Q2 2020 Belden Inc Earnings Call
Ladies and gentlemen, thank you for Jennie.
Welcome to this morning's building.
This conference call. Just as reminder, takes talking recorded at this time Youre in listen only mode. Later, we will conduct a question and answer session if you'd like.
Question. Please press star one on your Touchtone phone.
If you're in the question Q and wouldn't like to withdraw your question simply put a stark true.
I like to turn the conference over to Kevin Maczka. Please go ahead.
Thank you Jake good morning, everyone and thank you for joining us today for Belbin second quarter 2020 earnings Conference call.
My name is kinda NASSCO on building, Vice President of Investor Relations and Treasurer.
With me. This morning are building president and CEO role that's Jim.
Oh, Hey, Eric [noise].
Well, we'll provide a strategic overview of our business.
Provided detailed review of our financial and operating result.
Thank you Wendy.
We issued our earnings release earlier. This morning, we are prepared a slide presentation that we will reference on this call.
Press release presentation and transcript of todays prepared remarks are currently available online at Investor Day, Belden Dotcom [noise].
Turning to slide two in the presentation.
During this call management will make certain forward looking statements reliance upon the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
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 through a presentation every 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 [noise].
I will now turn the call over to our president and CEO role bastions rule.
Thank you, Kevin and good morning, everyone [noise].
That's a reminder, I'll be referring to adjusted results today [noise].
Please turn to slide three in our presentation.
Before we review our second quarter performance.
I'd like to update you on the three transformative actions, we initiated last year.
These include the divestiture of grass Valley [noise].
Upsize 60 million dollar cost reduction program.
The planned exits of approximately $250 million and differentiated copper cables product lines [noise].
First on July 2nd.
Subsequent to the end of the second quarter.
We completed the sale of grass valley to private equity firm Black driving capital.
This is an important milestone for building.
We're obviously pleased to complete this transaction.
Look forward to supporting the Black Dragon and grass valley teams during the transition [noise].
Second or <unk> cost reduction program is on track.
We previously Upcharge, you expected annual savings just $60 million.
Thank you communicated to the an expectation of delivering $40 million 2020.
The food 60 million dollar run rate in 2021.
We've made considerable progress and our teams delivered savings of $8 million into second quarter, representing $32 million annualized savings.
As a reminder, these are permanent cost reductions that will not return as demand recovers.
Finally, we previously delayed the planned exit of $250 million.
Copper cable product lines due to the global pandemic.
We intend to restart this process and engage with potential buyers in the second half was 2020.
Please turn now to slide four in the presentation.
We are extremely excited about the opportunities for belden, how should we continue our transformation in our line or portfolio purchases.
Markets with favorable secular trends.
Our key strategic priorities, our industrial automation.
Sorry for security.
Then in Fiveg and smart buildings.
We continue to believe that each of these markets offers compelling growth opportunities over the cycle.
I'd like to briefly touch on each of them, though.
First.
The global pandemic is clearly impacting demand for industrial automation on the temporary basis.
But we remain extremely optimistic longer term.
We see increasing levels on the automation everywhere in our daily lives.
Oh factories to restaurants to parking garages et cetera.
We absolutely see the secular tailwinds continuing due in large part to increasing labor costs and enhanced productivity and quality needs.
Social dispensing and other new practices in the post crisis environment represent yet another incremental demand driver for automation, all the factory floor and elsewhere.
In cyber security increasingly sophisticated and crossley attacks are driving the need for advanced cyber solutions.
We are especially excited about the nascent industrial markets, where we are particularly well positioned for success.
Well, it's truly unique offering provides critical cyber security protection for our customers.
Many of our industrial and enterprise customers delayed large projects, including tripwire installations in the first half of the year due to covert related shutdowns.
Importantly, however, we're not seeing project cancellations or market share loss and we are encouraged by a robust recent order trends.
We continue to add new customers expand existing deployments.
Introduce exciting new cloud based and other products.
And further penetrate international markets.
