Q2 2022 CommScope Holding Company Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the Commscope second quarter 2022 results conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your.
Telephone please.
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 make makowski head of Investor Relations. Please go ahead Sir.
Good morning, and thank you for joining us today to discuss <unk> 2022 second quarter results unmet Mccloskey has investor relations for Commscope and with me on today's call are.
Chuck Treadway, President and CEO , and Karl <unk> Executive Vice President and CFO you.
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.
Described in more detail in this morning's earnings materials reckon.
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 Dragline.
Thank you Mick and good morning, everyone I'll begin on slide two.
I am 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 include KOL networks, we reported net sales of $2 3 billion.
And adjusted EBITDA of $300 million.
As discussed over the last several quarters we.
We have taken actions to continue to grow the business and offset inflationary impacts.
Our second quarter results are a step in that direction as we have sequentially improved topline 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 one $1 5 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 six eight times to seven times seven two times by the end of this calendar year.
I am encouraged by our position as we move into the second half of the year.
As indicated by our guideposts for core adjusted EBITDA the ramp in the second half will be significant.
Our short term and medium term performance will be primarily driven by our Ccs and next segments.
Ccs has tremendous market tailwind and we're 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.
Nick's backlog grew 158% since the second quarter of 2021.
Our second quarter 2022, TTM book to Bill was one six.
Mix has operated at an adjusted EBITDA loss in the first two quarters of 2022, as we dealt with significant ship constraints as well as heavy development funding on new products.
We have better visibility to improved chip supply and our heavy investment in technology and new products will begin turning into revenue as we move through the second half.
I am very excited about value creation opportunities and mix for the short medium and long term.
And one 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 power shift.
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.
<unk> seen a balancing of the 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 E&S.
Our large installed base and customer relationships allow us to be on the leading edge of new hardware and software development as new architectures are selected and defined.
I'm now turning to slide three for a review of the second quarter and my priorities for Commscope.
Overall demand for Commscope products and solutions continues to be encouraging evidenced by the strong top line performance of our core portfolio growing net sales, 9% from the prior year and 8% from the first quarter.
Additionally, our growth would have been stronger if not for the continued semiconductor chip supply shortages impacting our business specifically in our E&S in niche segments.
There is significant uncertainty in the global macro economic environment.
Demand for core Commscope products and solutions remained resilient in the second quarter as backlog grew 5% from the first quarter ending at approximately $3 8 billion.
Despite our strong sales quarter core Commscope delivered a book to bill of one one.
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 Collin 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 in 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 and 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 multi year build cycle.
Mix represents a negative adjusted EBITDA contribution in the first half.
The business has experienced strong demand.
Mixed backlog grew 55% since the beginning of the year and delivered a second quarter book to Bill of one nine.
Revenue and profitability have been negatively impacted by semiconductor chip constraints.
We expect second half profitability improvement in mix as chip supply constraints improve.
Additionally, mixes investing heavily in new products services and software offerings and Ruckus in one cell.
Mix as some of our most exciting growth potential in the company as.
As demand increases for indoor networking and private as well as public wireless networks.
One.
<unk>, 28% of our first half adjusted EBITDA.
One first half net sales grew 14% from the prior year, primarily driven by site prep activities at the macro site.
I would note that site prep activities drove an increase in our integrated solutions business, which carries lower margin.
That said, we expect second half one 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.
This represents 26% of our course 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 <unk> 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 next and as was challenged with chip supply constraints in the first half.
In addition, as mix shifted to lower margin hardware products at the edge of the network.
We expect an improved chip supply and software mix for Ams that should improve net sales and profitability in the second half significantly weighted to the fourth quarter.
Finally, our homes segment represents 7% of our first half adjusted EBITDA and 20% of our first half net sales.
Home's contribution to the consolidated adjusted EBITDA performance of Commscope will remain in the mid single digit percentage level.
Significant progress was made in our Commscope next initiative.
Driving organic growth and operational efficiencies throughout the company are paramount to our Commscope next transformation.
Our capacity investments, thus far in Ccs had 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 increased 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 notebooks 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.
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 cost.
And the PON space there continues to be strong interest in our <unk> PON architecture.
Lab trials are expected to start during the third quarter and remain on track for expected commercial deployment growing next year.
And next we maintain our commitment to invest in ruckus in one cell 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 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 one cell I'm excited to discuss a significant new partnership in the one cell space.
