Good day, and thank you for standing by. Welcome to the CommScope Third Quarter 2021 Results Call. [Operator Instructions].

I would now like to hand the conference over to your first speaker, Mr. Russell Johnson, Vice President, Treasurer and Investor Relations. Sir, please go ahead. .

Good morning, and thank you for joining us today to discuss CommScope's Third Quarter 2021 results. With me on today's call are Chuck Treadway, President and CEO; Kyle Lorentzen, Executive Vice President and CFO; Tom Cloonan, Interim Chief Technology Officer; and Bud Watts, Chairman of the Board. .

You can find the slides that accompany this report on our Investor Relations website. .

Please note that some of our comments today will contain forward-looking statements based on our current view of our business, and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. .

Before I turn the call over to Chuck, I have a few housekeeping items to review. Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials.

Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results. All quarterly growth rates described during today's presentation are on a year-over-year basis, unless otherwise noted. .

I'll now turn the call over to our President and CEO, Chuck Treadway.

Chuck?.

Thank you, Russell, and good morning, everyone. Thank you all for taking the time to join our call this morning. I'm going to be starting on Slide 2. .

During the third quarter, core CommScope recorded net sales of $1.69 billion, a 6% increase over prior year. We achieved this top line performance despite shortages of manufacturing components during the quarter. Our core adjusted EBITDA of $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%. This strength was led by sales to the 3 leading North American mobile operators who continue to ramp up 5G-related macro cell site equipment deployments and infrastructure upgrades.

These operators are showing healthy demand for CommScope's base station antennas as well as other cell site infrastructure products, ranging from cabling and structural steel to power management solutions. And we also continue to make progress with our partner, Nokia, in commercializing our unique integrated active/passive antenna products.

These innovative products can help operators solve some of the most challenging aspects of 5G deployments, including footprint, weight, wind loading and speed of installation. .

In our Venue and Campus segment, revenue increased by 8%, driven by both our inside plant copper and fiber cabling solutions. We continue to see demand from data centers and a recovery in enterprise markets. .

In our RUCKUS business, we continue to see a healthy pace of new orders as RUCKUS backlog increased 31% in the quarter. However, our semiconductor allocations limited our ability to ship product and book revenue. .

And finally, our DAS and Small Cell business unit saw softer sales as compared to the third quarter of 2020. .

In our Broadband Networks segment, revenues declined by 4% during the third quarter. And as discussed in 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 in Broadband Network segment continues to be robust and is up 34% since the beginning of the year. In our Cable and Connectivity business, we are essentially selling everything we can produce.

We are also working hard to complete our Cable and Connectivity manufacturing expansion projects that we spoke about on previous calls. .

Moreover, we are seeing clear signs of CommScope's diverse portfolio of 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, prefer to direct their investment capital towards optimizing their existing cable plants.

For those customers, CommScope will remain a critical supplier of products ranging from software licenses and heading optics to access layer equipment. .

And our very large installed base of CMTS and optical nodes gives us a strong income with competitive advantage. Other operators are moving more aggressively to adapt new next-generation architecture solutions such as virtualization, distributed access architecture and fiber to the home.

For those customers, CommScope is equally well positioned given our fast developing suite of next-generation hardware and software offerings. This is an area where our long history as a cable equipment leader as well as our large installed base provides a competitive advantage. .

Operators understand that CommScope's new product offerings are not experimental, but are based on decades of hardened, optimized coding and are specifically designed to be backwards compatible with existing technology.

These and other factors help 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's largest cable operator, GCI, will use our RD-2322 device to support the deployment of Remote MAC-PHY. This cutting-edge product provides operators with the same field hardened and optimized code as previously described.

It is an all-in-one box, distributed CMTS solution that moves both the MAC and PHY layer functions out of the hardened -- out of the head end to a fiber optic node in the network access player. .

Also during the quarter, we announced that Liberty Global will deploy CommScope's high-density remote PHY shelf. This cutting-edge solution will enable this important European operator to push fiber deeper into its network and enjoy the benefits of the distributed access architecture.

