Q4 2021 Celestica Inc Earnings Call
Okay.
Free cash flow gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio adjusted net earnings adjusted EPS adjusted SG&A lifecycle solutions revenue 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 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 Q4 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.
<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 in the fourth quarter.
She has several important milestone capping a challenging but successful year.
Our company closed the acquisition of PCI, our first acquisition in three years.
It has been immediately accretive to our financial performance.
Accelerated our portfolio diversification efforts.
The return to top line year over year revenue growth in the fourth quarter after successfully disengaging with Cisco.
And we recorded our highest non IRS operating margin ever for the second straight quarter in a row.
In spite of a dynamic macro environment Celestica continues to execute well.
On our key objectives.
Answering our long term strategy.
Our fourth quarter revenue came in at 151 billion slightly higher than the midpoint of our guidance.
While non ifr rais adjusted EPS of <unk> 44.
Our highest quarterly adjusted EPS in more than 20 years came in well above the high end of our guidance range.
Non <unk> operating margin of four 9%.
With another high watermark for Celestica.
This represented our eighth consecutive quarter of year over year operating margin improvement and was higher than the guidance midpoint of four 5%.
With our solid progress on margin expansion over the last two years. We believe we are in a strong position to maintain our operating margin in our target range of $4 to 5% for 2022.
2021 was a great year for our Ccs segment as our hardware platform solutions business or HTS achieved a record 1.15 billion in sales.
Which represented growth of 34% compared to 2020.
As we continue to gain share and grow faster than the market.
Despite the challenges presented by the constrained global supply chain environment.
And from service providers in our <unk> business is expected to remain a driver of growth at Ccs for 2022.
Our Ats segment saw a strong revenue growth in 2021 led by our capital business, which achieved sales of approximately $750 million. We also experienced a return to growth in the fourth quarter of 2021, and our industrial business.
Looking ahead to 2022, we expect revenue growth in Acs of 10% or more our outlook is supported by continued strength in our capital equipment business.
Incremental growth in our industrial business further accelerated by the addition of PCI.
And continuing commercial aerospace recovery aided by new program ramps in defense.
While 2022 is by no means anticipated to be without its share of challenges.
We expect to build on the positive momentum we have established in 2021 and lead the company to another strong year of financial performance by executing on our strategic and operational objectives.
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 fourth quarter financial performance as well as our guidance for the first quarter and our outlook for 2022 now.
Sandeep over to you.
Thank you, Rob and good morning, everyone.
Fourth quarter 2021 revenue came in at $1 five 1 billion.
In line with the midpoint of our guidance range.
Revenue was up 9% year over year and up 3% sequentially.
A return to year to year growth was driven by double digit organic revenue growth in our Ats segment further accelerated by our acquisition of PCI.
We delivered non <unk> operating margin of four 9% 40 basis points ahead of the midpoint of our non <unk> adjusted EPS guidance range driven by strong performance in both segments.
Non <unk> operating margin was up 130 basis points year over year, and up 70 basis points sequentially.
Non <unk> adjusted earnings per share were <unk> 44 above the high end of our guidance range of 35 to <unk> 41.
This was up 18% year over year and up 9% sequentially.
In late 2021, we experienced a brief outage that temporarily impacted our operations based on the nature of the incident did not have a material impact on our financial results in Q4 2021.
Our operations are functioning at normal capacity and we do not expect any material impact to our Q1 2022 financial results from this brief outage.
Ats revenue was up 23% year over year in line with our expectations of a low 20 percentage year over year increase.
Sequentially Ats revenue was up 8%.
The year over year revenue growth in ETF was driven by continuing strength in capital equipment organic growth in our base industrial business and two months of contribution from the PCI acquisition.
We are pleased that Acs has achieved 10% or more of year over year revenue growth for the past three quarters.
Ccs segment revenue was up 1% year over year and flat sequentially.
Year over year, the Cisco disengagement offset the 5% growth we experienced from our non physical portfolio driven by strength from service provider customers.
Going forward, the disengagement Francisco will no longer impact our comparative.
Communications revenue increased by 1% year over year in line with our expectation of a low single digit percentage increase and was up 4% sequentially.
Year over year results were driven by growth in our <unk> business, which was largely offset by the Cisco disengagement.
Enterprise revenue in the quarter was flat year over year better than our expectation of a low single digit percentage decrease sequentially.
Sequentially Enterprise revenue was down 7%.
Our hps business delivered revenue of $350 million in the fourth quarter up 66% year over year led by demand strength and new program ramps with service providers supported by continuing datacenter growth.
Turning to segment margins.
<unk> delivered a segment margin of five 6% in the fourth quarter up 170 basis points year over year and up 130 basis points sequentially.
We are pleased to have delivered on our goal of having our Ats segment margin enter our target margin range of 5% to 6% in Q4 of 2021.
Also represented our eighth straight quarter of sequential margin expansion in our Ats segment.
