Q3 2021 Celestica Inc Earnings Call
Adjusted ROIC.
Free cash flow gross debt to non I FRS trailing 12 month adjusted EBITDA leverage ratio adjusted net earnings adjusted EPS, adjusted SG&A and adjusted effective tax rate.
Listeners should be cautioned that references to any of the foregoing measures. During this call denote non <unk> financial measures, whether or not specifically designated as such these.
These non <unk> financial measures do not have any standardized meaning prescribed by <unk> and may not be comparable to similar measures presented by other public companies that use <unk> 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 Q3 2021 earnings presentation, which are available at Celestica Dot com under the Investor Relations tab for more information about these and certain other non <unk> financial measures, including a reconciliation of historical non <unk> financial measures to the most directly comparable ifr.
<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 information is based on diluted shares outstanding.
Let me now turn the call over to Rob.
Thank you Craig good morning, everyone and thank you for joining us on today's conference call.
The strong third quarter results reflect the resiliency of our business and build on the positive momentum that has propelled our performance in recent quarters.
Despite the pervasive supply chain challenges impacting our industry. We continue to build on our progress push ahead and gain new ground towards achieving our long term objectives.
Third quarter revenue came in at 147 billion firmly in the center of our guidance range on non <unk> adjusted EPS of <unk> 35.
Came in towards the high end of our guidance range.
And our non <unk> adjusted operating margin of four 2% was above the midpoint of our guidance range. Despite the challenging macro environment during the third quarter, our strong results underscore the importance of the strategic transformation initiatives, we have recently completed.
Our third quarter represented our seventh straight quarter of year to year operating margin improvement in the second straight quarter within our target operating margin range at $3 75 to four 5%. This marks our highest quarterly operating margin in their history as a publicly traded company.
We continue to diversify our business as our lifecycle solutions portfolio grew 15% year to year.
Driven by another quarter of double digit growth in our Ats segment, and 20% plus growth in our hardware platform solutions, our hps business.
Lifecycle solutions represented 60% of our consolidated revenues in the third quarter up from 50% a year ago.
In the fourth quarter, we are targeting to achieve two important objectives that we set out at the beginning of the year.
First.
A return to topline growth since our disengagement with Cisco.
Second we anticipate that our Ats segment will reenter the target margin range.
We also anticipate the closing of our acquisition of PCI to take place next month.
We expect will further enhance our portfolio and add key capabilities to bolster our presence in attractive growth markets.
We believe that achieving these important milestones during the fourth quarter will position us for a strong finish to 2021 with solid momentum as we head into 2022.
Before I offer some additional detail on our business outlook I would like to turn the call over to Mandy who will provide you with additional color on our third quarter financial performance as well as our guidance for the fourth quarter mandate over to you.
You, Rob and good morning, everyone.
Third quarter 2021 revenue came in at 147 billion.
At the midpoint of our guidance range revenue decreased 5% year over year and increased 3% sequentially.
Our non Cisco revenues grew 6% year over year and grew 4% sequentially.
We delivered non <unk> operating margin of four 2% 20 basis points ahead of the midpoint of our guidance range driven by strong performance in both segments.
Non <unk> operating margin was up 30 basis points on both a year over year and sequential basis.
Non <unk> adjusted earnings per share were <unk> 35 towards the high end of our guidance range of 30 to 36.
And up <unk> <unk> year over year and up 510 sequentially. This marks our highest EPS in nearly five years.
Ats revenue was up 12% compared to a year ago in line with our expectations of a low double digit percentage year over year increase sequentially.
Sequentially Ats revenue was up 5%.
The year over year revenue growth in Ats was driven by a continuing recovery in our industrial business another quarter of strong demand in capital equipment and solid performance in our health Tech businesses. This was partly offset by softness in A&D, specifically in our commercial aerospace business.
Ccs segment revenue was down 14% year over year and up 2% sequentially.
The year over year decline was largely driven by the Cisco disengagement and demand volatility within certain programs in our enterprise end market.
