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spk08: Good day, and thank you for standing by. Welcome to the CommScope second quarter 2022 results conference call. At this time, all participants are on the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, to Mick McCluskey, head of investor relations. Please go ahead, sir.
spk12: Good morning, and thank you for joining us today to discuss CommScope's 2022 second quarter results. I'm Nick McCluskey, Head of Investor Relations for CommScope, and with me on today's call are Chuck Treadway, President and CEO, and Kyle Lorenzen, Executive Vice President and CFO. You can find the slides that accompany this report on our Investor Relations website. Please note that some of our comments today will contain forward-looking statements based on our current view of our business, and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, I have a few housekeeping items to review. Today we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results. All quarterly growth rates described during today's presentation are on a year-over-year basis unless otherwise noted. I'll now turn the call over to our President and CEO, Chuck Treadway.
spk11: Thank you, Mick, and good morning, everyone. I'll begin on slide two. I'm pleased to share that we delivered core net sales of $1.88 billion and core adjusted EBITDA of $287 million for the second quarter of 2022. For consolidated CompScope, which includes home networks, we reported net sales of $2.3 billion and adjusted EBITDA of $300 million. As discussed over the last several quarters, We have taken actions to continue to grow the business and offset inflationary impacts. Our second quarter results are a step in that direction as we have sequentially improved top line and profitability from the first quarter. As we head into the second half, we maintain our core adjusted EBITDA expectation for the full year to be in the range of $1.15 billion to $1.25 billion. As a result of our expectation to improve adjusted EBITDA in the second half, we expect our net leverage ratio will decline to a range of 6.8 times to 7.2 times by the end of this calendar year. I'm encouraged by our position as we move into the second half of the year. As indicated by our guideposts for core adjusted EBITDA, the ramp in the second half will be significant. Our short-term and medium-term performance will be primarily driven by our CCS and NICS segments. CCS has tremendous market tailwinds, and we are at the beginning of a multi-year build-out of fiber cable and connectivity. Our additional installed capacity will support this growth in addition to supporting operating leverage. As evident by our margin improvement during the quarter, we were able to raise price. Due to our large backlog, pricing benefits will accelerate sequentially in the second half of the year. We are pleased with the results of our pricing initiatives as our customers have been collaborative in assisting us in offsetting most of our inflationary impacts. Mixed performance in the second half will substantially improve. Markets remain very strong, especially in our ruckus products. NICS backlog grew 158% since the second quarter of 2021. Our second quarter 2022 TTM book to bill was 1.6. NICS has operated at an adjusted EBITDA loss in the first two quarters of 2022, as we dealt with significant chip constraints, as well as heavy development funding on new products. We have better visibility to improve chip supply and our heavy investment in technology and new products will begin turning into revenue as we move through the second half. I'm very excited about value creation opportunities in NICS for the short, medium, and long term. In OWN, we continue to expect our business to experience annual growth in the mid to low single digits. We're experiencing a shift from passive to active antennas that will negatively impact our growth. With that said, we're excited about our everything but the radio strategy, including our mosaic antenna and power shift. It is still early in these initiatives, but we are encouraged with customer interest and consider these as potential upsides. Margin percentages have been under pressure as we continue to work with customers to offset inflation and recognize mixed changes towards site prep. These impacts, have been partially offset by improved operating efficiencies. ANS has seen a balancing of their demand after a strong pandemic drive for bandwidth. In addition, as our mix has moved to the edge, margins have declined. Both of the above have negatively impacted our year-over-year adjusted EBITDA. We would expect the annual 2022 adjusted EBITDA to be more reflective of the ongoing business performance. We continue to innovate in ANS. Our large installed base and customer relationships allow us to be on the leading edge of new hardware and software developments as new architectures are selected and defined. I'm now turning to slide three for a review of the second quarter and my priorities for CommScope. Overall, demand for CommScope products and solutions continues to be encouraging. evidenced by the strong top-line performance of our core portfolio, growing net sales 9% from the prior year and 8% from the first quarter. Additionally, our growth would have been stronger if not for the continued semiconductor chip supply shortages impacting our business, specifically in our ANS and NIC segments. While there is significant uncertainty in the global macroeconomic environment, Demand for core CommScope products and solutions remained resilient in the second quarter as backlog grew 5% from the first quarter, ending at approximately $3.8 billion. Despite our strong sales quarter, core CommScope delivered a book-to-bill of 1.1. At the beginning of this year, we introduced our general management model to create individual ownership of our reorganized segments and business units. We believe this structure creates more focused and streamlined businesses, allowing us to better serve our customers and drive accountability deeper into the organization. This enhanced focus and flexibility is what will enable CommScope to drive performance given our strong in-market demand. It will allow us to invest significantly in R&D and new product introductions and drive future growth for years to come. and we are already starting to see the benefits of the structure. When we last spoke in May, Kyle and I shared our expectation to begin driving sequential margin improvement. During the quarter, we increased our core adjusted EBITDA margins 200 