Earnings Call: Q1 2018

Apr 27, 2018

Good morning, ladies and gentlemen, and welcome to Celestica First Quarter 2018 Financial Results Conference Call. At this time, all lines are in a listen only mode. I would now like to turn the meeting over to one of your hosts for today's call, Paul Carpino, Vice President, Investor Relations. Please go ahead. Good morning, and thank you for joining us on Celestica's Q1 2018 earnings conference call. On the call today are Rob Mionis, President and Chief Executive Officer and Mandeep Chawla, Chief Financial Officer. This conference call will last approximately 45 minutes. Rob and Mandeep will provide some comments on the quarter, and then we'll open the call for questions. During the Q and A session, please limit yourself to one question and a brief follow-up. As a preliminary note, as described in our press release issued earlier this morning, during the Q1 of 2018, we reorganized our business into 2 operating and reportable segments, Advanced Technology Solutions or ATS, consisting of our ATS end markets and Connectivity and Cloud Solutions, or CCS, consisting of our communications and enterprise end markets. Management's remarks on this call correspond to this new segment structure. Segment performance is evaluated based on segment revenue, segment income and segment margin, each of which are defined and described in this morning's press release. Please visit celestica.com to view the supporting slides and accompanying webcast. Also of note, our Annual Shareholder Meeting will be held this morning at 9:30 am, and the accompanying webcast can also be heard at celestica.com. 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, including those related to our strategies and plans for future growth priorities, trends in our industry, end markets and segments our anticipated financial and operational results and performance non IFRS operating margin goals and financial guidance. 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 the material assumptions on which such forward looking statements are based, as well as further information concerning financial guidance, please refer to the company's various public filings. These include our most recent MD and A and Annual Report on Form 20 F, including the Risk Factors section therein, filed with and in reports on Form 6 ks furnished to, the U. S. Securities and Exchange Commission and, as applicable, the Canadian Securities Administrators. Please also refer to our cautionary statements regarding forward looking information in such filings and in today's press release. Our public filings can be accessed at sec.govandsedar.com. We assume no obligation to update any forward looking statement except as required by applicable loss. During this call, we will also refer to certain non IFRS measures, which include adjusted gross margin, adjusted SG and A, non IFRS operating earnings, non IFRS operating margin, which is non IFRS operating earnings as a percentage of revenue, adjusted net earnings and adjusted EPS, free cash flow, adjusted return on invested capital or adjusted ROIC, adjusted effective tax rate, inventory turns and cash cycle days. These non IFRS measures do not have any standardized meaning under IFRS it may not be comparable with other non U. S. GAAP or non IFRS financial measures presented by other issuers. We refer you to today's press release, which is available at celestica.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. I will now turn the call over to Ron. Thanks, Paul, and good morning. Despite continued volatility in our CCS segment, Celestica delivered on Q1 non IFRS operating margin and revenue guidance, driven by strong results in ATS. We reported record revenue in ATS of 533,000,000 dollars up 8% from Q4 of last year and up 4% sequentially. This growth was primarily led by strength in our aerospace and defense end markets as well as our semiconductor end market. Additionally, not only did ATS achieve record revenue growth, but this segment has now grown year to year for 11 straight quarters, excluding the impact of exiting our former solar panel business. Importantly, as highlighted in our new segment disclosure released today, our growth in ATS is accompanied by a strong and stable margin profile. Year over year, segment operating margins in ATS for Q1 were up 50 basis points to 5.2%. In comparison, CCS segment income was down 44% or 130 basis points on a year over year basis. This meaningful growth in ATS segment income highlights one of the key value drivers of our transformation and represents what we believe to be a key turning point for our company. Uniquely, our total segment income this quarter now reflects the opposite split of our total revenue mix. In Q1, ATS contributed 36% of total company revenue and 62% of total segment income compared to CCS which contributed 64% of total revenue and 38% of total segment income. Importantly, this financial mix shift should help stabilize our overall results from the volatility we are