Belden Inc (BDC) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Inc. conference call. Just a reminder, this call is being recorded. (Operator Instructions) I would now like to the call over to Kevin Maczka. Please go ahead, sir.

Thank you, Stephanie. Good morning, everyone, and thank you for joining us today for Belden's Second Quarter 2018 Earnings Conference Call. My name is Kevin Maczka. I'm Belden's Vice President, Treasurer and Investor Relations. With me this morning are John Stroup, President, CEO and Chairman; and Henk Derksen, Belden's CFO. John will provide a strategic overview of our business and then Henk will provide a detailed review of our financial and operating results followed by Q&A. We issued our earnings release earlier this morning, and we've prepared a slide presentation that we will reference on this call. The press release, presentation and transcript of these prepared remarks are currently available online at investor.belden.com.

Turning to Slide 2 in the presentation. During this call, management will make certain forward-looking statements in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For more information, please review today's press release and our annual report on Form 10-K. Additionally, during today's call, management will reference adjusted or non-GAAP financial information. In accordance with Regulation G, the appendix to our presentation and the Investor Relations section of our website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information we communicate. I will now turn the call over to our President, CEO and Chairman, John Stroup. John?

Thank you, Kevin, and good morning, everyone. As a reminder, I'll be referring to adjusted results today. Please turn to Slide 3 in our presentation for a review of our second quarter performance. Second quarter revenues and EPS were above our guided ranges. I am extremely pleased to report record quarterly revenues that exceeded our long-term growth goal and our fourth consecutive quarter of double-digit EPS growth. Revenues in the second quarter increased 10% to $671.4 million. On a constant currency basis, revenues grew 8.4%, above the high end of our long-term financial goal of 5% to 7%.

EBITDA grew 9.6% year-over-year to $122.6 million, reflecting 18.3% EBITDA margins. Our proven Belden business system continues to drive sustainable productivity gains, offsetting the mix headwinds in the quarter. EPS increased 17.8% in the second quarter from $1.29 in the prior year period to $1.52. We expect improved organic growth, solid EBITDA margin expansion and continued double-digit EPS growth in the second half of the year. We are tightening our full year 2018 revenue and EPS guidance ranges to reflect our expectation of 11% to 12% revenue growth and robust 17% to 21% EPS growth.

We're also pleased to announce a favorable payment related to an IT dispute within our broadband business. We received cash and recognized a pretax gain of approximately $62 million early in the third quarter, which will not be included in our adjusted EPS for 2018.

Please turn to Slide 4 for a review of our business segment results. I will begin with our Enterprise solutions segment. As a reminder, our Enterprise solutions allow customers to transmit and secure data, sound and video across complex enterprise and media networks. Our key markets include smart buildings, final mile broadband and live media production. Revenues in this segment increased 14.6% year-over-year to $399.7 million or 13.4% on a constant currency basis. The smart building market continues to benefit from healthy nonresidential construction in the United States and increased needs for contractor productivity and building efficiency. This trend is best reflected by our innovative Category 6A cable products, which deliver both data and power over Ethernet. Category 6A cable revenues increased 43% organically in the second quarter on a year-over-year basis. Final mile broadband, which benefits from increasing broadband subscribers and network upgrades rebounded as expected in the quarter. We continue to expect mid-single-digit growth in this market for the full year 2018.

We also expanded the fiber capabilities within our broadband business during the quarter with the acquisition of NT2, a fiber component supplier with approximately $15 million in annual revenues. NT2's complimentary products expand our fiber-to-the-home offering for broadband service providers and bring our total annual fiber sales to approximately $100 million.

Further, we have a robust M&A pipeline, and we continue to actively pursue a number of attractive inorganic opportunities in this area. Live media production is served by our combined Grass Valley and SAM businesses. We completed the SAM acquisition during the first quarter, and the integration is progressing as planned. Revenue and EBITDA exceeded our expectations in the first full quarter of ownership as we are efficiently combining these 2 leading companies and capturing the targeted synergies.

