Q3 2023 Celestica Inc Earnings Call

October 26, 2023

Craig Oberg: 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 therein, our most recent annual report on Form 20-F, and our other public filings, which can be accessed at sec.gov and sedar.com. We assume no obligation to update any forward-looking statement except as required by law. In addition, during this call, we will refer to various non-IFRS financial measures, including ratios based on non-IFRS financial measures consisting of non-IFRS operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, adjusted free cash flow, gross debt to non-IFRS trailing twelve-month adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, adjusted SG&A expense, and adjusted effective tax rates.

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 and.

SEDAR Dot com.

We assume no obligation to update any forward looking statement, 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 margin adjusted gross margin adjusted return on invested capital or adjusted ROIC.

Adjusted free cash flow gross debt to non IRS trailing 12 month, adjusted EBITDA leverage ratio adjusted earnings per share or adjusted EPS.

Adjusted SG&A expense and adjusted effective tax rate.

Craig Oberg: Listeners should be cautioned that references to any of the foregoing measures during this call denote non-IFRS financial measures, whether or not specifically designated as such. These non-IFRS financial measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies that report under IFRS or who report under U.S. GAAP and use non-GAAP financial measures to describe similar operating metrics. We refer you to yesterday's press release and our Q3 2023 earnings presentation, which are available at celestica.com under the Investor Relations tab for more information about these and certain other non-IFRS financial measures, including a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements, and a description of modifications to specified non-IFRS financial measures during 2022 and 2023.

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 EIOPA arrest and may not be comparable to similar measures presented by other public companies that report under <unk> or us or.

Or who report under U S GAAP and use non-GAAP financial measures to describe similar operating metrics.

We refer you to yesterday's press release, and our Q3 2023 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.

The most directly comparable <unk> financial measures from our financial statements.

A description of modifications to specified Don <unk> financial measures during 2022 and 2023.

Craig Oberg: Unless otherwise specified, all references to dollars on this call are to US dollars, and per share information is based on diluted shares outstanding. Let me now turn the call over to Rob.

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.

Rob Mionis: Thank you, Craig. Good morning, everyone, and thank you for joining us on today's call. Celestica's Q3 revenue of $2.04 billion was towards the high end of our guidance range, while our non-IFRS adjusted EPS came in at $0.55, exceeding the high end of our guidance range. Our non-IFRS operating margin of 5.7% was our 15th consecutive quarter of year-to-year non-IFRS operating margin expansion. Our CCS segment continues to benefit from improved business mix due to the strength of our hyperscaler portfolio, reflected by segment margin of 6.2% for the Q3, the highest ever. We also saw meaningful sequential revenue growth in our HPS business. Our ATS segment delivered solid double-digit year-over-year revenue growth as we continue to see tailwinds from new program ramps, as well as demand strength in our aerospace business.

Thank you Craig good morning, everyone and thank you for joining us on today's call subsequent to third quarter revenue of $2.04 billion was towards the high end of our guidance range.

While our non <unk> adjusted EPS came in at 65.

Exceeding the high end of our guidance range.

Our non <unk> operating margin of five 7%.

Our 15th consecutive quarter of year over year, non <unk> operating margin expansion.

Our Ccs segment continues to benefit from improved business mix.

Due to the strength of our Hyperscale portfolio reflected by segment margin of six 2% for the third quarter. The highest ever we also saw a meaningful sequential revenue growth and our HPE Fs business.

Our Ats segment delivered solid double digit year to year revenue growth.

As we continue to see tailwind from new program ramps.

As long as demand strength in our aerospace business.

Rob Mionis: Celestica's strong results in Q3 are reflective of the bullish secular trend underpinning our portfolio and our team's solid execution. Before I provide an update on each of our end markets and some color on 2024, I would like to turn the call over to Mandeep, who will provide a detailed review of our Q3 financial performance and our guidance for Q4 2023. Mandeep, over to you.

So let's look as strong results in the third quarter are reflective of the bullish the secular trends underpinning our portfolio and our team's solid execution.

Before I provide an update on each of our end markets and some color on 2024.

Like to turn the call over to Mandy, who will provide a detailed review of our third quarter financial performance.

Our guidance for the fourth quarter of 2023.

Randy over to you.

Mandeep Chawla: Thank you, Rob, and good morning, everyone. Q3 revenue came in at $2.04 billion towards the high end of our guidance range. Revenue was 6% higher year over year, supported by higher revenues in both segments, including double-digit growth in our ATS segment. Our Q3 non-IFRS operating margin of 5.7% was 60 basis points higher year over year. This margin expansion was driven primarily by strong profitability in our CCS segment, supported by solid operational execution. Non-IFRS adjusted earnings per share for the Q3 were $0.65, exceeding the high end of our guidance range, and were $0.13 higher year over year, driven primarily by higher operating profits. Moving on to our segment performance.

Thank you, Rob and good morning, everyone.

Third quarter revenue came in at 2.04 billion towards the high end of our guidance range revenue was 6% higher year over year supported by higher revenues in both segments, including double digit growth in our Ats segment.

Our third quarter non <unk> operating margin of five 7% was 60 basis points higher year over year.

This margin expansion was driven primarily by strong profitability in our Ccs segment supported by solid operational execution.

Non <unk> adjusted earnings per share for the third quarter were 65.

Feeding the high end of our guidance range and were 13% higher year over year, driven primarily by higher operating profit.

Moving onto our segment performance.

Mandeep Chawla: Q3 ATS revenue was $859 million, up 12% year-over-year, and in line with our expectations of a low double-digit percentage increase. The year-over-year increase in ATS segment revenue was driven by the ramping of new programs in our industrial business, improving demand in A&D, and solid growth in our health tech programs. This growth was partly offset with ongoing market-related softness in our capital equipment business. ATS segment revenue accounted for 42% of total revenues in Q3, compared to 40% in the same period last year. Our CCS segment revenue of $1.18 billion were up 2% compared to the prior year period and accounted for 58% of total company revenues in Q3, compared to 60% in the prior year period.

Third quarter Ats revenue was $859 million up 12% year over year.

And in line with our expectations of a low double digit percentage increase.

The year over year increase in Ats segment revenue was driven by the ramping of new programs in our industrial business improving demand in A&D and solid growth in our health Tech programs.

This growth was partly offset with ongoing market related softness in our capital equipment business.

Ats segment revenue accounted for 42% of total revenues in the third quarter compared to 40% in the same period last year.

Our Ccs segment revenue of $1.18 billion were up 2% compared to the prior year period and accounted for 58% of total company revenues in the third quarter compared to 60% in the prior year period.

Mandeep Chawla: Year-to-year dynamics were largely unchanged from last quarter as very strong growth in our enterprise end market, supported by strong demand for proprietary compute, was largely offset by anticipated demand softness in our communications end market. Enterprise end market revenue in the quarter was up 31% year over year, higher than our expectation of a low double-digit percentage increase. Revenue growth was driven by program ramps and continued strength in demand for proprietary computes from our hyperscaler customers in support of artificial intelligence applications. Revenue in our communications end markets in the Q3 was lower by 10% year-over-year versus our expectation of a high single-digit percentage decrease. The decline was driven primarily by tough comps from a strong prior year period.

Year to year dynamics were largely unchanged from last quarter as very strong growth in our enterprise end market supported by strong demand for proprietary compute.

Largely offset by anticipated to be in the softness in our communications end market.

Enterprise end market revenue in the quarter was up 31% year over year higher than our expectation of a low double digit percentage increase.

Revenue growth was driven by program ramps and continued strength in demand for proprietary compute from our hyperscale customers in support of artificial intelligence application.

Revenue in our communications end market in the third quarter was lower by 10% year over year versus our expectation of a high single digit percentage decrease the.

The decline was driven primarily by tough comps from a strong prior year period.

Mandeep Chawla: HPS revenue was $493 million in the quarter, 5% lower year-over-year, but up 39% sequentially, in line with our outlook provided last quarter. HPS revenues were 24% of total company revenue in the Q3, compared to 27% in the prior year period. We expect HPS revenue to return to year-over-year growth in 2024 as we anticipate networking customers' demand to increase. Turning to segment margins. ATS segment margin in the Q3 was 4.9%, 10 basis points lower year-over-year, as the benefits of volume leverage and ramping programs in our industrial business were more than offset by softness in the capital equipment business. CCS segment margin during the quarter was 6.2%, up 100 basis points year-over-year, marking the first time one of our segment margins has exceeded 6%.

H P. S revenue was $493 million in the quarter, 5% lower year over year, but up 39% sequentially in line with our outlook provided last quarter.

for us in such statements.

Speaker: 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 they're in, our most recent and-report on Form 20F and our other public filings, which can be accessed at SEC.gov and Cedar.com. We assume no obligation to update any forward-looking statement, except is required by law.

H P. S revenues were 24% of total company revenue in the third quarter compared to 27% in the prior year period.

We expect <unk> revenue to return to year to year growth in 2024, as we anticipate networking customers demand to increase.

Turning to segment margins Ats.

Ats segment margin in the third quarter was four 9% 10 basis points lower year over year as the benefits of volume leverage and ramping programs in our industrial business were more than offset by softness in the capital equipment business.

Speaker: In addition, during this call, we will refer to various non-IFRS financial measures, including ratios based on non-IFRS financial measures, consisting of non-IFRS operating margin, adjusted gross margin, adjusted return on the invested capital or adjusted ROIC, adjusted free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted earnings per share, adjusted EPS, adjusted SGNA expense, and adjusted sales to effective tax rates. The sooner should be caution that references to any of the foregoing measures during this call to note non-IFRS financial measures, whether or not specifically designated as such.

Ccs segment margin during the quarter was six 2% up 100 basis points year over year, marking the first time one of our segment margin has exceeded 6%.

Mandeep Chawla: The increase was driven by higher volumes with our hyperscaler customers as well as production efficiencies. Moving on to some additional financial metrics. IFRS net earnings for Q3 were $80 million or $0.67 per share, compared to net earnings of $46 million or $0.37 per share in the prior year period. Adjusted gross margin for Q3 was 9.8%, up 90 basis points year-over-year due to higher volumes in both segments and improved mix. Q3 non-IFRS adjusted effective tax rate was 20% compared to 21% in the prior year period. Non-IFRS adjusted ROIC for Q3 was 21.5%, an improvement of 2.3% compared to the prior year quarter. Moving on to working capital.

The increase was driven by higher volumes with our hyperscale customers as well as production efficiencies.

Moving on to some additional financial metrics.

<unk> net earnings for the third quarter were $80 million or <unk> 67 per share compared to net earnings of $46 million or <unk> 37 per share in the prior year period.

Speaker: These non-IFRS financial measures do not have any standardized meanings prescribed by IFRS, and may not be comparable to similar measures presented by other public companies that report under IFRS, or who report under USGAP, and use non-GAP financial measures to describe similar operating metrics.

Adjusted gross margin for the third quarter was nine 8% up 90 basis points year over year due to higher volumes in both segments and improved mix.

Third quarter non <unk> adjusted effective tax rate was 20% compared to 21% in the prior year period.

Speaker: We refer you to yesterday's press release and our Q3 2023 earnings presentation, which are available at selected.com under the Investor Relations tab, for more information about these, and certain other non-IFRS financial measures, including a reconciliation of historical non-IFRS financial measures, to the most directly comparable IFRS financial measures from our financial stable, and a description of modifications to specified non-IFRS financial measures. During 2022 and 2023, unless otherwise specified, all references to dollars on this call are to US dollars, and per share information is based on deluded shares of standing.

Non <unk> adjusted ROIC for the third quarter was 21, 5% an improvement of two 3% compared to the prior year quarter.

