Q2 2019 Earnings Call
Your patients.
Good afternoon. My name is Shawn told and I'll be your conference operator today at this time I would like to welcome everyone to the list because second quarter 2019 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then number one on your telephone keypad, if youd like to withdraw your question press the pound key thank you.
Lisa Headrick, Vice President of Finance you May begin your conference.
Good afternoon, and thank you for joining us on Celestica second quarter 2019 earnings Conference call.
On the call today are Rob me honest, President and Chief Executive Officer, and Mandeep childless 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.
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 financial guidance. Please refer to today's press release, including the cautionary note regarding forward looking statements. There in our annual report on form 20-F, and other public filings, which can be accessed at SCC dot Gov in seed our dotcom.
We assume no obligation to update any forward looking statement, except as required by applicable law.
In addition, during this call we will refer to various non I FRS measures, including operating earnings operating margin adjusted gross margin adjusted return on invested capital or adjusted our resi free cash flow gross debt to non IRS trip trailing 12 month adjusted EBITDA leverage ratio adjusted net earnings adjusted EPS, adjusted EPS DNA expense and adjusted effective tax rate.
Listeners should be cautioned that references to any of the foregoing mench measures. During this call didn't know non IRS measures, whether or not specifically designed as such.
C.'s non I have for us measures do not have any standardized meanings prescribed by IRS and may not be comparable to similar measures presented by other public companies that use I FRS or who report under you got and use non-GAAP measures to describe similar operating metrics.
We refer you to today's press release, and our Q2 2019 earnings presentation, which are available at selected dotcom under the Investor Relations tab for more information about these and certain other non IRS measures, including a reconciliation of historical non FRS measures to the most directly comparable I FRS measures from our financial statements.
Unless otherwise specified all references to dollars on this call are to us dollars.
Now, let me turn the call over to Ron.
Thank you Lisa good afternoon, and thank you for joining today's conference call.
Most of the delivered second quarter results that were in line with us for patients with another quarter of strong free cash flow.
Despite lower revenue our sincere thanks delivered sequential and year over year margin improvements the result of improvements and productivity, resulting from our Ccs segment portfolio review and cost efficiency initiatives.
Well the capital equipment market remains soft we were pleased to see strong performance in the rest of the retail segments. Excluding capital equipment is yes, we have delivered low double digits year to year revenue growth with improved sequential and year over year profitability.
However, given the challenging demand environment the capital equipment business continued to operate at a loss driving Ats segment margin performance well below our targeted range.
In addition communications end market demand was softer than expected.
We expect to soft demand environment experienced in the first half of 2019 persist for the remainder of the year.
We continue to take actions intended to align costs to current revenue level, while remaining focused on our long term goals and executing on our transformational strategy.
I will provide you with additional information on the quarter and our outlook shortly but first mandeep will take you through our second quarter results and third quarter guidance.
Thank you, Rob and good afternoon, everyone.
For the second quarter of 2019, Celestica reported revenue of $1.45 billion in line with the midpoint of our guidance range and down 15% year over year.
Our non I efforts operating margin was 2.5% above our guidance midpoint of 2.4% and down 60 basis points year over year.
No one I have for US adjusted earnings per share were 12 cents at the midpoint of our guidance range.
Our Ats segment revenue was 39% of our consolidated revenue and grew 2% year over year in line with our expectations.
The increase year over year was driven primarily by double digit growth across our industrial Andy and Healthtech businesses offset in large part by significantly lower demand and our capital equipment business.
Sequentially Ats segment revenue was down 3% largely due to lower capital equipment demand and our disengagement from an unprofitable energy business customer.
This was partially offset by stronger demand and new programs and our other HTS businesses.
Our Cts segment revenue was down 23% year over year, primarily driven by enterprise program Disengagements as a part of our Ccs portfolio review.
As well as continued end market demand softness in our communications business.
Sequentially Ccs segment revenue was up 3% driven by seasonal demand growth and new programs.
Within our Ccs segment, the communications end market represented 39% of our consolidated revenue in the second quarter down from 42% in the second quarter of last year communications revenue in the quarter was slightly below our expectations and down 21% compared to the prior year period, driven by continued weakness in end market demand, partially offset by demand strength and new program revenue and supportive data center growth.
Our enterprise end market represented 22% of consolidated revenue in the second quarter down from 25% in the second quarter of last year.
