CommScope Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

Key Takeaways

  • Core adjusted EBITDA jumped 37% year-over-year to $315 million in Q1 despite a 4% decline in core net sales, delivering the highest first-quarter margin since the ARRIS acquisition.
  • NICS segment net sales surged 51% to $285 million and swung to $58 million in adjusted EBITDA from a prior-year loss, marking a clear profitable turnaround.
  • CCS business saw net sales dip 2% to $823 million while adjusted EBITDA rose 50% to $148 million, driven by pricing discipline and operational efficiencies.
  • OWN and Home Networks faced significant headwinds, with net sales down 34% and 32% respectively and profitability under pressure as customers destock and U.S. carrier spending slows.
  • Book-to-bill fell to 0.68 and backlog declined modestly but remains robust at $2.4 billion, supporting management’s reaffirmed full-year core adjusted EBITDA guidance of $1.35–$1.50 billion.
AI Generated. May Contain Errors.
Earnings Conference Call
CommScope Q1 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

You for standing by, and welcome to the CommScope's 2023 First Quarter Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Massimo De Sabato, Vice President of Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Good morning, and thank you for joining us today to discuss CommScope's 2023 First Quarter Results. I'm Massimo De Sabato, Vice President of Investor Relations for CommScope. With me on today's call are Chuck Treadway, President and CEO and Kyle Lorentzen, Executive Vice President and CFO. You can find the slides that accompany this report on our Investor Relations website. Please note that some of the comments today will contain forward looking statements Based on our current view of the business and actual future results may differ materially.

Speaker 1

Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, I have a few housekeeping items to review. Today, we will discuss certain adjusted or non GAAP financial measures, which are described in more detail in this morning's earning materials. Reconciliation 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.

Speaker 1

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 Trevoy.

Speaker 2

Thank you, Massimo, and good morning, everyone. I'll begin on Slide 2. I'm pleased to share that we delivered core net sales of $1,660,000,000 And core adjusted EBITDA of $315,000,000 for the Q1 of 2023. As we anticipated in our February release, Seasonality, project timing, customer inventory adjustments and slower demand in certain areas of the business Negatively impacted our top line in the Q1 with core net sales declining by 4%. Despite lower revenues, core adjusted EBITDA increased by 37% compared to the prior year.

Speaker 2

For consolidated CommScope, which includes our home networks business, we reported net sales of $2,000,000,000 down 10% And adjusted EBITDA of $312,000,000 up 23%. I am pleased with our Q1 core performance In light of some near term challenges on the demand side, our execution has generated significant value as we have improved our year over year EBITDA as a Percentage of sales is the highest first quarter since the ARRIS acquisition. This performance is a direct result of CommScope NEXT initiatives. Also during the quarter, we reduced our leverage. The adjusted net leverage ratio of 6.6 times Was down from 6.9x at the end of the Q4 of 2022.

Speaker 2

As expected, Our book to bill defined in the Q1 as we reduced lead times in most segments back to historical levels and experienced some change in near term demand that includes substantial customer inventory adjustments. Currently, There is a level of uncertainty around the return of demand that we are closely monitoring. We remain in constant dialogue with And expect the lower book to bill ratio to last through the 2nd quarter at a minimum. Based on customer discussions and quote activity in certain segments, 2nd half twenty twenty three and twenty twenty four fundamentals remain strong in our CCS and NICS segments. We believe the short term adjustment will give way to long term demand as network and fiber build out is still in early innings.

Speaker 2

However, we are closely monitoring the expected recovery as our early second quarter order activity remains low. Despite the lower book to bill, our core backlog ended the quarter at $2,400,000,000 roughly $1,000,000,000 higher than our backlog at the end of 2020. Although the environment remains challenged, based on current visibility, including customer discussions and quote activity, We maintain the expectation to deliver core adjusted EBITDA in the range of $1,350,000,000 to $1,500,000,000 for the full year 2023. With exit rates in the second half projected to strengthen over the first half, Early analysis indicates that 2024 remains on track to deliver within guidance as well. As we have indicated before, Our full year 2023 core adjusted EBITDA range had already considered challenging market conditions in the first half.