seeing in our CCS end markets. Although we are still working to diversify our overall revenue, we are now meeting a key objective of our transformational strategy, focused on driving more than half of our segment income from ATS. With ATS now contributing greater than 50% of our total segment income, we are excited that this transformation puts Celestica well underway as it redefines itself as a broad based industrial technology services and supply chain company. Clearly, our ATS investments over the past 2 years are starting to demonstrate their intended benefits. These benefits include delivering a more stable margin base for our overall consolidated results, providing both revenue and margin diversification and driving overall revenue growth. To build on this ATS momentum, we plan to continue to invest in this segment organically and through acquisitions. A good example of executing on our strategy is our Atren acquisition, which closed earlier this month and whose financial results and operational performance will stop being reflected in our Q2 results. As you recall, Atren is a leading designer and manufacturer of ruggedized electromechanical solutions, serving primarily military and commercial aerospace applications. We anticipate that this acquisition will add over $80,000,000 per year in revenue to our ETS segment. Atren enhances our established industry leading A and D platform with our capabilities in design and engineering, backplane and connector manufacturing and organized chassis enclosures for air and land A and D applications. These key capabilities combined with a solid track record of servicing global leaders in commercial aerospace and defense aligns well with our strategy and leadership position in this end market. Moving to CCS, in Q1, we continued to see the volatility in this segment that we first highlighted in the second half of last year. By the very nature of its end markets, CCS is more volatile than ATS. However, we believe that we have significant experience in effectively managing this volatility. Overall, CCS revenue was down 2% on a year over year basis, but in line with our Q1 target range. Within this segment, our communications revenue was down 7% compared to a very strong Q1 of last year. Offsetting this decline was our enterprise end market revenue, which was up 6% driven by stronger storage sales. With our expanded disclosure, you can clearly see the margin pressure in TCS over the past year associated with program volatility, pricing pressure and unfavorable mix change. In CCS, our segment margins dropped from 3.0% to 1.7% on a year over year basis. We expect these margins to show steady improvement throughout 2018 as we implement our restructuring and other productivity initiatives. While we achieved our overall company revenue and non IFRS operating margin targets, working capital and free cash flow remain under pressure as customer inventory continues to increase in both our ATS and CCS segments. We are currently in the midst of 1 of the tightest component markets in recent memory. Electronic component demand has rapidly increased, driven by significant deployment of digital technology in the automotive industry and the growth in IoT. The demand for materials continued to accelerate. Supply capacity has not kept pace with this demand and lead times have increased dramatically. This has resulted in material shortages, inventory of buffering across the OEM and customer demand churn. By way of example, the impact of this environment was evident in Q1, where inventory increased sequentially by more than $100,000,000 while revenue declined by $71,000,000 Even more significantly, year over year first quarter revenue was higher by $18,000,000 but inventory grew by $192,000,000 over the same time period. We expect this constrained inventory environment to continue throughout 2018. However, we have strong customer relationships and significant experience working with them through these types of environments. We are also working on various supply based cash cycle initiatives. In this environment, maintaining a strong cash position is essential and Celestica's balance sheet remains one of the strongest in the industry. Despite the cash impact associated with elevated inventory levels, Celestica has been able to remain active with its stock buyback program. During the Q1, we repurchased and canceled 3,300,000 subordinate voting shares for $35,000,000 under our normal cost issuer bid. Since announcing our NCIB program last November, we have now completed over $55,000,000 of this program and have canceled 5,200,000 shares. This program continues until the end of November and we intend to continue buying back shares between now and then. Thoughtful capital allocation and maintaining a strong balance sheet are essential to drive value for our customers and shareholders. As I have stated in the past, this management team will continue to be balanced and strong stewards of our capital. As we continue to move throughout our