Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Incorporated Conference Call. Just as 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, Anna. Good morning, everyone, and thank you for joining us today for Belden's third-quarter 2019 earnings conference call. My name is Kevin Maczka. I'm Belden's Vice President of Investor Relations and Treasurer.

With me this morning are Belden's President, CEO, and Chairman, John Stroup; Chief Operating Officer, Roel Vestjens; and CFO, Henk Derksen. John will provide an overview of our third-quarter performance and the two other significant announcements that we made today.

Roel will provide, Roel will review our segment results, 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 excluding Grass Valley.

Please turn to Slide 3 in our presentation for a review of our third-quarter performance and two other significant announcements that we made today regarding our intent to divest Grass Valley and a new cost reduction program.

We completed a rigorous strategic review of our portfolio of businesses and our cost structure, and today's announcement marks an important outcome. We concluded that it is in the best interest of our shareholders, customers, and employees to separate Grass Valley from Belden. As a result, we are pursuing a divestiture of Grass Valley.

With the support of JP Morgan, we are engaged with interested parties with significant experience in the broadcast industry. Based on the approval of Belden's board of directors to divest this business and the probability of completion, Grass Valley's financial results will be presented as discontinued operations going forward.

This strategic action also provides an opportunity for a broad-based organizational recalibration. As a result, we are announcing a cost reduction program that is designed to improve performance, delivering $40 million in annualized SG&A savings and enhancing our EBITDA margins by approximately 200 basis points.

We intend to deliver these improvements by streamlining the organization and investing in technology to drive productivity. This includes consolidating our internal business unit reporting structure, realigning our sales and marketing organization, and optimizing other functional areas, such as finance, procurement, IT, and HR.

These actions will begin immediately with some benefit in 2020 and the full benefit realized in 2021. Belden has a long track record of substantial growth, margin expansion, and shareholder value creation. But we are not satisfied with our recent performance.

We are reaffirming our commitment to our stated financial goals, including total revenue CAGR of 5% to 7% and EBITDA margins of 20% to 22%. We will be well-positioned to achieve our goals after executing these actions.

Importantly, the expected cost savings will more than offset the free cash flow dilution associated with the divestiture of Grass Valley. Now turning to the third quarter results. Revenues of $533.1 million were near the midpoint of our expected range for the quarter, excluding Grass Valley.

Consistent with our expectations, demand trends remain softer in some of our key industrial markets in the third quarter, but we are encouraged by the improving trends in our broadband business. EPS of $1.18 was also consistent with our expectations for the quarter, excluding Grass Valley.

Finally, we are updating our expectations of revenue and EPS from continuing operations for 2019 since Grass Valley will be presented as discontinued operations for the full year. Please turn to Slide 4 for a review of the impact of today's announcements on our portfolio.

Following a Grass Valley divestiture, the remaining Belden portfolio will consist of strong businesses in attractive industrial and enterprise markets, each aligned with powerful secular trends. These include industrial automation, cybersecurity, broadband and 5G, and smart buildings.

This portfolio, while smaller, offers improved revenue predictability and multiple platforms for accelerating organic growth. In addition, we continue to see numerous opportunities to invest in compelling inorganic opportunities in these robust markets. The business will also be more profitable after the implementation of our $40 million cost program.

We expect the planned savings to be accretive to EBITDA margins and EPS by approximately 200 basis points and $0.70, respectively. In summary, we are taking significant actions that will result in a more balanced and profitable portfolio of growing businesses. We expect these improvements in turn to drive meaningful shareholder value creation.

I will now ask Roel to provide a review of our business segment results.

Roel?.

Thank you, John. Please turn to Slide 5 for review of our business segment results. Beginning with our enterprise solutions segment, I will be referring to adjusted results, excluding Grass Valley. As a reminder, our enterprise solutions allow customers to transmit and secure data, sound and video across complex enterprise networks.

Our key markets include smart buildings and final mile broadband. Consistent with our expectations, revenues in this segment declined 4.4% on an organic basis to $280.9 million.

