Belden Inc

NYSE:BDC

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Incorporated Conference Call. [Operator Instructions] At this time, you are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]

I would like to now turn the conference over to Kevin Maczka. Please go ahead.

[Kevin Maczka, VP of IR, and Treasurer]

Thank you, Stephanie. Good morning, everyone, and thank you for joining us today for Belden's second quarter 2021 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 Senior Vice President and CFO, Jeremy Parks. Roel 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.com.

Turning now 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 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 Web site 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, President and CEO]

Thank 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 review of our second quarter highlights. We performed well again this quarter, and I'm pleased to report total revenues and EPS that exceeded the high-end of our guidance ranges. Our end markets continue to recover, and our global teams are meeting the robust demand levels, and successfully navigating the inflationary environment. This resulted in meaningful growth and margin expansion during the quarter.

Second quarter revenues increased 42% year-over-year to $603 million compared to our guidance range of $535 million to $550 million. Organic growth is a key priority. And revenues increased 28% year-over-year on an organic basis. The upside relative to our expectations was broad-based, with contributions from both the Industrial Solutions and Enterprise Solutions segments.

Incoming order rates were strong during the quarter, increasing 74% year-over-year and 18% sequentially. This resulted in a healthy book-to-bill ratio of 1.19 times. EBITDA increased 90% year-over-year to $93 million. EBITDA margins expanded 390 basis points from 11.6% in the year-ago period to 15.5%. EPS increased 163% year-over-year to $1.21 compared to $0.46 in the year-ago period and our guidance range of $0.88 to $0.98. We are increasing our full-year guidance to reflect the better-than-expected performance in the second quarter and an improved outlook for the second-half of the year. For the full-year 2021, we are increasing the high-end of our revenue and EPS guidance ranges by 170 and $0.77 respectively.

Turning now to our key strategic markets, we had another great quarter in industrial. Industrial Solutions revenues increased 32% organically with broad-based strength in each of our primary market verticals and regions. Market conditions are clearly improving, and we continue to see a number of compelling longer term demand drivers for automation solutions as industrial customers respond to increasing labor costs, increasing capacity requirements, the need to pandemic-proof operations, and other factors. Belden is extremely well-positioned and highly differentiated in the marketplace, and we expect to deliver solid growth in this market going forward.

As we shared with you previously, we are making targeted investments throughout the company to support our customers by driving innovation and strengthening our product roadmap. As just one example of our recent innovations in industrial automation, we launched an expanded suite of advanced connectivity solutions during the second quarter called LioN-X. The LioN-X solutions provide manufacturers with a faster and more reliable approach to transmitting sensor and actuator data in automated production environments. This is a state-of-the-art future-ready connectivity solution that is core to providing secure communication from the sensor to the cloud in industrial environments. These enhanced capabilities reflect our leadership position in this important growth market. We are also sharpening our commercial excellence in a number of areas such as solution selling. Beyond individual product sales, Belden is uniquely positioned to offer differentiated solutions to our customers, including cable, connectivity, networking, and software products and services.

I would like to highlight a recent success story in industrial automation that illustrates our capabilities in solution selling and resulted in a significant new business win. During the second quarter, we received a $6 million award for a project with a large investor-owned utility in the United States for the implementation of a critical communications network. This is an important strategic win. Over the course of the project, we will be providing an expanded solution from the combined Belden and OTN Systems, which we acquired in January to a longtime Belden customer that previously purchased our industrial automation and cybersecurity offerings. It showcases our product and commercial synergies and is a great example of the opportunities we are now positioned to secure in this market. This is the first phase of the project and significant future expansion is expected beyond this initial award.

Beyond this project, the continued upgrade of grid infrastructure by other utilities throughout the United States is expected to provide many other opportunities to deploy our technologies. We also continue to make progress involving our portfolio and aligning with growth markets. During the second quarter, we completed the divestiture of our copper cable product lines serving the oil and gas market in Brazil, which we do not view as a strategic priority. These products previously contributed approximately $15 million in annual revenue, with an immaterial contribution to EBITDA and cash flow, and we were pleased with the $11 million sales price. I would like to thank the team in Brazil for their efforts and wish them all the best.

