Q1 2021 Belden Inc Earnings Call
Express Star one on your Touchtone phone.
And the question queue and would like to withdraw your question simply press Star two I'd like to now turn the call over to Kevin <unk>. Please go ahead.
Thank you Stephanie and good morning, everyone and thank you for joining us today for Belden first quarter 2021 earnings conference call.
My name is Kevin and NASA on Belden, as Vice President of Investor Relations and Treasurer.
With me. This morning are Belden, president and CEO of <unk> and CFO Jeremy parks.
Rule will provide a strategic overview of our business and then Jeremy will provide a detailed review of our financial and operating results followed by Q&A.
We issued our earnings release earlier this morning, and we've 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 Dot Belden Dot com.
Turning to slide two and the presentation. During this call management will make certain forward looking statements.
For more information. Please review today's press release and our annual report on form 10-K.
Additionally, during today's call management will reference adjusted or non-GAAP financial information.
In accordance with regulation G. The appendix to our presentation and the Investor Relations section of our website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information we communicate.
I will now turn the call over to our president and CEO of <unk> rule.
Thank you, Kevin and good morning, everyone.
As a reminder, I'll be referring to adjusted results today.
Please turn to slide three and our presentation for a review of our first quarter highlights.
Demand trends continued to improve and the first quarter and I am pleased to report total revenues and EPS that exceeded the high end of our guidance ranges.
We are benefiting from the ongoing recovery and the global economy, and our leadership position and secular growth markets.
Solid execution by our global teams resulted in meaningful growth and margin expansion.
First quarter revenues increased 16% year over year to $536 million compared to our guidance range of 492 500 on $5 million.
Organic growth is a key priority.
And revenues increased 8% year over year on an organic basis.
The upside relative to our expectations was broad based with contributions from both the industrial solutions and enterprise solutions segments.
As a reminder, and January we completed the bolt on acquisition of <unk> systems and <unk>.
Leading provider of proprietary networking solutions tailored for specific applications and harsh and mission critical environments.
This was our first the industrial automation acquisition and years and.
And it's proven switching devices and network management software are complementary to belden, leading industrial networking offering.
We are very pleased with the integration and the performance of the business to date.
Incoming order rates were solid during the quarter, increasing 24% year over year and 11% sequentially. The.
This resulted in a healthy book to Bill ratio of 113 times.
EBITDA increased 32% year over year to $80 million.
EBITDA margins expanded 180 basis points.
From 13, 1% and the year ago period to 14, 9%.
EPS increased 40% year over year to 94.
Compared to our guidance range of 60%.
The 70.
We are off to a great start in 2021.
And we are increasing our full year guidance to reflect the better than expected performance and the first quarter and an improved outlook for the remainder of the year.
For the full year 2021, we are increasing the high end of our revenue and EPS guidance ranges by $130 million and 50, respectively.
Largely due to strength in the industrial automation and broadband and <unk> markets.
Please turn to slide for for a brief discussion of our strategic growth initiatives.
Belden senior leadership team and I are laser focused on driving solid and sustainable organic growth.
Did it and we are pursuing a number of compelling strategic initiatives to capitalize on the opportunities and our markets and accelerate growth.
I would like to briefly highlight a few of them for you now.
First we are significantly improving our portfolio and aligning around the favorable secular trends and our key strategic markets, including industrial automation and cyber security.
Broadband on <unk> and smart buildings.
We think these markets are secular growers and we are uniquely positioned to win and each of the.
And our largest market industrial automation, we are extremely bullish and we continue to see a number of compelling demand drivers.
The U S manufacturing PMI reading at the highest levels and nearly four decades and March so market conditions are clearly improving.
Longer term all roads lead to more automation and weather.
And it's the increase and cost of labor increase and capacity requirements for the needs to pandemic proof operations with social distancing protocols.
Belden is extremely well positioned and highly differentiated and the marketplace and we expect to deliver solid growth and this market going forward.
And broadband and <unk>, we think the secular trends are undeniable.
Broadband networks will need to be upgraded continuously to support high definition video consumption.
Streaming for.
Virtual reality work from home virtual learning etcetera.
Demand is only accelerating and there is clear momentum behind providing high speed broadband access to every household.
There is no doubt that we have sustainable competitive advantages and this market and we are.
And ideally suited to support for both <unk> and.
And telco customers as the upgrade and expand their networks.