Revenues in the smart building market were approximately flat on an organic basis, excluding changes in channel inventory levels, with the decline in the Asia Pacific region offsetting continued growth and share capture in the Americas. Revenues in final mile broadband declined 7% on a year-over-year basis and increased 7% sequentially, as expected.

Demand trends improved during the quarter, and we expect that momentum to continue. Importantly, we continue to see robust demand for our fiber optic products, with fiber revenues more than doubling in the third quarter.

Following the successful integration of two broadband fiber acquisitions earlier this year, we are significantly expanding our product offering and capturing additional share. Specifically, in the third quarter, our enhanced capabilities resulted in our first multimillion-dollar order from a large telecom operator related to 5G infrastructure.

We continue to pursue a number of other compelling inorganic opportunities that would allow us to further expand our fiber product offering and drive substantial growth. Enterprise solutions segment EBITDA margins were 16%. 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, mass transit, and energy. Revenues in this segment declined 3.1% on an organic basis to $252.2 million.

Consistent with our expectations, revenues were approximately flat, excluding changes in channel inventory levels. We continue to benefit from a balanced portfolio of industrial businesses. Demand remains robust in our process, mass transit, and energy markets, each of which increased at least 9% organically.

However, growth rates remained soft during the quarter in our largest industrial market, discrete manufacturing. Revenues in the discrete market declined 9% in the third quarter, with continued softness in Germany.

Given our recent order trends, the increased level of uncertainty in the global industrial economy and the weak manufacturing PMI readings in the United States and Europe, we expect the pressures in discrete to persist in the fourth quarter. In our cybersecurity business, we continue to make significant progress with industrial customers.

Nonrenewal bookings, our best leading indicator of revenues, increased a very robust 42% in the industrial vertical. However, total nonrenewal bookings declined after 4 consecutive quarters of double-digit growth due to project timing and sales execution.

We are aggressively implementing the appropriate corrective actions and expect performance to improve in the fourth quarter. Industrial solutions segment EBITDA margins were 17.8%. I will now ask Henk to provide additional insight into our third-quarter financial performance.

Henk?.

Thank you, Roel. 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'll be referencing adjusted results today, excluding Grass Valley. Please turn to Slide 6 for a detailed consolidated review.

Revenues were $533.1 million in the quarter, decreasing $20.9 million or 3.8% from $554 million in the third quarter of 2018. Revenues also decreased 3.8% organically from the prior-year period as a $10.5 million favorable impact from acquisitions was offset by a $10.5 million negative impact from currency translation and lower copper prices.

Adjusted for changes in channel inventory, revenues decreased 1.7% organically from the prior year. Gross profit margins in the quarter were 37.4%, decreasing 210 basis points, compared to 39.5% in the year-ago period due to lower volumes and inventory levels.

Our inventory balance declined during the quarter, as planned, which unfavorably impacted gross profit margins by approximately 60 basis points. We expect gross profit margins to improve sequentially in the fourth quarter. EBITDA was $89.3 million, decreasing $13.1 million, compared to $102.4 million in the prior-year period.

EBITDA margins were 16.8%, decreasing 170 basis points year over year. Net interest expense was consistent with the year-ago period at $14.2 million. 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 $56 million for the full year 2019, down from $61 million in 2018. Our effective tax rate was 17.7% in the quarter, compared to 21.6% in the third quarter 2018.

For financial modeling purposes, we recommend using an effective tax rate of 20% for the fourth quarter and 17.5% for the full year 2019. Net income was $53.8 million, compared to $61.6 million in the prior-year period. Earnings per share was $1.18 in the quarter, compared to $1.29 in the year-ago period. Please turn to Slide 7.

I will now discuss revenues and operating results by business segments. Our enterprise solutions segment generated revenues of $280.9 million during the quarter, decreasing 2.2% from the prior-year period.

