Q1 2020 Earnings Call
[music].
At this time all participants are in listen only mode. After the speakers presentation, we will conduct a question and answer session.
To ask a question during the session you will need to press star one on your telephone please be advised the stays conference is being recorded.
Analyst Please limit yourself to one question and one follow up thank you.
I'd like to hand, the conference over to your speaker for today, Cragle Berg, Vice President Investor Relations and corporate development. Please go ahead.
Good afternoon, and thank you for joining us on select because first quarter 2020 earnings conference call.
On the call today, or Rob the onus, President and Chief Executive Officer, and many Cholla Chief Financial Officer.
As a reminder, during this call we will make forward looking statements within the meetings at the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian Securities laws.
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 <unk> press release, including the cautionary note regarding forward looking statements, there and and our annual report on form 20-F, and other public filings, which can be accessed it FCC dot Gov hands.
Our dotcom.
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 IRS trailing 12 month adjusted EBITDA leverage ratio.
Adjusted net earnings adjusted EPS, adjusted SGN, a expense and adjusted effective tax rate.
Listeners should be caution that references to any of the foregoing measures. During this call to note 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 or who report under us GAAP and use non-GAAP measures to describe similar operating metrics.
We refer you to today's press release, and our Q1 2020 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 IRS measures to the most directly comparable I FRS.
Measures from our financial statements.
Unless otherwise specified all references to dollars on this call our to us dollars and per share information is based on diluted shares outstanding.
I'd now turn the call over to Rob.
Thank you Greg Good morning, Thank you for joining today's conference call.
Before we discuss left because results I'd like to take a moment toward knowledge of their commitment teamwork and creativity displayed by our global team as they have written for 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 of our employees.
As we maintained business continuity across the full for the 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 plus to have implemented several preventative and proactive measures to help protect the health and safety of our employees suppliers and customers.
We continue to promote a range of protocol that include a global work from home policy.
Physical vis vis some thing enhance screaming, providing personal protective equipment and shift 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 were 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 in line with beginning of quarter expectations.
Our Ccs segment posted solid margin performance on lower than expected revenue expanding segment margins sequentially for the fourth consecutive quarter and operating at the high end of 2% to 3% target range.
And our Ats segment, we are encouraged by capital equipments returned to profitability.
Capital equipment had posted a loss for the last five quarters and we are pleased that our restructuring actions and improved mix have accelerated its recovery.
However, increasing headwind in a and B contributed to Ats 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 Mandy 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 went through our previously disclose financial guidance for the first quarter of 2020 in response to the uncertainty created by various government mandated site closures stemming from cobot 19th.
Notwithstanding this disruptions caused by cobot 19, however, other than revenue, which was $6 million below the low end of our guidance range. Our 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 was down 8% year over year.
Our non IRS operating margin was 2.9% up 50 basis points year over year and flat sequentially.
And 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 impacts from Cobot 19, the year over year decline was driven by reduced revenue in energy due to previously planned disengagements and weakness in our Andy 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 in Andy driven by the 737, Max halt 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 up 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.
He has segment margin of 2.7% was down 30 basis points relative to last quarter due to demand softness related to covert 19 and headwinds in the Andy business, partly offset by strength in 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 coded 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.
Hi, FRS 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 to 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 Gionee 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 I FRS 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.
Non IRS adjusted earnings per share of 16 cents was up four cents year over year, mainly due to higher non IRS operating earnings and lower interest expense.
Non IRS adjusted ROI see of 9.5% was down 1.1% sequentially and up 1.6% compared to the same quarter of last year.
Moving onto working capital.
Our inventory at the end of the quarter was $1.1 billion, an increase of $80 million sequentially and flat relative to last year.
Inventory turns were 4.8 down 0.7 turns sequentially and down 0.2 turns year over year.
Capital expenditures for the first quarter were $12 million or approximately 1% of revenue.
Non I FRS 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 Toronto property.
[noise] 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.
So 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 of 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 have returned 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 and 2020, we anticipate taking additional restructuring actions in 2020 associated with adjusting our cost base to reflect shifting demand as a result.
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.
While 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 coping 19 presented three primary challenging the first quarter increase material constraints 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 in other areas, such as Andy and industrial.
We are working with customers to adjust and optimize future production schedules and at this time, we anticipate that most of the data demand shortfall, resulting from covered 19 will push into later quarters.