A few weeks ago, we announced that we collaborated with Microsoft on developing a solution and our shakopee, Minnesota facility using our one cell 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 automation applications.
Together, we will market, our joint solutions and other similar applications.
And next we're investing over $200 million this year in R&D to further develop our ruckus in one cell products.
We expect to see some of the value from these investments in the second half of the year.
For one we have spoken about our continued innovation in the antenna space over the past few quarters.
Mosaic are 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 one where our investments in innovation are now paying dividends is in power management.
Power shift 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 and <unk> deployment is a primary focus of carriers.
Our investments in this industry, leading technology have positioned commscope power ship business.
Well.
And we are on track to double in sales from the prior year.
And E&S, we're investing in innovation to accelerate the next evolution of HFC networks.
We recently announced that Liberty Global has selected our remote Mac Phy device also called RMB node platform for DOCSIS four <unk>.
This will be the industry's first DOCSIS four <unk> DAA initiative in Europe , and it will leverage Commscope DOCSIS leadership.
Our end to end portfolio of 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 industrial technology is very strong we continue to feel that investing in future development as 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 four.
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 to and offset by declines in Nicks Aaas and home.
Growth in topline 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 and unfavorable mix offsetting another quarter of strong top line growth.
Adjusted EPS was <unk> 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 AAN asset mix continues to be impacted by semiconductor chip shortages.
This had a material impact on our second quarter revenue.
Despite continued challenges 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 and 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 yields.
Yielding a book to Bill for core Commscope of one one.
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 decline as lead times normalized with supply chain improvement.
Turning to our segment highlights on slide five star.
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 <unk>.
Compared to the first quarter Ccs grew 18% driven by demand for fiber products and pricing initiatives.
Ccs adjusted EBITDA of $169 million grew 36%.
As the segment benefited from the increase in volume as well as price.
As noted we expect continued margin improvement in our Ccs business through the balance of the year as price increases continue to work through backlog and the business drives operating leverage in our manufacturing plants as capacity ramps.
Second quarter adjusted EBITDA margin of 17, 1% was a 530 basis points improvement from the first quarter as our pricing actions and operating improvement again impacting our P&L.
Next net sales of $205 million declined 8% from the prior year and across both rockets and ICM.
Next adjusted EBITDA of negative $15 million declined by approximately $20 million from the prior year driven by lower volumes related to chip shortages.
Input costs, driven by inflation and our continued investment and rockets on one cell.
However, I would note that <unk> 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.
<unk> net sales of $391 million grew 9% from the prior year.
Driven primarily by price and our integrated solutions business.
One 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.
One margins will remain pressured compared to historical levels as we continue to work with service providers.
To offset.
<unk> net sales of $293 million declined 19% from prior year and across all businesses and.
In addition to supply constraints. The decline was also driven by a mix shift and a difficult compare to 2021 as the first half of last year was a strong period for customer projects looking for immediate bandwidth increases to support demand driven by the pandemic.
Adjusted EBITDA of $58 million declined, 32% driven by lower volume and the mix change to lower margin hardware centric products found in the network edge.
While E&S 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'll remind you that project timing and mix matter significantly to the segment's performance and we expect the bulk of the recovery weighted toward the end of the year.
Finishing up our segment performance with home networks.
Home networks net sales of $424 million declined 7% from the prior year as growth in gateways was more than offset by declines in video.
Adjusted EBITDA of $13 million declined 12% from prior year, primarily driven by lower volume due to chip constraints.
Performance for the quarter was in line with our expectations as the business was down sequentially.
Our operator efforts to separate the home business remain on hold given the uncertainty in the chip supply environment.
The limited supply environment, we will continue to drive uncertainty.
<unk> backlog was approximately $900 million.
At the end of the quarter.
Turning to slide six for an update on cash flow.
For the second quarter cash from operations was a use of $95 million and adjusted free cash flow was a use of $91 million.
During the quarter working capital continued to be a use of cash to fund the growth in our overall business.
The $157 million increase in working capital is primarily a result of increasing revenues and our desire to support our customer deliveries as we manage through chip shortages.
In addition, during the quarter, we paid out our 2021 incentive plan.
Similar to last quarter. This resulted in the usage of our ABL revolver to which we ended the quarter with $50 million of outstanding borrowings.
As we've mentioned previously we are prudently managing cash and temporarily leveraging the available credit at our disposal to support our rapidly growing business.