Speaker 2

Our guidepost confirmation is predicated on customers delivering strong order rates in the second half per discussions we are having with them. With that said, we are using this opportunity to address our cost structure, including evaluating opportunities to manage improved efficiency in our period overhead costs and accelerating our CommScope NEXT cost initiatives. Before turning the call over to Kyle, I'd like to talk about expectations of our business position as we move further into 2023. As we indicated throughout last year, We believe CCS has strong market tailwinds and that we are at the beginning of a multiyear build out of fiber cabling connectivity. Orders were down in the Q1 and early Q2 as customers navigate the global economic uncertainty, high inventory levels and are shortened lead times.

Speaker 2

However, as we look to the future, we expect the 2nd quarter to continue to be supported by our backlog and expect the stronger second half of the year. It should be noted, second half revenue will be driven by Significantly stronger order rates versus the Q1. We are well positioned to deliver against significantly higher demand. We have aggressively invested in our internal capacity to enable CommScope to take full advantage of carrier footprint expansion driving fiber deeper. In addition, we are well positioned to serve demand for the 1,000,000,000 of dollars in expected government subsidies to help close the digital divide.

Speaker 2

In fact, last month, we were pleased to host the Honorable Secretary Raimondo of the United States Department of Commerce And the Governor of North Carolina, Rory Cooper, among others, announcing the expansion of our fiber optic cable manufacturing in North Carolina. U. S. Secretary of Commerce, Gina Raimondo said, as we've seen, we can produce materials needed for broadband deployment right here in America. With today's announcement of a $47,000,000 investment, CommScope is demonstrating its commitment to our once in a generation infrastructure movement.

Speaker 2

Additionally, our innovation engine is fully engaged to deploy the products that will enable all of this to come to fruition, Specifically designed to reduce installation complexity, save time and train the labor force faster. We continue to design our connectivity and cabling portfolio with these themes in mind. And we believe our innovations are driving strategic wins in the market. More recently, we announced our Heliarc fiber optic cable optimized for rural connectivity. This innovative new cable and our capacity investment will support an additional 500,000 homes passed per year.

Speaker 2

Being smaller and lighter, it will give our customers the ability to deploy cable faster and have an overall lower cost of deployment. All said, in the years to come, we view our continued technology innovations, capacity investments And customer demand will drive incremental opportunity for CCS, and we remain bullish for medium and long term growth. Turning to NICS. The business has significantly improved compared to the same time last year. We believe it has turned a corner and is anchored on a trend of profitability that we expect to continue going forward.

Speaker 2

Evidenced in the $58,000,000 of adjusted EBITDA delivered in the Q1. Over the last two quarters, The NICS segment is on an annualized EBITDA run rate of $229,000,000 We're seeing signs of chip supply constraints loosening in the market and expect gradual relief throughout 2023. Additionally, NICS ended the quarter with significant backlog supporting the Ruckus And ICN Businesses. We continue to invest in services and recurring software as part of the segment's transformation growth initiatives. I'm extremely excited about the future of NICS as a business that has been a large benefactor of our CommScope NICS program.

Speaker 2

For the remaining core CommScope Businesses, OWN and ANS, while their overall growth potentials may be more muted, Our innovation engine isn't slowing down. In OWN, we mentioned in the latter part of 2022, We fully contemplated the decline in U. S. Carrier capital spending into our overall core CommScope guidepost. And while this may present headwinds for 2023 revenue and adjusted EBITDA performance in the business, we expect some level of offset driven by share gains from our new technologies.

Speaker 2

This includes the Mosaic antenna solution as well as opportunities to deliver high efficiency passive antennas in energy cost conscious Regions such as Europe. Finishing with ANS, as we have discussed, the segment has transition to a leading supplier of edge related products, including RPD and RMD nodes as well as amplifiers. As we announced earlier this year, we shipped more than 1,000,000 RF amplifiers to top cable operators in 2022, demonstrating our global leadership in DOCSIS and access networks. In addition, we have developed with Comcast And FDX amplifier that will be used as their next generation amplifier as they move to 10 gs. In our legacy products, We continue to support our strong installed base.

Speaker 2

We continue to have opportunities in our legacy CMTS products to gain market share, especially outside of the United States. In addition to our strength in legacy technology and edge products, We are developing a virtual CMTS alternative. Based on the broad product portfolio, ANS is well positioned to support customers Across all technologies from head end to the edge. In Q1, the EBITDA results of the A and S business were impacted by the seasonality of the business, But we expect the segment to continue to improve through the rest of the year. And with that, I'd like to turn things over to Kyle to talk more about our Q1 results.

