CommScope Holding Company Inc (COMM) 2016 Q2 法說會逐字稿

Good morning, and welcome to the CommScope second quarter 2016 earnings call. My name is Carmen, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the streaming, this allows you to listen via your PC speakers. To ask a question, you will need to dial in to the live portion of today's call. (Operator Instructions). I will now turn the call over to Jennifer Crawford, Director of Investor Relations. Please go ahead.

Thank you Carmen. Good morning, and thank you for joining us today to discuss CommScope's second quarter 2016 results. With me on the call are Eddie Edwards, CommScope's President and CEO. Mark Olson, CommScope's Executive Vice President and CFO, and Phil Armstrong, CommScope's Senior Vice President of Corporate Finance. You can find the slides that accompany this review on our Investor Relations website. Now to our housekeeping items.

On slide 2, you will find our cautionary language related to forward-looking statements. During this conference call we will make forward-looking statements regarding our financial positions, plans, and outlook that are based on information currently available to management, management's beliefs, and a number of assumptions concerning future events. Forward-looking statements are not a guarantee of performance, and are subject to a number of uncertainties and other factors, which could cause the actual results to differ materially from those currently expected. For a more detailed description of factors that could cause such a difference, please see our second quarter 10-Q filed earlier this morning, and other SEC filings.

In providing forward-looking statements the Company is not undertaking any dilute or obligation to update these statements as a result of new information, future events, or otherwise. Please note that all dollar figures and percentages are approximations. In addition to GAAP information we will provide certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors. Detailed reconciliations of GAAP to adjusted measures can be found in the Appendix to our slide presentation.

In addition, we will be discussing pro forma BNS results for the second quarter of 2015 as though the BNS acquisition had been completed on January 1st, 2015. This pro forma information has not been prepared in accordance with US Generally Accepted Accounting Principles. Accordingly, the pro forma financial information may not be indicative of the results that would have been realized.

Slide 3 is our agenda for this morning. Mark will review the quarter results, highlight our two segments performance, discuss cash flow, liquidity and capital structure, review our BNS integration progress, and then provide our outlook for the third quarter and calendar year 2016. Finally, Eddie will make closing comments before we open the line for Q&A. To make sure everyone has the opportunity to ask a question on today's call, we request you ask one question and return to the queue for any additional questions. I will now turn it over to Mark. Mark.

Thanks Jennifer, and good morning all. Let's turn to slide 4 for a summary of our second quarter results. We are pleased to report second quarter sales of $1.31 billion, which was consistent with our guidance, and an increase of 51% year-over-year. On a pro forma basis for the BNS acquisition revenue declined 2% year-over-year, driven primarily by slow spending in international markets. Foreign exchange rate changes negatively affected revenue by 1% in the quarter. Orders were $1.33 billion during the second quarter, which provided a book-to-bill ratio of just over 1 times. The book-to-bill in our connectivity solutions segment was 1.09 times, and the book-to-bill on our mobility solutions segment was 0.92 times.

We are very proud of our second quarter gross margin of 42%, which was an increase of more than 600 basis points year-over-year. The increase was driven by higher margin BNS products, favorable changes in product and geographic mix, and an ongoing focus on cost management. For the quarter GAAP operating income rose 68% to $184 million. Excluding intangible amortization and other special items, non-GAAP adjusted operating income increased 65% year-over-year to $291 million, or 22% of sales. This increase was also driven by the addition of BNS, favorable mix and cost reductions. For the quarter GAAP net income rose 36% year-over-year to $62 million, or $0.32 per diluted share. Excluding special items non-GAAP adjusted net income increased to $145 million, or $0.74 per diluted share, up 51% year-over-year.

I will now discuss our second quarter performance in both of our segments, starting with the connectivity solutions segment on slide 5. connectivity solutions segment sales more than doubled year-over-year due to incremental revenue from the BNS acquisition. On a pro forma basis for the acquisition, connectivity solutions segment sales were essentially flat year-over-year. Foreign exchange rate changes negatively affected revenue by approximately 1% from the year-ago period. Low double-digit growth in North America Fiber-To-The-x was offset by slower spending in other major geographic regions. Clearly North American Outdoor Network Solutions were a bright spot for us this quarter. North American Service Providers continue to drive fiber deeper into their networks for both residential and commercial applications. Order input continues to be very strong, but we remain capacity constrained. We have been adding fiber capacity and expect to continue doing so for the remainder of this year. We believe that we are on a multi-year build in the US, and expect solid growth in this portion of our business for the next several years.

The results of our indoor network solutions business were mixed. Our indoor solutions which are found in commercial buildings, data centers, central offices and cable TV head ends, are more affected by the overall economic environment. While our North American enterprise business posted mid-single-digit year-over-year sales growth in the quarter, it was more than offset by slower sales outside the US. We saw particular caution in both Europe and the Middle East.

