Belden Inc. (BDC) Q1 2008 Earnings Report, Transcript and Summary

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 Ms. Dee Johnson, Director of Investor Relations at Belden. Please go ahead, ma'am.

Thank you, Katie. Good morning everyone and thank you for joining us today for the first quarter earnings conference call at Belden. With me here in St. Louis today are John Stroup, President and CEO of Belden and Gray Benoist, Vice President, Finance and Chief Financial Officer. Some logistics, we have a few slides on the web. To see those please go to investor.belden.com and sign on to the webcast. There's no www, it's just investor.belden.com. If you need a copy of our press release, you will find it in that same place 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 of factors that could have an impact on the company's actual results. This morning, John will begin with comments about the performance of the business in the first quarter; Gray will review some additional financial results and segment analysis; and then John will speak about our outlook for the business for the remainder of 2008, and then finally we'll open up the line for questions. So, at this time let's turn to our President and CEO, John Stroup.

Thank you, Dee. Good morning everyone. We are pleased to announce another quarter of strong earnings growth. On an adjusted basis, earnings per share increased 37% and operating income increased 27%. At the same time, we realized the benefits of our new global portfolio. As a reminder, we made three strategic acquisitions in 2007 that expanded our connectivity division and increased our revenue outside the United States. As I will discuss, this change is helping us navigate through a more challenging domestic market. The organic growth of the legacy Belden business was about 1%, as our mix of revenue continues to shift further away from North America towards Europe and Asia. I'd like to begin today by first addressing the situation in North America, where we experienced some challenges in the first quarter and then turn our focus to the other regions where we had some very good results. In the North American markets, we experienced a low single-digits revenue growth we expected in the parts of the business that are most attractive to us, but gave up more volume than we had anticipated in some of the more commodity-sensitive portions of the market. We had expected organic growth in the two segments based in North America to be approximately 3%. Instead organic growth was negative in the combined belt in Americas and specialty segments by about 3%. The difference is about $12 million in revenue. The North American market is now more challenging than it was one year ago. We have not achieved anticipated sales for some product lines where we have raised prices to recover higher material costs partly because some of the competition has chosen to simply absorb the additional costs and receive lower margins on such product sales. We believe that in the less differentiated product lines such as our lower category data cable and high-metal content industrial cables, where all of the manufacturers are facing commodity cost pressures including not only the inflation in copper, but also in compounds, fuel and freight [ph] that neither industry pricing or demand is very stable. We estimate that about one-fourth of our North American revenue is in this category of less differentiated products with higher metal content and more competitive pricing. The increased pricing pressure was most intense in our North American networking business where our revenue compared negatively year-over-year. Networking is about 24% of our global business, but it's 38% our combined North American volume. Within networking as you know we drive distinction between the more attractive products such as higher category cables and connectivity versus the less attractive products, which will be mostly categorized by A/V Cable. Today our mix is about 50/50. Our attractive networking products grew at or above what we perceived to be the market growth rate of upper mid-single digit. But we had a negative volume comparison in the less attractive networking products. In this area, we saw competitive price maneuvers by certain manufacturers who may have been struggling with their capacity and unable to flex their cost structure. As you would expect we were raising prices to offset rising commodity costs. Our broadcast, sound & security products all displayed strong growth in the quarter. Industrial volume grew slightly year-over-year, however, some of our lower spec industrial products produced in our Canada factory fell in volume due to the same competitive price pressures we experienced within our networking business, which were exasperated by having our costs in Canadian dollars. With ongoing market volatility, we moved to drive cost out of the business and accordingly we launched the counter measures we had prepared for such a situation. We continue to improve the performance of our plant in Nogales, Mexico. We estimate that we achieve $3 million of manufacturing cost savings in North America. On an annualized basis, this represents more than half of our $26 million savings in production costs that we have promised for 2008. In December, we had already initiated the Voluntary Separation Program and we have elected not to backfill the vacated positions for now. We had about a 100 salaried associates leave under the program with most of them exiting at the end of March. We moved ahead with the closing of our Connecticut plant. It's a smaller plant and not easy to flex, so it made sense to move the production to the new Nogales plant. The process will take about two quarters to complete and we have indicated that will be 2009 before we have net savings from the transfer. Elsewhere, we reduced our workforce to meet the lower demand. I am trying to give you a full picture of the North American situation because I know that's the concern for many of you, but let me just remind you of how much revenue diversification we have accomplished over the past two years. We've increased the proportion of connectivity and active components in our mix from 8% to 23%, we changed the geographic mix of our sales from 69% North America to less than 48% and by selling our telecom cable operation and acquiring businesses with industrial and consumer OEM emphasis, we decreased our reliance on the networking and communications sector from 40% to 24%. Let me now turn to Europe. The organic growth for our legacy Europe business was 2.6% in the first quarter. Remember we sold our KDP telco and assembly operations in 2007 and the first quarter of 2008 respectively, so you need to adjust the base line for first quarter growth by about $11 million. We are very pleased to report that this group gave us an operating margin of 10.7% aided by our ATW business in Germany, which correct the operating issues that were holding us back in the fourth quarter. Remember this was a breakeven business two years ago, when we set a challenging goal of getting the business to 10% operating margin by the end of 2007. Although we are one quarter late in delivering on that goal we are proud of our achievement and excited about the future growth prospects for this business. It's our expectation that our Europe legacy business and the Europe segment as a whole will remain in the double digit operating margins for the remainder of the year. Our European operations are now integrated and the entire segment has been placed under the leadership of Wolfgang Babel who joined us in 2007 to manage the Hirschmann and Lumberg automation businesses. Let's now turn our attention to the Belden Asia business, which reported record results in the first quarter. The legacy business grew 78% organically compared to the first quarter of 2007. Overall, growth within this business has been very strong recently; 10% in the third quarter, 50% in the fourth quarter, and now 80%. Bookings continued strong in the first quarter. The sales team is improving everyday and selling to end user customers and shifting our mix to include more systems and connectivity. Although the comps are getting tougher, we still have aggressive growth expectations for this business but it is closer to 20%, rather than these remarkable recent figures. Additionally, the legacy business in Asia is maintaining operating margins in the high teens, and they have yet to capture the benefits of local production that will become available for them, when we complete the new LTK plant later this year. And can manufacture more of our Belden products in China. Our acquisitions from 2007 continue to perform at or above expectations. They are making good progress with the integration of our Hirschman and Lumberg businesses, and we've had some good examples of U.S. commercial win through the synergy of our Belden sales force. Overall, our operating margin in the first quarter was 10%, compared with 12% in the first quarter a year ago. This is reflective of our business mix, with LTK having operating margins around 9%, Europe growing to 28% of our total revenue, and North America representing less of the mix. Our operating margin has a much different composition compared with the prior year. However, this geographic margin mix change is a company by a natural countermeasure in the form of lower tax rate in non-U.S. jurisdictions. So you see our effective tax rate coming in below 30% and that's precisely reflective of this geographic shift in revenues and profits. We generated $24 million in free cash flow in the first quarter and our ending cash balance was $197 million. We've repurchased approximately 900,000 shares using $36 million. We remain committed to the repurchase of our stock and see it as a great opportunity. However, we also have a very active acquisition funnel and we will continue to use our cash efficiently as we evaluate opportunities that we believe are a strategic fit to our long-term growth strategy. I was very pleased to announce during the first quarter that Steve Biegacki has joined us as Vice President, Global Sales and Marketing. Steve was formally at Rockwell Automation and has highly relevant experience in solution selling, globalizing the sales and marketing functions and organizing a verticals market approach, exactly the mission we have set for ourselves. I believe the addition of Steve to our team will help us greatly in the execution of all our go-to-market initiatives. And I am going to turn the call over to Gray for more discussion of the business results. Gray?

