Q3 2020 Celestica Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Selectica third quarter Twentytwenty earnings call. At this time all participant lines are on mute.
After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to turn the call over to your speaker today, Craig Berger, Vice President of Investor Relations and corporate development. Please go ahead.
Good morning, and thank you for joining us on Celestica third quarter 2020 earnings conference call.
On the call today are Rob My honest, President and Chief Executive Officer, and many Chawla Chief Financial Officer.
As a reminder, during this call we will make forward looking statements within the meetings of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian Securities laws.
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 forecast or predict 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 today's 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 at SCC Dot Gov.
And seed our dotcom we.
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 <unk> for us measures, including operating earnings operating margin adjusted gross margin adjusted return on invested capital for adjusted ROI see free.
Free cash flow gross debt to non high FRS trailing 12 month adjusted EBITDA leverage ratio adjusted net earnings adjusted EPS, adjusted EPS, DNA and adjusted effective tax rate.
Listeners should be cautioned 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 eye for us and may not be comparable to similar measures presented by other public companies that use IRS or who report under U.S. gap and use non-GAAP measures to describe similar operating metrics.
We refer you to today's press release, and our third quarter 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 I ever us measures to the most directly comparable IRS measures from our.
Financial statements.
Unless otherwise specified all references to dollars on this call are to us dollars and per share information is based on diluted shares outstanding let.
Let me now turn the call over to Rob.
Thank you Craig good morning, and thank you for joining today's conference call.
Despite the challenging environment, plus performed well in the third quarter delivering another quarter of year over year and sequential revenue and operating margin growth.
We are continuing to see the benefits of our portfolio transformation actions and our solid third quarter results are another sign that our strategy is yielding results.
Global payments successfully navigating today's challenges and is working tirelessly to support our customers, while keeping our employees safe.
Our operations remain largely stabilized and the supply chain continues to improve however, we continue to experience a fair amount of demand volatility as our customers end markets remain impacted by COVID-19.
Circumstances continue to change we are well prepared to adapt and address any new covert challenges.
We believe we have a robust set of processes and protocols in place to manage our operations and global supply chain.
Coburn IP situation continues to evolve around the world.
While we are experiencing demand strength in the capital equipment, and Healthtech markets and GBM business, we continue to see softness in other markets most significantly in commercial aerospace.
Our Ccs segment delivered another quarter of solid performance.
Revenue grew on a year over year basis and segment margin came in above our 2% to 3% target range. This quarter represents the fifth consecutive quarter of sequential margin expansion increase yes.
In our Ats segment demand weakness in some of our businesses is offsetting strong growth in health Tech and capital equipment driven by recent wins.
The cost productivity actions taken with an ats leading to improved profitability.
While we continue to take actions to return this segment to its target operating margin of 5% to 6%. We are encouraged by the sequential and year over year operating margin expansion of 80 has achieved in the third quarter.
As we continue to drive cost productivity actions and the broader demand environment improves we believe margins will return to target levels.
Overall, we believe the strength, we're seeing in several of our end markets is a testament to our diversification strategy and our ability to innovate execute and deliver for our customers. The actions we have taken to transform our business in recent years have strengthened our portfolio and we are pleased to be seeing the positive.
The results.
I will provide some additional color on our end markets, but first I will turn the call over to Mandeep to give you further details on our third quarter results over the humidity.
Thank you, Rob and good morning, everyone.
As a reminder, we did not provide financial guidance for the third quarter of 2020 due to the uncertainty created by COVID-19 during.
During the quarter, we experienced COVID-19 related impacts, including premiums paid to ensure continuity of supply and inefficiencies as a result of being unable to secure supply. However.
However, these impacts were offset by various recovery.
Our third quarter revenue came in higher than anticipated at $1.55 billion, mainly due to strong demand and communication fueled by GTN.
Our total revenue increased 2% year over year and 4% sequentially.
Our non IRS operating margin was 3.9% up 110 basis points year over year, and up 50 basis points sequentially.
The year over year, and sequential improvement was driven by productivity initiatives across our business and improved mix in CCM.
I had for US earnings per share were 24 cents up 29 cents year over year and up 14 cents sequentially.
No not yet for adjusted earnings per share were 32 cents up 19 cents year over year and up seven cents sequentially.
Our Ats segment with 34% of consolidated revenue down from 37% compared to the third quarter of last year.
Ats revenue was down 6% compared to the prior year period, but up 5% sequentially.
The year over year decline was driven primarily by COVID-19 related demand impact specifically in commercial aerospace and industrial.
This was partly offset by growth driven by new program ramps in Healthtech and capital equipment as well as continued strength in the semi market.
