Q1 2020 Earnings Call
At this time all participants are in listen only mode. After the speakers presentation, we will conduct a question and answer session.
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Analyst Please limit yourself to one question and one follow up thank you.
Dan The conference over to your Speaker for today, Craig Berger, Vice President Investor Relations and corporate development. Please go ahead.
Good afternoon. Thank you for joining us on Celeste, because first quarter 2020 earnings conference call.
On the call today, or Rob Munis, President and Chief Executive Officer, and many Chawla 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. So.
Such forward looking statements are based on management's current expectations forecasts and assumptions, which are subject to risks uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions forecasts or projections expressed in such statements.
For identification and discussion of such factors and assumptions as well as further information concerning forward looking statements. Please refer to our print press release, including the cautionary note regarding forward looking statements therein and our annual report on form 20-F, and other public filings, which can be accessed it FCC dot Gov answer.
<unk> Dot com.
We assume no obligation to update any forward looking statements, 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 invested capital or adjusted ROI see free cash flow EBITDA gross debt to non I FRS 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 references to any of the foregoing measures. During this call denote non IRS measures, whether or not specifically designated as such.
These non IRS measures do not have any standardized meanings prescribed by IRS and may not be comparable to similar measures presented by other public companies that use I FRS Oracle report under U.S., GAAP and use non-GAAP measures to describe similar operating metrics.
We refer you to todays press release, and our Q1 2020 earnings presentation, which are available that celestica dotcom under the Investor Relations tab for more information about these answered and other non IRS measures, including a reconciliation of historical non IRS measures to the most directly comparable <unk> for us.
Measures from our financial statements.
Unless otherwise specified all references to dollars on this call our to U.S. dollars and per share information is based on diluted shares outstanding.
Let me now turn the call over to Rob.
Thank you Greg Good morning, Thank you for joining todays conference call before.
Before we discuss Lusakans results.
What to take a moment toward knowledge of their commitment teamwork and creativity.
<unk> global team as they have risen to the challenge of steering the company to covert 19 pandemic.
Our priority was to put plans in place to help ensure that health and safety ever employees.
As we maintained business continuity across the South African network.
I would also like to thank our customers and suppliers for that partnership and finding ways to work through a variety of restrictions.
Since the beginning of a crisis.
Okay has implemented several preventative and proactive measures to help protect their health and safety of our employees suppliers and customers.
We continue to promote a range of protocols that include a global work from home policy.
Pickup in distancing inherent screening, providing personal protective equipment and ships flooding.
We will continue to put safety first while we work to maximize production uptime.
Now turning to our first quarter results.
Even in this challenging environment.
We're able to achieve improved year over year operating margin generate robust free cash flow and pay down long term debt.
Cobot 19 presented a number of challenges that negatively impacted our financial results this quarter.
First quarter revenue fell slightly below our withdrawn guidance range for profitability was ultimately inline beginning of quarter expectations.
If you see a segment posted solid margin performance on lower than expected revenue expanding segment margins sequentially for the fourth consecutive quarter.
Operating at the high end of its 2% to 3% target range.
And our ATM segment, we are encouraged by capital equipments returned to profitability.
Couple of equipment had posted a loss for the last five quarters and we're pleased that our restructuring actions and improved mix have accelerated its recovery.
However, increasing headwind in A.M.D. contributed to eat your segment margin below our target range of 5% to 6%.
I will provide some additional color on our end markets, but first I will turn the call over to 90 to give you further details on our first quarter results.
Thank you, Rob and good morning, everyone.
As a reminder, on March 17th 2020, we withdrew or previously disclosed financial guidance for the first quarter of 2020 in response to the uncertainty created by various government mandated site closures stemming from Cobiz 19th.
Notwithstanding this disruptions caused by cobot 19, however, other than revenue, which was $6 million below the low end of our guidance range or other results were firmly within the ranges originally provided.
Our first quarter revenue came in at $1.32 billion lower than originally expected mainly due to an estimated negative impact of approximately $85 million from cobot 19th.
Revenue decreased 12% sequentially and it was down 8% year over year.
Our non I have for US operating margin was 2.9% up 50 basis points year over year and flat sequentially.
No one I FRS adjusted earnings per share were 16 cents compared to 12 cents for the first quarter of 2019.
Our Ats segment revenue was 41% of our consolidated revenue up from 40% compared to the first quarter of last year.
Yes revenue was down 7% sequentially and down 5% compared to last year.
In addition to impact from Cobot 19.
A year over year decline was driven by reduced revenue in energy due to previously planned disengagements and weakness in our E. N D business, partially offset by improvements in capital equipment demand.
The sequential decline was mainly due to cope with 19 materials and manufacturing constraints and demand weakness any Andy driven by the 737, maxalt, partially offset by improvement in capital equipment.
Our Ccs segment revenue was down 15% sequentially and down 10% year over year.
The year over year decline was primarily driven by portfolio shaping actions.
Within our Ccs segment, the communication that market represented 39% of our consolidated first quarter revenue the same as the first quarter of last year.
Communications revenue in the quarter was down 10% year over year, largely due to covert 19 impact partly offset by continuing strength in our GTM business.
Our enterprise end market represents a 20% of consolidated revenue in the first quarter down from 21% in the same period last year.