Ccs segment margin of four 4% the highest since 2015 was up 100 basis points year over year and up 30 basis points sequentially.
The year over year margin increase was driven by continuing strength in our HPA business.
Moving on to some additional financial metrics.
<unk> net earnings for the quarter were $31 9 million or <unk> 26 per share compared to net earnings of $20 1 million or <unk> 16 per share in Q4, 2020, and net earnings of $35 2 million or <unk> 28 per share last quarter.
Adjusted gross margin was nine 6% up 120 basis points year over year, and up 80 basis points sequentially. The.
The year over year improvement was driven by growth in our <unk> business and our Ats segment as well as lower variable spend.
Non <unk> operating earnings were $74 3 million up $24 $3 million year over year.
13.0 million sequentially.
Our non <unk> adjusted effective tax rate for the fourth quarter was 16% an improvement of 3% year over year and sequentially.
For the fourth quarter non <unk> adjusted net earnings were $55 2 million compared to $33 3 million for the prior year period, and $43 $4 million in the last quarter.
Fourth quarter non <unk> adjusted ROIC of 16, 6% was up four 2% year over year and up one 4% sequentially.
Moving on to working capital.
Our inventory at the end of the quarter was $1 7 billion.
$606 million year over year and up $291 million sequentially.
Continued to maintain higher inventory levels to support growth across lifecycle solutions, while also increasing strategic inventory purchases in light of the current supply chain environment the increase.
Inventory was also driven in part by the PCI acquisition.
To offset the working capital impact of higher inventory, we continue to work with our customers to obtain higher cash deposits when appropriate.
Inventory turns in the fourth quarter with three five turns down from four four turns in the prior year period and down from $4, one churn last quarter.
Capital expenditures for the fourth quarter were $14 4 million or approximately 1% of revenue capital expenditures for 2021 totaled $52 million.
Non <unk> free cash flow was $36 million in the fourth quarter compared to $19 million in the prior year period and $27 million last quarter. This is our <unk> consecutive quarter of delivering positive non <unk> free cash flow.
Our free cash flow generation in 2021 was $115 million delivering on our target of at least $100 million in annual non <unk> free cash flow.
Cash cycle days were 75% in the fourth quarter up two days year over year and up three days 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 fourth quarter with $394 million down $70 million year over year and down $83 million sequentially.
Bind with availability under our recently expanded revolver, we continue to believe that our current liquidity of nearly $1 billion.
Sufficient to meet our anticipated business needs.
Following the closing of the <unk> acquisition in November we ended the quarter with gross debt of $660 million up $220 million from the previous quarter, leaving us with a net debt position of $266 million.
Our fourth quarter gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio was 2.0 tightened up <unk> six turns sequentially and up <unk> four turns from the same quarter last year.
Yeah.
At December 31, 2021, we were compliant with all financial covenants under our credit agreement.
We ended the quarter with $124 7 million shares outstanding a reduction of approximately 3% from the prior year period.
In early December that <unk> accepted our notice to launch a new normal course, issuer bid, allowing us to purchase up to 10% of the public float or up to approximately 9 million shares through December of 2022.
Hi.
Now turning to our guidance for the first quarter of 2022.
We are projecting first quarter revenue to be in the range of $1 4 billion to $1 55 billion.
At the midpoint of this range revenue would be up 19% year over year and down 2% sequentially.
First quarter non <unk> adjusted earnings per share are expected to range from 31 to 37 cents per share.
At the midpoint of our revenue and non <unk> adjusted EPS guidance ranges non <unk>.
<unk> operating margin would be approximately four 2% an increase of 70 basis points over the same period last year and a decrease of 70 basis points sequentially.
Non <unk> adjusted SG&A expense for the first quarter is expected to be in the range of $57 million to $59 million.
We.
State our non <unk> adjusted effective tax rate to be approximately 18%, excluding any impacts from taxable foreign exchange.
Turning to our end market outlook for the first quarter of 2022.
And our Ats end market, we anticipate revenue to be up in the low 20 percentage range year over year, driven by continued demand strength in capital equipment, a continuing recovery in A&D as well as the first full quarter of contribution from PCI.
In TPS, we anticipate.
Our communications end market revenue to be up in the high teens percentage range year over year, driven by strong demand from service provider customers supported by our <unk> offering.
In our enterprise end market, we anticipate revenue to increase in the mid teens percentage range year over year supported by strength in storage demand.
Finally, we would like to reiterate our outlook for 2022, which we discussed last quarter, we expect revenue to be at least $6 3 billion with lifecycle solutions growing at least 10% organically and our non <unk> operating margin between 4% and 5%.
I'll now turn the call back over to Rob for additional color on our end market and our overall business outlook.
Thank you Mandy as we take stock of our performance for the past fiscal year. We are pleased with our financial performance and the progress we have made towards our long term objectives.
