Q3 2023 Celestica Inc Earnings Call

Speaker 1: touch.

Speaker 2: 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 20F, and our other public filings, which can be accessed at sec.gov and cedar.gov.

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.

SEDAR Dot com.

Speaker 2: We assume no obligation to update any forward-looking statement except as required by law.

We assume no obligation to update any forward looking statement, except as required by law.

Speaker 2: 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 12-month adjusted EBITDA leverage ratio, adjusted earnings per share, adjusted EPS, adjusted SGNA expense, weight market buys a compromise, for markets,

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 <unk> trailing 12 month, adjusted EBITDA leverage ratio adjusted earnings per share or adjusted EPS.

Adjusted SG&A expense and adjusted effective tax rate.

Speaker 2: The listener should be cautioned that references to any of the four going measures during this call to note 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 US GAP, and use non- GAAP financial measures to describe similar operating metrics.

Listeners should be cautioned that references to any of the foregoing measures. During this call denote non <unk> financial measures, whether or not specifically designated as such these.

These non <unk> financial measures do not have any standardized meaning prescribed by EIOPA arrest and may not be comparable to similar measures presented by other public companies that report under <unk> or who report under U S. GAAP and use non-GAAP financial measures to describe similar operating metrics.

Speaker 2: We refer you to yesterday's press release and our Q3 2023 earnings presentation, which are available at Celeska.com under the investor relationship.

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.

Speaker 2: for more information about these and certain other non-IFRS financial measures, including a reconciliation of historical non-IFRS financial measures.

For more information about these and certain other non <unk> financial measures, including a reconciliation of historical non <unk> financial measures.

Speaker 2: to the most directly comparable IFRS financial measures from our financial statements. And a description of modifications to specified.ifRS financial measures during 2022 and 2020.

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

And a description of modifications to specified non <unk> financial measures during 2022 and 2023.

Speaker 2: Unless otherwise specified, all references to dollars on this call are to US dollars. Per share information is based on diluted shares of standing. Let me now turn.

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.

Speaker 3: 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. While our non-IFRS-aggressive EPS came in at $0.55, exceeding the high end of our guidance range.

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

Our non <unk> adjusted EPS came in at 65.

Exceeding the high end of our guidance range.

Speaker 3: A non-IFRS operating margin of 5.7% was our 15th consecutive quarter of year-to-year non-IFRS operating margin expense.

Our non <unk> operating margin of five 7% was our 15th consecutive quarter of year over year non <unk> operating margin expansion.

Speaker 3: I CCS Sagnac continues to benefit from the true business mix.

Our Ccs segment continues to benefit from improved business mix.

Speaker 3: due to the strength of a hyperstail portfolio who affected by segment margin of 6.2% to the third quarter, the highest ever. We also saw meaningful sequential revenue growth in our HPS business.

The strength of our Hyperscale portfolio reflected by segment margin of six 2% for the third quarter.

Highest ever we also saw a meaningful sequential revenue growth in our HPA business.

Speaker 3: Our ATS Fagment delivered solid double digit year-to-year revenue growth. As we continue to see tearwinds from new program ramps, as well as demand strength in our aerospace business.

Our Ats segment delivered solid double digit year over year revenue growth as.

As we continue to see tailwind from new program ramps.

As long as demand strength in our aerospace business.

Speaker 3: Plasticous strong results in the third quarter are reflective of the bullish secular trend underpinning our portfolio and our team's solid execution.

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

Speaker 3: 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 Mandy, who will provide a detailed review of our third quarter financial performance and our guidance for the fourth quarter of 2023. Mandy, over to you.

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 Mandy, who will provide a detailed review of our third quarter financial performance.

And our guidance for the fourth quarter of 2023 Mandy over the year.

Speaker 2: Thank you Rob, and good morning everyone. Third quarter revenue came in at $2.04 billion towards the high end of our guidance.

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 ECS segment.

Speaker 4: Revenue was 6% higher year-of-year, supported by higher revenues in both segments, including double digit growth.

Speaker 4: 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 efforts.

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.

Speaker 4: None IFRS adjusted earnings per share for the third quarter for 65 cents exceeding the high end of our guidance.

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

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

Speaker 4: work 13 cents higher year-over-year, driven primarily by higher operating profits.

Moving onto our segment performance.

Speaker 4: Third quarter, ATS revenue, was $859 million. Up 12% year-over-year.

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

Speaker 4: and in line with our expectations of a low double digit percentageing.

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

Speaker 4: The year-over-year increase in HES statement 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 program.

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.

Speaker 4: This growth is partly offset with ongoing market related softness in our capital

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

Speaker 4: HES segment revenue accounted for 42% total revenues in the third quarter compared to 40% in the same period last year.

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

Speaker 4: 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.

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.

Speaker 4: Year-to-year dynamics were largely unchanged from last quarter, as very strong growth in our enterprise and market, supported by strong demand for proprietary compute, was largely offset by anticipated advance openness in our communications.

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 it was <unk>.

Largely offset by anticipated demand softness in our communications end market.

Speaker 4: Enterprise and market revenue in the quarter was up 31% year-over-year, higher than our expectations of a low double-digit percentage increase.

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

Speaker 4: Revenue growth was driven by program ramps and continued strength in demand for proprietary compute from our hyperscaler customers in support of artificial

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

Speaker 4: Revenue in our communications end markets in the third quarter was lower by 10% year-over-year versus our expectation of a

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.

Speaker 4: The decline was driven primarily by tough comps from a strong prior to your period.