transformation, our priorities for capital remain focused on pursuing targeted and on strategy acquisitions to further enhance the company's margin profile, drive scale and capabilities in key end markets and expand our customer base, returning capital to our shareholders through share buybacks, and finally, investing to expand our network capabilities through targeted CapEx initiatives and investing in cost management programs to accelerate our productivity. As we plan for the remainder of 2018, we expect our CCS markets will continue to be dynamic. However, as reflected in our Q2 outlook, we expect to see further overall revenue growth and non IFRS margin expansion in Q2, including improvements in our CCS segment margins. Importantly, our Q2 revenue growth outlook reflects continued momentum in ATS. We are targeting a mid teens growth rate in Q2 even before any contribution from Atren. In summary, we are delivering on a strategy we put in place over 2 years ago and are committed to delivering additional margin, mix and revenue improvements throughout 2018 and beyond. We have positioned ourselves well in ATS with a good mix of customers and growing capabilities. We believe there continues to be an excellent opportunity to capitalize on the growth dynamics and outsourcing trends of customers in this segment. In CCS, we have more work to do, but with the world's best OEMs of customers and the very talented and experienced team members of Celestica, we believe we can make the necessary improvements to reduce costs for our customers and improve profitability in the segment's results. Let me close by thanking our global team, who against the backdrop of significant volatility and the implementation of a meaningful transformation strategy, continue to strive to deliver results for our customers and shareholders alike. Thank you for joining us. And now let me turn the call over to Mandeep for additional details. Thank you, Rob, and good morning, everyone. 1st quarter revenue of $1,500,000,000 was above the midpoint of our guidance range and up 1% year over year. Non IFRS operating margin was 3.0 percent in line with the midpoint of our guidance range. Adjusted earnings per share was 0 point 24 dollars $0.01 above the midpoint of our guidance range and we achieved adjusted ROIC of 14.4%. As a reminder, we have adopted IFRS 15 beginning in the Q1 of 2018 and will provide restated comparatives each quarter. Additionally, as we announced last quarter, we are now disclosing segment revenue and segment income for 2 reportable segments, ATS and CCS. This will provide additional insight as we continue to move through our transformational strategy. Let's start with our ATS segment. Growth in Advanced Technology Solutions has contributed significantly to the company's overall growth and has helped mitigate the impact of the adverse market conditions in our CCS segment. ATS revenue for the quarter was 36% of total revenue and was up 8% on a year over year basis, largely driven by new program revenue in Aerospace and Defense and strong demand in Semiconductor Capital Equipment. Strong semi demand also contributed to ATS achieving 4% sequential growth. For the Q1 of 2018, segment income for ATS was $27,900,000 and segment margin was 5.2%, up 50 basis points from the Q1 of 2017. This is the first time in the company's history that our ATS business has operated at this level. This margin improvement was largely driven by improved mix and scale benefit from higher revenue. The CCS segment, which is Communications and Enterprise combined, accounted for 64% of total revenue for the Q1 of 2018. PCS segment income was $16,800,000 translating to a margin of 1.7%. This compares to 3.0% for the Q1 of 2017. The decline in CCS margin reflects the pricing competitiveness in this segment and the margin headwinds we face, including shifts in revenue mix. However, as Rob noted and as we have reflected in our Q2 outlook, we anticipate improvements in this segment as we complete our productivity and restructuring initiatives. Within our CCS segment, the communications end market represents 39% of our consolidated revenue in the Q1. Revenue from this market was down 8% sequentially due to demand softness and seasonality. Communication revenue was down 7% year over year compared to a very strong Q1 of 2017 on softer demand, partially offset by new program revenue, including in JDM. In our enterprise end market, revenue decreased 10% sequentially mainly due to seasonality, but increased 6% on a year over year basis due to stronger demand in storage. Revenue from our enterprise end market represented 25% of total revenue. Our top 10 customers represented 71% of revenue for the Q1, a decrease of 2% from the Q4 of 2017 and up 1% from 1 year ago. For the Q1, we had 2 customers individually contributing greater than 10% of total revenue. Moving to some of the other financial highlights for the quarter. From an IFRS perspective, net earnings for the quarter were $14,100,000 or $0.10 per share compared