Q4 2023 Celestica Inc Earnings Call

Good day, ladies and gentlemen, and welcome to Celestica Q4, 2023 earnings Conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer.

Today's session.

If at any time during this call you require immediate assistance. Please press star zero for the operator. This call is being recorded on Tuesday January 30th 2024.

I would now like to turn the conference over to Craig Oberg, Vice President of Investor Relations and corporate development. Please go ahead.

Craig Oberg: Good morning, and thank you for joining us on <unk> fourth quarter 2023 earnings conference call on the call today are Rob <unk>, President and Chief Executive Officer, and Randy <unk> Chief Financial Officer.

As a reminder, during this call we will make forward looking statements within the meetings of the U S. Private Securities Litigation Reform Act of 1095 and applicable Canadian Securities laws.

Randy: Such forward looking statements are based on management's current expectations forecasts and assumptions, which are subject to risks uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions forecasts or projections expressed in such statements.

Operator: Good day, ladies and gentlemen, and welcome to Celestica's Q4 2023 earnings conference call. At this time, all lines are in a listen-only mode.

Operator: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, January 30, 2024. I would now like to turn the conference over to Craig Oberg, Vice President of Investor Relations and Corporate Development. Please go ahead.

Randy: 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.

Randy: Our most recent annual report on form 20-F, and our other public filings, which can be accessed at SEC Gov, and SEDAR plus dot com.

Craig Oberg: Good morning, and thank you for joining us on Celestica's fourth quarter 2023 earnings conference call. On the call today are Rob Maiones, President and Chief Executive Officer, and Mandeep Chawla, Chief Financial Officer. As a reminder, during this call, we will make forward-looking statements within the meanings of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws.

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

Randy: 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.

Craig Oberg: Such forward-looking statements are based on management's current expectations, forecasts, and assumptions, which are subject to risks, uncertainties, and other factors that could cause actual outcomes and results to differ materially from conclusions, forecasts, or projections expressed in such statements. For identification and discussion of such factors and assumptions, as well as further information concerning forward-looking statements, please refer to yesterday's press release, including the cautionary note regarding forward-looking statements therein, our most recent annual report on Form 20-F and our other public filings, which can be accessed at scc.gov and cedarplus.gov. We assume no obligation to update any forward-looking statement except as required by law. In addition, during this call, we will refer to various non-IFRS financial measures, including ratios based on non-IFRS financial measures consisting of non-IFRS operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, adjusted free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, adjusted SG&A expense, adjusted effective tax, and operating

Randy: Adjusted free cash flow gross debt to non <unk> trailing 12 month, adjusted EBITDA leverage ratio adjusted earnings per share or adjusted EPS.

Randy: Adjusted SG&A expense adjusted effective tax rate and operating earnings.

<unk> 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.

Randy: These non <unk> financial measures do not have any standardized meaning prescribed by IRS.

Randy: 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.

Randy: We refer you to yesterday's press release, and our Q4 2023 earnings presentation, which are available at Celestica Dot com under the Investor Relations tab for more information about these and certain other non <unk> measures.

Randy: Including a reconciliation of historical non <unk> financial measures to the most directly comparable <unk> financial measures from our financial statements.

Randy: The description of recent modifications to specified non <unk> financial measures.

Randy: Unless otherwise specified all references to dollars on this call are to U S dollars.

Craig Oberg: Listeners should be cautioned that references to any of the foregoing measures during this call denote non-IFRS financial measures, whether or not specifically designated as such. These non-IFRS financial measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies that report under IFRS or who report under US GAAP and use non-GAAP financial measures to describe similar operating metrics.

Randy: And per share information is based on diluted shares outstanding.

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

Rob: Thank you Craig good morning, everyone and thank you for joining us on today's call. We ended the year with a very strong fourth quarter, achieving revenue of $2, one 4 billion.

Rob: Which is towards the high end of our guidance range, while our non <unk> adjusted EPS came in at 76.

Craig Oberg: We refer you to yesterday's press release and our Q4 2023 earnings presentation, which are available at Zaleska.com under the Investor Relations tab, for more information about these and certain other non-IFRS financial measures, including a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements and a description of recent modifications to specified non-IFRS financial measures. 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. I now turn the call over to Rob. Thank you, Craig. Good morning, everyone.

Rob: Feeding the high end of our guidance range.

Our non <unk> operating margin was 6% exceeding the midpoint of our revenue and non <unk> adjusted EPS guidance ranges.

Rob: The outperformance in the fourth quarter relative to our guidance was driven by continued strength in our Ccs segment.

Rob: Sorted by the sustained growth of our hyperscale or portfolio.

Rob: Continuing to see the benefit of improved mix in our Ccs segment margin, which reached yet another new high of six 7% in the fourth quarter.

Rob: In our Ats segment.

Rob: Revenues were down slightly year to year as incremental demand softness in our industrial business and continued demand headwinds in our capital equipment business more than offset strong growth in our A&D business.

And thank you for joining us on today's call. We ended the year with a very strong fourth quarter, achieving revenue of $2.14 billion, which was towards the high end of our guidance range, while non-IFRS-adjusted EPS came in at 76 cents, exceeding the high end of our guidance range. The non-IFRS operating margin was 6%, exceeding the midpoint of our revenue and non-IFRS adjusted EPS guidance ranges. The strong performance in the fourth quarter, relative to our guidance, was driven by continued strength in our CCS segment, supported by the sustained growth of our hyperscaler portfolio. We continue to see the benefit of improved mix on our CCS segment margin, which reached yet another new high of 6.7% in the fourth quarter. In our ETS segment, revenues were down slightly year-to-year as incremental demand softness in our industrial business and continued demand headwinds in our capital equipment business more than offset strong growth in our A&E business. Our solo performance in the fourth quarter capped a stellar year in 2023.

Rob: Our solid performance in the fourth quarter capped a stellar year in 2023 throughout this past year, we continued to execute on our strategic plan enhanced our competitive presence in key markets and consistently delivered on our financial objectives and.

Rob: In 2023, our business generated revenue of approximately $8 billion, 10% higher than 2022, driven by strong growth in both our Ccs and Ats segments are.

Rob: Non <unk> adjusted EPS of $2 43.

Rob: Up 28% versus the prior year.

Rob: While non <unk> operating margin of five 6% was higher by 70 basis points.

Rob: With both results, marking the highest in the Companys history.

Rob: Our strong profitability and working capital management allowed us to generate non <unk> adjusted free cash flow of $194 million exceeding our full year target of $150 million.

Throughout this past year, we continued to execute on our strategic plan, enhanced our competitive presence in key markets, and consistently delivered on our financial objectives. For example, in 2023, our business generated revenue of approximately $8 billion. 10% higher than 2022, given by strong growth in both our CCS and ATS segments. Our non-IFRS adjusted EPS of $2.43 was up 28% versus the prior year, while non-IFRS operating margin of 5.6% was higher by 70 basis points, with both results marking the highest in the company's history.

Rob: Before I provide an update on the market outlook for each of our businesses.

I would now like to turn the call over to Mandy.

Mandy: We will provide further details on our fourth quarter financial performance and our guidance for the first quarter of 2024.

Mandy: Mandy over to you. Thank.

Mandy: Thank you, Rob and good morning, everyone.

Mandy: Fourth quarter revenue came in at 214 billion.

Towards the high end of our guidance range revenue was up 5% year over year supported by solid growth in our Ccs segment, partially offset by a modest decline in our Ats segment.

Mandy: Our fourth quarter non <unk> operating margin of 6.0% was 70 basis points higher year over year and marked the highest quarterly result in the Companys history.

Our strong profitability and working capital management allowed us to generate non-IFRS-adjusted free cash flow of $194 million, exceeding our four-year target of $150 million. Before I provide an update on the market outlook for each of our businesses, I would now like to turn the call over to Mandeep, who will provide further details on our fourth quarter financial performance and our guidance for the first quarter of 2020. Mandy Papageorgiou.

Mandy: Our margin expansion was driven primarily by higher profitability in both segments.

Mandy: As a result of improved mix and production efficiencies and higher volumes in our Ccs segment.

Non <unk> adjusted earnings per share for the fourth quarter was 76.

Mandy: Exceeding the high end of our guidance range.

Mandy: This results was <unk> higher year over year, driven primarily by higher non <unk> operating earnings as well as lower interest costs, a more favorable non <unk> adjusted effective tax rate and lower shares outstanding.

Mandeep Chawla: Thank you, Rob, and good morning, everyone. Fourth quarter revenue came in at $2.14 billion, towards the high end of our guidance range. Revenue was up 5% year-over-year, supported by solid growth in our CCS segment, partially offset by a modest decline in our ATS. Our fourth-quarter non-IFRS operating margin of 6.0% was 70 basis points higher year-over-year and marked the highest quarterly result in the company's history. Our margin expansion was driven primarily by higher profitability in both segments as a result of improved mix, production efficiencies, and higher volumes in our CCS segment. Non-IFRS-adjusted earnings per share for the fourth quarter were $0.76, exceeding the high end of our guiding goal.

Speaker Change: Moving onto our segment performance.

Speaker Change: <unk> revenues in the fourth quarter were $803 million.