These 2 customer wins demonstrate that 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 segment review with an update on Home Networks, which we consider noncore because our 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 are feeling the effects of supply chain disruptions across CommScope, our Home Networks business top line has been the most challenged by the global shortage of semiconductor chips. .

In addition to supply challenges, the business has also been negatively impacted by escalating prices of electronic components and freight. Because of supply chain constraints, our large Home Networks backlog continued to grow and remains above $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, our core backlog ended the quarter above $2.2 billion. .

The revenue growth and backlog build that we are achieving are direct evidence of the strength of our broad solutions portfolio. 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, our revenue performance was more than offset by significant headwinds 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 addressing these 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 are continuing to raise prices and take operational measures with the goal of offsetting 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 our large backlog of negotiated orders as well as the lag built into pricing adjustment provisions in some of our customer contracts, the flow-through impact of 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 inflationary impacts on our business through pricing and cost actions, I want to emphasize that CommScope is 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 or are ready for implementation. .

Additionally, we have now put in place the management processes and tools to track progress on each CommScope NEXT initiative. .

I'll now turn over the call to Kyle to provide further details on our third quarter results.

Kyle?.

Thank you, Chuck, and good morning, everyone. Before getting started on the overview of our financial results, I wanted to thank Chuck and the Board for giving me the opportunity to become CommScope's 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. .

My primary responsibility since joining CommScope a year ago has been to lead the transformation office and the CommScope NEXT initiative. From this perspective, it has become clear to me that CommScope has tremendous potential to create shareholder value. .

As we now move into the full implementation phase of CommScope NEXT, a key component of my role as CFO and a critical requirement for success will be ensuring that we have tight linkage between the financial oversight function and the goals of CommScope NEXT.

Clear and transparent financial management processes, combined with effective tools for tracking progress and driving accountability, will also be critical performance drivers going forward. .

I'm now turning to Slide 3 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, yielding a book-to-bill ratio of 1.1x. .

Adjusted EBITDA of $259 million decreased 24%, and adjusted EBITDA margin was 12.3%. Adjusted EBITDA included a $12.7 million charge for bad debt expense related to one customer in the Home Network segment. Adjusted earnings per share was $0.29 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 $1.69 billion. Core adjusted EBITDA declined 12% from prior year to $275 million, while adjusted EBITDA as a percentage of sales was 16.2%.

I'd remind you that the third quarter of last year benefited from a significant Broadband Networks software license sale of approximately $25 million. Normalizing 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 core business were again very solid, yielding a core book-to-bill ratio of over 1.1x. 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 cost and component availability environment, core CommScope net sales were ahead of prior year by 11% and adjusted EBITDA by 10%. .

Turning to Slide 4 for an overview of the supply chain situation. CommScope is feeling the impacts 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 of products with high content of various commodity and freight inputs.

As a result, component shortages in commodity and freight inflation are having significant revenue and cost impacts across all our business segments. .

Component shortages and, in particular, semiconductors, had 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, our order flow would have been able to support approximately $600 million of incremental revenue to what we now expect to ship for 2021.

Of this amount, approximately $260 million is related to our core business and the remainder of approximately $340 million is attributable to 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 have been most severe in the areas of key input commodities such as copper, steel, aluminum, resin, electronic components and freight costs.

While we have been dealing with input price inflation since the beginning of the year, these impacts accelerated during the third quarter. The net impact of input costs and freight inflation on the third quarter adjusted EBITDA in our core business was approximately $70 million. .

Although these inflationary increases may end up being transitory, the negative impact they are having on our business requires that we take significant mitigating actions now.

We have already started to increase prices to offset some of these impacts, and we will be implementing additional price actions across all our businesses throughout the balance of 2021 and into 2022. 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 cost increases. .

However, given the size of our backlog as well as the terms of our sales contracts, we are not targeting a full recovery of 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 that inflation is having on our business, we 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 an adjusted EBITDA basis for the core business. .

Turning to Slide 5 for an overview of our segment highlights and beginning with the Broadband Networks segment. Net sales of $780 million declined 4%, primarily driven by North America and Asia Pacific regions.