Enterprise revenue in the quarter was slightly above our expectations driven by demand strength, but down 26% year over year due to planned disengagements in connection with our Tcs segment portfolio review.
Excluding these disengagements enterprise end market revenue would have been relatively flat to the prior year period.
Our top 10 customers represented 65% of revenue for the quarter up from 62% last quarter and down from 71% in the same period last year.
For the second quarter, we had two customers individually contributing more than 10% of total revenue.
Turning to segment margins.
Ats segment margin was 2.8% up from 2.6% in the first quarter of this year as stronger performance in our aerospace and defense industrial and Healthtech businesses more than offset increased losses in our capital equipment business.
Our capital equipment business operated at a loss in the high single digit million dollar range, which was higher than expected due to lower than expected sequential demand.
Relative to the second quarter of last year Ats segment margin was down from 5.1%, primarily the result of losses within our capital equipment business.
Excluding capital equipment Ats would have delivered segment income within our EPS target margin range of 5% to 6%.
Ccs segment margin was 2.4% up sequentially and up from 2.2% in the same period last year.
The year over year improvement as a result of improved mix and productivity more than offsetting the impact of lower year to year revenue.
Moving to some other financial highlights for the quarter.
I have for US net loss for the quarter was $6.1 million or negative five cents per share compared to net earnings of $16.1 million or 11 cents per share in the same quarter of last year.
The decrease was the result of lower gross profit increased SGN expense and higher financing and amortization costs.
Adjusted gross margin of 7.0% was up 40 basis points sequentially as improved productivity, including lower variable spending across the majority of our businesses was partially offset by weaker demand and performance within capital equipment.
Adjusted gross margin was up 60 basis points year over year, primarily due to improved mix and productivity more than offsetting weaker capital equipment performance within Ats.
Our adjusted EPS DNA of $56 million was up $8 million year over year, primarily driven by unfavorable foreign exchange impacts and our impact acquisition.
Non IRS operating earnings were $36.7 million up $1.6 million sequentially and down $16.4 million from the same quarter last year.
Our non I have for at the adjusted effective tax rate for the second quarter with 36% higher than our expectations as a result of taxable FX costs.
Our tax rate continues to be higher than originally anticipated range due to lower levels of income including losses in certain low tax geographies.
Adjusted net earnings for the second quarter were $15.4 million compared to $40.2 million for the prior year period.
Non IRS adjusted earnings per share of 12 cents.
Represents a decline of 17 cents year over year, mainly driven by lower non IRS operating earnings and higher interest expense.
Non IFRS adjusted ROI see of 8.4% was up 0.5% sequentially and down 7.6% year over year, primarily driven by lower operating earnings.
Moving onto working capital.
Our inventory at the end of the quarter was $1.1 billion, an increase of $8 million sequentially.
Inventory turns were 5.0 flat quarter over quarter and down 1.6 turns from the same quarter of last year.
Capital expenditures for the second quarter were $23 million or 1.6% of revenue.
Non I efforts free cash flow was $47 million in the second quarter compared to negative $46 million for the same period last year, primarily driven by improved working capital.
We're encouraged by the improvements we've made in our working capital performance over the last two quarters year to date, we have generated $191 million of non IR for us free cash flow or $78 million without accounting for the traditional property sale proceeds of $113 million.
Cash cycle days in the second quarter were 65 days, an improvement of four days sequentially, primarily due to increased cash deposits from our customers.
Our customer cash deposits have increased to $139 million as of June thirtyth up from $120 million at the end of March.
As we continue to work with our customers on targeted inventory reductions in the second half of 2019, we expect a partial offset and reduction in cash deposits.
Now moving onto our balance sheet and other key measures.
We continue to maintain a strong balance sheet and remain confident in our long term capital allocation priorities. We are focused on generating positive free cash flow paying down debt returning part of our capital to shareholders and investing in the business to drive long term profitable growth.
Our cash balance at quarter end was $437 million down $21 million sequentially and up $35 million year over year.
We've made progress towards deleveraging our balance sheet in the quarter by reducing the outstanding balance on our bank revolver from $97 million on March $31 million to $53 million as of June Thirtyth.
Our net debt position at the end of June was $211 million and gross debt to non IRS trailing 12 month adjusted EBITDA leverage ratio was 2.3 times compared to 2.4 times as of March 30 Onest.