Consistent with our Commscope next plan and with the exciting high return growth opportunities. Both immediately in front of us and on the horizon. We are continuing to invest in our business given the company's strong liquidity position and near term profitability improvement.
Evident in this commitment to the company's long term growth future there will be approximately $162 million of R&D spend and $28 million of capital expenditures made during the quarter.
As we continue to drive organic growth.
Prove operational efficiencies and recover inflation through pricing actions, we expect positive cash flow generation in the second half weighted most significantly to the end of the year.
However, as we continue to grow the business, we will continue to invest particularly in working capital.
Turning to slide seven for an update on our liquidity and capital structure.
During the second quarter cash and liquidity remains 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 181 times an improvement from eight two times at the end of the first quarter.
With the previously mentioned EBITDA improvement in the second half we remain committed to meeting our year end target of net leverage in the six eight times to seven two times range.
Now turning to slide eight where I will conclude my prepared remarks with some commentary around our expectations for the remainder of 2022.
Market demand, coupled with our capacity investments continue to drive topline 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 as 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 maintained the expectation for the core Commscope business to deliver 2022 adjusted EBITDA in the range of $1, one 5 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 nine.
I am pleased with where we are in our transformation.
Although there are some challenges in the general market.
Core Commscope businesses held up well with a book to Bill of one one and continued growth in our backlog.
We will continue to monitor the demand environment, but we feel that commscope is well positioned because we delivered connectivity solutions.
Customers continue to place a high emphasis on connectivity and the quality of their connectivity.
We believe that many of our products and services will remain somewhat insulated from some of the broader challenges in the economy.
The focus our teams have on driving Commscope next initiatives are fueling organic growth pricing, new product development and operational efficiency.
Commscope next supported by our new segmentation and our general manager model provides a great platform for us to drive shareholder value.
We look forward to continuing the transformation journey as we head into the second half of the year.
Thank you for your support and interest in Commscope, We will now open the line for questions.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
I show. Our first question comes from the line of meta Marshall from Morgan Stanley . Please go ahead.
Great Thanks, and congrats on the quarter.
And in your commentary about kind of supply chain.
And commodity costs were maybe.
Yes.
More favorable than some of your.
<unk> network game 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.
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.
To improve I would like to comment, though that our supply chain team and engineers are just doing a great job and.
In redesigning where necessary and finding parts on the open market.
And I would say, we're also significantly improving our relationships with the chip suppliers, which has just given us a lot more visibility so.
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 during the second half or do you think you are getting to the place where you could be drawing down on inventory and then that's it for me. Thanks.
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 the app does the supply chain gets a little bit better.
Great. Thanks.
Thank you.
I show. Our next question comes from the line of to make Chatterji from Jpmorgan. Please go ahead.
Great. Thanks for taking my questions I guess just to start off.
I mean.
You're reiterating the full year guide.
You had to.
Strong quarter.
<unk> improvement in profitability in the back half.
James.
<unk> does silver level.
Outcomes for the second half. So I was just wondering in terms of the backlog that you have the price increases that you've made.
Managed to boss too.
What's sort of the.
The different outcomes.
Engender on in relation to hitting the low end or the high end of that guide, which is pretty wide for the second half.
From.
The.
I guess your presentation today I didn't see it seemed like you think some will keep tracking in line with the expectations. So maybe if you can also comment on where you are tracking data for that guide.
The full year that would be helpful and I have a follow up thank you.
Yes.
I think that as we've talked about.
In our prepared remarks as well as in the presentation.
We're just reconfirming the guidepost that we put out.
And with our current visibility we feel like.
Those continue to remain.
The appropriate guide.
And the change in half we would be.
We'd be telling.
Telling people that that was different so I think we believe that that's still the.
The range that we're going to be in and I think as it relates to.
Thinking about that guide clearly of the map.
<unk> tells us that we're going to have a better second half.
And as we've been talking about.
Our Q4 as we've implemented our price increase.
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 will see more in the second half of that price coming through.
Okay.
The other thing that was there.
Other thing I would add to that similar Gazette.
In the third quarter earnings report, we will give you a guide post for 2023.
Okay. Okay, that's great on the follow up.
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.
So for.
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.
You are more sort of minimum cash on the balance sheet at this point.
Let me start with kind of the overall recession question, and then I'll hand, it over to Kyle to speak more about liquidity.
I'd just say its very important to note that our demand is continues to be strong and I think it's important to say.