Revenues for the combined Grass Valley and SAM business were approximately flat on a year-over-year basis. We are encouraged that the combined EBITDA margin increased over 10 percentage points to 17% as a result of our successful integration and restructuring efforts.

Enterprise solutions segment EBITDA margins were 17.6%, increasing 140 basis points from the prior year period, primarily as a result of the acquisition integration.

Turning to our Industrial segment. Much like Enterprise, our Industrial Solutions allow customers to transmit and secure data, sound and video, but in this case, in harsh industrial environments. Our key markets include discrete manufacturing, process facilities, energy and transportation. Revenues in this segment increased 3.8% year-over-year to $271.7 million or 1.6% on a constant currency basis. This includes a headwind from the MCS divestiture, which closed at the end of 2017.

Cybersecurity revenues declined in the quarter, in part due to project timing, as 2 larger projects slipped into the second half of the year. Importantly, our improved product road map is gaining traction with new and existing customers. We've released a number of new cloud-based products during the quarter that enable the installed base to purchase additional product categories.

We also had a key win with a major pharmacy chain for a recently launched solution, which we expect to be well received by other customers as well. We continue to expand our reach into industrial customers as we now offer a comprehensive suite of capabilities tailored for this vertical. We expect to add to these capabilities in the coming quarters.

Discrete manufacturing, our largest vertical, grew 6.7% on an organic basis, driven by continued demand from machine builders and increasing investments in automation. The process market grew 8.6% organically with robust demand in chemical processing and water, wastewater applications.

Energy increased 3.7% in the quarter, driven by demand in electrical substation automation and alternative energy.

And finally, transportation, which predominately provides networking equipment for public transportation and infrastructure applications expanded 1.3% organically in the quarter with demand across a broad range of transportation markets, including airports.

Importantly, end market demand remains very encouraging with healthy order rates and backlogs across our industrial markets. Industrial Solutions segment EBITDA margins were 19.6% in the quarter, increasing 150 basis points sequentially and declining 110 basis points year-over-year due to the unfavorable mix headwinds.

I will now ask Henk to provide additional insight into our second quarter financial performance. Henk?

Thank you, John. I will start my comments with results for the quarter, followed by a review of our segment results, discussion of the balance sheet and close with our cash flow performance. As a reminder, I will be referencing adjusted results today.

Please turn to Slide 5 for a detailed consolidated review. Revenues were $671.4 million in the quarter, increasing $60.8 million or 10% from $610.6 million in the second quarter of 2017.

Revenues were favorably impacted by $9.7 million from currency translation, $9.7 million from higher copper prices and a net $33 million from acquisitions and divestitures. After adjusting for these factors, revenues increased 1.4% organically from the prior year period.

Importantly, all of the products held at 3PLs at the end of 2017 has been delivered to end customers. Through the end of Q2, we have recognized revenue on approximately $33 million of this product. The remaining $3 million will be recognized in future periods. We're glad to put this issue behind us.

Gross profit margins in the quarter were 40% compared to 41.4% in the year-ago period. The year-over-year decrease was driven by unfavorable product mix and higher copper prices.

As a reminder, when copper costs increase and we successfully raise selling prices, this drives higher revenue with minimal impact to gross profit dollars. As a result, gross profit margins decrease.

Operating expenses were $158.1 million or 23.6% of revenues. After adjusting for the impact of currency translations and acquisitions, operating expenses decreased $14.6 million, driven by our restructuring actions and productivity initiatives.

EBITDA was $122.6 million, increasing $10.7 million or 9.6% compared to the prior year period. EBITDA margins of 18.3% were consistent with the year-ago period.

Net interest expense declined 36% year-over-year from $23.5 million to $15.1 million as a result of the debt refinancing actions completed over the last year. We are extremely pleased with these actions, which substantially lowered our pretax cost of debt and extended our maturities.

At current foreign exchange rates, we now expect interest expense of $61 million for the full year.

Following the implementation of the Tax Cuts and Jobs Act of 2017, our effective tax rate for the second quarter was 24% compared to 16.6% in the prior year.

I'm pleased to report that our team has identified incremental tax planning initiatives available to us under the new tax laws. For financial modeling purposes, we recommend using an effective tax rate of 22% for the third and fourth quarters of 2018.

