Q2 2020 Celestica Inc Earnings Call
This time, all participants are not listen only mode.
So the speakers presentation, there will be a question and answer session.
The question trying to session you will need to press star one on your telephone. Please be advised that todays conference is being recorded I would now like to turn the conference over to your speaker today correct. Although please go ahead.
Thank you for joining us on Celeste second quarter 2020 earnings conference call on the call today are Robbie honest, President and Chief Executive Officer, and Mandy Trollope, Chief Financial Officer.
As a reminder, during this call will make forward looking statements within the meaning of 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 result.
Ever materially from conclusions forecasts or projections expressed in such a big.
For identification, a discussion of such factors and assumptions as well as further information concerning forward looking statements.
Please refer to todays 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 actually see dot Gov and see dot com.
We assume no obligation to update any forward looking statement, except as required by law.
In addition during this call.
We will refer to various non IRS measures, including operating earnings operating margin adjusted gross margin adjusted return on invested capital adjusted ROI Kathy.
Free cash flow gross debt to non IRS trailing 12 month adjusted EBITDA leverage ratio adjusted net earnings adjusted EPS, adjusted EPS, DNA and adjusted effective tax rate.
Listeners should be caution that references to any of the foregoing makers. During this call denote non IRS matters, whether or not specifically the 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 company that use IRS or who report under U.S. gap and use non-GAAP measures to be spikes similar operating metrics.
We refer you to todays press release, and our second quarter 2020 earnings presentation, which are available at Philips good Dot com 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 ever us measures.
Financial statement.
Unless otherwise specified all references to dollars on this call her to U.S. dollars 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 today's conference call.
Well, it's because second quarter results reflect solid execution that dynamic and challenging environment.
We had a solid quarter of revenue growth improved year over year and sequential operating margin generated robust free cash flow and pay down long term debt.
Throughout this challenging time, our global team has done exceptional work to maintain continuity of operations.
Got the health of our employees and deliver on customer commitments.
As government restrictions ease around the globe our operations have substantially stabilized our supply chain is gradually returning to normal ultrapars are working to ramp up capacity to meet increased demand driven by certain end markets.
Circumstances continue to change, but we will adapt to address any new challenges.
While we are experiencing demand strength in the capital equipment, Healthtech and service provider markets, we have seen softness in other markets, including commercial aerospace and industrial.
A few feel segment posted another quarter of solid performance expanding segment margins on a year over year basis.
Taxi fiasco has expanded margins sequentially for the fifth consecutive quarter.
Operating above our 2% to 3% margin range.
And our APC segment, we are seeing solid performance in a number of our differences. However, Pts segment margins remained below our target range of 5% to 6% due to the demand headwinds in our commercial aerospace and industrial businesses, resulting from the pandemic.
Overall.
We are pleased stuck a strong foundation and diversification, we have felt across or end market is helping us manage through a highly volatile environment.
I will provide some additional color on our end markets, but first I will turn the call over to Mandeep, giving further details on our second quarter results.
Thank you Rob and good morning, everyone. As a reminder, we did not provide financial guidance for the second quarter 2020, due to the uncertainty surrounding kobin 19 during the quarter well be incurred costs related to covert 19, including pp premiums paid to ensure continuity of supply and inefficiencies related to loss revenue due to an inability to.
Secure supply these costs were mostly offset by various recoveries.
Our second quarter revenue came in higher than anticipated at $1.49 billion, mainly due to strong demand from service provider customers fueled by our GTM offering.
Revenue increased 3% year over year and 13% sequentially.
Our non <unk> for US operating margin was 3.4% up 90 basis points year over year end up 50 basis points sequentially.
My first earnings per share were 10 cents compared to five cents loss per share for the second quarter of 2019 non <unk> for US adjusted earnings per share were 25 cents up 13 cents compared to the second quarter of 2019 and up nine cents sequentially.
Our each year segment was 34% of our consolidated revenue down from 39% compared to the second quarter of last year.
Ats revenue was down 11% compared to the prior year period and down 9% sequentially.
Both the year over year end sequential declines were driven by demand weakness in commercial aerospace and industrial largely due to koby 19, partially offset by strong demand and capital equipment and new program ramps in healthcare.
