CommScope Holding Company, Inc.

Good day and thank you for standing by. Welcome to the CommScope third quarter 2021 results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask your questions during the session, you will need to press star and then the number one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker, Mr. Russell Johnson, Vice President, Treasurer, and Investor Relations. Sir, please go ahead.

Good morning, and thank you for joining us today to discuss ComScope's third quarter 2021 results. With me on today's call are Jeff Treadway, President and CEO, Kyle Lorenzen, Executive Vice President and CFO, Tom Clunan, Interim Chief Technology Officer, and Bud Watts, Chairman of the Board. You can find the slides that accompany this report 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, I have 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 materials. 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. All quarterly growth rates described during today's presentation are on a year-over-year basis unless otherwise noted. I'll now turn the call over to our president and CEO, Chuck Treadway. Chuck? Thank you, Russell, and good morning, everyone. Thank you all for taking the time to join our call this morning. I'm going to be starting on slide two. During the third quarter, Core Comscope recorded net sales of $1.69 billion, a 6% increase over prior year. We achieved this top-line performance despite shortages of manufacturing components during the quarter. Our core adjusted EBITDA of $275 million represents a 12% decline over prior year. This decline was primarily driven by supply chain factors, including component shortages, increased commodity costs, and higher freight costs. Our strongest performing segment for the quarter was outdoor wireless networks, with revenues increasing 31%. This strength was led by sales to the three leading North American mobile operators who continue to ramp up 5G-related macro cell site equipment deployments and infrastructure upgrades. These operators are showing healthy demand for CommScope space station antennas as well as other cell site infrastructure products ranging from cabling and structural steel to power management solutions. And we also continue to make progress with our partner Nokia in commercializing our unique integrated active passive antenna products. These innovative products can help operators solve some of the most challenging aspects of 5G deployments, including footprint, weight, wind loading, and speed of installation. In our venue and campus segment, revenue increased by 8% driven by both our inside plant copper and fiber cabling solutions. We continue to see demand from data centers and a recovery in enterprise markets. In our ruckus business, we continue to see a healthy pace of new orders as ruckus backlog increased 31% in the quarter. However, our semiconductor allocations limited our ability to ship product and book revenue. And finally, our DAS and small-cell business unit saw softer sales as compared to the third quarter of 2020. In our broadband network segment, revenues declined by 4% during the third quarter, and as discussed in our last call, this includes the impact of a large software license sale that did not repeat. While we continue to experience strong demand across the board for advanced cable network solutions and cable and connectivity products, we were impacted by component shortages, primarily in our converged network solutions and access technologies business units. However, it is important to note that year-to-date broadband networks net sales are up 14% from prior year, and our backlog in broadband network segment continues to be robust and is up 34% since the beginning of the year. In our cable and connectivity business, we are essentially selling everything we can produce. We are also working hard to complete our cable and connectivity manufacturing expansion projects that we spoke about on previous calls. Moreover, we're seeing clear signs that CommScope's diverse portfolio of cable network solutions are continuing to generate significant value for cable customers. Capital investment in cable networks is growing, but it is also developing along very operator-specific lines with no one-size-fits-all choice regarding architecture evolution or upgrade paths. The migration to new architectures will not be linear or an overnight process, but will continue to develop at least through the end of this decade. Many operators that we serve are moving deliberately with the introduction of new cable architectures, and for the time being, prefer to direct their investment capital towards optimizing their existing cable plants. For those customers, Comscope will remain a critical supplier of products ranging from software licenses and head-in optics to access layer equipment. and our very large installed base of CMTS and optical nodes gives us a strong incumbent competitive advantage. Other operators are moving more aggressively to adapt new next generation architecture solutions such as virtualization, distributed access architecture, and fiber to the home. For those customers, CommScope is equally well positioned