Q3 2021 Belden Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome 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 a question and answer session.
He would like to ask a question. Please press star one on your Touchtone phone.
If you were in the question queue and would like to withdraw your question simply press Star two.
I'd now like to turn the call over to Kevin Moskow. Please go ahead Sir.
Thank you David Good morning, everyone and thank you for joining us today for Belden <unk> third quarter 2021 earnings conference call.
My name is Kevin <unk>, I'm buildings, Vice President of Investor Relations and Treasurer.
With me. This morning are <unk>, president and CEO role bastions in senior Vice President 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 Belden Dot com.
Turning to slide two in the presentation. During this call management will make certain forward looking statements.
For more information. Please review today's press release and our most recent quarterly report on Form 10-Q.
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.
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 role Vestron's rule.
You, Kevin and good morning, everyone.
As a reminder, I'll be referring to adjusted results today.
Please turn to slide three in our presentation for a summary of the third quarter takeaways.
We delivered another outstanding quarter with total revenues and EPS that exceeded the high end of our guidance ranges.
I'd like to thank our global teams for diligently executing our strategic plans to accelerate growth and expand margins.
Demand trends remained robust and I'm encouraged by our order rates.
We continue to strengthen our relationships with customers and capitalize on opportunities across our business.
We are increasingly benefiting from our focus on solution selling and new product innovation.
Our strong financial performance demonstrates that our initiatives are gaining momentum with customers, who recognized thus far of design engineering and service capabilities.
We are successfully navigating the challenging operating environment.
Our teams are supporting our customers and taking proactive steps to expand margins. Despite the significant inflationary pressures and supply chain challenges in our industry.
During the quarter, we further strengthened our balance sheet.
As we increased EBITDA and generate a free cash flow net leverage declined to two eight times at the end of the third quarter.
We are pleased to report that this is back within our targeted range of two to three times for the first time since the outbreak of the pandemic.
Finally, we are increasing our full year 2021 revenue and EPS guidance once again.
To reflect better than expected performance in the quarter and an improved outlook for the remainder of the year.
In summary, this was another excellent quarter for Belden, and I'm very proud of the achievements of our global teams.
Now before we review our third quarter performance in more detail.
To update you on some important strategic initiatives.
Please turn to slide four.
As you know Belden <unk> senior leadership team and I have been pursuing a number of compelling strategic initiatives to drive solid and sustainable organic growth.
One key initiative is to enhance our value added solution selling capabilities.
Beyond individual product sales belden is uniquely positioned to offer a complete and differentiated solutions, including cable connectivity networking and software products and services.
Given our product breadth and application expertise customers are increasingly turning to belden to solve their complex networking issues.
And enabled them to collect and analyze vast amounts of data.
Our sales and engineering teams are engaging with customers to optimize their operations increase productivity.
And improve safety.
I would like to highlight two recent project wins in industrial automation that illustrate our solution selling capabilities first.
In the logistics area, we recently engaged with a world leader in warehouse automation systems that provides conveyors material handling racks and other equipment to large warehouse operators.
This is a lifetime belden customer that recently expanded our engagement to include a complete factory for network assessment.
As a result of this milestone award we expect to deploy a comprehensive networking solution across more than 20 facilities for this customer.
And the second recent project, we engaged with a rapidly growing provider of robotic supply chain systems that utilizes automated guided vehicles or a G fees and large scale warehouses.
This application will include the design and implementation of next generation wireless HEV communication networks optimizing the operation for hundreds of Hev's at each site.
This represents a significant new revenue opportunity with this customer.
These are just two examples of recent customer engagements that illustrate how belden is transitioning from a product supplier to a value added partner in the design and implementation of advanced solutions.
We are very excited about the progress we are making on this important growth initiative.
Please turn now to slide five for a review of an innovative new product.
We are making targeted investments throughout the company to develop new and innovative products that support our value added solutions strategy and.
And one new product that I like to highlight in the industrial automation market is a new cellular communications gateway called Pro link edge.
This product is designed to help customers established remote connection to their machines.
And monitor data via a secure cloud based network.