Enterprise revenue in the quarter was down 10% year over year, largely due to planned disengagements as part of our Ccs segment portfolio review, partly offset by higher program specific demand, including a JD and programs.
Our top 10 customers represented 66% of revenue for the quarter down from 68% last quarter and up from 62% in the same period of last year.
For the first quarter, we had one customer contributing greater than 10% of total revenue compared to two customers year over year and sequentially.
Turning to segment margins Ats segment margin of 2.7% was down 30 basis points relative to last quarter due to demand softness related to cope with 19 and headwinds in the Andy business, partly offset by spreads and capital equipment.
Capital equipment returned to profitability for the first time since the fourth quarter of 2018 and as expected delivered profitability in the single digit millions.
Year over year Ats segment margin was up 10 basis points as improvements in capital equipment performance more than offset inefficiencies due to cope with 19 and headwinds in Andy.
See see a segment margin of 3.0% came in at the high end of our target range of 2% to 3% despite lower than expected revenue.
Segment margin was up 10 basis points sequentially and up 70 basis points year over year, both sequential and year over year improvements were driven by favorable mix, including strong growth and operating leverage ATM and continued productivity efforts.
Moving to some other financial highlights in the quarter.
I have for US net loss for the quarter was negative $3.2 million or negative two cents per share compared to net earnings of $90.3 billion or positive 66 cents per share in the same quarter of last year.
Earnings per share for the first quarter of 2019 included a 75 cents per share benefit from the sale of our Trunzo property.
Adjusted gross margin of 7.3% was up 30 basis points sequentially and up 70 basis points compared to last year, Despite lower revenue and negative impacts from cobot 19 sequential and year over year improvements were largely driven by improved mix and productivity.
Our adjusted as DNA of $50 million was down $2.5 million sequentially, primarily due to favorable foreign exchange impacts and lower variable spend.
Our adjusted US Genie was down $1.0 million from the prior year period, primarily due to foreign exchange benefits.
No not yet for US operating earnings were $38.1 million down $5.6 million sequentially and up $3.0 million from the same quarter of last year.
Our non IRS adjusted effective tax rate for the first quarter was 24% compared to 27% both sequentially and for the prior year period.
For the first quarter adjusted net earnings were $20.7 million compared to $15.8 million for the prior year period.
No and I are first adjusted earnings per share of 16 cents was up four cents year over year, mainly due to higher non I for us operating earnings and lower interest expense.
No one IRS adjusted ROI see of 9.5% was down 1.1% sequentially and up 1.6% compared to the same quarter last year.
Moving onto working capital.
Our inventory at the ended the quarter was $1.1 billion, an increase of $80 million sequentially and flat relative to last year inventory turns were 4.8 down to 0.7 turns sequentially and down 0.2 turns a year over year.
Capital expenditures for the first quarter were $12 million or approximately 1% of revenue.
Non <unk> first free cash flow was $54 million in the first quarter compared to $145 million for the same period last year.
All but $32 million of our first quarter 2019 cash flow was attributable to the sale of our trundle property.
Cash cycle days in the first quarter were 69 days up seven days sequentially and flat year over year.
Our cash deposits at the end of the first quarter of 2020 were $135 million up $13 million sequentially as we continue to work with our customers on working capital improvements.
We continue to improve our working capital performance and we remain focused on generating more than $100 million of dawn I have for us free cash flow in 2020.
Moving onto our balance sheet and other key measures.
The left to go continues to maintain a strong balance sheet, our cash balance at the end of the first quarter was $472 million down $7 million sequentially and up $14 million year over year.
As a result of our high cash balance and our $450 million revolver, which remains undrawn, so less because liquidity exceeds $900 million.
We believe this liquidity amount is sufficient to meet our current business needs.
As a result of continuing free cash flow generation, we were able to make progress in the first quarter towards deleveraging our balance sheet by retaining $61 million up long term debt.
Our gross debt position was $531 million at the end of March while our net debt was $59 million down $53 million sequentially and down $177 million from the first quarter of last year.
Our gross debt to non IRS trailing 12 month adjusted EBITDA leverage ratio improved 0.2 turns sequentially to 2.0 turns.
At the end of March we were compliant with all of our financial covenants under our credit agreement.
In the near term our priority is to continue to reduce our leverage providing us with increasing levels of flexibility and reduced interest costs.
Over the long term, though our capital allocation priorities remain the same.
We will continue to work towards generating strong free cash flow and plan to return approximately half to shareholders, while investing the other half into the business.
In the first quarter, we incurred $8 million of restructuring charges, while restructuring costs are forecasted to be lower than anticipated for the Cisco disengagement in 2020, we anticipate taking additional restructuring actions in 2020 associated with adjusting our cost base to reflect shifting demand as it was.
Adult restructuring cost for 2020 will be greater than the forecasted $30 million.
We believe that slifka has a strong operating model and solid balance sheet to whether the current coded 19 disruption.
As we look to the next quarter, we see continued uncertainty surrounding cobot 19th.
While our operations are largely stabilized the size and geographic diversity of our network exasperate. The high degree of variability surrounding government imposed workforce restrictions impacting not only our operations, but that of the global supply base.
Therefore, consistent with many of our large customers. We do not believe it would be prudent to provide any specific financial guidance for the second quarter at this time.