These declines were partly offset by strong demand from service provider customers, including in our EPS business.
And an increase in demand from certain other programs in our enterprise end market.
Our Ccs revenues from customers other than Cisco increased by 2% year over year.
Communications revenue declined 17% year over year greater than our expectation of a high single digit percentage decrease the year to year decline was primarily driven by the Cisco disengagement and demand volatility in certain program, partly offset by strong demand from service provider customers sequentially.
Sequentially Communications revenue was down 4%.
Enterprise revenue in the quarter was down 7% year over year better than our expectation of a low twenties percentage decrease sequentially enterprise revenue was up 16%.
Our hps business delivered revenue of $300 million up 22% year over year led by demand strength and new program ramps with service providers due to continued data center growth.
Turning to segment margins.
<unk> delivered a segment margin of four 3% in the third quarter up 60 basis points year over year, and 20 basis points sequentially.
This marks the sixth consecutive quarter of sequential Ats segment margin expansion the year over year margin improvement was driven by profitable growth in capital equipment, which more than offset softness in aerospace and defense.
Ccs segment margin of four 1% came in above our target range of 2% to 3% up 10 basis points year over year and up 40 basis points sequentially. The.
The year over year margin increase was driven by improved mix, including continued growth in our hps business.
Moving on to some additional financial metrics.
<unk> net earnings for the quarter were $35 2 million or <unk> 28 per share compared to net earnings of $30 4 million or 24 per share in Q3, 2020, and net earnings of $26 3 million or.
Or <unk> 21 per share last quarter.
Adjusted gross margin was eight 8% up 70 basis points year over year, and up 40 basis points sequentially. The year over year improvement was driven by growth in our hps and capital equipment businesses and lower variable compensation, partly offset by softness in A&D.
Non <unk> operating earnings were $61 3 million up $1 $2 million year over year and up $6 $3 million sequentially.
Our non <unk> adjusted effective tax rate for the third quarter was 19% an improvement of 1% year over year and sequentially.
For the third quarter non <unk> adjusted net earnings were $43 4 million compared to $40 9 million for the prior year period, and $37 9 million in the second quarter.
Third quarter non <unk> adjusted ROIC of 15, 2% was flat year over year and up one 5% sequentially.
Moving on to working capital.
Our inventory at the end of the quarter was 141 billion up $201 million year over year and up $181 million sequentially. As we continue to support growth in our hps business and increased inventory to support our customers in light of the current supply chain environment to.
To offset the working capital impacts of higher inventory, we continue to work with our customers on cash deposits when appropriate.
Inventory turns in the third quarter were $4 one turns down from four seven turns in the prior year period and down from four four turns last quarter.
Capital expenditures for the third quarter were $16 million or approximately 1% of revenue.
Non <unk> free cash flow was $27 million in the third quarter compared to $16 million in the prior year period and $31 million last quarter. This is now our 11th consecutive quarter of delivering positive non <unk> free cash flow, bringing our year to date total to $79 million.
Cash cycle days in the third quarter were 72 days up 11 days year over year and up one day sequentially.
Cash cycle days increased on a year over year basis, primarily due to higher inventory.
Moving on to some additional key metrics our cash balance at the end of the third quarter was $477 million.
Up $26 million year over year, and up $10 million sequentially combined with.
Availability under our revolver, we continue to believe that our current liquidity of over $900 million is sufficient to meet our anticipated business needs.
We ended the quarter with gross debt of $440 million.
Unchanged from the previous quarter, leaving us with a net cash position of $37 million.
Our third quarter gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio was one four turn flat sequentially and an improvement of 0.2 turns from the same quarter last year.
As we announced last month following the anticipated closing of the PCI acquisition in November we expect to add approximately $220 million of additional debt to our balance sheet through a new term loan.
At September 32021, we were compliant with all financial covenants under our credit agreement.
During the quarter, we repurchased approximately two 1 million shares for cancellation at a cost of $17 2 million.
Since commencing our CIB program in November of 2020, we have repurchased a total of $4 4 million shares at a cost of $35 9 million.