Moving on to working capital.

Mandeep Chawla: At the end of Q3, our inventory balance was $2.26 billion, down $85 million sequentially and down $65 million year-over-year. Cash deposits were $875 million at the end of Q3, up $65 million sequentially and higher by $251 million compared to the prior year period. When accounting for cash deposits, inventory continues to improve meaningfully, lower by $316 million on a year-to-year basis at the end of Q3 and lower by $150 million sequentially. Inventory days, net of cash deposit days, were 72 in Q3 compared to 85 in the prior year period. We anticipate a further improvement in inventory days over the coming quarters as material lead times continue to normalize.

At the end of the third quarter, our inventory balance was $2 2 billion.

Down $85 million sequentially and down $65 million year over year.

Cash deposits were $875 million at the end of the third quarter up $65 million sequentially and higher by $251 million compared to the prior year period.

When accounting for cash deposit inventory continues to improve meaningfully lower by $316 million on a year to year basis at the end of the third quarter and lower by $150 million sequentially.

Rob Mionis: Let me now turn the call over to Rob.

Rob Mionis: Thank you Craig, good morning everyone, and thank you for joining us on today's call. Susque's third quarter revenue of $2.04 billion was towards the high end of our guidance range. Well, a non-IFRS suggested EPS came in at $0.55 exceeding the high end of our guidance range. A non-IFRS operating margin of 5.7% was our 15th consecutive quarter of year, non-IFRS operating margin expansion. Our CCS segment continues to benefit from the true business mix due to the strength of our hyperstail portfolio, who affected by segment margin of 6.2% to the third quarter, the highest ever.

Inventory days net of cash deposit days were 72 in the third quarter compared to 85 in the prior year period.

We anticipate a further improvement in inventory days over the coming quarters as material lead times continue to normalize.

Mandeep Chawla: Cash cycle days were 72 during Q3, 1 day lower sequentially and 9 days higher than the prior year period. Capital expenditures for the quarter were $27 million or approximately 1.3% of revenue compared with 2.0% in Q3 2022. Non-IFRS adjusted free cash flow in Q3 was $34 million compared to $7 million in the prior year period. This represents our 19th consecutive quarter with positive non-IFRS adjusted free cash flow and brings our year-to-date figure to $110 million, more than double our performance of $51 million from the same period last year.

Cash cycle days were 72 during the third quarter, one day lower sequentially and nine days higher than the prior year period.

Capital expenditures for the quarter were $27 million or approximately one 3% of revenue compared with 2.0% in the third quarter of 2022.

Non <unk> adjusted free cash flow in the third quarter was $34 million.

Rob Mionis: We also saw meaningful sequential revenue growth in our HPS business. Our APS segment delivered solid double-digit year-to-year revenue growth. As we continue to see pair win some new program ramps, as well as demand strength in our aerospace business.

Compared to $7 million in the prior year period.

Rob Mionis: Plus, the case strong results in the third quarter are reflective of the bullish secular trend, underpinning our portfolio, and our team's solid execution.

This represents our 19th consecutive quarter with positive non I FRS adjusted free cash flow.

It brings our year to date figure to $110 million more than double our performance of $51 million from the same period last year.

Mandeep Chawla: Given our strong year-to-date performance and positive outlook for Q4, we are raising our non-IFRS adjusted free cash flow expectation from $125 million to $150 million for 2023. Moving on to some additional key metrics. Our cash balance at the end of Q3 was $353 million, which, in combination with our approximately $600 million of borrowing capacity under our revolver, provides us with liquidity of approximately $1 billion. We believe this is sufficient to meet our anticipated business needs. Our gross debt at the end of Q3 was $613 million, leaving us with a net debt position of $260 million.

Given our strong year to date performance and positive outlook for the fourth quarter, we are raising our non <unk> adjusted free cash flow expectation from 125 million to $150 million for 2023.

Speaker: Thank you.

Rob Mionis: Before I provide an update on each of our end markets and some color on 2024, I would like to turn the call over to Mandeep, who will provide a detailed review of our third quarter financial performance and our guidance for the fourth quarter of 2023.

Moving on to some additional key metrics.

Our cash balance at the end of the third quarter was $353 million, which in combination with our approximately $600 million of borrowing capacity under our revolver provides us with liquidity of approximately $1 billion.

Mandeep Chawla: Mandeep, over the year.

Mandeep Chawla: Thank you Rob, and good morning everyone. Third quarter revenue came in at $2.04 billion towards the high end of our guidance range. Revenue was 6% higher year-of-year, supported by higher revenues in both segments, including double digit growth in our ATS segment. Our third quarter non-IFRS operating margin of 5.7% was 60 basis points higher year-of-year. This margin expansion was driven primarily by strong profitability in our CCS segment, supported by solid operational execution. Non-IFRS adjusted earnings per share of the third quarter were 65 cents exceeding the high end of our guidance range, and were 13 cents higher year-of-year, driven primarily by higher operating profits.

We believe this is sufficient to meet our anticipated business needs.

Our gross debt at the end of the third quarter with $613 million, leaving us with a net debt position of $260 million.

Mandeep Chawla: Our Q3 gross debt to non-IFRS trailing twelve-month adjusted EBITDA leverage ratio was 1.1 turns, down 0.1 turn sequentially and down 0.4 turns compared to the same quarter of last year. At 30 September 2023, we were compliant with all financial covenants under our credit agreement. We did not purchase any shares for cancellation under our NCIB during Q3. We do, however, intend to continue to be opportunistic on share repurchases under our current NCIB for the remainder of the year and intend on renewing our NCIB program in December, subject to necessary approval. Now turning to our guidance for Q4 2023.

Our third quarter gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio was 1.1 turn down 0.1 turns sequentially and down 0.4 turn compared to the same quarter of last year.

At September 32023, we were compliant with all financial covenants under our credit agreements.

We did not purchase any shares for cancellation under in CIB. During the third quarter. We do however, intend to continue to be opportunistic on share repurchases under our current in CIB for the remainder of the year and intend on reviewing our NPI program in December subject to necessary approvals.

Mandeep Chawla: Moving on to our segment performance. Third quarter ATS revenue was $859 million, up 12% year-of-year, and in line with our expectations of a low double digit percentage increase. The year-of-year increase in ATS segment revenue was driven by the ramping of new programs in our industrial business, improving demand in A&D, and solid growth in our health tech programs. This growth was partly offset with ongoing market related softness in our capital equipment business.

Now turning to our guidance for the fourth quarter of 2023.

Mandeep Chawla: Q4 revenues are expected to be in the range of $2.0 to $2.15 billion, which if the midpoint of this range is achieved, will be slightly higher compared to the same quarter last year. Q4 non-IFRS adjusted earnings per share are expected to be in the range of $0.65 to $0.71 per share, which would represent an improvement of $0.13 per share or approximately 23% compared to the Q4 of 2022 if the midpoint of the guidance range is achieved. If the midpoint of our revenue and non-IFRS adjusted EPS guidance ranges are achieved, non-IFRS operating margin would be 5.7%, which would represent an increase of 40 basis points over the prior year period.

Fourth quarter revenues are expected to be in the range of 2.0 billion to $2. One 5 billion, which is the midpoint of this range is achieved will be slightly higher compared to the same quarter last year.

Mandeep Chawla: ATS segment revenue accounted for 42% total revenues in the third quarter compared to 40% in the same period last year. Our CCS segment revenue of $1.18 billion were up 2% compared to the prior year period, and accounted for 58% of total company revenues in the third quarter compared to 60% in the prior year period. Year-to-year dynamics were largely unchanged from last quarter, as very strong growth in our enterprise end market, supported by strong demand for proprietary compute, was largely offset by anticipated demand softness in our communications end market.

Fourth quarter non <unk> adjusted earnings per share are expected to be in the range of 65 to 71 cents per share, which would represent an improvement of 13 cents per share or approximately 23% compared to the fourth quarter of 2022, if the midpoint of the guidance range is achieved.

If the midpoint of our revenue and Donna I FRS adjusted EPS guidance ranges are achieved non <unk> operating margin would be five 7%, which would represent an increase of 40 basis points over the prior year period.

Mandeep Chawla: Non-IFRS adjusted SG&A expense for Q4 is expected to be in the range of $67 to 69 million. We anticipate our non-IFRS adjusted effective tax rate to be approximately 20% for Q4, excluding any impact from taxable foreign exchange or unanticipated tax settlement. Now turning to our end market outlook for Q4 of 2023. In our ATS segment, we anticipate revenue to be up in the low single-digit percentage range year-over-year, driven by expected double-digit growth in our industrial and A&D businesses, partly offset by ongoing market softness in capital equipment. We anticipate revenues in our communications end market to be down in the mid-teens percentage range year-over-year, driven by tough comps from the prior year period.

Non <unk> adjusted SG&A expense for the fourth quarter is expected to be in the range of $67 million to $69 million.

Mandeep Chawla: Enterprise end market revenue in the quarter was up 31% year-of-year, higher than our expectation of a low double digit percentage increase. Revenue growth was driven by program ramps and continued strength in demand for proprietary compute from our hyper-scaler customers in support of artificial intelligence applications. Revenue in our communications end market in the third quarter was lower by 10% year-of-year, versus our expectation of a high single digit percentage decrease. The decline was driven primarily by tough comps from a strong prior year period.

We anticipate our non <unk> adjusted effective tax rate to.

To be approximately 20% for the fourth quarter, excluding any impact from taxable foreign exchange.

Were unanticipated tax settlement.

Now turning to our end market outlook for the fourth quarter of 2023.

In our Ats segment, we anticipate revenue to be up in the low single digit percentage range year over year, driven by expected double digit growth in our industrial and A&D businesses, partly offset by ongoing market softness in capital equipment.

Mandeep Chawla: HPS revenue was $493 million in the quarter, 5% lower year-of-year, but up 39% sequentially, in line with our outlook provided last quarter. HPS revenues were 24% of total company revenues in the third quarter, compared to 27% in the prior year period. We expect HPS revenue to return to your growth in 2024, as we anticipate networking customers demand to increase.

We anticipate revenues in our communications end market to be down in the mid teens percentage range year over year, driven by tough comps from the prior year period.

Mandeep Chawla: Finally, in our enterprise end market, we expect revenue to be up in the high 20% range year-over-year, driven by anticipated continuing demand strength in proprietary compute programs from our hyperscaler customers. I'll now turn the call back over to Rob to provide details on the outlook for our end markets and business overall.

Finally in our enterprise end market, we expect revenue to be up in the high 20% range year over year, driven by anticipated continuing demand strength and proprietary compute programs from our hyperscale customers.

Mandeep Chawla: Credit to segment margin. HPS segment margin in the third quarter was $4.9 million. 10 basis points lower year-by-year as the benefits of volume leverage and ramping programs in our industrial business were more than offset by softness than the capital equipment business. IFRS net earnings for the third quarter were $80 million or $67 cents per share compared to net earnings of $46 million or $37 cents per share in the prior year period.

I'll now turn the call back over to Rob to provide details on the outlook for our end markets and business overall.

Rob Mionis: Thank you, Mandeep. Based on our solid performance this quarter and our strong guidance to close out the year, we are pleased to raise our preliminary 2024 outlook. In the coming fiscal year, we are maintaining our expectation of non-IFRS adjusted EPS growth of 10% or more compared to our 2023 outlook, which has increased from $2.25 to $2.36 based on the midpoint of our Q4 guidance. We expect this growth to be driven by a combination of higher revenue across each of our end markets and solid non-IFRS operating margin. I would now like to provide some detail on the outlook for each of our businesses. Beginning with our ATS segment, our industrial business has continued to experience very strong growth in 2023, driven by ramping new programs.