Well, we're not providing guidance, we do anticipate the second quarter to be largely inline with our first quarter results should conditions that are improve nor deteriorate further.
I'll now turn the call over to Rob for additional color and an update on our priorities.
Thank you Mandeep Cobot 19 presented three primary challenging the first quarter increased material constrain.
Deferred demand and operational inefficiencies first.
Material shortages increased by approximately 50% in Q1 2020 as compared to the end of 2019.
We're actively engaged with our supply base to procure materials and while we are making progress there continues to be uncertainty due to covert 19.
Second while we are experiencing demand strength in capital equipment and service provider, which is fueled by our Judaism hardware solutions.
We have seen softness another area, such as Andy and industrial.
We are working with customers to adjusted optimize future production schedules and at this time, we anticipate that most of the native demand shortfall, resulting from covered 19 will push into later quarters.
Finally.
Well, we have been impacted by government mandated shutdowns.
We're pleased with the work our teams have done to get us back online to meet our customers' requirements.
Currently our global network is operating at approximately 80% to 85% of normal workforce levels.
However, certain sites continue to operate at lower capacity levels.
Adult of government mandated operational restructuring currently in effect.
Others are operating at near normal levels, we're trying to add 95 plus percent.
As we think about 2020, we're pleased that we're able to start the year well the solid foundation and Ccs.
And with improving performance in capital equipment.
While we are now facing a number of near term headwinds as a result of covered 19.
We believe the strength of our portfolio will help mitigate some of these challenges.
Turning to Ats.
Our capital equipment business was and continues to be negatively impacted by covert 19.
Due to shelter and placed orders in various geographies.
Currently our capital could've been facilities in the Bay area, Oregon, and Malaysia operating at approximately 60% normal workforce level, while career is at full capacity.
Despite these challenges revenue was up 28% year over year in the first quarter.
And unfulfilled demand from Q1 is expected to be fulfilled in subsequent quarters.
The business returned to profitability in the first quarter and the single digit million dollar range.
The sequential improvement in profitability, that's helped in part by our productivity initiatives improved mix, a new program ramps.
The display market remains depressed and while volumes are improving.
We continue to expect near term softness with a modest recovery late in the year driven by increased demand for next generation smartphones and next generation large form factor displays.
As the industry should have some LCD to OLED, we believe that we are well positioned to support our customers growth I have already begun ramping new programs and our semi cap business, we're seeing full year demand strain on a year over year basis. However, our near term results were softer than expected driven by covered.
19.
We're pleased with the improved profitability in our capital equipment business I continue to take a long term view in this market.
Well, that's specialized vertical capabilities. We believe we are well positioned to capitalize on potential long term demand drivers for this business.
Across the balance of 80.
The challenges we are experiencing uncovered 19.
Our impacting growth across several markets, while also creating some opportunities.
Within industrial in the near term, we are seeing a modest demand reduction for certain end market products as result of corporate banking.
In a and B.
We are experiencing headwinds as a result of continued material constraints that have been exacerbated by covert 19.
Temporary halt of the Boeing seven to seven Max program.
As a result.
Andy was largely breakeven in the first quarter of 2020, However, we're expanding on the actions taken in the first quarter two adjusted cost base to this reduced level of demand.
Barring any unforeseen increased negative impact from covered 19.
We anticipate the business to improve its profitability in the near term.
The aviation industry is among the hardest hit industry by the pandemic.
And as such we anticipate that covert 19 will continue to pressure our AG business in 2020 as weakness spreads commercial market.
Finally, offsetting anticipated strengthen defense.
While we have facing challenges in our commercial aerospace different from the near term.
Please our defense business bolstered by a trend.
Continues to perform well.
We're excited they trend has received six Forestar supplier Excellence award from Raytheon in the first quarter.
This award is a recognition.
Team focused on quality and on time delivery each and every day.
Also as mentioned last quarter.
We are in the process of expanding one of our a trend facilities.
Accommodate additional I tar capacity.
That's one of the expansion of our licensing business.
I'm pleased that these expansion efforts are on track and expect them to be substantially complete by the end of year.
Well, then healthtech, we expect to see strong growth in 2020.
While we are seeing a modest near term decline than demand for products used in elective procedures due to covert 19 priorities. We're pleased with health techs growth, including a number of recent wins to partner with our customers in the fight against covert drinking.
We are working with Medtronic to quickly ramped up production of Ventilators. In addition, we're also collaborating with a Canadian based medical company to produce ventilators for the Canadian government.
Let's look as happy to do our part in combating covered 90.
Turning to see yes.
I see a segment delivered sequential margin improvement for the fourth consecutive quarter and operated at the top end of our 2% to 3% target range driven by portfolio actions and improved mix, including more JD.
We're pleased with the performance of our Judy and business at the end of 2019, GTM accounted for 500 million of revenue and the first quarter of this year.
JD EM revenue grew approximately 40% year over year.
Hi level of growth was fueled by a number of wins in the service provider market.
So let's go now support eight out of the 10 worlds largest hyperscale service providers developing technologies, which are deployed throughout their data centers.
We're seeing increased demand from service providers as they expand their data centers in support of growing cloud and online requirements.
Current demand growth is largely driven by 2019 wins and accelerated by the recent surgeon remote workers consumption of digital content.
