Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to this morning.
Corporation Conference call.
Just a reminder, just called is being recorded.
At this time, you are not listen only mode.
Later, we will conduct a question on I'm sure session and if you would like to ask a question. Please press star one.
Don't fall.
If youre in the question Q and would like to with withdraw your question. Please press star to Wonder Touchtone phone.
I would now like turn call over to Mr., Kevin Maczka. Please go ahead Sir.
Thank you Mark good morning, everyone and thank you for joining us today for buildings first quarter 2020 earnings conference call.
My name is Kevin Nasscom on building, Vice President of Investor Relations and Treasurer.
With me this morning, our buildings, President CEO and Chairman John Stroup.
Keep operating officer role, that's Jim and CFO Henk Derksen.
John will provide a strategic overview of our business.
I will provide a detailed update of our operations and review our segment results and then provided detailed review of our financial and operating results followed by Q1 day.
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 Day, Delvon 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.
Index to a 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'll now turn the call over to our President CEO and Chairman John Stroup John.
Thank you, Kevin and good morning, everyone.
As a reminder, I'll be referring to adjusted results today, Please turn to slide three in our presentation.
Before we review our first quarter performance I'd like to discuss the cobot 19 situation and how we are responding.
This unprecedented pandemic is putting incredible stress on the global economy in financial markets and our associates customers and suppliers are experiencing disruptions and their daily lives that were unimaginable, just a short time ago.
Well that is certainly not immune from these new challenges, but we have the solid financial foundation to whether these difficult times, we're committed to protecting our people and supporting our customers and offering our expertise and resources to assist in combating coping Nike.
[noise], the health and safety of our associates and their families remain our top priority and we are following C. D. C N W.H. show guidelines to maintain safe working conditions.
We rapidly scaled our work from home capabilities in our offices.
Enhance the hygiene practices, and our factories and implemented social distancing standards across our organization.
We're also providing flexible working arrangements to help employees and their families navigate the disruption.
Hi, I'm extremely proud to report that our teams are rising to the occasion and finding creative ways to support local efforts to combat Cobot 19.
This includes donating cableos and connectivity products for ventilator production.
Masks for medical centers and temporary hospitals in the United States.
And elsewhere.
In addition, we are using our threed printers to produce components for phase shields for medical workers and rapidly developing and testing designs for in 95 masks.
Our valued customers are feeling the impact of this global pandemic as well and we're focused on keeping them supply while keeping our associates SEC [noise].
The majority of our sites qualified for a central business status and remain operational, albeit at reduce capacity in some cases.
I will provide more details on our operations in his remarks.
We remain committed to our capital projects and R&D investments.
These investments are important to our customers and will enable us to provide a high level of product innovation in the future.
We're also taking the opportunity to further optimize our business for the current environment and the eventual recovery.
As you would expect we're managing our expenses and deploying countermeasures to protect cash flows.
This includes upsizing, our existing cost reduction program harvesting working capital and implementing compensation reductions for our senior leaders.
Specifically for the remainder of the year, we're reducing base salaries by 50% for myself and 30% for our senior leadership team.
We're also reducing cash retainer fees for our board of directors by 15%.
However, we intend to maintain our direct labor force.
Anticipation of improving demand trends later in the year.
During this period of softer demand our direct labor is allocating additional time to tie them and other continuous improvement and preventative maintenance activities.
This will allow our operations to emerge even stronger.
Please turn now to slide four in the presentation.
Next I would like to update you on the three transformative actions, we initiated last year following our comprehensive strategic portfolio review.
These include the divestiture of grass Valley, the 40 million dollar cost reduction plan.
And the planned exit of approximately $250 million.
Undifferentiated copper cable product lines.
The grass Valley Divesture remains on track and.
In February we announced a definitive agreements to sell 100% of grass valley to private equity firm Black dragging capital in a transaction that we expected to close in the first half of 2020.
The teams are working diligently to satisfy any remaining closing conditions and the transaction remains on track for closing in the second quarter.
As I mentioned, we are upsizing, our 40 million dollar SGN a cost reduction program.
We previously communicated and the expectation of delivering 20 million of these savings in 2020.
The full 40 million run rate in 2021.
We made considerable progress on achieving the plan savings and our teams have identified a number of incremental opportunities.
Today, we announced an increase in the program to 60 million, we now expect to deliver $40 million of savings in 2020, and the fall 60 million dollar run rate in 2021.
Finally, given current market conditions, we are delaying the planned exit of $250 million in copper cable product lines.
We believe that we are unlikely to maximize the value of these product lines. During a global pandemic. So we will revisit this process and engage with potential buyers when conditions normalize.