Thank you, John. Good morning everyone and thank you for joining us this morning. I will begin my comments with the discussion of the consolidated results of operations for the quarter, followed by the segment results and the cash flow, asset management and then working capital. Starting with revenue. This quarter revenues of $511.8 million was an increase of 52% year-over-year. 2007 acquired businesses contributed $167 million and currency translation was $15.3 million. The Czech telco and assembly businesses we divested last year and at the beginning of this quarter, generated $10.6 million of revenue in the first quarter of 2007. Taking these elements into consideration, year-over-year organic revenue growth as John mentioned was 1% for the quarter. I could ask you to turn to slide 7, please. Geographic mix of revenue as plan continues to ship towards Europe and Asia. Year-over-year this change is striking. In the first quarter of 2008, 41% of our revenue was in the United States, whereas a year ago the US contributed 58%. In Canada, although revenue dollars are about the same as a year ago, the proportion of consolidated revenue attributable to this market has fallen from over 10% in Q1 2007 to about 7% now. Europe sales were 28% in the first quarter, Asia Pac 19% and the rest of the world around 5%. We are achieving our targeted geographic revenue diversification and thus benefiting from faster economic growth rates in the emerging markets at a time when this approach helps consulate us from some of the uncertainty in the U.S. economy. High chart on the right depicts our revenue by vertical market. Vertical mix is little change from the fourth quarter of like the geographic mix significantly different year-over-year. Industrial market continues to grow and it is now 47% of our total revenue and networking vertical at 24% of our revenue is unchanged sequentially, but down from approximately 39% a year ago. Video sound and security market continues at about 12% of total revenue. This includes about 1.5 million in question sales in Asia for the Beijing Olympic venues. The transportation of defense vertical remains at about 4%. Consumer electronics and consumer OEM market served by LTK was about 13% of our revenue this quarter. To continue with the results of operations; in the first quarter GAAP results were earnings of $0.27 per diluted share. These results include a number of non-recurring items which I will quickly discuss. As we previously announced and as John mentioned, we are executing the plan to close our plant in Manchester, Connecticut. Consolidating that production volume with other facilities primarily within our new Nogales plant and writing off and disposing of excess manufacturing equipment and capacity. This resulted in an asset impairment charge of $11.5 million pretax. Secondly for the voluntary separation program announced in December we paid first quarter severance charges of $6.5 million. There about a 100 people who accepted the separation package and as they exited the organization in March we have elected to leave many of these positions vacant by realigning and consolidated responsibilities enabling cost control. Thirdly we incurred restructuring charges of $5.6 million pretax associated with the reorganization and consolidation of our European segment enhancing its productivity and future organizational effectiveness. More as we sold and lease backed our newly constructed Nogales Mexico plant. Because of currency fluctuations we incurred a loss on this transaction of about $1 million. We booked a pretax charge of $2 million in the quarter resulting from the enactment of tax rate changes in non-US jurisdictions. A lowering of tax rates most notably in Germany, drove the need to adjust our deferred tax assets and liabilities associated with the first quarter true up of first accounting, most notably with respect to the Hirschmann acquisition. I will focus the remainder of my comments on adjusted results without these charges. For you benefit the reconciliation between GAAP and adjusted results has been provided as part of today's press release and is also available at the end of today's slide presentation. I could have you review the adjusted results on slide 8. Gross profit margin was 29.3% in the first quarter. The expansion of 60 basis points from the fourth quarter and 60 basis points higher than the average of our post acquisition consolidated gross profit percentages from quarters two, three and four last year. As we will address more thoroughly in the SG&A discussion, there is a reclassification, it gives us a benefit of 40 basis points in gross margin in the first quarter. However, on our seasonally lower Q1 revenue and facing rising commodity cost beyond just copper, our gross profit performance is clearly starting to show the progress that we have expected. Sequential improvement in gross profit was recorded in most of the business units with the notable exception of the Specialty division. More appropriately our most significant countermeasures were enacted. As John noted earlier, the European legacy business within the European division showed a 300 basis point improvement in sequential gross profit and the quarter based on stabilizing manufacturing and executing on a focused sales strategy, actions that we discussed in our fourth quarter conference call. I'd like to ask you to please reference slide 9, 2008 mark several changes to our reporting of SG&A and we hope we'll provide better, more meaningful disclosure of information going forward. The first change is to identify our R&D spend on a new line and the income statement. Our investment in new products and technology is become exceptionally important; it is a focus area of the company. Previously elements of R&D had been included in both cost of goods sold and SG&A expense. Additionally we have aligned 100% of the company's finance, HR, IT, legal and administration cost in the SG&A where depending on the businesses some portion of these costs have been previously recorded in cost of goods sold. We are now classifying 100% of the company's distribution center activities in the [cost]. Again depending on the business some of these costs have been classified as SG&A previously. We are very pleased to have our financial statements better identify these areas of investment and cost and to present better SG&A matrix, providing us all more insight into these areas. Net reclassification from cost of goods sold to SG&A and R&D was $1.9 million in the first quarter, a 40 basis point increase in gross profit and a corresponding 40 basis point increase in the combination of R&D and SG&A expense. First quarter SG&A and R&D expenses were $98.5 million. This is down $5.7 million sequentially and down $9.1 million sequentially when adjusted for the reclassifications I just reviewed and the Q1 FX impacts resulting from a stronger euro. Other income in the quarter, which is income from our manufacturing joint ventures in China, was $1.2 million favorable to the guidance of $1 million that we discussed in February. For the income taxes you can reference slide 10. Income tax expense was $13.4 million in the adjusted results or 29.4% of pretax income for the quarter. This is a lower effective tax rate than we had earlier predicted in our outlook and reflects the change in our geographical distribution of operating earnings. Going forward we expect this distribution of earnings to remain relatively constant for the year and therefore we're adjusting our 2008 outlook for the effective tax rate from 32% to 30%. We continued our share repurchase program as John had mentioned in the first quarter, buying back 900,000 shares for total outlay of $36.3 million and our average diluted shares for the first quarter were $48.4 million. Also note that management has remaining share repurchase authorization of $32 million. Now I would like to turn to the segment results. External revenues at Belden Americas segment was $186.3 million, flat compared with a year-ago period. Inter-divisional sales were $19.8 million a significant year-over-year increase driven by strong demand in Asia. Including the inter-divisional sales total shipments of Belden Americas increased 4.3% year-over-year. Segment operating income adjusted by 4.8 million for the VST severance charges and the loss in the sale of Nogales was $36.1 million or 17.5% of total segment revenues, compared with 18.3% in the first quarter of 2007. Specialty products segments external revenue in the first quarter was $53.4 million which is lower by 5.7% compared with the first quarter a year ago. The year-over-year change was driven by our Mohawk business which was required to manage through a very difficult competitive situation is some less attractive networking products as John discussed earlier. Divisions revenue from affiliates increased 47.7% compared with a year ago, but was lower sequentially reflecting the successful ramp up production at the Nogales plant, now able to effectively supply an increasing proportion of our North American requirements. The operating profit of the specialty segment adjusted by $14.2 million for the asset impairments in VST severance charges was $7.1 million or 9.9% of total revenue compared with 14.9% operating margins in the prior year quarter. The European segment's external revenue was $184.6 million in the first quarter, including $101.1 million from the businesses acquired in 2007. A legacy Belden portion of the segment grew 2.6% organically after adjusting for the Czech businesses sold during 2007 and 2008. Operating income of the European segment was $21.7 million or 11.4% of total revenue after adjusting for the restructuring charges of $4.8 million. The legacy Belden portion of the segment, as John mentioned earlier, generated a 10.7% operating margin achieving a goal that we established several quarters ago of managing the businesses performance to double-digit operating profit. Each specific segment had first quarter external revenues of $87.6 million of which $66 million was attributable to LTK. The legacy Belden Asia-Pacific business experienced year-over-year revenue growth of over 80%, 78% organically. Of the Asia-Pacific segment as a whole, operating income was $8.9 million or 10.2% of revenue reflecting seasonally lower sales for LTK and a very good high-teens operating margins in the legacy business. Free cash flow in the first quarter was $23.8 million and operating cash flow was $30.7 million, our eighth straight quarter of positive operating cash flow. Depreciation and amortization was $13.8 million in the quarter. With respect to capital expenditures and our asset light objectives in 2007, you recall we incurred $64 million of capital expenditures and sold $38 million of assets, resulting in net capital expenditures of $26 million. In the first quarter of 2008, the execution continues with the capital outlays of $6.9 million offset by $23 million of asset sales for net capital expenditures of a negative $16 million. Additionally, assets in working capital were sold in the first quarter as we exceeded the cable assembly businesses in Decin, Czech Republic, a follow-on transaction of sale reduction telco business in the third quarter of 2007. As I mentioned, we used $36.3 million for repurchase of shares during the quarter and our ending cash balance was a $196.8 million. I could ask you to turn to slide 11 please. First quarter 2008 working capital turns were 5.7, down 0.3 turns from the fourth quarter of 1 turn favorable to prior year. We had modest growth performance in DSO and DPO; however inventory turns degraded from Q4 levels of 6.6 turns to 5.6 turns as we held finished good inventory at the end of Q1, fuel [ph] demand that did not materialize in time to ship in the quarter. Year-over-year inventory turns improved 0.5 turns from 2007 Q1. As a result, our net use of cash for working capital was $11 million in the quarter, which I view is creating greater opportunity for operating cash flow improvements throughout the remainder of the year. At this time I would like to turn it back to our CEO, John Stroup for a few remarks about our 2008 outlook. John?