basis points sequentially, primarily driven by price and operational efficiencies. This is the beginning of our ramp as we expect continued margin improvement in the second half of the year. An example of our improvement is best represented in our largest segment, connectivity and cabling solutions, or CCS. In the second quarter, we were able to increase CCS net sales by 18% and improve adjusted EBITDA margins by 530 basis points sequentially. This is a testament to our focus on growth and success in increasing price to offset inflation. Core CommScope margins will continue to improve as we work through older price backlog and introduce our renegotiated prices into our P&L. Additionally, we expect to gain operating leverage from our top line growth, including the continued ramp up of our new facility in Mexico. For purpose of scaling our different businesses from their profitability contributions, I'll refer to the middle chart this morning. CCS represents 52% of our first half adjusted EBITDA for the core portfolio. The CCS segment had a strong quarter with segment sales growing 26% over last year. Our fiber cable and fiber connectivity business net sales growth in the second quarter was 39% year-over-year and 19% sequentially. We expect CCS to continue to deliver top-line growth given the strong in-market segment demand and as additional capacity continues to come online. We also expect our margins to improve as we recover price to offset inflation, in addition to driving operational leverage as our manufacturing capacity ramps. We believe the CCS market is in the early phases of a multi-year build cycle. MIX represents a negative adjusted EBITDA contribution in the first half. The business has experienced strong demand. NICS backlog grew 55% since the beginning of the year and delivered a second-quarter book-to-bill of 1.9. Revenue and profitability have been negatively impacted by semiconductor chip constraints. We expect second-half profitability improvement in NICS as chip supply constraints improve. Additionally, NICS is investing heavily in new products, service and software offerings, and ruckus in oneself. Next is some of our most exciting growth potential in the company, as demand increases for indoor networking in private as well as public wireless networks. OWN represents 28% of our first half adjusted EBITDA. OWN first half net sales grew 14% from the prior year, primarily driven by site prep activities at the macro site. I'd note that site prep activities drove an increase in our integrated solutions business, which carries lower margin. That said, we expect second half owned adjusted EBITDA margins to be above the second half of last year and first half of this year, driven by price recovery to offset inflation and operating efficiencies. And finishing up on our core segments, ANS represents 26% of our core Comscope adjusted EBITDA for the first half of the year. First half net sales were down 18% versus prior year driven by normalization from high pandemic-related bandwidth demand. As discussed in previous calls, ANS is our most project-oriented business, and their results are best analyzed on a full-year versus full-year rather than quarter versus quarter basis. Similar to NICS, ANS was challenged with chip supply constraints in the first half. In addition, ANS mix-shifted to lower-margin hardware products at the edge of the network. We expect an improved chip supply and software mix for ANS that should improve net sales and profitability in the second half, significantly weighted to the fourth quarter. Finally, our home segment represents 7% of our first half adjusted EBITDA and 20% of our first half net sales. Home's contribution to the consolidated adjusted EBITDA performance of CommScope will remain in the mid-single-digit percentage level. Significant progress was made in our CommScope Next initiative. Driving organic growth and operational efficiencies throughout the company are paramount to our CommScope Next transformation. Our capacity investments thus far in CCS have been evidenced by the top line growth we've delivered in the past few quarters. As we continue to bring on more capacity, drive operational leverage, and increase price to recover commodity inflation, we expect to continue driving margin expansion. We're also evaluating future rounds of capacity additions. As part of our CommScope Next organic growth strategy, our teams are responsible for prioritizing R&D initiatives and new product introductions in our core businesses. We continue to focus on paying for our incremental R&D through cost saving initiatives in other areas. Our 2022 core spend of approximately $600 million for R&D and new product introductions will be the highest level of investment since the close of the ARIS acquisition. Within our CCS segment, in addition to driving capacity to fuel growth, we are also focusing our investments into new product families. Whether it's our NOVAX fiber connectivity products for outdoor fiber deployments, or our Propel platform for indoor data centers, there's a common thread behind our drive to innovate. The demand for high-speed, low-latency networks is increasing exponentially, and CommScope is designing the technologies that not only deliver the capabilities to deploy these networks, but do so in a way that increases efficiency for the customer, saving time, energy, and reducing overall deployment costs. In the PON space, there continues to be strong interest in our XGS pond architecture. Lab trials are expected to start during the third quarter and remain on track for expected commercial deployment growing next year. In NICS, we maintain our commitment to invest in ruckus and oneself given the encouraging market interest in our capabilities. While these investments have driven overall segment EBITDA performance negative in the first half of the year, we believe these strategic decisions will unlock significant value for the segment's future and its role to play in the public and private indoor networking space. In addition to the progress we continue to make with carrier approval for OneCell, I'm excited to discuss a significant new partnership in the OneCell space. A few weeks ago, we announced that we collaborated with Microsoft on developing a solution in our Chacopee, Minnesota facility using our OneCell and Microsoft's cloud services to support a fully integrated private wireless network. This solution allows us to run a private wireless network integrated with state-of-the-art IoT solutions focused on industrial automation