Welcome to this morning's Belden Reports First Quarter 2023 Results Conference Call. Just a reminder, this call is being recoded. At this time, you are in a listen only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Aaron Reddington. Please go ahead, sir.

Thank you. Good morning everyone and thank you for joining us for today's Belden's first 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 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.belden.com. Turning to slide 2 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. First, I want to take a moment to express my gratitude to the Board, our employees, and our business partners. Over the last 21 years, I have held numerous roles at Belden. However, it is my honor to be able to continue my journey as President and CEO. I am truly excited about where Belden is headed as a company. We are executing upon our strategy, driving more innovation across our business, and adding to our world-class team in our transition to becoming a leading solutions provider. It’s an exciting transformation for the company and I am humbled by the opportunity. Now, to the task at hand, our quarterly results. As a reminder, I’ll be referring to adjusted results today. Please turn to slide four for a summary of the major accomplishments we achieved in the first quarter of 2023. First, once again our team delivered another outstanding quarter, with total revenues and EPS that exceeded expectations for the 12th quarter in a row. Our revenue grew, our margins expanded, and our organic growth exceeded our previously issued guidance for the quarter. Revenues increased by 7% organically, with positive organic growth in both segments. On top of solid growth, our EBITDA margins improved by 110 basis points to 17.4% for the quarter, driven by leverage on our organic growth combined with a favorable product mix. Growth in the quarter was broad-based across our businesses and our regions. As Belden continues to transform from a supplier of trusted products to a value-added solutions provider, we are seeing the results; improved and more consistent organic growth, increasing margins, and deeper customer partnerships. Second, I am pleased to announce that in April we closed on the acquisition of Sichert. I will provide more detail later, but at a high level,…

Thank you, Ashish. I will start my comments with results for the first 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. Now, please turn to slide eight in our presentation for a review of our first quarter results. We delivered meaningful growth and margin expansion again this quarter. First quarter revenue increased 5% year-over-year and 7% organically to $642 million, exceeding our guidance range of $615 million to $630 million. We had another impressive quarter in Industrial Automation with revenues increasing 9% organically. We continue to see compelling longer term demand drivers for automation solutions as industrial customers respond to labor shortages, capacity requirements, and the reshoring of production. Enterprise Solutions revenue increased 3% year-over-year on an organic basis, with mid-single-digit growth in Broadband Solutions and low-single-digit growth in Smart Buildings. Orders for the quarter came in as expected and we ended the quarter with a book-to-bill of 0.93, which was up from 0.91 in the prior quarter. Gross profit margins in the quarter were a robust 38.6%, up 80 basis points sequentially and up 400 basis points compared to a weak first quarter in the prior year. The quarter benefited from better than typical product mix and favorable absorption as we increased inventory to meet higher expected shipment levels in Q2. Given the strong start to the year, we now expect full year gross margins to be up at least 120 basis points compared to 2022. EBITDA in the first quarter increased 12% year-over-year to $111 million. EBITDA margins expanded 110 basis points to 17.4%. Net income in the quarter was $73 million, up 23% from $60 million in the prior year period and EPS increased 28%…

Thank you, Jeremy. Please turn to slide 11 for our updated outlook. Let me start by saying I am pleased with our first quarter performance. As discussed earlier, we exceeded expectations for revenue, EPS, and organic growth. Looking forward, we expect 2023 to be a year of continued macro uncertainty. However, our business is benefiting from long-term secular trends that have lengthy investment cycles. As such, we remain focused on expanding our growth opportunities and investing in both organic growth and bolt-on M&A. Given our solid first-quarter performance and recent capital deployments, I am pleased to share that we are increasing our full year revenue and EPS outlook and reaffirming our organic revenue growth targets. For the full year 2023, we now expect revenues of between $2.71 billion to $2.76 billion. We are reaffirming our consolidated organic growth of 3% to 5%. When we drill deeper, we continue to see Industrial Automation growing organically in the mid to high single-digits, Broadband growing organically in the mid-single-digits, and Smart Buildings remaining approximately flat organically year-over-year. We expect full-year 2023 EPS to be $6.95 to $7.25, representing EPS growth of approximately 8% to 13%. For the second quarter, we expect revenues of between $675 million to $690 million, with organic growth between 3% to 5%. We expect second quarter EPS to be $1.70 to $1.80. Our portfolio is designed to deliver organic growth in excess of GDP. We are confident in our ability to execute our strategy and generate sustainable, long-term shareholder value. Our transformed portfolio aligns Belden with key long-term secular trends. Investments in automation, reshoring, increased connectivity, increasing bandwidth usage, and network upgrades all bode well for Belden to produce sustainable earnings growth. Please turn to slide 12 to review our value creation framework before closing remarks. First, I would…

Thank you. [Operator Instructions] We'll go first to Mark Delaney with Goldman Sachs. Your line is open. Please go ahead.

