Earnings Call: Q3 2020

Oct 28, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Celestica Third Quarter 2020 Earnings Call. At this time, all participant lines are on mute. After the speakers' presentation, there will be a question and answer session. I would now like to turn the call over to your speaker today, Craig Oberg, Vice President of Investor Relations and Corporate Development. Please go ahead. Good morning, and thank you for joining us on Celestica's Q3 2020 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 today's press release, including the cautionary note regarding forward looking statements therein, and our annual report on Form 20 F and 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, adjusted EPS, adjusted SG and A and adjusted effective tax rate. Listeners should be cautioned that 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 Q3 2020 earnings presentation, which are available at celesica.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 and thank you for joining today's conference call. Despite the challenging environment, Celestica performed well in the 3rd quarter, delivering another quarter of year over year and sequential revenue and operating margin growth. We are continuing to see the benefits of our portfolio transformation actions and our solid third quarter results are another sign that our strategy is yielding results. Our global team is successfully navigating today's challenges and is working tirelessly to support our customers while keeping our employees safe. Our operations remain largely stabilized and our supply chain continues to improve. However, we continue to experience a fair amount of demand volatility as our customers end markets remain impacted by COVID-nineteen. As circumstances continue to change, we are well prepared to adapt and address any new COVID challenges. We believe we have a robust set of processes and protocols in place to manage our operations and global supply chain as the COVID-nineteen situation continues to evolve around the world. While we are experiencing demand strength in the capital equipment and health tech markets and JDM business, we continue to see softness in other markets, most significantly in commercial aerospace. Our CCS segment delivered another quarter of solid performance. Revenue grew on a year over year basis and segment margin came in above our 2% to 3% target range. This quarter represents the 6th consecutive quarter of sequential margin expansion in CCS. In our ATS segment, demand weakness in some of our businesses is offsetting strong growth in HealthTech and Capital Equipment, driven by recent wins. The cost productivity actions taken within ATS are leading to improved profitability. While we continue to take actions to return this segment to its target operating margin of 5% to 6%, we are encouraged by the sequential and year over year operating margin expansion that ATS achieved in the Q3. As we continue to drive cost productivity actions and the broader demand environment improves, we believe margins will return to target levels. Overall, we believe the strength we are seeing in several of our end markets is a testament to our diversification strategy and our ability to innovate, execute and deliver for our customers. The actions we have taken to transform our business in recent years have strengthened our portfolio and we are pleased to be seeing the positive results. I will provide some additional color on our end markets, but first, I will turn the call over to Mandeep to give you further details on our 3rd quarter results. Over to you, Mandeep. Thank you, Rob, and good morning, everyone. As a reminder, we did not provide financial guidance for the Q3 of 2020 due to the uncertainty created by COVID-nineteen. During the quarter, we experienced COVID-nineteen related impacts, including premiums paid to ensure continuity of supply and inefficiencies as a result of being unable to secure supply. However, these impacts were offset by various recoveries. Our Q3 revenue came in higher than anticipated at $1,550,000,000 mainly due to strong demand in communications fueled by JDM. Our total revenue increased 2% year over year and 4% sequentially. Our non IFRS operating margin was 3.9%, up 110 basis points year over year and up 50 basis points sequentially. The year over year and sequential improvement was driven by productivity initiatives across our business and improved mix in CCS. IFRS earnings per share were $0.24 up $0.29 year over year and up $0.14 sequentially. Non IFRS adjusted earnings per share were $0.32 up $0.19 year over year and up $0.07 sequentially. Our ATS segment was 34% of consolidated revenue, down from 37% compared to the Q3 of last year. ATS revenue was down 6% compared to the prior year period, but up 5% sequentially. The year over year decline was driven primarily by COVID-nineteen related demand impact, specifically in commercial aerospace and industrial. This was partly offset by growth driven by new program ramps in HealthTech and Capital Equipment, as well as continued strength in the semi market. Higher sequential revenue was due to demand strength across several of our end markets. Our CCS segment revenue was up 7% year over year and up 3% sequentially. Within our CCS segment, the communications end market represented 45% of our consolidated 3rd quarter revenue, up from 42% in the Q3 of last year. Communications revenue in the quarter was up 9% year over year, largely driven by strength in our JDM business. Sequentially, communications revenue was up 8%, driven by strong demand across a number of our