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

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

Speaker 4: 5% lower year-over-year, but up 39% sequentially, in line with our outlook provided last year.

Speaker 4: HPS revenues were 24% of total company revenues in the third quarter compared to 27% in the prior year period.

<unk> revenues were 24% of total company revenues in the third quarter compared to 27% in the prior year period.

Speaker 4: We expect HPS revenue to return to your growth in 2024. As we anticipate networking customers demand...

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

Speaker 4: Turning to segment margin, ACS segment margin in the third quarter was 4.9%.

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 at our industrial business were more than offset by softness in the capital equipment business.

Speaker 4: 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.

Speaker 4: DCS segment margin during the quarter was 6.2% of 100 basis points year-of-year. Marking the first time one of our segment margins has exceeded 6%.

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%.

Speaker 4: The increase was driven by higher volumes with our hyperscaler customers, as well as production efficiencies.

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

Moving on to some additional financial metrics.

Speaker 4: IFRS net earnings for the third quarter were $80 million or $0.67 per share compared to net earnings of $46 million or $0.37 per share in the prior year.

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

Speaker 4: Adjusted gross margins in the third quarter was 9.8%, up 90 basis points year-over-year due to higher volumes in both segments and in

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.

Speaker 4: Third quarter, non-IFRS adjusted effective tax rate was 20% compared to 21% in the priority.

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

Speaker 4: Non-IFRS-adjusted ROIC for the third quarter was 21.5%, an improvement of 2.3% compared to the prior year quarter.

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.

Speaker 4: At the end of the third quarter, our inventory balance was $2.26 billion, down $85 billion sequentially, and down $65 million year over year.

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

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

Speaker 4: 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.

Cash deposits were $875 million at the end of the third quarter up $65 million sequentially and higher by 251 billion.

<unk> to the prior year period.

Speaker 4: When accounting for cash deposits, 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.

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.

Speaker 4: Inventory days, net of cash deposit days, were 72 in the third quarter compared to 85 in the prior year.

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

Speaker 4: We anticipate a further improvement in inventory days over the coming quarters as material lead time.

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

Speaker 4: Cash cycle days were 72 during the third quarter, one day lower sequentially, and nine days higher than the prior year.

Cash cycle days were 72 during the third quarter, one day, lower sequentially and 90% higher than the prior year period.

Speaker 4: Capital expenditures for the quarter were $27 million, or approximately 1.3% of revenue, compared to 2.0% in the first quarter.

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

Speaker 4: 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 $110M, more than double our performance of $51M from the same period last year.

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

Compared to $7 million in the prior year period. This.

This represents our 19th consecutive quarter with positive non <unk> 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.

Speaker 4: Given our strong year-to-date performance and positive outlook for the fourth quarter, we are raising our non-IFRS adjusted free cash flow expectation from $125 million to $150 million for 2023.

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.

Moving on to some additional key metrics.

Speaker 4: 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...

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.

Speaker 4: Our gross debt at the end of the third quarter was $613 million, leaving us with a net debt position of $260 million.

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

Speaker 4: Our third quarter gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.1 turns, down 0.1 turns.

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

Speaker 4: and down 0.4 turns compared to the same quarter of last year.

Speaker 4: At September 30th, 2023, we were compliant with all financial covenants under our.

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

Speaker 4: 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 repurchases under our current.

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 renewing our CIP program in December subject to necessary approvals.

Speaker 4: for the remainder of the year and intend on renewing our N2IB program in December , subject to necessary approvals.

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

Speaker 4: 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, would be slightly higher compared to the same quarter last year.

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.

Speaker 4: Fourth quarter, non-IFRS adjusted earnings per share are expected to be in the range of 65 cents to 71 cents per share, which would represent an improvement of 13 cents per share, or approximately 23%, compared to the fourth quarter of 2020.

Fourth quarter non <unk> adjusted earnings per share are expected to be in the range of 65 to 71 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.

Speaker 4: If the midpoint of our revenue and non-IFRS adjusted EPS guidance ranges are achieved, non-IFRS operating margin would be 5.7%.

If the midpoint of our revenue and Donna <unk> 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.

Speaker 4: which would represent an increase of 40 basis points over the prior year.

Speaker 4: Non-IFRS-adjusted SG&E expense for the fourth quarter is expected to be in the range of $67 to $69 million.

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

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

Speaker 4: to be approximately 20% for the fourth quarter, excluding any impact from taxable foreign exchange or unanticipated tax settlement.

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.

Speaker 4: In our ATF segment, we anticipate revenue to be up in the low single digit percentage range of your...

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.

Speaker 4: Driven by expected double-digit growth in our industrial and AMD businesses, partly offset by ongoing market softness and...

Speaker 4: We anticipate revenues in our communications end market to be down in the mid-teens percentage range year-of-year driven by tough cops from the prayer.

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.

Speaker 4: Finally, in our enterprise-end market, we expect revenues to be up in the high 20% range year-of-year. Firm and by anticipated continuing demand strength in proprietary compute programs from our hyper-scaling.

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.

Speaker 4: I'll now turn the call back over to Rob to provide details on the outlook for our end market and business.

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

Speaker 3: Thank you, Mandy. This is our solid performance this quarter. And our strong guidance to close up the year, we are pleased to raise our preliminary 2020-24 hour.

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.

Speaker 3: In the coming fiscal year, we are maintaining our expectation of non-IFRS adjusted EPS growth of 10% or more compared to a 2023 outlook, which has increased from 2025 to 2036. Based on the midpoint of our fourth quarter-guys.

