Q2 2022 Celestica Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Celestica Q2, 2022 earnings Conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If you require immediate assistance at any time, Please press star zero for the operator.
This call is being recorded on Tuesday July 26 2022.
I'd now like to turn the call over to Mr. Craig Oberg. Please go ahead.
Good morning, and thank you for joining us on <unk> second quarter 2022 earnings conference call on the call today are Rob My illness, President and Chief Executive Officer, and Randy <unk> Chief Financial Officer.
As a reminder, during this call we will make forward looking statements in the meanings of the U S. Private Securities Litigation Reform Act of 1095 and applicable Canadian Securities laws.
Such forward looking statements are based on management's current expectations forecasts and assumptions, which are subject to risks uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions forecasts or projections expressed in such statements.
For identification and discussion of such factors and assumptions as well as further information concerning forward looking statements. Please refer to yesterday's press release, including the cautionary note regarding forward looking statements are in our most recent annual report on form 20-F, and other public filings, which can be accessed at SEC Gov.
<unk> Dot com.
We assume no obligation to update any forward looking statements, except as required by law.
In addition, during this call we will refer to various non <unk> financial measures, including ratios based on non <unk> financial measures consisting of non <unk> operating earnings non.
<unk> operating margin adjusted gross margin adjusted return on invested capital or adjusted ROIC.
Adjusted free cash flow gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio adjusted net earnings adjusted earnings per share or 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 meanings prescribed by EIOPA Ross and may not be comparable to similar measures presented by other public companies that report.
Under Ifr S or report under U S GAAP and use non-GAAP financial measures to describe similar operating metrics.
We refer you to yesterday's press release, and our Q2 2022 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.
After a strong start to the year, we have carry forward that momentum into the second quarter delivering another quarter of solid performance.
Our results met or exceeded our expectations across both our Ats and Ccs segments. Despite challenges presented by the macro environment.
Our solid performance in the second quarter was driven by double digit year over year revenue growth in both our Ats and Ccs segment and higher year over year revenues across all of our end markets.
Additionally, we are pleased to have delivered strong adjusted free cash flow in a highly volatile environment.
We believe that the current environment continues to present significant opportunities for us with customer Mark demand remaining strong.
However, we remain cautious and vigilant given the risks presented by the current supply chain situation macroeconomic challenges and other potential hurdles related to the COVID-19 and geopolitical tensions.
I am pleased to say that our team has done an excellent job navigating these challenges and we believe that our business is well positioned to weather any further challenges on these fronts.
In early June , but Tom Indonesia facility experienced a fire in their warehouse thankfully no. One was hurt and the facility was back online a few weeks later.
Although we lost inventory on the fire and we anticipate the site will be at pre incident production rates as we exit the year.
The financial impact of the second quarter was minimal and we expect that the impact to our 2022 annual topline will be less than $100 million.
And we made up in 2023.
We have insurance that largely covers the impact of the fire, including building restoration inventory and disruption to the business.
Given the solid demand backdrop across our businesses and our demonstrated ability to navigate the present challenges. We are pleased to raise our full year 2022 guidance.
$6 $7 billion or more in revenue and tightened our non <unk> adjusted EPS range to between $1 65, and $1 75.
Before offering some additional color on our outlook for each of our businesses.
I would like to turn the call over to Mandy who will provide additional details on our financial performance in the second quarter as well as our guidance for the third quarter over to you Mandy.
Thank you Rob and good morning, everyone second quarter 2022 revenue came in at $1 $72 billion at the high end of our guidance range revenue was up 21% year over year and up two.
10% sequentially fueled by revenue growth across our end markets.
We delivered operating margin of four 8% 20 basis points higher than the midpoint of our revenue and adjusted.
Adjusted EPS guidance ranges driven by solid results in both our Ats and Ccs segment.
<unk> operating margin was up 90 basis points year over year, and up 40 basis points sequentially.
Normalized for US adjusted earnings per share were <unk> 44.
At the high end of our guidance range and up 14% year over year and up 5% sequentially.
Ats segment revenue was up 24% year over year in the second quarter above our expectation of low 20 percentage year over year increase.
<unk> Ats segment revenue was flat.
The year over year growth in Ats segment revenue was driven by higher revenue across all ETF businesses with particular strength in capital.
And our industrial business the.
The year over year performance also benefited from the addition of PCI.
Our Ccs segment delivered another strong quarter with revenue up 19% year over year, driven by strength Smart communications and enterprise markets.