applications. Together, we will market our joint solutions and other similar applications. And next, We're investing over $200 million this year in R&D to further develop our Ruckus and OneCell products. We expect to see some of the value from these investments in the second half of the year. For Ohm, we've spoken about our continued innovation in antenna space over the past few quarters. Mosaic, our active passive antenna platform, designed to drastically reduce the footprint at the top of the tower, continues to generate interest in North America and international markets. And trials of the mosaic are expected to continue throughout the balance of the year. Another area within OWN where investments in innovation are now paying dividends is in power management. PowerShift is the industry's first intelligent plug-and-play DC power supply. It continues to see significant benefit from C-band deployments in the U.S., as regulating voltage to high-power remote radio units in 5G deployments is a primary focus of carriers. Our investments in this industry-leading technology have positioned Comscope's power shift business well, and we are on track to double in sales from the prior year. In ANS, we're investing in innovation to accelerate the next evolution of HFC networks. We recently announced that Liberty Global has selected our remote MAC5 device, also called RMD, node platform for DOCSIS 4.0. This will be the industry's first DOCSIS 4.0 DAA initiative in Europe, and it will leverage CommScope's DOCSIS leadership. Our end-to-end portfolio solutions will deliver a new European node and custom DAA platform designed specifically for Liberty Global. I hope the above demonstrates that while we are focused on capacity, pricing, and efficiency, our commitment to leading industry technology is very strong. We continue to feel that investing in future development is necessary as we manage our cash position. With our refocused investment in technology innovation, capacity expansion, and operational efficiency, CommScope is well positioned to deliver on our transformation targets and creates significant incremental shareholder value. And with that, I'd like to turn things over to Kyle to talk more about our second quarter results.
spk10: Thank you, Chuck, and good morning, everyone. I'll start with an overview of our second quarter results on slide four. For the second quarter, consolidated Comscope reported net sales of $2.3 billion, an increase of 5% from the prior year, driven by growth in our CCS and OWN segments, and offset by declines in NICS, ANS, and HOME. Growth in top line includes approximately $37 million for a 2% headwind associated with the year-over-year change in FX rate. Adjusted EBITDA of $300 million declined 3% as a result of input cost inflation, an unfavorable mix, offsetting another quarter of strong top-line growth. Adjusted EPS was 41 cents per share, declining 5% from prior year. For core CommScope, net sales of $1.88 billion grew 9%, and adjusted EBITDA of $287 million declined 2%. Our core business, particularly ANS and NICS, continues to be impacted by semiconductor chip shortages. This had a material impact on our second quarter revenue. Despite continued challenges and uncertainty, we see an improving situation in the second half of the year. We've talked at length over the past few quarters about the impact of input cost inflation on our business. Importantly, during the second quarter, while not entirely offset, we began to see an improvement in margin as we work pricing through backlog to offset inflation in some of our businesses. Looking forward, this trend should continue as we expect margins for the core portfolio to improve through the balance of the year. Core Comscope backlog continued to increase, ending the quarter at $3.8 billion, an increase of 5% from the first quarter of this year. And as Chuck mentioned earlier this morning, demand in the core business remains resilient, yielding a book-to-bill for core CommScope of 1.1. We continue to monitor the demand side of the business and believe that some of our end markets will be more resilient than the general economy due to the need for increased bandwidth and government funding supporting network expansion. Despite the recent growth and backlog, We expect backlog to be in decline as lead times normalize with supply chain improvement. Turning to our segment highlights on slide five. Starting with CCS, net sales of $987 million increased 26% from the prior year and across all businesses, driven by another quarter of strength in fiber. Compared to the first quarter, CCS grew 18% driven by demand for fiber products and pricing initiatives. CCS adjusted EBITDA of $169 million grew 36% as the segment benefited from the increase in volume as well as price. As noted, we expect continued margin improvement in our CCS business through the balance of the year as price increases continue to work through backlog, and the business drives operating leverage in our manufacturing plants as capacity ramps. Second quarter adjusted EBITDA margin of 17.1% was a 530 basis points improvement from the first quarter, as our pricing actions and operating improvement began impacting our P&L. Nick's net sales of $205 million declined 8% from the prior year and across both Ruckus and ICM. Nick's adjusted EBITDA of negative $15 million declined by approximately $20 million from the prior year, driven by lower volumes related to chip shortages, higher input costs driven by inflation, and our continued investment in Ruckus and OneCell. However, I'd note that NICS exited the month of June at profitable adjusted EBITDA, and we expect through the combination of pricing increases and better visibility to chip supply, the overall segment should deliver positive EBITDA to the balance of the year. Owned net sales of $391 million grew 9% from the prior year, driven primarily by price and our integrated solutions business. Own adjusted EBITDA of $75 million declined 5% from the prior year as an increase in volume was more than offset by input cost inflation and unfavorable mix. In line with our prior commentary, while we expect margins to improve in the second half of the year in comparison to the first, own margins will remain pressured compared to historical levels as we continue to work with service providers to offset. ANS net sales of $293 million declined 19% from prior year and across all businesses. In addition to supply constraints, the decline was also driven by a mixed shift and a difficult compare to 2021, as the first half