Revenues were favorably impacted by $10.5 million from acquisitions and negatively impacted by $4.1 million from currency translation and copper prices. After adjusting for these factors, revenues decreased 4.4% organically on a year-over-year basis.

EBITDA margins were 16% in the quarter, declining 180 basis points year over year and increasing 30 basis points sequentially. The year-over-year decline resulted primarily from lower volumes. The industrial solutions segment generated revenues of $252.2 million in the quarter, decreasing 5.5% from the prior-year period.

Currency translation and copper prices had a negative impact of $6.4 million. After adjusting for these factors, revenues decreased 3.1% organically. After adjusting for changes in inventory levels at our channel partners, segment revenues were approximately flat organically.

EBITDA margins were 17.8% in the quarter, declining 180 basis points from the prior- year period and approximately flat sequentially. The year-over-year decline resulted primarily from lower volumes and unfavorable product mix. If you will please turn to Slide 8, I'll begin with our as-reported balance sheet highlights.

Our cash and cash equivalents balance at the end of the third quarter was $297 million, consistent with the prior quarter and down from $329 million in the prior-year period. Working capital turns were consistent with the prior quarter at 5.9 turns.

Day sales outstanding was 68 days, compared to 64 days in the prior quarter and 66 days in the prior-year period. Inventory turns were 5.3 turns compared to 5.1 turns in the prior quarter and 4.9 turns in the prior-year period.

Our total debt principal at the end of the third quarter was $1.42 billion, down from $1.48 billion in the prior quarter and $1.53 billion in the third quarter of 2018. Net leverage was 2.6 times net debt-to-EBITDA at the end of the quarter, consistent with the prior quarter and in line with our target of two to three times.

Please turn to Slide 9 for a few cash flow highlights. Cash flow from operations in the third quarter was $67.9 million, compared to $130.2 million in the prior year. The prior year benefited from a nonrecurring gain of $47 million related to a patent litigation.

On a trailing 12-month basis, cash flow from operations increased by 10% from $252.5 million in the third quarter 2018 to $277.9 million in the third quarter 2019. Net capital expenditures were $23.3 million for the quarter, consistent with the prior-year period. Free cash flow in the quarter was $44.6 million.

On a trailing 12-month basis, free cash flow increased by 5% from $160.8 million in the third quarter 2018 to $169.5 million in the third quarter 2019. 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. As mentioned previously, we are updating our revenue and EPS expectations for the year, and our new fourth-quarter and full-year 2019 guidance from continuing operations excludes the results from Grass Valley from all periods.

We anticipate fourth quarter 2019 revenues to be between $510 million and $530 million, and EPS of $1 to $1.15. For the full year 2019, we now expect revenues to be between $2.092 billion and $2.112 billion. We now expect full-year EPS of $4.32 to $4.47.

This EPS range does not include any benefit from our cost reduction plans, which we, are expected to be accretive to EPS by approximately $0.70, once fully implemented. That concludes our prepared remarks. Anna, please open the call to questions..

Thank you. [Operator instructions] We will take our first question from Noelle Dilts from Stifel. Please go ahead..

Hi, guys. Good morning..

Good morning, Noelle..

So first, just on the Grass Valley divestiture.

Could you just give us, you kind of mentioned high probability, but could you just give us a little bit of a sense of where you are in terms of the engagement? And maybe a little bit more on how you're thinking about timing there?.

Well, so Noelle, it's certainly our preference to be able to get that resolved as quickly as possible. We have been working on it for a little while. If we were in a position to announce something definitively, of course, we would have done it today, but we're not. So we're, it's top priority for me and for Hank.

We'd like to get it done this quarter, if possible. But if not, then we'll get it done as quickly as we can. But it's, it absolutely has our full attention..

Thanks. And then shifting over to the cost reduction program, the $40 million. Could you give us a sense of how that breaks out? And just kind of where you see some of those costs coming from within SG&A and generally? And then second, you mentioned you'll see some cost reduction in 2020.