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.

So $2.36.

Based on the midpoint of our fourth quarter guidance.

Speaker 3: Respect this growth be driven by a combination of higher revenue across each of our end markets and solid non IFRS operating.

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

Speaker 3: I would now like to provide some detail on the outlook for each of our businesses.

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

Beginning with our Ats segment.

Speaker 3: 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 wrap.

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.

Speaker 3: 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.

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

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

Speaker 3: We anticipate continuing growth in 2024, supported by our investment to expand capacity in Indonesia, which is expected to be online by year-end.

We anticipate continuing growth in 2024.

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

Speaker 3: The recovery and commercial hours space demand continues to fuel solid growth in our AMD business. Supporting our greater than 30% increase in revenue's zero to date, compared to the prior year period.

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.

Speaker 3: 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 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.

Speaker 3: With commercial traffic now approaching more normalized levels, we anticipate our overall AD revenue growth rate moderating in 2024, so remaining relatively strong as we continue to have a healthy balance.

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

Speaker 3: Moving on to capital equipment. The man continues to be soft across the broader way for fabric equipment market, which has been compounded by the recent U.S. China trade restrictions affecting the semi-indus...

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.

Speaker 3: We continue to be encouraged by our ability to execute in the challenging the mark.

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

Speaker 3: and remain profitable despite a material, year-rear reduction, and volume. Overall, our capital equipment portfolio is benefiting from a combination of favorable mix and the ramping of new program wind.

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.

Speaker 3: Looking ahead, we believe that our capital equipment business is operating at truck levels. And while we expect the underlying market demand to be relatively flat year year in 2024, we do expect our business to grow based on new program overtime. By the end of the budget. Currently has????.

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.

Speaker 3: And our health tech business, the ramping of new programs and surgical instruments and imaging devices are supporting solid growth during 2023. Overall, we demand outlook for our health tech business remains healthy with growth into 2024.

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 2024.

Now turning to our Ccs segment.

Speaker 3: The broader environment continues to be positive for ICCS segment as hyperscalers are making significant investments in data center capacity.

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

Speaker 3: 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 applications 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.

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.

And the resulting increase in data center traffic, we believe that the different stages of this investment cycle will be synergistic.

Operator: and such statements.

The band four.

Our entire suite of data center offerings at various times throughout the entire cycle.

Operator: 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 speedr.com. We assume no obligation to update any forward-looking statements, except as required by law.

Speaker 3: Demand in our enterprise and market is showing significant strength benefiting from the tailwinds of PITO-stales investments in data center compute capacity to support the growth in artificial intelligence application.

Operator: 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 12-month adjusted EBITDA leverage ratio, adjusted earnings per share, adjusted EPS, adjusted SGNA expense, and adjusted cost-effective tax rates. The sooner should be caution that references to any of the four-going measures during this call to note non-IFRS financial measures, whether or not specifically designated as such.

Demand in our enterprise end market is showing significant strength benefiting from the tailwind of Hyperscale as investments in data center compute capacity to support the growth in artificial intelligence applications.

Operator: 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.

Speaker 3: Our medium-term outlet for this business also remained very positive, with expectations for continued strong demand and for proprietary compute, as well as ramping programs and storage.

Our medium term outlook for this business also remained very positive with expectations for continued strong demand and proprietary compute as well as ramping programs in storage.

Speaker 3: We anticipate that these factors will support double digit revenue growth rate and our enterprise business through 2024.

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

Speaker 3: The near-term outlook for our communications end market remains soft into the end of the year.

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

Speaker 3: primarily due to cost costs. However, we do expect that this business will resume year-to-year revenue growth in 2024, as customer investments in compute begins to pull through demand for networking. We are encouraged by our median term outlook for our communications and market, supported by our leading position in 400G and recent wins in 800.

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

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.

Operator: 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.

Speaker 3: We are also encouraged by the sequential growth and 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.

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.

Operator: Unless otherwise specified, all references to dollars on this call are to US dollars, and per share information is based on diluted shares of standing.

Speaker 3: And new networking and compute programs wrap in 2020.

And new networking and compute programs ramp in 2024.

Craig Oberg: Let me now turn the call over to Rob.

Speaker 3: Finally, I'm pleased to announce that we will be holding a virtual investor briefing on November 29th.

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

Rob Mionis: Thank you, Craig.

Speaker 3: 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 High Test

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

Rob Mionis: 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. While our 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-to-year non-IFRS operating margin expansion. Our CCS segment continues to benefit from a true business mix due to the strength of a hyperstellar portfolio affected by segment margin of 6.2% to the third quarter, the highest ever.

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

Speaker 3: We also intend to provide further details on our 2024 outlook, as well as our long-term financial targets and capital allocation payments.

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

Speaker 3: We will be releasing the details of the event shortly and we hope that all of you can join us on that day.

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

Speaker 3: 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.

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.

Speaker 3: are clustering both of the previous highs set last year.

Speaker 3: I have the utmost confidence and trust in our team to execute on a long-term strategy.

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

Speaker 3: Continued to deliver on our targets and set us up for another great year in 2024.

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

Speaker 3: With that, I would now like to turn the call over to the operator for questions.

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

Yes.

Speaker 5: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer the session.

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 on song you'll ESC Tony front acknowledging your request and your question. So the Pollock and you'll get a daily seats should do with Citi.

