Q2 2021 Celestica Inc Earnings Call
[music].
Good day, and thank you for standing by welcome to the Celestica.
Q2, 2021 and earnings call at this time, all participants are in a listen only and the Australia speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star 1 on your telephone.
Be advised that today's conference is being recorded.
If you require any further assistance.
Please press Star Zero, and I would now like to hand, the conference over to you and your speaker today Craig Goodbody. Please go ahead.
Good morning, and thank you for joining us on <unk> second quarter, 2020.1 earnings conference call on the call today are Rob My honest, President and Chief Executive Officer, and Mandy Cholla.
Chief Financial Officer.
As a reminder, during this call we will make forward looking statements within the meetings of the U S. Private Securities Litigation Reform Act of 1995 and applicable Canadian Securities laws.
Such forward looking statements are based on management's current expectations forecast and assumptions, which are subject to risks.
Uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions forecasts or projections expressed in such statements Friday.
And for identification and discussion of such factors and assumptions as well as further information concerning forward looking statements. Please refer to yesterday's press release, including the.
Cautionary note regarding forward looking statements therein.
Our most recent.
Annual report on form 20-F, and other public filings, which can be accessed at FCC dot Gov and SEDAR Dot com.
We assume no obligation to update any forward looking statement, except as required by law.
In addition, during this call we will refer to various.
Non I FRS financial measures, including operating earnings operating margin adjusted gross margin adjusted return on invested capital or adjusted ROIC.
Free cash flow gross debt to non <unk> trailing 12 month, adjusted EBITDA leverage ratio and.
Adjusted net earnings adjusted EPS adjusted.
G&A and adjusted effective tax rate.
And there should be cautioned that references to any of the foregoing measures. During this call denote non I FRS financial measures, whether or not specifically designated as such these.
These non <unk> financial measures do not have any standardized meaning prescribed by ifr S and may not be.
<unk> similar measures presented by other public companies that use <unk> F. R S or who report under U S GAAP and use non-GAAP financial measures to describe similar operating metrics.
We refer you to yesterday's press release, and our Q2.2021 earnings presentation, which are available at select to get Dot com under the Investor Relations.
<unk> for more information about these and certain other non <unk> financial measures, including a reconciliation of historical non I FRS financial measures to the most directly comparable <unk> financial measures from our financial statements.
Unless otherwise specified all references to dollars on this call are to U S dollars and per share.
Share information is based on diluted shares outstanding.
Let me now turn the call over to Rob. Thank.
Thank you Craig good morning, everyone and thank you for joining us on today's conference call.
Our strong performance and the second quarter is attributable to the execution of our multi year transformation.
It also reflects the stability and resilience.
Tab, cooperations and our ability to operate under challenging conditions.
Our second quarter revenue of 1.42 billion was at the high end of our guidance range driven by another quarter of year over year double digit growth and.
And our hardware platform solutions, our hps business.
And double digit growth and our Ats segment.
On non <unk> adjusted EPS of <unk> 30.
And non <unk> operating margin of 3.9% both meaningfully exceeded the high end of our guidance range.
Our second quarter operating margin performance represented our sixth straight quarter of year to year operating margin.
And was within our target range of $3.75 to 4 and 5% a strong Q2 performance and multi year margin expansion efforts are a result of the execution of our strategy, including portfolio shaping and driving operational excellence across the enterprise.
On non <unk> adjusted.
Preliminary cash flow came in at $31 million for the quarter.
Or $52 million year to date, and we continue to target $100 million of free cash flow and 2021.
Throughout the quarter, we continued to face operational challenges and the form of supply chain constraints and workforce contaminants.
Depreciation and such as Malaysia, soon and the resurgence of COVID-19.
But our team's operational agility and advanced planning tools are enabling us to effectively navigate this dynamic environment.
We believe that our portfolio is stronger than ever with an improved margin profile and the.
And momentum to drive long term organic growth.
We expect our operating margin to continue to expand in the coming quarters, driven by our anticipation for higher Hbf's concentration and our Ccs segment.
And as long as volume leverage fueled by steady growth and our API segment.
Despite being tempered.
From that and you had softness in our commercial aerospace business Ats segment revenue grew by 12% year to year and Q2, driven by another exceptionally strong quarter and our capital equipment business as well as returned to growth and our industrial business.
Our Ats segment reported its fifth consecutive quarter.
On a sequential segment margin expansion remains on track to achieving segment margin.
Within our 5% to 6% target range by the end of the year.
Within Ccs, our non Cisco portfolio experienced another quarter of year to year growth.
And as both enterprise and communications and market revenues.
By competed our expectations.
And our Ccs segment continues to perform well with segment margin of 3.7% and the second quarter.
With double digit year to year growth, our HTS business recorded sales of more than $300 million and the second quarter <unk> grew 13% on a year to year.
Year basis and.
And year to date <unk> revenues of $501 million are up 24% compared to 2020.
Demand for our hardware platform solutions continues to be robust and our current expectations are that revenue for HTS will exceed $1 billion for 2021.
In recent quarters, we have begun to highlight the financial performance of our lifecycle solutions business.
Which combines the revenues of our HTS business and Ats segment.
As we noted during our previous quarterly conference calls on lifecycle solutions portfolio generates higher margins.
<unk> greater barriers to entry for competitors.
<unk> and offers a more robust growth profile compared to our traditional EMS portfolio.
We are encouraged by the performance of our lifecycle solutions portfolio, which has exhibited double digit revenue growth on a year over year and sequential basis.
Looking ahead, we are pleased to provide third quarter revenue.
And our guidance and the $1.4 billion to $1.55 billion range and non <unk> operating margin guidance of 4%, representing the midpoint of our revenue and adjusted EPS guidance ranges.
Achievement of 4% operating margin would represent the highest quarterly operating margin.
And at Celestica and the last 20 years. Additionally, we currently expect our performance and the fourth quarter to be at third quarter levels or better.
I am pleased with the progress we have made and executing our strategy and transforming our business.
Year over year operating margin has been expanding for the last 6 quarters.
