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 to ask a question. During the session you will need the 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.
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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> 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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The forest measures from our financial statements.
Unless otherwise specified all references to dollars on this call or to the 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.
During solid first quarter results revenue and adjusted EPS were both above the midpoint of our guidance ranges.
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 of the company's 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 Ats segment, we experienced slightly better than expected revenue results.
The 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 where the.
The Tcs after having successfully concluded on Cisco disengagement in the fourth quarter of 2020, we are focused on growth.
While Ccs revenue in the first quarter was down on a year over year basis, primarily because of the Cisco disengagement of <unk>.
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 H P. S businesses previously referred to as of Julianne business remains an engine for growth within our Ccs segment.
H B 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 of catalysts for both the Ccs revenue growth.
And segment margin strength.
Last quarter. We also highlighted that we referred to revenue from the H P. S business and Ats segment as lifecycle solutions.
It is our view that the businesses, which compromise our lifecycle solutions portfolio share of several key characteristics that reflect the focus of our commercial strategy.
We consider of lifecycle solutions revenue to be diversified revenue and our strategy continues to be to expand the portfolio as a percentage of the total company, enabling long term profitable growth.
The strategy includes pursuing markets with high barriers to entry robust long term growth prospects of <unk>.
Tract of margins and the opportunity to offer our customers higher value added solutions throughout the product lifecycle.
We are pleased that the lifecycle solutions portfolio grew in 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 would like to turn the call over to Mandy to provide you with some financial details on the first quarter as well as the 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.
The revenue decreased 6% year over year end of 11% sequentially.
Despite Q1 traditionally being a seasonally soft quarter from a volume perspective, we delivered non ire for us operating margin of three 5% exceeding the midpoint of our guidance range by 10 basis points, reflecting the benefits of our portfolio of reshaping activities and improved mix across several businesses.
Year over year non ire for us 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 volume in Ccs.
This was partially offset by higher sequential Ats segment margin driven by higher volumes and favorable mix.
None of the idea 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 the on <unk> sequentially for.
First quarter, I FRS or earnings per share were <unk> <unk>.
Of 10 cents of year over year and down the <unk> sequentially.
Sequentially.
Our Ats segment accounted for 43 per cent of our consolidated revenue during the quarter, our highest level of Ats concentration reported to date and up from 41 per cent and the first quarter of last year.
The ETF revenue was down 3% compared to last year ahead of our expectations of of 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 help tick 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% of year over year, largely driven by the Cisco disengagement and partly offset by strong demand from service provider customers, including in our <unk> 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.
Communications 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 per cent 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.
Achieving a margin of 4.0% the ETF segment achieved its fourth consecutive quarter of sequential margin expansion of 130 basis points year over year and up 10 basis points sequentially. The.
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.
The sequential margin decline was due to lower volumes due to the 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 the 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 N ats businesses, which generate more favorable margins than our non H P. S. 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 per cent compared to 24 per cent 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 I O for S. 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.
Mainly due to lower sequential non I for us 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 in the 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. 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.
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 the 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 I for S. Trailing 12 month adjusted EBITDA leverage ratio was one four turns an improvement of 0.2 turns sequentially and 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 N CIB 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 I for us free cash flow the.
Achieving our annual targets and returning 50% of 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 are projecting second quarter revenue to be in the range of 1.325 billion to one point 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 five per cent 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 the 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 per cent 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 the outlook.
Thank you Mindy.
Pleased with our company's continuing execution of our strategy, which reflects our team's work ethic and the 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. The pipe constraints continue to impact most of our end markets, resulting in extended lead times for components in the first quarter.
Due to our 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 of 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 rise 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 compares to 2020, we also.
<unk> 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 in the 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 of the impacts of COVID-19 on our industrial business now behind US we expect to return to year over year revenue growth in the second quarter.
A&P headwinds on the commercial aerospace market continue to pressure our results as operators have meaningfully pared back of 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 the 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.