Speaker 3

Thank you, Chuck, and good morning, everyone. I'll start with an overview of our Q1 2023 results on Slide 3. For the Q1, consolidated CommScope reported net sales of $2,000,000,000 a decrease of 10% from the prior year, driven by declines in OWN and Home, partially offset by strong mix growth. Adjusted EBITDA of $312,000,000 increased 23%. Adjusted EPS Was $0.35 per share, increasing 35% from prior year.

Speaker 3

This is in line with our comments in the 4th quarter call, indicating that the Q1 was going to be down sequentially due to seasonality, customer inventory adjustments and lower demand. For Core CommScope, net sales of $1,660,000,000 declined 4% from the prior year And adjusted EBITDA of $315,000,000 increased 37%. The increase in adjusted EBITDA Against the backdrop of lower sales was attributable to CommScope NEXT initiatives focused on operational efficiency and price. Also, I would like to mention, as reported in the press, we experienced the cyber incident that resulted in minimal impact to the business operations. Our historical investments in business continuity and IT system resilience allowed us to minimize impacts from an aggressive attack.

Speaker 3

We also learned some lessons and have implemented several new systems and tools to significantly minimize the probability of additional incidents. Core CommScope backlog continued to decrease and ended the quarter at $2,400,000,000 A decrease of 17% versus the end of 2022. Core book to bill for the quarter was 0.68. We are still roughly $1,000,000,000 above our December 2020 backlog levels that provide some offset To lower short term order rate. Turning now to our segment highlights on Slide 4.

Speaker 3

Starting with CCS, net sales of $823,000,000 decreased 2% from the prior year. Net sales for our network, cabling and connectivity product line increased year over year. This was more than offset by a decrease in our building and data center connectivity product line net sales given typical seasonality continued inventory adjustments in the channel. However, as mentioned, CCS customer conversations remain bullish On medium and long term growth. CCS adjusted EBITDA of $148,000,000 Increased 50% from the prior year, primarily driven by our CommScope NEXT initiatives, including cost efficiency and pricing.

Speaker 3

NICS net sales of $285,000,000 increased sharply by 51%. From a business unit perspective, Ruckus led the way, increasing 57%. The NICS business is still seeing chip Supply constraints, but the constraints are loosening and we expect the situation to improve as we move through 2023. Nick's adjusted EBITDA of $58,000,000 improved from negative $14,000,000 in the prior year, primarily driven by stronger demand and better pricing. The last two quarters is more indicative of Nick's performance moving forward and the LTM results.

Speaker 3

We continue to be excited about the growth opportunities in NICS as we continue to invest heavily in R and D for Ruckus And once so, demand remains strong in mix as we ended the Q1 with a backlog of approximately $700,000,000 OWN net sales of $258,000,000 decreased 34% from the prior year And across all business units. This was expected as North America service providers indicated significantly lower spending from 2022 to 2023. In addition, the Q1 revenue was impacted by customer inventory adjustments that will spill into the Q2. OWN adjusted EBITDA of $60,000,000 declined 16% from the prior year. As previously indicated, we view the long term opportunity for OWN as having single digit growth.

Speaker 3

That being said, we believe 2023 presents anticipated headwinds that will drive OWN's Top line to decline this year. The headwinds are primarily driven by the expected reduction in North American operator capital expenditures And customer inventory adjustments. This decline was partially offset with new product innovations discussed throughout the last few quarters, such as our Mosaic Antenna solution. During the quarter, we saw our first meaningful orders of the Mosaic Antenna with large service providers. It's also important to highlight that the lower North America service provider spending has been previously contemplated in our full year 2023 core adjusted EBITDA guideposts.

Speaker 3

ANS net sales of $299,000,000 Decreased 6% from the prior year due to project timing. A and S adjusted EBITDA of $50,000,000 Declined 33%, primarily driven by lower revenue and product mix, which essentially represents a shift in customer spending Toward more hardware centric and lower margin products like our nodes and amplifiers. We expect that ANS will deliver stronger EBITDA quarters The rest of 2023 as project timing is second half weighted. Finishing up the segments with Home Networks. Home net sales of $337,000,000 declined 32% from the prior year across all business units, driven by customer inventory adjustments and lower demand.

