Matthew Tractenberg - Vice President-Investor Relations John S. Stroup - President, Chief Executive Officer & Director Hendrikus Derksen - Chief Financial Officer & Senior Vice President-Finance.

Elliott Smith - SunTrust Robinson Humphrey, Inc. Frank Carson - Longbow Research LLC Steven Fox - Cross Research LLC John Quealy - Canaccord Genuity, Inc..

Ladies and gentlemen, thank you for standing by. And welcome to this morning's Belden Incorporated Third Quarter 2015 Earnings Release 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. I would now like to turn the call over to Matt Tractenberg.

Please go ahead, sir..

Thank you, Tina. Good morning, everyone, and thank you for joining us today for Belden's third quarter 2015 earnings conference call. My name is Matt Tractenberg. I'm Belden's VP of Investor Relations. With me here this morning are John Stroup, President and CEO; 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. Before we begin, I'd like to let our audience know that Belden's 2015 Financial Analyst and Investor Event will be held on December 7th and will be once again, virtual.

This live webcast will provide a review of the year, a discussion of the strategy and business drivers, and present 2016 guidance, followed by Q&A. You can find more details on our IR website in the coming weeks. We issued our earnings release earlier this morning and we have prepared a slide presentation that we will reference on this call.

The press release, presentation, and transcript of these prepared remarks are currently available online at investor.belden.com. Turning to slide two in the presentation, during this call, management will make certain forward-looking statements.

I'd 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.

Actual results could differ materially from any forward-looking statements that we make, and the company disclaims any obligation to update this information to reflect future developments after this call.

For a more complete discussion of factors that could have an impact on the company's actual results please review today's press release and our annual report on Form 10-K. Additionally, during today's call, management will reference adjusted or non-GAAP financial information.

In accordance with Regulation G we have provided a reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information we communicate. This reconciliation is in the appendix of the presentation and has been posted separately to the Investor Relations section of our website.

I'll now turn the call over to our President and CEO, John Stroup.

John?.

Thank you, Matt, and good morning, everyone. As a reminder I'll be referring to adjusted results today. Please turn to slide three in our presentation for a review of our third quarter highlights. Given a challenging demand environment I'm pleased with our performance during the quarter.

Expected weakness within our industrial platforms was offset by solid demand for our enterprise, broadband connectivity and network security solutions. Revenue in the third quarter was $590.1 million, an increase of 2.2% on a constant currency basis.

After adjusting for copper, currency, and acquisitions, revenue declined 3.1% from the year ago period. Gross profit margins were 40.8% for the quarter, an increase of 320 basis points from the year ago period. EBITDA margins were 16.5%, an increase of 80 basis points from the year-ago period.

Our ability to expand margins, regardless of the economic environment, continues to be a strength. We also repurchased almost 698,000 shares of Belden common stock for $39 million. Free-cash flow was a robust $75.1 million, an increase of $20.2 million or 37% from the year ago period.

And finally, we are increasing the expected range of full year adjusted income from continuing operations per diluted share to $4.80 to $4.90. Please turn to slide four for a review of our business segment results. Broadcast revenue in the quarter was $228.1 million, as compared to $256.6 million in the year ago period.

Sequentially, revenues increased organically by 4.7% from $219.4 million in the second quarter, which is slightly better than typical seasonality. As discussed last quarter, Broadcast customers continue to be impacted by a strong U.S. dollar and weak oil prices.

This is evidenced by the decline in International revenues of 23%, versus strong growth in the United States of 7.9% from the prior year period. Furthermore, demand for our broadband connectivity products was robust, with organic revenue growth of 8.3% in the quarter. Within Grass Valley, revenues increased by 5.8% sequentially.

In addition, the book-to-bill ratio was above 1, leading to a product backlog position that is 37% larger than one year ago. EBITDA margins for the platform were 15.3%, increasing 30 basis points year-over-year, and we are on target to achieve our productivity initiatives announced last quarter.