Speaker Change: Down 2% year over year slightly below our expectations of a low single digit percentage increase.

The year over year decline in Ats segment revenue was driven by demand softness in our industrial business, primarily as a result of slowing demand in certain programs as well as continued demand headwinds in our capital equipment business.

Speaker Change: These declines were partially offset by solid performance in our A&D business, which saw growth of more than 20% compared to the prior year period.

Speaker Change: Ats segment revenue accounted for 38% of total revenues in the fourth quarter compared to 40% in the same period last year.

Mandeep Chawla: This results in $0.20 higher year-over-year, driven primarily by higher non-IFRS operating earnings, as well as lower interest costs, a more favorable non-IFRS adjusted effective tax rate, and lower shares outstanding. Moving on to our segment performance, ATS revenues in the fourth quarter were $803 million, down 2% year-over-year, slightly below our expectations of a low single-digit percentage.

Speaker Change: Our fourth quarter Ccs segment revenue of 134 billion.

Speaker Change: It was up 10% compared to the prior year period, driven by very strong growth in our enterprise end market, partially offset by anticipated demand softness in our communications end market.

Speaker Change: Ccs segment revenue accounted for 62% of total company revenues in the quarter compared to 60% in the prior year period.

Speaker Change: Enterprise end market revenue in the fourth quarter was up 46% year over year meaningfully above our expectation of a high twenties percentage increase.

Mandeep Chawla: The year over year decline in ATS segment revenue was driven by demand softness in our industrial business, primarily as a result of slowing demand in certain programs, as well as continued demand headwinds in our capital equipment business. These declines were partially offset by solid performance in our A&E business, which saw growth of more than 20% compared to the prior year period. ATS segment revenues accounted for 38% of total revenues in the fourth quarter, compared to 40% in the same period last year. Our fourth quarter CCS segment revenue of $1.34 billion was up 10% compared to the prior year period, driven by very strong growth in our enterprise end market, partially offset by anticipated demand softness in our communications end market. The CCS segment revenue accounted for 62% of total company revenues in the quarter compared to 60% in the prior year period.

Speaker Change: This growth was driven by ramping programs and strengthening demand for AI ml compute from our Hyperscale customers.

Speaker Change: Revenue in our communications end market was lower by 10% compared to the prior year period better than our expectation of a mid teens percentage decrease.

Speaker Change: Similar to last quarter. The decline was driven primarily by tough comps at some of our customers continue to digest inventory purchased in the prior year.

Speaker Change: <unk> revenue was $484 million in the quarter, 1% lower year over year.

Speaker Change: Hps revenues were 23% of total company revenues in the fourth quarter compared to 24% in the prior year period.

Speaker Change: Turning to segment margins.

Speaker Change: Ats segment margin in the fourth quarter was four 7% up 30 basis points year over year.

Mandeep Chawla: Enterprise-end market revenue in the fourth quarter was up 46% year-over-year, meaningfully above our expectation of a high 20s percentage. This growth was driven by ramping programs and strengthening demand for AI ML compute from our hyperscaler. Revenue in our communications and market was lower by 10% compared to the prior year period, better than our expectations of a mid-teens percentage decrease. Similar to last quarter, the decline was driven primarily by tough comps, as some of our customers continue to digest inventory purchased in the prior year. HPS revenue was $484 million in the quarter, 1% lower year over year.

Driven by strong productivity and favorable mix.

Ccs segment margin during the quarter was six 7% up 80 basis points year over year, driven by higher volumes and improved mix, including significant growth with our hyperscale customers.

Speaker Change: During the fourth quarter and for 2023, we had one customer which accounted for more than 10% of total revenues, representing 29% for the quarter and 22% for the year.

Speaker Change: Let's go have a longstanding relationship with this customer a global hyper scalar that we have been reporting for well over a decade.

We support this customer across 25 programs covering <unk> and non <unk> products in the areas of networking and compute.

Mandeep Chawla: HPS revenues were 23% of total company revenues in the fourth quarter compared to 24% in the prior year period. Turning to segment margin, ATS segment margin in the fourth quarter was 4.7%, up 30 basis points year-over-year. Driven by strong productivity and favorable conditions, BCS segment margin during the quarter was 6.7%, up 80 basis points year-over-year, driven by higher volumes and improved mix, including significant growth with our hyperscalar business. During the fourth quarter, and for 2023, we had one customer that accounted for more than 10% of total revenues, representing 29% for the quarter and 22% for the year. LISCA has a longstanding relationship with this customer We support this customer across 25 programs, covering HPF and non-HPF products in the areas of networking and communication. The products we build are highly complex, and as a result, the majority of these programs are single-source.

Speaker Change: The products, we build are highly complex and as a result, the majority of these programs are single sourced. In addition, we are pleased that as a result of our strength in engineering and solid operational execution. We continue to win new programs with this customer and expect to see demand strength continued through 2024 and into 2025.

Speaker Change: Moving on to some additional financial metrics.

<unk> net earnings for the fourth quarter were $84 million or <unk> 70 per share compared to net earnings of $42 million or.

Speaker Change: <unk> 35 per share in the prior year period.

Speaker Change: Adjusted gross margin for the fourth quarter was 10, 4% up 100 basis points year over year due to improved mix and production efficiencies.

Fourth quarter non <unk> adjusted effective tax rate was 20% in the quarter compared to 23% in the prior year period.

Speaker Change: Non <unk> adjusted our ROIC for the fourth quarter was 23, 3% an improvement of two 6% compared to the prior year quarter, driven by strong profitability and working capital management.

Mandeep Chawla: In addition, we are pleased that, as a result of our strength in engineering and solid operational expertise, we have been able to deliver on our promise to the world. We continue to win new programs with this, and expect to see demand strength continue through 2024 and into 2025. Moving on to some additional financial information, IFRS net earnings for the fourth quarter were $84 million, or $0.70 per share, compared to net earnings of $42 million, or $0.35 per share, in the prior year. Adjusted gross margin for the fourth quarter was 10.4%, up 100 basis points year-over-year due to improvements and production. The fourth quarter non-IFRS adjusted effective tax rate was 20% in the quarter compared to 23% in the prior year.

Speaker Change: Moving on to working capital.

At the end of the fourth quarter, our inventory balance was $2 1 billion.

Speaker Change: Down $155 million sequentially and down $244 million year over year.

Speaker Change: Cash deposits were at $905 million at the end of the fourth quarter up $30 million sequentially and higher by $79 million compared to the prior year period.

Speaker Change: When accounting for cash deposits inventory at the end of the fourth quarter was lower by $323 million on a year over year basis, and lower by $185 million sequentially.

Speaker Change: Inventory days net of cash deposit days were 62 in the fourth quarter compared to <unk> 79 in the prior year period.

Mandeep Chawla: Non-IFRS adjusted ROAC for the fourth quarter was 23.3%, an improvement of 2.6% compared to the prior year, driven by strong profitability and working capital. Moving on to working capital, At the end of the fourth quarter, our inventory balance was $2.11 billion, down $155 million sequentially and down $244 million year over year. Cash deposits were $905 million at the end of the fourth quarter, up $30 million sequentially, and higher by $79 million compared to the prior year period. When accounting for cash deposits, inventory at the end of the fourth quarter was lower by $323 million on a year-over-year basis and lower by $185 million sequentially.

Speaker Change: We are pleased with the improvements we are seeing in inventory as material constraints continued to improve and can pull into lead times normalized.

Speaker Change: Cash cycle days were 72 during the fourth quarter flat sequentially and eight days higher than the prior year period.

Speaker Change: Capital expenditures for the quarter were $33 million or approximately one 5% of revenue compared with one 6% of revenue in the fourth quarter of 2022.

Speaker Change: For the full year capital expenditures were $125 million.

Speaker Change: Or one 6% of revenue as we continue to invest in growth across our network to support customer demand.

Speaker Change: As we look to 2024, we expect our capital expenditures to modestly increase to between 175% and two 5% of revenues with a higher level of spend in the first half of the year.

Mandeep Chawla: Inventory days, net of cash deposit days, were 62 in the fourth quarter, compared to 79 in the prior year period. We are pleased with the improvements we are seeing in inventory, as material constraints continue to improve and compote into lead times normally. Cast cycle days were 72 during the fourth quarter, flat sequentially, and 8 days higher than the prior year.

Speaker Change: Our increasing level of capital expenditures is geared towards capacity expansion at key sites in support of demand for AI ml compute and <unk> programs.

Speaker Change: In Thailand, we are currently building out over 100000 square feet of additional capacity with the first phase expected to be online in the first quarter of 2024, and the second phase expected to be completed in the first half of 2025.

Speaker Change: This expansion is being partially funded by a co investment with one of our hyperscale customers to facilitate demand for highly specialized data center products.

Mandeep Chawla: Capital expenditures for the quarter were $33 million, or approximately 1.5% of revenue, compared with 1.6% of revenue in the fourth quarter of 2022. For the full year, capital expenditures were $125 million, or 1.6% of revenue, as we continue to invest in growth across our network to support customer development. As we look to 2024, we expect our capital expenditures to modestly increase to between 1.75% and 2.25% of revenues, with a higher level of spend in the first half of the year. Our increasing level of capital expenditures is geared towards capacity expansion at key sites in support of demand for AIML compute and HPS programs. In Thailand, we are currently building out over 100,000 square feet of additional capacity, with the first phase expected to be online in the first quarter of 2024, and the second phase expected to be completed in the first half of 2025.