In the quarter connectivity solutions segment adjusted operating income increased 133% year-over-year to $169 million, or 22% of connectivity sales. The nearly 110 basis point year-over-year increase in adjusted operating income margin was due primarily to favorable product and geographic mix, and benefits from cost reduction initiatives. While we're incrementally more cautious on the global economic environment, we delivered another solid quarter of increased profits. In the second half of 2016, we expect continued strong demand for outdoor network fiber solutions in North America, driven by new services and competition in the access market. We also expect improved performance in the back half of the year in indoor networks, driven by growth in data centers.

Let's turn to slide 6 to discuss mobility solutions segment performance. Our mobility segment sales increased 3% year-over-year to $529 million, primarily due to the BNS acquisition. On a pro forma basis for the acquisition mobility solution segment sales declined 5% year-over-year, primarily due to product line pruning. Foreign exchange rate changes had a negative impact of approximately 1% on mobility segment sales in the second quarter, compared to the prior-year period. North America remained a bright spot for mobility solutions as well. Ongoing investment and densification by most North American Service Providers drove upper single digit pro forma sales growth in the US, despite ongoing product rationalization within the BNS wireless portfolio. However, this solid performance was offset by declines in other major geographic regions. Sales were particularly slow in India and the Middle East.

We're pleased with our mobility segment's profitability in the quarter. Adjusted operating income increased 18% year-over-year to $122 million, or 23% of sales. The nearly 310 basis points year-over-year increase in adjusted operating margin was primarily driven by favorable product and geographic mix, as well as benefits from cost reductions. Looking ahead we now expect growth in the North American market to moderate in the back half of the year based on recent order patterns. However, our overall calendar year 2016 expectations for North America have generally remained unchanged from earlier this year. In the international markets we remain cautious given global economic uncertainties and delays in the Indian spectrum auction. Longer term we expect demand for our mobility solutions to be positively affected by wireless coverage and capacity expansion in emerging markets, and the increase in demand for mobile broadband in developed markets. Today we are assisting operators in transitioning to a more flexible and efficient network, including adapting to network virtualization, Cloud RAN, and 5G.

Next I will discuss cash flow and liquidity on slide 7. During the second quarter CommScope generated $151 million of cash from operations, invested $16 million in capital expenditures, net of $2 million CapEx related to the BNS acquisition, and paid $15 million in integration and transaction costs. We also paid a $10 million debt redemption premium to redeem $300 million of our PIK Notes in June. Adjusted free cash flow for the quarter was $160 million, more than double the prior-year period. This increase was driven by the BNS acquisition, the year-over-year improvement in profitability, and an ongoing focus on improving working capital performance. Adjusted free cash flow for the 12 months ended June was $559 million, or up 42% year-over-year. We ended the quarter with $875 million of total liquidity, comprised of $516 million of cash and cash equivalents, and availability under our credit facility of $359 million. We are very pleased with our strong cash flow performance. As we have noted many times, we focus on bottom line results. We continue to prune less profitable product lines which dampen top-line growth, that drive enhanced profitability and cash flow.

Turning to slide 8, I will discuss our capital structure. The left side of the slide shows our capital structure at net leverage ratio of 4.5 times at the end of the quarter, down from 5 times at the end of last year. The right side of the slide shows our major debt maturities. After levering up for the BNS acquisition, we are now focused on driving down leverage. We're pleased to announce today that we will redeem the remaining $237 million of the 6.625% PIK Notes on August the 29th. This early and voluntary redemption will save us approximately $16 million in annual interest costs. After the final redemption of our PIK Notes, we will have paid $537 million of debt during 2016, and $650 million since closing the BNS acquisition last August. As we said at our Investor Day we intend to pay down approximately $1 billion of debt post the BNS acquisition by the end of next year.

Turning to slide 9, let's discuss the status of the BNS integration. We're pleased to announce we are accelerating and increasing our annual cost synergy target by $25 million. We now expect calendar year 2016 cost synergies of more than $100 million, and annual cost synergies by 2018 of more than $200 million. As we have highlighted before, we have more than 30 specific projects identified to drive BNS synergies. Teams across the Company are working diligently to drive synergies while integrating the business effectively. While we outperformed the initial estimates in essentially all areas, our operations team has found particular success. For example, we now expect to substantially exceed cost synergies originally expected from the planned closure of our Sydney, Nebraska operations. We are redeploying assets to other facilities globally, and are able to use those assets more efficiently. While early integration activities have been successful, we still have much hard work in front of us. We plan to begin significant IT systems cutovers during the fourth quarter of this year. We're focused on continuing to execute on our integration plans, and drive significant shareholder value. Finally, our outlook is shown on slide 10, and I will highlight a few items.

For the third quarter we expect revenue of $1.26 billion to $1.31 billion. GAAP earnings per diluted share of $0.37 to $0.39, based on 196 million weighted average diluted shares, and adjusted earnings of $0.69 to $0.74 per diluted share, up 35% year-over-year at the mid-point. For the full year we now expect revenue of $4.85 billion to $4.95 billion. GAAP earnings per diluted share of $0.91 to $0.96, based on 196 million weighted diluted shares, and adjusted earnings per diluted share of $2.42 to $2.52, or up 33% year-over-year at the mid-point. And finally we inspect cash flow from operations of more than $550 million. The Company's updated full year guidance reflects revenue expectations for a second half of the year that is comparable to the first half, despite additional concern around the international markets, we are pleased to increase our full year earnings and cash flow guidance. And with that, I will turn the call over to Eddie, to discuss his thoughts on the quarter, before the operator opens the call for Q&A. Eddie.

