Belden Inc

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Reports third quarter 2023 results call. Just a reminder, this call is being recorded. At this time, you're in a 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 touch-tone 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 Aaron Reddington, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us for Belden's third quarter 2023 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 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, Ashish Chand. Thank you, Aaron, and good morning, everybody.

We appreciate you joining us today. As highlighted in our communication three weeks ago, third quarter results were below our expectations as demand unexpectedly weakened within our industrial and broadband markets, adding to ongoing pressure from Channel D stocking. Despite a softening in demand, our expanding solutions-driven mix drove gross margin outperformance, resulting in Belden achieving the lower end of our initial adjusted EPS outlook. Our proactive efforts towards becoming a premier solutions provider continue even amid the current market weakness. We believe this approach will drive incremental growth and margin expansion over the long term. In the meantime, We are evaluating opportunities to protect margin where appropriate and have already taken cost-saving measures in response to the market weakness. Furthermore, we remain confident in the resilience of our portfolio, which stands well-positioned to benefit from significant secular trends with lengthy investment cycles. Now let's review the quarter. Please turn to slide four for a summary of the third quarter of 2023. As a reminder, I will be referring to adjusted results today. Our team performed admirably considering the difficult operating backdrop. Unfortunately, industry demand weakness came about unexpectedly and we experienced a marked change in orders in our industrial and broadband markets during the quarter. After growing orders 4% sequentially in the second quarter, total orders were down 19% sequentially in the third quarter. As such, we achieved quarterly revenues of $627 million, down 7% year-over-year. Despite end-demand softness, our shift to solution sales continues, which led to favorable margins during the period. Gross margins were up 280 basis points to 39%, EBITDA margins were up 80 basis points to 18.4%. Organic growth was down 4% in our industrial automation segment, with EBITDA margins up 230 basis points to 22.5%. In enterprise solutions, organic growth was down 14%, with EBITDA margins down 110 basis points. As we adjust to this temporary weakness, we expect to continue to follow up previously outlined capital allocation priorities with organic growth as a top priority, followed by M&A, and finally returning capital to shareholders. Our balance sheet is strong with ample liquidity, and leverage at Belden remains low at 1.3 times, down from 1.4 times in the prior quarter. We have significant financial flexibility to execute upon our strategic plans while staying around our targeted net leverage ratio of 1.5 times, even if the outlook becomes more challenging. Pre-cash flow for the quarter was robust, and we continue to deploy capital to grow the business. I'm pleased to report that, air-to-date, we have invested nearly $110 million in M&A, with our most recent acquisition of CloudRail an edge software provider that helps connect and manage devices in industrial environments. Welcome to the team, Cloud Rail. Further, here to date, we have returned over $150 million to shareholders. In summary, the unexpected shifts in market demand in industrial and broadband during the third quarter impacted orders. That being said, our team executed well and we are proud to have sustained these healthy levels of profitability with such a strong balance sheet and cash flow position. Now please turn to slide five for a summary of our market performance in the third quarter and where we see things trending over the short term. Taking a step back, during the third quarter, orders changed considerably in our industrial and broadband markets. Smart buildings performed as expected, but was more than offset by the sequential change in orders in our other markets, starting with the industrial automation market. The first half of the year, our business performed well with orders roughly flat sequentially in the second quarter, and point-of-sale data confirming our order trends. As the third quarter progressed, industrial customers became increasingly cautious, and we saw a material change in our orders, and point of sale data. On a sequential basis, our industrial orders for the third quarter were down 21%. The softness in the industrial market has many contributing factors. But at a high level, the weakness in orders has two major drivers. First, we experienced a pause in end customer demand due to broad weakness in discrete manufacturing. Second, both OEMs and distributors took action to further reduce inventory levels during the quarter. The smart change in demand for industrial automation products and solutions is a temporary reaction coming into the back half of 2023 amid overall macro uncertainties. Looking forward, we expect to see reduced demand for a few quarters as end users adjust to challenges in the marketplace. However, we expect them to emerge with continued investments in automation. Longer term, our secular trends remain intact, led by reshoring, labor shortages, and investments in industrial automation. I'm confident that we are well positioned to grow market share once we get past this temporary slowdown. In the smart buildings market, we saw revenue and orders more or less in line with our guidance. Within smart buildings, we experienced weakness in commercial real estate, with more stability in our targeted verticals such as hospitality and government. The smart building market continues to face challenges with higher interest rates creating uncertainty and distributors continuing to destock as they adjust to lower demand and work to improve cash flow. Similar to our industrial market, point-of-sales data declined in the third quarter, which points to further weakness into the fourth quarter and 2024. Longer term, we expect to see demand growth from increasing digitization and expanding connectivity needs. Our customers have increasingly complex challenges, including hybrid networks that combine disparate data and network protocols onto a single backbone. Weldon is well positioned to address these challenges with a product breadth and technical expertise. Finally, in the broadband solutions market, we had a good first half of the year with meaningful order growth in the second quarter. However, in the third quarter, we experienced a sharp reversal with orders down 28% sequentially. This change in the third quarter is the result of MSOs adjusting their procurement processes to reduce inventory and rely on shorter lead times to meet demand. Planned network upgrades remain intact. However, we anticipate a soft fourth quarter as customers further adjust inventory into ARN. We expect a pickup in orders as we move through the first half of 2024 with further momentum as government funding increases throughout next year. I will now request Jeremy to provide additional insight into our third quarter financial performance.