Our Ccs segment revenue was up 12% year over year end up 29% sequentially due to strengthen judea, including with service provider and our success in securing critical components to meet increased demand.
Within our Ccs segment, the communications end market represented 43% of our consolidated second quarter revenue up from 39% in the second quarter of last year.
Communications revenue in the quarter was up 14% year over year, largely driven by strength in our GTM business, partly offset by a reduction in Cisco revenue as we continued our plan to disengagement.
Sequentially Communications revenue was up 27% driven by demand strength in GDN.
Our enterprise end market represented 23% of consolidated revenue in the second quarter up from 22% in the same period last year.
The price revenue in the quarter was up 10% year over year, driven by strength in Judea, partially offset by plan Disengagements as part of our Ccs portfolio optimization program.
Sequentially Enterprise revenue was up 32%, primarily due to demand strength in GBM and seasonality.
We are pleased by the growth in GTM as we continue to ramp several remedies and support increased levels of demand from our hyperscale customers.
In the first half a twentytwenty, our GTM business achieved more than $400 million of revenue.
85% year over year and accounted for 14% of our total revenue for the first half of 2020.
Our top 10 customers represent 60% of revenue for the second quarter up from 65% in the same period last year and up from 66% last quarter.
For the second quarter, we had one customer contributing 10% or more total revenue compared to two customers in the second quarter 2018, and one customer last quarter.
Turning to segment margins.
Yes segment margin of 3.1% was up 40 basis points sequentially, mainly due to improve profitability in a Andy.
Our capital equipment business continued its recovery posting another quarter of profitability as we ramped new programs.
Year over year Ats segment margins were up 30 basis points as improvements in capital equipment, driven by higher productivity and volume leverage more than offset reduced profit contribution for me Andy.
Ccs segment margins of 3.6% came in above our target range of 2% to 3% and were up 120 basis points year over year end up 60 basis points sequentially.
Both the year over year and sequential margin improvements were driven by improved operating leverage favorable mix, including strong growth in Judy EM and the positive impact of our productivity efforts.
Moving to some other financial highlights for the quarter.
I have for US net earnings for the quarter were $13.3 million or 10 cents per share compared to a net loss of $6.1 million or negative five cents per share in the same quarter of last year.
Adjusted gross margin at 7.5% was up 50 basis points compared to last year and up 20 basis points sequentially.
Year over year end sequential improvements were largely driven by volume leverage productivity and improved mix and Ccs.
Year over year, or adjusted EPS cheating, a $53 million was down $3 million, primarily due to lower variable spend partially offset by higher variable compensation.
Yesterday, and it was up $3 million sequentially, mostly due to unfavorable foreign exchange.
Non I have for US operating earnings were $50.8 million up $14.1 billion from the same quarter last year and up $12.7 million sequentially.
Our non I have for us adjusted effective tax rate for the second quarter was 24% compared to 36% for the prior year period, and 24% last quarter.
For the second quarter, adjusted net earnings were $31.7 million compared to $15.4 million for the prior year period.
Non IR for us adjusted earnings per share of 25 cents.
Lets up 13 cents year over year, mainly due to higher operating earnings and lower interest expense.
Sequentially non I have for US adjusted earnings were up nine cents, mainly due to higher earnings and lower interest expense, partly offset by higher tax.
Non I have for us adjusted ROI see of 12.9% was up 4.5 per cent compared to the same quarter last year and up 3.4% sequentially.
Moving on to working capital.
Our inventory at the ended the quarter was $1.2 billion, an increase of $120 million relative to last year, and an increase of $134 million sequentially as we invest in hyperscaler growth and work to burned down inventory in markets impacted by Cobot 19.
Total returns were 4.9 down 0.1 turns year over year and up 0.1 turns sequentially.
Capital expenditures for the second quarter were $11 million or approximately one percentage of revenue.
Non <unk> first free cash flow was $38 million in the second quarter compared to $47 million for the same period last year.
Year to date, we have generated $92 million in non I have for us free cash flow and continue to target generating $100 million or more of non I for us free cash flow in 2020.
Cash cycle days in the second quarter were 60 days, an improvement of five days year over year and an improvement of nine days sequentially.
Our cash deposits at the end of June were $222 million up $87 million sequentially as we continue to work with our customers on working capital improvements.
Moving onto our balance sheet and other key measures.
