CommScope Holding Company Inc (COMM) 2002 Q1 法說會逐字稿

Thanks, Michelle. Thank you for joining us on this call. During this call, we may make forward-looking statements regarding CommScope and OFS BrightWave plan 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 perform 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 more detailed description of factors that could cause such a difference, please see the press release we issued today or CommScope's filings with the Securities Exchange Commission. In providing forward-looking statements, the company does not intend and is not undertaking any duty or obligation to update these statements as a result of new information, future events and otherwise. Jearld Leonhardt will review first quarter results. Jearld?

Thanks, Phil. Today, CommScope announced first quarter results for the period ended March 31, 2002. The company incurred a net loss of $1.6 million, or 3% per diluted share for the first quarter of 2002, which includes $8 million of after-tax equity and losses of OFS BrightWave, or about 13 cents per diluted share. These results compared to net income of $16.6 million, and earnings of 32 cents per diluted share in the first quarter of 2001. CommScope acquired an 18.4% ownership interest in OFS BrightWave, an optical fiber and fiber cable venturer between CommScope and Furukawa Electric Company Limited of Japan during the first quarter of 2001, and CommScope is reporting the results using the equity method of accounting for this investment. CommScope's income before equity losses of OFS BrightWave for the first quarter of 2002 were $6.3 million, or 10 cents per diluted share, which is in line with the company's prior guidance. CommScope's sales for the first quarter were $160 million, down 26% from the year-ago period, but up 11% sequentially. Domestic sales were 135 million in the quarter, down 13% compared to the prior year, but up 22 cent sequentially. International sales of 25 million continue to reflect a challenging global environment, and were down 59% year over year and down 25% sequentially. Orders booked in first quarter rose 32% sequentially to $175 million. Domestic international orders rose 26% and 61% respectively from fourth quarter 2001 levels. First quarter booked-to-bill ratio was roughly 1.1 times with international stronger than domestic. Book-to-bill in the first quarter supports our belief that we have past the low point in sales from the current downturn. However, the turbulent economic environment makes it difficult to forecast the pace of recovery. Broadband/video sales worldwide decreased 22% year over year to $133 million for the quarter, but rose 12% from the fourth quarter of 2001. Domestic broadband/video sales were essentially flat year over year, but were up 26% sequentially, primarily due to stronger than expected domestic broadband sales to Adelphia and AT&T, both of which were about 10% of total company sales. Market for fiber optic cable remains particularly challenging with vigorous ongoing pricing pressure. However, despite pricing pressures sales of fiber optic cable for broadband application increased modestly from the fourth quarter 2001. Pricing for co-axial cable remains stable during the quarter. International sales were $25 million for the first quarter, down 59% year over year. Sales were down in all regions year over year and continue to reflect the difficult global environment. However, we believe the improved order input in the first quarter is a preliminary sign of stabilization. We do expect improvement in international sales as we move through 2002, but we believe that recovery may be gradual. Although some widely-publicized projects in Germany have been delayed, we believe that upgrade opportunities there should ultimately be realized. We intend to continue enhancing our international capabilities because we believe that international markets will be a source of long-term growth for CommScope. Domestically, we believe that we will see modest, sequential improvement as we move into the seasonally strong summer months, including benefits from the increased infrastructure spending announced by AT&T, somewhat offset by lower-expected sales to Adelphia. Local area network sales increased and 33% sequentially to $20 million for the first quarter. We are pleased in the improvement of the lan business during the historically low first quarter. We believe our marketing partnership with the Semen Company improved our ability to provide world-class network cabling solutions to customers across the United States. This was another difficult quarter for our wireless, another telecom product category, sales of $7 million, which is down significantly from prior periods. We continued to encounter reduced equipment spending by domestic, telecommunication operators, and severely reduced spending for telephone central office application. While we are disappointed with our current performance, we continue to enhance our global wireless capabilities, penetrate new accounts, and expect to achieve sequential wireless sales growth during the remainder of 2002. Total company gross margin for the first quarter was 22.2% compared to 24.3% in the year-ago period, and 24.1% in the fourth quarter of 2001. Gross margin for the quarter was affected by a number of items, including changes in sales volumes, ongoing pricing pressure for certain products, higher overhead costs related to employee benefits, and a new international facility, among others. We believe that we can achieve gradual, modest growth margin improvement as we move through the year, assuming co-axial cable pricing remains stable, sales volumes improve. First quarter SG&A expense was approximately $1 million, down slightly year over year and down from the fourth quarter 2001. As a percentage of sales, SG&A was up year over year primarily due to lower sales volume. As we have previously indicated, we intend to continue funding sales and marketing efforts and investment in I.T. infrastructure in order to enhance our competitive position around the world. SG&A has also been affected by bad debt expense due to the difficult market environment. As a percent of sales, SG&A declined 200 basis points from the fourth quarter, primarily due to higher sales volumes. As sales recover, we expect SG&A to continue to trend down as a percent of sales.