In 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 of 2020, we continue to see the benefits of our portfolio reshaping initiatives, which have resulted in improved mix and higher year over year of non <unk> operating margin. Despite operating on the 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 of 21 compared to 2020.
Our hardware platform solutions business demonstrated another excellent quarter with a year to year growth of 46% in the first quarter on.
On the back of strong demand from service providers in the 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% of year ago.
Just on the orders we have received from our customers to date.
Currently expect HP has 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 of lifecycle solutions portfolio grew 7% year to year and grew 1% sequentially.
In Q1 2021 on lifecycle solutions revenue accounted for 59% of 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.
It currently.
Currently.
We also expect our lifecycle solutions portfolio to grow in the double digit percentage range of 2021.
Per 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.
Diversifying our end markets delivering higher value solutions for our customers expanding our lifecycle solutions capabilities and flawlessly performing for our customers. We believe the strategy will lead to sustainable revenue growth and expanding operating margins over the long term.
I would 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 the 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 the press star one on your telephone lifts draw on your question press, the pound or Husky and 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'd like to start in the semi.
Inductor space I'm, just wondering if you think about that business.
It 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 the semi capital equipment business relative to any shortages the chips might pass 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 Kevin.
The entire industry.
We're expecting this year.
Year over year growth and also of sequential growth.
And we also feel that will grow faster than the market. This year because of the new vertical investments that we've been making the semi.
Semi cap space with respect to the inverse of that the takes if you will know on the shortage side you know I think we've managed it very well in the Q1 as we highlighted in the script.
The revenue that was gated by material Schwartz with $12 million, which is frankly, a 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 of the upside then constraining the output.
So net net I think it's a positive for us and we're looking forward to us very strong capital equipment there.
This year and probably likely into next year and beyond based on the the forecast that our customers are coming on.
Okay, that's great color.
The hps growth that you saw I'm curious about the.
Other drivers when you see a bump in demand like that within each of the accident.
What's driving that exactly of that.
Is that engineering work, that's converting into a bigger manufacturing ramp or in fact 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 than the other parts of the business right.
Help me with that.
Yeah. Good question, so what we've seen in the HTS business, it's been a very robust and growing market and it's been really fueled for us by a broader adoption of our products. Both within all of 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.
And then growing share with them and hyperscale of growth as a percentage of total on Keystone has been increasing.
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 our products based on the offering that we have.
And then lastly operations team has just been doing a phenomenal job being able to.
The 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 that the the hps business that youre using to backfill the capacity.
From Cisco and then.
I'll pass it on.
Yeah, exactly and I would say largely so regarding the Cisco.
The transition frankly, we couldnt have planned it any better as I mentioned in the call. We've met all of our backfill targets with a richer mix of programs.
The hardware platform solutions, and frankly, it's a lot more aligned to our strategy and capabilities and the top of that we've had strong demand from our base business.
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 IHS products.
Okay. Thanks for taking the questions.
Thanks Robert.
Your next question comes from the line of sign of my shop, the loss with the BMO capital markets.
Hi, good morning.
Robert with the structure the component shortages is that impacting some segments more than other stores that are just fairly across the board.
Is it impacting the segments that have higher growth rates than us.
So the segments of it.
The higher growth rates, our HVAC segment capital equipment segment, a little bit of industrial those of the segments that are impacting.
The compacting more but again I would.
Couch it as of kind of tempering, the upside versus constraining the base demand.
Very strong demand environment of these segments and customers are trying to accelerate.
The demand and it's being paid by some of the component shortages now that being said, we're frankly, we're all over it.
We have good order coverage.
With our.
Suppliers and the teams are working on it very hard.
Maybe for Dan I'll, just expand on on what Robert what Rob was mentioning.
Because of the.
The advanced planning that the team had done we have been able to largely get ahead of the material constraints on winter I was talking about tempering of the upside the.