While we continue to see growth in our Network, Cabling and Connectivity business, this was offset by declines in Access Technologies and Converged Network Solutions. .

Adjusted EBITDA of $158 million declined 22%, primarily driven by lower sales volumes and rising input costs. We also faced a difficult compare in the third quarter due to a large high-margin software license sale that did not repeat.

Despite supply constraints and commodity cost inflation, on a year-to-date basis, Broadband revenues and adjusted EBITDA were up 14% and 18%, respectively. .

Overall demand in the business continues to be solid with our backlog for Broadband Networks over 50% more than the prior year. This continued growth -- demand growth and backlog build is particularly apparent in our Network Cabling and Connectivity business.

This business 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 to continue as operators push fiber deeper into networks and as the release of RDOF funds accelerates. .

As Chuck noted, during the third quarter, we continue to see a strong trend of cable operator investment in existing networks as well as continuation of the gradual trend of adopting distributed access network models.

We expect the investment cycle in 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 fiber deeper into networks as well as an accelerating pace of greenfield fiber network builds. .

Turning to Venue and Campus Networks on Slide 6. Net sales of $555 million increased 8% with strength across all regions. Segment growth was driven by our business connectivity infrastructure business unit, which supplies indoor copper and fiber cabling for enterprises and data center customers.

This growth was partially offset during the quarter by net sales declines at RUCKUS and in our DAS and Small Cell business unit. .

Adjusted EBITDA of $56 million is modestly due to a combination of volume increase and early progress on pricing initiatives, offset by input cost inflation. Backlog versus prior year period increased by over $430 million or 159%. And since the beginning of the year, backlog has increased by 148%.

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. Within the business unit, we continue to see a post-COVID recovery of commercial real estate and infrastructure project activity that is supporting new spending on indoor copper and fiber cabling.

These product lines also benefited from continued government stimulus spending for education and health care-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 cabling product lines.

In addition to the above, demand for indoor fiber products from data center customers remains robust with strong momentum in expansion and upgrade-related spending by multi-tenant enterprise and hyperscale data centers. .

In our distributed antenna systems business, 4G- and 5G-related venue upgrades remain a key driver of incremental sales.

During the quarter, as has been the case throughout 2021, we saw a steady progression of smaller upgrade projects related to hospitals, airports and entertainment venues as opposed to large-scale stadium deployments that we executed during 2020. .

And our OneCell business unit continues to scale up, driven by several more 4G sites going on air. We're also expanding our 5G engagements with customers as we look to deploy solutions for both public and private networks. .

Finally, the technology evolution to WiFi 6 and 6E and government stimulus spending are driving very strong demand and backlog growth in our RUCKUS business. We are also seeing a recovery in the hospitality vertical as a pickup in both business and tourist travel is driving hotel operators to upgrade their networks. .

RUCKUS also benefited during the third quarter from healthy demand from 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 WiFi access points and campus switches to customers at a rate that matched our order inflow. .

Turning to Outdoor Wireless Networks on Slide 7. Net sales of $356 million increased significantly, up 31% from prior year, driven primarily by North America. From a business unit perspective, we saw the greatest revenue benefit from our diverse portfolio of macro cell tower infrastructure solutions. .

Segment adjusted EBITDA of $61 million increased 13% over prior year and was primarily driven by higher volumes, partially offset by input cost inflation and freight increases. Outdoor Wireless performance during the third quarter was largely driven by continued ramping of telco operator investment spending to upgrade macro cell sites for 5G service.

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As operators focus on macro cell site preparation, we are seeing healthy global demand for a wide variety of Outdoor Wireless products. Our Outdoor Wireless segment's backlog remained 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 a continued demand from telco operators for our suite of base station antennas, but also for cell site infrastructure solutions such as HELIAX cabling, structural steel, cabinets and power management solutions.

As heavier and more power intensive equipment is added to the macro site, wind loads, power regulation and operating costs become more important considerations and should continue to benefit CommScope's broad, everything but the radio portfolio of products for macro cell sites. .