By our Hps business.
Ccs segment revenue was 17% higher sequentially.
Our ECS business delivered revenue of $459 million in the second quarter up 52% year over year, driven by strong demand and new program ramps with service providers supported by continuing capital investments in data centers.
Communications revenue was up 12% year over year in line with our expectations of a low double digit percentage increase and was up 14% sequentially.
Year over year and sequential growth was driven by our <unk> business.
Enterprise revenue in the quarter was up 36% year over year better than our expectation of a high percentage increase.
Sequentially Enterprise revenue was 25% higher.
The year over year increase was driven by strong demand across both compute and storage customers fueled by demand in our HPA business and new program ramps.
Turning to segment margins.
Segment margin was four 5% in the second quarter up 40 basis points year over year and down 50 basis points sequential.
The year over year margin increase was driven by improved operating leverage from higher volumes and the addition of PCI.
Ccs segment margin of 5.0%, our highest recorded Ccs segment margin.
It was up 130 basis points year over year, and up 110 basis points sequentially.
The year over year and sequential margin increase was driven by improved leverage from higher volume and improved mix due to growth in our HPA business.
Moving onto some additional financial metrics.
<unk> net earnings for the quarter were $36 million or 29 cents per share compared to net earnings of $26 million or 21 per share in the same quarter last year.
Net earnings of $22 million or <unk> 17 per share last quarter.
Adjusted gross margin was 9.0%.
60 basis points year over year, and up 20 basis points sequentially the.
The year over year improvement was driven by improved operating leverage due to higher volumes in both segments as well as more favorable mix.
Non <unk> operating earnings were $83 million up $28 million year over year.
$14 million sequentially.
Our non <unk> adjusted effective tax rate for the second quarter was 22%, 2% higher year over year, and 3% higher sequentially as a result of unfavorable jurisdictional mix.
For the second quarter non <unk> adjusted net earnings were $54 million.
Up $16 million year over year and up $6 million sequentially.
Second quarter non <unk> adjusted ROIC of 16, 2% was up two 5% year over year and up two 3% sequentially.
Moving on to working capital.
Inventory at the end of the second quarter was $2 1 billion.
$173 million sequentially and up $883 million year over year.
Well our inventory has increased recently.
We'll note that our revenue for the first half of 2022 was up 24% compared to 2021.
We continue to anticipate strong revenue growth in the second half of 2022.
Given the anticipated level of growth coupled with ongoing material constraints, we have been investing in our inventory levels to ensure we can better service customer demand.
We are also continuing to work with our customers to help offset the working capital impact of our inventory purchases by providing higher levels of cash deposits.
In the second quarter, our cash deposits were up over $300 million.
Year over year more than 150% increase.
Capital expenditures for the second quarter were $21 $6000 or just over 1% of revenue.
Our capital expenditures in the first half of 2022 have been lower than our annual target of one 5% to 2% of revenue, we do anticipate higher capital expenditures in the second half of 2022 to support new strategic program ramps and anticipated strong growth in lifecycle solutions.
No and I have progressed adjusted free cash flow was $43 $3 million in the second quarter compared to $31 $2 million in the prior year period.
Zero point $5 million last quarter.
Cash cycle days were $60 million in second quarter, an improvement of two days year over year and 70 sequentially.
Cash cycle days improved on a year over year basis as higher <unk>.
And higher cash deposit rate more than offset higher inventory.
Moving on to some additional key metrics.
Our cash balance at the end of the second quarter was $365 million down $102 million year over year and up $19 million sequentially combined with approximately $600 million of availability under our Walker, we believe that our current liquidity of approximately $1 billion.
There is sufficient to meet our anticipated business needs.
We ended the quarter with gross debt of $651 million down $4 million from the previous quarter, leaving us with a net debt position of $286 million.
Our second quarter gross debt to non <unk> trailing 12 months adjusted EBITDA leverage ratio was one seven times down.
0.1 turns sequentially.
<unk> three turns from the same quarter last year.
At June 32022, we were compliant with all financial covenants under our credit agreements.
During the second quarter, we repurchased approximately 1 million shares for cancellation at a cost of $9 $8 million. We ended the quarter with $123 2 million shares outstanding a reduction of approximately 3% from the prior year period.
Our capital allocation strategy remains unchanged.
The long term, we aim to return 50% of our adjusted free cash flow to our shareholders, while investing 50% in our business.
