Well, good morning, ladies and gentlemen. I am Bill Etherington, Chair of the Board of Celestica, and I will act as chair of this annual shareholders' meeting. I welcome our shareholders, as well as our employees and guests who are attending this morning. Let me first introduce the individuals other than myself who are proposed for election to our board. I'll ask each of the nominees to stand and remain standing while the introductions proceed. At the end, you can give them an enthusiastic round of applause. Let me start with Robert Cascella. Robert is Executive Vice President and an executive committee member of Royal Philips, and this is his first time standing for election to the board. Robert. Deepak Chopra, former President and Chief Executive Officer of Canada Post Corporation. Remain standing. These guys never follow instructions. Dan DiMaggio, retired Chief Executive Officer of UPS Worldwide Logistics Group.
Lorette Kelner, retired Executive Chairman of International Lease Finance Corporation, a subsidiary of American International Group. Rob Mionis, President and Chief Executive Officer of Celestica. Carole Perry, retired investment banker and former Commissioner of the Ontario Securities Commission. Tawfik Papoutsis, a Managing Director of Onex Corporation. Eamon Ryan, retired Vice President and General Manager of Lexmark International. Michael Wilson, retired President and Chief Executive Officer of Agrium Incorporated. Thank you all. Please be seated. I now call the meeting to order. In accordance with the company's bylaws, Betty Del Bianco, Chief Legal and Administrative Officer and Corporate Secretary of Celestica, will act as Secretary of this annual meeting. With the consent of the meeting, I hereby appoint Josette Koffyberg and Eric Karamanian of Computershare Investor Services to act as scrutineers of the meeting. Betty will now report on certain procedural matters. Betty.
Mr. Chairman, the notice of this meeting, together with a form of proxy, the related management information circular, and the consolidated financial statements of the company for the financial year ended December 31, 2018, as well as the auditor's report thereon, have been mailed or delivered to each director, the auditor, and each shareholder entitled to vote at this meeting. Copies of these materials are also available at this meeting. The scrutineers report that the requisite quorum of shareholders is represented at the meeting. Certain matters to be proposed at this meeting will be conducted by ballot. If you have already submitted a proxy, it is not necessary to also complete and submit a ballot at this meeting.
If you are a registered holder or a proxy holder and you have not already voted, or if you are a registered holder and would like to change your vote and you have not already received a ballot, please put up your hand when requested to do so, and the scrutineers will provide you with a ballot. The ballot should be completed by marking an X in the appropriate spaces and must be clearly signed. If you are a registered shareholder, please print your name on the ballot. When you have completed and signed the ballot, please so indicate to the scrutineers who will come and collect it. Mr. Chairman.
Thank you, Betty. I declare the meeting to be properly constituted. The first item on the agenda is the election of directors. May I have a nomination of those nominees for director listed in the management information circular?
Chairman, I nominate each of the following to serve as a director. Those are the next Subject [inaudible] .
These nominees have accepted their nomination. Are there any further nominations? As there are no further nominations, I declare the nominations closed. As Celestica has adopted individual voting for directors and a majority voting policy, we will be conducting a vote by ballot for the election of these directors. In accordance with the instructions just provided by Betty earlier in this meeting, please put up your hand if you require a ballot at this time. If you received the ballot now or before now, please raise your hand once it is complete, and the scrutineer will also collect it. While we are waiting for the scrutineer's report on the election of directors, we'll move to the next item of business, which is the vote on the advisory resolution on the company's approach to executive compensation, or, as it is commonly referred, a say-on-pay vote.
Shareholders are being asked to approve a resolution on an advisory basis and not to diminish the role and responsibilities of the board of directors to accept the approach to executive compensation disclosed in the company's management information circular delivered in advance of the meeting. I will now ask someone to move that the say-on-pay resolution appearing on page 22 of the company's management information circular be approved. Thank you, Wendy. Adam, thank you. This vote will also be conducted by ballot. In accordance with the instructions provided earlier, please put up your hand if you require a ballot. If you have received a ballot now or one earlier, please let the scrutineers know and they will collect them.