Good morning and thank you very much for taking the question. Ashish first one for you given your change in responsibility. I mean, you spoke a bit already in your prepared remarks on prioritizing solution sales. Maybe elaborate a bit more if you could on what your key priorities are and if you can help us better understand how you plan to measure success?

Sure, Mark. Well, thanks for the question. So, as we've even spoken at our Investor Day last year, our strategy has changed from being a supplier products to providing value-added solutions. And what that means for us is understanding our customers' KPIs and meaningfully impacting them with either a network or a network and data solution. And we previously tested this approach in our Industrial Automation segment, which actually did very well over the last three years in terms of the solutions content in the business. We are now ready to take this across Belden, so I think our first priority going forward is expanding enhanced solutions delivery to our Enterprise Solutions segment. And there are many interesting vertical areas in that space. For example, healthcare, hospitality, higher education, whilst, of course, we continue to focus on data centers and -- which going to all these areas too. We obviously need to connect our solutions through our broadband connectivity offering to other places where data move to. So, I mean, at the end of the day, our job is to collect all the data within a certain operational infrastructure, make sure it is backhauled correctly or connected correctly to the backhaul so that it can be used by the applications customer chooses in order to optimize whatever they're trying to do. So, it's a reasonably simple and robust story. I think the we have marked is that we are the only player that happens to be in data acquisition, data transmission, data orchestration and data management, and that gives us a unique position to solve these problems. In terms of measuring success, we want to be very steady in terms of our solutions growth. So, currently, we are at that high single-digit, low double-digit mark in terms of our solutions content. And over the next few years, we want to steadily take this up to the 20% plus level, which would be very good in terms of margin accretion for us.

And is it a rough split of, like margin for a solution sale, how much higher margins in those sorts of target areas?

So, our margins are pretty high if you notice just on the base business itself, right? So, the way to think about this Mark is that today, there are OEMs, systems integrators, and contractors that take our products and create point solutions for our end customers. And we make, as you know, 35%, 37% margins in that space. Solutions margins typically tend to be approximately 10% 12% higher. If we can do the full network and data solution that's even higher because then we have, built in horizon that does data integration and it provides a very different kind of value. But I think more importantly than the base margin expansion is how much more sticky we become and how long term that relationship becomes with our customers.

That's very helpful. I think you just want one more for me if I could please. Maybe help us understand a bit better the dynamics at play with orders and backlog. I mean, I think your backlog was over $800 million at the end of last year and very high levels versus its history, orders, book-to-bill was under 1, but you guys had expected that. So, you just can help us understand the order environment and how much backlog maybe it gets worked out over the course of the year? Thanks.

Yes. So, in general, the markets we work in like we said, are driven by secular trends and long-term investment cycles, right? So, Industrial Automation obviously has is benefiting from labor shortage. Even the cost of capital changes help us in that market in terms of people needing to get their infrastructure more productive. So, we've noticed across verticals in industrial automation orders remain strong as expected. Obviously, overall, there has been some contraction because of the inventory positions that had been created last year. And -- but we are not a backlog driven business. And I think as supply chains normalize, customers are slowly reducing the early orders, but our backlog in 2022 was approximately 20% up versus 2021. And used to be -- at a point in time, used to be like at one month's sales in terms of backlog. In 2022, we were like three to four months of sales. So, even with that slight deterioration because of inventory adjustments, we are very well-positioned, Mark, at this point and we have no concern about the backlog.

Thank you.

We'll go next to William Stein with Truist Securities. Your line is open. Please go ahead.

Great. Thanks for taking my questions. Great quarter and outlook. Congratulations on that. I'd like to linger on the Smart Building business, it's the one that I think drives the most concern. I think you're guiding it flat for the year, which seems really quite positive considering, pretty -- I think a pretty negative outlook for non-residential construction. Ashish, in the past, you've talked about more revenue per project coming from upgrades versus new construction. Can you address perhaps the split between new construction versus upgrades and how that is trending or is expected to trend over time?