given our fast developing suite of next generation hardware and software offerings. This is an area where our long history as a cable equipment leader, as well as our large install base, provides a competitive advantage. Operators understand that CommScope's new product offerings are not experimental, but are based on decades of hardened, optimized coding, and are specifically designed to be backwards compatible with existing technology. These and other factors help make CommScope the vendor of choice for operators seeking to implement new network architectures in a cost-effective and low-risk manner. I'm very pleased to report that we are already seeing clear evidence that our newest DAA solutions are making good traction with cable customers who are upgrading their current networks and preparing for future network evolution. During the third quarter, we announced that Alaska's largest cable operator, GCI, will use our RD2322 device to support a deployment of remote MACFI. This cutting-edge product provides operators with the same field-hardened and optimized code as previously described. It is an all-in-one box, distributed CMTF solution that moves both the MAC and PHY layer functions out of the head end to a fiber optic node in a network access layer. Also during the quarter, we announced that Liberty Global will deploy CommScope's high-density remote PHY shelf. This cutting-edge solution will enable this important European operator to push fiber deeper into its network and enjoy the benefits of a distributed access architecture. These two customer wins demonstrate that CommScope is meeting current operator needs with new technologies, playing a leading role in the gradual migration of active cable functionality to the network edge, and is poised for global broadband growth. I'll finish up my segment review with an update on home networks, which we consider non-core because our previously announced intention to spin off the business during the second quarter of 2022. Home networks revenues declined by 28% during the quarter versus prior year. While we are feeling the effects of supply chain disruptions across Comscope, our home networks business top line has been the most challenged by the global shortage of semiconductor chips. In addition to supply challenges, the business has also been negatively impacted by escalating prices of electronic components and freight. Because of supply chain constraints, our large home networks backlog continues to grow and remains above $1.1 billion. Overall, I want to emphasize that we continue to see strong and, in some cases, record demand for our portfolio of communications and networking technologies. Year-to-date, we have grown our core business revenue versus the same period last year by 11%. As a result of the strong demand and supply constraints, our core backlog ended the quarter above $2.2 billion. The revenue growth and backlog build that we are achieving are direct evidence of the strength of our broad solutions portfolio. It is clear that many of our customers continue to show confidence in CommScope as a partner for building the networks of the future. During the quarter, our revenue performance was more than offset by significant headwinds related to the current supply chain environment. Like many other technology companies, we experienced supply constraints with semiconductor chips that negatively impacted both net sales and adjusted EBITDA. In addition to component shortages, Comscope also faced commodity inflation as well as higher freight costs. The net impact of input cost and freight inflation on the third quarter consolidated adjusted EBITDA was approximately $80 million. I can assure you that we are addressing these supply chain pressures with a sense of urgency across Comscote. While these disruptions may ultimately prove to be transitory, we cannot afford to operate under that assumption. We are continuing to raise prices and take operational measures with the goal of offsetting the inflationary cost impacts. I want to emphasize that this catch-up process is not going to be immediate. While we are already making good progress on the pricing front, the reality is given our large backlog of negotiated orders, as well as the lag built into pricing adjustment provisions in some of our customer contracts, the flow-through impact of price increases is going to take several quarters to fully materialize in our P&L. We expect to see the revenue and margin pressure that we experienced in the third quarter persist for the remainder of 2021 and into 2022. As we accelerate our efforts to recover inflationary impacts on our business through pricing and cost actions, I want to emphasize that CommScope is in the early stages of a fundamental business transformation. During the third quarter, we continue to make excellent progress on CommScope Next, and we now have over 100 targeted initiatives, either in-flight or ready for implementation. Additionally, we have now put in place the management processes and tools to track progress on each CommScope Next initiative. I'll now turn over the call to Kyle to provide further details on our third quarter results.