of last year was a strong period for customer projects looking for immediate bandwidth increases to support demand driven by the pandemic. Adjusted EBITDA of $58 million declined 32%, driven by lower volume and the mixed change to lower margin hardware-centric products found in the network edge. While ANS was also supply constrained during the quarter, looking forward, we expect through a combination of increasing material flow, internal production ramping, and project timing, the business should deliver a stronger second half compared to the first of this year. That said, I'd remind you that project timing and mix matter significantly to the segment's performance, and we expect the bulk of the recovery weighted toward the end of the year. Finishing up our segment performance with home networks. Home networks net sales of $424 million declined 7% from the prior year, as growth in gateways was more than offset by declines in video. Adjusted EBITDA of $13 million declined 12% from prior year, primarily driven by lower volume due to chip constraints. Performance for the quarter was in line with our expectations as the business was down sequentially. Our efforts to separate the home business remain on hold given the uncertainty in the chip supply environment. The limited supply environment will continue to drive uncertainty. Home backlog was approximately $900 million at the end of the quarter. Turning to slide six for an update on cash flow. For the second quarter, cash from operations was a use of $95 million and adjusted free cash flow was a use of $91 million. During the quarter, working capital continued to be a use of cash to fund the growth in our overall business. The $157 million increase in working capital is primarily a result of increasing revenues and our desire to support our customer deliveries as we manage through CHIP shortages. In addition, during the quarter, we paid out our 2021 incentive plan. Similar to last quarter, this resulted in the usage of our ABL revolver to which we ended the quarter with $50 million of outstanding borrowings. As we've mentioned previously, we are prudently managing cash and temporarily leveraging the available credit at our disposal to support our rapidly growing business. Consistent with our CommScope Next plan and with the exciting high return growth opportunities both immediately in front of us and on the horizon, we are continuing to invest in our business given the company's strong liquidity position and near-term profitability improvement. Evidence in this commitment to the company's long-term growth future is the approximately $162 million of R&D spend and $28 million of capital expenditures made during the quarter. As we continue to drive organic growth, improve operational efficiencies, and recover inflation through pricing actions, we expect positive cash flow generation in the second half, weighted most significantly to the end of the year. However, as we continue to grow the business, we will continue to invest, particularly in working capital. Turning to slide seven for an update on our liquidity and capital structure. During the second quarter, cash and liquidity remained strong. We ended the quarter with $229 million in global cash. Total cash and liquidity for the quarter was approximately $900 million. I would also advise that periodic usage of the ABL revolver may continue. It is highly probable that we will remain in the revolver during the third quarter as we manage rapid growth. While we are prudently managing cash, we continue to invest in the business, particularly around opportunities to drive organic growth. We made no incremental debt repayments during the quarter beyond the required $8 million of term loan amortization. The company ended the quarter with net leverage of 8.1 times and improvement from 8.2 times at the end of the first quarter. With the previously mentioned EBITDA improvement in the second half, we remain committed to meeting our year-end target of net leverage in the 6.8 times to 7.2 times range. Now turning to slide eight where I will conclude my prepared remarks with some commentary around our expectations for the remainder of 2022. Market demand coupled with our capacity investments continue to drive top line growth. Our general management model and new segmentation are driving efficiencies throughout the entire CommScope portfolio. Pricing initiatives to offset inflation have already started to positively impact all of our segments and is a trend we expect will continue to drive margin recovery during the second half of the year. While the global macroeconomic environment remains uncertain, our demand has remained resilient. As Chuck mentioned earlier, we maintain the expectation for the core CommScope business to deliver 2022 adjusted EBITDA in the range of $1.15 billion to $1.25 billion. This level of EBITDA indicates that we will see sequential improvement in the second half of the year. And lastly, as we continue to stress, as a result of project timing and mix, our business should be viewed on an annual basis rather than quarterly. And with that, I'd like to give the floor back to Chuck for some closing remarks.
spk11: Thank you, Kyle. I'll finish on slide nine. I am pleased with where we are in our transformation. Although there are some challenges in the general market, the core CompScope businesses held up well with a book to build at 1.1 and continued growth in our backlog. We will continue to monitor the demand environment, but we feel that CompScope is well-positioned because we deliver connectivity solutions. Customers continue to place high emphasis on connectivity and the quality of their connectivity. We believe that many of our products and services will remain somewhat insulated from some of the broader challenges in the economy. The focus our teams have on driving CommScope Next initiatives are fueling organic growth, pricing, new product development, and operational efficiency. CommScope Next supported by our new segmentation and our general manager model, provides a great platform for us to drive shareholder value. We look forward to continuing the transformation journey as we head into the second half of the year. Thank you for your support and interest in CommScope. We'll now open the line for questions.
spk08: Thank you, sir. As a reminder, to ask a question, you will need to press star 11 on your telephone. please stand by while we compile the Q&A roster. Aishah, our first question comes from the line of Meta Marshall from Morgan Stanley. Please go ahead.
