Ladies and gentlemen, Thank you for standing by and welcome to this morning’s Belden Incorporated Conference call. Just a reminder, this call is being recorded. 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 Kevin Maczka.

Please go ahead sir. .

Thank you, Nick. Good morning, everyone. Thank you for joining us today for Belden’s Fourth Quarter 2018 Earnings Conference Call. My name is Kevin Maczka. I am Belden’s Vice President, Treasurer and Investor Relations. With me this morning are John Stroup, President, CEO, and Chairman, 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 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 in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

For more information, 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, 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, CEO, and Chairman, John Stroup.

John?.

Thank you, Kevin, 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 fourth quarter performance. Revenues in the fourth quarter increased 8.1% year‐over‐year and 6.8% organically to $654.1 million.

When adjusted for unfavorable movements in foreign currency rates and copper prices, revenues were consistent with our expectations across most of our portfolio. Recall that we entered the fourth quarter with the expectation that capacity constraints in our Industrial segment would continue through the end of the year.

I am pleased with the progress we are making on expanding manufacturing capacity and reducing lead times. We expect these efforts to drive significant improvements in customer service and inventory levels going forward. EBITDA in the fourth quarter increased 10.4% year‐over‐year to $121.6 million.

EBITDA margins expanded 40 basis points from 18.2% in the prior year to 18.6%. EPS increased 2.5% in the quarter, from $1.62 in the prior year period to $1.66. As a reminder, the fourth quarter 2017 benefitted from an unusually low tax rate.

Net leverage was reduced from 2.5 times net debt-to-EBITDA in the third quarter to 2.2 times at the end of the fourth quarter. This is near the low end of our target range of 2 times to 3 times. We completed our $200 million share repurchase program by deploying the final $50 million in the fourth quarter.

We also announced a new $300 million authorization, which we expect to begin executing in 2019. Please turn to Slide 4 for a brief discussion of our full year 2018 results. In 2018, we generated record revenues, EBITDA, and EPS. Full year revenues increased 8.5% to a record $2.592 billion.

On a constant currency basis, revenues grew 7.9%, exceeding our long‐term financial goal of 5% to 7%. EBITDA increased 9.2% to a record $474.2 million, driven by robust 24% growth in the Enterprise Solutions segment. Enterprise Solutions benefitted from the successful integration of the SAM acquisition within our Live Media business.

EBITDA margins of 18.3% were consistent with the prior year. Lower interest expense and share count resulted in a 13.3% increase in EPS to a record $6.06. Cash flow from operations also increased by 13.3% to $289.2 million. 2018 was also highlighted by balanced capital deployment toward organic growth investments, share repurchases, and acquisitions.

We increased net capital expenditures to $98 million to fund a number of attractive organic initiatives that are expected to drive meaningful growth in future periods. This included investments in new hardware and software products, such as our successful Cloud‐based cybersecurity solutions, and a new manufacturing facility in India.

This important facility made its first shipments during the fourth quarter. We deployed a record $175 million toward share repurchases, and we also completed two strategic acquisitions for $103 million, and we are very pleased with the successful integrations.

The addition of Snell Advanced Media, or SAM, allowed us to significantly improve our Live Media business, and NT2 complemented the fiber offering in our Broadband business. Please turn to Slide 5 for a review of our business segment results. I will begin with our Enterprise Solutions segment.

As a reminder, our Enterprise solutions allow customers to transmit and secure data, sound, and video across complex enterprise and media networks. Our key markets include smart buildings, final mile broadband, and live media production. Revenues in this segment increased 14.1% year‐over‐year to $379.4 million, or 7.4% on an organic basis.

End demand in the smart building market increased 2.8% year‐over‐year in the quarter. This market continues to benefit from healthy non‐residential construction in the United States, and increased needs for contractor productivity and building efficiency.

This trend is best reflected by our innovative Category 6A cable products, which deliver both data and power over Ethernet. Category 6A cable revenues increased 23% organically in the fourth quarter and 28% for the full year. Revenues in final mile broadband declined approximately 5% on a year‐over‐year basis relative to our expectation of flat.