to $22,500,000 or $0.16 per share in the Q1 of 2017. Lower IFRS net earnings were driven by lower gross margin and higher other charges, including higher restructuring and acquisition costs. Restructuring charges were $6,900,000 this quarter. As we outlined last quarter, we launched an enterprise wide productivity program to identify cost reduction opportunities in our network to increase operational efficiency and productivity. These actions enable us to respond to the volatility in CCS market including pricing volatility. We anticipate that we will incur an aggregate of between $50,000,000 to $75,000,000 in restructuring charges in connection with this program and expected to run through the middle of 2019. So far, we have incurred approximately $15,000,000 of charges. Adjusted gross margin of 6.6% was down 10 basis points sequentially, primarily due to lower revenues. On a year over year basis, gross margin was down 70 basis points due to mix and pricing pressure in CCS. Our adjusted SG and A was $47,000,000 within our range of $45,000,000 to $47,000,000 for the quarter and similar to the same period last year. Non IFRS operating earnings were $44,700,000 or 3.0 percent of revenue, which was at the midpoint implied in our revenue and EPS guidance range for Q1. This was down $5,200,000 sequentially and down $8,500,000 relative to the same period last year. Our adjusted effective tax rate for the Q1 was 18%, within our annual expected range of 17% to 19%. Adjusted net earnings for the Q1 were $33,900,000 Adjusted earnings per share of $0.24 represents a decline of $0.05 year over year. Adjusted ROIC of 14.4% was down 2% sequentially and approximately 5% year over year, primarily affected by lower profitability and higher inventory. Moving on to working capital. IFRS 15 has changed the timing of our revenue recognition for a significant portion of our business from point in time to overtime, resulting in revenue for certain contracts being recognized earlier than under the previous recognition rules. However, the overall impact of this change was immaterial and was reflected in the Q1 outlook we originally provided. The new IFRS standard also shifts dollar balances between inventory and accounts receivables, whereby accounts receivable dollars increase and inventory dollars decrease. Important to note, these changes do not affect the company's cash flow. Under IFRS 15, our inventory increased by $105,000,000 from December 31, 2017 to $929,000,000 at the end of March. The increase in inventory in the Q1 was driven by continuing high levels of demand volatility, late period demand reductions, material constraints and investments in new programs. Inventory turns for the Q1 were 6.4, a decline from 7.2 turns in the Q4 of 2017 and a decline from 7.8 turns in the Q1 of 2017. Capital expenditures for the Q1 were $17,000,000 or 1.1 percent of revenue. Cash used in operating activities for the quarter was $5,000,000 compared to cash flow from operations of $36,000,000 in the prior year period. Driven primarily by elevated levels of inventory, free cash flow was negative $34,000,000 compared to positive free cash flow of $14,000,000 for the same period last year. As Rob noted, we purchased and canceled 3,300,000 subordinate voting shares under our normal course issuer bid program during the Q1 for approximately $35,000,000 This reduced our outstanding shares by 2.3%. In total, we have bought and canceled 5,200,000 shares since the commencement of this program. At March 31, 2018, we had approximately 139,600,000 shares outstanding. Moving on to our balance sheet. Our balance sheet remains strong and continues to demonstrate to our customers our ability to invest and grow with them, while allowing us to pursue targeted acquisitions, while also returning capital to shareholders. Our cash balance at quarter end was $436,000,000 down $79,000,000 sequentially and down $122,000,000 year over year. During the quarter, we made our quarterly repayment of $6,000,000 against our outstanding term loan, which now has a balance of $181,000,000 Our net cash position at March 31, 2018 was $254,000,000 Looking at our guidance for the Q2 of 2018, we expect to show sequential revenue, adjusted operating margin and adjusted EPS growth. For the Q2, we are projecting revenue to be in the range of 1,575,000,000 dollars to $1,675,000,000 The midpoint of this range would represent an 8% sequential revenue increase and 4% year over year revenue increase. 