Taken to account that we are a networking connectivity customer.
Networking 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 one one and grew our backlog by 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.
<unk> to be <unk>.
Demand very strong.
Yes, I think specifically on the question about.
Cash.
I think as I.
As we answered the first question.
Sure.
As a few things happened as we start seeing a little bit improved supply chain position.
As we add capacity.
<unk>.
I think we will we will see.
A little bit of a <unk>.
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.
Telling people, we will continue to delever with that with that cash flow. So I think the second half.
The project better.
We are able to mitigate some of the inventory as the supply chain and our capacity comes online.
Thank you thanks for taking my questions.
Thank you.
And I show. Our next question comes from the line of George Notter from Jefferies. Please go ahead.
Hi, guys. Thanks, very much I guess I wanted to ask about the <unk>.
Cable and connectivity solutions business side, I think you said it grew 18% sequentially, which is.
Which is terrific but.
Hi, guys. Thanks, very much I guess I wanted to ask about the cable and connectivity solutions business. I think you said it grew 18% sequentially, which is.
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 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.
Thanks George.
Just as we think about you should roughly think of our growth has been in Ccs.
A little bit more than a third 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 were probably about two thirds 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.
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 is we're probably about two thirds of the way of having that stuff online and the rest will come on in the second half of the year and then we will be.
To be in a position to think about what the next investment is.
Got it and just for clarification, that's two thirds of the ramp as of right now early August or are you talking about two thirds.
For the full Q2.
Yes, it's sort of at the end of Q2.
Okay, great. Thank you.
Thank you.
And I show. Our next question comes from the line of Matt Mcmahon from Deutsche Bank. Please go ahead.
Hey, guys. Thank you for taking the question.
On cost inputs, we started seeing some downward movement in spot rates for some of your larger raw material inputs in recent months I'm wondering if that's provided any sort of incremental benefit.
In the second quarter, and I guess more importantly, any tailwind you're baking in from this in terms of relief on the cost side and raw materials in the second half of the year. Thanks.
I'll start and then Ken 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, maybe not at.
<unk> wants to add anything to that.
Yes, we don't really have in our and our thoughts about the rest of the year, we don't have a lot of.
Raw material reduction built into our into our forecasting.
We have had sort of flat off of the end of Q2.
Got it got it if I could just ask one follow up we're going to wait till next quarter's call for guidance formal guidance on 'twenty, three but I would think with the exit rate of $2 87, and core EBITDA. This past quarter, and then obviously a bigger step up coming in <unk>.
In terms of the guide posts you've put out previously related to 2023 I would think this kind of gives you a pretty good.
Exit rate and better confidence or visibility in those existing 'twenty three targets I'm. Just wondering if that's sort of a fair assumption or anything else to read into there for 'twenty three.
Yes, I think we're yes.
I think we're doing what we what we said we were going to do we're okay with our Q2, but work.
Have a lot of work to do.
And.
We're really focused on.
To continue to improve the business focusing on the second half and I think when we get to that point to talk about 'twenty three we will talk about 23.
Sure.
Still need to see where the second half.
Shakes out before we can start talking about 23.
Yes.
Great. Thank you.
Thank you.
And I show. Our next question comes from the line of Simon Leopold from Raymond James. Please go ahead.
Great. Thanks for taking the question I wanted to see if maybe you could discuss your business mix by a little bit by verticals in that.
Assuming youre seeing your strength, primarily from your service providers cable and telcos.
And I guess, what I'm trying to look forward of insight on your enterprise exposure from particularly in the cabling side, whether you're seeing evidence of sort of the weakening macro there any.
Any color you can offer talking about vertical exposure. Thank you.
Yes, I would say I would say on the enterprise side, what we're seeing right now is it just there's a demand for improved.
Let's say office experience.
Or just business experience.
The facilities that we're still seeing pretty strong demand, there and I would say on the.
On the Ruckus side.
We're really at the verticals, we're going after are.
Say, a little bit insulated from recession et cetera, because think about education, you think of our hospitality.
And the multi dwelling units apartment complex those are all pretty hot and those are our main segment. 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 and enterprise, but right now thanks.
<unk> seemed to be pretty strong.
Okay.
Thank you.
Thank you.
And I show. Our next question comes from the line of Steven Fox from Fox Advisors. Your question. Please.
Thanks, Good morning, a couple questions if I could first off it seems like there's a lot of as usual there is 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.
