Earnings Call: Q1 2021

Apr 29, 2021

Good day and thank you for standing by. Welcome to the Celestica Q1 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer And as a reminder, today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Craig Oberg, Vice President of Investor Relations and Development. Please go ahead. Good morning, Thank you for joining us on Celestica's Q1 2021 earnings conference call. On the call today are Rob Mionis, President and Chief Executive Officer and Mandeep Chawla, Chief Financial Officer. As a reminder, during this call, we will make forward looking statements within the meanings of the U. S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. 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 as required by law. In addition, during this call, we will refer to various non IFRS measures, including operating earnings, Operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, Free cash flow, gross debt to non IFRS trailing 12 month adjusted EBITDA leverage ratio, adjusted net earnings, References to any of the foregoing measures during this call denote non IFRS measures, whether or not specifically designated as such. These non IFRS 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 measures to describe similar operating metrics. We refer you to today's press release and our Q1 2021 earnings presentation, which are available at selexa .com under the Investor Relations tab for more information about these and certain other non IFRS measures, including a reconciliation of historical non IFRS measures to the most directly comparable IFRS measures from our financial statements. Unless otherwise specified, all references to dollars on this call are to U. S. Dollars and per share information is based on diluted shares outstanding. Let me now turn the call over to Rob. Thank you, Craig. Good morning, everyone, and thank you for joining us on today's conference call. Celestica is off to a strong start in 2021, delivering solid first quarter results. Revenue and adjusted EPS were both above the midpoint of our guidance ranges. And I am pleased that our non IFRS operating margin is up 60 basis points on a year over year basis, reflecting the strength of our strategy and strong execution. Our portfolio transformation initiatives Continue to yield results and our core business is growing. Although revenue decreased 6% in Q1 2021 Compared to Q1 2020, the decrease was largely driven by a disengagement from Cisco, whose revenue accounted for 13% of our total Q1 twenty The revenue of the company's non fiscal business grew 7% year over year. Furthermore, We executed the transition seamlessly and we were able to meet our revenue and mix backfill objectives. Within our ATS segment, we experienced slightly better than expected revenue results due to strong growth in HealthTech and Capital Equipment. We also reported our 4th consecutive quarter of sequential margin expansion and continue to target being back in our 5% to 6% target margin range by the end of the year. Within CCS, after having successfully concluded our Cisco disengagement in the Q4 of 2020, We are focused on growth. While CCS revenue in the Q1 was down on a year over year basis, primarily because of the Cisco disengagement, Our remaining CCS portfolio grew by 16% year over year. The CCS segment continues to perform well With our year over year improvement in segment margin for the 5th consecutive quarter and once again operating above our 2% to 3% target range. Our hardware platform solutions or HPS business previously referred to as our GDM business remains an engine for growth within our CCS segment. HPS generated $200,000,000 of revenue in the Q1, A 46% increase on a year to year basis. We continue to expect our HPS business to be a catalyst for both CCS revenue growth and segment margin strength. Last quarter, we also highlighted that we refer to revenue from our HPS business and ATS segment as Lifecycle Solutions. It is our view that the businesses which compromise our Lifecycle Solutions portfolio Sure. Several key characteristics that reflect the focus of our commercial strategy. We consider Lifecycle Solutions revenue to be diversified revenue and Our strategy continues to be to expand this portfolio as a percent of the total company, enabling long term profitable growth. This strategy includes pursuing markets with high barriers to entry, robust long term growth prospects, Attractive margins and the opportunity to offer our customers higher value added solutions throughout the product lifecycle. We are pleased that our Lifecycle Solutions portfolio grew in the Q1, both sequentially and on a year over year basis. I will offer some further color on our end markets and the overall business outlook shortly. However, first, I would like to turn the call over to Mandeep provide you with some financial details on the Q1 as well as our Q2 guidance. Thank you, Rob, and good morning, everyone. 1st quarter 2021 revenue came in at $1,230,000,000 slightly above the midpoint of our guidance range. Revenue decreased 6% year over year and 11% sequentially. Despite Q1 traditionally being a seasonally soft quarter from a volume perspective, We delivered non IFRS operating margin of 3.5 percent, exceeding the midpoint of our guidance range by 10 basis points, reflecting the benefits of our portfolio reshaping activities and improved mix across several businesses. Improved by 60 basis points, driven by a significant improvement in our ATS end market. Sequentially, non IFRS operating margin declined by 10 basis points, driven by lower volumes in CCS. This was partially offset by higher sequential ATS segment margin driven by higher volumes and favorable mix. Non IFRS adjusted earnings per share were $0.22 $0.01 above our guidance midpoint and an improvement of $0.06 year over year, while down $0.04 sequentially. 