Speaker 3

Home adjusted EBITDA of negative $3,000,000 Declined from $23,000,000 in the prior year as a result of the lower revenue. We continue to work on the transformation initiatives in home networks, including near term cost reductions. We continue to look for the right separation opportunity for the Home business. Turning to Slide 5 for an update on cash flow. As indicated on our prior call, we expected the 1st quarter To be a use of cash because it is our 2nd highest interest paying quarter and the timing of our annual cash incentive payouts.

Speaker 3

That said, for the Q1, cash flow from operations was a use of $46,000,000 And adjusted free cash flow was a use of $40,000,000 20 23 cash flow from operations Declined from the prior year because the majority of our annual cash incentive payment occurred in the Q2 in 2022. Our cash balance declined $71,000,000 which included a use of $50,000,000 to buy back debt. Excluding the buyback, cash balance declined only $21,000,000 We expect to generate meaningful improved free cash flow for the full year of 2023. As we indicated on the last call, we would expect the midpoint of our EBITDA guidepost For 2023 to a little over $400,000,000 to $500,000,000 of adjusted free cash flow for the year. Turning to Slide 6 for an update on our liquidity and capital structure.

Speaker 3

During the Q1, our cash and liquidity remained strong. We ended the quarter with $327,000,000 in global cash and total available cash and liquidity of over $1,000,000,000 We did not draw on our ABL revolver during the Q1 of 2023 and therefore ended the quarter with no outstanding balance. In the Q1, we executed the debt buyback program and repurchased $57,000,000 of our long term debt For cash consideration of $50,000,000 To add more detail, we repurchased $47,000,000 Of the 8.25 percent senior notes due 2027, dollars 7,000,000 of the 6% senior notes due 2025 And $3,000,000 of the 7.125 percent senior notes due 2028. We also paid the required $8,000,000 of term loan amortization during the Q1. The company ended with an adjusted net leverage Of 6.6, which was below where we ended 2022.

Speaker 3

Going forward, we intend to continue to reduce leverage And we'll buy back securities opportunistically across the breadth of our capital structure when we see appropriate returns. I'm now turning to Slide 7, where I will conclude my prepared remarks with some commentary around our expectations for the remainder of 2023. Although our external environment remains challenged with lower order rates in the short term, We still expect to deliver 2023 adjusted EBITDA in the range of $1,350,000,000 to $1,500,000,000 Again, the midpoint of this range already contemplates a relatively flat year over year top line growth. This guidance is dependent on the recovery of our order rates in the second half, particularly in our CCS and OWN segments. As Chuck mentioned, we are implementing cost actions, including accelerating certain CommScope NEXT efficiency initiatives.

Speaker 3

The magnitude of this program will be dependent on how we see orders evolve over the next quarter. We expect 2nd quarter core net sales and adjusted EBITDA to be generally in line with the Q1, an improvement in the second half of the year as we expect to see a ramp in orders and cost actions. As we continue to stress, as a result of project timing and mix, Our business should be viewed on an annual performance basis rather than quarterly. And with that, I'd like

Speaker 2

to give the floor back to Chuck for some closing remarks. Thank you, Kyle. Despite the uncertain near term economic environment, as Kyle and I have mentioned during our prepared remarks this morning, We believe that our backlog and CommScope NEXT initiatives provide a strong foundation for the company to continue to grow and create value. I'm pleased with our team's performance in the Q1, and we will continue to manage the things we control. Our profitability profile has dramatically improved since the Q1 of 2022, driven by efficiency projects and pricing.

Speaker 2

CCS and NICS are a testament to that progress as we have improved those two segments' EBITDA by $121,000,000 over the same period of last year. We continue to monitor the demand environment across all segments. We feel positive about the medium and long term environment, especially in CCS, where fiber build out has tailwinds. With that said, we are experiencing a pause in orders As customers deal with recessionary impacts on their business, including inventory management, our teams are committed to aggressively and I'd like to thank you for your interest in supporting CommScope And belief in our ability to continue to drive transformative change, which we believe will continue to unlock significant value for our shareholders. And with that, we'll now open the line for questions.

Operator

Thank you. Our first question comes from Steven Fox from Fox Advisors LLC. Your line is open.

Speaker 4

Hi, good morning. Two questions, if I could. I was wondering if you could first off provide a little more color on the customer inventories You see it on the owned segment and the CCS side, in terms of how they've improved, What is the expectation for working them down, etcetera? And then secondly, when we think about further improvements And EBITDA from next initiatives, can you sort of give us a sense for how many dials you could sort of Adjust depending on what the demand environment looks like in the second half to maybe stick to the EBITDA guidance for

Operator

the full year? Thank you.

