M&A Announcement

Sep 22, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Celestica Acquisition of PCI Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Craig Oberg, Vice President of Corporate Development and Investor Relations. Thank you. Please go ahead. Welcome everyone to our conference call to discuss Celestica's acquisition of PCI Limited. During this conference 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 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 sec.govandsedar.com. We assume no obligation to update any forward looking statement except In addition, during this call, we will refer to various non IFRS financial measures, including Celestica's operating margin, Free cash flow, gross debt to non IFRS trailing 12 month adjusted EBITDA leverage ratio and adjusted EPS and PCI's adjusted EBITDA margin, adjusted gross margin and the EV EBITDA multiples of specified peers. Listeners should be cautioned that references to any of these measures during this call denote non IFRS financial measures and non GAAP measures in the case of PCI unspecified peers, whether or not specifically designated as such. These non IFRS and non GAAP financial measures do not have any standardized meanings prescribed by IFRS or GAAP and may not be comparable to similar measures presented by other public companies that use IFRS or who report under U. S. GAAP and use non GAAP financial measures to describe similar operating metrics. We refer you to yesterday's press release and the slide presentation, which are available at celestica.com under the Investor Relations tab for more information about these non IFRS and non GAAP financial measures, including their definitions and with respect to Celestica, the location of reconciliations of these non IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements. We do not provide reconciliations for forward looking non IFRS financial measures as we are unable to provide a meaningful or accurate calculation or estimation Reconciling items and the information is not available without unreasonable effort. All PCI historical financial information and projected results Concerning PCI have been provided to us by PCI. See the section captioned PCI Information of the slide presentation accompanying this discussion for additional assumptions with respect thereto. On this call, we will also refer to adjusted gross margin and EV EBITDA multiples of specified peers. See the section captioned Market and Industry Data in the slide presentation accompanying this discussion for a detailed description of this information. 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. On the call with me today is Rob Mionis, our President and Chief Executive Officer Mandeep Chawlaar, Chief Financial Officer and Eyal Teo, Chief Executive Officer of PCI Limited. Following our prepared remarks, we'll open up the call for Q and A with Rob, Mandeep and Eyal. With that, I'd like to hand the call over to Rob. Thank you, Craig. Good morning, and thank you for joining us on today's conference call. This is a great day for Celestica. The acquisition of PCI is an exciting moment for our company as it builds on the strong foundation we have created over the last several years and helps accelerate our path to consistent margin expansion and sustainable long term revenue and earnings growth. Before we talk about our acquisition of PCI, I'd like to recap some of the important steps we have taken over the last few years to strengthen Celestica. Since 2016, we've executed a bold strategic transformation to strengthen our portfolio. Our strategy has focused on building our presence in high growth, high value end markets, enabling us to capitalize on emerging industry trends, while moving up the value chain to provide end to end solutions throughout the product lifecycle. In the early stages of the journey, We took decisive steps to position Celestica for success in the years to come. This included transformational actions such as disengaging from $1,250,000,000 of revenue not aligned with our strategy, driving a $75,000,000 network wide efficiency program and making strategic acquisitions in both the Aerospace and Defense and Capital Equipment Industries. As our transformational actions started to yield results, more recently, we have been focused on optimizing our portfolio to targeted investments in engineering platforms and new capabilities in both ATS and hardware platform solutions. And as we look forward, we are excited to be entering into what we see as a growth phase of our journey with targeted organic revenue growth in 2022 across ATS and hardware platform solutions or our Lifecycle Solutions portfolio, which now represents 60% of our total revenues. Growth is also expected to be driven inorganically through acquisitions such as PCI. The successful execution of our transformation and optimization initiatives has enabled us to drive improved non IFRS operating margin, Generate strong and consistent non IFRS free cash flow and significantly strengthen our balance sheet. This has resulted in a great deal of financial flexibility to invest in our business through R and D and CapEx, while simultaneously returning capital to our shareholders through share buybacks. In fact, over the past 5 years, we have deployed almost $200,000,000 to reduce our share count by approximately 10%. As we walk you through the details of our acquisition of PCI, We will highlight how the addition of PCI will diversify and further enhance our ATS offerings, providing us with additional expertise and capabilities to continue to expand our presence in attractive high margin markets. With PCI as part of Celestica, We will build on our leadership position with innovative