Thank you, Gray. I want to share with you some of the information and the thought process that has gone into our current outlook. Despite falling short of our own revenue goal for the quarter, we did build approximately $20 million of backlog and had a book-to-bill ratio of $1.04. During the first quarter, our North America channel partners reduced their inventory by approximately $10 million, while their daily sell-through rate showed good momentum throughout the quarter. Additionally, our expectations for the second quarter and full year are based on our normal seasonal pattern and no change in the current U.S. demand profile. We bridge from our first quarter performance through our full year outlook by looking at revenue seasonality and cost reduction actions. Our first quarter revenue was typically 50 to $75 million lower than quarters two, three and four due to seasonality. Leverage of this volume will expand margins by about 200 basis points dependent on mix. Additionally, making good on the remaining elements of our 2008 annual cost reduction pledge of $26 million provides additional expansion. We are maintaining our revenue outlook at $2.2 billion to $2.3 billion, but the composition of that revenue will be shifted toward revenue outside the United States. Based on this updated revenue composition, we are expecting full year operating margin to be between 12% and 13%. This geographic mix creates the benefit of a more favorable effective tax rate for the year. To reflect the completion of the first quarter, we are narrowing our full year outlook for earnings per share. Our previous range was $3.45 to $3.75. We now estimate this range to be $3.45 to $3.65. At the midpoint of the range, we will have EPS growth year-over-year of 24%. Thanks to all of you on the call for your interest in Belden. This concludes our prepared remarks. We now have some time for your questions. Our operator, Katie will remind you of the procedures for asking your question. Question and Answer

