Q1 2022 Celestica Inc Earnings Call
Primarily by our growth in our industrial and capital equipment businesses.
Including our first full quarter of results from PCI.
We're also pleased to see our A&D business returning to growth from trough levels in 2021.
While we are operating in a challenging supply chain environment. We believe we will build on the positive momentum we have established in the first quarter by executing on our strategic and operational objectives and achieve another year of strong financial performance in 2022.
Based on robust year to date demand and the assumption that the supply chain environment does not materially worsen. We are pleased to have raised our full year 2022 revenue outlook to $6 $5 billion or more.
If achieved this would represent 15% year over year growth.
In addition, as a result of the higher revenue outlook, we have tightened the range on a full year non <unk> adjusted EPS range to between $1 60, and $1 75.
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 first quarter financial performance.
All of our guidance for the next quarter and details on our 2022 outlets over the year mandate.
Thank you, Rob and good morning, everyone.
First quarter 2022 revenue came in at $1 $5 7 billion above the high end of our guidance range revenue was up 27% year over year and up 4% sequentially fueled by double digit revenue growth in both of our segments.
We delivered non <unk> operating margin of four 4% 20 basis points ahead of the midpoint of our revenue and adjust.
Adjusted EPS guidance ranges driven.
Driven by strong performance in both segments.
<unk> operating margin was up 90 basis points year over year, and down 50 basis points sequentially.
Non <unk> adjusted earnings per share were <unk> 39 cents above the high end of our guidance range of 31 to 37.
And up 17% year over year and down five sequentially.
Ats segment revenue was up 31% year over year above our expectation of a low 20 percentage year over year increase.
Organically Ats revenue was up 12% year over year sequentially.
Sequentially total Ats segment revenue was up 10%.
The year over year and sequential revenue growth in Etfs was driven by continued strength in capital equipment organic growth in our base industrial business and a full quarter of revenues from PCI.
We are pleased that Etfs has achieved over 10% year over year organic revenue growth for each of the past four quarters.
Our Ccs segment continued to deliver strong top line growth with revenue up 24% year over year and down 1% sequentially.
Year over year growth was driven by strength from across our communications and enterprise market led by our <unk> business.
Our HTS business delivered revenue of $362 million in the first quarter up 81% year over year led by demand strength and new program ramps with service providers supported by continuing data center growth.
Communications revenue was up 18% year over year in line with our expectation of a high teens percentage increase NIM was down 1% sequentially.
Year over year growth was driven by growth in our <unk> business.
Enterprise revenue in the quarter was up 36% year over year better than our expectation of a mid teens percentage increase sequentially.
Sequentially Enterprise revenue was approximately flat.
Year over year increase was driven by strong demand across both compute and storage customers and less than anticipated seasonality impact.
Turning to segment margins.
Yes delivered a segment margin of 5.0% in the first quarter up 100 basis points year over year and down 60 basis points sequentially.
Year over year margin increase was driven by improved operating leverage from higher volumes and productivity.
Ccs segment margin of three 9% was up 80 basis points year over year and down 50 basis points sequentially.
The year over year margin increase was driven by higher volume and stronger mix related to our HTS business moving on to some additional financial metrics.
<unk> net earnings for the quarter were $22 million or <unk> 17 per share compared to net earnings of $11 million or <unk> <unk> per share in the same quarter last year and net earnings of $32 million or 26 per share last quarter.
Adjusted gross margin was eight 8% up 20 basis points year over year and down 80 basis points sequentially.
The year over year improvement was driven by strong operating leverage as a result of higher volume and cost productivity efforts, partly offset by inefficiencies from material constraint.
Non <unk> operating earnings were $69 million.
Up $26 million year over year and down $5 million sequentially.
Our non <unk> adjusted effective tax rate for the first quarter was 19%, 2% lower year over year, but 3% higher sequentially.
For the first quarter non <unk> adjusted net earnings were $48 million up $20 million year over year and down $7 million sequentially.
First quarter non <unk> adjusted ROIC of 13, 9% was up three 1% year over year, and then two 7% sequentially.
Moving on to working capital.
Our inventory at the end of the quarter was $1 93 billion.
Up $781 million year over year, and up $238 million sequentially, we continue to maintain higher inventory levels to support growth across our lifecycle solutions business, while also increasing strategic inventory purchases in light of the constrained supply chain environment.
