Q4 2019 Earnings Call
Body and welcome to the Swastika fourth quarter 2019 earnings conference call.
This time, all participants are any listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one in your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the converts over to your speaker today, Mr., Craig Huber Vice President of Investor Relations in corporate development. Thank you. Please go ahead Sir.
Good afternoon, and thank you for joining us on Celeste because fourth quarter 2019 earnings conference call on the call today, or Rob Me honest, President and Chief Executive Officer, and Mandeep trial, let Chief Financial Officer.
As a reminder, during this call we will make forward looking statements within the meetings of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian Securities laws.
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We assume no obligation to update any forward looking statement, except as required by law.
In addition, during this call we will refer to various non IRS measures, including operating earnings operating margin adjusted gross margin adjusted return on investment invested capital or adjusted our Allies C.
Free cash flow gross debt to non IRS trailing 12 month adjusted EBITDA leverage ratio.
Adjusted net earnings adjusted EPS, adjusted EPS, DNA expense and adjusted effective tax rate.
Listeners should be caution that the references to any of the foregoing measures during the call denote non IRS measures, whether or not specifically designated as such.
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Report under U.S. gap and he was non-GAAP measures to describe similar operating metrics.
Oh, we refer you to today's press release on our fourth quarter earnings presentation, which are available at Celestica dotcom under the Investor Relations tab for more information about these and certain other non IRS measures, including a reconciliation of historical non offer I FRS measures to the most directly comparable I up our us measures from our final.
All statements.
Unless otherwise specified all references to dollars on this call RT U.S. dollars, let me now turn the call over to Rob.
Thank you Craig good afternoon. Thank you for joining todays conference call a fourth quarter results reflect solid execution across our business.
With revenue above the midpoint of our guidance range.
No I as far as adjusted EPS at the high end about guidance range.
We remain focused on cost productivity initiatives executing our portfolio actions.
Wrapping new programs deliver another quarter of sequential operating margin improvement well generating strong free cash flow.
In addition, our efforts to diversify our end markets and customers continue to progress with Ats now representing 39% of our revenues up from 33% a year ago.
Within the Ats segment, we posted improved profitability sequentially delivered improved performance in our capital equipment business.
And executed new program ramps across our industrial and Healthtech businesses.
I see a segment performance continue to benefit from our portfolio actions delivering sequential margin improvement for a third consecutive quarter, an operating at the high end up by 2% to 3% target range I will provide some additional color on our end markets an album shortly but first I will turn the call over demand due to give you some details on the fourth quarter.
And our first quarter of 2020 guidance. Thank you, Rob and good afternoon, everyone for the fourth quarter of 2019, Selectica reported revenue of $1.49 billion above the midpoint of our guidance range, primarily driven by program specific demand strength in enterprise.
Revenue decreased 2% sequentially and was down 14% year over year.
Our non <unk> for us operating margin was 2.9% above our guidance midpoint of 2.8% and down 60 basis points year over year.
No one I have for US adjusted earnings per share were 18 cents at the high end of our guidance range, primarily due to favorable mix and one cents per share a favorable taxable FX.
Our Ats segment represented 39% of our consolidated revenue up from 33% compared to the fourth quarter of last year Ats revenue was up 5% sequentially up 3% compared to last year and was inline with our expectations.
On a year over year basis growth in our capital equipment business and new programs in our industrial and Healthtech businesses were partially offset by plan disengagement of non strategic programs in our energy business.
Growth was primarily the result of stronger demand and new program ramps in capital equipment.
Our Ccs segment revenue was down 22% year over year, but was above our expectations due to demand strength in our enterprise end market sequentially Tcs segment revenue was down 6%.
Within our Ccs segment, the communications end market represented 39% of our consolidated fourth quarter revenue consistent with the fourth quarter of last year.
Communications revenue in the quarter was below our expectation and down 15% year over year due to continuing program specific weakness.
Customers represented 60% of revenue for the quarter up one per cent sequentially and down 1% relative to last year.
In the fourth quarter, we had to customers representing greater than 10% of revenue compared to one customer in the third quarter and three customers in the fourth quarter of last year.
Turning just segment margins.
Ats segment margin of 3.0% was up 20 basis points relative to last quarter, primarily due to improve performance in our capital equipment business, Although capital equipment lost money in the low single digit millions the business improved relative to last quarter due to higher demand and the positive impact of our cost reduction initiatives the remainder of V.T.S.
Tinny to perform relatively well, albeit we continue to have inefficiencies in Andy due to supply chain constraints and volatility.