Higher sequential revenue was due to demand strength across several of our end markets.
Our Tcs segment revenue was up 7% year over year and up 3% sequentially.
Within our Ccs segment, the communications end market represented 45% of our consolidated third quarter revenue.
Up from 42% in the third quarter of last year.
Communications revenue in the quarter was up 9% year over year, largely driven by strength in our GTM business.
Sequentially Communications revenue was up 8% driven by strong demand across a number of our customers including sprint in GTN.
Our enterprise end market represented 21% of consolidated revenue in the third quarter consistent with the same period last year.
Enterprise revenue in the quarter was up 3% year over year, largely driven by strength in our service provider business, partially offset by planned disengagement, that's part of our Ccs portfolio optimization program.
Sequentially Enterprise revenue was down 6% due to demand softness.
We are pleased with the performance of our GTM business as we continue to ramp a number of new programs and support increasing levels of demand from our hyperscaler customers.
Year to date, our GTM business achieved approximately $600 million in revenue up approximately 9% compared to the prior year period and accounted for approximately 15% of our total company year to date revenue.
Our top 10 customers represented 68% of revenue for the third quarter up from 67% in the same period last year and flat quarter over quarter.
For the third quarter, we had one customer contributing 10% or more of total revenue unchanged from the prior quarter and the third quarter of 2019.
Turning to segment margin.
Although still below our target range Ats segment margin of 3.7% was up 90 basis points year over year due to improvements in our capital equipment business as well as higher productivity and volume leverage across a number of our businesses within ATM, resulting from new program ramps.
Sequentially Ats segment margin was up 60 basis point, driven by cost productivity efforts across the business and higher volumes.
Dcs segment margin of 4.0% came in above our target range of 2% to 3% and was up 120 basis points year over year and up 40 basis points sequentially.
This represented the highest margin in Ccs into 2015 and reflects improved mix as well as the benefits from our portfolio shaping initiatives as we successfully execute our transition plan.
The year over year margin improvement was driven by favorable mix, including strong growth in Judaism improved operating leverage and cost productivity.
The sequential margin improvement was driven by favorable mix.
Moving to some other financial highlights for the quarter.
Hi, FRS net earnings for the quarter were $30.4 million or 24 cents per share compared to a net loss of $6.9 billion or negative five cents per share in the same quarter of last year.
Adjusted gross margin of 8.1% was up 150 basis points compared to last year and up 60 basis points sequentially.
Year over year, and sequential improvements were largely driven by volume leverage improved mix and productivity across the business.
Year over year, our adjusted EBITDA of $56 million was up $8 million, primarily due to higher variable compensation.
So you need with a $3 million sequentially, mostly due to higher variable compensation, partly offset by favorable foreign exchange dynamic.
Not I FRS operating earnings were $60.1 million up $17.5 million from the same quarter last year and up $9.3 million sequentially.
Our non I have for as adjusted effective tax rate for the third quarter was 20% compared to 46% for the prior year period, and 24% last quarter.
We are pleased with the improvement in our overall tax rate driven by increasing levels of profits in lower tax geography.
For the third quarter, adjusted net earnings were $40.9 million compared to $16.6 million for the prior year period and $31.7 million last quarter non.
No and I efforts adjusted earnings per share of 32 cents was up 19 cents year over year due to higher operating earnings lower taxes and lower interest expense.
Sequentially non IRS adjusted earnings per share were up seven cents, mainly due to higher earnings.
No one I have for us adjusted ROI see a 15.2% with a 5.1% compared to the same quarter of last year and up 2.3% sequentially.
Moving on to working capital.
Our inventory at the end of the quarter was $1.2 billion, an increase of $171 million relative to the prior year period, largely driven by investments in our GDN business.
Sequentially inventory was approximately flat.
Inventory turns were 4.7 down 0.7 turns year over year and down 0.2 turns sequentially.
Capital expenditures for the third quarter were $10 million or less than 1% of revenue.
No one I have for us free cash flow was $16 million and with third quarter compared to $66 million for the same period last year.
Year to date, we have generated $108 million in on I have for us free cash flow in line with our full year 2020 target of $100 million or more.
In the fourth quarter, we are targeting to generate positive free cash flow.
Got several days in the third quarter were 61 days flat year over year and up one day sequentially. Our cash deposits at the end of September were $207 million down $15 million sequentially.
Moving on to other key measures.
So let's go continues to maintain a strong balance sheet, our cash balance at the end of the third quarter was $451 million up $2 million year over year and up $15 million sequentially.
Combined with our $450 million revolver, which remains undrawn, we have a solid liquidity position of over $900 million. We believe we have sufficient liquidity to meet our current business needs.
