Belden Inc

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Incorporated conference call. Just a reminder, this call is being recorded. At this time, you are in the listen-only mode. Later, we will conduct a question-and-answer session. If you would like to ask a question, please press star 1 on your touch-tone phone. If you are in the question queue and would like to withdraw your question, simply press star 2. I would now like to turn the call over to Kevin Maska. Please go ahead, sir.

Thank you, Sergei. Good morning, everyone, and thank you for joining us today for Belden's fourth quarter 2020 earnings conference call. My name is Kevin Masca. I'm Belden's Vice President of Investor Relations and Treasurer. With me this morning are Belden's President and CEO, Roel Bestjens, and CFO, Hank Dirksen. Roel will provide a strategic overview of our business, and then Hank 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.belvin.com. Turning to slide two in the presentation, during this call, management will make certain forward-looking statements. For more information, please review today's press release and our 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 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? 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 fourth quarter highlights. Demand trends improved in the fourth quarter, and I'm 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 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 the 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 four 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'm 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. For the full year 2020, we delivered revenues of $1.863 billion and EPS of $2.75. Free cash flow generation was $86 million compared to our expectation of approximately $75 million. Beyond the initial response to the pandemic, The year was highlighted by the bold steps we took to position the company for substantially improved organic growth and margins. This includes streamlining our cost structure, funding our compelling growth initiatives, and significantly improving our portfolio of businesses. On the cost side, we delivered on our commitments by successfully reducing SG&A costs by $40 million for the full year 2020. We exited the year with a quarterly run rate savings of $15 million in the fourth quarter, so we are prepared to deliver the full $60 million in savings in 2021 as planned. This represents approximately 300 basis points of incremental EBITDA margin expansion on an annual basis. These are permanent cost reductions that will not return as conditions normalize. As we executed these cost reduction plans, we continued to make strategic investments to accelerate growth and capitalize on the opportunities in our key markets. To that end, R&D spending increased 14% to $107 million in 2020, with approximately 65% of this investment dedicated to software development. This includes standalone software and embedded software within various hardware products. We are making targeted investments to support growth and innovation in industrial automation and enhance our best-in-class cybersecurity cloud platform. These innovations are important to our customers and our shareholders as they will further strengthen our product offering and enhance our competitive advantage. We also maintained capex spending of approximately $70 million for the year to ensure that we have the capabilities and capacity to fully participate in the anticipated growth in our key markets. We made significant portfolio moves during the year, including the sale of Grass Valley in July. Divesting this business simplified and improved our portfolio. It also removed a considerable drag on consolidated organic growth, as declines in Grass Valley's business in prior years represented a substantial headwind. In addition, we initiated a process to divest approximately $200 million in revenues associated with certain undifferentiated copper cable product lines. These are primarily stand-alone product lines that are low growth and low margin, and we do not believe that they can meet our growth or margin goals in the future. Much like Grass Valley, we believe that exiting these product lines will improve our end market exposure. In this case, we are exiting the oil and gas markets and reducing our exposure to certain smart buildings markets. We expect to complete multiple transactions associated with these product line exits. We are encouraged by the overall progress to date and we remain on track to complete these divestitures in the first half of 2021, as previously communicated. Finally, Subsequent to the end of the fourth quarter, we announced the bolt-on acquisition of OTN Systems for $71 million. The transaction closed on January 29th. Please turn to slide five for additional details on OTN Systems. This is our first industrial automation acquisition in years, and we are very excited to add this talented team and its innovative networking products and technologies to our portfolio. OTN Systems is a leading provider of easy-to-use and highly reliable network solutions tailored for specific applications in harsh, mission-critical environments. Its value-added technology allows customers to easily build, maintain, and monitor complex networks in growing industrial markets such as power transmission, mass transit, and process. Belden and OTM Systems have a commercial partnership dating back to 2017, so we have a thorough understanding of the business and the value it will add to our product offering and our customers. The company's primary brand and product line, known as Xtrand, consists of proven switching devices and network management software that is complementary to Belden's leading industrial network offering. We expect the acquisition to contribute incremental revenue and EPS of approximately $36 million and 11 cents, respectively, during the 11 months of ownership in 2021. Consistent with our M&A strategy, this acquisition supports one of Belden's key strategic priorities related to the growing demand for industrial automation by adding proprietary technology and mission-critical hardware and software products for more complete end-to-end solutions. It also accelerates Belden's initiatives related to customer innovation centers or CICs with advanced solution selling and customer consulting capabilities. This will allow us to bid on a wider array of projects. It offers meaningful business synergies in the product technology, and commercial areas, and we see significant opportunities to leverage our global customer base to accelerate growth and further improve profitability. We remain an inquisitive company, and we continue to pursue other strategic and organic opportunities in industrial automation and fiber connectivity that would further enhance our product offering and growth potential. However, We are prioritizing de-levering in the near term, and as a result, we expect our M&A activity to be modest in 2021. I will now ask Henk to provide additional insight into our fourth quarter financial performance. But before I do so, I wanted to discuss the other matter referred to in our press release this morning. After 20 years with Belden, the last nine as our CFO, Hank has announced his departure next month, following a transition of duties to Jeremy Parks. Hank, your contributions to Belden are difficult to put into words. You are a meaningful part of the history of this company, and we thank you for everything.