As a result were gaining traction on driving strong growth, what our industrial cyber security and our software as a service offerings.
This provides further confirmation that the cyber security solutions, we provide remain a critical area of investment for our customers.
Even in the midst of this pandemic.
In broadband on Fiveg demand for more bandwidth and faster speeds ever increasing and the gold at 19 front demick, there's only accelerating demand for our fiber optic and other products.
We continue to expand or fiber product portfolio and capacity.
Through organic and inorganic investments.
I couldn't find bolt on fiber acquisitions completed in the last five years.
We are extremely well positioned to support our legacy I mean show customers as they upgrade existing networks in response due to record demand levels and new competitive threats from Fiveg.
We also support telco customers as they built out new Fiveg infrastructure.
Simply put we are extremely well positioned to win in both.
Finally in smart buildings, increasing use of integrated networks to enable improved user experiences.
Fission C and data analytics drive increasing demand for our connectivity solutions.
The outlook for some smart building markets has changed due to covert 19.
But we continue to see growth opportunities in certain market verticals, such as government healthcare and data centers.
As the economy, we opens we would expect healthy demand from these customers to partially offset the headwinds in other verticals within smart buildings.
Turning now to slide five in the presentation.
We view Belden as is very compelling investment opportunities and I would like to reiterate our investment thesis for your now.
There are significantly proving our portfolio of businesses.
Additionally, the company for enhanced growth and profitability.
As we successfully execute our strategic brands and deliver on our goals. We would expect this in turn to drive superior returns for our shareholders.
Key performance drivers include the portfolio moves that I just discussed along with continued growth investments to capitalize on the opportunities in our strategic markets.
Good data and we remain committed to our 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.
There are successfully executing our 60 million SGN a cost reduction program.
Which represents approximately 300 basis points of incremental EBITDA margin expansion.
And we continue to believe that the business has the potential to achieve EBITDA margins into 20% to 22% range in time. However.
It is important to note that we do not intend to achieve this by sacrificing R&D or other growth investments.
Finally, before moving onto our second quarter highlights I would like to mentioned that I'm extremely proud of the commitment and dedication of a workforce during these turbulent times.
A recent survey of our teams confirmed that they continue to be highly engaged and productive.
We implemented social distancing and our factories and remote and flexible working arrangements in our non factory locations.
Allow people to work effectively from any location.
Further we have enhanced our support for local communities by launching our connect with community program.
This new initiative allows belden employees to take up to one week of fully paid time off to support volunteer initiatives.
Improved the lives of this advantage groups in their community.
Yes. It is our sincere hope that this program will enable belden employees to make it direct positive impact on the life of others.
Please turn now to slide six in the presentation to review our second quarter highlights.
In the second quarter, we delivered revenues $424.8 million, an EPS of 46 cents.
The quarter was highlighted by very robust demand in broadband and fiveg with orders increasing by 20% on a year over year basis.
And 13% organically.
With broadband networks being stressed like never before.
The products offered by this business are uniquely suited to address the issue is presented by the global pandemic, such as new work from home practices.
Importantly, our strong balance sheet and ample liquidity provides the financial flexibility successfully navigate this difficult economic environments.
We exited the quarter with cash on hand off $393 million.
Recall that early in the second quarter and out of an abundance of caution we proactively drew down $190 million under our revolving credit facility.
We're very comfortable with our liquidity position at this point and as a result, we repaid 100 million.
The $190 million revolver draw late in the second quarter.
Finally, free cash flow was $20 million into quarter.
We are encouraged by the positive free cash flow generation during a period of unprecedented global economic disruption.
I will now asking to provide additional insight into our second quarter financial performance Inc.
Thank you will.
The second quarter financial performance I'd like to discuss the details of the definitely transaction.
This transaction included cash consideration various forms of deferred consideration.
Gross cash consideration was 120 million or approximately 67 million net of cash delivered.
Yes.
While also made a short term investment.
In dollars on equity interest in gas value and we expect to convert into cash within 120 days at closing.
