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.

Session.

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'd 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.

Craig Oberg: 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 0 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 Mionis, 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 adjust.

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 statements 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 rate, and operating earnings.

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

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

Randy: May not be comparable to similar measures presented by other public companies that report on <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.

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

Randy: A 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 U.S. 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.

Rob: We ended the year with a very strong fourth quarter, achieving revenue of $2 4 billion.

Rob: Which was 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 Celestca.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. Let me now turn the call over to Rob. Thank you, Craig. Good morning, everyone.

<unk> the high end of our guidance range.

Rob: Our non <unk> operating margin was 6%.

Assuming 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 supported by the sustained growth of our hyperscale or portfolio.

Rob: We continue 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 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 is 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 outperformance 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.

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

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

Rob: Was 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 company's 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.

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

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. Our strong profitability and working capital management allowed us to generate non-IFRS adjusted free cash flow of $194 million, exceeding our full 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. Mandeep, it's over to you.

I'd 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: Mandate over to you. Thank.

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

Mandy: Fourth quarter revenue came in at 214 billion.

Mandy: 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.

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

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

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

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

Speaker Change: Exceeding the high end of our guidance range.

Speaker Change: 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.

Thank you, Rob, and good morning, everyone. Forbes 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 segment. Our fourth quarter non-IFRS operating margin of 6.0% was 70 basis points higher year-over-year and marked the highest quarterly results 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 was $0.76, exceeding the high end of our guiding principle.

Speaker Change: Moving onto our segment performance.

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

Speaker Change: Down 2% year over year slightly below our expectation 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.

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. 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: Our fourth quarter Ccs segment revenue of 1.3 dollars 4 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.

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: 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: <unk> revenues were 23% of total company revenues in the fourth quarter compared to 24% in the prior year period.

Turning to segment margins.

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

Enterprise and 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 end market was lower by 10% compared to the prior year period, better than our expectation 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. HPS revenues were 23% of total company revenues in the fourth quarter compared to 24% in the prior year. Turning to the segment margin.

Speaker Change: 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 or customers.

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

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

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

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 trends continued through 2024 and into 2025.

ATS segment margin in the fourth quarter was 4.7%, up 30 basis points year over year, driven by strong productivity and favorable. 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. 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. LISCA has a longstanding relationship with this customer, a global hyperscaler that we have been supporting for well over a decade. 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.

Moving on to some additional financial metrics.

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

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

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

Speaker Change: 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 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.

In addition, we are pleased that as a result of our strength in engineering and solid operations, we continue to win new programs with this, and we expect to see demand strength continue through 2024 and into 2025. Moving on to some additional financial metrics. 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.

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

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.

Inventory days net of cash deposit, Dave where 62 in the fourth quarter compared to <unk> 79 in the prior year period.

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 continue to improve and can poll since 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 or one 6% of revenue as we continue to invest in growth across our network to support customer demand.

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.

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 coalesce into lead times normally. Cash cycle days were 72 during the fourth quarter, flat sequentially, and 8 days higher than the prior year period. 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.

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.

Speaker Change: And 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.

Our increasing level of capital expenditures is geared towards capacity expansions 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: 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.

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 HPF customers. This edition is expected to be online in the first half of 2024.

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 and.

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.

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 pre-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 feedback, 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: Our gross debt at the end of the fourth quarter was $609 million, leaving.

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 flat 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.

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

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 $1 75 billion.

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

Our fourth-quarter growth debt to non-IFRS trailing 12-month adjusted epithelial 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 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 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 <unk> 77 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: At 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.

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

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: If this legislation is not substantially enacted in the first quarter, our estimate for our first quarter non IRA for us adjusted effective tax rate would be approximately 15%.

Speaker Change: 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.

Speaker Change: 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 hps 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 scalar customers.

Speaker Change: 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.

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 settlement. 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 age.

We continue to expect revenue of $8 5 billion or more non <unk> adjusted EPS of $2, 70% or more.

Rob: Non <unk> operating margin to be in the range of five 5% to 6%.

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

Rob: We are pleased with our strong performance in 2023.

Rob: <unk> continues to see very positive momentum in the first quarter of 2024.

As such we are currently undertaking discussions with our customers and suppliers.

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, 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 outlooks for each of our end markets and the overall picture. Thank you, Mandeep.

Rob: In order to obtain better visibility into the remainder of the year.

Rob: And we look forward to providing an update on our 2024 outlook with our first quarter results.

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

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 the broad.

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: The economic environment.

Rob: 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 all of 2024 <unk>.

Rob: <unk> 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.

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.

In our A&D business the sustained recovery in commercial aerospace has seen domestic air travel surpassed pre pandemic levels in many economies, resulting in annual revenue growth of more than 30% in 2023 compared to 2022.

