Ladies and gentlemen, thank you for standing by, and welcome to this morning's Belden Reports Second Quarter 2023 Results Conference Call. Just a reminder, this call is being recoded, and at this time you are in a listen only mode. But later, we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to VP of Investor Relations Mr. Aaron Reddington. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us for Belden’s second 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 contains 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 and good morning everyone. Thank you for joining us today. Let’s turn to Slide 4 for a summary of the major accomplishments we achieved in the second quarter of 2023. As a reminder, I’ll be referring to adjusted results today. First, once again our team delivered another outstanding quarter, with total revenues and EPS exceeding expectations for the 13th quarter in a row. Our revenue grew, our margins expanded, and our organic growth came in at the high end of our previously issued guidance for the quarter. During the second quarter, we achieved record quarterly revenue of $692 million, record earnings per share of $1.91, and we expanded our EBITDA margins by 120 basis points to 17.8% for the quarter. Very solid execution from the Belden team, well done. Growth in the quarter was broad-based across our businesses and 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 resilient growth, increasing margins, and deeper customer partnerships. Second, our segments continue to perform well considering the challenges and uncertainties around the world. End demand for our products and solutions was healthy, with both of our segments experiencing positive revenue growth with expanding margins for the quarter, tough to do in today’s environment. Sound execution across the business helped us achieve 5% organic growth company-wide, 8% organic growth in Industrial Automation Solutions, and 1% organic growth in Enterprise Solutions. Finally, as our business continues to grow, and we invest our capital towards high-return opportunities, leverage at Belden remains low at 1.4x, in line with levels a year ago. Our current balance sheet is strong with ample liquidity. Combined with low net leverage, we have significant flexibility to execute our strategic plans whilst staying…

Thank you, Ashish. I will start my comments with results for the second 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 8 in our presentation for a review of our second quarter results. We delivered meaningful growth and margin expansion again this quarter. Second quarter revenue increased 4% year-over-year and 5% organically to a record $692 million, exceeding our guidance range of $675 million to $690 million. We had another impressive quarter in Industrial Automation with revenues increasing 8% 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 1% year-over-year on an organic basis, with mid-single-digit growth in Broadband Solutions and a low-single-digit decline in Smart Buildings, which we will discuss later. Orders for the quarter were up 4% sequentially, we ended the quarter with a book-to-bill of 0.90. We expect orders in the second half to increase from the first half with our book-to-bill remaining below 1.0. Gross profit margins were a robust 38.1%, up 370 basis points compared to the prior year. The quarter benefited from a better-than-typical product mix as we continue to sell more solutions and generate favorable productivity. Given the strong start to the year in both Q1 and Q2, we are increasing our expectations for full-year gross margins to be up approximately 200 basis points compared to 2022. This would imply slightly lower sequential gross margins in the second half, given the strong outperformance in the first half. EBITDA increased 11% year-over-year to $123 million. EBITDA margins expanded 120 basis points to 17.8%. Net income in…

Thank you, Jeremy. Please turn to Slide 11 for our updated outlook. Let me start by saying I am very pleased with our second quarter performance. As discussed earlier, we met or exceeded expectations for revenue, EPS, and organic growth. Looking forward to the second half of the year, we expect 2023 to be a year of continued macro uncertainty where we gain incremental clarity as the year progresses. As it relates to revenue expectations, after the first half of the year, I am happy to report that we expect continued growth in our Industrial Automation and Broadband markets consistent with our past guidance. We see Industrial Automation growing organically in the mid to high-single digits and Broadband growing organically in the mid-single digits. As Jeremy mentioned previously, for Smart Buildings, which has a temporary channel headwind, we expect organic growth to be down low to mid-single digits for the full year. Despite temporary channel adjustments, let me reiterate my confidence in the Smart Buildings market. With our full suite of Belden products including fiber, combined with solutions, I see a much greater opportunity ahead for Belden over the long term. The impact on our business will be solely on revenue, which is why we are adjusting our full year 2023 revenue and organic growth estimates accordingly. For the full year 2023, we now expect revenues of between $2.695 billion to $2.725 billion with organic growth of 3% to 4%. Next onto earnings per share. I am happy to report that our business continues to execute with higher productivity and increased solution sales. Considering our strong first half and continued margin expansion, we are raising our full- year EPS targets. We now expect full-year 2023 EPS to be between $7.15 and $7.35, representing EPS growth of approximately 12% to 15%…

Thank you. [Operator Instructions]. Our first question today comes from the line of William Stein at Truist Securities.