So let's go continues to maintain a strong balance sheet, our cash balance at the end of the second quarter was $436 million down $1 million year over year and down $36 million sequentially.
Combined with our $450 million revolver, which remains Undrawn. We continued to have a strong liquidity position of approximately $900 million.
We believe we have sufficient liquidity to meet our current business needs.
We continue to make progress towards deleveraging our balance sheet in the quarter by repaying $61 million of long term debt.
Gross debt position was $470 million at the end of June while our net debt was $34 million down $25 billion sequentially.
Our gross debt to non I have for us trailing 12 month adjusted EBITDA leverage ratio improved by 0.3 turns sequentially to 1.7 turns.
At the end of June we were compliance with all 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 for future investments and lower interest cost.
Over the long term, though our capital allocation priorities are unchanged, we will continue to work towards generating strong free cash flow and plan to return approximately half to shareholders, while investing the other half in the business.
In the second quarter, we incurred $7 million of restructuring charges, including cost to rightsize, our commercial aerospace and industrial cost base to reflect a reduction in overall demand.
We continue to take restructuring actions in the third quarter.
As we look to the next quarter, we continue to see a dynamic environment driven by cobot 19, although the situation is improving and most jurisdictions and our operations have largely stabilized given the continuing uncertainty potential cobot 19 resurgence of and their impact on our customers supply chain and factory utilization we do.
Do not feel it would be prudent to provide specific financial guidance for the third quarter.
Well, we're not providing guidance, we do anticipate the third quarter to be largely inline with our second quarter results should conditions, neither improve or deteriorate further.
I'll now turn the call over to rub for additional color and an update on our priorities.
Thank you Mandy and the first half of the year, we strengthened our position in book Ccs and Ats.
While we are still facing a variety of headwind, we believe that the strength of our portfolio is helping to mitigate some of these challenges.
We feel that our portfolio shaping and productivity actions over the last two years, while difficult at the time have better positioned us to deliver value added solutions across a broad set of markets.
Now turning to Ats.
The challenges we are experiencing from covered Nike are adversely impacting several ats markets, while also creating opportunities and others.
Our capital equipment business posted another profitable quarter, and we continue to see overall demand building.
Our wealth is driven by increased demand in our base business as well as new program ramps across a number of capital equipment end markets.
Our success in securing new programs has been enabled by our performance and breadth of global capabilities.
In a Andy.
While we had record level bookings in the first half a year and demand in our defense business remained stable, we continue to experience lower demand in our commercial aerospace business.
Profit contribution from a and B business improved sequentially on lower revenue.
And we continue to take action to address the cost base to reflect this reduced level of demand.
The actions we have taken started to yield results from Q2.
And we expect Andy profitability to improve as we exit the year barring any further additional negative impacts from covered 19.
We continue to be a leader in the a and b market, providing the world top Andy customers what product lifecycle solutions.
A good example of that is a refund five year renewal of our operate in place agreement and Mississauga, Canada with a prominent and be customer.
As a reminder, we support this customer with final Assembly test and repair and overhaul for key product line supporting commercial and defense market.
The renewed agreement not only strengthens our relationship with this customer.
Provides a strong foundation that enables us to <unk> to deliver product lifecycle solutions to a broad set of other customers as well.
Within industrial in the near term, we are seeing weak demand across our customer base as a result of coordinator.
At the macro environment improves we anticipate the industrial market will gradually recover.
Then healthtech, we continue to see strong demand for diagnostic equipment and modest improvement in demand for elective surgery products.
We expect to see strong growth continuing healthtech throughout 2020, as we ramp production of essential products.
As medical devices and diagnostic tools that are critical in a diagnosis and treatment of covert 19 patients.
We are happy to do our part in the fight against this pandemic by providing critical solutions to a number of customers.
Now turning to Tcf.
Our studio segment delivered strong performance as a result of increased demand from our service provider market as customers expand and upgrade datacenters in support of growing cloud and online requirements.
The strong revenue growth is driven by key wins over the last 18 months.
I'm compounded by the recent surge in demand due to the work and learn from home trend.
Well from a service provider customers more than offset revenue declines from portfolio shaping and communications and enterprise and the impact of covered 19.
Strong margin performance.
It was driven primarily by portfolio actions operating leverage and improved mix, including a growing JD and business.
