Belden [BDC] Conference call transcript for 2022 q3
2022-11-02 15:26:09
Fiscal: 2022 q3
Operator: Ladies and gentlemen, thank you for standing by. Welcome to this morningâs Belden Third Quarter 2022 Earnings Results Conference Call. I would now like to turn the call over to Jeremy Parks. Please go ahead, sir.
Jeremy Parks: Thank you, Mary. Good morning, everyone, and thank you for joining us today for Beldenâs Third Quarter 2022 Earnings Conference Call. This is Jeremy Parks, Beldenâs Chief Financial Officer. With me this morning is Beldenâs President and CEO, Roel Vestjens. Roel will provide a strategic overview of our business, and then I 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 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.belden.com. Turning to Slide 2 in the presentation. During this call, management will make certain forward-looking statements. For more information, please review todayâs press release and our most recent annual report on Form 10-K. Additionally, during todayâs 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, Roel Vestjens. Roel?
Roel Vestjens: Thank you, Jeremy, and good morning, everyone. As a reminder, Iâll be referring to adjusted results today. Please turn to Slide 3 for a summary of todayâs presentation. We delivered another outstanding quarter with total revenues and EPS that exceeded the high end of our guidance ranges for the 10th straight quarter. Further, we delivered a company record of $1.77 of EPS. I would like to thank our global teams for their strong execution in navigating a complex and challenging environment while supporting the needs of our customers. Revenues in the quarter increased 15% organically and the increase was broad-based across our businesses, demonstrating the continued strength of the secular trends behind our portfolio. We continue to transition from a supplier of trusted products to a value-added partner in the design and implementation of network infrastructure solutions. We are very excited about our progress, which is reflected in our strong financial performance. Our capital allocation strategy continues to be balanced and to drive shareholder value. Accordingly, we have executed on $150 million in share repurchases year-to-date through October. And as we increased EBITDA and generated $110 million of free cash flow, net leverage declined to 1.1x at the end of the third quarter. We are comfortable with that leverage at this level, which is below our target of 1.5x. After another strong quarter, we are increasing our guidance for the year. The revised revenue guidance now represents consolidated organic growth of 15% to 16% compared to our prior expectation of 12% to 13%. Additionally, we increased our EPS guidance by $0.27 at the high end, resulting in full year EPS growth of 32% to 34%. Now please turn to Slide 4, and I will provide highlights of some recent customer wins. I am pleased with the progress our teams have made on our strategic initiatives, including investments in new product innovation and our solution selling capabilities in order to capitalize on the secular tailwinds in our markets. I would like to highlight 2 recent examples of customer wins within industrial automation that demonstrate our progress in these areas. First, we received the initial Belden Horizon order. Belden Horizon is a cloud-based software platform that meets the fast-growing customer need for a simple, secure and reliable way to connect operations systems at the edge while maintaining security and communication with the cloud. Our customers recognize the benefits of using Horizon to provide remote support for their operations, allowing them to reduce project delivery time without compromising on security. We are excited about the many opportunities in our pipeline that include this important new edge connectivity product as part of a complete network solution. Second, we received a large order in the quarter for our next-generation industrial gateways and related hardware from a large U.S.-based semiconductor manufacturer. The customer is increasing capacity, and our solutions will be based in a brand-new facility for computer chips being built right here in the U.S. Our solutions will enable seamless communications between disparate machines on the factory floor and from the machines to the cloud. These examples give us confidence in the strength of the secular trends in industrial automation and our strategic investments. Now please turn to Slide 5 in our presentation for a review of the third quarter highlights. We delivered meaningful growth and margin expansion again this quarter. Third quarter revenues increased 11% year-over-year and 15% organically to $670 million, exceeding our guidance range of $625 million to $640 million. And our revenue performance was strong in both the Industrial Automation Solutions as well as the Enterprise Solutions segments. We had another impressive quarter in Industrial Automation. Industrial Automation revenues increased 16% organically in the third quarter. We continue to see compelling longer-term demand drivers for automation solutions as industrial customers respond to labor