Investor Update

Jun 3, 2021

Good day, and thank you for standing by. Welcome to the Celestica Capital Equipment Roundtable Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Then one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Craig Ulberg, Vice President of Investor Relations and Corporate Development. Please go ahead. Thank you for joining us for a discussion regarding our Capital Equipment business. On the call today are Rob Mionis, President and Chief Executive Officer Mandeep Chawla, Chief Financial listen only mode. As a reminder, during this call, we will make forward looking statements within the meanings of the U. S. Private to the Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including, without limitation, statements related to anticipated market trends as well as our strategies, targets, expectations and anticipated operating results. Such forward looking statements are based on management's to current expectations, forecasts and assumptions, which are subject to risks, uncertainties and other factors that could cause actual outcomes and results listen only mode. To differ materially from conclusions, forecasts or projections expressed in such statements, including without limitation, listen only mode. We will refer to the presentation materials accompanying this discussion available on our website, www.celestica.com, under the Investor Relations tab. Our most recent management's discussion and analysis of financial conditions and results of operations, including the cautionary note regarding on forward looking statements therein and our most recent annual report on 20 F and other public filings, which can be accessed at sec.gov on and sedar.com. On this call, we will also discuss industry expectations and projections with respect to various sectors as well as anticipated display manufacturing growth. These expectations and projections are based on and mode. To the formalities and limitations pertaining to forward looking statements based on or attributable to such external reports and publications. We assume no obligation to update any forward looking statement except as required by law. In addition, during this call, we will refer to our to the Q2 2021 non IFRS operating margin and adjusted EPS. These non IFRS Financial measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies that use IFRS or who report under U. S. GAAP and use non GAAP financial measures to describe similar operating metrics. And listen and the information is not available without unreasonable effort. We are also unable to address the probable significance of the unavailable information. Forward looking non IFRS financial measures may vary materially from the corresponding IFRS financial measures. Unless otherwise specified, all references to dollars on this call are to U. S. Dollars and per share information is based on diluted shares outstanding. Listen only mode. During this call, we do not intend to, nor in our view will we, disclose any material non public information. Mode. Let me now turn the call over to Mandeep. Thanks, Craig. Good afternoon, everyone, and thank you for joining us on today's capital equipment roundtable discussion. Before we pass the call over to Robbie Gregg to provide a deep guide into our capital equipment business, I wanted to address some recent developments and note that we have reaffirmed our Q2 2021 guidance. As discussed in our Q1 2021 results conference call, the supply environment is currently constrained, only mode, resulting in extended lead times for most electronic components. We continue to work very closely with our customers and suppliers only mode by using advanced planning tools and effective resource management practices, largely mitigating the impact thus far on our business. I want to highlight a recent development in Malaysia. The decision by the Malaysian government to lock down non essential public and private workforces is an important step to curb the recent rise in the COVID-nineteen cases in that region. The Malaysian authorities consider Celestica's workforce to be essential and therefore, our Malaysian facilities continue to operate during the lockdown, albeit at a reduced capacity. While our facilities in Malaysia are important to our operations, listen only mode. However, the situation is fluid and we will continue to evaluate and respond as circumstances evolve. Listen only mode. As stated in our May 26 press release, we are reaffirming our Q2 2021 guidance, which we provided during our Q1 earnings call. We continue to expect our revenue to be within the range of $1,325,000,000 to $1,425,000,000 As a reminder, For our non Cisco portfolio, achievement of the midpoint of our revenue guidance range would represent revenue growth of 3% year over year. We also continue to expect 2nd quarter non IFRS adjusted earnings per share to range between $0.21 to $0.27 At the midpoint of our revenue and adjusted EPS guidance ranges, non IFRS operating margin would be approximately 3.5%. Listen only mode. This would represent the 6th consecutive quarter of year to year margin expansion. I would now like to turn the call over to Rob, only. We will open up the discussion on our capital equipment business. Rob, over to you. Thank you, Mandeep. While the semiconductor space has been the subject of much attention from the investment community in recent quarters. Here at Celestica, we have spent decades investing in the depth and breadth of our service offerings within our capital equipment business. As one of the largest capital equipment manufacturers in the industry, we believe listen only mode. At this is the right time