Speaker 5: 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 your request, and your questions will be polled in the order they are received.

Speaker 5: 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 key.

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

We're using a speaker phone please lift your handset before pressing any keys.

Speaker 5: Your first question comes from the line of Robert Young from Canacorg.

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

Speaker 6: Hi, good morning. The first place I wanted to ask about is one of the last topics on your prepare remarks around what you've talked about the pause and switch sales to hyperscalers. I think previously suggested it was buffer inventory that needed to be digested.

Hi, good morning.

Please I wanted to ask about is the last topics on you.

Repaired remarks around that.

You've talked about the pause in switch sales to Hyperscale or <unk> I think previously suggested it was buffer inventory that needed to be digested.

Speaker 6: 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, 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.

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 what's the driver between the switch sales how closely tied to it.

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 tearwinds on new program ramps, as well as demand strength in our aerospace business.

<unk> opportunity is it and then maybe a little more detail around how that recovers.

Speaker 3: Hi Rob, sure. First I'll start off by saying that, you know, a high-per-scalers 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, 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.

Hi, Rob sure.

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

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

We will grow close to 30% this year and we have very strong demand.

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. Mandeep, over the year.

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.

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 APS 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 and our CCS segment, supported by solid operational execution. Non IFRS adjusted earnings per share for 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.

Mandeep Chawla: Moving on to our segment performance. Third quarter ATS revenue was $859 million, plus 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.

Speaker 3: In terms of networking demand, we are getting towards the end of some inventory burndown.

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

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 and market, supported by strong demand per proprietary compute, was largely offset by anticipated demand softness in our communications and market.

Speaker 3: For the top customers that we tracked that had the most buffers, one of them has returned to growth both sequentially and year-to-year.

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.

Mandeep Chawla: Enterprise and market revenue in the quarter was up 31% year-over-year, higher than our expectations of a low double digit percentage increase. Revenue growth was driven by program ramps and continued trends in demand for proprietary compute from our hyper-scaler customers in support of artificial intelligence applications. Revenue in our communications and markets in the third quarter 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.

Speaker 3: 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're also starting to ramp the new 800G programs in the second half of 2024.

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

Full through of networking.

To happen with the <unk>.

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 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.

Increased demand of proprietary compute we're also starting to ramp some new 803 programs in the second half of 2024.

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 at our industrial business were more than offset by softness than the capital equipment business. The CS segment margin, during the quarter was 6.2% of 100 basis points year-by-year, marking the first time one of our segment margins has exceeded 6%. The increase was driven by higher volumes with our hyper-scaler customers, as well as production efficiencies.

Speaker 6: Okay, thank you. And a question on capacity, if the AI Optimized Server Business continues at this pace. The AI Optimized Server Business continues at this pace.

Okay. Thank you and a question on capacity.

If the.

AI optimized server business continues at this pace.

Speaker 6: and the switching business recovers, do you have the capacity to grow both of those businesses?

And the switching business.

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

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

Speaker 3: We do, Rob. We started some expansion earlier in the year in Southeast Asia, and that capacity, 80,000 square feet, will be coming online in the first quarter of 2024.

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.

Speaker 3: We're also starting to invest side by side with our customers to expand capacity in Thailand another 50,000 plus square feet.

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

Speaker 7: 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 view of AI growth going into 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.

Mandeep Chawla: Moving on to working capital. At the end of the third quarter, our inventory balance was $2.26 billion, down $85 billion 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 $316 million on a year-to-year basis at the end of the third quarter, and lower by $150 million sequentially.

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.

Bullish view of AI growth going into.

The medium 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 to support their very robust demand.

Speaker 6: Okay, one, just one clarification there on the side by side investment with a, with a customer, does that create any kind of exclusive relationship? Or does it tie a customer to a little more close to maybe a little more clarity around that? And then I'll pass.

Okay.

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 closely maybe a little more clarity around that and then I'll pass the line.

Speaker 7: Yeah, it's also 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.

Yes, 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.

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% of revenue, compared to 2.0% in the third quarter of 2022.

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

Speaker 7: And also in Thailand, we're building, basically a dedicated building just to support AI growth without customer. And that's a pretty profound statement. Thank you.

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.

Thanks for all that pipeline.

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 flow expectation from $125 million to $150 million for 2023.

Speaker 5: 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 Maxim <unk> from RBC capital markets. Please go ahead.

Speaker 8: Yeah, 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?

Yes. 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 2024 across the different programs.

Thanks for the question.

Speaker 7: Hybriscalus typically locked down their full year budget towards the end of October early November . So right now I think we have

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

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, the 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 $250 million. Our third quarter gross debt to non-I for us, trailing 12-month adjusted EBITDA leverage ratio, was 1.1 turns, down 0.1 turns, and down 0.4 turns, compared to the same quarter of last year.

Speaker 7: Pretty good visibility into the third quarter of 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 additional color on 24 and also color for our three year outlook as well. But right now, demand is very robust across our hyper scalars, especially in areas of proprietary territory.

Pretty good visibility into the third quarter of 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.

Additional color on 24 and also color.

For our three year outlook as well.

Right now demand is very robust.

Across our Hyperscale is especially in areas of <unk>.

Prior to your computer.

Speaker 8: Just in terms of your competitiveness with those customers, have you seen any changes in competitors positioning, whether that's competitors being more aggressive on price or new entrance or maybe supply chain conditions are better for competitors? Like anything that might impact your relationships with the hyper-scale customers in the foreseeable future?