Net income in the quarter was $72.6 million compared to $64.3 million in the prior year period.

Earnings per share was $1.52 in the quarter, increasing 17.8% from $1.29 in the prior year period.

Please turn to Slide 6. I will now discuss revenues and operating results by business segment. Our Enterprise solutions segment generated revenues of $399.7 million during the quarter, increasing 14.6% from the prior year period. Higher copper prices, currency translations and acquisitions increased revenues by $49.2 million. After adjusting for these factors, revenues increased 50 basis points organically year-over-year. I'm pleased with the success of our recent price actions, which increased revenues sequentially for the third consecutive quarter. We expect additional benefits from these actions in the second half of the year.

EBITDA margins were 17.6% in the quarter, increasing 140 basis points from the prior year period and 120 basis points sequentially. The year-over-year increase was driven by successful acquisition integration and sustainable productivity improvements. As a reminder, we completed the acquisition of Snell Advanced Media or SAM during the first quarter 2018. We are investing approximately $50 million this year in integration and restructuring efforts to capture the value of the combined company and generate a compelling 13% return on total invested capital. These strategic actions include substantial cost reductions and manufacturing footprint rationalization.

We're extremely pleased with the substantial progress made by the team in the first few months of ownership. Revenue and EBITDA exceeded our expectations in the second quarter, contributing to the solid Enterprise segment EBITDA margin performance. The Industrial Solutions segment generated revenues of $271.7 million in the quarter, an increase of 3.8% from $261.8 million in the prior year period. Currency translation and higher copper prices had a favorable impact of $10.3 million.

The divestiture of MCS completed at the end of 2017 resulted in a $7 million lower revenues. After adjusting for these factors, revenues increased 2.5% organically.

EBITDA margins of 19.6% decreased 110 basis points year-over-year, driven by unfavorable product mix and higher copper prices. Again, when copper costs increase and we successfully raise selling prices, this drives higher revenue with minimal impact to EBITDA dollars. As a result, EBITDA margins decrease.

If you will turn to Slide 7, I'll begin with our balance sheet highlights. Our cash and cash equivalents balance at the end of the second quarter was $261 million compared to $363 million in the first quarter and $670 million in the prior year period. The year-over-year decrease reflects our capital deployments net of cash flow generation.

Our industry-leading working capital turns were 6.4 turns compared to 5.7 turns in the prior quarter and 7 turns in the prior year. Days sales outstanding and days payable outstanding were consistent with the year-ago period at 63 days and 87 days, respectively. Inventory turns showed meaningful sequential improvement from 4.6 turns to 5.2 turns despite the inflationary environment and increased output as inventory levels declined approximately $10 million.

We're encouraged by this progress on inventory turns during the quarter and expect further improvements going forward.

Our total debt principal at the end of the second quarter was $1.51 billion compared to $1.69 billion in the first quarter 2018 and $1.7 billion in the year-ago period. The sequential decrease of $181 million reflects favorable currency translation and $82 million of outstanding debt that was repaid in early April as part of our debt refinancing actions. Net leverage was 2.7x net debt-to-EBITDA at the end of the quarter, in line with our target range of 2.5 to 3x.

Please turn to Slide 8 for a few cash flow highlights. Cash flow from operations in the second quarter was $54.5 million compared to $47 million in the prior year despite $15 million of incremental restructuring costs. Net capital expenditures were $22.1 million for the quarter compared to $11.8 million in the prior year periods as we increased our investment in organic growth initiatives. This included investments in new software products and a new manufacturing facility in India, which is scheduled to be operational by the fourth quarter. As a result, free cash flow was $32.4 million in the second quarter 2018, compared to $35.2 million in the prior year periods. For the full year 2018, we continue to expect free cash flow in the range of $210 million to $230 million. This represents approximately 15% growth at the midpoint, which is consistent with our long-term financial goal of 13% to 15%.

