Belden Inc (BDC) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden, Inc. conference call. (Operator Instructions). I would now like to turn the call over to Matt Tractenberg.

Thank you for joining us for Belden's first quarter, 2014 earnings conference call. My name is Matt Tractenberg, Belden's VP of IR. With me here this morning are John Stroup, President and CEO, and Henk Derksen, Belden's CFO. John will provide a strategic overview of our business, and then Henk will provide detailed review of our financial and operating results, followed by Q&A.

We issued our earnings release this morning and we've prepared a slide presentation that we will reference on this call. The press release and the presentation are available online at www.investor. Belden.com.

Turning to slide two in the presentation, during this call management will make certain forward-looking statements. I'd like to remind you that any forward-looking information we provide is given in reliance of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. The comments we will make today are management's best adjustment based on information currently available. Actual results could differ materially and the Company disclaims any obligation to update this information to reflect future developments after this call.

For a more complete discussion of factors that could have an impact on the Company's actual result please review the Company's press release and Form 10-K. Additionally, during today's call management will reference adjusted, or non-GAAP financial information. In accordance with Reg G we have provided a reconciliation of the most closely related GAAP to the non-GAAP information that we communicate. This reconciliation is in appendix of the presentation and has been posted separately to the investor relations section of our website.

I will now turn the call over to our President and CEO, John Stroup.

Good morning. As a reminder I'll be referring to adjusted results. Revenues for the first quarter were $488.3 million. After adjusting for changes in copper and currency, revenues declined 3.1% from a year ago period. This reduction in revenues was a result of challenging prior year comparisons and unforeseen adjustments in channel inventory. We estimate this inventory reduction at $12 million.

When accounting for this change revenues decreased 80 basis points from the year ago period in line with expectations. I'm pleased by our continued progress with gross profit margin expansion now at 36.1% and best-in-class. Operating profit margin of 13.1% was in line with the year ago period.

Demand patterns in the first quarter were impacted by severe weather in much of the United States. Orders stopped in both January and February recovered nicely in March with daily order rates 20% higher than the prior two months.

Over all orders in March grew 9% from the year ago period and the strength continued in April giving us comfort that our full-year guidance is on target. This did, however, impact the number of metrics during the quarter most notably, inventory and free class flow measures which Henk will discuss in a moment.

We completed the acquisition of Grass Valley and the team is off to a solid start with our previously communicated integration plan. As discussed last quarter, we believe there is an opportunity to improve operating profit margins through the application of our lean enterprise techniques in the areas of SG&A. Our objective is to reduce SG&A expense as a percentage of revenue by approximately 100 basis points by year end. We have incorporated both of these items in our full-year guidance which I will discuss in greater detail later in this call.

Please turn to slide three in our presentation for a review of our first quarter highlights. Gross profit margins increased 160 bps year-over-year to 36.1% and remains best in class. Operating profit margins were consistent with a year ago period at 13.1%, a solid outcome given the lower volume. Income from continuing operations per diluted share totalled $0.80 this quarter compared to last years $0.84 per dilutedshare. This is the result of interest expense being $0.05 higher than the year ago period.

Please turn to slide four to review the first quarter income statement. Revenue for the quarter of $488.3 million was down $22.1 million, or 4.3%, compared to $510.4 million in the first quarter of 2013. On an organic basis, revenue was down 3.1% year-over-year. After further adjusting for changes in inventory at our channel partners, sales declined by 80 bps from a year ago period.

The growth environment remains mixed with improved demand in Europe, up 3.7%, and China up 5.1%. This offsets softer performance from regions including the US, Canada, down 4.5% where the majority of the inventory reduction occurred, and Latin America down 1.9% all on a year-over-year basis.

Please turn to slide five for a review of our business segment results. Broadcast revenue in the quarter was $166.5 million as compared to $158.5 in the year ago period, an increase of 5%. Miranda, in particular, saw a growth of 19% on a year-over-year basis.

Operating profit margins were 14% increasing 70 bps year-over-year and currently at the low end of our corporate goal. Revenue within our enterprise platform was $108.4 million down from $116.6 million in the first quarter of 2013. A decrease of 4.5% after adjusting for changes in copper and currency.