Revenue from our lifecycle solutions business continues to grow as a percentage of overall revenue.
And so that's the case is currently on track to post year over year revenue growth on an absolute basis and the fourth quarter.
Additionally, our bookings performance has been strong driven by our engineering led approach and our efforts have.
Have resulted in a diversified portfolio with strong secular tailwind.
Before I offer some additional detail on the outlook for each of our end markets and the overall business.
I would like to turn the call over to Mandy, who will provide you with more color on our financial performance and the second quarter as well as more detail on our third quarter.
Sort of guidance.
Thank you, Rob and good morning, everyone.
Second quarter 2021 revenue came in at $1.42 billion at the high end of our guidance range.
And your decreased 5% year over year and increased 15% sequentially.
Our non Cisco revenues grew 6% year over year and grew 15% sequentially.
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We delivered non <unk> operating margin of 3.9% 40 basis points ahead of the midpoint of our guidance range driven by stronger than expected performance in both segments.
And I FRS operating margin was up 50 basis points year over year, and up 40 basis points sequentially.
The year over year improvement was driven by.
Improved operating leverage and Etfs, resulting from double digit revenue growth and improved Ccs performance, including higher H P. S revenue concentration.
The sequential improvement was due to higher volumes and favorable mix across several businesses as well as strong performance and our Ccs business.
Non <unk>.
So earnings per share were <unk> 30 cents above the high end of our guidance of 27 cents and up <unk> <unk> year over year and up 8 sequentially.
IR for US earnings per share were 21 cents up 11 cents year over year and up 13 cents sequentially.
Ats revenue.
Adjusted is up 12% compared to a year ago slightly below our expectations of a mid teen percentage year over year increase.
<unk> Ats revenue was up 6%.
The year over year revenue growth and Etfs was driven by a recovery and demand and a return to growth and our industrial business and new program wins and market share gains and our capital equipment.
Equipment business.
This was partly offset by continued softness in commercial aerospace.
Sequential growth was driven by continuing strength and capital equipment, partly offset by health Tech.
Ccs segment revenue was down 14% year over year, largely driven by the Cisco disengagement, partly offset by strong demand from service provider customers, including and.
And our hps business sequentially.
Sequentially Ccs revenue was up 22% led by strong demand from service provider customers strong demand and our <unk> business as well as normal seasonality and our enterprise business.
Revenue and our Ccs portfolio from businesses other than Cisco increased by 2% year over year.
Communications revenue was down 7% year over year, less and our expectation of a low double digit percentage decrease the decline was largely due to the Cisco disengagement, partly offset by strong demand from service provider customers.
Sequentially Communications revenue was up 20%, reflecting strength with service providers.
Enterprise revenue in the quarter was down 25% year over year, less and our expectation of a low thirty's percentage decrease.
Lower revenue were the result of program specific demand dynamics with several of our server customers.
Sequentially and.
<unk> revenue was up 26% driven by normal seasonality and program specific.
<unk> strength with certain storage customers.
Our hps business delivered its highest revenue quarter ever with sales of $302 million up 13% year over year led by consistent demand strength and new program ramps with service providers due to continued data center growth.
As Rob mentioned, our lifecycle solutions.
Solutions business, a combination of the revenue from our E. T S and H P. S businesses continued its robust growth trajectory lifecycle solutions accounted for 60% of sales on a year to date basis compared to 51% and the first half of 2020.
We continue to believe that lifecycle solutions is the best representation of our diverse.
Fight portfolio.
Okay.
Our top 10 customers represented 67% of revenue during the second quarter down 1% year over year and up 2% sequentially.
For the second quarter, 1 customer represented 10% or more of our total revenue versus 1 and the same quarter last year and.
In the prior period.
ETF delivered a segment margin of 4.1% and the second quarter up 100 basis points year over year, and 10 basis points sequentially.
This marks the fifth consecutive quarter of sequential Ats segment margin expansion the.
The year over year margin improvement.
And none driven by double digit percentage revenue growth and capital equipment and growth and health tech, which more than offset a soft commercial aerospace demand environment.
The sequential improvement was due primarily to strong growth and capital equipment driving better operating leverage.
Ccs segment margin of 3.7% came in above.
Our target range of 2% to 3% and was up 10 basis points year over year and up 60 basis points sequentially.
This represents the sixth consecutive quarter of year to year margin improvement and our Ccs segment.
The year over year margin improvement was primarily driven by favorable mix due to our portfolio reshaping activities and in any.
Increasing concentration of revenue from our <unk> business and strong commercial recoveries.
Yeah.
The sequential margin improvement was due to demand strength and H P. S.
Moving on to some additional financial metrics.
<unk> net earnings for the quarter were $26.3 million or 21 cents per share compared to net.
And of $13.3 million or <unk> 10 per share and Q2, 2020 and net earnings of $10.5 million or 8 cents per share and the previous quarter.
Adjusted gross margin of 8.4% was up 90 basis points compared to the same period last year and down 20 basis points sequentially.
The year.
Net earnings improvement was driven by strength and H P S and capital equipment, partly offset by headwinds in A&D.
While the sequential decline was largely due to higher variable compensation.
Second quarter, adjusted SG&A of $54.7 million was up $1.4 million year over year, primarily due to investments and the business.
Adjusted SG&A was up $1.1 million sequentially.
No and I FRS operating earnings were $55.0 million up $4.2 million from the prior year period, and up $11.7 million sequentially.
Our non <unk> adjusted effective tax rate from second quarter was 20%.
Compared to 24% for the prior year period, and 21% last quarter.
For the second quarter non <unk> adjusted net earnings were $37.9 million compared to $31.7 million for the prior year period, and $27.8 million in the first quarter.
No.
And I FRS adjusted earnings per share of 30 cents was up 5 cents year over year due to higher non <unk> operating earnings and lower interest expense.
Sequentially non <unk> adjusted earnings per share were up 8% driven by higher non <unk> operating earnings.
Second quarter non <unk> adjusted.
C of 13, 7% was up 0.8% compared to the same quarter of last year and up 2.9% sequentially.
