Ladies and gentlemen, thank you for standing-by. 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 Mr. Kevin Maczka. Please go ahead, sir.

Thank you, Mark. Good morning, everyone, and thank you for joining us today for Belden’s first quarter 2020 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 a strategic overview of our business, Roel will provide a detailed update on our operations and 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 two 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 three in our presentation. Before we review our first quarter performance, I’d like to discuss the COVID-19 situation and how we are responding. This unprecedented pandemic is putting incredible stress on the global economy and financial markets, and our associates, customers, and suppliers are experiencing disruptions in their daily lives that were unimaginable just a short time ago. Belden is certainly not immune from these new challenges, but we have the solid financial foundation to weather these difficult times. We are committed to protecting two our people and supporting our customers and offering our expertise and resources to assist in combating COVID-19. The health and safety of our associates and their families remain our top priority, and we are following CDC and WHO guidelines to maintain safe working conditions. We rapidly scaled our work from home capabilities in our offices, enhanced the hygiene practices in our factories, and implemented social distancing standards across our organization. We are also providing flexible working arrangements to help employees and their families navigate the disruption. I am extremely proud to report that our teams are rising to the occasion and finding creative ways to support local efforts to combat COVID-19. This includes donating cabling and connectivity products for ventilator production, and masks for medical centers and temporary hospitals in the United States, Wuhan and elsewhere. In addition, we are using our 3D printers to produce components for face shields for medical workers, and rapidly developing and testing designs for N95 masks. Our valued customers are feeling the impact of this global pandemic as well, and we are focused on keeping them supplied while keeping our associates safe. The majority of our sites have…

Thank you, John. Before I review our business segment results, I’d like to provide a more detailed update on our operations. As John mentioned, most of our U.S. and global facilities remained operational during the outbreak while implementing enhanced safety protocols designed to protect our associates. In most cases, we received exemptions to remain open because we qualified as an essential business based on the nature of our products. However, operations in countries with government-mandated shutdowns, such as India, were suspended in the first quarter and have not yet reopened. In addition, some facilities that were closed temporarily have reopened, albeit under capacity restrictions in some cases. In China, our Suzhou facility was previously closed due to government mandate but is now open and operating at full capacity. In Mexico, we are operating at limited capacity due to an agreement with the local government. Importantly, we have effectively shifted production from closed or impaired facilities to other facilities with little or no customer disruption. For example, in January, our customers in China were benefiting from our manufacturing capacity in Europe and the United States. In April, the opposite is true. We are extremely thankful that across our global operations, only a few Belden associates have tested positive for COVID-19 to-date. In each case, we followed our pre-established processes for site sanitation and employee quarantines, which resulted in temporary disruptions. We anticipate improving demand trends in the second half of the year, so we intend to maintain our direct labor force sized for normalized demand levels. During this temporary period of lower demand, our direct labor will allocate additional time to kaizens and preventative maintenance activities. The majority of our office locations have implemented work-from-home protocols, with our remote connectivity systems functioning well. From a supply chain perspective, we did experience…

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 will be referencing adjusted results today. Please turn to slide 11 for a detailed consolidated review. Revenues were $463.5 million dollars in the quarter, decreasing $36.6 million, or 7.3%, from $500.1 million in the first quarter of 2019. Revenues decreased 9.1% organically from the prior-year period, as a $17.0 million favorable impact from acquisitions was partially offset by an $8.2 million negative impact from currency translation and lower copper prices. After further adjusting for changes in channel inventory, revenues decreased 6.4% organically from the prior year. End demand for our products exceeded our shipments in the first quarter. Incoming orders of $489.0 million dollars resulted in a book-to-bill ratio of 1.06. Gross profit margins in the quarter were 36.9%, declining 50 basis points compared to 37.4% in the year ago period. This decline was due to lower production volumes and unfavorable product mix. EBITDA was $60.8 million dollars, compared to $76.4 million in the prior-year period. EBITDA margins were 13.1%, decreasing 210 basis points from 15.3% in the first quarter 2019. Our SG&A cost reduction program is ahead of schedule, as we delivered $5 million of savings in the first quarter relative to our original commitment of $2 million. We also continued to fund our growth initiatives and R&D investments, and we remain committed to these important projects. Net interest expense was consistent with the year-ago period at $13.3 million dollars. At current foreign exchange rates, we expect interest expense in 2020 to be approximately $57 million dollars. Our effective tax rate was 18.2% in the first quarter, as we benefitted from…