1st quarter IFRS earnings per share were $0.08 up $0.10 year over year and down $0.08 sequentially. Our ATS segment accounted for 43% of our consolidated revenue during the quarter, Our highest level of ATS concentration reported to date and up from 41% in the Q1 of last year. ATS revenue was down 3% compared to last year, ahead of our expectations of a mid single digit percentage year over year decline. Sequentially, ATS revenue was up 4%. The year over year revenue decline in ATS was driven by weakness in commercial aerospace and industrial, partially due to COVID-nineteen, largely offset by new program ramp in Healthtech and very strong demand growth in capital equipment. Sequential growth was driven by strength in capital equipment and Help Tech offsetting moderate headwinds in A and D and Industrial. Our CCS segment revenue was down 9% year over year, largely driven by the Cisco disengagement and partly offset by strong demand from service provider customers, including in our HPS business. Sequentially, CCS revenue was down 19%, driven by seasonality in our enterprise business as well as the Cisco disengagement. With the Cisco disengagement behind us, we are pleased with the growth in the remainder of our core CCS portfolio, whose revenue increased 16% year over year. Within our CCS segment, the communications end market represented 40% of our consolidated first Quarter revenue, up from 39% in the Q1 of last year. Communications revenue in the quarter was down 2% year over year As the declines resulting from the Cisco disengagement were largely offset by robust demand from service provider customers. Sequentially, communications revenue was down 16%, mainly driven by seasonality as well as the Cisco disengagement. Our enterprise end market represented 17% of consolidated revenue in the Q1, down from 20% in the same period last year. Enterprise revenue in the quarter was down 21% year over year and down 27% sequentially. The year over year and sequential declines were driven by program specific demand softness and seasonality. Our HPS business once again delivered strong growth in the Q1 with revenue up 46% year over year, led by higher demand from service provider customers. HPS accounted for 16% of our consolidated revenue, up from 10% a year ago and 15% in Q4 2020. Our top 10 customers represented 65% of revenue during the Q1, down 1% year over year and 2% sequentially. For the Q1, no customer represented 10% or more of our total revenue versus 1 customer in the Q1 of 2020 and 2 in the prior quarter. Turning to segment margins. Achieving a margin of 4.0%, the ATS segment achieved its 4th Consecutive quarter of sequential margin expansion, up 130 basis points year over year and up 10 basis points sequentially. The year over year improvements were driven by accretive new programs in Healthtech and Capital Equipment more than offsetting headwinds in our A and D business. CCS segment margins of 3.1% came above our target range of 2% to 3%, up 10 basis points year over year and down 30 basis points sequentially. Year over year margin improvement was primarily driven by favorable mix. The sequential margin decline was due to lower volumes due to seasonal demand dynamics, partly offset by favorable mix. Moving to additional financial metrics. IFRS net earnings for the quarter were $10,500,000 or $0.08 per share, compared to a net loss of $3,200,000 or $0.02 loss per share in the same quarter of last year and net earnings of $20,100,000 or $0.16 per share in the previous quarter. Adjusted gross margin of 8.6% was up 130 basis points compared to the same period last year and up 20 basis points sequentially, both on a lower base of volume. Year over year and sequential improvements were largely driven by of Lifecycle Solutions portfolio revenue, which is made up of our HPS and ATS businesses, which generate more favorable margins than our non HPS CCS Revenues. 1st quarter adjusted SG and A of $53,600,000 was up $3,700,000 versus a year ago, primarily due to higher functional spend and unfavorable foreign exchange impacts. Adjusted SG and A was down $2,900,000 sequentially. Non IFRS operating earnings were $43,300,000 up $5,200,000 from the same quarter last year and down $6,700,000 sequentially. Our non IFRS adjusted effective tax rate for the Q1 was 21% compared to 24% for the prior year period and 19% last quarter. For the Q1, adjusted net earnings were $27,800,000 compared to $20,700,000 for the prior year period and $33,300,000 last quarter. Non IFRS adjusted earnings per share of $0.22 were $0.01 above our guidance midpoint and up $0.06 year over year due to higher non IFRS operating earnings and lower interest expense. Sequentially, non IFRS adjusted earnings per share were down $0.04 mainly due to lower sequential non IFRS operating earnings. 1st quarter non IFRS adjusted ROIC of 10.8% was up 1.3% compared to the same quarter of last year and down 1.6% sequentially. Moving on to working capital. Our inventory at the end of the quarter was 1,150,000,000 dollars up $62,000,000 sequentially and up $81,000,000 compared to the prior year period, largely to support growth in our HPS business. Inventory turns were 4.0 in the 1st quarter, down from 4.4 turns last quarter and from 4.8 turns in the prior year period. Capital expenditures for the Q1 were $13,000,000 or approximately 1% of revenue. Non IFRS free cash flow was $20,900,000 in the Q1 compared to $53,800,000 for the same period last year and up from $18,500,000 in the prior quarter. We are pleased to have delivered positive non IFRS free cash flow for 9 straight quarters. Cash cycle days in the Q1 were 82 days, up 13 days year over year and up 9 days sequentially. Our cash cycle days are higher than normal, partially due to the lower level of revenue we experienced in the Q1. Our expectations are for cash cycle days to improve as we continue through 2021. In the Q1, we incurred $6,000,000 of restructuring charges to further adjust our cost base to align with changing demand levels, primarily in our A and D business. Moving on to some additional key metrics. Our cash balance at the end of the Q1 was $449,000,000 down $23,000,000 year over year and down $14,000,000 sequentially. Combined with our $450,000,000 revolver, which remains undrawn, We continue to have a very strong liquidity position of approximately $900,000,000 in available funds. We believe our liquidity is sufficient to meet our current business needs. During the quarter, we repaid $30,000,000 of our long term debt and ended the quarter with gross debt of $440,000,000 Achieving net cash of $9,000,000 This marks the first time we have achieved a positive net cash position since the Q3 of 2018. Our Q1 gross debt to non IFRS trailing 12 month adjusted EBITDA leverage ratio was 1.4 turns, An improvement of 0.2 turns sequentially and an improvement of 0.6 turns from the same quarter last year. We are pleased with the progress we have made to deleverage our balance sheet, which we have achieved as a result of strong non IFRS free cash flow generation and Disciplined Capital Management. At the end of 2021, we were compliant with all financial covenants under our credit agreement. Since announcing our NCIB program last November, we have repurchased approximately 600,000 shares at a cost of $5,300,000 for an average price of $8.35 per share. As we proceed through 2021, we will continue to take a balanced approach towards capital allocation. We are focused on generating $100,000,000 or more of free cash flow and utilizing this cash to primarily pay down debt to reduce our interest expense and