The deferred consideration included a 175 million five year sellers note.
Up to 88 million Pik interest on the sellers note over that five years Darren.
And 178 million in potential earn out.
Earn out payments based on certain performance thresholds, both the sellers might end to pick and place I do 2005 years.
As will mentioned.
We were very pleased to complete this transaction based on the terms of the deal. We continue to have a financial interest in a long term success of the business and we look forward to supporting.
The black Laggan Ben.
Change during the transition.
Please turn to slide seven play detailed consolidated leave you.
I'll start my comments with results for the quarter.
By a review of our segment results at a discussion.
The balance sheet and cash flow performance.
I Wonder how will the uplifting adjusted results today.
The avenues for $424.8 million in the second quarter compared to 548.4 million the second quarter of 2019.
The news decreased 21.7% organically.
Yes, yes, as a 6.9 million favorable impact acquisitions was offset by an 11.2 million negative impact from currency translation idle a couple sizes.
After further adjusting for changes in jail inventory avenues decreased 15.6% organically.
The by year.
The goal that we entered the second quarter without blending assumption that channel partners, So even production and channel inventory levels.
<unk> million during the quarter the actual reduction was approximately 25 million.
Now anticipate the amazing 25 million induction.
The third and fourth quarter.
And our expectation that Jeff Infinity deductions for the full year Twentytwenty unchanged at 70 million.
Gross profit margins in the quarter, 35.4% declining two at 20 basis points compared to 37.6%.
<unk> billion.
This decline was due to lower volumes and gel ends and the reduction.
EBITDA was $49.1 million compared to 91.6 million.
Okay.
EBITDA margins were 11.6% compared to 16.7% in second quarter 2019.
Our estimated that you pull that.
He is on schedule.
Consistent with our commitment we delivered savings of 8 million into second quarter.
Presenting 32 million annualized savings.
We also continued to fund a golf initiatives.
The investments and we remain committed to these important projects.
Net interest expense increased by approximately $1 million sequentially in the quarter due to temper that enable things under our revolving credit facility.
Let's turn and foreign exchange rates, we expect interest expense in twentytwenty to be approximately $57 million.
Our effective tax rate was 17% in second quarter as we benefited incremental discrete that's funding initiatives.
We expect effective tax rate of approximately 20% for the third quarter, 19% for the fourth quarter.
Net income in the quarter was $20.8 million.
Compared to 58.8 million in the prior periods.
And the share is 46 cents in the quarter.
I had two adult and 26 cents in Diego periods.
Turning now to slide eight in the presentation.
View business segment results.
I will begin with on the field solutions segments.
As a reminder, our industrial solutions allow customers to 10 summit and secure audio video and data in harsh industrial environments.
Markets includes discrete manufacturing process facilities energy and mass transit.
The industrial solutions segment generated revenues of two elements and $21.4 million in the quarter.
So lets you translation and crop prices had a negative impact of $7.5 million.
After adjusting for these sectors and changes in Jain Condotti revenues decreased 18% organically on a yield via basis.
Within this segment industrial nation revenue also declined 18% year over year after adjusting for changes in general inventory levels.
Not surprisingly declines were broad based across market verticals.
Revenues in our cyber security business declined in the second quarter on the year over year basis and were flat sequentially. More importantly, we secured a number of large strategic all this new and existing customers.
Results non mobile things at best leading indicator of revenues increased 37% year over year overall and 70% in industrial verticals.
Industrial solutions segment, EBITDA margins were 11.9% in the quarter compared to 18.4% in Diego period.
Really due to lower volumes.
Turning now to our enterprise segment.
Neither enterprise solutions allow customers to transmit and secure audio video and data across and complex enterprise networks.
Markets include all bent and Fiveg that's by buildings.
Our enterprise solutions segment generated revenues of $203.4 million during the quarter.
Eight 6.9 million favorable impact from acquisitions.
Actually upset by 3.7 million negative impact from currency translation local prices.