Our gross debt position was $470 million at the end of September while our net debt was $19 million an improvement of $15 million sequentially.
Gross debt to non IRS trailing 12 month adjusted EBITDA leverage ratio was 1.6 turns an improvement of 0.1 turns sequentially and a 0.6 turn improvement from the end of 2019.
The year over year improvement is the result of strong free cash flow generation disciplined debt reduction and improve profitability.
At the end of September we were compliance with all financial covenants under our credit agreement.
Our capital allocation priorities remain unchanged, we will continue to work towards generating strong free cash flow and over the long term, we plan to return approximately half to shareholders, while investing the other half in the business.
In the third quarter, we incurred $4 million of restructuring charges to adjust our cost base to fluctuating levels of demand, including in our India business.
We will continue to take restructuring actions in the fourth quarter as we complete the Cisco transition and adjust our cost base across segment undergoing demand pressure.
Year to date, we have taken $19 million of restructuring charges and that this time anticipate that our full year restructuring charges will be less than our original estimate of $30 million.
Now turning to our guidance for the fourth quarter of 2020.
We are projecting fourth quarter revenue to be in the range of 1.35 billion to $1.45 billion.
At the midpoint of this range revenue would be down approximately 6% year over year and down 10% sequentially.
Fourth quarter non Iflorist adjusted earnings per share are expected to range between 22 cents and 28 cents.
At the midpoint of our revenue and adjusted EPS guidance ranges non IRS operating margin would be approximately 3.5% an increase of 60 basis points over the same period last year and a decrease of 40 basis points sequentially.
Non idea for us adjusted <unk> expense for the fourth quarter is expected to be in the range of 56 million to $58 million.
Based on the projected geographical mix of our profits in the fourth quarter, we anticipate our non IRS adjusted effective tax rate to be approximately 20%, excluding any impacts from taxable foreign exchange.
Turning to our end market outlook for the fourth quarter 2020.
And our Ats end market, we anticipate revenue to be down in the low double digits year over year due to sustained weakness in commercial aerospace as a result of coke at Nike, partly offset by growth in capital equipment, and our health Tech business.
In our communications end market, we anticipate revenue to increase in the low single digits year over year, driven by strength in Judea, and partly offset by our planned disengagement from Cisco.
In our enterprise end market, we anticipate revenue to decrease in the low double digit range year over year, driven by weaker end market demand and remaining portfolio shaping activity.
I'll now turn the call back over to Rob for additional color ended updates on our priorities.
Thank you Mandeep.
We are pleased about 2020 year to date performance despite their challenges, resulting from COVID-19.
We continue to benefit from the investments we have made in the portfolio shaping and productivity actions taken over the last few years we've.
We believe that these actions have made us a stronger company and better position us for the future.
Our third quarter results reflected strong mix and operational performance as we continue to execute on our portfolio shaping activities, including our Cisco transition.
We are pleased to have improved operating margin on a year over year basis for the third consecutive quarter. Despite COVID-19 headwinds.
Now turning to say, yes.
Our capital equipment business posted another profitable quarter with strong volume driven by increased demand in our base semi business and new wins in a number of adjacent equipment end markets.
While demand is up materially from a year ago, we are seeing the overall demand environment leveling off as we enter 2020 and enter 2021.
And then Andy while demands in our defense business remains stable.
We continue to experience demand softness in our commercial aerospace business demand in 2020 is materially down from a year ago, and we expect these depressed market conditions to persist throughout 2021.
We will continue to drive would be appropriate cost productivity actions to improve the overall profitability of this business at lower levels of revenue.
In industrial the impacts of covert Nike moderated in the third quarter, and we experienced a gradual recovery of demand across our customer base. We also saw an improvement in profitability on a year over year basis, as new programs ramp and we executed on our cost productivity roadmap.
Well, then healthtech our team is executing very well on projects supporting the fight against COVID-19.
We continue to see strong demand for our diagnostic equipment and anticipate improvement in the demand for elective surgery products in the first half of 2021.
We anticipate an elevated level of demand as we end 2020 and enter 2021 from the ramping of essential products to fight COVID-19.
Now turning to see US overall I am pleased with the strong performance of our Tcs segment in the third quarter.
The segment posted year over year revenue growth as growth from our hyperscale customers more than offset revenue declines from our portfolio shaping actions.
As we mentioned in the past the strong revenue growth in Ccs is driven by strategic wins over the last two years compounded by increasing demand.
Due to the work and learn from home trend as customers extends an upgrade datacenters in support of growing cloud and online requirements.