A return to year over year revenue growth record operating margin and near record adjusted EPS demonstrates that we have been effectively executing against our strategy and our transformation is complete.
We are also pleased that our shareholders were rewarded in 2021, as our share price, which outperformed the primary Canadian and U S indices, reflecting our strong performance.
However, we have no intention of resting on our laurels and we are constantly striving for further improvement.
Our focus is now squarely set on meeting our performance expectations for 2022.
Which includes solid topline growth in combination with anticipated record non ifr rais operating margins for the year.
Which if achieved will lead to the highest ever annual non <unk> adjusted EPS.
Our efforts to diversify our commercial portfolio remained a centerpiece of our long term strategy and we are pleased with the progress we are making.
Our lifecycle solutions business saw another quarter of solid revenue growth up 36% year over year in the fourth quarter recording nearly $1 billion in sales and accounted for a record 65% of total revenue during the quarter.
For the full year 2021 <unk>.
Lifecycle solutions accounted for 61% of total sales compared to just 39% in 2017.
Looking forward to 2022.
We reiterate our expectation for lifecycle solutions revenue growth of at least 10%.
As I mentioned in my opening remarks, the year ahead will not be without its share of challenges the global supply chain environment continues to be the most challenging we have dealt with in recent memory.
And the new borrow variants, leading to further outbreaks of COVID-19 may further exacerbate positions.
The fact that these hurdles have not stood in the way of US meeting our financial performance objectives is a testament to the resourcefulness effort and commitment of our entire global team.
However, we believe that the component shortages due date, our true growth potential as we believe the demand backdrop with our customers support materially higher revenues and the absence of these challenges.
Our first quarter and full year 2022 outlook have accounted for these macro conditions to the best of our ability.
And we expect the supply chain environment will remain constrained for the medium term.
Now turning to the outlook for our segments and our ACS segment, we achieved two important goals in 2021.
First we realized a long term annual revenue growth target ending the year with 11% growth compared to 2020.
Second we achieved our goal of re entering our Ats segment target margin range of 5% to 6%.
With a strong fourth quarter.
We continue to target a long term annual revenue growth rate of 10% in our Ats segment.
For 2022.
As a result of organic growth.
And the addition of PCI, we expect ACS segment revenue of approximately $2 8 billion.
And segment margin of approximately five 5%.
If achieved this would represent approximately 20% revenue growth compared to 2021 and approximately a 100 bps of year over year segment margin expansion.
Our capital equipment business continues to exhibit exceptional strength.
Driven by market share gains new wins, and a robust demand backdrop, which we expect to continue through all of 2022, our outsized growth is supported by our global footprint.
Which we believe is tailor made for success in this market, including our presence in South Korea.
We are leveraging to capitalize on significant from a cap growth opportunities in that geography.
Our industrial business is expected to be a key contributor to Ats revenue growth in 2022.
Supported by both organic growth in our base industrial business, coupled with the addition of PCI.
A number of new program ramps as well as secular demand tailwind in several areas, including EV charging smart metering.
Automation and telematics are expected to drive year to year gains, which are expected to be accretive to our targeted long term ats revenue growth rate.
Demand in our A&D business continues to stabilize posting modest year to year growth in the fourth quarter.
We expect commercial aerospace demand to experienced a modest recovery in 2022.
Compared to the trough levels seen in 2021.
Commercial air traffic begins to normalize.
While overall defense spending is expected to remain stable in 2022.
<unk> has a number of new program ramps supported by our new facility in Maple Grove, Minnesota, which we opened in July of last year.
In our health Tech business, while we expect to see some softness in early 2022.
Through the ramping down of certain COVID-19 related programs. We expect this demand to be replaced by new program ramps throughout the year and surgical imaging and patient monitoring equipment markets.
Turning to Ccs.
Our Ccs segment recorded its highest Ccs segment margin in the past five years.
With a strong demand from service providers is expected to continue supporting EPS growth.
We reiterate our view that Ccs will maintain strong segment margin in 2022.
The margin outlet for our hardware platform solutions business remains strong supported by robust demand from our service provider customers.
We expect another year of strong growth in 2022.
The challenges presented by the current supply chain environment.
We continue to anticipate <unk> delivered strong growth compared to 2021.
In the communications end market, we anticipate year over year growth to continue throughout 2022, driven by strong demand from service provider customers, particularly in our <unk> business.
As mentioned, we believe that our growth prospects will remain tempered relative to their potential as a result of component constraints.
In our enterprise end market.
We anticipate that year over year declines in our enterprise business have largely stabilized.
We expect our annual rate to be higher in 2022 compared to 2021.
We continue to operate in an unprecedented environment as we turn the page on another year, we enter 2022 with a sense of optimism and the confidence that our company is solidly positioned to deal with the challenges ahead and capitalize on the opportunities at hand.
Our recent successes in the context of these challenges speak to our ability to execute on our plan and serves to validate our strategic vision.
