Q2 2021 Celestica Inc Earnings Call
Fundamentals 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 in our Ccs segment.
As well as volume leverage fueled by steady growth in our Ats segment.
Despite the temporary.
By continued softness in our commercial aerospace business.
<unk> segment revenue grew by 12% year over year in Q2, driven by another exceptionally strong quarter in our capital equipment business as well as return to growth in our industrial business.
Our Ats segment reported its fifth consecutive.
Quarter of sequential segment margin expansion.
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.
As both enterprise and communications end market revenue.
Revenues exceeded our expectations.
The Ccs segment continues to perform well with segment margin of 3.7% in the second quarter.
With double digit year to year growth, our HTS business recorded sales of more than $300 million in the second quarter <unk> grew 13% on a year.
Year to year basis a.
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 of 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 presents greater barriers to entry for.
Competitors 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 the year over year and sequential basis.
Looking ahead, we are pleased to provide third quarter.
The revenue 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 are.
Achievement of 4% operating margin would represent the highest quarterly operating margin.
<unk> at Celestica in the last 20 years. Additionally, we currently expect our performance in the fourth quarter to be at third quarter levels or better I am pleased with the progress we have made in 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 the post year over year revenue growth on an absolute basis in the fourth quarter. Additionally.
Additionally, our bookings performance has been strong driven by our engineering led approach and our efforts.
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 in the second quarter as well as more detail on our third quarter.
<unk>.
Thank you, Rob and good morning, everyone.
Second quarter 2021 revenue came in at $142 billion at the high end of our guidance range revenue decreased 5% year over year and increased 15% sequentially.
Our non Cisco revenues grew 6% year over year and grew 15% sequentially.
<unk> we.
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.
Non <unk> operating margin was up 50 basis points year over year, and up 40 basis points sequentially.
The year over year improvement was driven by.
The sequential improvement was due to higher volumes and favorable mix across several businesses as well as strong performance in our Ccs business.
Non <unk>.
The improved earnings per share were <unk> 30.
Above the high end of our guidance of 27.
And up <unk> <unk> year over year and up 8 sequentially.
IR for US the earnings per share were 21.
Up 11 cents year over year and up 13 sequentially.
Ats revenue.
<unk> was 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 in EPS was driven by a recovery in demand and the returned to growth in our industrial business and new program wins and market share gains in our capital equipment.
The justice.
This was partly offset by continued softness in commercial aerospace.
Sequential growth was driven by continuing strength in 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 in.
Of our Hps business sequentially Ccs revenue was up 22% led by strong demand from service provider customers strong demand in our <unk> business as well as normal seasonality in our enterprise business.
Revenue in our Ccs portfolio from businesses other than Cisco increased by 2 percentage year over year.
Communications revenue was down 7% of year over year less than 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 than our expectation of a low 30 percentage decrease.
Lower revenue were the result of program specific demand dynamics with several of our server customers.
Sequentially. The enterprise revenue was up 26% driven by normal seasonality and program specific.
The 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.
Business, a combination of the revenue from our E. T S and hps businesses continued its robust growth trajectory of lifecycle solutions accounted for 60 per cent of sales on a year to date basis compared to 51% in the first half of 2020.
We continue to believe the lifecycle solutions is the best representation of our diverse.
Of the spine 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 in the same quarter last year and.
<unk> in the prior period.
Turning to segment margins.
The ATM delivered a segment margin of 4.1% of in 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 year over year margin improvement.
None driven by double digit percentage revenue growth in capital equipment and growth in health tech, which more than offset of soft commercial aerospace demand environment.
The sequential improvement was due primarily to strong growth in 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 in 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 in H P. S.
Moving on to some additional financial metrics <unk> net earnings for the quarter were $26.3 million or 21 per share compared to net.
Net earnings of $13.3 million or <unk> 10 per share in Q2, 2020, and net earnings of $10.5 million or <unk> <unk> per share in 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.
The improvement was driven by strength in H P S and capital equipment, partly offset by headwinds in the 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 in 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 per cent 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.
Per S. Adjusted earnings per share of 30 cents was up 5 cents year over year due to higher non I FRS operating earnings and lower interest expense <unk>.
