Belden (BDC) Q2 2024 earnings call transcript

CORPORATE PARTICIPANTS Ashish Chand Belden Inc. – President & CEO Jeremy Parks Belden Inc. – CFO Aaron Reddington Belden Inc. – VP Investor Relations PRESENTATION Aaron Reddington, Belden Inc. – VP Investor Relations Good morning everyone, and thank you for joining us for Belden’s second quarter 2024 Earnings Conference Call. With me today are Belden’s President and CEO Ashish Chand and Senior Vice President and CFO Jeremy Parks. Ashish 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 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 in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For more information, please review today's press release and our most recent 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 contains 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 Ashish Chand.

Ashish Chand, Belden Inc. – President & CEO Thank you Aaron, and good morning everyone. We really appreciate you joining us today. Let’s turn to slide 4 for a summary of the major accomplishments we achieved in the second quarter and key messages I would like to highlight. As a reminder, I will be referring to adjusted results today.

First, let me start by congratulating our team on another solid quarter in light of this dynamic environment. Inventory destocking continues in our markets, however, our performance was stable. For the second quarter, our revenue and EPS both exceeded the high end of our guidance as our solutions transformation continues to push forward. Revenue totaled $604 million dollars and EPS came in at $1.51.

Second, I am pleased to report steady demand for the quarter, similar to what we saw in the prior period. Orders in the second quarter were up 9 percent sequentially, marking the third consecutive quarter of order growth. We ended the quarter with a book-to-bill of 1.0 times, up from 0.9 during the same period last year. Our markets continue to experience headwinds and I am encouraged to see steady execution resulting in performance exceeding our expectations.

Finally, our business continues to generate meaningful cash flow, and we are deploying capital consistent with our capital allocation priorities. Trailing twelve month Free Cash Flow was strong at $234 million dollars, roughly in line with recent performance. With our ample free cash flow, our team continues to reinvest in high-return opportunities beneficial to shareholders. As we announced previously, we closed the acquisition of Precision Optical Technologies during the quarter, providing new product capabilities to further enhance our solution opportunities in the broadband market. Post transaction completion, our proforma leverage remains reasonable at 2.1 times. With ample free cash flow in the second half of the year, we have the opportunity to bring our leverage down closer to our long term target net leverage ratio of 1.5 times as the year progresses.

Now please turn to slide 5 for a summary of our Broadband solutions business after closing the Precision Optical acquisition. Let me take a moment to reiterate why we think the broadband and fiber markets are so attractive. Then, I will highlight some recent initiatives we have taken to strengthen our position in this key vertical. The broadband markets in the US have experienced tremendous growth, with broadband data consumption more than doubling over the past five years. Many secular trends are supporting and driving that growth including: increased reliance on home network for work and entertainment, advancements in technology to increase both access and speeds, and heightened competition between providers to gain customers and market share for broadband services.

These trends are expected to continue, further driving data growth and consequently requiring our customers to make significant capital investments. Fortunately for the industry, there are multiple government stimulus programs designed to support the expansion of broadband access. The most meaningful over the next few years is anticipated to be the Broadband Equity, Access, and Deployment (or BEAD) Program. As time passes and allocations are granted, we are learning more and more about the timing of the massive $42.5 billion dollars BEAD funding initiative. Our best estimates now show the majority of that funding hitting the market between 2025 and 2030, with our business squarely positioned to participate in the development. Further, we see similar dynamics playing out in key markets globally, including in Western Europe.

Now to share about the steps we have taken to strengthen our Broadband Solutions business and how we are positioned to capitalize on the massive increase in broadband infrastructure spending just over the horizon. As you recall, we have been on a multi-year path to broaden our fiber portfolio and grow our broadband business. Our focus has been on expanding into high-growth applications in the broadband network through strategic tuck-in acquisitions combined with organic growth initiatives. To date, we have acquired several businesses in the broadband market with our most recent acquisitions of Sichert in 2023 and Precision Optical Technologies in the second quarter. These acquisitions helped us build a valuable portfolio of fiber products focused on the last mile of broadband networks and gain share with major MSOs as a trusted partner for their upgrade and expansion plans.

Further, we have invested internally in new products and expanded our capacity, most notably with the Fiber Technology Center opened earlier this year in Tucson Arizona. The new facility serves as a multifunctional hub where we house R&D, manufacturing, and distribution functions focused on advancing our leadership position and improving our optical fiber capabilities. Today I am happy to report that our Broadband Solutions business has grown considerably and our product portfolio is positioned for high growth. On a proforma basis, our Broadband Solutions business has revenues of approximately $660 million dollars, of which half comes from fiber and fiber-related products. With our acquisitions and solutions framework, our business is much better positioned to win in the marketplace. As customers seek ways to quickly expand and upgrade their networks supported by massive government stimulus, companies like Belden who can rapidly provide comprehensive solutions will gain market share.

I will now request Jeremy to provide additional insight into our second quarter financial performance.

Jeremy Parks, Belden Inc. – CFO Thank you, Ashish. I will start my comments with results for the second quarter, followed by a review of our segments, a discussion of the balance sheet and cash flow, and finally our outlook. As a reminder, I will be referencing adjusted results today. Now, please turn to Slide 6 in our presentation for a review of our results. Second quarter revenue decreased 13 percent year-over-year and was down 13 percent organically to $604 million dollars, exceeding the high end of our guidance of $580 million dollars. Orders were up 9 percent sequentially, with sequential growth in both segments. We ended the quarter with a book-to-bill of 1.00 indicating continued stability. Compared to the prior year, we experienced softness in both Industrial Automation Solutions, with revenue decreasing 13 percent organically, and Enterprise Solutions, with revenue decreasing 14 percent organically.