However, moving forward our capital allocation priority will focus on reducing our net debt, while continuing to be opportunistic with respect to share repurchases under our NCI.
Now turning to our guidance for the third quarter of 2022.
We are guiding third quarter revenue to be in the range of 165 billion to $1 8 billion.
It's the midpoint of this range is achieved revenue would be up 18% year over year and approximately flat sequentially.
Third quarter non <unk> adjusted earnings per share are expected to range from 41.
47 cents per share.
If the midpoint of our revenue and non <unk> adjusted EPS guidance ranges Archie non <unk> operating margin would be approximately four 8% an increase of 60 basis points year over year and flat sequentially.
No.
Adjusted SG&A expense for the third quarter is expected to be in the range of $64 million to $66 million.
We anticipate our adjusted effective tax rate to be approximately 21%.
Now turning to our end market outlook for the third quarter of 2022.
In our Ats end market, we anticipate revenue to be up in the high teens percentage range year over year.
By demand strength, and new program ramps and capital equipment and industrial.
Tcs, we anticipate our communications end market revenue to be up in the mid teen 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 also increased in the mid teens percentage range year over year supported by demand strength in our storage market and the continued growth in our HPA business.
I will now turn the call back over to Rob for additional color on our businesses and overall outlook.
Thank you mandate.
We believe that cluster is a more diversified and resilient business today.
At any point in our company's history.
Recently investors have heightened their focus on a number of mounting macroeconomic risks, which include interest rate hikes inflation supply chain constraints and the potential for a recession. Given this I think it may be instructive for us to provide additional color for each of our businesses.
One of the core pillars of our strategy has been to grow our lifecycle solutions business, which represented 67% of our total revenue in the second quarter of this year up from approximately 40% of revenues compared to five years ago.
We believe that our shift towards lifecycle solutions businesses has resulted in a more diversified company with healthier margins more attractive long term growth profile.
Less exposure to consumer markets.
We also believe that these characteristics position for Africa to effectively execute in a recessionary environment.
And gives us confidence in our long term outlook of 10% annual lifecycle solutions revenue growth and 10% annual EPS growth through 2025.
Turning to our outlook for our businesses.
Our capital equipment business has continued its strong performance in Q2 2022.
Driven by strong secular demand new program ramps and market share gains we anticipate the strong performance to continue in the second half of the year.
While the trajectory of capital spending growth in the wafer fab equipment market is expected to moderate in 2023.
We believe that the current semiconductor component shortages are a positive indicator of continued intended investment over the coming years.
The tailwind underpinning growth in semiconductor demand, our structural rather than cyclical in our view.
And while spending on trailing edge technologies greater than seven nanometer are likely to be impacted negatively by a recession. We believe that the demand we are seeing in leading edge technologies western seven nanometer, which represent nearly 80% of our semiconductor business is robust and far less.
Sensitive to a broader slowdown in the economy.
Additionally.
We believe that our strong backlog fueled by new program wins and customer mix position us to outperform expectations for the broader wafer fab equipment market in the coming years.
Moving on to our industrial business.
Our industrial business remains a primary driver of our Ats segment revenue growth as an example.
Over the past few years, we have won a number of new programs and the energy storage and generation markets, which are anticipated to generate strong revenue growth in the coming years.
While the industrial market is not immune to a recession, we believe that the majority of our industrial portfolio is not exposed to markets typically more sensitive to economic slowdown.
Additionally, we believe that growth drivers, such as automotive connectivity and Green energy.
A long term secular investment trends and there are less likely to see major fluctuations in a recession.
The A&D market continues to show year over year improvement spurred by an increase in activity in the commercial aerospace market.
Along with increased defense investment.
Within our business, specifically, we believe that new defense wins, along with a recovery in the commercial and business jet markets will support revenue growth moving forward. We also believe that the majority of our A&D business is somewhat insulated from a recession given the long term nature of aircraft fleet in defense spending investment decisions.
Now I'll shift to health Tech.
We believe that our health Tech business continues to present attractive growth opportunities as demand in areas, such as surgical instruments and patient monitoring devices continue to support growth in 2022.
Even in recessionary times people get sick and we believe that the demand for our goods and services. We provide should continue to grow as the population ages.
Overall, we are pleased with the positioning of our Aps portfolio as we look to the second half of 2022.
Now turning to our Ccs segment.
Our <unk> business continues to perform remarkably well recording 64% growth year to date compared to the prior year period, and achieving approximately $820 million in revenue in the first half of 2022.