Moving on to the Enterprise platform, where revenues grew organically by 8.8% year-over-year. The business is benefiting from the U.S non-residential recovery and consistent execution. Congratulations to the team on another strong performance. EBITDA margins were 16%, an increase of 60 basis points from the year ago period.

Revenues within our Industrial platforms, on a combined basis, declined by 5.4% organically during the period. As mentioned last quarter, the strengthening U.S. dollar and sustained low oil prices are negatively impacting the demand environment. We anticipate these issues to persist for the remainder of the year and into next.

Project revenues from customers within oil and gas markets declined by approximately 30% from the prior year period. MRO revenues, which represent approximately 20% of sales for the combined platforms, were unchanged from the year ago period. And sales to machine builders declined slightly from the third quarter 2014.

On a combined basis, EBITDA margins of 16.3% declined slightly from last year. We are aggressively evaluating opportunities to drive productivity in these businesses, given our view that demand will be weak at least through next year.

And finally, the Network Security platform had a solid quarter with revenues of $41.4 million, an organic increase of 12.4% from the year ago period and EBITDA margins of 27.2%. I'm particularly pleased with growth within the utility sector, where revenues are expected to nearly double this year.

We're very excited about the opportunity within both industrial and broadcast applications as we enter 2016. 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 five for a detailed consolidated review.

Third quarter revenues were $590.1 million, a decrease of $23 million or 3.8% from $613.1 million in the third quarter 2014. Currency translation had the effect of decreasing revenues by approximately $37 million in the third quarter of 2015 compared to the year ago period. When adjusting for this, revenues increased 2.2% year-over year.

Acquisitions contributed $45.8 million in the quarter. On an organic basis, revenues declined 3.1% from the year ago period. Sequentially, revenues decreased $8.4 million, $6 million of which was a result of lower copper prices, with the remainder driven by currency translation.

On an organic basis, revenues were up slightly, in line with typical seasonality. Gross profit margins for the period were 40.8%, increasing 320 basis points from the year-ago period, due to successful execution of our M&A strategy. Sequentially, gross profit margins decreased 90 basis points due to the timing of input costs.

Third quarter SG&A expenses were $118.8 million, or 20% of revenue. After adjusting for the impacts of currency and acquisitions, SG&A expenses declined by $5 million year-over-year and $6 million sequentially, a result of successful implementation of productivity initiatives. R&D expenses for the quarter were $36.5 million or 6% of revenue.

We continue to appropriately invest in the development of innovative solutions within all our platforms. EBITDA margins were 16.5%, up 80 basis points year-over-year and a result of the accretive acquisitions closed the last 12 months. Sequentially, EBITDA margins declined slightly.

Net interest expense for the quarter was $25.4 million, an increase of $3.9 million year-over-year, a result of the additional senior subordinated notes issued in November of 2014. Given current exchange rates, we expect interest expense of approximately $27 million in the fourth quarter.

The adjusted effective tax rate for the third quarter was 18.9% compared to 21.3% in the prior year. For financial modeling purposes we recommend using a 17% effective tax rate for the fourth quarter, resulting in an 18% tax rate for the full year 2015.

We will provide you with the suggested 2016 tax rate during our Investor Day webcast on December 7th. Income from continuing operations per diluted share was $1.14 compared to $1.15 in the year ago period. Please turn to slide six. I will now discuss revenues and operating results by business segment.

Broadcast Solutions generated revenues of $228.1 million during the third quarter. Compared to the year ago period revenues decreased $28.5 million, $10.5 million of which is attributed to currency translation. On a year-over-year basis, organic revenues declined 6.3%. Sequentially, revenues increased $8.7 million, or 4.7% on an organic basis.

In the face of these market headwinds I'm pleased with our ability to improve EBITDA margins within the Broadcast segment by 30 basis points year-over-year and 90 basis points sequentially. Our $30 million investment in cost savings at Grass Valley is progressing as planned, and will result in annualized cost savings of $30 million.

Our Enterprise Connectivity Segment generated revenues of $113.8 million during the third quarter, a decrease of $1.5 million year-over-year from $115.3 million. This platform faced a $7 million headwind resulting from currency translation and a $5 million unfavorable impact from lower copper prices.