Speaker Change: In Malaysia, we are building more than 80000 square feet of capacity to support strong demand from customers in our Ccs segment, including our Hps business. This addition is expected to be online in the first half of 2024.

Speaker Change: Turning to non <unk> adjusted free cash flow.

Speaker Change: We generated $84 million in the fourth quarter compared to $43 million in the prior year period, marking our 20 <unk> consecutive quarter of positive non <unk> adjusted free cash flow.

Speaker Change: This result brings our total free cash flow for the year to $194 million.

Speaker Change: Ahead of our full year outlook of $150 million.

Speaker Change: And approximately double our results from 2022 of $94 million.

Speaker Change: The outperformance was driven by strong profitability and working capital management.

Speaker Change: Looking forward to 2024, we are expecting $200 million.

Speaker Change: Or more of non <unk> adjusted free cash flow $25 million higher than the outlook, we shared in our November virtual investor meeting.

Speaker Change: Moving on to some additional key metrics.

Speaker Change: At the end of the fourth quarter, our cash balance was $370 million.

Speaker Change: Higher by $17 million sequentially.

Speaker Change: In combination with our approximately 600 billion of borrowing capacity under our revolver. This provides us with liquidity of approximately $1 billion, which we believe is sufficient to meet our anticipated business needs.

Mandeep Chawla: This expansion is being partially funded by a co-investment with one of our hyperscalers to facilitate demand for highly specialized data center products. And in Malaysia, we are building more than 80,000 square feet of capacity to support strong demand from customers in our CCS segment, including our HPS. This edition is expected to be online in the first half of 2024. Turning to non-IFRS-adjusted precast.

Speaker Change: Our gross debt at the end of the fourth quarter was $609 million.

Speaker Change: Leaving us with a net debt position of $239 million.

Speaker Change: Our fourth quarter gross debt to non <unk> trailing 12 month adjusted EBITDA leverage ratio was one one turns.

Mandeep Chawla: We generated $84 million in the fourth quarter, compared to $43 million in the prior year period, marking our 20th consecutive quarter of positive non-IFRS adjusted free cash. This result brings our total free cash flow for the year to $194 million, ahead of our full year outlook of $150 million and approximately double our results from 2022 of $94 million. The outperformance was driven by strong profitability and working capital. Looking forward to 2024, we are expecting $200 million or more of non-IFRS adjusted free cash flow, $25 million higher than the outlook we shared in our November virtual investor meeting. Moving on to some additional key points, At the end of the fourth quarter, our cash balance was $370 million, higher by $17 million sequentially. In combination with our approximately $600 million of borrowing capacity under our revolver, this provides us with liquidity of approximately $1 billion, which we believe is sufficient to meet our anticipated business needs. Our gross debt at the end of the fourth quarter was $609 million, leaving us with a net debt position of $239 million.

Speaker Change: Sequentially and down 0.2 turns compared to the same period of last year.

Speaker Change: As of December 31, 2023, we were compliant with all financial covenants under our credit agreement.

Speaker Change: During the fourth quarter, we purchased approximately 400000 shares for cancellation under our normal course issuer bid at a cost of $10 million for 2023, we repurchased a total of $2 6 million shares for cancellation or approximately 2% of our shares outstanding at year end at a total cost of 36.

Speaker Change: Yeah.

Speaker Change: In December the TSS accepted our normal course issuer bid, which is in effect until December 2024 under this new and CIB. We are authorized to purchase up to approximately 11 8 million shares or approximately 10% of the public float.

Speaker Change: We continue to believe that investing in our share buyback program is a good use of capital and intend to repurchase shares on an opportunistic basis in 2024.

Speaker Change: Now turning to our guidance for the first quarter of 2024.

Speaker Change: First quarter revenues are expected to be in the range of $2.0 billion to $5 billion to $2 175 billion.

Speaker Change: Which is the midpoint of this range is achieved would represent growth of 14% compared to the prior year period.

Mandeep Chawla: Our fourth quarter growth debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.1 turns flat sequentially and down 0.2 turns compared to the same period of last year. As of December 31st, 2023, we were compliant with all financial covenants under our credit facility. During the fourth quarter, we purchased approximately 400,000 chairs for cancellation under our normal course issuer bid at a cost of $10 million. For 2023, we repurchased a total of 2.6 million shares for cancellation, or approximately 2% of our shares outstanding at year-end, at a total cost of $36 million. In December, the TSX accepted our normal course issuer bid, which is in effect until December 2021. Under this new NCIB, we are authorized to purchase up to approximately 11.8 million shares, or approximately 10% of the public float.

Speaker Change: First quarter non <unk> adjusted earnings per share are expected to be in the range of 67 to 77 cents per share.

Which at the midpoint would represent an improvement of 25 per share or 53% compared to the first quarter of 2023.

Speaker Change: If the midpoint of our revenue and non <unk> adjusted EPS guidance ranges are achieved non <unk> operating margin would be 6.0%, which would represent an increase of 80 basis points over the same period last year.

Speaker Change: Non <unk> adjusted SG&A expense for the first quarter is expected to be in the range of $62 million to $64 million.

Speaker Change: We anticipate our non <unk> adjusted effective tax rate to be approximately 20% for the first quarter, excluding any impact from taxable foreign exchange or unanticipated tax settlement.

Speaker Change: Our first quarter guidance assumes that our income will be subject to global minimum tax as legislation that has been introduced in Canada may be approved before the end of the quarter.

Mandeep Chawla: We continue to believe that investing in our share buyback program is a good use of capital and intend to repurchase shares on an opportunistic basis in 2024. Now, turning to our guidance for the first quarter of 2024. First quarter revenues are expected to be in the range of $2.025 billion to $2.175 billion, which if the midpoint of this range is achieved, would represent growth of 14% compared to the prior year period. First Quarter Non-IFRS Adjusted Earnings per share are expected to be in the range of $0.67 to $0.77 per share, which at the midpoint would represent an improvement of 25 cents per share or 53% compared to the first If the midpoint of our revenue and non-IFRS Adjusted EPS guidance ranges are achieved, non-IFRS operating margin would be 6.0%, which would represent an increase of 80 basis points over the same period last year. Non-IFRS adjusted SG&A expense for the first quarter is expected to be in the range of 62 to 64.

Speaker Change: This legislation is not substantially enacted in the first quarter, our estimate for our first quarter non ire for us adjusted effective tax rate would be approximately 15%.

Now turning to our end market outlook for the first quarter of 2024.

Speaker Change: In our Ats segment, we anticipate revenue to be down in the low single digit percentage range year over year, driven by demand softness in our industrial business and ongoing market softness in capital equipment, partly offset by continued growth in A&D.

We anticipate revenues in our communications end market to be up in the low single digit percentage range year over year, driven by strengthening demand in networking from hyperscale customers, including in our HTS programs.

Speaker Change: Finally in our enterprise end market, we expect revenue to be up in the high 60 percentage range year over year, driven by anticipated demand growth in AI ml compute programs from our hyper scaler customers.

I'll now turn the call back over to Rob to discuss the outlook for each of our end markets and the overall business.

Rob: Thank you mandate before discussing the outlook for our markets I would like to reaffirm the following metrics from our 2024 financial outlook that we provided on our virtual Investor meeting in November we continue to expect revenue of $8 5 billion or more non <unk> adjusted EPS of $2 70.

Mandeep Chawla: We anticipate our non-IFRS adjusted effective tax rate to be approximately 20% for the first quarter, excluding any impact from taxable foreign exchange or unanticipated tax subsidies. Our first quarter guidance assumes that our income will be subject to global minimum tax, as legislation that has been introduced in Canada may be approved before the end of. If this legislation is not substantially enacted in the first quarter, our estimate for our first quarter non-IFRS adjusted effective tax rate would be approximately $15,000. Now, turning to our end market outlook for the first quarter of 2024. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage range year-over-year, driven by demand softness in our industrial business and ongoing market softness in capital equipment, partly offset by continued growth in AI.

Rob: <unk> o'mara and non <unk> operating margin to be in the range of five 5% to 6%.

Rob: In addition, as Randy mentioned, we have raised our non <unk> free cash flow outlook for the year to $200 million or more.

We are pleased with our strong performance in 2023 and continues to see very positive momentum in the first quarter of 2024.

Rob: Such we are currently undertaking discussions with our customers and suppliers.

Rob: In order to obtain better visibility into the remainder of the year and we look forward to providing an update on our 2020 for outlook.

Rob: Our first quarter results.

Rob: Now moving on to the outlook for each of our businesses.

Mandeep Chawla: We anticipate revenues in our communications end market to be up in the low single-digit percentage range, driven by strengthening demand and networking from hyperscaler customers, including in our HPS. Finally, in our enterprise-end market, we expect revenue to be up in the high 60s percentage range year-over-year, driven by anticipated demand growth in AIML compute programs from our hyperscalers. I'll now turn the call back over to Rob to discuss the outlook for each of our end markets and the overall picture. Thank you, Mandy.