No JD in business, we continue to see an impressive growth as a result of the investments made over the last few years.
Which have enabled us to deliver higher value add services to our customers, while providing further stability and diversification to our overall tcfs business.
So Africa supports eight of the World 10 largest hyperscale or service providers developing technologies that are deployed throughout their data centers.
Turning to the Cisco disengagement is progressing as planned a manufacturing was mostly completed in the third quarter and.
And we anticipate the transition to be largely complete by the end of the year.
We are pleased with the progress we are making to backfill Cisco, but higher value add solutions and have secured new business across a number of customers. We remain on track to achieve our goals with a richer mix of programs.
As I look back on our performance year to date I continue to see evidence that our strategy is taking hold a portfolio shaping and productivity actions over the last few years well difficult at this time have better positioned us to deliver those value added solutions across a broad set of markets.
In particular.
I am pleased we're able to generate 3.9% operating margin in the third quarter. Despite the severe downturn in the commercial aerospace and industrial markets.
As we look ahead to the fourth quarter, we expect JD M. Two continued to be strong fueled by recent wins and increased demand for our products and services. However.
We anticipate some softness in enterprise driven by a soft demand environment and our portfolio actions.
Well, we expect to see a segment margin to remain strong in the fourth quarter, we anticipate that margin will moderate sequentially due.
Due to mix normalization and incremental investments in our JD in business as we invest in the next generation of products in support of a growing market.
In a T.S., we continue to build a stronger more diverse and higher value portfolio.
We expect continued weakness in commercial Aerospace Park.
Partially offset by strength in our other Ats markets.
During these unprecedented times, we continue to face uncertainties surrounding the potential impact from COVID-19.
But we remain confident in the long term outlook.
Before we close today I would like to talk about another important area of our business environmental social and corporate governance or E.S.G. matters.
For the last 10 years. These three focus areas have been integral to everything we do.
So that's the <unk> is a technology company, but first and foremost we are a people company and with that comes a responsibility of doing whats right buyer, our employees and customers and the world around Us for example.
To date 17000 of our employees have signed the sustainable workforce pledge. Moreover, we have shifted a large portion of our energy consumption to renewable sources, reducing our greenhouse gas emissions by 57% in 2019.
We continue to set aggressive sustainability goals by establishing new targets to reduce our scope one in scope to greenhouse gas emissions by an additional 30% by 2025.
And when it comes to diversity and inclusion we are taking action across our global footprint to ensure we continue to foster and and an environment in which employees of all backgrounds may drive.
These and other U.S.G. initiatives will continue to remain at the core of clustered of strategy and operations going forward.
I want to extend my appreciation to our global team for their hard work and commitment, especially during these difficult times.
Their resilience and dedication are the keys to adapting to this unprecedented moment.
We look forward to updating you over the coming quarters with that I would now like to turn the call over to Amy to begin our culinary. Thank you.
Thank you at this time, a little bit conducting our question and answer session to allow for as many questions as possible. We ask that you. Please limit your questions to one question with one related follow up you.
In order to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Todd Copeland with C. I do see Todd Your line is open.
Hi, good morning, everyone and.
I wanted to have you talk about what you think the business looks like once we get past cold. The 19. So if we think about gross drivers like JD and Sammy.
What is a normalized growth rate for the current portfolio or at least the portfolio. Excluding not Cisco wants that disengagement is complete and then any color on that would be super helpful to think about the business. Once we get through that had done it. Thank you.
Hey, Todd good morning, and thanks for joining the call today, so mandeep here.
You know there's been a tremendous amount of volatility I would say I'm going through 2020. Some markets are up significantly other markets are down significantly what we are seeing as we're entering into the fourth quarter is that there is some level of stability starting to appear Oh, you know what the softness that we've seen in the commercial aerospace side is starting to level off.
The significant demand increases and the service provider business are starting to level off and so if you look over into 2021. Our view at this point is is that Ats should continue to target the 10% growth rate that we have always put up there and we think that we have roadmaps that give us confidence that that is a possibility for 2021.
On the Ccs side, you know, there's going to be a big revenue overhang from Cisco, but we all knew that was coming.
And then when you look at the Ccs business X or Cisco or we're looking to maintain our performance going into 2021, but we continue to target you know a series of bookings to also drive a little bit of incremental growth, but as we exit 2020, we do see some of the markets stabilizing at the levels that they're at and then there's opportunity.
But some of those depressed markets come back.
And Paul I want to add yes, glad I would just add some color to that would then with an Ats I think the growth drivers for us would be.
Our capital equipment business, that's really being fueled by our program wins and share gains over the last couple of years or industrial we think is going to return to growth and of course, our health Tech business is doing quite well.