On an organic basis, growth in the quarter was 8.8% year-over-year, a result of solid demand for our products and strong execution by the team. The Enterprise segment generated EBITDA margins of 16%, in line with expectations. EBITDA margins increased 60 basis points from the year ago period and decreased 200 basis points sequentially.

As mentioned on our previous earnings call, second quarter margins benefited from the timing of input costs. This platform is on-track to achieve 16% EBITDA margins for the full year, in-line with expectations shared with you last December.

Revenues within our industrial platforms declined 5.4% organically from the year ago period while holding EBITDA margins relatively flat on a combined basis. The impact of lower copper price and currency translation was approximately $26 million year-over-year. The Industrial Connectivity segment generated revenues of $147.7 million.

Organic revenues declined 5.3% year-over-year, largely due to sustained low oil prices. EBITDA margins of 15.7% increased 20 basis points year-over-year, reflecting our ability to manage costs in a soft environment. Margins declined 210 basis points sequentially, attributable to the timing of input costs.

We expect EBITDA margins to return back to a level of approximately 17% in the fourth quarter. The Industrial IT segment generated revenues of $59.2 million. Revenues declined $10.9 million year-over-year mainly due to currency headwinds. On an organic basis, revenues declined 5.4%.

EBITDA margins of 17.7% declined 170 basis points year-over-year, a result of lower volume. Sequentially EBITDA margins increased 110 basis points, driven by an improved cost structure. Finally, our Network Security platform continues to perform well, generating revenues of $41.4 million, up 12.4% on an organic basis year-over-year.

If you will please turn to slide seven, I will begin with our balance sheet highlights. Our cash and cash equivalents balance at the end of the third quarter was $242 million, compared to $208 million in the prior quarter and $449 million in the prior year. Inventory turnover was 6.7 turns, up 0.7 turns sequentially, and down 0.3 turns year-over-year.

Days sales outstanding was 63 days in the third quarter, a decrease of one day sequentially and an increase of one day year-over-year. PP&E turnover was 7.4 turns, an improvement of 0.1 turn sequentially and down 0.2 turns year-over-year. Net leverage was 4.0 times net debt-to-EBITDA at the end of the quarter.

I'd like to remind you that our balance sheet remains in excellent shape. Our debt is fixed at attractive rates, maturing between 7 and 10 years from now, and brings with it few, if any, restrictive covenants. We anticipate net leverage of 3.6 times by year-end with continued improvement in 2016.

Please turn to slide eight for a few cash flow highlights. Cash from operations were a robust $86.9 million compared to $63.2 million in the prior year period. Net capital expenditures for the quarter were $11.8 million, increasing $3.5 million compared to last year.

Free cash flow continues to be strong at $75.1 million in the quarter, an increase of 37% from the year-ago period. We continue to expect free cash flow for fiscal 2015 to be approximately $180 million, including a $30 million investment at Grass Valley.

For the third quarter, we purchased approximately 698,000 shares of Belden common stock for $39 million. On a combined program-to-date basis, we have repurchased a total of 7.4 million shares, or greater than 15% of the company at an average price of $47.43 per share. That completes my prepared remarks.

I would now like to turn this call back to our CEO, John Stroup, for the outlook.

John?.

Thank you, Henk. Please turn to slide nine for our outlook regarding the fourth quarter and full year 2015 results. Despite a challenging environment, our business is benefiting from a number of favorable secular trends that we expect will continue the remainder of this year and into next.

Moreover, our ability to capture share and drive productivity provides us with the confidence to guide full year earnings growth in the range of 13% to 16%. We expect fourth quarter 2015 revenues to be between $595 million and $615 million, and adjusted income from continuing operations per diluted share is expected to be between $1.45 and $1.55.

For the full year we now expect revenues between $2.353 billion and $2.373 billion. The expected range of adjusted income from continuing operations per diluted share is now at $4.80 to $4.90.

