Q1 2021 Celestica Inc Earnings Call
Good day and thank you for standing by welcome to the Celestica Q1, 2021 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker presentation that will be a question and answer session.
I ask a question during this session you will need to press star one on your telephone.
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And as a reminder, today's conference call is being recorded.
I would now like to hand, the conference over to your Speaker today, Craig Oberg, Vice President of Investor Relations and development. Please go ahead.
Good morning, and thank you for joining us on Celestica as first quarter 2021 earnings conference call on the call today are Rob My honest, President and Chief Executive Officer, and many pallet Chief Financial Officer.
As a reminder, during this call we will make forward looking statements within the meanings of the U S. Private Securities Litigation Reform Act of 1095.
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In addition, during this call we will refer to various non <unk> measures, including operating earnings operating margin adjusted gross margin adjusted return on invested capital or adjusted ROIC free.
Free cash flow gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio adjusted net earnings adjusted EPS, adjusted SG&A and adjusted effective tax rate.
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F R S measures from our financial statements.
Unless otherwise specified all references to dollars on this call are to U S dollars and per share information is based on diluted shares outstanding.
Let me now turn the call over to Rob. Thank.
Thank you Craig.
Morning, everyone and thank you for joining us on today's conference call.
So that's the kind of it's off to a strong start in 2021 for Rob.
Bring solid first quarter results revenue and adjusted EPS for both above the midpoint of our guidance ranges.
And I am pleased that on non <unk> operating margin is up 60 basis points on a year over year basis, reflecting the strength of our strategy and strong execution.
Our portfolio transformation initiatives continue to yield results in our core business is growing.
Although revenue decreased 6% in Q1 2021 compared to Q1 2020, the decrease was largely driven by a disengagement from Cisco.
Whose revenue accounted for 13% of our total Q1 2020 revenue.
The revenue on the Companys non physical business grew 7% year over year.
Furthermore, we executed the transition seamlessly and we were able to meet our revenue and mixed backfill objectives.
Within our EPS segment, we experienced slightly better than expected revenue results.
Strong growth in health Tech and capital equipment.
We also reported our fourth consecutive quarter of sequential margin expansion and continue to target being back in our 5% to 6% target margin range by the end of the year.
Within Ccs after having successfully concluded our Cisco disengagement in the fourth quarter of 2020, we are focused on growth.
On Ccs revenue in the first quarter was down on a year over year basis, primarily because of the Cisco disengagement, our remaining Ccs portfolio grew by 16% year over year.
Ccs segment continues to perform well with our year over year improvement in segment margin for the fifth consecutive quarter and once again operating above our 2% to 3% target range.
Our hardware platform solutions.
Or <unk> business previously referred to as our JDM business.
For an engine for growth within our Ccs segment.
H P S generated $200 million of revenue in the first quarter, a 46% increase on a year to year basis.
We continue to expect our hps business to be a catalyst for both Ccs revenue growth.
And segment margin strength.
Last quarter. We also highlighted that we refer to revenue from HPE Fs business in Ats segment as lifecycle solutions.
It is our view that the businesses, which compromise on lifecycle solutions portfolio share several key characteristics that reflect the focus of our commercial strategy.
We consider our lifecycle solutions revenue to be diversified revenue and our strategy continues to be to expand this portfolio as a percentage of total company, enabling long term profitable growth.
This strategy includes pursuing markets with high barriers to entry robust long term growth prospects attractive margins and the opportunity to offer our customers higher value added solutions throughout the product lifecycle.
We are pleased that our lifecycle solutions portfolio grew on the first quarter, both sequentially and on a year over year basis I will offer some further color on our end markets and the overall business outlook. Shortly however, first.
I'd like to turn the call over to Mandy to provide you with some financial details on the first quarter as well as our second quarter guidance.
Thank you, Rob and good morning, everyone.
First quarter 2021 revenue came in at 1.23 billion.
Slightly above the midpoint of our guidance range.
Revenue decreased 6% year over year and 11% sequentially.
Despite Q1 traditionally being a seasonally soft quarter from a volume perspective, we delivered non I FRS operating margin of three 5% exceeding the midpoint of our guidance range by 10 basis points, reflecting the benefits of our portfolio reshaping activities and improved mix across several businesses.
Year over year, non <unk> operating margin improved by 60 basis points, driven by a significant improvement in our Ats end market.
Sequentially non idea for us operating margin declined by 10 basis points driven by lower volumes in Ccs.
This was partially offset by higher sequential Ats segment margin driven by higher volumes and favorable mix.
Non I O for US adjusted earnings per share were <unk> 22, one.
<unk> above our guidance midpoint, and an improvement of six cents year over year, while day on <unk> sequentially for.
First quarter Ifr's earnings per share were eaten up 10 cents year over year and down <unk> <unk> sequentially.
Sequentially.
Our Ats segment accounted for 43% of our consolidated revenue during the quarter, our highest level of Ats concentration reported to date and up from 41% in the first quarter of last year.
GTS revenue was down 3% compared to last year ahead of our expectations of a mid single digit percentage year over year decline.
Sequentially Ats revenue was up 4%.
The year over year revenue decline in Etfs was driven by weakness in commercial aerospace and industrial partially due to COVID-19, largely offset by new program ramps and health checks and very strong demand growth in capital equipment.
Sequential growth was driven by strength in capital equipment and help text offsetting moderate headwinds in A&D and industrial.
Our Ccs segment revenue was down 9% year over year, largely driven by the Cisco disengagement and partly offset by strong demand from service provider customers, including in our EPS business.