Recall that broadband order growth slowed in the third quarter due to customer inventory management, and as expected, that trend persisted in the fourth quarter.

We continue to drive robust growth with our fiber optic and our outside‐the‐home products, which benefit from increasing broadband subscribers and network upgrades, but we are seeing softer demand for products used inside‐the‐home. As a result, revenues declined modestly on a full year basis.

We expect these trends to continue, with growth in the outside network offset by softness in the home. We also see a number of attractive inorganic opportunities in the fiber area that would allow us to further expand our outside‐the‐home product offering and drive substantial growth.

Revenues in live media production were approximately flat sequentially in the fourth quarter. Importantly, orders increased sequentially and exceeded our expectations. Enterprise Solutions segment EBITDA margins were 17.8%, increasing 320 basis points from the prior year period, primarily due to acquisition integration and improved pricing.

Pricing gains throughout the year allowed us to successfully offset input cost inflation. Turning now to our Industrial segment, much like Enterprise, our Industrial Solutions allow customers to transmit and secure data, sound, and video, but in this case, in harsh industrial environments.

Our key markets include discrete manufacturing, process facilities, energy, and transportation. Revenues in this segment increased 6% on an organic basis to $274.7 million with strong growth in all key verticals. Discrete manufacturing and process facilities, our largest verticals, grew 7.5% and 14.3% respectively on an organic basis.

We continue to benefit from strong demand from machine builders and increasing investments in automation, and we expect these favorable trends to continue. Cybersecurity demand trends remain very encouraging.

Non‐renewal bookings, our best leading indicator of revenues, increased a robust 17% year‐over‐year in the fourth quarter after increasing 18% in the third quarter. Our new Cloud‐based solutions continue to gain traction with new and existing customers. Importantly, non‐renewal bookings increased 32% in Industrial end-markets.

We are further expanding our reach into this key vertical with the most comprehensive suite of products, specifically designed for industrial applications. Industrial Solutions segment EBITDA margins were 19.8% in the quarter. I will now ask Henk to provide additional insight into our fourth quarter and full year financial performance.

Henk?.

Thank you, John. I will start my comments with results for the quarter, followed by a review of our 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 6 for a detailed consolidated review.

Revenues were $654.1 million in the quarter, increasing $49.2 million, or 8.1%, from $604.9 million in the fourth quarter of 2017. Revenues were favorably impacted by a net $22.7 million from acquisitions and divestitures and negatively impacted by $14.5 million from currency translation and lower copper prices.

After adjusting for these factors, revenues increased 6.8% organically from the prior year period. Please note that the prior year period was negatively impacted by $36 million related to previously disclosed revenue recognition timing. After adjusting for this impact, revenues increased 80 basis points from the prior year period.

Gross profit margins in the quarter were 40.6%, increasing 130 basis points compared to 39.3% in the year‐ago period. Operating expenses were $156.2 million dollars, or 23.9% of revenues. EBITDA was $121.6 million dollars, increasing $11.4 million, or 10.4%, compared to $110.2 million in the prior year period.

EBITDA margins were 18.6%, increasing 40 basis points from 18.2% in the fourth quarter 2017. Net interest expense declined $1.5 million dollars year‐over‐year to $15 million, as a result of the successful debt refinancing actions completed in early 2018.

As a reminder, our debt is entirely fixed at an average interest rate of 3.5% with no maturities until 2025 to 2028. At current foreign exchange rates, we expect interest expense of $59 million for the full year of 2019, down from $62 million in 2018. Our effective tax rate was 17.8% in the quarter, compared to 4.6% in the fourth quarter 2017.

The prior year period benefitted from a number of incremental discrete tax planning initiatives. For the full year, our effective tax rate was 20.7%, compared to 13.7% in 2017. In 2019, we expect an effective tax rate of 21%.

As a result of the higher effective tax rate in the quarter, net income was $77.7 million, compared to $79 million in the prior‐year period. Earnings per share was $1.66 in the quarter, increasing 2.5% from $1.62 in the prior year period. Please turn to Slide 7. I will now discuss revenues and operating results by business segment.

