Belden Inc (BDC) 2011 Q3 法說會逐字稿

The Belden, Incorporated conference call will begin momentarily. Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden, Incorporated conference call. Just a reminder, this call is being recorded. At this time, you are in a listen-only mode.

Later we will conduct a question and answer session. (Operator Instructions). I would now like to turn the call over to Henk Derksen. please go ahead, sir.

Thank you, Nicky. Good morning, everyone, and thank you for joining us today for Belden's third quarter 2011 Earnings conference call. My name is Henk Derksen and I'm Vice President of Corporate Finance. With me here today is John Stroup, President and CEO.

John, will provide a strategic overview of our business and I will provide a detailed review of our financial and operating results, followed by question and answer. We issued our earnings release earlier this morning, and we have prepared a slide presentation that we will reference on this call. The press release and the presentation are available online at investor.belden.com. Please note, there's no WWW in that web address. Just investor.belden.com.

Turning to slide two 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 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 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 three, during this call, management will reference certain non-GAAP financial information, in accordance with regulation G, we have provided a reconciliation of the most closely associated GAAP financial information to the known GAAP financial information we communicate. This reconciliationis in the appendix of the presentation and has been posted separately to the Investors Relation section of our website. I will now turn the call over to our President and Chief Executive Officer John Stroup. John.

Thank you, Henk, and good morning everyone. I'm extremely pleased with our third 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 successfully integrate our recently acquired businesses. Please turn to slide four for a review of our third quarter highlights. Earnings growth was 38% on a year-over-year basis.

Revenues grew 31% year-over-year to $519.7 million and 18% excluding acquisitions and currency effects. At $61.4 million, free cash flow generated was nearly two times net income in the third quarter.

We ended the period with $348.2 million in cash and cash equivalents, and this exceptional cash flow generation was due in part to the traction made with our lean initiatives in our recently acquired companies.

In addition, we purchased approximately 867,000 shares of our common stock for $25 million, under the previously announced share repurchase program. Our guidance will be discussed at the conclusion of our prepared remarks.

Please turn to slide five to review the third quarter income statement. As I indicated, revenues totaled $519.7 million, up 31% year-over-year.

Adjusting for the acquisitions we've completed over the past year and currency effects, revenues grew 18%, which especially in today's economic climate is a testament to our enriched portfolio of products and geographies and the improvements we made with the execution of our market delivery system. Adjusting for changes in copper costs, revenues increased approximately 11%. Although we had expected a slight decline, inventory at our channel partners was unchanged from the prior quarter. Gross margin was 29.4%, up 20 basis points sequentially, and down 40 basis points compared to the third quarter of 2010.

Operating margin was 10% down 90 basis points sequentially and down 50 basis points compared to the third quarter of 2010. After adjusting for acquisitions, currency and copper, year-over-year gross margin and operating margin increased 150 basis points and 80 basis points respectively. The sequential decline in operating margin was a result of our typical seasonal pattern, as well as a sudden slowdown at our Chinese joint ventures largest customer due to excess inventory in its distribution channel. We expect this inventory correction will be largely behind us by year-end.

The year-over-year improvement in margins was the result of leverage on growth and improved mix, as you will see on slide six. Compared to the prior year, the percentage of revenue from our connectivity and networking platforms is up 430 basis points. Connectivity revenue grew 59% and networking revenue was up 48%, both benefiting from the acquisitions made in the past several quarters. In the third quarter, we acquired Buyers Security Incorporated. While having negligible impact on our immediate sales and operating profit, Buyers cyber IT solutions provide an excellent extension to Belden's existing security platform, further strengthening the Company's leadership in industrial networking.

In addition, our networking platform grew 27% organically during the quarter, fueled in part by strong performance in the emerging markets. Of particular note is the 70% networking revenue growth in our Asia Pacific segment.

In addition, I'm extremely pleased with 51% year-over-year revenue growth and 34% organic growth in the emerging markets of Brazil, India, and China, where we generated $78 million in revenue for the quarter. These markets are making significant investments in manufacturing, infrastructure, and other key markets served by Belden.