While we are waiting for the scrutineers' report on the motions, we will move to the next item of business, which is the presentation of the company's consolidated financial statements and the auditors' report thereon. These were included in the annual report that was mailed to each shareholder who elected to receive this report, and as previously noted, copies are also available at this meeting. The next item on the agenda is the appointment of the auditor of the company. May I have a motion? Thank you, Jeff. Thank you, Leila. I will now call for a vote on the motion by way of a show of hands. Would those in favor of the motion please raise their hand. Are there any abstentions? Any votes against? I declare that motion carried. The next item of business is the authorization of the Board of Directors to fix the auditor's remuneration.
May I have a motion? Chairman, I move that the Board of Directors Thank you, Todd Insel. Thank you. I will now call for a vote on this motion by way of a show of hands again. Would those in favor please raise their hand. Any abstentions? I declare that motion carried. May I now have the scrutineers' report on the votes conducted by ballot at this meeting? We're just waiting for that for a second, and here they come. Just give us a second. Thanks, Joseph. I have reviewed the scrutineers' report and hereby declare that the individuals nominated are elected as Directors. The scrutineers' report also shows that each elected Director received votes in excess of the thresholds established under Celestica's majority voting policy, as described in the management information circular.
With respect to the motion on the advisory resolution on say on pay, as described on page 22 of the circular, the scrutineers' report shows that a majority of votes cast at this meeting were voted in favor of that motion. I therefore declare that motion carried. The number of votes cast in favor of, withheld from voting, or voting against for each item of business at this meeting will be reported as part of the report of voting results to be filed following this meeting. As there is no other business to come before the meeting, I will entertain a motion to end the formal part of the meeting, after which we will proceed with a presentation from management of Celestica. Thank you, Rob. Thank you. Would those in favor, please raise their hand. Any votes contrary? I declare that motion carried as well.
I'd now like to invite Rob Mionis, as Chief Executive Officer, to give a presentation from management of Celestica. Following his presentation, Rob and Mandeep Chawla, Chief Financial Officer, will take questions. I would also like to welcome those who are now joining us over the internet for the webcast of the management presentation of this annual meeting. Rob.
Good morning. Welcome to our AGM. 2019 marks Celestica's 25th anniversary, a significant milestone in our proud history. Celestica was founded in 1994 with 800 employees working in just two facilities, and today we are a global company with over 35 sites and 28,000 employees. I find it remarkable to look back at what has changed and, just as important, what hasn't changed over the last quarter century. We have built our legacy across geographies, languages, and industries. Even as we have grown into a multinational corporation, we have never wavered from our commitment to fostering a culture of teamwork, ingenuity, confidence, and care. That's what makes great work happen at Celestica and inspires us to consistently deliver innovation to our customers. Three years ago, we established a strategy to guide our transformation into a company that is well equipped to thrive within rapidly changing markets.
We want to capitalize on new opportunities to diversify our portfolio, expand our markets and services, and optimize our global operations network. Despite the near-term challenges we are facing in some areas of our business, we believe that we continue to make progress towards these goals. Let's take a look at how we plan to continue focusing on the four pillars that support our transformational journey. The first pillar is to further strengthen our Advanced Technology Solutions, our ATS segment, and drive consistent profitable growth. Our ATS segment serves customers in the aerospace and defense, capital equipment, industrial, smart energy, and HealthTech markets. We continue to make investments in these markets because we view them as an important part of our future.
We believe that as these markets continue to grow and begin to outsource more and more of their supply chain, they present significant growth opportunities for us. As a leading manufacturing service provider to the aerospace and defense industry, we help our customers gain competitive advantages through optimizing supply chains and driving innovation. We have over 15 years of experience in enabling high reliability A&D applications, and we understand the pivotal role supply chains play in enabling growth. We continue to see healthcare as an attractive market. We also need to deliver improved, more affordable healthcare to a growing population as they increase. We have one strategic business that is driving our growth in this important industry, thanks to our strong proof points in surgical instruments, in vitro diagnostics, patient monitoring, and imaging sub-markets.