Customers will now be able to use this single integrated device.
There's multiple components were previously required to provide the same functionality.
We expect to continue developing innovative new products and complete networking solutions to support our customers and increase our growth opportunities.
Now please turn to slide six in our presentation for a review of third quarter highlights.
As I mentioned, we delivered meaningful growth and margin expansion again this quarter with total revenues and EPS that exceeded our expectations.
Third quarter revenues increased 33% year over year to $631 million compared to our guidance range of 592, six or $5 million.
Organic growth is a key priority.
And revenues increased 24% year over year on an organic basis.
The better than unexpected performance was broad based.
With contributions from both the industrial solutions and enterprise solutions segments.
EBITDA increased 54% year over year to 100 on $1 million.
EBITDA margins expanded 230 basis points from 13, 7% in the year ago period to 16%.
EPS increased 82% year over year to $1 31.
Compared to 72 cents in the year ago period, and our guidance range of $1 11 to $1 21.
We are increasing our guidance once again.
For the full year 2021, we are increasing the high end of our revenue and EPS guidance ranges by $50 million and 20, respectively.
Turning now to our key strategic markets we.
We had another great quarter in industrial.
Industrial solutions revenues increased 30% organically in the third quarter.
Market conditions remain very healthy.
And we continue to see a number of compelling longer term demand drivers for automation solutions as industrial customers respond to increasing labor costs.
Increasing capacity and productivity requirements and other factors.
Belden is highly differentiated in the marketplace and we expect to deliver solid growth in this market moving forward.
Turning now to enterprise.
Enterprise solutions revenues increased 18% year over year on an organic basis in the third quarter, driven by improving end market trends and significant share capture in broadband and fiber <unk> and smart buildings.
Within the segment revenues in broadband and fiber <unk> increased 6% organically.
We see strong secular trends in this market driven by the ever increasing demand for high speed broadband and the desire to provide greater access.
We have a sustainable competitive advantages in this market and we are ideally suited to support both NSO and telco customers.
They continuously upgrade and expand their networks.
Revenues in smart buildings increased 32% year over year, and 13% sequentially on an organic basis substantially exceeding our expectations.
We are very encouraged by the improvements we are seeing in this market and the strong execution by our teams.
We are benefiting for our commercial focus on growth verticals, such as data centers and health care facilities.
In addition, our improved operational performance and superior lead times are enabling continued share capture.
To summarize we had another great quarter we.
We are committed to driving robust organic growth and are encouraged that our strategic initiatives are gaining traction.
I will now ask Jeremy to provide additional insight into our third quarter financial performance Jeremy.
Thank you rule, please turn to slide seven for a detailed consolidated review.
I will start my comments with results for the quarter.
Following by a review of our segment results and a discussion of the balance sheet and cash flow performance.
As a reminder, I will be referencing adjusted results today.
Revenues were $631 million in the quarter, increasing 155 million or 33% from $476 million in the third quarter of 2020.
Revenues increased 24% year over year, and 6% sequentially on an organic basis.
We have not seen significant restocking by our channel partners and we believe this revenue performance is consistent with robust end demand.
Incoming order rates remained strong during the quarter, increasing 48% year over year and approximately flat sequentially compared to the very strong orders in the second quarter.
This resulted in a book to Bill ratio of 113 times, including 1.2, and industrial solutions and 1.05 in enterprise solutions.
Gross profit margins in the quarter were 36, 1%.
Increasing 80 basis points compared to 35, 3% in the year ago period.
As a reminder, as copper costs increase we raise selling prices, resulting in higher revenues with minimal impact to gross profit dollars as a result gross profit margins decrease.
In the third quarter the pass through of higher copper prices had an unfavorable impact of 210 basis points.
Excluding the impact of this pass through gross profit margins would have increased 290 basis points year over year, we're 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 additional price recovery and productivity measures to support gross profit margins.
EBITDA was $101 million, increasing $36 million or 54% compared to $65 million in the prior year period.
EBITDA margins were 16%, increasing 230 basis points compared to 13, 7% in the year ago period.
