Q2 2021 Belden Inc Earnings Call
Yes.
Ladies and gentlemen, thank you for standing by and we'll go to this mornings Belden incorporated conference call. Just a reminder, this call is being recorded at this time you are in a listen only mode. Later, we will conduct and conduct a question and answer session. If you'd like to ask a question. Please proceed starkey followed by the Wanker and you touched them phone.
If you are and the question in queue and we'd like to withdraw your question simply press Star 2 and I'd like to now turn the conference over to Kevin and Mike Graham. Please go ahead.
Thank you Stephanie and good morning, everyone and thank you for joining us today for Belden second quarter 2021 earnings Conference call.
My name is Kevin Masco, I'm Belden, as vice President of Investor Relations and Treasurer.
With me. This morning are belden, as president and CEO, Rune, <unk>, and senior Vice President and CFO Jeremy Parks.
And we'll 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 Belden Dot com.
Turning now to slide 2 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 and.
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 Rural Vestron's rule.
Thank you, Kevin and good morning, everyone.
As a reminder, I'll be referring to adjusted results today.
Please turn to slide 3 and our presentation for a review of our second quarter highlights.
And we performed well again this quarter and I'm pleased to report total revenues and EPS that exceeded the high end of our guidance ranges.
Our end markets continue to recover and our global teams are meeting the robust demand levels and successfully navigating the inflationary environment.
This resulted in meaningful growth and margin expansion during the quarter.
Second quarter revenues increased 42% year over year to $603 million compared to our guidance range of $535 million to $550 million.
Organic growth is a key priority.
Revenues increased 28% 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.
Incoming order rates were strong during the quarter, increasing 74% year over year and 18% sequentially.
This resulted in a healthy book to Bill ratio of 1.19 times.
EBITDA increased 90% year over year to $93 million.
EBITDA margins expanded 390 basis points from 11, 6% and the year ago period to 15, 4 and 5 per cent.
EPS increased 163% year over year to a dollar and 21 cents compared to 46 cents and a year ago period, and our guidance range of 88 to 98 cents.
We are increasing our full year guidance to reflect the better than expected performance and the second quarter and an improved outlook for the second half of the year.
For the full year 2020, 1 we are increasing the high end of our revenue and EPS guidance ranges by $170 million and 77, respectively.
Turning now to our key strategic markets, we had another great quarter and industrial and.
Industrial solutions revenues increased 32% organically with broad based strength and each of our primary market verticals and regions.
Market conditions are clearly improving and we continue to see a number of compelling longer term demand drivers for automation solutions and industrial customers respond to increasing labor costs, increasing capacity requirements and the need to pandemic proof operations and other factors.
Belden is extremely well positioned and highly differentiated and the marketplace and we expect to deliver solid growth and this market going forward.
As we shared with you previously we are making targeted investments throughout the company to support our customers by driving innovation and strengthening our product roadmap.
And that's just 1 example of a recent innovations and industrial automation and we launched an expanded suite of advanced connectivity solutions during the second quarter gold lie and X.
The lie and X solutions provide manufacturers with a faster and more reliable approach to transmitting sensor and actuated data and automated production environments.
This is a state of the art future ready connectivity solution that is core to providing secure communication from the sensor to the cloud and industrial environments.
These enhanced capabilities reflect our leadership position and this important growth market.
We are also sharpening our commercial excellence and a number of areas such as solutions selling.
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.
I would like to highlight our recent success story and industrial automation that illustrates our capabilities and solutions selling and resulted in a significant new business win.
During the second quarter, we received a 6 million dollar award for a project with a large investor owned utility and the United States for the implementation of our critical Communications network.
This is an important strategic win.
Over the course of the project, we will be providing and expanded solution from the combined belden and Ots systems, which we acquired in January 2 a longtime belden customer that previously purchased our industrial automation and cyber security offerings.
It showcases our product and commercial synergies and is a great example of the opportunities. We are now positioned to secure and this markets.
This is the first phase of the project and significant future expansion is expected beyond this initial award.
Beyond this project the continued upgrade of grid infrastructure by utter utilities throughout the United States is expected to provide many other opportunities to deploy our technologies.