The need for artificial intelligence and machine learning technologies, how global government agencies come back covert 19.
While we are seeing strong growth within Judy M. and service provider customers.
Relocation OEM demand softness and portfolio shaping continues to adversely impact our revenue.
Five by covert 19.
Cisco disengagement is progressing as planned.
And we expect to transition to be largely complete by the end of 2020.
We continue to work with Cisco to ensure fish and seamless and successful transition.
We're pleased with the progress and selectively backfill fiscal revenue.
Higher value add solution and continue to have many inquiries about available capacity at our Thailand facility, we have a large funnel of opportunities to backfill Thailand.
And we already experienced strong booking from the first quarter of 2020.
We believe we're on track to meet our bookings targets with a richer mix of programs.
While there was uncertainty surrounding the impact cobot 19 may have in the near term, including an R. and D. segment.
We remain confident in our long term outlook, we believe that our strength in Ccs hardware solutions.
To support the growing demand for cloud and bandwidth coupled with a limited exposure to consumer oriented markets provides us with a solid foundation during these uncertain times.
We are excited about our future opportunities for sustainable profitable growth.
Well that's the thank all of our employees, who are focused on keeping our operations running and working together to help mitigate the risks for our customers.
Their effort and commitment to working together to adapt to the situation has been nothing less than extraordinary.
We look forward to updating you over the coming quarters with that I would now like to turn the call over to the operator to begin on Tonight.
Certainly as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad analysts. Please limit yourself to one question and one follow up Gus Papageorgiou.
With Pi financial your line is open.
Thanks for taking my questions and congratulations on a good decent quarter, given the challenging environment I just want to hit on the Cisco disengagement I mean I.
I imagine there was a pretty complicated undertaking and under normal circumstances, but with.
All the chaos, it's going out there in supply chain I mean, you're how certain argue that it's going to happen. This year and has do you know if Cisco has found other providers and if they don't.
If there aren't able to find other providers in within the timeframe that you plan what is the plan for maybe extending it I mean are are there is there anything in the contracts that would be beneficial for you if cisco were to extend their supply agreement with you.
I got to drop a yet you know the transition plan that we walked out with Cisco is complete so they have found other providers.
And we're working with them on a female.
And efficient transition so.
You know while things could change that Oh, good a pandemic yeah I think they have home so for all the work and we're working in the your transition plan.
And in our side are you know where we're encouraged by the you know the very strong bookings that we've seen to date back. So that is still work with programs at a more aligned to our strategy, we're seeing some strain.
Lot of strength enough service provider business.
While the median.
Hello.
Can you have a strong some alone.
It is nothing Thompson enterprise.
Okay, great sorry, if I could just one one more I mean, it's good cash flow in the quarter. You know when do you do you think when do you think you'll be getting by the end of the year, you'll be in a in a net cash position I mean, obviously your inventory levels are higher because of a material constraints, but if you kind of continue at these levels do you think by the end of the year will be you guys will be.
In a net cash position.
Hi, guys to Mandeep here, yes, so we're very pleased with the cash flow generation in the first quarter 54 million.
As we mentioned, we're targeting above $100 million for the full year, and so that would imply that well get pretty close to two that but what I would just say is that the timing of course will will be up and down given the the cobot impact right. Now. So we do expect to continue to generate strong free cash flows. We go through 2020, and our number one focus.
Right now is to de lever. So if the cash generation does come in as expected, we should be getting close to a net cash position.
Great. Thanks for taking my questions.
Thanks.
Todd Coupland would see I'd be see your line is open.
Hi, good morning, everyone.
Good morning, just a follow up on that free cash flow I think he said all the free cash flow was from operations. The exit except 32 million was was that right. So.
[music].
Actually I saw it mandeep, you're actually know we were just providing a bridge.
On a year over year basis, when you back out the Toronto property sale and so what we were indicating is that our cash flow was a stronger than than the previous period. When you back up the trying to sell.
Oh.
I just wanted you do a give us the goal posts to get to 100 million for for the year, particularly given a you've done pretty well in them in a in a in quarter. One terms of you know getting that you know halfway there. So just talk about the puts and takes would get you to 100 million.
Sure. So if you look at our cash cycle performance, we were relatively flat on a year over year basis, and that is with inventory levels being elevated and so if the in a as you're aware in Dms space if revenues to decline it has the opportunity to kick out I'm much more cash Oh, we currently.
Do have visibility to generating a little to cash flow and it's a combination of slightly lower revenue, but then also continuing working capital performance I, specifically a in the areas of inventory and deposits that we feel like we're making good progress in those areas.
Okay.
And then my second question follow up question is from what you're seeing from your customers at this point and the you know the various government requirements do you have an opinion on the strength of the recovery I mean this is obviously a major to date across a number of companies, but you know as busy as it to you.
Is it a L.
I imagine some of your segments will take longer odds come back such as aerospace, but you know excluding that talk about well what your customers are telling you in terms of Oh, how quickly the business come back once the various regions opened up thanks a lot.
Hey, Todd it's Rob Yes. Good question, it's certainly a conversation we've been having with all our.
Customer again, yeah.
It does depend I think.
And our Ccs business, especially and service provider and in areas. So that support the hyperscalers yeah. They see thing accelerating during the cold and pandemic and thirst for bandwidth.