Finally.
While we have been impacted by government mandated shutdowns.
We are pleased where the work our teams have done forgot to 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.
As a result of government mandated operational restrictions currently in effect.
Other operating near normal levels with China at 95 plus percent.
As we think about 2020, we're pleased that we're able to start the year was a 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 equipment facilities in the Bay area, Oregon, and Malaysia operating at approximately 60% normal workforce level, while Korea 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 in the single digit million dollar range.
The sequential improvement in profitability was helped in part by our productivity initiatives improved mix and 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 grow and have already begun ramping new programs in our semi cap business. We are seeing full year demand strength 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 and continue to take a long term view of this market.
With a specialized vertical capabilities, we believe we're well positioned to capitalize on potential long term demand drivers for this business.
Across the balance of Ats the challenges we are experiencing from covered 19.
Our impacting growth across several markets, while also creating some opportunities.
Within industrial in the near term, we're seeing a modest demand reduction for certain end market products as result of covered 90.
In a and B.
We are experiencing headwinds as a result of continued material constraints that have been exacerbated by covered 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 are expanding on the actions taken in the first quarter two adjusted cost base, because 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 industries, whether pandemic.
And as such we anticipate that covert 19 will continue to pressure our HIV business in 2020 as weakness spreads to their commercial market.
Partially offsetting anticipated strength in defense.
While we have facing challenges in our commercial aerospace business in the near term.
We're pleased that our defense business bolstered by a trend.
Continues to perform well.
We're excited that each one has received its fixed forestar supplier Excellence award from Raytheon in the fourth quarter. This award is a recognition.
Our team's focus 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 atrium facilities to accommodate additional I talked capacity.
As long as 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 the year.
Well, then healthtech, we expect to see strong growth in 2020.
While we are seeing a modest near term decline in demand for products used in elective procedures due to covert 19 priorities. We're pleased with health text growth, including a number of recent wins to partner with our customers in the fight against covert banking.
We are working with Medtronic to quickly ramped up production of Ventilators. In addition, we're also collaborating with the Canadian based medical company to produce ventilators for the Canadian government.
Plastic is happy to do our part in combating covered 90.
Turning to Ccs.
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 are pleased with the performance of our JV in business at the end of 2019, JD I'm accounted for 500 million of revenue and in the first quarter of this year.
ATM revenue grew approximately 40% year over year. This higher level of growth was fueled by a number of wins and then service provider market.
Trust can now supports eight out of the 10 worlds largest hyperscale service providers developing technologies, which are deployed throughout their data centers.
Where thing increased demand from service providers as they expand their datacenters in support of growing cloud and online requirements.
Current demand growth is largely driven by 2019 wins and accelerated by the recent surge in remote workers consumption of digital content.
The need for artificial intelligence and machine learning technologies.
Global government agencies combat covert 19.
While we are seeing strong growth within JD I'm in service provider customers.
Communication OEM demand softness and portfolio shaping continues to adversely impact our revenue.
Five I covered 19.
Osisko 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 and efficient Cmos and successful transition.
We're pleased with the progress and selectively backfill fiscal revenue.
With higher value add solutions 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 bookings 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 is uncertainty surrounding the impact covert 19 may have in the near term, including at our a in D. segment.
We remain confident in a 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 with sustainable profitable growth.
Well if 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 an 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.
[noise] 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 challenging environment I just want to hit on the Cisco disengagement I mean, I imagine there was a pretty complicated undertaking and under normal circumstances, but with all the chaos, it's going out there and 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.
There are unable to find other providers in within the timeframe that you plan I mean, what does 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.
Hi, guys. It's Rob you have the transition plan that we walk that with Cisco is complete so they have found other providers and you know we're working with them on a seamless.
And efficient transition so.
Now while things could change in mix.
Well good a pandemic I think they have home so for all the work and we're working to the a transition plan.
And in our side are you know where we're encouraged by the you know very strong bookings that we've seen to date to backfill that you still work with programs that are more aligned to our strategy, we're saying history.
Lot of strengthen that service provider business.
A lot of me when hall to Parliament.
Can you have the day strengths on the low level opportunities both in the outcomes in enterprise.
Okay, Great is right and if I could just one one more I mean, it's good cash flow in the quarter.
When do you do you think when do you think you'll be doing by the end of 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 it in a net cash position.