Sequentially Ccs revenue was down 19% driven by seasonality in our enterprise business as well as the Cisco disengagement.
With the Cisco disengagement behind US we are pleased with the growth in the remainder of our core Ccs portfolio, whose revenue increased 16% year over year.
Within our Ccs segment, the communications end market represented 40% of our consolidated first quarter revenue up from 39% in the first quarter of last year.
<unk> revenue in the quarter was down 2% year over year as the declines resulting from the Cisco disengagement were largely offset by robust demand from service provider customers.
Sequentially Communications revenue was down 16%, mainly driven by seasonality as well as the Cisco disengagement.
Our enterprise end market represented 17% of consolidated revenue in the first quarter down from 20% in the same period last year.
Enterprise revenue in the quarter was down 21% year over year and down 27% sequentially.
The year over year and sequential declines were driven by program specific demand softness and seasonality.
Our hps business once again delivered strong growth in the first quarter with revenue up 46% year over year led by higher demand from service provider customers.
H P. S accounted for 16% of our consolidated revenue up from 10 per cent a year ago and 15% in Q4 2020.
Our top 10 customers represented 65% of revenue during the first quarter down 1% year over year and 2% sequentially.
For the first quarter, no customer represented 10% or more of our total revenue versus one customer in the first quarter of 2020 and two in the prior quarter.
Turning to segment margins.
Achieving a margin of 4.0% ETF segment achieved its fourth consecutive quarter of sequential margin expansion up 130 basis points year over year and up 10 basis points sequentially.
The year over year improvements were driven by accretive new programs in health Tech and capital equipment more than offsetting headwinds in our A&D business.
Ccs segment margin of three 1% came above our target range of 2% to 3% up 10 basis points year over year and down 30 basis points sequentially.
Year over year margin improvement was primarily driven by favorable mix.
The sequential margin decline was due to lower volumes due to seasonal demand dynamics, partly offset by favorable mix.
Moving to additional financial metrics.
<unk> net earnings for the quarter were $10 5 million or <unk> <unk> per share compared to a net loss of $3 $2 million or <unk> <unk> loss per share in the same quarter of last year.
And net earnings of $20 $1 million for 16 cents per share in the previous quarter.
Adjusted gross margin of eight 6% was up 130 basis points compared to the same period last year and up 20 basis points sequentially, both on a lower base of volume.
Year over year, and sequential improvements were largely driven by a higher percentage of lifecycle solutions portfolio revenue, which is made up of our H P S and ETF businesses, which generate more favorable margin than our non hps Ccs revenues.
First quarter, adjusted SG&A of $53 $6 million was up $3 $7 million versus a year ago, primarily due to higher functional spend and unfavorable foreign exchange impacts.
Adjusted SG&A was down $2 $9 million sequentially.
Non <unk> operating earnings were $43 3 million up $5 2 million from the same quarter last year and down $6 $7 million sequentially.
Our non <unk> adjusted effective tax rate for the first quarter was 21% compared to 24% for the prior year period, and 19% last quarter.
For the first quarter adjusted net earnings were $27 8 million compared to $20 7 million for the prior year period, and $33 $3 million last quarter.
Non <unk> adjusted earnings per share of 22.
We're one above our guidance midpoint and up six since year over year due to higher non ire for us operating earnings and lower interest expense.
Sequentially non <unk> adjusted earnings per share were down for me.
Mainly due to lower sequential non <unk> operating earnings.
First quarter non ire for us adjusted ROIC of 10, 8% was up one 3% compared to the same quarter of last year and down one 6% sequentially.
Moving on to working capital.
Our inventory at the end of the quarter was 1.15 billion.
Up $62 million sequentially, and up $81 million compared to the prior year period largely to support growth in our hps business.
Inventory turns were for 0.0 in the first quarter down from four four turns last quarter and from four eight turns in the prior year period.
Capital expenditures for the first quarter for $13 million for approximately 1% of revenue.
Non I O for a free cash flow was $29 million in the first quarter compared to $53 8 million for the same period last year and up from $18 $5 million in the prior quarter.
We are pleased to have delivered positive non ire for us free cash flow for nine straight quarters.
Cash cycle days for first quarter were 82 days up 13 days year over year and up nine days sequentially. Our cash cycle days are higher than normal partially due to the lower level of revenue we experienced in the first quarter on.
Our expectations are for cash cycle days to improve as we continue through 2021.
In the first quarter, we incurred $6 million of restructuring charges to further adjust our cost base to align with changing demand levels, primarily in our A&D business.
Moving on to some additional key metrics.
Our cash balance at the end of the first quarter was $449 million down $23 million year over year and down $14 million sequentially.
Combined with our $450 million revolver, which remains Undrawn and we continue to have a very strong liquidity position of approximately $900 million in available funds. We believe our liquidity is sufficient to meet our current business needs.
During the quarter, we repaid $30 million of our long term debt and ended the quarter with gross debt of $440 million, achieving net cash of $9 million.
This marks the first time, we have achieved a positive net cash position since the third quarter of 2018.
Our first quarter gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio was one four turns an improvement of 0.2 turns sequentially and on an improvement of 0.6 turns from the same quarter last year.
We are pleased with the progress we have made to deleverage our balance sheet, which we have achieved as a result of strong non I for a free cash flow generation and disciplined capital management.
At the end of 2021, we were compliant with all financial covenants under our credit agreement.