This segment saw the largest impact on sales from inventory adjustments during the quarter. When accounting for this revenue grew by approximately 1.7% year-over-year. Operating profit margins were 9.7% for the period, an improvement of 200 basis points from the first quarter of 2013.

While I'm pleased with the year-over-year improvement and margins we continue to see opportunities for expansion. As expected and incorporated into our guidance, our industrial businesses experienced difficult year-over-year comparisons. Industrial connectivity had revenue for the quarter $159.3 million, down $17.4 million from a year ago period.

After adjustments for changes in copper, currency, and changes to inventory at our channel partners, revenues were down approximately 4% year-over-year. Operating profit margins were 13.4% for the first quarter,down 60 bps year over year on lower volume.

Industrial IT revenue of $54.1 million decreased by $4.4 million from $58.5 million in the first quarter of 2013. Last year's results benefiting from large non-recurring projects in Asia. Strong orders in March and April give us confidence that healthy full year growth remains achievable.

Operating profit margins in this platform were 16.7% for the quarter, down 90 bps from last year's period largely the result of lower volume.

I will now ask Henk to provide additional insight into our first quarter financial performance.

Thank you, John. I'll start my comments for results for the quarter followed by a review of our operations and segment results,a discussion of the balance sheet, and close with our cash flow performance. As a reminder I will be referencing adjusted results today. Please turn to slide six for details.

First quarter consolidated revenues were $488.3 million compared to the first quarter of 2013 revenues declined 4.3% or $510.4 million. After adjusting for changes in copper and currency, revenues decreased organically 3.1% year-over-year. The decrease is largely a function of the inventory adjustments made by our channel partners during the first quarter and difficult prior year comparisons.

We estimate, the inventory reduction to be approximately $12 million. Additionally, and included in our guidance, our Industrial businesses benefited from several large projects the first quarter 2013 with a year-over-year impact of $17 million to $18 million.

Sequentially, revenue declined $27.6 million or 5.3% from $515.9 million. After adjusting for changes in copper, currency and inventory, revenues declined 2.5% in line with typical seasonal factors.

After the uneven start to the year, order rates accelerated throughout the first quarter as we saw a 9% order growth in March year-over-year. We expect the macroeconomic environment to return to normal patterns given the increased activity in both March and April. Best in class gross margins were 36.1%. Increasing 160 bps year-over-year and 90 bps sequentially. The year-over-year improvement is the result of strong performance from our Broadcast platform, productivity improvements within enterprise connectivity, and a richer mix of products within industrial connectivity.

First quarter SG&A expenses were $93 million, or 19% of revenue. R&D expenses were $20.1 million, or 4% of revenue. SG&A and R&D expense combined for the quarter were $130.1 million, up slightly year-over-year and down sequentially. As previously mentioned we have identified an opportunity to achieve productivity enhancements placing us more in line with best in class companies.

SG&A expense as a percentage of revenue exiting 2013 was 18%. Our objective is to drive it down by approximately 100 bps by year end continuing through 2015. We've allocated $18 million to invest in this program most of which will be used the second quarter and excluded from our adjusted results. This will allow us to quickly realize the benefits in the second half of 2014 continuing into next year. The process has already begun and we expect the benefits of approximately $0.10 in EPS in 2014. More than half of which will be seen in the fourth quarter. An additional $0.20 next year.

For the first quarter 2014 we recognized $1 million in operating income from the equity method investment from our Hirschmann joint venture. This decline of $1.3 million from $2.3 million on a year-over-year basis is in line with expectations communicated previously.

Our operating profit margins were 13.1%, flat from the year ago period and down 70 bps sequentially. The resilience of the base model remains in tact, allowing us to deliver attractive levels despite revenue head winds experienced during the quarter.

Income expense for the quarter was $18.7 million, down $0.8 million sequentially. The year-over-year increase of $2.9 million is primarily the result of debt issuance which took place in March of last year. Our weighted average cost of debt remains at 5.7%. Going forward, we expect interest expense to be $19.3 million per quarter.

The adjusted affected tax rate for the first quarter was 21.9%. Compared to 24.7% in the year ago period. Driven primarily by one time items. For financial modeling purposes we recommend using a 24% effective tax rate both for second quarter and full year 2014.

