Q3 2021 CommScope Holding Company Inc Earnings Call
Give me and thank you for standing by welcome to the Commscope third quarter of 2021, we saw it style at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask you a question during the session.
You will need to press Star and then the number one on your telephone keypad. If you require any further assistance. Please press car zero.
I would now like to have the conference overthrew your first speaker Mister Russell Johnson, Vicepresident treasure and Investor Relations. Sir. Please go ahead.
Good morning, and thank you for joining us today to discuss Commscope third quarter of 2021 results with me on today's call are kept treadway, President and CEO, Colorado, Thanks, Executive Vice President and C. F O.
Clinton interim Chief Technology Officer, and Bud Watch Chairman of the Board you can find the size of the company. 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 a 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.
Four I turn the call over to Chuck I have a few housekeeping items to review today, we will discuss certain adjusted or nine yeah, GAAP financial measures, which are described in more detail in this morning to earnings materials.
Filiation does non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website alright.
Alright pieces during today's discussion will be your adjusted results all quarterly growth rates prescribed during today's presentation or on a year over year basis, unless otherwise noted.
Now turn the call over to our President and CEO Chuck currently.
Thank you Russell and good morning, everyone. Thank you all for taking the time to join a call. This morning, I'm going to be starting on slide too.
During the third quarter Court Commscope recorded net sales of $1.69 billion, a 6% increase over prior year.
We achieved this top black performance, despite shortages of manufacturing components during the quarter.
Our core adjusted EBITDA $275 million represents a 12% decline over prior year.
This decline was primarily driven by supply chain factors, including component shortages increased commodity costs and higher freight costs.
Our strongest performing segment for the quarter was outdoor wireless networks with revenues increasing 31%.
The strength was led by sales to the three leading North American mobile operators, who continue to ramp up five G related macro sell side equipment deployments and infrastructure upgrades. These.
These operators are showing healthy demand for Commscope space station antennas as well as other cell site infrastructure products, ranging from cabling and structural steel to power management solutions.
And we also continuing to make progress with our partner Nokia and commercializing our unique integrated active passive entertainment products.
These innovative products can help operators solve some of the most challenging aspects of five G deployments, including footprint wait when loading and speed of installation.
And our venue in campus segment revenue increased by 8% driven by both are inside plant copper and fiber cabling solutions.
We continue to see demand from data centers, and a recovery and enterprise markets.
And a ruckus business, we continue to see it healthy pace of new orders as Ruckus backlog increased 31% in the quarter.
However, our semiconductor applications limited our ability to ship product and book revenue.
And finally, our depth and small cell business unit soft software sales as compared to the third quarter of 2020.
And a broadband network segment revenues declined by 4% during the third quarter and as discussed at our last call. This includes the impact of a large software license sale that did not repeat.
While we continue to experience strong demand across the board for advanced cable network solutions and cable and connectivity products. We were impacted by component shortages, primarily in our converged network solutions and access technologies business units.
However, it is important to note that year to date broadband networks net sales are up 14% from prior year and our backlog and broadband network segment continues to be robust and is up 34% since the beginning of the year.
And our cable and connectivity business, where essentially selling everything we can produce we're also working hard to complete our cable and connectivity manufacturing expansion projects that we spoke about on previous calls.
Moreover, we're seeing clear signs of Commscope diverse portfolio, a cable network solutions are continuing to generate significant value for cable customers.
Capital investment in cable networks is growing but it is also developing along very operator specific lines with no one size fits all choice regarding architecture evolution or upgrade path.
The migration to new architectures will not be linear or an overnight process, but will continue to develop at least through the end of this decade.
Many operators that we serve are moving deliberately with the introduction of new cable architectures and for the time being preferred the director investment capital towards optimizing their existing cable plants.
For those customers Commscope will remain a critical supplier products ranging from software licenses and had an optics to access layer equipment.
And a very large installed base of C. M. T. S. An optical notes gives us a strong income with competitive advantage.
Other operators I'm moving more aggressively to adapt view next generation architecture solutions, such as virtualization distributed access architecture and fiber to the home.
For those customers Commscope is equally well positioned given are fast developing suite of next generation hardware and software offerings.
This is an area, where our long history of the cable equipment leader as well as our large installed base provides a competitive advantage.
<unk> graders understand that Commscope, new product offerings are not experimental but are based on decades of hardened optimized coding and Ah specifically designed to be backwards compatible with existing technology.
These and other factors helped make commscope the vendor of choice for operators seeking to implement new network architectures in a cost effective and low risk manner.
I'm very pleased to report that we are already seeing clear evidence that our newest DAA solutions are making good traction with cable customers, who are upgrading their current networks and preparing for future network evolution.
During the third quarter, we announced that Alaska is largest cable operator, GCI will use our Rd 23, 22 device to support a deployment of remote Mac phy.
This cutting edge product provides operators with the Seinfield garden and optimize code as previously described.