Speaker 2

Thanks, David. Look, I think our customers bought a lot in 2022 due to like the ramping up of their build outs and the Supply chain shortages. And I think over the last two quarters, there's been a lot about destocking. But I would say we also see some places where the demand is lower as people kind of think about and digest the current macro environment. But I'd say a large majority of our customers are pointing to a strong rebound in the second half.

Speaker 2

The other thing I think that's affecting us is the lead times Are much lower than they've been in the past. We were having lead times of 6 months For some product lines and now they're like 2 to 4 weeks. So I think that's also affecting their inventory.

Speaker 4

And in terms of the pipeline yes, sorry.

Speaker 3

Yes, I'll take the second part of your question. Just on the other CommScope levers, CommScope Next levers we have, I think we clearly feel like There is cost opportunities in the business depending on the demand environment. I think some of those New initiatives, but some of those also are just accelerating initiatives that we've already identified. And I think as we said in the remarks, as we will dial Those levers in as we see demand unfold here in the next quarter or so.

Speaker 2

And Steve, I would just follow-up on my answer. I would say it's also relatively highly dependent on the business. In our enterprise businesses, we have really good visibility. But in our service providers, I would say the visibility is less. That being said, we're in a constant dialogue with them about their inventory levels and we have some insight With the service providers, but not as much as enterprise.

Speaker 2

So that gives us a little more confidence in what we think is happening in the second half.

Speaker 4

Great. That's helpful. Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Simon Leopold of Raymond James. Your line is open.

Speaker 5

Thanks for taking the question. I wanted to maybe unpack a little bit about the trending in CCS, Given that some of the opportunities you're highlighting like the government opportunities, I feel are more longer term And I really want to get a better understanding of just the setup for 2023 and the recovery in the second half, if I might. It does seem to imply some kind of hockey stick improvement in the second half. And I just want to make sure I'm not extrapolating or putting Too much weight on that one segment in your full year expectation. If you could help me understand that.

Speaker 5

Thank you.

Speaker 2

Yes. So I'd start by saying our customers do remain bullish, but I think we said in our script, we're going to we expect Slightly better second half than first half. I wouldn't think like a very strong hockey stick. And I think we said the 2nd quarter is more flattish compared to the first. But related to your other comment, our customers do remain bullish medium and long term.

Speaker 2

We also think related to government spending, RDOF from my perspective is probably 20% to 40% Where it's going, so that's going to continue. And I think there's a lot that's Coming would be, but as you say, I think that's more of a 24 type number. I would also comment that the cable business is actually strong and we continue to pretty much sell what we can make. But the connectivity is really where we're seeing the softness, and we think that's more to Our end customers finding labor or maybe slowdown or not going as fast in projects as they thought.

Speaker 5

And then actually anticipated my follow-up. I think, on the last conference call, you had talked about A and S as a segment Being relatively flat to maybe slightly up in 2023, it looks like a slow start. But when I think about the upgrade activity and the demand for amplifiers and nodes, I would think the demand environment is pretty good. I wanted to check How you feel about the full year setup for A and S? Thanks.

Speaker 3

Yes. I think in our comments, we talked about the fact that A and S There's definitely going to be second half weighted. A and S is just a quarter to quarter is a lumpy business based Project and timing of those projects. So we definitely believe that A and S is going to have a much better second half Then first half and that's in many cases projects that we have in hand that we just have to execute against.

Speaker 2

The other thing I would add to that, Simon, is we're well positioned with our RPD and R and D nodes As well as the amplifiers and that business is growing fast for us. And I would even go as far as to say, our legacy business is still Very profitable and that's we're growing share outside of the United States. And then in addition to just the business That way, we're also developing new products with the virtual CMTS. And as you read in the Press release. We're developing the FDX amplifier with Comcast, that I would say further positions us as a leader in that space.

Speaker 5

Great. Thank you very much.

Operator

Thank you. One moment please. Our next question comes from the line of George Notter of Jefferies. Your line is open. Again, George Notter of Jefferies.

Operator

Your line is open.

Speaker 6

Hi, there. Thanks very much. Hey guys, I guess the question I have here is, I'm really surprised by the strength of the EBITDA and margin performance in the business Given the softness in the top line and I appreciate your comments about how the NEX program It's driving improvement. At the same time, I feel like the NEX program has been around for a few years. I guess my impression is that that business has been kind of ongoing.