With strong margins.
The exceptional demand strength continues to be driven by investment in data center expansion from our service provider customers.
Current trend that we believe is likely to persist for at least the near term.
Our positive outlook is supported by the capital investment plans of several of our key customers and a solid order book. Additionally, our hps business continues to gain market share from Oems.
Given the long term horizon and strategic nature of service providers customers capital investment plans as well as what we believe are secular rather than cyclical trend supporting data center growth. It is our view that demands on our HTS business will remain resilient in the near term.
Demand in the communications end market largely comprised of service provider customers is expected to be robust throughout the remainder of 2022.
Driven by networking customers and continued strong demand for our 400 <unk> switches.
Our HTS business continues to account for an increasing share of our communications end market.
And in our enterprise end market.
Largely comprised of OEM customers the year over year growth, we are seeing in storage and compute is expected to continue at least in the near term supported by a strong order book with industry leaders.
However, we remain cautious in our outlook as enterprise demand has historically been more prone to cyclicality and the slowing economy.
We believe that philosophy is built for success over the long term as we look ahead to the second half of 2022 I firmly believe that our business is well positioned to take advantage of the numerous growth opportunities across our markets.
Importantly, however, we believe we are also capable of weathering the macroeconomic challenges that we may encounter.
I continue to have great appreciation for the tireless work of our entire global team and their commitment to our values and their consistent execution have helped make our strategic vision into a reality.
Our company's talent and culture and fill me with a confidence that we will continue to set a high bar for the future and that we will achieve those expectations with that.
I would now like to turn the call over to the operator for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear three ton prompt acknowledging our request and your questions will be pulled in the order. They are received should you which declined from the polling process. Please press star followed bite you and if he is.
A speaker phone please lift your handset before pressing any keys one moment for your first question.
Your first question comes from Robert Young with Canaccord Genuity. Please go ahead.
Hi, good morning.
I was hoping that you could just talk a little bit.
On visibility.
Some comments in the prepared comments, but just wanted to see if you had any changes from last quarter.
The visibility you're seeing in the semi cap, particularly are you still seeing the same.
Same.
Build schedule.
Visibility there.
Hi, Rob.
Specifically in semi cap.
We are currently customers are giving us when you're rolling forecasts.
Our visibility is about three times normal levels right now.
I mean, even customers savvy concept, so anxious to get their units are authorizing us to ship some product truck parts and when you catch it up before it hits the fab.
There's no doubt I think broadly speaking within capital equipment that.
There's a slowdown in the memory devices, but we see that being back filled with foundry logic audience I E leading edge seven nanometer and as we mentioned on the call that makes about 80% of our business combined with that mix our strong order book.
Programs are we are poised to outperform the market.
Through this year.
And we feel that we're well positioned for 'twenty, three and 'twenty four as well.
Okay, Great and then second question for me would be on the Ccs margins, which are very strong again this quarter.
If you were to remove the impact of Hps. So I was curious if the remaining businesses still operating that 2% to 3% target level.
Is there any thought of changing the target level.
And outside.
Outside of HTS, how is that performing.
Yeah.
Good morning, Rob.
H P. S is performing very well.
And we are we're very pleased with it the margins right now are accretive to our target range and so our target range for the company is 4% to 5% and H B S. Right now is operating pretty close to the high end of it and sometimes even higher.
<unk> said, the non <unk> portfolio within Ccs continues to be very healthy.
We're seeing strong growth with both service provider as well as enterprise customers. We had the ability to continue to refine the portfolio as we go and so we're very pleased with the book of business that we have and so that 2% to 3%.
Historically was set with HP as being a very small contributor and so the outsized growth is being driven by H B S. And so you can back into the fact that the rest of the portfolio is operating in line with expectation in terms of going forward clearly Ccs continues to operate above that 2% to 3% range. We are considering when the right time is.
To adjust that.
E T S is a little bit outside of the range and we would like a test to consistently be in this range before we go and make changes to our overall targets, but very pleased with the momentum in Ccs and we expect that we're going to see strong margins going forward as well.
And last question just on the <unk>.
Yes margins what would be the key areas of drag there I assume it's Andy is still operating at below.
<unk> levels is that the case.
Drag on margins.
Sorry.
Other areas.
A&D is not yet operating at its target margin levels, you know that it's a very heavy fixed cost business that being said, we're very pleased with the sequential increases that we're seeing in A&D and we are starting to see the benefits of the recovery and so we are very confident that A&D will be able to return back to its historical strong margins.