We ended the quarter with $124 7 million shares outstanding a reduction of approximately 3% from the prior year period.
We are pleased with our history of returning cash to shareholders. While also investing in our business.
While our long term capital allocation strategy remains unchanged our focus in 2022 as a result of our acquisition of PCI will be to reduce our net debt.
That being said given what we see is a modest leverage balance. We believe we also have the flexibility to opportunistically repurchase shares for cancellation when warranted.
As such we intend to commence a new in CIB program during the fourth quarter subject to necessary approvals after our existing in CIB program expires in November.
Now turning to our guidance for the fourth quarter of 2021, we would like to note that our Q4 guidance assumes a partial quarter of financial results from PCI.
We are projecting fourth quarter revenue to be in the range of 142 5 billion to $1 $5 75 billion.
At the midpoint of this range revenue would be up 2% sequentially and up 8% year over year.
This will be our first quarter with topline growth on a year to year basis since the third quarter of 2020.
Fourth quarter non <unk> adjusted earnings per share are expected to range from 35 to <unk> 41 per share.
At the midpoint of our revenue and adjusted EPS guidance ranges non <unk> operating margin would be approximately four 5% an increase of 30 basis points sequentially and up 90 basis points over the same period last year.
This would represent <unk> highest ever non <unk> operating margin in our history as a publicly traded company.
Non <unk> adjusted SG&A expense for the fourth quarter is expected to be in the range of 62 million to $64 million.
We anticipate our non <unk> adjusted effective tax rate to be approximately 19%, excluding any impacts from taxable foreign exchange or unanticipated tax settlement.
Turning to our end market outlook for the fourth quarter of 2021.
In our Ats end market, we anticipate revenue to be up in the low twenties percentage range year over year, driven by continued demand strength in capital equipment sustained momentum in industrial as well as a partial quarter of financial results from PCI.
And Ccs, we anticipate our communications end market revenue to be up in the low single digit percentage range year over year, driven by strong demand from service provider customers supported by our hps offering and the beginning of Cisco's revenue lapsing from our comparative.
In our enterprise end market, we anticipate revenue to decrease in the low single digit percentage range year over year.
I'll now turn the call back over to Rob for additional color on our end markets and overall business outlook.
Thank you mandate.
We continue to execute on our long term strategic objectives and build on our momentum quarter after quarter with the heavy lifting of reshaping and restructuring now behind US we are squarely focused on growth and maintaining strong margins as our top priority is moving forward. However, we recognize the road ahead is not without its challenges.
Pressure on component availability remains persistent and pervasive in the current business environment. The dedicated efforts and proactive approach to demand planning by our global procurement and planning teams has allowed us to secure the necessary supply to continue to achieve our revenue and profitability targets.
While dynamic we have accounted for the impact of these supply chain challenges in our fourth quarter 2021 guidance and fiscal 2022 outlook to the best of our abilities.
However, we believe that our growth remains constrained relative to its potential.
As we feel that current customer demand supports materially higher revenues.
As Randy mentioned, despite material constraints, we anticipate a return to topline growth in the fourth quarter and operating margins of four 5% the highest in plastic of history as a publicly traded company.
In addition, I would like to reaffirm our 2022 outlook of at least $6 3 billion in revenues with lifecycle solutions growing 10% or more in operating margins between four and 5%.
Now turning to the outlook for our segments and Ats, we are on track to achieve our 10% revenue growth target for 2021 on an organic basis.
Additionally.
We continue to expect our Ats segment margin to reenter our target margin range of 5% to 6% during the fourth quarter.
Our Ats segment results for the fourth quarter are expected to include a partial quarter of results from PCI.
Our capital equipment business continues to experience exceptional strength supported by robust secular tailwind and market share gains with another quarter of strong performance our capital equipment business remains on track to exceed $700 million in revenues in 2021.
Which would represent greater than 30% growth compared to 2020.
We continue to believe that the dynamics supporting this growth are not short term in nature, providing an extended runway for continued strength in demand.