Just in terms of your competitiveness with those customers have you seen any changes in.

Competitive positioning whether that competitors being more aggressive on price or or new entrants or maybe.

Mandeep Chawla: As September 30th, 2023, we were compliant with all financial covenants under our credit agreements.

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

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 repurchases under our current NCIB for the remainder of the year and intend on renewing our NCIB program in December, subject to necessary approval.

Your relationships with the Hyperscale customers in the foreseeable future.

Speaker 7: This class of customer right now is very focused in on

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

Partners that could reliably and technically scale volume.

Speaker 7: reliably and technically scale volume. And that plays to our strengths. These compute modules part to compute modules are...

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 $65.71 per share, which would represent an improvement of $13 per share, or approximately 23% compared to the fourth quarter of 2022, if the midpoint of the guidance range is achieved.

And that plays to our strengths.

Compute modules prior to compute modules are very complex they require water cooling, which we're very good at.

Speaker 7: 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.

And we're also very good at ramping new programs. So the most important award criteria suppliers that can reliably scale, new production and Thats why we are winning more than our fair share.

Work with these guys.

Speaker 8: And maybe just one final one. On the Q4 guidance, it implies enterprise segment revenues to re-accelerate quarter over quarter, and well, ATS, I guess it 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 quarter over quarter in Etfs.

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. Non-IFRS-adjusted FG-N8Pence for the fourth quarter 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 the fourth quarter, excluding any impact from taxable foreign exchange or unanticipated tax settlement.

It's 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 to those end markets.

Speaker 4: Good morning, Max. I'm it's me and Deep here. You know, first off, I would talk about the second half of 23 in totality, which is, you know, we're coming at 7,900 for the year. The outlook we had nine or three months ago for

Hey, good morning, Max limits May deep here.

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

Which is 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.

Mandeep Chawla: Now turning to our end market outlooks in 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. Finally, in our enterprise end market, we expect revenues to be up in the high 20% range year over year, driven by anticipated continuing demand strength in proprietary compute programs from our hyper-scaler customers.

Speaker 4: 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. That's been happening as we've gone through the year and it's continuing to keep for 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. 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%. You're a growth on a full-year basis. And so there's a little bit of timing delay sometimes between various cores.

The enterprise edge.

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.

Demand that we're in the process of fulfilling.

Speaker 4: 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, and so there's a little bit of timing delay 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.

As to if you just look at Etfs 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, 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.

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. 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. 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.

Speaker 4: And if you, you know, the last thing I would also say is that you look at the end market 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 if you will.

Lastly, I would also say is that if you look at the end market 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%.

Great Thanks for that Greg.

Thanks Victor.

Speaker 5: Your next question comes from the line of Daniel Chan from TD Cowan. Please go ahead.

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

Speaker 4: Hi, thanks. Mindy, if you're talking about the ETS strength this year, next quarter, you're kind of guiding it for, sorry, 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 at anything, the semi-cap weakness or any delays like that.

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

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 wrap. 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.

Speaker 4: 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.

No it 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.

Speaker 4: But we are also facing tough coms. If you just look at the fourth quarter of last year, ATS crew 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.

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.

Holding going into the fourth quarter.

Speaker 4: Okay, that's good to hear. And then if we just switch gears to the HPS business, one of the strongest sequential growth we've ever seen out of the business, or AI programs being migrated to HPS engagements or is there something else driving us right?

Okay, that's good to hear.

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 revenue zero 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.

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

AI programs being migrated to HTS engagements or is there something else driving that strength.

Speaker 7: 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 a starting of some increased network demand, as one of the earlier calls mentioned. We are seeing

We are seeing.

Some H B S proprietary.

Programs being migrated to H B S.

Is that still in the early stages the drivers of the H P. S growth is really a.

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

Speaker 4: A couple of our hyperscalers starting to buy more and more networking gear, which is HPS gear as well. Yeah, 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 that are starting to come online, and some of those are HPS products. That'll be towards the back end of the year. And then there is some compute products as well in our HPS portfolio, which you could tie both of those to overall AI.

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

Again, we are expecting growth in <unk>.

And there is two nice drivers that are happening one is the <unk> switches that are 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 HPE portfolio.

Rob Mionis: Moving on to capital equipment, demand continues to be soft across the broader way for 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 the challenging market and remain profitable despite a material year, year reduction and volume. Overall, our capital equipment portfolio is benefiting from a combination of favorable mix and the ramping of new program wins.

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

Great. Thank you.

Thanks, Dan.

Speaker 5: Your next question comes from the line of Thanas Mastropoulos from BMO. Please go ahead.

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

Speaker 9: Hi, good morning. Generally speaking, it seems like macro conditions have deteriorated the last couple of months. 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?

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 market share development.

Rob Mionis: Looking ahead, we believe that our capital equipment businesses operating at truck levels, and while we expect the underlying market demand to be relatively flat year, year in 2024, we do expect our business to grow based on new program wins.

Speaker 7: 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.

Hey, Scott I would say overall.

Rob Mionis: In our health tech business, the ramping of new programs and surgical instruments and imaging devices are supporting solid growth during 2023. Overall, we demand outlook for our health tech business remains healthy with growth into 2024.

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

Speaker 7: 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, too availability is really pacing. Our ability to support demand there. And going into next year, we see some.

Just going around the markets within A&D.

A&D business continues to be strong we have a very healthy backlog it's.

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

Rob Mionis: 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 cycle of trend, accompanied by our 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 at various times throughout the entire site.