design and engineering capabilities and high growth markets. We are also excited to welcome aboard E. O. Teo and the rest of the talented management team from PCI, whom we expect will play an important role in the company and its success following the closing of the transaction. Now, I'd like to turn the call over to I. L. Teo, Chief Executive Officer of PCI to provide some background on the company. Thank you, Rob. This is an exciting day for the entire PCI team. I want to tell you about PCI And why I believe our future is so bright as part of Celestica. PCI is one of the largest providers of EMS solutions in Asia With an exclusive focus on diversified markets, with our headquarters in Singapore, we have 5 design and manufacturing centers Strategically located throughout the region, including in Singapore, China, the Philippines and Indonesia. I believe that a critical part of PCI success is our team of design engineers that have helped us to build innovative Industrial leading capabilities and a differentiated engineering and IP platform. We have focused on building capabilities in emerging industries where we can We maintain strong relationships by working closely to create solutions that support them to achieve their goals Throughout the product lifecycle, from design through manufacturing and new product introduction, our customer centric approach and deeply embedded relationships Enabled by our design led capabilities have allowed us to retain and expand our mandates with many of our blue chip Fortune 500 customers. This is reflected by the fact that our top 10 customers Have been with us for an average of 14 years. We view the transaction with Celestica as a natural next step In our evolution, they will enable us to advance our capabilities and provide even greater value to our customers. We are excited to leverage Celestica's global footprint and world class resources as a Tier 1 EMS player to accelerate the expansion of business while bringing our differentiated engineering capabilities to their already impressive team. Next, I would like to provide an overview of PCI's unique capabilities in a number of different areas. Not only does PCI have a strong presence in their key markets such as industrial, telematics, specialty equipment and smart home, but we also bring a wealth of In RF design, PCI designs telematics systems and manufacturer devices, which enable fleet management systems. PCI Telematics capabilities enable intelligent transportation system that can be customized to the needs of the customers, Whether that's a municipality responsible for a fleet of buses or hospital managing its ambulance response time, PCI's human machine interface offerings are an area that we believe represents a significant long term growth opportunity. Industrial, machinery and vehicles are increasingly adding display interfaces. PCI White brings a wide range of expertise relevant for human machine interface products, including design and manufacturing of LCD modules, And of course, in the age of Internet of Things, Sensors and radio modules are more critical than ever for use by end users and data harvesting for companies. These applications are very broad and quickly expanding as both companies and consumers demand for data continue to grow. This underlying technology also works in combination with artificial intelligence to create automated solutions that can be leveraged and analyzed data in real time with true decision making capabilities. PCI supports a number of IoT to smart beds that track sleep, heart rate and temperature. In embedded systems such as single board computers and computer on modules, PCI offers hardware solutions that incorporate many common computing components that can be customized and integrated into a wide range of and products. We believe that pairing of PCI units expertise in this exciting market combined with Celestica's Established Formula for Success as a global Tier 1 leader in the EMS space will help accelerate the growth of our business. Together, we believe that we will be able to push the boundaries of innovation in our industry and deliver stronger, More comprehensive solutions to our customers. Before I turn the call over to Mandeep, I want to thank the entire PCI Thank you for their dedication and hard work that led us to this point. I know that with Celestica, the brighter days are ahead of our organization. Thank you, Mandeep. Over to you. Thank you, Eyal. I want to echo Eyal's excitement about the opportunities that we anticipate for both of our organizations Through this transaction, we believe the addition of PCI to the Celestica platform is a combination where the whole is truly greater than the sum of the parts. While EL has already highlighted some of PCI's differentiated expertise and capabilities in high growth markets, I want to touch on a few of the other benefits that we see from this acquisition. 1st, PCI's market presence and expertise in areas that are complementary to Celestica's key competencies are expected to drive cross selling opportunities across our existing portfolio. 