It is an all in one box distributed CMT solution that moves both the Mac and five layer functions out of the heart and out of the head and two in optics.
The fiber optic node in the network access player.
Also during the quarter, we announced that Liberty Global will deploy Commscope is high density remote by shelf. This cutting edge solution will enable this important European operator to push fiber deeper into its network and enjoy the benefits of a distributed access architecture.
These two customer wins demonstrated commscope is meeting current operator needs with new technologies, playing a leading role in the gradual migration of active cable functionality to the network edge and is poised for global broadband growth.
I'll finish up my second review with an update on home networks, which we consider non-core because I've previously announced intention to spin off the business during the second quarter of 2022.
Home networks revenues declined by 28% during the quarter versus prior year.
While we were feeling the effects of supply chain disruptions across Commscope, our home networks business topline has been the most challenged by the global shortage of semiconductor chips and.
In addition to supply challenges. The business has also been negatively impacted by escalating prices of electronic components and Frank.
Because of supply chain constraints.
Locks home networks backlog continues to grow and.
And remains about $1.1 billion.
Overall I want to emphasize that we continue to see strong and in some cases record demand for our portfolio of communications and networking technologies.
Year to date, we have grown our core business revenue versus the same period last year by 11%.
As a result of the strong demand and supply constraints are core backlog ended the quarter about $2.2 billion.
The revenue growth and backlog build that we were achieving our direct evidence of the strength of our broad solutions portfolio. It.
It is clear that many of our customers continue to show confidence in Commscope as a partner for building the networks of the future.
During the quarter revenue performance was more than offset by significant headwind related to the current supply chain environment.
Like many other technology companies, we experienced supply constraints with semiconductor chips that negatively impacted both net sales and adjusted EBITDA.
In addition to component shortages Commscope also felt based commodity inflation as well as higher freight costs.
The net impact of input costs and freight inflation on the third quarter consolidated adjusted EBITDA was approximately $80 million.
I can assure you that we are adjusting the supply chain pressures with a sense of urgency across commscope. While these disruptions may ultimately prove to be transitory, we cannot afford to operate under that assumption.
We're continuing to raise prices and take operational measures with the goal about setting the inflationary cost impacts.
I want to emphasize that this catch up process is not going to be immediate.
While we are already making good progress on the pricing front. The reality is given a large backlog of negotiated orders as well as the lack bill tensive pricing adjustment provision.
Provisions in some of our customer contracts.
Flow through impacted price increases is going to take several quarters to fully materialize in our P&L.
We expect to see the revenue and margin pressure that we experienced in the third quarter persist for the remainder of 2021 and into 2022.
As we accelerate our efforts to recover the inflationary impacts on our business through pricing and cost actions I want to emphasize that commscope as in the early stages of a fundamental business transformation.
During the third quarter, we continued to make excellent progress on Commscope next and we now have over 100 targeted initiatives either in flight are ready for implementation. Additionally.
Additionally, we have now put in place to management processes and tools to track progress on each Commscope next initiative.
I will now turn it over the call to Kyle to to provide further details on our third quarter results.
Thank you Chuck and good morning, everyone before getting started on the overview of our financial results I want her to think Chuck him aboard for giving me the opportunity to become Commscope as Chief Financial Officer, I'm very excited by the prospect of working with the entire management team as we continue our efforts to transform the business.
But primarily responsibility since joining commscope a year ago has been to lead the transformation office in the Commscope next initiative.
From this perspective, it has become become clear to me that commscope has tremendous potential to create shareholder value.
As we now move into the full implementation phase and Commscope next.
T component of my role as CFO and a critical requirement for success will be ensuring that we have tightened linkage between the financial oversight function and the goal Commscope next clear and transparent financial management processes combined with effective tools for tracking progress and driving accountability will.
Also be critical performance driver's going forward.
I am now turning to slide three for an overview of our consolidated results.
During the third quarter regarding the consolidated business net sales decreased 3% to $2.11 billion orders for the quarter were $2.34 billion yearly in a book to Bill ratio of 1.1 times.
Adjusted EBITDA of 259 million decreased 24% and adjusted EBITDA margin was 12.3% so.
Adjusted EBITDA include the 12.7 million dollar charge for Baghdad expense related to one customer in the home network segment.
Adjusted earnings per share was 29 cents per share and decreased 43% from the prior year period.
Shifting focus to our core Commscope businesses net sales increased 6% in the quarter to $169 billion.
Or adjusted EBITDA declined 12% from prior year to $275 million, while adjusted EBITDA as a percentage of sales with 16, 2%.
I would remind you that the third quarter of last year benefited from a significant broadband networks software license sale of approximately $25 million.
Normalising for this item year over year net sales would have increased 8% and adjusted EBITDA would have declined more modestly at around 4%.
Orders for the cord business were again very solid yearly to pour book to bill ratio of over 1.1 times, our core business backlog remains strong at more than 2.2 billion and is up 61% year to date.