In the second quarter of 2019, we repurchased 3.2 million shares at a cost of $23 million and above that the maximum number of shares that we can cancel under this program, which expires in November of 2019.
Restructuring charges related to our cost efficiency initiative were $9 million this quarter, including charges related to our capital equipment business, bringing the total program spend to date to $60 million.
We anticipate spending at the high end of the $50 million to $75 million program range with an expected completion by the end of 2019.
Now turning to our guidance for the third quarter of 2019.
We are projecting third quarter revenue to be in the range of 1.40 billion to $1.50 billion.
At the midpoint of this range revenue would be down 15% year over year.
Third quarter non IRS adjusted earnings per share are expected to range between nine cents and 15 cents.
At the midpoint of our revenue and adjusted EPS guidance ranges non IRS operating margin would be approximately 2.5% flat to the second quarter.
Non IRS adjusted SGN expense for the third quarter is expected to be in the range of $53 million to $55 million.
Based on the projected geographical mix of our profits in the third quarter, we anticipate our non IRS adjusted effective tax rate to be similar to the second quarter and above our previously anticipated annual rate.
Turning to our end market outlook for the third quarter of 2019.
And our EPS end market, we are anticipating revenue to be down low single digits year over year.
While we expect steady growth across most of our Ats businesses. This growth is expected to be more than offset by persistence demand softness in the capital equipment market.
In our communications end market, we anticipate revenue to decrease in the mid teens percentage range year over year, driven by continued end market demand softness.
And our enterprise end market, we anticipate revenue to decrease in the mid 30% range year over year, primarily driven by planned program Disengagements as part of our Ccs portfolio review.
I'll now turn the call over to Rob for additional color and an update on our priorities.
Thank you Mandeep.
Despite the challenging environment, we made solid progress in the quarter and lowering working capital driving strong free cash flow and improving the profitability of our business outside of capital equipment.
Within Asia, we had strong revenue growth and our Andy industrial and Healthtech businesses.
Led by new program ramps, which more than offset continued demand weakness in the capital equipment business.
The performance of our hps businesses other than capital equipment improved sequentially and year over year due to improved mix.
Our progress of ramping new programs.
As expected the MP business continued to be impacted by material shortages in the quarter.
Relative to last quarter, we saw a marginal improvement in materials availability, which drove improved throughput and efficiency.
We expect the supply environment in general to gradually improve in the second half of the year.
In the second quarter, our capital equipment business continued to be impacted by soft demand in both semiconductor and display markets.
Since the start of the capital equipment downturn, we have significantly reduced our overhead transitioned a number of programs to our lower cost regions and we are in the process of closing four facilities.
With a goal of lowering the breakeven point of this business and improving profitability.
However, in the second quarter demand was weaker than expected and down sequentially, resulting in higher than expected operating loss.
As we look to the third quarter, we are seeing signs of stabilizing demand and expect capital equipment revenue to be flat sequentially.
We are taking incremental cost actions to drive improved profitability.
And while we expect a loss in the third quarter similar to the second quarter, we do anticipate improved performance in future periods. At this stage, we do not see semiconductor demand environment improving in 2019.
And on the display side, we're expecting continued revenue weakness for the remainder of the year.
As lower customer Capex spending is delaying the ramp of next generation programs.
We have however secured a number of new business awards within our semiconductor business, including market share gains and are in the early stages of preparing for the these grants.
We anticipate these new programs will begin ramping in 2020 and will yield growth in revenue and profitability as volumes gradually increase.
We have built the capital equipment business and includes specialized vertical capabilities, including precision machining.
Cleaning welding and power coded as well as design engineering and supply chain services, we believe that maintaining the infrastructure and sales. We have in these areas is critical to our ability to maximize our growth and profitability when market demand returns to prior levels.
In a more normalized demand environment, we believe our capital equipment business will deliver profitability higher than our target DCNS segment margin range.
We are confident we have the right strategy relationships and capabilities in place to be successful in this market turning to Ccs overall this business performed in line with our expectations. The plan enterprise revenue Disengagements are on track to be completed by the end of 2019 and as expected with a full year 2009 impact of just over $400 million relative to last year. Once complete we believe we will emerge with a more resilient ccs business offering higher value add solutions to our customers.