We also continue to be encouraged by operator interest in our active/passive hybrid antenna collaboration with Nokia and its potential to simplify 5G 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 made strong progress in several international markets, securing a base station antenna win at a major European operator and making new headway as a potential important player in Japan's 5G network infrastructure. .

Turning to Slide 8 for our Home Networks segment. Net sales of $415 million declined 28% year-over-year and in all regions, except for Asia Pacific. From a business unit perspective, sales declined in both video and broadband gateway product lines. .

Adjusted EBITDA of negative $16 million declined $46 million from the prior year, which include the impact of bad debt expense. The profitability decline was driven most significantly by lower volumes and higher input costs.

Home Networks products rely heavily on semiconductor chips, and our inability to source chips in the required quantity continues to materially impact the ability of Home Networks to deliver products to serve the demand we are seeing. .

Home's 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, and our visibility for orders now extends well into 2022.

Selling price increases have been announced and are being implemented to offset the inflationary costs. .

As an update on the Home Networks spin-off, we are continuing to make progress on separating the business from core CommScope and expect to execute the spin-off as planned during the second quarter of 2022. .

Now turning to our cash flow overview on Slide 9. For the third quarter, cash flow from operations generated $67 million, and 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 have discussed today, we expect our levels of inventory to remain elevated until supply disruptions improve. This is due primarily to extended transit times of our inputs and finished goods and the need to hold higher inventories of certain components to offset supply volatility. .

Considering the above as well as lower EBITDA, driven by 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 manage 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 refinanced $1.25 billion of secured notes due in 2024 with a new 8-year tranche of secured notes due in 2029.

This refinancing pushed out a large tranche of debt and extended our next debt maturity to 2025. It also reduced our interest rate on this tranche of debt by 75 basis points and lowered annual interest expense by over $9 million. .

During the third quarter, our cash and liquidity once again remained strong. We ended the quarter with over $411 million in cash and no outstanding draws under our ABL. The company's total available liquidity was nearly $1.1 billion. We made no significant net debt repayments during the quarter beyond the required $8 million of term loan amortization. .

The company ended the quarter with net leverage of 7.1x, an increase from 6.6x at the end of the second quarter. We remain committed to our longer-term goal of significantly reducing leverage and expect to provide insight into our path and timetable toward this goal as we refine our CommScope NEXT strategy around cost efficiency and growth. .

I will now turn the call back to Chuck. .

Thank you, Kyle. I'm 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 14, which we will provide further details on various initiatives that make up CommScope NEXT. During this event, we also plan to provide guidepost designed to enable investors to judge our progress and performance for future periods as we implement CommScope NEXT. .

And I also want to thank our employees for remaining resilient through the continued challenges of the pandemic and operating environment. I'm proud of the unwavering support of our team to mitigate these issues and position CommScope for the next level of growth and profitability. .

We'll now open up the call for questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Amit Daryanani from Evercore. .

So I guess I have 2 questions. The first one is sort of understand that the supply chain impact that you talked about, I think, a $50 million to $60 million of EBITDA impact in December.

Can you talk about what does that mean for your free cash flow in December quarter? Is it going to be positive, I guess? Or it would be the negative zone? And then how does that $50 million to $60 million headwind play out into calendar '22 for you?.

I didn't catch the last part of the question.

How does the $50 million or $60 million play out in what?.

In next year into calendar '22, does that sort of neutralize by the time you exit next year? Or does it remain around that $50 million run rate?.

Yes. So obviously, with the lower EBITDA forecast, it is going to impact our cash as we think about Q4. When we think about how that $50 million to $60 million impacts as we move into '22, I think as we said, obviously, we're taking mitigating actions.

Those mitigating actions will start to ramp up against our goal of trying to offset those inflationary impacts. So I think we'll see a gradual improvement as we go through 2022 off of the Q4 base. .

Got it. Chuck, you're going through a fairly sizable business transformation with CommScope NEXT and more.

I'm curious with your perspective, and you've done this in the past as well, I think, what is the difference, if any, of doing this in the public domain versus perhaps doing it privately? And given the headwinds that you're seeing, should we think about the CommScope NEXT benefits you've talked about in the past being pushed out further from the prior time line?.