Thank you, Mark. We're pleased to deliver strong second quarter results that exceeded our expectations, while continuing to make excellent progress on our BNS integration plan. We are particularly proud of our record second quarter gross margin, which reflects the impact of higher gross margin BNS solutions, favorable product and geographic mix, and cost synergy realization. As Mark indicated, the North American market was the bright spot for the quarter. In this market we had solid growth in both connectivity and mobility segments for the first half of the year. Looking forward, we continue to expect half-over-half growth in 2016 for connectivity solution segment driven by continued strong demand associated with the Fiber-To-The-x deployments.

Our mobility segment is much the same. We delivered strong growth in the first half of 2016 in North America, despite significant product pruning. While we expect lower second half sales compared to the first half of the year, our overall annual performance in North America is generally consistent with our expectations heading into the year. The more significant change in our mobility outlook over the last few months has been related to international business. Economic concerns in Europe and Latin America, as well as delays in spectrum auctions in India has made us incrementally more cautious. This slowdown in international business is expected to more than offset growth in North America.

Despite the lumpiness of the wireless business, we do not see any material change in our long-term mid-single-digit organic growth guidance for the Company. Even with a stable wireless business in 2017, we believe we have a clear path toward modest top-line growth for the full Company. We are confident in our long-term position. This confidence in the future and strong cash flow positioned us to announce early and voluntary redemption of the $237 million remaining outstanding principal of our PIK Notes. Additionally we are focused on integrating the BNS acquisition quickly and effectively, and are pleased to announce an accelerated and incremental $25 million targeted annual cost synergies. Year-to-date we have achieved over $40 million in cost synergy realization, and continue to ramp this number. We are well on track to achieve our updated plan.

Finally, I would like to thank our global CommScope team for all of their hard work, particularly with respect to the integration efforts. I am proud of our employees working tirelessly to deliver strong results like we saw in the second quarter, all while continuing to focus on integration efforts. Overall we remain focused on positioning the Company for long-term success, while delivering profitable growth while maintaining costs, or managing costs effectively. We are well-positioned to help customers transition to the networks of the future, with our robust fiber portfolio, and technology-leading wireless solutions. Now we will be happy to answer your questions, and Carmen I turn the floor over to you.

Thank you. (Operator Instructions). Your first question will come from the line of Vijay Bhagavath with Deutsche Bank.

Yes. Yes. Good morning. Hi Eddie, Mark.

Hi Vijay.

I caught an interesting point in the press release you mentioned about product rationalization. It you could elaborate on that further, would it be slower growth lower margin product that you would be looking to rationalize off the product portfolio? What's driving the product rationalization, and any thoughts on the roadmap heading into the back half and into next year? Thanks.

Vijay, as I said at the Investor Conference we expected to do over $100 million in product rationalization during the course of the year. As Mark said in his prepared remarks, much of that has come from the Mobility part of what BNS was, and that's the DAS business. Basically that's where their business in mobility was. We have taken quick action in integrating that team with the CommScope team, and have rationalized some redundant products, and some products that had either low margins or negative margins from our portfolio. Additionally, we continue to look at rationalization of low margin products throughout the CommScope portfolio, as well as the rest of the BNS portfolio. So this is something that we have done over a long period of time with the Company, and our focus is generating cash and bottom line profit. We understand it impacts our topline to some extent, but we think over the long-term, it is the best thing for the Company in maximizing our earnings.

Thank you. Your next question comes from the line of Rod Hall with JPMorgan.

Yes. Good morning guys. Thanks for taking the question. I guess I wanted to go back to the international business and the guidance, and try to juxtapose those two things. So you're reducing the full year guidance a little bit here. I assume based on your commentary that's mostly international. I'm just wondering Eddie or Mark if you guys could give us some idea of specifically where you have reduced your expectations, is it Europe, is it mostly India? Just kind of help us understand where that expectation reduction came from, because we are clearly seeing some signs of weakness in Europe I think. Also on US order visibility, it's great to hear you guys talking positively there. I wonder if you guys could just give us an idea of how much order visibility do you have right now? How far out into the back-end of the year can you see do you think, and just help us understand also the trend there. Is it still small cells, crosshaul, backhaul, or are there other things going on in the wireless environment? Thank you.

That's a lot of questions. Rod maybe I'll start. I'll start with the cut into your question on the second half in the international markets. And coming into the year we had talked about maybe some room for a little bit of optimism in a modest recovery perhaps in Europe in the second half of the year, and quite honestly we aren't seeing that right now. We don't see a material deterioration, but any optimism around a recovery in Europe is something that we cannot point to at this point in time.

