CommScope Holding Company Inc (COMM) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2003 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time if you have a question please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Monday, August 11, 2003.

I would now turn the conference over to Phil Armstrong, Vice President of Investor Relations, please go ahead, sir.

Good morning and thank you for joining us on this call. Frank Drendel, CommScope's Chairman and Chief Executive Officer, Brian Garrett, CommScope's President and Chief Operating Officer and Jearld Leonhardt, CommScope's Chief Financial Officer join me on the call.

During this conference call, we may make forward-looking statements regarding CommScope and OFS BrightWave's market and financial position, 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 the press release we issued today and CommScope's filings with the Securities and 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 or otherwise. After Jearld Leonhardt reviews the second quarter results, we'll open it up questions, Jearld?

Thank you, Phil and good morning.

Today CommScope reported sales of $141 million and other results for the second quarter of 2003. While sales and gross margin were at or above previous guidance, we reported a net loss of $51 million or 87 cents per share for the second quarter. The net loss included fixed assets, impairment charges of 34 cents per share for CommScope and after-tax equity in losses of OFS BrightWave, LLC, of 57 cents per share related to CommScope's minority ownership in this venture.

In comparison for the second quarter of 2002, the company incurred a net loss of $43 million or 69 cents per share which included 21 cents per share related to CommScope's write-off of Adelphia receivables and a 56 cents per share of equity and losses of OFS BrightWave.

CommScope's sales for the second quarter of 2003 were $141 million compared to $155 million in the year-ago quarter and $129 million in the preceding quarter. The sequential increase in sales is primarily due you to increased sales to broadband service providers other than Comcast, stronger wireless sales and improved land sales. The year-over-year sales decline was due to lower global broadband video sales.

Orders booked in the second quarter of 2003 were $138 million compared to $135 million in the preceding quarter and $157 million in the second quarter of 2002. Second quarter book to bill ratio was slightly less than 1. Worldwide broadband video sales of $109 million were down 13% from the second quarter of last year but up 7% sequentially.

Despite lower sales to Comcast, sales rose sequentially, primarily due to stronger sales to other domestic broadband service providers. Sales to Comcast represented about 17% of total company sales for the quarter and were down $6 million sequentially. The year-over-year decline in broadband video sales primarily resulted from lower sales to charter communications as well as lower international and fiberoptic cable sales.

Worldwide broadband video orders for the second quarter were $107 million. International sales rose 8% sequentially to $27 million but remain below year-ago levels of $34 million. While international sales have been relatively stable over the past four quarters our near-term visibility remains limited. International orders were $27 million for the quarter.

Pricing for coaxial cable remained relatively stable during the quarter. However, sales of fiberoptic cable which represented more than 10% of total company net sales during the quarter continued to experience meaningful price pressure year-over-year.

Fiberoptic cable sales for broadband video applications declined by more than 20% year-over-year and sequentially. In contrast, land sales benefited during the quarter from increasing fiberoptic cable and apparatus sales. We also believe improved project business positively affected our results.

We are pleased with our land sales, 25 million for the quarter, which rose 7% year over year and sequentially. Land orders for the quarter were $23 million. Wireless, other telecom sales rose sequentially for the third straight quarter. Sales were $8 million for the quarter, up 63% sequentially and up 20% year-over-year.

While we expect project business to be somewhat irregular, we believe that CommScope has made steady progress communicating this sell range value proposition to new customers. We are committed to building this business as we continue to bring innovative products to market. We remain optimistic about long-term opportunities for our wireless products. Despite rising material costs, total company gross margin for the second quarter rose about 170 basis points sequentially to 20.4%, primarily due to increased sales volume. Gross margin in the second quarter of 2002 was 20.5%.

While we are pleased with the sequential performance we remain concerned about the potential for escalation in the cost of plastics and other polymers. Selling, general and administrative expense was $22 million in the second quarter. This compares to $41 million in the year-ago quarter which included pre-tax charges of $20 million for the write-off of Adelphia receivables.

For the first six months of 2003, SG&A was down about 2% year-over-year excluding bad debt expense. R&D expense was approximately 1.5 million dollars or roughly 1% of sales in the second quarter.