[Operator Instructions]. Mr. Stroup, your first question is from Celeste Santangelo with Merrill Lynch.

Celeste?

Regarding your comments on the--

Celeste, could you speak you up? We couldn't hear you?

Okay. Just wanted to clarify on your comments on the pricing environment in North America for the networking cable business, is that strictly on the lower end products? You are not seeing anything on the higher-end categories.

Celeste, it's far more pronounced at the low end. I wouldn't say that we aren't seeing some pressure on the high end, but there is clearly a very big difference between what we are seeing on the lower category of IV [ph] open architecture product line that we are seeing in the Indian [ph] solutions under Belden brand. It's a pretty big difference.

Okay. And then could you talk about the demand environment, generally in North America for networking where you are seeing on the high end versus low end?

We saw actually pretty good performance on the high end in the networking category but we saw it improve throughout the quarter, Celeste. March was much better than January-February. And we are also seeing improved sell-through information as I mentioned before in March compared to January and February. So, the start of the quarter was fairly weak both in terms of shipments as well as sell-through and we have seen that improve. And as we said before, the lower end product line, the product is more sensitive to pricing in the area where we had more difficulty.

Okay. And then, just looking at the operating margin targets now, as you go though the year to get the 12% to 13%, just assumes a little more aggressive ramp, could you talk about how you get there? How the progression? Basically I want to know how dependent that is on the macro environment? You talked about a lot of internal initiatives things that are going on that are going to get you there, but I just want to know how dependent it is on the macro environment and how much improvement do you have built into that to account for what's going on in North American networking pricing?

Well if you bridge our Q1 to full year, Celeste, I think what you will find is that if we achieve the revenue outlook that we've expressed, the operating margin that we would get from that would generate most of the improvement of 10% up to that 12% to 13%.

Okay.

And then what we've done is, we have looked at our forecast by region differently now than we did previously. So we have baked in the fact that the U.S. economy is going to be weak. We believe it will be weak through the year and we are relying more heavily from strength outside of the United States as we prepare our forecast. So clearly volume is a big part of the expansion and operating income from 10, up to that 12% to 13% range. But we have in fact changed our expectations as to where that revenue comes from. Our European business is strong, our Asian business is strong and we've counted on the U.S. business, it's just been weaker than what we would have thought at the start of the year.

Okay, great, thanks.

Thank you.

We'll go next to Matt McCall with BB&T Capital Markets. Matthew McCall - BB&T Capital Markets: Thanks. Good morning everybody.