As Chuck mentioned, despite solid growth in the quarter. The entire company continues to be impacted by significant challenges related to the global supply chain environment.
It should be noted that on a year to date basis, despite a difficult costume component availability environment or Commscope net sales were ahead of prior year by 11% and adjusted EBITDA by 10%.
Turning to slide for for an overview of the supply chain situation.
Commscope is feeling the impact of the challenging global supply chain environment.
We are a technology company that is very dependent on the supply of key electronic components as well as a manufacturer products with high content with various commodity and freight inputs.
As a result component shortages in commodity and frame inflation are having significant revenue and cost impacts across all our business segments.
Component shortages and in particular semiconductors at a meaningful impact on our ability to deliver on the strong customer demand we continue to see during the third quarter.
On a full year basis, if we had a normal supply of electronic components with no shortages or delays aren't order flow would've been able to support approximately $600 million of the incremental revenue to lap what we now expect to ship for 2021.
This amount approximately $260 million is related to our core business and the remainder approximately 340 million is attributable home networks.
As Chuck mentioned earlier in addition to component shortages, we continue to experience significant inflationary headwinds that we're actively working to mitigate.
These impacts are in most severe in the areas of key input commodities, such as copper steel aluminum rather than electronic components and freight costs.
What we have been dealing with input price inflation since the beginning of the year. These impacts accelerated during the third quarter.
Net impact of input costs and frame inflation on the third quarter adjusted EBITDA and our core business was approximately $70 million.
Although the inflationary increases men, maybe end up being transitory the negative impact they are having on a business requires that we take significant mitigating actions now we've already started to increase prices to offset some of these impacts and we will be implementing additional price actions across all our businesses through.
The balance of 2021 and Institute 22, we will also continue additional cost and operational measures to supplement our pricing actions our goal will be to fully offset our input and freight costs increases however, given the size of our backlog as well the terms of our sales contracts.
We are not targeting a full recovery these impacts until the end of 2022.
This implies that we will continue to feel the impact of supply chain disruptions on our financial results into 2022 with a gradual recovery of profitability throughout the year.
To further highlight the impact inflation is having on our business can you can provide the following data.
While we expect core revenue to grow mid single digit percent year over year in the fourth quarter due to continuing supply chain pressures, we are expecting the fourth quarter of 2021 to be roughly $50 million to $60 million lower than the third quarter on and adjusted EBITDA basis for the core business.
Turning to slide five for an overview of our segment highlights since beginning with the broadband network segment net.
Net sales of $780 million declined 4%, primarily driven by North American the Asia Pacific regions.
We continue to see growth in our network cable and and connectivity business. This was offset by declines in access technologies and convert converge network solutions.
Adjusted EBITDA of $158 million declined, 22%, primarily driven by lower sales volumes and rising input costs. We also facing a difficult compare in the third quarter due to a large high margin software license sale that did not repeat.
Despite supply can springs, and commodity cost inflation on a year to date basis broadband revenues and adjusted EBITDA were up 14% and 18% respectively.
All demand and the business continues to be solid with our backlog for broadband networks over 50% more than the prior year.
This continued growth down demand growth and backlog build is particularly apparent in our network cable and connectivity business.
This unit continues to benefit from a variety of fiber expansion projects by cable operators and telcos as well as government broadband stimulus.
We expect this growth continue.
Spent this growth to continue as operators push fiber deeper into networks and as the release of art funds accelerates.
As Chuck noted during the third quarter, we continue to see a strong trend of cable operator investment in an existing networks as well as continuation of the gradual trend of adopting destroy.
Distributed access network models.
We expect the investment cycle, an existing networks to have a long tail and we are equally well positioned to serve those operators, making the transition to network architects. Finally, we expect to benefit from continued investment by operators into driving cyber deeper into networks as well as accelerating pace of Greenfield.
Fiber network bills.
Turning to venue on campus networks on slide six.
Net sales with $555 million increased 8% strength across all regions segment growth was driven by our business connectivity infrastructure business unit, which supplied indoor copper and fiber cabling for enterprises in data center customers. This growth was partially offset during the quarter, but.
Net sales declined ruckus in in our Duffs and small so business unit.
Adjusted EBITDA $56 million modestly due to a combination of volume increase in early progress on pricing new initiatives offset by input cost inflation.
Backlog versus prior year period increased by over $430 million or 159%.
Since the beginning of the year backlog has increased by 148% without.
Without supply constraints, we would have shipped approximately 65 million of additional products in the quarter.
Our business connectivity infrastructure unit drove the overall segment growth for the quarter.
The business unit, we continue to see a post COVID-19 recovery of commercial real estate and infrastructure project activity that is supporting new spending an indoor copper and fiber cable.
These product lines also about it benefited from continued government stimulus spending for education and healthcare related connectivity projects.