Thank you, Henk. The COVID-19 situation is very dynamic and visibility into the extent to which our global markets and manufacturing capacity will be impacted is limited. This makes it incredibly difficult to accurately forecast near-term trends. Given the wide range of potential outcomes, we are not providing specific revenue or EPS guidance for the second quarter or full year 2020 at this time. That said, the typical seasonal patterns are unlikely to hold this year. We expect our revenues and EPS to be lower sequentially in the second quarter. We are also anticipating significant reductions in channel inventory levels. Again, our prior planning assumption for the full year was a reduction of approximately $50 million, but we now expect approximately $70 million with the majority occurring in the second quarter. While we are not able to accurately predict the timing and magnitude of the recovery, our current expectation is that business conditions will bottom in the second quarter and we will see sequential improvement in the second half. We look forward to resuming our normal guidance practices once visibility returns. 11 That concludes our prepared remarks. Operator, please open the call to questions

[Operator Instructions] So, we will now pass to our first questionnaire, Noelle Dilts from Stifel. Please go ahead.

Hi guys, good morning and thanks for everything you guys are doing to support health care industry during the crisis. So, my first question was just on the channel partner inventory reduction $50 million going to $70 million. Could you just clarify, how much of that inventory reduction you did -- channel partner inventory reduction you did see in the quarter. And then I know in the past we have talked about and have that the Westco Anixter merger could have on inventory reductions that hasn’t closed yet. So, are you expecting potentially some additional inventory reduction beyond the second quarter as that closes? I just like to get -- I'm sorry, and also by segment. How you’re thinking about that inventory reduction would be helpful? Thanks.

So, thanks Noelle for the question. This is John, I’ll let Roel add. So, the $20 million that came out in the first quarter was what we had expected, and we thought there’d be another $30 million, we now think it'll be 50. This is obviously not a precise calculation. The process we use to get there is we start by forecasting what the sell-through will be at our channel partners, then we look at what their historical turns are. And then we calculate the amount of inventory that will either go up or go down. Given that we think most of our channel partners are also going to be focused on cash flow, like we and most companies are, we thought they might want to take turns off a little bit. And as a result, we thought that the inventory reduction could be a little bit larger. This by the way, is inclusive of the planned acquisition and integration of Westco and Anixter. So, this is all in there. We're not expecting anything in addition to that. As it relates to segments, our inventory at our channel partners is largely cable products. So, there's a few exceptions, but it's mainly cable, which means that it's going to be roughly split between our Smart Buildings business and our Industrial Automation business roughly, we do have a few customers that hold inventory. So, for example, in our Broadband and 5G business, we have some customers like Comcast and Charter that hold inventory and we look at that as well and include that in our calculation, but it's relatively small compared to the large channel partners.

And then again, understanding that there's not all that much visibility. Anyway, you could expand upon the trends that you're seeing so far in April, and kind of how the month has trended so far?

So, I think the question Noelle, it's a little hard to hear you. I'm going to let Roel answer, but I think your question was, what are we seeing in April and how is April been compared to March and where we are, so Roel do you want to give an update please?

Sure. April is trending according to expectations, we see APAC, our Asia Pacific region actually trending up relatively strong orders in China. BPC was off to a very strong start in April, but overall, we think the second quarter will be down sequentially from the first quarter.

And I think Roel, our order run rate in April so far has been fairly similar to what we saw the last couple of weeks of March. So, although it's changed a little bit by region, and it does bounce around a little bit, I think on an average over the last three or four weeks of April, we've seen demand be pretty similar to what we saw at the end of March, which was down pretty substantially compared to February.

