CommScope Holding Company, Inc.

Gentlemen, hello and welcome to the CommScope fourth quarter and full year 2020 results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone phone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Russell Johnson, Vice President, Treasurer and Investor Relations.

Good morning, and thank you for joining us today, and welcome to our fourth quarter and full year 2020 earnings call. I'm Russell Johnson, Vice President of Treasury and Investor Relations, and joining me today are Chuck Treadway, President and CEO, Alex Pease, Executive Vice President and CFO, Morgan Kirk, Executive Vice President, CTO and Segment Leader for Broadband Networks, and Bud Watts, Chairman of the Board. You can find the slides that accompany this call on our Investor Relations website. Please note that some of our comments today will contain forward-looking statements based on our current view of our business and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, just a few housekeeping items to review. Today we will discuss certain adjusted or non-GAAP financial measures which are described in more detail in this morning's earnings material. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results unless otherwise noted. Also note, the full year 2019 results include historical eras pre-acquisition results reflecting certain classification changes to align to Comscope's presentation. All quarterly and annual growth rates described during today's presentation are on a year-over-year basis unless otherwise noted. I will now turn the call over to our President and CEO, Chuck Treadway. Chuck? Thank you, Russell, and good morning, everyone. Today, I'll start with the review of our 2020 highlights and our fourth quarter results. I'll then provide a preview of our transformational initiative to drive growth and value creation, which we refer to as CommScope Next. Let's turn to slide three. As the COVID-19 pandemic was beginning to unfold, we moved aggressively to keep our people safe and continue delivering for our customers. We pivoted quickly to remote work, put in place robust health and safety systems, and initiated a business continuity program. Our team leveraged the diversity of our global manufacturing footprint to mitigate supply chain risk and respond to the evolving regional challenges. Within a matter of weeks, we mitigated the vast majority of our supply chain challenges and our factories were running at capacity. The management team and I are proud of CommScope's ability to deliver on our promise to meet customer needs in such a challenging time. In addition, we continue to innovate across the wide range of technologies and businesses. At Comscope, the future of wireless networks, 5G, Wi-Fi 6, and 6E are rapidly taking shape. As new CBRS and C-band spectrum is introduced, we are ready to bring all of this to life by developing innovative technologies. One example is our new interleaved passive active antenna that we developed together with our partner Nokia. Last year, we delivered the largest DAS in the world to AT&T Stadium, home of the Dallas Cowboys, to enable 5G services to their fans. We also helped education customers like the New Zealand Ministry of Education meet connectivity demands for their students and faculty with Wi-Fi 6 access points and switches. In the U.S., the Rural Digital Opportunity Fund, or RDOC, has generated enormous demand across our portfolio of fiber cable, hardened connectivity, and fixed wireless products. We are actively investing in capacity and technologies to meet this demand. And across our portfolio, virtualization, cloud, and analytics are defining a new generation of products and solutions. Whether it is helping operators mitigate the distributed access architecture, manage the network ecosystem through the cloud, or optimize performance self-healing tools and technologies, PoundScope is leading the way to the next generation of networks. Thanks to the hard work of our dedicated employees, we delivered solid financial results despite many challenges faced by our company, industry, and broader economy. In the fourth quarter, we delivered $362 million in adjusted EBITDA, up 6% from the third quarter and 12% from the prior year, despite the fines and revenues. We also delivered an adjusted EPS of 59 cents per share and generated $65 million of adjusted free cash flow. Since the close of the ARIS acquisition, the team has over-delivered on a synergy commitment of $150 million, one year ahead of schedule. These results are directly tied to the hard work, discipline, and efficiency in 2020, which we will continue to build on in 2021. While I acknowledge we need to do more as a company, I commend the team on delivering consolidated adjusted fee-to-pay margins up sequentially and year-over-year. It's important to note that these results reflect lower incentive compensation, strong CMTFs, lightened sales, and certain COVID-related benefits, such as reduced travel and marketing staff. We attribute our performance in 2020 to our strong supply chain and decades of experience supporting our customers through challenging times and periods of network transformation. In 2021 and beyond, we