Great. Thanks for taking my questions. Congrats on the better profitability in particular. But I'd like to ask about visibility in general and what's changed that result in this downtick in the full-year view. I understand you've addressed a lot of it in the prepared comments. It sounds like it's almost exclusively or exclusively in channel inventory in your Smart Buildings business. First, maybe confirm that understanding and then also we'd love to hear about what you might have learned through this process that would help mitigate a sort of channel build and this effect that we're seeing now from happening in the future. Thank you.

Good morning, Bill. Yeah, so just to reconfirm what we said in our prepared remarks. We, at this point in time, overall we see the Industrial Automation Solutions and the broadband business as consistent with our prior guidance. And within the Smart Buildings business, which is approximately 25% of our total revenues, the encouraging news is that POS, point-of-sale data and demand in Q2 for example was 2% up organically. And also about 35% of that business, which is focused on priority verticals that grew in the first half about 4%. So really the issue is limited to some of the more commercial real estate oriented markets there within Smart Buildings. And then the dynamic is really our channel partners feeling that they want to draw down more inventory and our prior estimates were that they would stop doing that about a couple of months ago. It's going a little further and I think that process is going to turn only sometime in Q3. As a result, we've taken the high end down by 1%, effectively 0.5% for the rest of this year. So yes, it's basically localized to that sub-vertical in the market and the dynamic is with the distribution process. Now, in terms of what we have learned going forward, I think as we've discussed on prior calls, we have really, over the last two years, worked with our channel partners on maintaining healthy turns. And we have not fallen into the trap of building up too much inventory. And I think there is some more fine-tuning we need to do maybe to that process in the Smart Buildings area. And that fine-tuning happens kind of automatically when you have more solution sales and end-user connection. And I think that, it just speaks to our requirement to build more solutions capability in Enterprise as a whole and in Smart Buildings specifically.

Second follow-up, margin performance, impressive both in the quarter and the outlook. I wonder if you can maybe quantify a little bit when, productivity and mix. Productivity I think we all understand, but when we talk about mix, maybe how much of the improvement is mix-related and then within that, how much is it just higher margin products or more solutions on? Thank you.

Yes. So, as you know, our best reference for that is our Industrial Automation segment. The solutions portion there is about in the mid-teens, 15% to 17% at this point growing. Now, the other way to think of that in our Industrial Automation portfolio is the portion that is active devices and software. That's about a third of our Industrial Automation business versus the passive products and components, that's the other two-thirds. Now, both solutions and the active portion are growing approximately high teens to close to 20% organically. And obviously that's driving improved margins essentially by leading with solutions that have more content of high margin products. We haven't done really any pricing this year. That’s not – I mean, we've covered that in the last 18 months. It's already behind us. We are very focused on driving more active and software content as part of the overall solution story. And then on the Enterprise side, we do see demand for more specialized fiber-oriented products, including connectivity. You've seen how we've transformed – you know our broadband business it's now approximately 40% fiber content. So obviously that's driving better margins too. I think the area of opportunity for us going forward in mix is how within Smart Buildings, we do more and more on the growth verticals. We did about 35% in the first half of this year. So this is really the data centers, federal healthcare, hospitality and in these verticals, we see that the KPI for the user is not just connectivity, but to do something with that connectivity, like saving a life for example, in a hospital. And I think those markets tend to reward us better for our specialized products. So that – it's really that story, right. The whole solutions positioning is starting to pay off very well in the industrial side. You see patches of it on the Enterprise side and more to come on that.

Great. Thank you very much.

Thank you.