customers, including strength in JDM. Our enterprise end market represented 21% of consolidated revenue in the 3rd quarter, consistent with the same period last year. Enterprise revenue in the quarter was up 3% year over year, largely driven by strength in our service provider business and partially offset by planned disengagement as part of our CCS portfolio optimization program. Sequentially, enterprise revenue was down 6% due to demand softness. We are pleased with the performance of our JDM business as we continue to ramp a number of new programs and support increasing levels of demand from our hyperscaler customers. Year to date, our JDM business achieved approximately $600,000,000 in revenue, up approximately 90% compared to the prior year period and accounted for approximately 15% of our total company year to date revenue. Our top 10 customers represented 68% of revenue for the 3rd quarter, up from 67% in the same period last year and flat quarter over quarter. For the Q3, we had 1 customer contributing 10% or more of total revenue, unchanged from the prior quarter and Q3 of 2019. Turning to segment margin. Although still below our target range, ATS segment margin of 3.7% was up 90 basis points year over year due to improvements in our capital equipment business as well as higher productivity and volume leverage across a number of our businesses within ATS, resulting from new program ramps. Sequentially, ATS segment margin was up 60 basis points, driven by cost productivity efforts across the business and higher volumes. DCS segment margin of 4.0% came in above our target range of 2% to 3% and was up 120 basis points year over year and up 40 basis points sequentially. This represented the highest margin in CCS since 2015 and reflects improved mix as well as the benefits from our portfolio shaping initiatives as we successfully execute our transition plan. The year over year margin improvement was driven by favorable mix, including strong growth in JDM, improved operating leverage and cost productivity. The sequential margin improvement was driven by favorable mix. Moving to some other financial highlights for the quarter. IFRS net earnings for the quarter were $30,400,000 or 0 point $900,000 or negative $0.05 per share in the same quarter of last year. Adjusted gross margin of 8.1% was up 150 basis points compared to last year and up 60 basis points sequentially. Year over year and sequential improvements were largely driven by volume leverage, improved mix and productivity across the business. Year over year, our adjusted SG and A of $56,000,000 was up $8,000,000 primarily due to higher variable compensation. SG and A was up $3,000,000 sequentially, mostly due to higher variable compensation, partly offset by favorable foreign exchange dynamic. Non IFRS operating earnings were $60,100,000 up $17,500,000 from the same quarter last year and up $9,300,000 sequentially. Our non IFRS adjusted effective tax rate for the Q3 was 20% compared to 46% for the prior year period and 24% last quarter. We are pleased with the improvement in our overall tax rate driven by increasing levels of profit in lower tax geographies. For the Q3, adjusted net earnings were $40,900,000 compared to $16,600,000 for the prior year period and $31,700,000 last quarter. Non IFRS adjusted earnings per share of $0.32 was up $0.19 year over year due to higher operating earnings, lower taxes and lower interest expense. Sequentially, non IFRS adjusted earnings per share were up $0.07 mainly due to higher earnings. Non IFRS adjusted ROIC of 15.2% was up 5.1% compared to the same quarter of last year and up 2.3% sequentially. Moving on to working capital. Our inventory at the end of the quarter was 1 point $2,000,000,000 an increase of $171,000,000 relative to the prior year period, largely driven by investments in our JDM business. Sequentially, inventory was approximately flat. Inventory turns were 4.7, down 0.7 turns year over year and down 0.2 turns sequentially. Capital expenditures for the Q3 were $10,000,000 or less than 1% of revenue. Non IFRS free cash flow was $16,000,000 in the 3rd quarter compared to $66,000,000 for the same period last year. Year to date, we have generated $108,000,000 in non IFRS free cash flow, in line with our full year 2020 target of $100,000,000 or more. In the Q4, we are targeting to generate positive free cash flow. Cash cycle days in the Q3 were 61 days, flat year over year and up one day sequentially. Our cash deposits at the end of September were $207,000,000 down $15,000,000 sequentially. Moving on to other key measures. Celestica continues to maintain a strong balance sheet. Our cash balance at the end of the Q3 was $451,000,000 up $2,000,000 year over year and up $15,000,000 sequentially. Combined with our $450,000,000 revolver, which remains undrawn, we have a solid liquidity position of over $900,000,000 We believe we have sufficient liquidity to meet our current business needs. Our gross debt position was $470,000,000 at the end of September, while our net debt was $19,000,000 an improvement of $15,000,000 sequentially. Our gross debt to non IFRS trailing 12 month adjusted EBITDA leverage ratio was 1.6 turns, an improvement of 0.1 turns sequentially and a 0.6 turn improvement from the end of 2019. The year over year improvement is a result of strong free cash flow generation, disciplined debt reduction and improved profitability. At the end of September, we were compliant with all financial covenants under our credit agreement. Our capital allocation priorities remain unchanged. We will continue to work towards generating strong free cash