You're every year H.P.S. segment margin with down 70 basis points, primarily driven by Andy partially offset by improvements in capital equipment.
Ccs segment margin of 2.9% was up 10 basis points sequentially due to better mix, including strong results and J.D.M. and productivity.
Ear every year Tcs segment margins was down 40 basis points as a result, a very strong performance in the fourth quarter of last year.
Lower volume in the quarter C.C.S. delivered segment margin at the high end of R.C.C.S. target range of 2% to 3%, which reflects the benefits of our portfolio actions and continuing productivity efforts.
Moving to some other financial highlights for the quarter.
I.F.R.S. net loss for the quarter with negative $7 million or negative five cents per share compare to net earnings of $60 million or positive 44 cents per share in the same quarter of last year.
Fourth quarter 2018 included a tax benefit of 36 cents per share and the remainder of the European year decrease was mainly due to lower gross profits.
Chested gross margin of 7.0% was up 40 basis points sequentially, largely due to improve performance in capital equipment program mix and lower variable spending.
You ever year, adjusted gross margin was down 20 basis points as lower profit in C.C.S. and Andy more than offset improve performance in capital equipment.
Our adjusted S.G.N.A. $52 million was slightly higher than expected and up $4 million sequentially, primarily due to foreign exchange.
Adjusted S.G.N.A. decreased $3 million year over year, primarily as a result of lower variables spend.
Non I.F.R.S. operating earnings were $43.7 million, approximately 1.0 million dollar sequentially and down $16 million from the same quarter of last year.
We're a non I.F.R.S. adjusted effective tax rate for the fourth quarter was 27% better than expected primarily due to favorable affects impacts.
Excluding effects impacts our effective tax rate for the fourth quarter would've been 33%.
For the full year of 2000 in 19 hour adjusted effective tax rate was 34% higher than are beginning of the year anticipated range of 19% to 21%, mainly due to lower levels of income including losses in certain low tax geography.
For the fourth quarter, adjusted net earnings were $23.7 million compared to $39.7 million for the prior year period.
No on I.F.R.S. adjusted earnings per share of 18 cents. We're at the high end up our guidance range of 12 cents to 18 cents per share and down 11 cents per share your every year.
Mainly due to lower non I.F.R.S. operating earnings.
No one I have for us adjusted R.Y.C. of 10.6% was up 0.5% sequentially and down 4.4% compared to the same quarter of last year.
Moving on to working capital.
Inventory at the end of the quarter was $1.0 billion, a decrease of 41 million dollar sequentially and down $98 million relative to last year.
Inventory turns were 5.5 relatively flat sequentially and down 0.5 turns your every year.
Capital expenditures for the fourth quarter were $16 million or 1.1% of revenue.
Capital expenditures for 2000 in 19, where $81 million or 1.4% of revenue slightly lower than are expected range of 1.5% to 2.0% of revenue.
2020 , we expect our capital expenditures to be in the range of 1.5% to 2.0% of revenue.
<unk> free cash flow with positive $44 million in the fourth quarter compared to negative $30 million for the same period last year, primarily driven by improved working capital.
We are encouraged by the improvements we have made an are working capital performance, which have contributed to very strong free cash flow generation in 2000 in 19.
Regenerated non I.F.R.S. free cash flow of $301 million in 2019, and as we look towards 2020 strong working capital performance remains a priority.
Cash cycle days in the fourth quarter were 62 days up one day sequentially are cast deposits increased to $122 million up $14 million from last quarter as we continue to work with our customers on working capital improvements.
Moving onto her balance sheet and other key measures select to go continues to maintain a strong balance sheet, our cash balance at the end of the fourth quarter was $480 million up 31 million dollar sequentially and up $58 million year over year.
Our gross debt position was $592 million at the end of December down $2 million sequentially, while our net debt was approximately $112 million down $33 million sequentially and down $223 million from the fourth quarter of last year.
We encourage $11 million and restructuring charges this quarter and have concluded our cost efficiency initiative.
Total program spend up to $81 million was higher than our originally estimated range of 50 million to $75 million as we accelerated other costs actions, including those that Cisco.
Now turning toward guidance for the first quarter of 2020, we're projecting first quarter revenue to be in the range of 1.3 to 5 billion to $1.4 billion to $5 billion.
At the mid point of this range revenue would be down 4% year over year.
First quarter non I.F.R.S. adjusted earnings are expected to be in the range of 13 cents to 19 cents per share.