We were also able to make solid progress during the quarter with various pricing initiatives designed to recover commodity impacts on our cable and product lines.
In addition to the above.
Demand for indoor fiber products from data center customers remains robust with strong momentum and expansion and upgrade related spending by Multitenant enterprise and Hyperscale data centers.
And are distributed antenna systems business, <unk> and <unk> related venue upgrades remain a key driver of incremental sales.
During the quarter as has been the case throughout 2021, we saw steady progression of smaller upgrade projects related to hospitals airports and entertainment venues as opposed to the large scale stadium deployments that we executed during 2020.
At our one cell business unit continues to scale up driven by several more <unk> sites going on air. We also expanding our five G engagements with customers as we look to deploy solutions for both public and private networks.
Finally, the technology evolution, Wi Fi six and 60 and government stimulus spending are dragging very strong demand and backlog growth in our ruckus business.
We are also seeing a recovery in the hospitality vertical as a pick up in both business and tourist travel driving hotel operators to upgrade their networks.
Ruckus also benefited during the third quarter from healthy demand for multi dwelling unit and educational verticals.
Despite these encouraging demand trends ruckus sales were materially impacted during the third quarter by semiconductor shortages that limit our ability to ship Wi Fi access points and campus switches to customers at a rate that matched our order and flow.
Turning to outdoor wireless networks on slide seven.
Net sales of $356 million increase significantly up 31% for prior year, driven primarily by North America from a business unit perspective.
We saw the greatest revenue benefit from our diverse portfolio of macro salt tower infrastructure solutions.
Segment, adjusted EBITDA $61 million increased 13% over prior year and it was primarily driven by higher volumes, partially offset by input cost inflation and frayed increases.
Outdoor wireless performance during the third quarter was largely driven by continued wrapping of telco operator investment spending to upgrade macro cell sites for five G service.
As operators focus on macro site preparation, we are seeing healthy global demand for a wide variety of al Gore wireless products.
Or outdoor wireless segments backlog remains strong which is a trend we have seen for much of 2021. We believe that this backlog is very solid with some visibility into 2022.
During the third quarter, we saw continued demand from telco operators for our sweet a vacation antennas, but also for cell site infrastructure solutions, such as Healy acts tabling structural steel cabinets and power management solutions.
As heavier and more power intensive equipment is added to the macro site wind loads tower regulation and operating costs become more important considerations and could should continue to benefit.
Tom Scopes broad everything, but the radio portfolio of products for Microsoft sites.
We also continue to be encouraged by operator interests and are active passive hybrid antenna collaboration with Nokia and its potential to simplify five G deployments.
And we expect to have more news to share about this exciting technology evolution in the coming months.
Stepping outside of North America during the quarter, we've made strong progress and several international markets securing a base station antennal in at a major European operator, and make a new headway as a potential important player in Japan five G network infrastructure.
Turning to slide eight for our home network segment net.
Net sales of $415 million declined 28% year over year and in all regions, except for Asia Pacific from a business unit perspectives sales declined in both video and broadband gateway product lines.
EBITDA negative $16 million declined $46 million from the prior year, which included the impact of that that expense.
Profitability decline was driven most most significantly lower volumes and higher input costs.
Networks products rely heavily on semiconductor chips and our inability to source chips in the required quantity continues to material impact the ability of home networks to.
To deliver products to serve the demand we're seeing.
Holmes profitability was also negatively impacted by rising component input and freight costs. In addition to expedite fees.
On the positive side home networks continues to build strong and high quality backlog at our visibility four orders now extends well into 2022 Shelley.
Selling price increases have been announced and are being implemented to offset the inflationary costs.
As an update on the whole network spinoff, we are continuing to make progress on separating the business from core commscope, but expect to execute the spinoff as planned during the second quarter of 2022.
Now turning to our cash flow overview on slide nine.
For the third quarter cash flow from operations generated $67 million adjusted free cash flow was $64 million for the quarter. We saw nearly $110 million of inventory increases. However, this was roughly offset by other working capital changes given the supply chain issues that we've discussed today.
We expect our levels of inventory to remain elevated until supply disruptions improve.
This is due primarily to extended trapped in times of our inputs of finished goods and the need to hold higher inventories of certain components to offset supply volatility.
Considering the above as well as lower EBIT, driven by supply chain supply constraints and input cost inflation. We now expect full year cash flow generation to remain softer than originally expected.
This situation should gradually improve as we realize the effects of our initiatives to offset inflation.
In the meantime, we will continue to prudently managed cash and working capital.
Turning to slide 10 for an overview of our liquidity and capital structure.
During the third quarter, we continue to take steps to proactively manage and Derisk our balance sheet. We successfully refined financed $1.25 billion of secured notes due in 2024 with a new eight year tranche of secured notes due in 2029.
This refinancing pushed out a large contract that an extended our next step maturity to.
2025.