spk07: Great, thanks, and congrats on the quarter. Your commentary about kind of supply chain and commodity costs were maybe more favorable than some of your networking kind of counterparts this quarter of not really talking about maybe it worsening this quarter or being at peak, and you had a pretty favorable outlook on the second half. And so just wanted to get a sense of, you know, what you saw in terms of difficulty of supply chain in Q2 maybe versus Q1 and how you see that developing in the second half. Thanks.
spk11: Sure, Meta. Thanks for your question. I would say, look, it's still a fight day to day, you know, pretty much across the board. But I would say we have more challenges on the chip side. And with the chips, we are seeing some loosening in the market, and we expect the second half to improve. I would like to comment, though, that our supply chain team and engineers are just doing a great job in redesigning where necessary and finding parts on the open market. And I would say we're also significantly improving our relationships with the chip suppliers, which has just given us a lot more visibility. So I think that's the best way to put it.
spk07: Got it. And maybe just as a quick follow-up, would you expect to still be in an inventory build position through the second half, or do you think you're getting to the place where you could be drawing down on inventory? And then that's it for me. Thanks.
spk10: Hi, Mina. This is Kyle. Yeah, I think we're at a point where we – see some opportunities to move inventory down in the second half. You know, I don't think that those are going to be, you know, significant, but I think we will start seeing a trend down as the supply chain gets a little bit better.
spk07: Great.
spk10: Thanks.
spk08: Thank you. And I show our next question comes from the line of Sameek Chatterjee from J.P. Morgan. Please go ahead.
spk01: Great. Thanks for taking my questions. I guess Just to start off, I mean you're reiterating the full year guide today and you had a strong quarter and expecting an improvement in profitability in the back half, but that unchanged kind for the full year does still leave a range in terms of outcomes for the second half. So I was just wondering in terms of the backlog that you have, the price increases that you've managed to pass through, what's sort of the different outcomes are contingent on in relation to hitting the low end or the high end of that guide, which is pretty now white for the second half. Because from the, I guess, your presentation today, it didn't seem, it seemed like things are mostly tracking in line with your expectations. So maybe if you can also comment on where you're tracking relative to that guide for the full year, that would be helpful and have a follow-up.
spk10: Yeah, so I think that, you know, as we talked about, you know, in our prepared remarks as well as in the presentation, you know, we're just reconfirming, you know, the guidepost that we put out. And, you know, with our current visibility, we feel like, you know, those continue to remain, you know, the appropriate guide. And, you know, if there's a change in that, you know, we would be, you know, you know, we'd be, you know, telling people that that was different. So I think we believe that that's still the, you know, the range that we're going to be in. And I think as it relates to, you know, thinking about that guide, you know, it clearly, you know, the math tells us that, you know, we're going to have a better second half. And as we've been, you know, talking about since our Q4 is we've implemented our price increase. We have, you know, in our core business, $3.8 billion worth of backlogs. And it just is going to take time for the pricing to work all the way through. We saw a step function change from Q1 to Q2. And as we've been talking about, we'll see more in the second half of that price coming through.
spk11: The other thing I would add to that, Simic, is that in the third quarter earnings report, we will give you guideposts for 2023.
spk01: That's great. My follow-up is, Kyle, you talked about the need to invest in the business, and we all are aware of sort of the macro slowdown that increasingly is getting talked about or sort of speculated for the next 12 months. So in light of that and the need to continue to invest in the business, to grow the business, how are you thinking about liquidity or more so sort of minimum cash on the balance sheet at this point?
spk11: Let me start with kind of the overall recession question, and I'll hand it over to Kyle to speak more about liquidity. I would just say it's very important to note that our demand just continues to be strong. And I think it's important to, you know, take into account that we are a networking connectivity customer. I mean, a networking connectivity supplier and manufacturer. And our customers and end users are all wanting, you know, better connectivity. And we had another strong quarter with a book to build a 1.1 and grew our backlog by like 5% from Q1 to Q2. Obviously, we're going to keep a close eye on the markets and we'll react accordingly. But right now, I mean, everything seems to be, you know, demand very strong.
spk10: Yeah, I think specifically on the question about, you know, cash, you know, I think as we answered in the first question, You know, as a few things happen, as we start seeing a little bit improved supply chain position, as we add capacity, you know, I think we will, you know, we'll see, you know, a little bit of a downturn in our inventory levels, which, you know, will definitely help us, you know, improve and generate cash in the second half. And as we generate cash, as we've been telling people, we'll continue to deliver with that cash flow. So I think the second half should project better as we are able to mitigate some of the inventory as the supply chain and our capacity comes online.
spk01: Thank you. Thanks for taking my questions.
spk08: Thank you. And our next question comes from the line of George Natter from Jefferies. Please go ahead.
spk14: Hi, guys. Thanks very much. I guess I wanted to ask about the cable and connectivity solutions business. I think you said it grew 18% sequentially, which is terrific. Hi, guys. Thanks very much. I guess I wanted to ask about the cable and connectivity solutions business. I think you said it grew 18% sequentially, which is terrific. which is terrific, but I'd love to better understand where that growth is coming from, how much of that is pricing, how much of that is the manufacturing expansion, any sense for that? And then also just extending on that, can you talk about the pacing of the manufacturing expansion down in Juarez? If I remember correctly, that facility was going to open in late Q1 and then ramp thereafter, but maybe an update there would be great. Thanks.