We also talked about the Indian market, a very strong grower for us in 2015. We saw good business there in the first half of 2016, particularly in the mobility segment, but with the pushout in the Indian spectrum auction, we did see a material slowing in the rate of the spend there during the second quarter, and so our outlook now in India is for a significant slowing in particular in the wireless market for the second half.

And then the third market we would point to is the Middle East. And certainly macroeconomic conditions there are a factor that we see driving a softening in business across both of our segments. The one bright spot that we have in the international markets right now is still in our, we would call our APAC region, or Asia, absent India and China. There is still project activity some in the wireless space, as well as some of the fiber builds that you will see in some countries like Australia, that are giving us continued modest growth in the Asia-Pacific region. But overall macroeconomic conditions there have weakened, and we're seeing that in our outlook for our second half.

In the US we talked earlier about we expected the market to start slow and finish strong during the course of the year. The opposite happened. We did start slow in January but started to pick up and remained strong through this past quarter. And we expected to be somewhat muted during the back-end of the year from the mobility side. We have a very strong demand on Fiber-To-The-x builds.

I think we also said on the last call that we are capacity constrained here in North America for the connectivity solutions business. We remain constrained. We are adding capacity as fast as we can. We have added over 3,000 people since the acquisition in this side of the business, so that capacity will come online during the course of the back-end of this year, and be ready to be fully utilized in 2017 where we continue to see very strong demand.

Your next question is from the line of Jess Lubert with Wells Fargo Securities.

Morning. I wanted to follow up on the last question, and I was hoping to provide some additional details on the US wireless side, and perhaps you can help us understand the breadth of the order slowdown you saw as we entered the second half? If that was one carrier or a number of carriers and to what degree you think this is a temporary pause, as they digest product they bought over the last couple quarters, or if this is a bigger slowdown due to the completion of some of their densification initiatives, and if you can help us understand where you're seeing the US operators specifically prioritize their spend from a wireless perspective? That would be helpful.

Okay. It's more than one. It's a primary carrier and then one that's smaller, but it is more than one, and it has to do more with timing of buy, opposed to quantity of buy. As I said earlier to Rod's question is that we expected the pace of buying to accelerate during the course of the year, and we saw that happen in a different timeframe. So I think there is inventory in the channel for a couple of carriers, and that will impact the order rate for some of the balance of the year. I think we do expect orders in the fourth quarter for 2017; some of our customers have talked about that. They do see a rebuild over that period of time. Some of this is also possibly a substitution to other parts of their business. We at CommScope are very fortunate that we have access to that full wallet, whether it be mobility or connectivity, and so as I said at Investor Day we're somewhat indifferent to where it comes from. We now have a more balanced company than we ever had before, so we're fortunate to be able to get that revenue from both sides. The unfortunate part of that is we are capacity constrained, and there is some limit to the upside that we can generate in the near-term from the connectivity side.

And, Jess, we had also pointed in the US market to slightly better performance in Q2 in wireless than what we had anticipated. So for the full year our outlook for the US wireless sales are very much in line with the outlook we gave at the beginning of the year, which represents mid single digit growth over 2015.

In terms of macro metro cell and/or antenna systems, do any of them stand out as being more strength, or areas where you're seeing the operators start to cut back?

We have a lot of strength in the macro side of the business. The small cell or DAS side of the business started slow during the course of the year but has picked up a lot of pace of late, and I think we see strength through the balance of the year in that. We still remain on pace in our Airvana acquisition to have our new products developed during the course of late Q4 to early Q1. Everything is on target, expectations we are in trials with multiple carriers globally, and so we think that small cell which will be used in the densification of the networks will be a good driver for us next year.

Thanks.

Your next question comes from the line of Kulbinder Garcha with Credit Suisse.

Hi. Thank you for the question. Just one for Eddie and one for Mark. Eddie, for you like in the wireless mobile business, can you just speak about growth your confidence around it because think it's been almost two years since it has grown, and I know there's some geographic variations, but the confidence that really is a low single digit business, because when I look at the CapEx trends at least globally, I can envisage how we might see a two-year downturn even from here until 5G deployments really start on a global basis. I am trying to think could CommScope in that environment actually even grow next year in wireless? And the second question is for Mark. Just on gross margins. The business mix strength that you -- sorry the better business mix that you spoke about can you speak about specifically which product lines were driving that, and the sustainability of it going forward? Thanks.

Okay. I don't think we see a material fall-off over the course of the next year or so. These things, we have charts over the last multiple decades to show what's happened with the G's, and we're past the growth spurt part of 4G, and certainly here in North America, we have the rest of the world yet to build. We're just barely over 50% in 4G today, and so that will continue. I think what has hurt us, and Mark mentioned in his narrative, the delay of the spectrum auction from July to at least October I think is impactful of our international side for the balance of the year, and maybe early into 2017. The valuation that has been placed on that is enormous, and we have to see how it's taken when the auction does finally open. But that has slowed India considerably and it was a key driver in 2015 for growth, and we had expectation of continuation.