shortages, capacity requirements and reshoring of production. Enterprise Solutions increased 14% year-over-year on an organic basis in the third quarter, driven by continued strength in the broadband markets and solid execution in meeting customer delivery requirements. Within the segment, revenues in broadband and 5G increased 23% organically. In addition to the strong end demand environment, revenues in the quarter benefited from our operational execution to meet accelerated customer delivery time lines for key products. We continue to see strong demand from network operators for our fiber connectivity products. Some of these customers have begun to receive early phases of RDOF funding, and they are now delivering on projects to provide fiber connections to underserved regions. We offer easy-to-use fiber solutions, such as our mini Flex product family, which allows customers to install fiber connections quickly and reliably, another example of our product innovation yielding results. We see long-term secular trends in this market, driven by the ever-increasing demand for high-speed broadband and the resulting investments required to upgrade networks. Revenues in smart buildings increased 6% organically, and I continue to be pleased with our commercial focus on growth verticals, such as data centers, government and health care facilities, which are up over 15% organically on a year-to-date basis. EBITDA in the third quarter increased 17% year-over-year to $118 million. EBITDA margins expanded 90 basis points from 16.7% in the year ago period to 17.6%. The EPS increased 33% year-over-year to a record $1.77 compared to $1.33 in the year ago period and our guidance range of $1.50 to $1.60. Additionally, we ended the quarter well positioned with net leverage of 1.1x remaining below our target of 1.5x. This level of net leverage provides us with significant flexibility to execute our strategic plans while pursuing M&A and returning capital to shareholders. In summary, this was another excellent quarter for Belden, and Iâm very proud of the achievement of our teams. I will now ask Jeremy to provide additional insight into our third quarter financial performance. Jeremy?
Jeremy Parks: Thank you, Roel. Please turn to Slide 6 for a detailed consolidated review. I will start my comments with results for the quarter, followed 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 $670 million in the quarter, increasing $65 million or 11% from $605 million in the third quarter of 2021. Revenues increased 15% year-over-year on an organic basis. As expected, we began to modestly work down our record backlog during the quarter, a result of solid execution to meet customer delivery requirements, particularly in broadband and 5G. Accordingly, our book-to-bill ratio this quarter was 0.95x. On a year-to-date basis, our book-to-bill ratio remains very healthy at 1.09. While we expect to continue working down the backlog in the fourth quarter, we expect to enter 2023 with nearly 20% more backlog than we had at the start of 2022. Gross profit margins in the quarter were a robust 36.2%, increasing 190 basis points compared to 34.3% in the year ago period and 180 basis points sequentially. Gross profit margins benefited from leverage on higher volume and the impact of price increases enacted earlier in the year. EBITDA was $118 million, increasing $17 million or 17% compared to $101 million in the prior year period. EBITDA margins were 17.6%, increasing 90 basis points compared to 16.7% in the year ago period, driven by the strong gross profit margin performance. Net interest expense declined $6 million from the year ago period, benefiting from the early debt repayment that we completed in the first quarter as well as favorable foreign exchange rates. At current foreign exchange rates, we expect interest expense to be approximately $10 million in the fourth quarter and $45 million for the full year 2022. That compares to $63 million in 2021. Our effective tax rate was 18.9% in the third quarter. We expect an effective tax rate of approximately 20% for the fourth quarter of 2022, resulting in a full year effective tax rate of approximately 19.3%. Net income in the quarter was $78 million, up 28% from $61 million in the prior year period. Earnings per share was a record $1.77, increasing 33% compared to $1.33 in the third quarter of 2021. We were very pleased to deliver such robust growth and margin expansion once again. Turning now to Slide 7 in the presentation for a review of our business segment results. I will begin with our Industrial Automation Solutions segment. As a reminder, our Industrial Solutions allow customers to transmit and secure audio, video and data in harsh industrial environments. Our key markets include discrete manufacturing, process facilities, energy and mass transit. The Industrial Automation Solutions segment generated revenues of $351 million in the quarter, increasing 10% from $319 million in the third quarter of 2021. Segment revenues increased 16% on an organic basis with double-digit growth in each of our primary market verticals. Industrial Automation segment EBITDA margins were 20.2% in the quarter, increasing 140 basis points compared to 18.8% in the year-ago period due to solid operating leverage on volume growth and favorable pricing. 