That being said it is a one of the drags on the quarter, but other than that was primarily ramping programs. We're very pleased with the revenue growth that we're seeing in Etfs right now, it's exceeding our expectations and we're expecting strong growth going into the second half some of that growth is being fueled by new wins that we have in the industrial business.
And we are investing forward before those programs really turned to revenue.
As we continue to ramp new programs in the back half of the year, we do expect some opportunities on the margin side.
Okay. Thanks, a lot I'll pass my congrats on the big truck.
Your next question comes from everywhere, but yeah.
Yeah with Bank of America. Please go ahead.
Alright, Thank you for taking my questions.
Mandy beer racing to the guidance for the full year by $200 million on the revenues.
It looks like inventory was up about 9% sequentially.
Can you comment on working capital requirements. I mean, do you think inventory now is at a level, where you can maintain or reduce this level and how should we be thinking about free cash flow given the higher growth expectations.
Yeah.
So the inventory is elevated relative to last quarter and to your point, it's being driven by a lot of the growth that we're seeing as Rob mentioned in the prepared remarks, we are seeing significant growth in the first half of this year, which we are expecting to continue into next year inventory that you buy today is not always just for the quarter in front of you or even two quarters, sometimes youre looking forward to.
Early parts of 2023, and so I think the inventory one way to look at it is it's a good leading indicator for the growth that we're expecting as we finish this year and going into next year will it.
Stabilize at these levels or will it go.
Dramatically different I think it's a function of how quickly we're able to get the right person because one of the reasons that we do have elevated inventory as you know is because we continue to work with our suppliers to square off the kits, but as material availability becomes better we would expect to see some improvement in overall turns from.
From a free cash flow perspective, we're happy with the free cash flow generation that we've had to date about 43 $44 million as you mentioned last quarter, we are still targeting positive free cash flow in the back end of this year.
Although we would like to do $100 million or more.
Expectation should be set that we may do less than that and the number that we provided last quarter was $75 million for the full year and I think that's still the right number to keep in front of you.
Going forward, though we think that with the order book that we have as well as with the opportunity for inventory to start unwinding.
In a very strong position to generate good cash flow in 'twenty three and beyond.
Above our $100 billion target.
And that same throughput.
I would also add that on the supply chain environment, just a vantage point, we are starting to see the light at the end of the tunnel if you will do.
Due to some.
Some of the consumer products.
Having some inflationary paragon in the market cooling golf, we are seeing more availability on some of the components that we use so things are starting to gradually ease up so we're cautiously optimistic on that front.
Okay. Thanks for that Rob it's helpful can I follow up on the enterprise demand.
Strong 36% year on year growth.
Can you help us understand.
The where that demand came from is it was it more on servers or storage and and you see that sustaining over the rest of the year.
Yeah. So in Q2 as both storage and servers are particularly our non it exited fixed proprietary.
<unk>.
And in terms of.
Third quarter again, we see some strong.
Demand largely in storage due to tough comps, we see a compute on a year over year basis cooling off.
But it for my last question can I ask on H P. S.
We're seeing strong growth and that has good margins is there a target percent of revenue that you are targeting for that business can continue to gain share what are some of the drivers there.
That are driving that growth.
What level of investment do you need to make to keep driving growth in hps business. Thank you.
Yeah replace so.
Yeah.
So I think the word truck using this in the script was remarkable performance in H P. S and that is what we are seeing very strong growth overall.
Type your question back to lifecycle solutions, though in totality lifecycle solutions, which is made up of the hps business at Ats, we are expecting to grow at a 10% growth rate over the next number of years a T. S is very much tied to the end markets that they're in as well as the increasing level of outsourcing plus we're having market share gain.
And a lot of areas, which is helping us do very very well this year and we expect will help us continue that growth going forward on the hps side is very much tied to data center growth rates and our view right. Now is that data center build outs are going to continue at a double digit rate at least in the near term and as Rob mentioned, we have a good level of visibility with our specific.
Our customers so far in the first half of the year lifecycle solutions I think is up.
<unk> 25, and 30% year over year revenues and so clearly we are operating above the 10% Mark we do anticipate some of that strength can continue into the back half of the year, but the way to think about lifecycle solutions as we go into 'twenty three and beyond is that the 10% growth number we're feeling pretty confident.