Kyle? Thank you, Chuck, and good morning, everyone. Before getting started on the overview of our financial results, I wanted to thank Chuck and the Board for giving me the opportunity to become CommScope's Chief Financial Officer. I'm very excited by the prospect of working with the entire management team as we continue our efforts to transform the business. My primary responsibility since joining CommScope a year ago has been to lead the transformation office and the CommScope Next initiative. From this perspective, it has become clear to me that CommScope has tremendous potential to create shareholder value. As we now move into the full implementation phase of CommScope Next, a key component of my role as CFO and a critical requirement for success will be ensuring that we have tight linkage between the financial oversight function and the goals of CommScope Next. Clear and transparent financial management processes combined with effective tools for tracking progress and driving accountability will also be critical performance drivers going forward. I'm now turning to slide three for an overview of our consolidated results. During the third quarter, regarding the consolidated business, net sales decreased 3% to $2.11 billion. Orders for the quarter were $2.34 billion, yielding a book-to-bill ratio of 1.1 times. Adjusted EBITDA of $259 million decreased 24%, and adjusted EBITDA margin was 12.3%. Adjusted EBITDA includes a $12.7 million charge for bad debt expense related to one customer in the home network segment. Adjusted earnings per share was $0.29 per share and decreased 43% from the prior year period. Shifting focus to our core CommScope businesses, net sales increased 6% in the quarter to $1.69 billion. Core adjusted EBITDA declined 12% from prior year to $275 million, while adjusted EBITDA as a percentage of sales was 16.2%. I'd remind you that the third quarter of last year benefited from a significant broadband networks software license sale of approximately $25 million. Normalizing for this item, year-over-year net sales would have increased 8%, and adjusted EBITDA would have declined more modestly at around 4%. Orders for the core business were, again, very solid, yielding a core book-to-bill ratio of over 1.1 times. Our core business backlog remains strong at more than 2.2 billion and is up 61% year-to-date. As Chuck mentioned, despite solid growth in the quarter, the entire company continues to be impacted by significant challenges related to the global supply chain environment. It should be noted that on a year-to-date basis, despite a difficult cost and component availability environment, core Comscope net sales were ahead of prior year by 11% and adjusted EBITDA by 10%. Turning to slide four for an overview of the supply chain situation. Comscope is feeling the impacts of the challenging global supply chain environment. We are a technology company that is very dependent on the supply of key electronic components, as well as a manufacturer of products with high contents of various commodity and freight inputs. As a result, component shortages in commodity and freight inflation are having significant revenue and cost impacts across all our business segments. Component shortages, and in particular semiconductors, had a meaningful impact on our ability to deliver on the strong customer demand we continue to see during the third quarter. On a full year basis, if we had a normal supply of electronic components with no shortages or delays, our order flow would have been able to support approximately $600 million of incremental revenue to what we now expect to ship for 2021. Of this amount, approximately $260 million is related to our core business and the remainder, approximately $340 million, is attributable to home networks. As Chuck mentioned earlier, in addition to component shortages, we continue to experience significant inflationary headwinds that we are actively working to mitigate. These impacts have been most severe in the areas of key input commodities such as copper, steel, aluminum, resin, electronic components, and freight costs. While we have been dealing with input price inflation since the beginning of the year, these impacts accelerated during the third quarter. The net impact of input cost and freight inflation on the third quarter adjusted EBITDA in our core business was approximately $70 million. Although these inflationary increases may end up being transitory, the negative impact they are having on our business requires that we take significant mitigating actions now. We have already started to increase prices to offset some of these impacts, and we will be implementing additional price actions across all our businesses throughout the balance of 2021 and into 2022. We will also continue additional costs and operational measures to supplement our pricing actions. Our goal will be to fully offset our input and freight cost increases. However, given the size of our backlog, as well as the terms of our sales contracts, we are not targeting full recovery of these impacts until the end of 2022. This implies that we will continue to feel the impact of supply chain disruptions on our financial results into 2022 with a gradual recovery of profitability throughout the year. To further highlight the impact that inflation is having on our business, we can provide the