Belden Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to this morning’s Belden Incorporated Conference Call. Just as a reminder, today’s call is being recorded. At this time, you are in a listen-only mode. Later, we will conduct a question-and-answer session. I'd now like to turn the call over to Kevin Maczka. Please go ahead, sir.

[Kevin Maczka:]

Thank you, Sergey. Good morning, everyone, and thank you for joining us today for Belden’s fourth quarter 2020 earnings conference call. My name is Kevin Maczka, I’m Belden’s Vice President of Investor Relations and Treasurer. With me this morning are Belden’s President and CEO, Roel Vestjens and CFO, Henk Derksen. Roel will provide a strategic overview of our business and then Henk will provide a detailed review of our financial and operating results followed by Q&A.

[Roel Vestjens:]

Thank you, Kevin, and good morning, everyone. As a reminder, I’ll be referring to adjusted results today. Please turn to Slide 3 in our presentation for a review of our fourth quarter highlights. Demand trends improved in the fourth quarter, and I am pleased to report that revenues, earnings and cash flow exceeded our initial expectations. Fourth quarter revenues increased 5% sequentially to $498.5 million, compared to our initial guidance range of $460 million to $485 million and our revised guidance range of $494 million to $499 million. The upside relative to our expectations was broad based, with contributions from both the Industrial Solutions and Enterprise Solutions segments. During the fourth quarter, our channel partners further reduced their inventory levels by approximately $22 million as expected, resulting in a reduction of approximately $70 million for the full year 2020. Importantly, this is not expected to recur in 2021. Incoming order rates were solid during the quarter, increasing 13% sequentially. This resulted in a book-to-bill ratio of 1.10 times including a robust 1.16 times in the Industrial Solutions segment. EPS increased 25% sequentially to $0.90, compared to our initial guidance range of $0.63 to $0.78, and our revised guidance range of $0.85 to $0.90. Free cash flow generation was $101 million in the quarter, which exceeded our expectations by approximately $11 million. As a result, we exited the fourth quarter with cash on hand of $502 million, which provides ample flexibility as we pursue our strategic initiatives. Please turn to Slide 4 for a brief discussion of our full year 2020 results. 2020 was a truly unprecedented year, with each of us facing significant challenges related to the global pandemic, both personally and professionally. I am extremely proud of the way our global workforce responded to these challenges and maintained a sharp focus on supporting our customers and executing our strategic plans while maintaining the safest possible working conditions.

[Henk Derksen:]

Thank you, Roel, for the kind words. Before I begin my prepared remarks, I want to express my gratitude to my team, the leadership team and the Board of Directors, the entire finance and IT organization, and so many Belden colleagues around the globe who have shaped my time at the company. I am proud of my role in leading Belden through a substantial transformation, from a regional cable company in the early 2000s to the global networking solutions company it is today. I leave the company with a strong balance sheet and capital structure, and much improved portfolio and I am confident that Belden remains well-positioned for future success. 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 $498.5 million in the quarter, compared to $549.7 million in the fourth quarter of 2019. Revenues decreased 9.3% on a year-over-year basis and increased 4.8% sequentially. After adjusting for a $5.5 million favorable impact from acquisitions and a $14 million favorable impact from currency translation and higher copper prices, revenues declined 12.8% organically on a year-over-year basis. After further adjusting for changes in channel inventory levels, revenues decreased 6.1% organically from the prior-year. On a sequential basis, revenues increased 2.9% organically after adjusting for a $9.1 million favorable impact from currency translation and higher copper prices. After further adjusting for changes in channel inventory, revenues increased 9.6% organically on a sequential basis.