Sequentially non <unk> adjusted earnings per share were up 8% driven by higher non <unk> operating earnings.
Second quarter non <unk> adjusted.
ROIC of 13, 7% was up 0.8 per cent 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.
Last year as we continue to support growth in our Hps business.
Inventory turns were 4.4 turns in the second quarter up from 4.0 turns last quarter, but down from 4.9 turns in the prior year period.
Capital expenditures for the second quarter were $10 million or just less than 1 percentage of revenue.
Period, non <unk> 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 $20.9 million in the prior quarter. This is now our 10th consecutive quarter of delivering positive non <unk> free cash flow.
Cash.
He is 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.
In the second quarter, we incurred a 3.
Cycle dealers of restructuring charges or <unk> <unk> per share to further adjust our cost base to better align with changing demand levels in 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.
As of year over year, and up $18 million sequentially come.
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.
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 or.
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.
Returns 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 last.
We're a pointer 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.
Our 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.
We continue to target returning 50.
The per cent of non <unk> free cash flow to shareholders with the other 50 per cent to be reinvested in 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 in the range of $1.4 billion to.
Our $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.
The 1.4 hour 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 32 to 36 cents.
At the midpoint of our revenue and adjusted EPS.
The year ranges non.
Non <unk> operating margin would be approximately 4.0 per cent an 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 in 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.
In our Ats end market, we anticipate revenue to be up in the low double digit percentage.
<unk> range year over year, driven by continued demand strength in our capital equipment and <unk> businesses and a continued recovery in industrial partially offset by continuing demand softness in commercial aerospace as a result of COVID-19 in.
N Ccs, we anticipate our communications end market revenue to be down in the high single digit percentage range year over.
The 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 <unk> business and.
In our enterprise end market, we anticipate revenue to decrease in the low twenties percentage range year over year due to market demand softness, particularly from server customers.
In a relatively strong comparative quarter last year.
Our outlook sees 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 of operating margin improvement.
We maintain our expectation for lifecycle solutions revenue to.
To grow in 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 mandate.
The financial metrics are beginning to reflect the benefits of the critical decisions, we made to improve the business over the last 20.
The 4 months.
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 of becoming more severe in the second half of 2021 and in certain geographies concerns are rising regarding.
The resurgence of COVID-19.
To the best of our ability we have fact of these dynamics into our outlook and feel confident that our talented team kind of effectively address any challenges ahead.
Now turning to the outlook for our segments.
In Acs, we remain on track to.
Regarding of our target of 10% revenue growth in 2021.
With continued strength in capital equipment growing momentum in industrial.
And an expectation of a modest recovery in commercial aerospace as we ramp new wins from the second half of the year.
We are on our way towards reaching our target segment margin range of 5% to 6% by the.
Rich here.
Our capital equipment business continues to experience very strong growth supported by demand tailwind and market share gains.
The demand environment in the semiconductor capital equipment market remains robust.
As we have noted before we believe that the factors driving this growth.
The end of the extended runway and are not short term in nature.
We expect these conditions to persist for the remainder of the current year and into 2022.
In the display market, we believe that spending is shifting to subsequent periods as component shortages are delaying new program ramps.
Having the city expansion plans.
We continue to anticipate capex spending growth to resume in the 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 components to exceed $700 million in revenue in 2021.
Which would represent 30% plus growth compared to 2020.
In industrial we're seeing the beginning of the demand recovery with double digit growth during Q2.2021 compared to the prior year period driven by new.
The business largely in energy storage and EV charger market.
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.
Right.
We expect year over year growth in industrial to continue into the second half of 2021.
And the A&D, while demand appears to have stabilized on a sequential basis.
Headwinds in the commercial aerospace market persist in the market remains meaningfully softer than a year ago while.
When demand in commercial aerospace market to remain depressed compared to pre COVID-19 levels into 2022, we do expect a modest recovery to materialize in the latter half of this year and should begin to see sequential improvement as new programs begin to ramp.
In our health Tech business demand remains.
We expect bust supported by new program ramps and COVID-19 related projects are all the calls for continued year to year growth for the duration of 2021.