Our Enterprise Solutions segment generated revenues of $379.4 million dollars during the quarter, increasing 14.1% from the prior year period. Revenues were favorably impacted by $29.6 million from acquisitions and negatively impacted by $7.2 million from currency translation and copper prices.

After adjusting for these factors, revenues increased 7.4% organically on a year‐over‐year basis. After adjusting for the revenue recognition impact in the prior year that I mentioned previously, revenues declined 3.1% year‐over‐year. EBITDA margins were 17.8% in the quarter, increasing 320 basis points from the prior year period.

The year‐over‐year increase was driven by successful acquisition integration and solid execution on our pricing initiatives. The Industrial Solutions segment generated revenues of $274.7 million in the quarter, increasing 80 basis points from the prior year period. Currency translation and copper prices had a negative impact of $7.3 million.

The divestiture of MCS completed at the end of 2017, resulted in $6.9 million lower revenues. After adjusting for these factors, revenues increased 6% organically. Demand remains robust across our industrial markets with orders increasing 6.4% year‐over‐year on an organic basis.

EBITDA margins were 19.8% in the quarter, declining 240 basis points year‐over‐year. Volume and price benefits were offset by temporary inefficiencies related to extended lead times throughout the supply chain.

We made significant progress during the quarter, but still incurred additional costs to support our customers and maintain our on‐time delivery standards. In addition, we continue to make strategic investments in new products, such as Cloud‐ based cybersecurity solutions, which are expected to drive growth in future periods.

If you will please turn to Slide 8, I will begin with our balance sheet highlights. Our cash and cash equivalents balance at the end of the fourth quarter was $421 million, compared to $329 million in the third quarter and $561 million in the prior year period. The year‐over‐year decrease reflects our capital deployments, net of cash flow generation.

We are very pleased with our capital deployments in 2018. This included a significant increase in organic growth investments, record share repurchases and two successful strategic acquisitions. Working capital turns were 9.5 turns, compared to 6.2 turns in the prior quarter and 8.2 turns in the prior year.

Days sales outstanding improved 6 days on a year‐over‐year basis, from 71 days in the prior year period to 65 days. Inventory turns were 5 turns, consistent with the year‐ago period. Our total debt principal at the end of the fourth quarter was $1.49 billion, compared to $1.53 billion in the third quarter and $1.58 billion in the year‐ago period.

Net leverage was 2.2 times net debt-to-EBITDA at the end of the quarter, down from 2.5 times in the third quarter and in‐line with our target range of 2 times to 3 times. Please turn to Slide 9 for a few cash flow highlights.

Cash flow from operations in the fourth quarter was $188.4 million dollars, increasing 24%, compared to $151.7 million in the prior year as a result of increased EBITDA and improved working capital. Net capital expenditures were $34.4 million for the quarter, compared to $29.8 million from the prior‐year period.

For the full year, net capital expenditures increased from $63 million to $96 million as we increased our investments in organic growth initiatives. This included new hardware and software products and our new manufacturing facility in India.

Free cash flow in the quarter was $154 million, increasing 26%, compared to $121.9 million in the prior year period. We generated free cash flow of $193 million in 2018, consistent with the prior year, despite the increased capital investments.

Finally, I am extremely pleased to report that we have fully remediated the previously disclosed material weakness in financial reporting related to revenue recognition in our Grass Valley business. Our new controls are operating effectively, and we are glad to put this matter behind us. That completes my prepared remarks.

I would now like to turn this call back to our President, CEO, and Chairman, John Stroup for the outlook.

John?.

Thank you, Henk. Please turn to Slide 10 for our 2019 outlook. We entered 2019 facing an increased level of global economic uncertainty and some secular headwinds in our Enterprise Segment. This will pressure our 2019 revenue and earnings growth rates. We anticipate first quarter 2019 revenues to be between $564 and $594 million, and EPS of $0.80 to $1.

For the full year 2019, we expect revenues to be between $2.495 billion and $2.595 billion, and EPS of $5.50 to $6.15. For financial modeling purposes, we recommend using interest expense of approximately $59 million and an effective tax rate of 21% for the full year 2019.