2nd, PCI's strategically located facilities across Asia We'll expand Celestica's footprint in attractive low cost regions with skilled labor in close proximity to where our customers are operating. And third, the addition of PCI's commercial portfolio is expected to further diversify Celestica's customer base with the anticipated addition of more than 20 long tenured blue chip customers, allowing us to achieve greater consistency in our financial performance through market cycles. I now want to talk more about the financial aspects of the deal and why we believe the acquisition of PCI is such an attractive opportunity for Celestica. We're acquiring PCI from Platinum Equity for $306,000,000 in cash, which reflects an EV to EBITDA multiple of less than 7 times. Given the growth profile of PCI's portfolio, its strong margin performance and its highly differentiated design and engineering capabilities, We believe this is a very attractive price for this asset. PCI presents compelling financial benefits for Celestica, meeting all of our stringent financial hurdles and criteria for M and A transactions, including accretion to our non IFRS adjusted EPS in year 1 and generating returns anticipated to exceed our cost of capital by the 2nd year or sooner. As we integrate PCI into Celestica, We also expect to realize certain cost synergies following the completion of the transaction, particularly in the areas of supply chain optimization. We expect these synergies to further enhance PCI's operational results starting in the 2nd year of ownership. PCI's financial profile is characterized by strong sustainable growth on both the top and bottom line and aligns with our focus towards non IFRS operating margin expansion. PCI is expected to generate approximately 3 $1,000,000 of revenue with $45,000,000 of adjusted EBITDA in 2021, 100% of which is derived from diversified markets complementary to our ATS segment portfolio. PCI has a demonstrated track record of consistent top line growth with a revenue CAGR of 10% over the past 3 years. The company's focused go to market strategy, new wins and solid proof points have helped it to generate a strong sales pipeline in attractive markets, which we believe will support strong growth into 2022 and beyond. This further supports the positive outlook for our ATS segment and gives us added confidence to achieve our long term ATS segment revenue growth rate target of 10% per year. PCI's portfolio also has a compelling double digit adjusted EBITDA margin profile that is accretive to Celestica's ATS segment margins, driven by strong design capabilities and a track record of driving operational efficiencies. With the acquisition of PCI, We believe that our ATS segment will be comparable to like size Tier 1 ATS peers that derive the majority of their revenues from diversified, High reliability end market. The annual revenue of our ATS segment is expected to be approximately $2,800,000,000 in 2022 and have a targeted revenue growth rate of 10% over the long term. ATS, similar to these like sized Tier 1 peers, also generates high gross margins, reflective of the high barriers to entry in these end markets. We draw this comparison to highlight that these like sized Tier 1 ATS peers are currently trading at an EV to EBITDA multiple up to 10 times. Looking at non IFRS gross margins more closely For all of Celestica, you will notice that gross margins have been expanding across our portfolio over the last 2 years. In fact, Gross margins last quarter at 8.4 percent was up 180 basis points from 2 years ago. With the addition of PCI, We expect gross margins to expand even further. Our 2nd quarter pro form a gross margin profile with PCI would have been 8.8%, reflecting 40 basis points of accretion. This margin profile puts Celestica as one of the top gross margin performers amongst Tier 1 EMS peers. We highlight this because amongst Tier 1 EMS peers, we have historically seen strong correlation between gross margins and valuation. As we continue to target revenue growth and expanding margin, we believe that there is an opportunity for shareholder returns to be unlocked if the multiple being applied to peers With comparable margins were to be applied to Celestica over time. Now turning to our revised outlook. As a result of the anticipated PCI acquisition and the expected addition to our top line growth and accretive impact to our operating margins, We are raising our financial outlook for 2022. We now expect to achieve revenues of at least $6,300,000,000 with non IFRS operating margin between 4.0% and 5.0 percent. The PCI acquisition will also be accretive to our non IFRS adjusted EPS in the 1st year. As a result, we are raising the outlook for our non IFRS adjusted EPS growth for 2022 to 20% or more compared to 2021 versus our prior outlook of growth of 10% or more compared to 2021. Following the closing of the transaction, Our pro form a gross debt to non IFRS trailing 12 month adjusted EBITDA leverage ratio, assuming the transaction had closed on June 30, 2021, It's expected to be approximately 1.8 times compared to 1.4 times prior to the transaction. As Rob noted earlier, While we will focus on deleveraging in the near term, we expect to continue our balanced capital allocation approach that includes investing in our business and returning capital to shareholders through share repurchases over the long term. I'll now pass the call back to Rob for closing remarks before we take your questions. Thank you, Mandeep, and thank you again, Eyal, for joining us today. We believe that today Celestica is Stronger than we have ever been, both financially and operationally. The PCI transaction represents an opportunity to extend PCI's design platforms across ATS' markets and build on our momentum in high growth markets that are aligned with long term industry tailwinds. The addition of differentiated design and engineering capabilities will help us build on our strong innovation platforms, expand into adjacent emerging markets and create cross selling opportunities And diversifying our customer base with the anticipated addition of more than 20 blue chip customers to our portfolio. PCI checks all the boxes with respect to our strict financial M and A criteria and is intended to enable us to strengthen our financial profile by enhancing our top line growth potential, expanding our