Challenge right now is dropping orders and when customers want it.
Secure product within the quarter.
Startup time to secure the material so we factored into our guidance, but it's really cheap range, maybe just all upside.
Okay, and then you mentioned that the cash cycle days of should improve.
That's an interesting dynamic given the shortages is that of function of your end market mix of what's what's driving the 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 the formula of two point average and we are of a lower level of revenue and then just the 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 or frankly, the reduction that we have not yet seen.
It is all factored into our outlook and we still feel comfortable longing for January of over $100 million of cash even with the current operating environment.
Great and then finally to the comments on the semi equipment margins and how they're tracking currently versus what you consider kind of be.
Your target margin for that segment.
Yes, so what I would say is of 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 demands from cantor.
But there is opportunity still for the <unk> trigger margin expansions on.
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 the margins to improve in the basal.
And so overall, what I would say is the capital equipment continues to grow we do still believe that there is some opportunity for further margin expansion.
Okay. Thanks, guys I'll pass the line.
Your next question comes from the line of <unk>.
Bunch of Sharia with bank of America.
Hi, Thanks for taking the question.
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 the communications, which won outperformed your expectations and then on the enterprise sales.
I think the revenues came in a little bit lower than what you had guided but also you are 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 in our net.
Working business. We also saw some demand strength with existing programs, which is the mix of HTS zone.
But broadly speaking.
The communications upside was driven by Hbf again, it was offset by the Cisco exit on some demand dynamic.
On non Cisco revenue was really driven by networking.
Yes.
On the enterprise side.
Siemens.
Broad demand softness market software from HDD and compete.
And the tougher comps.
And we've had a number of ramping programs.
2020.
Where demand healthy.
Normalized this year.
And the operators, there's some noise in the background, maybe you could.
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 end of the component shortages I mean, which components are you seeing shortages.
On I mean, specifically and.
The inventory you end up 60 million.
<unk> was that the some of that.
Are you using the strength of your balance sheet to keep some of the raw materials on hand.
And do you expect the inventory to be up sequentially in the June quarter.
I'll take the first part and I'll pass the second part commodity so in terms of the shorts right now.
Largely on the semiconductor side semiconductor of lead times by on.
One measure of have increased by 50% over the last six months, which is frankly outstanding the wafer fabs are operating at Max capacity, one of the negative on our.
On the shortages of very strong.
On the semi cap business.
But on the passive side lead times of also some conclusion, it's been about a 20% increase from new.
The terms on the path of the last six months.
And I do believe they will get more constrained as time moves on the 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 90% of U S.
We have one.
But Paul I'm going to take your questions I personally just to wrap up for your question on inventory.
So yes, the inventory dollars are relatively flat on a year over year basis, two dynamics happening number. One is we are building of inventory with for <unk> because of the continuing growth that we're seeing we are expecting <unk> growth sequentially.
As we go through the year, the other thing as well as the because of the supply chain environment, we were able to work very closely with our customers to secure material.
In light of up to the orders and one of the things you'll see as our deposits also increased quite a bit so the paying for some of that in terms of the performance as we go through the year of the the turns are expected to improve.
And so Q1 is expected to be the low point when it comes the inventory true.
Paul I'll turn it over to you for questions.
Thanks Sandeep.
Just.
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 or can you highlight out either in EPS or 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.
What's changed with customers is there anything meaningfully changing in terms of either of 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.
The question on the Ats side, we've been investing in.
Engineering capabilities.
Across all of those segments.
And the big change in the margin profile of our ATF business today.
Today and lots of moving forward.
Is the dramatic increase in what we call engineering led engagements so.
So we're not just in the we're not just to be him off the provider in our API segment, we're actually.
And the engineering partner as well.
Ben.
The continuing shift in our strategy and on 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 designed in from secular.
Tailwind that we've been seeing.
It's good because it's the second tick it off and largely fueled by the engineering capability on the solutions that we're providing to our customers.