Moving on to working capital.
Our inventory at the end of the quarter was 1 point to $2 billion up $71 million sequentially and up $19 million compared to the same peer.
Period last year, as we continue to support growth and our <unk> business.
Inventory turns were 4.4 turns and the second quarter up from 4.0 turns last quarter, but down from 4.9 turns and the prior year period.
Capital expenditures for the second quarter were $10 million or just less than 1% of revenue.
ROE I know and I FRS free cash flow was $31.2 million in the second quarter compared to $37.9 million for the same period last year and up from $29 million and the prior quarter. This is now our 10th consecutive quarter of delivering positive non IRS free cash flow.
Cash.
Sales in the second quarter were 71 days up 11 days year over year and down 11 days sequentially.
The sequential improvement of our cash cycle days reflects normal seasonality and our continuing efforts to improve working capital performance. Despite the well known challenges in the supply chain environment.
And the second quarter, we incurred a 3.
<unk> million dollars of restructuring charges or <unk> <unk> per share to further adjust our cost base to better align with changing demand levels and several of our businesses and geographies.
Moving on to some additional key metrics our cash balance at the end of the second quarter was $467 million up $31 million.
Cycled every year and up $18 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 and available funds.
And you to believe that our liquidity is sufficient to meet our current business needs.
Yeah.
We ended the quarter with gross debt of $440 million unchanged from the previous quarter, leaving us with a net cash position of $27 million.
Our second quarter gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio was 1.4 turns.
Sequentially and an improvement of zero.
And your 3 turns from the same quarter last year.
At the end of June 2021, we were compliant with all financial covenants under our credit agreement.
During the quarter, we repurchased approximately 1.6 million shares at a cost of $13.4 million.
Since commencing our NCI V program.
November we have repurchased a total of $2.2 million shares at a cost of $18.7 million and we intend to deploy capital towards share repurchases in the third quarter of 2021.
We ended the quarter with $126.8 million shares outstanding a reduction of approximately 2% from the prior year.
Year period.
We remain committed to our previously stated capital allocation priorities. We are focused on generating positive free cash flow and balancing the paying down of our debt with maintaining optimal financial flexibility and dry powder to enable the acceleration of our strategy through disciplined M&A.
And we continue to target returning 50.
The percent of non <unk> free cash flow to shareholders with the other 50% would be reinvested and our business over the long term.
Given our strong balance sheet and level of our share price relative to our view of our fundamentals. We will continue to opportunistically purchase shares for cancellation under our NCI V program.
Current and CIB plan expires in November of 2021, and has up to approximately $6.8 million shares remaining that are eligible for repurchase.
Now turning to our guidance for the third quarter of 2021, we are projecting third quarter revenue to be and the range of $1.4 billion to.
Our and $5.5 billion. We note that we have widened our typical guidance range for revenue this quarter from $100 million to $150 million to account for the potential impacts from a dynamic supply chain environment.
At the midpoint of this range revenue would be up 4% sequentially and down 5% year over.
Over year for our non Cisco portfolio achievement of the midpoint of our guidance range would represent revenue growth of 6% year over year.
Third quarter non <unk> adjusted earnings per share are expected to range from 30 to 36 cents.
And at the midpoint of our revenue and adjusted EPS.
1 point ranges.
On <unk> operating margin would be approximately 4.0% and increase of 10 basis points over the same period last year and up 10 basis points sequentially.
Non <unk> adjusted SG&A expense for the third quarter is expected to be and the range of 56 million to $58 million.
We anticipate our non <unk> adjusted effective tax rate to be approximately 20%, excluding any impacts from taxable foreign exchange or unanticipated tax settlements.
Turning to our end market outlook for the third quarter of 2021.
And our Ats and market, we anticipate revenue to be up in the low double digit percentage.
<unk> range year over year, driven by continued demand strength and our capital equipment and health Tech businesses and a continued recovery in industrial partially offset by continuing demand softness and commercial aerospace as a result of COVID-19.
In Ccs, we anticipate our communications end market revenue to be down in the high single digit percentage range year over.
A year driven by our disengagement from Cisco.
The remainder of our communications portfolio is growing driven by strength and demand from our service provider customers as well as our <unk> business and.
And our enterprise and market, we anticipate revenue to decrease and the low twenties percentage range year over year due to market demand softness, particularly from server customers.
And a relatively strong comparative quarter last year.
Our outlook and he's lifecycle solutions continuing to account for a growing portion of our consolidated revenues as we continue to diversify our portfolio it.
It will serve as our long term driver and operating margin improvement.
We maintain our expectation for lifecycle solutions revenue to.
And the low double digit percentage range in 2021.
I'll now turn the call back over to Rob for additional color on our end markets and overall business outlook.
Thank you Manny.
Our financial metrics are beginning to reflect the benefits of the critical decisions, we made to improve the business over the last 20.
To grow on.
We believe we have strong momentum and are optimistic regarding our ability to capitalize on the opportunities that lie ahead.
However, the road ahead does not come without its challenges material constraints on becoming more severe and the second half of 2021 and in certain geographies concerns are rising regarding.
For them the resurgence of COVID-19.
And the best of our ability we have factored these dynamics into our outlook and feel confident that our talented team can effectively address any challenges ahead.
Now turning to the outlook for our segments.
And a T S. We remain on track to.
And regarding of our targeted 10% revenue growth and 2021.
With continued strength and capital equipment growing momentum and industrial.
And then and expectation of a modest recovery in commercial aerospace as we ramp new wins and the second half of the year.
We are on our way towards reaching our target segment margin range of 5% to 6% by the.
To achieve here.
Our capital equipment business continues to experience very strong growth supported by demand tailwind and market share gains.
The demand environment, and the semiconductor capital equipment market remains robust and.
As we have noted before we believe that the factors driving this growth.
Have an extended runway and are not short term in nature we.
We expect these conditions to persist for the remainder of the current year and into 2020.2.
And the display market, we believe that spending is shifting to subsequent periods as component shortages are delaying new program ramps.
And of the EBIT expansion plans.