Gross profit margins were 38.2 percent, increasing 10 basis points as favorable mix benefits helped to more than offset lower volume. EBITDA came in at $99 million dollars with EBITDA margins down 130 basis points to 16.5 percent. Decremental margins for the quarter performed as expected, in line with our target of 20 to 30 percent. Net income was $62 million dollars, down from $82 million dollars in the prior-year period. EPS was $1.51, above the high end of our guidance range of $1.40. Turning now to slide 7 for a review of our business segment results. For the quarter, performance by segment was aligned with our expectations. Orders grew modestly for the third quarter in a row, in spite of continued slowness in our markets.

For the second quarter, Revenue in our Industrial Automation Solutions segment was down 12 percent compared to the prior year. EBITDA margins were 20.3 percent in the quarter, down from 20.7 percent in the prior year. Orders in Industrial Automation were up 6 percent sequentially, and flat compared to the prior year. For the quarter, we experienced weakness in our discrete end markets, particularly in the EMEA region, where customers continue to manage inventory. For the second quarter, Revenue in our Enterprise Solutions segment was down 13 percent compared to the prior year. EBITDA margins were 11.6 percent in the quarter, down from 14.1 percent in the prior year. Orders in Enterprise Solutions were down 6 percent year-over-year but increased 14 percent sequentially.

As we moved into the seasonally stronger second quarter, Broadband Solutions orders grew 18 percent sequentially, with Smart Buildings up 11 percent. As expected, we continue to see customers destocking in our markets, however its worth noting the pace of destocking has moderated over the past few quarters. Next please turn to Slide 8 for our balance sheet and cash flow highlights. Our cash and cash equivalents balance at the end of the second quarter was $565 million dollars compared to $597 million in the fourth quarter of 2023. However, please note that the cash consideration for the Precision Optical acquisition was transferred shortly after the quarter closed. On a proforma basis, we ended the quarter with $273 million dollars in cash, net of the payable to sellers of Precision Optical Technologies.

Our financial leverage was 1.5 times net debt to EBITDA at the end of the second quarter. On a proforma basis, net of the payable, we ended the quarter with net leverage of 2.1 times. As we communicated previously, we intend to maintain net leverage of approximately 1.5 times over the long term. As a reminder, we generate the majority of our free cash flow in the second half of the year, which gives us the opportunity to continue to reduce leverage and further deploy capital. Year-to-date we have deployed approximately $350 million dollars towards M&A and share repurchases. We currently have $115 million dollars remaining on our current repurchase authorization. As a reminder, our next debt maturity is not until 2027, and all of our debt is fixed with rates averaging 3.5 percent.

Through the second quarter, our trailing twelve-month free cash flow came in as expected at $234 million dollars roughly in line with previous periods. Please turn to Slide 9 for our updated outlook. Order patterns remain steady across our markets as customers navigate this dynamic environment. Relative to the second quarter, end demand is expected to increase modestly with revenues up sequentially. For the third quarter, assuming current market conditions do not deteriorate further, we expect revenues in the range of $635 million to $650 million dollars and adjusted EPS in the range of $1.55 to $1.65. That concludes my prepared remarks. I would now like to turn the call back to Ashish.

Ashish Chand, Belden Inc. – President & CEO Thank you, Jeremy. To close, let me reiterate that the second quarter for Belden was once again steady with orders and end demand reflecting stability in our business. As expected, our customers continue to reduce inventory and operate cautiously in this dynamic environment. However, let’s pause and reflect on where we stand in this cycle. In the third quarter of last year we saw a sharp decrease in orders from our customers, with our orders reaching a post-COVID low. Since then we have slowly but steadily experienced marginal sequential increases in orders over the past 3 quarters, resulting in second quarter orders up nearly 20 percent from our low last year. Certainly destocking continues in our markets, but it is safe to say that the magnitude has come down.

Over the past 2 quarters, our book-to-bill has been 1 or higher and I am encouraged by the execution of our team. I believe we have gained market share during this uncertainty thanks to our solutions transformation.

Looking forward to the third quarter, we see continued stability across our businesses as customers remain watchful. Economic indicators such as inflation are encouraging, and manufacturing PMI figures are improving, however, they are not consistently back into expansion territory yet. As a short-cycle business, our forward view is limited beyond the most current quarter, so it's difficult for us to estimate when these trends will dissipate. What I can say is that our business is positioned well for strong outperformance once we are on the other side of destocking and we will continue to execute in a measured fashion, working to advance solutions and gain share. The long-term secular drivers and investment cycles remain intact, and looking forward, we expect to see higher revenue and EPS through the next cycle.

Reindustrialization is just beginning and our products and solutions are aligned with many secular growth drivers. We are well-positioned to take advantage of the growth opportunities ahead of us, and our balance sheet is strong to enable our expansion. Our team will continue to execute through this temporary weakness and will look for opportunities to gain share where possible. I would like to take a moment and recognize the contributions of our associates this past quarter and welcome the Precision Optical team to Belden. I appreciate your efforts and would like to thank you for your support as we continue to transform Belden through a challenging environment. That concludes our prepared remarks, operator please open the call to questions.