Can you give us a better sense of how much you think you may recognize next year, and how quickly some of that comes through?.

Well, first of all, you were correct that it is SG&A..

Yes..

I just want to underscore that it's not R&D. So we're not expecting to make any changes in our R&D spend in total. We might reallocate from one business to another, which we do normally. So it is SG&A. It's going to come in all areas, so where it's going to be opportunities for us to reduce our G&A expense by streamlining the organizational structure.

We see opportunities to reduce our sales expenses by taking the opportunity to be more thoughtful about how we go to market, IT, finance. So it's broad based. This is a project we've been working on for quite some time. We've done a lot of work with the benefit of some external benchmarking.

So we've got a lot of confidence we'll be able to get that done without any impact to revenue. As of early December, when we have our investor day, more specifics with regard to how much of that $40 million would actually be seen in 2020.

But in terms of, just rule of thumb, I would say that if you exclude the cost of implementing the program, you're probably going to get $20 million or half of it in 2020, and then we would see the full benefit in 2021..

Okay, great. And one last question, if I may. Just looking at your guidance because you're now stripping out Grass Valley, it's just maybe a little bit challenging to make sure we're gauging that correctly versus standing estimates.

But just could you give us a sense of when you look across the core business? It sounds like maybe you took down your expectations a little bit in industrial, maybe a bit in cybersecurity, broadband, and enterprise about the same.

Is that the right way to think about it? Or am I a little bit off on that?.

We're with you. It is complicated given all the things that are moving, so let me give you some perspective. So first of all, if we adjust for the channel build a year ago in Q4, and we adjust for what we think the destocking will be in Q4 of this year, we're actually guiding growth on the high end, about 3%.

So this guidance is implying about 3% organic growth after adjusting for changes in inventory levels at our channel partners on a consolidated basis. That's going to be roughly balanced between the two platforms. We've got our industrial business. We think it's going to be up around 2% to 3%.

And we've got our enterprise business that we think is going to be up about 3% to 4%. So if we're right about that, then obviously we're going to be exiting the year with considerably more organic growth momentum than what, we have benefits from Grass Valley and disc ops, but it also benefits from stronger trends in our broadband business.

Our smart building business continued to do well in America. And our industrial business, if you put aside our discrete subvertical, which saw weakness this quarter, as well as the prior, which I think is consistent with a lot of other companies, our other three verticals all grew high single digits again in the quarter.

So if you adjust for the channel, which is big on a year-over-year basis, this guidance reflects healthy organic growth for the consolidated results..

Thanks so much..

Yes..

[Operator instructions] We take our next question from Matt McCall from Seaport Global Securities. Please go ahead..

Thank you. Good morning everybody..

Good morning, Matt..

So John, I think that the goal of these moves is, or you said, or I guess, the result of these moves is going to be better revenue visibility and EBITDA margins, maybe allowing your EBITDA margins targets to be within reach.

Can you maybe get into that a little bit more? What kind of revenue visibility? How long is, do you have the visibility over what period? And then where will the EBITDA margin stand post these moves?.

Yes. So without question, the business that's been the hardest for us to forecast has been Grass Valley for a number of reasons. One, of course, is the market itself is going through a lot of difficulty, a lot of turbulence. You see that with our competitors.

And then the other thing is that of all our businesses, it's without question, the most nonlinear. So a lot of our orders and a lot of our revenue come in the last month of the quarter, and we typically don't enter the quarter with a lot of backlog.

And that made it substantially more difficult for us to accurately forecast our results, and that is something that we were very good at pre Grass Valley and something that's been frustrating for us and for our investors. So we believe divesting Grass Valley will substantially help us there.

Now of course, as you know, our other businesses don't necessarily have a lot of backlog either, but the market conditions are more understandable and far less turbulent, and therefore, we think our ability to forecast will improve. As it relates to the profile of the business, we're expecting the organic growth profile to improve.