2nd quarter non IFRS adjusted net earnings are expected to range between $0.25 to $0.31 per share. At the midpoint of our revenue range and EPS range, non IFRS operating margin would be approximately 3.2%. Our operating margin for the Q2 is expected to improve based on solid revenue growth, particularly growth in our ATS segment and as we begin to realize some benefits from our restructuring program. Non IFRS adjusted SG and A expense for the 2nd quarter is projected to be in the range of $51,000,000 to $53,000,000 Finally, we estimate our 2nd quarter non IFRS adjusted effective tax rate to be in the range of 17% to 19%, excluding any impacts from taxable foreign exchange. Looking at our end market outlook for the Q2. In ATS, this market continues to experience strong demand and we're anticipating revenue to be up in the high teens year over year. This is being driven by new program ramps, including in our aerospace and defense and semiconductor markets as well as the inclusion of a trend. In our communications business, we anticipate a decline in the mid single digits. In our enterprise end markets, we anticipate revenue to decline by low single digits year over year. In closing, we are pleased with our results and outlook despite the volatility in our CCS business. The focus on building a strong ATS business is progressing nicely as our additional disclosure shows and we believe we can continue to build on our strong position from here. We are accelerating our restructuring program in 2Q to improve our overall financial performance and our goal continues to be in the 3.5% operating margin range in the second half of this year. Now, I'd like to turn over the call to the operator to begin our Q and A. The first question comes from Ruplu Bhattacharya from Bank of America Merrill Lynch. Your line is open. Yes, good morning. Thank you for taking my questions. First on component shortages. Rob, I think you mentioned that that is an ongoing thing. Can you quantify if there was any revenue hit from lack of components in the Q1? And just related to that, in terms of inventory going up $100,000,000 how much of that is because of the component shortages versus WIP versus finished goods? Hi, Ruplu, it's actually Mandeep here and I'll maybe start trying off to answer that. So there's about a $30,000,000 revenue impact in the Q1 due to material constraints. It's slightly higher than what we've seen in previous quarters. Given and as you saw in the remarks, we are seeing that these trends that are happening are going to be continuing for at least another few quarters. And so we expect likely a similar type of impact in the Q2, but that's been built into our guidance already. In terms of the increase in the overall inventory, you're right, material constraints have driven some of it, which is really being reflected through demand churn as well as buffering from our customers. And then just the extended lead times is driving the remaining piece of that. The majority of the changes in our inventory are happening with some of our larger customers. And we are seeing right now that because of the buffering, a lot of it right now is current inventory and it's raw materials. Thanks Mandeep for all for the clarifications on that. And just related as a follow-up on that question, in terms of free cash flow, how should we think about that for the full year? And do you see the component shortages alleviating towards the latter half of this year? Yes. So I'd say that there's on free cash flow, as you know, we continue to target $100,000,000 each year. There's 2, I would say, major assumptions right now that we are continuing to monitor. The first one, and you would have seen it in our press release, is around the timing of the close for the Toronto property sale. Our expectations right now is that, that closing will happen either at the end of this year or early next year. The impact of that from a cash flow perspective is about US45 $1,000,000 So to meet the targets that we're working towards, we would be looking for that property sale to close this year. The second thing is around inventory and it's very dynamic as you know. Our assumption right now is that the inventory situation doesn't get any And if the inventory situation doesn't get any worse, we'll continue to work towards that target. Okay. Thank you so much. Thanks, Ruplu. Next question, Jacqueline. Your next question comes from Paul Steep from Scotia Capital. Your line is open. Great. Thanks. Mandeep, maybe just to continue on the exact same theme. Within inventory in the restructuring efforts you've undertaken, how much could we maybe expect that the restructuring action might help you strip out some of the buffering that's going on across the platform? Thanks. Yes. Hi, Paul. I would say as I maybe I'll talk about restructuring first. As we've shared, it's an enterprise wide cost productivity program. Our estimation is that we will incur $50,000,000 to $75,000,000 taking us into the middle of next year. I think as I shared on the call last quarter, that range being at the higher end of that range would really result in us taking more network based type of decisions, which I think leads into your question on impacts to ongoing business with customers. Right now, I would say that we're continuing to work towards that range. We are anticipating being at the lower end of the range at this time. And so if we were to see changes to our footprint, that's how you would see changes in the inventory come through. Right now, we don't have anything to