In the second half, while we do anticipate a moderation of demand for some COVID-19 products, we expect growth in other programs such as surgical instruments.
<unk>, Robert turning to the Ccs.
Ccs segment continues to perform well the.
The strong performance is driven by our portfolio reshaping initiatives and the continued growth of our <unk> business, both in absolute terms and as a portion of our Ccs segment revenues. We expect both of these factors to continue to support strong.
In our Ccs segment into 2022.
Although the 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.
Maher deliver strong results.
The beauty of growth of 24%, primarily driven by robust demand from service providers in the 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.
The Senate revenue growth for 2021.
In the communications end market, we expect market demand to remain strong in 2021, largely comprised by service provider customers.
Growth of these customers has backfill the capacity from the Cisco disengagement.
As noted.
<unk> fully 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 in the fourth quarter compared to the prior year period.
In our enterprise end market.
The demand.
Although alignment continues to be relatively soft, notably from silver customers.
We expect the these market conditions will persist for at least the duration of the year.
As we enter the second half of 2021, we are pleased that of transformational efforts are yielding results of momentum.
Amanda the venues to build.
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 for the balance of the year remain unchanged are returned to the absolute growth margin expansion, including Ats returning to its target margin range and execute.
Continuing a disciplined capital allocation strategy.
I was moving up to 2022.
We expect the market to remain dynamic. However, we believe that robust secular tailwind strong operational performance and the ramping of new programs bode well for Celestica as a result.
Execute assuming that the severity of supply chain constraints expected for the remainder of 2021 do not worse than we.
We anticipate revenue to grow in 2022 compared to 2021 and are targeting to generate $6 billion or more of revenue for 2022 with operating margin within our target range.
Of 375 to 4.5%.
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 navigating any challenges the.
Of the commitment talent and resiliency of our entire global team remains the 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.
Of the immediate and long term future of of our company.
We 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.
<unk> asked the question you will need the press star 1 on your telephone do we get all of your question.
Press, the pound or Heskey, please standby, while we compile the Q&A roster.
Your first question comes from the line of Dennis must capillaries from BMO capital markets. Please go ahead.
Good morning, and congrats on the very strong quarter.
<unk> historically, you haven't been of specific in terms.
The providing color 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 of our customers, giving you maybe a longer lead times as a result of that or does that also speak maybe to your confidence on.
Of the stability of some of the macro trends like in capital equipment.
Yeah, a little bit of both.
Thanks for the recognition of <unk> on a strong quarter.
And much of our business because the supply chain constraints are so prevalent in the lead times of extended we have several customers lot of thing.
The skimming the order of horizon, when basically the same with some of you to build it we will take it 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 of what we've been able to book.
It gives us confidence.
Then lastly, with.
Just the.
<unk> secular tailwind that we're seeing in the majority of our markets and I would even say even in a and b, we're starting to see.
The recovery starting to happen because of the confidence to kind of do some foreshadowing of what we think of 2022 of coming on.
Great and then.
In terms of the supply constraints.
$30 million impact on revenue this quarter.
What are you assuming it's going to be the upcoming quarter. I think you commented that it seems to be getting worse not better.
Yes, it is certainly getting more severe.
The stepping back from.
I think we got a jump on it.
We saw this happening in the second half of last year. So we extended our lead times.
With our suppliers, we asked the work closer with our customers to make sure they opened up the 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 of 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 is largely not perishable effect. The demand is coming in stronger than our guidance range. So if we're able to push through and solve some of these shortages are there is a possibility for upside as well.
And lastly, I would.
I would say that.
Yeah.
With an H P S.
We've got a lot of supply chain resiliency and toward design process, which has proven to be of benefit and being a design of authority with an H b O sort of giving us some incremental leverage versus some of the EMS players. So at this stage of the game I would say it would be we're starting off the quarter.
With a higher amount of revenue, that's gated by materials and sort of a 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.
Thanks.
Okay.
Your next.
The question kind of from the line of first.
And by the client.
From Bank of America. Please go ahead.
Yeah. Thank you for taking my questions. The C. C of segment saw a pretty strong sequential margin improvement.