These are things that are somewhat out of our control and really hard to forecast, when we come down to these locations that have material impact, but what we would see, and I think what we would expect is a stable environment, not much growth, not much shrinkage but from a stable environment on the mobility side coming next year. We have not yet started the planning process, so this is just some, I think some early indications of what we might see. We will manage to whatever that number is. Our focus repeatedly is on the bottom line to make sure that we generate the earnings potential of the Company, but we are well-positioned, continue to be well-positioned with all of our customers around the globe, and ready to participate in their growth as it comes.

In building wireless I think we see a continuing growth there. That's going to be a very important segment. It will be I guess in unit cost it will be a lower price point than what we have seen in the past, so we will sell more units. There's still over 30 billion square meters of underutilized space globally that need to be covered. This is something with densification that is not a nice thing to have, but for the efficiency of the network you're going to have to have these small cells to make sure you're not consuming enormous power from your macro sites. So we're highly optimistic about what Airvana is going to bring us, as well as IME in our DAS program, both of which are on track now for sales.

How big is that business now, the in building wireless roughly speaking of let's say wireless overall revenues would you say?

Well, it still remains to be about a quarter of what our wireless revenues have been.

And Kulbinder, just turning to your gross margin question you will recall that we achieved a record first quarter gross margin in the March quarter of 39%, and in the June quarter at 42%, that's an all-time record for the Company. So we're very pleased with that. We would point to a few factors that drive that. First of course is volume. Second is geographic mix. Last year the mix of the overall Company business was about 50/50 US/International. We expect in 2016 that mix to modulate a bit toward the US, maybe 55/45 and so a continuing strong US market as we see at this point will be a help for us, and then the synergy realization I think as Eddie had commented, about half of our synergies are realized in cost of sales, and so we're seeing the benefit of that as well. So we like gross margin. It starts with a 4. We have gotten accustomed to that, and we don't want to see that change.

Your next question comes from the line of Amir Rozwadowski with Barclays.

Thank you very much, and good morning, folks.

Hi.

Good morning Amir.

I was wondering if we could touch upon a bit more on the strong FTTx build that you're seeing in North America relative to the capacity constraints that you're seeing. In terms of some of that demand perspective, how do you think about that demand over the mid to longer-term? And just thinking about it relative to what we're hearing with respect to some of the fiber builds for the carriers, as well as some of the demand outlook for some of the data center providers with respect to fiber. I'm really trying to get a sense, in terms of multi tier demand levels for you guys, and how sustainable that is?

Okay. I'll talk about the maybe the outside a little bit. We have had a lot of discussions with our service provider that would be the MSO market, as well as the carrier Service Providers, not just here in North America but around the world. What we see certainly here a big part of our market, strong demand on a multi-year basis. Expectations of material increases year-over-year to come beginning now, and that's why we're building capacity for the connectivity side as fast as we can. I said that we had increased 3,000 or so people since the acquisition, virtually all of that and maybe, maybe more than 100% of that is in the connectivity side. So we're ramping up, but we're still capacity constrained based upon the growth of demand, even with that growth of our manufacturing base.

And Amir just to put the outside plant market into perspective, that represents, our revenue into that market represents about 25% of the total Company sales, and that's where we're seeing the strongest rate of growth right now.

Great. And then if I can, just one quick follow-up. I know in the past you folks have indicated 2017 free cash flow guidance of greater than $500 million. It seems as though there are some moving pieces on the topline, but synergies seem to be coming in better than expected. Any color in terms of whether there is an update relative to that? Do you feel more comfortable with that trajectory or anything along those lines?

I would tell you Amir that we continue to feel very comfortable with that outlook for next year. Certainly geographic mix is a little bit of a helper there for us, but we don't expect to have any material movement in capital expenditures. We have been managing our working capital very carefully. The increase in profitability and then our debt reduction program. All of those combined have provided a nice tailwind for us in cash flow.

Great. Thanks very much for the incremental color.

Sure.

Your next question comes from the line of Tal Liani with Bank of America Merrill Lynch.

Hi guys. This is [Dan Bartus] on for Tal. Thanks for taking the question. Two quick ones for me, actually. First, just wanted to dig into your thoughts on the small cell and metro cell timing a little bit more. So we have been hearing that things might be moving slower than expected due to difficulty dealing with municipalities. Just wondering if you guys think that's one of the biggest driving factors there? And then just generally on technology as we move to LTE Advanced and 5G, the antenna technologies are getting increasingly complex with new MIMO technologies. So wondering how confident you guys are with your antenna roadmap to 5G, and if you see the need to either increase R&D efforts, or maybe some more tuck-in acquisitions? Thanks.

Okay. We have talked a lot about building anything on the outdoors or indoors, and site acquisition, power, and backhaul are the three components that we see. It is hard to get access to whether you have to, for backhaul if you have to dig up the street, or pole attachments, or anything like that. So that does take more time than maybe people would anticipate, and a lot of the aesthetics of the builds have to be enhanced, and I think we're well-positioned to do that with a lot of our hidden antenna capabilities. But I think that is something that impacts the timing.