Our next question comes from Fox Advisors and the line of Steve Fox.

Hi. Good morning. First, just to follow-up on all the comments you just made on the high-value solution. Is there a way to give us a sense for how much year-over-year margins benefited from just the mix shift or the higher sales of higher-value solutions? Then I had a follow-up.

Yes. Morning, Steve. So I would say that we are expecting gross margins to be up 200 basis points on a year-over-year basis. I would say that the bulk of that really came – I would say 95% of that really came from the solutions approach. We haven’t – like I said before, we haven't done any different pricing this year and we see that in different stages. So in the industrial markets, that solutioning has gone beyond network solutions all the way to data solutions, right. So more data management software for example, Belden Horizon is helping us there. On the Enterprise side, the solutioning is still maybe at the network level. But margins, even there, gross margins have gone up as a result of that. So to really put a brief answer on that, I would say all of our margin improvement is coming from solutions dynamics.

Great. That's helpful. And then looking at your top line, you discussed the Enterprise, the Smart Building piece thoroughly. But can we talk a little bit about broadband and industrial? On the broadband side, a couple of your competitors have actually been downgrading their sales forecast for the rest of the year as spending has slowed down. So I was curious if you could talk about that outperformance. And then from an outsider looking in on industrial, we're seeing purchasing manager indexes go down around the world, especially in Europe and Germany. And you're putting up 8% organic growth. So I was wondering if you could talk about that outperformance in what seems like a tougher market than 90 days ago. Thanks.

Yes. So consistent with what we've said in the past, I think our broadband business is benefiting from very long-term trends. We've seen really no change in orders or PRS for example with our operator customers. And they are benefiting obviously from infrastructure spend. The RDOF spend about $20 billion; over 10 is already started. [Inaudible] is coming up. I think our customers are preparing to deploy that funding. And the reason we're different Steve, from some of our peers is that we focus a lot on the MSO market and the operators who are building out the access portion of broadband versus telco, which tends to be more cyclical and is more the trunking portion of broadband and I think that's what differentiates us. Now, the interesting opportunity we have, and we're already seeing some of that, still early days, but a lot of those operators are looking for hybrid networks where they want to go into campuses, into buildings, and they need also products out of our Smart Buildings and industrial portfolio to help them with that. So, I think we've avoided the big spurt when telcos were investing rapidly, and we've avoided the reduction, so we've remained stable, and I think the broadband business is really on a very strong footing here. And then industrial, I think it's important to understand that there's been a dramatic change in our industrial business over the last three years. Like I said previously, about a third of the business is now active products and software driving solutions, and that needs to be comped with some of our solutions-oriented automation peers right, people who are not selling products or wire and cable products, but really the full solution suite. And that market – I mean if you look at the guidance…

Great. That's all really helpful. Thank you.

Thank you, Steve.

Our next question comes from the line of Reuben Garner at The Benchmark Company.

Thank you. Good morning, everybody. So, not to beat a dead horse here, but can you talk about the differences between Smart Buildings and your other markets in terms of how much you go through, like what percentage of your business goes through distribution versus working more on a solution direct with the customer approach?

Sure. So Reuben, first of all, the bulk of our business, both in Industrial Automation and in Smart Buildings is through channel partners, right, so it goes through distribution. I think the difference is that on the Industrial Automation side, a lot of the selling is now done by Belden Consultants and salespeople and supported by the whole Belden infrastructure. And the channel partners are really more in fulfillment, and we work very closely with them, identifying opportunities and fulfilling them, right, so that's an important piece of the solution there. On the Smart Building side, we are more dependent on our channel partners for sales, because the market is far more fragmented. Other than, in our priority verticals, where in the case of hospitality, healthcare, data centers, we get involved a lot more in the end-user sales process. So, I think – and by the way, just to complete the story, in broadband, it's really not through distribution. The overwhelming bulk of our business there is direct to MSO or direct to operator there. So coming back to Smart Buildings, obviously, as I said before, the opportunity for us is to get closer to the end-users in terms of understanding some of their challenges and creating solutions for them. We will always fulfill through distribution, because that’s – Belden is not equipped to do bulk breaking and distribution. That's not our skill. We want to focus on solution creation, and I think it's just that slight difference in Smart Buildings where we are less involved downstream and we want to get more involved.