flow. And over the long term, we plan to return approximately half to shareholders while investing the other half in the business. In the Q3, we incurred $4,000,000 of restructuring charges to adjust our cost base to fluctuating levels of demand, including in our A and D business. We will continue to take restructuring actions in the Q4 as we complete the Cisco transition and adjust our cost base across segments undergoing demand pressure. Year to date, we have taken $19,000,000 of restructuring charges and at this time anticipate that our full year restructuring charges will be less than our original estimate of $30,000,000 Now turning to our guidance for the Q4 of 2020. We are projecting 4th quarter revenue to be in the range of 1,350,000,000 dollars to $1,450,000,000 At the midpoint of this range, revenue would be down approximately 6% year over year and down 10% sequentially. 4th quarter non IFRS adjusted earnings per share are expected to range between $0.22 $0.28 At the midpoint of our revenue and adjusted EPS guidance ranges, non IFRS operating margin would be approximately 3.5%, an increase of 60 basis points over the same period last year and a decrease of 40 basis points sequentially. Non IFRS adjusted SG and A expense for the Q4 is expected to be in the range of $56,000,000 to $58,000,000 Based on the projected geographical mix of our profits in the 4th quarter, we anticipate our non IFRS adjusted tax rate to be approximately 20%, excluding any impacts from taxable foreign exchange. Turning to our end market outlook for the Q4 of 2020. In our ATS end market, we anticipate revenue to be down in the low double digits year over year due to sustained weakness in commercial aerospace as a result of COVID-nineteen, partly offset by growth in capital equipment and our Healthtech business. In our communications end market, we anticipate revenue to increase in the low single digits year over year, driven by strength in JDM, partly offset by our planned disengagement from Cisco. In our enterprise end market, we anticipate revenue to decrease in the low double digit range year over year, driven by weaker end market demand and remaining portfolio shaping activities. I'll now turn the call back over to Rob for additional color and an update on our priorities. Thank you, Mandeep. We are pleased with our 2020 year to date performance despite the challenges resulting from COVID-nineteen. We continue to benefit from the investments we have made and the portfolio shaping and productivity actions taken over the last few years. We believe that these actions have made us a stronger company and better position us for the future. Our 3rd quarter results reflected strong mix and operational performance as we continue to execute on our portfolio shaping activities, including our Cisco transition. We are pleased to have improved operating margin on a year over year basis for the 3rd consecutive quarter despite COVID-nineteen headwinds. Now turning to ATS. Our capital equipment business posted another profitable quarter with strong volume driven by increased demand in our base semi business and new wins in a number of adjacent equipment end markets. While demand is up materially from a year ago, we are seeing the overall demand environment leveling off as we enter 2020 and enter 2021. In A and D, while demand in our defense business remains stable, we continue to experience demand softness in our commercial aerospace business. Demand in 2020 is materially down from a year ago, and we expect these depressed market conditions to persist throughout 2021. We will continue to drive the appropriate cost productivity actions to improve the overall profitability of this business at lower levels of revenue. In industrial, the impacts of COVID-nineteen moderated in the Q3 and we experienced a gradual recovery of demand across our customer base. We also saw an improvement in profitability on a year over year basis as new programs ramped and we executed on our cost productivity roadmap. Within HealthTech, our team is executing very well on projects supporting the fight against COVID-nineteen. We continue to see strong demand for diagnostic equipment and anticipate improvements in the demand for elective surgery products in the first half of twenty twenty one. We anticipate an elevated level of demand as we end 2020 and enter 2021 from the ramping of essential products to fight COVID-nineteen. Now turning to CCS. Overall, I am pleased with the strong performance of our CCS segment in the Q3. The segment posted year over year revenue growth as growth from our hyperscaler customers more than offset revenue declines from our portfolio shaping actions. As we mentioned in the past, the strong revenue growth in CCS is driven by strategic wins over the last 2 years compounded by increasing demand due to the work and learn from home trend as customers expand and upgrade data centers in support of growing cloud and online requirements. In our JDM business, we continue to see impressive growth as a result of the investments made over the last few years, which have enabled us to deliver higher value add services to our customers, while providing further stability and diversification to our overall CCS business. Celestica supports 8 of the world's 10 largest hyperscaler service providers, developing technologies that are deployed throughout their data centers. Turning to the Cisco disengagement, it is progressing as planned. Our manufacturing was mostly completed in the Q3 and we anticipate the transition to be largely complete by the end of the year. We are pleased with the progress