After further adjusting for changes in channel inventory revenues declined 13% organically on a year over year basis.
Revenues in all bent and psyche increased 2%.
Got it basis underlying demand is very robust with orders increasing by 20% overall and 13% identically.
The global pandemic.
And the extreme stress on bulk networks is laughing, increasing investments and network infrastructure by our customers supporting continued growth in our fiber optic and other outside the home products.
Veritor.
Inside the home business is seeing strong demand for self install pits as a result, social distancing enable reluctance to sense technicians into consumer homes.
Revenues for self install bids in second quarter equals the revenue generated for the full year 2019.
Revenues in the smart buildings markets declined 21% on organic basis, excluding the reduction in channel inventory levels during the quarter.
Our enterprise solution segment, EBITDA margins were 10.9% in the quarter.
Back to 14.5% in the prior periods.
Due to lower volumes.
If you'll please turn to slide nine I'll begin with balance sheet highlights.
Okay, that's equivalent balance at the end of the second quarter.
And $93 million compared to two at a 94 million and apply at quarter end to end of the 95 million by periods as will mentioned early in the second quarter, we proactively do.
One kind of 90 million under our 400 million folding credit facility.
This was done out of an abundance of caution doing exceedingly and certain time.
We feel very comfortable with excellent liquidity position and as a result really based on that million of the launch of 19 million Voltac law late in the second quarter.
We expect to lead pay an amazing 90 million later this year.
When the Devil Terence were 6.6 turns compared to 6.8 churns in the prior quarter and 7.7 turns in the pie you paid.
They sales outstanding 65 days increased by six days sequentially and eight days by year.
Inventory turns were 4.5 turns compared to 4.6 turns in the prior quarter and 5.2 turns in the prior year.
Total debt principal.
The second quarter was 1.56 billion compared to 1.4 billion in the first quarter.
This reflects the additional 90 million in Boeing on the defaulting kind of facility and go into foreign exchange rates.
That language was fleet 0.6 times net debt to EBITDA at the end of the quarter.
This is that the highly evolved our target of age of two point, though the lead times and we expect sent back to the targeted range as conditions normalize.
Turning now to slide 10, I will discuss our debt and abilities and covenants.
As a reminder.
Excluding the tempo that either multiple Boeing.
That is entirely fixed at an effective average interstate leaf, 0.5% with no maturities until 2025 to 2028.
We have no maintenance covenants on this debts. So we are not at this open event of default falls by worsening economic conditions.
As I mentioned previously very comfortable with the quality of a balance sheet and our liquidity position at this point.
Please turn to slide 11 play future cash flow highlights.
Cash flow from operations in the second quarter was $39.9 million compared to 67.7 million in the prior year period.
Net capital expenditures were $19.8 million for the quarter compared to 27.2 million into play it beginning.
The year over year difference.
I know the related to project timing.
The cash flow in the quarter was 20.1 million barrels compared to 40.5 million into your opinions.
We are encouraged by the fee that's positive free cash flow generation doing a quarter of home that's intended global economic disruption.
On a trailing 12 month basis at the end of the second quarter Twentytwenty free cash flow was $145.2 million.
We implemented countermeasures.
Cash flow very early in this crisis, including upsizing, our cost reduction program and other expense controls and working capital deductions.
Following these actions and the positive free cash flow performance in the second quarter, we expect to remain solidly free cash flow positive for the full year Twentytwenty.
Before we open the call for Q1, eight I'd like to me.
A few concluding remarks.
Both at 19 pandemic continues to create significant economic uncertainty.
Visibility into an adventure timing and magnitude of its probably not global markets remains limited.
Making it difficult to accurately forecast near term results.
Given a wide range of potential outcomes.
Not providing specific revenue or EPS guidance for the first quarter awful year Twentytwenty at this time.
That said, we are encouraged by our incoming order rates in July.
Assuming no further material disruption related to the global pandemic.
And expectation is that business conditions bottom in the second quarter, and we will see modest sequential improvement.
Third and fourth quarters.