Since announcing our NCI program last November we have repurchased approximately 0.6 million shares at a cost of $5 3 million for an average price of $8 35 per share.
As we proceed through 2021, we will continue to take a balanced approach towards capital allocation.
We are focused on generating $100 million or more of free cash flow and utilizing this cash to primarily pay down debt to reduce our interest expense and maintain maximum financial flexibility.
We will however, also be opportunistic towards share buybacks under our existing and CIB program.
Our long term capital allocation priorities remain unchanged, we are focused on generating consistent non io for us free cash flow.
Keeping our annual targets and returning 50% of that capital to shareholders with the other 50 per cent to be reinvested in our business.
Now turning to our guidance for the second quarter of 2021, we.
We are projecting second quarter revenue to be in the range of 1.325 billion to one for two 5 billion.
At the midpoint of this range revenue would be up 11% sequentially and down 8% year over year, including the impact of our disengagement from Cisco for.
For our non physical portfolio achievement of the midpoint of our guidance range would represent revenue growth of 3% year over year.
Second quarter non <unk> adjusted earnings per share are expected to range between 21 to 27 cents per share.
At the midpoint of our revenue and adjusted EPS guidance ranges non <unk> operating margin would be approximately three 5% an increase of 10 basis points over the same period last year and flat sequentially.
Non <unk> adjusted SG&A expense for the second quarter is expected to be in the range of $54 million to $56 million.
We anticipate our non <unk> adjusted effective tax rate to be approximately 21%, excluding any impacts from taxable foreign exchange or unanticipated tax settlements.
Turning to our end market outlook for the second quarter of 2021.
In our Ats end market, we anticipate revenue to be up in the mid teen percentage range year over year, driven by continued demand strength in our capital equipment and health Tech businesses and a return to growth in industrial partly offset by continuing weakness in commercial aerospace as a result of COVID-19.
In Ccs, we anticipate our communications end market revenue to be down in the low double digit percentage range year over year, driven by our disengagement from Cisco.
The remainder of our communications portfolio is growing driven by strength in demand from our service provider customers as well as our hps business.
In our enterprise end market, we anticipate revenue to decrease in the low 30% range year over year due to market demand softness and very strong performance in the same quarter last year.
I'll now turn the call back over to Rob for additional color on our end markets and overall business outlook.
Thank you Mindy.
Pleased with our company's continuing execution of our strategy, which reflects our team's work ethic and ability to navigate the unique challenges presented by the current business environment.
We are off to a strong start with our first quarter results, which we believe position us for a successful 2021.
We continue to navigate several challenges in the context of the current macro environment for pipe constraints continue to impact most of our end markets, resulting in extended lead times for components in the first quarter due.
<unk> advanced planning and proactive approach to securing necessary components and materials.
We were able to limit the impact on our revenues to $12 million, while we have accounted for our best estimate of the potential impact of component shortages in our second quarter outlook. We are seeing further tightening of supply chains and market conditions are becoming more challenging.
We continue to monitor the situation and are working closely with our suppliers and customers to mitigate the impact on our business. We expect these conditions will persist for the remainder of 2021.
Despite the challenges from COVID-19, we continue to operate at normal capacity levels across our network. We are seeing the number of COVID-19 cases price again in certain regions.
While many parts of the globe in the midst of a third wave.
While some jurisdictions, such as Canada, and Western Europe are responding with additional restrictions other jurisdictions are easing the restrictions.
Our global operations team continues to work diligently to implement the required health and safety protocols and the health and wellbeing of our employees and business partners remains our highest priority as we navigate through these dynamic times.
Now turning to our segments and Etfs, we are very encouraged by the resiliency of our diversified businesses and we reiterate that we are targeting 10% revenue growth in 2021 compared to 2020.
We also remained focused on re entering our target segment margin range of 5% to 6% by the end of the year. Despite the continued weakness in commercial aerospace.
Our capital equipment business continues to exhibit very strong growth, primarily led by new wins and market share gains from our semi cap customers.
The demand backdrop in the semiconductor space remains quite strong supported by secular tailwind.
We expect our capital equipment business to remain robust from second quarter and for the remainder of 2021.
In our display business as noted in our comments last quarter.
We continue to anticipate growth towards the end of the year and into 2022.
And industrial demand has largely stabilized on a sequential basis with the worst of the impact from COVID-19 on our industrial business now behind US we expect to return to year over year revenue growth in the second quarter.
And A&P headwinds on the commercial aerospace market continue to pressure our results as operators have meaningfully pared back expenditures in the face of lower levels of commercial air traffic.
We have taken the actions, we believe to be necessary to adjust our cost structure to align with a slower level of demand.
Looking ahead, while we expect the commercial aerospace market to remain depressed throughout 2021.
We are anticipating higher revenue in the second half of the year.
Compared to the first half as new program wins ramp.
And our health Tech business, we continue to see strong growth both year to year and sequentially supported by the ramping of a number of new program wins, we anticipate the strength to continue throughout 2021.
Now turning to Ccs.
Having successfully completed the Cisco disengagement in Q4 for 2020, we continue to see the benefits of our portfolio reshaping initiatives, which have resulted in improved mix and higher year over year non <unk> operating margin. Despite operating on a lower base of revenue our Ccs segment margin once again.
Past, our target range of 2% to 3% and.
And we expect full year margins to be at the high end of the range or slightly higher.
As noted while revenues are lower on a year to year basis as a result of the Cisco disengagement on non Cisco Ccs business grew 16% in the first quarter compared to the prior period, we anticipate further growth for our non Cisco Ccs portfolio in 'twenty, one compared to 2020.