Turning now to slide five in the presentation.
I'd like to update you on our end markets.
Recall that the strategic actions. We are executing will result in an improved portfolio of businesses that is aligned with favorable secular trends in industrial automation cyber security broadband in Fiveg and smart buildings.
We continue to believe that these are robust markets with compelling growth opportunities over the cycle.
We are well positioned to participate in that growth as we execute our strategic plans.
Turning now to slide six in the presentation.
That said the current situation is very dynamic and visibility remains limited.
Making it incredibly difficult to accurately forecast near term trends.
Such we thought it would be helpful to share our view of the potential trends in our markets once conditions normalize.
When the crisis passes and global economies reopened we believe that many of our businesses could emerge stronger than ever.
The next three slides illustrate our view of market conditions in a post crisis environment.
Green represents markets that we believe could see an accelerated recovery.
Represents markets that we'll likely see a typical recovery while red represents markets that could remain depressed for an extended period before recovering.
Broadband in Fiveg, which represents approximately 23% of total revenue should be a clear beneficiary of the global pandemic and the associated social distancing and work from home practices.
Broadband networks are being stressed like never before.
We believe this will drive increasing investments and network infrastructure by our customers supporting continued growth in our outside the home product revenues.
Further our inside the home business recently secured several large orders of self install kits as a result of social distancing and a reluctance to send technicians into consumers' homes.
We're all well positioned to benefit we are well positioned to benefit from increasing demand for broadband in fiveg and the required investments in network infrastructure.
Turning now to industrial automation, which represent approximately 46% of total revenue.
The global pandemic is clearly impacting in demand on a temporary basis, but we remain extremely optimistic about automation trends longer term.
We see a number of drivers of sustainable secular growth, including increasing labor cost and enhance productivity and quality needs.
Social distancing and other new practices in the post crisis environment could represent yet another incremental demand driver for automation.
Within industrial automation, we serve customers and for market verticals, including discrete manufacturing process facilities energy and mass transit.
Our discrete products reside in machines on factory floors in a number of industries.
Not surprisingly recent demand trends very significantly by sub vertical.
We support customers and consumer products material handling medical and pharmaceutical products and semiconductors.
These are areas of relative strength that we expect to perform very well in the recovery.
The energy market is all about electric utilities, producing and distributing electricity.
This vertical includes conventional electricity generation, along with newer alternatives, such as wind and solar and smart grid installations.
Energy is typically less cyclical than most industrial verticals and we expect demand to remain healthy through that period.
Mass transit is also typically less sensitive to economic conditions.
Projects in this market are often state funded and infrastructure related stimulus investments could be especially beneficial, particularly in the EMEA and Asia Pacific regions.
Much like industrial automation demand trends and smart buildings very significantly by sub vertical.
I would also expect robust demand in some of our smart building markets, we serve government healthcare and datacenter customers and as the economy Reopens, we would expect healthy demand from these customers to partially offset the headwinds and the other verticals within smart buildings.
Finally, cyber security is about 6% of our total revenue we continue to see compelling secular growth opportunities in cyber security, especially in industrial applications.
Robert Coping 19 is impacting our near term results.
Customers are temporarily shifting the right priorities elsewhere and delaying planned projects.
Recently, however, we're not seeing large project cancellations and we expect the projects to proceed as the crisis passes.
Turning now to slide seven in the presentation.
This slide highlights our other verticals that we would expect to see a normal recovery once the global economies reopened.
And process facilities, we play in the water and wastewater oil and gas metals and mining and chemicals markets process markets like water and wastewater tend to be much more stable even in recessionary environments.
We would characterize our expectations for the recoveries in these markets as relatively normal.
Turning now to slide eight while we expect many of our markets to see accelerating demand trends as the global economies recover some of our markets maybe depressed for an extended period before recovering.
For instance, in smart buildings, our customers in the hospitality retail and commercial real estate markets are clearly facing fundamental changes in their business that will have implications for demand for our products.
We would expect projects currently underway to proceed to completion, but new project starts in these markets could soften going forward.
Oil and gas is obviously challenged and I would note that this market represents only approximately 5%.
Total revenues.
Similarly demand from automotive factories is increasingly pressured and is also represents only approximately 6% of total revenues.
In summary, we say, we see many more opportunities and risks in our markets in the post crisis environment.
Our portfolio of businesses will be impacted by koby 19 to varying degrees, but we believe that many of our businesses such as broadband in fiveg and discrete manufacturing lumbered stronger than ever.
We remain extremely excited about the opportunities for belden going forward as we continue our transformation.