In Brazil, where preparations are underway for the 2014 FIFA World Cup, and 2016 summer Olympic games, we have bolstered our business with the recent acquisitions of [Holy Rock]. We experienced another strong quarter of growth in the industrial end market. Revenue grew 33% year-over-year and grew organically by 20%.

On an end market basis, the most significant year-over-year change is broadcast, which grew 60% and where the percentage of revenue increased 270 basis points to 15% of our total revenue. This is primarily due to the two connector acquisitions completed in the past several quarters. Despite another decline in year-over-year non-residential spending, I'm pleased to report 18% organic growth in our enterprise end market.

Turning to our key performance indicators on slide seven, inventory turnover was 7.4 in the third quarter, a .6 turn improvement on a year-over-year basis.

This improvement was accomplished despite absorbing lower turnover at the companies we've recently acquired. Property, plant and equipment turnover, which is a measure of fixed asset efficiency, improved 1.5 turns year-over-year to 7.3.

It's clear by these results that our commitment to lean principles continues to make a positive difference. I will now ask Henk to provide additional insight into our third quarter financial performance. Henk.

Thank you, John. I will start my comments with our consolidated results, followed by an income statement review, a discussion of our segment results, and a balance sheet, and close with our cash flow performance.

Please turn to slide eight. Third quarter revenues totaled $519.7 million, up 31% year-over-year. Income on continue operations totaled $31.4 million or $0.65 per diluted share, up 38% compared to $0.47 in the year ago period.

After adjusting for the effects of acquisitions and currency, organic revenue was 18%. Third quarter 2011 revenues include approximately $14 million in favorable currency translation year-over-year, and approximately $2 million unfavorable currency translation sequentially.

The majority of the currency effect was associated with the Euro, which along with the Canadian dollar was favorable year-over-year, but unfavorable sequentially. The Chinese yuan was favorable both on a sequential and year-over-year basis.

Acquisitions completed in the past several quarters contributed $38 million to our third quarter revenues. Those margins decreased 40 basis points year-over-year, and increased 20 basis points sequentially. After adjusting for acquisitions, currency, and copper, those margins increased on a 50 basis points year-over-year and increased 20 basis points sequentially.

Those margins benefited from leverage from our growth on a year-over-year basis. Mix improved as a result of in our connectivity and networking platforms, contributing 90 basis points year-over-year and 20 basis pointed sequentially.

Third quarter SG&A expense was $85.4 million or 16.4% of revenue.

An improvement of 30 basis points year-over-year, and flat in lower terms sequentially. When adjusted for acquisitions and currency, SG&A expenses is improved 40 basis points year-over-year. The year-over-year improvement in SG&A as a percent of revenue demonstrates the operating leverage we have in the business, and our continued commitment to our strategic investments.

As our end markets continue to grow, we expect to further realize this leverage in our financial results. Our (inaudible) expense was $13.6 million this quarter or 2.6% of revenues, an improvement of 10 basis points year-over-year, and $900,000 sequentially. At $3.4 millionfor the quarter, amortization of intangible assets increased by $800,000 year-over-year as a result of recently acquired companies.

The results from our Chinese joint venture which we account for as an equity method investment was $1.5 million for the quarter, this is a reduction of $1.6 million year-over-year, and $2.4 million on a sequential basis.

As John pointed out in his remarks, this decline was a result of a certain slow down at the joint venture's largest customer due to excess inventory in its distribution channel. We believe the long-term goal prospects for this business are strong.

Effective tax rate this quarter was 22.3% compared to 23.5% last quarter and 24.2% in the third quarter of last year. The effective tax rate benefited on several discreet items, which had a favorable $.05 benefits to the earnings per share this quarter.

For financial modeling of the fourth quarter 2011, we suggest using a 24.5% effective tax rate which is the rate we incorporated in our fourth quarter and full-year guidance as we will discuss in just a few moments.