Our hardware platform solutions business demonstrated another excellent quarter with year to year growth of 46% in the first quarter on.
On the back of strong demand from service providers in our communications end market.
This growth helps to offset some of the impact from our Cisco disengagement.
HP represented 16% of our total business from the first quarter up from 15% last quarter and 10% a year ago.
Just on the orders we have received from our customers to date.
Currently expect hps to grow in the double digit percentage range in 2021 higher than the high single digit percentage growth range, we indicated in January.
In the communications end market, we expect demand to remain robust in our core portfolio of business in 2021 supported by the recent strength in demand from service providers.
On a year to year basis, however, revenue growth will be pressured by the day Cisco disengagement.
In our enterprise end market demand has been relatively soft in recent quarters and we expect these conditions to persist for the near to medium term.
As previously discussed our hps revenue in Ats segment revenue together represent what we call lifecycle solutions in the first quarter, our lifecycle solutions portfolio grew 7% year to year and grew 1% sequentially.
In Q1 2021 on lifecycle solutions revenue accounted for 59% on total revenues up from 52% in Q4 of 2020, we continue to expect lifecycle solutions to account for a growing portion of our total consolidated revenues and act as a driver of non <unk> operating margin improved.
Yes.
Currently.
We also expect our lifecycle solutions portfolio to grow in the double digit percentage range in 2021 compared to a high single digit percentage range outlook in January.
With 2021 off to a strong start we remain as focused as ever on executing our strategy, which is diversifying our end markets delivering higher value solutions to our customers expanding our lifecycle solutions capabilities and flawlessly performing for our customers. We believe this strategy will lead to some.
Stable revenue growth and expanding operating margins over the long term.
I'd like to thank our employees for their incredible efforts and dedication for the company.
Our global teams commitment resiliency and adaptability during these challenging times is commendable.
Our people are the key driver to our success and their performance in stills on us great confidence that we will continue to deliver strong results and execute on our plan for the remainder of the year and beyond.
We look forward to updating you on our progress over the coming quarters.
With that I would now like to turn the call over to the operator to begin our Q&A.
Thank you Rob as a reminder to ask a question you will need to press star one on your telephone lift draw. Your question press the pound or Heskey from please standby, while we compile the Q&A roster.
Your first question comes from the line of Robert Young with Canaccord.
Hi, good morning.
I would like to start in the semi conductor space I'm. Just wondering if you think about that business.
Puts and takes around all of the chip shortage news that we're hearing today.
I assume that that's more of a positive driver for your business given the potential for capacity expansion in semi capital equipment business relative to any shortages that chips might draw.
Driving your business and maybe some comments there would be helpful.
Hey, Rob, Yes, that's correct.
As you've been reading the semiconductor and semi cap space has been quite strong.
For us.
And given the entire industry.
We're expecting this year.
Year over year growth and also sequential growth.
And we also feel that we will grow faster than the market. This year because of the new vertical investments that we've been making in semi.
Semi cap space with respect to the inverse of that it takes if you will know on the shortage side I think we've managed it very well in Q1 as we highlighted in the script.
Hi.
Revenue that was gated by material Schwartz with $12 million, which is frankly fairly low we got ahead of it.
We do think that's going to increase as time moves forward, but it's more about tempering. The upside then constraining the output. So net net I think it's a positive for us and we will control it to us very strong capital equipment.
This year and probably likely into next year and beyond based on the forecast on our customers are coming on.
Okay, that's great color.
The hps growth that you saw I am curious about that.
Broader drivers when you see a bump in demand like that within each day.
What's driving it back from your debt.
Is that engineering work, that's converting into a bigger manufacturing ramp for <unk> system and expansion of the demand and the products that you sell.
It seems to me that like.
Quick jump in demand there would be less.
Likely been in other parts of the business right.
Help me with that.
Yes, good question and what we've seen in the Hps business, it's been a really robust and growing market and it's been really fueled for us by a broader adoption of our products both within the data center and across a larger set of customers. So frankly, where we're gaining market share we do business with eight of the 10.
Service providers.
Growing share with them and Hyperscale of growth as a percentage of total on key spent has been increasing as a result of that we've been growing not just with the market, but also faster than the market because our product is being used again by a broader set of customers and within the data center and finding new uses for.
For our products based on the offering that we have.
And then lastly operations team has just been doing a phenomenal job being able to meet.
Meet higher levels of output.
Based on the relationships, we have with ecosystem partners from silicon providers as well.
Okay, Great and then as debt.
Cisco revenue.
Now as you're replacing is it.
On the Hps business that youre using to backfill the capacity.
From Cisco and then I'll.
Thanks, guys.
Yeah, exactly and I would say largely so.
Regarding the Cisco.
Frankly, we couldn't have planned it any better.
I mentioned in the call we've met all our backfill targets with a richer mix of programs.
Hardware platform solutions, and frankly, it's a lot more aligned to our strategy and capabilities and on top of that we've had strong demand from our base business and when we look at the utilization in Thailand with the Cisco business was performed it's quite strong and it's driven by a solid mix of HTS products.
Okay. Thanks for taking the questions.
Thanks Robert.
Your next question comes from the line of sign ups much shop for less with BMO capital markets.
Hi, good morning.
Rob with respect to the component shortages is that impacting some segments more than others or is that just fairly across the board.
Is it impacting the segments that have higher growth rates Dennis.