I think also the technology to make sure you don't have small cells that interfere with each other is critical, and that's one of the key aspects of our OneCell that will, that's being developed now at Airvana. So we think we're well-positioned. I think that market is going through an in earnest build, and I do think it probably has started a little slower than anticipated, because it's been advertised a long time, and there's not so much out there in the field. We have 1.5 million devices Airvana did over the course of time that we inherited, and so it will be a growing market, and one that we should participate well in. Your last question, Dan?

Yes. Just on the antenna roadmap to 5G. You guys expect to have to increase R&D efforts or tuck-in acquisitions, and just generally are things getting more competitive as you think about 5G antennas? Thanks.

Well it certainly is probably going to be a changing design. I think it would be more reallocation of resources probably than increase of dollars. We have probably over 1,000 R&D people within the Company, and we at all times are needing to move them around. On the RF side has some very skilled people. I think they can adapt to whatever the needs are. We are active in consultation and testing, and trials with many of the carriers here in North America. The standards haven't been set yet. And so it is an evolving process that we'll have to see what happens, whether it becomes an active oriented antenna combination or whatever, but those designs are in the thought process now, and we will be a participant.

Great. Thanks.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

Yes. Good morning. Thanks very much for taking the questions. First question is on the BNS cost synergies. Can you help understand of the $100 million you expect to realize this year, how much of that is already baked into the run-rate this next quarter? What sort of linearity should we think about from get to the $100 million this year, to the $200 million by 2018, and then that 50/50 ratio of BNS savings between COGS and OpEx. Is that still the right split to be thinking of for the incremental BNS cost savings still to come?

Sure, Mark. I think in Eddie's comments you may have heard him mention that we're broadly in the range of about $40 million of the $100 million that we have committed to 2016 having been realized now in the first half of the year. And so you will see that ramp as we move throughout the back half, and so we will let you do the smoothing between the third and the fourth quarters. But as far as where it sit on the P&L about half of it is on cost of sales, and we have talked about some of the programs some plant closures for example the one I had commented on in Sydney, Nebraska. There have been actions taken in the wireless business as you're aware that we had a facility in San Jose that we have announced the closure of. Some of the incremental actions yet to be taken in operations include rationalizing some of the distribution centers that we have arranged the world. So as we tell people there are no home runs here. These are a lot of bunts and singles, and we're very pleased with where we're at on executing against these at this point.

That's helpful. And then for a follow-up question I was hoping for some more color on the mobility business. One of your competitors, Amphenol, actually raised their mobility segment guidance for this year looking for low to mid-single-digit organic growth and actually talked about seeing strength in their international business there. Is anything going on in terms of market share in that segment?

Relative to them I don't think so. We cover the globe and we cover virtually everything on the infrastructure side of the market, which is different than anybody else in this business. And so I think it's hard to equate somebody maybe with a narrower portfolio as to what they see strength, and which customers and/or markets they may concentrate on. So we feel good about where we are relative to people that are like us, and we're proud of being the leader in the mobility segment, and continue to be a strong leader.

Mark, you may have heard the comment earlier that organically we expect mid-single digit growth in the wireless business here in the US this year as well, and I think that is one of the primary markets for the firm that you had referenced.

Thank you.

Line of George Notter, Jefferies.

I'm sorry. We didn't hear the name.

George Notter.

Okay. Thank you. Hey George.

Hi, guys. Thanks a lot. Okay. I guess I was trying to better understand the process involved with the ramping capacity on the fiber connectivity side. I think you said earlier that the capacity would really come online I think just at year-end, and you have added 3,000 people. Can you just walk us through the process involved? Why does it take so much time I guess to ramp-up that capacity?

Well, we have to buy some equipment, we have to train people, the equipment is not instantaneously done. We have to make sure that we have a layout in our factories that is efficient. So we have to move things around. We have to make sure that the supply chain can support us. There is no reason to ramp-up and then have to stop because your supply chain is not efficient. So there's a lot to do, and we have a significant integration going on that impacts all of these locations as well. So it's not a let's go start and get it done next week kind of model. It's months. It takes months of time. They had a certain level of capacity when we acquired the business. The business in the last few months has grown dramatically, and I think far exceeding what most people would have expected, and the technology that we got from BNS is extremely good. Their products and solutions are accepted widely across the world, and so there's just an enormous amount of demand put on those factories to produce. So it's not an easy task, George, to get this done, but we're making progress.

Got it. And then the last question I had was just on I wanted to ask about a couple of new products. PowerShift, I think you guys started shipping that recently. Any sort of thoughts there on how big that can be for you? And then I guess I thought I would just ask about ION-E as well. Thanks.

Okay. ION-E is now approved here in North America by large carriers. We have revenue generated here, Europe, the Middle East, with sites that are well in excess of $1 million each. So that's taking off now as we expected it would have. Maybe later than we had hoped, but it is now being realized, and I think the efficiency of its software base capability of rolling it out is very appreciated by our customer base. So that is something that we think over the next few years will distance itself from some of the other products that have been in our portfolio for a long time. In the PowerShift product we are marketing that now. It's a brand new product that has just come out. We have high expectations because of the efficiency that can be realized in the macro-environment. So we think it's going to be a good seller for us.