Great. I'll take the second question first. And I would say that the supply chain challenges actually are really giving us, I'd say, more of a sense of urgency in the company. So it's really helping us 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.

A lot going on in terms of growth, in cost, in portfolio optimization. So we continue to see all that. In fact, we had already made significant progress in price to cover the inflationary impacts on the enterprise side. So now, obviously, that has to flow through the system.

Now we have to go look at the service provider contracts and review all those, and we have those already starting up -- those conversations already starting up. I mean these are decade-long relationships. So we feel like we're going to get through that. .

But I'd say overall, compared to other transformations in the past, I think we're on a great path. We're on a great track. There's tons of opportunity here. We continue to see it. We have hundreds of initiatives, tons of action items. And now we have tools that we're putting in place to measure and track those.

I think the teams 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 in DAA and fiber to the home, our HGS PON product is going to be coming out. Remote MAC-PHY, we win in business remote PHY 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're understanding what they want to do, where they want to invest. It is unfortunate that we're hit with the supply chain challenges, but that doesn't affect or take anything away from where we're going with CommScope NEXT. And like I said, we're still calling out by the end of 2023, we're going to have the $500 million run rate.

So I'm still on track for that. .

Your next question comes from the line of George Notter from Jefferies. .

I'd love to just kind of keep going on the topic of pricing increases. If memory serves, I think you guys were talking about a 7% price increase that you were in the process of instituting, I think, that was a few months ago, 3 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 you've got to work through the backlog in order to institute those pricing increases. But it seems like end of 2022, to get that fully instantiated, seems like that's a pretty long duration. So maybe you can talk more about pricing. .

I'll start and then Kyle can add to it. I would say, as we shared with you before, or I don't know if we did or not, but I'll share it now, we went after the enterprise business because there was a lot of copper inflation, and we started going after that, I'd say, 6 months ago.

And we're seeing that already in average quotation price levels increased, and we're starting to see that flow through. That's why you see the Venue and 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 better price flow-through, through our Venue and Campus business, we will see that continuing to flow through as our backlogs draw down. .

On the service provider side, our intention is to pass through this inflationary cost. I think everybody understands what's going on in the world, and they understand what we're dealing with. And so we're going through those contracts. And where we have enterprise customers, we're able to move faster.

Where we have contracts we're looking through the contracts, going through, having those discussions and 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, our anticipation is we will get through the pricing and we'll start to have the full impact by the middle of the year. So we'll start to see that flown out at full impact third and fourth quarter.

I don't know, Kyle, if you want to add anything?.

That's fine. .

Anything you guys can say in terms of just the magnitude of pricing increases and I guess as you get through this, will you be able to fully offset the impact of higher input costs or partially offset that? What's the end game?.

Yes. I mean I think we have line of sight to a large portion of the offset. As Chuck said, some of that has been implemented. Some is in process of being implemented. So I think our comment on that would be we have line of sight to a good portion of the offset.

Obviously, some of those we still need to implement and have some conversations with customers about that. But I think we feel that we've got a good path forward to offsetting a good portion of it. .

The next question comes from the line of Simon Leopold from Raymond James. .

You noted that the pricing -- sorry, this is Victor in for Simon. You noted that the price increases will take several quarters for the impact to kind of fully flow through the financials. And then those vendors are expecting that the headwinds are going to persist into 2022.

But if the dynamic around the supply environment changes significantly at that point, how does CommScope kind of address the issues at that point? And are there things that you guys can do to shift the business model to give you guys more flexibility around that? Or is this just kind of something that's innate in the business and kind of something that we just have to learn to live with?.

I think when we look at the price increases, I mean, 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 doing. And hopefully, it does abate, but we can't wait. So in terms of that, that's our approach. .

In terms of looking at our, I guess, supply chain and where do we see it going, I mean, 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 this thing abates. .

The only comment that I would make on that is, obviously, we're focusing on the pricing aspect. But there obviously is -- there are operational levers that we're 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 helpful.