During the second quarter of 2003 we concluded that certain of the company's manufacturing assets had no future use in operations as a result of ongoing weak global business conditions. These assets, primarily used for broadband cable manufacturing, included uninstalled, under utilized and idle fixed assets in the United States and in Brazil. CommScope recognized pre-tax impairment charges from fixed assets of $32 million or 34 cents per share during the second quarter. These charges included $21 million for domestic broadband cable manufacturing assets, 9 million for Brazilian manufacturing assets and 2 million for other domestic manufacturing assets.

Overall, the impairment charges of $32 million represented about 14% of plant, property and equipment or about 4% of total assets. While this action will not have a significant impact on our manufacturing capability, it is expected to reduce our future depreciation expense about $2 million a year.

Our equity method investee, OFS BrightWave, also continues to face difficult global business conditions. As a result they took actions to reduce their cost structure through restructuring and recognition of assess impairment during the second quarter. For the quarter, OFS BrightWave had revenues of $22 million, a negative gross profit of 42 million and a net loss of 293 million. The net loss included charges of $258 million, primarily related to fixed asset impairment, restructuring and cost reduction efforts.

CommScope recorded after-tax charges of $34 million or 57 cents per share in the second quarter for equity and losses of OFS BrightWave related to CommScope's minority investment in this venture. Furukawa, the majority owner of OFS BrightWave previously announced that major global reviews of its optical fiber and fiberoptic cable operations which included OFS BrightWave. Furukawa indicated that restructuring, special charges and job cuts might be necessary at certain manufacturing facilities during 2003 in order to reduce its cost structure.

As part of the restructuring process, Furukawa reported that it plans to close the OFS BrightWave manufacturing facility in Brazil but plans to maintain a sales force in the region. Furukawa also indicated that it plans, as part of its cost reduction measures, to integrate OFS and Furukawa sales efforts in the Asia Pacific region.

CommScope expects ongoing pricing pressure and weak global demand for fiberoptic cable product at least through 003. As a result, while we believe the OFS BrightWave, or that OFS BrightWave has reduced its cost structure through restructuring, we continue to expect OFS BrightWave to incur losses at least through 2003.

Turning to CommScope's cash flow and balance sheet issues for the quarter, net accounts receivable were $71 million, inventories were $37 million, and depreciation and amortization was $9 million. Overall, net cash provided by operating activities was $18 million for the second quarter. We continue to closely manage capital expenditures; for the quarter capex was less than $1 million, resulting in free cash flow, defined as cash flow from operations less capital expenditures, of about $17 million.

CommScope ended the quarter with $140 million in cash and cash equivalents, up 15% from the first quarter balance of $122 million and up 22% from June of last year. Total long-term outstanding debt at June 30th was $183 million or about 28% of our booked capital structure.

Regarding outlook, while we have seen some signs of market stabilization, we remain cautious in our near-term sales outlook. We are also cautious about margins since we expect ongoing cost pressures, primarily related to the cost of polyethylene and other plastics. As a result, we expect that CommScope's third quarter 2003 sales and gross margin will be slightly lower than to consistent with the second quarter 2003 levels. We do expect to continue generating free cash flow during the second half of 2003.

During July, we received a $13.5 million tax refund primarily related to the carry-back of 2002 deductible losses from OFS BrightWave and the write-off of Adelphia receivables. In addition, we expect capital spending for 2003 to be about $10 million and expect to remain well below depreciation and amortization for the next few years.

Thank you and now we'll open it up for questions.

Thank you. Ladies and gentlemen, if you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would you like to withdraw your registration please press the 1 followed by the 3. If you are using a speaker phone please lift up your handset before entering your request. One moment, please, for the first question.

Our first question comes from the line of Daryl Armstrong with Salomon Smith Barney. Please go ahead with your question.

Thank you very much. I have two questions. First of all, other than the polyethylene and plastics issue, are there any other components that you're concerned about that you could see some higher pricing for this year?

Then second of all, if could you provide us an update in terms of what you're seeing from Adelphia, that would be helpful as well.

I'll take the first one and the second one. The poly increase is real. We're still working on different suppliers that can affect that. We're looking around the world to see if we can find alternate suppliers for that product. So that one is clearly in the numbers this quarter and will be in the numbers next quarter.