will continue to build on our ability to provide next-generation solutions and execute with agility. There is a lot more work to do, and we are not slowing down. As the business environment normalizes from the pandemic, a portion of our cost savings will come back, whether it's through increased travel, resumption of customary sales and marketing activities, or normal inflationary effects. We will also continue to invest in next-generation R&D programs to lead in the markets we serve and fully realize our growth potential. This is one of the focus areas of CompScope Next. Let's go ahead and turn to slide four for some more perspective on CompScope Next. CompScope Next, which we launched in January, will focus on driving business growth that outpaces the market, controlling costs, optimizing business performance, and unlocking significant shareholder value. As we shared last quarter, The board and management team understand that our stock is underperformed. We're confident that executing Comscope Next's strategy, we will ensure the company is on the right path for the next level of growth and profitability. Comscope Next will be a defining chapter for the company and my highest priority as CEO. It will focus on three primary vectors of value creation. First, we will double down on delivering growth. Even in my first quarter with the company, our team has uncovered many opportunities for profitable growth. The areas we will explore include vertical market strategies designed to gain market share, capacity constraints in our factories to deliver more product where demand already exists, investing in international expansion, enhanced channel relationships, and development of critical technologies. As we continue to analyze and prioritize these opportunities, I'm confident we will be able to accelerate growth as we drive commercial excellence and refine our go-to-market strategies. Second, we will focus on business optimization, initially evaluating and reducing non-value-added costs. While the company has a strong history of cost control, we can do more. We will eliminate unnecessary complexity and costs by streamlining duplicative systems and redundant processes that exist today. As we dig deeper into the business units, we've discovered unproductive investments that can provide us with additional financial flexibility to reallocate development funds to higher return projects. We also see opportunities to implement tools to advance business operations, take the company to the next level of efficiency through continuous improvement. We will be tackling all of this quickly, and we will share more details on the plan and our financial goals as we progress. Third, we will actively evaluate the health of our full portfolio of products and businesses. We intend to dynamically reallocate capital to those businesses where we have winning value proposition, industry-leading technologies, and a clear path to growth and value creation. And our businesses that are more commoditized will either manage those for cash or, where appropriate, evaluate alternative ownership structures that can unlock greater shareholder value. We are confident that by implementing Comscope next, we will create a stronger, more efficient Comscope and deliver long-term value for all of our stakeholders. With all of this said, I'd like to manage expectations on timing. We will not see the impact of this initiative immediately. In some cases, it will take orders and others longer. And it should be expected in the immediate future, as COVID-related restrictions on travel, marketing, and other business activities subside, we will see some costs coming back into the business. It will be one of the jobs of CommScope Next to accelerate past this short-term deadline. In addition to CommScope Next, we have taken other significant actions. Morgan Kirk was appointed the segment leader of broadband networks in addition to continuing responsibilities as the company's chief technology officer. Morgan's strength in technology and business leadership will serve broadband and CommScope well as we develop the next generation network architectures and drive profitable growth. We also brought in Jack Carlson as Chief Commercial Officer to help CommScope drive above-market growth, and Kyle Lorenzen to assist in executing CommScope Next. I've worked with both Jack and Kyle in previous companies and have first-hand experience with their ability to drive go-to-market excellence and achieve sustainable cost efficiency. All told, the team has mobilized enthusiastically, delivering strong bottom-line results through the end of the year, and we are energized by the opportunities ahead. We've begun to put a foundation in place to shape the future of Comscope and deliver a step-change improvement in the shareholder value through our Comscope Next initiative. We look forward to providing more detail on the progress we have made implementing Comscope Next during our first quarter earnings call. And with that, I'd like to turn the call over to Alex to recap the full year and provide more detail on the quarter and trends we're watching in 2021. Alex? Great. Thanks, Chuck, and good morning, everyone.