And just in addition to the backlog trends that you mentioned, have you had any specific conversations with customers in more detail these days that give you confidence into your visibility around the demand?.

Yes. I would say -- if I just go through the segments quickly, I would say the Broadband, I would say, the backlog there is very sticky. I'd say many of our active products basically don't have a substitution, and we're getting a ton of visibility from our customers more than we would have had in the past.

And I would say on the other half of our business, nonactive, I mean we're able to sell everything we can make right now. So I feel good about our backlog there. .

On OWN, 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 and a lot more visibility, which is really helping us and gives me a lot of confidence that the backlog is solid. .

On the VCN side, again, I think half of our business, we're able to sell everything we make. I'd say when you think of more of the active products there, I think there are possibilities for substitution.

But I would say that we have a large specification position and where we do have product and when we're getting product, we're making sure we're protecting our positions there. .

The next question comes from the line of Meta Marshall from Morgan Stanley. .

This is [ Karun ] on for Meta. So you sort of noted an $80 million impact to EBITDA in the quarter.

I guess just I wanted to get more detail around whether it was more so inability to deliver versus higher costs? Is there any breakdown that you can provide or more color around the breakdown between those two?.

That number is all related to cost. .

Okay. Got it. That's helpful. And then just a quick follow-up. I guess you sort of saw a step-up in S&M spend despite sort of seeing revenue come down. So I was just wondering if that's more so to do with new incentives going into place? Or just curious as to any other color for what were the primary drivers for that step-up. .

Can you repeat the beginning of the question? It was just a little bit garbled. .

Yes, no problem. So you sort of saw a step-up in S&M spend despite sort of seeing revenue come down. Just wondering if you can provide any color for what drove that step-up. .

Yes. From that perspective, -- It's more of a timing issue. Obviously, we have things that come on quarter-to-quarter. It's not -- 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 as we've talked about, some of those are going to require some investment. And yes, clearly, we're going to see an uptick in that.

But I think as we get into the CommScope NEXT piece, we're going to see margin driven by those investments in 2022. .

The next question comes from the line of Sami Badri from Credit Suisse. .

First question is for you, Chuck. I know you're talking about the CommScope NEXT strategy and 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 to, which is post 3Q '21 results? 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're putting into adjusted free cash flow, one number that really sticks out is the transaction transformation and integration costs where you booked $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 of reviewing the charges and the exits of 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 considered an adjustment if we're so far away from when we were supposed to be adjusting integration into your company?.

So I'll take the first question. And what I would say is the $500 million, when we said it before, is still what we're saying now. It's on top of where we were in 2020. We can't look at the inflationary cost right now. I mean that's what we're trying to drive. We didn't change our number based on that. .

Yes. So I think not getting too much into the details, I mean, obviously, some of -- we're obviously spending money on our integration cost today. It's not just about CommScope NEXT because we are spending some money there. But it's also about we are spending some money on the spend for the Home Networks business.

As it relates to the add-back, obviously, we implemented sort of our first wave of the CommScope NEXT initiative with some reorganization within our overhead structure. And quite honestly, that will continue sort of work its way through in the '22 and even in the '23 period. .

Got it. 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 as well as multi-tenant data center operators.

And if my memory serves me correctly, you do sign set price lists for basically all these major customers, and those price lists are revised either annually or every 2 years. .

Now the big issue, I think, a lot of people have is you now 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 orders 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 going to be for your major customers, just so we can understand how you're going to navigate 2022 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 have -- and then I would say, in other cases where we don't have it, we have to just depend on our relationships because we've had them for years.

And this is how we have to work through things. I mean you have to open up paper, but this is pretty much unprecedented. So I think we're open to have those -- we're going to have those conversations. We're having those conversations, and we're expecting that we're going to work through this. But obviously, it's hundreds of contracts.

I mean some of them, I just don't know the timing of all those on the call. .

The next question comes from the line of Steven Fox from Fox Advisors. .

Two questions, if I could. First of all, I'm not fully clear on how you're overcoming the semiconductor constraints you're dealing with.

How are you going to sort of remove that sales bottleneck? And should -- and how long do you think it will take?.