To offset the working capital impacts of higher inventory, we have more than doubled the cash deposits from our customers year over year and will continue to work with them to obtain higher cash deposits when appropriate.
Inventory turns in the first quarter were three two times down from $4 zero turns in the prior year period and down from three <unk> last quarter.
Capital expenditures for the first quarter were $16 $4 million or 1% of revenue.
Non <unk> free cash flow was zero point $5 million in the first quarter compared to $20 9 million in the prior year period, and $35 6 million last quarter. This is our 13th consecutive quarter of delivering positive non <unk> free cash flow.
Cash cycle days were <unk> 76 in the first quarter, an improvement of six days year over year and up one day sequentially.
Cash cycle days decreased on a year over year basis, as higher inventory was more than offset by higher <unk> and higher cash deposit rate moving on to some additional key metrics.
Our cash balance at the end of the first quarter was $347 million down.
Down $102 million year over year and down $47 million sequentially.
Behind with approximately $600 million available under our revolver, we believe that our current liquidity of nearly $1 billion is sufficient to meet our anticipated business needs.
We ended the quarter with gross debt of $656 million.
<unk> 4 million from the previous quarter, leaving us with a net debt position of $309 million.
Our first quarter gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio was one eight times.
<unk> two turns sequentially and up <unk> four turns from the same quarter of last year.
At March 31, 2022, we were compliant with all financial covenants under our credit agreement.
During the quarter, we repurchased approximately 700000 shares for cancellation at a cost of $7 $8 million. We ended the quarter with $124 1 million shares outstanding a reduction of approximately 3% from the prior year period.
Our long term capital allocation strategy remains consistent we intend to return 50% of our non <unk> free cash flow to our shareholders, while investing 50% and our business over the long term.
However, our focus in 2022 as a result of our acquisition of PCI will be to reduce our net debt, while continuing to be opportunistic towards share repurchases.
Now turning to our guidance for the second quarter of 2022.
<unk> second quarter revenue to be in the range of $1 $5 75 billion to $1 75 billion.
At the midpoint of the range has achieved revenue would be up 16% year over year and up 5% sequentially.
Second quarter non <unk> adjusted earnings per share are expected to range from 38 to <unk> 44 per share.
At the midpoint of our revenue and non <unk> adjusted EPS guidance ranges are achieved non <unk> operating margin would be approximately four 6% an increase of 70 basis points year over year, and an increase of 20 basis points sequentially.
Non <unk> adjusted SG&A expense for the second 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 20%, excluding any impacts from taxable foreign exchange or unanticipated tax settlement.
Turning to our end market outlook for the second quarter of 2022.
Our ETF end market, we anticipate revenue to be up in the low 20 percentage range year over year, driven by demand strength in capital equipment, and industrial including the acquisition of PCI.
In Ccs, we anticipate our communications end market revenue to be up in the low double digit percentage range year over year, driven by strong demand from service provider customers supported by our Hps business.
In our enterprise end market, we anticipate revenue to increase in the high teens percentage range year over year supported by strength in servers.
Finally, as Rob mentioned, we are pleased to increase our revenue outlook for 2022 to at least $6 5 billion based on our strong execution robust demand to date and the current supply chain environment. We.
We will continue to evaluate our 2022 outlook throughout the year and so the supply chain environment materially improve we will update our outlook accordingly.
We continue to anticipate <unk> operating margin between 4% and 5% and are now targeting non <unk> adjusted EPS of between $1 60, and $1 75 for the full year.
I'll now turn the call back over to Rob for additional color on our end market and overall business outlook. Thank.
Thank you mandate.
Transformation behind US we are looking ahead, we remain committed to our long term vision of becoming the undisputed industry leader and a high value markets to achieve this objective we will continue to focus on the core pillars of our strategy.
First we will continue to grow where we are market leaders or have specific competitive advantages, what we call our lifecycle solutions business.
We are already executing well against this strategy as our lifecycle solutions business represented 67% of our total revenue at the end of the first quarter of 2022 up from 59% in the first quarter of 2021.
Looking forward to the remainder of 2022, we reiterate our expectation for strong growth and lifecycle solutions.
The second core pillar of our strategy.
Is to invest for growth by continuing to enhance our capabilities across the value chain.
And to develop new capabilities to further expand our set of solutions for our customers.
We have recently made significant organic and inorganic investments in our capabilities, including our Richardson, Texas in Maple Grove, Minnesota facilities as well as our acquisition of PCI for all three of these investments are examples of bolstering our capabilities our cross.