Thank you Mandy.

Based on our solid performance this quarter and a strong guidance to close out the year. We are pleased to raise our preliminary 2020 core outlook.

In the coming fiscal year, we are maintaining our expectation of non <unk> adjusted EPS growth of 10% or more.

<unk> 2023 outlook, which has increased from $2 25.

The $2 36.

Based on the midpoint of our fourth quarter guidance.

We expect this growth to be driven by a combination of higher revenue across each of our end markets and solid non ifr S operating margin.

Mandeep Chawla: Adjusted gross margins for the third quarter was 9.8 percent, up to 90 basis points year-by-year due to higher volumes in both segments and improvement. Third quarter, non-IFRS adjusted effective tax rate was 20 percent compared to 21 percent in the prior year period. Non-IFRS adjusted ROIC for the third quarter was 21.5 percent and improvement of 2.3 percent compared to the prior year quarter.

I would now like to provide some detail on the outlook for each of our businesses.

Beginning with our Ats segment.

Our industrial business has continued to experience very strong growth in 2023, driven by ramping new programs. We expect this momentum to continue into the next year as these green programs continue to ramp.

Rob Mionis: We expect this momentum to continue into the next year as these growing programs continue to ramp. Our PCI business also achieved solid revenue growth in 2023, and we are pleased that they are on track to achieve the synergy objectives established at the time of acquisition. We anticipate continuing growth in 2024, supported by our investment to expand capacity in Indonesia, which is expected to be online by year-end. The recovery in commercial aerospace demand continues to fuel solid growth in our A&D business, supporting a greater than 30% increase in revenues year-to-date compared to the prior year period. Our defense business is also experiencing solid double-digit growth in 2023, supported by a number of new program ramps, and we anticipate this momentum to continue into next year.

Our PCI business also achieved solid revenue growth in 2023 and.

Mandeep Chawla: Moving on to working capital. At the end of the third quarter our inventory balance was $2.26 billion down $85 million sequentially and down $65 million year-by-year. Cash deposits were $875 million at the end of the third quarter, up $65 million sequentially and higher by $251 million compared to the prior year period. When accounting for cash deposits inventory continues to improve meaningfully, lower by $315 million on a year-to-year basis at the end of the third quarter and lower by $150 million sequentially.

And we are pleased that they are on track to achieve the synergy objectives established at the time of acquisition.

We anticipate continuing growth in 2024.

Supported by our investment to expand capacity in Indonesia, which is expected to be online by year end.

The recovery in commercial aerospace demand continues to fuel solid growth in our A&D business supporting a greater than 30% increase in revenues year to date compared to the prior year period.

Our defense business is also experiencing solid double digit growth in 2023 supported by a number of new program ramps and we anticipate this momentum to continue into next year.

Mandeep Chawla: Inventory days, net of cash deposit days were 72 in the third quarter compared to 85 in the prior year period. We anticipate a further improvement in inventory days over the coming quarters as material these times continue to normalize. Cash cycle days were 72 during the third quarter, one day lower sequentially and nine days higher than the prior year period. Capital expenditures for the quarter were $27 million or approximately 1.3 percent of revenue compared to 2.0 percent in the third quarter of 2022.

Rob Mionis: With commercial air traffic now approaching more normalized levels, we anticipate our overall A&D revenue growth rate moderating in 2024, though remaining relatively strong as we continue to have a healthy backlog. Moving on to capital equipment. Demand continues to be soft across the broader wafer fab equipment market, which has been compounded by the recent US-China trade restrictions affecting the semi industry. We continue to be encouraged by our ability to execute in a challenging market and remain profitable despite a material year-over-year reduction in volume. Overall, our capital equipment portfolio is benefiting from a combination of favorable mix and the ramping of new program wins. Looking ahead, we believe that our capital equipment business is operating at trough levels. While we expect the underlying market demand to be relatively flat year-over-year in 2024, we do expect our business to grow based on new program wins.

With commercial air traffic now approaching more normalized levels, we anticipate our overall A&D revenue growth rate moderating in 2024 remaining relatively strong as we continue to have a healthy backlog.

Moving on to capital equipment.

Demand continues to be soft across the broader wafer fab equipment market, which has been compounded by the recent U S. China trade restrictions affecting the semi industry.

Mandeep Chawla: Non-IFRS adjusted free cash flow in the third quarter was $34 million compared to $7 million in the prior year period. This represents our 19th consecutive quarter with positive non-IFRS adjusted free cash flow and brings our year-to-date figure to $110 million more than double our performance of $51 million from the same period last year. Given our strong year-to-date performance and positive outlook to the fourth quarter, we are raising our non-IFRS adjusted free cash allocation from $125 million to $150 million for 2023.

We continue to be encouraged by our ability to execute in a challenging market and.

And we remain profitable despite a material year over year reduction in volume overall, our capital equipment portfolio is benefiting from a combination of favorable mix and the ramping of new program wins looking ahead.

We believe that our capital equipment business is operating at trough levels and while we expect the underlying market demand to be relatively flat year over year and 2024, we do expect our business to grow based on new program wins.

Mandeep Chawla: Moving on to some additional key metrics. Our cash balance at the end of the third quarter was $353 million which, in combination with our approximately $600 million of borrowing capacity under our revolver, provides us with liquidity of approximately $1 billion. We believe this is sufficient to meet our anticipated business needs. Our gross debt at the end of the third quarter was $613 million, leaving us with a net debt position of $260 million.

Rob Mionis: In our health tech business, the ramping of new programs in surgical instruments and imaging devices are supporting solid growth during 2023. Overall, the demand outlook for our health tech business remains healthy with growth into 2024. Now turning to our CCS segment. The broader environment continues to be positive for our CCS segment as hyperscalers are making significant investments in data center capacity. Market observers have suggested that we may be in the early days of this long-term secular trend, accompanied by a major hardware upgrade cycle to support artificial intelligence applications and the resulting increase in data center traffic. We believe that the different stages of this investment cycle will be synergistic and support demand for our entire suite of data center offerings at various times throughout the entire cycle.

In our health Tech business, the ramping of new programs and surgical instruments and imaging devices are supporting solid growth during 2023 overall.

Overall, the demand outlook for our health Tech business remains healthy with growth into 'twenty 'twenty four.

Now turning to our Ccs segment.

The broader environment continues to be positive for our Ccs segment as Hyperscale is are making significant investments in data center capacity.

Market observers have suggested that we may be in the early days of this long term secular trend accompanied by a major hardware upgrade cycle to support artificial intelligence application.

Mandeep Chawla: Our third quarter gross debt to non-IFRS, trailing 12-month adjusted EBITDA leverage ratio, was 1.1 turn, down 0.1 turn sequentially, and down 0.4 turn compared to the same quarter of last year. As September 30th, 2023, we were compliant with all financial covenants under our credit agreements.

And the resulting increase in data center traffic, we believe that the different stages of this investment cycle will be synergistic and support the band for our entire suite of data center offerings at various times throughout the entire cycle.

Mandeep Chawla: We did not purchase any shares for cancellation under our NCIB during the third quarter. We do, however, intend to continue to be opportunistic on share purchases under our current NCIB for the remainder of the year and intend on renewing our NCIB program in December, subject to necessary approval.

Rob Mionis: Demand in our enterprise end market is showing significant strength, benefiting from the tailwinds of hyperscalers' investments in data center compute capacity to support the growth in artificial intelligence applications. Our medium-term outlook for this business also remains very positive, with expectations for continued strong demand and proprietary compute, as well as ramping programs in storage. We anticipate that these factors will support double-digit revenue growth rate in our enterprise business through 2024. The near-term outlook for our communications end market remains soft into the end of the year, primarily due to tough comps. However, we do expect that this business will resume year-to-year revenue growth in 2024 as customer investments in compute begin to pull through demand for networking. We are encouraged by our medium-term outlook for our communications end market, supported by our leading position in 400G and recent wins in 800G.

Demand in our enterprise end market is showing significant strength benefiting from the tail winds up hyperscale as investments in data center compute capacity to support the growth in artificial intelligence applications.

Mandeep Chawla: Now turning to our guidance for the fourth quarter of 2023, fourth quarter revenues are expected to be in the range of $2.0 billion to $2.15 billion, which, if the midpoint of this range is achieved, will be slightly higher compared to the same quarter last year. Fourth quarter, non-IFRS-adjusted earnings per share are expected to be in the range of $0.65 to $0.71 per share, which would represent an improvement of $0.13 per share, or approximately 23% compared to the fourth quarter of 2022, if the midpoint of the guidance range is achieved.

Our medium term outlook for this business also remains very positive with expectations for continued strong demand and proprietary compute.

Well as ramping programs in storage.

We anticipate that these factors will support double digit revenue growth rate in our enterprise business through 'twenty 'twenty four.

The near term outlook for our communications end market remained soft into the end of the year.

Primarily due to tough comps. However, we do expect that this business will resume year to year revenue growth in 2024 as.

Mandeep Chawla: If the midpoint of our revenue and non-IFRS-adjusted EPS guidance ranges are achieved, non-IFRS operating margin would be 5.7%, which would represent an increase of 40 basis points over the prior year period. The non-IFRS-adjusted SGN-8 fence for the fourth quarter is expected to be in the range of $0.67 to $0.69 million. We anticipate our non-IFRS-adjusted effective tax rate to be approximately 20% for the fourth quarter, excluding any impact from taxable foreign exchange or unanticipated tax settlement.

As customer investments in compute begin to pull through demand for networking.

We're encouraged by our medium term outlook for our communications end market supported by our leading position in 400 G and recent wins and 800 G.

Rob Mionis: We are also encouraged by the sequential growth in our HPS business in Q3 and believe that it is poised to return to annual growth in the coming year as customer inventory levels are expected to normalize and new networking and compute programs ramp in 2024. Finally, I'm pleased to announce that we will be holding a virtual investor briefing on 29 November. We are looking forward to walking the investment community through an overview of our CCS and ATS portfolios, including a more thorough look at the opportunities we see in our hyperscaler business. We also intend to provide further details on our 2024 outlook, as well as our long-term financial targets and capital allocation framework. We will be releasing the details of the event shortly, and we hope that all of you can join us on that day.

We are also encouraged by the sequential growth in our hps business in the third quarter.

And believe that it is poised to return to annual growth in the coming year.

As customer inventory levels are expected to normalize.

And new networking and compute programs ramp in 2024.

Finally, I am pleased to announce that we will be holding a virtual investor briefing on November 29.

Mandeep Chawla: Now turning to our end-market outlook for the fourth quarter of 2023. In our ATS segment, we anticipate revenue to be up in the low single-digit percentage range year-of-year, driven by expected double-digit growth in our industrial and AMD businesses, partly offset by ongoing market softness and capital equipment. We anticipate revenues in our communications end-market to be down in the mid-teens percentage range year-of-year, driven by tough comps from the prior year period. Finally, in our enterprise end-market, we expect revenues to be up in the high 20% range year-of-year, driven by anticipated continuing advanced rent in proprietary compute programs from our hyper-staylor customers.

We're looking forward to walking to the investment community through an overview of our Ccs and Ats portfolios.

Putting a more thorough look at the opportunities we see in our Hyperscale business.

We also intend to provide further details on our 2024 outlook as well as our long term financial targets and capital allocation framework.

We will be releasing the details of the event shortly and we hope that all of you can join us on that day.

Rob Mionis: We have much to look forward to as we aim to close with a strong finish to the year. We are on track to achieve the highest ever non-IFRS adjusted operating margin and non-IFRS adjusted earnings per share in the company's history, eclipsing both of the previous highs set last year. I have the utmost confidence and trust in our team to execute on our long-term strategy, continue to deliver on our targets, and set us up for another great year in 2024. With that, I would now like to turn the call over to the operator for questions.

