CommScope Holding Company, Inc.

Q1 2023 Earnings Conference Call


spk02: Backlog and Comscope Next initiatives provide a strong foundation for the company to continue to grow and create value. I'm pleased with our team's performance in the first quarter, and we will continue to manage the things we control. Our profitability profile has dramatically improved since the first quarter of 2022, driven by efficiency projects and pricing. CCS and Next are a testament to that progress, as we have improved those two segments EBITDA by $121 million over the same period of last year. We continue to monitor the demand environment across all segments. We feel positive about the medium and long-term environment, especially in CCS, where fiber buildout has tailwinds. With that said, we are experiencing a pause in orders as customers deal with recessionary impacts on their business, including inventory management. Our teams are committed to aggressively and positively manage the items that we can control. I'd like to thank you for your interest in supporting CommScope and belief in our ability to continue to drive transformative change, which we believe will continue to unlock significant value for our shareholders.
spk12: And with that, we'll now open the line for questions.
spk03: Thank you. Thank you. Ladies and gentlemen, again, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 1-1. One moment for our first question. Our first question comes from Stephen Fox from Fox Advisors LLC. Your line is open.
spk08: Hi. Good morning. Two questions, if I could. I was wondering if you could first off provide a little more color on the customer inventories you see on the owned segment and the CCS side in terms of how they've improved customer What is the expectation for working them down, et cetera? And then secondly, when we think about further improvements in EBITDA from, you know, next initiatives, can you sort of give us a sense for, you know, how many dials you could sort of adjust depending on what the demand environment looks like in the second half to, you know, maybe stick to the EBITDA guidance for a full year? Thank you.
spk02: Thanks, David. Look, I think our customers bought a lot in 2022 due to, like, the ramping up of their buildouts and the supply chain shortages. And I think over the last two quarters, there's been a lot about destocking. But I would say we also see some places where the demand is lower as people, you know, kind of think about and digest the current macro environment. But I'd say a large majority of our customers are pointing to a strong rebound in the second half. The other thing I think that's affecting us is the lead times are much lower than they've been in the past. We were having lead times of six months for some product lines, and now they're like two to four weeks. So I think that's also affecting their inventory.
spk08: And in terms of the pipeline, yeah, sorry.
spk07: Yeah, I'll take the second part of your question. just on the other CommScope Next levers we have. I think we clearly feel like there's cost opportunities in the business, depending on the demand environment. I think some of those are new initiatives, but some of those also are just accelerating initiatives that we've already identified. And I think as we said in the remarks, You know, as we, you know, we'll dial, you know, those levers in as we see, you know, demand unfold here in the next quarter or so.
spk02: And, Steve, I would just, you know, follow up on my answer. I would say it's also, you know, relatively highly dependent on the business. You know, in our enterprise businesses, you know, we have really good visibility. But in our service providers, I would say the visibility is less. That being said, you know, we're in a constant dialogue with them about their inventory levels, and we have some insight, you know, with the service providers, but not as much as Enterprise. So that gives us a little more confidence in what we think is happening in the second half.
spk08: Great. That's helpful. Thank you.
spk03: Thank you. One moment, please. Our next question comes from the line of Simon Leopold of Raymond James. Your line is open.
spk11: Thanks for taking the question. I wanted to maybe unpack a little bit about the trending in CCS. Given that some of the opportunities you're highlighting, like the government opportunities, I feel are more longer term. And I really want to get a better understanding of just the setup for 2023 and the recovery in the second half, if I might. It does seem to imply some kind of hockey stick improvement in the second half. And I just want to make sure I'm not extrapolating or putting too much weight on that one segment in your full year expectation. If you could help me understand that. Thank you.