So the segments have higher growth rates, our HVA segment capital equipment segment, a little bit industrial those are the segments that are.
It's impacting more but again I would.
Couch it as a kind of tempering the upside versus constraining the base demand.
Very strong demand environment in these segments and customers are trying to accelerate.
Their demand and it's being paid by some of the component shortages now that being said frankly, we're all over it.
We have good order coverage.
Our.
Suppliers and the teams are working on it very hard.
Maybe for Dan I think to expand on on what Robert what Rob was mentioning.
Because of the.
Advanced planning that the team had done we have been able to largely get ahead of that on stroke constraints when Rob is talking about temporary upside.
Right now, it's dropping orders when customers want it.
Secure product within the quarter.
The startup time to secure the material so we factored into our guidance.
But it's really tempering, maybe just all upside.
Okay, and then you mentioned net cash cycle days showed improved checkouts interesting dynamic given the shortages is that a function of your end market mix or what's driving that dynamic.
Yes, so cash cycle days the metric itself is just abnormally high in the first quarter.
What we're seeing is a function of a formula its a two point average and we have a lower level of revenue and then just Cisco coming out as well.
But as we go through the year metric is going to get back more in line with what you would have historically expected from us.
Even with the inventory growth that we have been seeing.
Frankly, the reduction that we have not yet seen.
It is all factored into our outlook on we still feel comfortable on being able to generate over $100 million free cash even with the current margin environment.
Great and then finally can you comment on the semi equipment margins and how they are tracking currently versus what you consider kind of be your target margin for that segment.
Yes, so what I would say is is that the semiconductor business itself is performing very well right. Now. So it is in line with our expectations and we believe that there continues to be stronger demand for <unk>.
That there is opportunity still for some trigger margin expansions on the display side of the business.
As we commented we're expecting the demand to start picking up towards the end of the year and so there is an opportunity for margin to improve in the basal it's on.
Overall, what I would say from those capital equipment continues to grow.
You still believe that there is some opportunity for further margin expansion.
Great. Thanks, guys for Pascua.
Your next question comes from the lineup for <unk>.
Budget Sharia with bank of America.
Hi, Thanks for taking the questions.
Rob The communications revenues came in better than expected I think you had guided decline of high single digits, but it was down only 2% so.
Can you just drill into the different end markets within communications, which outperformed your expectations and then on the enterprise side.
I think revenues came in a little bit lower than what you had guided but also youre guiding down 30% year on year. So if you can just kind of highlight some of the things going on in the enterprise side as well.
Sure.
So on the comm side the strength that we've seen is really.
Our networking business. We also saw some demand strength with existing programs, which is a mix of HTS zone.
Ms book.
Robert speaking.
Communications upside was driven by HTS again, it was offset by the fiscal exit on some demand dynamic.
On non fiscal revenue was really driven by networking.
Our HTS business.
On the enterprise side, what we've seen.
Broad demand softness Microsoft flow from HDD and compute.
And tougher comps.
And we've had a number of ramping programs.
In 2020, where demand has.
Normalized this year.
And operator, there's some noise in the background, maybe you could figure.
Figure out if somebody needs to go on mute.
Okay. Thanks for the details on that Rob.
And just just to drill a little bit into the into the component shortages I mean, which components are you seeing shortages.
On <unk>, specifically and.
On the inventory you end up $60 million.
<unk> was that some of that.
Using the strength of your balance sheet to keep some on the raw materials on hand.
And do you expect inventory to be up sequentially in the June quarter.
I'll take the first part and I'll pass the second part to Mandy. So in terms of the shorts right now it's largely on the semiconductor side semiconductor lead times.
Non measure have increased by 50% over the last six months, which is frankly outstanding wafer fabs are operating at Max capacity, while a negative on our.
On our shortages on very strong positive on our semi cap business.
But on the passive side lead times are also some conclusion, it's been about a 20% increase from the time from a possible for the last six months.
And I do believe we will get more constrained as time moves on tantalum capacitors MLC seems resistors. So I do think that we'll get more constrained as we get further into the year as well.
And over the mandate on the AR and the inventory.
And your next question comes from the line of Paul steep with Scotia capital.
One second metric mandate was on mute.
As we have won.
But Paul let me take your question that briefly just to wrap up for your question on inventory.
Inventory dollars are relatively flat on a year over year basis, two dynamics happening number. One is we are building inventory for HTS because on the continuing growth that we're seeing we are expecting EPS to grow sequentially.
As we go through the year.
The other thing as well is that because of the supply chain environment, we were able to work very closely with our customers to secure material.
<unk> lineup for their orders and one of the things you'll see as our deposits also increased quite a bit so they're paying for some of that in terms of performance as we go through the year. The turns are expected to improve.
And so Q1 is expected to be the low point when it comes to inventory.
Paul I'll turn it over to you for questions.
Thanks Sandeep.
Just a.
Couple of quick ones first one maybe for Rob and.
A little bit higher level here.
If you step back and maybe walk us through can you highlight out either in EPS for Ccs with the new programs, you've been winning sort of consistently and some of the segments over the last year year and a half.
Whats changed with customers is there anything meaningfully changing in terms of either your approach to the market in terms of its profitability profile or in terms of how customers are contracting and committing.
We'd want to look at.
Quick question on our Ats side, we've been investing in.
Engineering capabilities.
Across all our segments.
And a big change on the margin profile of our ATF business today.
Today and also moving forward.
The dramatic increase in what we call engineering led engagements. So we're not just in the we're not just sitting here most provider in our Ats segment, we are actually.