At the mid point of our revenue and adjusted E.P.S. guidance ranges non I. After s. operating margin would be approximately 2.9% and would represent an increase 50 basis points over the same period of last year.
No one I.F.R.S. adjusted S. Genie expense for the first quarter is expected to be in the range of 51 million to $53 million.
Finally, we estimate our <unk> adjusted of effective tax rate for the first quarter to be approximately 30 per cent, excluding any impacts from taxable foreign exchange our full year <unk> adjusted effective tax rate expectations are in the mid 20% range with an elevated adjusted effective tax rate in the first half do chanting.
Faded geographical mix and closer to historical rates expected in the second half of the year.
Turning to our end market outlook for the first quarter and R.A.T.S.N. market, we anticipate revenue to be up in the low single digit percentage range year over year as growth across most of our E.T.S. businesses, including in capital equipment is expected to be partly offset by the impact of plan program Disengagements in our energy business and program Spicier.
Demand softness in R. and D. business.
In our communications and market, we anticipate revenue to be flat year over year as continue to end market demand softness is offset by program ramps in support of service provider broke including GDN.
In our enterprise and market, we anticipate revenue to decrease in the mid 20% range year over year, mainly due to plan to program Disengagements as part of our C.C.S. portfolio review in addition to weaker and market demand.
Oh now turn the call over to Rob for additional color and an update on our priorities.
Thank you mandate 2000, a 19 was a challenging you are given the difficult the man environment.
Response, we took a number of progressive measures, including proactively shaping our portfolio driving cost reduction initiatives in executing program ramps.
We continue to focus on providing higher value add solutions to our customers enable by diversified and more resilient portfolio.
Actions, we took this past year drove improved operating margin and non I.F.R.S. address at E.P.S. throughout 2000 in 19.
As we exit the year, we believe all lower costs Bayes and stronger portfolio position those for improve performance in 2020.
With an A.T.S.R. capital equipment business was presented with a number of challenges.
Conductor and display market step too severe lows.
However, our productivity initiatives and new program ramps and capital equipment continue to yield results.
And the fourth quarter.
We have proved our performance and reduced our loss to the low single digit millions.
As we looked at 2020, we anticipate improvement in the semiconductor equipment demand to the first half of the year and are encouraged by the anticipated market trends for the second half of 2020.
The display market remains depressed and while volumes are improving we continue to expect near term softness with modest record relating to here given by increased demand for next generation smartphones and next generation large form factor displays.
Has the industry ships from L.C.D. to override we believe that we are well positioned to support our customers growth and I'll already planning new program ramps and 2020.
We continue to take a long term view on this market and has a market leader, we continue to partner with our industries leading brands.
<unk> capital equipment can be generating a profit in the single digit million dollar range in the first quarter of 2020.
Driven by our costs productivity initiatives and volume leverage.
With our specialize vertical capabilities. We believe we are well positioned to capitalize on the long term demand drivers for the business.
Inane day, we are experiencing headwinds as a result of continued material constraints.
Anticipate that the halted the Boeing 737, Max program also put some downward pressure on R. and D. revenues and 2020.
Which we have already factored into our first quarter guidance that being said.
Anticipated improvements in other parts of A.T.S. should more than offset to 737 Max impact from 2020.
Students strong demand in our defense business, we are spending one of our a trend facilities to accommodate additional I tar capacity as well as a new licensing business, which isn't emerging area for us and they Andy.
2000, a 19, we had strong revenue growth in our industrial and help that businesses.
By new program ramps, which more than offset revenue weakness in the energy business due to program Disengagements.
We are encouraged by our strong bookings momentum and already T. a segment, particularly in our health tack and industrial businesses, which is leading to increase scale additional proof points and a stronger and more diverse A.T.S. portfolio.
Looking ahead, we expect to experience near term challenges in or indeed business.
Doing the material constraints and 737 Max demand uncertainty. However, we are seeing strengthening demand in our capital equipment business, coupled with growth in our industrial and Healthtech markets and the benefits of our productivity initiative.
As a result.
You expect to see margin expansionary T., a segment and 2020 and we continue to focus on returning to our 5% to 6% target margin range.
Turning to C.C.S. in 2019, I see see a segment Robin who was impacted by communications demand softness and planned enterprise disengagements, partially offset by new program ramps.
C.C.S. did however benefit from our portfolio review and costs productivity initiatives segment margins up a higher end of our target range.
<unk> lower revenues, we are pleased that the actions we are taking in C.C.S. have help C.C.S. operate and its target range for the last seven quarters.