As Randy mentioned.
Getting a business continues to thrive with another quarter of impressive growth.
Within JD M., we invest in leading edge product Roadmaps and design capabilities and provide a full suite of products solutions across all IP infrastructure data set of technologies.
The combined product lifecycle capabilities JPM.
Which was somewhat to Ats are intended to help customers reached their markets more efficiently from design to manufacturing and aftermarket support.
JD and drive more value for our customers early in the product lifecycle, yeah, Bari, creating stickier and mutually beneficial relationship.
We believe JD and we'll continue to be a driver of growth for the company in the future.
Turning to the Cisco disengagement your transition is progressing as planned.
And we expect to transition to be largely complete by the end of year.
We have a large funnel of opportunities targeted towards Carlin and we are pleased with the progress, we're making tobacco fiscal revenue.
We have higher value add solutions, we remain on track to achieve our goals with a richer mix of programs.
Looking at our business overall, while there is uncertainty surrounding the impact that covered by team I have in the near term I remain confident in our long term outlook I believe.
There are tremendous opportunities in front of us across both Ats and she's yes.
We believe swastika has a solid foundation to wonder uncertain times.
We also believe our balance sheet remains strong as a result of strong free cash flow generation with our moderate amount of debt at high level of liquidity.
We are excited about our future opportunities for sustainable profitable growth.
I want to thank our global team well come together with passion and determination to keep our operations running effectively there resilient and commitment to working together to adapt to the situation have been nothing less than extraordinary.
We look forward to updating you over the coming quarters with that I'd like to turn the call over to the operator to begin our culinary.
Thank you as a reminder, just a question press star one on your telephone to withdraw your question President Pankey analyst. Please limit yourself to one question and one follow up please wait while we compile the question. Thank you.
Your first question comes on line of Gossip pop out charge you with Pi financial. Please go ahead.
Hi, Thanks, and congrats on great quarter, I mean, I know things are very kind of the still volatile.
But you know while ago you provided some kind of long term goals for your margins and then she looked at the margins. This quarter I mean Ccs is is exceeding those margins ats so not quite there, but you know if you were to look at the mix of business and the growing volumes and chips.
You can you kind of give us an update of what you're thinking in terms of long term margin goals and if you think they've changed at all like we would see CSP moving higher.
Maybe ats be moving lower or stable, just kinda give us any sense of where you think you can be good longer term.
Okay. Good morning, Gus and thanks for the question. So we continue to feel that the target margin range of 375 to four and a half its the right range for us and the ranges that we haven't place for both Ccs NHS continue to hold so 5% to 6% for each yes, and a 2% to 3% for Ccs So if I.
I just take each of those we're very pleased with the performance that we saw in Tcs and I'm pleased that they were able to operate above their margin range you know its with one quarter and it's not it's too early to say if their target margin range should be raised but clearly when they have strong operating leverage and very positive mix as they have had a they're going to before.
I'm very very well on the Ats side, we're seeing good momentum to get back into the 5% to 6% range, but we still have businesses that are not yet there that capital equipment is continuing to scale, a aerospace and defense. While we started to take some restructuring actions is not yet where it used to be and then we're continuing to see ramping programs.
In industrial and in Healthtech. There's also a mix shift that's happening a little bit where we're having less profit contribution from Andy So in order to get to the 375 to four and a half on a sustainable basis, we need both of the businesses to be in their ranges in order for Ats to get back into the range, we'd see continued to see improvements in capital equipment and Andy.
We also need to see some level of modest recovery in industrial and then on the Ccs side you know if they are operating at the high end of their range that will support us to get to where we want to go.
Just quick follow up so on the H., Yes, I mean, you've got chip volumes, improving but aerospace still we continue to Boeing Cabot canceling programs.
Mean, which of these two is the bigger influence.
Volume increases in chips or cost restructuring and in aerospace.
I'd say that they're both equally important and it well its capital equipment in aerospace and defense or larger segments within each get says you know a capital equipment when it that full scale can operate above the 5% to 6% range, they're not there yet and although we are continuing to see strong market demand. We are also ramping.
On a number of programs that we've won and so as those programs reach steady state will see improved margin on the aerospace and defense side, you know as Robin mentioned.