Speaker 6

And so I'm getting back to just where the EBITDA margin performance is coming from. I guess I assume some of it is higher pricing, this year kind of keeping While input costs are rolling down, I mean, is that the narrative here that we should be thinking about or is there something else to play that I should be better understanding?

Speaker 2

Well, I have several comments. I'd start by saying CommScope NEXT went into effect at the end of 2021. And when we really think about that, I mean, it's only like a year and a half almost old. And when you think about where we're going with the general manager model, it allows us to see inefficiencies that's Caused by our former matrix structure. I mean, the matrix structure, there's it just builds distrust between the business units and the central functions And it causes for a lot of, let's say, shadow organizations.

Speaker 2

So we've seen a lot of opportunities to take out cost and we continue to see those. I would also say process mapping allows us to minimize the waste and improve the processes. And related to supply chain, I would say that the current where we are with supply chain constraints, although they're loosening and moderating, I mean that's prevented us from really addressing our direct materials. This is really about a cultural change in the company And having our business leaders make an impact. I would also emphasize the NICS turnaround At a $72,000,000 increase in EBITDA year over year for the quarter, I mean, it just shows A lot that's going on in that business.

Speaker 2

So I think it's just we're managing our business with a GM mindset. We're changing the culture and we're getting people to pay attention to waste. And I think there's a lot of opportunities here.

Speaker 6

Got it. Okay. So then I assume improvement in input cost is not a factor in the EBITDA improvement this

Speaker 3

No. I mean, I think the pricing that we talked about last year, we were calling back some of the inflationary impacts. We're not seeing massive benefits on input costs at this point in time.

Speaker 7

Okay, super.

Speaker 6

Thanks very much guys. I appreciate it.

Operator

Thank you. One moment please. Our next question comes from the line of Matt Niknam of Deutsche Bank. Your line is open.

Speaker 8

Hey, guys. Thank you for taking the questions. Just 2, if I could. First, on the core EBITDA targets that you reaffirmed for 23. I'm wondering, can you achieve the targets with accelerated cost efficiency measures if orders don't Snap back as contemplated or as you anticipate in the second half of the year.

Speaker 8

And then maybe a follow on in terms of free cash flow, Just wondering how we should think about the cadence over the next several quarters. And Kyle, I believe you reaffirmed the $400,000,000 to $500,000,000 expectation for adjusted cash flow. Just want to make sure Okay. Thank you.

Speaker 3

Yes. So let me take the first part of the question. There's always a balance between seeing what's happening on the demand side and managing our costs. I think we feel like there's room if the demand doesn't bounce back that we've got cost levers. Obviously, that's going to depend on what happens with demand and what type of changes we see.

Speaker 3

So I think We feel like there's still levers to pull on the

Speaker 2

cost. Doug, just

Speaker 3

on the free cash flow, I think as we talked about, Q1 is usually use of cash. We should build cash in Q2, Q3, Q4. The only thing that really impacts majorly the timing is just our interest payments. So the Q3 is our highest interest payment quarter. So I'd expect building cash in Q2,

Speaker 7

maybe a

Speaker 3

little bit impacted by just the timing of the interest Payments in Q3 and then continued build in Q4, that gets us to that 400 to 500 number that we've been talking about.

Speaker 8

Okay, great. If I could just squeeze in one follow-up on the order rates. As you think about the improvement in the second half of the year, Any sort of order of magnitude? Are you thinking maybe flattish with year ago levels? Like I'm just trying to get a sense of how meaningful That order improvement is that at least is being initially contemplated in the commentary?

Speaker 3

Yes. I don't think we're going to talk about the specific numbers, but I think as we Mentioned in our commentary, it needs to be there needs to be a pretty nice rebound in our order rate from what we saw in the Q1. Clearly, the Q1 being impacted by the things that Chuck talked about, the inventory adjustments, the reduction of our lead times, And clearly some of the project timing. So we're not going to give numbers, but yes, I think we'd have to see some strong

Speaker 8

Rebound. Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Anna Gosco of Bank of America. Your line is open. Pardon me, Anna Gosco of Bank of America.

Operator

Your line is open.

Speaker 9

Hi. Thanks very much. So Kyle, just on the free cash flow, what is your planned use for that free cash flow?