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 and 5G and smart buildings. The Enterprise Solutions segment generated revenues of $319 million during the quarter, increasing 12% from $286 million in the third quarter of 2021. Segment revenues increased 14% organically. Revenues in broadband and 5G increased 23% year-over-year on an organic basis due to solid execution and strong demand for our fiber connectivity products. For the full year, we expect organic growth for fiber products of more than 50%. Secular trends in this business remain strong, and we are encouraged by the early impacts of government funding for fiber in rural areas. Revenues in smart buildings increased 6% year-over-year and 5% sequentially on an organic basis. Our continued focus on growth verticals, particularly health care and enterprise data centers contributed to the solid financial performance. Enterprise Solutions segment EBITDA margins were 14.4% in the quarter compared to 14.1% in the prior year and 13.6% in the second quarter. If you will please turn to Slide 8 for our balance sheet highlights. Our cash and cash equivalents balance at the end of the third quarter was $547 million compared to $528 million in the second quarter and $456 million in the third quarter of 2021. Days sales outstanding of 59 days were in line with 60 days in the prior year and 59 days in the prior quarter. Inventory turns were 4.9 compared to 4.5 in the prior quarter and 5.1% in the prior year. Our financial leverage was 1.1x net debt to EBITDA at the end of the third quarter compared to 1.4x in the second quarter and 2.9x a year ago. As we communicated in our recent Investor Day, we intend to maintain net leverage of approximately 1.5x going forward. During the quarter, we repurchased approximately 1.2 million shares for $70 million. On a year-to-date basis, through fiscal October, we repurchased approximately 2.6 million shares for $150 million. Following these repurchases, we have $65 million remaining on our existing authorization. Going forward, we intend to maintain a disciplined financial policy. Our capital allocation priorities will be balanced, emphasizing organic growth initiatives while also considering strategic M&A and additional share repurchases. Please turn to Slide 9 for our cash flow highlights. Total cash flow from operations in the quarter was $87 million, up 16% compared to $75 million in the prior year period. Capital expenditures were $19 million for the quarter, down slightly from $25 million in the prior year period. During the quarter, we received $42 million of proceeds from the sale of a building in New Jersey. We sold the building after we consolidated distribution centers in the United States earlier this year as part of our commitment to lean enterprise. Due to the higher cash flow from operations and the proceeds from the asset sale, free cash flow in the quarter was $110 million compared to $50 million in the prior year period. For the full year 2022, we continue to expect free cash flow to exceed $200 million. That concludes my prepared remarks. I would now like to turn the call back to our President and CEO, Roel Vestjens for the outlook. Roel?
Roel Vestjens: Thank you, Jeremy. Please turn to Slide 10 for our outlook. Once again, we are increasing our revenue and EPS guidance for 2022. The market environment remains very dynamic with considerable challenges and uncertainties. However, we entered the fourth quarter of the year with significant levels of customer backlog, and we continue to gain momentum with our strategic growth initiatives. We expect underlying demand in the fourth quarter to be in line with the third quarter. However, compared to third quarter revenues, fourth quarter revenues are expected to be lower due to a stronger U.S. dollar and Difficult seasonal patterns. Accordingly, we anticipate fourth quarter 2022 revenues of $635 million to $650 million and EPS of $1.60 to $1.70. For the full year, we now expect revenues of $2.53 billion to $2.98 billion compared to prior guidance of $2.52 billion to $2.55 billion. Our revised revenue now represents consolidated organic growth of 15% to 16% with solid growth in both segments compared to our prior expectation of 12% to 13%. We expect full year 2022 EPS to be $6.27 to $6.37 compared to our prior guidance of $5.90 to $6.10. For the full year 2022, our new guidance represents EPS growth of 32% to 34%. Please turn to Slide 11. Now before we conclude, I would like to reiterate our value creation framework. Our commitment is to drive EPS to $8 or more by 2025. Now achieving our new EPS guidance of $6.37 for 2022 will represent solid progress towards reaching our longer-term goal. Belden is well positioned to benefit from the long-term favorable secular trends in industrial automation, broadband and 5G and smart buildings. Iâm confident that our teams will continue to drive significant value for our shareholders. Now that concludes our prepared remarks. Mary, please open the call to questions.
