Q3 2020 Belden Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to this morning's Belgium incorporated conference call.
Just as a reminder, this call is being recorded.
At this time, you're in a listen only mode. Later, we will conduct a question answer session.
We would like to ask a question. Please press star one on your Touchtone phone.
If you are.
In the question queue I would like to withdraw your question simply press true I would now like turn the call over to Kevin Maczka. Please go ahead Sir.
Thank you Mary good morning, everyone and thank you for joining us today for building <unk> third quarter 2020 earnings conference call.
My name is Kevin Masco, and Golden Vice President of Investor Relations and Treasurer.
With me. This morning are building president and CEO, that's true yes.
Hi, Eric.
He will provide a strategic overview of our business and then provide a detailed review of our financial and operating results followed makes you want it.
We issued our earnings release earlier. This morning, 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, Belden 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.
Next to our presentation in the Investor Relations section of our web site <unk>.
A reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information, we communicate well.
I will now turn the call over to our president and CEO role Bastards rule.
Thank you Kevin and good morning, everyone. That's.
As a reminder, I'll be referring to adjusted results today.
Please turn to slide three in our presentation for a review of our third quarter highlights.
Business conditions improved during the third quarter and I'm pleased to report solid double digit sequential increases in revenue.
Yes, and free cash flow.
Third quarter revenues increased 12% sequentially to $475.8 million.
Both of our segments delivering organic growth on a sequential basis in the quarter.
Yes increased 57% sequentially to 72 cents.
And free cash flow increased 78% sequentially to $35.7 million.
I'm extremely proud of the way our global workforce has responded to the unprecedented challenges this year.
The teams remain highly engaged and committed to supporting our valued customers bombing.
While maintaining the safest possible working conditions.
These significantly improved results demonstrate the continued dedication of our associates around the world.
During the quarter, we made further significant progress with our $60 million SGN a cost reduction program.
We expect to deliver $40 million of these savings are 2020 and the full $60 million and 2021.
Our teams delivered to the $12 million in savings in the third quarter as expected and we intend to deliver the full 50 million quarterly run rate savings in the fourth quarter.
When fully realized this represents approximately 300 basis points of incremental EBITDA margin expansion on an annual basis.
As a reminder, these are permanent cost reductions that will not return as conditions normalize.
As we successfully execute our cost reduction plans, we continue to make strategic investments to accelerate growth and capitalize on the opportunities in our key markets.
To that and R&D spending increased 26% year over year in the quarter with over 60% of these investments now dedicated to software development.
This includes Standalone software and embedded software within various hardware products.
We are making targeted investments and compelling growth opportunities across the portfolio to drive further innovation in industrial automation and enhance our best in class Cyber security cloud platform.
Innovations are important to our customers and our shareholders as they will further strengthen our product offering and.
Hence our competitive advantage and drive growth.
We are seeing a return on prior investments in broadband fiber in the form of outsized growth in DC and those products.
Similarly, we expect our current investments in industrial automation in cyber security to drive accelerated growth in Ddos solutions going forward.
Our strong balance sheet and ample liquidity provides the financial flexibility to make these important investments.
As we successfully navigate this economic downturn.
Positioned the company to fully participate in the recovery.
We exited the quarter with cash on hand of $391 million. After repaying all remaining short term revolver borrowings.
We are comfortable with our liquidity position at this point.
Finally demand trends and visibility in our business are improving.
As a result, we are resuming our traditional guidance practices.
We expect modest sequential improvement in underlying demand during the fourth quarter. However.
We expect our channel partners to pursue incremental reductions in channel inventory levels during the fourth quarter after only modest reductions in the third quarter. This.
This will partially offset the sequential growth in underlying demand that we expect that it is contemplated in our guidance.
Please turn now to slide four in the presentation.
Looking out beyond the quarter, we remain very excited about the opportunities for belden as we continue our transformation.
We are aligning our business around markets with favorable secular trends.
And our key strategic priorities, our industrial automation cyber security.
Ben Fiveg and smart buildings.
We believe that each of these markets offers compelling growth opportunities over the cycle.
I'd like to briefly review each of them now.
First.
The global pandemic, clearly impacted demand for industrial automation on a temporary basis, but we remain extremely optimistic longer term do.
You are in large part to increasing labor costs and enhance productivity and quality meats.
The secular tailwinds remain fully intact.
Social distancing, another new health and safety practices represent yet another incremental demand driver for automation on the factory floor and elsewhere.
In cyber security increasingly sophisticated and costly attacks are driving the need for advanced cyber solutions.