[Roel Vestjens:]

Thank you, Henk. Please turn to Slide 11 for our outlook. 2021 will be a year of recovery in most of our key markets. During the year, we expect to complete our transformative portfolio actions and turn the focus to accelerating organic growth. Our recent order rates are encouraging, and I am confident in our ability to achieve our financial goals and drive superior returns for our shareholders. We anticipate first quarter 2021 revenues to be between $490 million and $505 million, and EPS of $0.60 to $0.70. For the full year 2021, we expect revenues to be between $1.99 billion and $2.050 billion, and EPS of $2.90 to $3.30. For financial modeling purposes, we recommend using interest expense of approximately $61 million for 2021 and an effective tax rate of 20% for each quarter and the full year. This guidance includes the expected accretion from the OTN Systems acquisition. It continues to include the contribution of our copper cable product lines that we are in the process of divesting, which contributed approximately $200 million in revenue and $0.20 in EPS in 2020. We will update our guidance accordingly as we complete these divestitures. Please turn to slide 12 for a bridge that walks from our 2020 results to the high end of our 2021 guidance. We expect current copper prices and foreign exchange rates to have a favorable impact on revenues of approximately $80 million in 2021, with a negligible impact on earnings. We expect consolidated organic growth in the range of 1% to 4%, or up to $70 million, with solid growth in our Industrial Solutions segment partially offset by declines in the Smart Buildings markets within our Enterprise Solutions segment. We anticipate an incremental $36 million in revenue and $0.11 in EPS from the OTN Systems acquisition. Consistent with our commitment, we expect to realize the incremental $20 million in savings under our SG&A cost reduction program. These savings represent $0.36 in EPS. R&D investments are an important strategic initiative designed to drive growth in future periods, but these investments will temporarily pressure margins and EPS in 2021. Finally, a normalized effective tax rate of 20%, along with modestly higher interest expense and share count represent an EPS headwind of approximately $0.20 for the year. For the full year 2021, the high end of our guidance implies total revenue and EPS growth of 10% and 20%, respectively. Please turn to slide 13. Before we conclude, I would like to reiterate our investment thesis. We view Belden as a very compelling investment opportunity, as we are taking bold steps to drive substantially improved business performance. We are significantly improving our portfolio and aligning around the favorable secular trends in our key strategic markets, including industrial automation, cybersecurity, broadband & 5G, and smart buildings. We continue to invest in our business to position the Company for accelerating organic growth and robust margin expansion. As we successfully execute our strategic plans and deliver on our goals, we would expect this to drive superior returns for our shareholders. That concludes our prepared remarks. Sergey, please open the call to questions.

[Operator:]

Our first question comes from Reuben Garner from Benchmark. Please go ahead.

[Reuben Garner:]

Thank you. Good morning, everybody. First of all Henk good luck moving forward and hopefully you stay in touch and Jeremy congrats on the new role. Maybe if we can start off the way the fourth quarter ended and your first quarter guidance is pretty strong. Can you just talk about maybe order trends last year with the confidence that Q1 will already be returning to growth in then in that same kind of thought process the outlook for the year I think would seem a bit conservative just given what you are already seeing in terms of recovery. Can you just talk about how you're thinking about 2021 top line?

[Roel Vestjens:]

Okay. Thank you for the question. So there's a couple of factors to consider. So first of all, we did end the year very strong as we mentioned in our prepared remarks with a bill to bill of 1.1, most notably very strong bill to bill Industrial Solutions segment that we represented in our remarks 1.16 times. Secondly, we are encouraged by the order so far in January. They are in line and trending towards the high end of our guidance. And thirdly, the way that the calendar works out Reuben, we actually have three more shipping days in Q1 than we did in Q1 last year, which means we have three less shipping days in Q4 of this year. So that's why we feel confident that we'll be able to hit our Q1 guidance.

[Reuben Garner:]

And back at the Analyst Day it sounded like 2021 growth in three out of your four business with smart buildings still expect to lag the recovery. Are you still thinking about the same way, maybe just talk about what you're seeing in the sub markets within your total 2021 outlook?