We can now pass to our next question from Sean Harrison from Luke Capital. Please go ahead.

Hi, good morning, everybody. John or Roel, wanted to just think more about the Smart Buildings business because that's typically been a bit of a laggard, as we've done our downturn or recessionary type events. And so, is that something where maybe the pain isn't as immediate as you are seeing, particularly the industrial business right now and you would see maybe more of a downturn as we get into 2021. But just know how the cyclicality of that businesses potentially change since 2008, 2009?

So, as we highlighted, our Smart Buildings business is approximately 25% of our total within that 25 apart. That is in our in our opinion the most vulnerable to a downturn would be the commercial real estate, hospitality and retail, which is about 15% of our total. What we're seeing right now, Sean is a little unusual and I think it's a consequence of the shelter in place orders, where contractors are unable to actually do the work at the normal rate on projects that are already started. Our expectation is that will improve, and that we would see stronger demand in the second half for our Smart Buildings products. But that demand would be a consequence of projects that would have been started probably nine to 12 months ago. So, our belief is that most of the projects that were already started will be completed. We'll probably see softness is in a year from now, because we think it's unlikely there will be very much activity and starts in the second, third or fourth quarter within commercial hospitality and retail, so as we think about modeling, in my opinion, I would think that somewhere around the second or third quarter of 2021 we would begin to feel the negative effects of weakening starts within commercial hospitality and retail, which is about 15% of our total.

Okay, that's helpful. And then second just on free cash flow is a percentage of net income; I know you're typically targeting a hundred percent. Are there any dynamics this year other than kind of the lower profitability that would affect Belden achieving that goal?

Well, there's a little impact, this is a Henk, Sean. It does impact restructuring for sure as we execute our OpEx simplification programs, we expect funding here of approximately 50 million to get a 60 million annualized cost reduction.

We can now pass to the next question from Reuben Garner from Benchmark Company. Please go ahead.

Thank you. Good morning, everybody. Maybe just start with a follow-up on the question about Smart Buildings on slide eight. I'm a little surprised to see the commercial real estate part of that. Can you just maybe elaborate on what you're expecting there? And I guess the heart of the question is we've heard a lot of, are you seeing in media a lot of expected changes particularly in the office environment and how people work and where they work. And you'd think that there be more of a need for Smart Buildings and connectivity, if you will, in the office spaces. Is that not necessarily a big part of that 11%, or a big part of the new construction and that's why it's red, can you just kind of touch on that piece of it a little bit more?

Yeah. So, first of all, this is obviously somewhat speculative. And none of us know exactly how the economy will reopen, but as you said, we think it's likely in the future that people might view their investment in commercial real estate differently. They may think about how they use space differently. They may think about work from home differently. And so, as a consequence, we think that there's a good chance that the starts in commercial real estate in the second quarter and through the rest of the year might be down from the prior year. And if that's true, 12 months from now, we would see the impact from a square footage point of view. We would continue to expect the secular benefit of more connected devices within the installed square footage. And I think that will continue, but it probably won't be able to completely overcome the reduction in square footage. So, as we sit here today and we look at our portfolio, that's an area where we feel like there could be some headwinds, entering 2021 and we wanted to be clear and transparent with our investors about that possibility.

Great. Thanks. That's very helpful. And then Broadband and 5G, obviously green in the slide, can you just talk about what you're seeing here recently from an order trend standpoint, I'd imagine that there's more of a need another for increased speed and worth, can you just kind of tell us what you've seen so far over the last four to six weeks?

This is Roel, absolutely, that's absolutely true. As we mentioned in our prepared remarks, we sold orders up 4% in that segment, we furthermore continued to see a trend of very strong performance outside the home. So, our orders are actually up 9% in Q1 for outside the home products. So, this trend of people working more from home, spending more time in their homes and hence consuming more bandwidth, we expect to be very favorable for this business in the medium and in the longer-term.

Thanks. Good luck navigating through all this guys.