Okay. Thanks for all the details appreciate it thanks.
Your next question comes from tennis Masker Paulus with BMO. Please go ahead.
Good morning.
Robert appreciate all your commentary on the macro so maybe just to summarize if we.
You think about sort of the customer discussions youre, having now versus three months ago.
Does it sound pretty consistent in terms of demand outlook and visibility or any significant changes you'd highlight just thinking to your conversations now versus last quarter.
Yeah. Good question. Thank you.
Just with all the noise in the market.
<unk> completed an exhaustive review of our entire portfolio by end market.
Took the time to truly understand the demand drivers for each of our businesses.
We understand the buying behaviors of our customers, we engage customers at multiple levels and align with them on their outlook.
The cross correlated that outlook with our views.
With our supply chain partners.
Based on that.
The message to your point is probably fairly consistent quarter over quarter.
We have at least through the end of 2022, our confidence in our outlook and as such you know we raised our expectations for the full year.
And in the midterm.
Pick up portfolio is fairly resilient remember this is a little corny, but neutral Africa, we're much more diversified business lifecycle solutions in Q2 was 67% of our business and our strategic goals are to ticket north of that we're not in consumer oriented markets. We're somewhat more insulated from a downturn and we've been operating very well.
That starts with the operating system, which has been a proven model.
Kind of battery supply chain constraints in some of the other macro issues. So again, the resiliency of our portfolio will be really a function of the depth and the duration of any potential recession, but you know based on the whole work that we've done and the conversations we have you know for 2022, we feel pretty good and then moving into 'twenty three 'twenty four we think we have a fairly busy.
Portfolio.
Okay. That's helpful.
On the Q3 guidance.
You're guiding for revenues to be roughly flat sequentially.
I thought that you've been supply constrained and it sounds like the supply backdrop is getting a little bit better. So so why would that not lead to sequential revenue uptick or are there other kind of puts and takes to think about in that regard.
Yeah. So I think it's really a an end market by end market conversation, we are starting to see some level of improved material supply what that's trading into though is a reduction in lead times not necessarily that we're able to secure materials immediately we think the 17 25, but when.
I would really point you towards less about the sequential revenue growth, but the year over year revenue growth.
At 18% it is still a tremendous amount of growth on a year over year basis, and that thankfully is being fueled across our end markets in both our.
H P S as well as Etfs. The other thing I'd also mentioned, though is PCI, we did talk about how the impact in the second quarter was negligible, but the revenue impact in the back half of the year is expected to be less than $100 million. So we are seeing that impact in.
In the third quarter really happy that we're able to continue to maintain a very strong profitability. Despite those inefficiencies.
Okay, Great I'll pass along thanks.
Thanks Anna.
Your next question comes from Jim Suva with Citigroup. Please go ahead.
Thank you and congratulations to you and your team as we look at your strong results and your guidance and outlook.
I just wanted to get a little bit of commentary on color of your discussions you're getting with your customers are they all kind of like business is good supplies short, we just want to get stuff into the fulfillment system or is there any kind of overview or a little bit of.
Tempering about macro concerns as we've heard from some other companies about some macro concerns.
Hi, Jim.
Yes, the conversations we've had are really the former.
We have across capital equipment, industrial and health Tech and are on H B S business.
You know our customers are very eager to to.
To get their product we have strong backlogs.
We're still not mature.
A real constrained although slowly easing across all of these product lines.
And there it's really bullish in the short term, we're talking to them about the midterm and it's a market by market dynamics.
But in most cases.
These markets.
H B F specifically.
These are not they're telling us these are not short cycle decisions that they're making.
The investment in the cloud and data center expansion, maybe with strategic investments there.
By our growth in cloud by advertising by augmented reality all of these maybe even strategic anchors.
And that's something I don't want to fall behind.
The environment, they're also pretty flush with cash this customer base, so they're continuing their investment.
Similarly in capital equipment, leading edge.
Equipment is still in short supply are largely driven by some of the data center customers for leading edge component tree and industrial.
Once again, we're largely a close it's largely come from Green energy.
We're a very material constrained right now and a very strong backlogs in A&D go long cycle business and health Tech as we mentioned, there's really no recession.
Proof type of segments, so based on our mix of business the conversations that we've happening with them.
As it says normal there are concerned about the macro environment, but they're asking us to fulfill that demand pretty quickly.
Jim maybe the one thing I would ask.
And one thing I'd, just add to Rob's comments, where.