We also continued to make progress evolving our portfolio and aligning with growth markets.
During the second quarter, we completed the divestiture of our copper cable product lines, serving the oil and gas market in Brazil, which we do not view as a strategic priority.
These products previously contributed approximately $15 million and annual revenue with an immaterial contribution to EBITDA and cash flow and we were pleased with the $11 million sales price.
I would like to thank the team in Brazil for their efforts and wish them all the best.
Turning now to enterprise NFS.
And enterprise solutions revenues increased 23% year over year on an organic basis and the second quarter.
Within the segment revenues and broadband and 5 G increased 13% organically.
We see strong secular trends and this market driven by the increasing demand for high speed broadband and the desire to provide access to every household.
Broadband networks will need to be upgraded continuously to support high definition video streaming work from home.
Virtual learning and many other applications.
We have sustainable competitive advantages in this market and we are ideally suited to support both M. S O and telco customers as they upgrade and expand their networks.
Broadband and fiber revenues increased 28% organically year to date in 2020, 1 after similar growth in 2020.
We expect further robust growth going forward as we continue to strengthen our patent protected fiber R&D capabilities.
And engineering resources, and reduce our time to market for new offerings.
Okay.
Revenues and smart buildings increased 36% year over year on an organic basis substantially exceeding our expectations.
We are very encouraged by the improvements we are seeing and its market and the strong execution by our teams.
We entered the year with an expectation that smart buildings revenue would decline in 2020, 1, but we now expect to deliver solid growth and this market.
We are benefiting from commercial focus on growth verticals, such as data centers and health care facilities.
In addition, and improved operational performance and superior lead times are enabling continued share capture.
To summarize we had a great second quarter and first half of the year.
We are committed to driving robust organic growth in 2020, 1 and beyond and are encouraged that our strategic initiatives are gaining traction.
I'll now ask Jeremy to provide additional insight into our second quarter financial performance Jeremy. Thank you rule. Please turn to slide 4 for a detailed consolidated review.
I will start my comments with results for the quarter, followed by a review of our segment results and and discussion of the balance sheet and cash flow performance.
As a reminder, I will be referencing adjusted results today.
Revenues were $603 million and the quarter, increasing 178 million or 42% from $425 million in the second quarter of 2020.
Revenues increased 28% organically compared to the prior year and 9% sequentially.
Importantly, we have not seen material restocking by our channel partners.
And so we believe this revenue performance is consistent with improving and demand.
Incoming order rates were also very strong during the quarter, increasing 74% year over year and 18% sequentially.
This resulted in a book to Bill ratio of 1.19 times, including 122, and industrial solutions, and 1.1 sick and enterprise solutions.
Gross profit margin in the quarter were 35, 7%.
Increasing 30 basis points compared to 35, 4% in 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 a result gross profit margin decrease.
And the second quarter the pass through of higher copper prices had an unfavorable impact of 320 basis points.
Excluding the impact of this pass through gross profit margin would have increased 350 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 that inflationary pressures will likely persist and we are proactively addressing this through price recovery and productivity measures to support gross profit margin.
EBITDA was $93 million, increasing $44 million or 90% compared to $49 million and the prior year period.
EBITDA margins were 15, 5%, increasing 390 basis point compared to 11, 6% and a year ago period.
Excluding the impact of higher copper pass through pricing.
EBITDA margins would have increased 510 basis points year over year, demonstrating solid operating leverage on higher volumes.
Net interest expense was consistent with the year ago period.
At current foreign exchange rates, we expect interest expense to be approximately $62 million in 2020.1.
Our effective tax rate was 18, 2% in the second quarter as we benefited from incremental discrete tax planning items.
We expect and effective tax rate of approximately 19% and the third quarter and and $19.5 per cent for the full year 2021.
Net income in the quarter with $55 million compared to $20 million and the prior year period.
Earnings per share was $1.21, compared to 46 cents and the second quarter of 2020.
We were very pleased to deliver such robust growth and margin expansion and the second quarter.
Turning now to slide 5 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 $335 million in the quarter, increasing 51% from 221 million and the second quarter of 2020.
Segment revenues increased 32% organically.
Revenues in industrial automation, and our largest market.