We continue to anticipate capex spending growth to resume in future periods supported by new OLED technology shifts and demand tailwind in key end markets, including mobile TV and IC applications.
We reiterate our expectation for our capital equipment.
And capacity to exceed $700 million and revenue in 2021.
Which would represent 30% plus growth compared to 2020.
And in industrial and we're seeing the beginning of a demand recovery with double digit growth during Q2.2021 compared to the prior year period driven by new.
And business, largely and energy storage and EV charger markets.
As an example, we are excited by our recently announced win with Lumina, where we will partner to produce its iris Lidar system with engineering led wins like this and continuing demand strength across our industrial business.
We.
And your over year growth and industrial to continue into the second half of 2021.
And a and D. While demand appears to have stabilized on a sequential basis headwinds.
Headwinds and the commercial aerospace market persist and the market remains meaningfully softer than a year ago, while we.
We expect demand and commercial aerospace market to remain depressed compared to pre COVID-19 levels into 2022, we do expect a modest recovery to materialize and the latter half of this year and should begin to see sequential improvement as new programs begin to ramp.
And our health Tech business demand remains.
We expect lost supported by New program ramps and COVID-19 related projects our outlook calls for continued year to year growth for the duration of 2021.
And the second half, while we do anticipate a moderation and demand for some COVID-19 products, we expect growth and other programs such as surgical instruments.
Robert turning to Ccs our Ccs.
Ccs segment continues to perform well.
This strong performance was driven by our portfolio reshaping initiatives and the continued growth of our hps business, both on absolute terms and as a portion of our Ccs segment revenues. We expect both of these factors to continue to support strong.
And our Ccs segment into 2020.2.
Although ccs revenues remained lower on a year to year basis, our non Cisco Ccs business is up nearly 8% year to date.
Compared to the first half of 2020.
Our hardware platform solutions business continues.
Mark deliver strong results.
With year to year growth of 24%, primarily driven by robust demand from service providers and our communications end market.
Our order book and general market outlook continues to be very positive and we reiterate our expectations for H P S to achieve double digit.
And the Senate revenue growth for 2020.1.
And the communications end market, we expect market demand to remain strong and 2021 largely comprised by service provider customers.
Both of these customers have backfill that capacity from the Cisco disengagement.
As noted.
We expect communications year to year revenues to be lower compared to 2020 as a result of the Cisco disengagement, We expect communications revenue growth to resume on an unadjusted basis, and the fourth quarter compared to the prior year period.
And our enterprise and market.
The demand.
Although alignment continues to be relatively soft, notably from silver customers.
We expect that these market conditions will persist for at least the duration of the year.
As we enter the second half of 2020..1 we are pleased that our transformational efforts are yielding results and momentum.
Continues to build and.
And we believe we are positioned where we need to be in order to achieve our strategic goals and financial targets.
Our areas of focus from a balance of the year remain unchanged and returned to absolute growth margin expansion, including Ats returning to its target margin range and exit.
A man and a disciplined capital allocation strategy.
As we went up to 2022, we expect from market to remain dynamic. However, we believe that robust secular tailwind and strong operational performance and the ramping of new programs bode well for Celestica as a result.
Secured and that the severity of supply chain constraints expected for the remainder of 2021 and do not worsen.
We anticipate revenue to grow in 2022 compared to 2021 and are targeting to generate $6 billion or more of revenue for 2020.2 with operating margin within our target range.
A $3.75 to 4 and 5%. We are also anticipating net adjusted EPS will expand by approximately 10% or more in 2022 compared to 2021.
Our entire team remains focused on executing our game plan and driving the evolution of our business while effectively.
I say navigating any challenges there.
And their commitment.
Alan and resiliency of our entire global team remains a driving force behind our success there our ability to consistently meet the challenges faced by our business and deliver on expectations and fills me with the utmost confidence and optimism.
Over the immediate and long term future of our company.
And I look forward to updating you on our progress over the coming quarters and with that I would now like to turn the call over to the operator for Q&A.
Thank you.
Reminder, to ask a question you wouldn't need to press star 1 on your telephone Covid Gary.
Your question.
Press, the pound or hashed E. Please standby were weak and policy came on.
Your first question was on from the line of standard Smiths catalyst from BMO capital markets. Please go ahead.
Good morning, and and congrats on the very strong quarter I'm, Rob historically, you havent been that specific in terms.
Providing color on on the subsequent year and so just curious as to.
What motivated you to do that this time.
Do you have a higher level of visibility, perhaps given the supply constraints are customers, giving you a maybe a longer lead times as a result of that or does that also speak maybe to your confidence on.
The inability of some of the macro trends like and capital equipment.
Yeah, a little bit of both panels and <unk>.
Thanks for the recognition on on a strong quarter.
And much of our business because the supply chain constraints and so prevalent and the lead times are extended we have several customers that are saying.
They're forming their order horizon, and basically playing with them and you can build it and we will take it and that's giving us some increased confidence.
And then just looking more broadly at our our wins over the last 18 to 24 months in terms of what we've been able to book.
It gives us confidence and.
And then lastly, I would.
So.
The secular tailwind that we're seeing and the majority of our markets and I would even say even on a and b, we're starting to see.
A recovery starting to happen gives us the confidence to kind of do some foreshadowing and what we think our 2020.2 coming on.
Great and then.
In terms of supply constraints, it was $30 million impact on revenue this quarter.
What are you assuming it's going to be in the upcoming quarter. I think you commented that it seems to be getting worse or better.
Yes, it is certainly getting more severe.
Just stepping back from.
And then I think we got a jump on it.
And we saw this happening and the second half of last year. So we extended our lead times.
And with our suppliers, we asked a lot closer with our customers to make sure they opened up their order books.
For the first half of this year I think we've all of whom modestly impacted going into the back half of the year I think and everyone else has caught up frankly.
So it's going to get a little bit more severe.
That being said the demand that we're seeing and largely not perishable and fact that demand is coming and stronger than our guidance range. So if we're able to push through and solve some of these shortages are there is a possibility from upside as well.
And lastly, I would.
And I would say that.