This outlook includes the benefit of a onetime favorable legal payment of approximately $62 million or $45 million net of tax related to a previously disclosed patent infringement case brought by our PPC broadband business against a competitor. This case was originally filed in 2011, and the cash payment in July relates to the willful infringement of PPC's patents in prior years. As a result, this payment will not be included in our adjusted EPS guidance for 2018.

This outlook also reflects our current view of EBITDA and the incremental investments being made by our live media business to support our customers as they transition from CapEx models to OpEx models.

As a clear leader in the industry, we view this as an opportunity to further support our customers and capture incremental market share.

Finally, we allocated $25 million towards our share repurchase program in the second quarter, repurchasing 388,000 shares. We repurchased 1.4 million shares for $100 million in the first half of 2018, and we have $75 million remaining on our current authorization.

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

Thank you, Henk. Please turn to Slide 9 for our outlook regarding the third quarter and full year 2018. We are on track to meet our 2018 commitments. For the full year, we expect record revenues and EBITDA margins. We also expect free cash flow growth of approximately 15%, in line with our long-term goal of 13% to 15%.

We anticipate third quarter 2018 revenues to be between $670 million and $690 million and EPS of $1.65 to $1.75.

For the full year 2018, we are tightening our revenue and EPS guidance ranges. We now expect revenues between USD 2.643 billion and USD 2.673 billion compared to our prior range guide -- prior guidance range of between USD 2.633 billion and USD 2.683 billion. This represents 11% to 12% growth or 10% to 11% on constant currency basis, exceeding our 5% to 7% long-term financial goal. This also represents organic growth of 5% to 6% for the full year and 8% to 10% in the second half. We now expect full year EPS of $6.28 to $6.48 compared to our prior guidance range of $6.23 to $6.48. This represents robust 17% to 20% growth. That concludes our prepared remarks. Stephanie, please open the call to questions.

(Operator Instructions) John Stroup, your first question is from Noelle Dilts from Stifel.

I just wanted to dig into the broadcast platform a bit more. First, just going back to your comment that revenues for the -- I want to make sure I heard this correctly, revenues for the combined Grass Valley and SAM businesses were approximately flat year-over-year. So you're saying they're -- that's not pro forma, right, for the SAM acquisition? I think I'm interpreting that correctly. So could you just give us a feel for sort of your legacy Grass Valley business, kind of the trends you're seeing there in international and domestic and how you're thinking about that for the back half of the year?

Yes. So Noelle, you're correct. So when we made the comment that the combined Grass Valley, SAM business was flat on a year-over-year basis, that's including SAM's actual results in the prior year. So end market demand was flat year-over-year. That was an improvement sequentially. Margins improved nicely. I think we were at about 17% margins, so the team has done a great job on integration. In the back half, we're expecting that the end markets will remain the same. We typically see a bit of a pickup in the second half as customers begin to be a little bit more aggressive on their capital deployments. But I would say right now, I would characterize the end market as stable. Funnel inflow is fairly steady. Lead rates and win rates out of the funnel are steady. The team is ahead of schedule on the integration activities. And so, as I think about our sequential improvement from the first half to second half, a meaningful portion of that is going to be the profitability improvement at SAM, especially compared to where they were in the first quarter.

Great, that's helpful. And then, great detail also on the manufacturing segment end markets. Can you give us a sense, again, here of how you're kind of looking at -- how you're looking at the industrial markets as you head into the back half of the year and into 2019?

Yes. So as you know, Noelle, the biggest vertical within Industrial is discrete. And that's a little more than half of our total, and it was up 6.5% in the quarter. I can't even remember how many quarters in a row we've seen growth in discrete, but it's been a pretty good run. And we really don't see anything changing that. As we've talked about, the environment for automation is very good, there's labor shortages all around the world. Actually, companies like Belden are fighting some of those labor shortages, so people are investing in automation around the world. And we've got just a very robust set of products. And quite honestly, I thought that we had a chance to do even better in the second quarter than what we reported. And we had some capacity constraints in a couple of areas of our business. So that business is doing really well. We're encouraged by process up 8.5%. That represents probably 20%, 25% of our Industrial business. So you've got 3 quarters of the business growing somewhere between 5% and 7%. And then if you look at transportation and energy, they were up, not as strongly, but they're a small piece of the business. So the Industrial business right now is in really good shape from an end market growth point of view. And then on the Enterprise side, our broadband business, I think, was up 13% in the quarter, which was a very nice performance, particularly given where they were in the first quarter. So we've got a couple of pockets in the company that we need to improve. We mentioned we weren't happy with our results in cybersecurity, but the overwhelming majority of the business right now is performing well.

