BELDEN INC. Q3 FY2024 earnings call

Major Accomplishments - Third quarter revenue was $655 million, up 8% sequentially, and earnings per share was $1.70, up 13% sequentially. Adjusted EBITDA margins increased 70 basis points to 17.2%. - Orders in third quarter were up 8% sequentially, marking fourth consecutive quarter of order growth, up 28% year-over-year with strength in both segments. Organic revenue growth returned to Americas region (over 60% of overall business) with positive 1% year-over-year. - Deployed $6 million to acquire Voleatech, a software acquisition to support active products portfolio and edge devices with firewall technology for industrial OT networks. Continued share repurchases, with 1.2 million shares repurchased using $115 million of free cash flow. - Won multi-year opportunity worth 25-45 million euros from Deutsche Bahn to upgrade high-speed ICE train systems and a $2 million project in hospitality vertical with a major gaming and leisure operator.

For the third quarter, Automation Solutions segment revenue was down 2% compared to the prior year, with EBITDA margins at 21.4% (down from 22.5% prior year) and orders down 1% sequentially but up 25% compared to prior year. Smart Infrastructure Solutions segment revenue grew 13% compared to prior year, EBITDA margins at 12.7% (down from 13.3% prior year), and orders up 18% sequentially and 31% compared to prior year. Automation Solutions revenue declined 3% organically year-over-year, but excluding discrete vertical, organic revenue growth was positive. Smart Infrastructure had improvements in broadband and smart buildings growth verticals.

Fourth Quarter Outlook - Anticipates order patterns to remain steady across markets. Revenues expected to be in range of $645 million to $660 million (17%-20% increase over prior year quarter). Adjusted EPS expected to be in range of $1.62 to $1.72 (11%-18% increase over prior year quarter). - Path to $8 EPS includes mid-single digit organic growth, 30% incremental EBITDA margins, and roughly $200 million in capital deployment, building on annualized $6.80 EPS from third quarter performance.

Risks - Market uncertainty with customers operating cautiously. Impact of U.S. elections and uncertain interest rate environment. Continued need to monitor inventory destocking progress and its impact on sales. Uncertainty in APAC markets due to multiple systems of governance and recent elections in some parts.

Q: Can you remind us – did that close at the end of last – the prior quarter or at the very start of this quarter? And if you could, disclose to us the revenue generated in the quarter from that company relative to your expectations.

A: The Precision deal closed right at the end of second quarter. Revenue came in right about what we expected, $34.5 million.

Q: Maybe you can sort of shed some light us to why that’s even being highlighted. Is it more strategic than some of the other acquisitions have been? Or does the strategic importance outweigh that $6 million price tag? And can you disclose the annualized revenue expectation there?

A: Voleatech is important because it accelerates unifying the security layer across all our active products, which is very important for customers concerned about security. The revenue itself is not very large, and we're not going to be disclosing it specifically.

Q: How should we think about gross margin that Lite just given there’s likely a probably higher percentage of passive component sales? How should we think about this dynamic as growth returns?

A: We continue to improve gross margin every year. Expect gross margins to improve between 50 to 75 basis points per year assuming mid single digit growth, as we're still early in the solutions sales journey.

Q: Is this just kind of easier comps versus last year when the deceleration there was a little bit more pronounced than on the industrial side of the business? And then I guess also on industrial solutions, can you just kind of walk through discrete process energy just how the underlying markets performed a little bit?

A: On a sequential basis, industrial has been pretty – we’ve seen nice gradual improvement from quarter-to-quarter. In that business, we’ve seen better performance obviously in process and energy and still a bit of a headwind in discrete automation. Within Smart Infrastructure, the growth looks better on a year-over-year basis and actually there was pretty decent sequential growth in both revenue and orders.

Q: I believe you said you’re still seeing destocking occurring throughout the channel even as revenues picking up sequentially. So hoping to better understand more specifically where you see inventory levels and distribution and any views around where inventory may be as the company exits this year.

A: Inventory at distribution is at a level consistent with longer term trends in terms of days of inventory at distributors. Still waiting to see additional improvement in POS as end customers or intermediate customers work through their inventory, but we think we're making progress and probably getting close to the end.

Q: My next question was about the $8 earnings target the companies had for 2025. I realized that was initially provided in a different macroeconomic backdrop. But maybe you can share your views around the potential to get to $8 of earnings in 2025. And if so, maybe talk about the path to get there.

A: We talked about the path to get to $8 at Investor Day. We used an annualized $6.60 in EPS based upon Q3 or Q3 guidance. And then we bridge that to $8 and that included mid-single digit organic growth off where we were in Q3, 30% incremental EBITDA margins and then roughly $200 million in capital deployment. Since then, nothing’s really changed other than we did slightly better in the third quarter. So the path looks very similar to that.

Q: I believe you characterized APAC as tempered in the prepared remarks, given the potential for stimulus in China. I realize it’s a smaller region for you, but any prospects for APAC to get better and are you hearing any indications of that from your customers or distribution partners?

A: The funnel – the sales funnel we have for projects across APAC, including China, is positively inclined. Once there are a few more confidence boosting measures in China and a few other markets in APAC, we think it’ll be better than expected. But we have been cautious because it’s a broad region with multiple systems of governance and recent elections in some parts.

Q: How are the conversations with your customers going in terms of planning and maybe just talk about how they’re thinking about investment, deployment.

A: Our sales funnel for projects is up mid to high single digits versus start of this year. More and more customers are talking to us about integrating IT and OT, looking for simplified integrated systems across IT/OT and single technology stack for hardware and software. These conversations are extremely encouraging across multiple verticals.

Q: How do you see the landscape, I guess for acquisitions and are you focused more on software today or how do you kind of think maybe about the balance of acquisitions, hardware versus software longer term?

A: We are certainly focused on three areas: edge hardware, wireless and security through M&A. We continue to enhance security through M&A, focusing on the layer closest to the network, which is where Voleatech comes in. These are the three areas we continue to focus on: edge hardware, software, wireless and security.

Q: Can you talk us through what the difference between Bolia Tech [ph] and the old Tripwire business is from maybe an application and technology perspective?

A: Our customers want their networks to be secure. Network access control is through macmon acquisition, but not fully integrated. Visibility software is partnered with others. Compliance is where Tripwire was, which was two steps away from the network. Voleatech is more at the layer closest to the network, providing unified firewall interface and software system for consistent experience across Belden Active products. So it's different from Tripwire which was more compliance, file integrity management.