Yeah.
With an H P S.
We've built a lot of supply chain and resiliency and toward design process, which has proven to be a benefit and being a design authority with an H b and so it's giving us some incremental leverage versus some of it and that's players. So at this stage of the game and I would say it would be we're starting off the quarter.
With a higher amount of revenue that's gated by materials and are larger.
Revenue guidance range, but at the same time, we got a we got a beat on it in terms of working it down.
Great. Thanks, Robert that's why.
Thanks.
Okay.
Your next.
2 questions on the central line and.
Firstly about acquire.
From Bank of America. Please go ahead.
And thank you for taking my questions.
On the Ccs segment saw a pretty strong sequential margin improvement.
Think of the prepared remarks, you also talked about some 1 time disengagement and game.
But can you just help US bridge the sequential improvement from 311 percentage of free trade zone.
30%.
Hi, rich blue and.
And you care, yes.
So I would say that overall, the strong performance and Tcs.
And in line with our expectation.
Concentration of HTS.
And he has performed very well and the quarter and then of course revenues were up sequentially.
In terms of the recoveries you know, we're actually quite pleased by it and as you know we went through a long disengagement and along the way and there's a number of various items I need to be negotiated with our end customers we were able to.
And operationally execute very well and had a number of our signed releases and a quarter, where we were able to and.
Essentially you get those recoveries and what we've been working towards for quite some time.
But even as we go forward, we continue to expect the Ccs business is going to perform.
Very well as each day as concentration continues to grow.
Got it thanks for the clarification on that Monday, I wanted to ask on the guidance for fiscal 'twenty 2.
On the margin guidance was that you would be within the 6 and 7.5 to 4.5% range I just wanted to clarify that because even this quarter you were in that range Oh are you, saying.
Saying that the you know for the full year fiscal 2020 fiscal.
Fiscal 'twenty, 2 and you're going to be in that range on.
Or do you think that every quarter.
Are you gonna be and the range.
Yeah, it's probably a little bit early for us to give up on the specifics on the quarters.
And of course, we're not giving guidance.
Full year, but what.
Yes.
The performance that we had in the third quarter were clearly seeing carryforward right now into the back half of the year and the strength that we are seeing and the second half is continuing into 2022 as you know we do have a little bit of seasonality in our business and types of Q1 is lower than when you look at the trailing quarters, but overall.
Overall, the fundamentals are continuing to strengthen we do feel comfortable that to be and the target margin range for the entire year and how each of the quarters play out we'll give more color and so we get closer to it.
Okay, and thanks for that and just from my last question.
I think you talked about the display.
Market pushing out a bit.
Do you expect that to some Meg and the first half of next year or is there any any color on when that market can come back.
Hi, Robert.
No.
Right now I think we're seeing the majority of the ramping happening and 23.
Relative to 'twenty, 2 reason being from a chip shortages.
Slowing down and the introduction of new technology.
The OEM and the people buying the capex equipment, and actually flowing new product launches and as it was.
And that it's 1 of the go on some of our capacity expansion plans.
So we.
We expect.
And the majority are around actually been pushing right and we expect that to happen towards the end of 'twenty 2 into 'twenty 3 at this stage and again.
Got it thanks for all the details and congrats on the quarter.
Thank you Robert.
Oh.
Your next question comes from Todd Coupland CIBC. Please go ahead.
Yes. Good morning, everyone. I also wanted to ask about 2022, 6% above factset in terms of.
6 billion versus true.
And expectations.
And between this quarter and last quarter.
The biggest.
Changes that you've seen in the market.
And then if you could sort of rank order, though is as we think about 2020.2.
Hey, Todd.
And just thinking about it.
I think the biggest change was our conviction and what we're seeing and capital equipment.
On the severity of.
Kept shortages does.
Spending strength that we see out of the and Oems on on adding capacity.
The investments that people are making.
And we will be making and the adoption of 3 nanometer nodes.
I'll expect it to.
To accelerate.
And Keith.
Semiconductor capital equipment.
Spending a very robust so that's giving us a lot of confidence moving forward on top of that we've been actually within and capital equipment and we've been growing much faster than the market certainly this year and looking at the wins that we've been able to clock up over the.
The last 18 months, we're also anticipating to grow faster than the market and next year.
And gaining share and high level Assembly and machining and also new investment and robotics, we picked up some new customers and display.
And then making some investments and our new verticals and frankly being the largest and.
And the most capable player out there relative to our peers.
Customers are turning to us, especially on these times, because we have been able to.
And meet their capacity.
You know basically deliver on time and and be able to ramp efficiently. So that's giving us a lot of.
Confidence on top of that.
That the strength that we're seeing and and our hps business in terms of pure data center growth.
<unk> is giving us a lot of confidence as well and.
Lastly, you know just from some of the other segments, we're seeing increased outsourcing and health Tech, we're seeing a recovery on our industrial markets.
And defense markets.
And we're starting to pick up based on new program wins and with things and some good growth.
Coming out of our commercial aerospace again, you know moving into the back half of the air and into next year does that have has been picking up a little bit the MRO markets and starting to turn and so it's a combination of a lot of different things.
Thank you for that.
Just on the aerospace and defense.
Sounds like Youre being cautiously optimistic is that.
Naturally a material swing factor.
And as we go through 2020.2 could it be could you just share what.
You know some of the upside items could be on that.
That area, what should we watch for in terms of that actually coming through and.
Okay.
Yeah, and in terms of 2020, 2 and A&D I wouldn't call. It a material swing factor, we are counting on a gradual recovery of the A&D market.
And what we're seeing and to the back half of the year.
We're seeing a little bit of a pickup and defense are I'll say about that's about 25% of the growth the balance of the growth is coming out of commercial aerospace, it's being led by new programs.
Wins and market recovery and single aisle and also in defense aviation some of that dual Io and starting to pick up a little bit as well.
And what the analysts are saying the industry analysts regarding our commercial aerospace and not expecting full recovery before 2024, but it's more of a modest recovery and I think we're in line with that modest recovery in terms of how we see our business our India business are tracking.