we are making to backfill Cisco with higher value add solutions and have secured new business across a number of customers. We remain on track to achieve our goals with a richer mix of programs. As I look back on our performance year to date, I continue to see evidence that our strategy is taking hold. Our portfolio shaping and productivity actions over the last few years, while difficult at the time, have better positioned us to deliver value added solutions across a broad set of markets. In particular, I am pleased we're able to generate 3.9% operating margin in the 3rd quarter, despite the severe downturn in the commercial aerospace and industrial markets. As we look ahead to the Q4, we expect JDM to continue to be strong, fueled by recent wins and increased demand for our products and services. However, we anticipate some softness in enterprise driven by a soft demand environment and our portfolio actions. While we expect CCS segment margin to remain strong in the 4th quarter, we anticipate that margin will moderate sequentially due to mix normalization and incremental investments in our JDM business as we invest in the next generation of products in support of a growing market. In ATS, we continue to build a stronger, more diverse and higher value portfolio. We expect continued weakness in commercial aerospace, partially offset by strength in our other ATS markets. During these unprecedented times, we continue to face uncertainty surrounding the potential impact from COVID-nineteen, but we remain confident in our long term outlook. Before we close today, I would like to talk about another important area of our business, environmental, social and corporate governance or ESG matters. For the last 10 years, these three focus areas have been integral to everything we do. Celestica is a technology company, but first and foremost, we are a people company. And with that comes responsibility of doing what's right by our employees and customers and the world around us. For example, to date 17,000 of our employees have signed the sustainable workforce pledge. Moreover, we have shifted a large portion of our energy consumption to renewable sources, reducing our greenhouse gas emissions by 57% in 2019. We continue to set aggressive sustainability goals by establishing new targets to reduce our Scope 1 and Scope 2 greenhouse gas emissions by an additional 30% by 2025. And when it comes to diversity and inclusion, we are taking action across our global footprint to ensure we continue to foster an environment in which employees of all backgrounds may thrive. These and other ESG initiatives will continue to remain at the core of Selective's strategy and operations going forward. I want to extend my appreciation to our global team for their hard work and commitment, especially during these difficult times. Their resilience and dedication are the keys to adapting to this unprecedented moment. We look forward to updating you over the coming quarters. With that, I would now like to turn the call over to Amy to begin our Q and A. Thank you. Thank you. At this time, we will be conducting our question and answer session. Your first question comes from the line of Todd Coupland with CIBC. Todd, your line is open. Good morning, everyone. I wanted to have you talk about what you think the business looks like once we get past COVID-nineteen. So if we think about growth drivers like JDM and semi, what is a normalized growth rate for the current portfolio or at least the portfolio excluding Cisco once that disengagement is complete? Any color on that would be super helpful to think about the business once we get through the pandemic? Thank you. Hey, Todd. Good morning. Thanks for joining the call today. So Mandeep here. There's been a tremendous amount of volatility, I would say, going through 2020. Some markets are up significantly, other markets are down significantly. What we are seeing as we're entering into the Q4 is that there is some level of stability starting to appear. The softness that we've seen in the commercial aerospace side is starting to level off. The significant demand increases in the service provider business are starting to level off. And so if you look over into 2021, our view at this point is that ATS should continue to target the 10% growth rate that we have always put out there and we think that we have roadmaps that give us confidence that that is a possibility for 2021. On the CCS side, there's going to be a big revenue overhang from Cisco, but we all knew that was coming. And then when you look at the CCS business ex Cisco, we're looking to maintain our performance going into 2021, but we continue to target a series of bookings to also drive a little bit of incremental growth. But as we exit 2020, we do see some of the markets stabilizing at the levels that they're at And then there's opportunities with some of those depressed markets come back. And Tyler, I would just add some color to that. Within ATS, I think the growth drivers for us would be our capital equipment business that's really being fueled by program wins and share gains over the last couple of years. Industrial, we think, is going to return to growth. And of course, our HealthTech business is doing quite well. And within CCS, we do even though expect incremental JDM growth on a year over year basis, even though as Mandeep mentioned, the demand is moderating a little bit from the very strong growth we had this year. That's great. Thanks very much. Appreciate the color. Your next question comes from the line of Robert Young with Canaccord Genuity. Robert, your line is open. Hi, good