to highlight the unique advantages and capabilities of our Capital Equipment business. On. Capital Equipment is an instrumental part of our overall strategy and key enabler for our ATS segment to achieve long term segment revenue growth of 10% and target segment margins of 5% to 6%. Capital equipment revenue is expected to exceed of $700,000,000 this year, a record for the business, growing over 30% compared to 2020 and its margins operate at the high end of our ATS segment target margin range. Recent semiconductor shortages highlight and important set of structural factors supporting the strong growth and demand we are experiencing within the capital equipment space, and Celestica is ready to capitalize on these opportunities. Our market leadership position, both upon leading edge vertical capabilities and the global manufacturing footprint all reflect the level of investment and strategic focus our company has dedicated to this business. Only mode. We believe that there is an opportunity for us to unlock significant shareholder value from our capital equipment business. And at the end of today's discussion, we hope that you have a better understanding of the differentiated nature of our offering. We have created a model that enables us to provide greater value than traditional EMS players in this market. We do not believe our business model is fully understood by the market and as such, the more favorable financial profile and attractive growth prospects of the business or not fully reflected in our valuation. I would like to thank all of you for joining us today. And I would now like to turn the call over to Greg Marvell, Vice President of to capital equipment. Greg, over to you. Thanks, Rob. As Rob stated, we believe that Celestica's capital equipment business offers an incredible opportunity on our years of investment and the secular trends that are driving fundamental shifts in the market. We spent the last decade building world class capabilities, on. We are now in the line of our presentation. We are now in the line of our presentation. We are now in the on strategic acquisitions. The capital equipment market is in the early stages of an expected multi year stretch of cyclical strength. On. In the last downturn, we optimized our cost structure while expanding capabilities and did not sacrifice capacity, quality or on time performance. These operational improvements in combination with very strong bookings have resulted in material increase in our market share over the last few years. And are starting to reap the benefits as growth returns to the market. In addition, our differentiated model is leading to continued new program wins with our customers. Only mode. As a result, Celestica's revenue growth in the space is anticipated to outpace the level of market growth expected by the industry this year. Listen only mode. There are a number of macro drivers that underpin the current market dynamics in the semiconductor and display space. In Wafer Fab Equipment, we're experiencing very strong underlying demand as highlighted by the well publicized shortage of semiconductors. The macro trends of continued digitization of the economy and increased connectivity are supporting growth and demand for chips, on a multi $1,000,000,000 addressable market such as the Internet of Things, 5 gs services and connectivity trends within the automotive sector all projected to grow considerably over the next half decade or more. Other underlying dynamics, including remote work from home and learn from home trends, which have accelerated as a result of the COVID pandemic and spending growth in markets such as cloud computing, on. Gaming and artificial intelligence are expected to bolster the demand for semiconductor for several years to come. Listen only mode. These end markets are expected to sustain double digit annual growth rates into the latter part of this decade, providing secular tailwinds for chip demand, on. Naturally, this bullish outlook for growth in end markets that require semiconductor components on. Chip manufacturers have announced plans to increase on capital spending substantially over the next several years to support higher levels of production capacity. As a result, analysts estimate that the wafer fab equipment spending is expected to reach $86,000,000,000 globally, a more than 43% increase compared to an already strong 2020 year on. We're spending totaled $60,000,000,000 globally. In addition to broader supply chain shortages due to increased demand, Advancements in chip manufacturing methods are also driving increased spending on wafer fab equipment, such as the proliferation of extreme on Ultravia Lithography Systems, for which spending is expected more than double by 2025. In the memory market, fundamentals remain healthy. We're seeing NAND inventories being depleted with NAND manufacturers beginning to see pricing stability and even some recovery in pricing in recent quarters. While recent quarters have seen a cyclical trough in demand for display of capital equipment, The outlook is encouraging. We expect that spending will resume supported by a number of OLED technology shifts and key tailwinds propelled by mobile, on TV and IT application advancements. The display market is expected to experience considerable growth over the mode supported by increased commercial adoption, growth in popularity of large format panels and next generation panels and the Internet of Things. As previously mentioned, we made significant investments in our capital equipment business over the last decade. I would like to take some time to talk about those investments on