maintain maximum financial flexibility. We will, however, also be opportunistic towards share buybacks under our existing NCIB program. Our long term capital allocation priorities remain unchanged. We are focused on generating consistent non IFRS free cash flow, Achieving our annual targets and returning 50% of that capital to shareholders with the other 50% to be reinvested in our business. Now turning to our guidance for the Q2 of 2021. We are projecting 2nd quarter revenue to be in the range of 1,325,000,000 to $1,425,000,000 At the midpoint of this range, revenue would be up 11% sequentially and down 8% year over year, including the impact of our disengagement from Cisco. For our non Cisco portfolio, achievement of the midpoint of our guidance range would represent revenue growth of 3% year over year. 2nd quarter non IFRS adjusted earnings per share are expected to range between 0.21 to $0.27 per share. At the midpoint of our revenue and adjusted EPS guidance ranges, Non IFRS operating margin would be approximately 3.5 percent, an increase of 10 basis points over the same period last year and flat sequentially. Non IFRS adjusted SG and A expense for the Q2 is expected to be in the range of $54,000,000 to $56,000,000 We anticipate our non IFRS adjusted effective tax rate to be approximately 21%, excluding any impacts from taxable foreign exchange or unanticipated tax settlements. Turning to our end market outlook for the Q2 of 2021. In our ATS end market, We anticipate revenue to be up in the mid teen percentage range year over year, driven by continued demand strength in our Capital Equipment and Healthtech Businesses and a return to growth in industrial, partly offset by continuing weakness in commercial aerospace as a result of COVID-nineteen. In CCS, we anticipate our communications end market revenue to be down in the low double digit percentage range year over year, driven by our disengagement from Cisco. The remainder of our communications portfolio is growing, driven by strength and demand from our service provider customers as well as our HPS business. In our enterprise end market, we anticipate revenue to decrease in the low 30s percent range year over year due to market demand softness and very strong performance in the same quarter last year. I'll now turn the call back over to Rob for additional color on our end markets and overall business outlook. Thank you, Mandeep. We are pleased with our company's continuing of our strategy, which reflects our team's work ethic and ability to navigate the unique challenges presented by the current business environment. We are off to a strong start with our Q1 results, which we believe position us for a successful 2021. We continue to navigate several challenges in the context of the current macro environment. The pipe constraints continue to impact most of our end markets, resulting in extended lead times for components. In the Q1, due to our advanced planning and proactive approach to securing necessary components and materials, We were able to limit the impact on our revenues to $12,000,000 While we have accounted for our best estimate of the potential impact component shortages in our 2nd quarter outlook, we are seeing further tightening of supply chains and market conditions are becoming more challenging. We continue to monitor the situation and are working closely with our suppliers and customers to mitigate the impact on our business. We expect these conditions will persist for the remainder of 2021. Despite the challenges from COVID-nineteen, We continue to operate at normal capacity levels across our network. We are seeing the number of COVID-nineteen cases rise again in certain regions, while many parts of the globe in the midst of a 3rd wave. While some jurisdictions such as Canada and Western Europe are responding with additional restrictions. Other jurisdictions are easing their restrictions. Our global operations team continues to work diligently implement the required health and safety protocols and the health and well-being of our employees and business partners remains our highest priority as we navigate through these dynamic times. Now turning to our segments. In ATS, we are very encouraged by the resiliency of our diversified businesses. And we reiterate that we are targeting 10% revenue growth in 2021 compared to 2020. We also remain focused on reentering our target segment margin range of 5% to 6% by the end of the year, despite the continued weakness in Commercial Aerospace. Our capital equipment business continues to exhibit very strong growth, primarily led by new wins and market share gains from our semi cap customers. The demand backdrop in the semiconductor space remains quite strong, supported by secular tailwinds. We expect our capital equipment business to remain robust in the Q2 and for the remainder of 2021. In our display business, as noted in our comments last quarter, we continue to anticipate growth towards the end of the year and into 2022. In industrial, demand has largely stabilized on a sequential basis. With the worst of the impacts of COVID-nineteen on our industrial business now behind us, We expect to return to year over year revenue growth in the Q2. In A and D, headwinds in the commercial aerospace market continue to pressure our results As operators have meaningfully pared back expenditures in the face of lower levels of commercial air traffic, we have taken the actions We believe to be necessary to adjust our cost structure to align with a slower level of demand. Looking ahead, while we expect the commercial aerospace market to remain depressed Throughout 2021, we are anticipating higher revenue in the second half of the year compared to the first half as new program wins ramp. In our Healthtech business, we continue to see strong growth both year to year and sequentially, supported by the ramping of a number of new program wins. We anticipate this strength to continue throughout 2021. Now turning to CCS. Having successfully completed the Cisco disengagement in Q4 of 2020, we continue to see the benefits of our portfolio reshaping initiatives, which have resulted in improved mix and higher year over year non IFRS operating margin despite operating on a lower base of revenue. Our CCS segment margin once again surpassed our target range of 2% to 3%, and we expect full year margins to be at the high end of the range or slightly higher. As noted, while revenues are lower on a year to year basis as a result of the Cisco disengagement, our non Cisco CCS business grew 16% in the Q1 compared to the prior period. We anticipate further growth for our non Cisco CCS portfolio in 2021 compared to 2020. Our hardware platform solutions business demonstrated