operating margin and further diversifying our business to perform 2 market cycles. Simply put, we believe the acquisition of PCI will make Celestica stronger. We are confident that with PCI, we will create new and exciting opportunities for Celestica and PCI, And we look forward to working with Iyo and his team in the years to come. Operator, please open the line for questions. Your first question comes from the line of Rob Young with Canaccord. Hi, good morning. And maybe the first place for me to start would be around the new end markets, the customer profile. You said that You're adding 20 blue chip customers, I think elsewhere in the call, Fortune 500 customers. Is there any detail you can provide around those? You said they're new customers. Any further detail around that would be helpful. Yes. Hi, Rob. This is Yi Lei. Let me sort of give you some color and flavor of the 20 customers we mentioned in the call just now. We are actually primarily focused and the customers are mainly in the segment of industrial, Telematics, right, as the main market segment that these 20 customers actually serve. We have just couple of them are very high end Consumer customers, but I would say primarily in the industrial segment as well as the telematics segment. Okay. And then in the revised guidance, are sorry, go on. In the revised guidance, are you expecting any revenue leakage? I think you said you're adding $300,000,000 of revenue, but The trailer the 21 revenue of $325,000,000 I'm just trying to understand that. Yes. Hey, Rob. No, We don't expect any revenue leakage. One of the reasons we're so excited about this transaction is the vast majority of the revenue and the customers are located Industries with double digit $1,000,000,000 TAMs growing at double digit growth rates. And these are markets and Customers that we don't have a lot of exposure to. So we do think that there is a nice synergy opportunity in order to Put the take some of those capabilities that Celestica already had and sell them into PCI's existing customers and vice versa. Okay, great. And then I was looking at the operating margin guidance range for ATS 5% to 6%, which is same as previous guidance And you're guiding to the middle of that range, but you're raising the overall corporate margin target. And so I guess there's something in CCS to be thinking about here Better than previous or if you can help me understand why the ATS margin Guidance isn't changing the overall range. Yes. No, absolutely. So, what we're seeing as a company is that PCI is going to be adding somewhere between 30 to 40 basis Points of accretion to the full company. And so when we've been getting now the guidance of 4% to 5%, that's inclusive of that accretion. You'll note, of course, Rob, that our traditional target margin guidance range was capping out at 4.5%. So we have raised it now to 5.0%. On the ATS side, we said that we were targeting 5.5%. Of course, we're working towards trying to do more than that. But when we had given previous color on ATS, we had shared that the business would be in its margin range the entire year, which could have implied that the lower end of the range. Now we're letting everyone know that we're feeling confident that the business should be able to do 5.5%. Of course, we'll work to try and do better than that. Okay, great. Last question just around the HPS business. It seems as though this is going to drag you into some new areas. Maybe you can talk about how this expands the JDM or HPS business. And then I'll pass the line. Sure, Rob. Yes, some of the capabilities that PCI brings, especially in the areas of RF design, I have some applicability in the HPS area in the areas of edge computing. It's still early days in the areas of integration, but we'd be certainly Looking to expand those capabilities into HPS markets. Additionally, in terms of The process of engineering, the function of engineering, we have a global engineering footprint and we'll be looking to capitalize on that footprint to expand EL's capabilities and PCI's capabilities around the globe, so we should be able to take these capabilities that we have, which are centralized Lodging in Asia and be able to extend them throughout the globe, which will improve PCI's reach And enable some cross selling. Okay, great. Thanks. Congrats on the acquisition. I'll pass the line. Thanks. Your next question comes from Ruplu Bhattacharya with Bank of America. Hi. Thank you for taking my questions. Maybe the first one for Eyal. Can you talk about the seasonality of the PCI business, which quarters are stronger, which are weaker? All right. Thanks, Rupu, for that question. Now before I talk about the seasonality, I think I've already earlier Even though we have that by social high end. So because of the main segment I mentioned, they present less of a seasonality fluctuation throughout the years. So actually what we have been experiencing so far has been a fairly less dynamic, more even out quarters of revenue and the business. And this is exactly how our customers operate in their end market. So I would say very, very little dynamics Along that, there may be occasional because of business condition, but I would say it has always been fairly less dynamic in terms of the seasonality. Okay. Thanks for the details on that. Maybe you've talked about synergies. Maybe Rob or Mandeep, can you talk a little bit about the level of integration or restructuring that you see as you bring PCI into the business? That you see as you bring PCI into the business. And also in terms of synergies, can you talk about what are you baking in, in terms of revenue Synergies as well as synergies at the operating margin level. Sure. Hi, Ruplu. I'll start off and