Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to this morning, Badging incorporated conference call. It just as a reminder, this quarter is being recorded.
This time you are only mode. Later, we will conduct a question and answer session.
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I would now like to turn to going over to Kevin Maczka. Please go ahead Sir.
Thank you and good morning, everyone and thank you for joining us today for buildings third quarter 2019 earnings conference call.
My name is Kevin Masco, I'm building, Vice President of Investor Relations and Treasurer.
With me this morning, our buildings, President CEO and Chairman, John Stroup, Chief operating Officer rule, Vestjens and CFO Henk Derksen.
John will provide an overview of our third quarter performance and the two other significant announcements that we made today rule were provide rumor review our segment results and then Hank will provide a detailed review of our financial and operating results followed by keeping it.
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 dots held in Dot com.
Turning to slide two in the presentation.
During this call management will make certain forward looking statements in reliance upon the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
For more information. Please review today's press release and our annual report on Form 10-K .
Additionally, during today's call management will reference adjusted or non-GAAP financial information.
In accordance with regulation G. The appendix to our presentation and the Investor Relations section of our website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information we communicate.
I will now turn the call over to our President CEO and Chairman John Stroup John .
Thank you, Kevin and good morning, everyone.
As a reminder, I'll be referring to adjusted results today, excluding grass valley.
Let's turn to slide three in our presentation for a review of our third quarter Professor performance.
And two other significant announcements that we made today regarding our intent to divest grass valley and a new cost reduction program.
We completed a rigorous strategic review of our portfolio of businesses and our cost structure and today's announcement marks an important outcome.
We concluded that it isn't the best interest of our shareholders customers and employees to separate grass valley from Belden.
As a result, we're pursuing a divestiture of grass valley.
With the support of JP Morgan, we're engaged with interested parties with significant experience in the broadcast industry.
Based on the approval of Belden. This board of directors to divest this business and the probability of completion.
Grass Valley's financial results will be presented as discontinued operations going forward.
This strategic action also provides an opportunity for a broad based organization organizational recalibration.
As a result, we're announcing a cost reduction program that is designed to improve performance delivering $40 million in annualized SGN, a savings and enhancing our EBITDA margins by approximately 200 basis points.
We intend to deliver these improvements by streamlining the organization and investing in technology to drive productivity.
This includes consolidating our internal business unit reporting structure realigning, our sales and marketing organization and optimizing other functional areas, such as finance procurement ITC and HR.
These actions will begin immediately with some benefit in 2020 and the full benefit realized in 2021.
Belden has a long track record of substantial growth margin expansion and shareholder value creation.
We're not satisfied with our recent performance.
We are reaffirming our commitment to our stated financial goals, including a total revenue CAGR of 5% to 7%.
And EBITDA margins of 20% to 22%.
We will be well positioned to achieve our goals after executing these actions.
Importantly, the expected cost savings will more than offset the free cash flow dilution associated with the divestiture of grass Valley.
Now turning to the third quarter results.
Revenues of $533.1 billion were near the midpoint of our expected range for the quarter, excluding grass valley.
Consistent with our expectations demand trends remained soft or in some of our key industrial markets in the third quarter, but we are encouraged by the improving trends in our broadband business.
EPS of one dollar an 18 cents was also consistent with our expectations for the quarter, excluding grass valley.
Finally, we are updating our expectations of revenue and EPS from continuing operations for 2019 cents grass Valley will be presented as discontinued operations for the full year.
Please turn to slide four for a review of the impact of today's announcements on our portfolio.
Following a grass valley divestiture, the remaining belden portfolio will consist of strong businesses in attractive industrial and enterprise markets each aligned with powerful secular trends.
These include industrial automation cyber security broadband in Fiveg and smart buildings.
This portfolio, while smaller offers improved revenue predictability and multiple platforms for accelerating organic growth.
In addition, we continue to see numerous opportunities to invest in compelling inorganic opportunities in these robust markets.
The business will also be more profitable after the implementation of our $40 million cost program.
We expect the plan savings to be accretive to EBITDA margins and EPS by approximately 200 basis points and 70 cents respectively.
In summary, we are taking significant actions that will result in a more balanced and profitable portfolio of growing businesses. We expect these improvements and turn to drive meaningful shareholder value creation.