Turning now to Enterprise; Enterprise Solutions revenues increased 23% year-over-year on an organic basis in the second quarter. Within the segment, revenues in broadband and 5G increased 13% organically. We see strong secular trends in this market, driven by the increasing demand for high-speed broadband and the desire to provide access to every household. Broadband networks will need to be upgraded continuously to support high-definition video streaming, work from home, virtual learning, and many other applications. We have sustainable competitive advantages in this market, and we are ideally suited to support both MSO and Telco customers as they upgrade and expand their networks. Broadband fiber revenues increased 28% organically year-to-date in 2021 after similar growth in 2020. We expect further robust growth going forward as we continue to strengthen our patent-protected fiber R&D capabilities, add engineering resources and reduce our time to market for new offerings.

Revenues in smart buildings increased 36% year-over-year on an organic basis, substantially exceeding our expectations. We are very encouraged by the improvement we are seeing in this market and the strong execution by our teams. We entered the year with an expectation that smart buildings revenue will decline in 2021, but we now expect to deliver solid growth in this market. We are benefiting from commercial focus on growth verticals such as datacenters and healthcare facilities. In addition, our improved operational performance and superior lead times are enabling continued share capture.

To summarize, we had a great second quarter and first-half of the year. We are committed to driving robust organic growth in 2021 and beyond and are encouraged that our strategic initiatives are gaining traction.

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

[Jeremy Parks, SVP and CFO]

Thank you, Roel. Please turn to slide four 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 $603 million in the quarter, increasing $178 million or 42% from $425 million in the second quarter of 2020. Revenues increased 28% organically compared to the prior year and 9% sequentially. Importantly, we have not seen material restocking by our channel partners. And so, we believe this revenue performance is consistent with improving end demand. Incoming order rates were also very strong during the quarter, increasing 74% year-over-year and 18% sequentially.

This resulted in a book-to-bill ratio of 1.19 times, including 1.22 times in Industrial Solutions and 1.16 times in Enterprise Solutions. Gross profit margins in the quarter were 35.7%, increasing 30 basis points compared to 35.4% in the year-ago period. As a reminder, as copper costs increase, we raised selling prices, resulting in higher revenue with minimal impact to gross profit dollars. As a result, gross profit margins decrease. In the second quarter, the pass-through of higher copper prices had an unfavorable impact of 320 basis points. Excluding the impact of this pass-through, gross profit margins would have increased 350 basis points year-over-year. This exceeded our expectations for the quarter, and we are especially pleased with the performance given the current inflationary environment.

We expect that inflationary pressures will likely persist, and we are proactively addressing this through price recovery and productivity measures to support gross profit margins. EBITDA was $93 million, increasing $44 million or 90% compared to $49 million in the prior year period. EBITDA margins were 15.5%, increasing 390 basis points compared to 11.6% in the year-ago period. Excluding the impact of higher copper pass through pricing, EBITDA margins would have increased 510 basis points year-over-year, demonstrating solid operating leverage on higher volumes.

Net interest expense was consistent with the year-ago period. At current foreign exchange rates, we expect interest expense to be approximately $62 million in 2021. Our effective tax rate was 18.2% in the second quarter as we benefited from incremental discrete tax planning items. We expect an effective tax rate of approximately 19% in the third quarter and 19.5% for the full-year 2021. Net income in the quarter was $55 million compared to $20 million in the prior year period. Earnings per share was $1.21 compared to $0.46 in the second quarter of 2020. We were very pleased to deliver such robust growth and margin expansion in the second quarter.

Turning now to slide five 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 key markets include discrete manufacturing, process facilities, energy and mass transit.

The Industrial Solutions segment generated revenues of $335 million in the quarter, increasing 51% from $221 million in the second quarter of 2020. Segment revenues increased 32% organically. Revenues in industrial automation, our largest market, increased 36% year-over-year on an organic basis, with broad-based strength across each of our primary market verticals.