how they were instrumental in developing our key capabilities and value proposition for our customers. While we find ourselves in a great position to capitalize on today's tailwinds, This was a result of long term sustained focus on making the necessary investments in our NPI, geographic footprint, on vertical capabilities and supply chain development. Celestica first entered the capital equipment business in 2011 with our acquisition of Brooks Automation's Extended Factory Business. This acquisition provided us with a foothold into the capital equipment markets, on the call to the operator and the operator to discuss the financial results. The following year, We acquired Fremont, California based D and H Manufacturing Company. This acquisition was a key investment towards supporting our vertical integration on our capital equipment business with our Johor Malaysia facility expansion. With this investment, we significantly bolstered our low cost, high volume manufacturing capability, strategically located in close proximity to some of our key customers' factory sites. Listen only mode. After 5 more years of consecutive annual revenue growth in our capital equipment business, in 2018, Celestia acquired Impact Holdings. Listen only mode. This acquisition was important on numerous fronts. It helped Celestica gain its strong foothold in the display market, and expanded our strategic geographic footprint to serve key OEM customers and their end customers with facilities in Northern California and South Korea. Because of the Impac acquisition, we have also received new bookings for our semi business from existing customers. Celestia's capital equipment offering consists of unique services and capabilities relative to our traditional EMS peers. As I highlight some of those key differentiators, I hope to convey why we believe that our capital Our business is growing due to early involvement in NPI programs on the flawless launch to our volume manufacturing sites, supporting our OEM customers' diverse and evolving needs, the competitiveness of our offering centers on meeting our customers' critical needs for faster time to market, continuous innovation, integrated solutions And increasingly, the flexibility and responsiveness to accommodate rapid increases in demand. Listen only mode. We are able to accomplish this through a mix of unmatched design in MPI solutions in wafer fab equipment and display, on deep expertise developing supply chain capacity and a strategic global geographic network to provide timely and comprehensive services to our to key OEM customers around the world. This set of capabilities, which is unique amongst our peers, places Celestica in a leadership position with the capital equipment market. This evolution has changed our competitive landscape as our differentiated model enables us to provide our customers with additional value and listen. Our global network consists of 6 leading edge capital equipment centers of excellence across South Korea, on. Malaysia and the Western United States. Our facilities are located in close proximity to key OEM customers. In the U. S, We are located close to our customers to support local engineering NPI programs, which are mostly transitioned to our Asia locations and embedded relationships with our teams. This allows us to deliver our customers a far more comprehensive suite of solutions beyond simple low cost, on high volume manufacturing, which remains a value proposition of some of our competitors in the capital equipment market. Celestica has a wide array of service offerings within our 3 key capital equipment submarkets, semi, display and adjacent markets. The semi end market remains our largest submarket. On. Our business works for the majority of the leading semiconductor wafer fab equipment OEMs in the industry, and we remain a top solutions provider, on. Leveraging our supply chain, engineering expertise and specialized vertical capabilities to deliver solutions with speed to market and at a competitive cost. Only mode. Our solutions include U. S.-based engineering NPI team, which works with customers to finalize their designs as well as prepare the products to move our volume manufacturing sites, leveraging our high level assembly and vertical capabilities. In addition, we've invested significantly in the development of established supply base in regions we serve enabling increased capacity for our customers. Our key capabilities in the display market are bringing us to further opportunities enabling the 2018 acquisition of Intact Holdings and the organic investments made in the years that have followed. The size and complexity of display equipment requires highly dedicated engineering expertise and specialized manufacturing assets. Display equipment is exceptionally large and complex, and we are able to design, manufacture and qualify a majority of the products on. Small house, Miracay has over 50 trailer trucks to deliver one system, so proximity to end customers is important. Given that 2019 2020 were challenging years in the display capital equipment markets, our investment impact yet to realize its full potential. However, we believe that the fundamentals of the acquisition still hold and positions us listen only mode to benefit from the reemerging growth in the market. In addition, we're leveraging some key vertical capabilities brought to us by the acquisition, which include distribution subsystems and machine parts cleaning, which are driving future growth in these areas for both the display and semi businesses. Finally, I want to touch on some of our exciting adjacent markets where we see meaningful