I'd like to thank our entire global team and commend their efforts during 2021 review our dedication and focus our company will push ahead. Once again in 2022 and continue to make that vision a reality.
And with that I would now like to turn the call over to the operator for Q&A.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Got you.
Your first question comes from Dan Ives Master Pollock from BMO capital markets. Please go ahead. Your line is open.
Hi, good morning.
On the supply chain.
<unk> had a bigger impact on revenue in Q4 than in Q3 can you provide some color in terms of how youre thinking about that impact heading into Q1 and through 2022.
Are you assuming that it gets.
Stable from here, a bit worse or what's implicit in your assumptions.
Hi, Good morning. This is Rob yes, as we go into Q1.
Assuming that the impact in Q1 is very similar to Q4.
Now as you look out for full year 'twenty two.
Don't expect any meaningful improvements throughout the year. If you just think about what's going on in the macro environment with strong OEM growth.
Let me cap capacity that is coming online will probably be late in the year inventories are low lead times of our pricing is up so.
So we've.
We've aligned ourselves and assume that we're not going to see meaningful improvement in supply chain constraints throughout the year.
Being said.
As you can see we've been carrying fairly well through the environment.
Driven by our strong processes are strong people and we're also working closely with our customers.
On the customer sides have to add some more color.
We've been very transparent with them and as such they have opened up the horizons and in many cases.
We have increased cash deposits that we could secure strategic inventory for them.
And on the process side, we've developed a series of new automated tools and in many cases, we actually understand our customers' demand better than they do which allows us to more clearly communicate with a supplier you can get the critical supply that we need.
Okay.
Okay.
Yes.
Sorry go ahead.
Sorry, <unk> I.
I'm just going to add some numbers to what Robert just mentioned.
As you know for Q1, we are continuing to have a little bit of a wider guidance range plus or minus $75 million. So we have taken into account material constraints to the best of our ability for the first quarter and then when we talk about 2022.
We are targeting at least $6 $3 billion in revenue our demand outlook is north of that.
And so we've just done to the best of our ability we've taken into account the supply environment.
Communicating the $6 3 billion plus.
Yeah.
Great.
You don't disclose backlog, but I have to assume that.
Yet your backlog is growing and a weighted average of your backlog its probably increasing setting up your longer term visibility is that fair.
Yes that is.
Our customers.
Backlog is increasing.
Sometimes two to three fold and as such our backlog is also increasing to the same extent.
Oh.
And then finally on net cash cycle days.
Obviously inventory is increasing and dropped setting it to some extent with higher deposits. How do you think that dynamic kind of progresses over the coming months.
Yes, so it's been a tough environment as you know this year and but we're pleased that we were able to generate over $100 million of cash in 2021. Despite it.
Inventory has been growing but we've been doing that strategically and then at the same time working with customers on deposits as we go into 2022, we expect again the environment is going to remain largely consistent inventory will be elevated for a period of time, but again supported by deposits.
We are still targeting strong free cash flow in 2022, but as that inventory unwind, we should expect that from deposits will unwind as well so.
It doesn't all fall to the bottom line in terms of cash, but we've taken into account in our.
Our protection.
Great. Thanks.
Your next question comes from Robert Young from Canaccord. Please go ahead. Your line is open.
Hi, good morning, just.
On the semi cap outlook obviously.
Very strong for 2022, I'm, just curious relative to last quarter.
The outlook is better or worse, there's been a lot of capacity expansion announcements I'm trying to put that into context.
No in the public domain versus what you might have known ahead of time from your customers as the environment better today than it was three months ago.
Hi, Rob would you mean.
Sure.
When should the environment you mean, our Q4 performance relative to Q3 performance within our business or more broadly speaking more broadly and thinking about 2022.
Yes, so 2022.
Hum.
The external environment and what we're hearing from our customers and markets should be growing about 14%, 15% is what we're hearing.
Internally here, we're aligned to grow much faster than.
And then the market build the fact.
We've been frankly, just taking share and we have a new program a number of new program ramps that are scheduled to happen during the course of the year.
As of.
Carnival assembled machining robotics new customers.
In display et cetera.
But the external market that we're having phone was about above.
About 15%, 14% increase year over year from a wafer fab equipment.
Okay and that does sound better I think you said the market was 12% growth last quarter. So the market. It sounds like it's better than it was last quarter is that a fair statement.
Yes, the outlook I'm talking not about the quarter.
The outlook is higher than it was last quarter. So the outlook is increasing and it's also expanding as well what we're hearing from the market folks and our customers.
I expect this cycle if you will.
Can certainly loss throughout 'twenty, two and well into 'twenty three and many are asking us for capacity requirements through 'twenty four as well to make sure that we're able to grow with them.
Okay, and then on the the Hps gross.
For 2022, 10% or greater I was just looking at the comps.
Expectation for Q1 growth of high teens.
Think of that normally is.
A slower quarter Q1, and so I'm trying to reconcile the 10%.