I'll let Mandeep Finish up. We're expecting synergies in 3 areas. The first one is in supply chain combining our scale between the two companies. The second is in was in operations, deploying the Celestica operating system throughout PCI's operation. And the third is cross selling. As we mentioned during the presentation material, We're looking to combine our customer portfolios and innovation platforms to take these design platforms that PCI has and extend them across ATS' market and we think there's great synergy there. And so with that, we're looking for some cross selling opportunities. Given supply chain lead times and also just time to implement some of these things, we're not expecting anything material until the 2nd year onwards. And I'll let Mandeep answer the second part of your question. Yes. Just to round up the answer, Ruplu, The restructuring will not be required in order for us to both integrate the business as well as in order for us to Realize the synergies, which as Rob mentioned, starts in the 2nd year. From an integration perspective, PCI is a very strong standalone business, And we have a pretty defined integration methodology for acquisitions. Essentially, if there's a business case to integrate something, we will. If it's a control item, we will. But I think one thing you may have noted is that PCI was a publicly traded company not too many years ago. So the control framework within that business is quite strong, so we don't see a need to over integrate the business. Okay. Maybe just a follow-up on that, Mandeep. I kind of remember that PCI had about 500 plus employees. How many employees are you taking on? I mean, is that the right number? And how do you see that So actually PCI has close to 3,000 employees. Their largest manufacturing facility is in Indonesia where they have almost 2,800 employees. And so they do have a significant footprint. From an OpEx perspective, it's going to be largely in line from a margin percentage of revenue perspective, their SG and A. So we expect they'll be relatively consistent with Celestica. Okay. Thanks for the clarification on that. Maybe if I can just sneak one more thing in. Your debt to EBITDA ratio will grow to 1.8 times. Can you remind us what Absolutely, Ruplu. So, yes, to your point, we were at 1.4x gross leverage at the end of last quarter. Had we closed PCI At that same time, it would have added about 0.4x leverage. So that would have gotten us to 1.8x. From a credit facility perspective, we're able to go to a maximum of 4.0, although we don't have any intention of doing that. And one thing that we have shared over the many previous Calls that we've had is that we are comfortable as a company operating in the 2 to 2.5 times debt gross debt leverage ratio You know, zip code. We will be comfortable going above that as long as we can get back into that range in a short period of time. So as it relates to future M and A, We do continue to have a balance sheet that is strong, but we're focused on our long term capital allocation priority. And as you know, that is to invest 50 percent of the business through things such as PCI, but also to return cash to shareholders, and we think we've been managing that We will continue to look at M and A, and we do have the balance sheet to execute on it. We have the management bandwidth as well. I think it's safe to say that in the near term, we're going to be very focused on integrating the business and helping PCI meet their business case. Thank you for all the details. Thanks. Thanks, Ricola. Your next question comes from the line at Thanos Montropoulos with BMO Capital Markets. Thanos, your line is open. Sorry about that. Good morning and congrats on the acquisition. Maybe just following up on the balance sheet question. At the current leverage ratio, would there be any constraints to share buybacks or no? No, there will not be. There aren't any restrictions or negative covenants on our credit facility that prevent us from doing more buybacks at this time. Our buyback program is scheduled To expire in November, and it's our anticipation right now that we would be renewing the program once that time comes. Okay. And if we look at the 10% 3 year CAGR that the business has achieved, Yes, maybe you can provide more color in terms of just what specifically has driven that? Has it just been a broad mix So the various markets you're exposed to or have there been a couple of those markets that really stood out in driving that 10% CAGR? All right. Yes, Sunez, maybe I'll just give some color of that. I think you have seen that the CAGR is about Customers, I think that's one of the contributing factor. And the other most important one I think is also we brought on board new That helped contribute to the revenue growth. So this is all coming from the two fronts. And again, I would just say that the CAGR that we have seen other than the two fronts, There's one more layer of important factor. It's actually the fact that we are getting a lot more business in these two fronts I just mentioned In the design space, so I think that helps a lot as well in changing our relationship with the customers. Okay, great. And then, Rob, you alluded to some of the capabilities from an HPS perspective. If you look at the current revenue mix PCI today, how much of that would you characterize as HPS per your definition? Yes, about a third of PCI's revenue, I think we would classify as HPS or perhaps JDM. And while it's focused more on the industrial telematics markets, I still think based on the design Your next question comes from the line of Paul Treiberg with RBC Capital Markets. Thanks very much and good morning. Just looking through, PCI's, some of the old annual reports. I