Morning.
Thank you, Mark.
Thank you.
I thought we could start on a big objective that the management team has been focused on, and as you should know, has been a big priority of yours, and that's around solution sales. The company has talked about 10% of revenue coming from solutions sales as a target for 2024. Maybe just to start, level set us on what do you consider to be a solution sale, and where do you see that mix going over the longer term?
Sure. So solutions are kind of the mainstay of our new strategy, and the whole idea is that we have a fairly diversified portfolio with best-in-class products. But when we pull them together to provide the full data infrastructure for a customer that needs to deal with increasing volume, velocity, and variety of data, that is a solution because it goes end-to-end from all the sources to the destinations of data. And, yeah, so we started this process in 2020, mostly on the industrial automation side. We are now just over 10% of revenues from solutions. Our goal is to get to 20% by 2028. We stated that publicly. And within that, we see opportunities for both our Automation Solutions segment as well as what we call a Smart Infrastructure Solutions segment, which is more the enterprise-type applications of hospitality, healthcare, education campuses, etc.
and of course, industrial automation would be or automation solutions would be a little higher than 20%. Smart infrastructure would be slightly lower, but as a blended number, that's where we think we'll get critical mass.
And for it to be defined as a solution, it's anytime is it multiple products? Does it have to have software? I mean, when does it count as a solution?
Yeah, it's more to do with how we engage rather than exactly what we sell because sometimes the solutions process is a bit of a journey for a customer. But when we engage with a customer right from the outset where we've figured out what KPI they wanna improve, and then we've impacted their workflow and data flow design to then typically provide multiple products, including services and software, but it doesn't have to be. Sometimes it's hardware plus services. Sometimes it's, you know, hardware plus software. So it's some combination of things, but it's more to do with how we engage and how we construct that solution.
Okay. Jeremy, maybe I can go to you for this one. What does it mean for Belden's financial when a solution sale occurs, and is there typically recurring revenue that comes with a solution sale?
Yeah. So, solutions are generally speaking more profitable than just a typical product sale, mostly because of the fact when we sell a solution, we sell higher margin products. So we sell more of some of our active components: switches, gateways, routers, software, things of that nature. So, selling solutions is a very good strategy for us to improve profitability over time, and we've seen that progress so far in the industrial business.
You know, as Belden has talked about having an ecosystem of partnerships that it's utilizing as part of this solutions approach. You talked about Accenture. You talked about cloud providers like AWS and also some of the tech platform providers like Nokia. How is that affecting your ability to sell these solutions products?
Yeah. So, you know, at the outset, we said that our goal is to provide the data infrastructure solution that connects sources and destinations of data. So if you think of the sources and the destinations, they tend to be either hardware or software companies that either produce or consume or both, you know, with data. So think of AWS, for example. They want more data in the cloud, but they also recognize the fact that not all data needs to move to the cloud because it's super expensive, and it might be, you know, it might have too much latency. So, when we work with end customers, for example, in the manufacturing space, smart manufacturing space, having partnerships with, for example, AWS allows us to decide what data needs to move, and then we have pre-configured protocols. So think about this.
There are two languages, so to speak, or protocols that allow data to go to the cloud, but there are typically 260 languages spoken on an advanced manufacturing shop floor. So now we convert all of that to simple language. Let's call, let's call that Google Translate, for example. That's what we do. And then we port data to the AWS cloud infrastructure. So it's very beneficial for AWS to have us to do that. It's very beneficial for the customer that AWS and Belden are working together. And then, you know, recently, we talked about an acquisition called CloudRail that allows you to set up data to the cloud in minutes, literally. So it's a kind of plug-and-play product with some firmware.
And that has brought our partnership with AWS even, you know, it's made it even more close because now AWS can literally tell customers that if you plug in these devices anywhere, within minutes, we can have your data in the cloud. So I think that's one kind of partnership with a technology vendor. The other kind of partnership is with systems integrators like Accenture because while we wanna do the architecture of the solutions, we don't wanna do the implementation. That's not really our expertise. So, you know, the way to think about it is that we are producing fabric that needs to be tailored to a particular customer's sites, and I think we have a really good partnership with SIs, including with Accenture to do that.
