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spk03: Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden third quarter 2022 earnings results conference call. Just as a reminder, this call is being recorded. At this time, you're in listen-only mode. Later, we will conduct a question and answer session. If you'd like to ask a question, please press star 1 on your touchtone phone. If you're 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 Jeremy Parks. Please go ahead, sir.
spk01: Thank you, Mary. Good morning, everyone. And thank you for joining us today for Belden's third quarter 2022 earnings conference call. This is Jeremy Parks, Belden's chief financial officer. With me this morning is Belden's president and CEO, Ruel Vestens. Ruel 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.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 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 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.
spk02: Roel? Thank you, Jeremy, and good morning, everyone. As a reminder, I'll be referring to adjusted results today. Please turn to slide three for a summary of today's 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 1.1 times at the end of the third quarter. We are comfortable with net leverage at this level which is below our target of 1.5 times. 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 percent compared to our prior expectation of 12 to 13 percent. Additionally, we increased our EPS guidance by 27 cents 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 two 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 customer recognized 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 US-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 US. 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 to $640 million. 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 timelines 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 MiniFlex 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 healthcare 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 19 basis points from 16.7% in the year-ago period to 17.6%. 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 1.1 times remaining below our target of 1.5 times. 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 I'm very proud of the achievement of our teams. I will now ask Jeremy to provide additional insight into our third quarter financial performance. Jeremy?
spk01: Thank you, Roel. Please turn to slide six 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 0.95 times. 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 solution 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 solution 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 solution 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 healthcare 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 eight 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 1.1 times net debt to EBITDA at the end of the third quarter. compared to 1.4 times in the second quarter and 2.9 times a year ago. As we communicated in our recent investor day, we intend to maintain net leverage of approximately 1.5 times going forward. During the quarter, we repurchased approximately 1.2 million shares or $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 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.
spk02: Roel. Thank you, Jeremy. Please turn to slide 10 for 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 typical 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 $2.583 billion to $2.598 billion compared to prior guidance of $2.52 billion to $2.55 billion. A 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. I'm 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.
spk03: Thank you. If you'd like to ask a question during the Q&A session, please press star 1 on your touchtone phone. If you'd like to withdraw a question, press star 2. Please also limit yourself to one question and one follow-up question. Again, press star 1 to ask a question. And now take our first question from Chris Dankart of Loop Capital. Please go ahead.
spk06: Hey, morning, everyone. Thanks for taking the questions. Morning, Chris. Yeah, I more appreciate that you, you know, how the strength and fiber and broadband more holistically. I guess, just wanted to put a fine point on it. We're just seeing the early days of our DOS investment. This is, we really haven't seen any dollars flow from the Infrastructure and Jobs Act yet, correct?
spk02: Yeah, that's correct.
spk06: 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 there's some concern out there about the hyperscalers 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?
spk02: Yeah, so let me answer the question twofold. First of all, we're not seeing a significant slowdown in our growth verticals at all, so we remain very bullish here. Two is, yeah, it's 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.
spk06: Yeah, absolutely. Thank you for the reminder on that.
spk02: Yeah, mind you, Chris, we don't play in hyperscale data centers. So that's not an area that we deploy resources in.
spk06: Perfect. Perfect. And I guess just one last follow-up from me, maybe just any comments on pricing or kind of the impacts of price and RAS in the quarter?
spk02: As we've been able to do all year, we were successful in passing on the price increases that we've seen, the labor inflation that we've seen. Obviously, input prices have normalized a little bit. They've come down a little bit, and we adjust our pricing accordingly. So nothing to report.
spk06: Understood. Well, again, congrats on the quarter.
spk07: Really nice results here. Appreciate that.
spk03: And we can take our next question from Noelle Dills of FIFO. Please go ahead.
spk04: Hi, thanks. I was hoping you could just give us an update on how things are progressing with your SAS and DAS initiatives and any progress since last quarter. Thanks.
spk02: Well, first of all, we're pleased with the progress. Secondly, revenue in that area is still very, very small. We are very encouraged by the Belt and Horizon Order, which is a huge stepping stone into eventually becoming a network as a service provider. So we're pleased with the progress. Our sales funnel is extremely healthy and we are very pleased and therefore we specifically called it out that we're now seeing the first orders roll in of our SaaS offering.