Thank you.

We'll now pass to the next question from William Stein from SunTrust. Please go ahead.

Great. Thank you for taking my questions. First, we understand your expectation for revenue to decline in Q2, we understand you cap size it. Can you helps perhaps better understand what we should expect from a detrimental perspective on gross and operating margins please?

So, this is Henk. I think we should model detrimental EBITDA margins of 30% to 35% and addition as included in our prepared remarks, we should also include roughly 4 to 5 million placeholder, because we’re planning to keep the capacity in our factories intact and expectation of rebound in the third and the fourth quarter.

So that placeholder is that sort of one-time -- in addition to that 30% to 35% detrimental or is that a comment as it relates specifically to cash flow but not EBITDA?

No, that's in addition to the detrimental and that’s temporary.

Okay. Thank you for that. One other, which is you did a -- the company was already in the midst of some pretty transformative events, sometimes you look to crises to expect well-managed companies to undertake some activities to transform the business to become stronger coming out. Belden sort of fortunate in that some of these were already underway with the Grass Valley divestiture and the $250 million of cable and wire and the restructuring. And so, one of those seems to be on contract happening Grass Valley, we have the 40 million upsize to 60, the 250 million divestitures on hold for now. Are there any other things that we could think of that either perhaps I missed in the script or other things that you're doing or thinking about doing that could improve your competitive position coming out of the crisis, I know you said M&A is off the table for now, but I don't know new product introductions or are you looking at the potential for smaller competitors to have a tougher time and maybe capture share. Anything like that we could point to be more optimistic about Belden's future.

Yeah. Well, so first of all, I thought you summarized our actions well. I also agree with you, that we are fortunate that we had begun many of these things well in advance of this crisis and that gives us a strong head start. It's a lot easier to increase a $40 million cost reduction to $60 million than it is to start one from scratch. So that's actually perpetuals for us. The other things I would say that we're doing that I think provide optimism is we're clearly much stronger financially than some of our competitors. That's obvious and we're already beginning to see that play out in terms of how customers think about choices that they make. And Roel and team I think are doing an excellent job of making sure our customers are aware of that and helping them make good decisions. The other thing is that this slide that we've showed all of you with regard to the markets that we would expect to actually benefit from this crisis and some of the ones that we think would be negatively impacted, Roel and team are already redeploying resources around this view. So, we've got in the case of, for example, commercial real estate. We know that we have a 12-month lag between when starts occurring and when we get revenue. And that means that Roel and team have a 12-month head start to figure out how we redeploy our resources towards other markets that we're much more bullish about like broadband. So, we can redeploy commercial resources, we can redeploy engineering resources, we can redeploy manufacturing capacity. That's a huge advantage. And then the last thing I'd like to say, the Roel already pointed in his prepared remarks, is the decision we made long ago to manufacture our products near our customers is proving enormously helpful. We're not having to deal with the kind of supply chain disruptions that people, other people have had to deal with. And I think at the end of the day, that allows us to continue to solidify the trust that we have with our customers. So those would be the things I would point out.

Thanks.

Thank you.

We can now pass to the next question from Jed Dorsheimer Canaccord Genuity. Please go ahead.

Hi, thanks. And thanks for those slides. It's helpful to kind of recognizing that that there's some variability at least shows it's helpful to understand the mindset. So, I guess my first question is around sort of that rebound slide. And just want to make sure I'm looking at it correctly if I -- weighted average the different segments. Looks like your expectations are at some point in time and kind of holding those yellows is outliers. For 50% of the business to be up 11% and 50% of the business to be down 5% to 7%. Is that sort of the right way to look at that? And then kind of have that yellow is a wildcard for the variability.