share in that regard. Okay. And then just maybe switching for one second back to ATS. Rob, can you talk about what you're seeing out there in terms of demand for, I guess, new programs, new wins, how you're maybe approaching the market, obviously, on the A and D side and the semi, maybe the go to market situation? Thank you. Sure. We're seeing ATS has been a strong growth component for us and continues to be a strong growth component. In Q1, we saw heavy demand from semi cap and we think it's going to be a very good year for semi cap this year. And we also see a good year on A and D as well. A and D is really being fueled by adding Atren into our outlook and also our OIP that we announced is coming online and that's ramping fairly nicely as well. In HealthTech, Industrial, those businesses are going through a little bit of softness in the Q1. But as some of the old programs are coming offline and some of the new programs are coming online, we expect both HealthTech and Industrial and Energy actually to be strong growth components this year. Hence, we put out a long term target of 10% ATS growth, organic growth over the long term and we feel good about hitting that target this year. Great. Thank you. Thanks, Paul. Next question, Jacqueline. Your next question comes from Thanos Moschopoulos. Your line is open. Hi, good morning. On ATS margins, there were certainly some good year over year improvements. Is that predominantly a function of operating leverage? Was it a function of program costs, program ramp costs going away year over year? Or were there other factors that you'd point to? And how much room for improvement would you see in that margin percentage in the coming quarters? Yes. Hi Thanos. Yes, we're very pleased with the performance that ATS had in the Q1. It was a record performance for that business. Overall, what we're seeing is really a lot of strength happening in the A and D business as well as continuing demand strength in semi. So we are benefiting from leverage, revenue was up on a year over year basis and we are seeing just strong operational performance as well. As we go forward, again, we're pleased with the performance right now. The target margin range for the ATS business would be in the 5% to 6% range and moving up that scale will come down to mix within the ATS business as well as continuing revenue growth. And then as we look at the 3.5% margin target for the second half, would that be more weighted towards improvement in ATS or would that have more to do with CCS given the restructuring program in place? Yes, more the latter Thanos. Again, we're going to work to be within that target range of 5% to 6%, but there will be some ebbs and flows as we go quarter to quarter, as we ramp certain programs, as demand shifts from one segment to another. In terms of the even the 3.2% that we are guiding for the 2nd quarter, it is reflective of some traction that we're making on the restructuring effort. And we continue to feel that we will be in the 3.5% range in the back end of the year. And that's going to be driven by some growth in ATS as well as the integration of Atren, but also largely because of the productivity improvements we're expecting to see in CCS. Great. I'll pass the line. Thanks. Great. Thanks Thanos. Next question, Jacqueline. Your next question comes from Jim Suva from Citi. Your line is open. Thanks very much. On the ATS comments, I think you said up 15% year over year next quarter, which is encouraging. Can you let us know organically what would that be? Because I believe that's potentially helped by integration of an acquisition. And then on the CCS, have pricing or the dynamics gotten worse or continued to improve or continue to worsen? Or how should we think about that? Because now you're doing a restructuring that you announced. It seems like it's kind of things beyond your control. And then I may have a follow-up. Thanks. Hi, Jim. I'll take your first question and pass the second question to Rob. In terms of the ATS growth rate, so you're right, we made two comments in the script. Without Atren, our expectation is that we will be up in the mid teens year over year. And with Atren, we expect to be in the high teens year over year. And then on the pricing, Rob can give you any thoughts. Yes. I think the pricing dynamic has certainly got a little bit more severe in recent history. We have experienced pricing dynamics in the past and we've navigated through them well in the past. It's really being driven by 2 factors, the OEM consolidation, I. E. They need less providers and there's excess capacity out there. But the good news is that we have been winning and keeping our share and now we're just working the productivity initiatives in order to drive increased profitability and also working with our customers to increase our value added services such that we could both be able to move up the margin chain. Okay. Then my follow-up is, if you mentioned you continue to win your share and not lose share in your CCS segment. I