another excellent quarter with year to year growth of 46% in the Q1 on the back of strong demand from service providers in our communications end market. This growth helps to offset some of the impact from our Cisco disengagement. HPS represented 16% of our total business in the Q1, up from 15% last quarter and 10% a year ago. Based on the orders we have received from our customers to date, We currently expect HPS to grow in the double digit percentage range in 2021, higher than the high single digit percentage growth range we indicated in January. In the communications end market, we expect demand to remain robust in our core portfolio of business in 2021, supported by the recent strength in demand from service providers. On a year to year basis, however, revenue growth will be pressured by the Cisco disengagement. In our enterprise end market, demand has been relatively soft in recent quarters and we expect these conditions to persist for the near to medium term. As previously discussed, our HPS revenue and ATS segment revenue together represent what we call Lifecycle Solutions. In the Q1, our Lifecycle Solutions portfolio grew 7% year to year and grew 1% sequentially. In Q1 2021, our Lifecycle Solutions revenue accounted for 59% of total revenues, up from 52% in Q4 of 2020. We continue to expect Lifecycle Solutions to account for a growing portion of our total consolidated revenues and act as a driver of non IFRS operating margin improvement. Currently, we also expect our Lifecycle Solutions portfolio to grow in the double digit percentage range in 2021 compared to a high single digit percentage range outlook in January. With 2021 off to a strong start, we remain as focused as ever on executing our strategy, which is diversifying our end markets, Delivering higher value solutions to our customers, expanding our lifecycle solutions capabilities and flawlessly performing for our customers, We believe this strategy will lead to sustainable revenue growth and expanding operating margins over the long term. I'd like to thank our employees for their incredible efforts and dedication to the company. Our global team's commitment, resiliency and adaptability during these challenging times is commendable. Our people are the key driver to our success and their performance instills on us great confidence That we will continue to deliver strong results and execute on our plan for the remainder of the year and beyond. We look forward to updating you on our progress over the coming quarters. With that, I would now like to turn the call over to the operator to begin our Q and A. Thank you, Your first question comes from the line of Robert Young with Canaccord. Hi, good morning. I'd like to start in the semiconductor space. I just wonder if you think about that business and the puts and takes around all of the chip shortage News that we're hearing today. I mean, I assume that that's more of a positive driver for your business given the potential for Capacity expansion in the semi capital equipment business relative to any shortages that chips might have driving your business. And maybe some comments here would be helpful. Yes, that's correct. As you've been reading, the semiconductor semi cap space has been quite strong for us And for the entire industry, we're expecting this year year over year growth and also sequential growth. And we also feel that we'll grow faster than the market this year because of the new vertical investments that we've been making in our semi cap space. With respect to the inverse of that, the takes, if you will, on the shortage side, I think we've managed it very well in Q1 as we highlighted in the Revenue that was gated by Material Shots was $12,000,000 which is frankly fairly low. We got ahead of We do think that's going to increase as time moves forward, but it's more about tempering the upside than constraining the output. So net net, I think it's a positive for us and we're looking forward to a very strong capital equipment this year And probably likely into next year and beyond based on the forecast that our customers are giving us. Okay. That's great color. The HPS growth that you saw, I'm curious about the broader drivers. When you see a bump in demand like that within the HPS segment, What's driving that exactly? Is that engineering work that's converting into a bigger manufacturing ramp? Or is that just An expansion of the demand in the products that you've built? Like it seems to me that like a quick jump in demand there would be Less likely than other parts of the business, but help me with that. Yes, good question. What we've seen in the HPS business, it's been a very robust and growing market and it's been really fueled for us by a broader adaption of our product set both within the data center and across a larger set of customers. So frankly, we're gaining market share. We do business with 8 of the 10 Service providers and then growing share with them and hyperscaler growth as a percent of total increase spend has been increasing. As a result of that, we've been growing not just with the market, but also faster than the market because we our product is being Used again by a broader set of customers and within the data center, we're finding new uses for our products based on the offering that we have. And then lastly, our operations team has just been doing a phenomenal job being able to meet the higher levels of output Based on the relationships we have with ecosystem partners and silicon providers as well. Okay, great. And then as that Cisco revenue, now as you're replacing it, is it the HPS business that you're using to backfill the capacity From Cisco? And then I'll pass on. Yes, exactly. And I would say largely so. Regarding the Cisco Transition, frankly, we couldn't have planned it any better. As I mentioned in the call, we've met all our backfill targets with a richer mix of programs, AKA Hardware Platform Solutions. In fact, it's a lot more aligned to our strategy and capabilities. And on top of that, we've had strong demand from our base business. And when we look at the utilization in Thailand where the Cisco business has performed, it's quite strong and it's driven by a solid mix of HPS products. Okay. Thanks for taking the questions. Thanks, Rob. Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Hi, good morning. Rob, with respect to the component shortages, is that impacting some segments more than others? Or is it just fairly across the board? It's impacting the segments that have higher growth rates than us. So the segments that Have higher growth rates, our HBS segment, Capital Equipment segment, a little bit industrial. Those are the segments that are it's impacting more. But again, I would count it as it's kind of tempering the upside versus constraining the base demand. It's a very strong demand environment in these segments Customers are trying to accelerate their demand and it's being paced by some of the component shortages. Now that being said, frankly, we're all over it. We have good order coverage with our suppliers and the teams are working very hard. Yes, maybe Dan, if I could expand on what Rob is mentioning, because of the advanced planning that We have been able to largely get ahead of the initial constraints. When Rob is talking about tempering the upside, the challenge right now is drop in orders. When customers want to secure product within the quarter, there's just not enough time to secure the material. So We factored it into our guidance, but it's really tempering maybe additional upside. Okay. And then you mentioned that the cash cycle days should improve, which I thought is an interesting dynamic given the shortages. Is that a function of your end market mix or what's Yes. So cash equivalents, the metric itself is just abnormally high in the Q1. What we're seeing is a function of the formula. It's a 2 point average and we have a lower level of revenue. And then just with Cisco coming out as well. But as we go through the year, the metric is going to get back more in line with what you would have historically expected from us. But even with the inventory Growth that we have been seeing or frankly the reduction that we have not yet seen, it is all factored into our outlook and we still feel are comfortable in being able to generate over $100,000,000 of cash even with the current supply chain environment. Great. Then finally, can you comment on the semi equipment margins and how they're tracking currently versus what you consider kind of your target margin for that second? Yes. So what I would say is that the semiconductor business itself is performing very well right now. So it is in line with our expectations and we believe that as there There is an opportunity still for some further margin expansion. On the Skuway side of the business, as we commented we're expecting the demand to start picking up towards the end of the year. And so there's an opportunity for the margins to improve in that business. And so overall, what I would say is that as capital equipment continues to grow, we do still believe that there's some opportunity for further margin expansion. Okay. Thanks guys. I'll pass the line. Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Hi. Thanks for taking the questions. Rob, the communications revenues came in better than expected. I think you had guided a decline of high single digits, But it was down only 2%. So can you just drill into the different end markets within communications, which one outperformed your expectations? And then on the enterprise side, I think revenues came in a little bit lower than what you had guided, But also you're guiding down 30% year on year. So if you can just kind of highlight some of the things going on in the enterprise side as well. Sure, Rupu. So on the comm side, the strength that we've seen was really in our networking business. We also saw some demand strength With existing programs, which is a mix of HPS and EMS, but broadly speaking, the Communications upside was driven by HBS. Again, it was offset by the fiscal exit and some demand dynamics. But Our non fiscal revenue was really driven by networking in our HPS business. On the enterprise side, what we've seen is Broad demand softness, market softness in HTV and compute and tougher comps. And we've had a number of ramping programs in 2020, where demand has normalized this year. And operator, there's some noise in the background. Maybe you could figure out if somebody needs to go on mute. Okay. Thanks for the details on that, Rob. Okay. And just to drill a little bit into the component shortages. I mean, which components are you seeing shortages on, I mean, specifically? And the inventory went up $60,000,000 sequentially. Was that some of that are you using the strength of your balance sheet to keep some of the raw materials on hand? And do you expect inventory to be up sequentially in the June quarter? Thank you, Paul. I'll take the first part And I'll pass the second part to Mehdi. So in terms of the shorts, right now, it's largely in the semiconductor side. Semiconductor lead times, By our measure have increased by 50% over the last 6 months, which is frankly outstanding. The wafer fabs Operating at max capacity, while negative on our shortages, a very strong positive on our semi cap business. But on the passive side, lead times are also starting to increase. It's been about a 20% increase in lead times in the passive over the last 6 months. And I do believe they will get more constrained as time moves on tantalum capacitors, MLCCs, resistors. So I do think that will get more constrained as we get further into the year as well. And over to Mandeep on the inventory. Your next question comes from the line of Paul Steep with Scotia Capital. One second, I think Mandeep was on mute. Let me ask one last one. Yes. Paul, let me take your question. Actually, just to wrap up your question on inventory, The inventory dollars are relatively flat on a year over year basis. Two dynamics happening. Number 1 is we are building inventory with for HPS because of the Growth that we're seeing, we are expecting HPS to grow sequentially as we go through the year. The other thing as well is that Because of the supply chain environment, we were able to work very closely with our customers to secure material and lined up to their orders. And one of the things you'll see is Deposits also increased quite a bit, so they're paying for some of that. In terms of performance as we go through the year, the turns are expected to improve. And so Q1 is expected to be the low point when it comes to inventory churn. Paul, I'll turn it over to you for questions. Thanks, Mandeep. Just a couple of quick ones. First one, maybe for Rob And a little bit higher level here. If you step back and maybe walk us through, can you highlight out Either in ATS or CCS, with the new programs you've been winning sort of consistently in some of the segments over the last year, year and a half, What's changed with customers? Is there anything meaningfully changing in terms of either your approach to the market in terms of its profitability profile or in terms of how customers are contracting and committing that we'd want to look at? Good question. On the ATS side, we've been investing in engineering capabilities across all our segments. And a big change in the margin profile of our ATS business Today and also moving forward is the dramatic increase in what we call