We'll move on to Shawn Harrison with Longbow Research.

Hopefully, you can -- hoping to clear something up. The free cash flow guidance that you gave 90 days ago. Did that include the expected payment for the PPC verdict? And if not, kind of what changed within the forecast?

Yes, so it did not. So we updated our forecast for roughly $45 million net of tax payment, so the settlement. We also adjusted our EBITDA, and we are making incremental investments in working capital to drive more share capture in our live media in our SAM, Grass Valley business.

What does that actually entail because I noted you mentioned the conversion from a CapEx model to an OpEx model, but what has to occur within the kind of the Grass Valley, SAM business for you to be able to capture share going forward?

Yes. So we have a balance sheet, and we can offer up capital leases to our customers that our competitors can't. So we feel that's a significant competitive weapon, and we're currently deploying that strategy and executing upon that strategy.

Does that bring any incremental risk to Belden as you look forward as now you're offering capital leases and maybe what are the terms on those associated leases?

Yes, so terms are better than our interest rate. So terms are better than our interest rate. And we're doing it mainly through our existing customers. So it wouldn't change the risk profile.

Okay. Then last question, I guess. The repurchase program, I think you had done most of it in the month of April. It trailed off for the remainder of the second quarter. What really changed since then since the stock price was still in the high 50s, low 60s for the most of the quarter and still here through July?

So we did -- you're right, most of the $25 million that was repurchased in Q2 was in April at the point of the board considering whether or not to purchase more in the second quarter. We were working on some things that we thought could happen, that would have been material nonpublic information. And so as a result, the board decided to not reengage in a repurchase in the latter half of the second quarter. And we'll reevaluate that again as a board when we meet later this month.

Moving on to Matt McCall from Seaport Global Securities.

John, can you maybe go through -- in the past months and quarters, you talked about some, I guess, an increased focus on organic growth. Can you go or maybe give us an update on some of those organic growth initiatives, the impact they've had to date, the expected impact in your second half guide and maybe how they help frame -- how we should start looking at '19?

Yes. So I think we're going to exit 2018 with a lot of momentum on the organic growth side. So our full year guidance and our second half guidance, I think I made a comment about the fact that if you look at our guidance, it implies that our organic growth in the full year is going to be 5% to 6% and that in the second half, it's going to be 8% to 10%. And so I feel like we're going to exit 2018 with a lot of momentum. I mentioned already that the end markets within our Industrial businesses are healthy, and we expect that to continue into 2019. I haven't yet mentioned, but we had, I think, very good growth in our Enterprise connectivity or LAN business. That was up about 5% currency adjusted on a year-over-year basis. So when you look at some of the comps in that market, I think, again, we outperformed. Broadband was up 13%. And so we've got a lot of the businesses that are performing well. The pieces that are not in the second half growth rate that I would expect to see in 2019 that would be additive is we haven't yet seen any benefit from the investment that we're making in capacity in India, for example. We haven't yet seen meaningful revenue from the investments that we've made on our cybersecurity platform for cloud-based solutions as well as integrated SVM and -- or SCM and VM products as well as some of the industrial initiatives on cybersecurity. So there's still, I think, quite a lot to come in 2019 that I believe would be additive to exiting 2018 at a very nice rate.

Perfect. And you -- I think when discussing the Industrial space, you talked about adding some capabilities. Can you -- I don't think I heard the specifics. Is this kind of indicative of another round of organic initiatives beyond what the initial announcements were? What were you referencing there?

