Belden Inc. Q3 2009 Earnings Conference Call

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Belden Inc. (BDC)

Q3 2009 Earnings Call

October 28, 2009 10:30 a.m. ET

Executives

Gray Benoist - CFO

John Stroup - President and CEO

Analyst

Sean Connor - BB&T Capital Markets

Shawn Harrison - Longbow Research

Gary Farber - C. L. King

Nat Kellogg - Next Generation Equity Research

Jeff Beach - Stifel Nicolaus

Dana Walker - Kalmar Investments

Presentation

Operator

Ladies and gentlemen, thank you for standing by. 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. Later, we will conduct a question-and-answer session. If you would like to ask a question, please press star one on your touch-tone phone. Your questions will be taken in the order they are received. If you are in question queue and would like to withdraw your question, simply press the pound key. I would now like to turn the call over to Mr. Gray Benoist. Please go ahead, sir.

Gray Benoist

Thank you Jennifer. Hello and good morning everyone my name is Gray Benoist and I am the CFO of Belden. Thank you for joining us today for the third quarter 2009 earnings conference call. Joining me on the call today from here in St. Louis is John Stroup, President and CEO of Belden.

First on logistics, we have put a few slides on the web. To see these please go to investor.belden.com and sign on to the webcast. There is no www in that address, just investor.belden.com. Also if you need a copy of our press release, you will find it in that same location.

During the call today, management will make certain forward-looking statements. I would like to remind you that any forward-looking information we provide is given in reliance upon the Safe Harbor 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. Our actual results could differ materially from any forward-looking statements that we might make. However, the company does not intend to update this information to reflect developments after today and disclaims any legal obligation to do so. Please review today's press release and our annual report on form 10-K for more complete discussion or factors that could have an impact on the company's actual results.

This morning, John will begin with the comments about the performance of the business in the third quarter, after which I will review some additional financial results and segment analysis. Then, John will speak about our outlook for the business, and finally we'll open up the line for questions. So at this time, I'd like to turn the discussion over to our President and CEO, John Stroup. John?

John Stroup

Thank you Gray and good morning everyone. The realities of the global economic downturn continue to impact our year-over-year result in the third quarter. However, despite this challenging operating environment, we delivered better than expected results, including sequential revenue growth in three of our four business segments. Additionally, we realized a book-to-bill ratio slightly greater than one. Although, in our European segment, revenue declined sequentially due to seasonality, our focus on improving the segment's cost structure through product portfolio and restructuring actions yielded sequential improvements in both gross and operating profit. Our restructuring initiatives, which started in December 2008, generated $12 million of savings in the third quarter. This is $2 million better than planned, and we expect to be able to achieve a similar level of cost savings in the fourth quarter. This will bring our annual benefit for 2009 to $40 million with an annual exit rate of $48 million. It is worth noting that gross margins were higher than the same period one year ago despite the negative impact of substantially slower demand.

Although Gray will discuss the following in greater detail in a few moments, I want to highlight the continued improvements we have made with respect to inventory returns. We were able to improve our inventory returns sequentially and year over year to all-time company highs. Such achievements in the face of these economic conditions are truly unique, and are an indication of our commitment to and our improved proficiency with lean manufacturing principles.

For the second consecutive quarter, we generated free cash flow in excess of $40 million, resulting in a year-to-date total of just under $94 million. Our continued ability to generate significant free cash flow has allowed us to build our cash balance to $312 million, from $227 million at the end of 2008. Our strong cash position and solid balance sheet provides us an excellent foundation on which to build and enhance our competitive positions in all of our serve markets. We are fortunate to have such talented and dedicated associates, and I am especially proud of what they have accomplished thus far in 2009. Our company would not be in strong a financial or operational position without their dedication and commitment to our corporate values and strategies, and I thank them for their hard work and sacrifice.

Our demand is largely driven by overall business investment, and as such, we pay close attention to select broader macroeconomic indicators. Although the PMI and ABI indices, both leading indicators have improved from June 2009 levels, and European indices are also trending positively, we have seen little evidence of improving in markets with the exception of Asia, where we are seeing real signs of recovery. Our investments in this region over the past three years have strongly positioned us to benefit from this regional recovery.

On the other hand, we don't expect to see end market growth in Europe and the United States until businesses are once again comfortable making capital investments. This typically lacks GDP growth by couple of quarters.

Let's spend a few moments talking about the adjusted results in our individual businesses starting with the Americas group. Revenue within our Americas group grew 4% sequential, despite continued channel inventory reductions and competitive price pressure. Gross profits improved 250 basis points year over year reflecting our actions to improve our portfolio and cost structure. Although this segment's operating margins declined 210 basis points sequentially to 17.2%, this result is still well within our expected range. We are pleased with this result, as the basis for the sequential decline is largely the result of volatility and copper cost. During the first half of the year, when spot prices for copper were at their lowest point of 2009, we benefited from lower cost copper due to our ability to properly manage our inventory. Pricing remained elevated, as many channel partners worked off their inventory, which was made up of higher priced copper. As a result, we recognized a $2 million benefit, and margins were slightly elevated during the second, which was highlighted in our second quarter earnings call. However, as copper prices continue to rise during 2009, the same volatility had the opposite effect in our results. In the third quarter, it had a negative impact of $2 million. Despite our improved inventory performance, we are not immune to the short-term impacts of copper volatility. However, copper pricing and volatility have no lasting impact on our pricing model. Independent from copper prices, we are beginning to experience increased levels of competition, as some manufacturers are at significantly depressed utilization levels. We believe that our proactively restructuring and cost reduction plan allow us to deal with this situation better than most.

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