The high teams expertise.
Expectation in Q1.
Visibility just lower as you go through the year or just Q1, just higher than it might normally be.
Okay.
Moving to communication the majority of the ramps that we're seeing in comp is coming from.
HTS and continued demand strength and new program ramps and networking, which is largely fueled by H.
<unk>, we're also seeing some demand strength in some existing programs as well, but the high teens is really a reflection of HTS growth, what we're saying.
Yes, and Rob, but what I would just add it.
Goes back to our 2022 commentary.
We're expecting growth of 10% or more and lifecycle solutions, which of course is inclusive with hbf and going back to the comments I shared with them. The demand outlook remains robust. What we're doing is we're also taking into account the materials environment. When we provide that color. So as we just look at Q1, which is right in front of us.
We're feeling quite comfortable.
Based on the supply environment, but of course, we continue to be cautiously optimistic that should go beyond Q1.
Okay, Great and then I didn't see an update on the target margins for Ccs.
Five 5% for 2022 days in the 2% to 3% still relevant.
Yes.
6% for Etfs in general.
What I would say that.
Yes, we expect that the performance of <unk> is going to continue coming out of 2021 and as you know throughout 2021. They were above your target margin range and so we expect strength to continue on the Ats side. We're pleased that the entered back into their target margin range of 5% to 6%.
And we expect strong performance.
Those levels or.
Possibly higher throughout the year, we gave on a full year number of around five 5% what I would say in terms of target margin. So as you know we did increase the company's range to 4% to 5% for 2022.
We really look at what the right target margin ranges are for the individual segments. As we go through the year frankly, we want to operate in the range for a few quarters.
We also wanted to complete the integration of PCI, So right now.
The higher margins from both segments is being reflected in the total company number and we'll revisit what the right ranges are over the long term with the segments later on.
Okay. Thanks for taking the questions.
Thanks Rocco.
Your next question comes from Todd Coupland from CIBC. Please go ahead. Your line is open.
Yes, good morning, everyone.
I wanted to ask you about margins as well I think street expectations for 2022.
The EPS is.
45 to $1 50, and it's more or less implying the low end of your 4% to 5% target range $4, one or something like that.
At the start of the year is that the right place to be in that target range or given you've increased the guidance range should.
Should people start to move towards the middle of that range given the momentum in your business.
Little color around that would be helpful. Thank you.
Sure.
Thanks for the question Todd, Yes, what I would say to that.
We do know what the consensus numbers are at around $6 $3 billion in revenue and $1 47, or so of EPS.
And then the implied margins are in the four to four 3% range. What I would say is is that that's at the low end of what we're targeting as you can see from our guidance for the first quarter up four 2%, which historically is our weakest quarter based on seasonality, we are targeting stronger margins at four 2% as we go through the remainder of the year.
So from a revenue perspective.
To reiterate my comments, others, we are targeting $6 $3 billion or more.
As we go through the year, where we're just temporary demand right now with some of the material constraints.
Dynamics. So all in all we believe that consensus right now is reflecting the low end of what we are targeting we are certainly targeting higher than that.
Okay and is that at this point in the year beyond seasonality is the biggest swing factor.
Supply chain plays out.
It is the biggest dynamic I would say that could flex our revenue again the demand outlook remains robust. It has remained robust through 2021, we think we've done a nice job of.
Managing through it but the impact is anywhere between $30 million to $50 million a quarter of our revenue that we could've done had we not had any supply constraints.
So we think we've accounted for that in the $6 3 billion and we don't see it getting significantly worse, but at the same time based on what we're seeing right now we don't we also don't see it getting better in 2022.
Great.
And my second question relates to the PC PCI acquisition.
Apologies if you disclose this but how much did it contribute to revenue and EPS in the fourth quarter.
It contributed.
Specifically I will this time, because it was a partial quarter.
The business closed transaction closed on November the first.
Gave us about 1% of our overall growth so ex PCI, we would've been about 1% to 2% lower.
On a year over year, Batesville and as we're going into next year as we've communicated we're expecting an incremental amount of around $300 million or so on a year over year basis.
Okay.
Great. Thanks for the color I appreciate it.
Thanks, Doug.
Your next question comes from Paul steep from Scotia Capital. Please go ahead. Your line is open.
Hey morning, maybe.
Maybe just to go back a little bit.
Robert Mandy can you can we talk about non hps Ccs and just.
The cadence there obviously.
Adam.
Theres been grossing.
Our niche programs.
My question is longer term, how should we think about recalibrating that portfolio. We went through a lengthy period of maybe removing.
Revenues in client work that might be better placed all other places where are we in that trending because it looks like you've replaced capacity in hps as a percent of Ccs will sort of tick down a little bit on a percentage basis of the mix this year.
I sort of reconcile.
Yeah.
Hey, Paul I'll start off I'll, let Rob finish what I would say is is that.