As part of our improving and market alignment, we haven't taking significant steps to reduce challenged businesses to remove challenged businesses from the portfolio and exit the less attractive markets and.
And we are not done.
As you know we initiated the process last year to divest approximately $200 million and revenues associated with certain undifferentiated copper cable product lines.
These are primarily standalone product lines that are low growth and low margin.
And we do not believe they can meet our growth or margin goals and the future.
We believe that exiting these product lines will further improve our end market exposure.
And this case, we are essentially exiting the oil and gas markets and reducing our exposure to certain less attractive smart buildings markets.
We expect the complete multiple transactions in 2021 associated with these product line exits.
We remain on track and we look forward to updating you as we close these transactions.
Next we are committed to supporting our customers by driving innovation.
As a result, we are making targeted investments to strengthen our product roadmap.
We are particularly focused on driving innovation and our end to end the industrial networking solutions and accelerating development of our best in class Cyber security cloud platform.
We are also improving the software content of our offerings, including embedded software within various hardware products.
And developing fiber connectivity solutions to be used across a number of industrial and enterprise applications.
These innovations are important to our customers and our shareholders as they will further strengthen our product offering and enhance our competitive advantage.
We are also sharpening our commercial excellence and the number of important areas such as solution selling customer innovation centers and digital transformation.
Beyond the individual product sales belden is uniquely positioned to offer differentiated solutions to our customers, including cable and connectivity networking and software products and services.
Through our solution selling and strategic accounts programs, we are increasingly capitalizing on these opportunities by engaging with customers as one belden rather than separate businesses.
One of the ways, we are doing that is through customer innovation centers our CICS.
CICS or a newer initiative designed to improve customer intimacy and support solution selling.
This will allow us to not only support our customers, but go innovate with them create solutions that solve their complex networking problems.
And deliver superior service and support.
The CIC model is unique to belden and it reflects our commitment to leading and our key markets.
We are very excited about the potential here.
And April we announced the opening of a state of the art CIC and Stuttgart, Germany.
We have plans to open other CICS around the world over the next 12 to 18 months.
We are hosting a virtual grand opening of the Stuttgart facility on May 12.
And I invite each of you the register for the season on our web site to participate in the virtual guided tour, which will highlight our new capabilities.
Finally digital transformation is another important and ongoing initiative for many companies including Belden.
We want to improve the customer experience and make working with belden as easy as possible and we know that certain customers want to interact with us exclusively through digital and mobile means.
We are upgrading our capabilities in these areas and our teams have made significant progress.
To summarize we are committed to driving improved organic growth rates.
And I am excited about the numerous opportunities we have to do that.
I will now ask Jeremy to provide additional insight into our first quarter financial performance Jeremy.
Thank you rule, 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 and the discussion of the balance sheet and cash flow performance.
And as a reminder, I will be referencing adjusted results today.
Revenues were $536 million and the quarter.
Increasing $73 million or 16% from $464 million and the first quarter of 2020.
Revenues were favorably impacted by $33 million from currency translation, and higher copper prices and $4 million from acquisitions.
After adjusting for these factors revenue increased 8% organically from the prior year period.
Incoming order rates were solid during the quarter, increasing 24% year over year, and 11% sequentially and accelerating as the quarter progressed.
This resulted in a healthy book to Bill ratio of one one and three times with particular strength in industrial automation and broadband and <unk>.
Gross profit margin in the quarter were 36% decreasing 90 basis points compared to 36, 9% and the year ago period.
As a reminder, as copper costs increase we raise selling prices, resulting in higher revenue with minimal impact to gross profit dollars as the result gross profit margins to decrease.
And the first quarter the pass through of higher copper prices had an unfavorable impact of approximately 180 basis points.
Excluding this impact gross profit margins would have increased to 90 basis points year over year. This exceeded our expectations for the quarter and we are especially pleased with the performance given the current inflationary environment.
We expect net inflationary pressures will likely persist throughout the year and we are proactively addressing through additional price recovery and productivity measures to support gross profit margins.
EBITDA was $80 million, increasing $19 million or 32% compared to $61 million and the prior year period.
EBITDA margins were 14, 9% compared to 13, 1% and the prior year period and improvement of 180 basis points year over year.
And the pass through of higher copper prices had an unfavorable impact of approximately 70 basis points and the quarter.
Excluding this impact EBITDA margins would have increased 250 basis points year over year, demonstrating solid operating leverage on higher volume.