We are especially excited about the industrial markets, where we are particularly well positioned.
Seldom is truly unique offering provides critical cyber security protection and this remains an important area of investment for our customers. During this dynamic.
We are clearly gaining traction.
With our new cloud based and other products.
Encouraged by robust recent orders for industrial cyber security.
Software as a service offerings.
In broadband than Fiveg demands for more bandwidth and faster speeds is ever increasing and the COVID-19 pandemic is only accelerating demand for our fiber optic and other products.
We continue to expand our fiber product portfolio and capacity through organic and inorganic investments, including five bolt on broadband fiber acquisitions completed over the last few years.
We are extremely well positioned to support our MSR customers as they upgrade existing networks in response to a record demand levels and new competitive threats from Fiveg.
We also support our telco customers as they built out new Fiveg infrastructure.
Finally, and smart buildings, the increasing use of integrated networks drives increasing demand for our productivity solutions.
The outlook for some smart building markets is clearly changed due to COVID-19.
While we continue to see growth opportunities in certain market verticals, such as government health.
Healthcare and Datacenters.
As the economy recovers, we would expect healthy demand from these customers to partially offset the headwinds in other verticals within smart buildings.
I will now ask Henk to provide additional insight into our third quarter financial performance. Thank you.
Thank you will please turn to slide five for a detailed consolidated review I will start my comments with results for the quarter followed by a review of our segment results a discussion of the balance sheet and cash flow performance. As a reminder, I will be doubling sales adjusted results today.
Revenues were $475.8 million in the quarter.
Compared to $533.1 million in the third quarter of 2019.
Revenues decreased 10.7% on a year over year basis, and increased 12% sequentially.
After adjusting for a $4.9 million, they will impact from acquisitions, and a 5.2 million favorable impact from currency translation and higher copper prices.
Theres declined 12.6% organically on a year over year basis.
After adjusting for a 12.3 million favorable impact.
Sales in translation and higher prices.
Any change is 9.1% organically on a sequential basis.
Recall that we entered the third quarter that a planning assumption that channel partners would pursue induction Intel inventory levels $25 million during the second half of the year and $70 million for the full year 2020.
Our expectation for the full year is unchanged.
We now expect most of the second half with the option to occur in the fourth quarter after experiencing only modest reductions of approximately $3 million in the third quarter.
Gross profit margins in the quarter, what 35.3% declining 210 basis points compared to 37.4% in the beginning it.
The decline was primarily due to lower volumes.
That was $65.3 million compared to $49.1 million in the prior quarter and $90 million in the play.
EBITDA margins were 13.7% compared to 11.6% by the quarter and 16.9% in the prior year.
As will mentioned, we made further significant progress with 60 million, that's a cost reduction program.
Systems with our commitment we delivered savings of $12 million in the third quarter and that presenting a 48 million.
Yes.
We expect to deliver the full 15 million quarterly run rate savings in the fourth quarter.
As we streamline our cost structure, we remain committed to our important growth initiatives.
In the quarter, we increased our R&D investment by $6 million or 26% from the prior year.
Net interest expense increased by approximately $1 million sequentially in the quarter due to changing foreign exchange rate.
Finland Foreign exchange rates, we expect interest expense in 2020 to be approximately $58 million.
Our effective tax rate was 17.7 cents in the third quarter as we benefited from incremental discrete tax planning initiatives. We expect an effective tax rate of approximately 19% for the fourth quarter and 18% for the full year.
Net income for the quarter was $32.2 million.
Added 20.3 million in the pipe quarter and $54.4 million in the prior year period.
Earnings per share 72 cents in the third quarter compared to $1.19 cents a year ago period.
Period end.
Earnings per share increased 57% sequentially from 46 cents in the second quarter.
Turning now to slide six in the presentation you all of our business segment results I will begin with our industrial solutions segment.
Hi, there are industrial solutions allow customers to Doug Smith, and secure audio video and data in high industrial environments.
This includes discrete manufacturing both has facilities energy and mass transit.
The industrial solutions segment generated revenues of 240.
$46.7 million in the quarter.
Currency translation.
I just had a favorable impact.
Million dollars year over year and $8.1 million sequentially off.
After adjusting for these factors.
Revenues decreased 15% organically on a year over year basis increased 8% sequentially.
Within this segment industrial automation revenues declined 16% year over year and increased 8% sequentially.
Lets surprisingly that sense were consistent across our market verticals in the quarter.