To date, this market has not relied heavily on outsourcing and supply chain partnerships, but we believe this is changing. Even as healthcare OEMs face ever-increasing cost pressures, they still must deliver a better patient experience through innovative products and technologies. We anticipate that these factors will compel them to turn to Celestica to help deliver operational excellence and achieve compliance with government regulations across the supply chain. Shifting to industrial and smart energy markets, OEMs appear to be focusing more of their research and development resources on solution delivery and improving their customer user experience. As a result, they are turning to partners such as Celestica to improve the design and manufacture of their innovative hardware. We see significant opportunity in both the industrial and smart energy markets.
In industrial, we have developed innovative solutions in areas such as metering and IoT, industrial automation and controls, and high-volume industrial products. While in smart energy, we support customers in two critical ways. First, we deliver advanced solutions and services for power generation, conversion, monitoring, controls, and storage. Second, we provide the ability for them to source components and assemble electronics in one of our in-region facilities. Although OEM supply chains are designed to serve traditional end markets, that model appears to be too cumbersome and expensive for smart energy product manufacturers, which we believe is leading to a greater need for flexibility in the supply chain. That's where Celestica comes in. We enable our customers to leverage our broader scale across multiple markets, drive working capital benefits, and reduce fixed assets. The second pillar supporting our transformational journey is pursuing targeted and disciplined M&A to accelerate growth.
Our customers look to us to provide a full range of end-to-end product lifecycle solutions. M&A is one lever we are using to bolster our lifecycle solutions for our customers, accelerate our diversification, and position us for profitable growth. Our acquisition of Atrenne last year brought us deep expertise in the design and manufacture of ruggedized electromechanical solutions for military and commercial aerospace applications. It also expanded our service offerings for industrial customers. The integration of Atrenne was smooth, and its performance has already exceeded our expectations. Our capital equipment business, which includes display, semiconductor, and power and signal distribution equipment, enables us to provide our customers with a full spectrum of specialized vertical services. Our acquisition of Impakt last year both expands our capital equipment capabilities and provides an important entry into South Korea.
This gives us in-region presence for our capital equipment customers and positions us to capitalize on the anticipated growth of next-generation display technologies. In fact, we have recently secured significant new business as a result of adding this acquisition to our capabilities. Despite the demand declines in this market, we continue to believe that the long-term fundamentals for this space are favorable. Both the Atrenne and Impakt acquisitions bolstered our capabilities and reach by improving our design competency and establishing us in new markets and geographies. We believe that the long-term nature of these investments will help expand our leadership position in A&D and capital equipment markets for years to come. We continue to evaluate strategic acquisition targets that we believe will help us diversify our markets, expand our capabilities, and further develop our relationships with new and existing customers, drive increased margins and shareholder value.
The third pillar is to reshape our Connectivity and Cloud Solutions , or CCS portfolio, grow in targeted areas. Our CCS segment consists of our communications and enterprise end markets. Our services include designing and building routers, switches, servers, storage, and optical devices that are the building blocks of a global digital economy. We enable some of the world's most innovative brands with solutions intended to help them stay ahead of the frenetic pace of change in rapidly evolving markets. We believe we are a source of innovation for our customers with our advanced design and engineering capabilities, our global manufacturing and supply chain and product solutions, leading-edge hardware platforms for the technology that connects the world.
By investing in next-generation hardware for the modern data center and networking technology landscape, we intend to enable our customers to focus on developing and delivering the next wave of software and service solutions. As part of our strategy to continue diversifying our business and improving shareholder returns. We initiated a comprehensive review of our CCS portfolio last year. The goal was to identify opportunities to reshape our business mix and emerge with a healthier portfolio. That review is complete, and we expect to complete the majority of the related actions this year. We believe what will emerge will be a more resilient and consistent business within CCS, offering higher value-added services and solutions to our customers.