Excluding the impact of higher copper pass through pricing.
<unk> margins would have increased 310 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 2021.
Our effective tax rate was 18, 5% in the third quarter as we benefited from incremental discrete tax planning items.
We expect an effective tax rate of approximately 20% in the fourth quarter and 19, 1% for the full year 2021.
Net income in the quarter was $60 million compared to $32 million in the prior year period.
And earnings per share was $1 31 increase.
Increasing 82% compared to 72 cents in the third quarter of 2020.
We were very pleased to deliver such robust growth and margin expansion in the quarter.
Turning now to slide eight in 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 in harsh industrial environments our.
Our key markets include discrete manufacturing.
<unk> facilities energy and mass transit.
The industrial solutions segment generated revenues of $345 million in the quarter, increasing 40% from $247 million in the third quarter of 2020.
Segment revenues increased 30% organically with broad based strength across each of our primary market verticals.
Nonrenewable bookings for our integrated cyber security solutions increased 10% year to date and industrial markets.
Industrial solutions segment, EBITDA margins were 17, 3% in the quarter, increasing 170 basis points compared to 15, 6% in 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 networks. Our key markets include broadband five G and smart buildings.
The enterprise solutions segment generated revenues of $286 million during the quarter, increasing 25% from $229 million in the third quarter of 2020.
Segment revenues increased 18% organically.
Revenues in broadband and <unk> increased 6% year over year on an organic basis due to healthy end market demand and solid share capture.
As a reminder, broadband and fiber <unk> revenues increased in the third quarter of 2020 and revenues are now up double digits compared to the pre COVID-19 period.
Demand for our broadband fiber products remains strong with orders, increasing 28% year to date.
Revenues in the smart buildings market increased 32% year over year, and 13% sequentially on an organic basis.
<unk> exceeding our expectations.
Improving market conditions and strong operational performance resulted in further share captured during the quarter.
Enterprise solutions segment, EBITDA margins were 14% in the quarter, increasing 250 basis points compared to 11, 5% in the prior year period.
If you will please turn to slide nine I will begin with our balance sheet highlights.
Our cash and cash equivalents balance at the end of the third quarter was $458 million compared to $423 million in the second quarter and $391 million in the prior year period.
We are very comfortable with our current liquidity position.
Working capital turns were seven eight compared to seven six in the prior quarter and $6 six in the prior year period.
Days sales outstanding of 56 days compared to 53 in the prior quarter and 58 in the prior year period.
Inventory turns were five two compared to $5 one in the prior quarter and 5.0 in the prior year.
Our financial leverage improved significantly again this quarter net leverage of two eight times net debt to EBITDA at the end of the third quarter is back within our targeted range of two to three times.
This compares to three three times in the second quarter and four times in the first quarter.
We expect net leverage to trend even lower in the fourth quarter, which is seasonally the strongest quarter of the year, where free cash flow generation.
Turning now to slide 10 I.
I will discuss our debt maturity schedule.
As a reminder, our debt at the end of the third quarter was entirely fixed at attractive interest rates.
We have no near term maturities and no maintenance covenants on its debt.
During the quarter, we took steps to further strengthen the balance sheet and extend our maturities.
Specifically in July we issued $300 million euros, a new 10 year notes maturing in 2031.
The interest rate on these notes is three 375%.
We were very pleased with this transaction.
We used the proceeds from this transaction during the third quarter to redeem the full 300 million euros outstanding on our 2025 notes.
As a result, our.
Debt maturities now range from 2026 to 2031 with an average interest rate of three 6%.
This provides significant financial flexibility as we execute our strategic plans.
Cash flow from operations in the third quarter was $75 million.
Increasing 47% compared to $51 million in the prior year period.
Net capital expenditures were $25 million for the quarter compared to $15 million in the prior year period.
The year over year change, primarily reflects the timing of capital projects.
And finally free cash flow in the quarter was $50 million, increasing 41% compared to $36 million in the prior year period.
We are pleased with the year to date free cash flow generation of $50 million, which is approximately $65 million better than the year ago period.