As such we reiterate our expectations for strong growth into 2022.
Our industrial business continues to build momentum and posted another quarter of year to year revenue growth.
We expect this momentum to continue and anticipate year over year and sequential growth in the fourth quarter, driven by new program ramps in such areas as EV charging energy generation and smart metering.
With the anticipated completion of our acquisition of PCI next month, we will also begin to consolidate <unk> revenues into our industrial business further boosting our revenue outlook and margin profile to exposure to new customers and end markets.
We expect <unk> portfolio as well as our existing industrial business to achieved solid organic growth in 2022.
Our A&D business continues to show signs of stabilization registering modest sequential growth for the second straight quarter.
We expect this initial momentum to continue into the fourth quarter and into 2022 supported by New program wins. However, we expect commercial aerospace demand to remain depressed relative to pre pandemic levels into 2022.
In spite of the soft near term outlook, we continue to make long term investments to enhance our capabilities in our A&D business in July we announced the opening of our April comp electronics facility in Maple Grove, Minnesota, a state of the art 110000 square foot facility.
And to support customers in the highly regulated aerospace and defense markets.
As well as the industrial and energy spaces bookings have been strong since the opening of the facility. Additionally, the site is also in the process of obtaining the necessary regulatory certifications to support customers in the health Tech market.
Our health Tech business registered a very strong third quarter, while demand remains robust we expect growth rates to moderate in the short term as COVID-19 related demand is replaced by new program ramps, we expect our health tech market to continue to grow into 2022.
Fueled by these new program ramps.
Now turning to Ccs.
Our Ccs segment continues to achieve excellent results.
Registering a sixth straight quarter with segment margin above our target range, despite revenues being lower year to year as a result of improved mix, including growth in our hps business and our disengagement with Cisco.
Our hps business continues to perform well and remains on track to exceed $1 billion in revenue in 2021.
With this growth momentum and anticipate it to continue into 2022, we expect to maintain Ccs segment margins comfortably within our 2% to 3% target range or higher.
Looking ahead.
We also expect our Ccs segment to realize a return to topline growth in the fourth quarter on a year to year basis as the revenues from Cisco start to lapse on a comparative period.
Our hardware platform solutions business has posted year to date revenues of more than $800 million representing.
Representing 23% growth compared to 2020 was the primary driver being consistent demand strength from our service provider customers.
Our hps business has achieved this impressive growth in spite of the challenges related to component constraints.
Component constraints, notwithstanding our opportunity funnel and general market outlook remains very positive. We now expect hps to achieve greater than 20% revenue growth for 2021 versus 2020, and anticipate growth of 10% or more in 2022 compared to this year.
Given its growth prospects, we continue to invest in hps and recently expanded our footprint by establishing a center of excellence that will support Hps engineering in Richardson, Texas.
750000 square foot facility, not only addresses our customers' desire for additional U S based capacity, but bolsters, our rack integration capabilities, thereby strengthening our relationship with Hyperscale.
We're aiming to consolidate their supply base to partners with full lifecycle solutions.
And communications end market.
<unk> is expected to remain strong through the fourth quarter.
Largely driven by service provider customers, we anticipate year to year growth in our communications end market to resume on an absolute basis in Q4 of 2021 for the first time since the completion of our disengagement with Cisco in 2020.
However, as mentioned our growth outlook remains tempered as communications revenues are likely to continue to be impacted by material constraints. Despite strong demand.
In our enterprise end market. The strong demand we are seeing in storage is expected to be largely offset by continued softness in computing.
We expect these dynamics to persist during the fourth quarter, though year to year declines in enterprise revenues are stabilizing.
As we look to the fourth quarter. Our business has reached an important inflection point I'll focus has shifted from reshaping and transforming our portfolio.
So achieving a return to absolute growth and building on our momentum I want to thank our entire global team for their dedicated efforts, which drive our performance and enable us to achieve our goals and with that I would now like to turn the call over to the operator to begin our Q&A session.
Thank you and as a reminder to ask a question you will need to press Star then the number one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q&A roster.