believe companies like Cisco and stuff like that are in there. Cisco's growing revenues and things like that. So I'm just kind of just trying to bridge the thing of you not giving up some programs or losing some programs yet, companies like Cisco growing. So how should we bridge those differences of trends of what we're seeing out there in the marketplace? Yes, it comes down to the mix of programs that participate and support versus what the broader our broader customers participate in. Got you. And then lastly, so the program that you participate on, are there a lot more in the future like the next 12 months that we should see that are rolling off that you're not on the new ones? Or are we at the worst part of it now? Or how should we think about that? Because it's really the divergence of what we're seeing in the industry versus your CCS trends. I would think about it as there's some programs that we're on that are trailing off and there's some new programs that we won that haven't yet picked up. So we see ebbs and flows, especially in our comms market, and that's what you're seeing in our results. Okay. And last thing, any comments on optical? Yes. On optical, we had very strong year last year. We're up 30 ish percent, I think it was. So the comps on a year over year basis for us are a little bit tougher. But that being said, we have seen weakness here in the Q1 and expect to see weakness in the Q2 as well at optical. We are seeing strength in networking. And why the weakness? Well, the comps are a little bit tougher year over year and some of the programs that we're on specifically on optical systems are trailing off a little bit. Okay. Thanks so much for the details. Yes. Great. Thanks, Jim. Next question, Jacqueline. Your next question comes from Todd Coupland from CIBC. Your line is open. Yes. Good morning, everyone. So I just want to make sure I have the rhythm of the cash this year. So is it fair to think about sort of restructuring and real estate to roughly offset each other and then cash flow and the acquisition to offset each other. So the delta really is the inventory build and it's going to be tough to get that back given the trends that you're talking about. Is that basically include all the major items? It does Todd and it's a good way to think about it which is the proceeds from the Toronto sale would be about $45,000,000 If we were at the low end of the restructuring program and we were to complete it in 2018, it would imply about $45,000,000 of cash that we would use. Of course, there's a range on that, but ballpark numbers, those offset each other. On the inventory side, if you think about the fact that we were able to typically generate $100,000,000 of free cash flow on a historical basis, A lot of that comes in through standard working capital. So if inventory is not getting a lot worse, we would typically be in that range. The other caveat I would say though is that, as you know, in our industry, as we grow the top line, it does consume working capital. And so if demand was to be very strong as we go into the back end of the year, that would be a near term headwind. Okay. And in spite of not having sort of the traditional free cash flow in your sight this year, does the balance sheet still give you the flexibility to act on M and A and or buyback or both? Yes, absolutely. So we have a $436,000,000 of cash net cash position of close to $250,000,000 with the Atren acquisition included, which closed on April 4th, so we funded it on our revolver at this time. We're only at 1.2x leverage. Our S and P rating, as you may have seen, we got renewed a couple of weeks ago. And we continue to believe that we have the ability to lever up 3.5x, but we're focused on being under 3x leverage. But if we were to leverage to even up to 3.5x, we think that we would have dry powder of close to $700,000,000 which we can continue to deploy on buying back shares, continue to deploy on targeted and focused M and A. Okay, that's great. And then just to the actual trends in inventory, so you call out auto and IoT. Can you maybe just comment on what types of applications in both of those areas are actually pressing the supply chain? Just a couple of examples and color would be helpful. Thanks a lot. Yes. So this is Ross. So on components, we've seen lead times dramatically increase year over year in memory. We're actually seeing lead times up about 50% year over year, standard lead times. Discrete is about 50%. Passives right now are probably the most constrained. MLCC's lead times are maybe upwards of or close to a year, and it's giving the entire industry some pause as well. And linear and logic also are up quite a bit on a year over year basis. Based on what we're seeing and what we're hearing, we do expect NAND to get maybe a little bit better towards the end of this year, but we are hearing that the balance of the place will be constrained to the balance of 2018. Thank you, gentlemen. Thanks, Todd. Next question, Jacqueline. Your next question