Your next question is from the line of Shawn Harrison with Longbow Research.

Hi. Good morning everybody. I was hoping I guess dig in a little bit to the, I guess it was formerly called the enterprise and broadband businesses. I think you highlighted strength in North America particularly in the second quarter, and I guess just compare and contrast how you see those businesses North America versus international in the second half versus first half, and if you're seeing any share gains in that business as well?

In the first half, Shawn, we did see nice mid-single-digit growth in the enterprise market. We see a growing data center market generally, and much more so moving into the second half of the year. Outside the US we saw declines in the sales into the enterprise business, though. And at this point while, to my earlier comments there will be ebbs and flows there, we are not at the margin optimistic about the recoveries in the international markets in the aggregate at this point for the second half.

And Mark, is that more a function of macro factors?

That's exactly what we would point to, is Europe has been slow, and we don't see it recovering. We don't see it materially worsening but not recovering at this point. And relative to other markets like the Middle East, we would have the same commentary. In India the biggest, the macro factor there for us has been more on the wireless side with spectrum auctions, of course within the enterprise market that wouldn't be a factor, but at this point we see accelerated growth in the US market for the enterprise space in the second half, but we are cautious around the international outlook right now.

Are you seeing acceleration in the old broadband coax, hybrid coax business? It seems like Amphenol saw a very health quarter?

Yes. We are. For us that's a more on the outside plant market. And again as I have commented that's about 25% of the Company's consolidated revenue is sales into that outside plant market. That has a very nice mix of fiber products, and we're able to sell some very attractive solutions into that market, which is growing very rapidly.

Okay. And then lastly, I'll be quick. If I think about debt reduction remaining $400 million or so versus that $1 billion target, it should imply some extra cash to play around with next year. I know you didn't put any plans in place at the Analyst Day, but are there updated thoughts maybe on a buy back or other avenues for deployment in 2017 once you pay down the debt?

Yes. Our priority uses for cash on first of course is to reinvest in the business, but in the medium term our target is to de-lever into the 2 to 3 times range, and so we're very comfortable having paid down $650 billion of acquisition debt effectively within 12 months after having closed the deal, that we will meet that $1 billion commitment. We think as well as the impact of that has not only on the mechanics of de-leveraging but we think that has very discrete value to our shareholders, as we reduce our leverage. And so our free cash flow generation as you know has strengthened. That gives us more optionality, and we will have more options and alternatives available to us as we get closer to that 2 to 3 times net leverage ratio.

Thank you. Your next question comes from the line of Steven Fox with Cross Research.

Hi. Good morning. Just two product questions from me. Just specifically on coaxial cable as it relates to maybe being pulled through with fiber. Can you talk about how that product line performed during the quarter? I think that's what the prior question was referring to with regards to Amphenol, and then secondly in terms of the recent uptick in Category 6A cabling, how is that overall affecting your business when you think about market share, margins, mix, et cetera? Thanks.

On the 6A side, that's a strong seller for us. I think we're certainly the leader in that market, and it's better margins than what the lower category cables would be. So it continues. For attachments in the plenum for a lot of wireless devices, but it continues to be strong and a bright spot from the copper side in that marketplace. From a coaxial standpoint, it's part of that portfolio. I think we focus on the whole portfolio, just not coax versus fiber, so that whole broadband area is showing a lot of growth more so than we have seen for years, because of the deployments of Fiber-To-The-x or some places where coax is used, but fiber would be the strong grower relative to the coax, though.

Thanks very much.

Your next question comes from the line of Simon Leopold with Raymond James.

Thank you for taking my question. I wanted to follow-up on the wireless group, particularly if you could help explain how your mobility business is either uncorrelated or how it's different in terms of trends relative to the base station suppliers and CapEx, and within that I think in the past you have talked about benefiting from refreshes to antennas in particular, with operators deploying multi band antennas replacing old antennas. Could you help us understand where that particular cycle is within the context of that bigger question? Thank you.

Well, the time at which they buy an antenna versus a base station could be different. If it's in a developing country where we do site rise solutions, and build the whole array at the top of the tower, that would be similar. If it's here in North America where the turfs, or the carrier directly buys the antenna they would probably buy it at a time that is shortly after when the base stations are bought, but I don't think there's a direct correlation as to an OEM's revenue versus ours. I think you will see a lot of difference there, relative to what you see from them.

Another way so think about that Simon is that densification at the macro cell tower is one of the primary ways that carriers are densifying. That requires incremental antennas, but not necessarily incremental base stations.

And in terms of the refresh cycle to multiband antennas?

Right. That's still happening, and I think we have said before that we saw some of our carriers buying antennas to replace ones they bought less than three years ago, because of what we can concentrate in the [bring down] on the same size, and save them money at an OpEx standpoint, versus having to put multiple antennas on that tower. So it helps in in-roading, it helps in OpEx from a rental standpoint, and that is still happening.