This guidance does not contemplate any benefit from potential M&A transactions or share repurchases in 2019. Please turn to slide 11 for a bridge that walks from our 2018 results to the high-end of our 2019 guidance.

Our 2018 results included $34 million in revenue, and $0.35 in EPS related to favorable revenue recognition timing in our Live Media business. This will not recur in 2019. In 2019, we expect to realize an incremental $9 million in revenue and $0.28 in EPS from the full year impact of our 2018 acquisitions.

At current foreign currency rates, we also expect 2019 revenues to be negatively impacted by approximately $22 million. After adjusting for these items, we expect organic growth to be approximately ‐2% to +2%.

Looking out beyond this year, I am confident that we have the strategy, balance sheet, and proven Lean enterprise system to drive meaningful growth and margin expansion longer‐term. That concludes our prepared remarks. Operator, please open the call to questions..

[Operator Instructions] And our first question comes from Noelle Dilts from Stifel. Please go ahead. .

Hi. Thank you. Good morning. .

Good morning, Noelle. .

I just wanted to start high level, I was hoping that in looking at your 2019 guidance, if you could give us a sense of what you are expecting in terms of growth rates and margins for Enterprise and Industrial? And if you could specifically speak to your expectations around Broadcast for 2019, that would be helpful. Thanks. .

Sure. So, from a top-line perspective, we would expect revenue growth in our Industrial business to be somewhere between 3% and 5% organically and on the Enterprise segment, we would expect it to be somewhere between zero to negative 5%.

From a margin perspective, I would expect the Industrial business to be somewhere between 19% and 20% EBITDA margins and I think that the Enterprise business would probably be between – somewhere between 17% and 18% EBITDA margins.

Within Enterprise itself, the Media business, as you know, Noelle, it’s little bit more difficult for us to predict given the lack of visibility and the lumpiness of the order pattern. But I would say in general, we would expect it to be somewhere around flat, maybe down a little, compared to last year.

But that’s as you know, probably the hardest one for us to be able to predict. .

Great. That’s helpful. And then, I think this quarter, again your Industrial results were quite strong in terms of the growth rates that you are seeing across the verticals.

Any pockets of weakness that you are seeing, just given some of the prevailing concerns around the industrial economy?.

We haven’t yet, Noelle. We had a really good quarter, again in our Industrial business across all four verticals and relatively consistent geographically. Even some folks have been talking about weakness in China, we haven’t really seen that yet. We had a good quarter in the fourth quarter with our Industrial business in China.

So we are expecting 2019 growth for Industrial to be similar to what we saw in 2018. So, although there are lots of comments out there about slowing in Industrial, we haven’t really seen it in our results yet. .

Great. Thanks, John. .

Yes. .

Okay, thank you. [Operator Instructions] Our next question comes from Shawn Harrison of Longbow Research. Please go ahead..

Hi, good morning everybody. .

Good morning, Shawn..

I was hoping – good morning, John. I was hoping to get a bridge principally for the March quarter year-over-year and I think you did $1.16 last year in earnings, but obviously you had a pretty healthy benefit from the rev rec dynamic helping out the March quarter.

So I was hoping to figure out, you are getting earnings bridge from March of this year to March of last year, at the start-off..

Yes, so, you are right. A year ago, we had revenue recognition in the first quarter from our Live Media business on product that had shipped and been invoiced in Q4. I think that was probably about $0.30 in the first quarter of last year. So I think you can take the $1.16 minus the $0.30 and that will get you to the starting point.

And then, as it relates to any other adjustments, there is a minor adjustment for currency, that’s probably about $0.03. And then, you could build it up from there in terms of volume. We are expecting volume to be up after you adjust for that if you go to our high-end. And then the fall-through we get on the volume, Shawn.

So, I think if you take that $1.16 less $0.30, you are going to get a pretty good starting point for a year ago. .