Please join us online on December 7th for our 2015 Investor and Financial Analyst event, during which we'll provide you with a review of the year, and our 2016 guidance. Details can be found on our IR homepage. That concludes our prepared remarks. Tina, please open the call to questions..

Thank you. Matt Tractenberg, your first question comes from William Stein with SunTrust..

Hi. This is Elliott Smith on for Will.

First, I was wondering if you could talk a little bit about the bookings linearity you saw during the quarter and how this related to what you normally see for the third quarter and how they've looked moving in October?.

Well, the orders in the quarter were fairly typical. There wasn't anything unusual. It wasn't backend loaded. In fact, in some of our businesses, there was a little more strength in the early part of the quarter than we typically see. But then I'd say in other businesses we saw very typical patterns or even a little bit more backend loaded.

So nothing that was unusual from a linearity point of view..

Okay. Thanks. That's helpful. And one more, if you could just give us some directional views by segment for the fourth quarter, that would be helpful? Thanks..

Sure. So as I mentioned in my prepared remarks, our expectation in the fourth quarter and next year is that we're going to continue to see nice growth in our Enterprise, Broadband, and Network Security segments. Those businesses are benefiting from favorable secular trends and we don't see those being disrupted any time soon.

And in our Industrial segments, we would expect that there will continue to be weakness as a result of low oil prices and a strong U.S. dollar. So in this most recent quarter organic growth on the combined basis for the industrial platforms was approximately negative 5%.

It's my expectation that we would see something similar to that in the fourth quarter. And for the broadcast business -- in addition to the Broadband business doing quite well in the third quarter, our more traditional cable business had a strong quarter as well.

And although, our revenue on a year-over-year basis with Grass Valley was down, bookings improved. So book-to-bill was above 1 again and product backlog within Grass Valley entering Q4 is $10 million higher than what we entered Q3. So we have a nice head start entering Q4 compared to where we were in the third quarter..

Great. Thank you..

We'll go next to Shawn Harrison with Longbow Research..

Hi, this is Frankie on behalf of Shawn. Thanks for taking my question. I just had a couple questions on Grass Valley..

Pardon me. I'm sorry. We're not able to hear you.

Can you speak up a little bit?.

Hi, can you hear me?.

Yeah, I can hear you now, thank you..

Okay. Thank you. Yeah, hi, this is Frankie on behalf of Shawn. I only just had a couple questions on Grass Valley.

One, are you guys seeing any changes, it looked like you have kind of bottomed? (21:55) And in terms of 2016, what are kind of drivers pushing it forward? Is it the Olympics, elections, or – and the second question to that is, just curious to where we're at with the restructuring program with Grass Valley and if you're considering it with any other units like industrial?.

Yeah, so, let me respond to it in reverse order. So as it relates to the restructuring, as Henk mentioned, we are on schedule with the productivity improvement programs within Grass Valley. We saw that in the third quarter results. We'll see improvement again in the fourth quarter and we'll see further improvement next year.

Within our industrial businesses we're looking very closely at opportunities to drive productivity improvements despite organic headwinds in 2016. We do think what we're experiencing with our industrial platforms in this quarter will be with us for a little while.

We don't see any imminent change to oil prices or to the dollar situation, and therefore we think that U.S. manufacturing sector is going to be weak at least in 2016. So we're evaluating those opportunities. I think we'll be in a position to be more detailed with everybody in December when we talk about guidance for 2016.

And then as it relates to Grass Valley, I would say the themes we discussed in the second quarter are still true in the third, and what I mean by that is, weakness outside of the U.S. is the primary issue, again related to the strong dollar and low oil prices.

Some of you may have noticed, for example, that there was an announcement by Al Jazeera to reduce head count. That was at least partially due to low oil prices. We saw actually nice recovery in bookings in the U.S. compared to other parts of the world in the third quarter. And of course, in 2016, we've got the benefit of the U.S.

Presidential election and we have the benefit of the Summer Olympics, and therefore, I would expect revenue to improve sequentially in Grass Valley from 2015 to 2016. Again we'll be more specific about 2016 when we're together in early December..