Rob: Beginning with our Ats segment, our industrial business recorded annual growth of 29% in 2023, driven by ramping programs in smart energy and EV charging. However, we began to see signs of market softness towards the end of the year due in part to pockets of weakness in.

Rob: And the broader economic environment higher interest rates as well as some delays in new program ramps as such we expect to see lower revenues in our industrial portfolio through the first half of the year before seeing a return to year to year growth in the second half, which should result in modest growth in our industrial business for.

Before discussing the outlook for our markets, I would like to reaffirm the following metrics from our 2024 financial outlook that we provided at our virtual investor meeting in November. We continue to expect revenue of $8.5 billion or more, non-IFRS adjusted EPS of $2.70 or more, and non-IFRS operating margin to be in the range of 5.5% to 6%. In addition, as Mandeep mentioned, we have raised our non-IFRS free cash flow outlook for the year to $200 million or more.

Rob: All of 2024, when compared to 2023.

Rob: We continue to believe that the structural trends in markets, such as EV charging smart energy and telematics amongst others remain intact and are supportive to growth in our industrial business over the long term.

In our A&D business the sustained recovery in commercial aerospace has seen domestic air travel surpassed pre pandemic levels in many economies.

Rob: Resulting in annual revenue growth of more than 30% in 2023 compared to 2022.

We are pleased with our strong performance in 2023 and continue to see very positive momentum in the first quarter of 2024. As such, we are currently undertaking discussions with our customers and suppliers in order to obtain better visibility into the remainder of the year. And we look forward to providing an update on our 2024 outlook with our first quarter results. Now, moving on to the outlook for each of our businesses, beginning with our ATS segment. Our industrial business recorded annual growth of 29% in 2023, driven by ramping programs in smart energy and EV charging. However, we began to see signs of market softness towards the end of the year, due in part to pockets of weakness in the broader economic environment, higher interest rates, as well as some delays in new program ramps.

Looking ahead, we expect to see strong demand across our commercial aerospace submarkets to continue in 2024.

Rob: Our defense business is also expected to see solid growth in the year ahead supported by new program wins and increased government investment in military capabilities.

Rob: Overall, we anticipate solid demand to drive low double digit percentage growth in our A&D business in 2024.

<unk> 2023.

Rob: In our capital equipment business market forecasts continue to suggest that the underlying market demand is operating close to trough levels and we should see flat to slightly higher demand in 2024.

Rob: We are maintaining our outlook for modest revenue growth in our capital equipment business in 2024.

Rob: Supported by the ramping of new program wins, and our assumption of base demand holding flat to 2023.

As such, we expect to see lower revenues in our industrial portfolio through the first half of the year before seeing a return to year-to-year growth in the second half, which should result in modest growth in our industrial business for all of 2024 when compared to 2023. We continue to believe that the structural trends in markets such as EV charging, smart energy, and telematics, amongst others, remain intact and are supportive of growth in our industrial business over the long term. In our A&E business, the sustained recovery in commercial aerospace has seen domestic air travel surpass pre-pandemic levels in many economies, resulting in annual revenue growth of more than 30% in 2023 compared to 2022. Looking ahead, we expect strong demand across our commercial aerospace submarkets to continue in 2024. Our defense business is also expected to see solid growth in the year ahead, supported by new program wins and increased government investment in military capabilities.

We anticipate that the year to year growth will largely be in the back half of the year setting up for a stronger recovery in demand in 2025.

Rob: In our health Tech business, we anticipate our revenue to grow in 2024 compared to 2023, as we ramp new programs.

Rob: So for our overall Ats segment. We are currently anticipate that revenue will decline slightly in the first half of 'twenty 'twenty four compared to 2023.

Rob: So the pockets of macro weakness affecting some of our markets. However, we anticipate that segment revenue will resume year to year growth in the second half of the year.

Rob: Overall, we are maintaining our expectation for Ats revenue growth in the mid single digit percentage range in 2024.

Rob: Now turning to our Ccs segment.

Rob: Demand backdrop for our Ccs segment continues to be very strong.

Overall, we anticipate sell demand to drive low double-digit percentage growth in our A&E business in 2024 compared to 2023. In our capital equipment business, market forecasts continue to suggest that the underlying market demand is operating close to trough levels, and we should see flat to slightly higher demand in 2024. We are maintaining our outlook for modest revenue growth in our capital equipment business in 2024, supported by the ramping of new program wins and our assumption of base demand holding flat for 2023. We anticipate that the year-to-year growth will largely be in the back half of the year, setting up for a stronger recovery in demand in 2025. In our health tech business, we anticipate our revenue to grow in 2024 compared to 2023 as we launch new programs.

Rob: Investments from Hyperscale is in data center infrastructure are fueling significant capex spending driven by growing demand for artificial intelligence and machine learning applications in.

Rob: In 2023, our portfolio with our Hyperscale is saw revenue growth of 32% compared to 2022 recording nearly $2 $9 billion in revenues. This accounted for 62% of our total Ccs segment revenues in 2023 up from 51% the prior year.

Rob: At a recent virtual investor meeting in November we delve further into this dynamic, which we believe is long term and structural in nature.

Rob: We anticipate solid growth to continue in 2024 and believes that this investment cycle has the potential to support several years of strong demand for our Ccs segment.

Rob: The demand outlook for our enterprise end market continues to be impressive as the beneficiary of Hyperscale is growing deployment of AI ml compute capacity.

Rob: We're seeing the strong momentum from 2023 continue and as mentioned earlier, we anticipate significant growth with our within our AI ml compute portfolio as we enter 2024.

So for our overall ATS segment, we currently anticipate that revenue will decline slightly in the first half of 2024 compared to 2023 due to the pockets of macro weakness affecting some of our markets. However, we anticipate that segment revenue will resume year-to-year growth in the second half of the year. Overall, we are maintaining our expectation for ATS revenue growth in the mid single-digit percentage range in 2024. Now, turning to our CCSO.

Rob: We expect additional growth in our storage business to materialize in the latter half of the year driven by demand from new programs.

Rob: After experiencing some softness in 2023 demand in our communications end market is anticipated to resume year to year growth in the first quarter.

Rob: Driven by a resumption of strength in networking demand from Hyperscale is which is expected to persist throughout the year.

The demand backdrop for our CCS segment continues to be very strong. Investments from hyperscalers and data center infrastructure are fueling significant CapEx spending, driven by growing demand for artificial intelligence and machine learning applications. In 2023, our portfolio with our hyperscalers saw revenue growth of 32% compared to 2022, recording nearly $2.9 billion in revenue. This accounted for 62% of our total CCS segment revenues in 2023, up from 51% the prior

Rob: Within our <unk> business, we anticipate to resume year over year growth in the first quarter of 2024 and for the full year.

Rob: This growth is being fueled by a number of new program wins in both networking supported by growth in our 400, <unk> and <unk> platforms and to some extent AI ml compute.

For 2024, we are maintaining our previously communicated expectation of low double digit percentage revenue growth in our Ccs segment supported by solid growth in both our enterprise and communications end markets.

Rob: Although we are seeing some divergence in the short term demand dynamic underlying our various end markets.

Rob: We believe that the fundamentals supporting our overall business are very constructive.

Rob: The benefits of our strategic portfolio diversification and our consistent execution.

At our recent virtual investor meeting in November, we delved further into this dynamic, which we believe is long-term and structural in nature. We anticipate this solid growth to continue in 2024 and believe that this investment cycle has the potential to support several years of strong demand for our CCS sector. The demand outlook for our enterprise and market continues to be impressive, as a beneficiary of Hyperscale's growing deployment of AI-ML compute capacity. We're seeing the strong momentum from 2023 continue.

Rob: We feel about our positioning for 2024 remains positive.

As we remain confident in our ability to meet our financial outlook and improve on our very strong performance in 2023.

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

Speaker Change: Thank you.

Speaker Change: Okay.

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 on your Touchstone song you only athlete Helen Tom That's all a junior request should you wish to take time from the polling process. Please press star followed by the number if.

Speaker Change: If you are using a speaker phone please lift your handset before pressing any team.

And, as mentioned earlier, we anticipate significant growth within our AI-ML compute portfolio as we enter 2024. Additionally, we expect additional growth in our storage business to materialize in the latter half of the year, driven by demand from new programs. After experiencing some softness in 2023, demand in our communications end market is anticipated to resume year-to-year growth in the first quarter, driven by a resumption of strength and networking demand from hyperscalers, which is expected to persist throughout the year. Within our HPS business, we expect year-to-year growth in the first quarter of 2024 and for the full year. This growth is being fueled by a number of new program wins in both networking, supported by growth in our 400G and 800G platforms, and to some extent, AI ML compute.

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

Hi, can you give us a little bit of color on the Hyperscale business and Ccs given the large customer accounting for 29%, it's a pretty significant chunk, maybe if you could talk about the business outside of that large customer is that driven by.

Robert Young: The high level of AI compute currently and there is one customer or a small number of customers there or is there some other dynamic going on there.

Hi, Rob.

Robert Young: The particular customer.

Rob: It's a hyperscale customer they are making significant investments in AI ml compute.