And within Ccs, we do even though a expect a incremental GTM growth on a year over year basis, even though its mandeep matching the demand is moderating a little bit from the very strong growth we had this year.
Oh, that's great. Thanks, very much appreciate the color.
Your next question comes from the line of Robert Young with Canaccord Genuity Robert Your line is open.
Hi, good morning, I'm not sure that I understood I understand the the drivers behind the moderation Ccs margins in Q4, I think you said mix normalization investments in J.D.M. is that all enterprise impact or maybe if you could break that is that lumpiness an hyperscalers late it could you talk about what's the driver there.
Sure Hey, Rob its mandeep here. So you know Ccs had frankly, just outstanding performance in the third quarter, a generating 4.0% <unk> as you know the target margin range for that business is 2% to 3% and so while we continue to expect a strong performance going into the fourth quarter from Ccs you know will it repeat 4%.
We don't expect to do at this point and so when we say moderation means get get back to a little bit more of a normal level and the reason for that is because a lot of things went right in the third quarter, we had strong mix with higher levels of JD M. Within JD M., we had some positive mix as well so the margin profile of the Trillium business was stronger than it normally is and then we.
Were also successful in generating a lot of service billings are with our customers. When you start to normalize for those things at the margin profile should start a leveling off a little bit.
Okay, Great and then my second question would be around I was surprised to see that restructuring a little lower than your target given aerospace does that suggest that you're not restructuring the aerospace business in the near term to meet demand or is that more related to the expectation that Cisco disengagement as lower whats why is the restructuring or no.
Excellent I guess yeah.
Yeah. So the restructuring dollars were not as high as the first two quarters of this year, but we still anticipate spending $30 million for the full year. So there's some additional costs that will be incurred in the fourth quarter. When you look at where our restructuring is being targeted towards well lot. Most of the activity that we need to do and Cisco has been complete.
But we still have some cost actions to take as we shipped that final product in the fourth quarter and then to your point I'm on the Ats side, where we continue to target the restructuring activities are in the businesses that had the most significant demand a downturn and those are in the aerospace and defense and industrial segments. So we do expect that we will continue to take action.
In the fourth quarter and stay within that $30 million on blue.
Okay, Thanks, and and all that add Rob that you know within the Cisco the restructuring with a lot less than originally anticipated due to the strength in the base business in some new wins that were able to direct to Thailand. So it was a lot lower than anticipated.
Great to hear thanks.
Your next question comes from the line has will keep out of China, which bank of America. Please your line is open.
Hi, Thanks for taking my questions [laughter] for the first one can you drill down a little bit into the communications segment. It looks like it was up strong 9% year on year, what did you see an optical networking and wireless did the revenue from Cisco meet your expectations and then just one that looks like the guide.
You're saying up single digits or low single digit. So is there some incremental weakness you're seeing in that segment and in for Q.
Hi, Ruplu, yeah within Threeq you broadly speaking you know we saw strength in service provide around came out with somebody else that with program exits in demand dynamic.
The strength really came from our networking business and again it was partially offset was the Cisco transmission, which is part of our communications segment.
As we move into Q4 or the dynamic really in terms of offsetting the growth is really the program transitions like the Cisco exit, but we still see very strong growth in networking, some very strong growth and existing programs both him not working and also offers.
<unk>.
Okay. Thanks for the details there Rob I just wanted to ask maybe from Mandeep can you remind us on your I'm going to capital allocation priorities now you reduce debt quite a bit. So I mean should we think that you will focus more on M&A or or how should we think about share buybacks going forward. So you need.
Well just on your capital allocation priorities for the next year.
Yeah, absolutely Ripley, so our long term priorities remain unchanged, we will continue to focus on generating strong cash flow I'm, returning 50% to our shareholders and investing 50% into the business and I know as you know over the last eight or nine years, we have been very aggressive on the share buybacks I frankly more.
So than any of our peers in the space.
So we are pleased with the cash flow performance that we've enjoyed you know we've been seeing so far this year and we have been able to get almost to a neutral net debt position, which is wonderful.
Our focus at this time continues to be on generating additional dry powder or whether we apply that to paying down more debt, where we we'll continue to just a build of dry powder and in terms of cash on our balance sheet. It because we continue to be focused on it looks good M&A targets that being said whenever we make an investment decision where.
Looking at its compared to alternatives as well and so we'll continue to monitor well when the right time is to open up the share buyback program a woman sure that we are looking at M&A targets from an ROI any P.S. accretion perspective relative to things such as share buybacks and as we do that analysis based on the moment that we're in you know we will have.