<unk> cycled solutions business.
We intend to make prudent investments in our capabilities in the quarters to come.
And finally, we will continue to advance the first operating system to drive excellence across our global network.
Operational excellence is the cornerstone of our success and will continue to be a top priority across our global network.
Although we are confident in our future. We believe that the component shortages will continue to gate, our true growth potential as we expect the supply chain environment will remain constrained for at least the remainder of the year.
We believe the demand backdrop with our customers, we support significantly higher revenues and the absence of these challenges our second quarter guidance and full year 2020 outlook have accounted for these macro conditions.
The best of our ability.
Now turning to the outlook for our segments.
Our Acs segment achieved impressive growth from the first quarter as we continued to benefit from strong demand and new program growth.
For 2022 as a result of anticipated continued growth.
We continue to expect Ats segment revenue of approximately $2 $8 billion or more in segment margin between five and 6%.
Our Ats segment revenue outlook has achieved this would represent approximately 20% growth compared to 2021.
Our capital equipment business continued its impressive trajectory in Q1 2022.
Driven by market share gains new wins and robust secular tailwind.
Wafer fabrication equipment demand is strong and we continue to believe that these dynamics support additional runway for continued growth.
Our industrial business is expected to continue to be a large contributor to our growth this year.
We are currently well positioned with six leading EV charging Oems.
And are also building a strong presence in the energy storage market.
We have already begun significant ramps in this space, which are anticipated to continue throughout 2022 and beyond.
Additionally, our acquisition of CCI has already begun to yield cross selling synergies as we work together to deliver and expand our range of capabilities to our customers.
The recovery in the A&D market continues as we are experiencing an increase in demand from commercial aerospace.
Stated in previous calls.
Given A&D was the largest component of our Ats segment prior to the pandemic. We believe there is significant runway for growth as the A&D market continues its recovery.
Moreover, new wind and logos in the defense space and UAV businesses are expected to drive even further growth in A&D.
We believe that our health Tech business is a very attractive business with significant growth opportunities with an accretive margin profiles are.
Our expertise across a wide array of end markets extensive site certifications and automation and provide a foundation for future growth in existing and new markets.
Now turning to Ccs, our Ccs segment continues to achieve excellent results growing 24% year over year.
Our HTS business grew 81% year to year, driven by service provider and communications customers. Moreover, our opportunity funnel and general market outlook remains very positive and HTS.
In our communications end market demand is expected to remain strong throughout the year largely driven by networking customers.
In our enterprise end market.
<unk> demand, we are seeing in storage and compute is expected to continue in the second quarter.
Today I can proudly say, we are stronger than ever we are more diversified yet focused company operating in markets with strong growth profiles and where we have a competitive advantage. We are built to win and we have a long term strategy in place intended to ensure that we continue our trajectory.
This progress could not have been accomplished without the hard work and perseverance of our employees I want to thank all of our employees for their continued support and commitment, enabling us to achieve our goals 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 to withdraw your question. Please press star one again.
First question comes from <unk> Bhattacharya from Bank of America. Please go ahead. Your line is open.
Hi, Thank you for taking my questions.
Is there a way to quantify what the revised full year guidance on the topline and bottom line.
In terms of disruption from the supply chain issues as well as from the war in Ukraine. What have you assumed in terms of headwind both on the top line.
Nine.
Hi, Mandy Pierre.
It's a tough one to answer in the sense that as you know, it's dynamic and it changes quarter to quarter as we as you saw with Q1, we ended up beating our guidance range, because we were able to be able to execute very well in the supply environment.
For the guidance that we provided into Q2, we are making an assumption right now that the supply environment is going to be relatively consistent to where it is today. So really the status quo and we're holding that assumption forward for the back half of the year to your specific point on the Ukraine and Russia. It has had a very minimal impact on the company to date and so we are expecting something similar.
Going into the back half of the year, because we know what suppliers are coming out.
The Ukraine, we know which ones of our customers have programs that are exposed to the Ukraine and those assumptions are consistent.
Okay got it.
Can I ask.
It looks like inventory was up 14% sequentially.
And now given the higher revenue growth assumptions for the year, how should we think about cash conversion cycle and free cash flow for the fiscal year.
Yeah. So inventory is up this year as you mentioned deposits are also up.