[Roel Vestjens:]

Yeah absolutely. So we see our Industrial Solutions segment grow approximately 6% to 8%. That's implied in the guidance. Our Enterprise Solutions segment, we expect to be down 1% to 5%, which is basically a tale of two cities. So our broadband and 5G business, we expect to continue to grow low single digits, but we do expect our Smart Buildings business to be further down and it could be down as much as 5% to 10%. That's kind of how our guidance was constructed.

[Operator:]

Thank you. We'll now move to our next question from William Stein from Truist Securities. Please go ahead.

[William Stein:]

Thanks for taking my question and also my congrats to everyone on the good results and outlook and especially Henk and Jeremy, I'd like to first ask you about shortages in the semiconductor we're seeing shortages pervade in that industry and when we look at your book-to-bill, we have to consider maybe somewhat of a strong backlog as related to customers expressing some concern about availability and maybe there are some go ahead. Is that dynamic you think realistic way to proceed? What's going on with your business or inventories going on, were there some other dynamic that makes you push back on that idea and in fact this maybe real demand.

[Roel Vestjens:]

Yeah we try to anticipate some of these shortages and as a result, you could see that our inventory levels in Q4 were only at 5.2 turns right and they were 6 turns a year ago, that's not where it used to and we made it up in other parts of the working capital. So therefore total working capital turns showed a nice improvement compared to a year ago, but that's the main reason for the higher inventory levels. So we wanted to make sure that we can indeed ship in Q1 and deliver on our backlog. Whether or not all the orders received are truly for the demand currently at place, it's obviously a little bit hard to tell. We don’t have a lot of blanket orders. So virtually all of orders come with requested ship dates that are not too far in the future. So hopefully that answers your questions. Those are the two dynamics that we see and how we try to anticipate.

[William Stein:]

Great and relatively short duration of backlog, so I think I get it. Another question you at the very end of your prepared remarks, you talk about Belden as a compelling investment opportunity, we haven’t seen buybacks in the quarter may be longer and you did some of that today. I am wondering how you think about the balance between these two activities in the coming year. What should we expect more of when they're pulled or pardon me, are buyback on hold or how should we think about it now?

[Roel Vestjens:]

Yeah our capital location has not changed from how we laid them out during Investor Day. So our priority was and will remain de-levering. I think Hank explained that we have no covenant issues, but we do feel that that is the most prudent thing to do in terms of the uncertainties the other world that we live in. As we see with OTN Systems, we obviously will continue to cultivate our long list of potential M&A targets most profoundly within the industrial automation space and fiber connectivity space for broadband and 5G offerings. So if there is an opportunity as you know you cannot always control the timing of these companies, then we will act, but as we highlighted, it will be -- we expect it to be modest in 2020. So that the first and foremost priority will continue to be de-lever.

[Operator:]

And our next question comes from Noelle Dilts from Stifel. Please go ahead.

[Noelle Dilts:]

Hi everyone and Henk, thanks for all you’ve done over the past 20 years and Jeremy congrats on the new role. So I am hoping you could just comment a little bit on the R&D investments, you talked about this again at Investor Day, but you discussed they are expected to pressure margins and EPS in 2021. How should we think about when you expect to start to feel return on those investments and as you look out to that kind of longer-term 20% to 22% EBITDA margin target? Do you still feel like that's achievable within the next two years, three years with this step up in R&D thanks?

[Henk Derksen:]

Yeah absolutely, absolutely, as a matter of fact, the investments that we're making now, we are confident will increase our growth rates in 2022 and 2023. So the sequence that outlined during our Investor Day still very, very. The guidance implies that to get us there in the first year of the three years that we outlined. So we're very confident that indeed the investments that we're making now will yield higher growth rates in '22 and in '23.

[Noelle Dilts:]

And then just in terms of you're seeing this nice strength in Industrial Solutions. Can you comment a little bit on what you're seeing in terms discrete oil and gas sub markets within the segment?