Increased 36% year over year on an organic basis with broad based strength across each of our primary market verticals.
Revenues for our integrated cyber security solutions also increased year over year for the second straight quarter.
We are pleased with the progress the team is making and advancing the product roadmap and identifying new commercial opportunities and industrial end markets.
Non renewal bookings increased 12% year over year and the first half of the year.
Industrial solutions segment, EBITDA margins were 16, 9% and the quarter, increasing 500 basis points compared to 11, 9% in the year ago period.
The year over year increase primarily reflects operating leverage on higher volume.
Turning now to our enterprise segment.
Our enterprise solutions allow customers to transmit and secure audio video and data across complex enterprise network.
Key markets include broadband.
And smart buildings.
The enterprise solutions segment generated revenues of $268 million during the quarter, increasing 32% from 203 million and the second quarter of 2020.
Segment revenues increased 23% organically.
Revenues in broadband and <unk> increased 13% 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 supports continued robust growth and our fiber optic products, which increased 21% organically and the second quarter.
Revenues in the smart buildings market increased 36% year over year on an organic basis.
<unk> exceeding our expectations.
Market conditions improved significantly in the quarter and our commercial engagement and strong operational performance are driving notable share capture.
Enterprise solutions segment, EBITDA margins were 13, 2% and the quarter and.
Increasing 230 basis points compared to 10, 9% and the prior year period.
If you will please turn to slide 6 I will begin with our balance sheet highlights.
Our cash and cash equivalents balance at the end of the second quarter was $423 million.
Compared to $371 million and the prior quarter and $360 million and the prior year period.
We are very comfortable with our current liquidity position.
Working capital turns were $7.6 compared to $6.7 and the prior quarter and 5.5 and the prior year period.
Days sales outstanding of 53 days compared to 54, and the prior quarter and 60 and the prior year period.
Inventory turns were 5.1 compared to 5 and the prior quarter and $4.5 and the prior year.
And our financial leverage improved significantly during the quarter net leverage was 3.3 times net debt to EBITDA at the end of the second quarter compared to 4 times and the prior quarter.
We now expect to trend back within the targeted range of 2 to 3 times by the by year end 2021.
Turning now to slide 7.
I will discuss our pro forma debt maturity schedule.
As a reminder, our debt at the end of the second quarter was entirely fixed at attractive interest rates.
We have no near term maturities and to no maintenance covenants on this debt.
Subsequent to quarter, and we took steps to further strengthen the balance sheet and extend our maturities.
Specifically in July we issued 300 million euros, and new 10 year notes maturing in 2031.
The interest rate on these notes is 337, and 5% which matches the lowest interest rate and 10 year notes in the history of the company.
We were very pleased to complete this transaction.
We intend to use the proceeds during the third quarter to redeem the full $300 million euros outstanding on our 2025 notes. So our total debt principal outstanding will be unchanged at the end of the third quarter.
Following the redemption, our debt maturities will range from 2026 to 2031 with an average interest rate of 3.6%.
This provides significant financial flexibility as we execute our strategic plans.
Please turn to slide 8 for a few cash flow highlights.
Cash flow from operations and the second quarter was $68 million compared to $40 million and the prior year period.
Net capital expenditures were $16 million per the quarter compared to $20 million and the prior year period.
And finally free cash flow in the quarter was $52 million compared to $20 million and the prior year period.
We are pleased with the year to date free cash flow generation, which is approximately $50 million better than the first half of 2020.
That concludes my prepared remarks, I would now like to turn the call back to our President and CEO rules engines for the outlook rule and thank you Jeremy.
Please turn to slide 9 and for our outlook.
And markets conditions, and continue to improve and I'm encouraged by our robust recent order rates and solid execution.
We are increasing our full year 2000, and 'twenty, 1 guidance to reflect better than expected performance and the second quarter and an improved outlook for the remainder of the year, while considering the renewed uncertainty related to the global pandemic.
We anticipate third quarter 2021 revenues of $590 million to $605 million and EPS of a dollar and 11.
2 a dollar and 21.
For the full year 2020, 1 we now expect revenues of 2.32 billion to $2.3 5 billion.
Compared to prior guidance of $2.132 to $1.8 billion.