And we now expect free cash flow of approximately $175 million for the full year 2021 compared to $86 million in 2020.
That concludes my prepared remarks, I would now like to turn the call back to our president and CEO rule vaccines for the outlook rule. Thank you Jeremy.
Please turn to slide 12 for our outlook.
Demand trends remain encouraging and our global teams are executing at a high level.
We are increasing our full year 2021 guidance to reflect better than expected performance in the third quarter and an improved outlook for the fourth quarter, while considering the challenging operating and supply chain environment.
We anticipate fourth quarter 2021 revenues of $615 million to $630 million and EPS of $1 21 to $1 31.
For the full year 2021, we are increasing the high end of our revenue guidance range by $50 million.
We now expect full year revenues of 2.385 to $2 4 billion.
Baird to prior guidance of two three to.
Two to three 5 billion.
Our revised full year guidance implies consolidated organic growth of approximately 19% to 20%.
Compared to our prior expectation of 15% to 17%.
We now expect full year 2021, EPS to be $4 67 to $4 77.
Compared to prior guidance.
The $4 37 to $4 57.
Our revised guidance for the full year implies total revenue growth of 28% to 29% and EPS growth of 70% to 73%.
Please turn to slide 13.
Before we conclude I would like to reiterate that I'm extremely optimistic about the future.
As we align our business around secular growth markets. We are taking bold actions to drive substantially improved business performance.
Are much better than expected results. This year show the benefits of our investments in solutions, selling and new product innovation.
I am confident that our team will continue to execute our strategic plan to deliver robust organic growth and margin expansion.
Driving significant value for our shareholders.
That includes that concludes our prepared remarks, David Please open the call to questions.
Thank you again, if you would like to ask a question during the Q&A session. Please press star one on your Touchtone phone.
If you would like to withdraw your question Press Star two.
Please limit yourself to one question and a follow up.
<unk>. Your first question is from Rubin Gardner.
Of the benchmark company.
Thanks, Good morning, everyone.
Good morning Reuben.
Congrats on the strong results and outlook I know, it's not the easiest environment out there.
Let's say some of the I'm sure their supply chain questions I do.
I am curious about the current price cost setup.
Maybe if you could just talk about.
Copper.
And how how passing that through is going and then any other.
Any other material.
Material material cost inflation that you are.
Facing and how the pricing environment is.
Okay. So first of all thank you for the kind words secondly.
Yeah, obviously, we're seeing those pressures, we're seeing input costs rise, but I've been very pleased with our ability to pass those costs on to our customers whether it is copper or all the other material that we're seeing that our global shortages of enhanced increased pricing.
And I think that illustrates the value that we provide to our customers I think it illustrates our position in the value chain.
And how we are perceived value is perceived by our customers. So.
As you saw by the additional revenue, but more importantly by the margin that is created of the revenue growth.
We're doing a pretty decent job at bashing all of that on to our consumers.
Perfect and then.
I've heard some comments about the commercial world running into some issues.
Doesn't sound like that's an.
Putting that in your smart buildings business, maybe just an update there what you're seeing from a demand perspective has there been any.
You know broader.
The indications that we're going to see a slowdown or do you have.
We'll continue to see growth going into 2022.
Yeah.
I appreciate the question so our results were better than anticipated, but specifically within the enterprise solutions segment, and then smart buildings, they were especially strong.
And we're seeing the two there's two drivers first of all the overall Abi index right that we carefully watch is still above 50 is about 56 I think the most recent number out there. So the core business. If you will is growing.
But I think more importantly, as you may remember Reuben we said I think it was the beginning of the year. It could be end of last year that we are reallocating resources from commercial real estate to some of the faster growing verticals within smart buildings.
Having on your revenue bookings thank you.
[noise] well. Thank you for the question will so first of all as we've is Jeremy explain or bookings were extremely strong Ah I think it's the second quarter in a row or at a book to Bill that's above 1.1.
So our backlog has never been so high to be honest.
But secondly, I think we're doing a good job at securing the materials that is required and hanging onto the labor force.