So the comments I think you're referring to are the investments that we're making within industrial cybersecurity. So there is a number of things that we've been doing to address that particular application more effectively because there are certain things about that application that are different than Enterprise applications. So the substantial step-up in R&D spend within our cybersecurity area have really been targeted at both cloud for Enterprise primarily, but then also for on-prem applications and capabilities for industrial cybersecurity. So we think both of those are going to be additive in the second half. We're expecting our cybersecurity business to do substantially better in the second half than they did in the second quarter as well as into 2019.

Okay, and I'm sorry, Kevin, I want to sneak one more in. If I take the items you talked about that aren't really in second half, but are going to help next year and thinking about the growth rates and the comps which you're going to face, I mean, how relative -- maybe just broadly relative to the 5% to 6% for the full year, maybe even 8% to 10% in the back half, how are you expecting or how should we kind of frame the relative growth opportunity '19 versus '18?

So when we're together in December, we'll obviously get more specific with you about how we're looking at growth for 2019. But given where I sit today, I think it's reasonable to expect that organic growth for Belden in 2019 is going to be somewhere around that 3% to 5% range based on what I see. Now that would obviously include an assumption that the general macroeconomic environment is unchanged at that point. But the industrial side of our business is good. Broadband is very good. I think there's reason for us to expect that our media business would be stable to improving. And we have every expectation that we're going to see improvement on our cybersecurity business. So I think that entering 2019, sitting where I am today, I think it's -- we're looking somewhere at 3% to 5% organic.

Up next is Mark Delaney with Goldman Sachs.

I think, typically, to get to the full year guidance, there is an assumption that gross margins in the fourth quarter pick up, which I think is typically related to seasonality in the cybersecurity business and maybe to some extent in broadcast as well. Help us understand if that's what's assumed this year as well and what sort of confidence and visibility the company has into that uplift in 4Q gross margin this year?

So Mark, you're correct. So we benefit in favorable mix from Q3 to Q4, H1 to H2 predominantly because of our cybersecurity business and our media business. So that's the predominant driver of the expansion of both gross and EBITDA margins. As it relates to visibility, I think, as you know, we don't enter any quarter with that much backlog. So in the case of our media business, we enter in with a pipeline of opportunities that we're pursuing, and we've got some historical perspective on what percentage of that funnel will actually be awarded and what percentage of that business that has been awarded we're going to win. And then, we also have a bottoms-up forecast from our sales team. And in the cybersecurity business, it's similar. We have a pipeline of opportunities. So we take our experience, and we try to handicap that pipeline and then we incorporate it into our full year guidance. So we have every reason to believe that we're going to see sequential step-up in those businesses. And obviously, we do the very best we can to forecast the -- as precisely as we can what that volume is going to look like. But sitting where we are right now, it looks as though the seasonal patterns are intact.

Got it, that's helpful. And for a follow-up, I thought the NT2 fiber acquisition that you mentioned was particularly interesting, and I think, John, you said it's a $15 million per year revenue run rate business and brings your total fiber sales now to $100 million. Can you just help us better understand exactly what the capabilities are of NT2 and what capability Belden has to maybe take that acquisition and scale it more broadly across your broader network?

Yes, so the acquisition was driven out of our broadband business and it's one of many acquisitions that we've made or we would expect to make to help our broadband business be more effective with our existing customers globally, but especially MSOs of United States as they begin to more aggressively deploy fiber technology into greenfield and brownfield applications. Our broadband business is very strong both inside the home and in the final mile. And as customers -- our customers begin to deploy more fiber, we think it's important that we have leading-edge solutions. Quite frankly, our customers' adoption of fiber technology has been slower than what they had told us it would be, but we believe it's going to pick up. And so this is just one piece of that overall picture as we continue to leverage what is a very strong position with those MSOs in the United States.

Rob Cihra with Guggenheim Partners.

I have 2 if that's okay. Just wanted sort of a clarification. I think you had said that your net revenue contribution from acquisitions and divestitures were $33 million. So if MCS was $7 million, does that mean that SAM was $40 million in revenue in the quarter and that just -- that would be like 1/3 more than expected, I think. So just confirming that and if that's the case, does that mean your $105 million that you had expected SAM to contribute this year, is that probably higher now or was it sort of just a particularly good Q2?

