All right, everybody, we're gonna get started. Good morning again. Welcome to JP Morgan's High Yield Leveraged Finance Conference. As most of you know, I'm Tom Egan. I cover technology and telecommunications for the company. Today it's my pleasure to have a conversation with the folks from CommScope. To my right, Kyle Lorentzen, Executive Vice President, Chief Financial Officer, and hiding down here in the front row, if you wanna tackle them later, Chuck Gilstrap, SVP, Tax and Treasury, and Michael McCloskey, Head of IR. I guess when you have a lot of debt, you get a lot of people in the room. All right. My mic live? Everybody hear me? Good. All right. Kyle, one of the things I hear a lot about, or I certainly did this quarter, was a lot of investor concerns about slower capital spending, mainly among the large telecom carriers. They're watching Verizon say, "We're trending down." We're watching AT&T say, "We're trending down." Can you tell us what you're seeing there from those companies and if that's something that people should be concerned about? I mean, when we look at that, it's really dependent on the segment and the carrier. You know, I'll talk about the CCS business, you know, which is obviously our largest segment. You know, I think, you know, we're definitely seeing, a fair amount of inventory adjustments, in that business. You know, you know, as we talked about on our calls, you know, we, you know, we started to see some order softness in Q4. You know, that's continued into Q1. You know, some of that's being driven by some of the large carriers, you know, in our discussions with our customers and the carriers, you know, there's still a fair amount of medium and long-term, you know, bullishness when it comes to the CCS business. You know, I think as we think about it, definitely, you know, seeing some impact, but a lot of that impact, as we talk to those, the carriers, is being driven by, you know, people just having too much inventory in the system. I think the other business that gets impacted is in our outdoor wireless networks business, so the, you know, the antenna, the antenna business. We're definitely seeing an impact in that business as a result of the carrier, the lower carrier spend in North America. I think, you know, as we talked about on our Q4 call, you know, we expect the OWN business to be down year-over-year as a result of that spending. I think we're seeing it here a little bit in the first quarter or the first half in the OWN business. I think that's gonna continue. We think in the CCS business, you know, there's a much stronger second half for us as we talk to those customers. How about on the cable side? Are you seeing the move to the edge increase, and how are you faring in that business compared to the traditional headend equipment that you normally provide? Yeah. I mean, if you're referring to the ANS segment. You know, I think as we have seen, you know, through 2022, you know, we've seen, you know, the product mix, you know, shift from the headend to the edge. We saw a lot of that happen in 2022. We've seen, you know, what we believe is to be, you know, the major adjustment from that mix happened in 2022. As a result of that, you know, again, as we've communicated, margins are lower on the products that are at the edge than they are at the headend. You know, so as our legacy products, you know, sort of decline and we're picking up on the edge, we're definitely seeing a mix change in the margins. You know, how we're faring in that business, you know, clearly we're a big player in the space. You know, we have technology that supports, you know, many different technology paths that our customers may choose. You know, so I think, I think we feel like we're well positioned, you know, along, you know, the chain, particularly as we go, you know, to the, to the edge. You know, I also would comment that just, you know, just like every piece of our business, there's things that, you know, I mean, you know, we're involved in most bids. Doesn't mean we win everything. I mean, we win some, and we lose some. You know, we're a significant player with our products that are on the edge, and we're selling, you know, those products to, you know, all of the big cable companies. You know, we would expect to continue to do that. We continue to bid on the jobs, and we'll win some and lose some. One of the other things that comes up quite a bit is your ability to pass through pricing. Can you talk a little bit about the products and segments where you've been able to pass through the higher costs, and then in segments where it's been more difficult? Yeah. I think in general, I'll sort of go back to our narrative is, you know, when we were facing the inflation, you know, the second half of 2021 and when it was really hitting, you know, our financial statements. You know, we, you know, we went out with a, you know, fairly aggressive price increases across all of our segments. We even talked about the fact that, you know, since we had pretty large backlogs, it was gonna take a while for us to work that through the PNL. I think if you look at, you know, our progress with our Q4 results, I think, you know, I think that demonstrates, I think, the fact that we have been able to, you know, get the price and sort of do what we said we were gonna do, you know, when we went down the journey of getting the price increases across the board. I think the teams have done a really nice job, not just working our internal processes, but also, you know, working with the customers. I mean, you know, customers understand the inflationary environment and, you know, they work with us and our teams to get those price increases implemented. I, you know, I think just like, you know, just like anything, there's, you know, there are segments that, you know, it's easier to get the price than others. I think in general, we feel good about how we've come out of the inflationary environment with