Please turn to slide nine for a brief discussion on our first quarter results and balance sheet and liquidity positions.
Revenues in the first quarter declined 7% on a year over year basis to $463.5 million.
In demand for our products exceeded our shipments in the first quarter with incoming orders declining 2% to $489 million.
EPS was 67 cents compared to 84 cents in a year ago period.
Perhaps more importantly, given the current environment, our balance sheet is strong and we're very comfortable with our liquidity position.
In recent years, we strengthened our balance sheet and secured sources of additional liquidity.
These decisions are providing to be especially beneficial now providing important financial flexibility to successfully navigate this difficult economic environment.
We exited the first quarter with cash on hand of $294 million subsequent to the ended the quarter and out of out of an abundance of caution we proactively drew down $190 million under our revolving credit facility, resulting an ample liquidity of over $450 million.
Our financial leverage at the end of the quarter was 2.8 times net debt to EBITDA.
This is within our stated range of two to three times Fortunately, our fixed interest rate that has no maintenance covenants and no maturities until 2025 to 2028.
I'll now ask rule to provide an update on our operations and a review of our business segment results role.
Thank you John.
Before I review, our business segment results I'd like to provide a more detailed update on our operations.
As John mentioned, most of our us and global facilities remained operational Germany outbreak, while implementing enhance safety protocols designed to protect our associates.
In most cases, we received exemptions to remain open because we qualified as an essential business based on the nature of our products.
However operations in countries with government mandated shutdowns such as India were suspended in the first quarter and have not yet reopened.
In addition, some facilities that were close to temporarily have reopened.
Under capacity restrictions in some cases.
In China or soon Joe facility was previously closed due to government mandate, but is now open and operating at full capacity.
In Mexico, we are operating at limited capacity due to an agreement with the local governments.
Importantly, we have effectively shifted production from close or impaired facilities.
Other facilities with little or no customer disruption.
For example in January our customers in China, we're benefiting from our manufacturing capacity in Europe, and the United States in April.
Yes, it is true.
We are extremely thankful that across our global operations only a few belden associates have tested positive for Covance 19 to date.
In each case, we followed our pre established processes for sites sanitation and employee quarantines.
Which resulted in temporary disruptions.
We anticipate improving demand trends in the second half of the year. So we intends to maintain our direct labor force size for normalized demand levels.
During this temporary period of lower demand our dealer direct labor allocating additional time to crisis.
Preventative maintenance activities.
The majority of our office locations have implemented work from home protocols with our remote connectivity systems functioning well.
From a supply chain perspective, we did experience some disruption with various suppliers in China and elsewhere.
But we have been able to manage through these situations for the most part.
We are benefiting from a decision made years ago to produce within close proximity to our demands whenever possible.
And as a result, we have minimize the potential supply chain disruptions.
At this point almost all of our suppliers have recovered through normal capacity levels.
Now please turn to slide 10 for a review of our business segment results.
Beginning with our industrial solutions segment.
Although I will be referring to adjusted results today.
As a reminder, our industrial solutions allow customers to transmit unsecured audio video and data in harsh industrial environments.
Our key markets include discrete manufacturing.
Process facilities.
NRG and mass transit.
Revenues in this segment declined 9% on an organic basis after adjusting for changes in channel inventory levels.
In $251.3 million.
Industrial automation revenues declined 6% year over year in the first quarter after adjusting for changes in channel inventory levels.
Not surprisingly the declines were broad based demand softening as the quarter progress.
And our channel partners reduced inventory levels.
Revenues and our cyber security business declined in the first quarter.
We typically generates a significant portion of our quarterly bookings and revenues in the last few weeks of the quarter.
And the last few weeks of March were significantly impacted by Covance related to shutdowns.
As a result, many of our customers understandably delayed large R&D projects, including tripwire installations.
We're not seeing project cancellations or market share loss.
And we anticipate significantly improved demand trends later in the years.
Industrial solutions segment EBITDA margins were 14.1%.
Turning now to enterprise segments.
As a reminder, our enterprise solutions allow customers to transmit unsecure.
Audio video and data across complex enterprise networks.
Our key markets include smart buildings and broadband in Fiveg.
Revenue in this segment increased 2% year over year.
$112.2 million.
Declined 3% on an organic basis.
After adjusting for the contribution of our recent broadband fiber acquisitions.
Changes in channel inventory levels.
Revenues into smart buildings market declined 6% on an organic basis with trends decelerating in March.
Consistent with our expectations, our channel partners reduced inventory levels in this market during the quarter.
Revenues in broadband and Fiveg were approximately flat in the quarter on an organic basis after adjusting for changes in customer inventory levels with orders increasing by 4%.
