quarter. It wasn't a lot. It was less than $10 million. And I think that some of the channel partners perhaps earlier in the quarter were sort of bulking up in anticipation, and I think with the recent macro news, maybe they had gotten a little bit more cautious. So as you think about our guidance from Q2 to Q3, we did incorporate that. We wouldn't expect that to repeat, the inventory build from Q2 to Q3.

In terms of order patterns, order patterns through the quarter were fairly steady. And our POS information in the quarter was good and consistent. So as we look at our business, we had a great quarter, real happy with it. We think the things we're doing are making a difference. Probably like all the rest of us, we're all sort of nervously watching what happens in Washington, DC and what the macroeconomic environment is going to look like in the second half, but from a microbasis, we feel good.

Thanks. And then my follow up, just on the great operating performance delivered out of Europe. I know networking sales were up strongly on a sequential basis, but given the operating margins there, were there other factors that kind of weighed into the numbers? And I guess what's the continued upside from here? Is it solely mix and volume driven or are there some operational improvements that we could see in the numbers?

I think in the case of EMEA, the biggest opportunity is leverage on volume. The mix of the business is real strong right now. We did, as you say, saw a stronger growth in Europe on networking than we did on cable. The networking business in EMEA was up 18% year over year. And there is some market expansion opportunities still within the connectivity segment, because we're still running below where we'd like to be. And again, a lot of that is volume related.

So the EMEA business is performing, from an operating margin point of view, kind of where we think we'd like it to be. And the better opportunity in EMEA I think is going to be on leverage.

You didn't ask the question, but in Asia, there is still a lot of opportunity for operating margin expansion. The team has done a good job growing connectivity and networking in Asia. The networking business was up 15% year over year. The connectivity business was up 15% year over year. So they're growing the high margin business, which is great, and it's allowed us to reinvest money into SG&A in Asia, which is a lot of our SG&A increase year over year.

We feel real good about where we are and feel real good about the opportunities for continued improvement.

All right. Thanks a lot and congratulations on the quarter.

Thanks.

Thanks, Shawn.

Mr. Benoist, your next question is from Matt McCall with BB&T Capital Markets.

Hi, Matt.

Good morning, guys. This is actually Jack Stimac filling in for Matt.

Hey, Jack.

I guess I just wanted to-- I think you talked about it. You said the organic revenue was up 11%, but-- and you may have said it but I missed it, but could you just kind of say what was the price cost gap? What was the inflation from copper and how much of that were you able to pass through?

So yes. The organic growth for the Company was 17% in the quarter. When you adjusted for copper it was 11%. So the difference is going to be the effects of copper. Even though the spot rate went down in Q2 from Q1, there's a little bit of a lag in the system, so that's the difference.

In terms of our pricing actions, as Gray mentioned, we actually made improvement sequentially. Our pricing situation is better in Q2 than it was in Q1. It was less by way of a copper phenomenon and more of a compound oil-based, petroleum-based compound phenomenon. Our team did a good job in the second quarter passing that on. So year-over-year pricing is neutral, but sequentially it's favorable.

Okay, great. With the new share repurchase program, maybe you could just give your outlook on acquisitions. Does that change that at all? And maybe you could, with the performance of the market recently, have deal premiums gotten better? Are there some deals that maybe look attractive now that didn't a few months ago?

The situation, from an M&A point of view, has really not changed very much in the last couple 3 months. The opportunities that we're pursuing, the funnel that we've built is consistent. We do, as Gray mentioned, we have sufficient liquidity to run the M&A program in tandem with the share repurchase program. So we view this as a really good opportunity for us to reinvest in development and continue to execute our M&A program. So we just feel like we're in a good position right now where we can do both.

And if could ask one more quick one. From a capacity standpoint, where do you guys stand on capacity utilization, and are you getting close to a point where you would actually have to invest in some additional capacity?

In the case of capacity expansion, it would be very isolated. So we might want to at some point make an incremental investment in our facility in Mexico, for example. As we've mentioned earlier, not for capacity reasons but for strategic reasons, we would like to have a manufacturing footprint in India, which would be helpful.

But if you look at our facilities around the world, from a square footage point of view, we have plenty of space. And our lead initiatives, of course, are always focused on increased throughput, cycle time reduction, which frees up capacity. So if we have capacity constraints at this point, it's going to be machinery-related, and that's going to be relatively small amounts of investment.

All right, great. Thanks for taking my questions.

Thanks, Jack.

Mr. Benoist, your next question is from Tony Kure with KeyBanc.

Good morning, Tony.

Good morning, guys. How are you?

Great.

Good. I just wanted to touch, I don't know if you hit on organic growth by product type, and if you did could you-- I apologize if I missed it. Excluding copper, FX, acquisitions?