There's $170 million increased at the high end of our guidance range includes approximately $140 million from improved operational performance and.
And $30 million from higher copper prices and current foreign exchange rates.
Our revised full year guidance implies consolidated organic growth of approximately 15% to 17%.
Compared to our prior expectation of 6% to 9%.
We now expect full year 2021, EPS to be $4.37.
And $2.4.57.
Compared to prior guidance of $3.50.
And to $3.80.
Our revised guidance for the full year 2021 implies total revenue growth of 25% to 26% and EPS growth of 59% to 66%.
We expect interest expense of approximately $62 million and and effective tax rate of 19, 5% for the full year 2021.
Please turn to slide 10.
Now before we conclude I would like to reiterate our investment thesis.
We are taking bold actions to drive substantially improve business performance and you are seeing that and are much better than expected first half performance and increased full year outlook.
This includes around aligning around growth markets, developing innovative networking solutions and enhancing our commercial capabilities.
Our financial leverage improved significantly during the quarter and we tend to return to our targeted leverage range by year end 2021.
I am confident that we have 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 again, if you'd like to ask a question during the Q&A session. Please press star 1 on your Touchtone phone.
And would like to withdraw your question. Please press star to please limit yourself to 1 question and 1 follow up question first.
Our first question comes from Noelle Dilts with Stifel.
Okay.
Right.
Hi, guys good morning, and congratulations on a really great quarter.
I was hoping that first you could kind of talk about you know.
We see some really strong growth and smart buildings.
You mentioned that you think part of that and share gain and just curious how you're kind of thinking about how much of the growth is coming from market recovery and maybe some catch up.
You know with construction projects start moving again first says.
What might be share gain thanks.
Yeah. Thank you for a day kind of where it's noelle. So 2 comments first of all on the commercial real estate market I think what we're seeing is that some projects that started earlier.
Are now being finished a little bit faster than we had anticipated.
And secondly, I think I highlighted on the call that we are successfully reallocating some resources to growth verticals within the smart building segment. So data centers and health care facilities are 2 of the verticals that I think we pointed out and.
And we're doing very well there.
Alright, just 1 quick data point, our data center business doubled in the quarter compared to a year ago.
So that's how I would like to see which we're cautiously optimistic on commercial real estate, but it remains a little bit murky.
And that segment.
And any thoughts on kind of how you're measuring.
The success of your commercial initiatives and share gain.
And we get point of sale information, which we compare to the public data that is out there of how our competitors are doing and we are confident that we are better positioned and are gaining share.
Okay.
And then on the broadband business I was hoping you could give us a little bit more detail on what youre seeing in terms of that inside the home business.
Outside the home and how Youre thinking about those pieces kind of kind of progressing over the next 12 months. Thanks.
Absolutely.
So the ratio of revenue in Q2 inside versus outside well, it's about 60% outside the home and 40% inside which is pretty consistent with where we have been tracking as I'm sure. You know what's interesting is that within the quarter the growth rates for outside the home on an organic basis.
<unk> were 17%, which was consistent with what they were and last quarter.
But even inside the home group so inside revenue grew 7%.
And last quarter inside growth was flat and as you may remember last year and even in 2019 and that actually.
Client inside the home revenue declined we expect now for the full year to have to grow inside the home revenue with about the same rate as we did in Q2 to approximately 7%.
Great. Thank you.
Youre welcome.
Thank you. Our next question comes from William Stein with <unk>.
Great. Thanks for taking my questions. Congrats on the very strong results, particularly in the enterprise segment.
I'm, hoping you can give us.
A little bit of a more robust.
The planned sale of copper cable and wire business sounds like you sold a small piece of it.
Where where are you on the rest of it and what to what degree is that contemplated in guidance.
Thank you. Thank you all for the nice comments, so we did indeed successfully.
And conclude 1.1 part of the of the transactions.
So.
And what we're seeing is that potential buyers have shifted their priorities a little bit so with the global economic.
Research and research the surge that we're seeing.
And they have shifted their priorities to fighting their own supply chain issues and optimizing their demand and their own.
Factories, and make sure theyre able to supply that demand. So we see a little bit of a shift in priorities of potential buyers.