Turning to slide nine for the segment results by product platform. This supplemental product reporting was initiated in the first quarter. As you can see, the company's product portfolio transformation, to which a richer mix of networking and connectivity products was realized on a year-over-year basis in each of our three geographic segments, with the EMEA segment as the most balanced. The portfolio transformation is one of the important drivers achieving our stated multi-year goal of operating profits between 13% and 15%.

Please turn to slide 10 for our segment results. Consistent with the reporting methodology we adopted in the first quarter, segment results are reporting, including the full allocation of corporate administrative expenses, and the prior year period has been updated accordingly. In our Americas segment, external revenues totaled $325.2 million, affiliate sales were $10 million, and total revenues was $335.2 million.

Third quarter external revenues were flat sequentially and increased [40%] year-over-year. Adjusted for acquisitions and currency, external revenues grew 22% year-over-year as a result of the success of the marketability systeminitiatives and improved product portfolio.

Third quarter operating income was $39.6 million or 11.8%, down 20 basis points sequentially. Adjusted for acquisitions, currency, and changes in copper costs, the operating income percentage in our Americas segment improved 100 basis points year-over-year. The Americas segment benefited from pricing, volume, and mix.

In our EMEA segment, external revenues totaled $103.7 million, affiliate sales were $30.8 million and total revenues were $134.5 million.

Third quarter revenues decreased 10% sequentially as a result of typical seasonal patterns in Europe, and increased 15% year-over-year. Third quarter operating income was $22.8 million or 16.9%, which is up 70 basis pointed sequentially and 290 basis points year-over-year on a currency (inaudible) adjusted basis. This quarters operating profit percentage of 16.9% represents record performance for our EMEA segment.

In our Asia Pacific segment, external revenues were $90.8 million, affiliate sales were approximately a $100,000, and total revenues were $90.9 million. Third quarter external revenues decreased 5% sequentially and increased 22% year-over-year.

On a currency (inaudible) adjusted basis, revenues declined 5% sequentially and increased 7% year-over-year. Both our sequential decline as well as our year-over-year growth were a result of a deliberate action to improve the segment's portfolio. On a year-over-year basis, we saw our combined networking and connectivity products grow by 44% from $13 million to $18 million for the quarter.

The cable products that we sell into consumer electronic end markets declined by $3 million in revenues sequentially and were approximately flat on a year-over-year basis, adjusted for changes in copper costs. Although the combined effect and favorable impact to mix, it was nearly offset by a challenging [prizing] environment within our consumer electronics business.

Operating income was $7 million or 7.7% in the third quarter, down 190 basis points sequentially and 250 basis points year-over-year both on a currency and copper adjusted basis. Given the current and future growth opportunity, we increased our (inaudible) investment by $3 million on a year-over-year basis and $1.5 million sequentially.

If you will turn to slide 11, I will begin with our balance sheet highlights. Cash and cash equivalents totaled $348.2 million at the end of the third quarter, up $19 million from the second quarter, and $52 million year-over-year.

Inventory turnover was 7.4 turnsdown from 7.5 turns in the second quarter due to a typical seasonal pattern in our business. Days payable was 80 days in a third quarter a six day improvement from 74 days in the second quarter. Days sales outstanding was 61 days in the third quarter, a one-day improvement from 62 days from the second quarter and a three-day improvement year-over-year.

As we mentioned in our previous call, accounts receivable collection has been an area of focus for us in the second half of this year. As we drive to achieve our stated goal for free cash flow to exceed net income for the year. Working capital turnover was 9.7 turns this quarter, up 1.6 turns from 8.1 turns in the second quarter, and up .5 turns year-over-year from 9.2 turns.

Adjusting for the recent acquisitions, the improvement is 1.4 turns on a year-over-year basis. As we indicated in our last quarter's earnings release, our Board of Directors authorized a $150 million share repurchase program.

In the third quarter, we purchased approximately 867,000 shares of Belden common stock for $25 million under this authorization. Based upon our strong (inaudible) position and liquidity available under our unused credit facility. We currently have approximately $600 million of dry powder available to pursue (inaudible) opportunities in combination with the share repurchase program.