Hopefully that addressed your question.
Great.
Maybe the 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 would how you were 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 from that I got one very fast cleanup.
Yes of course fault zone.
We're continuing to be opportunistic what we're really pleased with the strength of the balance sheet.
As we continue to generate free cash flow our priority will be the continued to delever.
Again, we paid down $30 million this past quarter, and we have an opportunity to Judy on the more as we go through the year and it really serves us in two ways. One is we are very focused on the EPS expansion year over year, and so that is helping of our interest expense and then it just continues to give us.
That's the healthier help your balance sheet, which gives us high level of the.
The flexibility.
To accurately debt.
When it comes for share buybacks.
We will continue to the opportunistic on it when the shares are trading at very low values, we build the in the market to buy how's.
However, we are showing the best of the first priority and so we watch it we will utilize the program whenever we need to.
But if the.
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 digit versus single digit last quarter.
What's the underlying the assumption that has to be true to reach that guide or the.
Maybe put another way is all of what you need to hit those numbers already in hand today.
I'll pass the one yes.
So all of it.
Of course, the combination of the two so it is.
HTS and EPS for EPS, we are reiterating our growth of expectation of the 10%.
And we're starting to see that as you proceed and of our guidance for the second quarter, just the very strong performance across a number of chicken.
And then on the HTS side, we have increased our growth expectations to the double digit, which frankly makes type of center more and so on when you put the two together it brings lifecycle solutions habit of of request for a profile on the Acs side.
I would say that the outlook for a couple of equipment.
Strong at this point and we do have.
The program ramps that are driving a lot of the growth and 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 from fields in other cases, we get the deals as they come along but.
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.
Okay.
Oh, thanks, so much of a 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 like I mean, the 46% Q1 is quite strong and then the outlook.
For 10% or more for the remainder of the year.
So the acceleration like how should we think about it.
Between Q2 and Q4.
Okay.
Yeah, Hey, Paul so.
Really pleased with the 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 the various tough comps when you go on <unk>.
<unk> in Q4 of last year.
And then digging a bit more further into that like the the underlying demand drivers remain intact. So alternately is it.
Do you think that's going to go through the year.
And the demand on the pipeline on the Hyperscale I was and the other is continuing the delta 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 deals.
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.
The hyper scaler concentration is the total in terms of total of hard percentage type of scaling for continuing to take more and more share of the overall market.
We're participating in that upside.
We are.
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 other.
Customer logos and of the growth that we are anticipating it with a lot of new program ramps.
Yeah.
But the thing I would.
Oh, sorry.
I would also add Paul that in this segment, particularly because of the demand strength of so strong on our growth is really going to be again temporary volume governed by our ability to get components.
But given the nature of the demand of 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 <unk>.
And because of the strong demand environment of would probably be more paced by a component availability of than anything else.
Yeah.
Thanks, that's a good point just shifting over to the health care business could you speak to the breadth of.
Momentum in that business I think the state.
The Canadian Bank letter from contracts ramped up I think last quarter, but how do you see you know outside of that contracting on the other opportunities on the breath of the momentum of that.
Good question, So how price business continues to exhibit strong growth.
Very strong growth in Q1 on the year over year basis also sequentially.
I would say about half the growth we're experiencing.
The COVID-19 related demand in the areas of PPE point of care of patient monitoring imaging devices.
And some of that growth that we're seeing in the first half of the it will probably tempered a bit in the back half of the year.
But.
The other half of the growth. The thing is really driven by new program wins, and I would say they're not direct.
The related to covered there in the areas of surgical instruments medical hardware patient monitoring.
So when you put those together, we're expecting you know of rapid strong year from our <unk> business all of them.
And on those areas.
And then just lastly for me just on the A&D business how.
How do you balance between profitability I E.
In light of lower utilization of the band in the near term.
Versus trying to gain a inc.
Documents are in that business, because I do think the long term growth opportunity.