Cyber security revenues declined 8% in the third quarter on a year over year basis and increased 6% sequentially.
We continue to secure large strategic orders and new customers and significantly expense engagements with existing customers.
As a result loan in the mobile games as best leading indicator of future revenues increased 18% year over year overall and 42% in the industrial vertical.
Further we continue to gain significant traction with our software as a service offerings.
Yes openings that was.
Resented nearly 20% of non renewal bookings in the quarter compared to only 5% a year ago.
Industrial solutions segment, EBITDA margins were 15.6% in the quarter compared to 11.9% in the prior quarter and 19.2% in either periods.
The year over year decline, primarily reflects lower volumes and they teased out R&D investments in industrial automation and cyber security.
Turning now to our enterprise segments as a reminder, enterprise solutions allow customers to transmit secure audio video and data across complex enterprise networks.
Rockets into all bent Fiveg Thats my buildings.
Enterprise solutions segment generated revenues of $229.1 million during the quarter.
Awful adjusting for a 4.9 million favorable impact from acquisitions, and a 1.9 million favorable impact from currency translation and higher copper prices revenues declined 10% organically on a year over year basis.
After adjusting for a $3.9 million they've laid back from proceeds Escalations and type of advisors revenues increased 11% sequentially.
Revenues involvement and Fiveg increased 4% organically.
On a year over year basis, and 7% sequentially.
Evan increasing demands for more bandwidth and fastest speeds is driving increased investments in network infrastructure by our customers.
This supports continued robust flow in a fiber optic products, which increased 17% year to date.
Got it basis.
Revenues in the smart buildings market declined 21% organically on a year over year basis increased 16%.
Hi, Julie.
Enterprise solutions EBITDA margins were 11.5% in the quarter compared to 10.9%.
For the quarter and 14.5% in the prior year period, the year over year decline primarily reflects lower volumes.
If you'll please turn to slide seven I will begin with our balance sheet highlights.
Our cash and cash equivalents balance at the end of the third quarter.
And that $91 million compared to the $93 million in the prior quarter and 97 million.
Yes.
They fall, but we will act as a dual down 190 million under our $400 million building pellet facility early in the second quarter. This.
This was done out of an abundance of caution outbreak of the global pandemic.
Comfortable with our current liquidity position and as a result, we repaid all mainly revolving revolver borrowings during the third quarter.
Well in terms of 7.5 turns compared to 6.6 turns in the prior quarter and 6.9 turns in the prior year period days sales outstanding of 63 days was consistent with the prior quarter and the prior year.
Thank you Dave Kang of 5.0 turns compared to 4.5 times in the prior quarter and 5.4 turns in the prior year.
Our total debt principal at the end of the third quarter was 1.52 billion compared to $1.56 billion in the second quarter. This reflects the payment of the borrowing under the revolving credit facility and fill in foreign exchange rates.
Leverage 3.8 times net debt to EBITDA at the end of the quarter.
This is temporarily above our targeted range of two point all the 3.0 times and we expect to turn back the dotted change as conditions normalize.
Turning now to slide eight I'll discuss abilities and covenants.
As a reminder, our debt is entirely fixed at an effective average interest rate of 3.5% with no maturities until 2025 to 28.
We have no maintenance covenants on this debt so I love about this open event of default thoughts by worsening economic conditions.
As I mentioned previously comfortable with our liquidity position and the quality of our balance sheet.
Please turn to slide nine for a few cash flow highlights Gary.
Cash flow from operations in the third quarter was $50.8 million.
Add to $67.9 million.
Yeah.
That's capital expenditures of $15.1 million for the quarter compared to 23.3 million in the prior year period.
The year over year difference is primarily related to the guys on the divestiture as we completed in July 2020.
Free cash flow in the quarter was $35.7 million compared to 44.6 million in the prior year period.
Cash flow increased 78% sequentially from $20.1 million in the second quarter. We are encouraged by the all the sequential improvement during a period of time.
In good economic disruption related to the global pandemic.
On a trailing 12 month basis at the end of the third quarter Twentytwenty free cash flow was $136.4 million.
Consistent with our typical seasonality, we expect the fourth quarter to be the strongest quarter of the year for free cash flow generation.
We expect to remain solidly fleet, that's still positive for the full year Twentytwenty.
That completes my prepared remarks, I would now like to turn this call back to our president and CEO will that change when you add them all.
Thank you Hank please turn to slide 12 for outlook.
As I mentioned previously demand trends and visibility in our business are improving.
As a result, we are resuming our traditional guidance practices.