We continue to have a stable outlook on the defense side. So most of the actions, we're taking or in response to the decline in commercial aerospace and so while we did take restructuring actions in the second quarter. There our actions there continuing into the third quarter and we would expect improve profitability in India as we go through the year.
Okay, great. Thanks, again, congrats on great quarter.
Thank you got.
Uh huh.
Your next question comes online that's kind of must show Puello would be M. all capital markets. Please go ahead.
[noise] diagnosed your line is Alvin.
Oh, sorry, sorry about that.
Rob actually look across the business, where would you say that there's still some bottlenecks from watching perspective.
Yeah, so from a supply chain perspective, it's it's actually much improved we measure shortages that are gaining revenue at the beginning of the quarter.
And for Q2.
Actually I ask that makes a Q3, it's actually a pre coven level.
That being said, we do have some hyper demand.
In support of our.
Service provider market, and that's causing that.
General combinations of some bought electronic component and there's some high reliability Park.
But and packing.
Aerospace and defense business that are kinda pacing myself as well, but broadly speaking I would say.
At this time components situation is much improved from a quarter ago homes.
Okay and within industrial can you just quite a little bit more color in terms of.
We are that weaknesses underlying that segment.
Yes, with industrial a lot of the revenue declines or.
Overall majority of the revenue declined to really holding related a lot of our market isn't a euro.
And with the economy shutting down a lot about products get installed and home.
Can I ask why should I be installed shutdown, which kind of check on the production lines. We do see your slowly opening up which is positive sign.
And then also businesses have generally style.
It back on spending so.
No.
I'll be speaking I would say everything in industrial has really been by corporate as the corporate environment improves we do expect the industrial markets.
Gradually improve as well.
We also have a fair amount of these programs that are wrapping and you know when they actually come to market that you think this a little bit of an uplift.
We will be to.
The next year.
Great. Thanks, guys that actually bring within that business.
Thanks.
And your next question comes from the line up Robert Young with Canaccord. Please go ahead.
Hi, Good morning, I know you said that Youre, giving guidance I think you said that you expect.
The current quarter be in line with with Q2 I was wondering if it does that apply to the margin strength that you're seeing in Q2.
Or are you trying to you know are you talking about revenue top line.
Hi, Rob Good morning, no our comments where for our overall results so topline and bottom line were strongest quarter and while we're not giving guidance for next quarter, our expectations right now or that it would be largely in line with what we saw on the second quarter.
Okay, great. Thank you and I'm, sorry, I wanted to talk about managing place you talked about the renewed agreement that's in a one of the weaker segments. It is the industry moving more towards this type of model looking back over the relationship what are the.
The positives or negatives of the manage in place and it just see this that's something that can really expand going forward.
Hey, Rob.
No I think it's a bespoke offering.
That you know that we have in certain situations with certain customers.
It comes really into play where the risk profile of moving to work is so large that customer feels it's better to take that over in place that being large fixed costs are monuments or or tribal knowledge.
For this renewal I think it's really time, we'd be taken it gives a guaranteed marketshare as the entire or commercial aerospace.
Industry is is down.
And the mix of our operate in place agreement is also on the defense side as well. So it's really is a stable base.
And in concert with this we also extended on long term contract for C series, which we assemble across our global network as well so it would be away P. and also an extension of the long term contract that we have customer.
In terms of expand again, it's certainly conversations we have and with customers and frankly, we're seeing there from the industrial space.
Volumes decrease our customers are facing utilization issues.
And they're looking to us to help solve those issues. Most of it is a lift and shift work with some of it could be operating place agreements as well.
Okay. Thanks.
And your next question comes on line of Jim Suva with Citigroup. Please go ahead.
Thank you you know I realize you didn't give full detailed guidance, but you mentioned Q3 should be similar to Q2. The question I had though is what are some of the variables because it seems like even in your prepared comments you mentioned with Q3.
Governments are opening more supply chains are getting closer to normal or proving it kind of lots of improvement comments. It would seem that that would almost imply that Q3 should be better than Q2. So maybe if you get out we just bridge the a misunderstanding and having their part why would be kind of.
Relatively flattish sequentially when no.
It seems like all the data points around the world are kind of pointing towards you know some improvements in Q3.