spk02: Yes. So I'd start by saying our customers do remain bullish, but I think we said in our script we expect slightly better second half than first half. I wouldn't think like a very strong hockey stick. And I think we said the second quarter is more flattish compared to the first. But related to your other comment, you know, our customers do remain bullish medium and long term. You know, we also think related to government spending, you know, our dollar from our perspective is probably 20 to 40 percent where it's going. So that's going to continue. And I think there's a lot that's you know, coming would be, but as you say, I think that's more of a 24 type number. I would also comment that, you know, I would also comment that, you know, the cable business is actually strong. We continue to pretty much sell what we can make. But the connectivity is really where we're seeing the softness. And we think that's more to, you know, our end customers finding labor, or maybe slow down or not going as fast in projects as they thought.
spk11: And that actually anticipated my follow-up. I think on the last conference call, you had talked about ANS as a segment being relatively flat to maybe slightly up in 2023. It looks like a slow start, but when I think about the upgrade activity and the demand for amplifiers and nodes, I would think the demand environment is pretty good. I wanted to check how you feel about the full year setup for ANS. Thanks.
spk07: Yeah, I think in our comments, we talked about the fact that ANS is definitely going to be second half weighted. ANS is just a quarter to quarter is a lumpy business based on project and timing of those projects. So we definitely believe that You know, ANS is going to, you know, have a much better second half than first half. And that's, you know, that's in many cases projects that we, you know, that we have in hand that we just have to execute against.
spk02: The other thing I would add to that, Simon, is, you know, we're well positioned with our RPD and RMD nodes as well as the amplifiers. And that business is growing fast for us. And I would even go as far as to say our legacy business is still growing. very profitable in that we're growing share outside of the United States. And then, you know, in addition to just the business, you know, that way we're also developing new products with the virtual CMTS. And as you read in the, you know, the press release, we're developing the FDX amplifier with Comcast that I would say further positions us as a leader in that space.
spk11: Great. Thank you very much. Yep.
spk03: Thank you. One moment, please. Our next question comes from the line of George Nader of Jefferies. Your line is open. Again, George Nader of Jefferies. Your line is open.
spk10: Hi there. Thanks very much. Hey, guys. I guess the question I have here is I'm really surprised by the strength of the EBITDA and margin performance in the business, just given the softness in the top line. And I appreciate your comments about how the NEXT program is driving improvement. At the same time, I feel like the NEXT program has been around for a few years. I guess my impression is that that business has been kind of ongoing. And so I'm getting back to just where the EBITDA margin performance is coming from. I guess I assume some of it is higher pricing. that you're kind of keeping while input costs are rolling down? I mean, is that the narrative here that we should be thinking about, or is there something else at play that I should be better understanding?
spk02: Well, I have several comments. I'd start by saying, you know, CommScope Next went into effect at the end of 2021. And when you really think about that, I mean, it's only like a year and a half, almost, you know, old. And when you think about where we're going, with the general manager model, it allows us to see, you know, inefficiencies that's caused by our former matrix structure. I mean, the matrix structure, there's, it just builds distrust between the business units and the central functions, and it causes for a lot of, let's say, shadow organizations. So, we've seen a lot of opportunities to take out costs, and we continue to see those. I would also say process mapping allows us to minimize the waste and improve the processes. And related to supply chain, I would say that the current, you know, where we are with supply chain constraints, although they're loosening and moderating, I mean, that's prevented us from really addressing our direct materials. This is really about a cultural change in the company and having our business leaders make an impact. I would also emphasize the next turnaround. At a $72 million increase in EBITDA year over year for the quarter, I mean, it just shows, you know, a lot that's going on in that business. So I think it's just we're managing our business with a GM mindset. We're changing the culture and we're getting people to pay attention to waste. And I think there's a lot of opportunities here.
spk10: Got it. Okay. So then I assume improvement in input costs is not a factor in the EBITDA improvement this quarter.
spk07: No. I mean, I think the pricing that we talked about last year, we were calling back some of the inflationary impacts. We're not seeing massive benefits on input costs at this point in time.
spk00: Okay.
spk07: Super. Thanks very much, guys.
spk10: I appreciate it.