We experienced some disruption related to fiber suppliers in China, but these suppliers are now back to full production levels.
We continue to see robust demand for our fiber optic products.
Following the successful integration of our broadband fiber acquisitions, we have significantly expanding our product offering.
Capturing additional share.
We're also capturing share with our inside the home products as we secured a number of large orders for self install kits.
Enterprise segments Enterprise solutions segment, EBITDA margins were 11.6%.
Finally, I would like to discuss channel inventory levels.
We entered 2020.
Planning assumption for the full year that our channel partners to pursue a reduction in channel inventory levels of approximately $50 million.
Given the more challenging environments, we now expect a larger channel inventory reduction of approximately $70 million.
Inventory levels declined $20 million in the first quarter consistent with our expectations.
And most of the remaining reductions are likely to occur in the second quarter.
I'll now ask heading into provides additional insight into our first quarter financial performance. Thank.
Thank you have all I will start my guidance with results for the quarter, followed by a review of our second consoles discussion of the balance sheet and close with a cash flow performance.
As a reminder, I will be level insync adjusted results today.
Please turn to slide 11 fully detailed insulated review.
Revenues will form the $63.5 million in the quarter, decreasing 36.6 million or 7.8% five minutes point 1 million in the first quarter of 2019.
Revenues decreased 9.1% organically.
The period as a $17 million favorable impact from acquisitions is partly offset by an 8.2 million negative impact from currency translation, a little couple sizes.
Just a further adjusting for changes in Jeff inventory revenues decreased 6.4% organically.
Yes.
And demand for our products exceeded our shipments in the quarter incoming orders of $489 million resulted into and hope to build a cho of 1.6.
Gross profit margins in the quarter, 36.9%.
Wining 50 basis points compared to 37.4% in Diego periods. This decline was due to lower production volumes and unfavorable product mix.
EBITDA was $16.8 million compared to 76.4 million.
Billions.
Hi, James with 13.1% decreasing two at 10 basis points from 15.3% in the first quarter 2019.
DNA cost reduction pull them is ahead of schedule as we delivered 5 million of savings in the first quarter relative to our commitment of 2 million. We also continue to fund adult initiatives and R&D investments and we remain committed to these important budgets.
Net interest expense was consistent with Diego period.
I mean point $8 million at go on foreign exchange rates, we expect interest expense in twentytwenty, the approximately $57 million.
Thanks, Nate was 18.2% in the first quarter as we benefited incremental discrete tax planning initiatives, we expect an effective tax rate of 20%.
Mainly quarter in Twentytwenty and the 19% for the full year.
Net income in the quarter was $13.5 million compared to 42 million.
Yes.
And some share 67 cents in the quarter compared to 84 cents in the billions.
Please turn to slide 12.
I will now discuss revenues and operating results by business segment.
In the first quarter 2020 cents for certain cable businesses and product lines on the enterprise solutions segment through the industrial solutions segment.
We have recast the diabetes segment information.
Form the change in the composition of affordable segments.
Alignments help us to simplify operating structure and enable bullish touching actions related to our cost reduction initiatives as well as potential divestitures.
The industrial solutions segment generated revenues of $251.3 million in the quarter.
Casing, 14% funded by a B C.
See translation and couple of devices at a negative impact of $5.4 million.
After adjusting for these factors and changes in channel inventory revenues decreased 9% organically on a year over year basis.
EBITDA margins were 14.1% in the quarter declining 460 basis points year over year.
Primarily due to lower production volumes goals investments and product mix.
Our enterprise solutions segment generated revenues of $12.2 million during the quarter.
Casing, 2% bye.
Avenues favorably impacted by $17 million from acquisitions.
Adjusting for acquisitions and changes in channel inventory in the year ago periods revenues declined 3% organically in the year over year basis.
EBITDA margins were 11.6% in the quarter.
Increasing one on a 20 basis points funded by periods, primarily due to improved productivity and our ongoing cost reduction Holden.
If you'll please turn to slide 13, I'll begin with a cash with a balance sheet highlights.
Okay and cash equivalents balance at the end of the first quarter was $94 million compared to 426 million in the fourth quarter and 39 million in that.
As Joe mentioned subsequent to the and the first quarter, we proactively to move down on of 90 million.
400 million performing credit facility.
Building, an ample liquidity of over 450 million. This was done out of an abundance of caution and we have no immediate plans to deploy this capital.
Working capital turns the 6.8 turns compared to 13 turns into by a quarter and 5.7 turns.
Year based sales outstanding of 59 days increased by two days sequentially and six days in the by year.