Please turn to slide 12 for a few cash flow highlights. Cash flow from operating activities was $68.3 million in the quarter compared to $49.9 million in the year ago period. Net capital expenditures totaled $6.9 million compared to $6.5 million in the year ago period.

Free cash flow was $61.4 million in the third quarter, nearly 2 times that income for the quarter compared to $43.4 million in the third quarter of last year.

We are well on our way to achieving our stated goal of free cash flow in excess of net income for the full year, which would imply free cash flow approximately $35 million in the fourth quarter of 2011.

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

Thank you, Henk. Please turn to slide 13 for our outlook regarding the fourth quarter and full year 2011 results. Despite a strong third quarter, our September order rates appear to reflect caution among many of our customers and channel partners.

Volatility in commodity prices and concerns regarding the economic state of most developed countries could translate into lower growth rates and reduced customer inventory levels. Therefore, we expect our fourth quarter 2011 revenues to be $490 million to $500 million, an income from continuing operations per diluted share to be between $0.50 and $0.55. This guidance implies organic growth of 6% to 8% for the quarter.

For the full-year 2011, the Company expects revenues to be $2.01 billion to $2.02 billion and income from continuing operations per diluted share to be between $2.33 and $2.38. That concludes our prepared remarked. Nicky, please open call to questions.

Thank you. (Operator Instructions). Your first question is from Matt McCall with BB&T Capital Markets. Please go ahead.

Hey, Matt, good morning.

How are you all?

Good, thank you, Matt.

So you referenced in the prepared remarks the 13% to 15% margins, I think it was you, Henk, you said that you were referencing mix and a big part of that assumption was getting the mix more balanced. As you talk about pursuing that margin goal, how much of obtaining that goal is dependent upon the mix shift and how much of that is dependent upon just pure volume growth? Are those two components we need to look at?

There are effectively three components, Matt. It's the mix, it's leverage of goal, and it's productivity, i.e., our lean initiatives.

So, Matt, if you look at the performance in the third quarter, roughly operating income improved year-over-year about 11 million from volume and about 4 million for mix, so as we've consistently stated as we grow the higher margin connector and networking businesses significantly faster than the cable business, we're going to continue to see favorable impacts from mix as we did in the third quarter and we would expect to see in the fourth as well as leverage on volume. So the quarter played out really very much the way we had expected with one exception really, which is the decline year-over-year end sequentially in the performance our JV in China because of the inventory build-up at our largest customers distribution channel which is really just a temporary phenomenon. So,I would say the quarter played out both on mix and volume exactly the way we thought it would.

Okay. On the Asian Pacific business, the JV mostly impacts the, I'm sorry,the income from equity method investment line, right? So, I'm trying to make sure I don't double count here. So if I look at the segment data, I think you did 7.7% margin, you referenced some strategic investments. So how do we start to, first, maybe you could discuss the strategic investments and where those investments or where those dollars are going, then how should we start to look at the margin there, I think the operating contribution margin was actually negative. I know there were some puts and takes. Just how do we look at that as we move into 2012 and maybe what's the assumption for Q4?

So, in the case of Asia, there were a couple of moving parts. So, as Henk referenced, we had favorable mix in Asia year-over-year, probably about $2 million of favorable mix because we grew the networking and connector businesses and the high margin cable business faster than the overall portfolio did, so that was a very positive thing.

We did, though, invest approximately about $3 million year-over-year in things that we think are necessary within the region to continue to grow those higher margin products faster. And if you look at our SG&A and our R&D spend in Asia, we're at about 14.8%. So you can see that our investment level there is still dramatically lower than it is in Europe or the Americas. Now some that has do with the business model of consumer electronics, but as we continue to grow the other pieces faster, I think we'll see that OpEx tend to go up more like we see in the Americas and in Europe. The one negative that we had in the quarter was we did have pricing issues in our consumer electronics business. It was about 2 million unfavorable year-over-year, and it's basically our inability to pass on non-copper commodity increases but largely compound price increases because of over-capacity in China in consumer electronics. And that's been a challenge now for sometime, that's a challenge that we continue to fight.