Speaker 7: incremental growth coming out of defense programs, supporting what's happening in the world. Within industrial, I would say across the board, we are seeing a little bit of a slowdown in the EV charger portion of our portfolio. Again, that's a very small portion of our portfolio, 2%.

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%.

Speaker 7: But 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. And then we also talked about, more broadly speaking,

But 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 <unk>.

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

Speaker 7: proprietary 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

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

Proprietary compute and all of our products that support AI growth very strong growth going into 24 versus 23 and 'twenty. Three is also having some.

It depends its growth as well.

Speaker 9: Great. Cash that fill days were up to do a higher receipt of those. Can you provide some color on the dynamic there?

Yes.

Great.

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

Yeah, Hey, Dennis.

Speaker 4: I take quarter to quarter dynamics sometimes or just the account specific. Overall though, if we look at pre-cash flow, we're happy with the conversion that we've been seeing, $110 million a year a day that's kind of double what we did at the same time last year.

I'd say quarter to quarter dynamics in terms of 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 Thats kind of double what we did at the same time last year.

Rob Mionis: The near-term outlet for our communications and market remains soft into the end of the year, primarily due to cost costs. However, we do expect that this business will resume year-to-year revenue growth in 2024 as customer investments in compute begins 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 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.

Speaker 4: 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. 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 they may have spiked a little bit on some of the specific accounts, it'll normalize as we go into the next few quarters.

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 and so we're starting to see some good working capital movements, we do expect to see 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.

Normalized as we go into the next few quarters.

Speaker 9: Great. Last one for me, something that 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 the 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?

Great.

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.

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

Does that inherently provide good margin opportunity for next year or is that going to be offset by other new programs are ramping next year.

Rob Mionis: Finally, I'm pleased to announce that we will be holding a virtual investor briefing on November 29th. We are looking forward to walking the investment community through an overview of our CCS and APS 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.

Speaker 4: Well, we're always ramping programs, which is a good thing, and so we're always going to have a little bit of that mixed 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, so 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. And then on the hyperscaler side, it's really about a portfolio and suite of portfolio products.

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

Mix it mix change if you will on a merger profile.

I would say that right now the.

Many of the programs that we are ramping are margin dilutive in some cases, we have 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 a portfolio of products.

Speaker 4: And we're pleased with the margin performance across all of our

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, a close setting, 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.

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

Speaker 4: 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 a record levels where I'm applying 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.

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 a record levels. We're implying 2024 will be at record levels and there is 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.

Great. Thank you.

Yeah.

Operator: With that, I would now like to turn the call over to the Operator for questions. Thank you, sir.

Speaker 5: Your next question comes from the line of Matt Shurin from Speeful. Please go ahead.

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

Speaker 10: Yes, thanks 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 and does that have any impact on margins?

Yes.

Operator: 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 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 before pressing any keys.

Yes, thanks very much Justin.

Another question regarding your cloud business.

<unk> on revenue recognition on the enterprise side.

Any of your business on a consignment basis.

Are you planning to shift any of that.

That have any impact on margins.

Speaker 4: So, there is some consigned materials in revenue that we do recognize.

So there is some confined materials in revenue that you recognize.

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

Speaker 4: 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 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 confinement that we have Look if you compare next year to what we're seeing this year is going to be relatively consistent We're not looking to confine a lot

Matt 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.

Robert Mionis: I think previously it 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 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.

And the EMS world to have consigned inventory.

The way 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.

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

Speaker 10: Okay, and relative to your CCS business, I know that hyperscale 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 and market a demand and as you continue to grow the hyperscale business that are faster rate, do you expect margins in that overall segment to expand?

Okay and relative to your Ccs business I know that Hyperscale 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.

Rob Mionis: Hi Rob, sure. First I'll start off the same but you know a high for scalers 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 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.

Market demand and as you continue to grow.

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

Fine.

Speaker 7: Yeah, we do have OEM business as well. And those OEMs also fell into the hyperscalers business. So we don't count that in our hyperscaler class, but those businesses are growing quite nicely as well. Right now, they're...

Yes, we do have our OEM business.

As well and those Oems also sell into.

Rob Mionis: In terms of networking demand, we are getting towards the end of some inventory burn down. For the top customers that we track that had 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. We are expecting the pull through of networking to happen with the increased demand of proprietary compute. We are also starting to ramp the new 800G programs in the second half of 2024.

Into the Hyperscale business so.

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

<unk>.

Right now there.

Speaker 2: working through some excess 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 hyperscalers. So we have seen in most cases that that's balancing itself.

Working through some excess.

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 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 or so.

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 are also starting to invest side by side with our customers to expand capacity in Thailand another 50,000 plus square feet and that is going to support AI growth well into the future and that capacity will come online in the first part of 2025 again.

We have seen in most cases that is balancing itself out.

Speaker 10: Okay, thank you. And 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 that line will also continue to come down.

Okay. Thank you and just lastly.

On 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 line will also continue to come down.

Speaker 4: Yeah, you know, right now, for both taxes and for interest, I would suggest on the tax sites start there to use 19 to 21 percent next year. This year we're on track for around 20 percent 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 that 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 20 to 20.

Yes.

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.

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

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

Speaker 11: Okay, very good. Thank you.

Okay, great great. Thank you.

Thanks Ben.

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 to maybe a little more clarity around that and then I'll pass line. Yeah, it's also 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 without customer and that's a pretty profound statement. Thanks for all that.