Hi, guys. Some 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 to we'll get pretty close to two that but what I would just say is is that the timing of course will will the up and down given the the cold they didnt.
Right now so we do expect to continue to generate strong free cash flows or go through 2020, and our number one focus right now is to de lever. So if the cast 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 the that free cash flow I think he said all the free cash flow was from operations to exit except 32 million was was that right. So.
[noise] actually.
But mandeep, you're actually know we were just providing a bridge I'm 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 that in the previous period. When you back up the trying to sell.
Okay.
[noise] I just want as you do a give us the goal posts to get to a 100 million or for the year, particularly given a you've done a pretty well in a in a in a in quarter. One terms of you don't getting that you know halfway there. So just talk about the puts and takes would get you too.
Hundred 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 Steve as you're aware and Dms space if revenues to decline it has opportunity to kick out I'm much more cash.
We currently I'm 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.
Yeah.
And then my second question follow up question it from what you're seeing from your customers at this point and the you know the various government or requirements do you have an opinion on the strength of the recovery I mean this is obviously a major good data across a number of companies that.
Is that he is it to you is it a al.
I I imagine some of your segments will take longer to come back such as aerospace, but you know excluding that talk about well what your customers are telling you in terms of Ah Ah I'll quickly the business come back once the various regions open up thanks a lot.
Hey, Todd it's Rob Yeah. Good question, it's certainly a conversation we've been having a dollar.
Our customers then yeah, you know it does depend I think.
And our Ccs business, especially service provider and in areas so that support the hyperscalers.
Yeah, they see thing accelerating during the cold and pandemic and the thirst for bandwidth.
But in other areas, especially like aerospace a mistake, it's going to be you know down for a good couple of years.
Industrial I think it's probably more of a you.
Health tack that there's some puts and takes a but generally speaking we see that as.
As a growth business so for us and also for industries as the.
Yes. The push ahead of you know elective surgery, a equipment, there's a pull in of everything else you took the diagnostic equipment.
So it depends on People's mix, but generally speaking hope that will be a growth business for us.
Well, so it really depends on the segment of the general sentiment.
Thank as people are hopeful for you is certainly not as they are the pessimists are saying I know.
There's a lot of optimism for you.
Great. Thanks, a lot we get to call it.
Paul steep with Scotia capital Your line is open.
Hi, good morning.
Rob could you maybe talk just a little bit longer term, if you've had any discussions yet or how clients would be thinking about maybe 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 for me. Thanks.
Yeah, right now customers are being very measured in tens always.
How they're thinking about.
Long term.
Correct.
Yeah.
You early on in the first couple of innings there was.
While the tariffs situation. The 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 kind of <unk> has total land costs that are optimized <unk> not a lot of discussion right now on any hardware interactions.
Perfect and then maybe deep how should we think about the operating costs, obviously, taking do affect your commentary around restructuring and 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 gold at 19, and so had we not had that headwind revenue would have come in a lot stronger and then with leverage would.
See margins or potentially expand from there. We also did inc. incur some direct costs relative to cobot 19, with a $3 million are so and so you know 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 going into the second quarter. We expect that there is gonna be some moving pieces. A 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 cost 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 a 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 or you know, we originally had anticipated $30 million restructuring charges for the year on 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.
Assets than what we had planned and so that original dirty is coming in lower however, as we add on additional actions to as we've mentioned 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're 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 I was curious can you talk about how much of that was driven by China.
And yes, and part of that $5 million.
Maybe the second March as in October 19 re he that words.
Sure so.
[laughter], sometimes it could be 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 material side on 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 indeed in the Asia region.
One of the challenges that we've been having it has been on the material supply. So the demand outlook as Robert mentioned into 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 challenged 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% or utilization 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.
Yes, so I set aside a and b it sounds as though the bigger impact. He is just not demand would be your ability to operate some facilities and then the ability secure enough supply to build is that correct to say correct. So it's the operating efficiency to your point and then as material supply I mean, if you look at our network right now.
Across our network, there's only one site that's actually currently not operating and it's a relatively small site and our expectations are that that site will be back online within the next few weeks and so on the operating side you just don't know if there's gonna be another government mandated shut down 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 had 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 is 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 again that were 80 to 85.
Okay and then last question for me it just directionality on the operating margins going forward I heard much different things it sounds as though restructuring indeed 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 you 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.