opportunities to leverage our core capabilities to expand access to other markets, Further diversifying our capital equipment portfolio, we are focusing our efforts in particular on categories with strategically advantageous characteristics, Some of the areas where we have strong proof points such as robotics, automated warehouse systems, synthetic diamond manufacturing, automated or smart vending and other commercial and service equipment require the same capabilities and expertise as our core semi and display businesses. These businesses constitute a small but growing portion of our capital equipment portfolio, and we see them increasing as a percentage of our business in the years to come. Listen only mode. In closing, we have highlighted the significant investments and acquisitions we have made over the past decade, and we have worked to build an industry leading offering in the capital equipment mode. We feel that our investments have placed us in a very strong competitive position with the ability to deliver unparalleled value to our OEM customers across the breadth of markets and throughout the value chain. This concludes the presentation portion of our call. I would like to thank all of you for joining us listen only mode today to learn more about our Capital Equipment business. I would like to now turn the call over to the operator for Q and A with myself, Rob and listen We will pause for just a moment to compile the Q and A roster. Your first question comes from the line of Ruplu Bhattacharya from Bank of America, your line is open. Hi, thank you for taking my questions. And Greg, thanks for all the details. Appreciate it. Mode. Maybe my first question, I wanted to focus on the semi cap part of the capital equipment business. Can you help us size how much of the revenue is from lithography versus process control versus deposition etch equipment? Maybe not in dollar terms, but just in terms of the relative size of your business in these three categories. And where does Celestica have competitive advantage. I mean, is there one aspect that is more favorable? And if you can just talk about the Yes, sure. In terms of on. We really provide equipment for all aspects of the semi business. We work with a majority of the major customers like icopi materials, Lam, ASML. So we touch all the process technologies. In terms of the wavefab equipment business itself, The equipment is very sophisticated, as you know. You can have an average price between $10,000,000 $250,000,000 right? If it's lithography, it's the higher end. But the modules that we support require stringent specifications, such as tolerances. And just obviously, a lot of the equipment that we process and provide Actually, processes wafer, line widths that are less than 7 nanometers. And so, Incredible requirements for both structure and the automation integration. Also contamination control, there can be no particles in these systems. So when we design and manufacture, Yes. They have very specialized factories to build in clean areas. And then also all your supply chain needs to meet specifications in terms of outgassing and coding. And then the industry is copy exact. So when we do design and build with our model, We're able to build that product for quite some time. So we've got 25 years history in this area, long term relationships. And then the model itself Obviously, we support design manufacturing. We have key verticals. Our supply chain is so our verticals, Every item that we manufacture, we have a vertical. So we've learned a lot about the manufacturing techniques, enable us to take costs out of the product. And then our supply chain, we have developed key suppliers When we develop them ourselves, we have a large network of supplier development engineers that develop these suppliers in regions close to our factories. So So it enables faster time to market for us. As I mentioned, it serves as an industry leading pipeline for our new programs because customers are coming to us with this differentiated model and then the margins are better than traditional EMS. Got it. No, that's helpful. Thanks for all the details on that. Maybe for my follow-up, I'll ask you a question on the other side of the business, which is the display part. In terms of your business, are you more tied towards smartphones or TVs? And I think Rob had mentioned that this year, the whole capital equipment business is going to be about 700,000,000 I'm assuming most of that is semi cap, not display. But in the long term in steady state, Do you think that the display segment can also get to like a double digit percent of your overall revenue? And just in steady state, How do you see the mix of revenue between semi capped and display? Thanks again for all the details. Yes, no problem. I mean, we serve in applications, we serve Mobile, TV and IT, all together. In terms of our business, semiconductor Conductors are always going to be a high percentage of the business. We are diversifying into display as well as adjacent markets. Those will grow, But, Sami will always be, the largest portion of our business. Okay. Thank you so much. Your next question comes from the line of Jim Suva from Citigroup. Your line is open. Listen. Thank you. And first of all, this was very informative and insightful. So thank you for your time and effort mode for this. You've mentioned in your prepared comments about lead times. Can you help us understand what is on typically normal lead times in this business because I assume it's quite longer than Consumer goods or other things like that given the complexity and uniqueness of it. So what's kind of