Right and just 1 last question.
So commercial aerospace and you had been on the stuff and 3 southern Max program and is does that need to have a significant turnaround.
For you to achieve these goals or is it just.
Single aisle and the defense, but can still get you there regardless of what happens there. Thanks a lot.
Yeah.
And on bladder the our exposure to 737 at this stage of the game from a percent of revenue, it's very low single digits. So it's just a broad market.
Great. Thanks, a lot.
Yeah.
Your next question comes from Rob Young and that's kind of court and didn't get ready. Please go ahead.
Good morning.
And you read reiterated the expectation is for the capital equipment business at like $700 million, but the display has pushed out so the I guess, the semi capital businesses materially better than where you thought it was even a couple of months ago and so I was wondering if you could.
Hi, Matt and if there's any color around the magnitude of the improvement on and then.
The display business comes back in the second half of 2020.2 what does that imply on the margin structure and the capital equipment business and those 2 businesses going strong.
Hey, Rob.
Jim I'll start off and on.
And that mandate.
I'll finish up on that 1.
So, yes I think.
Our views on the strength of the semiconductor capital equipment doesn't have gotten more bullish.
As the year has gotten longer.
And that's been bolstered by an uptick in.
Quinn.
And this forecast are and the mid to.
Yeah, and the short to midterm I would say and also been bolstered by some new wins that we have so again, we're growing much faster and the market. This year, we anticipate and much to grow much faster than the market next year, So that's giving us a lot more and.
And more confidence in terms of the display market.
It is you know pushing things to push to the right and fundamentals and I'll let him.
And you can talk about the margin profile, but the and fundamentals of that market is still intact and that.
And when the spending does resume and are based on the availability.
And you have trips to the support and new product launches, it's going to come in the form of increased spend there's a broad OLED adoption for P. CS and monitors automotive spending and terms of OLED displays and and cars from high contrast, and robustness is picking up obviously mobile phones and.
But a little on the Bulls and new advanced smartphones and.
You know a large size Tvs and then on micro Leds advanced technology OLED all on their ryzen and it's just a question of when these product launches will occur and back that up a little bit of time and and that's when it will happen and I'll turn it over and a mandate to talk about the margin profile.
Yeah.
Good morning, So as Rob had mentioned we are growing faster than the overall market right now we grew over 30% last year.
And towards growing you know, 30% or more this year as well and a lot of it is because of market share gains overall semi is performing very very well from a margin perspective.
We're operating at the high end of the target margin range and that's with display being net.
And the depressed levels and eventually.
Eventually we do expect 70 more moderate but its display and semi are both coming in very strong and we do have an opportunity to pour on above the target margin range.
I think youre hitting on on it, though which is as we.
We look forward and eventually the semi demand.
And it will normalize, but we have 2 areas of strength that will we believe keep the ETF. So overall segment and a strong margin profile..1 of course is display which still needs to come on line and then aerospace and defense, which we expect will be a multi year recovery should.
Also help over the couple of years.
And that's great and then.
Yes and <unk>.
Revenue and exploration here and you said over 1 billion and 2021 that seems to me to be below the pace for this current quarter and the first half. So are you expecting maybe a moderation there and then I'm just.
Reconcile that with the comments around the demand from Hyperscale and comms and shouldn't be a big driver behind HTS now how durable is that demand and how strong is that pipeline.
Yes so.
It's a great question, Rob because ECS is just performing very very well, we mentioned that the year to date revenue.
Trying to get around $500 million and the reason that we shared that we expected to be $1 billion or more is to basically confirm that our second half expectations are in line with the first half if not more.
And so we continue to see very strong growth coming into the back half of the year.
It also goes to 1 of the earlier questions in terms of why are we.
Showing strength for the fixed line going into next year as we've been dealing with the material constrained environment, we have been working with our customers to get longer order lead times and in some cases from a PFS and as Robin also mentioned from a macro perspective and data center brokerage Theyre very very high and we believe that that's continuing into next year and.
And that bodes very well for HTS. So.
And basically to say the second half is going to be.
On the first half were stronger and that momentum should be carrying into next year.
And so you're a bit just afraid that material constraints are going to have a bigger impact on these high growth programs is that so.
The Doctor.
And yes, I mean.
We've taken into accounts and our guidance and so youre hitting on it which is we believe that we have been able to account for what the challenges and ensure constraints would be.
But we are we have on order book that is higher than the guidance that we're providing and Robert touched on this briefly but so far the impact from our mature from trade environment.
<unk> has been basically our inability to deal with the drop in orders and upside and it actually hasn't had a material impact on <unk>.
Revenue that we had in the quarter. So on the HTS side, if we're able to secure all of the materials that we want we kept growing and faster than what we're hoping.
Thanks, a lot.
Your next question comes from Paul steep Scotia capital. Please go ahead.
Could you talk just a little bit maybe a different way to think about the visibility into the 6 billion won.
But how much of that would actually be sort of booked and secured the day or maybe stated another way.
What else needs to occur to sort of exceed the $6 billion range based on what you already have and hand.
Let me start off and I think it's Jim Suva actually on the phone so.
Is that right, Jeff we're talking to you know its Paul.
Well.
Sorry.
Alright, okay.
Paul what I would say is that overall.
The growth rate that we're expecting on lifecycle solutions.
10% more and more and so we talked already adjusted growth rate and we're seeing on the HTS side and on the Ats fundamentals, we're targeting 10% or more next year as well. So if we can achieve 10.
The percent growth rate and lifecycle solutions or more.
We feel that we have been very good.
And line of sight to the $6 billion.
On the remaining parts of the Ccs portfolio and we are targeting growth in.
Key areas that are strategic for us and.
That could possibly present, some upside opportunity as well.
Great and then maybe just the other question related to that would be.
How far through the sort of.
Let's call. It portfolio rationalization are we like I know you've discontinued a lot and there's always moving parts quarter to quarter, but.
How sort of happy are you with the.
The overall state.
Business things seem to be definitely heading in the right direction, but I'm just wondering you know how.
How much more is sort of left to be done and which areas do you think broadly.