Net interest expense increased $2 million year over year to $16 million as the result of foreign currency translation.
At current foreign exchange rates, we expect interest expense to be approximately $61 million in 2021.
Our effective tax rate was 19, 9% and the first quarter consistent with our expectations.
For financial modeling purposes, we recommend using an effective tax rate of 20% throughout 2021.
Net income and the quarter was $42 million compared to $31 million and the prior year period.
And earnings per share was <unk> 94.
Increasing 40% compared to 67 and the first quarter of 2020.
Turning now to slide six and the presentation for a review of our business segment results.
I will begin with our industrial solutions segment.
As a reminder, our industrial solutions allow customers to transmit and secure audio video and data and harsh industrial environments.
Our key markets include discrete manufacturing process facilities energy and mass transit.
The industrial solutions segment generated revenues of $310 million and the quarter, increasing 23% from $251 million and the first quarter of 2020.
Currency translation and higher copper prices had a favorable impact of $20 million year over year.
And the acquisitions had a favorable impact of $4 million. After adjusting for these factors revenues increased 14% organically.
Within this segment industrial automation revenues also increased 14% year over year on an organic basis.
With growth in each of our primary market verticals.
Cyber security revenues increased 8% year over year, and the first quarter with non renewal bookings, our best leading indicator of revenue increasing 74%.
We continue to secure large strategic orders with new industrial and enterprise customers and significantly expand our engagements with existing customers.
Industrial solutions segment, EBITDA margins were 16, 6% and the quarter, increasing 250 basis points compared to 14, 1% and the year ago period.
The year over year increase primarily reflects operating leverage on higher volumes.
Turning now to our enterprise segment, our enterprise solutions allow customers to transmit and secure audio video and data across complex Enterprise network. Our key markets include broadband <unk> and smart buildings.
The enterprise solutions segment generated revenues of $226 million during the quarter, increasing 7% from $212 million and the first quarter of 2020.
Currency translation and higher copper prices had a favorable impact of $13 million year over year.
After adjusting for these factors revenue increased 1% organically.
Revenue in broadband and <unk> increased 9% year over year on an organic basis.
The ever increasing demand for more bandwidth and faster speeds is driving increasing investments and network infrastructure by our customers. This.
And to support continued robust growth and our fiber optic products with increased 23% organically in the first quarter.
Revenue in the smart buildings market declined 6% year over year on an organic basis consistent with our expectation.
Enterprise solutions segment, EBITDA margins were 12, 4% and the quarter, increasing 80 basis points compared to 11, 6% and the prior year period.
If you will please turn to slide seven and I will begin with our balance sheet highlights.
Our cash and cash equivalents balance at the end of the first quarter with $371 million.
Compared to $502 million and the prior quarter and $251 million and the prior year period.
We are very comfortable with our current liquidity position.
Working capital turns were six seven compared to $10 three and the prior quarter and five six and the prior year period.
Day sales outstanding of 54 days compared to 50, and the prior quarter and 57 and the prior year period.
Inventory turns were five zero compared to $5, two and the prior quarter and for sick and the prior year.
Our debt principal at the end of the first quarter was 153 billion compared to 159 billion in the prior quarter.
The sequential decrease reflects the current foreign exchange rates.
Net leverage was four times net debt to EBITDA at the end of the quarter. This is temporarily above our targeted range of two to three times and we expect to trend back to the targeted range as conditions normalize.
Turning now to slide eight I will discuss our debt maturities and covenants.
As a reminder, our debt is entirely fixed at an attractive average interest rate of three 5% with no maturities until 2025 for 2028 and.
And we have no maintenance covenants on the debt.
As I mentioned previously we are comfortable with our liquidity position and the quality of our balance sheet.
Please turn to slide nine for a few cash flow highlights.
Cash flow from operations and the first quarter was the use of $42 million compared to the use of 52 million and the prior year period.
Net capital expenditures were $11 million for the quarter compared to $19 million and the prior year period, and and finally free cash flow in the quarter with the use of $53 million compared to the use of $71 million and the prior year period.
This concludes my prepared remarks, I would now like to turn the call back to our president and CEO rule vest and for the outlook rule.
Thank you Jeremy.
Please turn to slide 10 for our outlook.
And market conditions are improving and.
And I am encouraged by our robust recent order rates and solid execution.