Yes.
Your first question comes from the line of <unk> Belichick carrier with Bank of America.
Alright, Thank you for taking my questions.
The first question for Mandy Vegas.
It looks like inventory was up 15% sequentially and Youre guiding for Q revenues up 2%. So can you give us some details on what that mix of inventory was how much raw materials, how much lift.
And how should we think about cash conversion cycle and free cash flow in fiscal 'twenty two.
Good morning, <unk>. Thanks for the question.
Inventory is up as you've mentioned and we are taking a long term view right now on how we're managing the balance sheet. The demand as we've talked about a few different times is quite strong for 2022, and we are working with our customers to bring in the inventory that is needed in order to satisfy that demand now we are <unk>.
Mindful, though of maintaining the right level of returns we are working with our customers. When we can to get cash deposits. One of the things you'll notice is that our deposits are also up materially on a year over year basis, and then we're also working with our customers on carrying charges when we're not able to necessarily get the deposits because we continue to focus on ROIC.
From a cash perspective too early to tell with the 2022 is going to look like yet, but what I will say is that despite the inventory growing almost $200 million on a year to year basis, we still generated almost 80 million of free cash flow on a year to date basis, where part.
Targeting positive free cash flow in the fourth quarter, but we're mindful that we do want to get over the $100 million Mark and we're working through right now our plans for 2022.
But right now our focus really is on being able to fulfill as much of the demand as we can because it is quite strong.
Okay. Thanks for the details on that.
It looks like Youre going to ask <unk>.
And for Q.
You announced the <unk> acquisition, which is supposed to close in the fourth quarter given given those can you help us.
And remind us of your capital allocation priorities, how should we think about the priority of further acquisitions versus buybacks versus debt pay down.
Yes, absolutely.
<unk>, we have a good track record of generating strong free cash flow and.
And we also have maintained our long term strategy of returning half of it to shareholders through share buybacks over the long term and we've done a very nice job on that if you go back over five years or frankly, even over 10 years.
On the existing NCI program it does expire in November.
Under the program that we have right now so far we've repurchased four 4 million shares for cancellation. So not the entire program was used but enough of it was used to take advantage of opportunities in the market at certain times.
On a go forward basis, we are looking to open up a new program likely in December so that we can continue to be opportunistic on share buybacks just for your understanding under the under the filing that we intend to make with the GFX, we can repurchase for cancellation up to 9 million.
We however, we'll probably use about $3 million of that for stock based compensation. So you can think about it as a maximum amount of around 6 million shares under the new program that.
That being said our priority right now as we go into 2022 is number one to generate strong free cash flow and then to pay down debt as we go through the year, we think that that puts the company in a strong position our balance sheet will still be strong even after the PCI acquisition, but this just gives us additional flexibility.
But we will and we are willing to and we have the capacity to act on share buybacks. If we need to if we find that the stock price is not reflective of what we're doing we are willing to go in there and make opportunistic purchases.
Okay. Thanks for that and if I can just sneak one more in for Rob.
On the communications side, you had guided down high single digits. It looks like it actually was down 17% year on year.
Can you just give us some details on the end markets like what did you see an optical was there any.
Networking was there anything stronger or weaker than the other.
Yes, what we saw in the third quarter Grupo was.
Very good strength in networking.
Strength in.
HP us and also some EMS programs as well.
But it was a little down from our initial expectations driven by.
Some shortages that cleared late in the quarter, but not in time for us to get it out the door.
Okay. Thanks for all the details congrats on the execution.
Thanks Robert.
Yes.
And your next question comes from the line of Paul Treiber with RBC capital markets.
Thanks, very much and good morning, I was just hoping that you could speak to the sequential quarter over quarter trend in hps.
From Q3 to Q4 at least what's implied in guidance is there any seasonality there or is.
Or component shortages, but maybe headwinds to that business that growth.
The deceleration in growth expected for Q4.
Yes.
So some very good growth in hps in Q3.