We look forward to assuming a normal guidance practices once visibility the terms.
That concludes our prepared remarks, Jake please open the call questions.
Of course, if you'd like to ask a question during the <unk> session. Please press star one on your Touchtone phone she would like to withdraw your question. Please press star too.
Limit yourself to one question and one follow up question to allow everyone opportunity to ask your questions.
We'll hear first from Rivlin garner with.
Benchmark company. Please go ahead.
Thank you good morning, everybody.
Oh pardon.
And congrats on the new a new role.
Maybe.
There I know you're not new the belden, but neither the role just I guess high level do you foresee any.
A material changes to the growth strategy or direction.
The company now that you've been.
And CEO for a couple of months.
Well. Thank you for the question and thank you for that kind words, so, though the company for 14 and a half years now.
And very honored and privileged to take this rule.
As of May of this year indeed.
So I don't foresee any major changes in strategy at all I I'm very confident that the steps that we've outlined the strategic priorities that have described.
I will bring us to our financial roles, 20% to 22% EBITDA margins.
I think our best days are ahead of us I'm very excited about these secular trends in industrial automation.
Cyber security specifically in the industrial space for cyber security.
And broadband in Turkey.
And we've seen we're seeing temporary weakness is now, but I think we've highlighted the broadband and Fiveg orders that we received in the second quarter. So I think on the right track I think I'm very happy with our balance sheet.
So we have.
Ample liquidity, where a company is in great shape, a very impressed with our processes and ability to execute so I'm extremely excited extremely excited about the future.
Great good to hear and maybe on the.
Fiveg in broadband order strength I think last quarter, you talked about maybe a disconnect and I don't vessels since the second quarter phenomenon, but a disconnect between the order strength, you're seeing and.
What might actually flowed through in revenue or should we anticipate that still to be the case.
What what can you remind us what's behind that and does that mean and you just got a building backlog of business at some point a little will flow through.
Congrats on on the quarter and good luck navigating through.
Thank you appreciate that very much.
Yeah, we didn't know backlog.
And I think Thats a reason of there's two two causes.
The first one is indeed.
That some of our customers trying to secure capacity to try to secure.
Supply off products.
But secondly.
The.
Just to the tremendous a big secular trend of off data consumption into homes.
And in residential buildings caused our MSR shows at our telco customers just place order, Sean us to make sure that we were able to supply them.
We'll now move toward next question will come from Noelle Dilts with Stifel.
Hi.
Good morning, and congrats and good quarter.
Thank you good morning, though.
The money. So my first question, it's kind of ties into what you're just discussing but obviously you know the broadband business has been very strong I'm just curious how you're kind of thinking about the sustainability of upstream bendbroadband inside Gee, how do you think about how much better than sort of the temporary colgate related.
Versus yeah.
The growth that's reflected that kind of for longer term opportunity in the business.
Thanks, Yeah, I think we highlighted back in December that the long term growth rates for that segment is mid single digits. We still believe that to be true if anything it would probably be a little bit on the higher end of that versus the lower end of that because of what we've described.
But that's that's very much but we expect the business to grow out longer term.
Okay, great I'm going to someone nonresidential construction markets and smart building.
Obviously from the data coming out recently, maybe I for example.
Yes.
Consensus forecasts that them at that date has done a bit more negative I'm just curious how you're thinking about non res into life into 2021.
Yeah, well, obviously it is within the segments that we don't believe will recover swiftly from Golden Monkey I think we've been open about that in our chart last quarter. I think were open about that today, we do have verticals within the smart building segment that we.
We expect to recover swiftly I'll give you just one small example that data center revenue in Belgium is not that big but it grew 12% in Q2. So we also feel very bullish about government that about health care, but indeed, and commercial real estate will probably take a little bit longer to recover.
Perfect and.
And then just one quick question you know when you talk about modest sequential improvement and not result.
Yes, yes, I'm kind of looking at what do you think of it moderates as that kind of in the 10% range.