<unk> almost 150% year over year. So it is helping fund some of the build.
We really view inventory right now is an asset.
Our ability to secure this inventory is leading us to be able to fulfill demand from our customers, which is very robust and continuing through the year. We anticipate that inventory is likely going to remain elevated through 2022.
We were targeting $100 million or more of free cash flow when we were indicating $6 $3 billion of revenue for the year now that we're seeing our ability to.
More demand and that we've raised our revenue outlook, we likely will be less than $100 million for the year, but we are still targeting positive free cash flow for Q2 through Q4.
Got it and if I can just sneak one more in the Ccs segment operating margin was again higher than the 2% to 3% long term range. How should we what are some of the drivers for this and how should we think about that over the next couple of quarters.
Yes, most simplistically I would just point to Hps Hps's you knew as you know grew 81% year over year in the first quarter. The demand profile continues to be very strong. There is a very good level of adoption of the products that we have brought to market and so that will continue through.
2022.
Overall, what I would say is that.
<unk> is accretive to the Ccs margin. It's also accretive to the company margins and so as Hps continues to be a larger part of the pie. We do expect that we have margin benefits in Ccs.
Great. Thank you for all the details and congrats on the strong execution in the quarter. Thanks a lot.
Our next question comes from Dennis Moscow Pollock from BMO capital markets. Please go ahead. Your line is open.
Hi, good morning.
Supply chain has less of a top line impact than in Q4, and so just in terms of that sequential improvement does that reflects better component availability or is that have more to do with mix or with the mitigating actions that you guys were able to take.
Okay Fair enough, yes, as with Covid, we're becoming pretty adept at managing through supply chain constraints.
I would say the overall macro supply chain environment is still quite constrained and it's similar and dynamic.
Relative to Q4, our lead times or so.
<unk> extended.
We're seeing some increase in passive that being said we've been navigating.
Again through them quite well.
Sure.
Yes.
And things are.
Pretty much consistent with last quarter, and our expectation right now to Anil says that that will continue through the year as Rob mentioned when we look at.
As the constrained environment within semiconductors as an example lead times right now are relatively consistent in the first quarter as they were with the fourth quarter, where we are seeing some additional dynamics on the passive side capacitors and resistors lead times are extending.
But for the most part I would say that the environment is relatively consistent.
Okay.
How have the.
Lockdowns in China impacted the business if at all I mean.
I know you have a presence there is there any incremental impact from lockdown.
To date the impact operations has been immaterial.
Our attendance at our sites is in the 90% range in the China sites, but we are keeping a watchful eye on our suppliers, especially as it relates to inbound and outbound logistics.
Dynamic situation, but we believe that any of the risks are factored into our guidance.
And then finally, just the media reports, suggesting that the average lead time on semi equipment is now something like 18 months just curious if that's consistent with what youre, saying.
It is and I would say our customers' backlogs are at record highs the visibility that we have into our order book is also has increased which is helping us do effective planning and also material shorts as we continue to.
Most impressive growth out of that business.
Yes.
Okay, Great I'll echo the congrats on the quarter Epsilon.
Thanks Dennis.
Our next question comes from Jim Suva from Citigroup. Please go ahead. Your line is open.
Thank you.
I do my math right it kind of looks like your revenues. This year are going to be a ballpark, 15% or so if that's correct can you help us just dissect it about organic versus kind of I believe is the PCI acquisition is going to be fully folded in this year. So kind of organic versus total then I'll probably have a follow up thank you.
Yes, good morning, Jim.
We closed the PCI acquisition, we had indicated that revenue is being targeted.
In the $325 million range and so when we say 6500, if you back that out.
That's probably about 5% of the growth sort of 15% goes closer to 10% of our on an organic basis.
Okay.
PCI.
Revenue.
Trajectory of your plan still consistent I didn't know if that's kind of changed a little bit.
Past two.
Two months or so.
No and if I can maybe talk about PCI for a moment, we're very pleased with how the business is performing.
The revenue is on track to the business case in fact, it slightly exceeding it right now we're seeing strong demand across their customer group and being joining up with select because supply chain.
Expertise where else we're helping them also clear a lot of materials fourth. We're also really pleased from a integration perspective controls are integrated but we're also starting to see some benefits on the synergy side we.
Our first synergistic win between PCI and.
Celestica before it was PCI.
Let's take a customer that is going into a PCI facility and we have a very long list of other targets that we're working to do the same thing.