You know on engineering partner as well so that's been.
The continuing shift in our strategy on our contracting processes.
And similarly on the Ccs volume.
We called on HBO.
Nothing new if you will we've always had a strong HTS business from based on the products that we've.
We've designed in from secular.
Tailwind that we've been seeing.
Growth business that frankly, just kick it off and largely fueled by engineering capability on the solutions that we're providing to our customers.
Hopefully that addressed your question.
Great and then.
Maybe a second one for me on deep the classic capital deployment question, just just to check in I think last quarter you were very specific about the tangible book value and how you are approaching the buyback.
Any change in view on how you're sort of looking at capital deployment now that you've gone net cash positive and then I've got one very fast cleanup.
Yes of course.
So we're continuing to be opportunistic.
We're really pleased with the strength of our balance sheet.
As we continue to generate free cash flow, our priority will be to continue to delever.
Again, we paid down $30 million this past quarter, and we have an opportunity for as you go through the year and it really serves us in two ways. One is we are very focused on EPS expansion year over year, and so that has helped to lower our interest expense and then it just continues to give us.
That's a healthier and healthier balance sheet, which gives us high left on the flexibility.
To accurately.
When it comes for share buybacks.
We will continue to be opportunistic on it when the shares are trading at very low values, we will be in the market to buy.
However, we are showing the best for the first priority and so we watch it we will utilize the program whenever we need to.
But if.
But our first priority right now is to continue to look to delever.
Got it and last cleanup one for either of you just put the lifecycle guidance going from double digits versus single digit last quarter.
What's the underlying assumption that has to be true to reach that guide or.
Maybe put another way is all of what you need to hit those numbers already in hand today.
I'll pass on one yes.
So Paul it's of course, a combination of the two so it is.
HTS and Etfs for EPS, we are reiterating our growth expectations for 10%.
And we're starting to see that as you proceed in on our guidance for the second quarter, just with very strong performance across a number.
Good day.
And then on the <unk> side, we have increased our growth expectation to be double digit, which frankly makes 10% or more and so when you put the two together it brings lifecycle solutions for robust growth profile on the Ats side.
I would say that the outlook for.
For capital equipment.
Strong at this point and we do have.
New program ramps that are driving a lot of the growth on health Tech as well as in industrial and then on the HTS side. Similarly, we have from outlooks from our customers that are in some cases, we have for MTO and other cases, we get yields on could come along.
But I would say that the outlook for HTS is stronger today than it was even three months ago.
Thanks.
Your next question comes from the line of Paul Treiber with RBC capital markets.
Thanks, so much and good morning.
I was hoping you could speak to the linearity or the expected linearity of growth in <unk> over the year.
Is there any I mean.
<unk>, 46% Q1 is quite strong and then I look for.
For 10% or more for the remainder of the year industrial deceleration like how should we think about it.
Between Q2 and Q4.
Okay.
Yeah, Hey, Bob.
So we're really pleased with the growth that we're seeing right now in HTS as Youll recall the growth last year really went into overdrive, starting on the second quarter and so we are going to start to see some tougher comps, we wouldnt expect necessarily 46% growth in.
In the next couple of quarters.
That being said what we are.
Comfortable with at this point is that we would be seeing sequential growth.
So $200 million on the first quarter, we are expecting more than that in the second quarter.
But overall just very good overall performance and then when you look at it on a full year basis, it'll be stronger from last year for us.
But we do need to moderate expectations, because we just very tough comps when you go on.
Q4 of last year.
And then digging a bit more further into that like the underlying demand drivers remain intact. So ultimately is it.
Do you think that's going to go through the year.
And the demand in the pipeline on Hyperscale and others continuing to build on that business.
Yes, I mean, Rob touched on it a little bit which is we're doing business right now with eight of the top 10 Hyperscale.
And the eight that we're doing it with actually represent the vast majority of Hyperscale or Capex and then when you look at the.
Hyper scaler concentration is the total in terms of total hardware expense hyperscale and for continuing to take more and more share of the overall market.
We're participating in that upside with them.
No.
Concentrated in only a couple of customers because of wins that have been happening in the business over the last year to two years. There are a number of programs ramping and so we do have a diverse.
Set of product offerings that our customers are buying and we also have a diverse set of.
Customer logos and of the growth that we're anticipating is with a lot of new program ramps.
Yeah.
Okay.
I would also add.
Sorry.
I would also add Paul that in this segment, particularly because of the demand strength is so strong are our growth is really going to be again.
Again tempered by governed by our ability to get components.
But given the nature of the demand the design nature of the demand I would also say that its not perishable.
So again, we're expecting good strong sequential growth throughout the year, we do have some tough comps, but good strong sequential growth in and because of the strong demand environment, it'll probably be more paced by a component availability than anything else.
Yes.
That's a good point.
Just shifting over to health care business could you speak to the breadth.
Momentum in that business I think.
The Canadian ventilator contracts ramped up I think last quarter, but how do you see you know outside of that contract.
Other opportunities in the breadth of the momentum that.
Good question, So how price business continues to exhibit strong growth.
Very strong growth in Q1 on a year over year basis also sequentially.
I would say about half the growth we're experiencing.
As kind of COVID-19 related demand in the areas of PPE point of care patient monitoring imaging devices.
Some of that growth that we're seeing on the first half for be it will probably tempered a bit in the back half of the year.
But.
The other half for the growth. We're seeing is really driven by new program wins, and I would say, they're not directly related to COVID-19. There in the areas of surgical instruments medical hardware patient monitoring.