We have much to look forward to as we aim to close with a strong finish to the year. We are on track to achieve the highest ever non <unk> adjusted operating margin and non <unk> adjusted earnings per share in the company's history eclipsing both of the previous highs throughout last year.

Rob Mionis: I'll now turn the call back over to Rob to provide details on the outlook for our end-market and business overall. Thank you, Mandy. This in our solid performance this quarter, and our strong guidance to close out the year, we are pleased to raise our preliminary 2024 outlook.

I have the utmost confidence and trust in our team to execute on our long term strategy.

Continued to deliver on our targets and set us up for another great year in 2024.

Rob Mionis: In the coming fiscal year, we are maintaining our expectation of non-IFRS adjusted EPS growth of 10% or more compared to our 2023 outlook, which has increased from 2025 to 2036. Based on the mid-point of our fourth quarter-gun. We expect this growth to be driven by a combination of higher revenue across each of our end markets and solid non-IFRS operating margin.

With that I would now like to turn the call over to the operator for questions.

Yes.

Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the number 1 on your touch-tone phone. You will hear a 3-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by the number 2. If you are using a speakerphone, please lift your handset before pressing any keys. Your first question comes from the line of Robert Young from Canaccord. Please go ahead.

Thank you, Sir ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one and you touched downtime you'll hear see Tom Tom acknowledging your request and your question. So the Coke and you know I get a daily seats should you wish.

Climb from the polling process. Please press star followed by the number killed.

Rob Mionis: I would now like to provide some detail on the outlook for each of our businesses. Beginning with our ATS segment, our industrial business has continued to experience very strong growth in 2023, given by ramping new programs. We expect this momentum to continue into the next year as these green programs continue to last. Our PCI business also achieved solid revenue growth in 2023 and we are pleased that they are on track to achieve the synergy objectives established at the time of acquisition.

If you are using a speaker phone please lift your handset before pressing any keys.

Your first question comes from the line of Robert Young from Cana Quake. Please go ahead.

Robert Young: Hi, good morning. The first place I wanted to ask about is one of the last topics on your prepared remarks around what you've talked about the pause and switch sales to hyperscalers. I think previously you'd suggested it was buffer inventory that needed to be digested. I think at the very end of your comments, you suggested that it was now tied to the proprietary compute opportunity. I was wondering, I was hoping you could get into a little more detail around, you know, what's the driver between the switch sales, how closely tied to it, to the AI opportunity is it, and then maybe a little more detail around, you know, how that recovers.

Hi, good morning.

The first place I wanted to ask about is when is the last topics on your prepared remarks around the.

You've talked about the pause in switch sales to our Hyperscale I think previously you had suggested it was buffer inventory that needed to be digested.

And I think at the very end of your comments you suggested that it was now tied to the proprietary compute opportunity and so I was wondering I was hoping you could get into a little more detail around.

Rob Mionis: We anticipate continuing growth in 2024, supported by our investment to expand capacity in Indonesia, which is expected to be online by year end. The recovery and commercial aerospace demand continues to fuel solid growth in our AMD business, supporting our greater than 30% increase in revenues year to date, compared to the prior year period. Our defense business is also experiencing solid double-digit growth in 2023, supported by a number of new program ramps, and we anticipate this momentum to continue into next year. With commercial traffic now approaching more normalized levels, we anticipate our overall AMD revenue growth rate moderating in 2024, so remaining relatively strong as we continue to have a healthy backlog.

What's the driver between the switch sales how closely tied to it to the AI opportunity is it and then maybe a little more detail around how that recovers.

Rob Mionis: Hi, Rob. Sure. First I'll start off with saying that, you know, our hyperscalers will grow close to 30% this year, and we have very strong demand with that group of customers into next year. In fact, the demand is so strong, our growth as we exit the year is being paced by material availability, of which we think will clear up in the very early parts of next year. In terms of networking demand, we are getting towards the end of some inventory burn down. For the top customers that we track that have the most buffers, one of them has returned to growth both sequentially and year to year, and the other one will do so very early next year.

Hi, Rob sure.

First I'll start off with saying that you know a hyperscale are as well.

We will grow close to 30% this year and we have very strong demand with that group of customers into next year.

The demand is so strong.

Growth as we exit the year as being paced by material availability of which we think will clear up in the very early parts of next year.

Terms of networking demand, we are getting towards the end of some inventory burn down for.

Rob Mionis: Moving on to capital equipment, demand continues to be soft across the broader way for fabric equipment market, which has been compounded by the recent US China trade restrictions affecting the semi industry. We continue to be encouraged by our ability to execute in the challenging market, and remain profitable despite a material year-to-year reduction in volume. Overall, our capital equipment portfolio is benefiting from a combination of favorable mix and the ramping of new program winds.

The top customers that we track that had the most buffer is one of them has returned to growth both sequentially and year to year.

And the other one will do so very early next year, we are expecting.

Rob Mionis: We are expecting the pull-through of networking to happen with the increased demand of proprietary compute. We're also starting to ramp some new 800G programs in H2 2024.

Full through of networking.

To happen with the increased demand our proprietary compute we're also starting to ramp a new 803 programs in the second half of 2024.

[Company Representative] (Celestica Inc.): Okay. Thank you. A question on capacity. If the AI optimized server business continues at this pace and the switching business recovers, do you have the capacity to grow both of those businesses?

Robert Young: Okay. Thank you. A question on capacity. If the AI optimized server business continues at this pace and the switching business recovers, do you have the capacity to grow both of those businesses?

Okay. Thank you and a question on capacity.

If the AI.

Rob Mionis: Looking ahead, we believe that our capital equipment business is operating at trial levels, and while we expect the underlying market demand to be relatively flat year over year in 2024, we do expect our business to grow based on new program winds. In our health tech business, the ramping of new programs in surgical instruments and imaging devices are supporting solid growth during 2023. Overall, the demand outlook for our health tech business remains healthy with growth into 2024.

AI optimized server business continues at this pace.

And the switching business.

Recovers do you have the capacity to grow both of those businesses.

Rob Mionis: We do, Rob. We started some expansion earlier in the year in Southeast Asia, and that capacity, 80,000 sq ft, will be coming online in Q1 2024. We're also starting to invest side by side with our customers to expand capacity in Thailand, another 50,000-plus sq ft. That's gonna support AI growth well into the future, and that capacity will come online in the first part of 2025. Again, we have a very bullish view of AI growth, you know, going into, you know, the medium to long term. We think we're at the very beginning of a long-term upgrade cycle. As such, we're investing alongside our customers to increase our capacity to support their very robust demand.

We do Rob we started some expansion earlier in the year in Southeast Asia, and the capacity 80000 square feet will be coming online in the first quarter of 'twenty four.

We're also starting to invest side by side with our customers to expand capacity in Thailand, Another 50000 plus square feet.

And that's going to support AI growth well into the future and that capacity will come online in the first part of 2025 again, we have a very bullish.

Rob Mionis: Now turning to our CCF segment. The broader environment continues to be positive for our CCF segment, as hyperscalers are making significant investments in data center capacity. Market observers have suggested that we may be in the early days of this long-term cycle of trend, accompanied by a major hardware upgrade cycle to support artificial intelligence application. And the resulting increase in data center traffic. We believe that the different stages of this investment cycle will be synergistic and support the band for our entire suite of data center offerings that various times throughout the entire strike.

Bullish view of AI growth going into.

Liam to long term, we think we are at the very beginning of a long term upgrade cycle and as such we're investing alongside our customers to increase our capacity discipline. There are very robust demand.

[Company Representative] (Celestica Inc.): Okay. Just one clarification there on the side-by-side investment with a customer. Does that create any kind of exclusive relationship, or does it tie a customer to you a little more closely? Maybe a little more clarity around that, and then I'll pass line.

Robert Young: Okay. Just one clarification there on the side-by-side investment with a customer. Does that create any kind of exclusive relationship, or does it tie a customer to you a little more closely? Maybe a little more clarity around that, and then I'll pass line.

Okay. One just one clarification there on the side by side investment with that with a customer does that create any kind of exclusive relationship or does it tie a customer to you a little more closer maybe a little more clarity around that and then I'll pass line.

Rob Mionis: Yeah. It's a very sticky relationship with our customers that we're doing this with, and it just shows the commitment that they have with us relative to investing side by side with us and expanding the capacity. Also in Thailand, you know, we're building basically a dedicated building just to support AI growth with our customer. That's a pretty profound statement.

Yeah, It's I'll say, it's a very sticky relationship with our customers that we're doing this with and it just shows the commitment that they have.

Rob Mionis: Demand in our enterprise and market is showing significant strength benefiting from the tailwinds of PytroStale's investments in data center compute capacity to support the growth in artificial intelligence applications. On medium-term outlet to this business also remains very positive, with expectations for continued strong demand and proprietary compute, as well as ramping programs and storage. We anticipate that these factors will support double-digit revenue growth rates in our enterprise business through 2024.

With us relative to our investing side by side with us in expanding the capacity.

And.

Also in.

In Thailand.

We're building.

Basically a dedicated building just to support AI growth with our customer and that's a pretty profound statement.

Yes.

Mandeep Chawla: Thanks for all that. I'll buy for now.

Robert Young: Thanks for all that. I'll buy for now.

Thanks for all that pipeline.

Operator: Your next question comes from the line of Maxim Matushansky from RBC Capital Markets. Please go ahead.

Your next question comes from the line of Maxine and at this time Scott from RBC capital markets. Please go ahead.

Rob Mionis: The near-term outlet for our communications and market remains soft into the end of the year, primarily due to tough costs. However, we do expect that this business will resume year-to-year revenue growth in 2024, as customer investments in compute begin to pull through demand for networking. We are encouraged by our medium-term outlet for our communications and market, supported by our leading position in 400G and recent wins in 800G. We are also encouraged by the sequential growth and our HBS business in the third quarter, and believe that it is poised to return to annual growth in the coming year, as customer inventory levels are expected to normalize, and new networking and compute programs ramp in 2024.

Maxim Matushansky: Yeah, good morning. I just wanted to ask if there's anything you can share in terms of how the conversations with the hyperscaler customers are going for 2024 visibility, or otherwise, I guess at what point do you expect to have a better idea of that demand for the back half of 2024 across the different programs?

Yeah. Good morning, just wanted to ask if there is anything you can share in terms of how the conversations with the hyperscale customers are going for 2024 visibility or otherwise I guess at what point do you expect to have a better idea of that demand for the back half of 'twenty 'twenty four across the different programs.

Rob Mionis: Thanks for the question. Hyperscalers typically lock down their full year budget towards the end of October, early November. Right now I think we have pretty good visibility into Q3 2024. In the next two weeks, we'll probably have full visibility into all of 2024. In our investor update briefing on 29 November, we'll be providing additional color on 2024 and also color, you know, for our three-year outlook as well. Right now, you know, demand is very robust across our hyperscalers, especially in the areas of proprietary compute.

Thanks for the question.

Hyperscale is typically locked down their full year budget towards the end of October early November so right now I think we have.

Pretty good visibility into the third quarter of <unk> 24 in the next two weeks, we'll probably have full visibility into all of 2024 and in our Investor update briefing in November 29th we'll be providing.

Rob Mionis: Finally, I'm pleased to announce that we will be holding a virtual investor briefing on November 29. We are looking forward to walking the investment community through an overview of our CCS and ATS portfolios, including a more thorough look at the opportunities we see in our highest-scale business. We also intend to provide further details on our 2024 outlook, as well as our long-term financial targets and capital allocation framework. We will be releasing the details of the event shortly, and we hope that all of you can join us on that day.