Interestingly turns were 4.6 turns compared to six turns into play a quarter of 4.5 turns.
Total debt principal and the first quarter was 1.4 billion consistent with the by a quarter.
At level, which was 2.8 times debt to EBITDA at the end of the quarter inline with our target range of two distinct times.
Turning now to slide 14, I will discuss our debt facilities and covenants.
As a reminder that is entirely fixed.
Rich interest rate of 3.5%.
There's no maturities until 2025 to 20 foot games.
We have no maintenance covenants on that.
Not at risk of an event of default caused by worsening economic condition.
We're very comfortable for the quality of a balance sheets and our liquidity position at this point.
Please turn to slide 15.
Cash flow highlights.
Cash flow formulation. So the first quarter was a use of $52.1 million compared to use 46.1 million in the play.
That's capital expenditures were 18.8 million for the quarter compared to 23.6 million.
Periods.
Via difference is primarily related to timing.
Cash flow in the quarter was a use of $17.9 million consistent with 69.6 million into play.
On a trailing 12 month basis at the end of the first quarter free cash flow was $165.7 billion compared to 166.9 million into does 19.
Implementing counter measures with that cash flow and we expect to remain solidly free cash flow positive even in pace it via down.
So value as we were you in the financial sizes in 2008 ended 2009.
This includes upsizing existing fall. So that you pull then 40 to 60 million, although expense control, including executive compensation deductions and harvesting working capital.
Specifically, we expect to reduce working capital like proximately $75 million.
The remainder of the year as we reduce incidentally levels.
Seasonable and accounts payable.
Our capital deployment plans have changed in response to the bubble pandemic, what committed Gulf capital investments and we continue to expect capex of approximately $70 million in plenty plenty for continuing operations.
However, we now expect less share repurchase and M&A activity this year.
We deployed 21.2 million to repurchased 592000 shares in the first quarter year to date, we deployed 35 million.
Just 977000 shares.
At an average size of $35.83.
Well not blending to execute additional share repurchases until conditions normalize and visibility that turns.
Hello.
We are unlikely to complete additional M&A in this environment.
That completes my prepared remarks, I would now like to turn this call back to a pleasant CEO and chairman John.
John Thank you Hank.
Cobot 19 situation is very dynamic and visibility into the extent to which our global markets and manufacturing capacity will be impact is limited.
This makes it incredibly difficult to accurately forecast near term trends.
Even the wide range of potential outcomes, we're not providing specific revenue or EPS guidance for the second quarter or full year 2020 at this time.
That said the typical seasonal patterns are unlikely to hold this year.
We expect our revenues and EPS to be lower sequentially in the second quarter.
We're also anticipating significant reductions in channel inventory levels again or prior planning assumption for the full year, what's a reduction of approximately $50 million, but we now expect approximately 70 million with the majority occurring in the second quarter.
While we're not able to accurately predict the timing and magnitude of the recovery. Our current expectation is that business conditions will bottom in the second quarter, and we will see sequential improvement in the second half.
We look forward to resuming our normal guidance practices once visibility returns.
That concludes our prepared remarks, Mark please open the call to questions.
Yes, Sir.
Ladies and gentlemen, if you would like to ask the question can you signal on your telephone keypad by pressing star followed by the digit Ron.
To remove yourself from the Q, it's to digit star followed by the digit too.
Oh No question has asked to limit question limit their questions to one with just one follow up question to allow other participants to ask a question.
So we will now passed to our first questioner.
No deal.
Stacey Please go ahead.
Hi, guys good morning.
Thanks for everything you Patrick Ewing supports that healthcare industry during the crisis.
So my first question just on the channel partner inventory reduction 50 going to 70 million.
Could you just clarify how much of that inventory reduction to turn the partner inventory reduction you did see in the quarter and then on.
So we talked about.
That's correct anixter merger could have on.
On inventory reductions that hasn't closed yet.
How are you expecting potentially some additional inventory reduction beyond beyond the second quarter as that close as I just like to get.
Oh, I'm, sorry, and also by segment, how you're thinking about that inventory reduction would be helpful. Thanks.
So thanks for the question. This is John I'll, let all at Roulette.
So the 20 million that came out in the first quarter was what we had expected.
And we thought there'd be another 30 million, we now think it'll be 50.
This is obviously not a precise calculation the process we use to get there is we start by forecasting what the sell through will be at our channel partners that we look at what their historical turns are.
Then we calculate the amount of inventory that we either go up or go down.
Given that we think most of our channel partners are also going to be focused on cash flow like we in most companies are we thought they might want to take that turns up a little bit and as a result, we thought that the inventory reduction could be a little bit larger. This by the way is inclusive of the planned acquisition and integration of west going in.