Hi Matt. Matthew McCall - BB&T Capital Markets: First on the European outlook, you mentioned weakness expected in North America and most of that's in data networking. What's your exposure to networking in Europe?

It's, Matt, not nearly as high. Our networking business in Europe as a percentage of total revenue I think is less than 10%. Matthew McCall - BB&T Capital Markets: Okay.

It's lower, Matt, for two reasons right. One is that with our Hirschmann and Lumberg businesses, which are connectivity businesses primarily focused in the industrial market, that's a big chunk of our business in Europe. And secondly, our European cable business has not had as much networking businesses as a percentage of total as our U.S. businesses. Matthew McCall - BB&T Capital Markets: Okay, okay. What about the connectivity side, you talked about as a company, for the company as a whole. What about the percent in the U.S. market versus North American markets and in Asia?

I'm sorry, say that again, Matt. Matthew McCall - BB&T Capital Markets: The connectivity part of your business, the mix of those products with in the U.S. markets and then in Asia?

Our connectivity business in the U.S. is substantially lower the percentage of total revenues than it is in Europe. Same is true in Asia, which we've always thought was a good revenue opportunity for us. In North America, connectivity again is less 10% of our total business. We continue to stay very focused on growing our Hirschmann and Lumberg business in the United States. And, in Asia, in total again it's going to be far less than 10%, because of the LTK business. So, the area that we have the most exposure to networking is in the United States. Matthew McCall - BB&T Capital Markets: Okay. And, one of the comments, the last comments made was that you helps in inventory for demand, it did not materialize. As I think Gray, you said this, was this result of, and then John I think you just talked about trends improving in March, what was, was that just timing of those shipments or what was the issue there?

Yeah, we purposely entered the year with more inventory than we did a year earlier, because of what we have experienced the year before. And, we wanted to have a situation where if demand were strong out of the gate, we were prepared to deal with it appropriately. As it turns out, demand was not that strong coming into January, and therefore we had more inventory in January than what we would normally want to have and we began to bring that down. And you're right Matt, I did say that we saw improvement in March compared to January and February in North America, which is encouraging to us. But, we are still remaining fairly cautious about what the North American market environment going to look like. Matthew McCall - BB&T Capital Markets: Okay. And, couple more that the - I was surprised to see that the margins in the legacy Asia business were in the high teens, you have yet to see the benefit of manufacturing your products in Asia. Did I hear that correctly, and what's the outlook once - for margins in that legacy business, once you get the products, once you move the production to Asia.

Well, you did hear that correctly. We are in fact experiencing high double digits in Asia on our legacy business, even though we are not yet producing locally. And, we try to be real consistent about the fact that the benefits to us are really two. One, is we get shorter lead times in the market, which is very important for our customers and we think it will allow us to continue high organic growth rates that we have seen, perhaps not as high as what we have seen recently, but something on or about 20%. And, then that cost benefit of course is going to either show up in increased margins, or accelerated top line growth as we look at targeting markets that previously we were just not cost competitive. And, so we are really excited about how our business is performing in Asia right now, and we are really excited with the notion of them having local production to become even more competitive. Matthew McCall - BB&T Capital Markets: Okay. Okay, thank you. I am going to hop off and hop back in the queue. Thank you.

Thanks, Matt.

We will go next to Jeff Beach with Stifel Nicolaus.

Yes, good morning.

Hi, Jeff.

Hey, Jeff.

A couple of things. Starting with North America, if you could remove the negative impact from CATV, and look at the rest of the business, what will we see in the first quarter and a general outlook for the remainder of the year from everything else?

Well, the CATV weakness that we saw was the biggest part of the performance issues that we had in the specialty division, Jeff. And, if you were to remove that I think you would see a little bit of weakness in our industrial product lines at our Canada factory as well and then I would say the remaining part of the business performed actually quite well. We had sort of mid single digit growth rates in those businesses, margins were fairly constant there or expanding and we saw sequential improvement in our cost structure of about $3 million. So, those parts of the businesses performed quite well. It was just those other areas we talked about, I'm not sure I can bridge you, maybe exactly the way you want to, but I am trying to give you as much qualitative comments as I can.

Okay. Looking out into the second quarter and beyond, are we going to significantly less impact from this weak CATV market?

I think, our expectations are that sequentially the situation would remain the same. That we would not see significant deterioration, but nor are we baking significant improvements sequentially. And so, if we were to see improvement in that area, then that would be helpful to us. But really what we're counting on Jeff is that from Q1 to Q2, and for the rest of the year we will see our normal uptick in seasonal volume. We will see our business in Asia and Europe continues to perform as it has been. We'll get normal fall through on that incremental volume, and we'll continue to make progress on our cost structure.

Okay. I have a couple of questions. The next one is, you had weakness and made the decision to close the plant in Connecticut during the quarter, correct?

That's correct.

What kind of disruption, if, were you prepared immediately to shift that production into Mexico and take up the slack? Was there disruption to operations in making that decision and following through on it and will it continue to drag results?

It did not affect our first quarter results. We did not see disruption in that factory that affected our results in anyway in the first quarter. We do expect though as we transition out of that factory in the second, third quarters of this year, that we will in fact see a certain amount of disruption as we do normally. Jeff, those usually come in the form of some overlap of cost, some productivity issues on the ramp up, sometimes a little bit higher scrap on the ramp up, as we've seen in the another factory transition. But, we've considered all that Jeff in our full year outlook.