As far as Adelphia, that process continues. We're feeling more comfortable with our receivables at Adelphia but I don't expect that bankruptcy to be complete until at least the first quarter of next year.

Thank you very much.

Yes, sir.

Our next question comes from the line of James Jungjohan with CIBC World Markets. Please go ahead.

Hi, guys.

Hi, J.J.

On Comcast it was slightly lower sequentially and still is your biggest customer. Was that basically just a high percentage of fiber sales last quarter that didn't fall through or was that still some coaxial? And I've got one more follow-up.

Basically, the product mix was about normal. Clearly there was a little bit more fiber in the initial stage than there is now but it's just the sequence of the construction and the projects that are getting done and the projects that are starting up.

You had another question, J.J? Yeah, as a follow up to that and to the previous question on the poly, if we talked about last quarter possibly, you know, chatting with some of your customers about pushing through a price increase, any update or any push-back or any comments on that?

In this environment I think it would be impossible to get a price increase. Clearly we have contracts with these suppliers and we have contracts with our customers and so you have to get a window of opportunity when the demand is such that you can get a price increase. I can't imagine a price increase in this environment for the next two quarters, Jim.

Okay. And then just a quick last one, on the wireless division, it was up nicely, is that share gains, is that share gains across the board, share gains at one customer? Just seems like three-quarters in a row you're doing a little better there. What's going on?

Well, we're finally getting, Jim, which has been a lengthy and elaborate process the certification of these products at major customers. So the gain was across the table, at major customers all over the United States and in Europe, in fact, so part of the good news is that the customers are beginning to get accustomed to using this product, they like it.

We've had some excellent results now after three to four years of having this product in the field that is maintaining its performance and has had very little trouble in field reports so, some customers have picked up substantially with us.

Thanks, guys.

Our next question comes from the line of Steve Fox with Merrill Lynch. Please go ahead with your question. Good morning.

Good morning, Steve.

Could you talk a little bit about the OFS business? It sounds like, excluding the charges, it lost about a million dollars or so. Why can't it hit break even this year? That's my first question.

I'm not quite sure I understood your first question, Steve. How much it lost? A million dollars?

Yeah. It looks like -- I don't know if I got my numbers right but it looks like it lost about a million dollars excluding the charges. Is that right?

No, excluding the total loss for OFS BrightWave, Steve, was $293 million and the one-time charges were $258 million. So, it was significantly more than a million dollar loss.

About $35 million.

Of course, our portion of that is 18%.

But on the business, Steve, I think both OFS and the other major suppliers of fiberoptics in this environment continue to scale these businesses to whatever it takes to maintain at least a core business for the return. We're now down to about 1,300 employees at OFS. I think when we took it over it was north of 6,000 people. We have consolidated the locations.

Clearly, you know, no one will ever go back into the fiberoptic business, so the survivor in this, both Corning and ourselves, should have a very attractive business given to where we've scaled these things to. Again, we are protected, as you know, by the put. So as long as Furukawa is viable, I have every reason to believe they will be viable forever, we have a chance to get all of our money back or of a chance of a very significant over shift in those businesses.

In the meantime, we're one of the few companies in the world that can provide all the product to the last mile and that continues to be our strategy.

Then on the outlook, Frank, typically the third quarter is pretty seasonally strong. You're not seeing any of that?

We're seeing some improvement, Steve, but what has happened with the consolidation in the industry, for the first time these companies are much better at managing their environment over the entire 12 months. I am sure we will see a traditional uptake, as you've pointed out in this quarter, but I don't think it will be as bold as it has been in the past years.

Thank you very much.

Yes, sir.

Our next question comes from the line of Dan Ernst with Rodman & Renshaw. Please go ahead with your question.

Good morning gentlemen, a few questions if I could. First, what, if any, was the cash component of your own restructuring efforts this quarter?

Steve, we expected to have $2 million of depreciation and -- I'm sorry, Dan. $2 million of depreciation improvement going forward but that would be a non-cash item. So our restructuring was limited to at that impairment.

I think you also asked, we didn't have any cash cost to those, to speak of.

There was no layoffs associated with the downsizing in Brazil?