morning. I'm not sure that I understand the drivers behind the moderation CCS margins in Q4. I think you said mix and normalization investments in JVM. Is that all enterprise impact or maybe if you can break that, is that lumpiness in hyperscalers? Could you talk about what's the driver there? Sure. Hey, Rob, it's Mandeep here. So CCS had frankly just outstanding performance in the 3rd quarter, generating 4.0 percent EBIT. As you know, the target margin range for that business is 2% to 3%. And so while we continue to expect strong performance going into the Q4 from CCS, Will it repeat 4%, we don't expect it to at this point. And so when we say moderation, it means get back to a little bit more of a normal level. And the reason for that is because a lot of things went right in the Q3. We had strong mix with higher levels of JDM. Within JDM, we had some positive mix as well. So the margin profile of the JDM business was stronger than it normally is. And then we were also successful in generating a lot of service billings with our customers. When you start to normalize for those things, the margin profile should start leveling off a little bit. Okay, great. And then my second question would be around, I was surprised to see the restructuring a little lower than your target given aerospace. Does that suggest that you're not restructuring the Aerospace business in the near term to meet demand? Or is that more related to the expectation that Cisco disengagement is lower? What's why is the restructuring lower? And I'll pass it on, I guess. Yes. So the restructuring dollars were not as high as the 1st 2 quarters of this year, but we still anticipate spending $30,000,000 for the full year. So there's some additional costs that will be incurred in the Q4. When you look at where our restructuring is being targeted towards, well, most of the activity that we need to do in Cisco has been completed, but we still have some cost actions to take as we ship that final product in the Q4. And then to your point, on the ATS side, where we continue to target the restructuring activities are in the businesses that have the most significant demand downturn. And those are in the aerospace and defense and industrial segments. So we do expect that we'll continue to take actions in the Q4 and stay within that $30,000,000 envelope. Okay, thanks. And I'll add Rob that within Cisco, the restructuring was a lot less than originally anticipated due to the strength in the base business and some new wins that we're able to direct to Thailand. So it's a lot lower than anticipated. Great to hear. Thanks. Your next question comes from the line of Ruplu Bhattachary with Bank of America. Ruplu, your line is open. Hi, thanks for taking my questions. For the first one, can you drill down a little bit into the Communications segment? Looks like it was up strong 9% year on year. What did you see in Optical, Networking and Wireless? Did the revenue from Cisco meet your expectations? And then just on that, it looks like the guide you're seeing up single digits, low single digit. So is there some incremental weakness you're seeing in that segment in 4Q? Hi, Ruplu. Within 3Q, broadly speaking, we saw strength in service provider ramps and that was somewhat offset with program exits and demand dynamics. The strength really came from our networking business. And again, it was partially offset with the Cisco transition, which is part of our Communications segment. As we move into Q4, the dynamic really in terms of offsetting the growth is really the program transitions, I. E, Cisco exit. But we still see very strong growth in networking, some very strong growth in existing programs, both in networking and also optical. Okay. Thanks for the details there, Rob. I just wanted to ask maybe for Mandeep, can you remind us on your capital allocation priorities now? You've reduced debt quite a bit. So I mean, should we think that you'll focus more on M and A or how should we think about share buybacks going forward? So any thoughts just on your capital allocation priorities for the next year? Yes, absolutely, Ripley. So our long term priorities remain unchanged. We will continue to focus on generating strong cash flow, returning 50% to our shareholders and investing 50% into the business. And I know, as you know, over the last 8 or 9 years, we have been very aggressive on the share buybacks, frankly, more so than any of our peers in the space. So we are pleased with the cash flow performance that we've been seeing so far this year, and we have been able to get almost to a neutral net debt position, which is wonderful. Our focus at this time continues to be on generating additional dry powder, whether we apply that to paying down more debt or we will continue to just build up dry powder in terms of cash on our balance sheet, because we continue to be focused on looking at M and A targets. That being said, whenever we make an investment decision, we're looking at it compared to alternatives as well. And so we'll continue to monitor when the right time is to open up a share buyback program. We'll ensure that we are looking at M and A targets from an ROI and EPS accretion perspective relative to things such as share buybacks. And as we do that analysis based on the moment that we're in, we will have flexibility to go one way or the other. Right now, we are in a position where we can now reopen a share buyback program. But again, as we take an opportunistic view towards it, we'll open it up at that time. So whether it's going to be sometime in Q4 or sometime in 2021, we'll just continue to monitor how