Belden Inc (BDC) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Incorporated conference call. As a reminder, this call is being recorded.

(Operator Instructions)

I would like now to turn the call over to Matt Tractenberg. Please go ahead, sir.

Thank you, Don. Good morning everyone, and thank you for joining us today for Belden's third-quarter 2014 earnings conference call. My name is Matt Tractenberg. I'm Belden's vice president of investor relations. 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 a detailed review of our financial and operating results, followed by question and answer. 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 www.investor.belden.com. I'd like to take just a minute and invite all of you to join us for Belden's 2014 financial analyst and investor day.

This entirely virtual event will be Broadcast on December 2 at 11:00 AM Eastern time. The webcast can be accessed from our investor relations website.

Following an in depth discussion of our performance and opportunities, we'll take live Q&A from our audience. If you have any questions, please reach out to us. We're happy to help.

Turning to slide 2 in the presentation, during this call, management will make certain forward-looking statements. I would like to remind you that any forward-looking information we provide is given in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The comments we will make today are management's best judgment based on information currently available. Actual results could differ materially from any forward-looking statements that we make. 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 results, 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, we have provided a reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information we communicate. This reconciliation is in the appendix of the presentation and has been posted separately to the investor relation's website.

I will now turn the call over to our president and Chief Executive Officer, John Stroup. John?

Thank you, Matt, and good morning everyone. As a reminder, I'll be referring to adjusted results today. Please turn to slide 3 in our presentation for a review of our third quarter highlights.

I'm pleased with our record results, including revenues, earnings per share, and gross margins. I'd like to thank our associates for their hard work during the quarter, and their continued focus on aggressively executing our strategic plan.

Overall, the business performed as expected, with revenue growth in our Broadcast and Industrial platforms offsetting the portfolio initiatives within our Enterprise Connectivity business. Revenues for the third quarter were $613.1 million, an increase of 16.7% from the third quarter 2013.

A stronger US dollar and lower copper prices had an approximately $5 million unfavorable impact on revenues sequentially. When totaling revenue from the Industrial and Broadcast platforms, which accounts for approximately 81% of consolidated sales, revenues increased organically by 3.4% year over year.

If it had not been for our profitability improvement initiatives within the Enterprise platform, organic growth would have been near our goal of 4% to 6%. From a geographic perspective, we continue to benefit from a diversified global footprint.

We experienced solid performance in the United States, up 2.2%, Germany was up 4.2%, and Mexico, up 10.1%. This offset continued softness in Brazil, down 3.9% and Europe in total down 4.8% all on a year-over-year basis.

Record gross profit margins were 37.6% during the quarter, an increase of 160 basis points from the year-ago period and continue to be best in class. Operating profit margins in the third quarter were 14%, a sequential increase of 100 basis points and back into the range of our long-term goal of 14% to 16%.

This highlights the outstanding progress our Broadcast team has made with the integration of Grass Valley, acquired in the second quarter. As a result, we delivered a Company record $85.6 million in operating profit dollars during the quarter. We also generated record earnings per diluted share of $1.15 in the third quarter, an increase of 21% from the year ago period.

And finally, we bought back approximately 432,000 shares of Belden common stock for $31 million. I'm also pleased with the results from our Lean Enterprise initiatives. At the end of the third quarter, our property plant and equipment turnover increased 0.7 turns to 7.6 and working capital turnover increased a full turn to 8.0, both on a year-over-year basis.

Please turn to slide 4 for a review of our business segment results. Broadcast revenue in the quarter was $256.6 million, as compared to $179.2 million in the year-ago period, an increase of 43.2% and a result of solid organic growth and the acquisition of Grass Valley.

Organic revenue growth was 4.6% during the period and in excess of the market. Operating profit margins were 13.5%, increasing 290 basis points sequentially. Given the complexity and scale of this acquisition integration, I think these results are impressive.

Revenue within our Enterprise platform was $115.3 million, down from $123.4 million in the third quarter of 2013, a decrease of 5.2% on an organic basis. Operating profit margins were 12.7% during the quarter, an increase of 120 basis points from the year ago period.

The portfolio actions are clearly yielding results, and I look forward to a return to revenue growth in 2015. Industrial Connectivity had revenue for the quarter of $171.1 million, up $4.1 million from the year-ago period.

On an organic basis, revenues increased 3.5% year over year. Operating profit margins were 13.6% for the third quarter, down slightly year over year, driven by unfavorable product mix that is well within the natural variation of the business. Industrial IT revenue of $70.1 million increased by $14.1 million from $56 million in the third quarter of 2013, a result of the recent acquisition.