Paul and moving into Q4, we still see some very strong growth, what's really happening on a sequential basis is really just tougher comps we're seeing some nice.
Ramps and growth in networking.
And also moving into Q4, we're also seeing some growth in compute as well.
And shifting gears and looking at the supply environment in regards to the constraints.
Can you comment is $30 million headwind. This quarter are similar to last quarter I think on the last call or comments that the <unk>.
Environment will get more challenging.
What happened during the quarter that allowed you to mitigate that potential greater headwind.
Yes. Thanks for the question mid last year, I think we realize that we're going to be heading into the supply chain constrained environment for leaf through the end of 'twenty. Two so we started adopting our processes our procedures our organization structure put new tools in place and all those things are now in full force.
So I have to say right now we have very good visibility into our supply chain with these new tools and processes and while the situation is very dynamic I think we've demonstrated some very good resilient thus far.
And frankly, we're very good at managing volatile variables. That's what you have to do in these days and we've just been managing to the dynamic environment and every quarter is a new quarter, but we feel good about our team our processes and our ability to navigate through.
The road ahead.
And just related on the supply chain, but when you think about it from a downstream point of view just in terms of like global freight and getting the products to your customers and the backlog that we're hearing about in ports and whatnot are you seeing challenges in terms of shipping products to your customers or is it are you.
Seeing delays and lengthening of goods in transit.
Compared to historical.
The ranges that you've seen.
Yes that is certainly we're certainly seeing that that hasn't been the main impact for us.
We've been using different modes of transportation. We also have done a very nice job of regionalization and localization of the supply chain. So we have less product going across the ocean. If you will based on where our.
The final mile is done and that certainly helped us to be.
You're able to navigate through these.
Turbulent times.
Alright, thanks for taking my questions.
And your next question comes from the line of Thanos, Marcia Paula with BMO capital markets.
Hi, good morning.
Rob can you speak to just overall demand visibility I mean, obviously there is uncertainty in the supply side, but given longer lead times I'd have to imagine that your demand visibility.
Exceptionally strong at this point would that be a fair characterization.
Yes, fair enough that that would be.
Based on the extended lead times.
That's going on.
We've been working with our customers <unk> been pretty successful in doing that to extend their order books are to cover at least the long lead material. So our demand visibility is quite strong many of our customers, especially in the hyperscale space or if you could build it we will take a type of mentality and giving us firm purchase orders.
And in those types of environments, we've been doing our best to fulfill their demand, but frankly, what we don't get in one quarter, we will try to get in the subsequent quarter.
The majority of what we're seeing is non perishable demand.
Okay and remind us in terms of your current expectations for flat panel.
Is the expectation that they will remain subdued for much of 2000 to perhaps picking up in the latter part or what's your current thinking there.
The display market is I think going to be a little subdued into 2022, but the positive news is that because of our Korean footprint, we've been actually able to gain a lot of market share.
With semi cap equipment in Korea based on the location and the capabilities of that site so within semi cap you're aware.
The market share leader in there we've been gaining shares we've been growing faster than that.
The broader market, we have a fantastic footprint, we do new product introduction in the U S and we have factories in Malaysia, and the get in Korea. So while the display business is down in Korea, We're happy that we're able to ramp new semi cap program.
Okay, Great I'll pass the line. Thank you.
And as a reminder to ask a question you will need to press Star then the number one on your telephone keypad.
Next question comes from the line of Jim Suva with Citigroup.
Yes.
Thank you very much could you.
Shed some insights on the enterprise trends.
What you are seeing there it looks like that they were down year over year.
The reported quarter and your outlook also end.
I don't know, if thats comparisons or some inventory digestion.
What's going on there.
Sure Jim So in enterprise in Q3, we saw some demand softness in compute that was partially offset with some strength in storage.
We're seeing the same dynamic into Q4 as well growth in storage, both in flash and HDD, but some softness in compute the softness in compute is really driven by tough comps from a year ago.
Okay.
Okay. Thank you so much.
Welcome.
Thank you. Our next question comes from the line of Robert Young with Canaccord Genuity.