I'll now ask rule to provide a review of our business segment results.
Yes.
Thank you John .
Turning to slide five for a review of our business segment results.
Beginning with our enterprise solutions segment.
I'm, referring to adjusted results excluding grass valley.
As a reminder, our enterprise solutions allow customers to transmit unsecure in data sound and video across complex enterprise networks.
Our key markets include smart buildings and final mile broadband.
Consistent with our expectations revenues in this segment declined 4.4% on an organic basis.
$280.9 million.
Revenues in the smart building market were approximately flat on an organic basis, excluding changes in channel inventory levels.
With the decline in the Asia Pacific region.
Offsetting continued growth and share capture in the Americas.
Revenues in final mile broadband declined 7% on a year over year basis, and increased 7% sequentially as expected.
Demand trends improved during the quarter and we expect that momentum to continue.
Importantly, we continue to see robust demand for a fiber optic products.
Fiber revenues more than doubling in the third quarter.
Following the successful integration of two broadband fiber acquisitions earlier. This year, we are significantly expanding our product offering and capturing additional share.
Specifically in the third quarter or enhance capabilities resulted in our first multimillion dollar order from a large telecom operator related to fiveg infrastructure.
We continue to pursue a number of other compelling inorganic opportunities that would allow us to further expand of fiber product offering and drive substantial growth.
Enterprise solutions segment EBITDA margins were 16.0%.
Turning now to our industrial segment.
Much like enterprise, our industrial solutions allow customers to transmit unsecured data sound and video, but in this case in harsh industrial environments.
Our key markets include discrete manufacturing.
Process facilities mass transit and energy.
Revenues in this segment declined 3.1% on an organic basis.
$152.2 million.
Consistent with our expectations revenues were approximately flat excluding changes in channel inventory levels.
We continue to benefit from a balanced portfolio of industrial businesses.
Matt remains robust in our process mass transit and energy markets.
Each of which increased 9% organically.
However growth rates remained soft during the quarter in our largest industrial market discrete manufacturing.
Revenues in the discrete market declined 9% in the third quarter with continued softness softness in Germany.
Given our recent order trends.
The increased level of uncertainty and the global industrial economy, and the week manufacturing PMI readings in the United States and Europe , we expect the pressures in discrete to persist into fourth quarter.
And our cyber security business, we continue to make significant progress with industrial customers.
Non renewal bookings are best leading indicator of revenues increased a very robust 42% in the industrial verticals.
However, total non renewal bookings declined after four consecutive quarters of double digit growth.
Due to project timing and sales execution.
We are aggressively implementing the appropriate corrective actions and expect performance to improve in the fourth quarter.
Industrial solutions segment EBITDA margins were 17.8%.
Ill now ask Hank to provides additional insight into our third quarter financial performance.
Thanks.
Thank you whole almost on my comments with results for the quarter, followed by a review of our segment results a discussion of the balance sheet and close with our cash flow performance as a reminder, albeit evincing adjusted results today, excluding Casale. Please turn to slide six for a detailed consolidate leave you.
Revenues were $533.1 million in the quarter, decreasing 20.9 million or 3.8% from 554 million in the third quarter of two dot 18.
The revenues also decreased 3.8% organically from the by periods as a $10.5 million favorable impact from acquisitions was offset by a 10.5 million negative impact from currency translation lower copper prices.
Adjusted for changes in channel inventory revenues decreased 1.7% organically by.
Gross profit margins in the quarter were 37.4% decreasing 210 basis points compared to 39.5%, India go period, due to lower volumes and inventory levels.
Our inventory balance declined during the quarter as planned.
Favorably impacted gross profit margins by approximately 60 basis points, we expect gross profit margins to improve sequentially in the fourth quarter.
EBITDA was $89.8 million decreasing 13.1 million compared to one of the 2.4 million in the prior year period, EBITDA margins were 16.8% decreasing 170 basis points you have year.
Net interest expense was consistent with a year ago periods at $14.2 million.
As a reminder, our debt is entirely fixed at an average interest rate of 3.5% with no maturities until 2025 to 2028.
At current foreign exchange rates, we expect interest expense of $56 million for the full year 2019 down from $61 million in 2018.
Our effective tax rate was 17.7% in the quarter compared to 21.6% in the third quarter 2018.
