Vistance Networks, Inc. (TNM2.MU) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to this Vantiva conference call chaired by Luis Martinez-Amago, CEO; and Lars Ihlen, CFO. Apologize for the short notice, but I'm sure that you will understand the reason for this situation. [Operator Instructions] Just to remind you, this conference is being recorded. We would like to inform you that this event is also available live on our -- Vantiva's website with synchronized slide show. During this conference, statements could be made that constitute forward-looking statements based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the future results expressed, forecasted or implied by such forward-looking statements. For a more complete list and description of such risks and uncertainties, refer to Vantiva's filing with the French Autorite des Marches Financiers. I would like now to hand over the call to Luis. Please go ahead.

Thank you, Thierry, and good morning to everyone in the call. So we are here very excited to announce a major step in our strategic road map. As we were sharing with all of you in previous calls and more significantly, when we created this new company, Vantiva, about 1 year ago, we shared with you that we have a strategic plan, that we have ambitions and determination to bring this company to a different place. And one of the key aspects of that message at that time was to reinforce and regain leadership in our core business, which is the CPE business. We are sitting here, just to share with you that we have reached an agreement with CommScope to acquire their Home Network division, which is the equivalent of our Connected Home division. And this is a major step in our road map moving forward. In this slide, you see the major advantage of this deal. You know the ones that has been in conversations with us that this business, this industry of CPE is a business of scale. And when you get scale, you have many other advantages coming with it. So with this acquisition, we will have an extended geographical presence. It is to mention that surprisingly, there is a significant amount of synergies and not that many synergies. I think we are very complementary footprint in the customers we serve. And the second point you see there that we are going to enter into a significant amount of new customers, which is a major asset in this deal because this industry is very sticky. As you may know, it is -- when you serve a customer, it is very rewarding because you are there for a period of time. And it's very difficult to gain footprint in other accounts unless there is a good reason for this to happen. With this acquisition, we are gaining access to a number of very important accounts, and this is very encouraging for us. In addition, they have some assets that is going to be analyzed and use for our diversification strategy. They have some assets outside the CORE CPE, which would complement everything we are doing in the diversification space. It's not a surprise, the people that know this company, Vantiva and also CommScope, there is the source of many of the key competency in this industry in many aspects from hardware technologies, software technology and innovation. And that will give us access to a significant amount of new talent. Talent that for a period of time, it's difficult to find in the market because we are a very specialized industry. And with this, I think the scope of everything we can do will be really enlarged and I'm very motivated to the possibilities that we will have in innovation, utilizing and putting together a good competence that we have in both sides. And I say, it's been to direct competitors. As you can imagine, there is a significant amount of synergies that we are putting in the case. We are sharing with you that we are expecting to be north of EUR 100 million of synergies in the coming years. This is because we do the same sort of products, we serve the same type of customers. And I think we can extract a significant amount of synergies in this process, which will reinforce our profitability and free cash flow generation moving forward. All in all, a very important step in our strategic road map after 1 year being an independent company and very, very reassuring in our capacity not only to develop leadership in this market, to keep serving customers and to really enlarge our capacity to generate profits and free cash flow generation, so very encouraging. And let me go a little bit in more details, starting by sharing with you a bit the profile of CommScope. CommScope is a company that in terms of portfolio has the same portfolio than us. They have a business in broadband devices, that they have about -- 53% of the revenues in these broadband devices and a bit less of 40% on video devices for -- and all these are the figures of the published full year '22. They have a business in retail, is one of the few competitors, a few companies in this industry to also use their retail to serve some of these offers and then a very significant software and service play, which is of a extreme value to our customers. The geographical presence is pretty similar to ours, and it's surprising because we don't have a significant customer overlap. But geographically, they have 60% of their business in North America, and 25% in their business in EMEA. And the most important thing on the right of this slide, you will see that we will have access to a very significant new Tier 1 customers, 8 Tier 1 customers. Tier 1 is the customers with a significant volume of annual revenue and a long tail of other customers that will enlarge our capacity to operate in this business. So if we move to the next slide, it is about the synergies as well. So I'm very encouraged about the potential -- commercial potential of doing more with these new customers, doing better in our portfolio, but also key aspects of this is the amount of cost-driven synergies that we can