Flexibility to go when we are together right now we are in a position where we can now reopened a share buyback program, but again as we take an opportunistic view towards that you know we'll open it up at that time, so whether it's gonna be sometime in the fourth quarter or sometime in 2021, I will just continue to monitor how the market trades us and then <unk>.
So look at the alternatives in terms of M&A.
Okay. Thanks, Thanks for the details congrats on the quarter ends on the strong margin improvement.
Thanks <unk>.
Thank you. Your next question comes from the line of Dennis much lot Blessed with BMO capital markets Dennis Your nice open.
Hi, Good morning, Rob can you spend on the semi business you talked about seeing though demands leveling off as you enter next year, maybe a bit more color in terms what are your customers and background.
Sure. So you know semi cap has been a lot of capital equipment has been very strong semi cap has been particularly strong.
In the first half of this year, we saw a strong foundry spending on logic spending as we get into the back half of this year the foundry and logic spending is continuing and we are seeing some increase and.
A memory spending as well as you look forward to next year, we see the memory expanding continuing even even going from then to the DRAM.
A large portion of our growth is not just rising with the sea level, it's actually a new share gains approximately.
30% to 40% of our growth is really being driven by new wins, new share gains across all of capital equipment. We've been doing a very nice job of my interest growing or semi cap business, but we also have other capital equipment business that were expanding within a and.
In fact 20, new program ramps that were commencing right now so a lot going on a capital equipment.
Maybe on a related note what's happening in flat panel I mean is that to do didn't do we need to see some of the new cabs being built for that to pick up or are you seeing there.
Correct. The overall display market is still generally depressed a lot of the projects that you know what we thought we'd start wrapping a this year into the first half of next year are being pushed into the right.
That being said, we could pick a lot of action so last year to make the business more fish in that role of volume. So its actually talk complete a and we have a long view of the industry and we think it's well poised for the recovery. The drivers obviously would be smartphones as Fiveg gets Oh, no. That's set up that happens the metal probably.
The latter part of 21 to 22 and the new large form factor I T. V's should also help uplift or the market when this corporate crowd.
Oh forget fast.
Great. Thanks, a lot that's correct.
Your next question comes from the line of Paul steep Scotia Bank Paul Your line is open.
Great. Good morning, I guess, Rob or mean deep can you maybe talk a little bit about what you're thinking in terms of the M&A environment that there obviously its a challenged period you spend it wisely working on the business, but Dale as cash and capital builds sounds like priority is to try to grow the business.
And how does that environment, even looking or is it still sort of pause im just heads down on working your way through the current environment.
Hi, Paul I'll start off and Rob can add on if you'd like to so you know at the beginning of the year when covert it was starting to just hit every one we saw a dramatic drop off in a M&A activity that being said we are seeing a lot more targets that are coming online, which is nice to see you know.
We're evaluating a number of M&A transactions Ah every week and frankly as we as its very well understood that we're looking for certain types of targets to accelerate our strategies, we have not pulled the trigger on any of them largely because we want to make sure that it's the right fit you know when we look at M&A target prices.
Of course this is important we want to make sure that were picking the right price for it but we're also looking for capabilities that the business will bring to us and so that it can accelerate our strategies. We also want to ensure that it is that able.
People to be integrated relatively lightly we don't want to go through a massive integration when looking at targets and then yeah. You know again, we're just making sure that the business can provide us the right level of scale when needed and so we continue to apply the same filter there are some good targets out there, but nothing that is imminent at this.
Right.
Great and then just one quick follow up.
Can you give us a sense for Ccs, it's hard for all of us from the outside obviously Cisco the disengagements were to sort of plan and you've been replacing and sort of shifting some of that capacity back.
How far through that project would you say we are not in terms of Cisco disengaging, but in terms of sort of reorienting that capacity in the business to new two new business. Thank you.
Yes, Hi, this is rob so.
We're pretty far along on that process well a couple of different aspects first of all our base business is up that's really driven by our service provider a portfolio fueled by our JD I'm offering we've.
We've had significant new wins for Thailand, driven by both high value your mass players and also those trade in programs.
And when we started the Cisco transition.
We put in place you know bookings goal again, we werent intending to replace Cisco dollar for dollar we won at a higher rich programs have played to our portfolio. We put together a a bookings plan and we're very close to closing that are planned by the end of this year.
Now it takes time for those bookings to actually you know turn to revenue, which we think will be you know.
A lot of part of 21 to 22, depending on market uptick.
But overall I think were through the knot hole if you will.
On the Cisco transmitted transformation in the portfolio renewal wasn't Ccs very pleased with how Ccs has been operating.