Tony, this is John. So our organic growth for the product platforms are as follows. Our cable business was up 16%. When you adjust that for copper, it was up 8%. Our networking business was up 25% on an organic basis, and of course there is no copper adjustment for that. And our connectivity business was up 15.5%, and again no copper adjustment for that.

Okay, great. Thank you. And then was there any restructuring or integration expenses in the second quarter that would maybe anomalous to run rate as you go forward?

Well you know, Tony, as we mentioned before, the companies we acquire, we had stated plans with respect to integrating those companies and some costs associated with doing so. And that's why our stated accretion for the acquisitions in this year are not perhaps as large as you might expect.

So those programs are all on plan. We've made very, very good progress with all of them. And we would expect those acquisitions to perform better next year as those costs fall off the income statement.

Okay. I guess from a timing perspective, that would be pretty much washed out this calendar year, is that fair to say?

I think most of those costs would be behind us by the end of this calendar year.

Okay, great. Then last one is just Asia. The margin is sequentially pretty strong on obviously the volume increase, too. Just wondering, given the bump in margins in Asia, even with sounds like some headcount investments, what was the majority of that other than leverage? Was it the absence of consumers here? Did you prune more there or mix? Could you just maybe talk about margins in Asia?

Yes, well mix was real helpful in Asia. We continue to grow the networking and connectivity businesses faster than our cable business. And then within our cable business, we have higher margin Belden-branded cable and then we have lower margin consumer electronics. So all the mix levers were favorable, deliberately sequentially.

Okay. Did you continue pruning the consumer business there?

I think our consumer business sequentially was about flat. So, but I do think-- well I don't think, we did make improvements sequentially on gross profits even within that area. So the team is using a scalpel with respect to making certain that we have the right quality of businesses within that capacity.

Okay, great. Thank you so much.

Thanks, Tony.

(Operator Instructions) Mr. Benoist, your next question is from John Quealy with Cannacord.

Morning. Thanks for taking my question.

Hi, John.

Was wondering if you could talk about any areas of relative strength or weakness for the Hirschmann and GarrettCom businesses.

Well the networking business in total, which Hirschmann and GarrettCom make up, those businesses organically were up significantly in all regions of the world. So our networking business was up 23% in the Americas, which is a really strong quarter, 18% in Europe, and about 51% in Asia. So it was really strong across the board.

And we have been making progress with regard to the integration of GarrettCom. There's been a lot of work that's not yet evident with respect to product planning and being more focused about the markets that we go after. So we had a really strong quarter for the networking segment, which we were very pleased with.

Okay. And I guess just based on your earlier commentary, safe to assume that industrials in Asia was perhaps slightly strongly on a relative basis?

Yes. Our industrial business globally was up 31%. I don't have the Asia number right here in front of me, but given that the networking business was up 51% in Asia, the connectivity business was up 15% in Asia, both of which are predominately industrial markets, then my instincts would tell me that the 31% we saw globally was probably even richer in Asia.

Great, great. Thanks.

Mr. Benoist, your next question is from Keith Johnson with Morgan Keegan.

Good morning, guys.

Hey, Keith.

Hi, Keith.

Just a couple questions. Back on the comments you made earlier on the non-copper materials cost, and you said you were getting closer to offsetting them. I think it was a headwind in the first quarter. Here in the second quarter was it a headwind for you, and then how much?

We actually got a little benefit in the second quarter sequentially. The pricing mechanisms that were put into place in the first quarter were able to create coverage associated with the cost increases what we saw in the first quarter.

The second quarter costs continued to rise. And therefore, the timing associated with pricing increases, and the market's willingness to absorb those increases, the timing is a little bit off, which only gives us a year-over-year issue, not a sequential issue. So sequentially, we're fine because of the sort of deficit position we had in the first quarter which was in general recovered through pricing in the second quarter. Buy year over year, there is still a slight degradation. It's not of note. It's a nuisance rather than a major driver of margin creation. But it is, again, something that you've got to manage and neutralize in your business model.

Okay. I guess if I look at the second-quarter results, the $0.72, and you guys mentioned about $0.03 of that was coming from what looks like a lower tax rate. It's still well ahead of what you guys had kind of gave us for the range for the quarter when we did our last conference call. What areas I guess kind of jumped out and kind of pushed you up above what you thought your original range was?

Well I think there were two major things. One is we did get benefit from FX. So currency was favorable in the quarter compared to the first quarter. I think it was up about, I don't know, $4 million in gross profit and about $0.04 sequentially. So that was a good thing for us, sequentially.