But in other areas, especially like aerospace I think it's going to be a you know down for a good couple of years.
Industrial I think it's probably more of a you.
Healthtech that there's some puts and takes.
But generally speaking we see that as though.
As a CLO business for us and also the industries as the.
Well, that's a push out of you know elective surgery, a equipment, there's oh pulling of everything else in terms of diagnostic equipment.
It depends on on People's mix, but generally speaking hope that will be a growth business for us as well. So it really depends on the segments of the general sentiment I think if people are hopeful for you and certainly not of the now the pessimists are saying I know.
There's a lot of optimism for you.
Great. Thanks, a lot we get to call it okay.
Paul steep with Scotia capital Your line is open.
Hi, good morning.
Could you maybe talk just a little bit longer term, if you've had any discussions yet or how clients would be thinking that they may be shifting manufacturing capacity. We know we've had some.
Commentary it there, but people realigning supply chains and shifting things how would celeste because think about that and then I've got one quick follow up from India. Thanks.
Yeah, right now if customers are being very measured and can zone.
You know how they're thinking about.
Long term well footprint.
Yeah I think.
Early on in the first couple of anything that was.
While the tax situation there now there's a lot of discussion about localization and things along those lines.
Nobody is going overboard over rotating at this stage of the game in terms of looking at onshore in or anything drastic like everybody is looking to have a balanced.
You know portfolio that kinda <unk> has total land that costs are better optimize so not a lot of discussion right now on any hard rather actions.
Perfect and then maybe deep how should we think about the operating costs, obviously, taking do affect your commentary around restructuring in the fact that you'll be above the 30, but if we think about the operating cost in Q1.
Did we fully have the savings reflected in there at sort of the prior run rate or should we think that there's significantly more to come. Thanks.
[noise], let me know if I'm answering your question properly Paul. So you know we're pleased with the performance that we had in the first quarter, but there were puts and takes in there. So as we mentioned revenue was impacted by about $85 million because of cobot 19, and so had we not had that headwind revenue would have come in a lot stronger and then with leverage you would.
To see margins or potentially expand from there. We also did incur some direct costs relative to cope with 19 with a $3 million are so and so that's a that's weighing down on the results, but we had other you know.
Benefits on the other side.
We had some foreign exchange benefits, we saw some benefits on our tax rate as well and so while we're not providing guidance for going into the second quarter. We expect that there is gonna be some moving pieces you hit on one of them, which is the improved profitability in certain areas. You know Andy was approximately a breakeven business in the first quarter now we've already started to take some time.
Actions, but we need to take more cost actions and right size that business and right now the plans that we have our indicating a good a greater level of profitability in Andy as we move into Q2 and so the actions are continuing and I'll just touch briefly on the on the restructuring plans for the full year.
As mentioned you know, we originally had anticipated $30 million restructuring charges for the year.
The good news is is that because of the strong growth that we're seeing in Thailand, not only from new wins that you know we're getting into backfill Cisco, but also a lot of demand strength from service provider, we are able to redeploy more resources and assets than what we had planned and so that original dirty is coming in lower however, as we add on additional actions to I'm.
And we are seeing that that will add to it so right now our restructuring outlook for the full year is in the range of 30 million to $45 million.
Perfect. Thank you.
You welcome.
Rob Young with Canaccord Genuity your line is open.
Hi, good morning.
$85 million that you're talking about I think people might use that as a way to calibrate each year. So.
Sure. So can you talk about how much of that was driven by China.
And Oh.
Part of that $5 million.
Second March as impact.
Right.
Yes.
Sure so.
I see them talk about cobot 19 for a moment and Rob can add on as needed. So so there's kind of three likes the stool here, there's a the demand side, there's impacts on the materials side and then there's operations on the demand side, we talked about $85 million about two thirds of that was in the Ccs business and as you know I'm. The majority of Tcs is operations are.
In b or in the Asia region.
But one of the challenges that we've been having it has been on the material supply. So the demand outlook as Robin mentioned in one of his earlier responses is pretty strong although there's some puts and takes in aggregate. The demand outlook continues to be relatively strong the material constraints were challenge and that's one of the reasons that inventory has increased a little bit that's one.
Of the reasons, we had the $85 million of gated revenue and it really has to do with our suppliers being able to get back fully online and right. Now there is a portion of our suppliers that are not yet fully online which is causing some of these challenges. The other you know big unknown right. Now is you know we're very pleased that the operating network is running at 85% Oh.
Only station and we would hope that overtime that that would improve but it's a very large unknown right now and so right now we're anticipating as we go into Q2 that the it won't get materially better, but it also won't get materially worse.
Yeah, So if I set aside in d. it sounds as though the bigger impact. He is just not demand would be your ability to operate some facilities and then if the only secure enough supply to build.
Correct correct.
Correct. So it's the operating efficiency to your point and then it's material supply I mean, if you look at our network right now across our network is only one site. That's actually currently not operating and it's a relatively small site and our expectations are that site will be back online within the next few weeks and so on the operating side you just don't know if there is gonna be another.
Government mandated shutdown in whichever country you pick.
On the supply side, we've been seeing a good level of improvement and what we're finding is is that the supply constraints are not coming out of China other coming out of areas that have been hit after the China pandemics or after the pandemic hit China and so right now about 15% of those suppliers are currently at some level of disruption and so.