How do you sort of balance those two here.
Yeah that is that is the question that we talk about.
The the answer is we're trying to grow.
The.
In our A&D business, where the markets of 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. Its majority of 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 on the Biz Av market.
That being said, we do have several sites on the network that are of critical mass.
And we're keeping them at that level. So we don't lose capability of until the market does recover but it has been a drag.
Dragging on our Ats segment, but again, despite that our Ats segment seems too.
Is evidently stronger on the margin.
Perspective, largely fueled by the other verticals, where you mentioned.
On the cap health Tech of industrial.
Thanks. Your next question comes from the line of Todd Coupland.
Let's see I B C.
Yeah, good morning, everyone.
I wanted to ask about market conditions pose the Cisco engagement.
With that decision did you have a noticeable impact on overall pricing in the market with respect to not only yourselves.
The overall market Cisco has traditionally been very aggressive with their suppliers, but.
With you of major tier one supplier of pushing back are you are you seeing a bit of the power shift back to <unk>.
Someone like yourself too to drive better pricing.
Is there a is there a better total in the market as a result of that decision.
I think the.
<unk>.
In the core of MF, so non commoditized space I think pricing.
Usually isn't reflective of how utilized people's factories on.
In some cases for effective utilization is low some of the EMS players might make a decision to bring in low margin work to keep the utilization up and the inverse 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 <unk>.
Yes, I think pricing has been more disciplined.
Again, our strategy is to is the shift away from the lower value ramps up into the higher value add stuff. So there's higher barriers to entry stickier relationships and the margins tend to be higher because of the higher value add and that strategy. I think has proven out for us and will continue to work with sell through.
And post Cisco are you happy with the.
The Ccs mix or do you anticipate youll need to have a regular sort of upgrading of.
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 so it's.
Yeah.
Please take a look at it the the mix within the Ccs is it was very good on the EMS business and it's in the higher value out of areas and the HTS business is growing nicely.
And even in the EMS space you know, we were working with those customers to kind of move up the value chain and the interim.
The Fitch pass throughs.
And for those customers as well.
And then my last question is you have the mixes that you have you of that.
Excess capital on the balance sheet for growth 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.
Yes.
Yeah, I think that goes back to our potential M&A strategy.
When you were thinking about capabilities, we always take a look at.
Now does it makes sense for us to invest organically and build the capabilities or is there a sort of more accretive path to buy them.
Usually default because of the risk factor to the developing those capabilities in house and we've been making.
The investments.
When the many of the verticals within the capital equipment, we've been working on vertical integration.
One is in areas, such as well well paying from cleaning with 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 broaden the spaces, where we're always looking at it but at this stage of the game I don't think there's anything non material too to announce or to share with the the community.
And your next question comes from the line of Jim Suva with Citigroup investment.
Thank you so much for the details so far it's been very useful on my two questions and so you can ask them in the order you want.
Can you give us a little bit of insights or updates on all of your cloud efforts I know in the past it's been.
One of the hidden gem in the company of Celestica about your cloud doing so while it may be I don't know how much detail you can give but.
Any updates on that and then secondarily you know why.
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 five and a half billion or down 5% year over year is that calibrated correctly adjusted for some things are you sort of extra isn't there are some moving parts that were kind of calibrated generally correct correctly or any color or direct.
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.
And we have several sources of growth.
We mentioned on other calls.
Comprehensive roadmap is really around all of the core technology from the datacenter so within the switching which has been a key driver of growth this year point.
Point of Chi is one of the key drivers we have very strong positions.
With market leaders and other speeds as well also a heck of a white box business.
Edge is also a source of growth we've seen strong data center cloud offering including Hbf solutions.
And that's been a job of for us as the.
Data center of workloads move to the edge, we're seeing some strength from some of our com customer and so on the wired side, Jim from expansion from for two to five G.