So when you put those together, we're expecting rapid strong year from our <unk> business all in.
And on those areas.
Yes.
And then just lastly for me just on the A&D business.
How do you balance between profitability.
In light of lower utilization on demand in the near term.
Versus trying to gain.
Investments in that business, because I do think that long term growth opportunity.
Do you sort of balance those two here.
Yeah that is that is the question that we talk about.
The answer is we're trying to grow where the.
Our A&D business, where the market's on more favorable on that being in our defense business.
So as you mentioned on on the call. We are expecting some revenue growth from the back half of the year. It's majority on the defense space and its majority driven by some of the wins that we had last year that are starting to ramp in the back half of this year.
We're also expecting from flight.
Early signs of recovery in the <unk> market.
That being said, we do have several sites on the network that are critical mass.
And.
We're keeping them at that level, so we don't lose capability and until the market does recover but it has been.
Ragging on our Ats segment.
But again, despite that our Ats segment seems too.
Because evidently stronger on a margin.
Perspective, largely fueled by the other verticals, where you mentioned.
Semi cap health Tech and industrial.
Thanks. Your next question comes from the line of Todd Coupland.
Let's see I V C.
Yes, good morning, everyone.
I wanted to add.
Ask about market conditions pose for Cisco engagement.
With that decision did you have a noticeable impact on overall pricing in the market with respect to not only yourself, but the overall market Cisco has traditionally been very aggressive with their suppliers, but.
You have major tier one supplier of pushing back are you are you seeing.
On the power shift back to.
Someone like yourself too to drive better pricing.
Is there a is there a better tone in the market as a result for that decision.
I think the.
<unk>.
In the core MF, so non commoditized space I think pricing.
Usually isn't reflective of how utilized people factories on.
In some cases for effective utilization as well from Ams.
Prayers might make a decision to bring in lower margin work to keep the utilization up in the universe is true. So I think the pricing environment is a reflection of the demand environment with the demand environment being generally robust across most of E&S I think pricing has been more disciplined.
Again, our strategy is to shift away from lower value ramps up into the higher value add stuff. So there's higher barriers to entry stickier relationships and the margin tends to be higher because of the higher value add in that.
That strategy I think has proven out for us and will continue to yield results for us.
And post Cisco are you happy with it.
The Ccs next or do you anticipate youll need to have a regular sort of upgrading.
The mix as you look forward over the next two or three years.
Right now, we're very happy with the the Ccs mixed market conditions always change for with.
Yeah, we've always take a look at it but the mix within Ccs is it was very good on the EMS business. It's in the higher value add areas and HTS business is growing nicely.
And even in the EMS space.
We're working with those customers to kind of move up the value chain and to introduce HTS solutions, Inc.
For those customers as well.
And then my last question is you have the mixes that you have.
Debt capital on the balance sheet for growth are there are there any other verticals where.
You think you should expand either in Etfs or Ccs just talk about what might make sense over the next two or three years.
Yeah, I think that goes back to our potential M&A strategy.
When we're thinking about capabilities, we always take a look at.
And it does it makes sense for us to invest organically and build those capabilities or is there a sort of more accretive path to buy them.
Usually default because of the risk factor to developing those capabilities in house and we've been making.
Investments.
When many of the verticals within capital equipment, we've been working on vertical integration.
I mean is in areas, such as well well paying from cleaning whether on our health Tech business, we've been adding engineering capability, but on the industrial business, you've been adding engineering and design capability as well.
In terms of broadening space as well.
We're always looking at it but at this stage for the game I don't think theres anything non material too to announce or to share with the community.
And your next question comes from the line of Jim Suva with Citigroup investment.
Okay. Thank you so much for the details so far it's been very useful on my two questions and so you can estimate in any order you want.
Can you give us a little bit of insights or updates on on your cloud efforts I know in the past it's been.
Net of a hidden gem in the company of Celestica about your cloud doing so while it may be I don't know how much details you can give but.
Any updates on that and then secondarily.
While our full year guidance is hard to do there are some moving parts. This year for the year over year comparisons with the disengagement, which I believe if my Memory's right is around $500 million.
Can you correct me, if I'm right or wrong on that and if so do you think consensus for this year, which is around $5 5 billion per day.
And on 5% year over year does that calibrated correctly adjusting for some things are used on extra since there are some moving parts that were kind of cash.
<unk> generally correct correctly or any color or direction. Thank you so much.
Thanks, Jim I'll handle the first one and I'll ask Randy to talk about Cisco.
But in terms of our cloud business.
We have several sources of growth.
We mentioned on other calls.
Comprehensive roadmap is really around all the core technologies in the data center, so within switching which has been a key driver of growth this year.
<unk> is one of the key drivers we have very strong positions with.
With market leaders and other speeds as well also a healthy lifestyle business.
<unk>.
<unk> is also a source of growth, we've seen strong datacenter cloud offering including Hbf solutions.
And that's been a driver for us as a.
Data center workloads move to the edge, we're seeing some strength from some of our customers on the wired side, given some expansion from for <unk>.
And we're also developing some edge programs on the surface space that are resonating with emerging customers and we're working for them to make sure that they have the right solutions and the requirements on lastly on compute.
To help their business as well as data centers continue to expand AI and ml applications.
So emil.
Perfect.
Physicians, whether they're enterprise and service provider for questions as well so.
Again, all of the key technology from the data center.
We have very good positions and that's been a driver of growth.