Belden recently acquired Precision Optical and Voleatech to enhance its solution capabilities and offerings. Can you speak to how integrating these companies has impacted your customer engagement, and how has customer feedback been?
Yeah. So two different acquisition theses. Precision Optical really is a company that supplies very high-quality, high-end optical transceivers into the broadcast, sorry, into the broadband, service providers. So what Precision Optical does is they have hardware and software going into the data center of a broadband company but also into the equipment and the cabinets in the field. And then our legacy broadband business does everything in the middle of those two points, right? So now when we combine that, we are able to go to the customer with a full solution saying, "Hey, we can help you reduce your loss or improve your efficiency across this entire channel," and Precision plus Belden together can do that for you. Plus, they have a number of customers that, you know, we get access to.
So I think that's really very interesting in terms of growing our fiber footprint, growing our customer access. Voleatech, much smaller company, they do an amazing software interface for all sorts of firewalls. And we realized at Belden that since we had a number of different brands that had come together to form Belden solutions, we had slightly different software interfaces for each of our active products, and we decided to build a unified software platform. But now we don't need to because we acquired this company, and we can use that software. So it's kind of taken our R&D process, you know, it's taken it three years ahead. So different theses, but again, very good feedback from our customers. Even before we acquired Voleatech, we had already started working with them as partners, so our customers were exposed to that. Very exciting for us.
That's great. At your investor day in September, Belden highlighted a roadmap to increase Belden Horizon installs within its solution sales. Can you provide some color on where the company is currently with Belden Horizon and help us better understand how customer traction is progressing?
Yeah. So let me take a second here to just talk about what Belden Horizon is, and then we'll talk about where we've reached with that. So we talked about the fact that there are multiple sources and destinations of data. This is a big challenge for customers across industries, whether it's in manufacturing, mass transit, healthcare, whatever you, you know, whichever vertical you go to. And there is no, even if you buy equipment from end automation providers, there is no single orchestration platform where you can say, "All my data is accumulated in one place, and I can then hand it out to different people to process." So that's what Belden Horizon does. It's basically a data orchestration platform that sits on top of all the hardware and consumes all that data.
And it could be something as simple as making sure that all the temperature data is in one unit of measure, like Fahrenheit or Celsius. It could be something as simple as that. Or it could be we have vibration data, we have video data, and we have sound data, and it needs to be sent to different clouds because there are different applications sitting in different clouds that need to process that, right? So it could be something as complex as that. So Belden Horizon does all of that orchestration. So the reason we built it was not to start selling software standalone, but basically as a rubber band around our total hardware plus software offering because we would go to customers with a solution, and they would say, "Yeah, this is great. You guys are able to bring data from all sorts of places.
I don't know where to put it because, you know, if I put it in that data lake, then I can't serve it to another automation vendor's requirements. So how do we make it really universally available?" So we introduced Belden Horizon, you know, about two, three years ago as a very basic data orchestration platform. And now, you know, we had a lot of interest, by the way. So in our sales pipeline, a very large proportion of customers have now started working with Belden Horizon as their data integration platform. We've seen a number of successful implementations too, more recently in the last, you know, six to nine months. But coming up soon is a new version that'll also incorporate some AI features, and that'll allow a lot more autonomy in terms of how customers' data is orchestrated. They won't have to, like, have a person doing orchestration.
The system will do it for them based on set parameters. So that's kind of the next version. And again, a lot of customer excitement around that.
Horizon, would that product be applicable to both smart buildings and industrial customers, or is it more tailored for one kind of environment?
No, it's actually the one layer we have, which is fully, you know, interoperable. So in fact, one of our recent Horizon sales was to a hospital system where, in a hospital, you know, if you think about it, every device that monitors a patient's health in a hospital speaks a different language, a different protocol. And there was a big hospital system here in the U.S. that said, "I want all of that data on one screen so that somebody can easily see if that patient is healthy or not," right, versus having to look at, like, five different devices. So Belden Horizon was brought into that orchestration requirement. So yeah, it's applicable across all our verticals.