Yeah. Good good morning, Jim Yeah. So we didn't provide guidance maybe I'll talk about that first because there does continue to be a tremendous amount the volatility that we're seeing and so while we are seeing an improvement in even areas like supply chain you saw that in the second quarter. You know, we had $56 million of revenue that was gated from material supply and.
And we're starting this quarter in the third we have a number that's higher than that and while our teams did an excellent job working that number down during Q2 the risk. It continues a into the third quarter and so we have a little bit more of a balanced view.
Some of the items that you mentioned are are continuing and so what I would say isn't that a lot of the momentum that we saw building through the second quarter is now stabilizing so our factories were at about 95% utilization at the end of Q2, our expectation is that would continue through the third quarter are critical suppliers impacted is down to very low single digit.
Signage, we expect that will continue through the third quarter, we continue to see strength and capital equipment. We continue to see strengthen health Tech, we continue to see strength and service provider demand, but we also continue to see softness on the commercial aerospace side, we continue to see softness on the industrial side and so we haven't seen a significant change in some of the.
These dynamics from where we ended the second quarter.
[noise] and Jim I would also add that based on what we know.
We feel good but based on what we don't know it gives us concerned a rising case rate not just in North America, but around the world is causing some economies are not the pull back and putting from restrictions in place, which can impact our facilities impact our suppliers facilities and given the trend line for just.
We feel we're being prudent.
Great. Thanks, so much for the clarification. It's appreciate it.
Thanks, Jim picture.
And your next question comes the line of pulse Pete What Scotia capital. Please go ahead.
[noise] could we talk a little bit on eight yes, with <unk> capital equipment, if we assume that and as I recall I think in Q3 year ago, we had relatively easy comp.
How significant are the ramps if we were to see things sort of.
You know edged down a bit again are the new program ramps significant enough to actually help us have you're on your growth capital equipment and then second quick follow up would be in seats. Yes can you just remind us where we are in terms of your journey on JD M. overall, because it sounds like some good progress there. Thanks.
Sure. So on capital equipment, you know I do think I agree with you I think we will have.
Year over year growth in Q3, we've seen in the first half of the year.
That was we've seen strength driven by technology buys and five and seven that and maybe you get to the back half here at the demand is shifting more towards memory technology buys for Threed NAND, but there's also capacity buys now.
Coming online in terms of DRAM and NAND support increased demand.
And based on our no near term outlook and chatting with a question he thinks that backlog scannable hearing in the mid tier.
With respect to.
JD and again, we're very pleased with performance that we have and in that business.
He kogut, we have a number of next generation technology, when eight out of a pen hyperscale.
What happened during that endemic it really accelerated the deployment of these technologies and likely instrumental in increasing the bandwidth given everyone is moving online you know Mandeep mentioned and in Q2, Judy I'm almost doubled our year over year basis.
Can we do expect strong growth for the remainder and if you're coming either [noise].
Okay, that's it by those products and.
Sorry, one last one Rob hold geez on display we could go back to that can you talk to us a little bit up though.
Led and how you're thinking but those ramps. We know things have moved we know smartphones or demand is weaker but obviously you were ramping up for significant growth in that area.
Here are we like as a pandemic.
It's from timelines wildly off where we more or less on track. Thank you that's it.
Yes. Thanks to the question you know revenue in display is generally depressed projects that we had.
Planned for the back half of this year and into next year are being pushed to the right largely driven by the pandemic HM smartphone sales are down.
And watch TV sales are down as well, but as we mentioned we've taken a number of action you know during the press revenue to kind of repositioning the business move the majority of the work to Korea, and we have all long term beauty industry I do think Oh.
When the Fiveg phones, roughly the Uh huh.
Recycle if you will.
The next generation TV, it's come and we welcome OLED.
We'll be well since then.
Hopefully.
So those things to come so right now that the marketing.
I'm kind of question to the like.
No nothing I would have in our display business in Korea.
Is that Weve diversified there the revenue there. So we do in Korea, we do more than display now. We also had do a fair amount of semi cap work as well.
Thank you.
And your next question comes on line of trip to Backstop Taria Wet Bank of America. Please go ahead.
Hi, Thanks for taking my questions.
Can you give us your revised thoughts on free cash flow in fiscal 20, I think last time last quarter, you said more than hundred million, but it looks like you've already done 90 million. So any thoughts on working capital your inventories and and free cash flow.