Great, thanks. And then, understanding that you're not necessarily seeing weakness or a change in your Broadband Industrial Automation businesses, it sounds like a pretty consistent theme from some peers that others are seeing a slowdown. Are you seeing any kind of incremental pressure on pricing in any categories where you're getting kind of pushed back after a few strong years of inflation?

Yes. So, even before I answer the question, let me just clarify. Even on the Smart Building side, what we are seeing is change in channel draw dynamics. We are not witnessing end markets changing that much. Like I said, our POS and Q2 was up 2%. Our focus verticals in the first half were up 4%, and I think one difference is we are not exposed to hyperscale markets, which again like Telco are kind of cyclical, and we've remained focused more on those sub-verticals where the KPI is beyond connectivity. So, I just want to clarify that. And then, to your main question on pricing pressure. So, the business has transformed a lot and our customers see really the value of the solution in terms of the savings they get or the effect of the productivity they get. And as a result, those conversations have gone away from price per unit to really total cost of ownership of that solution. Now obviously, this is not across the board. We are still early in our solutions journey. But I think that's a big factor mitigating any price pressure. And the answer is not yet. We haven't seen people coming back and saying, this is more expensive than we expected. But people do want us to justify why we are a premium product and I think our consultants and our sales people are well equipped to do that.

Great. Thank you. Congrats guys on the strong results and good luck going forward.

Thank you, Ruben.

[Operator Instructions]. We'll hear next from Mark Delaney at Goldman Sachs.

Hi. Good morning. Thank you for taking the question. This is Morgan Leung on the line for – on behalf of Mark Delaney. So, thank you for all the color today. We just wanted to ask a little bit more about the demand trends you're seeing by region and how they might differ at all between North America, Europe and China. And I think you also talked a little bit about potential tailwinds from government funding in the Enterprise segment, so maybe talking about the dynamic with that regionally as well. Thank you.

Sure. So, if I think about kind of building across the board, really China is less than 5% of our business right now. And that is indeed the only region or sub-region which is down, and it's down kind of mid-single digits at this point. Non-China APAC by the way is up about 6% in Q2, so doing fine. A lot of infrastructure investments in those markets, especially in India, but pretty much across the board, electrification in Southeast Asia, a lot of data infrastructure getting built out. So overall we've seen strength across the board. I think the North American market, especially the U.S., remains very healthy right now, especially for Industrial Automation Solutions given the reshoring focus. I think it's really a bucking trend in terms of just overall what else may be going on in the economy. I think, in spite of all uncertainties, people are saying, we do need to produce more closer to the point of consumption and mitigate all supply chain risks. And then, if I think of the dark region, there is some impact given what's going on in Europe around geopolitics. So, it's not grown as much as you would have liked, but it's a very, very consistent, steady market for us, especially in automation. So, I think the big picture is China is down slightly as expected. It's a very small part of our business. Everywhere else we're doing fine. In the U.S. and North America especially, we're doing very well. And then, sorry, just to answer the second part of your question, tailwinds in Enterprise. Essentially, to be specific, that's in the broadband segment, where we've seen as I said before, the RO spending, $20 billion of infrastructure funding over 10 years. It started – we’ve seen evidence of that with some of our operating partners, MSO partners. And then, we're working really hard on getting new approvals in that space because of our increased fiber content. So, that's a good dynamic. And then once the big portion of the Infrastructure Investment and Jobs Act comes in, that's will really – that’s even 2x out of spending, so that will really provide more tailwind.

Okay, great. Thank you. That's really helpful. That’s all from us today.

Thank you.

And that was our final question from our audience today. Mr. Reddington, I will turn it back to you sir for any additional or closing remarks that you have.

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

Thank you, ladies and gentlemen. This does conclude our call for today, and you may now disconnect. Thank you for participating.