The non <unk> portfolio and Ccs is still very good business.
$2 billion of our overall revenue gives us terrific utilization in some of our key factories gives us the ability to have better buying power with our suppliers getting better pricing across the entire network and.
And so it is a very attractive piece of business. The other thing too is that it is becoming stickier because of our HPA business because when you can service a customer with both the traditional E&S offering as well as hps offering you become a more strategic supplier to that customer and so as we look into next year.
If you look at the overall growth rates of markets. It's in the low single digit rate, that's something that is not too far off of what we would expect of our non <unk> portfolio within Ccs.
But again.
We're pleased with the portfolio that we do have we've already made the tough decisions that we've had to make around portfolio shaping and so the portfolio. We have today, we think it.
It's still very strategic for us.
And the only thing I would add sorry, Rob.
The only thing I would add would be that.
Non hps portfolio on the areas of comes in.
Enterprise also enables us to actually gain more hbf content over time allows us to kind of move up the rack and offer solutions to our customers and also.
Transitioning customers from EMF hbf's over a period of time, so from enabler as well.
Okay, maybe Robert Mindy by the one who wants to start and I'll sort of two part this one.
Talk to us about what you're thinking about the global footprint in terms of where production is and may be shifting factories around you talked about opening the Minnesota facility last year.
But that's against the Capex backdrop, that's maybe been maybe more strain.
So I guess the second part of it from an <unk> deep how should we think about Capex. This year and next and then maybe the other one I believe we've cleared most of the real estate opportunity, but I think there still are some owned facilities, what's the opportunity to maybe realize some real estate unlock some value in real estate.
Uh huh.
You may deploy that capital.
Good question.
Footprint perspective.
Certainly an increased trend.
For regionalization, and we've been capitalizing on that from a couple of different aspects.
From a growth perspective as supply chains.
Become more complex.
And also as our customers want to regionalize more it's actually been increasingly amount of outsourcing.
We've seen from the customer base. So we have been.
Capitalize on that and growing.
Simply to support new customers Regionalization efforts and then secondly, based on the footprint that we have.
Many customers either to derisk, the supply chain or just.
Improved total landed cost of foster helps support multimode solutions.
So we've been kind of supporting them doing that so that's been <unk>.
Activity of outlets over the last 18.
10 months or so.
So we'll be fairly active this year in terms of maybe repositioning some of them.
Customers products to better align them with.
With where they needed to be.
But I think we have the right footprint right now to support our customers and we are looking at niche capacity expansions.
<unk> continues to grow though an empty spots.
And Paul I'll, just continue on the Capex front. So we spent about $50 million of Capex in 2021 around 1% of our revenue.
Lower than we had originally set out to do and Thats just because some projects that we were anticipating to start at the back end of this year had pushed to the right.
Along with display environment.
As we look into 2022, we are targeting closer to one 5% of revenue.
Think about it from a modeling perspective is $90 million to $100 million.
That's in line with the guidance that we traditionally give which is one 5% to 2% of overall revenue.
We're pleased though that.
We're spending that money is to support customer programs and new wins, so it largely growth oriented.
To your point about.
Owned versus leased real estate. It is something that we look at from time to time in being in 14 different countries. The dynamics is going to be different in various locations. We don't feel right. Now that is compelling reason to take any of our assets at this point and necessarily do a sale leaseback.
The business cases don't make sense in various scenarios.
But it is something that we constantly evaluate and we know that that is a source of capital.
If we wanted it to be.
Great last one and then I'll pass on.
Obviously closed PCI.
Bridge is up but it's going to quickly de lever at least.
Yes.
Okay.
Okay.
Yeah.
Paul Im sorry, I think your phone broke out.
To hear the question.
Okay.
Oh really.
<unk>.
Her them faster.
Okay.
Okay.
Paul I'm, sorry, I think the reception broke out the question didn't come through it maybe.
Let me give you another chance that that otherwise we can always put you back in the queue as well.
Hi.
Sorry, guys I will pass your lineup.
Bad reception.
Okay. Thanks.
Okay.
So, let's take that equipment will be so much better Paul.
[laughter].
Your next question comes from <unk> Bhattacharya from Bank of America. Please go ahead. Your line is open.
Hi, Thank you for taking my questions.
Can you help US bridge, the 70 basis points of margin decline between <unk> and <unk> I mean <unk>.
Ccs margins it looks like you have consistently been above the 2% to 3% long term range for over two years now I mean for the last eight quarters and on the Ats side, you're guiding I guess for sequential growth in revenues. So I'm trying to figure out what are some of the factors that are driving that margin decline.
Can you help us break that into how much is mix how much is FX how much is volume related and if you could just give us any guidance on how you're thinking about margins for both segments in the first quarter.
Sure.
Good morning, Mutlu. So what is the margin decline quarter to quarter is reflecting some moderation within Ccs as you know we don't give guidance ranges specifically at the end market level, but I can tell you that we are targeting above the guidance range or the target range and Tcs are close to above 3%.