And then you know historically your fourth quarter has been stronger than that but third quarter thought I saw the expecting that pickup seasonality.
Yeah, we expecting to GAAP leap on things need to do for and modest recovery.
Due to the well obviously seasonality is slightly different this year.
We're working through that channel inventory change.
$25 million, so you should.
That will help.
Financials.
Yes.
Little bit.
Visibility is poor and we think it you off to a ton okay solve in July or than July support.
Modest sequential.
Thank you.
And now over to our next caller and we'll hear from William Stein with Suntrust.
Great. Thanks for taking my question and good morning.
Perhaps you could elaborate on the kind of backlog for the overall business and your characterization.
Visibility as I'm not sure if he said more cloudy, but certainly you're not.
Providing specific guidance. So we understand the conns abilities limited, but hoping you can maybe characterize that easy based upon.
Just very limited backlog and customers ordering to Bury a short lead times or is it orders being placed but being moved around a lot more than typically how is this sort of playing out in the.
Buyer to seller relationship.
Yes, well so our business model is such that well that we have begun turns business.
So we typically have too.
Earned 70% of 11 news during the quarter. So we entered a corridor with a mom for a little bit over a month of backlog so backlog.
It is a is limited to that's implicit in the business model already pointed out a couple all positive developments it on mobile phone business, where we build awfully 20 million I grew up in the first half year Bobcat visibility remains.
Ah difficult in this environment.
And as a follow up.
I'm, hoping you can talk a good or maybe clarify a bit about the trick wire business I thought I heard.
I thought I heard you say that non renewal bookings were up 37% year over year, but the revenue was down year over year.
That would suggest perhaps that.
A significant portion of your customer base is not renewing.
Maybe you can set me straight on that.
Yeah. This is rule so indeed, the 37% is correct.
May I remind you of the lag that we have between these new written and non renewal bookings at before it actually you turn into revenue. In addition to that we're booking more and more software as a service orders. So it just takes a little while longer before we actually are able to recognize the revenue.
Our renewal rates.
Actually very hot very decent there are approximately 85% so they haven't come down as a matter of fact that you're slightly increased with customers not switching and and renewing or their commitment to tripwire. So that's the reason for the difference between these great nonrenewal booking rates that we've seen adding.
The revenue.
Thank you.
Now moving to Jed Dorsheimer with Canaccord Genuity.
Hi, Thanks for taking my question I guess, just a follow up.
You seen you seem pretty optimistic in terms of some of the longer term trends Hank I just wanted to ask directly in the only thing holding you back from providing.
Targets in guidance the backlog level and then could you just give me it's what that was the same period last year.
It's not necessarily the backlog level at all it's just that.
Things changed very rapidly.
It's still murky and we want to make sure as we've had been doing that when we provide guidance that we indeed.
You can count on that that you can count on us to deliver so we extended the periods, which we said, let's not guide because of the Murkiness and because of this Christmas.
At which things change.
I'm sure it's not it into that.
Specific to here in the United States, it's kind of hard to predict what the economies will do in terms of reopening are not reopening with the virus resurging or being under control. So that that's purely the reason.
All asking to comment on the backlog situated yet Jeff This is citizens Hank.
We're entering the third quarter within backlog and he and the second quarter of 191 million.
That compares favorable to last year, where we had on the 70 million in backlog.
End of Q2 in 2019.
I'm off that builds is it as a result of very strong bookings in our all been unpack GE business.
Got it so sorry, your backlog is actually higher I, just want to make sure I heard it correctly. Your backlog is higher today than it was a same period last year.
That's correct, that's right 20 million <unk>.
Okay.
Thanks, Good luck.
Thank you.
It looks like there's no further questions I'll turn the call back to your host for closing remarks.
Okay. Thank you Jay Thank you everyone for joining today's call. If you have any questions. Please reach out to the IR team here at Belden or email addresses investor relations at Belden Dotcom. Thank you.
And ladies and gentlemen, this concludes our conference. Thank you for your participation and you may now disconnect.
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