Income from continuing operations for the first quarter was $35.4 million, down 2.9% from $38.3 million compared to a year ago period. Sequentially income from continuing operations declined 4.8% from $40.2 million from the fourth quarter, in line with difficult seasonal patterns.

Please, turn to slide seven. I will now discuss revenues and operating results by business segment. Broadcast Solution generated revenues of $166.5 million during the first quarter. Compared to the year ago period revenues increase of $8 million and $158.5 million. Organic revenues increased 4.8% year-over-year and decreased 3.2% sequentially following a typical pattern we experienced at the beginning of each year.

When further adjusting for changes of inventory at out channel partners revenues increased 5.6% from the year ago period. We are pleased with the performance of the segment, and we're looking forward to the leverage that Grass Valley will bring to this platform.

Operating profit margins with the Broadcast segment, were 14% for the quarter up 70% basis points, 13.3% from the year ago period, and down 20 bps sequentially. The year-over-year improvement is attributed to strong demand for a higher technologies within this portfolio.

Our Enterprise Connectivity segment generated revenues of $108.4 million during the first quarter decreasing $8.2 million compared to a year ago period. After adjusting for changes in copper and currency revenues decreased 4.5% compared to the year ago period. This a platform experienced the largest approximately $7 million impact during the quarter. When adjusting for this, revenues increased 1.7% year-over-year.

Sequentially, revenues decreased $11.8 million from $120.2 million after adjusting for copper currency, and changes in channel inventory revenues increased 40 bps sequentially. Operating profit margins were 9.7% increasing 200 basis points year-over-year and flat sequentially. I'm very pleased with the year-over-year improvement, primarily a result of productivity gains driven in the quarter.

Our Industrial Connectivity segment generated revenues of $159.3 million during the first quarter. Revenues decrease $17.4 million, or $176.7 million in the first quarter 2013.

Order rates in March were encouraging, with growth of 13% from the year ago period. After adjusting for copper and currency revenues decreased 7.1% compared to the first quarter 2013.

Inventory adjustments during the quarter had an unfavorable impact of $5 million. When adjusting for this effect, revenues declined by approximately 4.4% year-over-year. As expected, large non-recurring projects in the year ago period resulted in an additional $14.3 million headwind.

Sequentially revenues decreased by $5.7 million from $165.0 million, in line with typical season patterns. Operating profit margins of 30.4% declined 60 bps from a year ago period and increased 40 bps sequentially. The year-over-year decline was the result of lower volume while the sequential improvement was driven by a mix within our Connectivity Solutions.

The Industrial IT segment generated revenues of $54.1 million during the first quarter. Revenues declined $4.4 million compared to $58.5 million in the first quarter 2013. Sequentially, revenues declined by $4.8 million from $58.9 million. Large non-recurring projects experienced last year account for $3.6 million of the year-over-year decline.

This project driven business tends to experience periods of volatility. We don't believe the slow start to the year to be indicative of the remainder of 2014, and point strong with these in March up 9% on the year ago period.

Operating profit margins of 16.7% decreased 90 basis points from 17.6% in the year ago period and 280 basis points sequentially, largely the result of lower volume.

At the consolidated level I'm especially pleased with the best in class cost profit margins of 36.1% and operating profit margins of 13.1% solid results given lower volume.

If you will please turn to slide eight I'll begin with our balance sheet highlights. Several of our balance sheet metrics were impacted as shipments accelerated throughout the period impacted collections and inventory levels. As a result, our cash and cash equivalents balance decreased to $569.6 million at the end of the first quarter.

Inventory turnovers 5.7 turns decreased 1.5 turns year over year and .7 turns sequentially. Days sales outstanding was 57 days in the first quarter, and increase of 3 days year-over-year, and one day sequentially. Capital turnover was six turns decrease of .8 turns year-over-year and 3.1 turns sequentially. PP&E turns was 6.5 turns, a decrease of .2 turns year-over-year, and decrease of .3 turns sequentially.

Debt leverage improved 2.7 times net debt to EBITDA in 2013 to 2.4 in the current quarter.