Our improved year to year and sequential Ccs segment margin performance is in part due to the improved mix, resulting from the portfolio transition as well as productivity improvements.
Within our communications business, we saw weaker than expected demand in the quarter driven by continued unwinding of customer inventory buffers and transitions to next generation technology.
This increased softness is expected to persist throughout the remainder of the year.
As a result of this and lower capital equipment demand total company revenue for 2019 is expected to be down in the low teens percentage range on a year over year basis, reflecting a lower 2019 revenue outlook than we anticipated three months ago.
As we look to the future of our Ccs segment. We continue to believe we are well positioned to serve cloud based service providers through a higher value added services such as Jvs.
We continue to evolve our offerings to support this new class of customers and we anticipate that over time.
The growth from these customers will strengthen and stabilize our overall ccs revenue, while diversifying our portfolio.
Although the current market and margin dynamics remain challenging we continue to make good progress in securing new wins across our markets year to date, we have delivered very strong bookings within Asia.
Up over 30% year over year and at our highest gross margin level today.
Although many of these programs will not fully ramped to see revenue for several years.
We believe these programs will help further diversify and expand our Ats segment and company margins.
We are also performing well with our customers for example in the second quarter eight trend was awarded a refi on integrated Defense systems Fourth Star supplier Excellence Award. This is the first time. The trend has received this award from the strategic customer in terms of margins. We continue to work towards achieving non IRS operating margin in the range of 3.75% to 4.5%.
As highlighted in our last call. There are a number of drivers required for us to achieve this margin range.
The first driver is restoring our Ats segment margin to the mid to higher end of a 5% to 6% target margin range.
Which requires a recovery of a capital equipment demand environment improved material supply and the successful ramp of new atheists programs.
The second driver is maintaining our Ccs segment margin within its target range of 2% to 3%.
Outside of capital equipment, we believe that we are building momentum towards achieving our margin targets program ramps in hps are progressing well.
And we see materials constraints modestly improving including an a and b.
We're also seeing stable Ccs margins, we continue to believe that 3.75% to 4.5% operating margin target is the right goal.
We have previously communicated that we were focused on achieving this range and our Ats segment goals within the first half of 2020 .
However, due to the persistence of uncertain demand conditions. It is difficult to predict the timing of a market recovery as such the timing for achieving our margin target is also uncertain.
While we are disappointed with the current environment and the length of the downturn, we are committed to executing our transformational plan.
We believe that the end result will be a more diversified business, which will help dampen the impact of market dynamics in any single market.
We believe that our strategy puts us on a path to driving sustainable profitable growth.
In the short term, we are tackling our challenges head on and remaining diligent in driving productivity improvements.
I want to thank our employees for their dedication as we manage our transformation and our many long term investors for their support.
We look forward to updating you on our progress.
Operator over to you for questions.
At this time I would like to remind everyone in order to ask a question Press Star then number one on your telephone keypad, we'll pause for just a moment to compile the Q and a roster.
Your first question comes from group to better Taria with Bank of America. Your line is open.
Hi, Thank you for taking my questions.
I think your target was to get to breakeven in capital equipment by the end of this calendar year based on the current trends that Youre seeing do you think that is still possible or would that be delayed.
Thank you Robert this is Rob.
Let me take a step back and.
Talk a little bit about the capital equipment environment, a little bit.
So you know we are clearly disappointed in the financial performance of our capital equipment business and the impact it's having on the overall company and its results.
I mentioned on the call that in Q2 revenue came in a little lower than expected and that was driven by late quarter demand erosion.
So in the near term we've taken some incremental cost actions were also being mindful to preserve the core capabilities that really differentiate us from our competition.
We're also working with our customers to drive them prove the efficiency and profitability.
So as we're getting to the second half as I mentioned of this year, we're seeing signs of revenue stabilizing.
And as we get into the 2020, we're expecting semicap revenue to grow and it's really as a result of our new wins converting to revenue. So to answer. Your question. This revenue growth along with the cost actions that we're taking is going to lead this business back to profitability.
And Furthermore, as the market continues to recover we do expect the capital equipment margins to be higher.
And our EPS target margins prior to the downturn.
This was the case and we believe this will be the case in a more normalized demand environment.
Yes over blue.
As we mentioned, we're expecting a loss similar to what we have right now in the third quarter. We are in the process of beginning to ramp programs and the cost actions that we're taking are well underway.