spk10: Thanks, George. Yeah, just as we think about, you know, you should roughly think of our growth as being in CCS, you know, a little bit more than a third of the growth is coming from price, and the rest is just coming from, you know, the volume growth. When we think about our capacity, you know, we're bringing capacity online on sort of a regular basis. As we talked about at the end of last year, the capacity that we were bringing on we're probably about two-thirds of the way through bringing that capacity on. That includes, you know, sort of ramping up our new facility in Mexico. I think the other thing that we would comment on is, you know, as we continue to look at the CCS market, you know, we're evaluating, you know, what are, you know, the next levels of investment that we need to make. And, you know, as we think about, you know, where we believe the CCS business is going to go, I mean, that's sort of a constant dialogue about, you know, how are we adding capacity to continue to meet the demand? So I think as we think about that first wave of capacity, you know, think about it as we're probably about two-thirds of the way of having that stuff online, and the rest will come on in the second half of the year, and then we'll, you know, be in a position to think about what the next investment is.
spk14: Just for clarification, that's two-thirds of the ramp as of, I guess, right now, early August, or are you talking about two-thirds for the full Q2?
spk10: Yeah, sort of at the end of Q2. Okay, great. Thank you.
spk08: Thank you. And I show our next question comes from the line of Matt Nickman from Deutsche Bank. Please go ahead.
spk05: Hey guys, thank you for taking the question. On cost inputs, we started seeing some downward movements in spot rates for some of your larger raw material inputs in recent months. So I'm wondering if this provided any sort of incremental benefit in the second quarter, and I guess more importantly, any tailwind you're baking in from this in terms of relief on the cost side and raw materials in the second half of the year. Thanks.
spk11: I'll start and then Kyle can finish. And I would say overall, There were a lot of puts and takes from the cost side, and I would say overall the costs are pretty flat. And remember, you know, we're still getting price, and I think, you know, we have more to get. And, you know, we're just watching it closely. Our systems are allowing us to see all the input costs, and, you know, we have tons of inputs, and we're watching it on a regular basis. Maybe Kyle wants to add anything to that.
spk10: Yeah, we don't really have, in our thoughts about the rest of the year, we don't have a lot of, you know, raw material reduction built into our forecasting. We have it sort of, you know, flat off of the end of Q2.
spk05: Got it, got it. If I could just ask one follow-up. We're going to wait until next quarter's call for guidance, formal guidance on 23. But I would think with the exit rate of 287,000, in core EBITDA this past quarter, and then obviously a bigger step upcoming in 3Q, 4Q. In terms of the guideposts you've put out previously related to 2023, I would think this kind of gives you a pretty good exit rate and better confidence or visibility in those existing 23 targets. I'm just wondering if that's sort of a fair assumption or anything else to read into there for 23. Thanks.
spk10: Yeah, I think we're, you know, I think we're doing what we said we were going to do. We're okay with our Q2, but we're, you know, have a lot of work to do. And, you know, we're really focused on, you know, how to continue to improve the business, focusing on the second half. And I think, you know, when we get to that point to talk about 23, we'll talk about 23. You know, still need to see where the second half, you know, shakes out before we can start talking about 23. Great.
spk05: Thank you.
spk08: Thank you. And I show our next question comes from the line of Simon Leopold from Raymond James. Please go ahead. Great. Thanks for taking the question.
spk02: I wanted to see if maybe you could discuss your business mix a little bit by verticals in that I'm assuming you're seeing your strength primarily from your service providers, cables and telcos. And I guess what I'm trying to look for is insight on your enterprise exposure from particularly in the cabling side, whether you're seeing evidence of sort of the weakening macro there, any color you could offer talking about vertical exposure. Thank you.
spk11: Yeah, I would say on the enterprise side, what we're seeing right now is that just there's a demand for improved, let's say, office experience, or just business experience in the facility. So we're still seeing pretty strong demand there. And I would say on the ruckus side, you know, we're really, the verticals we're going after are, you know, I'd say a little bit insulated from, you know, recession, et cetera, because, you know, think about education, you think about hospitality and the multi-dwelling units, you know, apartment complex, those are all pretty hot and those are our main segments. We feel pretty good about where we are there. We are obviously going to keep a close eye on what's going on with our cable business in enterprise, but right now things seem to be pretty strong.
spk02: Thank you.
spk08: Thank you. And I show our next question comes from the line of Stephen Fox from Fox Advisors. Your question, please.
spk03: Thanks. Good morning. A couple questions, if I could. First off, it seems like there's a lot of, as usual, there's a lot of mixed impact on the results this quarter and into the second half. Can you kind of summarize at the core CommScope level what were the biggest mixed impacts and how, to the extent we can quantify it or qualify it, and then how that switches into the second half of the year? And then I had a follow-up.