The way we're fighting it is to selectively move away from customers and applications that just aren't a good fit and grow the other pieces that are better. So, those are the three elements that were affecting the Asia results.

Okay. And then just a follow-up. You said you expect the SG&A to trend toward the other segments, so trend higher. What's the net impact there? I assume there's going to be some offset from some better gross margins, so how do we approach the whole operating margin component of that business as we look at 2012?

Well, you should absolutely expect that operating margins will go up. So the SG&A costs will trend up slowly and will trend up slower than gross profits. This is not us thinking that margins are going to go down. Margins will go up from where they arebut I think that you should expect the business model to start looking more like the Americas than it does currently in Asia. I.e. higher gross profit which currently gross profit in Asia 22.5% is lower than what we see in Americas right now at about 29%.

So we've got 700 basis points of opportunity that I think we will get and you should see our SG&A move up comparativelybut seeing the operating margin expansion like we've already seen in the Americas and Europe.

Okay, perfect. Thank you.

Thanks, Matt.

Our next question will come from Jeff Beach with Stifel Nicolaus. Please go ahead.

Good morning, John and Henk.

Good morning, Jeff.

Good morning, Jeff.

I was a little surprised to read about the cautionary statement in your press release. You've made a little bit of commentary, but I'm just looking back on the comments made by [Anextor] and Westco and many other companies that are definitely domestic centric, and coming back to those cautious statements I heard something here about China. But outside of that, what customers, what geographies are you seeing, let's call it a slowing of demand, which I haven't heard from, any of my other companies yet?

Jeff, in the third quarter, our order rates were lower than our shipments, so in the third quarter we shipped approximately 30 million more than we booked, and across the world what we saw was customers being more sensitive to how much inventory they should hold, and I think it's probably two things. One is some uncertainty, macro economic uncertainty particularly in Europe, and also the United States, trying to figure out what's going to happen.

Then secondly, with commodity prices being so volatile as they have been over the last 60-90 days, people I think being more careful in how much inventory they hold and not wanting to be on the wrong side of the purchases. So, our guidance includes the assumption that our channel partners are going to want to take inventory down in the fourth quarter because they're going to want to prepare themselves for the possibility of things not getting better and things getting worse. So we're taking what we think is a cautious position as it relates to our fourth quarter guidance. I think that with the recent news yesterday out of Europe and the GDP number that we got out of the US today there might be reason to consider that our guidance in the fourth quarter is overly cautious, but given what we saw in the third quarter and given the way things have been moving the last couple weeks, we thought it was the right way for us to approach the quarter.

All right. As a second question, on the continuing tax rate coming in below historical levels and below your guidance, can you give us initial thought on the tax rate next year?

Well, we guide as part of our investor day in Boston. We typically guide a jurisdictional mix and jurisdictional mix is between 28% and 30%.

Jeff, I think for now that's probably the right way to be thinking about 2012, if based on what I've seen today, Jeff, if we were to miss that number, we would probably miss it on the low end, not the high end.

All right, thanks.

And your next question will come from Tony Kure with KeyBanc. Please go ahead.

Hey, good morning, gentlemen.

Good morning, Tony.

Just wanted to follow up on the inventory destock and your guidance. Is there any way you couldquantity the magnitude of that?

We didn't see it in Q3, we thought we might see some in Q3. In fact, most of our distributors in Q3 either held or increased inventory and their turns actually improved slightly because our POS was up sequentially, so that was all good. In the forth quarter, as we sort of think about our situation, we think that there could be maybe $20 million of inventory correction in the fourth quarter based on what we think people might be considering risk, so that's kind of how we thought about our sequential bridge, about $20 million from Q3 to Q4.