Speaker 3

Yes. I mean, I think as we've been talking about, we want to continue to deal with the debt And continue to look at opportunities to address the debt. Clearly, we Took some steps in Q1 with some buybacks, and we'll continue to opportunistically look at Places that we can use the cash to continue the delevering and addressing the debt.

Speaker 9

Okay. And then with regard to the first Surety that you've got is 2025. Any plans or potential to refinance that to push that out?

Speaker 3

Yes. I think as we think about the maturities and the debt, I think the first thing is we obviously are very aware of the fact of the maturities and particularly The 25% and 26%, we clearly Are looking at opportunistic things that we can do from a market standpoint. So I think that's an ongoing conversation. I think with that said, a couple of things. Number 1, we feel like we've still got we've got some time.

Speaker 3

Number 2, We're going to generate some cash, which allows us to deal with some of those maturities. So again, we're aware of it. We're focused on it and we're looking for the right time to deal with that, but also Have some cash coming in and some time to deal with those even the 25s.

Speaker 9

Okay. And then finally, just wanted to on 2024, if I heard you It sounds like you guys think that you're on track to potentially reach the 2024 guide. So from a deleveraging standpoint, it would sort of be more of the same potentially with some more momentum in 24. Is that accurate? Yes.

Speaker 3

I think that's fair. Clearly, what we see in the second half of the year with the recovery of the demand is Impact that, but based on what we're hearing from customers, I think we feel like the exit rates in Q4 will be relatively strong, which will set us up for the 24 guideposts.

Speaker 9

Okay, great. Thanks so much.

Operator

Thank you. One moment, please. Our next question comes from the line of Amit Gareiani of Evercore, your line is open.

Speaker 7

Yes. Thanks for taking my question. I have 2 as well. I guess, First one, maybe the negative $40,000,000 free cash flow, I'd love to understand how is that versus your own internal expectations? And then you see this ramp towards $450,000,000 ish at the midpoint of your guide.

Speaker 7

Is there a way to think about how much of that is driven by better working capital improvements versus better profitability, That is pleasing to you

Speaker 2

in general. Well, I think

Speaker 3

as we mentioned in Q1, we have some headwinds that just normally hit us in Q1. Number 1 is a large interest payment quarter. The second is our cash incentive payment goes out, which is not insignificant. So as we go through the rest of the year, we'll be driving improved EBITDA performance As well as couple of the quarters, we'll have lower interest payment quarters than Q1. I think In our targets, I think as we've talked about in the last couple of calls, we don't have large working capital improvements built in there.

Speaker 3

I think we continue to manage inventory levels that we think it's excess, but it's going to take us a little bit of time to get That inventory down. So overall in those numbers, we don't have significant reductions in working capital built in to get to those targets.

Speaker 7

Got it. That's super helpful. And if I could just follow-up, one of the questions I think folks are sort of struggling with right now is just, you're talking about a very Strong back half recovery, I think if I take your full year assumptions and you do put assumptions, right? You're talking about a very strong back half recovery, while I think there's a broader worry that we might enter into recession and at least a lot of enterprise companies are down ticking more versus not. So, not to make you repeat everything you've said, but I'm just going to take, what gives you confidence that you can see this back half recovery?

Speaker 7

And is that recovery going to be across both enterprise and service provider market? Or Is there one space where you're seeing it better, but just anything on the back half strength and why you're convicted there would be helpful?

Speaker 2

Yes. Look, obviously, we're cautious as order rates haven't picked up to the level we expected them to. But with that said, the customers remain bullish on the second half, as number 1, government funding, specifically RDOF continues. And I'll also say the inventory that they have on hand will position us continues to get better, Let's say as that gets adjusted, that's going to help us. And also on the enterprise businesses, I would say the quote activity has improved a lot Since the Q4 and which indicates to us a stronger second half.

Speaker 7

Perfect. Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Shannon Cross of Credit Suisse. Your line is open.

Speaker 10

Thank you very much.

Speaker 9

I was wondering if you could talk

Speaker 10

a bit more about the composition of the backlog. How we should think about how the backlog is priced, if there's opportunity to Increased prices on that as you start to fulfill the backlog? Just I don't know, whatever you can give us in terms of details. Thank you.

Speaker 3

I mean, I think the composition of the backlog, we feel comfortable with the backlog. Our backlog It contains the price increases that we put in place last year to offset inflation. I don't think we're looking at the backlog as an opportunity to Get pricing. I think we're always looking for opportunities to make sure that we're managing price in relation to material cost And input costs, but I think we feel good about the backlog from a pricing perspective, I don't think we look at that as an opportunity.