As well as networking.

Rob: You mentioned on the call we have over 25 programs with this customer and it's comprised of.

Rob: Everything from hardware platform solutions to our high value <unk> to even services.

Rob: They are an industry leader, we've been doing business with them for over a decade.

Operator: For 2024, we are maintaining our previously communicated expectation of low double-digit percentage revenue growth in our CCS segment, supported by solid growth in both our enterprise and communications and marketing. Although we are seeing some divergence in the short-term demand dynamics underlying our various end markets, we believe that the fundamentals supporting our overall business are very constructive due to the benefits of our strategic portfolio diversification and our consistent execution. We feel that our positioning for 2024 remains positive, as we remain confident in our ability to meet our financial outlook and improve on our very strong performance in 2023. With that, I would now like to turn the call over to the operator for questions. Thank you. 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 on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your hands up before pressing any key.

Rob: There are also co investing with us on.

Rob: Some capex.

Rob: Our facility investments over in Thailand. So.

Rob: Very healthy relationship.

Rob: The broader hyper scaler.

Rob: We also seeing.

Rob: Strong growth from several others in the same area and we expect.

Rob: Concentration to improve over time.

Rob: And for people who are investment cycles.

I would just add to that Rob that.

Rob: As a reminder, we do business with a top five hyperscale and while we are doing a lot of AI ml compute with the with the large customer that Rob just talked about.

Rob: We're starting to see some return in demand coming on the networking side, which is helping us across the customer base and we're really encouraged that as we go into the first quarter now we're seeing growth resuming communications, we're seeing growth resuming hardware platform solutions and those are offerings that we provide.

Rob: Perfect.

Speaker Change: Okay. Thank you and then the second question, maybe I'm getting ahead of myself, you said youre going to revisit the full year outlook I think in Q1, but the outlook for five 5% to 6% operating margin seems conservative given.

You're doing so well in.

Speaker Change: The enterprise business in the Ccs is six 7% and you're entering at 6% in the guide it looks like 6% so.

Speaker Change: It looks as though it's going to decelerate in the back half of the year, maybe if you can discuss that in a pipeline.

Robert Young: Our first question comes from the line of Robert Young from Canaccord Genuity; please go ahead. Hi, can you give us a little bit of color on the hyperscale business and CCS given the large customer accounting for 29%? It's a pretty significant chunk. Maybe if you could talk about the business outside of that large customer, is that driven by the high level of AI compute currently, and there's one customer or a small number of customers there, or is there some other dynamic going on there? Well, hi, Rob.

Yeah.

Speaker Change: Robert I'll talk about two things one is the outlook for the full year and then I can talk to your point on margins specifically so when we look at full year 2024, we're really pleased with the way we enter 'twenty three and clearly we're off to a really hot start now into the first quarter and again encouraged by where we're seeing the demand signals come through both on constant hbf, but also.

Speaker Change: The demand signals from the hyper scalar has continued to strengthen.

Speaker Change: As you know in November we provided the outlook of $8 5 billion or more and $2.70 of EPS or more and right now we really do see that as being the floor.

So with this particular customer, it's a hyperscale customer. They're making significant investments in AI, ML, compute, as well as networking. As you mentioned on the call, we have over 25 programs with this customer, and it's comprised of everything from hardware platform solutions to high-value EMS to even services. They're an industry leader.

We are looking to do as Rob mentioned in his prepared remarks.

Speaker Change: Going back out to the customer base and re validating the second half outlook, we're having we're seeing that increased trend happening in the first half and now what we wanted to do is go and validate whether or not that was increasing level of demand.

We've been doing business with them for over a decade, and they're also co-investing with us on some CapEx facility investments in Thailand. So, a very healthy relationship.

Speaker Change: Signals are going to be added to the second half as well and so in April we'll come back with the updated forecast.

To your point on the margin profile itself as we talked about Ats is expected to see some very minor levels of declines in the first half of this year before resuming growth in the back end of the year Ats again, we're expecting across all of our end markets that have some level of growth in 2024.

Across the broader hyperscaler business, we're also seeing strong growth from several others in the same area, and we expect the concentration to improve over time as ebbs and flows of people's investments like that. I would just add to that, Rob, that, as a reminder, we do business with the top five hyperscalers, and while we are doing a lot of AI and not compute with the large customer that Rob just talked about, we're starting to see some return in demand on the networking side, which is helping us across the customer base. We're really encouraged that as we go into the first quarter now, we're seeing growth resume in communications; we're seeing growth... Harvard Platform Solutions, and those are offerings that we provide across the board.

Speaker Change: Cause that growth in the back half is going to be off the back of ramping program. There is going to be a little bit of margin challenges around there as well.

Again, 6% for the first quarter I believe the 270 is the floor and obviously, we're going to be working towards the high end of that pipe.

Speaker Change: 5% to 6% range as best we can.

Speaker Change: And one other thing I would add Rob I think by the end of the first quarter, we will have better visibility into.

Speaker Change: Capital equipment markets, we are seeing some.

Speaker Change: Signs of recovery, we're cautiously optimistic.

Our customers are starting to restock consumables and spares, which is a good sign so I think.

Okay, thank you. And then the second question: maybe I'm getting ahead of myself. You said you're going to revisit the full year outlook, I think in Q1, but the outlook for five and a half to six percent operating margin seems conservative given that you're doing so well in the enterprise business in CCS at 6.7%, and you're entering at 6%, and the guide looks like 6%, so it looks as though it's going to decelerate in the back half of the year. Maybe we can just discuss that, and I'll draw the line.

Speaker Change: Capital equipment gets better so will some of the Ats margins as well.

Speaker Change: Okay. Thank you I'll pipeline okay.

Speaker Change: Thank you we have our next question coming from the line of Max and at this time.

Max: BC capital markets. Please go ahead.

Max: Hi, Good morning, just on the communications side.

Max: Has there been any changes to your expectation for that networking growth to resume in Q1 or is it just the OEM business. This offsetting the hyperscale or strength I think I see that the guidance implies a quarter over quarter deceleration. So is that to me.

Mandeep Chawla: Yeah, Robert, I'll talk about two things. One is the outlook for the full year, and then I can talk to your point on margin specifically. So when we look at full year 2024, we're really pleased with the way we have. And, clearly, we're off to a really hot start now into the first quarter.

Max: That is primarily because of the OEM business softness.

Max: No as we head into Q1, we expect communications and networking to actually be up.

Mandeep Chawla: And again, encouraged by where we are, coming through, both on cons and HPS, but also the demand signals from the hyperscalers. As you know, in November, we provided the outlook of $8.5 billion or more and $2.70 of EPS or more. And right now, we really do see that as the... What we are looking to do, as Rob mentioned in his prepared remarks, is go back out to the customer base and revalidate the second half outlook. We're seeing that increased strength happening in the first half, and now what we want to do is go and validate whether or not that was an increasing level of demand. Signals are going to be added to the second half as well, so in April, we'll come back with an updated forecast. To your point on the margin profile itself, as we talked about, HES is expected to see some very minor levels of decline in the first half of this year before resuming growth in the second half.

Max: Driven by our hyper scale.

Max: On 400 G.

Max: 800 <unk> programs.

Max:

Max: Theres also hps driven program so.

Max: As we head into last year, we had some tough comps some of those tough comps are lapsing and now we're seeing comps return to growth.

Got it and on the Hyperscale or is there any changes from your last update I guess in November on your Hyperscale customer programs.

Max: And your expected demand over the next few quarters.

Max: And then you talked about new program wins with your largest customer.

Max: That something that you anticipated in previous quarters is that something that's new.

Max: Yes.

Max: Hyperscale programs, we've actually been winning incremental share that.

Max: That on top of increased demand strength has both been positive for us.

Max: Some of the reasons for some of the improved outlook that we're seeing into Q1 and potentially for the full year. Hence that's why we're going to take a quarter to revisit with our customers.

ATF, again, we're expecting across all of our end markets to have some level of growth in 2024. But because that growth in the back half is going to be off the back of ramping programs, there are going to be a little bit of margin challenges around. Again, 6% for the first quarter, believe 270 is the floor, and obviously we're going to be working towards the high end of that 5.5%. And one other thing I would add, Rob, I think by the end of the first quarter, we'll have better visibility into our capital equipment markets. You know, we are seeing some signs of recovery.

Max: And take a look at what the full year has to be but we have been winning some.

Max: Some incremental share and been booking.

Max: Really a significant amount of 803 programs.

And just final one for me just to revisit Ats I think some of your peers have also been seeing a slowdown in their end markets over the last little bit based on customers are working through their inventory buffers is that what youre seeing as well this quarter and can you maybe speak to with them.

Max: In industrial and capital equipment end markets, specifically kind of what is causing you to expect demand to return by the second half is it primarily kind of those new program ramps.

Mandeep Chawla: We're cautiously optimistic; a lot of our customers are starting to restock consumables and spares, which is a good sign. So I think, you know, as capital equipment gets better, so will some of the ATS margins as well. Okay, thank you. Thank you. We have our next question coming from the line of Maxim Matyshansky from RBC Capital Markets. Please go ahead.

Ats: Yeah. Good question, so our industrial business in 'twenty three.