expense was approximately 2 million, or roughly 1% of sales in the first quarter. Effective January 1, 2002, the company adopted the goodwill nonamortization provision of the Statement of Financial Accounting Standards, Number 142, for goodwill and other intangible assets. Adopting this provision had the affect of eliminating about $1.3 million of goodwill amortization on a quarterly basis. Turning to cash flow and balance sheet issues, first quarter IBTDA was 21 million, excluding losses in OFS BrightWave. Net cash provided by operating activities for the quarter was 16 million and reflects higher working capital needs associated with increasing sales. This is important to note that OFS BrightWave losses do not reduce CommScope's cash flows. At quarter end, net account receivables were 116 million. Inventories were 54 million. Total long-term debt outstanding at March 31 was approximately 194 million, or about 24% of our booked capital structure. We ended the quarter with 87 million in cash on our balance sheet, which included the repayment of 13 million to CommScope under revolving note receivable from OFS BrightWave. As we previously indicated, we have significantly lowered capital expenditures. Cap X declined to approximately $4 million in the first quarter. Free cash flow after capital spending was $12 million for the quarter. We currently expect capital expenditures to be in the 25 to 30 million range in 2002, depending upon business conditions. While we may place additional production capability in important international markets, we expect capital expenditures to remain below depreciation and amortization expense for several years. Intangibles amortization expense for the first quarter was $9 million. Market for fiber optic cable products continues to be affected by weak demand and significant pricing pressure. Our equity method in OFS BrightWave was not immune from this severe downturn. Brightwave's revenues from the first quarter were $27 million, and gross margin was a negative 48 million. The overall pre-tax net loss of OFS BrightWave in the first quarter was 69 million. BrightWave's depreciation and intangible amortization in the first quarter was approximately 13 million, and special charges including transition expenses were approximately 15 million. Clearly, this is a challenging market for optical products. However, we do believe that OFS BrightWave is taking appropriate steps to reduce its cost structure to adjust to the challenging market environment. Cost reduction efforts thus far include significant work force reductions across essentially all operating functions and corporate staff, considerable reductions in capital expenditures, budget cuts, and travel restrictions, among others. However, significant increases in sales volumes are needed for recovery and profitability in OFS BrightWave, which we are not optimistic can be achieved this year. As a result, we expect ongoing losses for BrightWave during 2002. Despite the losses expected in the nearer term, we believe the fundamental reasons for our strategic investment remains sound for the longer term. These are, first, creating a strategic partner in optical fiber and fiber cable. Second, enhancing our technology platform through cross-licensing and key intellectual property. Third, developing an attractive fiber supply arrangement, and last, taking advantage of our extraordinary opportunity to own unique fiber assets. In fact, we believe we have already enhanced our competitive position with some of our largest customers, the domestic MSOs, as a result of this investment. We firm believe that fiber optic technology will continue to be a key component of advanced telecommunications infrastructure around the world, and believe that this investment will create value over the longer term. During the first quarter, OFS BrightWave repaid a portion of the initial $350 million of the working capital loan to CommScope. CommScope's portion of the fully drawn initial lone was 30 million, of which, 13 million was repaid during the first quarter. Since this loan is a revolving credit arrangement, we expect BrightWave to redraw the funds in the coming months. In summary, we believe we passed the low point in CommScope's sales for the current downturn. A sequential increase in sales and orders during the first quarter supports our view, but it continues to be difficult to forecast the pace of recovery given the ongoing volatility in the markets. For the second quarter of 2002, we are cautiously optimistic and expect modest improvement in sales and profits before expected losses in OFS BrightWave. However, we are mindful of the turbulent economic environment, including the real challenges faced by many large telecommunication companies. Financially, we believe CommScope remains fundamentally sound with a strong balance sheet, good free cash flow, and adequate cash balances to internally fund near-term growth. We intend to carefully manage our balance sheet, to provide flexibility for growth, while monitoring the market for strategic opportunities that are often created in the midst of chaotic markets. Regarding the 10.2 million shares of CommScope stock held by Lucent, we have had no formal indication of their intentions. Thank you, and we'll be glad to answer your questions. Michelle?