Okay. Recent pricing moves with copper up, do you feel like in most of your products lines, you've been able to recoup copper or even maintained margins?

Jeff, I would say in the product lines that are in fact much more highly differentiated, like we see in broadcast, high-end networking products, most of our industrial products. We have in fact been able pass on prices to offset cooper. It's really only those more commodity based products where we have struggled do so.

Alright, thanks a lot. I'll get back in the queue as well. Thanks.

Thanks, Jeff.

We'll take our next question from Levon Von Reden with Hockey Capital.

Good morning.

Hi, Levon.

A question related to the CATV side of the business. I just wanted couple of pieces of clarification. As you saw throughout the quarter, did you get a sense that this weakness or I guess additional pressure that you saw on CATV side, did it ameliorate or did it continue, or what kind of happen as it progressed through quarter?

Von, I would say, it's been fairly steady through the quarter. We saw it earlier in the first quarter, in January we saw it. It didn't get any better throughout the quarter. I don't really have expectations that it's going to get better anytime soon. I think that we're in a situation where demand is a little bit weak in that category. And I think manufactures are making independent judgments about whether or not they want to keep their volume up and absorb that additional cost where they want to bring their prices up. And so, we are obviously looking at it every single day to make certain we're making the right choices. And, we will continuously evaluate that but I would say the situation has been relatively stable.

Which will lead me to the next part, the question was, was it a function mostly of demand, or was there also additional capacity?

I don't think anybody brought on additional capacity. I think, it's the demand came down from the established capacity levels, and it happened at the same time the copper was going up. And, I think those two things together made it more challenging in that category.

And, one quick clarification for the guidance, obviously you talked about your revenues following there normal seasonal patterns, and I am assuming with -- and you also talked about CATV -- are you expecting the CATV category as a whole to kind of get a little better as normally they would have I assume on a seasonal basis, or are you expecting that to remain weak as it is kind of now?

We have incorporated seasonality into all of our product lines, but then we have adjusted them individually based on the competitive environment we see.

Thank you.

We'll go next to Rob Crystal with Goldman Sachs.

Hi, John. I had a question on the margin progression in terms of Q1, maybe it's the bottom and sort of how do margins progress? And, I guess normally, and I guess Q4 is really softer as well.

Hi Rob. I think that we would expect to see pretty good expansion from Q1 to Q2 because of the additional volume, and then I think our cost reductions would continue throughout the year and see it improve. The expectation we have is that we make good improvement on our cost structure in the first quarter. So, as we incorporate that additional volume in Q2, we would see nice progression in operating income margin in the second quarter. And, then I would say it would improve somewhat in the third and fourth quarter.

I guess, and I don't know if you have this handy, but if historically Q1 margin might be, just picking numbers 7%, then Q2 and Q3 you see 200 to 300 basis points of sequential improvement or have you looked at it that way before?

Well what we've looked at is, we've looked at the patterns that we've normally seen. It's a little bit difficult for us to express in our financial estimate, because of all the acquisitions coming in and out, but Rob it would be my sense. Normally, what we see is that when we get the incremental volume from first to second quarter, and as we said that's normally around $50 million, we would expect to see the normal variable margin on that incremental volume and we would see very modest growth in our fixed cost structure to be able to produce that volume. And so, if you look at the full year bridge, if you take our first quarter results and you annualize that number, and you look at the incremental volume required to get to our full year guidance, and you look at 35% fall through on that volume, which is our typical fall through rate, you'll see just about 200 basis points of improvement in operating margin.

Perfect, thank you John.

You're welcome.

(Operator Instructions) We'll go next to Tom Price with Halogen Investments

Hi good morning, two questions. One, can you clarify a little bit about you CapEx guidance for the year at $60 million and reconcile that versus how you presented it in the first quarter?

The guidance remains at $60 million. A lot of it Tom, is relative to the new construction of the facility in China. It's a fairly significant construction. The total budget is over $30 million associated with the new site, it's in Suzhou. Some of the majority of the capital budget at its gross level is still within that $60 million target. That's why I sort of wanted to have the conversation about gross versus net. Again, they are realigned when you look at the cash flow statement. They are not lined up on the same line. So, one is applied to free cash flow and the other is not, but I'd like to look at them as net, and that's what the comment around first quarter that we really had negative CapEx and it's consistent with the way we've been managing the budget for the last year as well.

For the $60 million of the gross cash flow?

$60 million is gross and our first piece of the net adjustment was the first quarter activity at $23 million.

And then, my second question is just kind more of a medium-term view of Belden and specifically related to the comments about what old Belden look like and what the new one looks like as far as the percentage of the company, connectivity in North America, and the lower margin networking exposure? Just, if I look forward and tell you have two -- was that your Analyst Day in New York, which you kind of presented what you thought, your buying capacity was. Could you kind of give me an update of -- how you see acquisitions out there and how your view of what the new Belden will look like pro forma going forward.