spk03: Thank you. One moment, please. Our next question comes from the line of Matt Nicknum of Deutsche Bank. Your line is open.
spk09: Hey, guys. Thank you for taking the questions. Just two, if I could. First, on the core EBITDA targets that you reaffirmed for 23, I'm wondering, can you achieve the targets with accelerated cost efficiency measures if orders don't snap back as contemplated or as you anticipate in the second half of the year? And then maybe a follow-on in terms of free cash flow. Just wondering how we should think about the cadence over the next several quarters. And Kyle, I believe you reaffirmed the 400 to 500 mil expectation for adjusted cash flow. Just want to make sure that's the case. Thank you.
spk07: Yeah, so let me take the first part of the question. So it's always a balance between seeing what's happening on the demand side and managing our costs. You know, I think, you know, we feel like there's room if the demand, you know, doesn't bounce back that we've got cost levers. Obviously, that's going to depend on, you know, what happens with demand and, you know, what type of changes we see. So, I think we feel like there's still levers to pull on cost. Just on the free cash flow, you know, I think as we talked about, you know, Q1 is, you know, usually use of cash. You know, we should build cash. in Q2, Q3, Q4. The only thing that really impacts, you know, majorly the timing is just our interest payments. So the third quarter is our highest interest payment quarter. So, you know, I'd expect, you know, building cash in Q2, you know, maybe a little bit impacted by just the timing of the interest payments in Q3 and then continued build in Q4 that, you know, that gets us to that. you know, four to 500 number that we've been talking about.
spk09: Okay, great. And if I could just squeeze in one, one follow-up on the order rates, as you think about the improvement in the second half of the year, any sort of order of magnitude, are you thinking maybe flattish with year ago levels? Like I'm just trying to get a sense of how meaningful that order improvement is that at least is being initially contemplated in the commentary.
spk07: Yeah, I don't think we're going to talk about the specific numbers, but I think as we, you know, mentioned in our commentary, you know, it needs to be, you know, there needs to be a pretty nice rebound in our order rate from what we saw in the first quarter. Clearly, the first quarter being impacted by the things that Chuck talked about, the inventory adjustments, the reduction of our lead times, and clearly some of the project timing. So, you know, we're not going to give numbers, but yeah, I think we'd have to see some strong rebound. Thank you.
spk03: Thank you. One moment, please. Our next question comes from the line of Anna Gosco of Bank of America.
spk12: Your line is open. Pardon me, Anna Gosco of Bank of America. Your line is open.
spk05: Hi. Hi. Thanks very much. So, Kyle, just on the free cash flow, what is your planned use for that free cash flow?
spk07: Yeah, I mean, I think as we've been talking about, you know, we want to continue to, you know, deal with the debt and continue to look at opportunities to, you know, address the debt. You know, clearly we took some steps in Q1 with some buybacks and we'll continue to, you know, opportunistically look at places that we can use the cash to, you know, to continue the delevering and addressing the debt.
spk05: Okay, and then with regard to the first maturity that you've got is 2025, any plans or potential to refinance that to push that out?
spk07: Yeah, I think, you know, as we think about, you know, the maturities and the debt, I think the first thing is we obviously are very aware of the fact of, you know, the maturities and particularly, you know, the 25s and 26s. You know, we clearly, you know, are looking at, you know, opportunistic things that we can do from a market standpoint. You know, so I think that's an ongoing conversation. I think with that said, a couple things. Number one, we feel like we've still got a, you know, we've got some time. Number two, you know, we're going to generate some cash, which allows us to deal, you know, with some of those maturities. So, again, we're aware of it. you know, we're focused on it and, you know, we're looking for the right, you know, time to deal with that, but also, you know, have some cash coming in and some time to deal with those, even the 25s.
spk05: Okay. And then finally, just wanted to, on 2024, if I heard you correctly, it sounds like you guys think that you're on track to potentially, you know, reach the 24 guide. So from a deleveraging standpoint, it would sort of be more of the same, potentially with some more momentum in 24. Is that accurate?