It also reduced our interest rate on this tranche of that by 75 basis points and lowered annual interest expense by over $9 million.
During the third quarter of our cash and liquidity. Once again remains strong we ended the quarter with over $411 million in cash to know outstanding draws under our ABL.
The company's total available liquidity was.
It was nearly $1.1 billion, we made no significant net debt repayments during the quarter.
Beyond the required $8 million term loan amortization.
The company ended the quarter with net Leverages seven one times, an increase from six six times at the end of the second quarter, we remain committed to a longer term goal of significantly reducing leverage and expect to provide insight into our path and timetable towards this goal as we refine our commscope next strategy around Pops deficiency.
And growth I will now turn the call back to Chuck Picky.
Taking cough I am now on slide 11.
I want to reiterate my confidence in the path forward, we've laid out based on Commscope next and also confirm my commitment to achieve at least $500 million of incremental annual run rate adjusted EBITDA for core Commscope by the end of 2023.
We will be holding a virtual strategic transformation update on December 14th.
Which we will provide further details on various initiatives that makeup commscope next.
During this event, we also plan to provide guideposts designed to enable investors to judge our progress in performance for future periods as we implement Commscope next.
And I'll also want to thank our employees from remaining resilient through the continued challenges of the pandemic and operating environment.
I am proud of the unwavering support of our team to mitigate these issues and position Commscope for the next level of growth and profitability.
We will now open up the call for questions operator.
Thank you as a reminder to ask you a question you will need to press star one on your telephone keypad and if your question has been answered are you they should take remove yourself from the queue.
Pankey system by well he compiled thank you any russell.
[noise] Yeah. My first session comes from the nine F.
I N 90 from Evercore needs fixing to make your question.
Yep. Thanks, a lot good morning, everyone.
I have two questions. The first one is sort of understand the supply can in fact can you talked about 50 to 60 million and EBITDA impact in December.
Could you talk about what does that mean for your feet Costello in December quarter of is it going to be positive I guess it wouldn't be the negative zone and then how does that 50 to 60 million had been play out into account to 22 for Ya.
I didn't catch the last part of the question, how does the 50 or $60 million layout in months.
In the next year to count on the 22 does that sound.
Neutralized by the time the exit next show you or does it remain around that's accumulated representative.
Yeah. So obviously.
With a already that the forecast that is going to impact our cash.
Think about Q4 when.
When we think about how.
How that $50 million to $60 million impacts.
We move into 22, I think as we said.
Obviously, we're taking mitigating actions those mitigating actions will start to ramp up.
Totally against our goal of trying to offset those inflationary impacts.
We will see a gradual improvement as we go through 2022 off of the queue for days.
Oh.
Got it up.
Just you wait till fairly sizeable business transformation with Commscope Mexican Moore.
I'm curious from your perspective, and you have done this in the past is what I think.
What is the difference if any of doing this in the public domain horses, perhaps doing it privately.
And given the had been that you've seen should be think about the commscope mix benefits you've talked about in the past being pushed out farther from the pie timeline. Thank you.
Great I'll take the second question first and I would say that the supply chain challenges actually are really given us I'd say more of a sense of urgency in the company. So it's it's really helping accelerate what we're trying to do I mean, we're doing a ton of work.
Under the water if you will if you want to say.
The lot going on in terms of growth and cost and portfolio optimization. So we continue to see all of that in fact, we had already made significant progress in price.
To cover inflationary impacts on the enterprise side.
So now, but obviously that have to flow through the system now we have to go look at the service provider.
Tracks and review all of those and we have.
We have those already starting up those conversations already starting up I mean these are decadelong relationships. So we feel like we're going to get through that but I would say overall compared to other transformations in the past I think we're on a great path when a great track there's tons of opportunity here, we continue to see it we have hundreds of initial.
It has tons of action items and now we have tools that we're putting in place to measure and track. Those I think the teens are feeling very positive about where we're going in terms of lining up our strategies by product line, which is something that we might have not done in the past or at least clearly communicated.
We're making the right level of investments I mean, you think about the investments that we doubled down on and off.
DAA and.
Fiber to the home or X, yes pond product is going to be coming out remote Mac fiber when in business remote Fi as well I mean this is just primarily tied to more focus on our lines of business, we're getting to the business unit level to the general managers.
They are understanding what they Wanna do where they want to invest.
It is unfortunate that were hit with the supply chain chat.
Challenges, but that doesn't affect or take anything away from where we're going with commscope next.
And my Tech, but like I said, we're still calling out by the end of 2023, and we're going to have the 500 million run right. So I'm still on track for that.
Perfect. Thank you.
Thank you. Our next question comes from the line of George not therefore, I'm Jeffrey any specific questions.
Hi, there thanks, very much I'd love to just kind of keep going on on the topic of pricing increases.
If memory serves I think you guys were talking about a 7% price increase.
Since you were in the process of instituting I think that was a few months ago three months ago, but can you talk now about what the game plan is in terms of price increases anything you can tell us in terms of size timing.