But the four 4% that we saw in the fourth quarter was exceptionally strong.
Driven by strong.
Strong mix and some strong recoveries as well on the Ats side, we're targeting to be above the 5% again, the full year outlook for <unk>, 5.5% or thereabouts approximately.
And we are expecting to be at 5% or more.
We're working towards that and each of the quarters next year.
And then.
To answer your question, maybe a little bit more specifically on what's driving some of the moderation within Ccs that is the business, where we traditionally see seasonality.
Particularly with our enterprise customers.
So our goal would be to see margin strength in tcf going beyond the first quarter as well, but it is not unusual for CCF to have it quote unquote weakest quarter in the first quarter.
Okay. Thanks for the details on that.
Maybe related to margins I'm going to ask a more theoretical question.
You know as your capital equipment business grows I mean that should be accretive to your Ats segment margins I think you reported $750 million of revenues in that business capital equipment business in fiscal 'twenty one.
I'm trying to estimate how much more margin expansion can that business create so is there like a revenue level at which you reach steady state.
Margins in that business.
Okay.
So we're already experiencing strong margins in the business right now we've talked about this.
Some previous calls where as we continue to grow that business, we would expect that it could perform above 6% operating margin.
Not there yet from a consistency perspective, but also going to what we talked about for 2022, we're expecting further growth in seats. Yet. So we do expect incremental margin accretion from I'm, sorry capital equipment.
Incremental margin accretion from capital equipment as we go through 2022.
That being said, we wanted to make sure that we temper expectations because capital equipment demand will not continue forever and we do expect that eventually it will moderate we had been very disciplined on adding fixed costs of that business. So that we are able to weather. The next inevitable downturn, but the reason that we continue to be optimistic for the Acs business.
Is because our very large segment in aerospace and defense is operating below expectation and so we do expect that eventually when capital equipment moderates, our A&D business will hopefully be able to come right behind it and pick up any of that margin dilution. So we think we're set up for a good margin story over the next few years.
But we just want to make sure that we balance our expectations around capital equipment.
Okay. Thanks for the details on that I appreciate that.
For the last question Mandy can I ask you about your priorities for use of cash now that you have the new ntis.
How should we think about.
Debt reduction versus.
Share buybacks versus further M&A.
Yeah, absolutely so.
It all starts with free cash flow generation. So again pleased with the cash generation that we had in the 2020 $115 million, we are targeting $100 billion or more for 2022, albeit it is a challenging environment, we have a very healthy balance sheet.
Our gross leverage ratio that two points over time, it will reduce as we go through the year.
And then also our liquidity remains very strong with our refinance credit facility close to a $1 billion.
Up almost $400 million from where it was a quarter ago. So we feel like we have a lot of flexibility when it comes to share buybacks, we're going to continue to be opportunistic on those buybacks and what I mean by that is.
Does the stock price reflect what we are actually doing from an operational execution perspective, right. Now we believe that consensus estimate does not fully reflect what we are.
Aiming to do in 2022 and frankly, the multiple on the company is still trading at a discount relative to historical averages.
And so when there is weakness we are comfortable going in debt and buying back shares because we think that's a good use of cash for shareholders.
That being said, we maintain flexibility to do M&A.
Our long term priorities don't change, 50% back to shareholders.
Largely through it could be 50% of our cast generation being invested in the business, but on the M&A side.
As you know, we maintain a very very tight filter and it needs to be EPS accretive in year one.
Our OSB costs above our cost of capital by year, two or sooner has to be strategic fit for the business, we have to be able to integrate it well.
We will continue to look at M&A transactions as we go through 2022, we have both the balance sheet and the management capacity to do a transaction should the one great one coming in front of us, but we're going to be very disciplined and before we pull the trigger on anything.
Okay. Thanks for all the details congrats on the quarter and the strong margin performance.
Thanks, a lot with it.
Next question comes from Jim Suva from Citigroup. Please go ahead. Your line is open.
Thank you I have two questions and I'll ask them at the same time. So you can figure out which way you want to answer them, but one of those just mostly a clarification. When you mentioned about that you saw some recoveries in the quarter, there's lots of ways to define that some call it like recovery of Covid costs.
Although may call it the recovery of utilization rates, others may call. It like recovery from bad debt accruals or lots of other things can you just help us understand what you meant by recoveries and then the second question is am I right.
Let's go we're looking at now since it's post the Cisco disengagement that that this is the alignment and kind of the vehicle that we should look at going forward or do you still have some things in your portfolio for repositioning that we should be mindful of I know you of course have to do the integration of PCI, but it seems like.
We'll probably close to the point of the true clear.
Vehicle that we should be looking at going forward. Thank you.
Hey, Jim its maybe Peter can talk to you. This morning. So to answer your first question. When we're talking about recoveries was largely related to premiums that we're paying or freight expenses that we were able to successfully recovered from our customers during the quarter and that did.