And hence the reason why we can guide so strong.
Q4 relative to Q3 for example.
So yes, we are not immune to the challenges.
But as we've demonstrated now for three quarters in a row, where the teams are doing a pretty good job at securing the material and labor so that where he can at that we're able to satisfy our customers.
Uhm, maybe along the same lines I understand the book to Bill is very strong I forget for Belden, how meaningful that is can you remind us since the.
Ration of your backlog, perhaps typically and what it looks like today.
Yeah I will.
Use me this is Jeremy so you're right the backlog generally not that significant for us.
Where typically operating at a backlog that maybe.
Four to eight weeks worth of demand for.
For now it it's it's more significant than that.
So the backlogs up significantly versus where it was a year ago and we are seeing more ordering.
Earlier by customers. So customers are placing orders for the next quarter or maybe even two quarters out so that phenomenon.
Is taking place with US which is part of the reason that orders are so strong at the moment, but it's still by and large the backlog is not.
The most meaningful metric for us as a company.
Great. That's helpful. Thanks, and congrats on the very good results and outlook.
Thank you.
Our next question comes from Noel Dilts stifle.
Hi, guys and congratulations on that.
One corner.
You can kind of do catch on your longer term Martin expectations I know.
Sure.
What kind of artwork period, you talked about the long term, 20% to 22% go I think that with <unk>.
You know with the two Hunter Green.
Cable for my portfolio. It seems like that's kind of a stretch target that maybe you could give us an update on how you're thinking about Martin targets over the next few years.
Yes. Thank you I appreciate the kind words, so that is still our goal R for financial goals, so, including the longer term EBIT margin of 20% to 22% goal has not changed.
We feel good about achieving that goal.
A cough or it has indeed.
Fact, so when we published that goal gulp or was that a certain rate and now copper being significantly higher than that has an effect of at least 100 basis points. So if we report 16% approximately this year, it's 17% compared to the 20% to 22% goal that we published.
But we're well on our way and we feel good about.
We feel good about achieving that goal.
Okay, Great and then you know obviously I think you'll probably talk more about 2022 in a month or so but any kind of initial thought on how are you thinking about about growth for the year and if you look back at it sort of where we were last year, where you're feeling incrementally more positive than.
And maybe a little bit more cautious as we look out to next year.
Yeah I appreciate the question of well, but it's obviously C still a little bit early days.
It's still pretty murky out there we feel good about our results. This year, we feel good about the investments that we've made.
As I mentioned in my prepared remarks, I think it's fair to say that are paying off but we will provide guidance for 2022, when we announce our queue for results in February.
Okay. Okay got it thank you.
Thanks doll.
Your next question comes from Stephen Fox Fox Advisors.
Hi, Good morning, a couple of questions first of all.
From an outsider looking in it seems like you're almost seamless seamlessly passing on a lot of inflation.
Pressure. So your customers I was wondering if you could sort of dig into that I know, it's obviously a margin hit but if you're not it.
It doesn't seem like you're absorbing much inflation. So can you just sort of <unk> work through why that's the case.
Outperforming some of the other.
Other players in the field and then secondly, you mentioned market share gains a bunch of times I was curious if you could dig into some of the wives behind that.
Especially in industrial on broadband thanks.
Yeah. So I appreciate the question so first of all.
I think it's.
Estimate of the value.
So and I think the perceived value and the increased value that we provide to our customers goes hand in hand, but our solution selling approach. So if we sell if one of our competitors ourselves from nearly one component I think it's harder to pass on the price increase as if they provide a complete solution that aspect in with.
An end user whether it's a machine builder, whether it's somebody that owns a factory floor or the two examples that I gave it might be bettered remarks.
So I think it's that.
Are purchasing teams work hard.
Our supply chain games work hard and are.
Sales people work hard.
But I think ultimately it's how we are being perceived in the value that we that we.
Generate for our customers that drive that ability to.
Best inflationary pricing.
On the market share side.
I think we gain we've gained quite significant market share in our smart building segment and I think that's the reason for that is our operational performance. That's at least what we hear from our customers and our channel partners.