The integration of ProSoft is progressing as planned, and the performance is in line with expectations. Operating profit margins of the platform were 18.6%, an increase of 60 basis points from the year-ago period.

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

Thank you, John. I'll start my comments with 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 5 for a detailed consolidated review. Third quarter consolidated revenues were $613.1 million. Compared to the third quarter 2013, revenues increased $87.5 million or 16.7% from $525.6 million.

Acquisitions contributed $83.2 million of revenues, compared to the year-ago period. After adjusting for changes in color and currency, revenues increased by 140 basis points year over year. Sequentially, revenues increased $8 million from $605.1 million.

Acquisitions contributed $11.7 million of additional revenues and were partially offset by unfavorable currency and commodity prices with an impact of $4.8 million. Gross profit margins were 37.6%, increasing 160 basis points year over year and 60 basis points sequentially, both due largely to the acquisitions made this year.

Third quarter SG&A expenses were $116.5 million or 19% of revenue. Excluding the impact of acquisitions, SG&A expenses decreased $3.8 million year over year and $1.8 million sequentially, highlighting the impact of our productivity improvement program.

We remain committed to achieving SG&A costs of approximately $111 million as we exit the year. R&D expenses for the quarter were $29.2 million or 4.8% of revenue, increasing $8.4 million year over year as we continue to make the investments necessary to achieve our organic growth goal.

Operating profit margins were 14%. Although down slightly from the year ago period, an improvement of 100 basis points sequentially.

Net interest expense for the quarter was $21.5 million, an increase of $2.4 million year over year due to the additional senior subordinate notes issued in June. We expect fourth quarter interest expense to be approximately $22 million.

The effective tax rate for the third quarter was 21.3%, compared to 23.3% in the year-ago period. For modeling purposes we recommend using a 20% effective tax rate for the fourth quarter 2014. Income from continuing operations per diluted share increased 21% from the year-ago period and 10% sequentially, to a record of $1.15 per share in the third quarter 2014.

Please turn to slide 6. I will now discuss revenues and operating results by business segment. Broadcast solutions generated revenues of $256.6 million during the quarter.

Compared to the year-ago period, revenues increased 43.2% or $77.4 million from $179.2 million. After adjusting for changes in [corporate] currency, revenues increased 4.6% year over year and 2.3% sequentially.

Operating profit margins within the Broadcast segments were 13.5% for the quarter, an improvement of 290 basis points sequentially. In addition to the favorable sequential impact from Grass Valley, this segment benefited from leverage and volume as well as favorable product mix.

The Enterprise Connectivity segment generated revenues of $115.3 million during the third quarter, decreasing $8.1 million compared to the year-ago period and $6 million sequentially. After adjusting for corporate currency and changes in inventory and our channel partners and customers, revenues decreased by 4.9% year over year and were flat sequentially.

As mentioned on the prior call, we are emphasizing higher value solutions rather than lower margin cable products. The year-over-year improvement in operating profit margins of 120 basis points and increased operating dollars is a direct result of the improved portfolio. The sequential decline of 40 basis points is due to seasonally lower volume.

Our Industrial Connectivity segment generated revenues of $171.1 million during the third quarter. Revenues increased $4.1 million from $167 million in the third quarter 2013.

After adjusting for changing corporate currency, revenues increased 3.5% compared to the year ago period. Sequentially, revenues decreased by $7.1 million from $178.2 million due to typical seasonality, as well as and unfavorable impact of foreign currency.

Operating profit margins were 13.6%, decreasing 40 basis points from the year-ago period and almost 60 basis points sequentially. Both the year-over-year and sequential declines are primarily a result of unfavorable product mix.

The Industrial IT segment generated revenues of $70.1 million during the third quarter. Compared to the year-ago period, revenues increased 25.2% or $14.1 million from $66 million. After adjusting for the addition of ProSoft and changes in currency, revenues decreased by 1%.

Sequentially, revenues increased by $16.8 million or 12.1% on an organic basis, in line with expectations. Operating profit margins of 18.6% increased [310] basis points sequentially, primarily due to leverage on volume.

If you will turn to slide 7, I will discuss our balance sheet highlights. Our cash and cash equivalents balance was $449.1 million at the end of the third quarter, a decrease of $54.7 million year over year and an increase of $4.1 million sequentially.

Inventory turnover was 7 turns, an improvement of 0.6 turns year over year and 0.1 turn sequentially. Days sales outstanding was 62 days in the third quarter, an increase of five days year over year and a decrease of one day sequentially.