As I mentioned with Noelle, we're forecasting, or I should say we're guiding 3% on the high end organic growth, excluding changes in channel inventory. I would say in this market environment, that's quite strong.

We're expecting that the $40 million of cost reduction will be 200 basis points accretive to EBITDA margins, $0.70 accretive to earnings per share and neutral to free cash flow.

So we think that once we get through these changes, we have a business that, from a free cash flow point of view is equivalent, from a margin point of view, is improved, from an organic growth point of view, is improved, and we have a business that's far more predictable. And we think all those things ought to be well received by our shareholders..

Okay. Thank you for that. So I guess the next question, also multiple parts.

So are the portfolio moves finished, the cost savings initiatives finished? Is this kind of the extent of the announcement? And then on the cash flow comment that you just made, what are the plans for cash flow, really thinking about the impact on the balance sheet as we move forward?.

So I would never say this is the end of any activities with regard to either pruning the portfolio or driving productivity. So this is a substantial announcement today, and to the cost reduction.

But we certainly reserve the right to have further announcements with regard to pruning that would enhance our growth or margin and also enhance productivity that would improve our margins. So I'm not going to commit that this is it. There could be more to come, and there could be more to come in the near future.

With regard to the cash flow on the balance sheet, we're still planning by year-end to have leverage within our range. As I mentioned earlier, this cost reduction offsets the free cash flow of Grass Valley. So the balance sheet and the free cash flow generation of the business moving into 2020 is going to be in very good shape.

We'll get more specific with you about 2020 when we're together in December at our annual investor and analyst day, but I think you'll feel good about what the balance sheet's going to look like, just as you should, the growth in the EBITDA margins..

Okay. Perfect. Thanks, John..

Yes..

We take our next question from Gausia Chowdhury from Longbow Research. Please go ahead..

Hi, good morning. This is Gausia on behalf of Shawn Harrison. I just wanted to go back to the guidance question.

So just to make sure, apples to apples for continuing comps, what changed exactly? And where?.

Well, so we, of course, excluded Grass Valley. So, since it's in discontinued operations, we also updated continuing operations for our actual results in Q3 and our updated forecast.

I would say the only thing that changed meaningfully as it related to our outlook for Q4 outline based on conversations with our channel partners and also with their sell-through data, that it was prudent for us to include a larger destocking in Q4 than what we had originally contemplated..

Okay.

And then second, for free cash flow, is there an updated forecast then for 2019 that you could give?.

Yes. A couple of things that are moving around at TTM free cash flow in the third quarter, as I commented, was approximately $168 million. And a couple of things are moving around, the cost actions for sure. That's a question around timing, as well as the Grass Valley project that's under way. That could potentially impact our estimates.

So TTM $168 million. Everything else being equal based upon the channel impact year over year in QEC, EBITDA to come down a little bit implied in guidance. So $155 million, $160 million of free cash flow, everything else being equal..

Okay.

And then any plans for the, with the proceeds from the divestiture? Anything else that you would do?.

No change in strategy on proceeds. I think you should expect that our capital allocation will continue to be balanced. We'll prioritize our organic initiatives. We'll look at share buybacks. We already have an authorization if the stock is undervalued. And obviously, we'll look at bolt-on acquisitions, both within the broadband and the industrial space.

So no change in strategy in terms of capital allocation..

Thank you..

Thank you..

Kevin Maczka, there are no further questions at this time. Please continue..

Okay. Thank you, Anna, and thank you, everyone, for joining today's call. Before we close, I'd like to inform everyone that we will be hosting Belden's 2019 investor and analyst day event at the New York Stock Exchange on the morning of Tuesday, December 3rd.

At this event, we will provide a detailed update of the company's strategy for creating shareholder value. Please be on the lookout for formal invitations with registration details for those of you that would like to join us in person. The event will also be webcasted live and can be accessed via the Belden IR website.

If you have any questions, please reach out to the IR team here at Belden. Our email address is investor.relations@belden.com. Thanks, and have a great day..

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