Please turn to slide nine for a few cash flow highlights. As a result of the atypical pattern in addition to normal historical trends the first quarter resulted in a use of cash flow from operating activities of $20.4 million compared to $3.2 million in the year ago period. The net capital expenditures totaled $10.3 million in line with historical trends. Free cash flow was $(30.8) million in the first quarter, 2014. A decrease of $22.1 million on the year ago period.

We are confident that we will meet our full-year goal of free cash flow exceeding net income. Free cash flow as a percentage of net income from continuing operations over a trailing 12 month at the end of the first quarter was 109%. Dry powder at the close of Q1 was $828 million even after completing the Grass Valley acquisition on March 31, Black Powder is greater than $600 million providing the funding needed to execute our strategic plan.

Given the announcement of Grass Valley transaction in the quarter we did not repurchase any shares during the quarter. We intend to continue this program which still has $131 million the remaining current authorization. This completes my prepared remarks. I would now like to turn this call back to our CEO, John Stroup for the outlook.

Thank you, Henk. Please turn to slide ten for outlook for second quarter and full year 2014 results. Belden's outstanding business portfolio and improved organizational structure provide us with an opportunity to perform well in a variety of economic environments. We continue to emphasize our strategic initiative including our market delivery system and lean enterprise. We remain confident in our ability to deliver consistent operating results as we continue through 2014.

We expect our second quarter 2014 revenues to be between $585 million and $605 million, and adjusted income from continuing operations per diluted share to be between $0.95 and $1.05.

Please turn to slide 11 for a review of the changes in the 2014 guidance. For the full year we now expect revenues of $2.3 million to $2.35 million and adjusted income from continuing operations per diluted share of $4.05 to $4.35.

These expected results now incorporate the favorable impact of both Grass Valley and the SG&A productivity initiative as well as unfavorable impact from inventory adjustments at our channel partners and slightly lower copper prices. Please open the call to questions.

Absolutely. (Operator Instructions). Your first question is from Shawn Harrison, with Longbow Research.

Good morning, everyone. Two questions on margins. First, the solid gross margin achieved this quarter. How sustainable is that for the remainder of the year, understanding the mixed dynamics? Second, as we look at the SG&A reductions. If you could split that up between the divisions where we should see that fall and exactly when in 2015 would you the full $18 million savings run rate?

This is John. I'll let Henk comment on the second item. On the first item, the gross margins we achieved in the first quarter, those are sustainable going forward. Obviously if we see a little bit of up tick in volume which we would expect to see from Q1 to Q2 the leverage on that should be helpful, but I think we have a great deal of confidence in the gross margin level we're at today.

And on the SG&A, we expect annualized benefits to be approximately $18 million, and the focus of 60% will be on sales and marketing, 40% of back office activities, and they will favorably impact all of our segments.

When would you expect to see that full run rate number by, Henk?

So Q4 of this year will be closer to our run rate, Shawn.

Okay, and then one final question. John, one of your big distributors, one of your competitors yesterday highlighted improving trends in the enterprise market. What are you seeing there beyond the up tick in April? Is it improving? Do you have more confidence in that market coming back during the last three-quarters of this year?

Yes, so the enterprise business was the business that experienced the most impact from channel inventory changes. It was one of our larger distributors that curtailed their inventory that impacted our business. If I exclude that the order run rate is enterprise has been good, and we expect that business to continue to improve. So, sequentially we'll expect to see slightly better than typical trends from Q1 to Q2. That's an area of the business that we're pretty confident.

Thanks a lot, guys.

You're welcome.

Our next question comes from Stephen Fox, with Cross Research.

Hi Steve, good morning.

Steve, are you on mute? Operator, if we can take the next question, we'll come back to Steve.

Yes, the next question is from John Quealy, from Canaccord Genuity.

Good morning, folks. First question, Grass Valley, can you talk about integration, anything that you're seeing there? Will they be included in some of these SG&A activities? And then I'll have a follow up.