Anixter. So this is all in Theyre not expecting anything in addition to that.
As it relates to segments.
Our inventory at our channel partners.
Largely cable products. So theres, a few exceptions, but it's mainly cable which means that it's going to be roughly split between our smart buildings business and our industrial automation business roughly we do have a few customers and old inventory. So for example in our broadband in Fiveg business we have.
Some customers like Comcast in charter that hold inventory and we look at that as well as include that in our calculation, but it's relatively small compared to the large channel partners.
Okay Thats helpful. Thanks.
Okay.
You know I'm, just wondering all that much visibility.
On the anyway, you could expand upon.
That is seen so far in April.
You know how to my hats on the platform.
So I think the question too I was a little hard to hear your middle at rule answer, but I think your question was what are we seeing in April and how is April been compared to March in where we are so will you want to give an update please ensure april is.
Ending according to expectations, we see.
Feedback, our Asia Pacific region actually trending.
Relatively strong orders in China.
BPC was off to a very strong started in April but overall, we think second quarter will be down sequentially from the first quarter.
And I think rule, our order run rate in April so far.
He has been fairly similar to what we saw the last couple of weeks. So mark correct. So, although it's changed a little bit by region.
And it does bounce around a little bit I think on an average over the last three or four weeks of April we've seen demand being pretty similar to what we saw at the end of March which was down pretty substantially compared to February Rick.
Great. Thank you.
You're welcome.
Thanks.
You can now pass through our next question from Shawn Harrison from Loop capital. Please go ahead.
Hi, good morning, everybody.
So just thinking more about the smartphone business, because thats typically than a bit of a lag areas, we can reduce downturn or recessionary type of that so is that something where maybe the.
As immediate as you are sitting.
Particularly the industrial business right now and then you would see maybe more of a downturn as we get into 2021, but just how the cyclicality that that business is potentially change since the.
That makes us now.
So as we highlighted our smart buildings businesses approximately 25% of our total within that 25. The part that is in our opinion the most vulnerable to a downturn would be the commercial real estate.
Hospitality and retail which is about 15% of our total.
What we're seeing right now Sean is a little unusual and I think it's a consequence off the shelter in place orders were contractors are unable to actually do the work at the normal rate on projects that are already started our expectation is that will improve and that we would see strong.
Her demand in the second half for our smart building products, but that demand would be a consequence of projects that would have been started probably nine to 12 months ago. So our belief is that most of the projects that were already started will be completed.
Where we'll probably see softness.
Is in a year from now.
Because we think it's unlikely there will be very much activity in starts in the second third or fourth quarter within commercial hospitality and retail so as we think about modeling in my opinion I would think that somewhere around.
Second or third quarter 2021, we would begin to feel the negative effects.
Weakening starts within commercial hospital in hospitality and retail, which is about 15% of our total.
Okay. That's helpful.
And then second just on free cash flow as a percentage of net income I know you're quickly targeting out or are set are there any dynamics. This year other than China's lower profitability that would affect build on achieving that goal.
Well as a little impact this inc. as shown in does impact office fluctuating for sure.
As we as we execute upon our Opex simplification programs, we expect funding year, approximately 50 million to get a 60 million annualized cost.
Okay.
Okay.
We can now passed and next question from Rueben Garner from Benchmark Company. Please go ahead.
Thank you good morning, everybody.
Along with.
Hi, good just start with a follow up on on the question about smart buildings.
On slide eight I'm, a little surprised to see the commercial real estate, Oregon.
Red can you just maybe elaborate on what you're right you're expecting there and I guess that.
Pardon. The question is we've heard.
A lot of are you seem to me a lot of.
We expect that changes, particularly in the offsets.
Environment, and how people work and where they work and we think that.
There'd be more of the need for for Smart building connectivity. If you will remain in the office space.
Fairly big part of that 11% of big part of the new construction. The lump sites right can you just kind of puts on on that piece a little remark.
Yes. So first of all this is obviously somewhat speculative.
And none of us know exactly how the economy will reopen.
You said, we think it's likely in the future that people might view their investment in commercial real estate differently.
They may think about how that you space and differently. They may think about work from home differently and so as a consequence, we think that theres a good chance that the starts in commercial real estate in the second quarter and through the rest of the year might be down from the prior year and if thats true 12 months from now.
We would see the impact from a square footage point of view.
We would continue to expect the secular benefit up more connected devices within the installed square footage and I think that will continue.
But it probably won't be able to completely overcome the reduction in square footage.