engineering led engagements. So we're not just an EMS provider in our ATS segment. We're actually an engineering partner as well. So that's We're actually an engineering partner as well. So that's been a continuing shift in our strategy and our contracting processes. And similarly on the CCS side, we call that HPS, that's nothing new, if you will. We've always had a strong HPS business. And based on the Products that we've designed and some secular tailwinds that we've been seeing, HPS business has frankly just Just take it off and largely fueled by engineering capability and the solutions that we're providing to our customers. Hopefully that adjusts your question. Great. And then maybe the second one for Mandeep, the classic capital Just to check-in, I think last quarter you were very specific about the tangible book value and how you were approaching the buyback. Any change in view on how you're sort of looking at capital deployment now that you've gone net cash positive? And then I got one very fast Yes, of course, Paul. So we're continuing to be opportunistic. We're really pleased with the strength of the balance sheet. As we continue to generate free cash flow, our priority will be to continue to delever. Again, we paid down $30,000,000 this past quarter and we have an And it really serves us in 2 ways. One is, we are very focused on our EPS Expansion year over year. And so that is helping lower our interest expense. And then it just continues to give us a healthier and healthier balance sheet, which gives us High levels of flexibility to act where we need to act. When it comes to share buybacks, we will continue to be opportunistic on it. When the shares are trading at very low values, we will be in the market to buy. However, we aren't feeling that that's the first Priority. And so we watch it. We will utilize the program whenever we need to. But if but our first priority right now is Continue to look at delever. Got it. Last cleanup one for either of you. Just with the life cycle guidance going from double digit Versus single digit last quarter, what's the underlying assumption that has to be true to reach that guide? Or Maybe put another way, is all of what you need to hit those numbers already in hand today? Thanks. I'll pass the line. Yes. So Paul, it's of course a combination of the 2. So it is HPS and APS. So APS we are reiterating our growth And we're starting to see that as you can see in our guidance in the Q2 just with very strong performance across a number of segments. And then on the HPS side, we have increased our growth expectations to be double digit, which frankly means 10% or more. And so when you put the 2 together, it brings lifecycle On the HES side, I would say that the outlook for capital equipment It is strong at this point. And we do have new program ramps that are driving a lot of the growth in HealthTech as well as in Industrial. And then on the HPS side, similarly, we have firm outlooks from our customers. In some cases, we have firm POs. In other cases, we get POs as Come along, but I would say that the outlook for HPS is stronger today than it was even 3 months ago. Thanks. Your next question comes from the line of Paul Treiber with RBC Capital Markets. Thanks so much and good morning. Mitch, I was hoping you could speak to the linearity or the expected linearity of growth in HPS over the year. Is there any I mean, the 46% Q1 is quite strong and then the outlook for 10% or more for the remainder of the year, it does show deceleration. Like how should we think about it between Q2 and Q4? Yes. Hey, Paul. So we're really pleased with the growth that we're seeing right now in HPS. As you'll recall, the growth last year Really went into overdrive starting in the Q2. And so we are going to start to see some tougher comps. We wouldn't expect necessarily 40 percent growth in the next couple of quarters. That being said, what we are comfortable with at this point is that we would be seeing sequential growth. And So $200,000,000 in the Q1. We are expecting more than that in the Q2. But overall, just very good overall performance. And then when you look at it on a full year basis, But we do need to moderate expectations because we just had very tough comps when you go to Q2 and Q4 of last year. And just digging a bit more further into that like the underlying demand drivers remain intact. So ultimately, is it do you see sequential growth through the year and the demand in Pipeline on hyperscalers and others continue to build in that business? Yes. I mean, Rob touched on it a little bit, which is we're doing business right now with And the 8 that we're doing it with actually represent the vast majority of hyperscaler CapEx. And then when you look at the hyperscaler concentration in terms of total hardware Techerscalers are continuing to take more and more share of the overall market. And so we're participating in that upside with them. We are concentrated in only a couple of customers because of wins that have been happening in the business over the last Year to 2 years, there are a number of programs ramping. And so we do have a diverse set of product offerings that our customers are buying. And we also have a diverse set of Customer logos and of the growth that we are anticipating is with a lot of new program mix that are in the pipeline already. And I would also add, Paul, that in this segment, particularly because the demand strength is so Strong. Our growth is really going to be again tempered by or governed by our ability to get components. But given the nature of the demand, the design nature of the demand, I would also say that it's not perishable. So again, we're expecting good strong sequential growth throughout the year. We do have some tough comps, but good strong sequential growth. And because of the Strong demand environment will probably be more paced by component availability than anything else. Thanks. That's a good help. A good point. So shifting over to the Healthcare business, could you speak to the breadth of momentum in that business? I think the Canadian Venture Contracts ramped up, I think, last quarter. But how do you see outside of that bag contract in terms of the other opportunities and the breadth of momentum there? Good question. So HealthTech business continues to exhibit strong growth, very strong growth In Q1 on a year over year basis also sequentially. I would say about half the growth we're experiencing It's kind of COVID related demand in the areas of PPE, point of care, patient monitoring, imaging devices. And some of that growth that we're seeing in 1st half of the year will probably temper a bit in the back half of the year. But the other half of the growth we're seeing is really