materialize and bring to our cash generation. This possibility is in 3 main topics: The first one is COGS. In COGS, as you may know, important economy of scales in which our procurement capacity, our volumes can give us a lot of efficiencies. We have best practice in everything we do. We have -- we can get best practice from both companies and level up or increase the productivity and the profitability of each of the contracts and business we run. And then we will take the best practice in terms of supply chain and the way we do logistics, that also we can extract a significant amount of synergies in this space. In SG&A, as you can imagine, we can run the activity with a significant amount of synergies there because we can ship -- we are shipping a million of products. We can ship millions of more products without the need of doubling the size of the activity. So you see some aspects of what we are -- we will prepare in terms of synergies. And in terms of R&D, in addition to the innovation capacity, I'm sure that we can synergize most of the activity because the portfolio -- we don't need 2 portfolios for the same market. With a single portfolio, we will be able to provide the service to all our customers. So big, big, big step. And I think that free cash flow generation and synergies, which is one of the major components. And if we move to the next slide, we are a company -- we have a track record in doing this type of transactions. You've seen the bottom of the list, some acquisitions that Vantiva already did in the past, 3 in this space, 1 in the supply chain services space. But all these transactions were very successful, executed very quickly, executed on plan. So in our industry, most companies, most competitors are organically grown and just working on the portfolio from origin. I think we have proven that we can really get this advantage in integrating this type of acquisition and getting the benefit in terms of synergies and in terms of commercial upsell. And on the right, something that we have communicated with you. We have run in the period '18 to '20, a very important transformation project in Vantiva, which we call the Project Dolphin. We transformed the activity completely. We invested a lot in our portfolio, in all the process internally in a very powerful IT systems, and that has brought us where we are today, and we doubled the productivity. We increased -- we reduced the -- 45% of the OpEx for a permanent activity, proving that we will be very well positioned to bring all the synergies to the results of the company. If we go to the next one, let me share with you the key terms of the transaction. So the transaction is -- we are offering CommScope, they will receive 25% of Vantiva shares in a fully diluted basis. We have also agreed on a possible earnout of $100 million, provided that we reached an EBITDA equal or exceeding EUR 400 million in any fiscal year for the next 5 years with the condition that the payout will not be more than EUR 50 million per year. As you can see, I think it's a very, very interesting transaction. We are not going to make any from cash payment to CommScope. It's limited to the 25% and to this $100 million earnout. CommScope will become a key shareholder of Vantiva that we like with CommScope as a company. They will have a representative in our Board and they will help us in executing this strategy moving forward and create the value that we are committed to create. They have a lock-up period of 18 months, and that will give us a stability on their participation in our plan. The transaction structure is in the form of a call option agreement. This is due to the regulation limitations in France that we need to have consultation with our employee representatives. And as soon as we have -- this is a nonbinding consultation, but we give a lot of importance to their opinion. And as soon as we have their feedback, we will proceed to the call option. And very important for us on this transaction, the Board was fully supportive. You see in the slide that our main shareholders are endorsing the case and not only the ones represented at the Board, also Briarwood, which is one of our important shareholders, not represented in the Board is also really motivated and endorsing this transaction. And then you see the calendar. The calendar is we are today announcing the deal. We need to go through some antitrust process, which is following the regulation of the different countries. But we are very, very motivated to close the deal in a very speedy way. You see that we expect it to close in late quarter 4. And prior to that, we need the approval of our shareholders meeting that will happen late in December after we have concluded the consultation with our employee representatives. So you can see, normally, this will take a significantly longer time than this. We have put in place a process in which we are very certain that we can close this in this short time, which is important because we are eager to jump into the integration of the 2 companies and start delivering the promised results. So in summary, as I said at the beginning, this is a key milestone on our road map. We have worked hard during the last months in getting to this place. It is important for our core business. As I shared with you, but it's not the topic of this call, we have a lot of ambitions in diversification and in other pieces of the business. But today, we are here talking about the core business. This transaction is fully supported by all stakeholders. It will be key. The feedback from customers is starting to be extremely positive. They, like us, what we do, and they believe that this combination will bring a lot of good performance, good results for them and for our partners, our suppliers. And at the end of the day, we are building a stronger company with a lot of ambitions and a commitment to deliver on them. And with this, we are ready to open for questions.