So as we sit here today and we look at our portfolio, that's an area, where we feel like there could be some headwinds entering 2021, and we wanted to be clear and transmitted transparent with our investors about that possibility.
Great. Thanks.
Help on them.
God band in Fiveg.
Obviously, bringing in the slide.
Can you just talk about what your.
What you're seeing here recently from an order trend standpoint that imagine that theres more to move.
The number for increased Steven let me just trying to pull so what you've seen so far.
The last four to six weeks.
Yes. This is rules absolutely that's absolutely true.
As we mentioned in our prepared remarks, we saw orders up 4% in that segment.
Furthermore, continued to see it trends.
Of very strong performance outside the whole so our orders are actually up 9% in Q4 outside the home products. So this trend of people working more from home spending more time in their homes is consuming more bandwidth.
We expect to be very favorable for this business in the medium and longer term.
Thanks, Good luck more begin 12 expense.
Thank you.
Well now passed to the next question from William Stein from Suntrust Suntrust. Please go ahead.
Great. Thank you for taking my questions too.
First.
We understand your expectations for revenue to decline in some to understand side can you help us perhaps better understand what we should expect.
From a decremental perspective on gross operating margins group.
So this is Anglo.
I think we should model, that's a mental EBITDA margins.
30% to 35%. In addition, as included up a basket logs.
We shoot.
Also include awfully four to 5 million leaseholder, because we're planning to keep the capacity in effectively intact in expectation of rebound in the third and fourth quarter.
So that place holder that.
Sort of.
One more.
In addition to the Thats, good that 30% to 35% decrementals or is that a commentary specifically to cash flow, but not EBITDA.
No. That's in addition to the Decrementals and Thats done already.
Okay.
Okay.
The long one other which is.
Good day.
The company was already in the mix some pretty transformative Lance.
Sometimes we look to pricing is too.
No I expect well managed companies too.
Undertake some activities to transform the business to become stronger coming out well didnt certain fortunate in that some of these already underway with the grass Valley Karen.
Turning 50 million a table in wire end of restructuring and so.
One of those seems to be on gross contract happening grass Valley, we at the 40 million Upsized can 60.
250 million.
Divestitures on hold for now.
Or any other things that we can think of that.
Either perhaps I missed in the script or other things, you're doing or thinking about doing that could improve your competitive position.
Coming out in the crisis I know you said M&A is off the table for now but.
I don't want new product introductions or are you looking at.
The potential for smaller competitors to have a tougher time and maybe capture share from anything like that we can point to.
We're optimistic about future.
Yes, well so first of all I thought you summarized our actions well I also agree with you.
We are fortunate that we had begun many of these things well in advance of this crisis and that gives us a strong had start it's a lot easier to increase of 40 million dollar cost reduction to 60 million than it is to start one from scratch. So thats actually for two at us for us the other things I would say that were.
Doing that I think provide optimism.
As we are clearly much stronger financially some of our competitors that's obvious and we're already beginning to see that play out in terms of how customers think about choices that they make.
And rule and team I think are doing an excellent job.
Making sure our customers are aware of that and helping them make good decisions.
The other thing is that this slide that we showed all of you with regard to the markets than we would expect to actually benefit from this crisis and some of the ones that we thing would be negatively impacted roll a team already redeploying resources around this view so.
So we've got in the case for example, commercial real estate, we know that we have a 12 month lag between when starts occur and when we get revenue and that means that rule and team have a 12 month headstart to figure out how we redeploy our resources towards other markets that were.
Much more bullish about like broadband so we can redeploy commercial resources, we can redeploy engineering resources, we can redeploy manufacturing capacity.
That's a huge advantage and then last thing I'd like to say the rule already pointed on his prepared remarks is the decision we made long ago to manufacture our products near our customers is proving enormously helpful.
We're not having to deal with the kind of supply chain disruptions and people other people have had to deal with.
I think at the end of the day that allows us to continue to solidify the trust that we have with our customers, but those would be the things I would point out.
Thanks.
Thank you all.
We can now passed to the next question from jet Jed Dorsheimer kind of course Genuity. Please go ahead.
Hi, Thanks and.
Thanks for those slides, it's helpful to kind of by recognizing that there.
There's some variability it at least shows that.
Okay I understand the mindset.
So I guess my first question is is around sort of that rebound slide and just want to make sure I'm looking at it correctly, if I waited if I wavy.
Weighted average the.
Different segment looks like your expectations are it some point in time and kind of holding the yellow is outliers.
For 50% of the business to be up 11% and 50% of the business could be down 5% to 7% is that sort of the right way too.
To look at that and then kind of have that yellow is a wildcard for the variability.