Right now we are not.
Calling out the quarter that we are going to be getting into breakeven, but when those both of those actions ranking of programs as well as.
The cost productivity start taking a hold.
We're going to be moving back to profitability.
And then okay.
Okay. Thanks for the color on that and just for my follow up can you give us some more color on the communications end markets.
Is.
It may be any color on optical versus a routing and switching and with respect to the inventory buffer reductions or.
The the buffer inventory write work down any color on how long that is taking do you think you'll take the whole of COVID-19 or are just one more quarter any color on that thank you.
Yes, so it would start to return locations.
Last year at this time.
We had.
Quite the growth spurt. So we do have some tough comps. So that's a factor the other factor is the unwinding of inventory, but because as you mentioned, we think thats a.
Q3 Q4 dynamic.
In terms of the inventory buffer to wind down that being said thats on the backbone of our dynamic market.
We do see a bright spot in networking and optical though.
Moving forward.
Okay. Thank you so much.
Your next question comes from Thanos Moschopoulos with BMO capital markets. Your line is open hi, good afternoon on the capital equipment side can you help us understand where the sequential deterioration came from was was that more focused on semi versus display or.
Vice versa or does it come from both segments.
Yeah, Hey, Dennis maybe Pierre.
Our expectations in the second quarter were to have revenue come in higher than what it did and so we've been taking cost actions along the way, but when revenue drops off.
In a very short period of time.
Frankly, our cost structure, just wasn't that aligned to the revenue levels that we ended up having so that's what drove the greater loss.
You know, we are seeing softness and the semiconductor space. The majority of our portfolio with semiconductor Abba we has seen some softness in.
The display side as well so we're seeing a demand reductions in both areas.
And Thats just to put it in context, and our our base capital semiconductor business.
It was down about 50% on a year over year basis in Q2.
Quite a dramatic.
Drop from where we were this time last year.
And given that you are taking.
Restructuring actions and I think given that you're talking about revenue stabilizing sequentially why would the loss not be a lower amount.
The upcoming quarter than it was last quarter.
Yes so.
Two things one is we are in the process of taking the actions.
Most of them are underway, but they're not yet complete so that we will be completing them during the third quarter.
The second one is is that as mentioned weve actually been fortunate to have a number of new wins in the capital equipment space through 2018 and uneven so far in 2019.
We're in the process now of beginning to ramp those programs and so we expect those to start coming online in 2020.
So for the those two reasons as we execute both of those activities will start to see the benefits starting in the fourth quarter.
Okay, and then how should we think about working capital throughout the remainder of the year given the program Disengagements.
I guess the revenue declines should we expect to see some ongoing improvement in the cash cycle days.
Yes, I mean, we're really happy with the performance.
We have seen in the first half of the year we generated.
Close to $200 million of free cash flow as you know.
Was $80 million of operational free cash flow.
We are continuing to target positive free cash flow into the third quarter.
There will be some improvement I think in cash cycle days.
As we go through it but I'm not going to call a specific number at this point, but we do think that there continues to be an opportunity.
In unwinding working capital to the new revenue levels that we have.
Great. Thanks, guys I'll pass the line.
Thanks Dennis.
Your next question comes from Robert Young with Canaccord Genuity. Your line is open.
Hi, good evening.
Given that you meet your scenic station some higher cash what are your priorities there maybe if you could.
Quickly give us a sense of your appetite for M&A, how much room is left in the current density I'd be the buyback and what options do you have there I know you said you have some ramps to to find what other areas would you direct that cash.
Yeah, Hey, Robert I'll start off and its Rob Rob one side on Ken.
So.
Our focus really right now is on Delevering and continuing to generate positive free cash flow. So we did see our leverage dropped to 2.3 times.
In the quarter, our total leverage.
Drop you know close to $50 million and so as we generate more cash flow that is our priority. We're happy with the progress that we made on the share buybacks, we bought back eight point.
Three and 8.5 million shares.
For the first half of this year and that actually exhausted the amount of shares that we predict we can cancel under the current NCB. The current NC Ivy runs until December of this year and so at this time, we don't anticipate doing any further share buybacks in the third quarter and so any cash generation, we do have.
It would be going to fund internal investments such as capex or to continue to pay down debt on the M&A side.
We continue to have an active funnel, but.