Additional color on 24 and also color.

For our three year outlook as well.

But right now demand is very robust.

Across our Hyperscale is especially in areas of our proprietary computer.

Maxim Matushansky: Just in terms of your competitiveness with those customers, have you seen any changes in competitive positioning, whether that's competitors being more aggressive on price or new entrants or maybe supply chain conditions are better for competitors? Like, anything that might impact your relationships with the hyperscaler customers in the foreseeable future?

Just in terms of your competitiveness with those customers have you seen any changes in competitive positioning whether that's competitors being more aggressive on price or or new entrants or maybe.

Supply chain conditions are better for our competitors like anything that might impact.

Rob Mionis: We have much to look forward to as we aim to close with a strong finish to the year. We are on track to achieve the highest-ever non-IFRS adjusted operating margin, and non-IFRS adjusted earnings per share in the company's history, equipsing both of the previous highs that last year. I have the utmost confidence and trust in our team to execute on our long-term strategy, continue to deliver on our targets, and set us up for another great year in 2024.

Your relationships with the Hyperscale customers in the foreseeable future.

Rob Mionis: This class of customer right now is very focused in on partners that could reliably and technically scale volume. You know, that plays to our strengths. These compute modules, project compute modules are very complex. They require water cooling, which we're very good at. We're also very good at ramping new programs. The most important award criteria is suppliers that can reliably scale new production, and that's why we've been winning more than our fair share of work with these guys.

This class a customer right now is very focused in on.

Partners that could reliably and technically scale volume.

And that plays to our strengths. These compute modules prior to compute modules are very complex they require water cooling, which we're very good at and we're also very good at ramping new programs. So the most important award criteria are suppliers that can reliably.

Speaker: With that, I would now like to turn the call over to the Operator for Questions.

Speaker: Thank you, sir.

Gail new production and that's why we've been winning more than our fair share.

Speaker: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging a request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speaker phone, please lift your hands up before pressing any keys.

Our work with these guys.

Maxim Matushansky: Maybe just one final one. On the Q4 guidance, it implies an enterprise segment revenues to re-accelerate quarter over quarter, while ATS, I guess, implies fairly flat quarter over quarter. Are these more timing related, or is there anything to call out in terms of the changes kind of maybe in the near term to those end markets?

And maybe just one final one.

The Q4 guidance it implies and enterprise segment revenues to Reaccelerate core of a core Etfs.

It's fairly flat quarter over quarter or these more timing related or is there anything to call out in terms of the changes kind of maybe in the in the near term to to those end markets.

Robert Young: Your first question comes from the line of Robert Young from Canacord.

Mandeep Chawla: Yeah. Good morning, Maxim, it's Mandeep here. You know, first off, I would talk about H2 2023 in totality, which is, you know, we're coming in at $7,900 for the year. The outlook we had 9 or 3 months ago for the second half is largely intact. We did see some accelerated demand that took place in Q3, so a little bit of revenue did shift from Q4 to Q3. Largely, otherwise, Q4 is in line with what we were seeing just a few months ago. To your point, in terms of the underlying dynamics, the enterprise area is probably the area of the most growth that we're seeing right now.

Hey, good morning, Max I mean, it's made deep here.

Robert Young: Please go ahead. Hi. Good morning.

First off I would talk about the second half of 'twenty three in totality.

Rob Mionis: The first place I wanted to ask about is one of the last topics on your prepared remarks around what you've talked about the pause and switch sales to hyperscalers. I think previously it suggested it was buffer inventory that needed to be digested, and I think it's a very end of your comments, you suggested that it was now tied to the proprietary compute opportunity and so I was hoping you could get into a little more detail around what the driver between the switch sales, how closely tied to the AI opportunity is it and then maybe a little more detail around how that recovers.

As you know we're coming in at 7900 for the year the outlook, we had nine or three months ago for the.

The second half is largely intact, we did see some accelerated demand that took place in the third quarter. So a little bit of revenue did shift from Q4 to Q3, but largely otherwise Q4 is in line with what we were seeing just a few months ago to your point in terms of the underlying dynamics are the <unk>.

Enterprise area is probably the area of the most growth that we're seeing right now that's been happening is we've gone through the year and it's continuing into Q4, and frankly is going to be continuing into next year and it's tied in many cases, specifically to the proprietary compute.

Mandeep Chawla: That's been happening as we've gone through the year, and it's continuing into Q4, and frankly, is gonna be continuing into next year. It's tied, in many cases, specifically to the proprietary compute demand that we're in the process of fulfilling. ATS too, if you just look at ATS in total, I mean, the growth this year has been terrific. Right now it's on track for about 13% year over year growth on a full year basis. There's a little bit of timing delay sometimes between various quarters. You know, after growing strong double digits last year, it's gonna be low double digits this year. Our outlook going into next year for ATS continues to be targeting that 10% number.

Rob Mionis: Hi Rob, sure. First I'll start off by setting up a high for scalers, we'll grow close to 30% this year and we have very strong demand with that group of customers into next year. In fact the demand is so strong growth as we exit the year is being paced by until availability of which we think will clear up in the very early parts of next year. In terms of networking demand, we are getting towards the end of some inventory burn down.

Man that we're in the process of appealing.

A T S. Two if you just look at Etfs in total I mean, the growth. This year has been a terrific right now it's on track for about 13% year over year growth on a full year basis, and so theres a little bit of timing delays sometimes between.

Various quarters, but after growing strong double digits last year, it's going to be low double digits. This year and our outlook going into next year for Ats continues to be targeting that 10% number.

Mandeep Chawla: If you know, the last thing I would also say is that if you look at the end markets within ATS, we saw very robust growth in three of the four markets. We're gonna be growing 13% this year despite capital equipment being down, over 30%.

Rob Mionis: For the top customers that we track that have the most buffer is one of them has returned to growth both sequentially and year to year and the other one will do so very early next year. We are expecting the pull through of networking to happen with the increased demand of proprietary compute. We are also starting to ramp some new 800G programs in the second half of 2024.

And if you know.

The last thing I would also say is that if you look at the end markets within Ats, we saw very robust growth in three of the four markets. So we're gonna be growing 13% this year, despite capital equipment being down over.

Over 30%.

Maxim Matushansky: Great. Thanks. I'll pass the line.

Great. Thanks, so passionately.

Mandeep Chawla: Thanks, Maxim.

Thanks, Mike.

Operator: Your next question comes from the line of Daniel Chan from TD Cowen. Please go ahead.

Your next question comes from the line of Daniel Chan from TD Cowen. Please go ahead.

Rob Mionis: Okay thank you and a question on capacity, if the AI Optimized Server business continues at this pace and the switching business recovers, do you have the capacity to grow both of those businesses? We do, Rob. We started some expansion earlier in the year in Southeast Asia and that capacity 8,000 square feet will be coming online in the first quarter of 24. We're also starting to invest side by side with our customers to expand capacity in Thailand another 50,000 plus square feet and that's going to support AI growth well into the future and that capacity will come online in the first part of 2025 again.

Daniel Chan: Hi. Thanks. Mandeep, you're talking about the ATS strength this year. Next quarter, you're guiding it down to be up about low single digits, so a decel in that growth. Anything to call out there for that decel? Is it anything in the semi-cap weakness or any delays like that?

Hi, Thanks, maybe if you're talking about are the ETS strengths. This year next quarter, you're kind of guiding it for next quarter, you're guiding it down to be up about low single digit so a diesel in that growth anything to call out there for that do you sell is that anything that semi cap weakness or any delays like that.

Mandeep Chawla: No. Relatively flat on a sequential basis, Dan, but I'd point maybe to a couple of things. One is, again, outside of capital equipment, we're seeing good growth across all of our end markets. We are also facing tough comps. If you just look at the Q4 of last year, ATS grew by 29% organically. It was a very strong Q4 of last year, but we're glad to see that this peak revenue that we're seeing currently in ATS, which I believe is at a record level, is holding going into the Q4.

No relatively flat on a sequential basis.

Dan, but I would point maybe to a couple of things one is again outside of capital equipment. We're seeing good growth across all of our end markets, but we are also facing tough comps. If you just look at the fourth quarter of last year Ats grew by 29% organically.

So it was a very strong fourth quarter of last year, but we're glad to see that this peak revenue that we're seeing currently in Etfs, which I believe is at a record level is.

Rob Mionis: We have a very bullish review of AI growth going into the medium to long term. We think we're at the very beginning of a long term upgrade cycle and as such we're investing alongside our customers to increase our capacity to support their very robust demand.

Holding going into the fourth quarter.

Rob Mionis: Okay. That's good to hear. If we just switch gears to the HPS business, one of the strongest sequential growth we've ever seen out of the business. Are AI programs being migrated to HPS engagements, or is there something else driving that strength?

Daniel Chan: Okay. That's good to hear. If we just switch gears to the HPS business, one of the strongest sequential growth we've ever seen out of the business. Are AI programs being migrated to HPS engagements, or is there something else driving that strength?

Okay, that's good to hear.

And then if we just switch gears to the H P. S. A business one of the strongest sequential growth we've ever seen out of the business.

AI programs being migrated to H P. S engagements or is there something else driving that strength.

Rob Mionis: Okay one clarification there on the side by side investment with a customer. Does that create any kind of exclusive relationship or does it tie a customer to you a little more close and maybe a little more clarity around that and then I'll pass line. Yeah I'll say it's a very sticky relationship with our customers that we're doing this with and it just shows the commitment that they have with us relative to investing side by side with us and expanding the capacity. And also in Thailand you know we're building basically a dedicated building just to support AI growth with our customer and that's a pretty profound statement.

Mandeep Chawla: We are seeing some HPS proprietary compute programs being migrated to HPS. That is still in the early stages. The drivers of the HPS growth is really, you know, a starting of some increased network demand, as one of the earlier calls mentioned. We are seeing

Rob Mionis: We are seeing some HPS proprietary compute programs being migrated to HPS. That is still in the early stages. The drivers of the HPS growth is really, you know, a starting of some increased network demand, as one of the earlier calls mentioned. We are seeing

We are seeing.

Robert Young: Thanks for all that.

Some H B S proprietary.

Programs being migrated to H B S.

It is still in the early stages the.

The drivers of the H P. S growth is really a <unk>.

Starting of some increased network demand is one of the earlier callers mentioned we are seeing.

Rob Mionis: A couple of our hyperscalers starting to buy more and more networking gear, which is HPS, gear as well.

A couple of our Hyperscale is starting to buy more and more networking gear, which is H P. S gear as well, yes, so going into next year.

Mandeep Chawla: Yeah. Going into next year, Dan, we are expecting growth in HPS, and there's two nice drivers that are happening. One is the 800G switch is now starting to come online, and some of those are HPS products, that'll be towards the back end of the year. There is some compute products as well in our HPS portfolio, which you could tie both of those to overall AI.

Dan we are expecting growth in H P. S and Theres two nice drivers that are happening one is the eight energy switches now starting to come online and some of those are HPA products that'll be towards the back end of the year and then there is some compute products as well and our hps portfolio.

Which are tied both that you could tie both of those to overly.

Speaker: I'll pass line.

Maxim Matushansky: Your next question comes from the line of Maxim Mabashansky from RBC Capitol Margus.

Rob Mionis: Great. Thank you.

Daniel Chan: Great. Thank you.

Great. Thank you.

Mandeep Chawla: Thanks, Dan.

Thanks, Dan.

Maxim Matushansky: Please go ahead.