Revenues for our integrated cybersecurity solutions also increased year-over-year for the second straight quarter. We are pleased with the progress the team is making in advancing the product roadmap and identifying new commercial opportunities in industrial end markets. Non-renewal bookings increased 12% year-over-year in the first-half of the year. Industrial Solutions segment EBITDA margins were 16.9% in the quarter, increasing 500 basis points compared to 11.9% in the year-ago period. The year-over-year increase primarily reflects operating leverage and 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, 5G, and smart buildings. The Enterprise Solutions segment generated revenues of $268 million during the quarter, increasing 32% from $203 million in the second quarter of 2020. Segment revenues increased 23% organically. Revenues in broadband and 5G increased 13% year-over-year on an organic basis. The ever increasing demand for more bandwidth and faster speeds is driving increasing investments in network infrastructure by our customers. This supports continued robust growth in our fiber optic products, which increased 21% organically in the second quarter. Revenues in the smart buildings market increased 36% year-over-year on an organic basis, substantially exceeding our expectations. Market conditions improved significantly in the quarter, and our commercial engagement and strong operational performance are driving notable share capture.

Enterprise Solutions segment EBITDA margins were 13.2% in the quarter, increasing 230 basis points compared to 10.9% in the prior year period. If you will please turn to slide six, I will begin with our balance sheet highlights. Our cash and cash equivalent balance at the end of the second quarter was $423 million compared to $371 million in the prior quarter and $360 million in the prior year period. We are very comfortable with our current liquidity position. Working capital turns were 7.6 compared to 6.7 in the prior quarter and 5.5 in the prior year period. Day sales outstanding of 53 days compared to 54 in the prior quarter and 60 in the prior year period. Inventory turns were 5.1 compared to five in the prior quarter and 4.5 in the prior year, and our financial leverage improved significantly during the quarter. Net leverage was 3.3 times net debt-to-EBITDA at the end of the second quarter compared to four times in the prior quarter. We now expect to trend back within the targeted range of two to three times by year-end 2021.

Turning now to slide seven, I will discuss our pro forma debt maturity schedule. As a reminder, our debt at the end of the second quarter was entirely fixed at attractive interest rates. We have no near-term maturities and no maintenance covenants on this debt. Subsequent to quarter end, we took steps to further strengthen the balance sheet and extend our maturities. Specifically, in July, we issued EUR300 million in new 10-year notes maturing in 2031. The interest rate on these notes is 3.375%, which matches the lowest interest rate on 10-year notes in the history of the company. We were very pleased to complete this transaction. We intend to use the proceeds during the third quarter to redeem the full EUR300 million outstanding on our 2025 notes, so our total debt principal outstanding will be unchanged at the end of the third quarter. Following the redemption, our debt maturities will range from 2026 to 2031, with an average interest rate of 3.6%. This provides significant financial flexibility as we execute our strategic plans.

Please turn to slide eight for a few cash flow highlights. Cash flow from operations in the second quarter was $68 million compared to $40 million in the prior year period. Net capital expenditures were $16 million for the quarter compared to $20 million in the prior year period. And finally, free cash flow in the quarter was $52 million compared to $20 million in the prior year period. We are pleased with the year-to-date free cash flow generation, which is approximately $50 million better than the first-half of 2020.

That concludes my prepared remarks. I would now like to turn the call back to our President and CEO, Roel Vestjens, for the outlook. Roel?

[Roel Vestjens, President and CEO]

And thank you, Jeremy. Please turn to slide nine for our outlook. End market conditions continue to improve, and I'm encouraged by our robust recent order rates and solid execution. We are increasing our full-year 2021 guidance to reflect better-than-expected performance in the second quarter and an improved outlook for the remainder of the year while considering the renewed uncertainty related to the global pandemic. We anticipate third quarter 2021 revenues of $590 million to $605 million and EPS of $1.11 to $1.21. For the full-year 2021, we now expect revenues of $2.32 billion to $2.35 billion compared to prior guidance of $2.13 billion to $2.18 billion. This $170 million increase to the high-end of our guidance range includes approximately $140 million from improved operational performance and $30 million from higher copper prices and current foreign exchange rates.

Our revised full-year guidance implies consolidated organic growth of approximately 15% to 17% compared to our prior expectation of 6% to 9%. We now expect full-year 2021 EPS to be $4.37 to $4.57 compared to prior guidance of $3.50 to $3.80. Our revised guidance for the full-year 2021 implies total revenue growth of 25% to 26% and EPS growth of 59% to 66%. We expect interest expense of approximately $62 million and an effective tax rate of 19.5% for the full-year 2021.