So.
The green segments are all examples of vertical markets that we think will recover nicely from this business. So if you look at our baseline.
I think the math you are trying to do.
As we would expect that the businesses in green, which represent roughly 65% of our total we would expect those businesses to get back to and roll off where we work. So that's that's the expectation were trying to correct that we would expect to fully recover and then.
See growth from there.
The rights or areas, where we would not expect to recover back to where we were at least not anytime soon and the yellow we would expect that recovery to happen, but it would probably take a little bit longer so.
As we shared already we havent.
We're not providing guidance for the second quarter for the full year, but we're certainly trying to share with everybody. How we're thinking about our end markets. How we're thinking about the likely recovery and maybe most importantly, how we're thinking about how we deploy our resources in our capital.
Got it.
Useful.
And then.
Hi, Hank I, just just a question with respect to.
The EBITDA I want to make sure I caught this correctly in Q2, the way to think about is a.
Did you say at 35% reduction in.
In EBITDA over Q1 sequentially, and then reserving 4 million per kind of a recovery in Q3.
No.
He said is that can mental EBITDA margins on the sequential down into the avenue needs to be roughly 30% to 35% and then in addition, we like you to model. Another four to 5 million temper that he inefficiencies that we're holding to ensure.
We can respond to.
The gravity and improvement in demand in the third and fourth quarter.
Got it thank you.
You're welcome.
We are now passed to the next question from Mark Delaney Goldman Sachs. Please go ahead.
Hi, good morning, Thanks, very much for taking the questions or something to better understand.
Cost reduction plan are the 40 and 60 my number.
How much is added.
Savings servicenow ordinary that that they've been going to be reinvested or is that.
At about that the company expects to save them along those lines as I think about the.
Quarterly trajectory best unanimous manufacturing in this quarter.
35 million left to go for 2020 saving so.
If you take out.
On a quarterly basis about 9 million or separate quarter, there and takes time to mid 80 million range, but maybe could you go lower than that because of.
Missionary temporary and cost savings and this can help us think about the quarterly troponin. She made this year.
Yes.
So the cost reduction program. It will result into 40 million improvement.
Thats DNA, Northern Ireland, keeping our investment funds on the in place.
And the cadence is 5 million first quarter.
8 million second quarter 12 in the third fifteens and that's the best planning assumption.
Okay Thats helpful and then.
Question on on Cyber security you there was a market that I didn't get the green category, but across the company mentioned some near term headwinds are you trying to better understand some of the trends that that you can see and in terms of ordered and within cyber security and the customer discussions how quickly that business could that potentially come back.
Thank you.
Yes, we as we said in our prepared remarks.
We did not see any project cancellations, nor did we see a share loss projects that we would lose to competition.
Spec.
Uncertainty, so our larger customers dealing with.
Social distancing and not necessarily receiving our.
Engineers on side too.
Install or cyber security solutions to continue in the second quarter.
We do expect fully in the second half of the year for demand trends to improve.
Our industrial.
Offering.
Your your offering remains robust and continues to do well.
And we are certainly.
Adjusting some of our products and actually launching some new products in the second half of year that would help further.
Secured networks in this environment with people working more.
Thank you.
We cannot pass through our next question from Paul Chunk JP Morgan. Please go ahead.
Hi, guys. Thanks, Thanks for taking my questions. So I'm just a quick follow up on free cash flow seasonality kind of.
Assuming even stronger second half I'm kind of getting there.
Two key headwinds on but.
What are kind of puts and takes on working capital you know kind of benefit.
Yes, so we expect instantly movements throughout the year.
And the pity that evenly.
In total returns.
And slight improvement India. So as we think what are the main though the year and.
The whole accounts payable.
Okay, and then just a follow up on their cyber security question are you see in humans.
Picked up demand warrants, because we concerns come down given its becoming increasingly important.
Your enterprise customers.
Well, we're certainly seeing.
The projects.
Our not being canceled.
We're not losing to competition and we will win them at a later point in time, so that would be Pendleton and it's obviously the question into projects that were originally scheduled for late to occur later on in this year will they still look or will they shift as well that's a little bit hard to predict but we certainly expect.
Very robust demand moving forward in the medium and long term for cyber security offerings.
Thanks, Dan.
Thank you.
Kevin mascot there are no further questions at this time please continue.
Okay. Thank you Mark and thank you to everyone for joining today's call.
Have any questions. Please reach out to the IR team here at Belden or email address is investor relations at Belden dotcom. Thank you.
Thank you ladies and gentlemen, this concludes our calls for today you may now disconnect from the call. Thank you for participating.
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