These projects and these products remain non strategic and Theyre not part of the solution.
They're growing these businesses are growing right now so we'll see how the market develops and how the priorities of potential buyers develop.
And in the meantime, we just will continue to run them and we will only transact valuations that make sense to us.
Okay.
Okay. Okay. It sounds like maybe that sales on hold then let me turn to the other.
And topic I wanted to ask about what you just mentioned a moment ago, what's your capacity constraints and suburbs.
The other technology companies I cover.
And the capacity constraints are much more front and center I Havent really heard belden.
Mentioned these I'm not sure if there is a meaningful constraint at all but maybe you can help us understand to what degree you are.
Seeing any sort of extended lead times or trouble meeting.
Customer demand. Thank you.
So we're not obviously not immune to supply chain constrained and.
Sales and inflationary pressures and input costs.
Indeed, as the number shown we have been quite successful and managing dose.
So I think the teams have done a good job at securing capacity from our suppliers, which includes chipsets per our networking switches.
<unk> had done a good job of it.
And.
Ensuring and locking in supplies for resins, and all kinds of materials that is required to produce our cable. So we're not immune to them, but we thought that the teams have done a decent job and securing those demands. So therefore able to.
Both the results that we did and.
And increase.
Our outlook to the extent that we did.
We are.
Also obviously experiencing a little bit longer lead times on our products than typical but we have pretty solid data that.
We are able to deliver significantly faster.
And our competitors do.
So we feel good about how the teams have been managing that so far.
Great Thanks, and congrats again.
Thank you will.
Thank you. The final reminder, you may ask your question by pressing Star 1. Our next question comes from Steven Fox with Fox Advisors.
Hi, good morning.
And I was wondering if you could maybe talk a little bit about the dynamics behind raising prices for copper it sounds like the first question on that is it sounds like all of the.
Material pass through that impacted margins was on that enterprise side, even though you have obviously industrial carry some of that weighted as well and then secondly, what are you passing it through quicker than you expected as well in the quarter and just maybe a little bit of dynamics around that would help.
And then I had a father sure I'll tee it off and then I'll ask Jeremy to provide a little bit more comments and we have robust processes in place. So for a significant part of our revenue a significant part of our customer base. We pass through automatically we have certain bands and if copper increases above that bad debt and automatically.
The prices are being raised we've.
We've been dealing with this for decades right. So the processes that we built are pretty robust for the part of the revenue and part of our customers, where we do not have such agreements.
We have conversations and we pointed out and since we are a trusted brands that deliver such good delivery performance and excellent quality performance and.
And virtually all of the cases were just able to pass them on.
And so that's how I would answer the question, Yeah, and I think just go back to your other point Steve.
The copper impact the pass through impact affects both enterprise and industrial so both have some copper content and both are managing in.
And the same way, which is which is very aggressively as rural set. So I think from a timing impact we're not really getting a benefit in terms of EBITDA and we don't have.
Much headwind and the EBIT side, because the price increases that are coming at the same time, they're higher cost is hitting the P&L I think from a margin standpoint.
Pass through impact is affecting both both segments.
That's helpful. It sounds advantage in terms of just the timing pastures.
Being in line.
And then just and the second question on the enterprise side obviously.
You broke down the business year over year, and theres different comparisons versus a year ago that you're you're matching up against can you talk a little bit sequentially about broadband fiber and.
Smart smart buildings, how they did quarter over quarter, and and how maybe directionally, you're thinking of them into Q3 and Q4. Thanks.
Yes, so I'll give you those numbers, Steve so sequentially from Q1, and Q2 smart buildings was up 14% and broadband was up 19%. So strong growth in both of those sub segments.
And looking I'm looking forward to Q3, we guided a revenue number that is more or less flat and consolidated level.
Q2, and I would say that roughly what we expect for both of those enterprise businesses as well.
Great. That's helpful. Thank you.
Yes.
Thank you there are no further questions at this time.
Yeah.
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 at Belden, our email address is investor relations at Belden Dot com.
Thanks, and have a great day.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
Okay.
[music].
Yes.
Moving forward.
[music].
And.
Paul.
[music].
And.
[music].