We met its 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 looking to expand margins in 2020 compared to 29 team and were looking to grow our E. P. S as well in 2020 and so the 2.9% in.
Q1 was up 50 basis points I'm 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.
That most of my Shoplift <unk> with BMO capital markets. Your line is open.
Hi, Good morning, maybe just to clarify you said that actually has the next quarter you'd expect to see some profitability improvement in the M.D. and so what would be key offsets given that all else equal you would think that Q2 will look similar 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 cost.
Sure Petion that 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 a 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.
Business had a very strong level of performance in Q1, we're still anticipating 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 expectations.
Okay, and just to clarify in terms of the aided by 85% capacity that you're running at currently what segments are being most impacted by the constraints and the production shortfalls.
Yeah, Hi, it's Rob.
Right now [noise].
Capital equipment is running at about 60% to 70%, they're 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 some issues were having in Malaysia, the to get better the company gets filled with a surge if you will.
That's one of the the a little ones and we're really tracking it more by region then by business like in 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 NATO like I mentioned, Malaysia is a is 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 equipment, probably has the longest way to them.
Okay, becoming like roughly.
Okay.
Groups, who <unk> with Bank of America. Your line is open.
Hi, Thanks for taking my questions on the Ccs side.
Just looking at enterprise. It's the revenues came in better than you had expected you had guided down mid twenties, it came down 10% year on year.
Also on the communications side looks like it was slightly worse down 10% horses flat you had guided so maybe if you can drill down like what what do 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 and storage and compute supporting the hyperscalers about with somewhat offset by a offset by portfolio shaping the balance was resulting from now demand dynamics as we look.
Forward and enterprise, we see again continued portfolio shaping and that will again be partially offset with a new program ramps and storage and compute supporting a heck of Kelly.
And Tom but before we had been public pressure, we had product and technology transitions and some weaknesses and.
Traditional comes programs that were partially offset with some new program ramps supporting service provider.
And looking forward.
We do see some of the unfilled demand income from Q1 pushing into Q2, we had some new program ramps and networking supported by our JD and portfolio anything from demand strength and some existing programs in the networking area and that's being partially offset with some technology transition.
Okay. Thanks for the color rub on that.
For my second question I'm just on Andy.
Can you help us quantify what the with the dollar impact was on of the material shortages that you saw on Andy 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 M.S.
So given that that segment will be week over the course of the year do you still expect Ats segment to grow year on year or do you think does weakness any Andy just kinda masks the growth you're seeing in other parts of the business. Thanks.
[noise] Oh, yeah, it Oh, Oh, maybe take the a piece around a profitability and the outlook and Rob can add 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 737 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 us.
37, we won't give specifics on the direct impact, but what I will share or reiterate from last time as 737 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 a T.S. 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 it declined and Andy can be offset by capital equipment.
Okay. Thanks for all the color I appreciate it.
Thank you and with respect.
Kicking material constraints, you know out of the 85 million about.
I guess about 40% of so was pointed towards the P.F. The balance was in 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. So those continue do a impede our ability to get revenue out the door.
Okay. Thanks Trump appreciate it.
Okay.
Paul Treiber with RBC capital markets. Your line is open.
Well, thanks, very much and good morning sort of follow up on prior comment you made about capital equipment being 60% to 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 display is ramping up towards the end of the year.
Yes, the utilization comment was really just on you know what percent of.
The total hours available or our employees are consuming if you will and 60% to 70% relative to last year. It's about you know, we usually when at about 100%.
It's bringing that down is just.
Malaysia, specifically, a you know government mandates on how many people could be a in the building in any given time and it could be 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 to the full quarter.
California fill.
To shelter in place order, so that will probably oh fill the in place for some period of time. So we're waiting to see that with respect to display Korea has been at about 90% utilization may have not.
Been impacted significantly by cobot Ah thank goodness so.
Right now, we're seeing some sequential quarter over quarter improvement in display.
But as I mentioned during the call.
We don't see bombs materially or improving so perhaps towards the end of the or into next year as some of the cell phone smartphone sales still picking up in the industry.
Thanks, that's helpful. When I understand for my second question just in light of you know globally, the financial constraints and the uncertainty in this environment do you think it wasn't lead to you know overall greater willingness.
From your end customers per I'd to consider outsourcing maybe more so than what they did in the past or have you seen any signs of that at this point.