Okay, great. Also in your fourth quarter guidance, just trying to look at what regions would be most impacted here. Would it be fair to say that Europe would be the most resilient on the margin side and less susceptible or less exposed to that destock and that North American and Asia would see the biggest margin hit? Is that a fair assessment?

I think the risk on inventory right now is probably greater in the Americas. The one area that we have a little bit of concern of inventory out of Europe is our connector business because of the OEM supply chain and we think we may see a little bit sequentially there as well. I think the one that's probably the least impacted would be Asia because although our consumer electronics business may see destocking, the margin there is shallower.

Okay. I didn't quite catch it, if you said it, I apologize. Organic growth X copper for cable products?

So our cable products, organic growth, after adjusting for copper was 9%.

Okay, great. Then a final question I have is just I think you had been doing some restructuring it in the Americas earlier in the year, correct me if I'm wrong, if so, is there still restructuring expense hitting the P&L in the Americas in the fourth quarter or anywhere else for that matter?

No, the restructuring I think you're talking about is the integration costs associated with the recently acquired businesses. We did see some of that in the third quarter, we'll see some in the fourth as well, but it's getting better sequentially and we still feel good about the kind of improvement we'll see year-over-year in 2012.

Do you think it will be done by calendar 2012?

I don't have in front of me, but I think most of the heavy lifting is done by the calendar year.

Thanks so much.

Thank you, Tony.

(Operator Instructions). Your next question will come from Shawn Harrison with Longbow Research. Please go ahead.

Good morning, John and Henk.

Good morning, Shawn.

First question, I want to get back to your commentary on copper. People may be wanting to be a little bit cautious given the precipitous decline we've seen in copper spot prices. If you can talk about both what you're seeing customers do in reaction to the lower copper prices, maybe also how Belden could benefit on a short-term basis if you're seeing prices holding up here, but input cost decline?

So the volatility has been quite extraordinary, of courseI think copper is up again today, I think it might be up to 370 or something like that, so lots of volatility right now because people tend to bet on commodities when things are uncertain. What we saw in the third quarter, channel inventory positions didn't really change very much. We did see some channel inventory correction in our connector business in Europe for good reason. Our connector business has brought their lead time downs and therefore customers haven't had to stock as much which is good. So our guidance in Q4 is suggesting that maybe there will be some channel inventory correction as distributors try to exit the year with better balance sheet and try to manage through it.

There has been a move up in copper since we ended Q3, therefore, that might suggest that pricing is going to kind of hold in where it was, maybe there won't be a price decline the way we had thought. And I think the point you're making is that when copper falls, sometimes we get a non-recurring benefit. I'm not sure we would see much of that in this particular case, just given the way we bought copper in the last 60 days. I don't think we're going to see much of an impact either favorable or negative one over the next 60 days. My sense is that if copper kind of hangs in where it's at right now, we're not going to see much of an impact at all.

Okay, very helpful. Then I just wanted to ask a follow-up question. When looking at the EBITDA margins in the Americas, at least the incremental margins quarter-to-quarter were not what I thought they would be, maybe there's mixed factors, but if you could just help me out in terms EBITDA margins in the Americas and the change from the September quarter to the June quarter.

Sure, so the first thing I would call your attention to, is that when you adjust for copper, last year's EBITDA margins were 16.6. 100 basis points lower than reported. And then when you look at the growth from there it's up to 17.4. We did get the fall through that you would expect, we did get some benefit of mix from a million to a million and a half, and we did though invest about 2.4 million in OPEX year-over-year on some of the initiatives that we thought were important. Most notably we made a pretty sizeable investment in Brazil.

We've been taking the opportunity to make investments especially in emerging markets and high growth, high margin areas. I don't think that level will increase that 2.4 million of strategic investments kind of increases we would see normally, I think was a little bit out-of-character and that might be part of the reason why you didn't see the same kind of leverage you may have expected.

Thanks so much.

Thank you. There are no further questions at this time. Please continue.

Thank you, everyone, for participating in today's call. For those of you participating in this year's investor and analyst day meeting, look forward to seeing you in Boston on December 5th. Thank you.

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