Okay and then my last question is you mentioned.
More customer deposits and inventory, obviously, it seems like you'd rather have more inventory now rather than less.
Business structural in nature, where the just in time model is kind of changing and do you think is going to be a current event built in of deposits more inventory I'm just kind of curious if this is kind of a structural change not to achieve it resolves the whole industry.
Yes, I'll start off.
Mainly finished Jim I would say in today's environment.
Yes inventory is more of an asset than anything else.
It enables us to grow enables us to gain share either protect or gain share.
And we've been carefully working with our customers in partnership with them.
To make sure we get cash deposits to protect.
Their growth.
So to help protect and grow our market share. So it's somewhat of a win win.
When it comes to that.
That being said it is still somewhat of a very dynamic that supply chain environment, and we do get from <unk>.
<unk> perspective, when we think we're going to be able to ship some product.
And then it gets dark for a little bit of time until we can clear the last minute shortages, so theres still inefficiency in there but.
The way we're looking at it is we're managing it fairly well relative to everyone else.
And as proven by our strong growth over the last several quarters.
Jim maybe if I was to point to something structural or that could be a structural change is we are seeing much much higher levels of visibility from our customers as we go through this year and frankly into next year in some cases customers are giving us visibility on what their demand profile is.
18 months or even more out and they are backing it up contractually where they want us to bring in the material to support the demand that they are providing and they know that if that does not materialize that they are ultimately on the hook for the inventory.
We haven't traditionally seen order windows go out that far and so it'll be interesting to see as a supply chain environment normalizes, whether or not that's a new norm.
Okay. Then my last question is.
It looks like you took your revenue guidance up higher and then you would.
What would be the right word.
<unk> narrowed the EPS range by taking the lower end up but you didn't change the higher end is that just due to like more shipping costs and logistics costs about why you wouldn't also adjust the higher end of earnings.
No.
Just a reflection of the dynamic environment that brand right now.
So to your point, we took the $6 $3 billion or more to $6 5 billion or more and we tightened the range from about 55 to $1 75 to $1 $60 75, what were trying to say is that extra $200 million of revenue. We know is going to yield at minimum an additional five pennies.
And is there an opportunity to go above the range.
It will probably be tied to how much more revenue, we could do over six 5 million.
Okay. Thank you so much for all the details and clarifications.
Thanks, Jim.
Our next question comes from Paul Treiber from RBC Capital markets. Please go ahead. Your line is open.
Alright, thanks, very much and good morning, So obviously the demand environment that youre seeing is quite strong right. Now just hoping that you could provide any indication that you may have on the sustainability of demand.
There is a lot of macro concerns.
Beyond just technology, but across the board have you seen any signs of customers.
Either reducing.
Extended forecast or pulling purchase orders.
Anything that would suggest some sign of conservatism for the second half of the year or even in 2023.
Hi, Paul.
That's certainly something that's at the top of our minds to be <unk>, but frankly across our markets. We have seen no signs of that within Etfs, we see.
<unk> backlogs very strong visibility.
The same with industrial same with health Tech and the same with aerospace and defense and within our Ccs business, specifically, our hps business.
Have mandate mentioned earlier, we have very strong visibility.
With her npls for.
Really good period of time relative to <unk>.
Prior years, so we have seen no softening to date.
Paul maybe but I would just add is if we as a reminder from the discussion we had during the Investor day about a month ago or so what we had talked about with our confidence in the company's portfolio is really driven by the mix of the portfolio. So today in Q1.
67% or lets call. It two thirds of our revenue came from lifecycle solutions, which you know is built between ETS and hps on the Ats side, our long term view of that market has not changed we do believe that there are fundamentals in place, which will grow the ats markets and our share of it at 10% or more over the long term and then when we look at hps with the traction.
That we have right now and the amount of revenue share that we've been able to take we also believe that that business has the ability to grow at 10% or more over the long term clearly it's playing out in 2022 and right now we continue to feel confident going into 'twenty three that lifecycle solutions can grow double digits.
Thanks, that's helpful.
A bit of a follow up to Jim's question.
On the cash deposits and that structural change would you say all else equal that.
Larger amount of cash deposits as creating perhaps stickier demand or at least better visibility to future demand.
Yes, because what we are going to one of the remarks I made when a customer is giving us a order outlook that can go for 12 to 18 to 24 months and they want us to bring in inventory that they may not be able to consume in the next six to 12 months.