Even as we look to reshape the mix of businesses in this portfolio, our CCS team is moving full steam ahead, winning new businesses with OEMs and leading cloud-based service providers, to whom we provide both traditional EMS and JDM services. I want to take a moment to highlight the strong year our JDM services division had. We are working with our customers to develop a wide range of highly customized solutions across the IT infrastructure stack that are optimized for performance. Last year, JDM enjoyed steady growth on the strength of our communications products and the launch of 13 new programs. We continue to see good traction in our JDM portfolio. In the core of our EMS business, we earned a number of strategic new program wins with new and existing customers and further strengthened our key programs in the communications and enterprise space.
The fourth pillar is to drive an enterprise-wide productivity program to support margin expansion. In 2018, we continued to achieve higher levels of productivity and efficiency through many of our operations and supply chains and functions. In addition, we continue to streamline our processes by investing in automation and building the digital factory. We believe that this will help us drive greater orchestration through our factories by automating and connecting our people, our equipment, and our processes throughout our global network, and leveraging data analytics to greater drive speed and accuracy in decision-making. As we look ahead, we continue to face a number of challenges that we've been highlighting for you in recent quarters. In our end markets, we're experiencing slower cyclical demand from our capital equipment customers and pressure in our CCS segment. While in the industry overall, material and inventory constraints continue to be a challenge.
However, we believe that we have made good progress on our transformational journey and are confident that we have the right strategy in place for today and positioning the company to succeed tomorrow. We will continue to focusing on executing our strategy. This will include diversifying our markets and our customers and driving deeper relationships with our customers. Providing higher value-added solutions such as engineering, design, and aftermarket services, and expanding our lifecycle solutions and capabilities. Simply put, we remain committed to partnering with our customers to drive innovation and unlock the potential of the future. Thank you to our 28,000 employees around the globe who make it all happen. This diverse and talented team is committed to driving our customer success and our transformation. 25 years ago, Celestica was a small manufacturing unit of IBM, building metal subassemblies for its mainframe computers and support systems.
Since then, we have grown into a dynamic multinational company that has diversified, faced challenges, and transformed and continues to thrive. We're excited for the future and committed to driving shareholder value. That concludes my formal remarks. On behalf of the entire Celestica team, our board, I would like to thank you for your support and continued interest. Mandeep and I are happy to answer any of your questions.
Hi there.
Good morning.
Still on. Yep, okay. Good morning. I'm Paul Wernick from Burlington. In previous years, Research in Motion, when they had all the phone sales, that was the major customer for you, wasn't it? That is gone. Now, is that a little bit of a hole in the sales totals, or you've got a whole lot of other things to replace that?
Yeah. I think we disengaged with Research In Motion back in the 2012 timeframe.
You got a whole lot of other things to replace that.
Yeah, we've got a lot of other things, our strategy is really offering higher value-added solutions. Research In Motion, while it was a good customer at the time, our focus right now is not in the consumer market. It's really on the broader enterprise and communication space, and also Advanced Technology Solutions, which supports a number of different markets that we highlighted during the presentation. Consumer products such as Research In Motion, that's not a target segment for us any longer.
Okay. Now, the earnings growth is really not as much as it maybe should be, nor is the share price responding very well. Maybe you want more high-profit contracts in the future than in the past. That's just a suggestion.
Yeah.
Also, how about a dividend? That would be nice for everybody.
Thanks for the question. From a portfolio perspective, we completely agree with you. There is an opportunity to expand the profitability and the margins for the company. The transformation that we've been undertaking for a number of years has been with that sole focus in mind. The ATS business, we believe, can generate margins closer to the 5%-6% range, and the CCS business continues to be a stable foundation while we grow the ATS business. We believe that as we continue to grow ATS, that we're going to be able to bring the margins for the whole company up, which will eventually translate into profitability dollars. ATS, as an example, grew 13% last year. In the first quarter, ATS was up 9%. We've won a tremendous amount of wins in that business over the last two years and we're in the process of ramping them right now.