following data. While we expect core revenue to grow mid-single-digit percent year-over-year in the fourth quarter, due to continuing supply chain pressures, we are expecting the fourth quarter of 2021 to be roughly $50 to $60 million lower than the third quarter on an adjusted EBITDA basis for the core business. Turning to slide five for an overview of our segment highlights and beginning with the broadband network segment. Net sales of $780 million declined 4%, primarily driven by North American and Asia Pacific regions. While we continue to see growth in our network cable and in-conductivity business, this was offset by declines in access technologies and converged network solutions. Adjusted EBITDA of $158 million declined 22%, primarily driven by lower sales volumes and rising input costs. We also faced a difficult compare in the third quarter due to a large high margin software license sale that did not repeat. Despite supply constraints and commodity cost inflation, on a year-to-date basis, broadband revenues and adjusted EBITDA were up 14% and 18% respectively. Overall demand in the business continues to be solid, with our backlog for broadband networks over 50% more than the prior year. This continued demand growth and backlog build is particularly apparent in our network cabling and connectivity business. This business unit continues to benefit from a variety of fiber expansion projects by cable operators and telcos, as well as government broadband stimulus. We expect this growth to continue Expect this growth to continue as operators push fiber deeper into networks and as the release of RDoF funds accelerates. As Chuck noted during the third quarter, we continue to see a strong trend of cable operator investment in existing networks, as well as continuation of the gradual trend of adopting distributed access network models. We expect the investment cycle in existing networks to have a long tail, and we are equally well positioned to serve those operators making the transition to network architects. Finally, we expect to benefit from continued investment by operators into driving fiber deeper into networks, as well as accelerating pace of greenfield fiber network builds. Turning to venue and campus networks on slide six. Net sales of $555 million increased 8% with strength across all regions. Segment growth was driven by our business connectivity infrastructure business unit, which supplies indoor copper and fiber cabling for enterprises and data center customers. This growth was partially offset during the quarter by net sales declines at Ruckus and in our DOS and small cell business unit. Adjusted EBITDA $56 million increased modestly due to a combination of volume increase and early progress on pricing initiatives offset by input cost inflation. Backlog versus prior year period increased by over $430 million, or 159%. And since the beginning of the year, backlog has increased by 148%. Without supply constraints, we would have shipped approximately 65 million of additional products in the quarter. Our business connectivity infrastructure unit drove the overall segment growth for the quarter. Within the business unit, we continue to see a post-COVID recovery of commercial real estate and infrastructure project activity that is supporting new spending on indoor copper and fiber cabling. These product lines also benefited from continued government stimulus spending for education and healthcare related connectivity projects. We were also able to make solid progress during the quarter with various pricing initiatives designed to recover commodity impacts on our cabling product lines. In addition to the above, demand for indoor fiber products from data center customers remains robust with strong momentum in expansion and upgrade-related spending by multi-tenant enterprise and hyperscale data centers. In our distributed antenna systems business, 4G and 5G-related venue upgrades remain a key driver of incremental sales. During the quarter, as has been the case throughout 2021, we saw a steady progression of smaller upgrade projects related to hospitals, airports, and entertainment venues, as opposed to the large-scale stadium deployments that we executed during 2020. And our one cell business unit continues to scale up, driven by several more 4G sites going on air. We are also expanding our 5G engagement with customers as we look to deploy solutions for both public and private networks. Finally, the technology evolution to Wi-Fi 6 and 6E and government stimulus spending are driving very strong demand and backlog growth in our ruckus business. We are also seeing a recovery in the hospitality vertical as a pickup in both business and tourist travel is driving hotel operators to upgrade their networks. Ruckus also benefited during the third quarter from healthy demand for multi-dwelling unit and educational verticals. Despite these encouraging demand trends, ruckus sales were materially impacted during the third quarter by semiconductor shortages that limit our ability to ship Wi-Fi access points and campus switches to customers at a rate that matched our order inflow. Turning to outdoor wireless networks on slide seven. Net sales of 356M dollars increased significantly up 31% from prior year driven primarily by North America from a business unit perspective. We saw the greatest revenue