Yeah. Good good morning, Ruplu. So we're pleased with the cash flow performance, we've had a in the first half the year $92 million, we were setting the target to be just over $100 million. We don't expect the second half to be as strong as the first half and so we continue to be a focus on getting it just over $100 million you know as you.
We saw a our inventory has been building and we are working aggressively to bring that inventory down but in some of the a longer lifecycle businesses like aerospace and defense. It may take a little bit longer and so we are consuming some cash in there right now, but we do continue to expect a good performance a in other working capital measures deposit.
It's a strong receivables are strong and so right now over the back half of the year, we have a nominal expectations.
Okay. Thanks for that and for my follow up and wanted to ask a question on capital allocation policies. So looks like you have been paying down a significant debt over the last couple of quarters.
But I mean, given that you have strong liquidity now does it make sense at this stage of the cycle to look at plus will further M&A to supplement the growth that you're seeing.
Especially given valuations have come down so can you give us your overall touched on capital allocation priorities over the next 12 months. Thanks, Yes, absolutely so.
We've been very focused on de levering because our intention has been to build up our dry powder to give us maximum flexibility also of course, the benefit is I'd be lower interest expense and we can work on extending a U.P.S., which is a core focus for US right now and so we're very pleased with the performance that we had been able to show we pay down 100.
And $22 million a debt in the first half of the year.
We're not going to continue at this pace. We do think it's good to have a level of debt on the balance sheet helps us in many different areas.
But our capital allocation priorities remain unchanged or you know we have a very good track record of buying back shares.
We bought back over a billion dollars a shares over the last 10 years and so we'll look at various options to return cash to shareholders buybacks thing one of them, but we also continue to have a lot of very interesting opportunities that we're pursuing on the investments in the business side. Our M&A funnel continues to be very active a we are looking.
At a capability base targets, whether it's in our aerospace and defense segment again or other high reliability segments as well and so we'll continue to to evaluate you know those different options share buybacks versus a M&A transactions and you know drilling at that time and to look at what will drive the greatest level of value.
For shareholders.
But our long term strategy, a 50% that shareholders and 50% investing into business remains unchanged.
Thanks for all the detailed and congrats on the quarter.
Thanks.
Your next question comes on a football Cheever with RBC capital markets. Please go ahead.
Oh. Thanks, so much good morning, just in regards to me uptick that you're seeing in the service providers. They.
What's your sense at the increase at this quarter on what you expect through the year represents isn't sustainable higher level of demand as opposed to pull forward from future periods.
Hi, This is Rob so you know.
I guess another way to.
After the question is do we feel lot of buffering kind of going on we did see I think in the service provider business or an increase in buffering a in the early part of the year, though I caught the first half of the year.
Some of that buffering lessening.
I think there so some of the supply chain, but it's a lessening.
Despite the bar frame, we continuously strong demand from a service provider customers, we're seeing the strength across multiple customers and multiple technologies.
So I think well there could be a pull back at some point, we have good visibility into a customer's demand and we feel it sustainable in the mid term.
Hey, thanks for that.
Second question there.
We are holding inc. honing in on the Hyperscale isn't and GTM do you see more opportunities to do additional business with the Hyperscalers and what areas would that E. And then on the GTM a related span a GTM how is the R&D spending tedium R&D spending being tracking in do you also see an opportunity to expand.
JD M. R&D going forward.
Yeah I'll cover the Oh, the first part.
With respect to Oh Hyperscale.
They've been buying our full suite of products, you know in terms of compute storage and networking.
The predominant growth drivers right now are in the areas of networking, but we're seeing it in all in all the areas as well.
Again, we're doing business with eight out of it and then our business with.
All of them and it's growing substantially I'd say pull forward their roadmap, where they can't get our next generation products are actually buying more of our existing.
Products as well, which is you know paying dividends in some of the growth rates that we saw.
In terms of R&D spend though criminal do Mandy.
Sure. So you know we put our all of our spend in the R&D line and so you'll see what we do spend on GTN.
$25 million to $30 million over the.
Last few years, you know just as a reminder, we have over 300 design engineer sitting in Shanghai as well as a number of engineer sitting in other geos as well we've been very I'm pleased that we've been able to modestly scaled that number while dramatically increasing the topline.