Yes. So Bob, let me clarify a couple of things here. You're right. The MCS divestiture was $7 million decline to revenues. In addition to SAM, roughly $34 million for the quarter. The Thinklogical acquisition occurred in the second quarter of last year and it had an incremental benefit to the inorganic activity of roughly $4 million.

Okay, makes sense. And then, if I could just ask on the Industrial, are you going to give a book-to-bill Industrial orders in the quarter?

Yes. Book-to-bill is slightly above 1. But more importantly, we're entering Q3 compared to last year with roughly $30 million more backlog.

Sherri Scribner from Deutsche Bank.

I was hoping to get some clarification on the Industrial segment. Henk, I think you said Industrial grew 1.6% year-over-year in constant currency. I don't know if that's similar to organic growth. And then, discrete was up 6.7% and process was up 8.6% and energy was up 3.7%, transportation was up 1.3%. So it seems like most of your segments saw pretty strong growth well ahead of that 1.6% growth. And I'm trying to understand, does that imply that the cybersecurity business is down pretty substantially because it seems like it would have to have been down a lot to get those numbers to work out to roughly 2% growth for that segment?

Yes, Sherri, your math is correct. So the constant FX growth for Industrial Solutions was 1.6%. Organically, it was up 2.5%. And Tripwire or our cybersecurity revenue in the quarter was down about 15%. Now some of that had to do with projects that we booked actually in the early part of Q3 that we thought we would have booked in Q2. But your math is correct. We saw a strong growth in our Industrial end markets, especially discrete and process and that was unfortunately offset by a disappointing quarter within our cybersecurity business.

And that -- some of that is expected to come back in the second half because you think some of those deals slipped? Is that the way to think about it?

Yes. So one,in particular, we booked in the first couple of weeks of the third quarter.

Okay, okay. And then just thinking about the guidance. I don't mean to nitpick, but you tightened the range, but you kept the midpoint even though you beat the midpoint of your guidance this quarter by $10 million and you added an acquisition at $15 million a year or so, maybe that adds $5 million to $10 million more. I guess, I'm just wondering, is there some implication for the fourth quarter that it's maybe you're being a little more cautious on the fourth quarter for some reason? Or why didn't you take that midpoint higher given the stronger results and the acquisition?

Well, I think we have, obviously, as you might expect, we have a lot more confidence in the third quarter guidance than we would in the fourth quarter guidance just given to our proximity to the third quarter. So we guided third quarter based on what we're seeing. We could have, I guess, taken the full year up if we thought that was imperative, but we thought let's get the third quarter behind us and then we'll take the opportunity to issue our fourth quarter guidance. There is always a chance that we could be too conservative, but we thought this was a prudent approach given where we are in the quarter, and so that's how we addressed it.

And we do have a follow-up question from William Stein with SunTrust.

I think it's my first one, but that's okay.

I think that you did well. Let the record show this is your first question.

It's a very important point. I'm wondering if you can detail some of the geo performance in the broadcast business. In the past, I think you noted that what was very -- well, what had been doing better in Europe was not so strong in North America and I'm wondering if that performance by geo has changed at all as we've progressed through the year?

Yes, so it did. In the second quarter, the performance by region was actually incredibly consistent. And so for the first time in a while, the North America business was performing the same as our international businesses. They were all about flat on a year-over-year basis. And obviously, in any given quarter, you've got tough comps in one region and maybe not another. But at the end of the day, the business was flat on a year-over-year basis and it was flat by the 3 major regions.

Sounds like a big comeback in North America. And any update on the Thinklogical acquisition, another deal that was relatively recent, any update there?

Yes. So the Thinklogical acquisition at least so far is going well. They've got a bigger second half than they do first half. That's typical for them. Usually, the third quarter is their strongest bookings quarter and then the fourth quarter is typically their strongest shipping quarter because of the government cycle. But the pipeline looks really good. There's a lot of activity right now and a lot of desire for their technology. If they hit their full year forecast, which I don't have any reason to believe they will not, it will be a great year for Thinklogical and a great return on our investment.