Hi, Good morning, just curious some of the challenges around supply chain and some of the.
The challenges Youre customers are sooner or are they are they looking more closely at outsourcing opportunities with companies like <unk>.
The addressable market is starting to grow.
Particularly on the diversified side of the business.
On the diverse.
With respect to the supply chain challenges what were seeing.
As a higher renewal rate given the supply chain challenges on existing business its hard frankly to <unk>.
Transfer.
Work from one supplier to another supplier or go out on a competitive bid based on the supply chain constraints, we're seeing higher renewal rates.
We're also seeing.
In terms of increasing outsourcing trends, there's a tremendous amount of new product ramps that we have an ats that we've won for a.
A year ago year, and a half ago and those are just starting to ramp now and into into next year. So going through a digestion period of growth now once we were able to get.
These product certified and get the supply chain flush.
We're looking forward to a very strong 2022.
Okay, and then I wanted to ask maybe an extension of Paul's question earlier around the.
The hps growth.
More focus on 2020 to the 10% growth in 2022 seems as though it's a deceleration even if you consider the tougher comp and especially I think you said the inventory growth is related to hps, So I'm trying to reconcile.
The growth in inventory against this Hps guide of 10% growth in 2022.
Yeah, Rob. Thanks for the question I think we said, 10% or more I think at this stage of the game, we certainly believe it will be more.
From where we are now we have a very full pipeline the end market dynamics.
Still quite strong we have leading positions in each element of the rack, if you will in storage and compute.
And in networking.
The demand environment remains strong so I think that's probably a conservative estimate on our part.
Add to that Robert.
As you are aware a lot of our hps product does go into data centers and the if you just look at the data center market itself. It has a pretty attractive growth profile next year high single digits or so and we have as we've shown this year and last year, we are growing in.
Excess of what the market is doing.
Okay. One last little modeling question, if I could the guidance for SG&A is a big step up I assume part of that is related to PCI and so should we back yes part of it is related to PCI and then the other part of it has to just do with the timing of how we.
Model, our variable compensation, we have a larger expense in the fourth quarter.
So while it looks like a bigger numbers sequentially, it's not as big on a year to year basis.
So should we Shouldnt expect that to go up again in Q1, given the part contribution from PCI. It should come down after the company, yes. It will start you'll start to normalize we typically we typically have lower SG&A in the first half of the year versus the second half.
Okay. Thanks.
Thank you.
And your next question comes from the line of Todd Copeland with CIBC.
Yes, good morning, I had a call.
Questions, if I could firstly on PCI, what is the implied contribution in the fourth quarter.
Yes.
On revenue and EPS or margins.
Yes, so no problem.
The revenue right now we've assumed a $50 million in the $1 5 billion guidance number.
I will say that on a go forward basis, we won't be talking about the profitability, specifically, a PCI, but we have put it in at approximately 10%.
Ebs, so operating profit in the fourth quarter and then as you know as we go into getting the actuals. It will be part of our industrial business and then the profit will just be included in overall ETF.
Great I appreciate the granularity.
Second question, if we think about that roughly 10% growth into 2022 or $6 3 billion in revenue.
Given extended lead times in your view of supply chain for 2022.
How much additional investment in inventory is required to get to that $6 3 billion can you just talk about the puts and takes around that thank you.
So when we start off with the $6 3 billion. So as you know before the PCA acquisition was announced there was a $6 billion number and essentially what it implies is 10% growth on our lifecycle solutions portfolio, we've indicated that we're expecting ats to grow.
10% next year and that we are expecting hps to grow 10% or more so if you put 10% on our lifecycle solutions that pretty much gets you from 2021 numbers to $6 billion number next year and then we add PCI to that.
In terms of the inventory build is a dynamic situation right now because some of the inventory that we've already brought in house is to go and support some of the revenue growth as we go through the year. So we've never of course, given our inventory forecast, but what I would say is that.
We have already been investing in our inventory and we don't expect material.