the market trades us and then also look at the alternatives in terms of M and A. Okay. Thanks for the details. Congrats on the quarter and on the strong margin improvement. Thanks a lot, Ruplu. Thank you. Your next question comes from the line of Dennis Moschopoulos with BMO Capital Markets. Dennis, your line is open. Hi, good morning. Rob, can you expand on the semi business? You talked about seeing a demand leveling off as you enter next year. Maybe a bit more color in terms of what you're hearing from customers in that front? Sure. So, semi cap has been all of capital equipment has been very strong. Semi cap has been particularly strong. In the first half of this year, we saw strong foundry spending and logic spending. As we get into the back half of this year, the foundry and logic spending is continuing and we're seeing some increase in memory spending as well. As we look forward to next year, we see the memory spending continuing even going from NAND to DRAM. A large portion of our growth is not just rising with the C level, it's actually new share gains approximately 30% to 40% of our growth is really being driven by new wins and new share gains across all of capital equipment. We've been doing a very nice job of not just growing our semi cap business, but we also have other capital equipment business that we're expanding within. And in fact, 20 new program ramps that we're commencing right now. So a lot going on in capital equipment. Maybe on a related note, what's happening in flat panel, I mean, is that subdued? And do we need to see some of the new fabs being built for that to pick up or what are you seeing there? Correct. The overall display market is still generally depressed. A lot of the projects that we thought would start ramping this year into the first half of next year are being pushed into the right. That being said, we did take a lot of actions last year to make the business more efficient at lower volumes. Those actions are complete And we have a long view of the industry and we think it's well placed into the recovery. The drivers obviously would be smartphones as 5 gs gets that uptick happens and that'll probably be latter part of 2021 into 2022 and the new large form factor TVs should also help uplift the market when this COVID cloud hopefully gets passed. Great. Thanks. I'll pass the line. Your next question comes from the line of Paul Steep with Scotiabank. Paul, your line is open. Great. Good morning. I guess, Rob or me and Deep, can you maybe talk a little bit about what you're thinking in terms of the M and A environment out there? Obviously, it's a challenged period and you've spent it wisely working on the business. But as cash and capital builds, it sounds like priority is to try to grow the business. How is that environment even looking? Or is it still sort of pause and just heads down on working your way through the current environment? Hi, Paul. I'll start off and Rob can add on if you'd like to. So at the beginning of the year when COVID was starting to just hit everyone, we saw a dramatic drop off in M and A activity. That being said, we are seeing a lot more targets that are coming online, which is nice to see. We're evaluating a number of M and A transactions every week, frankly, as we it's very well understood that we're looking for certain types of targets to accelerate our strategies. We have not pulled the trigger on any of them, largely because we want to make sure that it's the right fit. When we look at an M and A target, price, of course, is important. We want to make sure that we're paying the right price for it. But we are also looking for capabilities that the business will bring to us so that it can accelerate our strategies. We also want to ensure that it is able to be integrated relatively lightly. We don't want to go through a massive integration when looking at targets. And then again, we're just making sure that the business can provide us the right level of scale when needed. And so we continue to apply the same filter. There are some good targets out there, but nothing that is imminent at this point. Great. And then just one quick follow-up. Can you give us a sense for CCS? It's hard for all of us from the outside, obviously Cisco, the disengagements weren't to sort of plan and you've been replacing and sort of shifting some of that capacity back. How far through that project would you say we are not in terms of Cisco disengaging, but in terms of sort of reorienting that capacity in the business to new business? Thank you. Yes. Hi, this is Rob. So you were pretty far along on that process for a couple of different aspects. First of all, our base business is up. That's really driven by our service provider portfolio fueled by our JDM offering. We've had significant new wins for Thailand driven by both high value EMS players and also those JDM programs. And when we started the Cisco transition, we put in place bookings goal. Again, we weren't intending to replace Cisco dollar for dollar. We wanted a higher rich programs that played to our portfolio. We put together a bookings plan and we're very close to closing that plan by the end of this year. Now it takes time for those bookings to actually turn to revenue, which we think will be latter part of 2021 into 2022 depending on market uptick. But overall, I think we're through the knothole, if you will, on the Cisco transformation and the portfolio renewal within CCS. We're very pleased with how CCS has been operating. And the mix is very strong and continuing to invest in our JDM portfolio and taking it to the next level. Only thing I'd