That was an OFS component. Back up on OFS, they expect to have about $8 million a quarter, OFS BrightWave, a quarter of improvements coming out of their restructuring activities, if that was your question. About half of which is a cash component and the other half would be depreciation.

Okay. So actually that was my -- leading to my second question. Of the $258 million special charges at OFS BrightWave, a lot of it was asset write-downs but what percentage would have been cash charges?

About -- I think it's about $40 million of the total.

Of cash charges at OFS BrightWave?

That's right.

And then moving on to your business, the write-down of the Adelphia receivables, if I recall correctly, you've done this once before. You've held some on your balance sheet with the idea that the restructuring was eventually going to happen and you would get paid and you'd actually gotten, I believe, some cash offers to buy out your receivables. Is there any change in that situation?

Well to, begin with, the Adelphia write-off we took was a one-time write-off way back when it first happened in June of last year and that was approximately $22 million. There hasn't been any additional write-offs on any Adelphia receivables since then. They have been paying us in an orderly fashion and we have been shipping product to them.

We still maintain working relationships with both the company and the receivers on this receivable; there have been some indications of some numbers close to 50% on those receivables. We have elected, at this date, not to accept those and continue to work towards the conclusion. So, there is a cash market for those receivables out there.

Right. So can you walk me through why you needed to write down the --

The write-down of Adelphia was in June of the previous year.

Yeah, there was no Adelphia write down in the quarter -- the second quarter of 2003, Dan. That write-down was the second quarter of 2002. Maybe I misspoke in the call.

You were just repeating what the charge was last year. Okay.

We were trying to make some clarity about that charge.

That's clear now. Then finally, on Comcast, I think there are a number of other vendors in the space that have reported that that is progressing well, then after the very weak seasonal first quarter lot of bad weather, the pickup happened in the second quarter, it didn't appear that way, according to you. Can you talk about what's going on at Comcast with respect to CommScope?

Let me try to explain that. I don't think that's a fair total assumption because our product is the first product that you need to ship in to any upgrade or rebuild. You can't add the amplifiers, you can't add the connectors, you can't add the taps or anything until you have the cable. We would naturally see it before everybody else did.

So if you look at the first quarter and the second quarter you can assume that some of that product was going in to be put in now, where the other vendors are beginning to see those orders. So I wouldn't assume that we have lost share or anything has happened there. It's just the way that they sequence through buying their product.

Okay. That's a fair answer. And if I could, I thought of one extra question, which is, after the write-down in plant, where are you at in capacity utilization?

We still have way north of a billion dollars worth of capacity.

Got it. Thank you, sirs.

Thank you, Dan.

Our next question comes from the line of Barry Haynes with Sage Asset Management.

Good morning. Two quick questions. It looked like charter was down year-over-year and they have done some amount of refinancing. Could you just categorize where they are, have they come back into the mark at all, are they still pretty much on the dormant side?

Secondly, we've had a couple conversations about Comcast but could you give us some sense of what they're telling you sequentially for the first half of the year compared to the first half? Thanks.

On charter, they clearly were down year over year but sequentially they have improved, so charter is beginning to get some of that direction on line.

I am sorry, I missed your second question, could you repeat that, please?

Comcast, have they given you an indication of what the second half might look like compared with the first half?

I would expect Comcast to be somewhat less than the first half. Clearly lower in fiber sales, probably pretty much stable in coaxial.

Okay, great, thanks.

Yes, sir.

Our next question comes from the line of Christopher -- I apologize, Michael Christo with Inwood Capital Management. Please go ahead with your question.

Yes, on the fiberoptic side, Frank, in the past you've given us a sense for the size of that market, level of inventories and apparently how a lot of inventory has been going over to India and Malaysia and the like. Can you give us a sense of where that might be today?

There are still brokers out there moving fiber at very very depressed prices, probably 10 cents on the dollar from some of these bankruptcies that are still working their way through. Brian and I saw one go across the other day from a major long carrier that was incredible pricing. Sooner or later that material gets used up.

I don't think we'll see any major improvement in the fiber telco side of the business until regulations are completed at the FCC. That is the key catalyst to get fiber to the home and those are promised every month but it seems it takes another month to get anything out of the communications areas.