Ats: By way of reminder, for close to 30% in Gatineau is fueled by Green energy programs recruiting EV charging energy storage energy generation.

Ats: Now as we are exiting the year demand started cycling down in some of these markets.

And the markets that were really impacted where interest rate sensitive markets, but Moreover, because of the material environment has dramatically improved our customers, where we've taken the opportunity to reduce their strategic inventory buffers. We think those buffers will normalize in the first half of the year and in the second half of the year, we have new programs.

Maxim Matyshansky: Hi, good morning. Just on the communications segment, has there been any change to your expectation for the networking growth to resume in Q1, or is it just the OEM business that's offsetting the hyperscaler strength? I think I see that the guidance implies a core-to-core deceleration, so is that to mean that that is primarily because of the OEM business softness? Now, as we head into Q1, we expect communications and networking to actually be up, driven by our habit scalers, both on 400G and 800G programs. There are also HPS-driven programs.

Ats: <unk> plan, which would return the industrial business to growth.

Ats: And our capital equipment business as I mentioned earlier, we're cautiously optimistic as we get to the back half of the year and certainly into 2025 that we're seeing some signs of growth.

Ats: And the costs are pretty much aligned there and again, we're seeing some spares orders and as a reminder, some of the headwinds that we're seeing in Etfs, we think will be more than offset with our strength that we're seeing our ccs business.

So as we added into last year, we had some tough comps. Some of those tough comps are lapsing, and now we're seeing comps return to growth.

Speaker Change: Great. Thanks, I'll pass the line.

Speaker Change: Thank you.

Our next question coming from the line of Planet must shop list from BMO capital markets. Please go ahead.

And on the hyperscaler, are there any changes from your last update, I guess in November, on your hyperscaler customer programs and your expected demand over the next few quarters? And you talked about a new program win with your largest customer. Is that something that you anticipated in previous quarters? Is that something that's new?

Hi, good morning.

Speaker Change: With respect to the full year guidance I hear you with respect to parking to discuss the second half outlook.

Planet: With your customers before revisiting the guidance, but certainly from the demand signals, you're highlighting it seems like it will be a stronger second half I guess from your perspective, what might be the key areas of uncertainty you might get further color on before visiting guidance would that be on semi and industrial or.

Yeah, we've been on our hyperscaler programs. We've actually been winning incremental share. That, on top of increased demand strength, has both been positive for us and some of the reasons for some of the improved outlook that we're seeing into Q1 and potentially for the full year. And that's why we're going to take a quarter to revisit with our customers and take a look at what the full year has to be. But we have been winning some incremental share and have booked a really significant amount of 800G programs. And just final one for me, just to revisit, ATS: I think some of your peers have also been seeing a slowdown in their end markets over the last little bit based on customers working through their inventory buffers. Is that what you're seeing as well this quarter?

Planet: Which areas would be the biggest source of demand variability as you think about second half.

Planet: Yeah, Hi, Thanks, Sandeep here so.

Sandeep: We were pleased to be able to interact with our customer base, specifically on the hyperscale side in the fourth quarter and that has led us to confidently come out with the outlook that we did.

Sandeep: Even after our.

Sandeep: Virtual Investor meeting in November we saw incremental improvement to the forecast coming from the Hyperscale and so that's reflected in our Q1 guidance.

Again, our outlook is for 14% year over year growth.

Sandeep: Which is higher than what we would've said he probably in November and we're seeing that demand strength continue into the second quarter. So the conversations with the Hyperscale is or is there an improvement in material availability on your end is there.

And can you maybe speak to, you know, within industrial capital equipment and markets specifically, kind of what is causing you to expect demand to return by the second half? Is it primarily those new program ramps? Yeah, good question.

Sandeep: As your deployment chain plans changed at all and how does that impact the second half of the year is it going to be similar to what we're seeing right now in the first half of the year and.

And then to Rob's point on capital equipment. So our assumption right now is that the base market is going to be flat.

So our industrial business in 23. A wave reminder grew close to 30 percent, and again, it was fueled by green energy programs, including EV charging, energy storage, and energy generation. You know, as we're exiting the year, demand started cycling down in some of these markets, and the markets that were really impacted were interest rate-sensitive markets. But moreover, because the material environment has dramatically improved, our customers were taking the opportunity to reduce their strategic inventory buffers. We think those buffers will normalize in the first half of the year, and in the second half of the year, we have new programs and ramps planned, which would return the industrial business to growth. In our capital equipment business, as I mentioned earlier, we're cautiously optimistic as we get to the back half of the year and certainly into 2025, we're seeing some signs of growth, and the costs are pretty much aligned there. And again, we're seeing some spares orders. And as a reminder, some of the headwinds that we're seeing in ATS, we think will be more than all set with our strength. Great, thanks, La Paz Line.

Okay.

Sandeep: Round trough levels right now some encouraging signs as Rob talked about and where we're expecting the growth to be in capital equipment is as we ramp ASML.

Sandeep: <unk> is a customer of ours for a few years now, but we've won a number last.

Sandeep: Last year, or so and those programs are in the process of being ramped right now and the demand signals from that specific customer have not changed and so what we're looking to do as we go to the rest of the customer base and capital equipment is to understand whether or not some of these early signs that we're seeing in terms of consumables and spares is going to lead to a demand uptick in the back end of the year.

Sandeep: And so it's really around Hyperscale, it's a couple of them.

That's helpful and then on the softness in industrial just to clarify is that primarily weighted.

In Green energy or is that kind of across the board in your various end markets within industrial.

Hi, Patrick.

Patrick: It's pronounced mostly in EV charging which is kind of being driven by a slowdown in EV.

Sales and also some of the incentives at least in the U S are slow to get out to the marketplace, that's having some impact as well as the higher interest rates, but we're also seeing a little bit of a slowdown in I'll call. It the broader industrial space, just driven by the burn down of strategic inventory buffers again, we expect.

Thanos Moschopoulos: Thank you. We have our next question coming from the line of Thanos Moschopoulos from Yemo Capital Markets. Please go ahead.

Mandeep Chawla: Hi, good morning. With respect to the full year guidance, I hear you with respect to wanting to discuss the second half outlook with your customers before revisiting the guidance, but certainly, from the demand signals you're highlighting, it seems like it'll be a stronger second half. I guess from your perspective, what might be the key areas of uncertainty you want to get further color on before visiting guidance? Would that be on semi-finished and industrial products, or which areas would be the biggest source of demand variability as you think about the second half? Yeah, hi Thanos, Mandeep here.

Patrick: Some new program ramps and the burn down of our buffers for the entire industrial business to start resuming to growth in the back half of the year.

Speaker Change: Great up offline. Thanks.

Speaker Change: Thank you we have our next question coming from the line of Daniel Chan from TD Securities. Please go ahead.

Daniel Chan: Hi, good morning, Congrats on the strong quarter here. So communications was stronger than expected. This quarter was that driven by AI demand strength or was that from non AI related cloud demand, where we're also starting to see some early signs of a recovery.

Mandeep Chawla: We were pleased to be able to interlock with our customer base, specifically on the hyperscaler side, in the fourth quarter, and that has led us to confidently come out with the outlook that we did. Even after our virtual investor meeting in November, we saw incremental improvements to the forecast coming from the hyperscalers, and so that's reflected in our Q1 guidance. Again, our outlook is for 14% year-over-year growth, which is higher than what we would have said probably in November.

In terms of comps.

Daniel Chan: It was driven by networking, which was kind of the.

Daniel Chan: Pull through that we've been mentioning that we would see as a result of AI ml demand.

Daniel Chan: And within networking there.

Daniel Chan: I'll call it AI ml networking, which is directly driven and we've seen a growth in those programs.

Mandeep Chawla: And we're seeing that demand strength continue into the second quarter. So the conversations with the hyperscalers are, is there an improvement in material availability on your end? Has your deployment plan changed at all, and how does that impact the second half of the year? Is it going to be similar to what we're seeing right now in the first quarter?

Daniel Chan: Working comes in a couple of different flavors. The 48 volt is really driven by some of the AI ml applications and we've certainly seen an uptick in that.

Daniel Chan: And then we've seen a lot of new.

Daniel Chan: Data center leasing activity. So just curious on the timing of this communications ramp as you guys are expecting 800 G to ramp into 2025, so with all these new data centers coming online or are these new builds going to have 800 G in them or will they leverage 400 G to begin with.

Mandeep Chawla: And then to Rob's point on capital equipment, so our assumption right now is that the base market is going to be flat. We're around trough levels right now, some encouraging signs, as Rob talked about, and where we're expecting the growth to be in capital equipment to be as we ramp up ASML. ASML has been a customer of ours for a few years now, but we've won a number of programs over the last year or so, and those programs are in the process of being ramped right now, and the demand signals from that specific customer have not changed. And so what we're looking to do as we go to the rest of the customer base in capital equipment is to understand whether or not some of these early signs that we're seeing in That's helpful.

Daniel Chan: So just wondering like with them building out all these new data centers this year, whether theyre going to be putting a lot of that next generation stuff or where they're going with the current generation equipment.

Speaker Change: That's a good question.

Speaker Change: I can tell you.