the price increases. I think that's reflective in our Q4 results where, you know, our profitability levels, you know, on a percent basis got back to levels that, you know, were more in line with historicals than they were the last, you know, several quarters. That's maybe a nice little segue into supply chain, 'cause that's one of the reasons why you had to pass through higher prices. You've mentioned a couple of times that even though we hear bits and pieces about how things might be easing up a little bit, but you've been pretty clear that it's not over yet and that it's probably gonna continue into at least the balance of this year. What sort of are your early thoughts, where are we, March, on how that's playing out? Yeah, I mean, I think from a supply chain standpoint, I would say that other than semiconductor chips, I think we, you know, we've seen availability of supply get better. Let me talk a little bit about semiconductor chips. You know, we've put a lot of work into semiconductor availability. You know, changing parts out to, you know, change parts out to chips where we can actually get product. You know, we've tried to build better relationships with the chip manufacturers. We've been doing a lot of work to try and help us, you know, with some of these chip constraints. With that said, although it's gotten a little bit better, I mean, we're still in an environment where we're seeing decommits and the availability isn't what we would like it to be. you know, that definitely impacts us in the NICS business, it impacts us in the Home Networks, and it hits us in the ANS business. Our comments around, you know, what we're seeing in 2023, a lot of that has to do with this whole chip supply issue, that we continue to believe that, you know, this is gonna still be a challenging environment to get everything we need in 2023. you know, what I would say about the other products, you know, when we look at, you know, inflationary levels, you know, there are things that have actually moved down in price, but there's still a lot of things that are at either elevated levels or in some cases we're still seeing price increases. you know, so, you know, a raw material, you know, like our glass that we buy for our fiber optic cable, I mean, you know, we're seeing price increases on those products. I think even on the chip side, we continue to see increases on the chip components as well. I think when we think about the inflationary environment, I think other than chips, we have availability, but these prices are still high, and in some cases, we're actually seeing, you know, additional increases. Are there other aspects of the inflationary environment, like for example, transportation and some of the things that we saw early on in the pandemic that were a problem? Do you see those things easing up? Then maybe in addition to that, the thing that comes up almost on a continual basis is labor. How are you fairing with labor in your business? Yeah. As I mentioned, you know, we're definitely seeing some things, you know, move down from a pricing standpoint. I think freight is one of those that we've definitely seen a move down in freight costs. That, you know, sort of allows us to offset increases that we see in some of the other components. What's the second part of the question? Labor. Labor. I mean, for us, we really haven't had a major problem with labor. You know, where we spend most of our time thinking about labor and talking about labor is with our customers. As the build-outs, you know, trying to understand, you know, what their labor constraints would be. As we think about our business and our manufacturing facilities and our R&D organizations and selling organizations, you know, I wouldn't consider that to be a major challenge for us right now. You came out of 2022 with a pretty solid backlog. $2.9 billion is what I wrote down here. Given where the business these days is, how should we think about what the normal level of backlog is? I know that you guys have been pretty bullish on being able to convert all of that into ultimate business and convert your bookings into business. Maybe you can talk a little bit about how you think about what a normal level of backlog would be and how you think that supports the business in 2023. I think the best way to think about the backlog, and we've been talking about this on the last few calls, is we expect our backlog to go down, right? As supply chain, you know, availability eases and we're, you know, able to get, you know, more parts, what it allows us to do is it allows us, with our capacity increases, to, you know, dramatically change lead times, right? As we've gone through the supply chain constraints, our lead times have clearly gotten pushed out. We've been able to bring a lot of those lead times in, particularly in our CCS business. Just that alone, you know, is gonna result in a backlog decline. You know, I think we've seen that backlog decline, you know, over the last quarter or so. We probably would expect that to continue. I think when we think about what would be normalized backlog, you know, I think if we go back and we look at, you know, before all of these constraints hit us, you know, the end of 2020, you know, we had a backlog that was significantly lower, I think we even mentioned on our call. Our backlog is up 110% versus the end of 2020. We think that the 2020, you know, ending is an area that, hey, we feel comfortable that that would be a nice balance between, you know, giving our manufacturing teams the visibility to, you know, to drive what we need to do from an operations standpoint, also allow us to give, you know, the type of service levels that we would want with our customers. You know, having $2.9 billion worth of backlog, I think is not really the issue. It's more around the lead times and where we wanna be with our customers. You know, there's still a fair amount of room that we need to do to take that