Speaker 5: Your next question comes from the line of Todd Topland from CIBC, please go ahead.

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

Speaker 12: Oh, 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.

Speaker 7: Yeah, with them enterprise, the volatility is really being driven by storage. We've had a new program ramp that was...

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

A new program ramp that was.

Speaker 7: Now put on pause by a customer as they qualify another piece of rack that they are looking to deploy in their data center. And as that comes online, you know, that program will continue to wrap. So really within enterprise it's some demand fluctuations that are happening within the storage area. Again, within enterprise we also have our proprietary fee-foo business and that continues to be very robust both in the third quarter and in the fourth quarter and going into next

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.

Rob Mionis: I'll buy a fine.

That program will continue to ramp so.

Maxim Matushansky: Your next question comes from the line of Maxim Matyshansky from RBC Capitol, Margan. Please go ahead.

Really with an enterprise at some demand fluctuations that are happening within the storage area.

Maxim Matushansky: Good morning.

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

Rob Mionis: 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? Thanks for the question. Hyperscalers typically lock 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 24 in the next two weeks, we'll probably have full visibility into all of 2024.

Speaker 12: And you called out switching growth.

Okay, and you called out switching growth.

Speaker 12: starting to return. I guess that's gonna show up in the enterprise line as well. And I know 800G is second half of the year. So 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.

<unk> the return.

I guess, that's going to show up in the enterprise line as well and I know 800 G. In second half of the year. So.

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

Some of the established products. Thanks.

Speaker 7: Well switching would be part of our communications end market and that will should come out of the gates in 24 or high out of the gates the 800 g We'll start ramping towards the end of the second half of 2024

Well switching would be part of our communications end market.

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 hyperscalers, especially in areas of proprietary compute.

And that should.

Should come out of the gates.

And 24 are hot out of the gate 800 G.

I'll 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 is that we've won a number of programs in the oncology market.

Speaker 4: The thing we're very pleased about Todd is that we've won a number of programs in the 100G 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 looking for in the 100G market. And so it's really a matter of just the time on when specific customers are shifting towards that spend.

It's really about the ability for our customers to absorb the hardware that they were 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 happy 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.

Rob Mionis: 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 entrance or maybe supply chain conditions are better for competitors, like anything that might impact your relationships with the hyperscaler customers in the foreseeable future? This class of customer right now is very focused in on partners that could reliably and technically scale volume. And you know, that place to our strengths, these compute modules, part to compute modules are very complex.

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

Speaker 4: but we're already in very active dialogue on the design front with those customers and are preparing for you know qualification bills as we go in spring.

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

Rob Mionis: They require water cooling, which were 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 where we're continuing more than our fair share of work with these guys.

Qualification bills as we go into 'twenty four.

Speaker 7: Just to add on, Todd, you know, it's a 400 to 800 G transition happens. We actually won all the follow on competitions from 400 to 800 G with a hyperscalus which just shows you the level of expertise that we bring into the party with respect to our design capability and manufacturing.

Just to add on Todd.

Is the 400 to 800 GE transition happens.

We've actually won all of 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.

Design capability and manufacturing capability.

Speaker 12: Okay, one last question on this point. So when you say starting 24 hot or out of the gate, so you mean in Q1, comms business will pick up from 400G. So 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 point, so when you say, starting 'twenty four hot or out of the gate.

You mean in Q1.

Maxim Matushansky: And maybe 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?

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

In Q1 because.

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

Speaker 4: Yeah, I thought I wouldn't, I wouldn't provide too much detail on the quarter themselves. Just says we're focusing really right now on the fourth quarter and then we'll look at the full year, we'll give 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 years on 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-scaler demand in each of the quarters next year. And so even if we're not shipping the energy product, there still is a large part of our portfolio at 400G.

Yes, Todd.

I wouldn't provide too much detail yet on this quarter it themselves.

It 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.

Mandeep Chawla: Hey, good morning, Max.

Mandeep Chawla: I'm 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 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.

Although we're getting the 800 G side, 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.

A large part of our portfolio that's for energy and some Hyperscale is are still buying for energy saw it not yet shifted to date under <unk> in a meaningful way and then of course, the compute side, we're seeing demand continue throughout all of next year.

Speaker 4: And some hyperscalers are still buying poor energy. Some have not yet shifted to these energy in a meaningful way. And then, of course, the compute side, we're seeing demand continue through it all.

Mandeep Chawla: 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. 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. ATS-2, if you just look at ATS in total, I mean the growth this year has been terrific right now.

Yes.

Speaker 12: One last question for me. So this is more of a strategic question. Obviously, you collapse the multi-vote structure and your large shareholder has divested its holdings.

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

<unk>.

Lapsed the multimode structure in your large shareholder has divested.

Holdings.

Speaker 12: You have a strong position in a key trend in the tech market right now. How are you thinking about 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.

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.

Mandeep Chawla: 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 our outlook going to next year for ATS continues to be targeting that. 10% number. And if you, you know, the last thing I would also say is that if you look at the end market 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%. Great. Thanks for the line.

Daniel Chan: Thanks.

Yes.

Something investors should have on their minds.

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.

Speaker 7: Thanks, Todd. You know, 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 filter and be very selective on looking for M&A deals.

Thanks Todd.

Happy with the progress that we've made in executing our strategic plan and right now on the M&A side as Mindy mentioned in other calls we continue to have a very tight filter and be very selective.

Mandeep Chawla: Your next question comes from the line of Daniel Chan from Katie Cowan. 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 it anything the semi cap weakness or any delays like that?