Thank you. Ladies and gentlemen, if would you like to register a question, please press the one followed by a four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speaker phone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from Jim Jungjohann with CIBC World Markets. Proceed with your question.

Hi, Jearld, Brian, and I don't know if Frank is there. How are you guys doing? You beat on the top line, but can you talk about linearly on the first quarter? It looks like things improved in the latter half. Was this a better year in terms of seasonality? Secondly, just gross margin guidance. You know, it was down sequentially. Should we model kind of flattishness, but then you were more optomistic, but is pricing that big of an issue, or should we be more concerned about the margin line?

Let me take it from the top down. First, correctly, it has improved, and I'm not sure that it gives us any kind of guidance that improvement will stand for the rest of the year. My concern is that the inventories were drawn down so tightly across the board that some of this was an inventory replacement and doesn't reflect true demand. The cable properties clearly are showing improve many. The pricing in fiber is just an absolute train wreck. It's a disaster out there as people try to unload the products. So I would be cautious on those. On the margins, clearly, there were some slight increases at cost, but most of that comes from just mixed pressure and pricing pressure, and that was two of your questions. What was your third one, Jim?

Seasonality. I wasn't watching the weather across the country, but typically this was supposed to be sequentially down, and you know, was seasonality probably better than what you thought?

I would say it was affected. I really believe, J.J., that a lot of that that the budgets for the MSOs were approved at the first of the year. These operators were running their property so tightly, and they went out and there wasn't any product. So I think what you have is, clearly, an early start to the AT&T program and some of the others, but I honestly believe that there was some replenishment of just the work in process materials that were in the system.

You mentioned a 1.1 book-to-bill. How did that correspond with the different segments? I don't know if you can talk about it. Was it positive cable TV, positive in wireless and positive in lan?

Positive in everything but wireless. Positive was flat to down. Clearly positive book-to-bill and CETV. Clearly, Adelphia and AT&T were showing the real improvements. Network lan was right at one, and the other areas were at about 1.005. Across the board, it was 1.1. You know, at least from that, we believe we've seen sort of the bottom, but I wouldn't say that this is any indication that it's going to be a fast recovery.

Great. That's all I have. Thanks.

Our next question comes from Jerry Labowitz with Merrill Lynch. Proceed.

Yes. Can you give us a little more color? You talked about pricing pressures. If you look on the core business side, where were the greatest pricing pressures? What did you see? Let's talk lan, the wireless area, and if you could give us some details on the co-axial cable portion?

I will take it from the time. The worst is the fiber area. It's variable price costing on every bit that you see come across so clearly, the most pressure we've seen is in the fiber cable area.

Can you give us some range to quantify it for us?

10 to 13% this quarter.

Which would be how much versus a year ago?