Operator: Your next question comes from the line of Thanos Moschopoulos from BMO. Please go ahead.

Rob Mionis: Good morning. I just wanted to ask if there's anything you can share in terms of how the conversations with the Hyperscale customers are going for 2024 visibility or otherwise. I guess at what point do you expect to have a better idea of that demand for the back half of 2024 across the different programs? Thanks for the question. Hyperscale is typically locked down their full-year budget towards the end of October, early November. So right now, I think we have pretty good visibility into the third quarter of 2024. In the next two weeks, we'll probably have full visibility into all of 2024.

Your next question comes from the line of Thomas <unk> Chopra from BMO. Please go ahead.

Thanos Moschopoulos: Hi, good morning. Generally speaking, it seems like macro conditions have deteriorated the last couple of months. Are you seeing any signs of that in any of your end markets or no, because of the specific ramps and markets you're involved in?

Hi, good morning.

Generally speaking it seems like macro conditions have deteriorated last couple of months are you seeing any.

Does that in any of your end markets or no because of the specific ramps in end markets you're involved in.

Rob Mionis: Hey, Thanos. I would say, you know, overall, our markets are holding pretty tight. You know, we're not very exposed to consumer markets or things that are very interest rate sensitive. You know, just going around the markets within A&D, A&D business continues to be strong. We have a very healthy backlog. It's tool availability is really pacing our ability to support demand there. Going into next year, we see some incremental growth coming out of defense programs supporting what's happening in the world. Within industrial, you know, I would say, you know, across the board, we are seeing a little bit of a slowdown in, you know, the EV charger portion of our portfolio. Again, that's a very small portion of our portfolio, 2%.

I think that is I would say overall.

Our markets are holding pretty tight we're not very exposed to consumer markets are things that are very interest rate sensitive.

You know just going around the markets within a N D a N.

The business continues to be strong we have a very healthy backlog it's up to.

Rob Mionis: And in our investor update briefing in November 29th, we'll be providing additional color on 24 and also color, you know, for our three-year outlook as well. But right now, you know, demand is very robust across the Hyperscale as especially in the areas of a proprietary compute. Just in terms of your competitiveness with those customers, have you seen any changes in competitive positioning, whether that's competitors being more aggressive on price or a new entrance or maybe supply chain conditions are better for competitors, anything that might impact your relationships with the Hyperscale customers in the foreseeable future?

Until availability is really painting, our ability to support demand there going into next year, we see some inc.

Incremental growth coming out of defense program supporting what's happening in the world.

Within industrial.

I'd say across.

The board, we are seeing a little bit of a slowdown in the.

The EV charge a portion of our portfolio again, that's a very small portion of our portfolio of 2%.

Rob Mionis: The other portions of our industrial portfolio are growing very nicely. Industrial is having very robust growth this year and very strong double-digit growth going into next year as well. Then we also talked about, more broadly speaking, proprietary compute and all of our products that support AI growth, very strong growth, going into 2024 versus 2023. 2023 is also having some stupendous growth as well.

But the other portions of our industrial portfolio are growing very nicely. Our industrial is having very robust growth this year and very strong double digit growth going into next.

Next year as well and then we also talked about more broadly speaking.

Rob Mionis: This graph of customer right now is very focused in on partners that could reliably and technically scale volume. And, you know, that plays to our strengths. These compute modules prior to compute modules are very complex. They require water cooling, which we're very good at. And we're also very good at ramping new programs. So the most important award criteria is suppliers that could reliably scale new production. And that's why we're continuing more than our fair share of work with these guys.

Proprietary compute and all of our products that support AI growth.

Very strong growth going into our 24 versus <unk> 23, and 23 is also having some.

It depends its growth as well.

Yeah.

Thanos Moschopoulos: Great. Cash cycle days were up, due to higher receivables. Can you provide some color on the dynamic there?

Great.

Cash cycle days were up due to higher receivables can you provide some color on the dynamic there.

Mandeep Chawla: Yeah. Hey, Thanos. I'd say quarter-to-quarter dynamics sometimes are just account specific. Overall, though, if we look at free cash flow, we're happy with the conversion that we've been seeing. You know, $110 million year to date, that's kinda double what we did at the same time last year. And then as you saw in our prepared remarks, we are increasing our free cash flow target for this year to $150 million. At the beginning of the year, it was $100 million. We're starting to see some good working capital movements. We do expect to see a strong conversion going into Q4 and into next year as well.

Yeah, Hey, Dennis.

I'd say quarter to quarter dynamics, sometimes they're just the account specific overall, though if we look at free cash flow, we're happy with the conversion that we've been seeing $110 million year to date it kind of doubled what we did at the same time last year.

Maxim Matushansky: And let me just one final one on the Q4 guidance. It implies enterprise segment revenues to reaccelerate core recorder will ATS. It implies fairly flat core recorder. Are these more timing related or is there anything to call out in terms of the changes, kind of maybe in the near term to those on markets?

And then as you saw in our prepared remarks, we are increasing our free cash flow.

For this year to $150 million at the beginning of the year was 100 and so we're starting to see some good working capital movements, we do expect to see a strong conversion going into the fourth quarter and into next year as well so while the cash cycle days may have spiked a little bit on some of the specific accounts.

Mandeep Chawla: While the cash cycle days may have spiked a little bit on some of the specific accounts, it'll normalize as we go into the next few quarters.

It will normalize as we go into the next few quarters.

Mandeep Chawla: Good morning, Maxim. It's my deep here. You know, first off, I would talk about the second half of 23 in totality, which is, you know, we're coming in at 7900 for the year. The outlook we had nine or three months ago for the second half is largely intact. We did see some accelerated demand that took place in the third quarter. So a little bit of revenue did shift from Q4 to Q3, but largely otherwise Q4 is in line with what we were seeing just a few months ago to your point in terms of the underlying dynamics.

Thanos Moschopoulos: Great. Last one for me. It sounds like you've had a lot of new program ramps across your business this year. Normally, my understanding is new program ramps, you know, are at a lower margin until they get up and running and are optimized. Does that inherently provide a good margin opportunity for next year, or is that gonna be offset by other new programs that'll be ramping next year?

Great last one for me.

You've had a lot of new program ramps across your business this year.

Normally my understanding is new program ramps.

Are the lower margin until they get up and running and are optimized.

Does that inherently provide a good march out with Germany for next year or is that going to be offset by other new programs are ramping next year.

Mandeep Chawla: Well, we're always ramping programs, which is a good thing. We're always gonna have a little bit of that mix change, if you will, on our margin profile. I would say that right now many of the programs that we are ramping are not margin dilutive. In some cases, we've already reached scale. If you use industrial as an example, we're very pleased with the margin profile that's happening in industrial despite the fact that we're still ramping so many programs because we've achieved a certain level of scale. On the hyperscaler side, it's really about a portfolio of products. We're pleased with the margin performance across all of our hyperscaler customers right now.

Well, we're always ramping programs, which is a good thing and so we're always going to have a little bit of that.

Makes it mix change if you will an emerging profile.

Mandeep Chawla: The enterprise area is probably the area of the most growth that we're seeing right now. That's been happening as we've gone through the year and it's continuing to Q4 and frankly, it's going to be continuing next year. And it's tied in many cases specifically to the proprietary compute demand that we're in the process of fulfilling. ATS2, if you just look at ATS in total, I mean, the growth this year has been terrific.

I would say that right now the many of the programs that we are ramping are margin dilutive in some cases, we've already reached scale. So if you use industrial as an example, we're very pleased with the margin profile.

Happening in industrial despite the fact that we're still ramping so many programs because we've achieved a certain level of scale and then on the Hyperscale side, it's really about a portfolio in Sweden the portfolio of products.

Mandeep Chawla: Right now, it's on track for about 13% year-over-year growth on a full-year basis. And so there's a little bit of timing delay sometimes between various quarters. But, you know, after growing strong double digits last year, it's going to be low double digits this year. And RL will be going to next year for ATS continues to be targeting. 10% number. And if you, you know, the last thing I would also say is if you look at the end markets within ATS, we saw very robust growth in three of the four markets. So we're going to be growing 13% this year despite capital equipment being down over 30%.

And we're pleased with the margin performance across all of our hyper scaler.

Maxim Matushansky: Great. Thanks for the line.

Customers right now now as we go into next year.

Mandeep Chawla: Now, as we go into next year, as you would see, we're targeting 10% EPS growth over 2023. 2023 will be at record levels. Last year we were at record levels. We're implying 2024 will be at record levels. There's different ways that we may get there. Some of it will be on top line growth, but there is an opportunity on margin expansion as well.

Speaker: Thanks.

As you would see.

Target is 10% EPS growth over 2023, 2023 will be at record levels last year with a record levels. We're implying 2024 will be at record levels and there's different ways that we may get there some of it will be on topline growth, but there is an opportunity on margin expansion as well.

Thanos Moschopoulos: Great. I'll pass the line. Thank you.

Great I'll pass the line. Thank you.

Mandeep Chawla: Thanks, Thanos.

Yeah.

Operator: Your next question comes from the line of Matthew Sheerin from Stifel. Please go ahead.

Your next question comes from the line of Matt Sheerin from Stifel. Please go ahead.

Daniel Chan: Your next question comes from the line of Daniel Chan from TD Cowan.

Right.

Rob Mionis: Yes, thanks very, very much. Just another question regarding your cloud business, particularly on revenue recognition, on the enterprise side. Is any of your business on a consignment basis, and are you planning to shift any of that? Does that have any impact on margins?

Matt Sheerin: Yes, thanks very, very much. Just another question regarding your cloud business, particularly on revenue recognition, on the enterprise side. Is any of your business on a consignment basis, and are you planning to shift any of that? Does that have any impact on margins?

Yes, thanks, very much but just another question regarding your cloud business, particularly on revenue recognition on the enterprise side.

Daniel Chan: Please go ahead. Hi, thanks. Mandeep, you're talking about the ATS strength this year. Next quarter, you're kind of guiding it for sort of next quarter, you're guiding it down to be up about low single digits. So a D cell in that growth, anything to call out there for that D cell is that anything the semi cap weakness or any delays like that. No, relatively flat on a sequential basis.

Any of your business on a consignment basis in.

Are you planning to shift any of that.

Does that have any impact on margins.

Mandeep Chawla: There is some consigned materials in revenue that we do recognize, Matt. What that means ultimately is that we're not putting it through into our revenue, and we're also not marking it up. It makes sense in the EMS world to have consigned inventory, otherwise customers would be paying a margin stack on some very expensive components. That being said, there is not a major shift in the concentration of consignment that we have. Look, if you compare next year to what we're seeing this year, it's gonna be relatively consistent. We're not looking to consign a lot more new material.

Uh huh.

The there is some confined materials in revenue that with you.

Mandeep Chawla: Dan, but I'd point maybe to a couple of things. One is again outside of capital equipment. We're seeing good growth across all of our end markets. But we are also facing tough comps. If you just look at the fourth quarter of last year, ATS grew by 29% organically. So it was a very strong fourth quarter last year, but we're glad to see that this peak revenue that we're seeing currently in ATS, which I believe is at a record level is holding going into the fourth quarter.

Recognize.

Daniel Chan: Okay, that's good to hear.

And so what that means ultimately is is that we're not putting it through into our revenue and were also not marking it up it makes sense in the EMS world to have consigned inventory otherwise customers would be paying a margin stack on some very expensive components that being said there is not a major shift in the.

The concentration of consignment that we have.

If you compare next year to what we're seeing this year, it's going to be relatively consistent and we're not looking to complain a lot more new material.