normal? And then you mentioned you're seeing What do you mean by extended? Can you quantify it? Is it like an extra month or quarter or something like that? Thank you. Yes, sure. So with our semi business lead times are typically in the 6 week range. But recently with COVID concerns, that's changed by about a month at this point. And then the display business is a little bit longer lead times, it's 10 to 12 weeks, haven't experienced any adjustments in those lead times at this point for that product line. Great. Thank you so much for the insights and it's greatly appreciated. Your next question comes from the line of Thanos Moskopoulos from BMO Capital. Your line is open. Hi. Given the growth in the segment and the future growth you're anticipating, can you speak to how you're able to scale up the capacity? Does that scale up pretty linearly? Are there any points at which you might have to contemplate more significant investments? And what's your current utilization looking like? If you can comment on that. Thanks. Yes, sure. So, right now, One thing that has differentiated us is that we have our own vertical capabilities that we've invested in, machining, on the call, cables, power, etcetera. And we've also developed suppliers. So when we exceed our capacity, we've developed them to leverage their capabilities that we've developed with them. And so we've added a great deal of additional capacity in terms of supply chain. And then our sites, we are expanding largely with clean rooms and new space. And right now, we're sizing our business to accommodate not only all the market share gain that we're driving, but also anticipating the market growing as we've stated and shown in the Gartner graph that we provided to you. Okay, great. And then in terms of the sourcing dynamic, are these typically, given the complexities, is it often sole source Yes, it's really a combination. In some cases, we helped design build the platform and then we transitioned from our MPI team to our volume manufacturing sites. So a lot of times that single source. There are some programs where the customer just needs to have business continuity requirements and needs the product to be built in different regions of the world. So they will outsource a portion of that share to someone else. But we always right now, we have the highest percentage of share for all of our customers. Great. I'll pass the line. Thank you. Your next question comes from the line of Robert Young from Canaccord. Your line is open. Hi. The semi space, as I understand it, is highly cyclical. And so I was curious, I mean, despite the fact that you seem to be at the front end of a positive part of the cycle. I mean, as you look forward, like are there any strategies that you have to smooth that out in the future? Are some of these adjacencies on strategies to do that. If you're looking out a couple of years, are we going to see another downturn in this segment of your business. Yes. So I'll start by answering by saying The last downturn was 2019 and since then the market's been growing. And as I described in the presentation, growth drivers such as 5 gs, Internet of Things, artificial intelligence are driving chip demand up for the foreseeable future. So we feel that the future is very strong. There's one item. The second is we're growing market share tremendously because of this model that we have. And if there's a year or maybe the business comes down slightly, We can adjust with this market share gain. And then you're correct, we are diversifying the business. That's why we wanted to get into display. It has a bit different cycle than semi. And then the adjacent markets, we're investing in this area. As I described earlier, we have proof points there, robotic warehouse systems and automated smart vending. These are growing markets. They require very stringent manufacturing just like semi and display does. And so we're investing. We just hired, an industry automation expert to help us drive the strategy and growth of that particular submarket and he's on Several committees within the U. S, but, we're investing and we're investing in engineers to grow in that area. It's a small part of the business now, The margin structure between the two business, the display and semi cap. I think you said semi cap was at the high end of on your 5% to 6% range for ATS. And would display sounds as though it's a business that would be at even higher than that given it's to these large complex systems. Maybe we could give some more color around that. Hey, Rob. It's Mandeep here. Yes, you heard correctly. I mean, the business is performing very well right now in aggregate capital equipment. So with the semiconductor business continuing to show strength and with the display industry, frankly, still not at peak demand levels, We are able to operate at the high end of the target margin range 5% to 6%. We are seeing that there's still an opportunity on the display side. So that actually goes to your previous question a little bit as well, where we still do have some demand drivers in front of a little bit as well, where we still do have some demand drivers in front of us. And we believe that when the semi business and the display business are both at maximum strength. The business in combination can be above the 6% target margin range. So we're pleased with the margin strength right now, but with some more display concentration, we do have the ability to expand margins further. Okay. Thanks. Thanks, Oliver. Your next question comes from the line of call. Steep from Scotia Capital. Your line is open. Great. Thanks for doing this. Maybe two questions. We'll