[Henk Derksen:]

Yeah we're -- our Q4 results were pretty even amongst the verticals. We feel good about discrete. If we look at our current order rates, then we feel -- we feel very strong about -- very good about discrete. Our leading indicator as we see it is our business in Germany. Business in Germany in Q4 was very strong. It was actually up approximately 20%. So we feel good about discrete and we see a nice uptick in the mass transit and this is where OTM systems will help us out.

[Operator:]

Thank you. We'll now take our next question from Steven Fox from Fox Advisors LLC. Please go ahead.

[Steven Fox:]

Henk, congratulations and thanks for all your help over the years. I've seen you manage AX banks but could you let us know what you're going to be doing? Anyway in terms of just the numbers, I guess I'm a little curious about where you see your customer inventories and the channel inventories, you mentioned some of that was a drag on growth last quarter. Can you just give us an update on how inventories look down the supply chain as they go up?

[Roel Vestjens:]

So first of all, let me start , there is no ambiguity. Let me call them the customer inventory levels. So we have outlined the plan at the beginning of year to get $70 million out of the system if you will. So further reduce our channel inventory partners levels at $70 million and that's exactly what matured, a lot of it in the fourth quarter as you saw, but that was exactly as we had forecasted it to be. So that up as well for 2021. We don't expect any of this to recur and turns at our channel partners, we now believe are at healthy levels. So were very, very pleased to have them behind us. As far as our supply chain is concerned, as I mentioned earlier, you saw that the inventory levels that we carry on our balance sheet in Q4 were actually a little bit higher than you probably would have assumed, meaning that our turns did not improve compared to year ago period. As a matter of fact, the degraded 0.8 turns. That's because we carry more inventory anticipating some of these shortages that you read about to make sure that we can satisfy our customers and maintain our high on-time delivery standards.

[Steven Fox:]

That's very helpful and then just as a follow-up, can you talk a little bit more about the broadband business and especially one how you're gaining market shares and then secondly, so that the growth outlook either between the MSOs versus networking?

[Roel Vestjens:]

Yeah so few comments that you might be helpful, we see the trends of our mix moving more towards outside the home versus inside the home continue. So all our full-year 2020, we had 50% of our revenue outside the home and hence 42% inside with actually an exit rate of 64%. Q4 we had 64% on our revenue outside the home. We saw the trend of fiber versus copper further improve. So for the year, 27% of our revenue within broadband and 5G is now fiber and actually we have an exit rate of 32% in Q4. So more than $100 million for doing fiber and fiber related connectivity products in that segment. So that's one. Two is we continue to expand our offerings for the telcos as they get ready for their 5G offerings. It's still relative small part of the business, but we continue to invest in terms of -- adjusting our products, making our products suitable for 5G market, as well as increasing some of our commercial coverage within that segment. Our MSO's are obviously still bread-and-butter right for that business. So we remain very strongly tied to our MSO customers and while we continue to expand our product portfolio, we continue to increase share through offering more solutions for these MSO customers.

[Operator:]

Thank you. We'll now take our next question from David Williams from Loop Capital. Please go ahead.

[David Williams:]

First, I wanted to ask a little bit on the Smart Building side and how you envision that playing out for the rest of the year. Obviously a question that the COVID situation, but as that improves, do you see a big rebound there or is it kind of how you're thinking maybe about the Smart Business start up buildings?

[Roel Vestjens:]

We continue to expect that business to decline in 2021 and I think during the Investor Day we highlighted that over the three year period, we outlined a base case and an upside case and the base case increase of low single digits over the last three years and the upside case most positive low single digits growth rates. So that's our outlook. We continue to monitor the starts right of commercial buildings and we're continuing to allocate more resources within the Smart Building segment to verticals that are actually growing such as the .

[David Williams:]

Okay. And then to our follow-up, just any comment on the ordering pattern in terms of being rational and are you seeing much anxiety in terms of trying to pull in orders just ahead of any shortages I guess down the food chain?