And mixes is you know very strong and the offering is very strong and we're continuing to invest in.
Like JD on portfolio, and our and you know picking that doesn't flow.
The only thing I'd, maybe add to that as well Paul is you're right. I mean, there's a lot of moving pieces, we've done disengagements and programs at Ccs going back now a year and a half the final revenue impact is still in 2020 is numbers and then we have Cisco as well you know if you look at overall Ccs for 2020 based on the Guy that we just provided it is implying relatively flat revenue on a year over.
Your basis, despite the dislocations, but that's been happening when you look at how Ccs has been growing outside of the Disengagements. The business is actually up in the double digit percentage range. So it talks to a lot of the bookings that we've been generating to drive growth in other areas to offset the discounts that are coming system pretty good underlying growth beyond the programs were different.
Switching from.
Thank you.
Your next question comes from the line of Paul Treiber with RBC capital markets. Paul Your line is open.
Okay. Thanks, very much and good morning, I was hoping that you could speak to that long term visibility or maybe sales pipeline that you have with the hyperscalers and in particular, the omni at the G.M. side of the business and typically you know how involved are integrated are you with the hyperscalers in terms of product road map.
Up and implanting programs out into the future.
Hi, Paul.
You know, where we have good visibility you know most of our Ccs business and JD I'm business, we could have a good visibility a quarter out when it comes to specific numbers.
But broadly speaking.
With all the Hyperscalers Oh, we have a technology roadmap meetings with them. So.
So we share our roadmaps for our technology, they sure why their requirements and we align closely such that we're ready when they need us to be ready you know within GBM.
We work very closely with our customers to to customized solutions for their specific applications. So in many respects, we're very tightly into linked with them when it comes to that requirement.
Yeah, and Paul you know and I know you know this one of the benefits that we have energy in business is that we are across a number of different sets of solutions. We provide <unk> you know solutions at networking and storage even over into <unk> kind of compute as well and as Rob mentioned, we work very closely with our customers to customize product, but we also have.
I products that customers are buying off the shelf as well, where the brand is not necessarily they're not necessarily turning around selling it they're using it for their own consumption and so because we have off the shelf products that they can take or they cut or products or they can customize what does it gives us some more diversity in terms of the sales channel.
And then when we look out like year to date JD amount Judy I'm, that's up 90%, 15% total revenue give the aspiration is there any long term targets you could share in terms of how you see that growth progressing over the next couple of years or maybe how large of a person.
Total revenue that business could get to.
So it started off I mean, as you know, we're not providing 2021 guidance, but what we can tell you is that as you mentioned the business is up materially or on a year to date basis, and we continue to see a similar similar level of growth in JD I'm going into the fourth quarter from a margin profile perspective, GTM has been performing accrete up to.
You'll see see us results and that has helped bring up the rest of the Ccs business as well as the company's margins as well as we look into 2021, and we are still targeting some level of growth and Rob I briefly mentioned that earlier, however, it's not going to be at the 90% levels again, what we're seeing this year is a combination of wins that we've had in place since 2018 and 20.
The 19 ramping and then some accelerated demand because a coded as that acceleration starts to moderate and as we start reaching steady state and our JD M. Ramps you know, we'll expect regular growth going into 2021, but we are still expecting a strong 2021 ingredient.
And I would also add the when you look at our JV in business and you look at our our Ats business, they're very similar in nature in terms of its an engineering led engagement its high value revenue.
When you look at our diversification efforts part of our strategy because when you took a JD and business. When you take our Ats does if you add them together, we kind of consider that our product lifecycle, you know revenue or high value revenue and broad goal that is to have that be well north of 50% of the company's revenue moving forward.
And so to some extent, we're we're already there looking to kind of grow that diversification into two of the best in those businesses.
Okay. Thanks for taking my question.
[laughter].
Your next question comes from line of Kurtz Watch this people hurt your line is open.
Hi, Good morning. Thank you for taking the question I'm, hoping to follow up on Cisco and Ccs and see if you can maybe just drill down a bit on on the cadence and the magnitude of the Cisco wind down should we be expecting the full roughly 10% of Cisco related sales to come off right at the turn of the new year.
Or could we see some lingering contribution into 2021.
Then I guess.
It's if you're able to maybe quantify how much of this wind down you're expecting to offset with new communication program ramps at this point that would also be helpful. Thank you.
Well I'll start off with that in terms of Cisco.
The wind down should be.
The manufacturing activities are largely complete in the third quarter when it comes to the fourth quarter very little revenue.
Contribution in terms of our business. So I would say the majority of the revenue is Ah.
You know completed or recognize with the state of the game.