To the extent, we can quantify it or quantify it and then how that switches into the second half of the year and I had a follow up.
Yes, I think.
Clearly our Ccs businesses.
As you know.
Our high growth business.
Our higher margin businesses in the cases of Nicks and <unk> as we talked about are being most impacted from.
From a core perspective by the chip constraints.
We expect to see that.
He's 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.
<unk> and one a little bit, but when we think about.
<unk> profile Ccs is growing.
Very quickly.
And then our higher margin <unk>.
<unk> businesses are being impacted by chip constraints. So.
We expect that to be part of some of our second half lift.
Thanks for that and then in terms of the manufacturing expansion.
Just two other things one year largest competitors seem to.
<unk> <unk>.
Issues executing to their plan and they're in the recent quarter into this quarter.
Connectivity in cabling side I was curious if that impacted you in any positive way and then along is along those lines can you talk about what would tee up.
The next level of expansion what it would most likely be directed at would you need like.
I'm kind of customer assurances et cetera. Thanks.
Yes, I'll start and Tom can add if we feel there's something there I would say the good news for US is that we started.
Really early in terms of starting our capacity expansion those are coming online now 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 some incremental smaller capacity that we can invest then 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 our processes and we're going through that in detail to improve with what we have even with existing capacity.
Great. Thank you very much.
Thank you.
And I show. Our next question comes from the line of Rod Hall from Goldman Sachs. Please go ahead.
Yes. Thanks for the question I guess I wanted to come back to the comment I think Chuck you made it on on the move from.
Tap into active antennas and how that would drag revenue.
I don't remember you having made that before so I wanted to dig into that a little bit more detail. Maybe you did make it before so you can say, if that's something you'd said before publicly but.
I'm just curious at that.
Reflect <unk> 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 I think it is more of a bigger picture thing I don't want us to get ahead of ourselves compared to a <unk> ramp up I think thats important to note.
I would say that what 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 power shift and we don't 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 are starting to look at this thing more than just a niche product. We just can't we just can't.
Tie it out to a number yet, but we're watching that very very close.
And when do you have any idea of 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 'twenty three thing I'm just kind of curious when you think the contribution start to.
Big enough on the radar screen that will begin to see it in the numbers.
This is probably more 'twenty three I think we're going to start to see some in 'twenty two.
But it's going to be more impactful in 'twenty three.
Okay, and then I wanted to ask you on commodities come.
Come back to that just to clarify your response earlier.
We saw commodities improving quite a bit in Q2 than we were but then the margins kind of just came in line and I think what I take from your prior that prior question and answer you gave is that other things increased and kind of offset the gains that commodities provides.
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.
Our decrease I'm sorry decrease.
I think I think there's 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 the 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 come often in a commodity index.
I think the other piece of it is we're not reward we are sitting on inventory, which has a evaluation.
Yes that we would have to work through that so.
I think our point is at this point in time.
Puts and takes.
We're just not seeing a lot of down.
Down in our input cost prices, yet that may happen, depending on what happens in the general economy, but as we sit here today.
We're not seeing we're not seeing a net reduction in our input costs.
Great. Okay I appreciate that guys. Thanks a lot.
Thank you.
And I show. Our next question comes from the line of Sami Badri from Credit Suisse. Please go ahead.
Hi, Thank you.
We've been hearing a lot about ARPA fund contributions and allocations and I think you guys might be a beneficiary not only just ARPA funds, but also Argos could we just kind of characterize the contribution that these two government programs are contributing potentially to your revenues.
Sure I would say they are both in early innings.
Obviously art off a little bit ahead, I would say we're probably.
Low hundred millions in the R&R side.
And things are just really kicking off I believe.
And then when you.
When you put together your forecast or at least your guidance for the second half of 2022.
That assumes that these government programs begin to contribute more or could you still accelerate in the second half without these programs coming in.
I think we're really not guiding on a first half or second half we're looking at our guidepost in.
All our indications are exactly where we've been calling it and we believe we're right in the.
We're in and 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 <unk>.
A big driving factor, but could you kind of give us an idea on that.
A little more color on the on the growth of the 36% and our cable most of our cable stuff is not done in that facility would be more of the connector side that we're doing in.
In the Mexico location.
Just for clarification.
Okay got it thank you for the detail appreciate it.
Thank you.
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 <unk>, President and CEO for closing remarks.
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.
The conference will begin.
T to raise your hand during Q&A you can dial one one.
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