As we look to 2020, we will continue to invest in our Judean business and evolve our product offerings. So we are well positioned to serve our customers, including are growing service provider engagements, while providing further stability and diversification two overall C.C.S. business.
We experience strong bookings in 2019, and anticipate ramping several new J.D.M. programs in the coming here.
Cisco transition planning is underway and we expect the transition would largely be completed by the end of 2020.
We continue to work with Cisco to ensure an efficient seamless and successful transition.
Given the phase exit of the fiscal program, we do not expect any revenue impact in the first quarter of 2020, and this has already been factored into our guidance.
We are also encouraged by the inquiries. We have received regarding are available capacity since the announcement of the Cisco disengagement.
And we are working to selectively secure new business. We believe that R.C.C.S. bookings pipeline is robust and is focused on growing higher value ads opportunities and J.D.M. and the growing service provider and emerging enterprise markets.
As I look back on our performance in 2000, a 19, although we generated very strong free cash flow I am just pointed without full year financial results.
Executing a transformation during a challenging demand environment was very difficult. However, I am encourage that we made solid progress on a transformational strategy well navigating market headwinds.
First.
Well to increase diversification across our business.
We reduced our top 10 customer concentration to 65% down from 70% in 2018 and increase our A.T. a segment concentration to 39% of total revenues.
From 33% last year, we have only one customer with revenue greater than 10% down from two last year.
Second we navigate a challenging market dynamics in a capital equipment and communications businesses, taking actions that we believe will lead to a stronger portfolio in the long term.
This includes significant cost actions and they'll capital equipment business to lower its break even point, which we believe will drive stronger profitability as we wrap new programs and when the demand environment improves third we successfully executed on a C.C.S. portfolio optimization review and we were from.
Only within our target segment margin range for C.C.S. throughout the are we.
We ended the year with a smaller but what we believe to be a more consistent and resilient business with high value added programs.
Fourth we successfully executed on a number of new program ramps and delivered strong growth in our industrial health pack and they Andy businesses.
And lastly.
We continue to balance approach to capital allocation utilizing the strength of our balance sheet to execute on approximately $70 million a share buybacks well also reducing on that leverage.
As we enter 2020.
Remained focused on several initiatives that we believe will drive improved operating margins and expand adjusted earnings per share.
Well, then R.A.T.S. segment.
Yeah focus on restoring margins through targeted 5% to 6% range.
Achieving this margin range requires a recovery in the capital equipment, and the A.N.D. supply and demand environment and a successful ramp of new A.T.S. programs, specifically in industrial and how tech.
Within R.C.C.S. segment, we're focused on completing our portfolio review actions and they've tend to continue to invest in areas. We believe akita's a longtime successive R.C.C.S. segment, including through R.J.D.M. offering.
While we're not providing revenue guidance for 2020.
We anticipate revenue growth in certain areas of R.C.C.S.N.A.T.S. segments to help partially offset the revenue decline from my portfolio actions.
Our capital allocation priorities remained consistent our goal is to generate between $100 million to $200 million and free cash flow and 2020 and over the long term, we intend to invest half of our available free cash flow into the business and return half to shareholders.
In summary.
Near executing on our strategy in order to drive long term sustainable profitable growth.
And add value to our shareholders.
You take this opportunity to thank our employees for the hard work and dedication our customers for their support and loyalty and our shareholders for that continued support of Celestica.
We look forward to updating you on our progress over the coming quarters with that I would now like to turn the call over to the operator to begin a cue in a.
Mm.
As a reminder to ask a question you will need depressed start wandering your telephone you withdraw your question press the pound key.
Is your first question comes in a line of Robert Young from Cannacord. Your line is open.
Hi, Good evening, maybe the first question Alaska's around the margins I think you reiterated the 5% to 6% target I don't know if I Miss it but did you also reiterate 2% to 3% pretty margins for the C.C.S. business or would you think that that could go higher given where the recent margin performance has been.
And then I think the overall, though operating margin targets, 3.75% to 4.5% is that still something that you're driving towards.
Yeah, Hi, Robyn <unk> here, so yeah, I'll I'll take that in pieces. So on the C.C.S. side, we're very pleased with the margin performance at the business has been having their performing very well strategically and operationally that being said we have seen some favorable mix over the last one or two quarters and so we still think that the two per cent of 3% range is the right range.
But we're very pleased that they've been operating at the higher end of that range on the A.T.S. side, 5% of 6% continues to be the right target range, you know where please that we saw some <unk> chill improvement in the fourth quarter, we're expecting a further improvement as we go into 2020 and I think that there are some positive momentum happening.