And then also I understand certainly that she got to work through the backlog in order to institute those pricing increases, but it seems like you know the end of 2022 to get that fully instantiated seems like a pretty long duration. So maybe you could talk more about pricing.
I'll start off and then how can add to it.
I would say as we shared with you before.
Well I don't know, if we did or not but.
Now we went after the enterprise business because there was a lot of copper inflation and we started going after that.
I'd say six months ago, and we're seeing that already an average quotation price levels increased and.
And we're starting to see that flowed through that's why you see the venue on campus business pretty much flat year over year in terms of EBITDA is because of that effect and although we haven't seen the full effect of that that did a price flow through throughout venue in Kansas business.
We will see that continuing to flip through as.
As our backlogs drawdown on the service providers side Iron section has to pass through this inflationary costs.
I think everybody understands what's going on in.
In the world and they understand what we're dealing with and.
And so we're going through those contracts and what we have enterprise customers.
We're able to move faster, where we got contracts where.
Looking through the contracts going through having those discussions and getting getting it passed through and we're going to depend on our decade long decades long relationships to work through this.
To your point about the timing of it.
Anticipation as we will get through the pricing and will succes have the full impact by the middle of the year.
So to start this even start to see that flown out at full impact third and fourth quarter.
I don't have a cough do you want to add anything that's funny.
Yeah.
Anything you guys can say in terms of just magnitude of pricing increases in.
I guess as you get through this will you be able to fully offset the impact of hiring.
Higher input costs or or partially offset that what's the end game.
Yeah, I mean, I think we have line of sight too.
A large portion of the offset.
As Chuck said some of that has been implemented some is in process of being implemented.
I think our comment on that would be we have line of sight too.
A good portion of the offset obviously some of those we still need to implement.
Have some conversations with customers about that but.
We feel that we've got.
A good path forward to offsetting.
Portion of it.
Okay. Thank you.
Thank you. The next question comes from the line of Simon Nepal from New England, James especially evening your question.
Oh, Hi, guys you know the date.
So this is a victory for Simon.
That that the price increase it will take several quarters for the impact to come fully throw through.
So the financial center.
Most vendors are expecting that the headwinds, they're gonna persist into 2022, but the dynamic around you supply environment.
Changes significantly at that point, how does come still kind of address you know the issues at that point and then you know all those things that you guys can do that.
You know shifted business model needed to give you guys more flexibility around that or is this just kind of something that's a neat.
The business incomes, we just have to learn to live with.
I think when we I think when we look at the price increases I think if we were thinking this would be more transitory, but we have to act as though it's permanent.
And that's what we're going to be done.
Hopefully it does debate, but we can't we can't wait.
So in terms of of that.
Our approach in terms of looking at our I guess fly chain and where do we see a dull ache.
We don't have a crystal ball for that but I would say what our goal is to.
Offset whatever inflation, we do see with pricing we're going to go after this shot and hopefully this will cover us.
Until the second base.
Only comment that I would make them out is obviously, we're focusing on the pricing aspect.
But they're obviously is.
There are operational libraries that were pulling at the same time and we feel like we're obviously a large organization that has lots of levers that we can pull so.
Although we're focused on pricing here, there's a lot of work going on from an operational standpoint as well.
To help us get to that goal.
Okay.
That's that's helpful. Just in addition to the backlog transit you mentioned that you had any specific conversations with our customers.
More detailed these days that gives you a competition to your visibility around that.
Yeah, I would say if I just go through the segments quickly I would say to broadband.
I would say the backlog, there's very sticky I'd say many of our acted products basically don't have a substitution and we get we're getting a ton of visibility from our customers more than we would have had in the past and I would say.
The other half of our business you are not active I mean, we're able to sell everything we can make right now so I feel good about about our backlog there.
O W N.
Look we have solid service provider relationships, where we actually are developing joint forecasted demand, which I think is again more than we've ever seen in the past a lot more visibility, which is really helping us and gives me a lot of confidence that the backlog is solid.
On the <unk> side.
I think half of our business, we're able to sell everything we make I'd say when you think of of the more of the active products. There I think there are possibilities for substitution, but I would say that we have a large specification physician.
And where we do have product when we're getting product, we're making sure we're protecting our positions there.
[noise] that's helpful. Thank you.
[noise]. Thank you. The next question comes from the line of metal Marshalls from Morgan Stanley. Please proceed. Thank your question.
Hi, everyone. This is Caroline on for me to thanks for the question. So you sort of noted and $80 million impact EBITDA in the quarter I guess, just I wanted to get more detail around the whether it was more so inability to deliver versus higher costs is there any breakdown that you can provide a more color around the.
Breakdown between those two.
Certain numbers all related to cost.
Okay got it that's helpful. And then just quick follow up I guess, you sort of saw a step up and that's in them spend.