spk04: 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? I'd be curious to hear how you're thinking about that split. Thank you.
spk01: Yeah. So we're 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 100 basis points and maybe a little bit better than that in industrial automation. um and a little bit lower than that 100 basis points in enterprise driven by the fact that variable margins in industrial automation are are a little bit higher looking forward into 2023 i think it's it's highly dependent on our volume so for instance if we were to grow consistent with um mid-single digits and i'm not David Wiltshire- guiding that by any means for 2023 very early but consistent with our investor day you would expect about 60 basis points. David Wiltshire- Of of margin expansion year over year and I would take that at roughly maybe 60 or 70 basis points in industrial automation and a little bit less than in our price, so I think we'll make good progress in both platforms. David Wiltshire- But, but I also think it's highly contingent on the growth right that makes sense, thank you.
spk03: And if there are any additional questions, please press star 1. We can take our next question now from Ryan Hebe of Goldman Sachs. Please go ahead.
spk00: Hey, guys. Thank you very much for taking the question. 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?
spk02: Yeah, I appreciate the question. So I don't fear the current environment or the environment that we have a high likelihood of entering. We are significantly better positioned than we have in the past to deal with higher profit capital, interest rates that are higher and a slowing economy. And I'll tell you why. I'll give you two reasons. The first one is applicable to more than 50% of Belden's revenue in the industrial solution segment. We've 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 need 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'll rely on companies to increase the effectiveness of their current assets. And that is exactly the road that Belden took. That's exactly the path of a whole solution selling approach that we entered a few years ago, and hence we're confident that that business will remain strong. On the other side of the house, the enterprise solutions, we've only, as we recently highlighted in the call, We've only now started to see the art of funding 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 we're, in summary, we're far better positioned, and I think we should fare well.
spk00: That's very helpful. And then do you still think that the 2025 $8 EPS target is achievable in that slower macroeconomic scenario?
spk07: Yes, we do. Yes, we do. Thank you.
spk03: We can now take our next question from Ruben Garner of the Benchmark Company. Please go ahead.
spk05: Thank you. Good morning, and congrats on the strong results and outlook, guys. Thank you, Ruben. So, Jeremy, you referenced the backlog entering 2023. I think you said, based on your projections today, it'll be 2020. percent higher than it was a year ago. I guess, can you talk about how that plays out? 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 it's probably substantially higher than quote unquote normal. So those are all my questions in one. Thanks, guys.
spk01: Yeah. Thanks, Reuben. It's a good question. So maybe to start with, just order a magnitude of the backlog relative to where we were at the end of 2019 and the pre-pandemic times. I think we'll exit with a backlog that's roughly five times. where we were back in 2019. So I think it definitely gives us a lot more visibility as we go into 2023 than we've had in the past. We have not seen any customers pushing orders out or canceling at this point. I think, if anything, we've seen the opposite, which is that customers are hungry for product and anxious for us to get it out the door. So I don't have a significant fear of any order cancellations into next year. I just think we're in a good spot with significantly more visibility than we've had in the past. Although I would say we're not a backlog business. We're still a relatively short cycle business. But I think we're better positioned than we are going into most years.
spk05: Any sense, Jeremy, on how much, I guess, visibility that really gives you five times normal? Is that enough to carry a couple of quarters that maybe you wouldn't have seen in previous cycles?
spk01: Yeah, I would say it's about a quarter and a half worth of revenue. It's about 30% of our revenue. And pre-pandemic, we would carry maybe a month's worth of revenue and backlog at any time.
spk05: Perfect. Thank you, guys. Congrats again.
spk07: Thanks, Ruben. And again, as a reminder, it is Star 1 if you do wish to ask a question at this time. Jeremy Parks, there are no further questions at this time.
spk03: Please continue.
spk01: Thank you, Mary, and thank you, everyone, for joining today's call. If you have any questions, please reach out to the IR team here at Belden. Their email address is investor.relations at Belden.com.
spk03: Thank you, ladies and gentlemen. This concludes our call for today. You may now disconnect from the call, and thank you for your participation.
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