The answer to your question is yes demand we feel a strong right now we're working very diligently to get the supply and we have dedicated resources on that and they're making very good progress and then on the operational side. You know we're pleased to get another were 80 to 85.
Okay and then last question for me it just directionality on the operating margins going forward.
Heard much different things it sounds as though restructuring in D. may actually be positive for that.
The CE business is profitable 2.9% operating margin. This quarter was strong do you think you can improve on that as you go through the year or is it just too uncertain.
Where be careful not to provide guidance. There is a lot of uncertainty and so I think the prudent thing would be to do that it wouldn't really be in any of our benefits to declare that we have a tremendous clarity when many of our customers themselves are saying that they don't but what we would say is that if you go back and look at kind of how we were thinking about 2020 earlier on we are look.
Turning to expand margins in 2020 compared to 29 team and we're looking to grow our Lps as well in 2020, and so the 2.9% in Q1 was up 50 basis points.
On a year over year excuse me and it was up on a year over year basis, and so if that 50 basis points improvement was there in Q1, where we're looking for margin expansion as we go through the remainder of the here, but we're not going to give a number at this time.
Okay. Thanks, a lot.
Thanks, Rob.
So most metropolis with BMO capital markets. Your line is open.
Hi, Good morning, and then he just to clarify you said that actually has the next quarter you'd expect to see some profitability improvement demand D and so what would be the key offsets given that all else equal you would think that Q2 blocks of her to Q1 net corporate level.
Well there are some again some impacts from direct costs around coated those will continue to be a little bit of an unknown. We had benefits in the first quarter as I mentioned around taxes as well as foreign exchange and those won't necessarily repeat themselves going into Q2, and so while we are expecting improvement in Andy and we expect continuing.
Interpretation profit contribution from capital equipment.
You know that they may be slightly offset the other thing I would say is is that we're very pleased with the performance that we saw in Ccs Ccs was at a 3% of their margins and that's the high end up their range you know I would say at this point, it's not necessarily something that we can just assume it's going to continue to be at that level. The business had a very strong level of performance in Q1, we're still anticipate.
Getting good performance for the remainder of the year, but Ah you know if the business falls, a little bit below 3% that wouldn't be very far off of our expectation.
Okay, and just to clarify in terms of the either by 85% capacity that you're running at currently what segments are being best impacted by the be constrained and the production shortfalls.
Yeah, Hi, it's Rob.
Now.
Capital equipment.
It's running at about 60% to 70% probably one of the most impacted that's largely driven by some low utilization in the Bay area.
And also Malaysia.
As of late we do expect ER physicians will having in Malaysia, the to get better.
Company gets over the surge if you will.
That's one of the a lower one and we're really tracking it more by region than by business I can China is almost back to normal levels.
Europe and.
Running very strong in 90 plus percent Thailand's running at 90 plus percent.
You know like I mentioned, the laser is ER is getting better but in the 70% range right now.
So.
Overall, I guess I would have to taking a lot I would have to say a couple of quick it probably has a long its way to go.
Okay.
Absolutely.
Okay.
Groups, who are out of China with Bank of America. Your line is open.
Hi, Thanks for taking my questions I'm on the Ccs side.
Just looking at enterprise revenues came in better than you had expected you had guided down mid twentys it came down 10%.
Also on the communication side looks like it was slightly worse down 10% horses flat you had guided so maybe if you can drill down like what did you what was better what was worse in each of these enterprise and communications end markets.
Sure. So what we saw an enterprise in Q1, we saw strong.
Demand in storage and compute supporting the Hyperscalers about was somewhat offset by a offset by portfolio shaping the balance was resulting from though demand dynamics as we look.
Forward in enterprise, we see again could you got portfolio shaping and that will again be partially offset with a new program ramps and start to compute supported a heck of a fairly.
And calm but before.
Having said public pressure, we had product and technology transitions and some weaknesses and.
Traditional times programs that were partially offset with some new program them support and service providers.
And looking forward, how we do see some of the unfilled demand and from Q1 pushing into Q2, we had some new program ramps and networking supported by our JD I'm portfolio anything said demand strength in some existing programs in the networking area and that's being partially offset with some.
Technology transition.
Okay. Thanks for the color Robin that for my second question I'm just on E N D.
Can you help us quantify what the what the dollar impact was on the material shortages that you saw on E. N D revenues and also the dollar impact of the Boeing 737, Max program and the Genesis and my question is I mean, Andy is a big part I mean, your lead or any Andy yes, so given that.
Does that segment will be week over the course of the year do you still expect Ats segment.
In Europe or do you think does weakness any Andy just kinda masks the growth you're seeing in other parts of the business. Thanks.
Yeah, Oh, Oh, maybe take the a piece around a profitability and the at looking at broken out on as well.
Andy is our largest segment within Ats and Andy has been performing very well for a number of years the challenges around the sudden 37 coming out of the into last year I have already been factored into our we're already factored into the numbers were looking at as we think about this year and so we haven't seen a material change at this point and what's happening around the said.
37, we won't give specifics on the direct impact, but what I will share or reiterate from last time is set in 37 was just a little bit under 10% of our overall Andy revenues are in last year and so at December 37, it's not moving too much on the other side of things, though there were a lot of inefficiencies. So.