Working capital turnover improved to 8, an improvement of 1 turn year over year and 0.1 turns sequentially. PP&E turnover was 7.6 turns, an improvement of 0.7 turns year over year and 0.3 turns sequentially, at least with our improved asset efficiency as seen on slide 7.

Finally, the stronger US dollar did reduce our total debt principal amount from $1.56 billion in Q2 to $1.54 billion in Q3. Net leverage decreased from three times net debt to EBITDA in the second quarter 2014 to 2.9 in the current quarter. We expect to exit the year at a level of 2.7.

Please turn to slide 8 for a few cash flow highlights. Cash flow provided by operating activities for the third quarter were at $63.2 million, compared to $67.3 million in the year ago period. Net capital expenditures for the quarter totaled $8.3 million, compared to $11.1 million last year.

Free cash flow, after capital expenditures, was $54.9 million. We remain committed to delivering our free cash flow in excess of net income for the full year.

For the quarter, we purchased approximately 432,000 shares of Belden common stock for $31 million. On a combined (inaudible) to date basis, we have repurchased a total of 6.3 million shares or greater than 13% of the Company at an average price of $44.77 per share. We now have $69 million remaining available under the current program.

Dry powder, at the close of Q3, was greater than $700 million. That completes my prepared remarks. I would now like to turn the call back to our CEO, John Stroup for the Outlook. John?

Thank you, Henk. Please turn to slide 9 for our Outlook regarding the fourth quarter and full year 2014 results. Despite a strengthening US dollar and uncertainty in Europe, I'm pleased to provide a full-year earnings forecast consistent with the prior quarter and in excess of the guidance communicated last December.

For the full year, we have narrowed the range for adjusted income from continuing operations per diluted share to $4.15 to $4.25 and expect revenues of $2.297 billion to $2.317 billion. Therefore, we expect our fourth quarter 2014 revenues to be between $590 million and $610 million. And adjusted income from continuing operations per diluted share is expected to be between $1.15 and $1.25.

Our assumption of a continued reduction of inventory at our channel partners and customers is unchanged from earlier this year. This guidance also incorporates a $15 million unfavorable impact on revenues from a stronger US dollar and lower commodity prices relative to our assumption at the time of our second quarter earnings call.

I look forward to sharing full-year 2015 guidance during our financial analyst and investor day held on December 2. Don, please open the call to questions.

Thank you.

(Operator Instructions)

Noelle Dilts, Stifel.

Hi, thanks. Good morning.

Hi, Noelle.

Hi. I understand you're giving guidance on December 2 for 2015, but I was hoping that you could maybe speak little bit more generally about your expectations regarding your opportunities by market as you look a bit further ahead? Where you're seeing some signs of improvement, where you think you can see a little bit stronger growth as you look out to 2015?

Sure. So I think that going into 2015, we remain comfortable with demand in the United States, which has been fairly consistent throughout 2014. I would expect that to continue. We're very optimistic about our Industrial businesses going into 2015 on a global basis. From a geographic point of view, I think that there's reason to be a bit cautious in southern Europe and also Brazil. I think the recent election in Brazil was disappointing from an economic point of view.

And as I mentioned on my script, I believe that we'll see organic growth in the Enterprise business in 2015, which will be extremely helpful. As I mentioned, if we had not taken these portfolio actions, which are very friendly to earnings in ROIC, we would've seen growth this quarter at about 3.4%, which is very, very close to the goal to 4% to 6%. So we enter 2015, I think, pretty optimistic about our ability to achieve our organic growth goal. Obviously, we look forward to having the full-year impact of Grass Valley, the full year impact of ProSoft. And the numbers that we've seen out there for 2015 by those who cover us, including yourself, seem to be pretty much in line with our expectations.

Okay. Great. And then digging into your expectation around organic growth in Enterprise, that's coming in spite of continued pruning of lower margin products, correct? Are you seeing a bit more traction in data centers? Could you just clarify a little bit where you're seeing some traction there?

Yes. So that's a great question Noel, because as you know, we put an emphasis on our Connectivity and Solutions business. We put an emphasis on data centers. We deemphasize cable only products. We deemphasize the LAN business. And that's created some fairly difficult comps for us in 2014. I look forward to rolling those over in 2015.

Just to give you some specifics, on a year-to-date basis, our Connectivity business is up 10% year-over-year. Obviously that's on a smaller number than the total but still nice growth, up 10%. Our data center business was up 10% in the third quarter, so also nice growth. And that means our cable-only, LAN business is down. And on a year-to-date business, it's down somewhere around 7% to 8%. So I look forward to seeing less pruning actions in 2015 because most of those will be completed in 2014.