Really exciting to see the traction you're having there. Maybe we could pivot a little bit and speak to some of the end market trends. As of your last earnings report, the company had seen order growth sequentially for four consecutive quarters and discussed general stability and order patterns. Can you provide some color on what you're seeing currently in your end markets?
Maybe Jeremy can start, and I can chime in.
Yeah. Yeah, sure. So, I think in general, things have been progressing pretty well as we've moved throughout 2024. Remember, we had this destocking that was relatively widespread market-wide and across our different end markets that started in the second half of 2023. Since then, we've seen progression, like you said, every single quarter. We've improved sequentially in orders, on a year-over-year basis. I expect that we'll be up pretty substantially in the second half of the year, 2024 versus 2023. We're not quite back to where we were in the first half of 2023 before this destocking happened. But again, I think we're making nice, steady progress every quarter. And our perspective would be that that is mostly because we're getting through this destocking. So we're getting closer to the end than we are in the beginning.
And I think the good news here also is that it's not just one business that's improving. All three businesses have gotten progressively better as we've moved throughout the year. So in general, I would say we're optimistic. There's still a little bit of uncertainty for 2025. We don't have perfect visibility, but things continue to move in the right direction. So I think in general, we're pretty happy.
Yeah. And if I can just add, you know, as Jeremy said, we are optimistic. Of course, we are also cautious. We are looking at the environment around us. But if I think of a more medium-term view, right, which is, let's say over two, three, four years, one of the defining problems and opportunities of our time is around reshoring and reindustrialization. So everybody talks about reshoring, but we don't have enough workers to make all those products that we wanna reshore. So unless we elevate the productivity of those workers with automation, edge compute, AI, it's unlikely that we can attain that capacity or capability, right?
So I think a lot of companies, a lot of our customers across the spectrum, whether they work in manufacturing or whether they work in hard infrastructure like mass transit, or whether they work in soft infrastructure like hospitality, healthcare, etc., all of that, people are now realizing that they just don't have enough labor whilst they're also dealing with elevated costs of capital. I know they're coming down, but it's still elevated. And whilst they have this pressure to increase capacity, right? For example, we called our plant manager in Richmond and said, "Hey, we wanna make much more in the U.S." And he was like, "Yeah, but my machinery is all very old, and I don't have enough people," right? So we had to actually do digitization in our own plants, which is a great project, by the way.
We can see how capacity can increase by maybe 15%, 20%, 30% in existing infrastructure. So this is, I think, what we are seeing right now. Of course, it is the end of destocking, but we are also seeing the beginning of this whole reshoring, reindustrialization phenomenon. And again, in the medium term, we are extremely optimistic.
Jeremy, you said you're most of the way through destocking. Maybe help us better understand how you're assessing that and to what extent is there additional destocking that might be needed?
Yeah. So first of all, I'll say we don't have perfect information. I think we do sell through distribution. So as it pertains to our larger distributors, we do have good information, and we have seen inventory turns go up and days of inventory come down over the past year. So that is an encouraging sign. And roughly where we were before this or before even COVID happened. So I think we're in a good spot with respect to distribution. Maybe a little bit of noise could happen as we go into year-end, but I think in general, we're in good shape. Where we don't have perfect visibility is beyond distributors, right, because we're selling to a pretty complex value chain: distribution, OEM customers, machine builders, and so forth.
And so we don't have perfect information there, but I think the trends in general, again, are pretty good. So what we're seeing is POS, point of sale information from our distributors, is improving every quarter as well, which I think is an indication that their customers are getting through the destocking as well. So again, information's not perfect, but we've calibrated multiple data points that make us believe we're getting towards the end.
Maybe remind us how much of your business goes through distribution?
So most of the business goes through distribution with the exception of our broadband business, which is mostly getting sold to MSOs and telcos. Outside of that, virtually everything else is getting sold through distribution.
Any regional differences you would call out as you think about U.S., Asia, Europe?
Yeah. Me or you?
No, go ahead.