There is a great deal new information on the CATV market. We have, in our belief, about the same percentage of that market as we do in the coaxial market.

Our next question comes from the line of Allen Mitrani with Copper Beach Capital, please go ahead.

Hi, thank you. Could you tell us what you think your new depreciation run rate will be quarterly post the write-off?

Hold on a second. We'll look it up.

Sure.

It will be around $8 million a quarter.

$8 million. Also, Frank to, your answer to, I think, Barry's question, was, or Dan's, if you still have about a billion dollars worth of capacity and you're running so far meaningfully below, does it pay maybe to take a deeper look in terms of cuts?

Well, I think you've got to consider for a moment, we're seeing improvement in our productivity from the new equipment, the new plants and the stuff that we've worked with. We've been able to sustain a margin that's better than about anybody else in telcom right now given this tremendous downturn in the marketplace. The worst thing that could happen to us is not have the product that we have and the capacity to manufacture them.

So we look at these plants very closely and I think you have to get to some degree of normalization in the market, both for fiber, coaxial and our wireless businesses before I want to take anything farther. We have a tremendous cash position, very stable as a company, great customer relationships and you've got two major MSOs that are pretty much still on the ropes. Once those come back you could move into this capacity quite rapidly.

You also have the situation of the global footprint, Brazil, we've got it cut back and you've got our situation in Europe where I won't give that position up until we definitely know what's going to happen in Germany. We looked at this very closely and I'm comfortable with where we are.

Do you have any timing as to when the German market could pick up again?

I have promised that so many times, I'm not going to go there. When it happens, it will happen fairly substantially. There are so many regulatory issues still to put over there, on getting that last mile piece.

Okay and then lastly, can you give us an update in terms of what your net operating losses are, maybe Charles has that, in terms of what the net operating losses are so far that are available to you to use based on the Furukawa?

The residual is what you're thinking we still have less that we could write-off and get a tax rebate on?

What you can use to shield taxes on over the next few years?

Right. I don't have that number at hand, Allen and at this point, I won't be able to give you any information on that. We were tax paying, obviously, in 2000, 2001and I think we still have net operating carry-back capability to those two periods, certainly.

Okay. Thank you.

Yes, sir.

Once again, ladies and gentlemen, to register for a question, please press the 1 followed by the 4. Our next question comes from the line of Eric Buck with Janco Partners. Please go ahead with your question.

Good morning, guys.

Good morning, Eric. Welcome back to the industry.

Nice to be back. Thank you. I missed the very beginning, you might have touched on this but could you give us a sense of the improvement that you saw sequentially in the cable space? It didn't come from the healthiest player, did it come from the second-tier guys, who are somewhat healthy or was this an improvement in the guys that are coming out of bankruptcy?

Actually, it was across the board. Almost every customer, with the exception of major ones, were showing improvement, some very slight and some significant. There is some strength in the lower tiers of this business.

Okay. And then you mentioned that your cable has to go in at the front end of an upgrade but also there's kind of at the rear end as you're deploying higher end services and there is a lot of feeder. Can you give us a sense of mix between trunk feeder and drop?

Clearly you're correct on there, the mix has moved more towards the drop cables and the smaller sizes than the trunk and feeder cables. Clearly, these DSL upgrades, cable modem upgrades versus DSL upgrades, a lot of the cable is replaced in the upgrade for the high speed data customer, as you know, so, the mix over the period has been moving more towards the 50/50, 55/45.

And you would skipping going forward that it would be more continuing to move closer to the subscriber in terms of the mix?

Yes, but I think what happens is you have two pieces you have to consider, Eric. One is, if you look at the traditional systems it would be 50/50, kind of a break on coaxial. But as you go deeper with these nodes that are getting stressed because of the traffic, then the fiber component comes in there and makes it more like 60/40 or 65/40 in terms of fiber.

Great. Thanks.

Once again, ladies and gentlemen, to register for a question, please press the 1 followed by the 4. At this time I'm showing there are no further questions, please proceed.

Thank you, ladies and gentlemen. I know it's a very difficult market out there. We are comfortable with our position in this emerging area and we appreciate your attendance to the call. Thank you.

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.