spk13: Yeah, I think
spk10: you know, clearly our CCS business is, you know, is, you know, our high growth business. You know, our higher margin businesses in the cases of, you know, NICs and ANS, as we talked about, are being most impacted from a core perspective by the CHIP constraints. You know, we expect to see that, you know, ease a little bit in the second half. You know, so those higher margin businesses segments you know we feel like we'll have a little bit of a better second half i mean there's some micro mix that happens within you know ans and own a little bit but you know when we think about you know our profile you know ccs is growing you know very quickly um and then our higher margin you know ans and mix businesses you know are being impacted by chip constraints so um you know we expect that to be part of some of our second half lift
spk03: Thanks for that. And then in terms of the manufacturing expansion, just two other things. Your largest competitor seemed to have some issues executing to their plan in the recent quarter and into this quarter on the connectivity and cabling side. I was curious if that impacted you in any positive way. And then along those lines, can you talk about what would tee up the next level of expansion, what it would most likely be directed at? Would you need, like, some kind of customer assurances, et cetera? Thanks.
spk11: Yeah, I'll start, and then Kyle can add if he feels there's something there. I would say good news for us is that we started, you know, really early in terms of starting our capacity expansions. Those are coming online. I won't make any comments on, you know, competitive situations. But I would say that, you know, we feel really good where we are with the capacity. What we're doing now with our capacity coming online and what we're doing now is looking at the bottlenecks. There's some, you know, incremental smaller capacity that we can invest in that will just help that improve without, you know, another big investment. So, we're looking at those right now. We're also, you know, as you can imagine, you have opportunities to look and find your waste and the processes, and we're going through that in detail to improve with what we have, even with existing capacity.
spk13: Great. Thank you very much.
spk08: Thank you. And Aisha, our next question comes from the line of Rod Hall from Goldman Sachs. Please go ahead.
spk09: Yeah, thanks for the question. I guess I wanted to come back to the comment, I think, Chuck, you made it on the move from passive to active antennas and how that would drag revenue. I don't remember you having made that before, so I wanted to dig into that in a little bit more detail. Maybe you did make it before, so you can say if that's something you've said before publicly. But I'm just curious that that reflects on how Mosaic's progressing, or is that just a bigger picture thing that you felt you needed to call out at this point? Just kind of curious what the background to that comment was, and then I have a follow-up.
spk11: Yeah, I think it is more of a bigger picture thing. I don't want us to get ahead of ourselves compared to a 4G ramp up. I think that's important to note. I would say that what we have with the everything but the radio strategy is allowing us to, I think, grow in the lower single digits. But what I did comment in the prepared remarks is that we do see upside potential with both Mosaic and PowerShift. And we just don't know how to measure it right now, but we are seeing some major carriers, as they look at what they have to do on top of the towers, they're starting to look at this thing more than just a niche product. We just can't tie it out to a number yet, but we are watching that very, very close.
spk09: And do you have any ideas on when those new technologies for you might be material to revenue? Do you think it Could be by the end of this year or do you think it's more a 23 thing? I'm just kind of curious when you think the contributions start to, you know, be big enough on the radar screen that we'll begin to see it in the numbers.
spk11: It's probably more 23. I think we're going to start to see some in 22, but it's going to be more impactful in 23. Okay.
spk09: And then I wanted to ask you on commodities. Just come back to that just to clarify your response earlier. You know, we saw commodities improving for you quite a bit in Q2, but then the margins kind of just came in line. And I think what I take from that prior question answer you gave is that other things increased and kind of offset the gains that commodities provided you in the quarter. I mean, is that a fair way to think about it? Or just kind of curious why that commodity increase didn't, you know, affect margins more at the gross margin level.
spk10: Yeah, I think there's a couple things going on. I think as we said, I mean, we see things coming up and we see things coming down. And then even in the things that are coming down, even from a commodity perspective, it's pretty volatile still, right? So if you look at copper prices, it's still pretty volatile. So, we're seeing things go up, we see things go down, and for the most part, in Q2, we sort of, you know, saw that as flat. Because remember, we're buying a lot of products that are outside of just a pure commodity, right? So, you know, we're buying, you know, glass, we're buying chips, and we're buying a lot of things that don't just sit in a commodity index. I think the other piece of it is, remember, we are sitting on inventory, which has a valuation that we would have to work through that. So I think our point is, at this point in time, with the puts and takes, we're just not seeing a lot of down in our input cost prices yet. That may happen, depending on what happens in the general economy. But as we sit here today, we're not seeing we're not seeing a net reduction in our input costs.
spk09: Great. Okay. I appreciate that, guys. Thanks a lot.
spk08: Thank you. And I show our next question comes from the line of Sammy Badri from Credit Suisse. Please go ahead.
spk04: Hi. Thank you. We've been hearing a lot about ARPA fund contributions and allocations, and I think you guys might be a beneficiary of not only just ARPA funds, but also RDOF. Could we just kind of characterize the contributions that these two government-led programs are contributing potentially to your revenues?