And I look forward to the business performing in a more balanced way. They've done a great job this year improving their margins. They've done a great job improving their productivity. And I know the team is anxious to get back into a growth mode in 2015.

Thanks for the color. I'll hop back in queue.

You're welcome.

William Stein, SunTrust.

Hi, good morning.

Hi, Will.

Thank you for taking my question. I just, first, want to clarify FX in metals, I think you said had about a $5 million revenue impact on Q3 and a $15 million impact on your Q4 guidance. Can you confirm that? And let us know also is there any comment on the earnings impact, if there is one?

So you're correct. Our third quarter was negatively impacted by currency and copper for $5 million. And we expect an additional $15 million in the fourth quarter, so a total of $20 million for the full year. There's no impact to profit from copper. So consistent with what we've always said, we don't see any impact from copper. The currency impact is predominantly translating at our operating income percentage. So that impact is going to be fairly easy to anticipate. So operating margin's at 14% -- that's roughly the impact from the FX.

That's helpful. And maybe, what would be helpful, if you discussed a bit about the pipeline for M&A and maybe update us on the progress of Grass Valley and ProSoft. So the recent deals and what the pipeline looks like going forward. Thank you.

Let me answer that in reverse order if I can. We've owned Grass Valley for two quarters now, and I'm exceptionally pleased with the performance of the team. We are right on schedule. We've done a nice job, I believe, of integrating this business, and I'm very optimistic for the future.

We owned ProSoft for a little more than a quarter. They're also performing as we expected. The integration there is not nearly as intense, and, therefore, there's not the same level of integration focus perhaps as there is on Grass Valley with the same level of complexity. But that business performed in its first quarter with us exactly as we expected.

And then in terms of the funnel and the pipeline, it remains very rich, a lot of activity. Of course, activity doesn't necessarily translate anything that's rewarding, but I would say that the funnels continue to be managed effectively. We've got the same group of people cultivating the same list of opportunities. And we continue to be very confident that our strategic plan, including the inorganic piece of it, will continue to happen the way we've seen it in the past.

Thank you.

Shawn Harrison, Longbow Research.

Good morning, everyone.

Good morning, Shawn.

John, I guess I want to go back to your statement that Grass Valley is right on casual. It seems as if, based upon the results for this quarter or even the guidance, that you might be a little bit ahead of the accretion schedule for that. Maybe I'm parsing it out too much, but if you could help me out with just how you're thinking on accretion this year?

So I would say that my comments, Shawn, are universal as it relates to all the different things that we need to do with Grass Valley and probably not isolated to the financial piece of it. I think from an accretion point of view, our perspective on Grass Valley for this year is it's going to be right where we thought it would be. Maybe it could be slightly better but at this point we're not going to make that commitment.

But there's a lot of work that's had to go into that, a lot of complexity around the manufacturing integration that the teams done extremely well, sales force, consolidation. A lot of back office integration, and so the teams doing a great job. So I think you can expect that we'll be right where we told you, or if we're going to miss, we'll probably be a little better than what you thought.

Okay. That sounds great. Second, the Industrial IT, you sound positive on overall Industrial, that market. Yet I think organic was down in the quarter. I don't know if that was a carry forward of the issues last quarter, but why are you more bullish on that business here into the back half of the year, or I guess the end of the year and into 2015?

So for two reasons. One, is we entered Q3, as you know, with a lot of backlog. And we achieved our revenue number in Q3, or achieved the number we expected to achieve. And we ended up not bringing the backlog down as much as we had thought. So we're entering in Q4 with more backlog than I think we expected maybe three months ago. On a year-over-year basis, we are seeing some weakness in the utility sector, particularly in the United States and also offshore wind in Northern Europe.

So those are a couple of vertical market issues that we've had to work our way through. We mentioned in the second quarter there were some tough comps for the Industrial IT business this year. But I think they're working through it. And I think that execution continues to improve. So I feel good about that business, how that business is performing. And I feel good about the opportunity for growth particularly in the fourth quarter and next year.

Thanks John.

Thank you.

(Operator Instructions)

Gary Farber, C.L. King.

Yes. Thanks. Just two questions. Can you comment on your thought process on R&D that's implied in your fourth-quarter guidance and how you think about it just preliminarily for next year? And then just also on Germany, how do you think about that market going forward, in the short term at least?