There is a funding equation that we have to work out with the customer.
And deposits is a lever that we can go to because they are asking us. Please bring in the inventory. Please secure it because I want to make sure that you can square my Kid a year from now.
But deposits aren't the only thing that we turned two we also in some cases get additional pricing from.
From customers and in some cases, we get early payments on receivables and at the end of the day.
Our approach to commercial accounts is the same as it's been for many years, which is where an ROIC driven company and so we wanted to ensure that if we're bringing in excess inventory that has more than covered either through other offsets in working capital or through pricing.
And Paul I would just add to back to your first question that the increased cash deposit is really a proxy for the confidence that our customers have and.
Their demand profile.
And the fact that it's up.
On a year over year basis.
Testament to that.
Okay. Thank you I'll pass lineup is very helpful.
As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Our next question comes from Todd Coupland from CIBC. Please go ahead. Your line is open.
Hi, good morning, everyone.
Also wanted to ask about the demand environment, but more from a strategic perspective.
When you when you when you see this extended supply chain it keeps getting pushed out in terms of relief.
Geopolitical issues does it makes you rethink what kind of footprint is appropriate.
Globally and weather.
Whether or not you should you should have.
More production in.
In North America, and just your thoughts on that thanks.
Yes, it's a good question the regionalization trend as we've seen.
Present here for over a year plus.
We've been working with our customers to help improve the resiliency of their supply chain.
And we have a very diversified footprint.
And as we think about.
Helping customers create that.
Our contingency plans and resiliency plans across their supply chain and has been shifting some of our capacity.
Into the Americas, If you will Mexico, and North America outside of Asia.
And we are constantly kind of looking at our network strategy to see where we need to add capacity and our take capacity out right now we feel very comfortable in what we are and where we're at that being said, we probably will need to look to make incremental investments. If we continue on this impressive growth profile that we have been under glass.
Several quarters.
Right and.
If that trend continues how does that impact footprint that you have.
In Asia Pac at the moment does that can you.
Can you imagine that getting.
Downsized.
Or you're making choices on different countries.
No at this stage of the game.
Any downsizing.
And the cards, we really see more just capacity expansion.
Specifically, probably in Mexico and also in other parts of Asia.
But in terms of contracts are based on the growth that we see.
We don't see that in the cards at least in the near to midterm.
Yes, so what I would say is that we continue to see customers have a stir.
A strong desire to be in southeast Asia, and because of our dominant footprint in Thailand, and Malaysia were able to satisfy the demand we're seeing customers some of those customers who want to be in southeast Asia also have a dual note strategy. So they also want similar programs run out of North America, and so we're seeing a lot of those go towards Mexico.
But.
The footprint, we have right now the feedback we're getting is it's quite strategic for our customers.
Hi.
And just just to update us on sort of the cost advantage. So you would see Thailand and Malaysia.
Material cost advantage over Mexico.
In the current environment.
To some extent from a labor perspective.
Yes, there are differences, but what I would also say is historically, what we would see is also parts going back and forth over the ocean and so it's interesting that if you go beyond just labor cost and you look at landed cost and total cost of ownership in some situations, depending on where the customer's product is growing it.
It actually sometimes could be on par or even cheaper to do to North America.
Alright.
I would also add that our supplier that our customers.
If there is a cost difference between various regions or customers.
Are more than willing to understand the differences and pay for those differences and the name of creating more resiliency in our supply chain.
Yes, yes that makes sense.
And then just last question for me.
Aerospace has been on a slow recovery you talked about at the half.
Muted expectations or that yeah. It seems like you're hinting at is getting better.
Is that is that a change or is that are you still being fairly conservative about the recovery there.
Yes.
I think in aerospace, we're expecting a stronger second half versus first half I would say it is a dynamic of commercial versus defense on commercial we see a steady recovery.
Getting better sequentially quarter to quarter to quarter and on the defense side, we have some new programs that we've won that will be ramping towards the back half of the year.
Can you go into segments.
Our business strategy is very hot right now has been in commercial aerospace I think.
North America Air traffic is recovering in China, and Europe , its lagging a little bit relative to North America, but I think it's steady growth.
And then.
We would also say, though is we're pleased with the sequential improvement that we're seeing in A&D, it probably wont get back to full recovery until 2024.
So as capital equipment over time may moderate.