Yeah, that's a very good question I.
I think that's especially true in ER and high reliability markets, what we've seen in past cycles, you know its customers work through their costs challenges.
And you must providers like ourselves that are the leaders and Andy we're a leader in in capital equipment, where leader.
Look to the leaders in those industries to help support them to 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 are these Oems were reluctant to outsourcing that pass at this stage of the game. They probably have a lot of Swiss cheese and that 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 and optimizing also on on our.
So we do view that as a opportunity and.
Especially as an impact from many America markets.
Matt Sheerin with Stifel. Your line is open.
Yes, Hi, good morning. This is current sports on from that question on the health Tech business and end 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.
Yeah, Hi to yes oppose it is actually having a positive impact on but the latest diabetes monitoring devices.
So we expect the bond or <unk>.
These strong for the balance of year some of our recent awards that we won.
Ultrasound diagnostic equipment.
Well celebrations of products that were currently producing.
We've also had some incremental award so we think the net benefit for US this year will be a north of $75 million probably for sales in the back half of this year.
So that you know really out of a fairly high growth rate in our health Tech business 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 expect in 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 may be for that demand coming back I think one of your peers.
Also indicated that it believed it was gaining share due to semi cap and semi cap due to supply constraints. So just wondering.
When those constraints you may be less it and how that competitive dynamic shakes out.
Right Yeah.
Thank you know a lot of the Q1 demand that with supply chain constrained.
We are really from a supplier of not being that fully up to speed will push into Q2 in subsequent quarters.
From a broad markets perspective, what were what we're seeing is you know technology buys continuing in areas of logic in Threed NAND missing 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 the portion of our or a demand strength is actually coming from these new program.
Ramp.
And then again more broadly speaking you know who's the.
The covered dynamic we have not heard of any major change in fab plans or expansions or upgrades or.
Pull backs on technology advancements a lot of the issues that.
These are in Q1.
In the semi cap industry was really due to logistic issues of our customers customers.
Having this isn't moving people around the materials around there are doing the installs were things on a long that.
We expect that to get better and in subsequent quarters.
And also our supply basins Mandy alluded to before.
Well we.
Actually my backlog coming online as well as government restrictions or improve that getting back on line and we're getting improved flow parts.
Yeah, I'll just that 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 I'm, we're seeing very strong levels of topline growth and.
It is I'm very much largely on the back of the 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 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 boasted some of your customers don't hit certain inventory turns that they they actually pay you seasonal holding that inventory for them can you give a detailed on the conditions under which that applies obviously with there's demand doesn't hit certain.
Their expectations than they do less inventory they'll pay but what about in this environment, where are you finding it tough to actually fulfilled at the request it there, but there are ordering from you.
Yeah, Hi, Dan Mandeep here, Yeah, So 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 where in.
I said capital in play or improve profitability, sometimes it's led supposed 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 or 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.
By 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 you know a cast deposits now were 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 tie.
You up even more working capital, let's understand when you're going to use it and if the time that you needed is little bit longer than what would be normal let's have a conversation around deposits and we found that our customers had 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 know so much more positive as it is is a factor that you just have so much more exposure to things like semiconductor equipment and less exposure to maybe like cell phone.
Phones, and Pcs or television is backed out there 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 would you know the mix as you mentioned a review semicap those are continuing to be strong.
It's certainly a service provider a business continues to be quite strong health that continues to bear right strong.
Headwinds that we're seeing in industrial.
We view that more of.
Push out versus a demand destruction in 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 Andy you know, obviously, we announced last.
Last quarter, we're seeing some 737, Max headwinds, which is a demand reduction and now with a lack of flying and 60% of the world aircraft being park.
We don't view and the demand being pushed out viewing the demand being decreased 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 announced we're also expanding our each one facility, which is gonna be a housing just about all defense work as well.
Thank you so much for the details on clarification scrutiny appreciate it.
Thanks.
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.
Well, then Ccs not portfolio continues to perform well we had margin from within their target range MSR portfolio shape.
Okay, and improved profitability of our capital equipment business.
While we faced this uncertainty and Mr. endemic I'm confident in the foster 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 progress throughout the year.
And best to you and your loved ones in these trying times.
This concludes the Celestica first quarter 2020 earnings call. We thank you for your participation you may now disconnect.