I think the the prepared remarks, you also talked about some 1 time disengagement of game.
Can you just help US bridge the sequential improvement from 311 percentage of 3 planes.
Per cent.
Hi, Ritu.
Yeah.
Yeah, So I would say that overall the strong performance of Tcs.
In line with our expectation of high concentration of HTS.
And it has performed very well in the quarter and then of course revenues were up sequentially.
In terms of the recoveries were actually quite pleased by it as you know we went through a long disengagement and along the way there the number of various items I need to be negotiated with our end customers we were able to.
Operationally execute very well and had the number of signed releases in the quarter, where we were able to.
Essentially to get those recoveries revenue would've been working towards for quite some time.
But even as we go forward, we continue to expect the Ccs business has been of performance.
Very well as the HTS concentration continues to grow.
Thanks for the clarification on the mandate.
Wanted to ask the on the guidance for fiscal 'twenty 2.
I think the margin guidance was that you would be within the 375 to $4.5 per cent range I just wanted to clarify that because even this quarter you were in the range Oh are you, saying.
Saying that the U.
For the full year fiscal 2020 fiscal.
Fiscal 'twenty 2 you are going to be in that range of.
Or do you think that every quarter of the.
Here, you're going to be in the range.
Uh huh.
Yeah, so probably a little bit early for us to give us the specific from the quarters.
Because of course, we're not giving guidance.
The full year, but what I would.
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 in the second half is continuing into 2022 as you know we do have a little bit of seasonality in our business in terms of Q1 is lower than when you look at the trailing quarters, but overall.
All the fundamentals are continuing to strengthen.
We do feel comfortable to be in the target margin range for the entire year.
And how each of the quarters play out we'll give more color as we get closer to it.
Okay. Thanks for that and just from my last question.
I think you talked about the display market.
Mike hit the pushing out a bit.
Do you expect that to some of making the first half of the next year or is there any any color on when that might kick into the metric.
Hi real flow.
No right now I think we're seeing the majority of the ramping happening in the 23.
Relative to the 22.
Reason being some of the chip shortages.
Slowing down the introduction of new technologies so the.
The OEM the people buying the capex equipment lots of flowing new product launches and it was the result of that it's 1 of the go on some of our capacity expansion plans.
So we.
We're expecting.
The majority of the ramps are actually been pushing rate and we expect with the happened towards the end of 'twenty 2 into 'twenty care at the stage of again.
Got it thanks for all of the detailed 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 the factset in terms of the.
6 billion versus consensus expectations.
Between this quarter and the last quarter, what's sort of the bigger stuff.
Sales that you've seen in the market.
And then if you could sort of rank order of though is as we think about 2022.
Hey, Todd.
Thinking about that.
I think the biggest change was our conviction in what we're seeing in capital equipment.
The severity of.
The the chip shortages are the.
Yes.
Spending strength that we see out of the end Oems on adding capacity.
The investments that people are making.
And we will be making and the adoption of 3 nanometer nodes zone.
I'll expect it to accelerate.
Accelerate.
And Keith.
The semiconductor capital equipment the <unk>.
Spending very robust so that's giving us a lot of confidence moving forward on top of that we've been actually within.
A couple of 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 go faster than the market and next year.
Have been gaining share and high level Assembly and machining for new investments in robotics, we picked up some new customers in display we have.
Been making from investments in new verticals.
And frankly being the largest and.
And the most capable player out there relative to our peers.
Turning to us, especially in these times, because we've been able to meet.
To meet their capacity.
Yeah, basically deliver on time and be able to ramp efficiently. So that's giving us a lot of.
The confidence on top of that.
The strength that we're seeing in our hps business in terms of pure data set of 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 increase outsourcing and health Tech the seeing a recovery of our industrial markets.
And our defense markets.
We are starting to pick up based on new program wins, and we're seeing some good growth.
Coming out of our commercial aerospace again moving into the back half of the air in the next year does that have has been picking up a little bit the MRO markets affect the term. So its the combination of a lot of different things.
Yeah.
Thank you for that.