Despite sort of seating revenue come down. So was just wondering if that's more so to do with the new <unk>, new incentives going into place or just curious as to any other car for for the primary drivers for that step up.
Can you repeat the beginning of the question. It was just a little bit garbled.
Yeah, no problem. So you sort of saw a step up in essence spend despite sort of seeing revenue uhm. Just wondering if you can provide any color for what drove that step up.
Yes, it from that perspective.
It's more of a timing issue obviously.
We have things that come on quarter to quarter, it's not I don't I wouldn't take anything into that.
Obviously.
One thing I would say is obviously as we start launching some of the Commscope next initiatives I think because we've talked about some of those are going to require some investment and yeah. Yeah clearly.
Uptick in that but I think as we get into.
The Commscope next piece, we're going to see.
Arjun driven by those investments in 2022.
Got it that's helpful. Thank you. Thank you very much.
Thank you. The next question comes from the line of.
Sami Badgering from credit Suisse Yeah.
Yeah, and I need to open.
Thank you.
First question is for you Chuck I know you were talking about the Commscope next strategy in the $500 million and you are reiterating that view, but one big clarification is this going to be $500 million on top of the Commscope next initial introduction, which was a while ago.
Right. So is that building off of a time that had a much higher adjusted EBITDA base level in 2021 or is that building off of where it's rebasing down too which is post three Q21 results that that's the first question and then second question is for Kyle and welcome to the team Kyle.
It's on free cash flow and then some of the numbers you are putting into adjusted free cash flow one number that really sticks out as the transaction transformation and integration costs were you above $26.3 million can you unpack. This because the last time you did a transformative transaction was a couple of years ago, and we're probably in the third cycle.
Reviewing the charges and the the exits a product lines in your business and you haven't spun off home networks. Yet. So why is that number increasing and why is it still consent considered an adjustment if we're so far away from when we were supposed to be adjusting integrations into your company.
So I'll take I'll take the first question and what I would say is the 500 million when we said it before it is still what we're saying now it's on top of where we were in 2020.
We can't look at the inflationary costs right now I mean, that's what we're trying to drive.
We didn't change our number based on that.
Yeah, So I think not getting too much into the details I mean, obviously.
Some.
We're obviously spending money on our integration costs today.
It's not just about Commscope next because we are spending some some money there.
It's also about where.
Spending some money on on the spin for the home networks business.
Relates to the Outback.
Obviously, we we implemented.
Sort of our first wave of the Commscope next initiative with some reorganization within our our our overhead structure.
Quite honestly that.
We will continue to work its way through.
22, and even in the 23 period.
Got it one.
One other follow up and this is a question I get from a lot of investors is you do have strategic partnerships and relationships with big telcos cable companies and probably cloud operators and as well as Multitenant data center operators.
And if my memory serves me correctly, you do sign set price lists for basically all of these major customers and those price lists a revised either annually or every two years now the big issue I think a lot of people have is you know have set price lists on the old terms a lot of channel.
Checks came in and said that there was a significant amount of purchase order submitted and then now you have inflationary factors coming in on your cost base, which is creating a big squeeze on your gross profit can you just walk us through when the next big price increases are are going to be four is your major customers. Just we can understand how you're going to navigate 2010.
Two and out into 2023.
Well I think it's important to note that many of those contracts have provisions in it for inflationary effects. So now we have to go back and have those conversations about that inflation.
And half and then I would say in other cases, where we don't have it we have to just depend on our relationship because we had him for years and this is this is how we have to work through things I mean, yeah something on paper, but this is pretty much unprecedented. So I think we are open that we're going to have those conversations we're having those conversations.
And we're expecting that we're we're going to work through this.
But.
It's under the contracts I mean some of them.
I just I just don't know the timing of all of those southern the call.
Got it thank you.
Thank you. The next question comes from the line of Stephen Fox from Oxford Nature. Your line is open.
Good morning, Uhm two questions if I could first of all I'm not totally clear on how you're overcoming the semi <unk>.
Conductor constraints, you're dealing with how are you.
I'm going to sort of remove that sales bottleneck and you should and how long do you think it'll take and.
And then secondly can you talk about where we are with ramping capacity in terms of outdoor cabling and connectors and whether you're considering maybe more capacity additions getting what you are saying in the markets. Thanks.
Yeah on the semiconductor side I mean, you have the big the big Broadcom Qualcomm Vaccinating those type of chip companies, we're having a lot of conversations with them and we're working on our allocations I'm trying to get more than what we would have gotten the path.
And so those are pretty much daily weekly conversation as they get more online we're going to be able to get more.
There's also the the rest of the components, which are.
Those are some areas that are challenged as well, where we're able to get some on the spot market.
And we also are seeing capacity increases by them as well, but I would argue that this is going to be probably choppy throughout 2022.
In terms of the capacity expansion.
I'd say things.
Things are already starting to come online and we should have most of it online if not all of it online by the end of this year.