We are increasing our full year 2021 guidance to reflect better than expected performance and the first quarter and an improved outlook for the remainder of the year, while considering the continued uncertainty related to the global pandemic.
We anticipate second quarter 2021 revenues of.
535 million to $550 million and EPS of <unk> 88 to <unk> 98.
For the full year 2021, we now expect revenues of 2.13 billion.
And two to $1 8 billion.
Compared to prior guidance of 199 billion.
Two 2.0 of $5 billion.
We now expect full year of 2021 EPS to be $3 50 to $3 80.
Compared to prior guidance of $2 90 to $3 30.
We expect interest expense of approximately $61 million for 2021, and the effective tax rate of 20% for each quarter and the full year.
This guidance continues to include the contribution of the copper cable product lines that we are and the process of divesting, which contributed approximately $200 million and revenue and 20 and EPS in 2020.
We will update our guidance accordingly, as we complete these divestitures.
Please turn to slide 11, and for a bridge that walks from the high end of our prior 2000 and 'twenty one guidance to our new guidance.
And again demand trends are improving and our recent order rates are encouraging.
As a result, we are increasing our volume outlook for the year by $90 million.
Our revised full year guidance implies consolidated organic growth and the range of 6% to 9%.
Compared to our prior expectation of approximately 1% to 4%.
Relative to our prior guidance, we expect higher copper prices and current foreign exchange rates to have a favorable impact on revenues of approximately $40 million and 2021, but a negligible impact on earnings.
For the full year 2021, the high end of our guidance implies total revenue and EPS growth of 17%.
And 38% respectively.
Please turn to slide 12.
Before we conclude I would like to reiterate our investment thesis.
We view belden as a compelling investment opportunity.
We are taking bold actions to drive.
Substantially improved business performance and.
You are seeing that and our better than expected first quarter performance and increased full year outlook.
We are positioning the company for accelerating organic growth and robust margin expansion.
We are also committed to delevering.
Enabled by strong fleet free cash flow generation, and we intend to return to our targeted leverage range as soon as possible.
I am confident that we of the management team.
Strategy and business system to successfully execute our strategic plans and drive strong returns for our shareholders.
That concludes our prepared remarks, Stephanie please open the call to questions.
Thank you maybe you'd like to ask the question. Please signal by pressing star one on your telephone keypad.
The reason the speaker Paul Please make sure your mute function is part of the laser signal to reach our equipment.
Let me your questions to one question with one follow up question and Dan You May Press Star one to ask a question. The first question comes from William Stein with John with Sandy.
Thanks for taking my questions, Matt Congrats on the.
The good results and especially the good.
Outlook, including.
And it looks like the second half.
The improvement as well so congrats on that.
I wanted to dig into the copper wire sales for a moment.
First can you help us or remind us of.
What portion of your spend on copper.
And.
Within the businesses that Youre planning on selling.
Well first of all thank you for the further comments.
I just want to make sure I understand you correctly.
So what portion of what percentage of our copper revenue are we planning on divesting.
No.
And of your spend on copper so.
One of the knocks on Belden historically, although I don't think its been so true lately.
Heavily influenced by copper the P&L substantially influenced by the volatility of the price of copper, which has risen quite a bit and the last year.
Im trying to and trying to better understand to what degree this.
Since that dynamic.
Got it got it.
And let's say 100 per you.
And you spend 100% on.
On copper today.
What's the Delta when you divest.
The copper cable and wire businesses.
Got it got it I appreciate the question.
Approximately 25%, so we will reduce our spend of approximately 25%.
Having said that.
As we've demonstrated and the pattern of recent for US and also in Q1, I think we've gotten pretty good at passing through higher input costs, which obviously first and foremost when we talk about cable include copper.
And so we feel confident that also when we talk about inflationary pressures on the input cost in general that we have the right processes and praise to further drive productivity to partially offset as well as fast those onto our customers.
And one other if I can you had significantly improved operating efficiency and much better than expected operating margin in the quarter.
It looks to us to be more related to Opex performance and gross margin improvement is that correct and.
And if so what drove that.
And what drove that performance improvement was the proactive cost reductions or revenue upside or mix or something else. Thank you.
Yeah. Thank you for the question so it's both.
It's both are the continuation of our Opex reduction program, but first and foremost it was.
Leverage leverage on the higher volume.
Jeremy explained that as a result.