Just on the aerospace and defense it sounds like Youre being cautiously optimistic because of that.
Essentially a material swing factor.
As we go through 2022 could be could you just share what the.
Some of the upside items could be in.
Well, what what should we watch for in terms of that actually coming through.
Thank you.
Yeah, and in terms of 2022, and A&D I wouldn't call. It of material swing factor, we are counting on a gradual recovery of the A&D market.
Now what we're seeing into the back half of the year.
Of that everything a little bit of a pickup in defense.
Say about <unk> of 25 per cent of the growth the balance of the growth of coming out of commercial aerospace, it's being led by new programs.
<unk> from market recovery in single aisle also in business aviation some of the dual aisle of starting to pick up a little bit as well.
Where do you see what.
What the analysts sort of thing the industry analysts regarding our commercial aerospace is the 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 tracking.
Right.
Last question.
On the commercial aerospace you had.
On the the 737 Max program. It is does that need to have a significant.
Turnaround.
For you to achieve these goals or is it the <unk>.
Single aisle in the defense, but can still get you there regardless of what happens there. Thanks a lot.
Yes.
Yeah, it's the latter the our exposure to 737 at the stage of the game from a percentage of revenue, it's very low single digits. So it's just the broad market.
Great. Thanks, a lot.
Yeah.
Your next question comes from Rob Young of Canaccord Genuity. Please go ahead.
Yeah.
Good morning.
You read reiterated the expectations for the capital equipment business at the $700 million, but the displays pushed out so the I guess the the semi capital business is materially better than where you thought it was.
Even a couple of months ago, and so I was wondering if you could.
Hi, Matt.
If theres any color around the magnitude of the improvement.
And then if the display business comes back in.
In the second half of 2022, what does that imply on the margin structure of the capital equipment business from those 2 businesses going strong.
Hey, Rob.
Kind of I'll start off.
All of that mandate.
For the shop on that 1.
So, yes I think.
Our views on the strength of the semiconductor capital equipment. They can have gotten more bullish.
As the year has gotten longer.
And thats been bolstered by an uptick in.
Uh huh.
And the forecast are in the mid to.
You know in the short to mid term I would say and also been bolstered by some new wins that we have so again, we're growing much faster than the market. This year, we anticipate the much to grow much faster than the market next year, So that's giving us a lot more of.
More confidence in terms of.
The display market.
It is pushing things to push to the right of the and fundamentals.
Maybe you can talk about the margin profile, but the fundamentals of that market is still intact.
When the spending does presume based on the available.
Of the trips to the support of new product launches, it's going to come in the form of increased spend there's a <unk>.
Broad OLED adoption for P CS and monitors automotive spending.
In terms of OLED displays in cars from high contrast, and robustness is picking up all the.
Mobile phones in.
The Bulls and the advanced smartphones and.
Large size Tvs minnow micro Leds advanced technology of OLED all on the horizon. Its just the question of when these product launches will occur and back that up a little bit of time and that's when the clinical what happened and I will turn it over the mandate to talk about the margin profile.
Yes.
Good morning, So as Robert mentioned, we are growing faster than the overall market right. Now we grew over 30% last year were true.
Towards growing 30% of more of this year as well and a lot of it is because of market share gains.
So semi is performing very very well from a margin perspective.
For operating at the high end of the target margin range, and that's with display being debt.
Slightly depressed levels.
Eventually we do expect the semi more moderate but its display and semi are both kind of coming in very strong we do have the opportunity to perform above the target margin range.
I think youre hitting on all of it though which is as we.
Word eventually the semi demand.
It will normalize, but we have 2 areas of strength that will we believe keep the etfs. The overall segment in the strong margin profile 1 of of course, the display which still needs to come online and then the aerospace and defense, which we expect will be of multiyear recovery.
It also.
So helpful for the couple of years.
Okay, that's great and then the.
Yes.
Our revenue net stationary instead of over a $1 billion in 2021 that says do you need to be below the pace for this current quarter and the first half. So are you expecting maybe of moderation there and then I'm just.
Trying to reconcile that with the comments around the demand from Hyperscale and comps seem to be a big driver behind H P. S. Now how durable is that demand how strong is that pipeline.