In different areas you know, there's a few things that are going to be required to get there are primarily a improvements in the capital equipment space, but we've highlighted some other things as well, which are you know working through some of the challenges and the turn any Andy and ramping some programs. The 375 to four and a half continues to be the target range that we are.
I'm moving towards just to reiterate what needs to be true for that to happen. We expect C.C. has to be firmly within their 2% of 3% range and we are looking to grow E.T.S. to the upper end of their range in order for us to get into a 375 to four and a half.
Okay, Great and then maybe just digging into the the Semicap demand environment and like you said that you saw improvement in the first half.
R.C. improvement in in the first have a 2020 and encourage potentially by H. Two is that what I heard a display would still be depressed I think that's consistent with what you'd said last quarter around customers, saying that there's a moderate level of demand in the first half a 2020 or so it feels to me like the demand environment is similar to what.
You saw last quarter is that right.
Yeah, Rob that's why we're probably a little bit more optimistic I would say on the second half the.
But the market seems to feel like <unk> memory might come back in the second half and next year, we're seeing pricing increases on memory was saying inventories reduce a little bit we don't necessarily have we wrote a book to support that yeah. That's why we're we're not calling a back half I'll pick up at the indicators of putting in a a favorable direction for you know continuing gossip.
Semicap in the back half of the year.
And on display pretty much the same as last year you know for US revenues are are improving on a year. We are basis. So we're getting.
Oh I am leverage if you will but as the five jail that phones again introduced in the next generation, although T.V.'s get introduced and we anticipate that really towards the end of 2020 to 2021, Oh, that's when we think <unk>.
Okay.
Perhaps as a bit early but at any of the the China events. Recently is is there any impact. It you see on your business I know that <unk> a bit of a semi hub is it too early to understand if there's an impact there.
Well, we've been working very hard over the last several days to understand it you know first and foremost we've reached out to many of our employees in as far as we know, they're safe and sound and taking the right actions terms of our China exposure, it's fairly limited relative to all of Celeste <unk> and appears we do about a billion dollars a year or revenue trying across too.
Who you know a large manufacturing facilities into jail and songs on Lake.
A lot of the work you do or is due source within this last took a network and also a revenues largely back end of quarters skewed in terms of how they go out inside of a quarter.
As you probably read the China government extended back to work day to February 10th.
And given everything that's going on it's it's a prudent move but given the February 10th day, and checking with our employees and checking with our suppliers. At this time, we don't think it's going to be a huge impact, but it's a very dynamic situation as as you can imagine and where have contingency plans in place and we're monitoring the situation very.
Closely.
Okay.
Other questions if I could the the Cisco disengagement I just want to understand that came into that.
I think you'd said it wouldn't have an impact in Q1 has any of it started.
And if it's complete by the end of 2020 is there any way to understand if the size of that if you could you know it reminds what that is and how it might play out through the year based on how you understand it now.
Sure I'll I'll answer the first five maybe people that second part so we started transition planning, but the transition itself have not started so we're still working through that the process in terms of the you know I'd participation right now is still at the majority of it will be I transitioned out by the end of the year.
In terms of magnitude and all that maybe just so yeah, so vote for Cisco as well as the previous program Disengagements our outlook for 2020 remains relatively consistent participating from the prior program Disengagements that were announced to about 100 million dollar impact in 2020 and on the Cisco piece three to 500 million.
It is dynamic and so you know, we'll keep you updated us that changes, but our outlook right now remains consistent.
Great and then you mentioned I tar and the comments, maybe that you talk a little bit about how big that businesses for you now and I think you said you're going to expand a facility that wouldn't require emanate to expand that business.
How maybe we could talk about the margin impact of I Tar I mean, what you're going after there and then I'll pass line.
Sure. So they we're we purchased a u. turn a couple of years ago and one of the facilities. They they do business out of three main facilities.
In one of the facility is a new hope, Minnesota, which was about 50000 square feet is actually running out of capacity. So we're taking the opportunity to at least a brand new building a state of the our facility in you know write down the street. If you will and you know based on the pipeline of.
I'll work that we have which is largely defense related you know it will be our news center of excellence with circuit cards, and a new set of excellence for a licensing business with an aerospace and defense largely catered towards the defense market.
And with doubling the size of the facility and we think we have strong willed pipeline to support that expansion.
The a trend acquisition continues to exceed all of our expectations. It's really has a wonderful management team winning awards from our customers and it's performing quite well.
<unk>.