Financial modeling purposes, we recommend using an effective tax rate of 20% for the fourth quarter and 17.5% for the full year 2019.
Net income was $53.8 million compared to 61.6 million in the prior year period earnings per share was $1.18 cents in the quarter compared to $1.29 cents in Diego periods.
Please turn to slide seven I will now discuss revenues and operating results by business segment.
Our enterprise solutions segment generated revenues of $280.9 million during the quarter decreasing 2.2% from the prior periods.
Revenues were favorably impacted by $10.5 million from acquisitions and negatively impacted by 4.1 million from currency translation, a couple of license opposite Justin for these sectors revenues decreased 4.4% organically on a year over year basis, EBITDA margins were 16% in the quarter.
Declining kind of 80 basis points year over year, and increasing 30 basis points sequentially.
We have a year decline resulted primarily from lower volumes industrial solutions segment generated revenues of $252.2 million in the quarter decreasing 5.5% from the by a period guilty translation and couple of prices had a negative impact of $6.4 million awful adjusting for.
These factors revenues decreased 3.1% organically.
After adjusting for changes in incidentally levels at a channel partners segment revenues were approximately flat organically.
EBITDA margins was 17.8% in the quarter declining 180 basis points from the by period and approximately flat sequentially. The of the year decline resulted primarily from lower volumes and unfavorable product mix.
If you'll please turn to slide eight I'll begin with our as reported balance sheet highlights our cash and cash equivalents balance at the end of the third quarter was $297 million consistent with the prior quarter and down 29 million in the prior periods when capital turns were consist.
With the by a quarter at 5.9 turns dsos extending was 68 days compared to 64 days by quarter and 66 days and the probabilities inventory turns were 5.3 turns compared to 5.1 turns into by quarter and 4.9 turns into by beneath.
Our total debt principal at the end of the third quarter was 1.42 billion down from 1.48 billion in the by a quarter and 1.5 15 billion in the third quarter of 2018 net leverage was 2.6 times net debt to EBITDA at the ended the quarter consistent with it.
Hi quarter, and then line with a target of two to three times.
Please turn to slide nine for a few cashel highlights.
Welcome operations in the third quarter was $67.9 million compared to one of the 30.2 million in the prior year by year benefited from a known the going gain of 47 million related to a patent litigation.
On a trailing 12 month basis cash flow from operations increased by 10%.
I wanted and 52.5 million in the third quarter 2018 to 277.9 million the third quarter 2019.
Net capital expenditures were 23.3 million for the quarter consistent with prior periods free cash flow in the quarter was $44.6 million compared to one of the $6.3 million and apply it periods.
On a trailing 12 month basis free cash flow increased by 5% from 160.8 million in the third quarter 2018 to 169.5 million in the third quarter 2019.
That completes my prepared remarks, I would now like to turn this call back to our president and CEO and chairman John slope Woody outlook. John . Thank you Hank as mentioned previously we are updating our revenue and EPS expectations for the year and our new fourth quarter and full year 2019 guidance from continuing operations.
Excludes the results from grass valley from all periods.
We anticipate fourth quarter 2019 revenues to be between 510 and $530 million, an EPS of one dollar to $1.15 cents.
For the full year 2019, we now expect revenues to be between 2.092 and $2.112 billion.
Now expects full year EPS $4 in 32 cents to $4.47.
This EPS range does not include any benefit from our cost reduction plans, which we are expected to be accretive to EPS by approximately 70 cents once fully implemented.
That concludes our prepared remarks Ana please open the call to questions.
Thank you again, if you would like to ask a question June Bikini session. Please press star one.
If you would like to withdraw your question. Please press star to please limit yourself to a question and a follow up.
So again.
Good question.
Okay.
First question from no Winston.
Please go ahead.
Hi, guys good morning.
Turning to well.
So first just on the grass Valley divestiture.
Could you just give us.
No you kind of mentioned high probability, but can you just give us a little bit of a sense of where you are in terms of the engagement and.
Maybe a little bit more on how you're thinking about timing there.
Well, so noelle, it's certainly our preference to be able to get that resolved as quickly as possible. We haven't working on it for a little while.
We were in a position to announce something definitively of course, we would have done it today, but we're not.
So.