Thanks. That was really helpful. And then changing gears, looking at your guidance, it looks like the biggest delta to EPS was lower tax rates.

Is that kind of what – what changed with it or is there something else?.

Well, I would say that clearly the tax rate is part of it, but I would say the other part of it is that the guidance has been updated to include the backlog position entering the fourth quarter. So I would say, in general, the fourth quarter, as we see it today, is very similar to what we saw three months ago.

And you're right, we do have a slightly better tax rate than what we incorporated into our guidance last quarter..

Okay. Thanks, guys. I appreciate it..

Thank you..

We'll go next to Steven Fox with Cross Research..

Thanks. Good morning. A couple of questions for me.

John, can you just dig into your latest thoughts on some of the cord cutting issues that I think were also hampering Grass Valley sales? Have you gotten any kind of better feel for how this is going to affect your business maybe into next year, if you ex out some of these onetime events or every multiple year events like the Olympics and things like that?.

Yeah so, Steven, I think cord cutting might be one of the greatest misunderstandings that exist in our business, and what I mean by that is that if you look at the data, the data shows that the biggest headwind for Grass Valley is outside of the United States. And of course cord cutting is at least today relatively contained to the United States.

And so it's true, of course, that there are alternatives for people to view content, and they're taking advantage of that, but the penetration rate is obviously quite low.

You may have noticed that Netflix struggled a little bit in the quarter, and there's a lot of aggressive actions being taken by what we'd call traditional customers to make certain that they maintain their viewership.

Now the other thing I would mention is that, to the extent that churn exists within the industry, it absolutely shows up within our broadband business. And our broadband business was up 8.8% in the quarter. So I feel like our broadcast platform is really well positioned for whatever ends up happening in the media industry.

Live content of course is two-thirds of what Grass Valley does. We continue to see that as an opportunity and an area of strength. Our broadband position is outstanding. So to the extent that people are in need of increased bandwidth for things like streaming, we're in good position.

So I just feel like it continues to be a misunderstanding and quite frankly a bit of a distraction away from the real data. And I always hate it when the data gets in the way, but the data really does point to the fact that most of the headwinds for Grass Valley are outside the U.S. and they relate to the currency and they relate to oil prices..

That's helpful. And then just in terms of your comments around the industrial market into next year, you're kind of throwing in the towel and maybe some other companies in that space are still holding out hope that things are going to bottom in the next couple of quarters.

Can you just sort of go into some of your thinking there, maybe parse it a little bit by which markets maybe can recover, if you see any, and which are dragging you down the most?.

Sure, so without question, the biggest issue for us and most companies in the industrial space is the impact from oil and gas. So our business within the oil and gas sector is down approximately 30% in the third quarter from a year ago. Our MRO business is flat and our revenues to machine builders is close to flat.

And our machine builder revenues, you can imagine, is more diversified, food and beverage, semiconductor capital equipment, a lot of different other industries.

Our view is the following; first, we don't see any recovery, meaningful recovery in oil prices next year and that's because we think supply and demand has not reached equilibrium and we don't see any sort of snapback out of China. Secondly, we don't see any possibility that the U.S. dollar is going to weaken next year.

In fact, we just saw in the last couple weeks, Europe reiterate their commitment to stimulus spending. I suspect there will be lots of other countries that'll follow. I think China might devalue further. I think the U.S. dollar is going to remain strong. And thirdly, we're in year seven of the economic recovery.

And I know it wasn't a particularly satisfying recovery to people, but it was a recovery. So I think it's far more likely than not that the United States is going to experience a manufacturing recession in 2016, and we're prepared for it..

Great, and just to clarify one other comment, within all that, you're considering cost actions that have not yet been rolled out for the Industrial segments.

That's something that's to come in the next quarter or so?.

So we're evaluating, as we do every year this time of year, in our budgeting process, how we will achieve our productivity goals. So we have a productivity goal in each of our businesses every year, independent of revenue growth.

Obviously productivity is a lot easier to achieve when revenue is growing and markets are growing, but that doesn't mean we don't have the same commitment to productivity improvement in a situation where revenues are declining. So, we're working on that now. And we'll be presenting that to our Board in November, as we do every year, our budget.