Okay. So, yeah, in general, I would say that the Americas is probably the best performing right now. So actually, we were up year-over-year in the Americas in the third quarter organically. So we're in good shape in the Americas. Asia is a smaller market for us. It's maybe 15% of total revenue, something like that. China in particular is pretty small. But I would say Europe is probably the most challenged area, or region right now. So Germany has been pretty slow. PMIs are still in the low 40s in Germany. So in particular, we've seen a little bit of weakness in discrete automation, and we've seen weakness in Europe.
You spoke a little bit around the elections and what that might mean for reshoring. Maybe you can double-click on that. I mean, are you having those kinds of conversations with customers already and seeing some momentum on that front, or is this more perspective and something that might happen next year?
No, it's already visible in our pipeline. So I think even pre-elections, most of our customers were convinced that whatever the outcome of the elections, there's gonna be a need for reshoring, whether it came through kind of an incentive-driven framework or a disincentive-driven framework, you know, tariffs, whatever. People knew that they had to invest, but there was some uncertainty. They were waiting. I think they were also waiting for interest rates to normalize a little bit, but our pipeline for solutions at the end of September was 30% higher than at the beginning of the year, right? So it's really grown a lot, and we have a far more stringent way of measuring pipeline now that we do solutions than we used to do products, right?
So the stage gate process is far more stringent, and conversion rates are actually pretty high, especially when a customer has visited our CIC and done a validation. By the way, the CICs are our Customer Innovation Centers where we bring in customers to tweak some of the hardware and software elements of the solution so we can validate that full solution for their applications. So really, pipeline has grown a lot. We see across, so it's a little muted even now in typical discrete manufacturing. It's still a little muted, but across the board, you know, if I look at power transmission and distribution, mass transit, healthcare, hospitality, if I look at some of the process industries, there's a lot of planning going on right now to increase capacity starting 2025.
Now, will some of those companies, you know, wait and see what happens to tariff policies exactly and, you know, before they kind of start digging? That is possible. There is still a little bit of speculation going on, but I think for the most part, everybody's gonna go, you know, pretty hard, starting 2025.
I just wanna make sure I heard correctly, 30% increase in the pipeline for solutions. That's over the last year?
That's between January 1st and September 30th this year.
Yep. Yep.
Okay.
And then you mentioned tariffs and that potentially being a challenge for Belden specifically. Help us better understand how much of your footprint is down in Mexico.
Yeah. So, so first of all, we make within region for each region largely, right? You know, 90% of what we make in a region is, what we consume in a region is made in the region. So we do have footprint across the Americas. We have manufacturing in Canada, in Mexico, and in the U..S. And the largest portion of that is in the U.S. And, you know, recently, I don't know whether you remember, but we built a new fiber facility in Tucson. We built a new facility for active products in North Carolina and Cornelius. We expanded our facility in Richmond in terms of the capacity. So, so yes, we do make products in Mexico, especially for a smart infrastructure solutions business.
But it's fairly easy for us to move them around within our footprint because our plants are large and they have multiple product categories being built there. So, you know, for example, we could move some of that to Richmond. So we are studying the tariffs carefully. You know, we have a team that's working on it right now. We don't obviously wanna do anything knee-jerk. So we're gonna, you know, let this whole thing evolve. But at this point, our assessment, our considered view is that we can manage the impact of those tariffs within our process, including with some pricing, and we are not necessarily worried about it.
Okay.
And we have levers to pull, like I said, in terms of moving the production.
Okay. Very helpful. Help me to better understand the company's exposure to the federal government vertical and maybe talk about your outlook for that end market.
So very small. You know, we have a couple of small businesses that do work with military and, you know, aerospace, those kinds of things. But generally, our exposure to federal government is very, very small, like in single digits.
Okay. On your broadband end market, the company has previously spoken about tailwinds tied to RDOF and BEAD funding. Maybe better help us understand what you've already seen from some of those programs, what might still be to come, and how impactful some of these stimulus measures might be for Belden.