We're it's top priority for me and for Hank we'd like to get it done.
This quarter a possible.
But if not then then we'll get it done as quickly as we can but it's.
Yes, absolutely has our full attention.
Okay. Thanks, and then shifting over to the cost reduction program. The 40 million on could you give us a sense of how that breaks out.
And just kind of where you see some of those costs coming from.
With NFC in a and.
And generally and then second you mentioned TLC some cost reduction in 2020 can you give us a better sense says.
How much you think you may recognize next year and how quickly some of that comes through.
Okay, well first of all you were correct that it is SGN a. I just want to underscore that it's not it's not R&D. So we're not expecting to make any changes in our R&D spend in total we might reallocate from one business to another which we do normally so it is SGN a it's going to come in all areas. So were is going to be opportunities for us to reduce our.
In a expense by streamlining the organizational structure, we see opportunities to reduce our sales expenses.
By taking the opportunity to be more thoughtful about how we go to market.
Hi Tech finance, so it's broad based.
This is a project we've been working on for quite some time, we've done a lot of work with the benefit of some external benchmarks marking.
So we've got a lot of confidence, we'll be able to get that done without any impact to revenue as it relates to timing in early December when we have our Investor day, we'll certainly talk about more specifics with regard to how much of that 40 million would actually be seen in 2020.
But.
In terms of.
Just just rule of thumb I would say that if you exclude the cost of implementing the program.
Probably going to get 20 million or half of it in 2020, and then we would see the full benefit in 2021.
Okay, Great and one last question if any.
Looking at your guidance, because you're not stepping out grass valley, it's just maybe a little bit challenging Ted make shareware, where gauging that correctly first as standing estimates.
But just can you give us a sense.
When you look across the core business. It sounds like maybe you took down your expectations, a little bit and industrial maybe a bit in cyber security.
Broadband and enterprise about the same is that the right way to think about it or or and I'm a little bit off on that.
So I agree with you and is it is complicated given all the things that are moving so let me give you. Some some perspective. So first of all if we adjust for the channel build a year ago in Q4, and we adjust for what we think the de stocking will be in Q4 of this year, we're actually guiding.
Growth on the high end.
About 3%. So this guidance is implying about 3% organic growth after adjusting for changes in inventory levels at our channel partners on a consolidated basis.
That's going to be roughly balanced between the two platforms. We've got our industrial business. We think is going to be up around 2% to 3% and we've got our enterprise business that we think's going to be up about three to four so if we're right about that and obviously, we're going to be exiting the year with considerably more or.
Organic growth momentum than what we had in the first half that of course benefits from grass valley in disc ops, but it also benefits from stronger trends in our broadband business.
Our smart building business continued to do well in North America, and our industrial business. If you put aside our discrete sub vertical which saw weakness this quarter as well as the prior which I think is consistent with a lot of other companies are other three verticals all grew high single digits again in the quarter. So if you.
Just for the channel, which is big on a year over year basis. This guidance reflects healthy organic growth for the consolidated results.
Hi, thanks much.
Yep.
Is there any additional questions. Please press star one on your touched on phones as a reminder, ladies and gentlemen, please limit yourself to one question and the Formula to mail. Our next question from month to month call from Seaport Global Securities. Please go ahead.
Thank you good morning, everybody.
Morning, Matt.
So so John I think that.
The goal of these moves is are you said that or I guess the result of these moves is going to be better revenue visibility and EBITDA margins maybe.
Allow your EBITDA margins targets to be within reach can you can you maybe get into that a little bit more what kind of revenue visibility. How long is do you have the visibility over what period, and then and then where will the EBITDA margins stand posts. These moves.
Yes, so without question the business Thats been the hardest for us to forecast has been grass valley for a number of reasons. One of course is the market itself is going through a lot of difficulty a lot of turbulence you see that with our competitors and then the other.
Thing is that of all our businesses without question. The most non linear so a lot of our orders and a lot of our revenue come in the last month of the quarter and we typically don't enter the quarter with a lot of backlog and that made it substantially more difficult for us to accurately forecast our results and that is something that we.
We're very good at pre grass valley and something that's been frustrating for us and for our investors. So we believe divesting grass valley was substantially help US there now of course as you know our other businesses don't necessarily have a lot of backlog either but the market conditions are far more predictable far more under.