And I believe in early December, when we talk to you all about our 2016 guidance, we'll be able to shed a little more light on what we're thinking around productivity programs in all of our businesses and probably more specifically the industrial platform..

Great. That's very helpful. Thank you..

Yes..

We'll go next to John Quealy with Canaccord..

Hi, good morning, folks. A couple questions here. First, if we can go back to Grass Valley, it's good to see that, you know, the broadcast business in Grass Valley is getting better, at least U.S., international and so that's partly oil and gas-related. The bookings, John, can you talk about, how does the margin profile look in the price.

Obviously you're taking costs out of OpEx across the Broadcast segment but talk to margins, if you could, on the forward book?.

Yes, so margins are fine. So we haven't really seen any meaningful change in margins. I mean, there's maybe a couple of projects I can point to where there's been heavy levels of competition. But I don't think that's unusual. So I haven't seen any change in the margin profile as a result of this demand decrease and presumably lower utilization.

I think that's, by the way, because obviously in this business there's not a lot of manufacturing cost to absorb compared to the other cost structures. So you know, margins haven't been an issue..

And then also, on the broader broadcast platform, obviously there's been some consolidation in terms of, you know, TE Connectivity and CommScope, any channel issues you've seen as you take a step back away from the Grass Valley brand across the enterprise there?.

No, our business that competes with Tyco and with CommScope is PPC, that's our broadband business. And they have such a strong position, both in terms of market share as well as intellectual property that, I think it's difficult quite frankly for TE or CommScope to do an awful lot. I mean we don't want to obviously take that for granted.

We work everyday to make sure that our customers are having a good experience with us. But the PPC business is just very, very strong. And then on the Grass Valley side we continue to leverage that brand in that market and customer position to pull through cable products, that's gone very, very well.

I think that the good news for Grass valley is that, even though the dollar is strong, even though oil prices are weak, all that does is postpone investment. It's not a matter of us losing business to local competition because they don't exist. So this business is going to have to make investments.

And I think the fact that volume began to improve here in the third quarter, particularly in the U.S., I think is probably a pretty good testament to the fact that this business is going to recover..

Okay. And then two final ones for me, on network security, you talked about perhaps some new products or adjacencies in the industrial and broadcast market in 2016. I imagine this is going to be a piece of the analyst webcast coming up in a few weeks.

But are we finally at a point where we can start to put Tripwire and bundle or integrate some of that functionality into the underlying hardware business that you've had over the years or what should we expect there?.

So we're already seeing it in the income statement this quarter, with the utility sector. So the work that's been done between our industrial IT team and the Tripwire team is making a real difference. And it's already showing up in our growth rates in the third quarter. So I want to start there. But there's activity in other areas, also.

Some of the areas of activity are a little bit difficult for us to talk about because they are with customers where the discussions are still fairly preliminary, but we have a number of very interesting projects that we're working on with some key large partners around how we help them secure their automation solutions as well as the broadcast solutions.

So we're obviously going to try to do the very best we can to share with you where we're going without disturbing or violating those conversations with our customers. And we'll continue to highlight things that are in the income statement, like in the third quarter with the utility sector..

Great. Thanks, John. Lastly, Henk, on cash flow and debt-to-EBITDA metrics, you've said and we've talked about trying to get below four here for year end.

Can you give us an updated look, and again, I'm sure this is going to be dived into in the call in a couple weeks?.

Sure. So we end the quarter at 4.0, and based upon our guidance, implied EBITDA, we think at the end of Q4, we'll be around 3.6..

Great. Thanks. Nice job, guys..

Thank you..

Matt Tractenberg, there are no further questions at this time. Please continue..

Thank you, Tina, that's going to do it for us today. Thank you, everyone for joining today's call. If you have any questions, please reach out to the IR team here at Belden. Our email address is investor.relations@belden.com. Have a great day, everyone..

Thank you. Ladies and gentlemen, this does conclude our call for today. You may now disconnect from the call. And thank you for participating..