Steven Fox from Cross Research.

Just I was wondering, John, if you could dissect the networking enterprise cable market a little bit more. How would you describe project business [versus] day-to-day sales activity and also may be an update on the competitive environment given your successful pricing? And then, also if you could just touch on the impact to lower copper prices now as you sort of work through the higher-priced inventory?

Yes. So the business did well in the quarter. As I said, it was up about 5% on a currency-adjusted basis. I would say there was no meaningful difference, at least that I recall, between project activity and sort of day-to-day MRO activity. The project pipeline is good. It's strong. We were happy with our 40%-plus growth in CAT 6A. I would say the pricing environment has improved. We saw an improvement from Q1 to Q2. We expect an improvement in Q2 to Q3. The recent sort of reduction in copper prices, I think that's, obviously, a benefit. I'm not sure that it's fallen sharply enough that, that would necessarily suggest there should be any changes in the pricing activity. And I would say -- the competition environment is about the same as it has typically been. It's a pretty competitive market. And one where you literally have to fight every day to win and get what you get, but I think the team continues to do very well. And we're looking forward to getting the benefit of more and more connected devices within the smart building. For a little while over the last couple, 3 years, it had been kind of going the other way. And so I think our team is optimistic looking forward that we're going to continue to see good nonres spending and good growth.

That's very helpful. And just as a quick follow-up. My understanding of the SAM acquisition, is that eventually you felt like there were some sale synergies you can realize on top of costs. Given that you are ahead of schedule on cost synergies, is it too early to start thinking about how you could leverage the different customer reaches to build up the business overall or is that beyond the 2019 thinking?

Yes. So most of the synergies in 2018 and '19 are cost synergies. Clearly, our ability to integrate the product road maps, like for example, in playout, I think we mentioned that they had a stronger user interface than we had. We had a stronger engine. I think those are the kinds of things that we would expect to see in terms of revenue synergies and share capture, but I think those are going to take a little bit longer. I wouldn't expect to see the benefits of those until late '19 or 2020.

We'll move on to Chip Moore with Canaccord.

The mix headwinds in Industrial. I assume that's related to the deals that slipped in cybersecurity. Maybe you could give us a sense of how big a headwind that was to profitability?

Yes. So, yes, you're correct. So the mix headwinds in the quarter were predominantly cybersecurity. And that business, I mentioned already, was off year-over-year about 15%, and gross margins for that business are 80% to 90%. And so you can do the math on that. You can see what the headwinds were. But on a year-over-year basis, I think mix within the Industrial platform was unfavorable by about $8 million.

Okay, great. And maybe just one more on the guidance. We've had some moves in copper and FX, will you just update your assumptions there?

The updated assumption for copper is from $3 in our prior guide to $2.90 per pound. And we are currently implying a euro of $1.16 compared to $1.20 before.

And our final question comes from George Godfrey with CL King.

Two parts. The first one is, I heard the commentary about investing the capital to help your customers in the purchasing of your products, but did I miss the actual CapEx hard dollar number, did you give that?

I did not, but CapEx this year will be approximately $100 million.

Okay. And if I look at the free cash flow guidance, $220 million at the midpoint, back out the $40 million for the onetime legal payment, will be $180 million and based on the EPS guidance, it looks like net income roughly $260 million. We're targeting about a 70% free cash flow conversion from net income. What do you think that is in '19? Is that the right number to think about on conversion rate?

Yes. We target free cash flow to grow between 13% and 15%. And that's what you should expect for next year. This year is a year where we made incremental investments in growth initiatives, the facility in India I called out, but also investments in software development, so expect 13% to 15% free cash flow growth from '18 to '19.

And use the $220 million level with the legal payment or should that be taken out?

Yes. There are a couple of other nonrecurring items. You, of course, have restructuring that's nonrecurring and the legal, so I would just take $220 million.

Kevin Maczka, there are no further questions at this time. Please continue.

Thank you, Stephanie, and thank you, everyone, for joining today's call. If you have any questions, please reach out to the IR team here at Belden. Our e-mail address is investor.relations@belden.com. 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.