Q2 2024 Celestica Inc Earnings Call
In the second quarter, our strong momentum continued, achieving revenues of $2.39 billion and adjusted EPS of $0.91.
both of which exceeded the high end of our guidance ranges.
A non-IFRS operating margin was 6.3%, which was above the midpoint of our revenue and adjusted EPS guidance ranges.
We also continue to generate solid adjusted fee cash flow, which came in at $63 million during the quarter, bringing our year-to-date total to $129 million.
Our CCS segment saw a 51% year-to-year increase in revenues in the second quarter and achieved segment margin of 7.2%, which is 120 basis points higher compared to the prior year period.
The top-line growth and margin expansion continue to be supported by large-scale investments in data center infrastructure from our hyperscaler customers, including very strong demand for our HBS offering.
In our ATS segment, revenues, as anticipated, were lower year-to-year, primarily driven by continued softness in our industrial business.
Despite this demand softness, we remain encouraged by the strength in other parts of our ETS portfolio. In particular, we saw solid double-digit revenue growth in both our A&D and capital equipment businesses in the second quarter.
Overall...
We are pleased with our solid performance in the first half of the year. Looking ahead, we feel we are very well positioned to continue to capitalize on a number of high-value opportunities across our portfolio.
and strengthen our leadership position in key end markets.
I would now like to turn the call over to Mandeep, who will provide a detailed review on our second quarter performance and our guidance for the third quarter of 2024. Mandeep, over to you.
Mandeep: Thank you, Rob, and good morning, everyone. Second quarter revenue came in at $2.39 billion, above the high end of our guidance range, and up 23% year over year.
Mandeep: The increase was supported by stronger-than-expected growth in our CCS segment, partially offset by demand softness in our ATS segment.
Speaker Change: Second quarter, non-IFRS operating margin of 6.3% was an improvement of 80 basis points over the prior year period.
Speaker Change: This expansion was driven by meaningfully higher profitability in our CCS segment due to operating leverage, driven by higher volumes, and improved mix.
Speaker Change: Our second quarter adjusted earnings per share was $0.91, which exceeded the high end of our guidance range and was $0.36 higher year-over-year. This marked our highest quarterly result in company history.
Speaker Change: Our second quarter Adjusted Effective Tax Rate was 20%, in line with our guidance. As anticipated, our Adjusted Effective Tax Rate included the in-quarter impact of global minimum tax, which was enacted in Canada during the quarter.
Speaker Change: Moving on to our segment performance.
Speaker Change: ACS segment revenue for the second quarter were $768 million, down 11% year-over-year, slightly more than our expectation of a high single-digit percentage decrease.
Speaker Change: Your decline in ATS segment revenue was driven by continued demand softness in our industrial business, partially offset by year-to-year growth in our A&E and capital equipment businesses.
Speaker Change: Our ETF segment revenues, other than our industrial business, grew 12% year-to-year in the second quarter.
Speaker Change: ACS segment revenue accounted for 32% of total revenues in the second quarter.
Speaker Change: Our second quarter CCS segment revenue of 1.62 billion dollars was 51% higher compared to the prior year period, driven by very strong growth in both our enterprise and communications and market.
Speaker Change: DCS segment revenues accounted for 68% of total company revenues in the second quarter.
Speaker Change: Revenue in our enterprise and market was up by 37% year over year in the second quarter, above our expectations of a low 20 percentage increase driven by strong demand for AI ML compute programs.
Speaker Change: Revenue in our communications ad market was higher by 64% compared to the prior year period, which was better than our expectation of a mid-40s percentage increase.
Speaker Change: The growth in our communications end market was driven by accelerating demand for HPS networking products from our hyperscaler customers, primarily in support of their investment in AI ML infrastructure.
Speaker Change: HPS revenue was $686 million in the second quarter, accounting for 29% of total company revenues and was up 94% year over year.
Speaker Change: The very strong growth in our HPS portfolio was driven by an acceleration in demand for networking products from hyperscaler customers, including 800G switch programs.
Speaker Change: Turning to segment margin, ATF segment margin in the second quarter was 4.6%, down 20 basis points compared to the prior year period, driven primarily by a reduction in operating leverage at select sites.
Speaker Change: DCS segment margin during the quarter was 7.2%, up 120 basis points year-over-year as a result of operating leverage and improved mix.
Speaker Change: During the second quarter, we had two customers that accounted for more than 10% of total revenues, representing 32% and 12% of sales for the quarter.
Speaker Change: We continue to remain comfortable with the current level of concentration in our portfolio, supported by our diversification across multiple programs with our largest customers.
Speaker Change: Moving on to some additional financial metrics.
Speaker Change: IFRS net earnings for the second quarter were $100 million, or $0.83 per share, compared to $56 million, or $0.46 per share, in the prior year period.
Speaker Change: Adjusted gross margins in the second quarter was 10.6%, up 90 basis points year-over-year due to improved mix, production efficiencies, and operating leverage.
Speaker Change: Our adjusted ROIC for the second quarter was 26.7%, an improvement of 6.7% compared to the prior year quarter, driven by higher profitability and effective working capital management.
Speaker Change: Moving on to working capital. At the end of the second quarter, our inventory balance was $1.85 billion, down $106 million sequentially, and down $493 million year-over-year.
Speaker Change: Cash deposits were $576 million at the end of the quarter, lower by $143 million sequentially, and down $233 million compared to the prior year period.
Speaker Change: As anticipated, we are returning some of our cash deposits from certain customers as gross inventory amounts reduce.
Speaker Change: Cast cycle days were 64 during the first quarter, down 5 days sequentially, and 9 days lower than the prior year period.
Speaker Change: Moving on to our cash flows. Capital expenditures for the quarter were $37 million, or approximately 1.5% of revenue, compared with 1.7% in the second quarter of 2023.
Speaker Change: We now expect our capital expenditures for 2024 to be between 1.5% and 2% of revenues, slightly below our previous outlook of between 1.75% and 2.25% due to the higher-than-anticipated annual revenue outlook.
Speaker Change: In the second quarter, we generated $63 million of adjusted free cash flow, compared to $67 million in the prior year period.
Speaker Change: We have generated $129 million of adjusted free cash flow year-to-date in 2024, compared to $76 million during the same period in 2023.
Speaker Change: We are pleased with our strong cash conversion and consistency in generating positive free cash flow on a quarterly basis, while also making the necessary investments to support our growth.
Speaker Change: Moving on to some additional key metrics.
Speaker Change: At the end of the second quarter, our cash balance was $434 million.
Speaker Change: In combination with our borrowing capacity under our revolver, it provides us with approximately $1.2 billion in total liquidity, which we believe is sufficient to meet our anticipated business needs.
Speaker Change: Our gross debt at the end of the second quarter was $750 million, leaving us with a net debt position of $316 million.
Speaker Change: Our gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.1 turns, up 0.1 turns sequentially, and down 0.1 turns compared to the same period last year.
Speaker Change: During the quarter, we amended and upsized our credit facility, increasing our revolver capacity from $600 million to $750 million.