I'll start and I'll, let Rob finish off maybe but from a from a revenue perspective.
Look the only tailwind right now and our numbers.
State of the Cisco.
And that's continuing to impact us on a year to year growth basis, but when you look at the portfolio. Excluding Cisco, we are growing and our guidance from the third quarter indicated the same thing when we look towards the fourth quarter Cisco is essentially going to lapse by then and so we are targeting to show revenue growth on an absolute basis.
And in the fourth quarter.
And I'll, let Robert talk about the rest of the portfolio.
Yeah, Hi, Paul.
So that's on the portfolio actions as I mentioned before.
Portfolio management is an active part of our strategy.
And said, we're ranking number 1 and number 2 on close to 95% of on.
Or is this from scorecard.
We've proven that we're pretty disciplined.
So we're not pursuing revenue from revenue.
Charlotte and revenue aligns with our capabilities and our strategy.
So at times, we might feel that it's better just step away, but that would be from a strategic lens.
But right now I think we're.
Happy with our portfolio and I think.
And and all the areas that we want to grow and.
And just to pick up.
A little bit on your first question with respect to and <unk>.
Next year is.
$6 billion of anticipation.
We just finished on a strategic planning process.
What we do.
And do we do with formally once a year and a refresh of quarterly so we went market by market account by account and we went through the bookings we went through our technology roadmap.
And taking all that into account and.
On the micro and macro environment, we feel pretty good.
About our ability to.
Slash 2.
To everyone on the call that we plan on doing $6 billion or more and.
And next year, we plan on expanding our EPS and we expand on and we expect to stay within our target margin range for the full year.
Great. That's helpful last 1 from me just maybe a broader market question Rob.
What are you seeing.
In terms of maybe contracting dynamics within A&D, if we think about you know.
More specifically the capital equipment business and any changes out there in terms of how your competitors are going to market or do we think we've sort of sustained and nice healthy environment with strong demand.
Thanks.
Yeah, but and well within capital equipment.
Supply chain and wanted visibility and certainly longer.
Given the ordering lead time, so we have much more robust.
Slot plans with our customers. So that's certainly helpful.
And within.
And <unk>.
A lot of our growth right.
Right now is on the.
Is on the heels of new program wins.
And it's also on the heels of Gist.
And I guess broad market recovery and if you want to look at some leading indicators you look at it.
Air traffic.
And I and.
The amount of the fleet, that's actually parked as soon as that traffic picks up and some of these parked aircrafts.
Start getting back and service and the OEM build rates pick up.
And protecting our order book to pick up but the contract and catalyst.
It's pretty disciplined and we haven't.
Dysfunctional behavior I would add.
Perfect. Thank you.
Your next question comes from Paul Treiber with RBC capital markets. Please go ahead.
Oh, thanks, very much and good morning, I just wanted to ask a question on the production side of the equation.
And when you speak at a high level.
And a lot of what was the strives and you took to mitigate on the challenges and Malaysia. This past quarter and then also to what degree and you move production between various facilities now.
Yeah.
Yeah, so in Malaysia.
The team has been.
Very.
And that making sure that we understand.
The government restrictions with respect to.
Material material control orders in terms of.
And where people could go how many people could work on different times, and so we've been pretty innovative with shift patterns.
Very and other things along the lines to minimize the impact to our customers and also.
The impact the impact to our financial performance. We also have a pretty broad network. So if we're not able to fulfill.
Work out of Malaysia, and we're able to potentially fill it out of other regions and that's been helpful.
And <unk> as we move forward as well to answer your second question.
And Paul Paul and I will just add that to date, when we've seen challenges and various countries because as you know we're in 14 countries around the world.
And we do get impacted by.
Short term closures.
Quickly or are deemed up to this point to.
So service.
And so while we need to work with the local authorities.
To get the proper documentation in place.
We normally and as we saw on the case of Malaysia are able to keep the factories running.
Very soon after.
Okay.
And a bigger picture question in terms of production and I just didn't.
And such in 2020.2.
To what extent is your outlook constrained by production and capacity or maybe another way to ask it and you know at what point in revenue annual revenue do you need to expand capacity and you know either.
Either or and more facilities on arises from the mines.
And how do we think about capex going into 2020 and beyond.
Yeah from for the most part.
We have ample capacity there are.
I wouldn't say any of the investments that we need to make are going to support 2022.
But looking at our long range plan.
And regardless, we probably need to make some investments on building out from additional North American.
Capacity and those and some of the things that we're looking into right now.
Some of it might be and Mexico from or what might be and and other areas as we enter into new lines of business.
Yes, and just to build on Robert.
The answer as he mentioned, we've just gone through a very detailed strategic planning process, which includes understanding the investments of each day to support the order book to be half.
And we feel that from a large part we have sufficient utilization across the.
And the factories to support a pretty robust revenue and level of growth on the investments that we're making and the U.
These are really on the back of customer.
Orders and customer request, when we're investing green dollars and the U S. For facility expansion does and example, we have and order book that pulp is behind it and then in terms of just overall capex as we look forward.
We continue to think that the 1 and half to 2.
Percent of revenue range will be sufficient and we don't really need to build out a lot more capacity in order to support the road.
Okay, and what do you think that.
And just 1 other thing to add and later on this week, we're having a grand opening and a new hub facility and.
Minnesota.
That's our ISR facility to support.
<unk> increased our defense work from.
And looking forward to seeing a brand new facility and meeting some of our customers there and.
Not only is it.
Defense side, but it's also supporting some of our health Tech business as well and we expanded that facility.
And all from 50000.
100000 feet.
From where we were to where we are now.
Okay, great thanks for that extra detail.
Yeah.
Your next question comes from James Suva Citigroup. Please go ahead.
And thank you and it's very encouraging to hear.
It seems like Celestica talk about 2022.
Behind that can you let us know is it you have like contracts that are giving you more confidence or that the lifecycle business is just much stronger or was it you know you just want a sense.
Send a message.
And to people out there is just kind of interesting to see this year you have so much conviction, which is quite positive to talk about you know 2022, when we saw 6 months locked it and this year.
