CommScope Holding Company, Inc. (NASDAQ:COMM) Q2 2022 Earnings Conference Call August 4, 2022 8:30 AM ET
Michael McCloskey – Head of Investor Relations
Chuck Treadway – President & Chief Executive Officer
Kyle Lorentzen – Executive Vice President & Chief Financial Officer
Conference Call Participants
Meta Marshall – Morgan Stanley
Samik Chatterjee – JPMorgan
George Notter – Jefferies
Matt Niknam – Deutsche Bank
Simon Leopold – Raymond James
Steven Fox – Fox Advisors
Rod Hall – Goldman Sachs
Sami Badri – Credit Suisse
Jim Suva – Citigroup
Good day and thank you for standing by. Welcome to the CommScope Second Quarter 2022 Results Conference Call. [Operator Instructions] 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 McCloskey, Head of Investor Relations. Please go ahead, sir.
Good morning and thank you for joining us today to discuss CommScope’s 2022 second quarter results. I’m Mick McCloskey, Head of Investor Relations for CommScope. And with me on today’s call are Chuck Treadway, President and CEO; and Kyle Lorentzen, 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.
Thank you, Mick and good morning, everyone. I’ll begin on Slide 2. 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 CommScope 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’ve 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 6.8x to 7.2x 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 guidepost 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 multiyear 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 and assisting us in offsetting most of our inflationary impacts.
Mixed performance in the second half will substantially improve. Markets remained 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 2 quarters of 2022 as we dealt with significant ship 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 are 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 PowerShift. It is still early in these initiatives but we are encouraged with customer interest and consider these as potential upside.
Margin percentages have been under pressure as we continue to work with customers to offset inflation and recognize mix 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 3 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 NICS segments. While there is significant uncertainty in the global macroeconomic environment, demand for core CommScope products and solutions remain 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 end-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 end 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 multiyear build cycle.
NICS 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 in RUCKUS and ONECELL. NICS is some of our most exciting growth potential in the company. As demand increases for indoor networking and 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 OWN 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 CommScope 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 at 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 and 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 ARRIS 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 NOVUX 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 PAM space, there continues to be strong interest in our XGS PON 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 ONECELL 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 Shakopee, 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. In NICS, 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 OWN, we’ve spoken about our continued innovation in the 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 CommScope’s PowerShift 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 MACPHY 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 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 create significant incremental shareholder value.
And with that, I’d like to turn things over to Kyle to talk more about our second quarter results.
Thank you, Chuck and good morning, everyone. I’ll start with an overview of our second quarter results on Slide 4. For the second quarter, consolidated CommScope 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 or 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 $0.41 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 CommScope 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 in backlog, we expect backlog to be decline as lead times normalize with supply chain improvement.
Turning to our segment highlights on Slide 5. 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 point improvement from the first quarter, as our pricing actions and operating improvement again impacting our P&L.
NICS net sales of $205 million declined 8% from the prior year and across both RUCKUS and ICN. NICS 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 through the balance of the year.
OWN 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 mix shift and a difficult compared 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 mix 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 ship 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 6 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 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.
Evident 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 more 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 7 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 note 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 8.1x, an improvement from 8.2x 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 6.8x to 7.2x range.
Now turning to Slide 8, 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.
Thank you, Kyle. I’ll finish on Slide 9. I am pleased with where we are in our transformation. Although there are some challenges in the general market, the core CommScope businesses held up well with a book-to-bill of 1.1 and continued growth in our backlog. We will continue to monitor the demand environment but we feel that CommScope 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 a 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
[Operator Instructions] Our first question comes from the line of Meta Marshall from Morgan Stanley.
Great. And congrats on the quarter. Your commentary about kind of supply chain and commodity costs or maybe more favorable than some of your networking kind of counterparts this quarter of not really talking about maybe 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 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?
Sure, Meta. Thanks for your question. I would say, look, it’s still a fight day to day, 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 and redesigning where necessary and finding parts in 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.
Got it. And maybe just as a quick follow-up. Would you expect it 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.
Yes, Meta, this is Kyle. Yes, I think we’re at a point where we see some opportunities to move inventory down in the second half. I don’t think that those are going to be significant but I think we will start seeing a trend down as does the supply chain gets a little bit better.
And I show our next question comes from the line of Samik Chatterjee from JPMorgan.
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’s unchanged kind for the full year does still leave engine 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 wide for the second half?
Because from the — I guess, your presentation today, it didn’t seem — it seems 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 will be helpful. And I have a follow-up.
Yes. So I think that as we talked about in our prepared remarks as well as in the presentation, we’re just reconfirming the guideposts that we put out. And with our current visibility, we feel like those continue to remain the appropriate guide. And if there’s a change in that, we’d be telling people that, that was different.