The last remaining things that we have in 21 would be very insignificant in just terms of you know very very low volume production or end of life programs and things like that but not material in nature as we move into next year. The bookings that I mentioned earlier, it's going to take some time for those bookings to convert.
Into revenue for perhaps a lot how the latter half of EUR 21, as we renew our portfolio unless you see upside.
Understood and then I guess, maybe just looking back at the recently completed quarter can you give any sense of sort of like linearity of demand throughout the quarter and maybe any notable volatility by segment or end market.
In terms of linearity or were you.
Most of our revenue was shut down in the third month of the Oh quarter.
I believe generally speaking.
Kind of a quarter about 25% of the revenue will go in month, 130% of the revenue will go in month, two and the balance will go in in month three of the quarter.
Pre covert post covered we have seen some modest changes the math, but it's hard to figure out whether that's just Dubai due the demand dynamics Workover dynamics.
But that's a general many already inside of quarter.
Okay. So no I guess material or a notable swings.
Within the end markets to to really call out.
Nothing nothing notable yeah.
Understood all right. Thank you very much.
And again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Gen State of other cities with Janney. Your line is open.
Thank you I am very impressed with the G. M. A traction you've been getting so if you could give us a little more context or color around it it sounds like it's it's very tied into the hyperscalers and the cloud companies I don't know if that's an accurate statement or not then is it you know.
A lot of servers are a lot of stores do a lot of switches and I guess importantly, how do you ensure that you could talk to most of you know is so that no other suppliers, especially.
Maybe goes on to Asia may be a little more price conscious don't you similar GBM upwards as you know we do here, they're doing it but yet your numbers speak for themselves about the impressive growth that you're seeing as well as the profitability. Thank you.
Hi, Jim Yes.
Yeah. Thank you for that <unk> in terms of JT and yes. The majority of the revenue is going to the Hyperscalers, but we also have Oh. They also go into some of our enterprise customers as well.
ER and the products that we're making is actually on all technologies across the data center. So.
You know, we're working on storage solutions beetroot solution networking solutions, which is probably the biggest portion of them if.
The difference I think between offering and some of our competitors offering is that it's it's truly customized to our customers' specifications.
And as I mentioned earlier, we're very proud to have with their product roadmaps.
And we're also working with silicon providers to make sure that we have access to.
Early silicone and developing leading edge capabilities to support our customers moving forward and we're also continuing to invest in.
In a fair amount of R&D, we've been doing that now for you know seven plus years and continuing to feed our product Roadmaps and have a very strong, though you know engineering centric engineering or capable organization.
And Ah that recipe, it's been working for US and lastly, I would say is because of our heritage. You know I think we are offering our customers you know enterprise.
Seven quality had no OTI I'm level pricing.
Jim maybe just to add onto some of the remarks that Rob made a you know we do believe that there are high barriers to entry into this business as Rod has mentioned, where we've been investing in this business for the better part of a decade $25 million to $30 million every year you see that on our R&D line one of the reasons that the business has been doing.
Well. It is we have very sticky relationships that go back there are a number of years, we don't compete with our customers. We don't have a brand. We don't have a direct sales channel and so that allows for a very high trust relationship. The other thing I would say that's been benefiting US is the footprint that we have a we started off a number of years ago doing a lot of.
Judy and production in China, and while we continue to do that but some of our customers they've been looking for a southeast Asia solution and so we do a lot of our JD and manufacturing in Thailand, which is one of our strongest sites and the networks and so because of the footprint that we're able to use as well as the types of products that we are producing which the crew.
It's a broad set we believe that the the barrier century or relatively high.
Thank you so much for the details that was a great just flipping and very much appreciate it. Thank you.
Thanks, Jim.
Thanks, Jim.
This concludes our question and answer session I will now turn the call back over to Rami that's for closing remarks.
Thank you Amy I'm pleased we were able to deliver another solid quarter Markwest sequential operating margin improvement and strong free cash flow.
Let's see a football okay Ah portfolio continues to perform well and delivered a sixth consecutive quarter of margin expansion as we execute our portfolio shaping actions and then they see us I'm pleased with the improved sequential profitability improvement of our businesses.
Given the continued headwinds that we're seeing in commercial aerospace and industrial.
And while we continue to face business uncertainty I missed this pandemic I believe we have proven that the celestica team has the ability to successfully navigate the challenges that might lie ahead I'd like to thank our global team for remaining vigilant on keeping themselves and each other safe. Thank you all for joining todays call.
We look forward to updating you as we progress throughout the year.
Ladies and gentlemen, this concludes today's conference call I'll be happy to let Scott. Thank you for participating you may now disconnect.
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