So my expectations on R&D, Gary, are that our investment is going to be consistent. There are certainly no plans to reduce our investments in R&D. And obviously, it's focused in a couple of businesses. Our Grass Valley business has a high R&D investment. Our Industrial IT has a high R&D investment. And we'll continue to make those investments, and I would expect that, as a percentage of revenue, you wouldn't see any change there. And then your second question --

Around Germany.

Yes. Sorry. Around Germany. The business in Germany for the quarter was pretty good. I think that there were some numbers that came out of Germany a couple, three weeks ago that made people a little bit cautious, including ourselves. I haven't really seen that show up in the order book yet. And I think that there is a bit of an offset here. So even though there might be some weaker demand in Europe in general, particularly Southern Europe, the fact that the euro is weakening is a good thing for many of our customers.

And if they're dealing with a weaker currency, then, by definition, their products are going to be less expensive in the export market. And we all know that Germany benefits significantly from the export market. So at this point, I don't think there's any reason for concern in Germany. And I think the team is managing through that well.

And just with the data that you look at typically, for some of that stuff to show up in your results do you need to see -- is it sort of immediate, a poor PMI could show up pretty immediately in demand? Or it takes a couple of data points to really make a pattern?

Yes. So we probably have on average a three-month lag or so from what you might see in either exports, machine exports and our demand. So you're probably looking at a 90 day lag between real weakening in demand of capital equipment and how it might affect us. And then you're probably looking at another 90 to 120 days before you would see the benefit of the weaker currency that I talked about. So there's clearly a little bit of a lag to that.

Right. Okay. Thanks.

Thank you Gary.

John Quealy, Canaccord Genuity.

Good morning, folks. Congratulations on the quarter. So a question here, and I apologize if you've addressed this earlier, but within Broadcast -- I know we've talked in the past about some mini demand cycles there with the midterm elections and perhaps the broader presidential election. Can you just give us your thoughts on the domestic trends around the Broadcast business vis-a-vis that particular catalyst in your end market?

So the demand in Broadcast for the third quarter was good. It was probably stronger actually in the US than it was, say for example, in Europe. And that was a bit of a shift for us, which I think is good.

I would say the only thing in this market that we're working with our customers on is making certain that they understand how to make smart decisions as it relates to IT and how IT is used in the Broadcast application. And that's a wonderful opportunity for us because, as you know, John, we've dealt with this transition already both in Enterprise, decades ago, and in the Industrial factory floor 10,15 years ago, where most of our Broadcast competitors really don't have any experience with IT-based technology.

So the team's working very hard on our new product offerings. We continue to see positive trends with over-the-top. If anything, that's accelerating. There was some interesting data this summer out of how viewership is accelerating even more towards over-the-top, which means our customers have to invest in automation. And they're willing to trade capital for reduced operating expense. So I'd say the general macroeconomic trends in that market continue to be good. And I think the cycle, that four-year cycle you mentioned, John, is going to play out the way it typically does.

Okay great. And then, secondly, across the consolidated business, can you talk about the cadence of the quarter? Was September better than your internal expectations? Or how did it play out for the Q3 period?

I'd say pretty typical. Q3 is always the hardest for us because August is a crapshoot particularly in Europe. So I don't think I've ever gone through an August in my career where I didn't get a little anxious because July orders usually start real strong. August weakens as people going vacation, particularly in Europe. And then September ends up being a strong quarter. But I think it was pretty typical. The only thing I would comment on is orders in the first part of October were a little bit stronger than maybe what we had expected. So that, obviously, gives us a little more confidence as we move into the fourth quarter.

Great, thanks. And my last question for Henk perhaps on the buyback, give or take $70 million left. Do you deploy another $30 million, $33 million in Q4? Or how should we think about that in the next couple quarters? And then perhaps a re-up, how are you guys thinking about the capital there? Thanks guys.

We feel that the share repurchase is wonderful allocation of our capital and continue to execute on our program. As you said, we still have $69 million remaining under our current program. And we'll consider upping the program over the next one or two quarters.

Yes. I think the other thing I would add, John, is that if you look at our stock price today, it's pretty obvious that the market has not yet factored in the expectations we have for the Company in 2015 and 2016. So you look at the valuation on a trailing basis, it seems to be in line. You look it based on a forward basis, it looks to be an opportunity. So we, obviously, take that into consideration as we think about how we deploy capital.

Mr. Tractenberg, there are no further questions at this time. Please continue.

Thank you, Don. And thank you to everybody for joining today's call. If you have any questions, please reach out to the IR team here at Belden. Our e-mail address is investor.relations@belden.com. Have a great day everyone.

Thank you, ladies and gentlemen. This concludes our call for today. You may now disconnect from the call. Thank you for participating.