[Roel Vestjens:]

Not at this point. I think I indicated that we feel good about the early trends that we're seeing it within the quarter, but we don't see anything out of the ordinary.

[Operator:]

And our next question comes from . Please go ahead.

[Unidentified Analyst:]

First, let me just comment, and Henk it's been great working with you for the short time that we have and congrats on your next endeavor. I guess the question that I have is because may be it might have been asked, I was just curious how your upstream supply chain has been shifting in the markets that you serve are changing in terms of the technology. So for example while you look at -- if I look at broadband infrastructure for example, does those frequently increase, how exact having an effect on your upstream supply chain?

[Roel Vestjens:]

So I think we've touched on this earlier. We feel good about our supplier's ability to deliver our components and the products that we require. We carry as Henk Gary highlighted earlier that we carry a little bit more inventory than we typically do for this specific reason to ensure that we don't run into shortages and that we're able to deliver our orders in Q1. We're able to book in turn in Q1 and able to maintain our high standards for our on-time delivery performance that our customers have expected from us at this point in time. So we don't see any issues at all.

[Unidentified Analyst:]

I guess what I was trying to ask is now whether or now the issues like this has been processed that I'm assuming that your supplier base is shifting now with the technology shifts and so my question was more about the process of evaluating testing and qualification of your upstream supplier if the market demands continue to shift at a rather rapid pace? I am just curious how you're managing that?

[Roel Vestjens:]

I understand, I appreciate the question, well first and foremost an increasing part of our offerings is software. So that obviously reduces the dependency on supplier lead times and supplier component availability. And secondly, because we are such a diverse enterprise, since we have so many different types of products and different types of suppliers, we're not very dependent on a few. So and thirdly, because we've been doing this for a while and we have such a broad supplier base globally, there's very little components if not as a matter of fact I don't know of a single component ever sole-sourced that we only have one option in. So as you may or may not recall, we had an issue years ago where we kind of get stuck with the supplier not being able to supply certain components for industrial switching equipment and ever since that we've increased the exposure of our processes and optimize the processes to ensure that we minimize the chances of that ever happening again. So that's kind how I would answer the question. Does that make sense?

[Unidentified Analyst:]

Yes sorry, I was trying to come off, that's helpful. Thank you.

[Operator:]

Thank you. We'll take our next question from Mark Delaney from Goldman Sachs. Please go ahead.

[Mark Delaney:]

Hank, thank you as well for all of your help over the last several years and we wish you the best going forward. Two questions from me if I could, maybe first on the Cybersecurity business, there has been a lot of news around increased number of assets especially with wind and I'm curious has delving seen a material increase in customer dialogue or your order of funnel for the wire business just given the increasingly inventory environment?

[Roel Vestjens:]

Our funnel currently supports our forecast for the first order for the full-year of 2021. We continue to focus on our number one strategic priority within Cybersecurity, the industrial space and we're pleased with the results that we've achieved within that vertical. So in 2021, in the second half, as you know our leading indicator is nonrenewal bookings. For the second half, they were up 11% Cybersecurity bookings in the second half and for the full-year they were actually up 31%. So what we feel good about the industrial priority within Cybersecurity and we continue to increase our funnel supporting the increased activity that we see.

[Mark Delaney:]

Understood and for my follow-up question, copper pricing, shipping cost and enterprises have all been rising. Can you speak to how much of a margin headwind you may be expecting in your 2021 outlook for some of these sectors?

[Roel Vestjens:]

We don't. We have the ability to pass it on to our customers oftentimes through contractual agreements, oftentimes through price increases and since we're very used to fluctuations in copper prices as well as other metals, we're confident in our ability as we have proven over the last years to be able to pass those increases on to our customers.

[Operator:]

There are no further questions at this time. Please continue.

[Roel Vestjens:]

Okay. Thank you, Sergey 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 [e-mail]. Thank you.

[Operator:]

This concludes today's conference call. Thank you for your participation. You may now disconnect.