So on a go forward basis, if we were to make some additional strategic investments, though we will be working with our customers to help support us on that and so as I mentioned at the beginning of the call.
We work with our customers on cash deposits to help offset our inventory.
Frankly internally, we look at inventory on a cash adjusted basis and in other instances, we will look to them for carrying charges in order to maintain the RFC.
Great. Thanks for that and then just if we were to sort of think through the unwinding of that.
Given the view of the world It sounds like you wouldn't get the working capital.
Flow back into the business likely until 2023.
I just think about that.
I think it's fair to assume that inventory will be elevated as we go through 2022 now of course understanding that AP has also elevated.
So when one starts to unwind the other will unwind as well.
Okay.
And then the last question if I could on the cap business semi cap equipment business.
What is the implied growth rate in that for 2022 any any color around that would be appreciate it thanks very much.
Yes, hi.
<unk> growth rate for 2022.
I would say is double digits.
And again the market for 2022.
The way we're looking at it is.
About 12% and we're feeling that we're going to be able to grow faster than the market.
Based on market share gains and a lot of those.
A lot of that is bolstered by the fact that those programs are won and now rapid.
Great. Thanks, a lot appreciate it.
Okay.
Okay.
And then as a reminder to ask a question simply press Star then the number one on your telephone keypad. Your next question comes from the line of Daniel Chan with TD Securities.
Hi, Thanks for taking my questions, Rob just to follow up on the higher visibility getting from the longer lead times do you think this trend of having these higher visibility continues. After these disruptions are over I'm sure. This is helping you with your planning and you'd like to like for it to continue going this way.
Interesting question I would like to think.
Yes, because the tools that we've developed new SIOP rhythms that we've developed.
As of analytical tools that we've been working with our customers on.
To help forecast demand.
Moving forward.
It's hard to predict.
We will go back to prior world.
Increased visibility will be maintain moving forward. So among certain of that will be at least for 2022, though I think this visibility will stay strong.
Okay. Thanks for that.
And then.
<unk> diverse geographic footprint and you being you seem to be less impacted by the lockdowns than maybe some of your peers has that allowed you to have any competitive displacements as customers try to get more supply.
Yes, we've been navigating through the Malaysian.
Issue and also some of the power issues and try.
Ana as well based on our footprint and our shift patterns.
There.
Creative ideas in terms of picking up share relative to that I wouldn't say that that has been a driver one way or another.
Allowing us.
To remain resilient, if you will and serve our customers through the turbulent times.
And Dan maybe I'll, just add to that as Rob mentioned in his remarks prepared remarks, we have we are investing in expansions in geographies like the U S. We have.
Have opened up a new facility in Minnesota to service a lot of our Ats customers and also.
Taken over facility in Texas in order to support our growth in Hps and <unk> integration and so I think the way to think about it is those are customer driven expansion, where we have either customers that are already tied to the sites of our customers who are now awarding new business to us because we have those sites and so we'll continue to be nimble.
To respond to what customers are asking us to do.
Okay. Thank you that's a very good it's.
Very good point, we're really quite excited about our investment in Richardson, Texas Thats really the next logic.
The logical progression and the value we provide to our customers and a lot of strong interest from customers in <unk>.
Filling up that site.
Operator are there any more questions there.
The next excuse me and at this time, Sir there are no further audio questions I will now hand, the call back over to Mr. <unk> for closing remarks.
Thank you.
With our performance in the third quarter and our momentum as we move into the final quarter of the year and closeout 2021 based on the midpoint of our fourth quarter guidance. We're on track to print a very strong year in the fourth quarter. The company is on track to achieve absolute year over year growth of the revenues from Cisco Star collapse on our comparative period and operating margins in 2000.
'twenty one are on track to increase by 50 basis points year over year to 4%, while adjusted EPS is on track to increase by more than 25% compared to 2020.
And while the world continues to react to the supply chain constrained environment. We have successfully adapted our operations to navigate through this dynamic environment and were excited that 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 all for joining today's call I look forward to updating you.
As we progress throughout the year.
Yes.
And thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.