Mandeep Chawla: And then if we just switch gears to the HPS business, one of the strongest sequential growth we've we've ever seen out of the business. Are AI programs being migrated to HPS engagements or is there something else driving that strength? We are seeing some HPS proprietary program programs being migrated to HPS. That is still in the early stages. The drivers of the HPS growth is really starting of some increased network demand as one of the earlier calls mentioned.

Rob Mionis: Okay. Relative to your CCS business, I know that hyperscaler is the fastest growing and is the largest portion of that business, but you do still have a strong OEM business. Could you talk about the dynamics going on there in market demand and as you continue to grow the hyperscaler business at a faster rate, do you expect margins in that overall segment to expand? Yeah, we do have OEM business as well, and those OEMs also sell into the hyperscalers business. You know, we don't count that in our hyperscaler class, but those businesses are growing quite nicely as well.

Matt Sheerin: Okay. Relative to your CCS business, I know that hyperscaler is the fastest growing and is the largest portion of that business, but you do still have a strong OEM business. Could you talk about the dynamics going on there in market demand and as you continue to grow the hyperscaler business at a faster rate, do you expect margins in that overall segment to expand?

Okay and relative to your your your Ccs business I know that Hyperscale is the past is growing and is the largest portion of that business, but you do still have a strong OEM business could you talk about the dynamics going on there.

End market demand.

And as you continue to grow.

The hyperscale business at a faster rate do you expect margins in that overall segment to expand.

Rob Mionis: Yeah, we do have OEM business as well, and those OEMs also sell into the hyperscalers business. You know, we don't count that in our hyperscaler class, but those businesses are growing quite nicely as well.

Mandeep Chawla: We are seeing a couple of our hyperscalers starting to buy more and more networking gear, which is HPS gear as well. So going into next year, Dan, we are expecting growth in HPS. And there's two nice drivers that are happening. One is the energy switches now starting to come online and some of those are HPS products that will be towards the back end of the year. And then there is some compute products as well in our HPS portfolio, which are tied both, you could tie both of those to overall AI.

Yeah, we do have our OEM business.

As well and those Oems are also sell into.

Daniel Chan: Great, thank you. Thanks Dan.

Into the Hyperscale business so.

We don't count that in our Hyperscale or class, but those businesses are growing quite nicely as well.

Rob Mionis: You know, right now, they're working through some excess, you know, inventory challenges, but as we get into next year, we do see those guys returning to growth.

Right now they're.

Working through some excess.

Inventory challenges, but as we get into next year, we do see those guys are returning to growth.

Mandeep Chawla: Yeah. There has been some pockets of softness amongst the enterprise customers when it relates to small-medium businesses. But as Rob mentioned, we also have a large set of customers that are selling directly into the hyperscalers. We have seen in most cases that that's balancing itself out.

There has been some pockets of softness amongst enterprise customers when it relates to small and medium businesses.

As Rob mentioned, we also have a large set of customers that are selling directly into the hyperscale or so that.

Thanos Moschopoulos: Your next question comes from the line of Tannis Mischopoulos from BMO.

Thanos Moschopoulos: Please go ahead. Hi, good morning. Generally speaking, it seems like macro conditions have deteriorated the last couple of months.

We have seen in most cases, the best balancing themselves out.

Matthew Sheerin: Okay. Thank you. Just lastly, on the model, could you give us your estimate for the interest expense and other line? I know that was down, and I imagine with working capital coming down, that line will also continue to come down.

Matt Sheerin: Okay. Thank you. Just lastly, on the model, could you give us your estimate for the interest expense and other line? I know that was down, and I imagine with working capital coming down, that line will also continue to come down.

Okay. Thank you and just lastly.

On the the model could you give us your estimate for interest expense and other line I know that was down and I imagine with working capital coming down that that money will also continue to come down.

Rob Mionis: Are you seeing any funds of that in any of your end markets or no, because of the specific ramps and markets are involved in? I would say overall our markets are holding pretty tight. We're not very exposed to consumer markets or things that are very interest rate sensitive. Just going around the markets within A&D business continues to be strong. We have a very healthy backlog. It's still availability is really pacing our ability to support demand there and going into next year we see some incremental growth coming out of defense programs supporting what's happening in the world.

Mandeep Chawla: Yeah. You know, right now, for both taxes and for interest, I would suggest, on the tax side, to start there to use 19% to 21% next year. This year, we're on track for around 20%, and at this point, we don't see a major deviation from that. To your point on interest expense, we are starting to see a little bit of a reduction. Despite rates having gone up so much, because of the cash conversion that we're having, we are having reduced AR sales, and we're not having to hit the revolver as much. I think right now, if you modeled somewhere close to $70 million for next year, it'd be representative of what we're expecting, and that is a bit of an improvement over 2023.

Yeah, right now for both taxes and for interest I would suggest on the tax side to start there to use 19% to 21% next year. This year, we're on track for around 20% and at this point, we don't see a major deviation from that.

And to your point on interest expense, we are starting to see a little bit of a reduction.

Despite rates Havent gone up so much because of the cash conversion that we're having we are having reduced our sales and we're not having to hit the revolver as much I think right now if you modeled somewhere close to $70 million for next year.

Rob Mionis: With an industrial, you know, I would say across the board, we are seeing a little bit of a slowdown in the EV charge of portion of our portfolio. Again, that's a very small portion of our portfolio, 2%. But the other portions of our industrial portfolio are going very nicely. Industrial is having very robust growth this year and very strong double digital going into next year as well. And then we also talked about more broadly speaking, for Parliamentary Compute and all of our products that support AI growth, very strong growth going into 24 versus 23, and 23 is also having some stupendous growth as well.

Representative of what we're expecting and that is a bit of an improvement over 2023.

Matthew Sheerin: Okay. Very good. Thank you.

Matt Sheerin: Okay. Very good. Thank you.

Okay, great great. Thank you.

Mandeep Chawla: Thanks, Matthew Sheerin.

Thanks, Matt.

Operator: Your next question comes from the line of Todd Coupland from CIBC. Please go ahead.

Your next question comes from the line of Todd Coupland from CIBC. Please go ahead.

Todd Coupland: Great. Thanks. Good morning, everyone. I wanted to ask about the volatility in the enterprise business, obviously strong in Q2 and then dipping down this quarter and moving back up next quarter. Can you just talk about why you're seeing that type of volatility and how we should think about the rhythm into 2024?

Great. Thanks, Hey, good morning, everyone.

I wanted to ask about the volatility in the enterprise business, obviously strong in Q2, and then dipping down this quarter and moving back up next quarter can you just talk about why why youre seeing that type of volatility and how we should think about the rhythm into 2024.

Yeah.

Rob Mionis: Yeah. Within enterprise, the volatility is really being driven by storage. We've had a new program ramp that was put on pause by a customer as they qualify another piece of the rack that they're looking to deploy in their data center. As that comes online, you know, that program will continue to ramp. Really, within enterprise, it's some demand fluctuations that are happening within the storage area. Again, within enterprise, we also have our proprietary compute business, and that continues to be very robust, both in Q3 and in Q4 and going into next year.

Yeah within the enterprise the volatility is really being driven by storage we've had.

Mandeep Chawla: Great. Cashlight buildings were up to do a higher receivables. Can you provide some color on the dynamic there? Yeah, hey, Thanos. I take quarter to quarter dynamics sometimes or just the accounts specific. Overall, though, if we look at free cash flow, we're happy with the conversion that we've been seeing, you know, $110 million a year a day, that's kind of double what we did at the same time last year, and then as you saw in our prepared remarks, we are increasing our free cash flow targets for this year to 150 million at the beginning of the year, it was 100.

A new program ramp that was.

Put on pause by a customer as they qualify another piece of rock that they're looking to deploy in their data center and as that comes online.

That program will continue to wrap so really with an enterprise at some demand fluctuations that are happening within the storage area.

Again with an enterprise. We also have a proprietary business and that continues to be very robust both in the third quarter and in the fourth quarter and going into next year.

Mandeep Chawla: So we're starting to see some good working capital movements. We do expect to see a strong conversion going into the fourth quarter and into next year as well, so while the cash cycle days may have spiked a little bit on some of the specific accounts, it'll normalize as we go into the next few quarters.

Thanos Moschopoulos: Great.

Todd Coupland: Okay. You called out switching growth starting to return. Does, I guess, that's gonna show up in the enterprise line as well. I know 800G is H2 of the year. When are you thinking some of that switch demand might show up? Is it just with the initial orders of 800G, or will that come with some of the established products? Thanks.

Okay, and then and you called out switching growth.

<unk> the return.

I guess, that's going to show up in the enterprise line as well.

I know 800 G in second half of the year so.

Thanos Moschopoulos: Well, that's one for me. It sounds like you've had a lot of new program ramps across your business this year. Normally, my understanding is new program ramps, you know, are at a lower margin until they get up and running and are optimized. Does that inherently provide a good margin opportunity for next year, or is that going to be offset by other new programs? I'll be wrapping next year. Well, we're always ramping programs, which is a good thing.

Thanos Moschopoulos: And so we're always going to have a little bit of that mix mix change, if you will, on our margin profile. I would say that right now the many of the programs that we are ramping are not margin dilutive. In some cases, we've already reached scale. So if you use industrial as an example, we're very pleased with the margin profile that's having an industrial despite the fact that we're still ramping so many programs, because we've achieved a certain level of scale.

What are you thinking some of that switch demand might show up is it just with the initial orders of 800 G or will that come with.

Some of the established products. Thanks.

Rob Mionis: Well, switching would be part of our communications end market, and that should come out of the gates in 2024, hot out of the gates. The 800G will start ramping towards the end of 2024, H2 2024, I should say.

Well switching would be part of our communications end market.

And that should.

It should come out of the gates.

In 24 hot out of the Gates 800 G.

Start ramping towards the end of 2020 for the second half of 2024, I should say, yes. So I think we're very pleased about it.

Mandeep Chawla: The thing we're very pleased about, Todd, is that we've won a number of programs in the 800G market. It's really about the ability for our customers to absorb the hardware that they're ordering. As we talked about last quarter, we're seeing proprietary compute really be the leading indicator. Obviously, we're fulfilling a lot of that right now. We're pleased that we've already received the wins that we were looking for in the 800G market. It's really a matter of just the time on when specific customers start shifting towards that spend. We're already in very active dialogue on the design front with those customers and are preparing for, you know, qualification builds as we go into 2024.

Todd is that we've won a number of programs in the energy market.

So it's really about the ability for our customers to absorb the hardware that they're ordering as we talked about last quarter. We're seeing the proprietary compute really be the leading indicator. Obviously, we're fulfilling a lot of that right now we're having we're pleased that we've already received the wins that we were looking for in the 800 <unk> market and so it's really a matter of just.

Thanos Moschopoulos: And then on the hyper-fueler side, it's really about a portfolio and suite a portfolio of products. And we're pleased with the margin performance across all of our hyper-skillers customers right now. Now, as we go into next year, as you would see, we're targeting 10% EPS growth over 2023. 2023 will be at record levels. Last year with the record levels, we're implying 2024 will be at record levels. And there's different ways that we may get there. Some of it will be on top line growth, but there is an opportunity on margin expansion as well.

Mandeep Chawla: Great.

At the time on when specific customers are shifting towards that spend.

But were already in very active dialogue on the design front with those customers and are preparing for.

Qualification bills as we go into 'twenty four.

Rob Mionis: Just to add on, Todd, you know, as the 400 to 800G transition happens, we've actually won all the follow-on competitions from 400 to 800G with the hyperscalers, which just shows you the level of expertise that we're bringing to the party with respect to our design capability and manufacturing capability.

Just to add on Todd.

It's a 400 to 800 G transition happens.

We've actually won all the follow on competitions.