Some material continues to be constrained and that's creating inefficiencies within the network. We saw shutdowns in the first quarter as well, which drove some of the inefficiencies, but the we are expecting a level of profitability as we go into Q2 to address your question on the 5% to 6% maybe range on the organic growth rate.
The commercial aerospace is down significantly and Ah, we are expecting a double digit decline in our aerospace and defense business in 2020, as a result of that and so because it's our largest segment, we likely will not hit the 10% growth rate in Ats. This year that we're targeting we're pleased that we were able to get to that rate a 9% for the last two years.
This year, we may not see that but that being said it we're still in the early innings capital equipment demand continues to be strong and we'll see how much of the decline and Andy can be offset by capital equipment.
Okay. Thanks for all the color I appreciate it.
Thank you and with respect to them and we're kicking material constraints you know the 85 million about.
I guess about 40% of so was pointed towards the P.F. the balance within about a Ccs <unk> a lot of the shortages within that 40% were within a and b some of them more covered related but also some of them or just.
No other issues that we're working through we've had some high reliability parts on some very specific programs that have bid on a.
On allocation for a period of time and we're working through a without supplier to increase their capacity that we just the backlog sort of continue do a impede our ability to get revenue out the door.
Okay. Thanks, Rob appreciate it.
Okay.
Paul Treiber with RBC capital markets. Your line is open.
Thanks, very much and good morning sort of follow up on a prior comment you made about capital equipment being at 16, 70% utilization, how does that compare to either last quarter last year.
Then how do you see utilization changing over the year. You know is that it's fairly rapidly moving items or are you looking for that to improve with displays ramping up towards the end of the year.
Yes, so the utilization comment was really just on.
You know what percent of.
The total hours available our employees are consuming if you will and 60% to 70% relative to last year. It's about you know usually when at about 100%.
Lets bringing that down it's just in Malaysia, specifically are you know government mandates on how many people could be a in the building in any given time and it didn't point in time.
And you know based on conditions, improving in Malaysia, we see that the restrictions or.
Being pulled back and our utilization improving over the next several weeks to.
The full quarter.
California so.
The shelter in place orders, so that will probably oh fill being placed for some period of time, we're waiting to see that with respect to display Korea has been at about 90% utilization may have not.
I've been impacted significantly by cold, but Ah thank goodness so.
Right now, we're seeing some sequential quarter over quarter improvement in display.
But as I mentioned during the call.
I don't see bombs materially improving so perhaps talk into the or into next year and some of the cell phone smartphone sales start picking up in the industry.
Thanks, that's helpful and I understand for my second question just in light of you know globally the financial constraints in the uncertainty in this environment do you think it wouldn't lead to you know one overall greater willingness from your end customers for I'd to consider outsourcing maybe more so than what they do.
In the past or you can be seen any signs of that at this point.
Yeah. That's a very good question I think that's especially true and ER and high reliability markets. What we've seen in past cycles, you know its customers work through their cost challenges.
And you must providers like ourselves that are the leaders in a and B. We're a leader in in couple of quick where leader.
They look to the leaders in those industries to help support them help supply a drug supply chain efficiency, so in Arizona and be a in particular.
We do see a potential benefit.
Okay, and if you go through its down cycle for us to actually pick up some incremental share where a these oems were reluctant to outsourcing that passed at the stages, a day and they probably have a lot of Swiss cheese and their factory as a lot of underutilized factories, and we could certainly help them through their efforts in terms of lifting and shifting and helping them to physically.
Consolidation.
Optimizing also on on our existing footprint. So would you view that as a opportunity and.
Especially has an impact from many of our E gifts markets.
Matt Sheerin with Stifel. Your line is open.
Yes, hi, good morning. This is current swartz on for Matt.
Question on the health Tech business and the ramping of some new Kobin related programs. Just wondering if you could offer a little bit more color on how you expect the incremental covert related demand how long you expect that to be sustained potentially and whether this will be a net benefit.
In the next few quarters, given the reduced demand for surgical products.
Hi to yes oppose it is actually having a positive impact on bank late as I'd be monitoring devices.
So we expect the bomb for devices to be strong for the balance of year. Some of our recent awards that we won.
Ultrasound for diagnostic equipment.
There are accelerations of products that were currently producing.
We also had some incremental award so we think the net benefit for us a this year will be a north of $75 million problem fulfilled in the back half of this year.
So that we already had a fairly high growth rate in our health, Texas will actually add to that high growth rate.
Understood. Thank you and then just another question looking at the capital equipment outlook, you mentioned that you expected some of the unfulfilled demand in Q1 to probably come back in future quarters.
But I'm just wondering if you may have any common commentary on on the competitive dynamics in this market and what the timeline maybe for that demand coming back I think one of your peers.
Also indicated that it believed it was gaining share due to semi cap in semi cap due to supply constraint. So just wondering.
When those constraints, you may be lifted and and how that competitive dynamic shakes out.
All right yeah.
Thank you know a lot of the Q1 demand that with supply chain constrained.
We are really from a acquire nothing that really up to speed will push into Q2 in subsequent quarters.
From a broad buckets perspective, what were what we're seeing as.
You know technology buys continuing in areas of logic and Threed NAND.