driven by new program wins and I would say they're Not directly related to COVID, they're in the areas of surgical instruments, medical hardware, patient monitoring. So when you Put those together, we're expecting a rather strong year from our Healthtech business all in those areas. And then just lastly for me, just on the A and D business, how do you balance between Profitability in light of lower utilization of demand in the near term versus trying to sustain Investments in that business, because I do think it's a long term growth opportunity. How do you sort of balance those 2 here? Yes, that is the question that we talk about. The answer is we're trying to grow where the in our A and D business where the markets are more favorable and that being in our defense business. So as we mentioned on the Paul, we are expecting some revenue growth in the back half of the year. It's majority in the defense space and it's majority driven by Some of the wins that we had last year that are starting to ramp in the back half of this year. We're also expecting some slight Early signs of recovery in the bizav market. That being said, we do have several sites in the network that are at critical mass and We're keeping them at that level, so we don't lose capability until the market does recover. But it has Dragging on our ATS segment. But again, despite that, our ATS segment seems to is definitely stronger on a margin Perspective was refueled by the other verticals we mentioned in the semi cap, healthtech, industrial. Your next question comes from the line of Todd Coupland with CIBC. Yes. Good morning, everyone. I wanted to ask about market conditions post the Cisco engagement. With that decision, did it have a noticeable impact on overall pricing in the market with respect Not only yourselves, but the overall market. Cisco has traditionally been very aggressive with their suppliers. But With you a major Tier 1 supplier pushing back, are you seeing a bit The power shift back to someone like yourself to drive better pricing. Is there a better tone in the market as a result of that decision? I think the in core EMS, so in a non commoditized space, I think pricing Usually, it's reflective of how utilized people's factories are. In some cases, where factory utilization is low, Some EMS players might make a decision to bring in lower margin work to keep utilization up and the inverse is true. So I think The pricing environment is a reflection of the demand environment. With the demand environment being generally robust across Most of EMS, I think pricing has been more disciplined. Again, our strategy is to shift away from The lower value add stuff into the higher value add stuff, so there's higher barriers to entry sticking relationships and the margins tend to be higher because of the higher value add. And that strategy I think has proven out for us and will continue to yield results for us. And post Cisco, are you happy with The CCS mix or do you anticipate you'll need to have a regular sort of Upgrading of the mix as you look forward over the next 2 or 3 years? Right now, we're very happy with The CCS mix market conditions always change. So it's we always take a look at it, but the mix within CCS It's very good. In the EMS business, it's in the higher value add areas and HPS business is growing nicely. And even in the EMS space, we're working with those customers to kind of move up the value chain and to introduce HPS Solutions into those customers as well. And then my last question is, you have the mixes that you have, You have excess capital on the balance sheet for growth. Are there any other verticals where You think you should expand either in ATS or CCS? Just talk about what might make sense over the next 2 or 3 years? Yes. I think that goes back to our potential M and A strategy. When we're thinking about capabilities, we always take a look at Now does it make sense for us to invest organically and build those capabilities or is there a shorter more accretive path to buy them? We usually default because of the risk factor to developing those capabilities in house and we've been making Investments, in many of the verticals within capital equipment, we've been working on vertical integration In areas such as well made, well paint and cleaning, within our Healthtech business, we've been adding engineering capability. With our Industrial business, we've been adding engineering and design capability as well. In terms of broadening spaces, we're always looking at it, but at the I don't think there's anything material to announce or to share with the community. Your next question comes from the line of Jim Suva with Citigroup Investment. Thank you so much for the details so far. It's been very useful. I have two questions and so you can ask them in any order you want. Can you give us a little bit of insights or updates on your cloud efforts? I know in the past it's been A bit of a hidden gem in the company of Celestica about your cloud doing so well. Maybe I don't know how much details you can give, but Any updates on that? And then secondarily, while a full year guidance is hard to do, there are some moving parts This year for the year over year comparisons with the disengagement, which I believe, if my memory is right, is around $500,000,000 Can you Correct me if I'm right or wrong on that. And if so, do you think consensus for this year, which is around 5.5 $1,000,000,000 or down 5% year over year. Is that calibrated and correctly adjusting for some things? Or I just want to make sure since there's some moving parts that were kind of Calibrated generally correctly or any color or direction. Thank you so much. Thanks, Jim. I'll handle the first one and I'll ask Mandeep to talk about Cisco. But in terms of our cloud business, We have several sources of growth. As we mentioned on other calls, our comprehensive roadmap is really around all the core technologies in the data center. So within switching, which has been a key driver of growth this year, 400 gs is one of the key drivers. We have very strong positions with market leaders in other speeds as well, also a healthy white box business. Edge is also a source of growth. We've seen strong data center cloud offering, including HPS solutions. And that's been a driver for us as data center workloads move to the edge. We're seeing some strength from some of our comms customers on the wired side given some expansion from 4 And we're also developing some edge programs in the service space that are resonating with some emerging customers. And we're working with them to make sure that they have the right solutions and the requirements. And lastly on compute, listen that's a healthy business as well as data continue