Yeah. So.
It's a great question, Rob because the HCS is just performing very very well, we mentioned that the year to date revenue.
Would you at around $500 million and the reason that we shared that we expect it to the $1 billion or more is to basically confirm that the our second half expectations are in line with the first half of it 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 the.
The strength for the $6 million 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.
As Robert mentioned from a macro perspective, maybe the center growth rates are very very high and we believe the that's continuing into next year and.
And all of that bodes very well for HTS. So.
Basically to say the second half is going to be as strong as the first half of our stronger and that momentum should be carrying into next year.
So you're a bit just the best afraid that material constraints are going to have a bigger impact on these high growth programs of that.
The VA factor.
Yeah, I mean, we've taken into accounts in our guidance and so youre hitting on it which is we believe that we have been able to account for what the challenges of reinsurance rates would be.
But we are we have an 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.
Has been basically our inability to deal with the dropping orders an upside it actually hasn't had a material impact.
The 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 could grow even faster than what we're opening.
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 of it the visibility into the $6 billion.
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 in 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.
Sure.
Sorry.
Okay.
Paul what I would say is of that overall.
The growth rate that we're expecting on lifecycle solutions.
10% of our Mark and so we talked already about the growth rate that we're seeing of the HTS side and then the Ats fundamentals, we're targeting 10% or more next year as well. So if we can achieve 10.
And lifecycle solutions or more we.
We feel that we at the very good.
The line of sight to the $6 billion on the remaining parts of the Ccs portfolio, we are targeting growth in.
The key areas that are strategic for us in.
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.
I know you've discontinued a lot and there's always moving parts quarter to quarter, but.
Sort of happy are you with.
The overall state.
Business things seem to be definitely heading in the right direction, but I'm just wondering.
How much more of sort of left to be done in which areas do you think broadly.
I'll start and I'll, let Rob the finish off maybe but from a from a revenue perspective.
Look the only tailwind right now in our numbers.
Next is from Cisco.
That's continuing to impact us on a year to year growth basis, but when you look at the portfolio. Excluding Cisco we're growing in our guidance from the third quarter indicated the same thing when we look towards the fourth quarter of Cisco is essentially going to lapse by the end and so we are targeting to show revenue growth on an absolute basis.
And in the fourth quarter.
And I'll, let Rob talk about the rest of the portfolio.
Yes, Hi, Paul.
So what does that sort of portfolio actions as I mentioned before.
The portfolio management is an active part of our strategy of App.
Being said, we are ranking number 1 the number 2 on close to 95% of our.
A question of the scorecard.
We've proven that we're pretty disciplined.
So we're not pursuing revenue per revenue.
Charlotte the 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 we're good.
And all of the areas that we want the growing.
And just to pick up.
A little bit on your first question with respect to <unk>.
Next year of.
The $6 billion of anticipation.
We just finished our strategic planning process.
What we do.
It was formally once a year in the refresh of quarterly so we went market by market account by account and we went through the bookings we went through our technology Roadmaps.
And taking all of that into account and the micro and macro environment, we feel pretty good.
About our ability to them.
Slash 2.
To everyone on the call that we plan on doing $6 million of more net.
Next year, we plan on expanding our EPS and we expand 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 any changes out there in terms of how your competitors are going to market or.
Do we think we've sort of sustained nice healthy environment with strong demand.
And yeah, but well within a couple of equipment.
Supply chain, 1 of visibility of certainly longer.
The ordering lead time, so we have much more robust.
Uh huh.
<unk> plans with our customers. So that's certainly helpful.
And within.
The.
A lot of our growth right.
Right now is on the.
<unk> is on the heels of new program wins.
And it's also on the heels of.
The broad market recovery, if you want to look at some leading indicators you look at it.
Air traffic.
And in.
The amount of the fleet, that's actually part of as soon as that traffic picks up and some of these parked aircrafts.
Start getting back in service and the OEM build rates pick up.
The protecting our order book the book up but the contracting process.
It's pretty disciplined we haven't.
Dysfunctional behavior I would add.
Perfect. Thank you.