We do believe that we have an offset that can happen in the outer years with AMD.
Okay, Okay, great I appreciate the color thanks a lot.
Our next question comes from Robert Young from Canaccord Genuity. Please go ahead. Your line is open.
If I could just continue that line of questioning on the.
Every you think might happen in <unk> in the second half what kind of implications might have on the margins or is it.
Is it at a stage, where it's still a drag to that 5% to 6% margin structure in Etfs.
It's a drag today, but we expect it to hold its own as we get towards the back end of the year. So right now.
As you know Rob Andy has a heavy very very heavy fixed cost structure, and we purposely decided to hold onto capabilities. During this downturn, we do need some more revenue growth in order to get that business to margins that we would normally see.
Our expectations for Etfs in total is that we will see some sequential margin improvement as we go through the year as you would've seen we did five zero percent in the first quarter, we are still targeting to be in the 5% to 6% range and we think that we can improve as we go through the year.
Yes.
And then my second question.
Is around the comment you made I think last quarter about higher renewal rates because of the difficulty that.
Your customers are seeing transferring work between vendors in more difficult supply chain is that still a factor and is there a pricing dynamic.
Our benefit that comes along with that.
Yes to both questions Rob It is still a factor.
When a customer thinks about switching.
<unk> if you will.
It's very hard for a new supplier, if you will to a provider to establish a what supply chain. So it is creating stickier relationships to some extent.
It does create a pricing advantage, but I wouldn't say, that's a main and main driver.
And rod that stickiness is reflective of the supply chain environment, but frankly, a lot of that stickiness would be there without if the reason that we focus on lifecycle solutions. They are very high barriers to entry you need a lot of investment for a number of years in order to get to a certain level of capabilities and so even in a normalized environment.
We think two thirds of the company, which is lifecycle solutions.
That stickier revenue than traditional E&S.
Okay and last question for me just it seems to me in my conversations that confidence in the semi cap cycle is weakening a little bit, but you still seem to be very confident on your visibility in 2022 I'm just curious.
Are you seeing any signs that.
The visibility or the durability of the semi cap.
Cycle, you're benefiting from.
Is it going to be it is a 2022 and 2023 is there any color on how long you think it may last.
If you have any comments you can.
Give any kind of outlook there that'd be helpful.
Yeah, No we're very confident in our capital equipment business as I mentioned earlier, the backlogs with our customers are very high the visibility that they're giving US is also very good.
We're also growing faster than.
And then the market.
Driven by.
Our high level assembly capability, our diversified footprint, our vertical integration that.
That we have so overall.
We're very bullish on our capital equipment at least this year and also going into next year as well.
UBS forecast basically says for the entire industry strong 22 <unk>.
Flattening out a little bit in 'twenty, three but again.
Our outlook is that we're going to be growing faster than the market based on some of those reasons I mentioned.
And Rob when Youre hearing remarks from others that the semi cycle may be slowing a little bit.
Yes.
As you know we produce equipment in the wafer fab equipment space.
Both memory and equipment that was going into logic foundry were on fire last year.
Memory has started to plateau in 2022, but the equipment, that's going into logic and foundry continues to be very high in terms of demand and so that's why 2022 still has good overall growth characteristics and then that logic foundry growth in 2020% that may moderate as we go into 2023, but.
But there is still some very good fundamentals in place for the remainder of this year.
Okay, Great. That's helpful. And then the other side of the capital equipment. The display market is that still something that could.
Become healthier in 2023.
Maybe right now.
Due to the very strong growth that we're having in semi cap.
We're repurposing a lot of the capabilities that we have in Korea to support the semi cap growth and given that.
Over about 40% of the capital is kind of a purchased through folks in that region Samsung Hynix, If you will.
It plays very well into our regionalization price so while the display market is down we're using the capabilities and the capacity we have in the area to support the tremendous growth that we have within capital equipment semi cap.
Okay.
Okay. Thanks, Thanks for taking my questions.
Thanks Ross.
We have no further questions in queue I'd like to turn the call back over to Rob <unk> for any closing remarks.
Thank you we're off to a strong start in 2022 and I am pleased that the execution of our strategy continues to yield results and we continue to execute well through a difficult supply chain environment. I'm also pleased that we're able to raise our full year financial outlook.
I'd like to thank our global team for a strong first quarter and thank you all for joining today's call. We look forward to updating you as we progress throughout the year.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.