Operator: We now take our first question from Chris Dankert of Loop Capital.
Christopher Dankert: Hey good morning everyone thanks for taking the question.
Jeremy Parks: Good morning, Chris.
Christopher Dankert: Yes, good morning. I appreciate that you hold the strength in fiber and broadband more holistically. I guess, just wanted to put a fine point on it. Weâre just seeing the early days of our DOS investment. We really havenât seen any dollars flow from the Infrastructure & Jobs Act yet, correct?
Roel Vestjens: Yes, thatâs correct.
Christopher Dankert: Okay. Perfect. And I guess to kind of further pull that line, I mean, obviously, fiber is very, very good. But I guess just given the more normalized growth in smart buildings, I guess, what are you seeing in data center? I know thereâs some concern out there about the hyperscaler slowing down? Just any thoughts on data center and kind of what those growth prospects look like kind of into the fourth quarter and beyond here?
Roel Vestjens: Yes. So let me answer the question twofold. First of all, weâre not seeing a significant slowdown in our growth verticals at all. So we remain very bullish. Two is, yes, itâs a more normalized growth at 6%. I agree with you. However, the business grew 5% sequentially, and it was up against a very tough comp. So smart buildings grew 32% organically in the third quarter of last year. So still very, very strong.
Christopher Dankert: Yes, absolutely thanks for the color on that.
Roel Vestjens: Yes. Remind you, Chris, we donât play in hyperscale data centers. So thatâs not an area that we deploy resources in.
Christopher Dankert: Perfect. Perfect. And I guess just one last follow-up for me, maybe just any comments on pricing or kind of the impacts of price in raws in the quarter?
Roel Vestjens: As weâve been able to do all year, we were successful in passing on the price increases that weâve seen, the labor inflation that weâve seen. Obviously, input prices have normalized a little bit. Theyâve come down a little bit, and we adjust our pricing accordingly. So nothing to report.
Christopher Dankert: Understood. Well, again, congrats on the quarter, really nice results here
Jeremy Parks: Appreciate that.
Operator: And we can take our next question from Noelle Dilts of Stifel.
Noelle Dilts: I was hoping you could just give us an update on how things are progressing with your SaaS and DAS initiatives and any progress since last quarter?
Roel Vestjens: Well, itâs first of all, weâre pleased with the progress. Secondly, revenue in that area is still very, very small. We are very encouraged by the Belden Horizon order, which is a huge stepping stone into eventually becoming a network as a service provider. So weâre pleased with the progress. Our sales funnel is extremely healthy, and we are very pleased and therefore, we specifically called it out that weâre now seeing the first orders roll in over SaaS offering.
Noelle Dilts: Great. And then could you just kind of, this is a question, I think, a little bit more for Jeremy. But could you just dig into your margin expectations by segment moving forward, even if you can give us some early thoughts into 2023. Iâd be curious to hear how youâre thinking about that split.
Jeremy Parks: Yes. So weâre not going to guide into 2023 at this point, but I can give you a general sense. So what I would say is if you look at the performance year-over-year in 2022, I think our EBITDA margins will improve by roughly a 100 basis points and maybe a little bit better than that in Industrial Automation and a little bit lower than that 100 basis points in Enterprise driven by the fact that variable margins in industrial automation are a little bit higher. Looking forward into 2023, I think itâs highly dependent on our volume. So for instance, if we were to grow consistent with mid-single digits, and Iâm not guiding that by any means for 2023, I think itâs very early. But consistent with our Investor Day, you would expect about 60 basis points of margin expansion year-over-year. And I would peg that at roughly maybe 60 or 70 basis points in industrial automation and a little bit less in enterprise. So I think weâll make good progress in both platforms, but I also think itâs highly contingent on the growth.