The integration of Grass Valley is right on schedule. The team began the process prior to close. We had a significant industry show right after the close in Las Vegas where we presented the new Grass Valley, which is the integrated businesses of Miranda and Grass Valley. We've already started the process of integrating and seeing the benefits of scale and synergy in all areas. We've been working on some of the manufacturing integration. So we're in very, very good shape. The numbers that Henk gave you, however, are on top of the benefits that we expect from Grass Valley. So when we communicated the expected accretion in Grass Valley which is $0.20 in this calendar year, the $18 million that Henk talked about in cost reduction, that's in addition to the Grass Valley accretion.

Got it. And so you guys gave nice forward looks on order books and some of the other divisions, but broadcast came in nicely on the P&L. Can you generally speak about what parts of Broadcast and looking forward how those order books are looking?

The order rates in Broadcast accelerated through the quarter. Broadcast had a nice quarter, and they also accelerated. The order rates in March in the Broadcast business were up 13% year-over-year, April is up another 7% year-over-year. Certainly the star of the platform in the first quarter was Miranda up 19% year-over-year, so a very strong quarter, and our PCC businesses also did very well. They were probably impacted more by weather in January and February timeframe, but they came back nicely. Good order trends in Broadcast gives us optimism going forward.

Last question, we know we have industrial tough comps through the year. When do they start to tail off in the back half of the year? Is it Q4, or Q3, we see some goodness? How should we think about those comps going away?

Q3 is when we expect to see the growth rates in both Industrial IT and Industrial Connectivity that we should expect. We roll off the top comps in both businesses after the second quarter.

Perfect, thanks.

And we'll come back to Stephen Fox, with Cross Research.

Hi, good morning. Sorry about that. Following up on that question, John, you mentioned the Miranda numbers. Can you give us color on what drove the 19% growth year-over-year, and what kind of growth are you now looking for the Miranda business going forward?

So the Miranda business growth rates are clearly good execution by the team, so I'm pleased with how they executed, and it has a lot to do with growth in Europe compared to Europe or prior years. We saw recovery there. We've also seen some nice benefits of synergies from a commercial point of view. But some of it has to do with the market as well. You may recall the first quarter last year from Miranda was a little tough. To be fair we've called out the industrial businesses having tough comps year-over-year. For Miranda they had easier comps in the first quarter followed the Olympics of the prior year, the presidential election. I think we saw improved market environment in Miranda and we benefited from a number of large projects that we booked and shipped in the quarter.

Thanks, and then secondly in terms of the SG&A focus with some of the restructuring activity, can you talk about how you're balancing investments also into the sales force? Because obviously the Company has been a little bit top line challenged the last several quarters, not necessarily your fault, but I'm wondering if at this point in the cycle how you're thinking about a return in investing in the top line maybe to gain a little bit more market share coming out of the down turn.

That's a great question. There are three areas we focused on productivity improvement. Finance, some of the back office functions in the Company, and also in the sales area as well. This is really a result of some of the bench markets we've done externally and internally, and there were some redundancy in investment of money. It will have some impact on some of the customer facing resources where we've had overlap but it also will impact some of the areas of sales and marketing where it has to do more with transactions. So customers service transactions, some of the supporting functions. So each of the platforms I thought did a very nice job of making certain that we allocate our investment to the areas of growth and to the areas of high margin, and I think that's one of the reasons we're seeing the favorable mix of the improved gross margin, and I would expect that to continue. It was a very thoughtful approach in exercise and something we've been working on for about nine months.

Great, that's very helpful. One final quick question. Talking about the inventory corrections and weather in the quarter, it's a chicken and the egg scenario, I think. Just to confirm you feel that those corrections are over with, and given how it was combined with bad weather does that mean that some of your distributors are under stocked, or how do you look at the channel right now?

In the channel inventory levels we've included in our full year guidance that they will not go back up again. And the reason we've done that is the feedback we've gotten from our distributors is as we've reduced our lead times and we've become more predictable in our on time delivery they're comfortable holding less inventory. I think this falls in the category of no good deed goes unpunished. The fact that we're doing a better job servicing them is why they're comfortable. In the long run it's a good thing. In the short term it creates a bit of a challenge. I think that's unrelated to the weather phenomenon. We saw it impact in January and February, but I think we've seen it come back. I think it had more to do with the inventory turnover rather than top line.

Great, thanks very much.

You're welcome.

(Operator Instructions). We'll take our next question from Matt McCall, with BB&T Capital Markets.