Your next question comes from Paul driver of RBC Capital markets. Please go ahead.
Thanks, very much and good morning, I just wanted to ask a couple of questions on the production side of the equation.
When you speak of it at a high level.
And seen a lot of what was the strides of you took to mitigate some of the challenges in the Malaysia. This past quarter and then also to what degree can you move production between various facilities now.
Yeah.
Yeah, so in Malaysia the.
The team has been.
Wow.
The debt, making sure that we understand the.
The government restrictions with respect to.
The material material control of orders in terms of.
Where people could go how many people could work at different times, so we've been pretty innovative with shift patterns.
Very.
The other things along the lines to minimize the impact to our customers.
The impact of 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 of and we're able to potentially fill it out of other regions from that's been helpful.
As we move forward as well to answer your second question.
And Paul I'll, just add debt to date, when we've seen challenges in various countries because as you know we're at.
14 countries around the world.
And we do get impacted by.
Short term closures, we very quickly or are deemed to this point.
And the Central service.
And so why do we need to work with the local authorities.
To get the proper documentation of place.
We normally and as we saw in the case of Felicia are able to keep the factories running.
Sudhakar.
Okay.
And a bigger picture question in terms of production.
The 2022.
To what extent is your outlook constrained by production capacity or maybe another way to ask it is you know at what point in revenue annual revenue do you need to expand capacity.
Either bring more facilities on or I guess the mines.
That's the affiliated how do we think about capex going into 2022 and beyond.
Yes, the 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.
We probably need to make some investments on building out from additional North American.
The capacity in the some of the things that we're looking into right now.
Some of it might be in Mexico from of what might be in 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 the strategic planning process, which includes understanding of the investments that we need to make to support the order book the behalf and.
And we feel that for the large part we have sufficient utilization across the.
The factories to support of a pretty robust revenue the level of growth on the investments that we're making in the U.
These are really on the back of customer.
Orders and customer requests when we're investing green dollars in the U S for facility expansion. That's an example, we have an order book debt problems behind it and then in terms of just overall capex as we look forward.
We continue to think that the 1 in the half to 2.
Of revenue range will be sufficient we don't really need to build out.
A lot more capacity in order to support the revenue.
Okay, 1 of the things that.
Just 1 of the thing to add and later on this week, we're having a grand opening in a new hub facility in Minnesota.
That's our ISR facility to support.
The increased defense work.
I'm looking forward of the thing a brand new facility of meeting some of our customers there and not only as the day.
Defense side, but it's also supporting some of our health Tech business as well and we expanded that facility.
Of all from 50000.
Percentage of 100000 feet.
From where we were to where we are now.
Okay, great. Thanks, a lot of extra detail.
Okay.
Your next question comes from the gains ease of Citigroup. Please go ahead.
Thank you and it's very encouraging to hear.
The likes loves to talk about 2022.
Behind that can you let us know is it you have like contracts sort of give me more confidence or the the lifecycle business is just much stronger or was it you know you just want to set.
Send the message.
The 2 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 left in this year.
Hi, Jim.
We do all of a lot of conviction as we move into into 2022.
As I mentioned when you step back we.
<unk> really been working very hard on transforming our business and we think were 2 of the knot hole. If you will we're really pleased with the growth of our hbf portfolio were really pleased with the investments that we've made in our engineering capability to drive improved margin.
And the cross the.
Our Ats segment.
And going through our strategic planning process going market by market account by account.
We felt it was the right time in our transformation as we went from transformation of the optimization and how we're going from optimization for growth.
Let.
All of our investors know that we feel really good as we move into 2022 and the kind of set some guardrails of 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.
Headline news.
Net 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 we feel really good about where we have been and where we're going.
Great. Thank you so much for the additional commentary and congratulations.
Thank you Jim.
Your next question comes from Daniel Chen of <unk> Securities. Please go ahead.
Hi, Good morning, there's some comments in the industry of the chip shortage last thing even longer than expected do you think that potentially extend the semi cap strength youre seeing.
The pizza.
The second part of that a mixture of I got the first part in terms of extending but what was the second part of the sudden Stan Yes, do you think that potentially extends the semi cap strength youre seeing.