Please turn to slide ten. Now before we conclude, I would like to reiterate our investment thesis. We are taking bold actions to drive substantially improved business performance, and you are seeing that in our much better-than-expected first-half performance and increased full-year outlook. This includes aligning around growth markets, developing innovative networking solutions, and enhancing our commercial capabilities. Our financial leverage improved significantly during the quarter, and we tend to return to our targeted leverage range by year-end 2021. I am confident that we have the management team, strategy, and business system to successfully execute our strategic plans and drive strong returns for our shareholders.

That concludes our prepared remarks. Stephanie, please open the call to questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Noelle Dilts with Stifel.

[Noelle Dilts, Stifel Nicolaus]

Hi, guys. Good morning and congratulations on a really great quarter. I was hoping that, first, you could kind of talk about -- you know, obviously, you saw really strong growth in smart buildings; Roel, you mentioned that you think part of that is share gain. I'm just curious how you're kind of thinking about how much of the growth is coming from market recovery and maybe some catch-up as construction projects start moving again versus what might be share gains?

[Roel Vestjens, President and CEO]

Yes. Thank you for the kind words, Noelle. So, two comments; first of all, on the commercial real estate market, I think what we're seeing is that some projects that started earlier are now being finished a little bit faster than we had anticipated.

And secondly, I think I highlighted on the call that we are successfully reallocating some resources to growth verticals within the Smart Building segment. So, datacenters and healthcare facilities are two of the verticals that I think we pointed out. And we're doing very well there. Just one quick data point, our datacenter business doubled in the quarter compared to a year ago. So, that's how I'd like to see. We're cautiously optimistic on commercial real estate, but it remains a little bit [murky] [Ph] in that segment.

[Noelle Dilts, Stifel Nicolaus]

And any thoughts on kind of how you're measuring the success of your commercial initiatives and share gain?

[Roel Vestjens, President and CEO]

We get point of sale information, which we compare to the public data that is out there, how our competitors are doing, and we are confident that we are better positioned and are gaining share.

[Noelle Dilts, Stifel Nicolaus]

Okay. And then, on the broadband business, I was hoping you could give us a little bit more detail on what you're seeing in terms of the inside-the-home business versus outside-the-home, and how you're thinking about those pieces kind of progressing over the next 12 months?

[Roel Vestjens, President and CEO]

Absolutely. So, the ratio of revenue in Q2 insight versus outside was about 60% outside-the-home and 40% inside, which is pretty consistent, where we have been tracking, as I'm sure you know. What's interesting is that within the quarter, the growth rates for outside-the-home on an organic basis were 17%, which was consistent with what they were in last quarter. But even inside-the-home grew, so inside revenue grew 7%. And last quarter, inside growth was flat. And as you may remember last year and even in 2019, that actually declined inside-the-home revenue declined. We expect now for the full-year to grow inside-the-home revenue at about the same rate as we did in Q2, so approximately 7%.

[Noelle Dilts, Stifel Nicolaus]

Great, thank you.

[Roel Vestjens, President and CEO]

You are welcome.

[Operator]

Thank you. Our next question comes from William Stein with Truist Securities.

[William Stein, Truist Securities]

Great. Thanks for taking my questions. Congrats on the very strong results, particularly in the Enterprise segment. I'm hoping you can give us a little bit of a more [robust update] [Ph] on the planned sale of copper cable wire business. It sounds like you sold a small piece of it. Where are you on the rest of it? And to what degree is that contemplated in guidance?

[Roel Vestjens, President and CEO]

Thank you. Thank you, Bill, for the nice comments. So, we did indeed successfully conclude one part of the transactions. So, what we're seeing is that potential buyers have shifted their priorities a little bit. So, with the global economic research, the surge that we're seeing, they have shifted their priorities to fighting their own supply chain issues and optimizing their demand in their own factories, make sure they're able to supply that demand. So, we see a little bit of a shift in priorities of potential buyers. These projects and these products remained non-strategic. They are not of a solution. They are growing. These businesses are growing right now. So, we'll see how the market develops and how the priorities or potential buyers develop. But in the meantime, we just will continue to run them, and we will only transact valuations that make sense to us.