Thanks, good morning everybody.

Good morning.

I think you filled in some of the blanks, but in March and April, can you give us a view segment by segment, I think I have most of them but not all of them I'm wondering about the industrial businesses.

The industrial businesses in March saw a double digit growth compared to year-over-year. In April when combined again 10% year-over-year, so it varied but both of them saw significant improvement coming out of February and into March and April.

I think you gave the broadcast business, did you give enterprise? Did I miss that?

No, I don't think I did. The Enterprise Business order rates in March and April are actually fairly similar to what they were last year. The order rates are not corrected for changes in channel inventory. Funnel rates for the business have been good and sequential up tick that we expect, we think we've got the underlying activity in the commercial area to get that done.

And John, taking this a step further if we put all this together, the order rates and the comps, can you talk segment by segment the trajectory of growth as we move through the year quantified or qualitatively.

In the second quarter the Industrial Connectivity and the Industrial IT businesses as I mentioned earlier will continue to have difficult comparisons. I don't think we'll see the same pressure from the channel inventory as we saw in the first quarter. I think its likely the channel inventory in the second quarter will remain the same. In the Broadcast Business we'll continue to see good growth year-over-year in Q2 and I would expect the same with the Enterprise Business. On a consolidated base our expectation is that growth will be approximately flat. Maybe up 2% on the high end of the range. That's largely going to be growth from Enterprise and Broadcast offsetting some tough comps in Industrial businesses year-over-year.

Okay, All right, and maybe one on the M&A front. Can you give us any thoughts on the targeted verticals, targeted product categories, size of candidates that you're a taking a look at? What would you be comfortable with, any detail about M&A.

The activity in the quarter on M&A was greater than normal. And that was a result of the number of opportunities that seem to be possible. And they really do fall into all four areas, so we've got activity in all four of our platforms on what we would consider to be highly strategic outstanding fit companies revenue size ranging from $60 million or $70 million up to $250 million, $300 million of annual revenue.

Thank you, guys.

Thank you.

We'll take our next question from Stephen Foltz, with Stifel.

Good morning. A question on the project weakness in the Industrial businesses. Is there a particular geography or end market that is focused on oil and gas or something else, and I know you're going to be facing easier comps, but outside of that do you see the project fitness improving in that market?

Year-over-year business, the difficult comps we had in Industrial businesses were a couple of big projects in Asia, one related to a pretty big military project in southeast Asia. The other was a pretty big activity in China. And in the Industrial Connectivity side we saw a little bit of weakness in Europe on a year-over-year basis. I'd say it had more to do with activity a year ago that was fairly sizable that had to do with a significant reduction in the quarter of this year. So we were very clear about that going into the quarter. That happened the way we thought. The thing that happened in the quarter that we didn't expect was in Industrial Connectivity especially, a sizable deduction in channel inventory that was almost $8 million on a year-over-year basis. That's really the disconnect between the top line achieved at 159 and where we thought they might be.

Great, thanks. Just one more quick one. It sounds like the integration of Grass Valley is going as planned, so is it safe to assume that the $0.50 accretion target that you laid out previously is still intact?

Absolutely.

Okay, great. That's all I have.

Thank you.

We'll go back to Shawn Harrison, with Longbow Research, for follow up.

Two brief follow ups. What is the revenue contribution expected from Grass Valley for the quarter, and then the non-GAAP accretion? And then the second would be on the buy back. How are you thinking about buy back activity going forward?

So the buy back the first quarter the fact that we didn't execute on the buy back was only because of the fact that we had material information for most of the quarter, and by the time we disclosed it there wasn't that many days left for the buy back. We do expect to continue forward with the buy back. The authorization is in place and we plan to move forward. And then on the Grass Valley, I'll let Henk respond.

Revenues from second quarter, $65 million. Accretion of $0.07 in the first quarter, remaining and $0.13 in fourth quarter.

That's fantastic, Henk. Thanks so much.

You're welcome.

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

Thank you everyone for joining today's call. If you have any questions please reach out to IR team here at Belden. Our email address is investor.relations@belden.com. We're happy to help. Have a great day everyone.

That concludes our call for today. You may now disconnect from the call. Thank you for participating.