30 to 40% at least. Again, that is somewhat mix driven because of the fiber counts in the cable. Clearly, it's very difficult out there. I would question whether anybody survives this business other than the two really large players in it. Then you go lan was difficult, but manageable. Brian will speak some more on this. Brian's making great strides in cost reductions, and the co-axial business was stable, very stable. We've seen some spot bidding around the world, where people are trying to get into a world here and there, but nothing we had to panic on, and wireless pricing wasn't as serious is that the volumes aren't there. None of the carriers are building anything. Those are the four classic areas.

Did you have any pull-ins during the quarter that won't replicate themselves later in the year?

Not that we know directly. The only question we have is that there is indication that inventory in the traditional large part of our business, the co-axial cable business are drawn down so tightly in the fourth quarter, that some of these MSOs got approval in their budgets and bought some. Clearly there were early starts of actually installing the cable at Adelphia and AT&T, but both of those give us some feeling that we will have a reach here, but it's not going to be a blowout.

We said we didn't think the Adelphia would be at that level going forward.

Okay.

I think, Jerry, the area that I'm pleased with is, you know, this is a difficult time for anybody that's in the Telecom supply business. CommScope remains very profitable, huge cash flow generation, and is positioned with plenty of capacity. We have a patent portfolio now that is untouchable in some of these areas and our dream of having a full-line supplier to the last mile and it's starting to prove itself. Some of these crossover sales that we're doing with the major customers, giving them a portfolio products between fiber, co-axial, lan, inside wiring, outside wiring is clearly increasing their market share with some of these customers. So as hard as it is out there the in the market, I'm very, very pleased with CommScope's position. Our balance sheet has never been stronger, and we are clearly positioned when recovery comes.

Great. Thanks.

Our next question comes from Larry Harris with HC Waynewright. Proceed with your question.

Yes, thank you. I was wondering if you could provide some indication as to the mix between trunk and distribution and drop during the quarter.

Yeah, Larry. You know, I think that, clearly, it's 65/45, 60/40 type of tune, and it's a historical issue. It hasn't changed drastically in either direction.

More trunk than draw?

Dollar-wise yes. Not footage-wise, obviously.

And in terms of the OFS BrightWave, you mentioned or Jearld mentioned that there were going to be some head count reductions and reductions in corporate expenses and other actions taken. Are those going to hit the June quarter results for OFS BrightWave?

Larry, I said there have been those kinds of actions thus far. We expect that they will continue to do cost reduction activity, but you know, those specific actions, we're not discussing.

I understand. Well, it looks like you had a good top-line performance and good free cash flow generation.

I appreciate that, Larry. We did, and I think we're positioned that as long as we can sustain at this level, we will not give up our sales force or give up on our research and development or especially our I.T. developments as long as we can stay in this kind of level, and I think we will be in very good shape when this thing finally shakes itself out.

Thank you.

Thanks, Larry.

Our next question comes from Selman Akyol with Stifel Nicolous. Proceed with your question.

Thank you. Given the strength you're seeing in the book-to-bill ratio on the international side, can you say where you're seeing the strength coming from?

Generally, it's about all over. Again, part of this kind of recovery position that we're seeing is it's nothing that you can say is one particular country that's just taken off. We had items for Germany, and there's modest amounts of product going into Germany. Latin America improved somewhat. It's this small lift taking place. We're still way down where we had been in prior years, but everything seems a little bit more stable. It seems like it's a little bit more of an interest in the product lines in the recovery.

Thank you very much.

Our next question comes from Daniel Earnst with Lienenburg Salomon. Proceed with your question.

Yes, good afternoon. Couple questions about fiber and OFS. Can you say what percentage of sales included fiber, and then could you repeat what numbers you gave on the top line for OFS and whether or not you have any guidance, and then I have a follow-up question.