Speaker Change: Is that 400 G is strong throughout the year 800 G is.

Speaker Change: Starting to ramp in the first half of the year very strong in the back half of the year and certainly picking up into the 25.

Speaker Change: That would lead me to believe it's a little bit of a blend but to be Frank with you I'm not entirely sure.

Speaker Change: One of the things that we are seeing Dan is that within some of our customers capex spending they are shifting capex towards AI applications, and so making a decision to refresh certain data centers over all of our data centers.

In addition to that.

Speaker Change: Also seeing is that for some of the customers as they are as silicon becomes available and Theyre looking for 400 gig solutions, while they wait for 800 G to be available in 2025 ethically.

And then on the softness in industrial, just to clarify, is that primarily weighted towards green energy? Or is that kind of across the board in your various markets in industrial? Hi Thanos.

It's pronounced mostly in EV charging, which is kind of being driven by a slowdown in EV sales and also some of the incentives, at least in the US, are slow to get out to the marketplace. That's having some impact as well as higher interest rates. But we're also seeing a little bit of a slowdown in, I'll call it, the broader industrial space, just driven by the burndown of strategic inventory. Again, we expect some new program ramps and the burndown of the buckers for this entire industrial business to start resuming growth in the back half. Great, I'll pass the line, thanks.

Speaker Change: I have to go through the design cycle et cetera. So we are seeing a shift of investment towards AI applications.

Speaker Change: And sometimes that's at the expense of more traditional cloud applications.

I appreciate it thanks for that and then final question. You also mentioned the ramp up of some of these sites just wondering whether you have enough capacity to deal with the near term demand that's coming in.

Speaker Change: Throughout this year.

And how those discussions are going on on your ability to service some of that demand. Thank you.

Speaker Change: Yes. Thanks.

Speaker Change: Interlocking with our customers and been investing forward.

Daniel Chan: Thank you. We have our next question coming from the line of Daniel Chan from TD Securities. Please go ahead.

Speaker Change: Capacity expansions, mainly in Thailand, we haven't we have a couple of phases and also in Malaysia.

Speaker Change: Ah phases coming online.

Mandeep Chawla: Hi, good morning. Congratulations on a strong quarter here. So communications was stronger than expected this quarter. Was that driven by AI demand strength, or was that from non AI related cloud demand, where we're also starting to see some early signs of a recovery? In terms of communications, it was driven by networking, which is kind of the pull-through that we've been mentioning that we would see as a result of AIML demand. And, you know, within networking, there's... I'll call it AIML networking, which is directly driven, and we've seen growth in those programs. Networking comes in a couple different flavors.

Speaker Change: In February ribbon cutting frankly.

So, yes, we do have enough capacity and its coming online.

Speaker Change: So very much aligned with the demand side I would say.

Speaker Change: And these are also highly automated factory is highly automated tests either so they are really producing a lot of productivity.

Great. Thanks.

Thank you we have our next question coming from the line of Matt Sheerin from Stifel. Please go ahead.

Matthew John Sheerin: Yes. Thank you good morning.

Matthew John Sheerin: My first question just wanted to circle back to the guidance for for Ccs and understanding.

The 48-volt is really driven by some of the AIML applications, and we've certainly seen an uptick. And then we've seen a lot of new data center leasing activity. So just curious about the timing of this communications ramp, as you guys are expecting 800G to ramp into 2025. So with all these new data centers coming online, are these new builds going to have 800G in them, or will they leverage 400G to begin with? So just wondering, like with them building out all these new data centers this year, whether they're going to be putting a lot of that next generation stuff in or whether they're going to be going with the current generation. That's a good question. What I can tell you is that 400G is strong throughout the year.

Matthew John Sheerin: You sort of lack of build visibility into the into the back half.

Matthew John Sheerin: But just looking to Q2 I know you have some visibility obviously, you're going to be up.

Enterprise high <unk> year over year, and I know Theres, a lot of lumpiness in that business, where you're up double digits, one quarter and then there's a digestion period and so what should we think about manned deep in terms of modeling at least sort of the first half into into Q3 in terms of seasonality.

Speaker Change: You see there's not a lot of seasonality is different but how should we think about that the cadence there.

Speaker Change: Yes, good morning, Matt. So we do have from our legacy OEM accounts, a little bit of.

800G is starting to ramp up in the first half of the year, and it's very strong in the back half of the year. I'm certainly picking up. 25. That would lead me to believe it's a little bit of a blend, but to be frank with you, I'm not entirely sure.

Speaker Change: Seasonality in our first quarter and as such I think you can think about the first quarter revenue number being the low point for the year.

Speaker Change: We are looking for sequential improvement as we go into the second quarter.

Speaker Change: And then again just wanted to maybe clarify some of the some of the wording, which is we do have an interlock with our customer base.

One of the things that we are seeing, Dan, is that within some of our customers' CapEx spending, they are shifting CapEx towards AI applications and so making a decision to refresh certain data centers over a period of time. In addition to that, what we're also seeing is that for some customers, as silicon becomes available, they're looking for 400G solutions while they wait for 800G to be available, as it goes through the design cycle, etc. So we are seeing a shift of investment towards AI. And sometimes that's at the expense of more traditional, but I appreciate it.

Speaker Change: In the back half of the year and that interlock gives.

It gives us the.

Speaker Change: Confident to be able to say that deal with that we're getting which is right. Now we believe data 5 billion should be the floor. What we have seen though is that after the interlocks.

Speaker Change: Requests from customers to say can you give me actually more product and can you give it to me sooner than what I had originally asked for and so thats whats filling in right now Q1 and in Q2 and so the conversations with the customers are around how.

Speaker Change: Have you changed your outlook for the back half of the year.

And what's driving that is it because youre accelerating datacenter deployments is it because there is.

Mandeep Chawla: And the final question, you also mentioned the ramp-up of some of these sites. Just wondering whether you have enough capacity to deal with the near-term demand that's coming in throughout this year and how those discussions are going on your ability to service some of that demand. Yeah, thanks.

Speaker Change: My beloved drill availability, which is happening.

Speaker Change: And then how does that impact.

Speaker Change: The last few quarters the way its impact in the first two quarters.

Speaker Change: So a positive conversation for sure and we do have a level of visibility as to really see if we can increase the number is not.

We've been interlocking with our customers and been investing forward on capacity expansions, mainly in Thailand. We have a couple of phases and also in Malaysia, and a phase is coming online in February, literally. So yes, we do have enough capacity, and it's coming online, you know, very much aligned with the demand state. And these are also highly automated factories, highly automated test centers, so they're really producing a lot. Great, thanks.

Speaker Change: So based on that would you expect the Q2 to be up sequentially then again.

Speaker Change: On a revenue basis yeah.

Speaker Change: What is that yes, we would expect higher revenues in Q2 than we do in Q1.

CCS: From Ccs, Okay, Okay, perfect and then.

CCS: Capacity adds in Thailand, and Malaysia, Rob could you give us a ballpark in terms of the revenue production.

CCS: <unk>.

CCS: In each of those are all combined is that incremental revenue, where you basically new programs or new capacity.

Matthew John Sheerin: Thank you. We have our next question coming from the line of Matt Sheerin from Siebel. Please go ahead. Yes, thank you. Good morning.

CCS: Versus shifting from another region.

Mandeep Chawla: My first question is, just wanted to circle back to the guidance for CCS and understand the sort of lack of visibility into the back half. But just looking to Q2, I know you have some visibility. Obviously, you're going to be up in the high 60s year over year. And I know there's a lot of lumpiness in that business where you're up double digits one quarter, and then there's a digestion period. And so what should we think about, Mandeep, in terms of modeling at least sort of the first half into Q3 in terms of seasonality? And obviously, there's not a lot of seasonality. It's different. But how should we think about that, the cadence there? Mandeep Jain: Yeah, good morning, Matt.

Rob: What I can tell you Matt is.

Rob: Yes, how much square foot, we're adding in the that the capacity improvements are a couple of fold one.

The phase one if you will which is coming online. This quarter is about 28000 square feet of manufacturing space, It's really a AI ml.

Rob: Casting facility. So we have to test farm for a fully automated test farm for our AI ml products.

Rob: So that's coming online right about now and in phase two will be the first half.

Rob: 2025, and that's a combined.

Productivity play, where we're combining all our warehousing and Thailand into one facility the save on space and drive productivity and also adding about 156000 130000 plus.

Mandeep Chawla: So we do have, from our legacy OEM accounts, a little bit of seasonality in our first quarter. And as such, I think you can think about the first quarter revenue number being the low point. We are looking for sequential improvement as we go into the second quarter. And then again, I just wanted to maybe clarify some of the wording, which is that we do have an interlock with our customer base in the back half of the year, and that interlock gives us the opportunity to be able to say the outlook that we're getting, which is right now we believe the What we have seen, though, is that after the interlocks, requests from customers to say, can you give me actually more product? And can you give it to me sooner than I had originally?

Rob: Plus of manufacturing space, which is going to support existing and new customers as well largely around AI and ml.

And we think those capacity expansions should take.

Rob: Take care of us through the next couple of years of growth.

Speaker Change: Okay, and just lastly men deep.

You talked about you basically increased your your cash flow guidance for the year, while keeping ever you have anything else impact what.