This morning, I'll start with a recap of 2020 before moving to our fourth quarter results, segment performance, and some commentary on cash flow and our capital structure. I'll finish with some closing thoughts on key industry and technology trends that we expect to influence ComScope's performance during the coming year before we open the call-out of the Q&A. Turning to slide six, the full year of 2020, net sales of $8.44 billion declined about 14% from the prior year of the combined company. We saw moderate growth in our broadband network segment during 2020, but sales declined across all other segments, most notably home networks, which was down 30%. From a geographic perspective, sales declined across all regions. Full year adjusted EBITDA of $1.22 billion declined 11%, while adjusted EBITDA as a percentage of sales improved more than 48 points year-over-year for the combined companies. We over-delivered on our 2020 synergy plan and moved quickly to take additional cost actions, particularly in home networks, to help preserve the bottom line in response to challenging business environments. From a segment perspective, broadband networks delivered significant growth and possibility of over 18%, but this was more than offset by adjusted EBITDA reductions in all other businesses. As Chuck mentioned, embedded in these results are the favorable impacts of certain COVID-related benefits, such as lower travel and marketing, reflected in the financials. Finishing up slide 6, suggesting that income for the year was $321 million or $1.56 per share compared to $479 million or $2.15 per share in the prior year. Injected free cash flow was $415 million compared to $793 million from the prior year. Noting that in 2019, we generated significant cash flow from working capital as we integrated the ARIS app position. Throughout the year, we faced many unexpected challenges, but our business model has proven remarkably agile and resilient in delivering bottom line results. Our global supply chain team worked tirelessly to mitigate disruptions caused by the COVID-19 pandemic. while simultaneously prioritizing the safety of our employees. We over-delivered on our original $150 million energy target, well ahead of our original timeline, and took significant costs out of the home network's business in response to increasing pressures within the video's best day. We also leveraged our variable cost structure effectively to reduce operating costs throughout the entire business. As a result, we are in a position to emerge from this cycle a dynamic and more streamlined company, and one that will be made even stronger through the impact of Costco next. As the industry tailwinds of 5G, RDOF, and DOCSIS 4.0 begin to take shape, we believe we're extremely well positioned to benefit for many years to come. Now let's move to slide 7 for a deeper dive into our fourth quarter results. And as a reminder, all of my references to quarterly growth rates are on a year-over-year basis, much otherwise noted. Net sales for the quarter of $2.13 billion declined approximately 7%, primarily driven by declines in home networks. Orders for the quarter were approximately $2.54 billion, with a book-to-bill ratio of 1.18. While we're pleased with the strong order flow, we do not expect to realize all of this backlog immediately due to capacity constraints, other supply chain-related considerations, and a portion of these orders that are related to support agreements or multi-year deals. Adjusted EBITDA of $362 million and adjusted EPS of 59 cents per share increased approximately 12% and 28% respectively. The company ended the year on a positive note for profitability, highlighted by sales strength in the higher margin broadband networks product combined with a laser focus on company-wide cost control. In the quarter, we reported adjusted operating expense of $406 million an 8% reduction from the prior quarter, primarily related to approximately $40 million in incentive compensation favorability. Turning to slide eight, I'll move to our second result. Beginning with our broadband network segment, net sales of $789 million grew over 17%, primarily driven by growth in North America and Caribbean and Latin America regions. From a business unit perspective, sales grew in the mid to high teens in both network cabling and connectivity, as well as in network and cloud. On a sequential basis, video systems and access technologies revenues were strong, although this was offset by supply constraints in our outdoor fiber and copper cabling. Product lines and the acceleration of a large CNPS license deal into the third quarter, which we spoke to on our last call. Order rates and backlog in the business were both extremely strong as cable operators continued to invest in their networks. Adjusted EBITDA of $213 million grew nearly 49%, driven primarily by higher volume and strong expense control. During the quarter, our broadband network segment benefited from a continuing trend of network investments as cable operators seek to reduce pressure on the uplinked portions of their network created by the new normal of work from home, video conferencing, and virtual learning. The existing networks were not designed to sustain uplink demand in the home alongside continued video demand. To address this, we continue to see more node-splitting, phoned, and .3.1 investments. Turning to slide 9 for our venue and campus network segment. Net sales of $477 million declined 7%, primarily driven by softness across all regions except China and the Caribbean and Latin America regions. The structured copper and cable product line was down significantly year over year, as COVID-19 had a substantial impact on the commercial real estate market that this product line serves. We also saw moderate declines in our ruckus business that were somewhat offset by growth in our hyperscale and multi-tenant data center fiber business, as well as our DAF and small cell business. On a sequential basis, sales were relatively flat in our inside plant copper and fiber businesses, but declined in our DAS and small-cell and ruckus businesses, in line with normal seasonality patterns, in addition to the completion of several large venue projects. Adjusted