Assuming no further material disruptions related to growth of 19, we expect modest sequential improvement in underlying demand in the fourth quarter, partially offset by incremental reduction in channel inventory levels that we discussed.
We anticipate fourth quarter 2020 revenues to be between $460 million.
$485 million.
An EPS of 63 cents to 78 cents.
For the full year 2020, we expect revenues to be between $1.8 billion to $4 billion and $1.849 billion.
EPS of $2.47 to $2.62.
Before we conclude I would like to reiterate our investment thesis we.
We view belden as a very compelling investment opportunity.
As we are significantly improving our portfolio and aligning around to favorable secular trends in industrial automation.
Cyber security broadband.
Broadband in Fiveg and smart buildings.
Throughout this challenging period, we continue to invest in our business to position the company for improving growth and robust margin expansion.
As we successfully execute our strategic plans and deliver on our goals. We would expect this to drive superior returns for our shareholders.
Finally, I would like to inform everyone that we will be hosting Belvac Twentytwenty investor day event virtually on Tuesday December 15th.
At this event, we will provide a detailed update on the company's strategy for creating shareholder value.
We hope you will be able to join for like for you guys.
That concludes our prepared remarks Mary please open the call to questions.
Thank you again, if you wish to ask a question during the session. Please press star one on your Touchtone phone if youd like to withdraw your question Press Star two we ask that you. Please limit yourself to one question and one follow up question.
Since your first question comes from Rueben Garner of.
Benchmark company. Please go ahead.
Thank you good morning, everybody.
Good morning.
Well, maybe we can start.
This is your I guess, you've been there for three or four or been in this role for three or four months now can you just maybe give us some observations.
Updates on on how things have been progressing in your new role and as anything I guess changed in your mind since you.
Earlier this year.
Sure.
Thank you. So obviously, it's not an easy year to continue velvets transformation.
But we're very excited about our strategic priorities.
We highlighted the 60 million dollar cost reduction we highlight the strength of the balance sheet. The belden has.
But probably even more importantly, we feel very good about the investments that we're making.
Even in this time, where top line is a little bit challenging of course, we continue to invest and I think we highlighted about the 26% improvement of R&D investments.
And we highlighted some of the areas, where our R&D investments are already yielding good returns. So for example.
Our fiber fiber related revenue and Rob and then Fiveg year to date is up 17%.
We feel good about the investments that we're making in the industrial.
Cyber security solutions.
We were able to report robust growth.
So I'm very excited.
And we feel good about the investments that we're making.
Thanks for that one and so I guess you've got.
Several different businesses, obviously with with different deferred.
Different.
Macro items that are impacting them can you I mean, a lot of puts and takes going into next year can you just talk about maybe you know you've got some short cycle business about them back from longer cycle business that Mike.
It might take a while for a return can you just kind of.
Your Crystal ball, how you see the world today talk about what 2021 might look like with all the puts and takes from a from a market growth opportunity and then obviously you've made some investments to try to grow grow in excess of that so can you just kind of give us believe the land.
Yeah sure so.
We will guide 2021, either journey, our investment day Investor day that we just announced or when we report our Q4 results, but I think it's important to remind us of two things. So first of all we.
We feel very good about three out of the four businesses.
We we've mentioned that smart buildings and also in 2021 will probably be a little bit more challenging.
There are verticals within the smart building segment that we see growth potential.
But we have to be realistic that business will probably be challenged in 2021 as well the other three businesses, we feel good about that.
The second thing we should take into account is that the 77 zero million dollars of channel inventory draw that we expect in 2020, we will obviously not return in 2021, so that by itself will create.
Significant revenue growth.
That's kind of how we see 2021.
Perfect. Thank you and good luck.
For the year.
Right.
Thank you so much.
We can now take our next question from the land sales.
Please go ahead.
Yes.
Thanks, Good morning, Hi, gentlemen, and congrats on a good performance in a challenging environment.
Thank you.
Sure. So my first question is around the channel partner inventory reduction given that they've sort of been running below your expectations I'm just curious why you're still expecting them to occur in the fourth quarter and I guess my question is is there a chance it might be it might be a little bit less than 25 in talking.
Yeah.
Yeah.
Thanks for the question so I think.
The anixter Wesco combination the integration from what we can tell is going very very well and we're very happy with.
The progress that they're making but as a result of that.
They didn't draw as much inventory as we thought they would draw.
And secondly, I think the balance that our channel partners are constantly trying.
Trying to find is outweighing optimizing our working capital versus serving our customer needs. So as they continue to improve and as they continue to update their revenue expectations.