Yeah, there's different views on how long the chip shortage last week, we heard from the Intel CEO of not so long.
About the lending.
Well into a you know through the end of the 23 I think he mentioned.
My My Crystal ball is of little murky right now I do think.
The chip shortage of probably laughs certainly through the end of this year at the mid next year does it as if it gets into Capex.
Spending.
Think of the peak of Capex spending as we see it right now might be.
In 'twenty, 2 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 it.
So I don't think it's going to.
Long ago again.
Might eat my words, I don't think it's gonna be a sharp decline I do think we have very strong secular.
Tailwind for years to come in the space and again, we have been and we have we are anticipating still grow faster than the market.
Yes, Dan just to build on it which is while.
The very strong growth that we're seeing in semiconductor is maybe accelerated a little bit because of the mature constrained environment. The industry itself has been growing now since 2019.
And so even without interest rate environment, we continue to see very good long term trends happening in the capital equipment space for the things that Rob was talking about the application.
The semi.
Semiconductors.
<unk>.
Are increasing and becoming more diverse growth side.
The cycles before.
Great. Thank you.
Okay.
Your next question comes from current sorts of Stifel. Please go ahead.
Hi, good morning.
On the supply side, hoping you can just maybe discuss in a bit more detail which component of 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 the lead time perspective.
Over the past 3 months.
Then can you also.
So detail any pricing pressure you may be seeing in the extent to which you're able to pass on those elevated cost of customers.
Sure. So I think the most constrained would be semi cap some of.
The conductors I should say excuse me semiconductor of lead times of about 31 weeks right now.
It's frankly, it's about 100%.
At the normal levels.
Several of semi suppliers are asking for or the coverage through the end of 2022 are we seeing wafer fabs.
Above Max capacity of 95 per cent.
The right behind it we're actually saying the passives are becoming more constrained.
As of.
And how does have seen about a 30% increase in lead times over the last 6 months.
You know, whether it's MLC CS of resistors or capacitors.
We expect the lead times of further increases in the back half of the field, we might even get back into the allocation every time will tell.
And lastly to your point Curt material.
The rising pricing has been on the rise.
But I would say from the most part the majority of the has been being passed on.
Through the entire value chain.
Understood.
Then maybe just on.
On the working capital and cash flow side.
Of commodity we'd be thinking about cadence through the balance of the year and into fiscal 'twenty 2 given some of the dynamics you discussed.
This is Kurt.
We're pleased with the cash generation that we've already been to people to have the $52 million from the first half of the year, we're exceeding its target of $100 million for the full year of 2021.
And as we look into 2022, we're targeting average $1 more of free cash flow. We're pleased with the performance of these add on the working capital side, despite the very challenging.
Materials environment, we generated positive free cash flow for the last 10 quarters and.
Sort of expecting that to continue as well and then just in terms of the balance sheet that goes with that with our.
The leverage of 1.4 times the balance sheet is very healthy.
Right now and it gives us the opportunity to really continue to invest in the business, but getting money back to the shareholders as well.
And so we've been buying so far on our share buyback program, we're buying so far this quarter and we will continue to be opportunistic on deploying that cash.
Yeah.
Great. Thank you very much.
As there are no further questions at this time I would now like to hand, the gun for inspector of funding.
Thank you.
Thank you overall I'm pleased with our performance for the first half of 2021.
Our efforts to diversify our portfolio are yielding results.
For the lifecycle solutions, representing 60 per cent of the company's revenue.
Up 9% from a year ago.
And in Q2 of the revenue of the Companys non Cisco business grew 6% year over year and in the.
The fourth quarter. We are currently on track the post year over year revenue growth on an absolute basis. Additionally.
Additionally, our operating margin.
Continued to expand in Q2, and we posted our sixth sequential quarter of year over year of non <unk> margin expansion.
As we move into 2022, we are targeting to generate $6 billion or more of revenue with operating margin within our target margin range of $3.75 to 4.5%.
We're also.
<unk> can 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.
You as we progress throughout the year.
They think of it East conference call. Thank you for participating you may not the scanner.
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