think in 2018, the top three customers 43% of PCI's revenue. Is that still the case? And what's the percent of revenue from top 10 customers? Yes, Paul, I can give some color on that. I think, yes, when you draw out that information, I think it just flowed 43% come from the top 3 at that time 2018. I think the dynamics and the profile has been changed and adjusted. I would say that currently based on the latest revenue profile, our top 10 customers actually represent close to 75% of our revenue, Okay. That's helpful. In terms of like the revenue growth Through this year, in light of the supply chain disruptions that we've seen in the industry and then like COVID Shutdowns or not, how has revenue growth been through this year relative to the 10% over the last 3 years? Actually, Paul, I think I would like to say that it has been interesting this year because Of our long relationship with our customers, I think you have seen the presentation script, our top ten has been with us for many years. So In terms of the supply chain constraint signal, the company actually saw it like late last year. And because of that, that we have Right. Helping us to continue to make our revenue to be on a rising trend despite of the market component situation. So in fact, the CAGR that you have seen over the last 3 years is not in any way affected up to this point of time because of the market constraint. So I think we have done quite a bit of preparation prior to the ever launch coming in early part of this year and also the Q2 through now. But I thought that has been a good planning that we have done to our customers since the second half of last year, right? So I think that helps to Maintain at least the CAGR through the last 3 years up to this point of time. Okay. And then one last one for me. Just to Rob and Mandeep, the return will be above the cost of capital in the 2nd year and it's great to hear. How do we think about the IRR and the acquisition relative to Celestica's acquisitions in the past? Yes. Hey, Paul. So yes, we are aiming for the ROI to be ahead of our cost of capital By year 2, but we did say or sooner. And frankly, with the strong margin profile of the business, we think that there is a strong possibility that, that could be in the 1st year as well. Relative to previous acquisitions, because a lot of times the profit that you're buying is Taking into account when you're looking at the purchase price, what we find is that the ROI is relatively similar. We look at acquisitions that typically have an ROI that's going to be in the low double digits by the 2nd year. And I would say that between Impakt and Atran and now with PCI, they all kind of are in the similar zip code. Okay. Thank you. Thank you. Your next question comes from the line of Todd Coupland with CIBC. Yes, good morning, everyone. I was wondering if you could give us a little background on how this deal came about and brought the 2 companies together. Hi, Todd. This is Rob. Yes, so I would say this was not a broad auction We've had our eye on PCI for a long period of time. And when it came to market, I think at the end of the day, we were the most logical Buyer for PCI. So we work very closely with Platinum Equity and the PCI team to work through a process And we were able to consummate the deal. Okay. Thank you. And then My question on PCI in terms of competitive landscape, given there is limited overlap with Celestica, who are you We are competing against from a design perspective and then ultimately from a broader EMS offering perspective. Thank you. Yes. Thanks a lot for the question. Now before I get into the competitive landscape, maybe I just give some color About our engineering capability, which I think is primarily driving our growth. Our capabilities are very centered and specialized in Wireless IoT antenna design as well as product with LCD display, right, we call it HMI, coupled with the embedded System is the PCBA. So because of our specialty in this area and deep expertise in this design know how, We typically will compete with design house that is very that are very, very deep in knowledge in this So this is one of the category of our competitive landscape. So but typically, as you know, Design House doesn't have Total product fulfillment, so they're just doing design. So I think we have sort of from the end to end supply chain product fulfillment perspective, we have a certain Stronger edge against them, so we can bring the product from creator to crib as compared to just design hubs. So the other category, if you talk about EMS marketplace, we typically come across competition from Hi, Tier 2 and even the Tier 1 players. So we have been able to see ourselves successful in even winning deals against the Tier 1 EMS In the world, as I said again, that's because we have very specialized design know how and deep design knowledge in bringing product To meet the customer expectation and on top of that is because of our speed of execution, our time to market is always on the forefront when we come to That competitive landscape. So that continues to give us the advantage over the other competitors we are seeing in the market globally, right? So when you say Tier 1, if I'm right, Flex has a big RF design capabilities. Is that what you mean when you say Tier 1? And then are you able to call out any specific Tier 2s that you typically come up against? Thank you. All right. Tier 1, I think it is not unknown in the world. I think people like Flex or even Jabil That's got design team that we from time to time we do encounter in RFP, RFQs. Tier 2 guys are more looking at People like if we were to say to some extent, I call it like benchmark high tier 2, low tier 1, Right. These are the category