Noelle Dilts: Great, that makes sense. Thank you
Jeremy Parks: Yes
Operator: We can take our next question now from Ryan of Goldman Sachs.
Unidentified Analyst: And the first one, just on the macro. Could you talk a little bit about how well positioned you think Belden is for a potentially slower macroeconomic environment next year and then which end markets could be a little bit more resilient and which perhaps could be more impacted in that scenario?
Roel Vestjens: Yes, I appreciate the question. So I donât fear the current environment or the environment that we are have a high likelihood of entering, we are significantly better positioned than we have in the past to deal with higher cost of capital, interest rates that are higher in a slowing economy. And Iâll tell you why. Iâll give you two reasons. The first one is applicable to more than 50% of Beldenâs revenue in the Industrial Solutions segment. Weâve worked hard to reposition our solutions to increase the effectiveness of the assets currently on the factory floor. So when we enter an environment where our customers do not build new factories and hence net new networking infrastructure or do not order new machines because they need more capacity, they will utilize their existing assets and they will rely they have to manage their P&Ls as well. So they will rely on companies to increase the effectiveness of the current assets, and that is exactly the road that Belden took. Thatâs exactly the path of a whole solution selling approach that we entered a few years ago. And hence, weâre confident that, that business will remain strong. On the other side of that was the Enterprise Solutions. Weâve only as we recently highlighted in the call, weâve only now started to see the Ardofunding and the funds relationship with the infrastructure bill being passed through to our customers. So we remain bullish about that as well. So I think weâre in summary, we are far better positioned and I think we should fare well
Unidentified Analyst: Thatâs very helpful. And then do you still think that the $20, $25, $8 EPS target is achievable in that slower macroeconomic scenario?
Roel Vestjens: Yes, we do... Yes. Yes, we do.
Unidentified Analyst: Thank you
Operator: And we can now take our next question from Reuben Garner of the Benchmark Company.
Reuben Garner: Congrats on the strong results and outlook, guys
Jeremy Parks: Thank you, Rueben
Reuben Garner: So Jeremy, you referenced the backlog entering 2023. I think you said based on your projections today, it will be 20% higher than it was a year ago. I guess, can you just can you talk about can you talk about how that plays out? What does the backlog ever have orders canceled? What kind of visibility does that give you for next year if things were to maybe turn worse than you expect? And then I guess maybe sorry for all the questions in one, but if you could talk about what that looks like relative to maybe pre-2020 times. I think itâs probably substantially higher than "normal" so thatâs those are all my questions in one...
Jeremy Parks: Yes. Thanks, Ruben. Itâs a good question. So maybe to start with just order of magnitude of the backlog relative to where we were at the end of 2019 in the pre-pandemic times. I think weâll exit with a backlog thatâs roughly 5x where we were back in 2019. So I think it definitely gives us a lot more visibility as we go into 2023 than weâve had in the past. We have not seen any customers pushing orders out or canceling at this point. I think if anything, weâve seen the opposite, which is that customers are hungry for product and anxious for us to get it out the door. So I donât have a significant fear of any order cancellations into next year. I think that I just think weâre in a good spot with significantly more visibility than weâve had in the past. Although I would say weâre not a backlog business. Weâre still a relatively short-cycle business. But I think weâre better positioned than we are going into most years.
Reuben Garner: Any sense, Jeremy, on how many how much, I guess, visibility that really gives you 5x normal. Is that enough to carry a couple of quarters that maybe you wouldnât have seen in previous cycles?
Jeremy Parks: Yes, I would say itâs about 1 quarter and half worth of revenue. Itâs about 30% of our revenue, 30% and pre-pandemic, we would carry maybe a month worth of revenue in backlog at any time.
Operator: Roel Vestjens: Thank you, Mary, and thank you, everyone, for joining todayâs call. If you have any questions, please reach out to the IR team here at Belden. Their e-mail address is investor.relations@belden.com.
Operator: Thank you, ladies and gentlemen. This concludes our call for today. You may now disconnect from the call, and thank you for your participation.