do the easy one first. Just in terms of just helping us actually understand the dynamics of core business. Could you talk to how well you have bookings visibility on the business and if there's any differentiation between semi and display? And then I've got one follow-up for whoever wants to. Yes, sure. So right now in terms of bookings visibility, In terms of just pure orders, we have in semi, we have a forecast slot plan for 9 months that it's rolling every month and we reviewed it with our customers. And then for display, it's 6 months and we do the same. And in terms of just new business, we've got a lot of new NPI projects that are coming to us because customers want to leverage this model. As we work on a new project, define which projects we're going to prioritize and go after. It really takes about a year and a half to take a new program to book it and move it to volume. Perfect. And that's a bit the same for both segments, Greg? Yes. Yes. Okay, fantastic. That helps give context. Last one is this. You're investing in the business. It looks like obviously returns on capital in this area of the business presumably are higher than other areas. What would be the gating factor to doing either a transformational or a bigger investment to further accelerate this part of the business. Hi, this is Rob. I'll take that one. In terms of the broad company and The exposure that capital has within all of ATS, within all of Celestica. We're happy with the level of concentration we are that we have with capital equipment. So further investments from an inorganic perspective. It's probably not something we would be interested in doing. However, we are always interested in high ROI, on high return organic investments to further strengthen our capabilities and further keep ourselves mode. Great. Sorry, just one clarification, I'll sneak in here on that, Rob. Just on you've talked about the adjacencies, should we not think that you wouldn't look to do some type of an inorganic deal That would maybe help push the boundary of capital out if Greg and the team and Andy and the team could find something that fit or no? Never say never, but at this stage of the game, that type of acquisition would probably be niche or tuck in and would be capability based. When we recently took a look at the market in terms of expanding on some of the adjacencies that Greg mentioned. We made the decision that it would make more sense for us organically build it based on the proof points that we have been able to establish for us to go out and buy it. But those types of decisions are things that we Your next question comes from the line of Paul Treiber from RBC Capital Markets, your line is open. Thanks so much. Good afternoon. This is really helpful. Just trying to understand the TAM, the total addressable market in both semi and display a bit better relative to what you're doing right now. Can you speak to how much that TAM do you currently have the capability of addressing or are you currently in And then when you look at that sort of remaining TAM, both within semi and display, how what sort of the path organically It sounds organically to try to address the TAM outside of what you're currently doing. Yes, sure. So The TAM IV outsourcing for both markets is typically 30% of the overall market. So, if we're talking about a $75,000,000,000 market for 2021, it's in the 30% range and very similar for display. So obviously, there's a lot of outsourcing that's occurring. Our model is really differentiating us to go after the key platforms Since 2019, 41% of our current revenue is from new market share is from new wins or market share gains. And so we see that trend occurring going forward. And obviously, we're setting ourselves up for the capacity to meet that type of growth going forward as well as this market, the semi market as I explained earlier is going to grow substantially based on what the Gartner information we showed you. Thanks. That's really helpful. Just on the point about market share gains and new wins, I imagine the vast majority of And generally speaking, how they tend to stock up against competitors? Yes. So That's a great question. As I stated in our presentation, we really have set up a differentiated model, particularly for high level assembly modules, which is the fastest outgrowing area, atmospheric front end system vacuum systems. The NPI capability we've set up, the verticals in the supply chain Our competitors do not have that level of service, in particular, in those three areas. So it's leading additional share for us. Customers are going to us because we've got 25 year history with them. We've been performing, continuing to grow with them. And our sites are located in the right geographic areas, where their volume manufacturing So, it's been a great model. It's differentiated us. I would also add here that Our competitors are largely include subsystem companies like, like, I'll give you examples, UCT and Ichor, and not necessarily a build to print, traditional EMS company. So customers are valuing on our solution and we're driving higher margins and we're providing them the capacity they need at the right cost points that they require. Thank you. That's helpful. There are no further questions. I now turn the call back to Rob Mionis for closing comments. Thank you. We hope that today's presentation has provided you with a better understanding of our capital equipment business on the differentiated nature of our offering. As I mentioned earlier, we're targeting to exceed $700,000,000 of revenue in 2021, That concludes today's conference call. You may now disconnect.