maybe add to that as well, Paul, is you're right. I mean, there's a lot of moving pieces. We've done disengagements in programs in CCS going back now 1.5 years. The final revenue impact is still in 2020 numbers and then we have Cisco as well. If you look at overall CCS for 2020 based on the guide that we just provided, it is implying relatively flat revenue on a year over year basis despite the disengagement split that have been happening. When you look at how CCS has been growing outside of the disengagements, the business is actually up in the double digit percentage range. So it talks to a lot of the bookings that we've been generating to drive growth in other areas to offset the disengagements that are coming. So some pretty good underlying growth beyond the programs we're disengaging from. Thank you. Your next question comes from the line of Paul Treiber with RBC Capital Markets. Paul, your line is open. Thanks very much and good morning. I was hoping that you could speak to the long term visibility or maybe sales pipeline that you have with the hyperscalers and particularly on the JDM side of the business, typically how involved or integrated are you with the hyperscalers in terms of product roadmap and planning programs out into the future? Hi, Paul. We have good visibility. Most of our CCS business and JDM business, we could have good visibility a quarter out when it comes to specific numbers. But broadly speaking, with all our hyperscalers, we have technology roadmap meetings with them. So we share our roadmap for technology, they share their requirements and we align closely such that we're ready when they need us to be ready. Within JDM, we've worked very closely with our customers to customize the solutions for their specific applications. So in many respects, we're very tightly interlinked with them when it comes to their requirements. Yes. And Paul, and I know you know this, one of the benefits that we have in our JDM business is that we are across a number of different sets of solutions. We provide solutions in networking and storage even over into compute as well. And as Rob mentioned, we work very closely with our customers to customize product, but we also have products that customers are buying off the shelf as well, where the brand is not necessary. They're not necessarily turning around selling it. They're using it for their own consumption. And so because we have off the shelf products that they can take or products that they can customize with us, it gives us some more diversity in terms of the sales channel. And then when we look out like so year to date JDM is up 90%, 15% of total revenue. Do you have aspirations or any long term targets you could share in terms of how you see that growth progressing over the next couple of years or maybe how large of a percent of total revenue that business could get to? So I'll start off. I mean, as you know, we're not providing 2021 guidance, but what we can tell you is that, as you mentioned, the business is up materially on a year to date basis and we continue to see a similar level of growth in JDM going into the 4th quarter. From a margin profile perspective, JDM has been performing accretive to overall CCS results and that has helped bring up the rest of the CCS business as well as the company's margins as well. As we look into 2021, we are still targeting some level of growth and Rob briefly mentioned that earlier. However, it's not going to be at the 90% levels again. What we're seeing this year is a combination of wins that we've had in place since 2018 2019 ramping and then some accelerated demand because of COVID. As that acceleration starts to moderate and as we start reaching steady state in our JDM ramps, we'll expect regular growth going into 2021, but we are still expecting a strong 2021 in JDM. I would also add, when you look at our JDM business and you look at our ATS business, they are very similar in nature in terms of an engineering led engagement, it's high value revenue. And when you look at our diversification efforts, part of our strategy is when you take our JDM business and you take our ATS business and you add them together, we kind of consider that our product lifecycles revenue or high value revenue. And the broad goal of that is to have that be well north of 50% of the company's revenue moving forward. And to this extent, we're already there and we're looking to kind of grow that diversification and continue to invest in those businesses. Okay. Thank you for taking my question. Okay. Your next question comes from the line of Curt Schwartz with Stifel. Curt, your line is open. Hi, good morning. Thank you for taking the question. Hoping to follow-up on Cisco and CCS and see if you can maybe just drill down a bit on the cadence and the magnitude of the Cisco wind down. Should we be expecting the full roughly 10% of Cisco related sales to come off right at the turn of the New Year? Or could we see some lingering contribution into 2021? And then I guess, if you're able to maybe quantify how much of this wind down you're expecting to offset with new communication program ramps at this point, that would be helpful. Thank you. I'll start off with that. In terms of Cisco, the wind down should be the manufacturing activities were largely complete in the Q3. When it comes to the Q4, very little revenue contribution in terms of our business. So I would say the majority of the revenue is completed or recognized at the stage of the game. The last remaining things that we have in 2021 would be very insignificant in terms of very low volume production or end of life