That's not an area that we are.
Actively hunting, we always have our filter open to continue to invest in capabilities.
But I'll, let rob add on to that if he wishes.
I think thats, a mandate reduce call that favorably unicorn hunting.
But we're through sign something compelling that really progressed as our strategic capabilities, we take a look at it but it's the smaller tuck in in nature at this stage of the game.
Okay and is there a target for.
Like turns of EBITDA, you'd expect in and debt exerting target.
Well, our long term target has been two to two and a half times and.
In line with what we see our peer group and we are glad that were in that range right now.
To be Frank it's a little bit difficult right now to call. The turns number because we are all at the same time faced with declining trailing 12 months of EBITDA and Thats just the nature as we continue to go through the transformation. So what our focus is maintaining.
Low set that weekend.
Okay, and then and then the Ccs portfolio review I think the commentary you said it was going to be completed in 2019 is there any appetite to start another portfolio review after that.
On Ccs or more broadly is there any thought on extending that program.
Yes. So we're pleased with the program that's underway right now as you mentioned.
It is on track to be completed with size at around $500 million to begin with.
The teams have done an excellent job in working with our customers to do that.
It's a part of what we do on a day to day basis, we continue to look at.
Making sure that we're generating the right level of returns for the significant value that we provide and so we want to have some long term strategic relationships with our customers and so if there are dynamics, where thats not the case, we will have conversations with our customers on how to improve profitability and of course.
Sometimes.
You need to part ways and business and so I would say that we're not looking at this time to initiate a new program, but it is an active part of how we manage the business in both Ccs as well as any teeth.
Okay. One last little question, just some it sounds as though the Andy business very healthy.
Less with the exception of material constraints.
Are there any other are there any risk items in that business that you see lot of business around Boeing NAND lot of news around Boeing rather and is there any.
Risks to highlight there to investors and I'll pass line.
Yes.
With respect to Boeing the impacted right now for us is negligible.
But to your point you know we're pleased that Andy grew in the double digits in Q2, and we're showing some gradual improvement in the backlog and the ramping of some new programs.
Both on our base business and through a trend.
So overall, it's it's getting healthier and we expect.
It's a good grip continue to gradually improve from a materials environment.
As of quarter's move on.
Okay. Thanks for answering the questions.
Thanks, Rob.
Your next question comes from Paul steep with Scotia Capital. Your line is open.
Great. Thanks, Rob and were Mindy, maybe you could talk a little bit but in communications in your statements here you flag.
Inventory buffering, obviously, the transition, but inventory buffering in next Gen program transitions as being too the impact items. There can you give us a sense of where you think we are in that cycle in terms of sort of burning through whats offered in the site in the supply chain and maybe where we are in terms of ramping up those new programs.
Yes.
So we think the unwinding of the inventory buffer as is.
Q3 Q4 dynamic.
As I mentioned earlier is a little bit on.
Our dynamic marketplace, a base volumes in terms of market adoption and things like that also fluctuate up and down but we think the buffers is a one or two quarter type of dynamic but in concert with that we're also seeing some of our customers.
Now transitioning their products from one generation to next generation.
And as that happens as their end customers realize that the demand for the.
The older product trails off until the new product comes in so we're seeing that dynamic as well as some of the product transitions are happening. So those both those combinations are giving us.
Lower revenues in to the back half of this year.
Okay.
If we go over to Andy we talked in the last couple of quarters, but the materials constraints and you note in your comments here, you think thats going to pick up in the back half can you give us a sense of how much that may have actually you think that might have constrained the business around just those constraints on those high reliability parts.
Give us maybe more sense of what it actually did did you. Just mean you held more stuff in Wip Board just orders didn't didn't materialize.
Yes in summary, it basically means that please.
We have all the orders in house, we have a lot of the.
Material in house, except.
For the for the pacing items, our customers are very eager to get that product in their hands and to their end customers and we're trying to burn off. This this backlog. This past due if you will and the pacing item is frankly.
Several types of components and commodity groups that are pacing that.
And these are our suppliers and our customers or suppliers are slowly getting healthier and improving their their supply to us, but it's not going to be.
Step function improvement on a quarter over quarter basis, its drips and drabs, but we are working hard and we are seeing that backlog gradually improve.
Great last one on the energy segment I know, it's now a small component of the overall business but.