Hi, Jim.
We do have a lot of conviction as we move into a into 2020.2.
And as I mentioned, when you step back we.
Company been working very hard on transforming our business and we think were you know 2 day knothole. If you will we're really pleased with the growth of our H B S portfolio were really pleased with the investments that we've made and our engineering our capability to drive our improved margin and.
And and across the R. A T. S segment are and you know going through our strategic planning process going market by market account by account.
We thought that was the right time and our transformation as we went from transformation to optimization and now we're going from optimization to growth.
On the left.
Let our investors know that we feel really good as we move into 2020, 2 and to kind of set some guardrails and where we're targeting our business to be in terms of revenue and margin and earnings expansion.
We've been getting I guess, a little bit of top you know headline news.
Headwinds from the Cisco disengagement and frankly, when you step back from it all we have emerged a much stronger company and we just want to let our investors know that you know we feel really good about where we had been and and where we're going.
Great. Thank you so much for the additional commentary and congratulations.
Thank you Jim.
Okay.
Your next question comes from Danielle Chinas State and Securities. Please go ahead.
Oh, Hi, good morning, there's some comments and the industry at the chip shortage last thing even longer than expected do you think that potentially expenses semi cap spreads youre, saying.
Uh huh.
And part of that a mixture of and I got the first part in terms of extending but what was the second part of the set and Stan Yeah. Do you think that potentially extends the semi cap strength you're seeing.
Yeah, there's different views on how long the chip shortage Ah last and when we heard from the Intel CEO and not so long.
The SEC about lending.
Well into you know through the end of 'twenty 3 I think he mentioned.
My My Crystal ball is a little murky right now I do think and.
And the chip shortage, probably last certainly through the end of this year into mid next year.
As if it gets into Capex.
On the building.
I think that the peak of Capex spending as we see it right now might be and 22, but then frankly as you look into 'twenty 3 'twenty 4 'twenty 5 some of the adoption of the advanced nodes 3 nanometer et cetera should stabilize at so I don't think it's going to.
And and.
And I think my words, and I don't think it's going to be a sharp decline and I do think we have very strong secular.
On a tailwind for years to come and the space.
And again and here, we have been and we are we are anticipating it will still grow faster than the market.
Yeah, Dan just to build on it which as you know well.
And the very strong growth that we're seeing and semiconductor maybe accelerated a little bit because of the mature constrain environment and industry itself has been growing now since 2019.
And so even without a constrained environment, we continued to see various good long term trends happening and the capital equipment space for the things that Rob was talking about the application.
Semiconductors and supporting.
And are increasing and becoming more diverse than.
Cycles before.
Great. Thank you.
Okay.
Your next question comes from Great sorts of Stifel. Please go ahead.
Hi, good morning.
Hum on the supply side, hoping you can just on maybe discuss and a bit more detail, which component areas, you're saying as most constrained right now and whether there've been any particular areas that are significantly sort of pushed out from a lead time perspective.
Over the past 3 months and then can you also.
I tell any pricing pressure and you may be seeing and the extent to which you're able to pass on those elevated costs to customers.
Sure. So I think the most constrained would be a semi cap semiconductors and I should say excuse me semiconductor lead times were about 31 weeks right now.
And frankly, it's about 100%.
Also deeper than normal levels.
Several semi suppliers are asking for or the coverage through the end of 2022 are we seeing wafer fabs and <unk>.
Love Max capacity at 95% are.
Right behind it we're actually saying passes I'm, becoming more constrained a passive.
And how does have seen about a 30% increase and lead times over the last 6 months, you know, whether it's M occ's resistors or capacitors.
We expect the lead times to further increase says and the back half of this year, we might have and get back into allocation every time will tell.
And lastly to your point Curt material.
Rising pricing has been on the rise.
But I would say from the most part and the majority of that has been being passed on.
You know through the entire value chain.
Understood and <unk>.
And then maybe just on on on the working capital and cash flow side.
Come on up we'd be thinking about cadence through the balance of the year and into fiscal 'twenty 2 given some of them down there and that you've discussed.
Yes, Kurt.
And we're pleased with the cash generation that we've already been and people to have the $52 million and the first half of the year, we're continuing to target $100 billion for the full year 2020.1.
And as we look into 2022, we're targeting $120 or more of free cash flow. We're pleased with the performance that we've had on the working capital side. Despite the very challenging and materials environment, we generated positive free cash flow for the last 2 quarters and if so.
We're expecting that to continue as well and then just in terms of the balance sheet that goes with that.
With our.
And I forget 1.4 times the balance sheet is very healthy.
And now and it gives us on the opportunity to really continue to invest and the business, but giving money back to the shareholders as well and.
So we've been buying so far on our share buyback program, we're buying and so far this quarter and we will continue to be opportunistic on deploying that cash.
Yeah.
Great. Thank you very much.
Yeah.
Is there and no further questions at this time I would now like to hand again for inspector on for them and kind of on the Mark.
Thank you.
Thank you.
I'm pleased with our performance for the first half of 2021 and our.
Our efforts to diversify our portfolio are yielding results.
<unk> from lifecycle solutions, representing 60% of the company's revenue.
Up 9% from a year ago.
And in Q2, the revenue of the Companys non Cisco business grew 6% year over year and and the.
The fourth quarter. We are currently on track to post year over year revenue growth on an absolute basis.
Additionally, our operating.
Margins continue to expand and Q2, and we posted our sixth sequential quarter of year over year, and non ifr ref margin expansion.
As we move into 2020, 2 we're targeting to generate $6 billion or more of revenue and operating margin within our target margin range of $3, 75% to 4.5%.
We're also.
Also currently anticipating that adjusted EPS will expand by approximately 10% or more than 22 compared to 21.
We are excited about our efforts to transform our business are yielding results I'd like to thank our global team for remaining vigilant and keeping themselves and each other safe and thank you for joining today's call I look forward to updating.
As we progress throughout the year.
This concludes today's conference call. Thank you for participating you may now disconnect.
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And then also.
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