spk07: Yeah, I think that's fair. You know, clearly, you know, what we see in the second half of the year with the recovery of the demand is going to impact that. But, you know, based on, you know, what we're hearing from customers, you know, I think we feel like the exit rates in Q4 will be relatively strong. which will set us up for the 24 guideposts.
spk05: Okay, great. Thanks so much.
spk03: Thank you. One moment, please. Our next question comes from the line of Amit Garyani of Evercore. Your line is open.
spk06: Thanks for taking my question. I have two as well. I guess first one, maybe the negative $40 million free cash flow. I'd love to understand how is that versus your own internal expectations And then you see this ramp towards $450 million-ish at the midpoint of your guide. Is there a way to think about how much of that is driven by better working capital improvements versus better profitability, that equation in general?
spk07: Well, I think as we mentioned in Q1, we have some headwinds that just normally hit us in Q1. Number one is a large interest payment quarter. The second is our cash incentive payment goes out, which is not insignificant. You know, so, you know, as we go through the rest of the year, you know, we'll be driving improved EBITDA performance as well as, you know, a couple of the quarters we'll have lower interest payment quarters than Q1. I think in our targets, I think as we've talked about the last couple calls, You know, we don't have large working capital improvements built in there. You know, I think we continue to, you know, manage inventory levels, you know, that, you know, we think it's excess, but it's going to take us a little bit of time to get that inventory down. So, you know, overall in those numbers, we don't have significant reductions in working capital built in to get to those targets.
spk06: Got it. That's super helpful. And if I could just follow up, you know, one of the questions I think folks are sort of struggling with right now is just, you know, you're talking about a very strong back half recovery, I think, if I take your full year assumptions and your June 4th assumptions, right? You're talking about a very strong back half recovery while I think there's a broader worry that we might enter into a recession and at least a lot of enterprise companies are down taking more versus not. So, you know, not to make you repeat everything you said, but I'm just curious, what gives you confidence that you can see this back half recovery? And is that recovery going to be across both enterprise and service provider market? Or is there one space where you're seeing it better? But anything on the back half strength and why you're convicted there would be helpful.
spk02: Yeah, look, obviously we're cautious as order rates haven't picked up to the level we expected them to. But with that said, the customers remain bullish on the second half. As number one, government funding, specifically RDOF, continues. And I also say the inventory that they have on hand will position us, continues to get better, let's say, as that gets adjusted. That's going to help us. And also on the enterprise businesses, I would say the quote activity has improved a lot since the fourth quarter, which indicates to us a stronger second half.
spk06: Perfect. Thank you.
spk03: Thank you. One moment, please. Our next question comes from the line of Shannon Cross of Credit Suisse. Your line is open.
spk04: Thank you very much. I was wondering if you could talk a bit more about the composition of the backlog, how we should think about how the backlog is priced, if there's opportunity to increase prices on that as you start to – So fill the backlog, just, I don't know, whatever you can give us in terms of details. Thank you.
spk07: I think, I mean, I think the composition of the backlog, you know, we feel comfortable with the backlog. Our backlog, you know, contains the price increases that we put in place, you know, last year to offset inflation. You know, I don't think we're looking at the backlog as an opportunity to get pricing. You know, I think we're always looking you know, looking for opportunities to make sure that we're, you know, managing price in relation to material costs and input costs. But I think we feel good about, you know, the backlog, you know, from a pricing perspective. And I don't, you know, I don't think we look at that as an opportunity.
spk04: What about the stability of the backlog? I mean, how contracted is it? Have you seen any of it dissipate? Yeah, I mean, I think...
spk07: I think the way to answer that is clearly we've seen some cancellation in our backlog, but nothing significant. I think we feel the backlog and the validity of that backlog to be pretty solid just based on the fact that we've gone through a pretty interesting first quarter and And although we've seen some cancellations, nothing that we would consider to be significant.