The backlog for many of our customers continues to be multiple quarters out and we have many of our customers who are still asking for more product and we're able to deliver and the of course, the gating item. There is material constraints and an interesting point is that we continue to see some customers want to pay expedite fees in order to get the materials.
Although there are slowdowns in parts of the macro economic environment, we're not necessarily seeing it.
At a grand scale within our customer base.
Okay and then my quick follow up the component constraints are they kind of the similar ones as like last quarter kind of like power management type items or have some resolved and others popped up about new new constraints. Just generally speaking, we're just kind of curious.
Are they generally consistent.
Jim was saying.
You know same areas passives.
You'll have highly times and.
Semiconductor still have highly terms, we've seen the lead times stabilized they havent gotten any worse and we're seeing a little bit as Mandy mentioned improvement in availability. We're also seeing our suppliers are saying some slots are opening up at the foundries, which is enabling them hopefully go to show supply a little quicker than originally anticipated in future quarters, So again, where.
So we're optimistic but it's the same type of componentry as previous quarters.
Yeah.
Thank you so much for the clarifications and again congratulations to you and your team at Celestica.
Thank you Jim.
Ladies and gentlemen, as a reminder, if you do have any questions. Please press star. One. Your next question comes from Todd Coupland with CIBC. Please go ahead.
Hi, Yes, good morning, guys.
Wanted to ask you about two things first.
On Hps.
In your business review.
What kind of recession scenario.
What caused that business to to pull back it sounds like you know.
Modest modest recession, not going to have an impact have you had those kinds of conversations with customers on.
What are what would be required to see actual pull back in that business.
Yes, we've had a card right now.
What we're seeing from them, it's a good order visibility approximately six months sometimes more.
Sandeep mentioned earlier that in many cases, they're still paying premiums IPSCO authorized in airfreight, which means that there have confidence.
I have two requirement.
And.
You know they have seen no change in the conversation right now is based on on a little bit more availability of supply we have seen some rebalancing of supply. So this is the case, where they might have too many optics versus a number of switches.
Again, the impact that also has been fairly moderate because we tend to focus more on the higher value areas of Davidson.
So the rebalancing that has been more on the lower value of the data center.
In terms of them pulling back.
They that hasnt.
Haven't mentioned any of that they all view this as long.
Long term cycle decisions, they get land construct business they stopped building the infrastructure.
So based on these lead times.
It's a construct and expand data centers it doesn't feel like it's going to be a falling off the cliff or a sudden.
A reverse space, if anything that might be a S. R.
Slowing down overtime.
So you know in the midterm.
We certainly haven't seen any signs of that.
And when we think about the customers here, it's the hyper scaler, but it is for the web services and not the social media platforms.
The right customer base to think about.
I would think it's.
All service provider customers.
Every every ones that you mentioned.
Okay.
As a reminder, Todd we do business with eight of the top 10.
Okay.
And then my question.
Second question was on working capital.
It's it's great to see the free cash flow, but if I did my math right. The inventory investment was more or less offset by stretching accounts payable so.
Is that how you sort of get there in the second half of the year. If you still have to make those.
Those investments in inventory. So then really it's.
The step up in free cash flow as is is when that start to unwind whenever that happens just a little color on that thanks.
Yeah, it's a it's a dynamic situation that where we're working through quarter by quarter. The other two items.
You did mentioned, there Todd where deposits as well as receivables on the deposit side, where we're very pleased with the performance that we've been seeing year over year, our deposits were up $325 million and we continue to work with our customers as we make strategic decisions around inventory buying on how much of it can be customer funded the.
The other point of course is receivables and we're pleased with the receivables performance and if you look at the breakdown on the cash cycle days, we are seeing an improvement on a year over year basis, So we need to be very disciplined.
On managing our working capital in this type of environment So far.
Pleased with the performance and we think that that discipline as it continues into the second half should lead towards positive free cash flow.
Great. Thanks for the color.
Thank you.
Your next question comes from Paul Treiber with RBC. Please go ahead.
Alright, thanks, very much and good morning, just wanted to follow up on a couple of comments that you made on the impact of the fire in Indonesia, and it looks like guidance for 'twenty two includes less than 100 million revenue impact.
But then you also mentioned that the cost of it or the impact would be covered by insurance. So how do we think about the impact.
Yes.
This year.
Yes.
Good morning, Paul So we're pleased that we have.
<unk> coverage for almost all of the exposure within the pumps facility.