From 400 to 800 G with a hyperscale is which just shows you the level of expertise that we're bringing to the party with respect to our.

Speaker: I'll pass the line. Thank you. Make sense.

Matt Sherin: Your next question comes from the line of Matt Sherin from Steveholt.

Our design capability and manufacturing capability.

Matt Sherin: Please go ahead. Yes, thanks very much. Just another question regarding your cloud business, particularly on revenue recognition.

Todd Coupland: Okay, one last question on this point. When you say starting 2024 hot or out of the gate, you mean in Q1, comms business will pick up from 400G. Should the investor expectation be reduced seasonality in Q1 because the comms business is expected to pick up? How should we think about that?

Okay. One last question on this just point so when you say starting 'twenty four hot or out of the gate. So you you you mean in Q1.

Mandeep Chawla: On the enterprise side, is any of your business on a confinement basis? And are you planning to shift any of that? Does that have any impact on margins? So there is some consigned materials in revenue that you recognize, Matt. And so what that means ultimately is that we're not putting it through into our revenue. And we're also not marking it up. It makes sense in the EMS world to have consigned inventory.

Comms business will pick up from 400 G. So should that should be investor expectation be reduced seasonality.

In Q1 because.

Businesses is expected to pick up how should we think about that.

Mandeep Chawla: Yeah. Todd, I wouldn't provide too much detail yet on the quarters themselves, just as we're focusing really right now on Q4, and then we'll look at full year. We'll give more color as we go along. What I would say is that more of it is gonna be towards H2.

Yeah, Todd I wouldn't I wouldn't provide too much detail yet on this quarter themselves are just says where we're focusing really right now in the fourth quarter and then we'll look at full year, we'll give more color as we go along but what I would say is is that more of it is going to be towards the back half.

Todd Coupland: Okay.

Mandeep Chawla: Although we're getting the orders on the 800G side, there aren't gonna be material shipments happening in H1 of next year. It's really tail end related. That being said, we are seeing strong hyperscaler demand in each of the quarters next year. Even if we're not shipping the 800G product, there still is a large part of our portfolio that's 400G, and some hyperscalers are still buying 400G. Some have not yet shifted to 800G in a meaningful way. Of course, the compute side, we're seeing demand continue throughout all of next year.

Mandeep Chawla: Otherwise, customers would be paying a margin stack on some very expensive components. That being said, there is not a major shift in the computation of confinement that we have. If you compare next year to what we're seeing this year, it's going to be relatively clear. Assistant.

Although we're getting 800 G side are there aren't going to be material shipments happening in the first half of next year, it's really tailwind related but that being said we are seeing strong hyperscale demand in each of the quarters next year.

So even if we're not shipping the energy products, they're still there still is a large part of our portfolio. That's 400 G and some hyperscale is are still buying for energy so that not yet shifted to the 800 feet in a meaningful way and then of course, the compute side, we're seeing demand continue threat over the next year.

Mandeep Chawla: We're not looking to confine a lot more into new material. Okay, and relative to your your your CCS business, I know that hyperscale is the fastest growing in is the largest portion of that business, but you do still have a strong OEM business. Could you talk about the dynamics going on there and market a demand and and as you continue to grow the hyperscale business that are faster rate. Do you expect more margins in that overall segment to expand.

Todd Coupland: Yeah. One last question for me. This is more of a strategic question. You know, obviously you have collapsed the multi-vote structure, and your large shareholder has divested its holdings. You have a strong position in a key trend in the tech market right now. How are you thinking about sort of like strategic positioning of the company from an M&A perspective? Is this something investors should have on their minds? Could there be consolidation in the EMS sector as a result of this strong demand trend? Just give us your thoughts on that. Thanks a lot.

Yes.

One last question for me. So this is more of a strategic question obviously.

You.

Lapsed the multimode structure and you are a large shareholder has divested it.

Holdings.

You have a strong position in a key trend in the tech market right. Now how are you thinking about sort of like strategic positioning of the company from an M&A perspective is this.

Mandeep Chawla: Yeah, we do have OEM business as well, and those OEMs are also sell into the hyperscale is business. So, you know, we don't count that in our hyperscale class, but those businesses are growing quite nicely as well. You know, right now they're working through some excess. So, you know, inventory challenges, but as we get into next year, we do see those guys returning to growth. There has been some pockets of softness amongst the enterprise customers when it relates to small and medium businesses, but as Rob mentioned, we also have a large set of customers that are selling directly into the hyperscale. So, we have seen it in most cases, but that's bouncing itself out.

Something investors should have on their minds.

Matt Sherin: Okay, thank you.

Could there be consolidation in the EMS sector as a result of the strong demand trend just just give us your thoughts on that thanks a lot.

Rob Mionis: Thanks, Todd. You know, we're very happy with the progress that we've made in executing our strategic plan. Right now, on the M&A side, as Mandy mentioned in other calls, we continue to have a very tight filter and be very selective on looking for M&A deals. We're continuing to look for capability-based M&A, and we're also very keenly focused on expanding our services business, especially as it relates to servicing our CCS and hyperscaler customers. We don't see any you know big moves on the horizon.

Thanks Todd.

Happy with that.

The progress that we've made in executing our strategic plan and right now.

On the M&A side.

We've mentioned in other calls we continue to have a very tight filter and be very selective and looking for M&A deals.

We're going to look for capability based M&A and we're also very keenly focused on expanding our services business, especially as it relates to our servicing our Ccs on hyperscale customers, but we don't see any big moves on the horizon.

Mandeep Chawla: And just lastly, on the model, could you give us your estimate for the interest of expense and other lines. I know that was down and I imagine with working capital coming down that that line will also continue to come down. Yeah, you know, right now, for both taxes and for interest, I would suggest on the tax side to start there to use 19 to 21% next year. This year, we're on track for around 20%.

Okay.

Todd Coupland: Thank you.

Thank you.

Rob Mionis: Thanks, Todd.

Thanks, Ed.

Okay.

Operator: There are no further questions at this time. I'd now like to turn the call back over to Mr. Rob Mionis for any closing remarks.

There are no further questions at this time I'd now like to turn the call back over to Mr. Rob Miami for any closing remarks.

Rob Mionis: Thank you. I'm pleased that we posted another solid quarter marked by our highest quarterly adjusted EPS ever. We continue to see positive momentum as we enter Q4 and into 2024. We also look forward to hosting you at our investor update towards the end of November. Thank you again for joining today's call, and we look forward to updating you next month.

Thank you I am pleased that we posted another solid quarter marked by our highest quarterly adjusted EPS ever we continue to see positive momentum as we enter the final quarter and into 2024. We also look forward to hosting you at our investor update towards the end of November. Thank you again for joining today's call and we look forward to.

Mandeep Chawla: And at this point, we don't see a major deviation from that. And then to your point on the interest expense, we are starting to see a little bit of reduction. Despite rates haven't gone up so much because of the cash conversion that we're having, we are having reduced AR sales, and we're not having to hit the revolver as much. I think right now, if you've modeled somewhere close to 70 million per next year, it'd be representative of what we're expecting, and that is a bit of an improvement over 2023.

Matt Sherin: Okay, very good.

Dating you next month.

Operator: Thank you, sir. 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 lovely day.

Thank you, Sir 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 lovely day.

[music].

Speaker: Thank you.

Code to Plan: Thanks, Ben.

Code to Plan: Your next question comes from the line of code to plan from CIDC. Please go ahead. All great. Thanks.

Code to Plan: Good morning, everyone. I wanted to ask about the volatility in the enterprise business, obviously strong in Q2 and then dipping down this quarter and moving back up next quarter. Can you just talk about why you're seeing that type of volatility and how we should think about the rhythm into 2024? Yeah, with an enterprise, the volatility is really being driven by storage. We've had a new program ramp that was put on pause by a customer as they qualify another piece of rack that they're looking to deploy in their data center.

Hum.

Hmm.

<unk>.

Hum.

[music].

Code to Plan: And as that comes online, you know, that program will continue to wrap. So really with an enterprise, it's some demand fluctuations that are happening within the storage area. Again, with an enterprise, we also have our proprietary food business, and that continues to be very robust both in the third quarter and in the fourth quarter and going into next year, and you called out switching growth, starting to return. I guess that's going to show up in the enterprise line as well.

Code to Plan: And I know 800g is second half of the year. So when are when are you thinking some of that switch demand might show up? Is it just with the initial orders of 800g or will that come with some of the established products? Thanks. Well, switching would be part of our communications and markets. And that will should come out of the gates in 24 or high out of the gates. 800g will start ramping towards the end of 2024, the second half of 2020.

Code to Plan: I think we're very pleased about Todd is that we've won a number of programs in the 800g market. And so it's really about the ability for our customers to absorb the hardware that they're ordering. As we talked about last quarter, we're seeing proprietary compute really be the leading indicator. Obviously we're fulfilling a lot of that right now. We're pleased that we've already received the wins that we were booking for in the 800g market.

Code to Plan: And so it's really a matter of just the time on when specific customers are shifting towards that spend. But we're already in very active dialogue on the design front with those customers and are preparing for qualifications as we go into 24. Just that on Todd, you know, it's a 400 to 800g transition happens. We actually won all the follow on competitions from 400 to 800g with a hyper scale which just shows you the level of expertise that will bring into the party with respect to our design capability and manufacturing capability.

Code to Plan: Okay, one last question on this this point. So when you say starting 24 hot or out of the gate, so you you you mean in q1, com business will pick up from 400g. So should the should the investor expectation be reduced seasonality in q1 because the com business is expected to pick up. How should we think about that? Yeah, Todd, I wouldn't I wouldn't provide too much detail yet on a quarter themselves.

Code to Plan: Just says we're we're focusing really right now on the fourth quarter. And then we'll look at full year. We'll get more color as we go along. But what I would say is that more of it is going to be towards the back half. Although we're getting the users on the 800g side, there aren't going to be material shipments happening in the first half of next year. It's really tail end related. But that being said, we are seeing strong hyper scale or demand in each of the quarters next year.

Code to Plan: And so even if we're not shipping the energy product, there are still there still is a large part of our portfolio. That's 400g and some hyper scaleers are still buying 400g. Some have not yet shifted to these energy in a meaningful way. And then of course, the compute side, we're seeing to be continued throughout the next year.

Rob Mionis: One last question for me. So this is more of a strategic question. You know, obviously you collapse the multi vote structure and your large shareholder has divested its its holdings. You have a strong position in a key trend in the tech market right now. How are you thinking about sort of like strategic positioning of the company from an M&A perspective? Is this something investors should have on their minds? Could there be consolidation in the EMS sector as a result of this strong demand trend?

Rob Mionis: Just give us your thoughts on that. Thanks a lot. Thanks, Todd. We're very happy with the progress that we've made in executing our strategic plan and right now. On the M&A side, as Mandeep mentioned in other calls, we continue to have a very tight felt and be very selective. I'm looking for M&A deals. We're keen to look for capability based M&A and we're also very keenly focused on expanding our services business, especially as it relates to servicing our CCA. Yes, on hyperscalic customers, but we don't see any big moves on the horizon. Thank you. They said. There are no further questions at this time.

Rob Mionis: I'd now like to turn the call back over to Mr. Rob Mionis for any closing remarks. Thank you. I'm pleased that we posted another solid quarter marked by our highest quarterly adjusted EPS ever. We continue to see positive momentum as we enter the final quarter and into 2024. We also look forward to hosting you at our investor update towards the end of November. Thank you again for joining today's call and we look forward to updating you next month. Thank you, sir.

Speaker: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please connect your lines. Have a lovely day. Thank you.

Q3 2023 Celestica Inc Earnings Call

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