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, given what you're seeing in the end markets?.

Yes, on the semiconductor side, I mean, you have the big Broadcom, Qualcomm and MaxLinear those type of chip companies. We're having a lot of conversations with them, and we're working on our allocations and trying to get more than what we would have gotten in the past.

And so those are pretty much daily, weekly conversations as they get more online, we're going to be able to get more. .

There's also the rest of the components, which are -- there 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 would say 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. That's helpful. What -- yes, go ahead. Sorry. .

The only thing I'd add in capacity is in addition to more capacity, we're 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 freeing up capacity with just what the assets we have. .

And Kyle 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 continue to reduce the bottlenecks. .

And just one clarification on the conversations ongoing 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 part of our cost structure. So it's not like we have commodity clauses, but 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 electrical buys and other buyers, they all understand what's going on with inflation. So I think that's helping us there.

What's the second one?.

Well, just in terms of where you're sort of holding up your customer network builds, would they -- are they expediting in that?.

Yes. Across the board, we've had many customers that are actually offering to pay expedited fees or offering to pay for increased component costs to make sure that they secure demand. .

Your next question comes from the line of Rod Hall from Goldman Sachs. .

This is [ Bala ] on for Rod. First, a quick clarification on the price increases. As you think about the time line of this increases, are you more thinking to pass on large expedite fees, et cetera, relatively immediately, whereas higher input costs would be to probably take longer because you need to rework the contracts? And I've got a follow-up. .

I'm really sorry. Can you repeat the question? We're having a little bit of audio challenges. .

Sure, no worries. Cost inflation related to logistics and expedite fee, would that pass through relatively immediately, whereas higher input costs would probably take longer because you might need to rework the contracts with customers. .

Yes. I think the answer to that question is in some places in our business, we are implementing expedite sort of freight surcharge fee that we can get to a little bit quicker. Obviously, in 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 mention is that we talk about our backlog, our backlog being at $3.3 billion.

There's also challenges that we have relative to the backlog and what we can do with our backlog from a repricing standpoint.

So working through the backlog is sort of as we talk about why this is going to take a little bit of time to work through because obviously some of that backlog is priced on a historical basis that we can't just go out and change necessarily. .

Got it. And Chuck, one follow-up. Coming back to the question on the visibility on the Outdoor Wireless business, you talked about joint development road maps, et cetera, with larger customers.

I just wondered, the time line of this visibility in that business today, how does that compare to typical? Is it much longer? Do you have visibility into multiple years going -- looking forward into the future? Just any color there would be helpful. .

Yes, I would say all the major providers are being very cooperative and really upfront and supportive of what we need to see visibility-wise because the lead time of parts and components. They understand they're 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 3x the visibility that we used to have in fact like a full year out, I'd say. .

Your next question comes from the line of Samik Chatterjee from JPMorgan. .

This is [ Angela Jen ] on for Samik Chatterjee. And congrats on the new CFO role. .

Thank you. .

Just one question. I wanted to follow up on the Outdoor Wireless visibility. When we saw the outlook from AT&T and Horizon, it looks like CapEx will really be ramping in 4Q and into '22, at least it seems to imply double-digit growth, at least in 4Q, if not in '22.

Are you seeing that similar sort of trend? And how sustainable is double-digit growth given your increased visibility in the Outdoor Wireless space?.

Yes. Well, I would say we're not going to be able to give you guidance on that at that level. But what I would say is things are heating up, and there's a lot to do in 5G. So I mean this is going to be multiyear, I don't know if this whole decade, but it's significant. .

Do you think it will outpace the rate at which your other segments are growing?.

Again, we're not going to give that type of guidance, and we just don't have that type. .

This concludes our question-and-answer session. I would now like to turn the conference back to our CEO, Chuck Treadway. Sir, please go ahead. .

Yes. Look, thank you very much for your support of CommScope, and thank you for your questions today. And we look forward to talking to you at Investor Day coming up in December. Thank you. .

Thank you. And this concludes CommScope Third Quarter 2021 Results Call. Thank you for participating. You may now disconnect..