backlog down in order to get to a service level that we'd feel good about with our customers. We have a debt audience here. Debt guys tend to be a little bit more cautious than equity guys 'cause they never have as much upside. One of the things that you did this year was you had told us that the back half of the year of 2022 was gonna be pretty good compared to the first half. You've kinda done the same thing for 2023, and you've got some folks who are a little nervous about it, that say, "Well, you know, that's always, like, the concern when you have a back half loaded year." Could you just maybe give us a few comments on why you feel comfortable with the second half of the year being pretty strong compared to the first half of 2023? I think the first thing I'd respond to on that is having conversations with our customers, right? I mean, clearly, you know, as we've, as we've indicated, you know, we've, we've seen a slowing order rate in Q4 and into Q1. It's something that we're spending a lot of time looking at. You know, we're in constant dialogue with our customers around, you know, what's going on, and, you know, when are those order rates gonna come back up? You know, that's, you know, the first answer to that is we're talking to our customers, and that's what our customers are saying. Our customers remain, you know, very bullish on, you know, the medium and, you know, long-term growth, and particularly in the CCS business, where I think we've probably seen, you know, a little bit more of the adjustment on order rates than we have in the other businesses. You know, I think the other piece that just, you know, sort of drives a little bit of our, you know, of the back half is, you know, just how some of our segments operate. For instance, in the ANS business, which is a very project-driven business, hey, the reality of it is we see more project work in the second half of the year than we do in the first half of the year, which is pretty similar to what we saw last year. If you go back and look at the performance of our ANS business, you know, the second half was much stronger than the first half, which was really driven not so much from, you know, some normalized demand. It just happened that the projects fell in the second half of the year. You know, I think we feel good 'cause we see the customers, also, as we look at the business, you know, we see just the timing of projects, and in some cases, like in our next business, just the availability that we have on chips. We feel as we're talking to our suppliers, we're seeing a little bit, you know, better situation in the second half than we are in the first half. You know, all those things together is what gives us, you know, confidence that, you know, we're gonna see the better second half. I think with that said, you know, yeah, we're spending a lot of time looking at our order rates, you know, and having conversations with our customers because, yeah, as these things adjust, and people are adjusting inventory, and you see your order rates, you know, decline, which, you know, we talked about our book-to-bill in Q4 being 0.63, you know, yeah, I mean, it's definitely something that, you know, we're looking at and having conversations with. What we're hearing is, you know, a lot of positives for the second half. You folks, and I forget whether it was you or Chuck that was talking about it a little bit on the last earnings call. You talked about a couple things. First was some of the initiatives that were put in place in 2022 that will still carry into 2023 to provide some cost savings. You mentioned also some new initiatives that we're gonna put in place in 2023 that would not only help 2023, but would help 2024 and down the road. Could you talk a little bit about what those initiatives are for cost savings and maybe give us a bigger than a breadbox kind of an idea about what you think they could do for their, for your bottom line? Yeah. I mean, I'm not gonna go into specifics, if we think about, you know, when we put. I tried. When we put CommScope NEXT in place, you know, at the beginning of 2021, you know, it's a pretty comprehensive program, which for all intents and purposes is focused on growth, and it's focused on the cost side. I think we feel, you know, good about, you know, where we are, and, you know, there's definitely, you know, still some opportunity in that program. With that said, you know, that's a pretty iterative process where, you know, new projects are coming on, old projects are falling off. I think, you know, just like, you know, sort of any business, there's opportunities for us to drive improvement, and we're doing that through CommScope NEXT. I guess how I would answer your question about the cost side is, we clearly are looking at our situation in the macro environment and, I mean, we are going to react to that. I mean, I think that there are costs to come out, and we will manage to that. With that said, as we think about our businesses, and particularly in the CCS and NICS business where we feel like there's growth on the medium and long term, I mean, we still have to balance the, hey, we need to invest for the future versus the cost savings. I think that's a balance that we're always trying to walk, particularly in those two businesses. You know, what I would say is there's, you know, there is cost to come out, and we're, you know, clearly looking at that in the first quarter as we, you know, watch what the, what the market environment looks like. Let me just switch up a little bit to the segments. You touched a little bit on the NICS segment and how you think that that could make some headway in the second half of the year. Can you just walk us through how you think about that segment longer term and why you think that it can sustain profitability down the road? Yeah. You know, I think that's a segment that I would say that, you know, Chuck and I have taken a personal interest in, to really work