programs and things like that, but not material in any nature. As we move into next year, the bookings that I mentioned earlier, it's going to take some time for those bookings to convert into revenues of perhaps the latter half of twenty twenty one as we renew our portfolio on the CCS side. Understood. And then I guess maybe just looking back at the recently completed quarter, can you give any sense of the sort of linearity of demand throughout the quarter and maybe any notable volatility by segment or end market? In terms of linearity, where most of our revenue was shipped out in the 3rd month of the quarter. I believe, generally speaking, inside the quarter, about 25 percent of the revenue will go in month 1, 30% of the revenue will go in month 2 and the balance will go in month 3 of the quarter. Pre COVID, post COVID, we've seen some modest changes in that, but it's hard to figure out whether that's just due to demand dynamics or COVID dynamics. But that's our general linearity inside of quarter. Okay. So no, I guess, material or notable swings within the end markets to really call out? Nothing notable, no. Understood. All right. Thank you very much. Your next question comes from the line of Jim Suva with Citigroup. Jim, your line is open. Thank you. I am very impressed with the JDM traction you've been getting. So if you could give us a little bit more context or color around it, it sounds like it's very tied into the hyperscalers or the cloud companies. I don't know if that's an accurate statement or not. And is it a lot of servers or a lot of storage or a lot of switches? And I guess importantly, how do you ensure that your protective moat is so that other suppliers, especially maybe those out of Asia who may be a little more price conscious don't do similar JVM efforts as we do hear what they're doing, but yet your numbers speak for themselves about the impressive growth that you're seeing as well as the profitability? Thank you. Hi, Jim. Yes, thank you for that. In terms of JDM, yes, the majority of the revenue is going to the hyperscalers, but we also have they're also going to some of our enterprise customers as well. And the products that we're making is actually on all technologies across the data center. So we're working on storage solutions, compute solutions, networking solutions, which is probably the biggest portion of them. The difference I think between our offering and some of our competitors offering is that it's truly customized to our customers' specifications. And as I mentioned earlier, we're very tied at the hip with their product roadmaps And we're also working with silicone providers to make sure that we have access to early silicone and developing leading edge capabilities to support our customers moving forward. And we're also continuing to invest in a fair amount of R and D. We've been doing that now for 7 plus years and we're continuing to feed our product roadmaps and have a very strong engineering centric, engineering capable organization. And that recipe has been working for us. And lastly, I would say is because of our heritage, I think we're offering our customers enterprise level quality at ODM level pricing. Jim, maybe just to add on to some of the remarks that Rob made. We do believe that there are high barriers entry into this business. As Rob has mentioned, we've been investing in this business for the better part of a decade, dollars 25,000,000 to $30,000,000 every year. You see that on our R and D line. One of the reasons that the business has been doing well is we have very sticky relationships that go back a number of years. We don't compete with our customers. We don't have a brand. We don't have a direct sales channel. And so that allows for a very high trust relationship. The other thing I would say that's been benefiting us is the footprint that we have. We started off a number of years ago doing a lot of JDM production in China. And while we continue to do that with some of our customers, they've been looking for a Southeast Asia solution. And so we do a lot of our JDM manufacturing in Thailand, which is one of our strongest sites in the network. And so because of the footprint that we're able to use as well as the types of products that we are producing, which is across a broad set, we believe that the barrier sentry are relatively high. Thank you so much for the details. That was a great description and very much appreciated. Thank you. Thank you, Tim. Thanks, Jim. This concludes our question and answer session. I will now turn the call back over to Ramayonis for closing remarks. Thank you, Amy. I'm pleased we're able to deliver another solid quarter marked by sequential operating margin improvement and strong free cash flow. Our CCF portfolio continues to perform well and delivered a 6th consecutive quarter of margin expansion as we execute our portfolio shaping actions. And in APS, I'm pleased with the improved sequential profitability improvement of our businesses given the continued headwinds that we're seeing in commercial aerospace and industrial. And while we continue to face business uncertainty amidst this pandemic, I believe we have proven that the Celestica team has the ability to successfully navigate the challenges that might lie ahead. I'd like to thank our global team for remaining vigilant and keeping themselves and each other safe. Thank you all for joining today's call, and we look forward to updating you as we progress throughout the year. Ladies and gentlemen, this concludes today's conference call. On behalf of Celestica, thank you for participating. You may now disconnect.