So, the green segments are all examples of vertical markets that we think will recover nicely from this business. So, if you look at our baseline, I think the math you're trying to do is we would expect that the businesses in green, which represent roughly 65% of our total. We would expect those businesses to get back to and grow off where we were. So that's the expectation we're trying to create that we would expect to fully recover and then seek growth from there. The reds are areas where we would not expect to recover back to where we were, at least not anytime soon. And the yellow we would expect that recovery to happen, but it would probably take a little bit longer. So, as we shared already, we haven't -- we're not providing guidance for the second quarter for the full year. But we're certainly trying to share with everybody how we're thinking about our end markets, how we're thinking about the likely recovery, and maybe most importantly, how we're thinking about how we deploy our resources and our capital.

Got it. That's useful. And then, Hank, just a question with respect to the EBITDA. I want to make sure I caught this correctly in Q2. The way to think about is did you say 35% reduction in EBITDA over Q1 sequentially. And then, reserving $4 million for kind of recovery in Q3.

No. What we what we said is the detrimental EBITDA margins on the sequential down in revenue, needs to be a roughly 30% to 35%. And then in addition, we'd like you to model another $4 million to $5 million of temporary inefficiencies that we're holding to ensure. We can respond to a recovery, an improvement in demand in the third and fourth quarter.

Got it. Thank you.

You're welcome.

We will now pass to the next question from Matt Delaney, Goldman Sachs. Please go ahead.

Yes, good morning. Thanks very much for taking the questions. First of all, it's something to better understand the cost reduction plan the $40 million and $60 million number. How much that is net savings? So, in other words, is that savings going to be reinvested? Or is that the net amount that the company expects to save. And along those lines, as I think about the quarterly trajectory of SG&A, I think it was $95 million this quarter, 35 million left to go for the 2020 savings. So, you have to take out on a quarterly basis, about 9 million or so per quarter. That will take down to mid-$80 million range but maybe could you even go lower than that because of the other temporary cost savings. So just can help us think about the quarterly trough this year.

Yeah. So, the cost reduction program will result into a $40 million improvement in SG&A, not in R&D. We're keeping our investments in R&D in place. And the cadence is $5 million the first quarter, $8 million in the second quarter, 12 in the third and 15 in the fourth. That's the best planning assumption.

Okay, that's helpful. And then my follow up question on Cybersecurity. There was a market that I think is in the green category. But also, the company mentioned some near-term headwinds. Just trying to better understand some of the trends that you've seen in terms of orders and within cybersecurity and the customer discussions about how quickly that the business could potentially come back? Thank you.

Yes, as we said in our prepared remarks, we did not see any project cancellations, nor did we see share loss projects that we would lose to competition. We expect this uncertainty so our larger customers dealing with social distancing and not necessarily receiving our engineers on-site to install our Cybersecurity Solutions to continue in the second quarter. But we do expect fully in the second half of the year our demand trends to improve. Our industrial offering, Cybersecurity offering remains robust and continues to do well. And we are certainly adjusting some of our products and actually launching some new products in the second half of the year that would help further secured networks in this environment of people working more from home.

Thank you.

We can now pass for our next question from Paul Chung, JP Morgan. Please go ahead.

Hi, guys. Thanks, thanks for taking my questions. So just a quick follow-up on free cash flow seasonality kind of assuming even stronger second half, kind of given the Q2 headwinds on COVID. But what are kind of puts in takes on working CapEx, you can kind of benefit from?

Yes, so we expect instability movements throughout the year. And pretty evenly an improvement in inventory turns and slight improvement in DSO, as we think for the remainder of the year and we'll hold accounts payable.

Okay. Thanks for that. And there's just a follow up on the Cybersecurity question. Are you seeing any kind of pent up demand? No once the COVID concerns come down doing it's becoming increasingly important for your enterprise customers?

While we're certainly seeing -- if the projects are not being canceled, and we're not losing to the competition and we will win them at a later point in time. So that would-be pent-up demand. It's obviously the question is the projects that we're originally scheduled for late to occur later on in this year will they still occur, will they shift as well? That's a little bit hard to predict. But we certainly expect very robust demand moving forward in the medium and long-term for our Cybersecurity offerings.

Thanks, guys.

Thank you.

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

Okay. Thank you, Mark. And thank you to 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. Thank you.

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