Looking for M&A deals.

Speaker 7: 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 CCS and hyperscaler customers. But we don't see any big moves on the horizon.

We're tending 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 on hyperscale customers, but we don't see any.

Big moves on the horizon.

Sure.

Thank you.

Thanks, Doug.

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. 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 that is at a record level is holding going to the fourth quarter.

Speaker 5: There are no further questions at this time. I'd now like to turn the call back over to Mr. Rob Mayones for any questions.

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

Mandeep Chawla: Okay, that's good to hear.

Speaker 7: 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.

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 update.

Your next month.

Mandeep Chawla: And then if we just switch gears to the HPS business, one of the strongest sequential growth we've ever seen out of the business. Or AI programs being migrated to HPS engagements, or is there something else driving our strength? We are seeing from HPS proprietary 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.

Speaker 5: 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 could you. Please disconnect your lines have a lovely day.

Speaker 13: ?

Thank you.

[music].

Mandeep Chawla: We are seeing a couple of our hyperscale is 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 back into 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. Great, thank you. Thanks Dan.

Okay.

Yes.

Sure.

<unk>.

Hum.

Yeah.

Okay.

[music].

Thanos Moschopoulos: Your next question comes from the line of Tannis Mischopoulos from BMO. Please go ahead. Hi, good morning.

Rob Mionis: Generally speaking, it seems like macro conditions have deteriorated the last couple of months. Are you seeing any funds with 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.

Rob Mionis: We have a very healthy backlog. Terrible 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, 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.

Rob Mionis: Industrial is having very robust growth this year, and very strong, double-digital growth 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. Great.

Mandeep Chawla: Cash-side fill days were up due to 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 of the 100.

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 they may have spiked a little bit on some of the specific accounts, it'll normalize as we go into the next few quarters. Great.

Mandeep Chawla: Well, that's one for me. Don't think 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 the 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.

Mandeep Chawla: 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 happening in industrial despite the fact that we're still ramping so many programs because we've achieved a certain level of scale.

Mandeep Chawla: 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 our 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. Great.

Rob Mionis: I'll pass the line. Thank you. Make that.

Matt Sherin: Your next question comes from the line of Matt Sherin from people. Please go ahead. Yes, thanks very much. We just have another question regarding your cloud of 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? And does that have any impact on margins? So there is some consigned materials in revenue that you recognize Matt.

Matt Sherin: 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. 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 confinement that we have. Look, if you compare next year to what we're seeing this year, it's going to be relatively...

Mandeep Chawla: Assistant. We're not looking to confine a lot more into new material. Okay, and relative to 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 demand and as you continue to grow the hyperscale business that are faster rate, do you expect margins in that overall segment to expand?

Mandeep Chawla: Yeah, we do have OEM business as well and those OEMs also fell into the hyperscale business, so we don't count that in our hyperscale class, but those businesses are growing quite nicely as well. Right now, they're working through some excess inventory challenges, but as we get into next year, would you 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 hyperskiller, so we have seen in most cases that that bouncing itself out. Okay, thank you.

Mandeep Chawla: And just lastly, on the model, could you give us your estimate for the interest expense and other line? I know that went down and I imagine with working capital coming down, that line will also continue to come down? Yeah, right now, for both taxes and for interest, I would suggest on the taxides start there to use 19 to 21 percent next year. This year, we're on track for around 20 percent, and at this point, we don't see a major deviation from that.

Mandeep Chawla: And then to your point on the interest expense, we are starting to see a little bit of reduction. Despite rates that 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 for next year, it'd be representative of what we're expecting, and that is a bit of an improvement over 2023. Okay, very good.

Mandeep Chawla: Thank you. Thanks, Ben.

Todd Tugland: Your next question comes from the line of Todd Tugland from CIDC. We still ahead. Oh, great, thanks.

Todd Tugland: 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 the rack that they're looking to deploy in their data center, and as that comes online, that program will continue to wrap.

Todd Tugland: So, really, within enterprise, it's some demand fluctuations that are happening within the storage area. Again, within enterprise, we also have our proprietary food business, and that continues to be very robust in the third quarter and in the fourth quarter and you called out switching growth, starting to return. I guess that's going to show up in the enterprise line as well. I know 800G is second half of the year. When are you thinking some of that switch demand might show up?

Todd Tugland: 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 for our success. The thing 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.

Todd Tugland: 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 and then 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.

Todd Tugland: Just to add on Todd, you know, it's the 400 to 800G transition happens. We actually won all the follow on competitions from 400 to 800G with a hyperscalus which just shows you the level of expertise that will bring into the party with respect to our design capability and manufacturing capability. Okay, one last question on this point. So when you say starting 24 hot or out of the gate, so you mean in Q1, comms business will pick up from 400G.

Todd Tugland: So should the investor expectation be reduced seasonality in Q1 because the comms business is expected to pick up? How should we think about that? Yeah, Todd, I wouldn't provide too much detail yet on the quarter themselves. Just says 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 cap.

Todd Tugland: 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 hyperscaler demand in each of the quarters next year. And so even if we're not shipping the energy products, there still is a large part of our portfolio at 400G. And some hyperscalers 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. One last question for me.

Todd Tugland: So this is more of a strategic question. Obviously, you collapse 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?

Todd Tugland: 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 hyperscaler customers, but we don't see any big moves on the horizon. Thank you. Big thought. 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 we want. 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.

Operator: 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.