Yes, Will, so first of all, thank you for your kind words in the quarter. So, coming to our Smart Buildings business, so overall this market is facing, some negative pressure, it's soft because of what's going on with non-res as you pointed out, right? But we very nimble A, given our size, but B, I think, given the markets in which we operate, right? So, we have very limited exposure, for example, to China where there's been in the past some cyclical, non res growth. And we are in the markets where infrastructure upgrades are currently underway, like for example, in the US. If you look at airports or if you look at hospitals or if you look at education. And as more and more bandwidth is consumed, as more connectivity required, there's a whole cycle of build outs that's taking place. I don't have size numbers to share with you at this point in terms of how that splits out, but if you look at the priority verticals we focus on, we actually grew 8% in Q1 in those markets. And as we add more verticals to that list, I can be expect overall our Smart Buildings business in spite of the non-res pressure to be flat, maybe slightly positive, but in that range and we feel pretty good about it. Now, we have seen in some of the upgrade projects. So, this is more anecdotal versus empirical. We have seen the content of fiber going up significantly and that's great for us given some of the acquisitions we've done and built fiber capability more on the broadband side, but these are converging very quickly. And that's an opportunity we will keep working on in terms of how do we bring our total portfolio to bear on these on these upgrades?

Great. I have a bunch of other questions. Maybe I'll limit myself to one follow-up. Can you talk about the trend of cost inflation or otherwise in terms of inputs and then your process of ensuring that gets passed along to customers? I'm sure those are not completely in sync. I'm sure there's somewhat out of phase. I'm sure there's some delay, but maybe you can clarify both the cost cycle and the pricing cycle to us? Thank you.

Sure. So, first of all, inflation within our raw material areas has actually reduced, right? So, there's been a little more stabilization versus the volatility we saw in 2022. So, most notably, on the electronic component side, we've seen more stable pricing. And I think there are three things we do pretty well as a company. The first is just in terms of having mechanisms to pass on these costs. So, on our cable portfolio, there is a lag obviously, when cost go up, there is a lag between the commodity price going up versus when we can realize it and that typically tends to be within the quarter. So, it's not it's not that dramatic. And we've been pretty proactive in getting ahead of it as you can see reflected in our margins. On the other components, especially on the electronics side, it's a well-documented situation. And we've been pretty straightforward with our customers in terms of discussing with them how we can ensure on time delivery in return for certain cost escalation. And the value we provide to our customers with these solutions -- network and data solutions is so significant in those markets will that it's a small cost to them compared to what they would incur if the project were to be delayed or if the operations were to go down. So, I think pricing has been a strong area of performance for us. I think the second thing we do well has been engineering redesigns. So, for example, we made changes to some of our PPAs based on the components that were more available versus less available. We also changed I think more quickly than some of our competitors, how we were pulling these components together and for example, and I think you and I talked about this. We started using boards set for more design for Consumer Electronic versus Industrial Electronics because they were more available at that point in time in the market. And then, of course, the third thing that helps us is our regional manufacturing footprint and that helps us absorb some of these costs, especially around logistics. So, I'm not concerned at this point about raw material inflation, there's nothing that is unexpected or that we can't pass on with a constructive discussion.

Thank you.

We'll move next to Reuben Garner with The Benchmark Company. Your line is open. Please go ahead.

Thank you. Good morning, everybody. Congrats Ashish on the new role. Maybe just a big picture question from you. It doesn't sound like much is going to change in terms of the strategy, but just wanted to kind of clarify, do you foresee any shifts, whether it be an M&A or growth strategies is the solutions approach in the broadband side of the business. Is that something that, that you're bringing to the table something that was already in motion kind of prior to the to the change in CEO role, any anything else that jumps out to you that might be different with you going forward?

Thank you. So, yes, I can checking you right and, basically, as we've said before, there is no significant change in terms of strategy. We stated -- last year, we stated proud of that we are leaning forward to being a solutions company our capital deployment process focuses first on organic growth. Second on solutions-driven bolt-on acquisitions and then third on share repurchase. So, those things remain intact. I think what changes really is the flavor in terms of how much we will accelerate. And we've seen more and more customers talk to us about the problems of dealing with islands of automation, islands of connectivity, islands of network, islands of data, and feeling -- they're struggling in terms of how do we pull all of this together so that it's manageable whilst getting the eventual data and the insights we want right? And it's not a small problem. And I think as our appreciation of that problem and that opportunity has grown and as our engagement with selected customers in selected verticals has grown, we feel that we can take this broadly to multiple verticals. And as we do that, we also realize that the customer of today, that's operating some infrastructure, whether it's a hospital, a hotel, a factory, a smart city, whatever it is, they have to deal with a hybrid of connectivity technology, right? So, you can go all the way from copper based cabling to fiber, to IEEE Wi-Fi, to 4G, to private 5G, and they need somebody who can pull this all together when it connects to the telecom or the cable service provider, right? And that's where our broadband business becomes very valuable as part of the solutions process. So, previously, we had not necessarily articulated how broadband would fit in to our solutions offering. I think now we are very clear and we've really made acquisitions that position as well. Sichert, for example, is a great example of how within a smart city or a large campus environment, we could offer a converged solution including a broadband cabinet that makes it easy for a single owner or operator to manage their network and data. So, I think you're right. This is a story where we continue what we are doing. We just accelerate a lot more. We resource it a lot more. We are leaning forward in hiring subject matter experts. We're leaning forward on our CICs, by the way, our next CIC is being inaugurated tomorrow in Chicago, and there's another one coming up then in Bangalore. So, I think that's indeed the way forward.