And then the other thing is volume was stronger than what we had expected. We had stronger volume. And at the time of issuing guidance, I think I had mentioned, somebody had asked how order rates looked, if they were good, so we were able to sustain that through the quarter. It was a little bit stronger than we thought it was going to be.

As you've kind of moved over, I know July was just-- we're not even finished with July, but are you picking up any, at the customer level, any nervousness just given, as you referenced earlier, the continued uncertainty out of Washington? And then of course continued uncertainty on the European side with the debt issues and just overall global economy right now?

I don't have any real insights beyond what you would read anywhere else. I mean I think that everybody is very hopeful that the folks that we elected are going to actually do their job and get some of these things behind us. And you do worry a little bit about folks sort of creating a self-fulfilling prophecy and getting more cautious and therefore sort of affecting the entire economy. So we're cautious about those things like everybody else, but in terms of day-to-day business at this point, I would say that there hasn't really been any significant change.

Great. Thanks a lot.

Thanks, Keith.

Mr. Benoist, your next question is from Jeff Beach with Stifel Nicolaus.

Good morning, John and Gray. Great quarter.

Thanks, Jeff.

thanks, Jeff.

A couple of questions. First, I did miss the growth. I got networking, but missed connectivity and broadcasting. Could you repeat those?

Yes. So our connectivity business, Jeff, was up organically 15.5% on a global basis that's consolidated. And then our broadcast business, and this had a lot of acquisition benefit, was up 63% year over year. So the acquisitions that we did, most notably in the fourth quarter, LRC from the Thomas & Betts company, as well as the ICM are in those numbers. So that was a big part of the expansion in the broadcast portfolio.

And organically?

I don't have the organic number by the end market, Jeff, for you. Sorry.

That's okay. So a question off of that. The very strong growth you're seeing across these end markets, it appears as though, or I'm going to guess that you're growing faster than your end markets in products -- networking, connectivity, industrial. And how much would you, and this would be a general question, how much would you attribute to taking market share from others and versus maybe finding new clients and expanding your product portfolio in growth from some of the acquisitions that you've made?

Well, Jeff, our organic growth, after adjusting for copper, is 11%. And I would estimate that half of that is share capture. I think our end markets grew somewhere between 5% to 6%. And that would include, that 5% to 6% would include a little bit of the channel growth that we saw from Q1 to Q2.

So I think 5% to 6% of our year-over-year growth is share capture. I think that some of that is product initiatives, but I think the lion share of that is the continued benefits that we're seeing from our market delivery system. We saw a real good growth year over year in our global account program. We saw real good growth in all areas of the world, especially in China, in our industrial end markets and share capture. So I think about half of that organic growth is us taking business away from other people.

Thanks. The second question I have, the significant and maybe even growing difference in profitability between EMEA and the Americas, some of it must be the mix of product with networking and connectivity, but there has to be more to it than that. Can you talk about that and then can you give us a rough range of some sort of a goal of profit margins in Americas over the next two or three years?

Sure. So I think there's two things that are most notable. Actually 3 things that are most notable in the difference between EMEA and Americas. One is the mix of business. So if you look at the mix of business, if Americas had the same mix of business that EMEA had, you'd see the Americas margins go up substantially.

Secondly is the Americas business is benefitting from revenue growth year over year on the acquired companies, but the acquired companies, because of the integration cost, aren't yet performing at the level that we would expect them to perform.

Thirdly, our EMEA business does capture the JV income that comes from our China-based business. And that JV income comes without any revenue, and so there's a little bit of benefit in the EMEA operating margins as a result of that.

So those 3 things, Jeff, are the difference between the two, and my expectation is that the Americas business, when it gets the full benefit of the acquired companies, as it continues to benefit from leverage, and product mix benefits from the growth rates in connectivity and networking, you're going to see the America business performing right at or near 15%.

Okay, great. Thanks a lot for the answers.

Welcome.

Thanks, Jeff.

Mr. Benoist, you have a follow-up question from Shawn Harrison with Longbow Research.

Hi again. Just wanted to delve into the sequential SG&A growth. I know it was mentioned investments that grow the business going forward. Was hoping maybe you could kind of quantify the amount and then just refresh my memory again on what the drop through rate is in terms of each dollar sales growth requires what incremental amount of SG&A.

So I think sequentially the growth in SG&A, as it relates to strategic initiatives that we invested in, was a little over $2 million. And most of that came in Asia. So we continue to invest a lot in Asia.

In terms of a fall through, 37% variable margin is a good fall through number. SG&A growth, as a percentage of revenue, half rate, so about 10%. So our fall through ought to be right in that 25% to 27%.

Okay, very helpful. Thanks so much.

You're very welcome.

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

All right. Thank you, Ryan.

Ryan, that completes our call today, and we can disconnect. Thank you.

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