And we're also developing some edge programs on the surface space that are resonating with the emerging customers and we're working with them to make sure that they have the right solutions and the requirements and lastly on compute theres lots of healthy business as well as the data centers continue to expand AI and ml applications.
So part.
Great.
The physicians with our enterprise and service provider of questions as well so again all of the the key technology from the data center.
We have very good positions of 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 of resistance for a partner of the changed given the criticality of the policy of the customers from.
<unk> getting success and that's been a key driver of our growth as well.
And the second one on I'll turn it over to a commodity.
Yes.
Morning, 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 on lifecycle solutions revenue at the end of last year, but just sort of $3 billion and again, we're targeting 10% or more growth in that overall portfolio, which is our HTS the hs businesses.
$300 million of more growth than any of them.
I'm here on the physical piece of about $520 million of revenue is coming out of year over year and so you can that's the number one thing that's offsetting the growth in our lifecycle solutions.
I will say is we gave her remarks on our growth for.
For the non Cisco portfolio from essentially the company X Cisco and agree on the first quarter of 7% the.
The midpoint of our guidance implies 3% growth in the second quarter and we are targeting.
The 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 of them.
Just a question regarding your enterprise segment, which was down double digits and it sounds like your outlook Rob.
More cautious on.
On that group.
I know, there's some tough comps you are up against on below where 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.
Senior to here on a cautious commentary from your own customers.
So based on the mix of programs that we have and we're hearing of conscious mix. We've had last year was a particularly strong year for us so a lot of the.
The comps that we think of really stopped.
Really tough at least for us on the storage side.
And also the same on the on the service side. So that's kind of a key driver of from.
The year over year comps.
The view of your lower guidance, if you will.
And the mix of products that we have in there is in our view of the general softness in <unk>.
HDD and external storage as well.
Okay. Thank you and just another inventory question.
Uh huh.
Regarding your outlook I think you said.
That you expected your inventory turns actually to be.
The two to improve as you get through the year.
Even though inventory levels.
Our higher is that correct.
That's right, Matt. So we expect that our first quarter revenue is going to be our lowest quarter of revenue in the year.
And a lot of the 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.
Excellent.
Okay alright, thank you.
Thanks, Matt.
Yes.
Yes.
Yeah.
Yeah.
Okay.
Operator, we can take the next question.
Yeah.
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 the number of Fabs announced expanded Capex and then also some of the suppliers take forecast up to what extent has that flowed through to you I'm just trying to get a sense for the opportunity for even more upsell.
To what you've been seeing so I'm just kind of curious whether you've seen some of those orders are really accelerate or do you think there's more to go.
No.
Hi, Dan from it's a very strong.
Semi cap environment right now.
We're the largest of one of the largest in our space and have leading positions with.
All of the major equipment manufacturers.
Net due out sort of thing so it's been a direct flow through for.
From the fab to them right for us.
And again this year a large portion of our growth is not just by a rising tide, but it's really by new programs, our share gains and a lot of.
Of 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 gonna be of direct beneficiary of.
Of what we're seeing of going on in the end of traps.
Uh huh.
Okay. That's helpful. Thanks.
And then on the on the communications side as you gain.
Zero of customers in <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 other large network.
The locations 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 the success versus anything else and the pulling on.
The 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 the value in having someone like celestica actually.
Designed that product for them.
And also quite other value added services, so I think the model.
I think this whole pandemic kind of just kind of shifted that model on accelerated that model moving forward.
It's been the 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 of lifecycle solutions, representing 59% of the company's revenue for <unk>.
Revenue of the company as non Cisco business grew 7% year over year in.
And Additionally, the operating margins continue to expand in the Q1 'twenty one we posted our fifth consecutive sequential quarter of year over year non ifr S 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 foreign investors. This time, we will focus on and on our capital equipment segment. So please stay tuned for more details.
The thank our global team for remaining vigilant in keeping themselves and each other safe and thank you all for joining today's call and 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.
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