And just to follow-up to that, what kind of investment do you foresee, are you leveraging some of the CICs you already have in place for the industrial side, or is this going to be a whole new sort of set for broadband? Any -- it sounds like you're hiring, like, how do we quantify? What kind of investment is it going to take for this this shift?

Yes. No, that's a good question. So, when we build the CICs, we always build them with the intention that they would present the complete building offering. It was not only meant for Industrial Automation. Remember, what we were doing was within Industrial Automation, we saw opportunity to go and pilot our approach because some of the problems that our customers in that space were facing in the last three years during the pandemic were more pronounced, shortage of labor, supply chains that were broken, cost of capital going up, aging equipment, lead-times and equipment. So, really that was the near-term opportunity for us. And to be fair, in the industrial space, we already had a reputation for full networks that were end-to-end, right? So, it became easier to go and offer solutions. Today, when a customer walks into a CIC, they see the whole -- the entire Belden portfolio at play right from how data is gathered from sensors in the shop floor, taken to the enterprise level where it's processed, connected through our broadband solutions to the information super -- highway or the telecoms. And so, really, that infrastructure will not have to be recreated. In fact, the one we have in Chicago coming up which will open tomorrow, we actually have a hospital and hotel room built in there to show technologies that go into a smart room. So, it's pretty seamless. Now, what we will have to invest in is as we activate new verticals, we have to invest in vertical-specific materials and training and there are use cases that need to be adapted by verticals. So, preventive maintenance is different in different verticals or customer experience is different in different verticals. And as you may have noted, we had a little extra spend in Q1, a lot of one-time items that we spent, basically, for developing solutions materials for new verticals. So, given our gross margins, we have the benefit in terms of that space to invest in those verticals. They might be a little bit leading forward in the sense that for the enterprise space, we may have to invest first before we can get all the results. The same thing happened on the Industrial side. But as a percentage of our revenue, it's fairly manageable. And yes, so I think the approach is fairly seamless. We will combine all our resources across the three businesses to take solutions to customers.

Fantastic. Thanks for the detail and congrats on the quarter and outlook. Good luck on quarter.

Thank you.

[Operator Instructions] We will move next to Chris Dankert with Loop Capital. Your line is open. Please go ahead.

Hey, morning. Thanks for taking the question. I guess to stay kind of on the CIC, the solutions there, how do we think about kind of marketing the capability that that Belden really has to help bring these islands data together? It seems like customers are often prize to just how much Belden can do for them in terms of increasing efficiency. So, how do we get the message out faster? I mean, is it really leaning on CICs here, is there an opportunity to add inside sales? We're just going to speak to the opportunity to move faster in terms of marketing.

Yes. No Chris, thank you. That's something on our mind all the time. How do we -- what's the balance between being able to deliver high quality solutions to the customers that we contract with, and how do we balance that with the need to grow faster. So, we've looked at companies that have transformed from products to solutions. And interestingly, only about 15% to 20% make it And if you look at the single biggest pareto for why the 80% fail, it's because they go too fast. And I think what's important for us is that this is truly a transformation and not a transplantation. So, it's not about getting new people and new assets and not changing the people we have. So, this is a lot about making sure that our existing people are able to design, support, deliver, deploy these solutions. So, we've been very measured. But I think you're right now that we have reached a certain point in terms of what we've achieved on the Industrial Automation segment -- Solution segment, it is time for acceleration. So, which is why we are now -- we are going through with all the CICs straight away. Within 2023, we'll have all of them ready. Previously, this was planned for 2024, 2025. We're increasing the rate at which we are hiring consultants. We already have 125. I think within this year, we should have another 30 to 40 especially focused on the traditionally enterprise segments. There's a whole change that's taking place also in terms of our go-to-market and lead generation process. We're leaning a lot more on digital means to do that. So, a number of investments are being made, but we want to be measured. And we want to deliver what we promised because I think that's what Belden ultimately stands for, right? We have this reputation of being extremely reliable. And we also know Chris that there have been companies that have come out and said hey, we can offer you data solutions and network solutions and they haven't delivered. They've always left the customer with some glitch or some connectivity problem or something that's missing and we don't want to repeat those mistakes. So, you might see a little bit of the legacy Belden mindset in terms of the speed at which we go forward. But I can assure you that a lot of investments are being made, and you will see a lot more acceleration.