EBITDA of $48 million declined 19% driven by lower volumes, as well as commodity cost inflation, particularly in copper. Within the venue and campus business, we continue to see extremely strong growth in our hyperscale and multi-tenant data center business as we gain share in this highly strategic growth segment of the market. We expect continued future growth as cloud-based professional and social collaboration tools, data storage, and streaming media become more mainstream and reduce reliance on legacy on-prem data centers. Our DAS and small cell business pipeline remains strong. Comscope's era digital DAS platform continues to be the wireless infrastructure application of choice for some of the world's largest and most demanding public venue applications. As an example, During the quarter, Comscope delivered its sweetest solutions to the Grand Hyatt at San Francisco International Airport that integrated our structured cabling, ruckus-active points and switches, and era in-building cellular into a seamless ecosystem for their customers and staff. This project ultimately started with a trend of owner-operators taking advantage of lower venue occupancies during the COVID pandemic to proceed with major communication upgrade projects and prepare for the coming 5G revolution and emerge from the pandemic even stronger. We are also optimistic that our one-cell product line will become an integral part of providing future-ready indoor mobile connectivity for enterprise customers in a 5G world. Closing out on the product line details, as indicated previously, we have experienced significant headwinds in those products, having exposure to verticals negatively impacted by COVID, particularly in structured copper cabling and ruckus, given the linkage to commercial real estate and hospitality. This has been offset somewhat by gains in the federal education and healthcare verticals where stimulus dollars are continuing to drive spend. Turning to slide 10 for our outdoor wireless network segment. Net sales of $295 million increased modestly at just over 1%, driven primarily by the Asia-Pacific, European, and North America regions. North American sales increased slightly despite two of the three major operators indicating a redirection of capital spending priorities towards the recently completed C-band auction. From a product line standpoint, the bulk of the growth occurred at the macro layer, particularly in base station antennas, an offset by weakness in metro cell deployments, which was created by COVID-related permitting and crew delays. Adjusted EBITDA of $60 million grew nearly 24%, primarily driven by the higher sales volume, favorable mix, and ongoing strong cost control. From a customer standpoint, T-Mobile has begun an aggressive investment cycle to build out their 5G networks with their 2.5 GHz spectrum, and our base station antenna and cable businesses saw solid benefits from our long and very constructive relationship with T-Mobile during the fourth quarter. Given the very active role taken by the other two carriers in the recently concluded C-band option, we expect the required investments to build out this newly acquired mid-band spectrum will create significant new opportunities for CommScope in 2021 and beyond. However, the timing associated with the 5G ramp relevant to our product line is likely to be weighted towards the latter portion of 2021 and beyond as operators shift focus to building out nationwide coverage. Internationally, the momentum for our active, passive radio solutions in collaboration with Nokia is growing in various global trials and other optimistic stages of evaluation. During the quarter, we had some large wins with European operators and advanced discussions around several additional opportunities. In other areas of our international portfolio, we've seen positive momentum in key Asia-Pacific markets, also driving future growth. Lastly, while the MetroCell business growth was slower than expected during 2020, due primarily to COVID-19 related municipal office closures and associated zoning and permitting delays, we're optimistic that as COVID recedes and the country begins to reopen, this business can return to its prior growth trajectory. As major U.S. carriers proceed with 5G-related build-outs of the new mid-band spectrum, an absolutely critical component will be the densification of coverage within the metro layer using Comscope's products. Turning to slide 11 for our home network segment. Net sales of $571 million declined 31% and across all regions. While we saw strong growth in our broadband gateway business, this was more than offset by declines in video. Adjusted EBITDA of more than $40 million declined 44%, primarily driven by the volume decline in video. During the quarter, home networks saw strong and consistent demand for broadband gateways through both the service provider and retail channels, which served as a positive catalyst for growth in this segment, offsetting continued weakness in the video market. New platform wins like the XT7 provide additional tailwinds for broadband gateways going forward. Broadband products also benefited from international growth trends, as illustrated by Vodafone Germany's recent passing of a million subscribers using Comscope's Dockers 3.1 gateway. Lastly, like many other global industries, our home network business is experiencing silicon supply constraints. This recent development has extended lead times across the home network ecosystem that may persist throughout 2021 and that likely accelerated revenue from certain key customers in Q4 in advance of anticipated shortages in 2021. Turning to slide 12 for an update on our cash flow. For the full year, cash from operations was $436 million and adjusted free cash flow was $415 million. For the fourth quarter, cash from operations and adjusted free cash flow were $98 million and $65 million, respectively. While 2019 cash flow significantly benefited from working capital as we integrated the air, we experienced a more normalized usage and increased capital investments in 2020. We continue to make progress on extending our terms with our supply base and remain focused on collecting timely from our customers. For the