One of the things you'll see as you've had some time to start going through our financial statements is we had about a $90 million inventory impact all of which we believe is covered by insurance and so we're actively in the process right now of working with our insurers are there is some level of business interruption insurance and what that really means is that we don't expect that.
The fixed cost structure that we have tied to the <unk> facility is going to put a material drag on the earnings.
So right now I think the way to think about it is that the contribution from that $100 million will.
We'll be tip.
Typical slow for rates that you would normally see.
If the phase <unk> to 10%.
Of an impact that goes with the $100 million, but we do believe that the insurance is going to help us not move into a loss position in the site in the back half of the year.
Okay. That's helpful. And then secondly, when you look at the bigger picture outlook for the second half of the year in terms of revenue versus cost you raised revenue guidance, but then just tightened the EPS guidance what is that youre seeing on the cost side that doesn't allow the higher revenue and you're guiding to drop to the bottom line.
And also drive higher EPS versus your previous range.
Yes, so when we were doing.
<unk> dollars $55 75 at the beginning of the year Paul It was with a combination of scenarios between margin and revenue I think more importantly, what I would talk to you as a current performance. So at four 8% EBIT in the second quarter, which is also our guide now for the third quarter. That's the second highest D. P E B outperformance.
The company has had since its IPO the highest was in the fourth quarter of last year at four 9%, so pretty pretty close and so maintaining that four 8% in the third quarter and you can make your assumptions on the fourth quarter. What it implies is that we are operating in the four 5% to 5% range, which is the highest the company has ever done on a full year level.
So the EPS lends itself towards the higher end of that range do we have the ability to maintain this margin performance in 2023, we're certainly targeting to do so and then.
Also point you back to our commentary on how we look at the future. We are continuing to target, 10% EPS growth off of that number going into 2023. So.
Steady as it goes I think that's how we're looking at it and we're pleased quarter by quarter, how the performance is coming in.
And then just lastly for me just also on the cost side as well can you just provide an update on what youre seeing in terms of wage pressures in other costs.
Excluding the supply chain.
Other costs that may be impacting your fixed cost structure and in how youre managing that.
Yeah, Hi.
Certainly seeing wage inflation across the board.
For the most part we've been.
Trying to recover that and had been recovering that in our forward pricing.
Many of our contracts have a quarterly repricing points and the ones that don't.
We are engaging with our customers in these discussions.
Put in premiums or things along those lines to cover the cost of inflation.
Labor inflation and our forward pricing.
Okay. Thank you I'll pass the line.
Your next question comes from Daniel Chan with TD Securities. Please go ahead.
Hey, Randy you guys were talking about improving supply constraints as we start to see that inventory unwind.
And you have more flexibility on your use of capital.
What should we expect that to your share buybacks to accelerate or is there other thoughts for that capital as as the.
Overall environment improves.
Yes, good morning, Dan.
I'd point back to our capital allocation remarks, as you know we have a very strong track record on share buybacks, we returned more than 50% of our free cash flow over the last 10 years or so back to shareholders.
Our approach towards a free cash flow generation and capital structuring is relatively consistent with the last few quarters, we want to generate strong positive free cash flow, but our focus in the near term is really to pay down debt.
We see multiple benefits from doing that.
Of course in a rising environment it becomes a bigger drag on your P&L from an interest expense perspective, we'd like to manage that as we focus on growing EPS, but it also allows us to continue to build dry powder, we have both the balance sheet as well as the management capacity to take on more business and for the right target. We are willing to act and so it gives us that option.
Reality that being said on the share buyback programs since we launched the program in the fourth quarter of last year, we bought back one point.
7 million shares.
And we have done is that we think at very favorable prices. The market has had depressed multiples will continue to be opportunistic as we look forward. As a reminder, we actually have the ability to buy up to 6 million shares under this program, which doesn't expire until the end of November and we bought back again less than $2 million. So we have the ability to add.
When we need to act, but in the absence of a <unk>.
Three a volatile stock our preference is to put that down towards debt repayment.
Great. Thank you.
Thanks, Dan.
Okay.
Mr. <unk> there are no further questions at this time. Please proceed.
Thank you.
We continued our strong start to the year by posting another solid quarter of results, we continue to execute well through a difficult supply chain and macro environment. I'm also pleased we're able to raise our financial outlook for the full year and feel confident in our customers' demand profile in order to do so I'd like to thank our global team for another strong 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 your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.