Thanks, Simon.

Thank you your next question comes from the line of Avi Silver with CLSA.

Thanks for slipping me in. Follow-up to the earlier question on gross margin. You talked about a few things driving gross margin product geographic mix and I guess a higher synergy. So in the second half it doesn't seem like the mix has poised to change much based on your regional and product inventory, and as you said the synergies are going to accelerate in the second half of the year. Is that a correct assessment?

Yes. I think that's a fair synopsis, Avi. As I mentioned of course we achieved a record first quarter gross margin in the March quarter. We achieved a all-time record of 42 points in the June quarter, and we have now gotten accustomed to having our gross margins start with a 4,and we don't expect that to change.

Okay, great. Just one quick follow-up. It seems like the free cash flow outlook is going up from about $480 million to $490 million, I know last quarter you got it to free cash flow this quarter the cash flow from operations, just assuming CapEx is around $60 million or $70 million for the year. So the lift in free cash flow guidance is stronger than the lift in earnings for the year. I just wanted to understand what's driving that? Does that speed up your de-leveraging plans? I think you're guiding in the presentation it said to approximately 4 times net leverage now. I think the last quarter it said low 4 times leverage. That's a bit subtle, so I just wanted to clarify that?

That's very perceptive, Avi.

Thank you.

Yes. We have raised our free cash flow guidance. The US versus international mix is a helper there. And it's also a credit to the entire team here on working capital management. And that's something that has been a hallmark for the Company, and when you are 4.5 times levered, it's something that you tend to focus on and do even better. And so yes, we have raised our cash flow guidance, and approximately 4 times versus low-4 times is perceptive. Thank you.

Thanks.

Carmen, are there other questions in the queue?

Your next question is from, or your last question is from the line of Walter Piecyk with BTIG.

Thanks. Can you talk about in your small cell business, whether there's been any change in kind of where the orders are coming from between operators and maybe other companies that are doing this type of work for those operators is my first question. By the way, on that I assume that's getting driven by someone in the connectivity space because that's kind of the key driver what these guys you are doing in the small cell. And then the second thing I think someone had asked about the issue that we identified about the metro companies, or metro push-back from some of these small cells, and how they were unsightly, and that might have been slowing some kind of, some of the small cell build. I'm just curious have you actually seen the operators or the companies that are doing work for them come back to you and say give us some more of these, more I guess or smaller version of your antennas things that shield it better, and if so, does that drive higher ASP and drive higher margins for you, if there's an overall shift to those types of products?

Okay. We sell DAS, small cell DAS, and we will sell the smaller cell new products. We sell them to the carrier. We sell them to the tower guys, and we can sell them to the enterprise customer and so we have an excited bunch of partners on the enterprise side waiting to get their hands upon these things, as they believe it's going to be a huge market in that enterprise network. So I think CommScope is well-positioned because of the diversity of products and customer set we have, that we can cover all of those.

We make coverage devices, solutions that are hidden in sight. We have a lot of those in historic areas that don't want to see an antenna, or at least an unsightly antenna in their neighborhood. I think your perception of some of this stuff looks ugly, and we have a lot of pictures of that, examples where sort of drive around and stop and take pictures. So I do think a lot of neighborhoods are up in arms about people trying to put antennas, or any type of antenna in their neighborhood. I think we have sign in Charlotte it has been in the paper. A lot of the nicer neighborhoods in Charlotte are having that issue right now.

So this site acquisition is a big deal. It's something that I think the question earlier it is a delaying problem to get deployed, and we generally are not involved in that process from the standpoint that would be the tower people or the carrier. Enterprise is pretty easy. They can hide this stuff inside their building, but that could be a part of the delay. This is relatively new products and so that's part of the issue, too. To make sure you have the right mechanism to get to market.

So have those guys come back to you and asked for products that will help them get those approvals?

We work with them to solve any of those needs that they have so I don't know specifically. We can get the answer to that for you. I don't know specifically.

Okay.

Any instances of that.

And just lastly just a follow-up on the first question, is it the connectivity group where that sales or distribution relationship is going to exist as this business evolves for the operators? Because I would think that the vast majority of the cost is really on the fiber side, and the antennas that they're using on these lamp posts are de minimis?

These things can also have active radios in them, too. That's what our Airvana product will. So the intent will be where it's more of an enterprise oriented cell that our enterprise team, or our connectivity team, service provider team, whatever, would carry that responsibility. If it's still going to be a carrier responsibility, then our wireless, our mobility sales force would deal with that.

Thanks, Walt.

And at this time I would like to turn the call back every to Eddie for any final comments.

Thank you, Carmen. I would like that thank you each of you for taking the time to join us on our earnings call today. We appreciate your continued and tireless interest in CommScope. We are extremely pleased with our start for the year. We have delivered record second quarter margins, a robust free cash flow and stronger than expected bottom line results. All while delivering known, and increasing our cost synergy plan. We feel confident in our market position and expect to build on it over the long-term. So thank you, and we'll talk to you again next quarter.

Thank you for participating in today's conference. You may now disconnect.