Yeah. So we haven't seen anything from BEAD as yet. I don't, I don't think generally the market's seen anything. We see that more as a second half of 2025 start. We've certainly seen, you know, the benefits of the RDOF funding. And if you look across the usage plans that we've discussed with our MSO customers, so whilst there was a destocking phenomenon, there hasn't been really any reduction in their rollout plans, whether it's in terms of, you know, new homes passed or whether it's in terms of increasing the speeds by deploying more fiber or more technology around DOCSIS upgrades. So our, you know, our usage, our sales to them, adjusted for inventory or tracking those usage plans they had. There is a big move right now to upgrade speeds.
This is one of the reasons we did the acquisition of Precision so that we can be more involved in that whole electronic design process in the channel. But yeah, I don't see, at least for the MSOs, any change from their longer-term plan. I know for the telco market, it's been a little more lumpy, but our exposure to telco is very small.
I know broadband in the past has been a market that's actually had some of the bigger inventory fluctuations. I know, Jeremy, we'd already spoken around inventory levels, and you guys felt like things were pretty well calibrated. Is that, is that also true for broadband?
Yeah. Yeah. I think we made great progress. Actually, broadband is one of the businesses where we've seen the most sequential growth as we've moved throughout this year. So I think we're in a good spot with the cable operators at this point. I don't think there's much more to do. Again, fourth quarter is always a little strange from an inventory management standpoint, but in the grand scheme of things, I don't see that there's really much to go. I think we're in good shape. And just as a reminder, you know, Jeremy said, reminded me. So the broadband bookings growth in Q3 was sequentially 12%.
Okay.
Excluding Precision, right? And it was also positive the quarter before that.
Yeah. What do you mean by markets can be strange in the fourth quarter?
So we feel completely, we feel great about our guidance right now for the fourth quarter. My only point is that sometimes, like you see, you see exaggerated inventory reductions in the fourth quarter as companies' customers manage cash. So we'll see some inventory reductions, but that's already factored into our guidance.
Okay. Got it.
There's nothing, no new information here, really.
Okay. Yeah. I just wanna make sure I understood what you meant by strange. The smart building market has been affected by the remote work shift. How is that business tracking, and to what extent are you seeing strength in data center and including on-prem data center?
Yeah. So to be honest, our data center business is still small. It's a lot of upside here. We've generally avoided the hyperscalers because those are not really high-margin opportunities for us, even though they're high growth. So we have a very focused data center team that's been put in place. Our goal is to go to data center opportunities with a full solution around, apart from what goes inside the data center, which is called the white space. There is a whole gray space opportunity around substations, so providing the data center with electricity, security, you know, HVAC, etc. So we are going to data centers and saying that by combining smart infrastructure and automation technologies, we can give you a full solution.
And we've seen increasing traction with that because people that are building data centers right now are very, very concerned about how they would supply it with power, right? That's a big problem. But smart buildings as a whole, the good thing that's happened for us over the last two, three years is we've reduced our dependence dramatically on the commercial real estate piece, which is now so smart buildings is about half of the or about 40% of the smart infrastructure solution segment, which is about 45% of Belden. And within that piece of smart buildings, commercial real estate is now less than 20%. So overall for Belden, it's like 4-5%. It's not a big exposure. Our bigger focus is on hospitality, healthcare, education campuses, warehouses, and then also getting smart building products into manufacturing, mass transit, power transmission and distribution, etc.
And those are doing reasonably well for us in terms of growth opportunities.
You mentioned on the last earnings call as well as today and some of our conversation about the energy business being, you know, an attractive opportunity for you. And, you know, in the past, I thought of Belden as more of a data automation kind of exposed company, but we keep hearing around energy. So maybe help us better understand what you're doing there. Are you guys selling high-voltage cables, or is this more managing the back end of the data to power smart energy?
Yeah. Yeah. Yeah. So we are not doing high-voltage cables. So just to make sure that there's no misunderstanding, our focus is on the edge compute and data management in a smart grid, so what we call the power transmission and distribution area. So in general, there is adequate energy being produced in most markets. The inefficiency is in the distribution process, right? And there are a number of reasons for that. One could be simply matching where energy is produced to, you know, where it's required. The second thing is with renewable energy, there is a kind of peak that takes place during the day, and then it kind of goes down at night. So there is a, you know, a curve that has to be dealt with.