Okay. And then, a longer-term question, John. At the end of your commentary, you highlighted, you think you have the platform for growth, but just standing back and looking at EBITDA 2018 or 2017, you kind of get a tale of two cities in the business between Enterprise and Industrial and Industrial seems to be a lot of tailwinds at its back.

Why are you seeing momentum again? But now you’ve got some issues with PPC. You got the challenges with the Live Media business and despite the growth in CAT 6A, kind of the Smart Building business has some secular challenges as well.

And so, what can be done to invigorate the other side of the portfolio here? Because that really seems to be holding back the overall growth of the company. .

Yes, so, I’d agree with your observation. We are very happy with the performance of the Industrial business. Obviously, it’s benefiting from really good macroeconomic conditions, secular tailwinds that I think it will be with us for a while and I think our team is executing well. So we feel really good about that.

And as you I guess, referenced Dickens, on the other side, the table we’ve got a segment that’s struggling a little bit right now. I think that the three pieces of them we view a little bit differently though and we’ve had a lot of conversations you might expect with our Board about those three businesses.

I think the Enterprise business is in fact going to have to at some point weather some cyclical headwinds around non-residential spending. But I think, we are well positioned there. I like the secular trends. I like what our team is doing. I think the issues that we’ve been facing with Broadband, I view them as more short-term and temporary.

Clearly, we are seeing a little bit of headwind inside-the-home. But I think our strategy to continue to invest in outside-the-home products. We have a lot of confidence in the Broadband network being built out and we also have a lot of confidence in our ability to participate in the 5G investment.

So, although we saw weakness in the fourth quarter compared to what they have typically done, I think, as you know, Shawn, that’s a business that over the long run has performed well and that we have a lot of confidence going forward. As I mentioned Q3, the business that concerns me the most if our Live Media business.

There is a number of secular headwinds that that business has been facing, I think it will continue to face. That’s the business that we are giving the most attention to as it relates to how do we improve its performance and how do we think about it fitting into our portfolio in the long run.

I don’t have anything specific to say about that or any updates that I could share with you at this point. But I can tell you that business is getting a lot more of my attention than the others as it relates to how it fits into our portfolio in the long run..

Thanks, John. Very helpful. .

You are welcome..

Thank you. Our next question comes from Will Stein of SunTrust. Please go ahead sir..

Great. Thanks for taking my question. With regard to that Broadcast business, can you update us on the company’s announced plans for customer financing a couple quarters ago? Whether you are still participating in that? And then I have a follow-up please. .

Yes. So, Will, I suspect you are referring to the fact that there were some projects last year where we entered into capital leases with our customers, not operating leases but capital leases. I think that’s peaked in Q2 as I recall. It came down quite a bit in Q3. There wasn’t a lot of activity in Q4.

So, I would say, if you look at the balance sheet that’s included in the information we submitted today and it will be in our 10-K, I think you are going to see that there wasn’t a lot of movement from Q2 to the end of the year. And I really wouldn’t expect that balance changing substantially in 2019. .

Thank you. And then, the follow-up relates to the new Wi-Fi standard that’s emerging, it’s Wi-Fi 6 or 802.11ax. Do you anticipate that will have further problematic impact on - let’s say, CAT 6 and other related categories that you sell into? Thank you. .

So, my knowledge of that is on the surface. But I would say, in general, that what we’ve noticed in Smart Buildings is as Wi-Fi becomes more prevalent within the building, there is more items that are connected to the Wi-Fi which creates more opportunities for connection points.

So, our products are often connected because of the power that we can distribute to the end-point in addition to Ethernet. So my immediate reaction would be, I don’t view that as a concern, but something that we’ll talk about more – in more detail with our engineering team. But on the surface, I don’t view it as a concern. .

Thanks, John..

Yes. .

Thank you. Our next question comes from Mark Delaney from Goldman Sachs. Please go ahead..

Yes. Good morning. Thanks for taking the questions. First question, I mean, you could help us understand a little bit of the linearity of revenue as you think about 2019. If my math is right, I think building off of the midpoint of 1Q guidance.

And using normal quarterly sequentials, I think it gets me toward the lower-end of the revenue view instead it get to the midpoint it seems that at some point that may need to be a stronger-than seasonal quarter.