Well.
The appropriate draws that they feel are appropriate at their inventory levels. So in Q2, we had a significant draw in Q1, we got a significant draw not so much in Q3, but we expect that means that they build.
I will draw the full 70 million before the end of the year [noise].
Okay.
And then on the increased investments in R&D and how should we think about that moving forward. It looks like R&D was running about you know.
<unk>, 0.4% of sales early in the quarter is that a reasonable run rate as we think about this moving forward.
Just kind of curious how you're thinking about that I think the thing that into 2021.
Yes, yes, that's that's a level that we feel comfortable with.
We recognize that's an increase but we do expect that but the changing landscape within industrial automation.
The further investments require for our cyber security offering on the industrial floor as.
Venezuelas remaining very innovative on the ended brought that in fact G segment.
That we have to increase that level of investment like I said that if that should be approximately the run rate that we should expect.
We feel comfortable with.
Okay, Great and then the milestones, hoping you could just dig a little bit deeper into the trends you're seeing in.
Broadband clearly a lot of banks that are outside the home.
I think the impact that that has benefited this year from now on social that sort of thing.
But some garrett you're kidding, just just could you give us some thoughts on how you see that developing into next year and you know do you expect the client on the inside the home business given the tough comp and do you think that can be offset by growth on the outside the home piece.
Yes. Thank you we we continue to expect mid single digit growth in that segment.
That remains unchanged and we feel that.
The largest growth opportunity.
Consistent with what we've outlined in the past and consistent with our strategic investments will be outside of the home and driven by fiber. So in this quarter. For example in Q3 are outside of the home revenue increased by 9%. So we do expect that trend to continue into 2021.
Great. Thank you.
You're welcome.
Making now take our next question from Mcenany of Goldman Sachs. Please go ahead.
Good morning.
Hi, It's Mark I was I mean, it can hear me now.
Yes in order to handle it.
Thanks, Yeah.
Yeah, I was hoping you could speak.
Speak a a little bit more about the improvements the company has been seeing within fiber and I think the company said that that that specific business is up.
And a growing and maybe you can update us on what percentage of the broadband Fiveg business. When you think about both out outside and inside the home and entered holiday is now made up of fiber and then and then how much is as copper and if you could also tell us how do you see that evolving over time.
You're talking about trying to exit some of the mature cover for portfolio, just trying to think through that that that evolution.
Yes for sure so at the end of the third quarter Mark.
Our fiber business for both on Fiveg.
Units was approximately 30% of total revenues.
And that compares extremely favorable to 2018 for example, where it was 5%. So we made substantial improvements in the portfolio on the fiber side.
Outside of the home inside of the home, it's been an area of focus.
And we expect to exit the year.
More than 50% of our business.
Here, it's a focus towards outside of the home.
Okay. That's helpful. And then just on the mature copper portfolio. There are different some of that business I Didnt company was looking to back away from over time can you talk a little bit about the latest thoughts on that.
Yeah sure so.
We are encouraged we're encouraged by the engagement that we're seeing from strategic as well as financial buyers.
Okay and.
And then just just.
Finally on on March.
Margins in the fourth quarter I just hoping.
To better understand gross margins in the December quarter, or yeah, I think consensus Cps when a bit higher on similar revenue.
Yeah. It depends on what the company had guided to so I'm not sure if it maybe they have anything and there is a little bit lower gross margin.
Maybe something kind.
Kind of flattish quarter on quarter like 35% or maybe there are some some increase in our back so just trying to better understand gross margin and opex trend and better understand.
Where were made that disconnect is.
As for the industry does versus what the company I guided to.
Yes, so close profit margins in the fourth quarter, we expect to be about 36% as.
As a little mentioned, we continue to focus on making investments in R&D.
So total Opex proximately 24, and a half 25%.
The fourth quarter.
Understood. Thank you very much.
You're welcome.
Kevin Maczka there are no further questions at this time please continue.
Okay. Thank you Mary and thank you everyone for joining todays call is.
As Ron mentioned, we will be hosting Belden 2020, Investor day event virtually on Tuesday December 15th please.
Please be on the lookout for registration details for those of you that would like to join US for the live webcast, which will be accessible via the Belden Investor Relations Web site.
If you have any questions. Please reach out to the IR team here at Belden, our email address is investor relations at Belden Dot com. Thank you.
Yeah.
Thank you ladies and gentlemen, this concludes our call today you may now disconnect from the call. Thank you for participation.
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Yeah.
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