And then, of course, there is some kind of dynamic requirement where some places that could consume energy could also then produce energy and send it back to the grid when they have a surplus, right, because they have their own generation. So there are these dynamics that have to be managed. And this needs a lot of data integration. It's a very, very complex process. So, and a number of the grids that we have across the world, including in the U.S., still have a lot of analog kind of products in that data integration process. So, for example, we had a customer in Spain where if they had an outage in their grid, it would take them 140 minutes to find where it was because of all the analog equipment that was deployed, right? So we are going in and modernizing and digitizing all of that grid.
This is a huge market opportunity for us. We have by far the most comprehensive portfolio in terms of active products, passive products, and software to solve that problem. A lot of these energy grids are also moving away from the old SONET SDH communication systems to IP. As this transition is happening, that's a great market opportunity for us. Again, no high-voltage cables, nothing of that sort. It's all data integration.
Okay. That's very helpful. A couple of financial questions, if I could, to close out the session. Maybe first, Jeremy, you can help us better understand the price-cost trends that Belden has seen in the business and maybe talk about how much inflationary pressures there may be that you're dealing with in areas like materials and labor.
Yeah. So, for sure, we have seen the rate of inflation come down over the past few years. It was pretty high in 2022, 2023. That's come down at this point. There's still price increases that we're seeing in various markets, especially on electronics. We see that to some extent. For the most part, commodities like copper and other metals and things of that nature have been coming down lately, which is a good thing. I think we've in general our policy or our approach has been to manage prices along with these commodity price changes or increases in our input costs. And we've been pretty successful over time passing those through. I think we have a good process in place to take action quickly.
Like Ashish just mentioned, tariffs are another area where we could see cost inflation, and we'll have to evaluate price increases to manage that as well. I think we're on top of it. Up to this point, we've had good success passing that on. I think looking forward, the opportunity for us then is to continue selling solutions and continuing to do more value-based pricing even, which I think hopefully will be a little bit of upside for us over time.
That's helpful. And you've articulated an $8 earnings target for 2025. I mean, that was as of a prior investor day, but you've maintained it at your most recent investor day this fall. The company spoke about different pathways to.
Yeah.
Potentially hit $8. Maybe talk about any pathways that are more or less likely. And do you still feel like $8 is achievable?
Yeah. I think it's achievable. As we said, it's a path to get there. We're not guiding for 2025 at this point because I think there's still uncertainty. We're still not back to where we were completely in the first half of 2023. But to answer your question, the bridge from where we are today to $8, I think the most likely path is that we see growth, right? Think about maybe mid-single-digit growth of where we are in the second half of 2024, 20 for probably 30% incremental EBITDA margins, and then some amount of capital deployment in 2025. That is a path to get there. It requires the economy to continue to get better. It requires us to get through this destocking completely. Like I said, I think we're close to the end on that at this point.
But I think that's a very realistic path. We'll just have to see how the economy evolves and what tariffs could do or other policy changes, how those could impact the economy. But in general, that's the way we're thinking about it.
Maybe just, you know, lastly, you mentioned capital allocation.
Yeah.
Any specific plans for cash deployment as you think about the next 12-24 months? You, you just did a couple of acquisitions.
Yeah.
I mean, is there appetite and room to do more?
Yeah. I mean, we could certainly do more. We generate good cash flow in this business. And leverage is not excessive right now. We're right around two times net leverage. If we deployed no capital, we would be clearly under the one and a half times target by the end of next year, which means we could deploy capital. Certainly, we could deploy the free cash flow that we generate in 2025 and beyond, and still be in a good spot. With respect to the priorities, we talked about them in Investor Day a couple of months ago. Number one, organic opportunities, CapEx and products. Number two, M&A, and number three, share repurchases.
We'll have to leave it there. But Ashish, Jeremy, thank you both for joining us.
Thank you very much.
Thank you.