So, where may that come?.

So, I think, typically, our first quarter will represent somewhere between 22% and 23% of our total revenue. Now the only thing that you sometimes have to think about is that, within the year, or within the quarter, there could be some movements around some of our businesses that tend to be a little bit more lumpy.

So, we could have $5 million or $10 million move from one quarter to the other. But I believe the guidance that we gave for Q1 and for the full year is consistent with our typical seasonality where Q1 would be between 22% and 23% of our total revenue. .

Got it. That’s helpful, John. And then, my follow-up is on the Security Software business and John, you mentioned the strength in non-renewal bookings for a couple quarters in a row now.

Help us understand how much of the Security Software business is now cloud-based products? And what’s embedded in the 2019 revenue outlook from Security Software? Thank you. .

Yes. So, the Cloud-based revenue is still relatively small compared to the entire business model, perpetual licenses continue to be strong.

What we have noticed however is that, our customers’ strong interest in Cloud-based products either in the cloud or the cloud or from the Cloud is clearly having an impact on their willingness to continue to invest in our product-line and to move forward with deploying more assets as it relates to both our SCM, as well as our VM product-lines.

So, I would say, we are seeing good growth in our Cloud-based products. But we are also seeing the benefits in our historical or legacy products from the confidence I think our customers are getting from the product roadmap and the investments we are making in the overall products. .

Thank you. Our next question comes from Steven Fox from Cross Research. Please go ahead. .

Morning. Two questions from me please. First of all, John, can you just sort of round out the organic growth discussion you mentioned, Enterprise being flat to down minus 5% and Media being flat to down a little bit.

What should we think about, in terms of trends in Broadband for the year and traditional Enterprise?.

So, for the Broadband business next year, I would expect it is going to be close to flat, maybe up a tad. I think it’s going to be a bit of a battle where we are expecting strong growth in outside-the-home products. We had strong growth in our fiber products last year. We expect that to continue in 2019.

But we think that we are going to see continued headwinds from inside-the-home products. So, probably about flat would be my best guess. And then on the Enterprise business, I think it’s going to be more of the same. I think you are going to be looking at somewhere between 0% and 3% growth. It might vary from quarter-to-quarter.

I think you are going to see stronger growth in CAT 6A. I think you are going to see slow growth or even declining revenue in the CAT 5 and CAT 5E product-lines. Based on what we are seeing right now, we don’t see a slowdown in non-res spending through the rest of 2019. So, I think that business will probably perform in 2019 like it did in 2018. .

That’s helpful. And then, in terms of just the traditional Enterprise business, so, you seem to be comfortable with the backdrop for non-res spending and as you mentioned, if it slows down that’s a problem for the business. But in the mean time, growing at 0% to 3% seems GDP or less like.

Could you just maybe expand on what else is going on under the cover there? Whether it’s pricing, competition, or maybe you need to up the innovation cycle in order to meet what your customers are using in the local area networks. Any color there would be helpful. Thanks. .

Yes. So, for the last couple of years, the challenge that business has had has predominantly been around the fact that the building itself has changed. There is fewer traditional connect points for copper as Wi-Fi gets deployed more aggressively.

Then over time, what we’ve noticed though is more devices, more things being connected via traditional copper devices. And we are beginning to see that reach equilibrium over the last, I’d say two to three years, it was clearly a headwind as you had less traditional jacks in the office, fewer telephones being connected.

Now you’ve got more Wi-Fi ports being connected. You have more intelligent devices like security cameras, sensors and so forth. So, I think the secular trends are moving from negative to positive. And I think the question now is, cyclically, where is the non-res business in the cycle? I think it’s going to be good in 2019.

I think there is a possibility that our Enterprise business could do better than the guidance we’ve given. But sitting where we are today, we thought it was prudent to expect the business would do similarly to the way it did in 2018. .

Thanks for the color. .

You are welcome. .

Thank you. And we have no additional questions at this time. .

Okay. Thank you, Nick, 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 e-mail address is investor.relations@belden.com. Have a great day..

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