on that with that team on, you know, how do you grow that business and, you know, how do you drive profitability in that business? You know, it's a business that, you know, we invest a lot in R&D. We invest a lot in sales and marketing and, you know, we want to, you know, turn that investment into profitability cause that, you know, that business clearly has underperformed, I think, from a profitability standpoint. As we work through 2021 and 2022, you know, I think, you know, sort of the fruits of our labor were recognized in the second half of the year, you know, where we, you know, were able to, you know, drive some strong improvement in the NICS business. Our Q4 number of $56 million of EBITDA, you know, there's about $10 million of one-time EBITDA in there. On a normalized basis, call it, you know, $45 million-$50 million. You know, what we would like to see is once we are able to get the chips, you know, we think that that is more indicative of the NICS business than, you know, what you saw in the first half of the year. you know, I think it's a long journey there, and I think we started that journey in 2022. I think the one other piece of that business that, you know, we're continuing to invest in and we, you know, we feel, you know, that has a lot of that value creation opportunity is on the software side of the business. you know, you know, turning more of that business from a hardware business to a software business is definitely, you know, one of our major focuses there. Over on the CCS side, which has been just booming lately, can you talk about where we are in that cycle? You know, do you see that staying stronger longer term, or at some point, could there be some near-term digestion of what people have been buying lately? Yeah. I mean, I think as we've talked about, we're dealing with some near-term, you know, near-term impacts of, you know, people buying a lot of material in 2022 and now adjusting their inventory levels. You know, with that said, I think we feel, you know, we feel bullish on a medium and long-term basis in that business as we continue to talk to the customers. You know, we're still early in the government funding initiatives. We're starting to see some funding on, you know, outside of North America from a government standpoint to build out networks. I think, you know, we're definitely dealing with some short-term digestion, but I think we feel, you know, very good about, you know, the long-term trajectory of that business now. How fast it happens, you know, you know, there's a lot of factors that go into that. I think, you know, we feel, you know, very good about the CCS business and our positioning there as we move forward. Again, you know, we, you know, just the amount of money that's gonna come in from government funding, we feel, you know, that alone, you know, has a lot of tailwind to it. Switching up again to the balance sheet. Here's a question I probably get every time I talk to an investor, my guess is you get it every time you talk to an investor. Your nearest maturity is 2025, the unsecured bond. How do you think about your refinancing options, if the market improves? Do you do something proactive, perhaps with secured debt? Do you wait until your business improves so that you can get better rates? How are you sort of thinking about that and your options today? Yeah. I guess how I'd answer that is, I think we have options. you know, our maturity is, you know, on the twenty-fives is still, you know, a couple of years away, more than two years away. It's something that, you know, we're talking about on a, on a very regular basis. you know, we're talking to all the banks. you know, I think as we think about that, you know, I think, you know, where we are today with rates, you know, we feel like, you know, we're gonna look at it over the next, you know, several quarters and figure out, you know, what's the right thing to do. We clearly have some secured capacity. you know, I think at this point in time, I don't think we see anything imminent. We're watching the markets and watching, you know, the rates to see what will be the best time to go ahead and do that. I think in addition to that, as we talked about, I mean, we, you know, expect to generate some cash here in 2023 and 2024, you know, which will help us as we at least deal with that, with that 25 maturity. One of the things that, probably for the past three, four quarters that I jump to when your earnings come out is the, is the inventory line. It's been a, it's been a use of cash as you've come out of the pandemic, and you've had to scramble to get parts. As a result, you said this year you don't expect an inventory line to be a significant source of cash flow. How do you see that playing out through the year? Is it sort of a use in the beginning of the year, or is it a declining use and may be a source by the time we get to the end of the year? When do you think that... It's a big balance sheet item and could be a really big source of free cash flow. When do you sort of see that beginning to become a source of cash flow for you? Yeah. I mean, I think as we think about inventory, you know, the first thing that I would say about inventory, which has been, you know, a use of cash, you know, we have grown the business, which definitely, you know, requires an investment in working capital. You know, I think on the inventory side, you know, we've talked about the fact that, you know, we definitely are holding more inventory than we would like to hold. A lot of that excess inventory is sitting in our chips. You know, the challenge that we have is, you know, as people decommit on chips or we can't get chips, you know, we'll go out. I use the example of, you know, we'll have a product that uses 50 different chips. You can get 49 chips. If you don't get the last chip to make your product, you're now sitting with 49 chips, and you're scrambling around trying to find, you know, that last