Got it. Yes. No. Thanks so much for the color there. I guess just to follow-up here. Forgive me if I missed it, but do you guys break down kind of what fiber growth was in the quarter? Maybe just kind of any update on what you're hearing from customers regarding some of those projects related to the Infrastructure and Jobs Act? I mean, and just that again, anything out on fiber and broadband growth going forward here?

Yes, Chris. I'll give you the fiber number. So, fiber was up about 8% sequentially. And outside the home products within broadband were up I think 14% or 15% year-over-year.

Yes. So Chris, fiber has been a very dramatic success story for us in the broadband business side. If you remember in 2019, fiber was kind of mid-teens, and now it's closer to the 37%, 38% mark and it's obviously been growing very consistently. And a lot of our bolt-on acquisitions have been in that space including most recently Sichert. So, we believe in that market. Our focus will remain obviously on access technologies versus what I call the trunking technologies, right? So, we are not in the we are not in the bulk fiber. We are more in the high quality, high finesse fiber products that gives more access and bandwidth to users. And that is the market where we also see overlap with our Smart Buildings technology.

Got it. Well, thanks so much for the color there and definitely best of luck going forward here guys.

Thank you.

Thank you.

We'll move to our next question with Steven Fox at Fox Advisors. Your line is open. Please go ahead.

Hi. Thanks. Good morning. If I did my numbers right, it looks like you guys are outperforming on the incremental margin side. It looks like on a year-over-year basis, your incrementals were 40% positive and then, sequentially, the decrementals were only 12%. So, I was just wondering if you can explain that outperformance, especially in the context of maybe breaking down the 80 basis points of gross margin improvement quarter-over-quarter? And then I had a follow-up. Thanks.

Yes. Hey, Steve, I'll take a stab at that one. So, gross profit margins were obviously really strong in the first quarter. I think the key driver there was just a very rich mix of active products that we shipped out switches and routers, which tend to be higher variable margin than some of our other products. What we saw in the first quarter was maybe a little bit of easing in terms of components, getting components in from suppliers from some of our electronic suppliers and so we are able to catch up a little bit on some of those shipments. So, it was a really strong gross profit margin, really strong mix from a product stand point. In addition, in the script, we did talk a little bit of we got a small benefit from the inventory build in the quarter. So, inventory was up a little bit, which is not atypical for us in the first quarter. We basically have a little bit of inventory build. So we got some positive absorption in the first quarter as well.

Great, that's helpful. And then just on the acquisition, can you give us a little bit more color on maybe what type of growth trajectory this business was on, how much it contributes to earnings for the year or the quarter? And I guess, I'm just curious how quickly you can sort of take it across your sales network since it's a European it looks like it's a European based business? Thanks.

Yes. Let me -- I'll give you the numbers first and then I'll let Ashish jump in in a second. So, the business that we bought Sichert on a full year basis, it's roughly $40 million in revenue, but obviously, we're going to have a partial year of ownership in 2023. So, the contribution is roughly $30 million in revenue this year and about $0.11 of EPS.

And in terms of the business itself, so Sichert has been growing in the mid to high teens, right? It's been in this very exciting space, which is especially in Europe right now, there's a lot of fiber growth in that dark region driven by the data expansion, data privacy, there's a there's a lot going on. Now, this is similar to what our growth has been. So, I think it's not surprising. But it does add a very significant advantage to us in terms of portfolio because when we sell those cabinets, essentially a lot that goes into those cabinets, maybe 80% our other products from our portfolio. So, it does provide us a more solutions bundling approach. And we think we will be able to take this forward to different markets very quickly. And obviously these are polycarbonate cabinets. Some jurisdictions have different requirements. So, we may have to work through those. But broadly, this is a highly differentiated product, it comes with certain intelligence in terms of how it's secured. There's some software around how it's locked and managed and that's pretty unique too. So, we see a lot of customers already raising their hands and saying that they would like to learn more or do a proof-of-concept with us. So, it is indeed very exciting.

Great, that's helpful. Thank you.

Thank you. With no other questions holding, I would now like to turn the conference back to Mr. Reddington for any additional or closing comments.

Thank you, Jess, and thank you everyone for joining today's call. If you have any questions, please reach out to the IR team here at Belden. Our email address is investor.relations@belden.com. Thank you very much.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation, and you may disconnect at this time.