I would expect that we'd continue to have some level of growth in our R&D spend in the outer years I'm as we sustain these revenue levels I, just continuing to invest and and various levels of talent and product Roadmaps, but you can just as a reminder, when we talk about Gtlds results were talking about it inclusive of that R&D spend and so with the.
Performance that GDP has been having margins are accretive to the overall company and that's after paying for the $25 million to $30 million of R&D.
All right. Thanks, taking my question.
Thank you.
Again, if you like to ask the question Press Star one on your telephone Keypad. Your next question comes to lineups Curt shots with Stifel. Please go ahead.
Hi, Good morning. Thank you for taking my questions I'm, hoping you can provide maybe a little bit more color on your manufacturing utilization by region. I know you said you were about 95% globally, so any breakdown by.
By the various regions would be helpful. Maybe on that topic I'm wondering if you can perhaps discuss any incremental costs are so associated with coded that you're expecting in future quarters, just any any framework on how to think about that.
And whether those some of those government subsidies and customer recoveries mentioned would be expected to continue.
Oh sure Curt I'll start off so overall mandeep matron worried about 95% China.
It's been well over 90% Syncera early March Europeans.
85% to 90% range, Thailand and Malaysia.
The north of 90%.
North America isn't the 85 Tonight, if we've got range, California in Mexico, probably being.
The two regions that are dragging the percentages down the others are north of 90% as well, okay, because your little color and what might be picked the second part of the question.
Im sorry can you just repeat the second part of the question.
Sure. So I'm just on the topic of utilization and incremental povich related costs. Just wondering if you can provide any color on.
Your outlook for those costs in the coming quarters, which which may be expected to repeat and also.
You mentioned, some government subsidies and customer recoveries benefit in Q2, so wondering.
If any of that won't repeat as well.
Great and then the answer is the net of the impacts was about $2 million into second quarter, we did see a higher level of costs related to things such as PV and expedite fees, but again, we were able to get a number of various recoveries to offset that our expectation in the third quarter, but the impact will be largely similar.
So a couple of million dollars at this point.
Great. Thank you very much and then perhaps as a follow up just wondering if you could.
Maybe provide any additional commentary on sort of 11 linearity of demand throughout the quarter and perhaps any any notable swings by end market or or segment. Since you had cited.
Some some volatility throughout the business so any color there would be appreciated.
Yeah. So you know similar to the comment that I had made with Jim the demand swings that we saw we saw earlier on in the quarter and so the markets that I referenced that were up we saw that very early on and then when the markets that were coming down to that happened very early on.
Those trends continue through much of Q2, and they're carrying into the third quarter as well right. Now so we're continuing to execute on a very strong level of demand in service provider as well as in semiconductor and you know it healthtech as well, but we are expecting commercial aerospace to continue to be depressed not only into the third quarter.
But as we exit this year as well and a industrial while we do expect the demand to start coming back a it hits right now shifted to the right and so we're taking cost actions with the assumption that those depressed levels of demand will continue for much of this year.
And I will also add that historically speaking most of our political event in the third month of the quarter.
During pandemic time, so right now within our service provider business a lot of the demand is being accelerated.
Earlier into the quarter I'm has been paced by a capacity material capacity thing from a fine.
Moving it already is.
A little bit.
Improved in certain segments with certain customers.
Understood. Thank you very much.
Thank you.
And there are no further question at this time I will turn the call back over to their presenters for closing remarks.
Hi, Thank you.
Despite a volatile macro environment, we continue to execute well for our customers. We're able to once again drive sequential operating margin improvement generate strong free cash flow and pay down long term debt in the quarter or Tcf portfolio continues to perform well and delivered a fifth consecutive quarter of margin expansion I missed our portfolio shaping up.
Okay, and then they yes, I'm pleased to improve profitability of our AG business and continued strength of our capital equipment and health Tech businesses.
While we continue to face uncertainty given this pandemic I believe we have proven that the softer team has the ability to successfully navigate the challenges that my lie ahead.
I'd like to once again, thank our global pain to remain vigilant and not only keeping themselves safe, but also helping technology interface with and thank you for joining us and I look forward to updating you as we progress throughout the year.
This concludes today's conference call you may now disconnect.
[music].