of peoples that we're looking at. But again, in our eyes, I think the way we look at Competitive landscape is not really tied ourselves to Tier 1 or Tier 2 EMS. We are looking at people with very deep Knowledge and expertise, right, in the area I just described. So in terms of PCI design strength, we are not a broad scale shop That covers all type of design. The fact that we are very specialized, I think always gave us the extra edge against the competition in the market, Because this competition is always evolving in the world and we are always trying to be ahead of the curve with the specialty that I just mentioned, Coupled with the speed of execution in which in this current marketplace, speed of execution and delivering products to market is in fact, I think, The primary driving winning factor in this competitive world. Okay. Two other quick questions, if I could. From a Blue Sky perspective in the 5 gs marketplace, it's been a little bit slow to evolve, But how are you thinking about that opportunity in Internet of Things, let's say, in a 2 or 3 year timeframe? Thank you. Yes. So if I were to draw like the 5 gs, I think many of you are aware of this 5 gs, which is also I call the Shorter range communication in terms of the wavelength. I think the way we are looking at it is that at the end it's about the total ecosystem of What PCI design expertise the offer in IoT wireless can fit into the broader scheme of things of the wireless What do you call it, short range or long range communication. In this whole communication ecosystem, 5 gs has A big role to play we all know in data transmission in mobile communications. But in short range IoT space, Our expertise can actually integrate whatever evolving technology because of 5 gs, because of short range LoRa and Sigfox. So our view is that PCI expertise when we say about IoT wireless, actually it all comes back to one This is something that PCI has very good strength on Into the hardware antenna design coupled with software tuning. So if you look at the 5 gs, It also boils down to this fundamental called hardware, which is internal design. This is something that PCI constantly is working on, Even in fact in the analog day, right, into GSM, 3 gs, 4 gs, we are in it and we are going to continue to evolve and invest our expertise to progress further in view of the market evolution in this communication space. Thank you very much. And then last question, there have been some Asian countries that have had been affected by plants shutdowns over the course of 2021. Can you just talk about your experience during COVID and what capacity you're currently operating at? Thanks a lot. Sure. Let me bring you back like exactly 1 year ago when the COVID was in Very uncertain period globally. So if you look at PCI footprint that I think you have seen in the presentation strip earlier, We are mainly in Asia. Our main factory is in Indonesia in an island called Patam, which is about 26 South of Singapore, right. We also have a headquarter in Singapore with design and small scale manufacturing. The other factory we have is actually in China. So if you look at the span of how COVID has affected the countries in Asia, right, last year it was That is affecting China in which we have our Indonesia plant that is continuing to support the revenue. So we are least affected, Coupled with the fact that China managed to come back on board as country as well as our operation coming back quickly to operation. So I would say that we have gone through a fairly stable state in the second half of last year. However, when the COVID come in the big time Affecting Asia, even until today, we were fairly fortunate because first Singapore is where we are located and our main source of engineering is We're fighting here in Singapore. I think the government has very good control system to allow business to continue as much as possible. Right. So I think in Singapore context, we were very well managed in terms of COVID. Now coming to our flagship plant in Indonesia in an island of Batam. Again, Batam was not actually being badly affected despite we have seen a lot of news about Southeast Asia country being And the very reason is because Bassam is an island, right? When you have an island, the Indonesia way of isolating movement Actually how is PCI because our factory has been and the island itself is least affected I would say compared to the archipelago of Indonesia. So in this slide, we were very least affected by the COVID in Indonesia. So as a combination of all the geographical side we As Singapore, China as well as Indonesia, I would say that our operation has been almost up and running throughout the last 15 months Since COVID started in January last year, the uptime has been more than 95% to 98% uptime. In terms of our run rate currently, our capacity occupation is also at about 75%. So we are doing Good, if not even well so far, right? Thanks for all the color. Appreciate it. No problem. Your next question comes from Daniel Chan with TD Securities. Hi, good morning. Some of these end markets like the smart home seem to have a bit of a consumer angle to it, which Celestica exited a long time ago. Just Wondering if you're thinking about exiting any of these end markets and reallocating resources to maybe some of the other stickier markets. Sure. I think I can give some color. It is true that when you talk about this smart home everything, it is very good to us consumer. In fact, in PCI, we are not really Working or targeting all in this consumer range smart technology or digitization. We are very much So I don't think we are in, so there's No exit point to talk to this card, but we are very much into the infrastructure and we expect to see