to expand AI and ML applications. So and we also have healthy positions with our enterprise And service provider, customer as well. So across, again, all the key technologies in the data center are we have very good positions. That's been a And it's very sticky business also because with each successful development cycle and product launch that we have with our cloud providers. There's an increased resistance for our partner that's changed given the criticality of the products to the customers. So success is beating success And that's been a key driver of our growth as well. And the second one, I'll turn it over to Mandeep. Yes. Good morning, Jim. So I'll stop short of providing full year revenue guidance, but I will double click on the pieces. And so As you hit on it, there are parts of the business that are growing quite nicely. So our life cycle solutions revenue at the end of last year was just under $3,000,000 Again, we're targeting 10% or more growth in that overall portfolio, which is our HPS and our ATS businesses. So, dollars 300,000,000 or more growth On the Cisco piece, about $520,000,000 of revenue is coming out year over year. And so you can that's the number one thing that's offsetting the growth In Lifecycle Solutions. What I will say is, we gave remarks on our growth for the non Cisco portfolio, so essentially the company ex Cisco. We grew in the Q1 of 7%. The midpoint of our guidance implies 3% growth in the 2nd quarter and we are targeting Growth in Q3 and in Q4 on a year over year basis for the non Cisco portfolio. That's very useful. Thank you so much for the details. Thanks Jim. Your next question comes from the line of Matt I wanted to just ask Just a question regarding your enterprise segment, which is down double digits. It sounds like your outlook, Rob, I was more cautious on that group. I know there's some tough comps you're up against, but we are hearing signs of on prem infrastructure spending Gradually improving, particularly as companies get back, as projects that were pushed out get renewed. Are you seeing that or are you just continuing to hear cautious commentary from your own customers? Based on the mix of programs that we have and we're hearing a cautious mix, we've had last year was a particularly strong year for us. So a lot of the comps that we think are very spot are really tough at least for us in the storage side And also the same on the service side. So that's kind of a key driver of some of the year over year comps, Year over year, lower guidance, if you will, and the mix of products that we have. And there's in our view, there's general softness In HDD and external storage as well. Okay. Thank you. And just another inventory Regarding your outlook, I think you said That you expected your inventory turns actually to be to improve as you get through the year even though inventory levels Or higher, is that correct? That's right, Matt. So we expect that our Q1 revenue is going to be our lowest quarter of revenue in the year. And a lot of the inventory that we have on hand, some of it was very strategically brought in to support some of the growth that we're seeing. And so we expect that our inventory turns We'll be improving sequentially. Okay. All right. Thank you. Thanks, Matt. Operator, we can take the next question. Operator, next question. Operator? Your last and final question comes from the line of Daniel Chan with TD Securities. Hi, good morning. I just want to drill into the semi cap opportunity a little bit more. I'm just wondering like we've seen a number of fabs announced Expanded CapEx and then also some of the suppliers take forecast up. To what extent has that flowed through to you? I'm just trying to get a sense for the opportunity for even more upside to what you've been seeing. So I'm just kind of curious whether you're seeing some of those orders really accelerate or do you think There's more to go. Hi, Dan. It's Rob. It's a very strong semi cap environment right now. We're the largest or one of the largest in our space and have leading positions with all the major equipment That do outsourcing. So it's been a direct flow through from the fabs to them right to us. And Again, this year, a large portion of our growth is not just by a rising tide, but it's really by new programs or share gains. And all of those new programs are based on the investments that we made during the down cycle and some new verticals and some capacity adds as well. So we think we're going to be a direct beneficiary of what we're seeing going on in the NFADs as well. Okay. That's helpful. Thanks. And then on the communications side, as you gain as your customers in HPS continue to gain share and You guys gained wallet share. I'm just curious whether that has any direct impact on some of the relationships that you have with some of your larger customers. Obviously, you've disengaged with Cisco, but you've got another large network or communications provider there. As you gain wallet share, does that change the conversation a little bit? Not materially. I mean, I think our between our cloud providers and our traditional OEMs, I think they view us as an enabler to their success versus anything else. And they're pulling on solutions that we offer both offer in our HPS business In one way or another. So the conversations have been healthy on both sides. I think they're seeing the value in Having someone like Celestica actually design that product for them and also provide other value added services. I think the model I think this whole pandemic has kind of shifted that model and accelerated that model moving forward. So it's been a net benefit Ladies and gentlemen, that concludes our Q and A portion of the call today. And I will now turn the call back over to Rob for closing remarks. Thank you, operator. We're off to a strong start in 2021 after a strong finish to 2020. We feel our efforts to diversify our portfolio are yielding results of Lifecycle Solutions, representing 59% of the company's revenue. The revenue of the company's non Cisco business grew 7% year over year. And additionally, our operating margins continue to And in Q1 2021, we posted our 5th consecutive sequential quarter of year over year non IFRS margin expansion. We're excited that our efforts to transform our business are yielding results. In May, we will be hosting another roundtable discussion for our investors. This time, we will focus in on our Capital Equipment segment, so please stay tuned for more details. I'd like to thank our global team for remaining vigilant and keeping them And thank you all for joining today's call. I look forward to updating you as we progress throughout the year. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.