Obviously, we're the minority shareholder of OFS, so basically, we would like more or less for OFS to report that. Our sales were public. It was 27 million for the quarter, and it was an overall loss of about 69 million, 70 million, and that gave the sales generated negative $48 million margin, negative margin loss, so I understand where you're headed. I will try to help you. The view I have of that situation is it's obviously a train wreck. Something on the order of this quarter last year would have been around 250 million, and so they're down 10 X, but clearly, the OFS BrightWave situation is containable. Because it is in one singular location. These numbers are horrible. They're horrible for everybody in fiber optics, but you have a situation where if they can get any kind of recovery coming toward this -- these products and these businesses that they have generally continued to reel in the cost, and we only have one facility that we have to have fixed-cost coverage on, so I still believe by the time our two-year window is up on whether or not we have to make the decision to go forward with that investment or to get our money back, that we'll have a chance to see if this has turned out to be the right decision. In the interim period, there's no question that their fiber is helping us with our customers. That is absolute.

And excluding OFS, what kind of sales was fiber?

Daniel, let me make one clarification for you. You say OFS, but remember, we're talking about OFS BrightWave.

Correct, yes.

Thank you.

You meant that, Brian, didn't you?

Right. So, again, what was it of your sales in.

Fiber represents approximately 10% of our sales this quarter.

Okay. Then my follow-up question on Adelphia, you said you don't think it will be as big going forward, but what's the chance that it drops off significantly?

That's a possibility. I mean, given the situation that's been reported publically on Adelphia, I would say that anything could possibly happen there. Personally, I think the Adelphia management team and the family that's been with the company, I've known them for years. They built that business, and I think they will do everything they can to sustain ownership and build it back into a business. There's no question in my mind that those properties are valuable. I don't think this is a risk of a CLEC or telecom carrier. Somebody will be there.

Excellent, thanks a lot.

Our next question comes from Toby Summer with Suntrust Robertson Humphrey. Proceed with your question.

I was hoping that you could describe and give a little bit more color in your lan sales, up pretty sharply sequentially. If you could describe if that's an underline, broad trend, or if there were any particular sales that may have helped with that sharp increase?

Well, it was a strong quarter, Toby, in just project activity. If you look at our numbers where we included last year of sales in the quarter, probably the increase in the quarter is probably more representative of what was a very, very soft fourth quarter. You know, the market and in figuring the lan segment is very, very competitive. We find ourselves spending a lot of time closing what, for us, is substantially project-oriented business. So I would characterize the remainder of the year as just a continued project-by-project earnout moving forward.

There was a large building of projects over the last half of last year. We're still encountering projects being pushed back, but others are falling, so you know, there remains a high level of interest and project quoting activity, so I wouldn't say it was an extraordinary bubble of, you know, a pent-up demand that fell in the quarter. Is that clear?

It is. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by a four on your telephone. Our next question comes from Richard Diamond with Inwood Capital Partners. Please proceed with your question.

I have two questions. One is Bill Schlier on the AT&T call said that upgrade construction for AT&T was going to be roughly 2 1/2 times the 2001 upgrade capital spending level at 1.1 billion. You know, how should we think about CTV participating in that? Secondly, just to get your sense, if you would consider stock buybacks at these levels?

First, on the Bill Schlier call, yes, we're aware of their commitment to upgrade that plan, and we believe it's part of the contract arrangement that they have with Comcast, that they're to get it in operation as soon as possible. We have a clear position with AT&T, and we will see participation in that. Again, I don't think they're far enough along now to really -- we've seen increase in orders and increase in product, but a lot of this takes some time to get multiplized. I think we will see more benefit this quarter than we saw in the first quarter and we will see more benefit each quarter, but to be able to give you a direct parameter on how much that will be worth to us, it will be a little difficult right now because there's still design work going on in those plants, but we will participate in it very well.

Stock buybacks.

I will tell you, you know, I'm a great believer of this stock. I never sold shares. I bought it at 35, personally with my own money, but right now, I think that a strong balance sheet is the strongest asset you can have in any company, given the uncertainty of these forecasts. Our ability to work with our customers, the uncertainty in all of these telecommunication areas, so it would have to be one great opportunity. I will never say never.