Yeah. Thanks.
And your next question comes from line of costs Papageorgiou from P.I. financial your line is open.
Oh, Thanks to take my question started <unk> margin go 5% to 6%.
I I don't recall, you, saying anything about display markets recovering to to reach that goal. So can you just talk a little bit or what would have to require for from the display business to kind of reach those goals.
You you said part part of it would report choir, which depend on you program ramps.
Can you give us idea of how big the new program ramps are for this and next year and how influential there will be on.
<unk> back to to the to reach those margin goals.
Yeah, I guess <unk>, you mean mean, maybe let me breaks down into the two pieces. One is you know to get back into the 5% of 6% range. We're really looking for capital equipment to get back to its target levels those target levels or north of 6% you know when we are in a strong demand cycle, primarily in the semiconductors.
Space, we can operate above six per cent.
Right now we are starting to see that demand cycle come back and so even if display was not to come in incredibly strong but was to come in at at levels that are higher than where it is today.
We believe that you know that would be enough contribution from capital equipment to get us back into the 5% of 6% range to move upward into that range. Then there's a few other things that we're looking for contribution from one is for the headwinds any N.D. to to subside and you know there's some good opportunity there but.
There's always going to be some unknowns and then on the ramping approach to you know I won't share the specific numbers on it but as we shared in the past we have had seen significant wins in both industrial and and held tech both of those businesses are growing a double digit rates right now the ramps are well underway the ramps are going as expected.
And so we don't expect at this point you know any adverse impacts from that but you know we do need to see a little bit more contribution from those ranting programs in order to to keep moving and then when we talk about the display contribution you know when we've purchased the impact business as we had mentioned it has a very strong March.
In profile and so as we see the display market really return, which is more in 21, we would expect to see a good level of volume leverage and that's just because of the number one the the margin profile of that business, but number two is we have taken the opportunity over the last year to reduce the.
Cost profile of that business and so we would just expect better contribution that demand really returns strong and 21.
That's right and on the N.D. so basically.
Boeing's spacing, some challenges, but defense seems to be doing well alright.
Yeah, correct Boeing is facing some challenges, but you have to put into context.
You know, we're we're the leader in a in D. for the M.S. space. So we do of course, many platforms and 737 inclusive is we do everything from circuit cards to complete line replaceable units of boxes that goes in the aircraft.
About 10% of R. and D. portfolio supports a 737 Mac so.
Right now we're you know, we're working with our customer to balance production, while preserving the long term.
So.
You know Andy historically speaking has grown in the mid to high single digits. You know as a result of the 737 downward pressure, we don't view that as being a long period of time, you know based on what we're hearing on what we're reading it you know where you're seeing ranges of three to six months.
[noise]. So the growth of A.N.D. is going to be muted until production turns on and then depending on the rating turns on bill kinda determine no how quickly it grows there, but again, it's from a magnitude perspective, it's only about 10% of our overall Andy portfolio, which is also the largest portion of a.
<unk>.
Great. Thank you for that additional color.
Mm.
<unk>.
And you do time constraints, we do assets you. Please let me yourself to one question and one follow up. Your next question comes from the line out Santos <unk> from the more capital markets. Your line is open hi. Good afternoon, you mentioned the a year for your improvement in inventory turns how would you expect that to trends, but of course, the here and what kind of in.
<unk> should we see on turns from this is good disengagement.
Yeah, <unk>, you know I'll put it into the context of overall cash flow you know we're pleased right now with the performance of saw in 2019 part of it was of course because of the a declining revenue that we had but we thought improvements in our overall working capital turns in a lot of that was driven by a inventory.
And we look at inventory right now in combination with customer deposits, because some customers who are unable to unwind or inventory in lieu of that have been providing us with deposits in so overall some very good benefits.
As you go into 2020, we're expecting another year of a strong free cash flow generation, we're targeting 100 million to $200 million and inventory at turns improvement is a part of that as well and so we we feel right now that we have some pretty good momentum on the cash a generation side.
Great and then Rob <unk>, you can you'd have an active pipeline, whereas the focus this year more on just managing the a C.C.S. disengagements and.
Either moving parts in the business.
Yeah, probably focus right now is on delivering that being said, we we do have active emanate pipeline I would say, we're looking for each capabilities pipelines largely focus on aerospace and defense and Healthtech, So still evaluating a emanate with a very focus lens and opportunistic and we're looking really for.
Capability plus.
Great outlined thanks.
Okay. Thanks.
Your next question comes from a line of Paul cheaper from RBC capital markets. Your line is open.