[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Emmanuel Matthew from ODDO BHF.

Good morning, gentlemen. Emmanuel Matot speaking from ODDO BHF. Several questions for me, please. First, what type of market share are you going to have together in that industry following the merger? Do you think it can be an issue from some antitrust authorities? Second, do you expect commercial synergies unleash cost synergies from that merger. What about the cash-out needed also for, let's say, extracting all the cost synergies you are mentioning? Third, why the Home Network division of CommScope is loss-making at the EBITDA level and not the Connected Home division of Vantiva? Where are you more profitable? And my last question, can we have a trading update for Connected Home at Vantiva, how the business went over the summer? I remember, H1 was challenging. Can we be more optimistic for H2?

Okay. Thank you, Emmanuel. Very interesting set of questions. Let me go one by one. On the market share, I will not comment any specific market share, but what I would say is that this industry is very, very fragmented. If you go to an access the data from analysts, the leader is not more than, let's say, 15%, 20%. So we are not in an industry that is at risk of, let me call it, dominance. So yes, both companies, we are leaders in this market, which is known but by no means that will represent a dominance that may trigger in our opinion, any antitrust actions. After that, you have situation country by country. But what we have analyzed and due to the characteristics of the transaction, we are going to file only in 3 countries for antitrust that is we are forced because of the condition of the transaction. So we are pretty optimistic that, that will not be a point. But this is without saying that the combination of the 2 companies is making a stronger company, okay, and a clear leader of the market. The second one, the commercial synergies. Yes, there are significant potential commercial synergies because the market is demanding strongest companies in this. The fragmentation and all the difficulties that we have lived in the past in this industry. You know that we have run between memory crisis, MLCC crisis, COVID -- crisis. We are living in a very tough industry in a very difficult situation. And customers, they want a stronger company. They want people that can have not only the technology competence, but also the acumen, the size, the scale to keep serving in whatever circumstances their business, and both companies that we have a very good image. So I'm expecting that the combination of both making a stronger company will maintain the current portfolio of customers, but we'll call the attention of new customers that I'm sure that they will -- really to talk to us to explore business opportunities. So it's not only that we have an aggressive plan, that the combination will be good. Now the third question is cash-out needed. As we commented in last earning call, we are working in new source of financing. And we have a plan, as you can imagine, I will not comment more here, but we have enough liquidity to go to the execution of the synergies on that one.

But if you look at how we are facing our synergies, Emmanuel, we expect the first year of operations to be neutral in terms of cash impact. So the synergies we realize will be offset by the cost of realizing them. And then the second year will be positive, and we will be at the full run rate of synergies that we are discussing here in the third year.

So as you can imagine, we have a plan. We are covered in terms of executing this plan. It will be not good to go in this transaction without having the resources to execute. Your fourth question was about my opinion about the Home Division of CommScope and why they are in the situation they are? I will not comment on what they do. You said why we are making money? They are not. Is going back a bit to what I explained, our Dolphin plan. I think we were matching advance of the industry in detecting the complexities of the industry. And everything we did, not only reducing our cost base significantly. Remember, almost 50% that gave us a significant capacity to survive in these situations. But also all the automation, all the processing supply chain, the way we run the activity, the way we deal with customers, the way we select where we want to be and where we don't want to be. The point is I can tell you that this is our source of success. And maybe the indication is that there are things to be done in the other side. But as you can imagine, is part of this plan, and we will execute and that will be the source of this. But I don't want to comment on any specific issue because, first, we don't know. We are still competitors. And until we close, we will not have access to some of the details. But I think this is a general feedback that would be a case.