In memory, a pick up in the hopefully in the back half of the air in DRAM and NAND, a large portion of the of our growth this year.
It's not just increased demand, but it's a new program ramps. We won a fair amount of business last year that business is now.
In ramp mode.
So a good portion of our or demand strength is actually coming from these new program.
Yeah.
And then again more broadly speaking you know the.
Covert dynamic we have not heard of any major change in fab plans or expansions or upgrade or.
Pull backs on technology advancement, a lot of the issues that we serve in Q1.
And then Semicap industry was really due to logistic issues of a customers customers.
Having this isn't moving people around the materials around there are doing the installs are things on along that can we expect that to get better and in subsequent quarters.
And also our supply basins Mandy.
Before.
Well we.
Absolutely not that's over the coming online as I suppose covenant restrictions are improved that getting back on line and we're getting into flow parts.
Yeah, I'll just add to Rob some comment just reiterate what we had said in her prepared remarks, which was capital equipment was up 20% on a year over year basis in the first quarter and so although there was some demand that pushed out into subsequent quarters, we're seeing very strong levels of topline growth and.
It is.
Very much largely on the back of wins that we've had in that space in 2018, and 2019th and so we do expect a good level of growth I just from those share takeaways and a new program ramps or you know, even though some ultimate demand may shift between quarters.
Great. Thank you very much.
Thank you.
Daniel Chan with TD Securities. Your line is open.
Hi, good morning, guys.
So in the past you said that it's if the inventory holding a books. It's just some of your customers don't hit certain inventory turns that they they essentially pay you feasible holding that inventory for them can you give a detailed on the conditions under which that applies obviously with if there is demand doesn't hit certain.
Their expectations and they do less inventory because they'll pay but what about in this environment, where are you finding it tough to actually fulfilled at the request it there that they're ordering from you.
Yeah, Hi, Dan Mandeep here, Yeah, Phil I'll take a step back for a moment and to talk about how we looked at the Ccs portfolio I'm going back over the last two years or our primary filter has been around ROI C and so while we ultimately have announced a number of programs that were disengaging from because we weren't able to address that either by having less were.
Yes, it capital in play or improve profitability, sometimes it's led to us to making a decision to disengage. However, there were a number of customers and our Ccs business, where we were able to come to favorable terms terms on and some of those terms are where we have a a inventory turn cash model in place with them and so if their demand is dropping off or if they need us.
To buy a lot more inventory to fulfill certain spikes a lot of times, a cash deposit will come in to help offset that and one of the things. You'll notice is forecast deposits now are up $235 million, that's up $15 million from the first quarter of last year and so the conversations we have with their customers are you know before we talk.
Hi, up even more working capital, let's understand when you're going to use it and if the time that you needed this little bit longer than what would be normal let's have a conversation around deposits and we found that our customers have been very open to those discussions.
Yes. Thank you.
Thanks.
Jim Suva with Citigroup Your line is open.
Thank you very much its a pleasant surprise that you actually are talking about you know Q2 being similar to Q1, and a kind of more but demand a push out as opposed to more of a demand destruction that.
Other companies are talking about because the krona virus.
Employment and economic slowdowns and things like that can you help us kind of bridge. The difference about why why your outlook is just you can see much more positive as it is a factor that you just have so much more exposure to things like semiconductor equipment and less exposure to maybe like self.
Phones, and Pcs or television things like that but it just seems like your outlook calls for a lot better demand in some of the other companies that were hearing out there. Thank you.
Hey, Jim Thanks for the question, Yeah, I pick out a lot of has to do with you know the mix as you mentioned a review semicap says, but continuing to be strong.
Certainly our service provider a business continues to be quite strong health that continues to be right strong.
Headwinds that we're seeing in industrial.
We view that more of.
Push out versus a demand destruction, a lot of our customers customers.
You know factors are not up operating or they can't do install so they just on pause until a the factors come online I guess exception would would be a and b, obviously, we announced last.
Last quarter, we're seeing some 737, a max headwinds, which is the demand reduction and now with a lack of flying and 60% of the world's a aircraft being park.
We don't view or Andy demand being pushed out viewing the demand being decrease but again, that's really in our.
Commercial business about 40% of our.
<unk> portfolio is in defense and we see that growing in the mid mid single digits as well and as we announce we're also expanding already trained facility, which is gonna be a housing just about all defense work as well.
Thank you so much for the detail some clarification such greatly appreciated.
Thanks, Jim.
There are no further questions at this time I would now like to turn the call back over to the presenters for final remarks.
Thank you.
You know given the volatile macro environment I think we executed well, we're able to drive sequential operating margin improvement generate strong Keith.
Cash flow and pay down long term debt in the quarter.
And then Ccs not portfolio continues to perform well we had margin from within their target range MSR portfolio shaping action in the NACF I'm pleased with a continued growth and improved profitability of our capital equipment.
While we faced this uncertainty of Misty and Dennis I'm confident in the softer the team and our ability to successfully navigate the challenges that may lie ahead.
I believe we're taking the appropriate action to keep our people say, while remaining focused on delivering for our customers. Thank you all for joining I look forward to updating you as we progressed throughout the year.
And best to you and your loved ones in these trying time.
This concludes the Celestica first quarter 2020 earnings call. We thank you for your participation you may now disconnect.