We're doing a fairly decent job at keeping the factories running and maintaining lead times and doing a better job I suppose.
On the delivery performance and broadband and five G.
I think it's R us competitive advantage to sustainable competitive advantage that we have in terms of our intellectual property protection and in terms of the customer intimacy that we have so we're very very tied to our customer base develop solutions jointly with our customers.
And hence do a pretty decent job at executing and growing a business.
And how 'bout industrial.
So on the industrial side it comes down to that's why the two examples that we gave in our prepared remarks were industrial automation examples to our solution selling approach we've made the appropriate investments in our customer innovation centres.
We've made the appropriate investments in R&D.
To make sure that we remain highly innovative and.
Develop the solutions joining with our customers. So that's how I would attribute the success and the industrial automation.
Great. Thank you very much.
You got it.
Your next question comes from Marc Delany of Goldman Sachs.
Yes. Good morning, Thanks, very much for taking the questions first one data center the company called that out as an area of strength is hoping you could provide some more details on on that.
Is that more of an on premise.
Part of the business showing strength some hyperscale just more details on on on that business would be helpful to start thanks, yeah.
Yes. Thank you Mark I appreciate the question.
Indeed, we are very pleased with the success.
And we are getting more involved in our customers asking us more early on in to cycle to add value in terms of design of the data centers and then the type of data centers are virtually all enterprise Oden Datacenters soda hyperscale is not an error.
Of strategic importance does it's not an area that we focus on.
Understood in English and was on on the broadband business you there is some potential.
Stimulus money tied to broadband projects and the infrastructure, but I realised hasn't passed yet, but the bookings have been very good I'm curious do you think you're potentially seen some of that.
Bookings come in it was potentially customers anticipating.
More more support for for broadband projects. So if that bill passes or would you think that those bookings are mostly still to come. Thanks.
I really appreciate the question.
So those bookings are still to come that's the good news all of that tailwind is yet to come as you rightfully pointed out the bill is not passed and secondly, the art off fund the rule development opportunity fund that was fast earlier those funds have not been distributed yet either so there's a lot of tailwind that is still.
Hmm.
[noise] got it thank you.
Your next question comes from Chris Stinker of loop capital.
Hey morning, everyone.
Again I appreciate the slide deck I guess you highlighted we are seeing nice organic growth here. Obviously, you solution sales folks is a big part of that the Upticked R&D, obviously, having an impact here, but out of curiosity. When we think about R&D spending going forward are we comfortable at this level do we need to take it up a little bit further just seemed success there how do we think about r&d's.
Spending kind of over the next couple of quarters or just any color that would be helpful.
Sure Yeah I appreciate the question well it is indeed very rewarding to see that the investments are paying off so thank you for noticing that.
We're comfortable with the current level of investment as a percentage of revenue.
So where where we've made the investments were tracking the productivity of the R&D investments.
I think the teams are executing to utilizing the funds effectively.
And as a percentage of revenue. This is probably the level that we feel comfortable with.
Got it thank you for that.
I'll try and take a slightly different tacked on this understands too early on 22, but just given the bookings strength and the order strength that you've got kind of a cross the visit is it fair to assume maybe a better than seasonal start to the year.
Yeah as I said, we feel we feel good we feel good about the company we feel good about what we're doing.
But it is still murky out there so I want to make sure that when we provide guidance and that we make comments that we actually are able to follow through on them and deliver and according to the expectations that you all should have and that our shareholders should have a feldman so.
So we'll wait until February to provide guidance for 2022.
Fair enough fair enough well, congrats on the quarter and and best of luck going forward here.
Thank you very much.
If there are any additional questions. Please press star one on your Touchtone phone.
Kevin mascot there are no further questions at this time please continue.
Okay. Thank you David and thank you everyone for joining today's call. If you have any questions. Please reach out to the I R team here at Belden, our email addresses investor Dot relations at Belden Dot com. Thank you.
Thank you ladies and gentlemen, this concludes our call for today you may now disconnect. The call. Thank you for your <unk>.
Meeting.
[music].