So if one great opportunity did come along, though, you would consider stepping up to the plate?

Yes, sir. I don't know what that entails, but I would definitely step up to the plate given a great opportunity.

Last question. Do you have some success stories that you could share with us where you were able to gain share in fiber or were able to package sales to MSOs of HSC and fiber together since you purchased OFS BrightWave?

We have several very successful stories that are in the works. We haven't completed the contracts yet, but we have at least gotten assurance that we will receive it because we were still working off some of our arrangements with our other fiber supplier, and I will brag on Brian for a little bit. Brian wouldn't do this, but our call-out activity and incoming calls and what our sales force has been able to do with having the opportunity to have this fully-loaded book offering for all of these products has been very, very successful. We're seeing a lot of opportunity to combine these products and being able to ship them to the same warehouse, being able to ship them on the same truck to the same location. Our transportation is a great asset in this. So, yes, there have been several, and there continues to be a substantial amount of work in progress. The one thing I am really encouraged about is the quoting activity that is taking place in our company, we haven't seen this kind of activity in 12 to 18 months. I'm not sure that it's not just price hunting, but there is solid activity. You know, incoming calls and the outgoing calls that are sales force and our customer reps are handling is at a very hyperactivity point, and it proves the point that we were smart in not getting rid of our sale force and not getting rid of our customer service reps and keeping this and take the beach at all cost opportunity. I think in the next coming quarters, we will be able to give you specifics of the size of these orders, because there are great opportunities.

Daniel Earnst, please proceed with your follow-up question.

Yeah. Quick follow-up, can you tell me what the bad debt expense was that you mentioned?

Daniel, that debt expense, the environment's particularly tough, and it was in the range of slightly under $2 million for the quarter.

Thanks.

Yes, sir.

Toby Summer with Suntrust Robertson Humphrey, please proceed with your follow-up question.

Just curious. I see your bookings were up substantially in the quarter. Do you break that out by co-axial? I was curious if you actually had a bookings figure for your lan segment also.

Yeah, we've got order business product category, Toby. First quarter orders in broadband/video were about 148 million. Lan, roughly, 20 million, and wireless and other just over about 7 1/2 million.

Thank you very much.

Our next question comes from Julie Centerollo with Morgan Stanley. Please proceed with your question.

Good afternoon. I just wanted to ask you about Cap X. I know you mentioned about 25 to 30 million for the year below D&A, and you said that some is going toward international opportunities, and I was wondering if you could highlight some of those.

We continue to build out the facilities that we already have and upgrade the facilities that we have from capital expenditures. So we have the bell gum co-axial plant, and we have the new co-axial facility in were still, and we're taking a very long look at China, so those are the kind of areas that we're looking at.

This is Jearld. The amount and the timing of starting some of this new capability internationally will have a big impact on the forecast or the use of capital for the year, and so 25, 30, we think is assuming we get well underway with those projects this year, but business conditions will dictate the actual timing of that.

Do you think would you enter China through partnership, or on your own through the Greenfield opportunity?

We're studying all of the above. We have a partner in Furukawa who has great experience in dealing with those situations. We may look at looking at building a combination co-axial fiber plan over there. Who knows. This industry will not stay at this level forever. If it does, the whole telecommunications industry will crater, so we will look at all of those opportunities going forward.

Great, thank you.

Yes, ma'am.

Toby Summer with Suntrust Robertson Humphrey, please proceed with your question.

Actually, I was going to drill down a little bit more on your bookings. Do you break down those by business segment between domestic and international also?

Yeah, this is Phil. We can give you domestic, 141. International's 34.

I think maybe your question, Toby, but most of the international business is broadband business.

Okay.

Yeah. We have little exposure at this point in the other area.

That was where I was going with the question. Thank you.

Gentlemen, I am showing no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Well, thank you very much, and we'll talk to you later.

Thank you for your support, and we will keep trying to keep it profitable.

Thank you very much.

Thank you, everybody.