Help us I'll, let Rob.
Maybe add on to.
Starting of an answer for the second one.
As we have said our portfolio shaping actions are complete we went through a multi year transformation. The transformation is done we're now in the growth phase and to what we're really pleased with is that we are now.
Hosting absolute growth numbers.
As we go into Q4, as we finish Q4 and as we're going and now into Q1 and all through 2022, we're looking for to see absolute growth across the company.
Of course, our strategic objectives are to continue to grow.
Our diversified set of businesses Hps and <unk>.
And again, we're targeting 10% or more growth in those businesses in 2022, and we think that as we continue to improve the mix from those very high reliability businesses. It just continues to strengthen the company and I'll, let rob add on to that.
Okay.
The majority of the <unk> mandate.
I would just say I'm really pleased.
The progress we've improved diversification.
As a result of that we've improved our margin.
<unk> has also improved our customer concentration so.
We think we have a much more resilient portfolio a portfolio thats much better aligned to take advantage of some of the.
Secular tailwind is that we're seeing.
So I would mark the transformation is complete but our work is not yet done because there's always room for improvement.
Thank you and congratulations to you and your team for lots of effort and work, which is now manifesting itself. Thank you.
I appreciate that.
Your last question comes from Paul Treiber from RBC Capital markets. Please go ahead. Your line is open.
Oh, thanks, very much and good morning, just could you speak to the labor environment.
You mentioned supply chain constraints, but to what degree are you seeing any shortages in labor if any or you know absenteeism. Our also wage inflation and how do you think about the labor environment through 2022.
Good question Paul.
We certainly are seeing pockets of.
Oh wait.
Wage inflation higher.
Higher absenteeism and difficulty in attracting talent I would call a pockets largely in the Americas on the West coast.
And also in the northwest area.
In terms of just kicking it off in terms of absenteeism driven by Covid, we had.
Much of it I think earlier in January but frankly.
Given the new CDC guidelines.
<unk> are back at work and we've returned to normal levels. So it was really for a very limited amount of time early in early in Q1.
Terms of the.
The inflationary environment.
I do think that's.
Alive and well if you will we've been taking that into account and working with our customers and re pricing accordingly.
And in terms of finding talent.
We're doing our best to.
Okay.
How partnerships with local universities.
And doing all the normal things to find the right talent.
Enable this.
Strong demand that we have in some key sites, but I wouldn't say, it's a broad global issue, we're just seeing certain pockets in certain geographies Paul.
And you mentioned being able to pass along wage inflation is there any blood.
Is it a cost related to labor shortages or absenteeism.
Constraining you that maybe you just referred to supply chain constraints or is it immaterial at this point.
Right now the labor constraints are.
Probably just impeding our ability to get product out the door in a certain timeframe.
But.
We have other tools in mind in terms of overtime or shift patterns and things like that will compensate for that so I wouldn't view it as a major barrier.
And in terms of fulfilling demand right now that the major barriers really around material, we havent material because you typically get the product out the door.
And we've been combating the labor shortage.
It sounds I wouldn't call it a top tier ratio over call. It a second carrier issue right now.
Yes.
Okay and then last question last question for me.
SG&A in the quarter, which was lower than what we anticipated could you speak to why you know I know.
Spoke to margins on a percentage basis, but how do we think about like SG&A dollars in Q4, and then also through 2022.
Yeah, Hey, Paul So I would say in Q4, we saw a little bit of a reduction it's a variable spend items.
That turned out to be favorable for us.
And as you go into 2022, largely we're looking to maintain our SG&A dollars and so to see leverage benefits of the topline growth that being said there are two things I would call out that.
At the SG&A. It always the first one of course is the PCI.
Integration PCI SG&A is going to be somewhere around $1 million a month, so look for about $12 million.
Added and going into 2022.
The second one is that we would anticipate that as we move towards the back end of the year that traveled isn't picking up from a management team perspective, we're in 14 countries, we travel to those locations frequently and.
And so we will expect to see a little bit more SG&A spend in that area 2022, compared to 2021, but largely we are expecting at the topline growth that we will continue to see cost productivity and we are.
Amy can be very disciplined on our SG&A spend outside of those items to drive good levels of productivity to offset inflation.
Okay. Thanks for taking my questions and congratulations on the quarter.
Thanks, Paul Thank you.
We have no further questions I would like to turn the call back over to Rob <unk> for closing remarks.
Thank you Julien.
I am pleased with our performance in the fourth quarter and our full year 2021 results, we continue to execute well through a difficult supply chain environment.
And we've completed our transformation and are now focused on continued growth and earnings expansion.
As we head into 2022 with strong tailwind and continued conviction that we're on the right path I'd like to thank our global team for a strong 21 and I also like to thank all of you for joining today's call and look forward to updating you as we progress throughout the year stay safe investigator.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.