Well I think that we're, as it relates to geographic diversity, we've made really good progress, and as I've noted in my comment, I think it helping us already. So, we are pleased with where we're there. Clearly, we would like Asia to be even at larger percentage of our total, and I think we are pretty happy with where we are in Europe. From a product breakdown point of view, we are clearly focused on expanding our connectivity product lines for a number of reasons. One, is it just makes good sense in our ability to leverage our commercial situation. It makes us a lot more important to our customers. We like the behavior of the category more in terms of less pressure on commodity, and so forth. So, I think you should expect that we will continue to add assets to the portfolio that do in fact improve and expand our percentage of product line within connectivity, both passive and active component. And, as I said our funnel is full. We are working hard on those opportunities, and if we can make sense from evaluation point of view on any of those strategic targets, we would certainly follow through on it.

And just lastly, what size are we talking about revenues or even assets you need to buy?

Well, the acquisitions that we look at range in size, some of them are small, $50 million or less. Some of them are substantially larger to $300 million. But, I think our view in December is absolutely unchanged in terms of our capacity, to be able to buy companies, exactly the kind of companies we want to buy is unchanged, and our activity levels are very, very high.

Thanks.

Thank you.

We will go next to Nat Kellogg with Next Generation Equities.

Hi guys, just a couple of quick questions. This I know you guys all with the coming down the pipeline have some, can you give us some sense of what the charges you might expect to see in Q2 and Q3, just so we get a sense of what we are looking at.

No, there is a, I think $2.5 million is what we would expect right now in Q2 associated with the severance and stay pay on the announcements that we previously made. And, I think there may be another $2 million associated with the pension issues that we discussed in the fourth quarter associated with the Montreal cessation of production. So I think, we've got somewhere around $4 million of expected future charges now.

Okay. Alright, that's helpful, so obviously done a lot of [fiscal]. And, then I was just wondering, if you give us a little sense of seasonality for the business of LTK, Lumberg and Hirschmann for Q1 to Q2. Obviously this is sort of the first time we're looking at that and just what that looks like compared to sort of the legacy Belden business, and if there is anything we should think of differently or similarly?

Well, the second quarter is a relatively strong quarter for almost all of our businesses. LTK because they're consumer electronic oriented. They tend to have a stronger Q3 and Q4 in anticipation of the Christmas time. And of course, our European businesses sometime see a little bit of dip in the third quarter, or the second quarter because of December month. But, Q1 is typically the lowest quarter especially for the cable business because of the weather related items, in terms of the amount of construction that's being done. So, that's a fairly typical pattern. And as I said, before the LTK pattern is a little bit different and that sort of offset some of that seasonality. But again, the seasonal pattern that we're expecting here is quite common

Okay, and I know, just I've heard a couple of - I mean, a little bit more on the distribution side but, do you guys noticed any affects from sort of Easter moving into Q1 to Q2, sorry, yeah from Q1 versus normally Q2?

Well, some of our channel partners told us that they saw some of that and I think that if they did it's so minor that we wouldn't have seen it in our order rates from them to us.

Okay

So, it's really hard for me to comment on that. They're closer to it than we are. The good news for us though is, we monitor their sell through data, and of course that's a much better leading indicator than our bookings rates, and the sell through data did improve throughout the quarter and that makes us feel more optimistic.

Okay, great. I now appreciate that help and that's all I got for now. Thanks

Thank you

Alright. Thanks Nat.

We'll take a follow up from Matthew McCall with BB&T Capital Markets Matthew McCall - BB&T Capital Markets: Thanks. Just of couple of more. The R&D breakout is helpful. Can you give us an idea what you gave us the Q1, but I guess the company is kind of apples and oranges Q1 this year versus Q1 last year. What was Q2 to Q4 of last year, I am sure I can find that but more importantly what's the outlook for the rest of the year?

Are you talking about just for R&D? Matthew McCall - BB&T Capital Markets: Sure.

Yeah, well again I think the first quarter is fairly indicative. Matthew McCall - BB&T Capital Markets: Okay.

What our expectations should be throughout the year? I think maybe there is going to be some slight variation associated with some additional investments, much like we incurred in the fourth quarter of last year when opportunities exist where we can use discretionary spending in order to be able to manage our product or technology opportunity we will do so and they will talk about it in these forums. But, right now I think the first quarter is fairly indicative maybe slightly higher going forward, maybe a $1 million higher. Matthew McCall - BB&T Capital Markets: Okay and I think you have mentioned that you didn't see any disruption from the Connecticut plant. I don't think you're seeing any benefit obviously there. The $26 million that you have highlighted that's going to help this year, was any of it recognized in Q1?

Yes. Yeah, we think there is about $3 million of improvement in the first quarter as a result of those actions that we have been discussing, and so on an annualized basis that would be about $12 million, which means we've got a little bit start for $26 million for the year. Matthew McCall - BB&T Capital Markets: Okay.

We had a good start, and still a lot to do. Matthew McCall - BB&T Capital Markets: Right, right okay. And then, all the actions that you on the Connecticut specifically of the other actions that will potentially help '09, any idea of what the potential savings are expected to be in fiscal year '09?

Well, we did recently announced, start of the same exercise that we applied to regional manufacturing on the cable product to the connective business. Our first step was consolidating the Midlothian facility, which is in Maryland, which was part of the Lumberg acquisition. Matthew McCall - BB&T Capital Markets: Okay.

I thought it was in Maryland, in to our tier 1 facility. So, the first step of that consolidation is now underway and I think we are going to see other items or another other activities associated with rationalization on the connectivity side in addition to the cable side.

Midlothian is going to take about a year. Matthew McCall - BB&T Capital Markets: Okay, but no quantification of '09.