Great so helpful.
Alright filling out out in the past city is.
Dish into more capacity.
Always looking at places that we have opportunity one of the things that we're doing from an operational standpoint is taking our assets and continuing to debottleneck them. So I think we've made some good strides in.
Q3 around free enough capacity.
With just what the assets we have.
Makes a great point, because there will be some things that are coming online maybe Q1 Q2, just to continue in that space as we as we continue to reduce the bottleneck.
Can you just one clarification on the conversations on going with customers that go outside of like networking cable where.
Price increases are more understood for copper and stuff like that.
Are these conversations.
Talking about putting in inflation riders or something that's more permanent to account both ways for inflation and where you have customers that really need product aren't they paying up for that inflation to get that product sort of in a spot way.
Yes.
I would say the commodities are an important part of our price of our cost structure, but it's not the full cup part of our cost structure. So it's not like we have commodity clauses, but we do we do have conversations with them and it's a lot as you say, it's a lot easier to move in the enterprise space everybody understands what's going on there and I think because of their electric.
Cool.
<unk> and other buys they all understand what's going on with inflation. So I think that that's helping us there.
It was the second one.
Well just in terms of where you're you're sort of holding up your customer network builds would they are they.
Byddai being in the past right, yes across the board. We've had many customers that are actually offering to pay expedited fees are offering to pay for increased component costs to make sure that they secured demand.
Great. That's helpful. Thank you.
Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Hi, Hi, Thanks for taking my question.
<unk> provides so let's take a quick clarification on the pricing table.
I would think I'm, a big time laying off this including Ottawa more thinking the popcorn.
I will stay calm, but iced tea and then I put <unk> immediately.
Hey in English input costs would need probably take long, though because the unit could evoke the contacts and I've got tunnel.
I'm really sorry.
Can you repeat the question, we're having a little bit of audio challenges.
Uhm.
Cost inflation.
The logistics and expect a T.
Would that.
Off to the NATO immediate T as Hyatt input costs would probably take longer because you might need to revoke the contact with customers.
Yeah, I think they.
The answer to that question is in some places on our business we are implementing expedite.
Sort of a freight surcharge fee that we can get to a little bit quicker obviously.
And some of our contracts.
We have contractual language that limits, our ability to potentially do that.
So obviously, it's a pretty big mixed bag across each of our product lines as to the flexibility that we have to do that.
I think as Chuck mentioned in our enterprise business. We obviously have been pretty aggressive just on the base price increases I think the last piece that we would sort of mentioned that we talk about our backlog our backlog been at 3.3 billion. There's also.
Yeah.
Challenges that we have relative to the backlog and what we can do with our backlog from a replacing standpoint, so working through the backlog is.
We talk about.
Why this is going to take a little bit of time to work through is obviously some of that backlog is price.
On a historical basis that we can't just go out and change necessarily.
Go ahead and check one follow up.
Coming back with a question on the visibility on the outdoor <unk>.
He talked about joined <unk> enough men Roadmaps logic.
Lodge, a customer I just wonder b.
Timeline on both visibility in that business today.
Huddled up on basic.
Is it much longer do have visibility into.
Mike Please E S going looking forward into the future just any kind of there will be helpful.
Yes, I would say all the major.
Providers are being very <unk>.
Very cooperative and really upfront and supportive of of what we need to see visibility wise, because a lead time of parts and components. They understand they are experiencing the same thing. So we're getting probably I mean I wasn't here years past, but I'd say, we're getting I'd say at least twice the visibility if not three times a desert.
Really that we used to have like.
Like a full year out.
Got it thank you.
Thank you. Your next question comes from the line of semi Catherine from J P Morgan, especially need your question.
Hi, Good morning. This is Angela Jen answer farming cavity and congrats on the new C F O wrong.
So yeah, just one question I wanted to follow up on the outdoor wireless visibility when we saw the outlook from AT&T and Fries and then it looks like capex, primarily be wrapping and partying.
22.
At least it seems to imply double digit growth at least in parking and if not are <unk> are you seeing that similar starting a trend and how sustainable and it.
Double digit growth Kevin.
This ability and the outdoor wireless faith.
Well I would say.
We're not gonna be able to give you guidance on that at that level, but what I would say is.
Heating up and there's a lot to dividend five G. So I mean, this is going to be in a multi year.
So a decade, but it's significant.
Do you think it well uhm outpaced may outlets and your other segments are growing.
Again, we're not going to get that type of guidance and we just don't have that.
But it's.
Okay great.
Great. Thank you.
Alright.
Thank you. This concludes our question and answer session I would now like to tender conference back to ICL Chinese can I. Please go ahead.
Thank you very much for your support of Commscope and thank you for your questions today, and we look forward to talking to you an investor day coming up in December.
Thank you.
Thank you and I'm still still required a tiny tiny one response. Thank you for participating you may now disconnect.
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