chip. I think the other, you know, just reality of it is, you know, with, you know, chip lead times, you know, going from months to, you know, 12-18 months over the period of time, you know, it just requires us to be a little bit better at forecasting our business. You know, you're now having to forecast your business 18 months in advance in some cases versus, you know, you know, before this issue hit us, we were, you know, thinking three and four months in advance. I think that's resulted in some inventory. I think the way that we think about it is, you know, as I mentioned before on the, on the chip side, we don't see a significant improvement in that in 2023. That's why we're, you know, we're signaling that, you know, we're gonna continue to deal with this inventory issue on the chip side through 2023. You know, I think, you know, the way to think about the business a little bit is, you know, with our first half being a little bit, you know, we're being lower than the second half. You know, I think there may be some opportunities for us on the inventory side in the first half. There may be a little bit of use in the second half as the business comes back. I think as we think about, you know, 2023, you know, we're not, you know, layering in, you know, big inventory movements. I think that's, you know, probably more of a 2024 issue as hopefully the chip situation gets a little bit better. Got it. Let me pause for a minute and just see if we have any questions from the audience. Do we have any questions? Here in the front. You know, just in terms of the trading prices of the companies that we have, just some opportunities out there giving free cash flow for this year for, you know, debt buybacks, you know, basically taking advantage of some of those prices. Is that being actively considered? Yeah. I mean, as I mentioned before, when it comes to the debt and the leverage, I mean, I think we have a fair amount of opportunities, and I think we're, you know, balancing, you know, dealing with the maturity stacks, you know, the near term maturity stacks versus, you know, potentially taking advantage of opportunities that are in the market from a pricing standpoint. Anyone else? Any other questions? I can't really see 'cause this light's shining in my eyes. Hey, listen. Oh, in the back, yeah. Hi, John. On ANS, there's more software now in the business. How are you thinking about the software as part of that business going forward? I mean, in the ANS business, we, you know, obviously sell software. We also have, you know, service agreements, so you know, that is a part of the business. I think, you know, we've definitely, you know, as some of our legacy products, you know, decline, we're probably gonna see some softening of our software business. You know, as we balance that against, you know, growing our edge business, you know, as we talked about, I mean, there's definitely a mix change that goes on in that business as you move from some of our legacy products, which would include software, you know, to the edge products. I mean, it's, you know. I think we've been talking about the fact that, you know, that transition is gonna happen and, you know, we have to manage our way through that. Let me just follow up on that point on edge products. When you, when you make this transition, 'cause I think most folks expect there to be some sort of a transition, it becomes another build cycle, so to speak, where somebody says, "All right, we're going to begin to make this transition from headend to push some stuff out to the edge." You come into the bidding process. How are you viewing that opportunity? I'll call it an opportunity, because it almost sounds like there's another build phase in addition to the one we saw during the pandemic, which mostly was focused on the headend. When you talk to your customers, how are they talking to you about an opportunity which could potentially be another build cycle for the cable guys? Yeah, I mean, I think as, you know, I think we have some communication that's come out. you know, as people like Comcast are upgrading their network, I mean, their architecture is different than what it was before. you know, we I think we've talked about, you know, how much we've grown an amplifier business. you know, five years ago, we weren't selling amplifiers. Now, you know, we're selling 1 million amplifiers. you know, I think that's just the transition that happens, is as the customers go through, you know, upgrade cycles, you know, there's clearly different technology paths that they can take. We feel like we're in good position to, you know, service each one of those different paths, and it's just now a matter of working with the customers to see what you win and what you lose. You know, I mean, you know, we've had margin degradation in that business in 2022. I mean, we, you know, I mean, we've seen a pretty big hit in the ANS business as we've gone from the headend to the edge. You know, a lot of that, you know, quite honestly has to do with, you know, the fact that, you know, we're getting the volume on the edge, right? You're getting the amplifier business, you're getting the node business. I think, you know, again, I think that transition, a lot of it took place in 2022. I think it will sort of continue to move on, and I think that, you know, we feel pretty good about, you know, being able to provide products in, you know, some of these new architectures that, you know, allow us to, you know, continue to maintain that business. I mean, I think we've talked about that business. That business is probably not getting back to a $400 million EBITDA business. I mean, that's a business that, you know, is gonna be a, you know, sort of a slower growth business for us, you know, as we go through this transition from, you know, the headend to the edge. Okay. Well, that brings us to the end of the time. Thank you for coming. Appreciate everybody from coming today. Thank you.