a lot more growth in the infrastructure space in terms of smart application. Dan, the only thing I maybe would add to that, this may be easier, Is that the areas that PCI is participating in though, we still find to be attractive. And so there's not really a reason that we feel we need to disengage. They're either very niche markets with very limited competition or there's a high level of And because of that, it actually leads to attractive margins. And so we believe that the Business that may fall into industry that we traditionally would not have targeted is actually quite sticky business for PCI, and we believe it's a good foundation. Okay, that's helpful. Thanks. The EBITDA margins are significantly higher than any other Public peers that we're looking at, including some of the Tier 2 peers that were mentioned, any color on how you're able to achieve that What kind of margin and is it a result of program mix or operational efficiency? Yale, maybe you can start off and then I will round it out. Sure. Thank you, Madhiv. So on that part, I think What we are able to always do in terms of perform in terms of margin is primarily because of our 2 aspects. One is actually on our engineering expertise like I mentioned because our design is very specialized. So typically in those Space, you tend to command a little bit higher margin than the other generic design environment. So I think this is the first aspect. Now the other aspect is also from the operation front because we are specialized in the type of products we do, like I mentioned, IoT wireless. So in terms of operation efficiency, in terms of supply chain factory operation, we are very geared and skilled To that front, so I think that also gives some operating efficiency, please respect to a generic production or manufacturing environment. So I think all these 2 adds up To a higher margin space that we can continue to command. Yes. And Dan, I'll just add to that, which is, look, PCI is a very Strong business for all the reasons we've talked about and they've been able to have a strong margin profile. What's interesting is that PCI's margins though are not materially higher Then our ATS business from a gross margin perspective. We did have a slide in the deck, which was showing that ATS is running at around 9.6% gross margin. As we continue to grow that business and the SG and A becomes a smaller portion of it, you'll see that drop to the bottom line. But when we add in PCI, it's about 60 basis points of accretion. And what we believe is that this is really an underpinning of our strategy, which is targeting markets with high barriers to entry That have a lot of deep engineering content embedded in them because they do allow for richer margins. And so as we continue to grow ATS, We're working to maintain the strong margin profile going forward. It's not just a current situation. Okay, thanks. And then last one for me. Good to see that the largest factory is in Indonesia, which I think diversifies your Asia footprint. Will you be repurposing some of these factories for your current businesses, especially as hyperscale customers look for more capacity outside of China? That's certainly an option in terms of what we would look to do to expand on some of the facilities that PCI has. Right now, we see potentially the need to add more capacity In Asia, potentially to need to add more capacity in the Americas. But as we progress on our strategic Plan and as business continues to grow, we'll certainly evaluate those options. Great. Thank you. Your next question comes from the line of Jim Suva with Citigroup. Thank you. You mentioned in your remarks in the Q and A that you're very strong on the PCI with Antenna and Fleet Management and such. So, we're typically used to companies like Amphenol, TE Connectivity and Sensata in that area. Are they actually your Customers or are they competitors or is it just completely different product solutions that you're doing? Hi, Jim. Thanks for the question. I think they are typically quite in a different segment than what we are in currently. So I would say not directly head on competitor because they are in a slightly different field and different target market types. Okay. Thank you. And then for Rob, and maybe the answer is rounding difference, but if PCI had, Say $325,000,000 of sales this year and you're increasing your sales outlook next year $300,000,000 And we would assume Based upon the presentation that PCI is growing, shouldn't it be kind of more than $300,000,000 to your increased outlook for next year or is it just rounding differences and there's nothing to read into there? Yes. Hey, Jim. No, nothing to read in there. It's rounding. So we had guided and Spandie, by the way, not Ross' voice. We did $6,000,000,000 as our outlook for 2022 just about a month or 2 ago. What we wanted to share was that we continue to remain confident in that outlook that we had provided and we're adding on PCI to that. And yes, we do expect PCI to be driving That concludes the question and answer portion of today's call. At this time, I'll turn the conference over to Rob Maionis, Chief Executive Officer for any closing remarks. Thank you, Erica, and thank you all for joining this morning. Celestica is stronger than it's ever been both operationally and financially. And the acquisition of PCI built upon the strong foundation We have built and represents the next step in our multiyear strategic transformation. We're all looking forward to working closely with EL and the entire PCI team. We also look forward to updating you on our progress next month. Thank you again all for joining and we look forward to talking to you soon. Thank you for participating. You may disconnect at this time.