Stand a bull and far less turbulent and therefore, we think our ability to forecast will improve.
As it relates to the profile of the business, we're expecting the organic growth profile to improve as I mentioned with Noel we're forecasting or I should say, we're guiding 3% on the high end organic growth excluding changes in channel inventory I would say in this market environment that is quite strong we're expecting that the $40 million.
Cost reduction will be 200 basis points accretive to EBITDA margins 70 cents accretive to earnings per share and neutral to free cash flow. So we think that once we get through these changes we have a business that from a free cash flow point of view point of view as equivalent from a margin point of view.
Has improved from an organic growth point of view is improved.
And we have a business this far more predictable and we think all those things ought to be well received by our shareholders.
Okay. Thank you for that so I guess the next question also multiple parts.
So our though are the the portfolio most finish the cost savings initiatives finish it just kind of the extended the announcement and then on the cash flow comment you. Just made what are the plans for cash flow really thinking about the impact on on the balance sheet as we move forward.
So.
I would never say this is the end.
Any activities with regard to either pruning the portfolio.
Or driving productivity. So this is a substantial announcement today, obviously as it relates to grass valley and to the cost reduction.
But we certainly reserve the right to have further announcements with regard to pruning that would enhance our growth or margin and also enhance productivity that would improve our margins. So.
Im not going to commit that this is that there could be more to come and there could be more to come in the near future with regard to the cash flow and the balance sheet.
We're still planning by year end to have leverage within our range.
As I mentioned earlier this cost reduction offsets the free cash flow of grass valley, So the balance sheet and the free cash flow generation to the business moving into 2020.
It's going to be in very good shape.
We'll get more specific with you about 2020, when we're together in December at our annual Investor and Analyst day.
But I think you'll feel good about what the balance sheet is going to look like.
Just as you should the growth in the EBITDA margins.
Okay perfect. Thanks, John .
We take our next question from Gosha Calgary from Longbow Research. Please go ahead.
Hi, Good morning, this is asking on behalf of Shawn Harrison.
I just wanted to go back to the guidance question. So just to make sure apples to apples for continuing comps Latino exactly.
Okay.
Well, so we of course excluded grass valley.
So since its in discontinued discontinued operations.
We also updated continuing operations for our actual results in Q3, and our updated forecast for Q4.
I would say the only thing that changed meaningfully as it related to our outlook for Q4 is I think that we felt like based on conversations with our channel partners and also with their sell through data that it was prudent for US to include a larger de stocking in Q4 than what we had.
Originally.
Contemplated.
Okay, Perfect and then second floor free cash flow is there an updated.
Cason for 2019.
Yes, a couple of things that I'm moving down that TTM free cash flow during the third quarter as I commented was approximately one of the 68 million and.
A couple of things I'm looking around the cost actions for sure and Thats a question on timing as well as the grass Valley project, that's on the way that could potentially impact our estimates.
So so TTM onesixty eight everything else being equal based up on the channel impact year over year in Q4, we should expect EBITDA to come down low that implied in guidance. So.
Onefifty 560 million of the cash flow everything else being equal.
Okay, and then any plans for the.
With the proceeds.
Hello.
Anything else.
No change in strategy and proceeds I think you should expect that our capital allocation will continue to be balanced we'll prioritize our organic initiatives, we'll look at share buybacks, we already have an authorization.
If the stock is undervalued and obviously, we'll look at bolt on acquisitions, both within the broadband in the industrial space.
So no change in strategy in terms of capital allocation.
Thank you.
No.
Given that there are no further questions at this stage. Please continue.
Okay. Thank you Ana and thank you everyone for joining today's call before we close I'd like to inform everyone that we will be hosting belden 2019, investor and analyst day event at the New York Stock exchange on the morning of Tuesday December Threerd.
At this event, we will provide a detailed update of the company strategy for creating shareholder value.
Please be on the look out for formal invitations with registration details for those of you that we'd like to join US in person. The event will also be webcasted lives and can be accessed via the belden IR website.
If you have any questions. Please reach out to the IR team here at Belden, our email address is investor relations at Belden Dotcom, Thanks, and have a great day.
Thank you ladies and gentlemen, this concludes our calling for today you may now disconnect from the call. Thank you for participating.