I thought I heard you mention Bund disengagement with a customer in the period can you just give us maybe a little bit more context around that thanks.
Yes sure so.
This is a product that probably quickly commoditized over a shorter period of time.
And as it being more of a commodity it's marked by higher cost out some lower price flexibility.
With our customers.
And you know our strategy frankly that has us playing more of the higher value add given the commodity nature of the product and.
The fact that it was loss generating.
We work with our customers have decided to disengage and help transition it to somebody who specialize in that more on the low end.
From a sizing perspective, it was less than 2% of HTS annual revenues.
Perfect. Thanks, guys.
Okay. Thank you.
Your next question comes from Todd Coupland with RBC. Your line is open.
Hi, good evening everyone.
A couple of housekeeping items.
In terms of thinking about a tax rate.
Post losses in capital how should we think about that.
Post losses, after we get back to profitability capital equipment, yes.
Yes.
So Todd.
On the question on taxes.
If you look back at our target rate was 19% to 21% at the beginning of the year and if you go back four or five years, you'll see that.
We more or less have operated plus or minus around that range for a number of years.
I mean ill just double click for on some of the.
The two main drivers again, one was mix, we had higher levels of profitability in high tax geos, but the second is and you're touching on it which is we have generated losses in capital equipment by driving restructuring and those losses are landing in geographies, where we pay very little to sometimes no tax and because of the historical losses in those areas were not able to really generate tax credits and so.
As we normalize our.
Capital equipment business, and we get back to profitability as the restructuring program comes to an end.
We would expect that this time that we're going to get back to our target range and I think the way to think about it right now would be 19% to 21%.
Okay.
And in terms of the buyback I thought you said you'd finished it for this year. So should we expect you to.
Two.
Reapply for another buyback or will you wait to the end of the year to do that.
Our intention would be to open another buyback, we like just for good housekeeping and to your point on to have a buyback program open when available because we can't have another program open until the end of December it's something that we would start the paperwork on.
Shortly but it wouldnt go into effect until the end of the year.
And you called out optical and networking growing under the covers can you just talk about what some of the drivers are for that.
Yes, the networking.
Growth in optical growth is really being fueled by datacenter growth and a large part of it is coming from a non traditional customers.
Yeah and on the optical side, we're seeing it more on the system side.
Versus the component side.
And is it like from a telecom perspective is it is it just bandwidth in the network is it.
As fiveg starting to kick in like what's actually happening there.
It's largely data center interconnect all of that data center as well too on the optical thats great. Yes, they both there.
Okay and then just last question. So you know you are buying a lot of stock back here.
Valuation is low here.
Does the board think about.
Whether or not.
It makes sense for so less ticket is to stay public given given all these transition points and.
Not not being terribly well received by the overall public market, maybe just give us your thoughts on that thanks a lot.
Yes, so as.
The leadership team and as a board, we always look for various ways.
Return.
Value to our shareholders right now we're committed to our current strategy.
We believe it sound we believe it's working.
Albeit it's not progressing as fast as we'd like.
Which is being really largely driven by aftermarket headwinds, we have and capital equipment and to some extent communications.
But we always look at a wide variety of ways to increase shareholder value.
Great I appreciate the color thanks, a lot.
Thank you.
Your next question comes from Paul Treiber with RBC capital markets. Your line is open.
Oh, thanks, very much and good afternoon.
You mentioned that you're closing four facilities in semi cap, where those plan at the beginning the year is that an incremental decision and then could you also elaborate on what regions are the type of facilities that you are closing.
Yes, so some of that was an acceleration.
Of the.
Okay impact integration.
Given the low revenue environment, we accelerated the integration and some of that was taking capacity out of the system.
A large portion of it was consolidation of facilities.
In and around our West coast.
And some of it was actually in Korea, and consolidation of facilities to make ourselves.
More efficient.
It's important to note that as we are.
Consolidating facilities and repositioning work to lower cost regions, we are lowering our breakeven point and lowering our cost to serve so when the market does come back we should be in a much better position to be able to serve that demand and to your point, though Paul.
As the demand has softened.
Even further than what we were originally expecting in the quarter. We did decide to take additional actions to bring the business back to a level of profitability.
And so we are continuing to sharpen our pencils to make sure. We can get this business back to breakeven and then growing from there.
And then you mentioned that.