Rob: Looking ahead, we expect to see strong demand across our commercial aerospace sub markets 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 compared to 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 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.

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

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

Rob: Now turning to our Ccs segment, the demand backdrop for our Ccs segment continues to be very strong.

Rob: Investments from Hyperscale 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 Hyperscale is saw revenue growth of 32% compared to 2022 recording nearly two <unk>.

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 roll out new programs. So for our overall ATS segment, we currently anticipate that revenue will decline slightly in the first half of 2024 compared to 2023.

Rob: $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: Anticipate that solid growth to continue in 2020 form 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 <unk>.

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

Due to 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, I'm turning to our CCS.

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 driven by a resumption of strength in networking demand from Hyperscale, 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.

Rob: To some extent AI ml compute.

Rob: 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.

Although we are seeing some divergence in the short term demand dynamic underlying our various end markets. We believe that the fundamentals supporting our overall business are very constructive.

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 the beneficiary of Hyperscale's growing deployment of AI-ML compute capacity.

Rob: Due to the benefits of our strategic portfolio diversification and our consistent execution.

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

Rob: 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.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: 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'll need athletes on Tom That's Alleghany a request to do is take time from the polling process. Please press star followed by the number killed.

We're seeing the strong momentum from 2023 continue, 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 in 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.

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

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

Robert Young: 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.

Speaker Change: Hi, Rob.

Speaker Change: The particular customer.

Rob: Hyperscale customer they are making significant investments in AI ml compute.

As well as networking.

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 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: We 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.

Rob: Russell co investing with us on.

Some capex.

Rob: So with the investments over in Thailand. So.

Rob: Very healthy relationship.

Rob: The broader hyper scaler.

Rob: We are also seeing.

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

Rob: Concentration to improve over time.

Rob: Inflows People's investment cycles.

Speaker Change: I would just add to that Rob that.

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.

Speaker Change: We're starting to see some return in demand coming 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 resuming hardware platform solutions and those are offerings that we provide.

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.

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 computation 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.

Speaker Change: You're doing so well in.

The enterprise business in Ccs is six 7% and you're entering at 6% in the guide 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.

Speaker Change: Yes.

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 have to '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 but also.

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.

Speaker Change: The demand signals from the Hyperscale orders continue 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.

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

Going back 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, you know, a very healthy relationship.

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

You know, 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 the ebbs and flows of people's investments cycle. 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 non-computing 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: 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 to have some level of growth in 2024.

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

Speaker Change: 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.

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.

Capital equipment markets, we are seeing some.

Speaker Change: Signs of recovery, we're cautiously optimistic a lot of some of 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 6% 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: It's capital equipment gets better so some of the Ats margins as well.

Speaker Change: Okay. Thank you our pipeline okay.

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

Maximilian: BC capital markets. Please go ahead.

Maxim: Hi, Good morning, just on the Communications segment has there been any changes to your expectation for the 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.

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 in the first quarter. And again, encouraged by where we're at, come through, both on cons and HPS, but also the demand signals from the hyperscalers, at https://www.youtube.com or the YouTube channel of your choice. Thank you for watching. Please subscribe to our channel and give this video a thumbs up.

Maxim: <unk> recorded a deceleration so is that to me.

That is primarily because of the OEM business softness.

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

Driven by our hyper scaler.

Maxim: 400 G.

Maxim: 800 <unk> programs.

Maxim:

There's also hps driven program so.

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

Also, check out our other videos over here. Thanks for watching. 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... 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 having, 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, uh, 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 back.

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

Speaker Change: And your expected demand over the next few quarters.

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

Speaker Change: That something that you anticipated.

Speaker Change: Previous quarters is that something that's new.

Speaker Change: Yes.

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

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

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.

Speaker Change: That's why we're going to take a quarter to revisit with our customers.

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

Speaker Change: Some incremental share and been booking.

Speaker Change: A really significant amount of 803 programs.

Speaker Change: 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 maybe speak to him.

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 is going to be a little bit of margin challenges around 6% for the first quarter. I 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. We are seeing some signs of recovery.

Speaker Change: Within industrial and capital equipment end market, specifically kind of what is causing you to expect demands return by.

Speaker Change: By the second half is it primarily kind of those new program ramps.

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

Ats: By way of reminder, grew close to 30% and again it was fueled by green energy programs, including EV charging energy storage energy generation.

Ats: 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 the material environment has dramatically improved our customers, where we've taken the opportunity to reduce their strategic inventory buffers, we think those buffers.

We're cautiously optimistic. Some of our customers are starting to restock consumables and spares, which is a good sign. So I think as capital equipment gets better, so will some of the ATS margins as well. Okay, thank you. I'll pass.

Ats: <unk> in the first half of the year and in the second half of the year, we have new programs ramps planned which returned to the industrial business to growth.

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.