And also, we need to take into account the reporting differences between U.S. GAAP and IFRS, where there are some positive impacts of being in IFRS, like R&D capitalization and the lease accounting. But on the other side, there are some other impacts on -- positive impacts on U.S. GAAP that we don't have in IFRS. But all in all, I think if we put them on a IFRS format, they would be positive in EBITDA as well, but not -- still not to the level of what we have achieved in Vantiva.

And your last question about the trading update. That's not the call, Emmanuel. I think we have an appointment later in October for our Q3 update. But today, I don't -- I will not provide any trading update.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Thomas Coudry from Bryan Garnier & Co.

Yes. A few, please. First one, could you please describe, I mean, as far as the revenue trend is concerned at CommScope, in particular in the TV division, you have made some strategic moves going -- refocusing on Android TV systems. What can you tell us about the strategy at CommScope here? My second question would be as far as debt is concerned, will the asset that you acquired come with debt? Or is it a pure debt-free transaction? And as a consequence of this question, I was trying to understand how the leverage at Vantiva Group would evolve pro forma the acquisition? And then last question, please, just to make sure I understand well, in terms of structure of earnout, so there is a $100 million maximum earnout. How is this structured? I mean can there be several thresholds? Or is it just $100 million or nothing? Or are the intermediary threshold that you can get depending on the results and then on what results?

Okay. I'll take the revenue, the first question, and Lars will take the other 2. So the revenue trends, and you were referring to Android TV, let me give you the -- a bit an introductory remark is these people, they have a significant presence in many markets. They were -- and they hold some important markets in video. But overall trends, the whole industry is following the same trends in terms of demand. I wouldn't say there are many -- there are very little structural market share movements, but the industry is in a low demand period. So we cannot extract much about the possible evolution of top line because everybody flies with the demand in the market in general terms. And you need to take into account the dynamics in the different markets are different. As you know, structurally, the American market is much more dynamic than what the European and Asian market is, meaning that when there are growth times or decline times Europe and APAC is slowing growth, slowing decline. So it's a bit more, let's say, stable American market, the operators, the markets normally are much more aggressive when there is growth, there is a significant growth, more than other places. When there is demand constraints, et cetera, is a bit more aggressive in the precaution. So this is what I can tell you. So I don't think that there is any major thing to comment on the revenue expectation. And in any case, as soon as we close and we will have more details about their topology, and that will be after closing, it cannot be before closing, we will be able to comment more. Okay. We move to the second one.

So this deal is structured as a cash-free, debt-free deal. So no debt is transferring with the transaction. There could, of course, be some insignificant debt in terms of pension liabilities and these kind of things, but that's not material in this sense. However, I cannot comment on how this will impact the leverage in very numerical terms because we are not giving guidance today on how this will impact us going forward. But of course, it is our intention to improve the leverage as we are not taking on more debt in this year. In terms of the earnout, it is kept at $100 million. So if we reach the earnout target, which is EUR 400 million EBITDA, they will get the fully earnout paid at $100 million, but it cannot be more than $50 million paid in a single year, okay? So the cash-out structure is split over at least 2 years, but it is only 1 level, and that is the EUR 400 million EBITDA.

And it's only 1 KPI. It is EUR 400 million, there is no other condition attached to it.

[Operator Instructions] We are now going to proceed with our next question. The question come from the line of David Cerdan from Kepler.

Yes. First of all, I would like to come back on some previous questions. So just to be clear about the industry structure, with the combination of your company and CommScope, what -- at which level do you estimate your global market share, first? And secondly, regarding the analysis of the antitrust issues, so you say that you will apply for 3 countries. Can you name the 3 countries? So this is my first question. Second question is regarding, I would say, the earnout conditions. The EUR 400 million of EBITDA, is it just for, I would say, the Connecting Home division? Or is it for the whole group Vantiva, including the DVD business? And my last question is regarding the risk of customer overlap. I was surprised when you said that you -- the customer overlap is quite limited or 0, if I'm correct. So can you maybe more develop on this customer overlap and notably for the U.S. market? And regarding the management, do you expect to integrate some manager from CommScope into the new group? Is CommScope an asset-light company? And that's all for me.