Not yet. We are, I mean, we're still looking at opportunities for more a competitive footprint always. And as Gray suggest, we are in the earlier stages of the connectivity product lines, not this similar to where we might have been with the cable, 18 to 24 months ago. Matthew McCall - BB&T Capital Markets: Okay, okay. And then, Gray one question I had about the balance sheet. It looks like goodwill went up about $56 million from the end of the year, and you mentioned the true up from the acquisitions is related to that, what's behind that goodwill?

Well there is two items in there. We have the restated goodwill associated with FX, and lot of our goodwill is in Europe, and this is the true up of the purchase accounting. So, there is two activities that adjusted goodwill in the quarter. Matthew McCall - BB&T Capital Markets: Okay. That's helpful, thank you all.

We'll go next to Adam Brenner [ph] with Platinum Investments.

Hi, thank you very much for taking my question. I just wanted to ask you a little bit about the high end of the networking market, and you talked about trends being little bit better there. Can you just talk about price increases, and how that took so far in the second quarter, or maybe late in the first quarter? Thank you.

Sure Adam. Yeah, we are seeing better performance with the higher end cable. I think there is two reasons for that. I think one is, I think, we are performing better. I think that our sales organization on the Belden brand on end-to-end solutions is doing a good job. So I think, we're at or above market in that category. There is price pressure there, but I think that clearly customers view that buying decision differently, and they are sensitive to price, and of course, we have fewer competitors that are really able to operate end-to-end solution. So it's our expectation that the higher end of that category will behave more attractively from our point of view, and that we'll continue to make good progress on that. That's a project based business, and so we monitor our pipeline very closely and the pipeline looks good. There have been some projects that have been slightly delayed. So we watch that very closely, but we are generally fairly positive about that into the business.

And then, maybe you just talk a little bit about, how much leverage are you going to take on. You are running around one times net debt EBITDA right now, in terms of buying back stock or doing acquisitions, how much room do you think you have, and how comfortable are you with the leverage?

Yeah. We've got a established guidance with respect to the expectations for leveraging targets that we've set for the enterprise. I'll give it to you in two fold, somewhere between to 30% to 40% debt to deposit equity, and somewhere around the 2.5 times EBITDA range is a comfort level and a consistent level that we've expressed.

Great. Thank you very much.

Welcome. Welcome to the call.

And, we will take our final question from Jeff Beach with Stifel Nicolaus.

Can you talk about the, where you are with the initiatives to combine industrial cables with connectivity and other electronics both in the U.S and Europe, and when you expect that to start making a contribution to Belden's numbers that are moving the needle?

Sure Jeff. I think there is two primary initiatives that are underway. The first is that in Europe, Lumberg and our European Cable business are working together now to offer solutions connector with cable. And in the past, Lumberg had done that with other vendors, and we are now working to migrate that from, one with that legacy situation, to one that would be a complete Belden Solution. And then secondly, I think we're beginning to make good traction Jeff on some of the commercial synergies in the U.S. with respect to industrial Ethernet products, leveraging the Belden sales organization. We've got a couple of commercial wins that I mentioned already. It's one of the top priorities for Steve Biegacki, the newest member of the senior leadership team to really help us drive greater improvement of the year. So, I'm optimistic that we are going to see some of that this year and enough of it that will start to move the needle, Jeff. But, in the first quarter results the examples I give you, would not be significant to show up in the consolidated results.

Alright, second back on Mohawk and the weakness in CATV, you expect that to continue, are you making significant cost reductions and changes to improve the profitability or reduce the negative impact there that will make a difference ahead?

Well, the decision that we took on our facility in Connecticut was impact of factory that was dedicated to the production of Mohawk product. So, that was one action that we took that will have a difference in the 2009 income statement. As it relate to 2008, we're expecting that the environment is going to continue to be difficult and we do expect them however to improve, as we do any business sequentially. And that improvement is going to have to come from some cost reduction on the factory floor in terms of better productivity and lower scrap. It's also going to have to come in some better commercial execution, which is going to be balancing the demand with the pricing better than I think we did in the first quarter. So, we are expecting some improvements sequentially, but it's not going to be enormous improvement, because we think the environment is going to remain tough.

Okay, and last just back a little bit more to the initiative of bringing Lumberg and Hirschmann products into system sales into Europe and in the U.S. You mentioned Lumberg in Europe, what is Hirschmann particularly doing, and are you seeing expanded sales of their switches and some of the other household electronics, is that expanding into new markets.

Well in the Hirschmann switch area, the industrial Ethernet piece, we have been focused in Asia and in the United States and trying to help them grow more quickly for two reasons. One is their share is lower in those markets, and secondly we thought we were better positioned commercially to assist them in that area. And we've already seen Jeff, some examples in both markets and where we are seeing improvement. We've won for example a major opportunity in India with the airport in Delhi, where we are expecting on all Belden cable, connectors and industrial Ethernet switches, clearly an opportunity that Hirschmann would not have had before. And we've had some other marked key wins in United States, where our Belden sales organization has been able to bring the industrial Ethernet products in. So, I think we are showing signs of improvement, signs of progress I should say. But, we think that there is still an awful lot more available to us in the future.

Alright, thank you.

Thanks, Jeff.

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

Okay. I think, we will cut it off right there. Thank you very much everyone for joining us on the Belden earnings conference call. We appreciate your interest. Please give us a call if you have any follow-up questions. This concludes our call.

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