Thanks, very much could you speak to capital equipment revenue on a sequential one year over year basis in terms of Q4, and then also in terms your expectation for capital equipment in a in Q1 in regards to revenue.
Hi, It Mandy pair of course, and we had been seeing some strong growth overall the demand for capital equipment, I would say dip to the low and 2019 in the second quarter, we saw a nominal growth into the third quarter and the girl just starting to really pick up as we moved into a the fourth quarter we had.
A lot of wins early in the year many of them as a market share gain so competitive take away and so we are in the process of not only seeing some demand uptick right now, but we're seeing the ramping of many of those programs as we go into the first quarter, we're expecting some additional volume growth over the fourth quarter, but.
Albeit not as maybe big of a of a sequential growth as we just saw in the fourth quarter.
And again, that's a combination of both demands trend as well as ramping of new programs.
[noise] integrate and secondly could you elaborate on your comment just in regards the inquiries in the pipeline that you're seeing for the the P.C.S. cat compassionate you're free up towards the end of the year and in how should or Oh, what's your sort of expectation on the profitability of any new contracts that you'd bring in.
On the C.C.S.I. in in a in comparison against the average that the two 3% target.
Yeah.
Yeah. So we've been very please at the level of interest that we're getting on consuming the available capacity in Thailand has been pretty high they mentioned on the call funnel is very robust and our attention really is not to back from a revenue on a dollar for dollar basis really focusing on Reverend or that has higher value added content. So.
Looking at expanding our customer base within a service provider business, we're looking at expanding her judean business when looking at new enterprise logo.
Within our service provider space, we're now doing business with the majority of the top 10 service providers.
And within that we provide a full suite of a product solutions across all the technology. These data center, a J.D.N. business, it's actually growing up was double digits expected to go in double digits and 2020.
Margin profile I would say you know the J.D.N. a business operates on a higher end of about the target Majid ranges and would be you know a creative that being said we are counting on a higher mix of J.D.N. business.
The overall portfolio live in the target market range.
But.
And your next question comes from a line of roof <unk> from Bank of America. Your line is open.
Hi, Thanks for taking my questions and thanks for all the details so far on the T.S. segment. So you know you're guiding the first quarter up but low single digit year on year do you expect as we go through the year an acceleration in revenue growth. Then do you think that exiting this year you can be back at the at the 10% or double digit kind of growth rate in that.
<unk>.
Any kind of color of what you expect to see as you go through this year and they get segment.
Yeah, I read Blue Nice to talk to you you know we're pleased with the growth that we're seeing overall N.A.T.S. 2019 was impacted by some market dynamics specifically in capital equipment and then as you know we did take some proactive disengagement actions on some nonstrategic customer program.
<unk> when you back those out we actually and 2019, so low double digit growth, we saw 13% growth in the rest of R.A.T.S., a business and that's actually after doing 13% growth in 2018 as well.
We are I'm anticipating a growth in 2020 I. We always you know caution people to remember that the 10% growth rate is a long term growth rate there are going to be some years, where we're above it and some years wherever below it into while we're not giving guidance for 2020, we continue to think that the 10% growth rate is the right target over the long term.
Oh.
Ah Okay. That's helpful. Mandy and maybe just from my follow up on the communications and market. I think you guys had guided for a decrease the little teams year on year, but you saw a little bit worse don't 15% and looks like for the first quarter, you're dating flat, which said, yes. Some some improvement so maybe if you can just touch on that.
And then markets, which you sign up to go to what you saw in networking and it is there. It is their sense of things getting better or is the inventory correction you've talked about in the past is that still continuing say any any kind of color on that and market within four q. as well as which are expecting for one q.
Sure.
So you know within four Q., what we saw was the ban weakness with some of our traditional over again, so we sort of some product in technology transitions with some of our customers and also for US we had some tough comps and networking. This time last year people were building buffers and due to the tariffs in those buffers we're in.
Rubbing the numbers last year. This was partially offset with some new program growth that we've been talking about in all service provider space.
You know regarding flat, what we're seeing as new program ramps and networking, we're saying demand straighter than some of our existing programs.
That's also being offset with them the man made a weakness that we're seeing from technology transitions in terms of a inventory buffering, we're not experiencing or any of that right. Now I think the buffers at least for US laws, we burnt off and for US. It's just about supplied a mix and public transitions and and demand dynamics.
Okay. Thanks again for all the details.
<unk>, okay. Thanks for Blue.
Your next question comes from line up Todd Copeland from C.I.B.C. Your line is open.