spk04: Okay. And then I guess my last question is just regarding your cost restructuring plan that you have in place and the ability to accelerate it. I'm wondering how long, once you make the determination, assuming that things stay weak to reduce costs, how quickly can we see that flow through the P&L? I'm just, again, trying to figure out the ability to remain or your confidence level and your ability to remain within your EBITDA range. Thank you.
spk02: I would just say, look, we believe there's, you know, always a balance between, you know, taking costs out and investing for growth. We have, I would say, strong opportunities midterm and long term. And the investments, the initiatives return on investments are very strong. With that said, We believe there's the opportunity to drive efficiency and take cost out, including period overhead. You know, we're thinking about a number now that we're looking at doing just in anticipation of potentially not coming back the way we wanted to. And we will be doing that, you know, very quickly.
spk12: So. Thank you.
spk03: Thank you. One moment, please. It looks like we do have time for one more question. One moment, please. Our next question comes from the line of Meta Marshall of Morgan Stanley. Your line is open.
spk01: Great. Thanks. I guess just in terms of do you feel as if kind of the improvements that you've seen to date have largely captured the pricing increases, or is there still kind of further benefit we should see from margins from kind of the pricing actions that you guys have taken? And then second, you talked about kind of the mosaic traction, but if we could just get an update on, you know, some of the other new initiatives that you have, either OneCell or, you know, you spoke to kind of some of the new fiber you have, just traction with some of the innovative parts of the portfolio would be helpful. Thanks.
spk07: Yeah, I'll answer the first one, and I'll give the second one to Chuck. So I think on the pricing side, you know, we were, you know, we went through our inflationary price increase last year. You know, I think that that pricing, you know, is essentially, you know, built into Q1. You know, our backlog contains the price increases. You know, I don't think we feel, you know, in the short to medium term that there is, you know, a lot of upside to pricing. You know, I think we, you know, feel like we're balanced, you know, both from a input cost perspective in a competitive standpoint. So, you know, I don't think we feel like, you know, in the short to medium term, there's a lot of opportunity there.
spk02: Well, thanks for the second half of the question, Mehta. In terms of new product introductions, I'll be really excited about Heliarc. It's a rural fiber optic cable that we were able to show to United States Secretary of Commerce Raimondo when she was at our site. The diameter is, you know, half of what it was. So it's green and we could ship more out, faster installation. Also in the CCS part of our business, we have NoBucks, which is coming down the pipe again. With all of our customers that we speak to, the challenges that they have is, you know, how do they train their people? How do they reduce installation times? And this No-Bucks product is going to get them both of that. Very easy installation techniques and training, very minimal training, much faster installation. So, you know, we're pleased about that. We already launched part of it in Europe. We're going to be launching it in the U.S. soon. In terms of the next business, we think about Ruckus One, which is going to be a combination of a Wi-Fi 7 product with cell service integrated in. You know, when you start thinking about private networks or think about manufacturing 4.0 to get into manufacturing locations to be able to use Wi-Fi and cell service in buildings in one box, we see that as, you know, very, very positive. But also, I would say on the ANS side, our RMD, RPD, our virtual CMTS, This technology that we're putting together gives our customers solutions that will fit them whatever path they choose, which is also very positive. So those are things that we're seeing, some bright spots. On the home network side, they have telehealth that they're working on, which is called HomeSite. It's a nice product that allows elderly people or anyone, I guess, to be able to answer the telephone on their television, to be able to have doctor's appointments through their television screen, and to be able to monitor them as they're in their home. So we have quite a bit of innovation in all the different segments in addition to the Mosaic product.
spk01: Great. Thank you.
spk03: Thank you. I'd like to turn the call over to Chuck Treadway for any closing remarks.
spk02: I'd just like to say thank you for your interest in CommScope and for your questions today, and I hope the rest of the week goes well for you. Thank you.
spk03: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.

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