So I think we believe that that’s still the range that we’re going to be in. And I think as it relates to thinking about that guide, clearly, the math tells us that we’re going to have a better second half. And as we’ve been talking about since our Q4 is we’ve implemented our price increase.
We have, in our core business, $3.8 billion worth of backlog 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.
The other thing I would add to that, Samik, is that in the third quarter earnings report, we will give you guidepost for 2023.
Okay. Okay. That’s great. And for my follow-up, I guess, 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 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?
Let me start with kind of the overall recession question, then 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 take into account that we are a network and connectivity customer — I mean, network and connectivity supplier and manufacturer. And our customers and end users are all wanting better connectivity.
And we had another strong quarter with a book-to-bill of 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 demand very strong.
Yes, I think specifically on the question about cash. I think as we answered in the first question, as a few happened as we start seeing a little bit improved supply chain position as we add capacity, I think we’ll see a little bit of a downturn in our inventory levels which will definitely help us improve and generate cash in the second half. And as we generate cash, as we’ve been telling people, we’ll continue to delever 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 in our capacity comes online.
And I show our next question comes from the line of George Notter from Jefferies.
I guess I wanted to ask about the Cable and Connectivity Solutions business. I think you said it grew 18% sequentially 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, George. Yes, just as we think about, you should roughly think of our growth as being in CCS a little bit more than 1/3 of the growth is coming from price and the rest is just coming from the volume growth. When we think about our capacity, 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 2/3 of the way through bringing that capacity on. That includes sort of ramping up our new facility in Mexico. I think the other thing that we would comment on is as we continue to look at the CCS market, we’re evaluating what are the next levels of investment that we need to make?
And as we think about where we believe the CCS business is going to go, I mean, that’s sort of a constant dialogue about how are we adding capacity to continue to meet the demand? So I think as we think about that first wave of capacity, think about it as we’re probably about 2/3 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 be in a position to think about what the next investment is.
Got it. And just for clarification, that’s 2/3 of the ramp as of, I guess, right now, early August or are you talking about 2/3 for the full Q2?
Yes, sort of at the end of Q2.
And I show our next question comes from the line of Matt Niknam from Deutsche Bank.
On cost inputs, we started seeing some downward movement 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 tailwinds you’re baking in from this in terms of relief on the cost side and raw materials in the second half of the year?
I’ll start and then Kyle can finish. And I would say, overall, there were a lot of puts and takes on the cost side. And I would say, overall, the costs are pretty flat. And remember, we’re still getting price. And I think we have more to get.
And we’re just watching it closely. Our systems are allowing us to see all the input costs and we have tons of inputs and we’re watching it on a regular basis. And maybe anything — Kyle wants to add anything to that.
Yes, we don’t really have in our thoughts about the rest of the year. We don’t have a lot of raw material reduction built into our forecasting. We have it sort of flat off of the end of Q2.
Got it. Got it. And if I could just ask 1 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 million in core EBITDA this past quarter and then obviously, a bigger step-up coming 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 rates and better confidence or visibility in those existing ’23 target. I’m just wondering if that’s sort of a fair assumption or anything else to read into there for ’23?
Yes. I think we’re doing what we said we’re going to do. We’re okay with our Q2 but we have a lot of work to do. And we’re really focused on how to continue to improve the business, focusing on the second half. And I think when we get to that point to talk about ’23, we’ll talk about ’23. Still need to see where the second half shakes out before we can start talking about ’23.
And I show our next question comes from the line of Simon Leopold from Raymond James.
I wanted to see if maybe you could discuss your business mix by — a little bit by verticals in that I’m assuming you’re seeing your strength primarily from your service providers, cable 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 can offer talking about vertical exposure?
Yes. 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 this facility. So we’re still seeing pretty strong demand there.
And I would say on the RUCKUS side, we’re really — the verticals we’re going after are I’d say, a little bit insulated from recession, et cetera, because think about education, you think about hospitality, in the multi-dwelling units, apartment complex, those are all pretty high and those are our main segments. So 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.
And I show our next question comes from the line of Steven Fox from Fox Advisors.
A couple of questions, if I could. First off, it seems like there’s a lot of — as usual, there’s a lot of mix impact on the results this quarter and into the second half. Can you kind of summarize at the core CommScope level, what was the biggest mix impacts? And how — to the extent we can quantified or qualified? And then how that switches into the second half of the year? And then I had a follow-up.
Yes, I think clearly, our CCS business is our high-growth business. Our higher-margin business is in the cases of NICS and ANS as we talked about are being most impacted from a core perspective by the chip constraints.