Okay. Thank you very much for the questions. So one by one again. On the market share, I will not comment, again, market share because it's a difficult [ science ]. It depends how you scope the market and normally operationally in the company, we scope the market on what is called addressable for us. For example, just to give you an example, we take out China, we take our Southeast Asia. We take out areas that we don't want to be. And then on the market that we want to be, we normally scope the share as what we are trying to address, okay? But this is what I would call operational market share. Now the market is big, it's huge. There are many areas that we are not covering. We don't want to cover. So this is why I will not throw here a percentage because it will be extremely misleading and to create more confusion than it -- but the point is these 2 companies has been leading the market. CommScope has been the #1 for many, many years. We've been the #2 for many, many years. The combination will create a leader with different businesses. And linking to the question of customer overlap, your question number 4. We have not 0. We have overlap in a number of customers, very limited. If you take the portfolio of customers that we are -- the overlap is very limited. And as soon as we can, we will deal with a small overlap with the customer impacted. Yes, to tell you that when we did the acquisition of Cisco, in certain points, we have significant overlap, and we could manage with customers in a very quick and positive manner. So I'm not expecting this to be a problem. But to your question is, yes, we are in a handful of customers, both of us serving products, not always in the same categories, but those are things that we will solve with customers directly. Concerning your question of antitrust, we are going to file in 3 countries: is Poland, South Africa and Colombia. And you were going to ask why. Every country has different rules, different regulations on what the authorities consider a transaction to be inspected. Those are the only 3 countries in which we believe we are falling into what the authorities are expecting, and this is where we are filing them. In any other country, we believe that we don't need to file. So this is why the process is so quick. And even in these 3 countries, we expect the process to be very speedy.

Sorry, you said Poland, South Africa and the last one, sorry, I missed it.

Colombia.

Colombia, okay.

Okay. So -- and the last question you had was -- sorry?

No, no, it's okay. It's okay.

And the last question on the management, we are not there. We are 2 operational companies. We have a process during the next months to start preparing the integration, respecting all the antitrust rules. But yes, we have the integration project in place, and we are going to start working with them. [indiscernible] will be before day 1, the combination of both teams and depending on the analysis of the talent, for sure. We are going to integrate any good talent that comes from the other side, but it's too early to say. You have a question on...

Question on the earnout basis. David, so it includes [ SES ], okay? So it's for the full Vantiva scope plus the contribution of Home Networks.

And just to come back on your antitrust, I'm sorry, the antitrust issues or question. What I don't understand is why the U.S. and European Union are not part of the countries?

Okay. That will be a detailed legal question, and we can take this aside, if you want. But every country define the rules and not the rules are -- even the KPIs, the trades are not similar. There are people that track market share. There are people that track of the value the transaction. There are people to try to possible dominant. So every jurisdiction has different conditions. We have the support of very powerful antitrust lawyer covering the world. And when you put the conditions of this on the different antitrust requirement, this is the conclusion of these 3 countries, which is very positive.

[Operator Instructions] We have no further questions at this time. I will now hand back to you for closing remarks.

Thank you very much. Thank you to everyone. Again, let me summarize, the headline is we are executing the road map that we put in front of us and in front of our investors and the Board at the day 1 of this new company, Vantiva, when we went out of the door last year. Again, the headline is we want to reinforce and keep this core business profitable and leading. We want to diversify the company. This is a milestone in the first topic. It is a very important transaction. We are very optimistic and dedicated to make it happen and deliver on the expected results. So thank you very much for your questions, and talk to you at the next occasion. Thank you.

Thank you, Luis. So now it's time to close this con call. Of course, if you have further questions, feel free to call me whenever you want. You have my details on the website. Speak to you soon. Bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.