[William Stein, Truist Securities]

Okay. It sounds like maybe that sales are on hold then. Let me turn to the other topic, I wanted to ask about, which you just mentioned a moment ago, which are capacity constraints in some of the other technology companies that cover the capacity constraints are much more front and center. I haven't really heard Belden mention these. I'm not sure if there is a meaningful constraint at all, but maybe you can help us understand to what degree you're seeing any sort of extended lead times or trouble meeting customer demand?

[Roel Vestjens, President and CEO]

So, we're obviously not immune to supply chain constraints and inflationary pressures on input costs. But indeed, as the numbers shown, we have been quite successful in managing those. So, I think the teams have done a good job at securing capacity from our suppliers, which includes chipsets for our networking switches. I think they've done a good job at ensuring and locking in supplies for resins and all kinds of material that is required to produce our cable. So, we're not immune to them, but the teams have done a decent job in securing those demand. So, therefore, able to post the results that we did and increase our outlook to the extent that we did. We are also obviously experiencing a little bit longer lead times on our products than typical, but we have pretty sound data that we are able to deliver significantly faster than our competitors do. So, we feel good about how the teams have been managing that so far.

[William Stein, Truist Securities]

Great. Thanks, and congrats again.

[Roel Vestjens, President and CEO]

Thank you, Bill

[Operator]

Thank you. [Operator Instructions] Our next question comes from Steven Fox with Fox Advisors.

[Steven Fox, Fox Advisors]

Hi, good morning, I was wondering if you could maybe talk a little bit about the dynamics behind raising prices for copper. It sounds like -- first question on that is, it sounds like all the material pass-through that impacted margins was on the enterprise side, even though you have, obviously, industrial carries some of that weight as well?

And then secondly, are you passing it through quicker than you expected as well in the quarter? Just maybe a little bit of dynamics around that would help. And then I have a follow-up.

[Roel Vestjens, President and CEO]

Yes, sure. I'll tee it off, and then I'll ask Jeremy to provide a little bit more comments. We have robust processes in place. So, for a significant part of our revenue, a significant part of our customer base, we pass through automatically. We have certain bands. And if copper increases above that band, then automatically, the prices are being raised. We've been dealing with this for decades, right? So the processes that we built are pretty robust. For the part of the revenue and part of our customers, where we do not have such agreements, we have conversations, and we point out. And since we are a trusted brand that delivers such good delivery performance and excellent quality performance in virtually all of the cases, we're just able to pass them on. So, that's all I would answer the question.

[JeremyParks]

Yes. And I think just going back to your other point, Steve, the copper impact, the pass-through impact affects both enterprise and industrial. So, both have some copper content and both are managing in the same way, which is very aggressively, as Roel said. So, I think from a timing impact, we're not really getting a benefit in terms of EBITDA, and we don't have much headwind on the EBITDA side because the price increases are coming at the same time, the higher cost is hitting the P&L. I think from a margin standpoint, that pass-through impact is affecting both segments.

[Steven Fox, Fox Advisors]

That's helpful. It sounds advantage in terms of just the timing pastures being in line. And then just as a second question. On the enterprise side, obviously, there's -- you broke down the business year-over-year, and there's different comparison services a year-ago that you're matching up against. Can you talk a little bit sequentially about broadband fiber and smart buildings, how they did quarter-over-quarter? And how maybe directionally you're thinking of them into Q3 and Q4?

[Roel Vestjens, President and CEO]

Yes. So, I'll give you those numbers, Steve. So, sequentially, from Q1 to Q2, smart buildings was up 14%, and broadband was up 19%, so, strong growth in both of those sub-segments. Looking forward to Q3, we guided a revenue number that is more or less flat at a consolidated level to Q2, and I would say that's roughly what we expect for both of those enterprise businesses as well.

[Steven Fox, Fox Advisors]

Thanks. That's helpful. Thank you.

[Roel Vestjens, President and CEO]

Yes.

[Operator]

Thank you. There are no further questions at this time.

[Roel Vestjens, President and CEO]

Okay. Thank you, Stephanie, and thank you everyone for joining today's call. If you have any questions, please reach out to the IR team here at Belden. Our email address is [e-mail]. Thanks, and have a great day.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.