We expect to see that ease a little bit in the second half. So those higher margin segments, we feel like we’ll have a little bit of a better second half. I mean there’s some micro mix that happens within ANS and OWN a little bit. But when we think about our profile, CCS is growing very quickly. And then our higher-margin ANS and NICS businesses are being impacted by chip constraints. So we expect that to be part of some of our second half lift.
And then in terms of the manufacturing expansion, just 2 other things, your largest competitor seem 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 like could be directed at? Would you need like some kind of customer assurances, et cetera?
Yes, 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 really early in terms of starting our capacity expansion and those are coming online. I won’t make any comments on competitive situations.
But I would say that 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 incremental smaller capacity that we can invest in that will just help that improve without another big investment. So we’re looking at those right now. And we’re also — as you can imagine, you have opportunities to look and find your waste in the processes and we’re going through that in detail to improve with what we have, even with existing capacity.
And I show our next question comes from the line of Rod Hall from Goldman Sachs.
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 drive revenue. I don’t remember you having made that before, so I wanted to dig into got 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 if that reflects on how MOSAIC is 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
Yes. 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 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 closely.
And when — 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 contribution starts to be big enough on the radar screen that we’ll begin to see it in the numbers?
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 on ’23.
Okay. And then I wanted to ask you on commodities. Just coming back to that, just to clarify your response earlier. We saw commodities improving for you quite a bit in Q2 and we were — but then the margins kind of just came in line. And I think what I take from your prior — 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 affect margins more at the gross margin level or decrease — I’m sorry, decrease on commodity…
Yes, I think there’s a couple of things going on. I think as we said, I mean, we see ups and — 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 saw that as flat because, remember, we’re buying a lot of products that are outside of just a pure commodity, right? So we’re buying 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 my — 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 a net reduction in our input costs.
And I show our next question comes from the line of Sami Badri from Crédit Suisse.
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 2 government-led programs are contributing potentially to your revenues?
Sure. I would say they’re both in early innings, obviously, RDOF a little bit ahead. I would say we’re probably low hundred millions in the RDOF side and things are just really kicking off, I believe.
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?
I think what we’re really not guiding on a first half or second half. We’re looking at our guidepost. And all our indications are exactly where we’ve been calling it and we believe we’re right in the — we’re in what we said we’re going to do and we’re going to continue to hold to that.
Got it. 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 kind of an idea by product segment just where you guys were able to really move the needle there to get the EBITDA numbers that you guys are suggesting to the second half?
Yes. So I think as we’ve talked about before, there’s 2 types of business that we have. We have service provider business and we have enterprise business. 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 price increases. And I think the magnitude of the input cost inflations which people have seen in our margins, that translates with the service providers and we’ve been able to get those price changes through. And I think as we’ve also talked about is we do have big backlogs and 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 when we think about it by business, I think in each of our businesses, we’ve had very aggressive price increases to offset the inflationary impacts.
I think the only business that we would probably call out is in 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 area that we’re not sort of in the double-digit range of price increases and it’s sort of an ongoing discussion with the service providers.
And I show our next question comes from the line of Jim Suva from Citi.
On your comments on your Mexico facility, is it completely ramped or kind of halfway there? Just kind of give a status check on it. And when it’s fully ramped, are you shifting some business from 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?
Yes. I’ll hit the beginning. I would say that we’re not transferring anything there. This is additional business that we’re picking up and the capacity expansions that are linked to the 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, do you want to hit anything there, Kyle?
No. I mean, I don’t — really, the capital for that facility has been spent but we also talk about with what we see in the market growth, we’d expect to continue to invest in capacity there as we move forward.
When you think about that, think about that facility being primarily ramped in Q2. But it’s like anything, we’re trying to drive continuous improvement and when you bring up a plant which we sort of brought up at the beginning of the year, it takes you several quarters to get to sort of full run rates as you think about training labor and so forth.
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 is fully up and running for the most part?
Yes. But I mean there’s other investments that we’re making. So when we think about our CapEx, call it in sort of the $125 million to $150 million range and we’re continuing to look at what that would be for ’23. We don’t really have a number we would want to provide at this point in time.
Okay. Then my last question is on backlog. You mentioned it grew and book-to-bill of 1.1. Did I hear right on your prepared comments that you mentioned do you expect backlog to start to decline? And if so, is that due to just the capacity ramping now coming online or is it due to customers kind of are getting what they need or the pricing has kind of played out? Or how should we think about those comments and maybe you just didn’t hear it right, the backlog will decline.
Yes. It’s all about lead times. As lead times come down because more capacity comes online, 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%. Our cable — most of our cable stuff is not done in that facility, it would be more on the connector side that we’re doing in the Mexico location. Just for clarification.
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.
Yes. Look, I just appreciate your interest and support of CommScope. Thank you for your questions today and I hope everyone has a great weekend. Thank you.
Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.