quarter, working capital was the net use of cash driven by accounts payable and the timing of certain payments. Looking forward to the annual improvement targets set within the organization, as well as the efforts of Comscope Next, we continue to evaluate opportunities to optimize working capital and unlock excess cash, particularly on the inventory front. Turning to slide 13 for an overview of our liquidity and capital structure. During the fourth quarter, our cash and liquidity remained strong We ended the quarter with $522 million in cash and no outstanding draws under our ABL revolver. Our total available liquidity of nearly $1.3 billion was relatively flat for the prior period. We also repaid $108 million of debt, and as a result, net leverage declined modestly as compared to the third quarter. Comscope has now repaid over $800 million in debt since the close of the ERISA Commission in 2019, which speaks not only to our ability to generate cash flow even when faced with challenging market conditions, but also to our continuing commitment to reduce leverage as quickly as possible while maintaining ample financial flexibility in uncertain times. Before we open the line for Q&A, I'd like to end with my view on how we see the market developing throughout 2021 on slide 14. Before going market by market, I'd like to remind everyone of our normal seasonality patterns. For all of our businesses, Q1 is typically the weakest quarter of the year, driven by a combination of weather-related factors, as well as a general pause in capital spending as budgets are being finalized. For outdoor wireless networks and the portions of broadband networks tied to construction spending, sales tend to peak in Q2 and Q3 as operators take advantage of more favorable weather conditions. for the portions of broadband network and venue and campus networks tied to electronics and licenses, such as CMTS and product lines, spending tends to round towards the back half of the year. Finally, the venue and campus network business can be very lumpy as large portions of that portfolio are tied to individual project awards. Because of this, it is reasonable to expect a weaker Q1, especially coming off the strength we saw in Q4. For the individual segments within broadband networks, we are seeing a fundamental change in how networks are being used as a persistent trend. This considerable strain on the uplink will require steady and consistent investment, and the pressure on the networks is driving more traditional node splitting activity at a higher pace, while deferring some of the next generation of virtualized investment. There's also increased demand for ubiquitous high-speed, low-latency broadband, funded in part by the Rural Digital Opportunity Fund, or RGOC. This represents another significant opportunity for Comso in the back half of the year as those investments begin to ramp. Within outdoor wireless, the release of the new mid-band spectrum through the C-band option is likely to drive the first real wave of 5G spending across the U.S. While this will also be more back half-weighted as operators finalize their strategies for deploying the spectrum nationwide, there is an increasing level of urgency as T-Mobile spending continues to ramp. Internationally, we're seeing improved competitive conditions in many of our markets and had several strong wins in both the Europe and Asia-Pacific regions, which shows a generally favorable trend as 5G spending begins to take shape. Within the venue and campus segments markets, we expect a variety of business conditions to contribute to some choppiness throughout 2021. Commercial real estate spending is likely to remain soft, which will negatively impact both the copper-structured and data centers. Hospitality, a highly strategic and important vertical for Ruckus, is also likely to remain under pressure, creating challenges for those product lines. Financially, we're seeing some potential headwinds relating to our ability to access silicon used by some of the Ruckus product line in the beginning of the second quarter. Offsetting these headwinds will be continued growth in the hyperscale and multi-center data center market, as well as increasing opportunities and growth in the federal education and healthcare verticals. Lastly, we expect our next-generation ERADAS platform, as well as our industry-leading one-cell in-building LTE solution, to begin ramping meaningfully in 2021. Finally, on our home network segment, work from home, virtual learning, and increased media consumption continue to fuel the need for higher performing broadband gateway devices, and we see continued growth in this important area. While we achieved several wins in video streamers, offsetting the declines in traditional video desktop boxes, we see continued pressure on the video product line as cord cutting and cord shading momentum continues to create a meaningful headwind. We also recognize that the global silicon shortages mentioned earlier will create a significant headwind to revenue and adjusted EBITDA, particularly in the first half of 2021 as lead times are pushed out and pricing pressures emerge. Before turning the call back over to Chuck for Q&A, I'll close with a few words on our cost structure in 2021. While Chuck mentioned Conco Next and the actions we will be driving aggressively in 2021 around both costs and growth, there will be some inflationary effects we need to contend with, as well as some one-time cost savings we experienced in 2020 that are likely to come back as COVID abates and business activities start to return to normal. Annually, we realized approximately $70 million in travel and marketing-related savings directly attributable to COVID, $20 million of which we expect to come back into the business in 2021. In addition, we expect approximately $20 million of additional incentive compensation expense in the first quarter of 2021 as compared to the fourth quarter of 2020. We're also seeing inflationary effects in many areas, most notably in copper, steel, and resin. Finally, we will need to reinvest in core strategic markets and technologies to achieve the growth aspirations that Chuck laid out. With that, I'll turn the call back over to Chuck for Q&A.