Near one.
I just wanted to confirm one point and then I'll ask a question. So on this on the transitions you called out there in Cisco's about 600 million.
Off of 2020 versus 2019 is that.
Did I hear that correctly.
That's right.
So we are expecting $4 million to $600 million of revenue impact year over year as a combination of both the Cisco disengagement as well as the tail end of the portfolio review on the A.T.S. side, we are targeting growth.
We're not providing fill your guidance, but we are targeting growth off of the base portfolio and then for the rest of C.C.S. You know we are expecting you know flat to some level of growth as well.
And then my question had to do a on a and the carrier space I know you do some five g. programs, it's been sort of lumpy. So far as the market is trying to figure out when actually to get going.
Indications are you getting four or five g. or.
And all the G. for a 2020 any color on that would be appreciated excellent.
Sure you know we've seen some strength in five three plus three regional.
<unk> that's expected to continue through the first half of the air but broad deployment for five days you still think is pushing out a little bit to 2021 and beyond again for for the five p. stuff. We play on the wired side and support the wired players well hopefully I can do a little bit color, but.
You know regionally, we're we're seeing pockets of grow right excellent appreciate it.
Your next question comes from line of Gyms do left from Citigroup. Your line is open.
Thank you I have two questions and I'll ask them at the same time. So you can take them in either order <unk>, which is fine if I add up the proactive disengagements that are happening I believe it in total it'd be $4 million to $600 million, which I think is 100, plus a range of three to five.
By for the other one is that for the full calendar year 2020, or do we need to kinda pro rated and the reason why it <unk>. It seems like Q1 will be down about 4% in revenues, but you know just just to set expectations fair without guiding 2020.
It seems like that future quarters would need to do you celebrate or degrading a little bit based upon that distinct engagements unless you know of course, you're winning more to offset that's I'm just trying to get my hands around the disengagements the timing of that kind of in the full your impact and then my second question is on Aerospace you mentioned, you're seeing some <unk> material.
Shortages.
Unfortunately, I'm not a a pilots or know much about the sector, but other companies to supply to the aerospace. Indeed concurred that you know Boeing has issues with the 737, Max but they haven't really decided material shortages. So can you help us understand what those material shortages are why you're seeing it maybe others aren't.
Yeah, Hi, Jim Nice to talk to <unk> I'll take the first question. So you're correct on the revenue impact than it is for the calendar 2020, and the $4 million to $600 million a combination of the two pieces is the right way to think about it you're right on a year over year basis relative we are two last year were showing.
Down about $60 million. So is a more we are weighted impact and the reason for that is because we expect that the Cisco impact is going to be a much more second half of the year. We are continuing to have discussions with them. They are continuing to go through their own transition process of you know.
Identifying suppliers and developing their own transition programs and so we haven't seen a material impact from the Cisco disengagement in the first quarter and we will expect it to be much more material in the back half of the year.
On the Andy side, Rob can talk about the material side.
Did you have I'm sorry, it's too many factors one is we're seeing a fair amount of inside to leave time orders as our customers are working to rebalance their schedules.
To accelerate some orders and pushing others out largely seven to seven Max related so a lot of the material constraints. We're working for was really as a result of you know trying to expedite things that are willing totally fun.
And the other portion so you know while it backlog is running over it's not necessarily coming down because of the we're adding to it never thing I would also say is that.
You know in one of our operate in places the processes, we take over our customers supply chain and the constraints that we're saying I'm not overly prolific but they're they're spot constraints with some suppliers that we're working with the transition to swastika preferred suppliers and that's taking a little bit of time.
<unk> transition over to our preferred supply base, and and you know get them up to speed I wouldn't necessarily call. It a a holistic issue versus a couple of critical folks that I've just kinda pacing the line.
And that's what we're working through.
Thank thank you so much for the detailed clarification gets greatly appreciated.
Because yeah.
There are no further questions at this time, Mr. I'll be honest I turn the call back over to you for some closing remarks.
<unk>.
So while our full year 2000, and I can results were disappointed I am encouraged the actions were taken to execute a transformation are gaining traction. Most so please with a sequential margin improvement we saw in the fourth quarter long with a strong free cash flow generation when experiments around 2000, a 19 with an A.T.S. employees that we're seeing early signs of a broader semicap recovery.
Within C.C.S.R. portfolios, performing well with margins firmly within our target range I missed a portfolio shaping actions. Thank you all <unk> and I look for updating you as we progress throughout the year.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Oh.
<unk>.
Yeah.