spk11: Sure. I would say they're both in early innings. Obviously, RDOF a little bit ahead. I would say we're probably low $100 million in the RDOF side. And, you know, things are just really kicking off, I believe.
spk04: And then when you put together your forecast or at least your guidance for the second half of 2022, does that assume that these government programs begin to contribute more or could you still accelerate in the second half without these programs coming in?
spk11: I think we're really not guiding on a first half or second half. We're looking at our guideposts and all our indications are exactly where we've been calling it and we believe we're right in the you know, we're in what we said we're going to do, and we're going to contain a hold of that.
spk13: Got it.
spk04: One other question on your price increases. So you referred to price increases, and that's been a big driving factor, but could you kind of give us an idea on just how you guys did it and to what magnitudes? Are we talking about mid-single digit, high single digit, or even low double digit price increases? And maybe just giving us a kind of an idea by product segment, just where you guys were able to really move the needle there to, you know, get, get the EBITDA numbers that you guys are suggesting into the second half.
spk10: Yeah. So I think as we've talked about before, there's two types of business that we have. We have service provider business and we have enterprise business. You know, on the enterprise business side, it's sort of a quote by quote, decision that we make as we raise prices. On the service provider side, I think as we've said a few times, it requires us to go have a conversation with the service provider and have a dialogue around a price increase. I think in the case of service providers, those conversations have been very productive and they've been very supportive of the price increases. And I think you know, the magnitude of the input cost inflations, you know, which people have seen in our margins, you know, that translates with the service providers. And we've been able to, you know, get those price changes through. And I think as we've also talked about is, you know, we do have big backlogs. And, you know, that's just going to continue to ramp. We saw a little bit of a ramp from Q1 to Q2, and we would expect that to continue with a ramp from Q2 to Q3, and then another ramp from Q3 to Q4. I think, you know, when we think about it by business, you know, I think in each of our businesses, we've had, you know, very aggressive price increases to offset the, you know, the, you know, the the inflationary impact. I think the only business that we would probably call out is our OWN business where we continue to work sort of on a day-by-day basis with our service providers to continue to try to push the price increases through to offset inflation. I think that's probably the only you know, area that, you know, we're not, you know, sort of in the double-digit range of price increases. And, you know, it's sort of an ongoing discussion with the service providers.
spk03: Got it. Thank you.
spk08: Thank you. And I show our next question comes from the line of Jim Suver from Citi. Please go ahead.
spk06: Thank you. On your comment on your Mexico facility, is it completely ramped or kind of halfway there? Just kind of get a status check on it. And when it's fully ramped, are you shifting some business, some other plants there and going to decommission something? Or is it kind of more greenfield build out? If you could just update us on that and what that kind of also means for CapEx for this year and next.
spk11: Yeah, I'll hit the beginning. I would just say that I would say that we're not transferring anything there. This is additional business that we're picking up in the capacity expansions that are, you know, are linked to the, you know, increased growth. As we mentioned, our fiber and connectivity business grew 36% year over year. And we're primarily using that facility for that area. In terms of, I don't know, capital, you want to hit anything there, Kyle?
spk10: No, I mean, I don't, you know, really the capital for that facility has been spent um but we also talk about you know with what we see in you know the market growth you know we'd expect to continue to you know invest in capacity there you know as we move forward um you know when you think about that you know you know think about that facility being you know primarily ramped in in q2 but you know It's like anything, we're trying to drive continuous improvement. And when you bring up a plant, which, you know, we sort of brought up at the beginning of the year, you know, it takes you, you know, several quarters to get to sort of, you know, full run rates, you know, as you think about training labor and so forth.
spk06: Okay. And what's that do for CapEx, like for this year, total spending in next? Does it go lower than CapEx next year if the plant's fully up and running for the most part?
spk10: Yeah, but, I mean, there's other investments that we're making. So, you know, when we think about our CapEx, you know, call it in, you know, sort of the 125 to 150 range. And, you know, we're continuing to look at what that would be for 23. We don't really have a number we'd want to provide at this point in time.
spk06: Okay. Then my last question is on backlog. You mentioned it grew. and booked a bill of 1.1. Did I hear right on your prepared comments that you mentioned you expect backlog to start to decline? And if so, is that due to, you know, just the capacity ramping now coming online? Or is it due that customers kind of are getting what they need or the pricing is kind of played out? Or how should we think about those comments? And maybe I just didn't hear it right, that backlog will decline.
spk11: Yeah, it's all about lead time. You know, as lead times come down because more capacity comes online, you know, they don't have to order so much in advance. So that's what we see there. Just a little more color on the growth of the 36%. You know, most of our cable stuff is not done in that facility. It would be more of the connector side that we're doing in the Mexico location, just for clarification.
spk06: Great. Got it. Thank you for the details. Let's appreciate it.
spk08: Thank you. And that concludes our Q&A session for today. At this time, I'd like to turn the call back over to Chuck Treadway, President and CEO, for closing remarks.
spk11: Yes, look, I just appreciate your interest and support of ComScope. Thank you for your questions today, and I hope everyone has a great weekend. Thank you.
spk08: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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