Thank you. We have our next question coming from the line of Maxim Matyshansky from RBC Capital Markets. Please go ahead.

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 does that mean that it 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 hybrid scalers, both on 400G and 800G programs. There are also, you know, HPS-driven programs.

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.

Great. Thanks ill pass the line.

Speaker Change: Thank you.

Speaker Change: We have our next question coming from the line of Brian is must shop list from BMO capital markets. Please go ahead.

Hi, good morning with.

Brian: With respect to the full year guidance.

So, you know, 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.

Brian: I hear you with respect to parking to discuss the second half outlook.

Brian: 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 wont get further color on before visiting guidance would that be on semi and industrial or <unk>.

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?

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

Brian: Yeah, Hi, 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.

Yeah, we've been on our hyperscale of 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 follow up for me to revisit ATS.

Speaker Change: Even after our.

Virtual Investor meeting in November we saw incremental improvement to the forecast coming from the Hyperscale and so thats reflected in our Q1 guidance.

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

Speaker Change: 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 or is or is there an improvement in material availability on your end is there.

Speaker Change: 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.

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? And can 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, a good question.

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

Speaker Change: Okay.

Speaker Change: 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.

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

Speaker Change: 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 through 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.

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.

And so it's really around Hyperscale as a couple of them.

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, and Dr. Great, thanks La Paz Line. Thank you. We have our next question coming from the line of Thanos Moschopoulos from Yemo Capital Markets. Please go ahead.

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

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

Speaker Change: Hi, Patrick.

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

Patrick: 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.

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 further color on before revisiting guidance, would that be on semi and industrial or which areas would be the biggest source of demand variability as you think We were pleased to be able to interact 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.

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.

Great up offline. Thanks.

Patrick: 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 demand strength or was that from non AI related cloud demand, where we're also starting to see some early signs of the recovery.

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 we would have said probably in November, 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: 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.

Daniel Chan: Working comes in a couple of different flavors, but 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.

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.

Daniel Chan: 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: What I can tell you is.

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.

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.

Speaker Change: In addition to that we're also seeing is that for some of the customers as they.

Silicon becomes available and Theyre looking for 400 gig solutions, while they wait for 800 G to be available in 2025 ethically.

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 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 inventories. Again, we expect some new program ramps and the burndown of the buffers 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.

Speaker Change: 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.

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

Speaker Change: Yes, we've been into.

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

Expansions, mainly in Thailand, we haven't we have a couple of phases and also in Malaysia.

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

Speaker Change: Phases coming online.

Speaker Change: In February ribbon cutting frankly so.

Daniel Chan: 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? We're also starting to see some early signs of a recovery.

Yes, we do have enough capacity and its coming online.

Speaker Change: Very much aligned with the demand side that would fit.

Speaker Change: And these are also highly automated.

Speaker Change: Factory is highly automated tests, either so they are really producing a lot of productivity.

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 a growth in those programs. Networking comes in a couple different flavors.

Speaker Change: Great. Thanks.

Speaker Change: 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.

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 with the current generation. You know, that's a good question. What I can tell you is that 400G is strong throughout the year, 800G is starting to ramp up in the first half of the year, very strong in the back half of the year, and certainly picking up. 25. That would lead me to believe it's a little bit of a mix, but to be frank with you, I'm not entirely sure.

Matthew John Sheerin: Your standing.

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

Matthew John Sheerin: Uh huh.

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

Matthew John Sheerin: On 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 happened to into Q3 in terms of seasonality.

Matthew John Sheerin: Obviously, there's not a lot of seasonality, it's different but how should we think about that the cadence there.

Matthew John Sheerin: Yes.

Matthew John Sheerin: Matt So we do have.

Matthew John Sheerin: Some of our legacy OEM accounts, a little bit of.

Matthew John Sheerin: 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. We are looking for sequential improvement as we go into the second quarter.

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 along a river. In addition to that, what we're also seeing is that some of the customers, as silicon becomes available, are 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 cloud computing. Thanks for that!

Matthew John Sheerin: In the back half of the year and that interlock.

Matthew John Sheerin: Gives us the.

Matthew John Sheerin: Confidence to be able to say the outlook that we're giving which is right. Now we believe data 1 billion should be the floor. What we have seen though is that after the interlocks.

Matthew John Sheerin: 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 that.

Matthew John Sheerin: Have you changed your outlook for the back half of the year.

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

Daniel Chan: 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. Thank you. Yeah, thanks.

A couple of drill availability, which is happening.

Matthew John Sheerin: And then how does that impact.

Matthew John Sheerin: 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, a phase is coming online in February rather than cutting. So, yes, we do have enough capacity, and it's coming in line, you know, very much aligned with the demand state that we're seeing. And these are also highly automated factories, highly automated test centers, so they're really producing a lot of... Great, thanks. Thank you. We have our next question coming from the line of Matt Sheerin from Steeple. Please go ahead.