We believe that the actions are in place right now to continue to move towards that higher profitability. On your question on a dividend, it's always an option that we consider. What we're focused on in the long term is generating strong free cash flow and returning half of that to shareholders. Right now, how we have been doing that is through share buybacks. If you look at how Celestica's performed since 2012 as an example, compared to the rest of our peers in the space, we've bought back more shares than any of our competitors. Our share count's gone down by an average of 5%. By doing that, as you know, as you lower your share count, it increases the level of profitability per share, which ultimately leads to stronger stock performance.
Yeah, it still is lagging, even with the buyback.
It is. The share price reflects our current performance. As we continue to drive the transformation, we believe that shareholder value will increase.
What % of everything is for Canada, what % is for the U.S., and what % is overseas in gross numbers?
Well, it depends on how you look at it.
Yeah.
From an employee perspective, we have 28,000 employees.
No, what you produce.
The employees reflect a lot of our production as well. We have about 1,000 employees in Canada right now. The vast majority of our footprint is in Asia, and we produce the majority of our products out of Asia. Where they end up going, though, often are towards the U.S.
How many employees are there in Asia?
I'm going to say more than half. I don't have the number right off of that, but we do disclose that in our financials.
Okay. It'd be nice to have higher earnings per share and dividend. That's all.
Thank you for your feedback. Appreciate it. One more question, please.
Former shareholder. Good morning. I was gone for a second. I see the shares are down about $1.50 today. I'd like you to explain to me, how do you help the shareholders by not paying a dividend, buying back shares, and the shares are going down? I never understood this. I wish somebody would explain this to me.
Why don't I start off? A dividend, let me talk about dividend because it's come up twice then. The ingredients of doing a dividend is to have strong, consistent levels of free cash flow, and also for that to be our primary avenue for investment. We have a very strong track record of generating free cash flow. We've generated very strong free cash flow for almost our entire tenure. However, over the last 18 months or so, free cash flow has been challenged. The material constraint environment, which Rob has spoken about, has resulted in much greater levels of working capital. Without that consistency in free cash flow over the last couple of years, a dividend would not be a prudent way of returning cash to shareholders. It continues to be an option that we would look at.
The other thing as well is that if you look at how we're deploying our cash, again, our long-term objective is to return to shareholders, and a dividend could be one day an option on how to do that. On the other side, we're investing in the business considerably. We invest about $80 million-$100 million in CapEx every year. As you're aware, we've also deployed capital towards M&A. We've made two strategic acquisitions within the ATS business, and we believe that will drive the growth overall. What we are committed to is driving stronger free cash flow, and we'll continue to return it to shareholders.
Yes, I have no objection to everything. What I have objection to is buying back shares, and I believe it may have been in RIM or Nortel. They bought back shares, didn't pay a dividend or didn't increase the dividend until Nortel went bankrupt. What I'm really trying to say is, putting money in the business, I agree with, but buying back shares, and that goes for every company, who are you trying to kid? If the company makes a mistake, let's say it goes bankrupt like Nortel did, or RIM, or almost there. At least if you pay the shareholders dividend, at least they got something to show for it. Matter of fact, in my case, with Nortel, they just sent me a, I know why they sent it to me, a $300 some kind of settlement. It shows you. That's what I'm saying.
I never agreed with buying back shares. To say you increase the value, that's fine, but if something happens or you lose a contract or something else, the shareholders are flatfooted. At least if you're paying a dividend, they get something out of it. Putting money in a company, I agree with this totally, but not to buy back shares. It's like consolidating shares. Who are you kidding if you take a share worth $2 and go to $20? Everybody knows you. You change the name. You're not kidding anybody. Thanks a lot.
Appreciate your input. Thank you very much.
Thank you. Any further questions? Thank you. That concludes our AGM.
Thank you.