You are not losing are planned to lose any capabilities.
So what's the strategy when you mitigate that to mitigate that risk when you do close those facilities are they mostly overlapping facilities.
Or do you have.
And knowledge or our IP that you need to transfer amongst some of them.
Yes. Some of it is transferring work from from high cost Geos, So low cost zero, so with that comes.
The equipment and the and the knowledge.
And some of it is just a preserving.
Yes to some extent, we had some overlapping capabilities.
Between.
Impact and our capital equipment business, So weve consolidated.
That extra capacity in those capabilities. So we could serve it more efficiently.
But you know and every time, we do this we always mark out whats key and whats core in terms of people with processes and capabilities and we make sure that we're not the risk of losing those things. So we can respond to the market when it does return.
And just lastly on the display programs you mentioned a push out from the second half of this year to 2020, I think that was a he made a similar comment last quarter.
Is there any change like are you seeing a further push out are you reiterating that the same color from last quarter.
Yes. So we were we were tracking a large customer project that we thought would start ramping towards the end of this year.
And that specific project pushed out to the end of next year.
However that was partially offset by several smaller projects.
Which we expect to start ramping in 2020 back in the news yesterday, there was and customer announcing some major investments in turn and a half GE, which we're tracking.
And according to that announcement they are announcing production in 2021 2022, so the and the long term fundamentals for the display in market are I think are intact.
It's just a question now of timing.
Recall, it was incremental softness from 90 days ago.
Okay. Thank you.
Your next question comes from Jim Suva with Citigroup investment your line is open.
Thank you very much you've given us a lot of detail so far which is greatly appreciated.
On the semi cap.
Orders have things gotten worse or stabilized or improved because it seems like there's been some other semi cap equipment companies, who started to talk about billings in orders that started to improve so I'm just trying to get a sense from you about your visibility how those orders percolated down to you or stabilize or are things still pretty pretty disappointing in that segment.
Yes, so inside inside of Q2.
We've gotten incrementally worse than what we were thinking from the beginning of the quarter.
Moving to the back half.
We think thats at the Q2 levels the stabilized.
We've seen some of the recent news and upgrades of some customers.
Customers customers, if you will at the end markets.
We have yet to kind of see that pickup.
We are mindful that that might happen towards the end of the year, but right now our views are that that.
That's not going to happen if it does happen that might be.
Some potential upside for us and we'd be very happy to serve that.
The growth that we're actually.
Banking on and.
Looking forward to is probably more in 2020 again thats not more of capacity increases, but thats just converting a lot of the business that we booked.
In prior periods converting that to our revenue and 2020.
Great and then switching over to the communications segment.
It seems like there are some companies, there's we've actually been seeing some pretty pretty good string to whether it be on the enterprise side or service provider or even fiveg buildouts. So is it inventory digestion is it a customer concentration or is it you happen to have some programs that just right now we're not in favor Im just trying to triangulate our connect the dots of how that we've seen some strength in those markets, but then maybe some inventory or some customers that we should think about you don't have to name names, but just help us understand a bridge those.
Sure. So I think the biggest driver it was on a year over year basis, all the tough comps, but beyond that it's largely the inventory buffers.
And then from.
A customer perspective, our traditional Oems are.
Probably.
Down the most and were feeling that slow down as well and.
That's being driven by just the overall disruption that's happening in the marketplace.
Which is probably nothing new from what we've said in prior quarters infrastructure as a service and desegregation and things like that or.
Disrupting the traditional Oems.
Our business model.
And then we're what we're happy to see under the covers is we're seeing very strong growth on the service provider side.
The GTM investments that we've been making are paying off and so despite the.
Softness that we're seeing in those legacy.
Customers, there is being buffered, a little bit and by then.
Some good growth in other areas.
Great. Thanks, so much for the details that's great I appreciate it.
There are no further questions at this time I will now turn the call back over to the presenters.
Thank you Sean Tom So in Q2, we delivered in line results and it was marked by very strong cash flow the performance of our business other than capital equipment is performing well.
And within capital equipment, we're taking the appropriate short term measures with an eye towards our longer term goals again, we believe our strategy is sound and over time the actions that we're taking will improve our diversification.
Proven enable consistent and profitable growth.
I. Thank you for joining and we'll look forward to updating you as we progress throughout the year.
This concludes today's conference call you may now disconnect.