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

Speaker Change: On a revenue basis, yes.

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

Matthew John Sheerin: Yes, thank you. Good morning. My first question is, just wanted to circle back to the guidance for CCS and understand sort of the 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 enterprise 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? Yeah, good morning, Matt.

CCS: <unk>.

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

Rob: Versus just shifting from another region.

Rob: Uh huh.

Rob: What I can tell you Matt is.

Rob: How much square foot, we're adding in that.

Rob: The capacity improvements are a couple of four one.

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

I am now.

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

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

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 content to be able to say the outlook that we're getting, which is that right now we... What we have seen, though, is that after the interlocks, customers request 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?

2025, and that's a combined.

Productivity play out where we're combining all our warehousing and Thailand into one facility the sevan space isn't that drive productivity and also adding about 156000 130000 of.

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

Rob: And we think those capacity expansion should.

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

Speaker Change: Okay, and just lastly men deep.

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

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.

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: 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 incentives, but 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.

Is it because you're accelerating data center deployments? Is it because there is a better level of availability, which is happening? And then how does that impact the last two quarters the way it impacts the first?

Speaker Change: Reduce some of that cash.

Speaker Change: A really strong finish to 2023.

Speaker Change: $94 million, we believe that that is the right goal as a minimum for next year on.

So, positive conversations, for sure, and we do have A-level visibility. It's really, So based on that, would you expect the Q2 to be up sequentially then again? On a revenue basis, yes. Yes, we would expect higher revenues in Q2, from CCS. Okay, okay, perfect.

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 that the goal of $200 million or more.

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

Matthew John Sheerin: 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 just an AIML testing facility.

Speaker Change: Yeah.

Speaker Change: Okay. Thank you.

Speaker Change: Thanks, Matt.

Thank you.

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

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

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

Todd Coupland: 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.

So it's a test farm for, a fully automated test farm for all 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, you know, take care of us through the next couple of years. 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?

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.

Todd Coupland: That's a very good question.

Speaker Change: I would say we're still in the early innings.

The upgrade cycle.

I'd say that by the fact that.

It just started about a year or so ago.

Speaker Change: Uh huh.

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.

A little bit longer than the quarter to quarter discussions.

Speaker Change: So obviously going to be demand dependent.

Two year process, a five year process.

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 passes and semi-finished products, but we are seeing them drop pretty close to that level.

The mindset towards getting that upgrade complete.

Speaker Change: Yeah.

Speaker Change: 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: Don't necessarily overlap at once which for at least for Celestica should give US you know many years of growth.

We have been unwinding inventory as a result, so we're pleased that we're able to reduce some of that cash. A really strong finish to 2023, $194 million. We believe that that is the right goal as a minimum for next year on the back of increasing profitability and the inventory environment that we have, and so we think the goal of $200 million or more reflects a good level of conversion and is the right target. Okay. Thank you. Thanks, Beth.

I would add to that side.

Again, we support that the top five hyper scaler, but not all of the top five hyper scaler spend capex the same way and there's a couple in.

Speaker Change: In particular that.

Speaker Change: Sometimes they are leading 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.

As with some of the Hyperscale or that are at the leading edge of the more complex technology, Hence we're seeing the demand strengthened AI ml compute and we're seeing the wins come in on 800 G switches, some which are starting to be shipped in 'twenty four and then a lot more of which will be shipped in 2025 and as we see some of the other hyper scalar that follow behind that.

Todd Coupland: Thank you. We have our next question coming from the line of Todd Coupland from CIBC. Please go ahead.

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 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? Hey, good morning, Todd. You know, it's, uh... That's a very good question.

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

Speaker Change: Opportunity for us and so we tend 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 or at least for the next two or three years.

Speaker Change: And I would just close with.

Speaker Change: The adoption of some custom silicon.

Speaker Change: 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.

I would say we're still in the early innings of the upgrade cycle. I mean, and I say that by the fact that it just started about a year or so ago, and given the amount of compute which makes up about, you know, 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 the customers in terms of their cycles to get that upgraded. A little bit longer than the quarter-to-quarter discussions. 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 what?

Speaker Change: 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.

Speaker Change: I appreciate the color thanks, a lot.

Speaker Change: Yes.

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.

My sense is that it's a multi-year process. It's certainly five plus years, and again, across each of the hyperscalers that we're dealing with, they'll each have different hypotypes 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 strength for AIML compute, and again, we're seeing 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 are seeing...

Bob: I am pleased with the rate 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.

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

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].

Thank you for that. And I would just close by saying, 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, we expect to see Internet traffic driving 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 Mionis will make the 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 with continued strong execution and encouraged by a strong market position and growing market.

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. Thank you.