The fact that are the copper prices rose Salt Lodge and kind of hit the fact that our gross profit margins improved quite substantially.
So it was first and foremost of leverage on volume.
Thank you.
Thank you. Our next question comes from Steven Fox with Fox Advisors.
Hi, good morning.
And I had a couple of questions first of all of them a little confused on just the copper commentary.
Understand the pass through Matt, but are you, saying that you were able to do.
<unk> set all of the higher cost within the quarter or was there also sort of some inflation that you had to absorb that you havent passed on to the customers and then I had a follow up.
Yes, Hi, Steve This is Jeremy so.
And we did a really good job of recovering.
Nearly all of the higher copper costs I think one so what you have to keep in mind is we're typically.
What's hitting the P&L as maybe what we purchased and the prior couple of months. So our copper costs rose substantially in Q1, but not all the way to where the spot market is today.
And but we were very proactive and implementing price increases.
We took some at the beginning of the first quarter and then some at the beginning of the second quarter as well.
Okay that makes sense and then looking out to the second quarter guidance.
I mean, it looks relatively flat quarter over quarter and raising prices.
I'm, just trying to understand that and the context of the book to Bill and what seems like it seems like you were surprised at the end of the quarter in terms of the strength of broadband side the demand from reading the tea leaves correctly. So can you just give some color on your thinking for the June quarter.
Yes, I think.
Follows from Q on Q2, it follows relative typical seasonality.
It's about 18% on.
<unk> increase year over year and.
And it's still a little bit too early for us.
To increase the second quarter would even more so this is the number that we feel comfortable with we're tracking well.
<unk>.
Substantiate the the.
The support the number that we gave and it's more in line with first half typical seasonality.
Okay. That's helpful. Thank you.
Youre welcome.
Thank you, Mike and if you'd like to ask the question you May Press Star one of our next question comes from Jay Yadav with stifle.
For now on Bill Congrats on a great quarter.
Thank you that management's thoughts on the recent government broadband program, including <unk> and the types of infrastructure stimulus and the potential of application on belden broadband and.
Thank you the does maybe over the next tier.
Yes, so the only comment I'll make because.
And is on the art off because of the other packages as you know are still being negotiated so it's a little too early to comment on those but obviously, we feel very good about art off right. So $20 billion investment over 10 year. That's obviously is going to help us and.
On that.
Just kind of help us rollout, our broadband and <unk> products throughout the United States. So we feel very good about that.
And.
You already see that and our increased outlook for this year for broadband and <unk> business. So that is clearly clearly a tailwind for that business.
Okay, great. Thanks.
Thank you and our next question comes from David Williams with loop capital.
Hey, good morning, and let me add my congratulations on the quarter.
Thank you I appreciate that.
Yes, so I guess just.
A little bit on the order rates you talked about.
Credit well through the quarter and just kind of wondering if you on any color as we've gotten into the second quarter here. How those rates have trended are you seeing any acceleration or any concerns there with around the order activity and the last couple of weeks.
Yeah I appreciate the question no the actually accelerated throughout Q1, So March was actually the strongest.
And so far.
Orders and the quarter are trending and exactly how we anticipated them to be supporting our improved guidance range.
So we're off to a strong start there as well.
Okay, and then maybe on the raw material side.
We're hearing of quite a few shortages of the raw material side, and not just pricing, but resins and <unk>.
Just kind of raw material inputs.
What are you seeing there are you able offset those and then perhaps maybe on the logistics side is there anything that's.
And that's going on there that would be incremental to the cost side.
Yes, So let me answer the question and a few different ways still of the short answer to your question is yes, we feel confident that also the non and copper price right of our input cost. So for example, the residence and we're able to pass on to our customers.
And the other part of your question I think is are we going to run into any supply chain constraints throughout the year and.
And we're pretty confident that we have enough material or access to enough material in order to support the revised the outlook that we've provided the.
It doesn't just include the <unk>.
Residents and other compounds, but it also includes chips for our industrial.
Security.
The industrial grade switching equipment.
So we're pretty confident that we have.
The supply chain and place in order to fulfill this increased demand.
Great. Thanks, so much.
Got it.
Thank you there are no additional questions at this time.
Okay. Thank you Stephanie and thank you everyone for joining today's call. If you have any questions. Please reach out to the IR team here of Belden. Our E Mail address is investor relations at Belden Dot Com and have a great day. Thank you.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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John.
John.
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