And it's very sticky business also because with each successful development cycle on product launch that we have with our cloud providers. There is an increase resistance for a partner to change given the criticality of the products from our customers from 60.
Cash is building success and that's been a key driver of our growth as well.
And the second one on I'll turn it over to Mandy.
Yes.
Jim So I'll stop short of providing full year revenue guidance, but I will double click on the pieces.
And so as you hit on it there are parts of the business that are growing quite nicely. So our lifecycle solutions revenue at the end of last year was just under $3 billion and again, we're targeting 10% or more growth in that overall portfolio, which is our HTS for EPS businesses.
$300 million for more growth than waiting for.
On the physical pieces about $520 million of revenue is coming on a year over year and so you can that's the number one thing that's offsetting the growth in lifecycle solutions.
I will say is we gave her remarks on our growth for.
For the non sysco portfolio substantially the company X Cisco heavy grew in the first quarter of 7%.
The midpoint of our guidance implies 3% growth from second quarter, and we are targeting.
Growth in Q3, and in Q4 on a year over year basis.
For the non sysco portfolio.
That's very useful thank you so much for the details.
Thanks, Jim.
Your next question comes from the line of Matt Sheerin with Stifel.
Okay.
I wanted to just.
Ask here.
Just a question regarding your enterprise segment, which was down double digits and it sounds like your outlook, Rob I was more cautious on.
On that group.
There's some tough comps you are up against.
We are hearing signs of on Prem infrastructure spending gradually improving particularly as companies get back.
As projects that were pushed out get renewed.
Are you seeing that or are you just.
Moving to hear on a cautious commentary from your own customers.
Based on the mix of programs that we have and we're hearing a conscious mix. We've had last year was a particularly strong year for us so a lot of.
The comps that we think are really stopped.
Really tough restaurants on the storage side.
And also the same on the on the service side. So that's kind of a key driver of.
The year over year comps.
Your lower guidance, if you will.
And the mix of products that we have in there is in our view there is general softness in.
HDD and external storage as well.
Okay. Thank you and just another inventory question.
Uh huh.
Regarding.
For your outlook I think you said.
On that you expected your inventory turns actually to be.
Two to improve as you get through the year.
Even though inventory levels.
Our higher is that correct.
So we expect that our first quarter revenue is going to be our lowest quarter of revenue in the year and a lot of inventory that we have on hand.
Some of it was very strategically brought in to support some of the growth that we're seeing and so we expect that our inventory turns will be improving simple.
Sure.
Okay alright, thank you.
Thanks, Matt.
Yes.
Yes.
Yeah.
Yeah.
Okay.
Operator, we can take the next question.
Operator next question.
Okay.
Operator.
Last and final question comes from the line of Daniel Chan with TD Securities.
Hi, Good morning, I, just wanted to drill into the semi cap opportunity a little bit more I'm. Just wondering like we've seen in a number of Fabs announced expanded Capex and then also some of the suppliers.
<unk> forecast up to what extent has that slowed through to you I'm just trying to get a sense for the opportunity for even more upside to what you've been seeing so I'm just kind of curious what are you seeing some of those orders really accelerate or do you think there's more to go.
No.
Hi, Dan it's Rob it's a very strong.
Semi cap environment right now.
We're the largest on one of the largest in our space and have leading positions with.
All the major equipment manufacturers.
Net do outsourcing so it's been a direct flow through for.
On the fab to them right for us.
And again this year.
On the large portion of our growth is not just by a rising tide, but it's really by new programs, our share gains and losses.
For those new programs are based on the investments that we made during the down cycle.
And from new verticals and some capacity adds as well. So we think we're going to be a direct beneficiary of.
What we're seeing going on in the <unk> fab as well.
Okay. That's helpful. Thanks, and then on the on the communications side.
Jane.
Zero customers and <unk> continue to gain share and you guys gained wallet share I'm just curious whether.
Whether that has any direct impact on some of the relationships that you have with some of your larger customers. Obviously, you disengaged from Cisco, but you've got another large network communications.
Communications provider there.
As you gain wallet share does that change the conversation a little bit.
Not materially I think are.
Between our cloud providers on our traditional Oems I think they view us as an enabler.
For their success versus anything else.
We're pulling on.
Solutions that we offer both offer on our HTS business on one way or another.
For the conversations have been healthy on on.
Both sides.
I think they're seeing the value in having someone like celestica actually.
Designed that product for them.
And also quite on the value added services, so I think the model.
I think this whole pandemic on just kind of shifted that model on accelerated that model moving forward.
It's been a net benefit on on.
On all lines of business.
Great. Thank you.
Yeah.
Ladies ladies and gentlemen that concludes our Q&A portion of the call today and I will now turn the call back over to Rob for closing remarks.
Thank you operator, we're off to a strong start in 2021 after a strong finish to 2020, we feel our efforts to diversify our portfolio are yielding results with lifecycle solutions, representing 59% of the company's revenue for <unk>.
Revenue of the company's non Cisco business grew 7% year over year.
And Additionally, our operating margins continue to expand in a Q1 'twenty one we posted our fifth consecutive sequential quarter of year over year non ifr from margin expansion.
We're excited that our efforts to transform our business are yielding results in may we will be hosting another round table discussion for our investors. This time, we will focus on and on our capital equipment segment. So please stay tuned for more details I'd like to thank our global team for remaining vigilant in keeping themselves and each other safe and thank you all for joining today's.
Call I look forward to updating you as we progress throughout the year.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Okay.
Uh huh.
[music].
Okay.