benefit from our diverse portfolio of macro cell tower infrastructure solutions. Segment adjusted EBITDA of $61 million increased 13% over prior year and was primarily driven by higher volumes, partially offset by input cost inflation and freight increases. Outdoor wireless performance during the third quarter was largely driven by continued ramping of telco operator investment spending to upgrade macro cell sites for 5G service. As operators focus on macro site preparation, We are seeing healthy global demand for a wide variety of outdoor wireless products. Our outdoor wireless segments backlog remains strong, which is a trend we have seen for much of 2021. We believe that this backlog is very solid with some visibility into 2022. During the third quarter, we saw continued demand from telco operators for our suite of base station antennas, but also for cell site infrastructure solutions such as heliacs cabling, structural steel, cabinets, and power management solutions. As heavier and more power-intensive equipment is added to the macro site, wind loads, power regulation, and operating costs become more important considerations and should continue to benefit comscopes broad everything but the radio portfolio of products for macro cell sites we also continue to be encouraged by operator interest in our active passive hybrid antenna collaboration with nokia and its potential to simplify 5g deployments and we expect to have more news to share about this exciting technology evolution in the coming months Stepping outside of North America during the quarter, we made strong progress in several international markets, securing a base station antenna win at a major European operator and making new headway as a potential important player in Japan's 5G network infrastructure. Turning to slide eight for our home network segment. Net sales of $415 million declined 28% year over year and in all regions except for Asia Pacific. From a business unit perspective, sales declined in both video and broadband gateway product lines. Adjusted EBITDA of negative $16 million declined $46 million from the prior year, which included the impact of bad debt expense. The profitability decline was driven most significantly by lower volumes and higher input costs. Home Network's products rely heavily on semiconductor chips, and our inability to source chips in the required quantity continues to material impact the ability of Home Networks to deliver products to serve the demand we are seeing. Home's profitability was also negatively impacted by rising component input and freight costs, in addition to expedite fees. On the positive side, Home Networks continues to build strong and high-quality backlog, and our visibility for orders now extends well into 2022. Selling price increases have been announced and are being implemented to offset the inflationary costs. As an update on the Home Networks spinoff, we are continuing to make progress on separating the business from core comp scope and expect to execute the spinoff as planned during the second quarter of 2022. Now turning to our cash flow overview on slide nine. For the third quarter, cash flow from operations generated $67 million and adjusted free cash flow was $64 million. For the quarter, we saw nearly $110 million of inventory increases. However, this was roughly offset by other working capital changes. Given the supply chain issues that we have discussed today, we expect our levels of inventory to remain elevated until supply disruptions improve. This is due primarily to extended transit times of our inputs and finished goods and the need to hold higher inventories of certain components to offset supply volatility. Considering the above, as well as lower EBITDA driven by supply constraints and input cost inflation, we now expect full-year cash flow generation to remain softer than originally expected. This situation should gradually improve as we realize the effects of our initiatives to offset inflation. In the meantime, we will continue to prudently manage cash and working capital. Turning to slide 10 for an overview of our liquidity and capital structure. During the third quarter, we continue to take steps to proactively manage and de-risk our balance sheets. We successfully refinance 1.25Billion dollars of secured notes due in 2024 with a new 8 year tranche of secured notes due in 2029. This refinancing pushed out a large crunch of debt and extended our next step maturity to 2025. It also reduced our interest rate on this tranche of debt by 75 basis points and lowered annual interest expense by over $9 million. During the third quarter, our cash and liquidity once again remained strong. We ended the quarter with over $411 million in cash and no outstanding draws under our ABL. The company's total available liquidity was nearly $1.1 billion. We made no significant net debt repayments during the quarter beyond the required $8 million of term loan amortization. The company ended the quarter with net leverage of 7.1 times, an increase from 6.6 times at the end of the second quarter. We remain committed to our longer-term goal of significantly reducing leverage and expect to provide insight into our path and timetable toward this goal as we refine our CommScope Next strategy around cost efficiency and growth. I will now turn the call back to Chuck. Thank you, Cobb.