Speaker 10

What about the stability of the backlog? I mean, How contracted is it? Have you seen any of it dissipate?

Speaker 3

Yes. I mean, I think the way to answer that is, We haven't clearly, we've seen some cancellation in our backlog, but nothing significant. I think we feel The backlog and the validity of that backlog to be pretty solid just based on the fact that we've gone through a pretty Interesting Q1. And although we've seen some cancellations, nothing that we would consider to be significant.

Speaker 10

Okay. And then I guess my last question is just regarding your cost restructuring plan that you have in place and The ability to accelerate it. I'm wondering like how long once you make the determination assuming that things stay weak To reduce costs, how quickly can we see that flow through the P and L? I'm just, again, trying to figure out the Ability to remain or your confidence level and your ability to remain within your EBITDA range? Thank you.

Speaker 2

I would just say, look, we believe there's always a balance between taking costs out and investing for growth. We have, I would say, strong opportunities mid term and long term. And the investments the initiatives return on investments are very strong. With that We believe there's the opportunity to drive efficiency and take cost out including period overhead. We're thinking about a number now that we're looking at doing, just in anticipation of Potentially is not coming back the way we want it to, and we will be doing that very quickly.

Speaker 2

So.

Speaker 10

Thank you.

Operator

Thank you. One moment please. It looks like we do have time for one more question. One moment please. Our next question comes from the line of Meta Marshall of Morgan Stanley.

Operator

Your line is open.

Speaker 11

Great. Thanks. I guess just in terms

Speaker 10

of do you feel as

Speaker 11

if kind of the improvements that you've Seeing to date, have largely captured the pricing increases or is there still kind of further benefit we should see from margins from kind of the pricing actions that you guys have taken? And then second, you talked about kind of the Mosaic traction, but if we could just get an update Some of the other new initiatives that you have either OneCell or you spoke to kind of some of the new fiber you have, just traction with some of The innovative parts of the portfolio would be helpful. Thanks.

Speaker 3

Yes. I'll answer the first one and I'll give the second one to Chuck. So, I think on the pricing side, We were we went through our inflationary price increase last year. I think That pricing is essentially built into Q1. Our backlog contains the price increases.

Speaker 3

I don't think we feel in the short to medium term That there is a lot of upside to pricing. I think we feel like we're balanced both from an Input cost perspective in a competitive standpoint. So I don't think we feel like in the short to medium term, there's a lot of opportunity there.

Speaker 2

Well, thanks for the second half of the question, Meta. In terms of new product introductions, I'll be really excited about Heliarc. It's a rural fiber optic cable that we were able to show to United States Secretary of Commerce, Raimondo, when she was at our site. The diameter is half of what it was. So it's green and we could ship more out faster installation.

Speaker 2

Also in the CCS part of our business, we have Novoox, which is coming down the pipe again with all of our customers that we speak to the challenges that they have is, How do they train their people? How do they reduce installation times? And this Novoox product is going to get them both of that very easy Installation techniques and training, very minimal training, much faster installation. So we're pleased about that. We already launched part of it in Europe.

Speaker 2

We're going to be launching it in the U. S. Soon. In terms of the NICS business, We think about Ruckus 1, which is going to be a combination of a Wi Fi 7 product with cell service integrated When you start thinking about private networks, they're thinking about manufacturing 4.0 To get into manufacturing locations, to be able to use Wi Fi and cell service in buildings in one box, we see that as Yes. Very, very positive.

Speaker 2

And also, I would say on the A and S side, Our R and D, RPD, our virtual CMTS, this technology that we're Putting together gives our customers solutions that will fit them whatever path they choose, which is also very positive. So Those are things that we're seeing, some bright spots. On the home network side, they have telehealth that they're working on, which is called HomeSight. It's a nice product that allows to elderly people To or anyone, I guess, to be able to answer the telephone on their television, to be able to have doctors appointments through their television screen, And to be able to monitor them as they're in their homes. So we have quite a bit of innovation in all the different segments in addition to the Mosaic product.

Operator

Great. Thank you. Thank you. I'd like to turn the call over to Chuck Treadway for any closing remarks.

Speaker 2

I'd just like to say thank you for your interest in CommScope and for your questions today. And I hope you have the rest of the week as the rest of the week goes well for you. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great

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