Speaker Change: What are the reasons for that is that a function of the inventory reduction and working capital reduction and the cash flows from that or anything else.

Speaker Change: Yes, so we continue to be encouraged that the material environment is stabilizing and improving we're seeing lead times right now not necessarily at pre pandemic levels for both passive and Chinese but.

Mandeep Chawla: And so that's what's filling in right now, Q1. And so the conversations with the customers are around, have you changed your outlook for the back half of the year? And what's driving that?

Speaker Change: We are seeing them drop pretty close to that level and they have been improving quarter to quarter. We have been unwinding inventory as a result, so we're pleased that we're able to reduce some of that cash.

Speaker Change: A really strong finish to 2023 under $94 million, we believe that that is the right goal as a minimum for next year on.

Mandeep Chawla: Is it because you're accelerating data center deployments? Is it because there is a better level of scalability, which is happening? And then how did that impact the last two quarters the way it was impacting the first?

Speaker Change: On the back of increasing profitability and an inventory environment that we think is going to continue to improve and so we think the goal of $200 million or more.

Speaker Change: Is reflects a good level of conversion and is the right target at this time.

Mandeep Chawla: So, positive conversations, for sure, and we do have A-level visibility, it's just really, So based on that, would you expect the Q2 to be up sequentially then again? On a revenue basis, yes. What's that?

Speaker Change: Yeah.

Speaker Change: Okay. Thank you.

Speaker Change: Thanks, Matt.

Speaker Change: Thank you.

Speaker Change: Our next question coming from the line of Todd Coupland from CIBC. Please go ahead.

Mandeep Chawla: Yes, we would expect higher revenues in Q2, from CCS. Okay, okay, perfect. And then the capacity ads in Thailand and Malaysia, Rob, could you give us a ballpark in terms of the revenue from production capacity in each of those or combined? And is that incremental revenue where there's basically new programs or new capacity versus shifting from another region? What I can tell you, Matt, is how much square feet we're adding and that the capacity improvements are a couple of fold. You know, the phase one, if you will, which is coming online this quarter, is about 28,000 square feet of manufacturing space. It's really an AIML testing facility.

Todd Coupland: Great. Thank you and good morning, everyone.

Todd Coupland: I wanted to step back from these detailed questions and just ask.

A question on the hyper scaler market data global data center market.

Todd Coupland: What's your view on how much of the <unk>.

Todd Coupland: Data Center Hyperscale, a market has been upgraded to support.

Todd Coupland: <unk>.

Todd Coupland: January generative AI large language model processing needs, how far how far into that cycle would you think we are at this point.

Speaker Change: Hey, good morning, Todd.

Speaker Change: <unk>.

Speaker Change: That's a very good question.

I would say we're still in the are in the early innings.

Speaker Change: The upgrade cycle.

Speaker Change: I'd say that by the fact that it.

So it's a test farm, a fully automated test farm for all our AIML products. So that's coming online right about now, and then Phase 2 will be in the first half of 2025. And that's a combined productivity play where we're combining all our warehousing in Thailand into one facility to save on space and drive productivity, and also adding about 156,000, I mean, 130,000 square feet of manufacturing space, which is going to support existing and new customers as well, largely around AI and ML, and we think those capacity expansions should and many more. Thank you. Okay, and just lastly, Mandeep, you talked about how you basically increased your cash flow guidance for the year while keeping everything else intact. What are the reasons for that?

Speaker Change: It just started about a year or so ago and given the.

Speaker Change: The amount of compute which makes up about 50% of any data center that needs to kind of get upgraded I think we're still in the very early innings of that upgrade cycle.

Speaker Change: Yeah, and the customers in terms of your cycles to get that upgraded.

Speaker Change: A little bit longer than the quarter to quarter discussions.

Speaker Change: I mean, it's obviously going to be demand dependent but is that.

Speaker Change: Two year process, a five year process.

Speaker Change: The mindset towards getting that upgrade complete.

Speaker Change: Yeah.

My sense is it's a multi year process, it's certainly five plus years.

Speaker Change: And again across each of the Hyperscale is that we're dealing with each has different appetites in different phases for deployments of it.

Speaker Change: Necessarily all overlap at once which for at least for Celestica should give us how many years of growth.

I would add to that Scott.

Mandeep Chawla: Is that a function of the inventory reduction and working capital reduction and the cash flows from that, or anything else? Yeah, so we continue to be encouraged that the material environment is stabilizing and improving. We're seeing lead times right now, not necessarily at pre-pandemic levels for both passive and semi-passive; we are seeing them drop pretty close to that level for finding answers here. And so we think the goal of $200 billion or more reflects a good level of conversion. Target.

Scott: You know again, we support that the top five hyper scaler, but all of the top five hyperscale or spend capex the same way and there's a couple in.

Scott: In particular that.

Scott: Sometimes our meeting with the more complex technologies and then the other hyperscale or some type of follow what we're really encouraged about is where we're seeing a lot of our new wins come in and our demand outlook.

Scott: As with some of the Hyperscale or is that are at the leading edge of the more complex technology, hence were seeing the demand strengthen AI ml compute and we're seeing the wins come in on 800 G switches, some which are starting to be shipped to 24, and then a lot more which will be shipped in 2025 and as we see some of the other hyper scalar that followed behind that.

Mandeep Chawla: Okay, thank you. Thanks, Beth. Thank you. We have our next question coming from the line of Todd Coupland from CIBC. Please go ahead.

Scott: Demand it gives us an idea of the fact that this does have an opportunity to be a multi year.

Todd Coupland: Great, thanks, and good morning, everyone. I want to step back from these detailed questions and just ask a question about the hyperscaler market, the global data center market. What's your view on how much of the data center hyperscaler market has been upgraded to support generative AI and large language model processing needs? How far into that cycle would you think we are at this point? Good morning, Todd. You know, it's, uh... That's a very good question. I would say we're still in the early innings of the upgrade cycle, and I say that because it just started about a year or so ago.

Scott: Opportunity for us and so when we and to Rob's point, we're really in the early stages right now of the AI ml Capex investment cycle of course, nobody has visibility 10 years out on when things are going to look like but we are seeing demand signals at least for the next two or three years.

Scott: I'll just close with.

Scott: The adoption of some custom silicon.

She is going to drive compute programs and thats going to accelerate in the future and then investments in AI is also going to drive advance networking and that's gonna be a driver in the future.

Scott: And then also with our enterprise customers, we expect to see our internet traffic, that's going to drive improvements in data center interconnect as well so the whole upgrade cycle I think has a long life to it.

The amount of compute, which makes up about 50% of any data center that needs to kind of get upgraded, I think we're still in the very early innings of that upgrade cycle. Yeah, and customers in terms of their cycles to get that upgraded. You know, a little bit longer than the quarter to quarter discussions is, I mean, it's obviously going to be demand dependent. But is that a two-year process, a five-year process? What's the mindset towards getting that upgrade complete? You know, my sense is it's a multi-year process.

I appreciate the color. Thanks, a lot. Thanks.

Scott: Yeah.

Speaker Change: Thank you.

Speaker Change: There are no further questions at this time I would now like to turn the call back over to Mr. Bob <unk> for final closing comments.

Bob: Thank you.

Bob: I am pleased that we posted another solid quarter and the momentum is carrying through into the first quarter of 2024 and all through 2024 I'm also pleased by our continued strong execution and encouraged with our strong market position in growing markets.

It's certainly five plus years, and again, across each of the hyperscalers that we're dealing with, they'll each have different hypotheses and different phases for deployment so that they won't necessarily all overlap at once, which should give us, at least for Celestica, many years of growth. Yeah, you know, I would add to that, Todd. Again, we support the top five hyperscalers, but not all the top five hyperscalers spend their CapEx the same way, and there's a couple in particular that sometimes are leading with the more complex technologies, and then the other hyperscalers sometimes follow. What we're really encouraged about is where we're seeing a lot of our new wins come in and where our demand outlook is for some of the hyperscalers that are at the leading edge of the more complex technologies, hence we're seeing the demand strengthen for AI and all compute, and then we're seeing the wins come in on the 800G switches, some of which are starting to be shipped in 24 and then a lot more which will be shipped in 20 Of course, nobody has visibility 10 years out on what things are going to look like, but we do.

Bob: You again for joining today's call and I look forward to updating you next quarter.

Speaker Change: Thank you Sir.

Speaker Change: 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.

Speaker Change: [music].

And I would just close with, you know, the adoption of some custom silicon is going to drive compute programs, and that's going to accelerate in the future. And then investment in AI is also going to drive advanced networking, and that's going to be a driver in the future. And then also with our enterprise customers, you know, we expect to see that Internet traffic is going to drive improvements in data center interconnect as well.

So this whole upgrade cycle, I think, has a long life. Appreciate the color. Thanks a lot. Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Rob Mayones for his final closing comments.

Thank you. I'm pleased that we posted another solid quarter, and the momentum is carrying through into the first quarter of 2024 and all through 2024. I'm also pleased by continued strong execution and encouraged by a strong market position and growing markets. Thank you again for joining today's call, and I look forward to updating you next quarter. 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. Transcribed by https://otter.ai