comes from Robert Young from Canaccord. Your line is open. Hi, good morning. Just an additional bid on that last question. How much money on or how much cash on the balance sheet do you require to run the existing operation? Like is there a certain amount that you need to have there that is not available to M and A, sort of that 700 number if you lever up, like what amount would you have to subtract to run the business? Yes. So when we when I talk about the dry powder, it does take into account excess cash. We've typically said, Robert, anywhere between 5% to 7% of our revenue would be required. There's a range on that and I hate to say it, but it depends. And what it depends on is the geographical distribution of the cash. We have continued to repatriate cash from overseas. We want to do it in a tax efficient manner. But we believe to run the operation on a day to day basis, 5% to 7% is typically a good rule of thumb. Okay. And then on some of the margins that you've been given on the call, I think you said ATS could eventually hit 5% to 6% range. Is that informing the 3.5% in the second half? Like should if I look at 5.5%, if I pick the midpoint, then that suggests that the CCS business would have to get to around 2%, which would be expansion from 1.7% this quarter. And so is that a good way to think about it? Yes, I would say operating within that range of 5% to 6% is going to come down to largely mix. There are some segments that we operate in as you know that we make significant investments in. There's higher various entry, there are high regulatory. And so significant investments in. There's higher barriers to entry. They're high regulatory. And so therefore, they do drive some higher margin from a P and L perspective. We have other segments that aren't necessarily in that same situation. So it does come down to mix. The expansion that we are expecting to get to 3.5% are driven again by the restructuring program continuing to take root, the integration of Atren as well, which is off to a good start so far since the deal is closed And they're just continuing to perform in ATS. But we do expect to your point CCS to get better as we go through the year. Okay. And I think you said earlier in the call that you expect growth and improvement in margins in 2018 in CCS. Did I hear that correctly? Yes. As the restructuring program continues to take root, we would expect margins to improve in our CCS business. Okay. And one last little thing. I think you said that the impact of IFRS 15 on the Q2 guidance was nominal. Was that correct? Correct. It's immaterial and it's been factored into our guidance. Okay. Thank you. Thanks, Rob. Next question, Jacqueline. Your next question comes from Paul Treiber from RBC Capital Markets. Your line is open. Yes. Thank you and good morning. I just want to follow-up on your one of your last comments just in regards to Adrian and the integration plans. Just how is the integration going? And then also, it's my understanding that Atrient was a couple of businesses. Are you looking to more closely align and integrate those businesses into the ATS segment? Yes. So it's still early days, but the Atren acquisition is going quite well. In fact, the team was up here in Toronto, sales team and our ATS sales team is already doing account mapping and plotting the path ahead in terms of top line opportunities. Our approach right now with Atren is to focus on the areas of integration that yield the most synergies. And that's really in some of the areas of COGS and some of the areas on the top line in terms of penetrating new accounts with our expanded offering. And then tell us that is I'm sorry, go ahead. No, in terms of integrating into the entire business, Atren is reporting into our ANDC. And just, yes, the follow-up is in regards to the ATS outlook for 5% to 6% margins, should we think of Atrient as being accretive to that level? Or is it, it's basically inclusive of Atrient already? Yes. We haven't disclosed the specific margins for Atren, but it is a we did share though that it was purchased at a high single digit It is accretive to the company's average. Okay. Thanks so much. And it is inclusive with any Great. Thank you, Paul. Next question, Jacqueline. Your next question comes from Gus Papageorgiou from Macquarie. Your line is open. Hi, thanks. So you said that there's 2 customers that account for 10% plus sales. I'm wondering, could you tell us would you have any customers that would account for more than 10% of segmented income? Gus, well, on the CCS side, the answer would be yes. Those two customers would carry over. And on the ATS side, I'm going to get back to you on these specific percentage. I don't want to misspeak if they're straddling the line. What about in total? Like in total segmented income, would anybody represent more than 10% of segmented income? We don't break it out in that way. And as you know, it's again, that's inflows within our businesses. So we don't break out profit concentration at the customer level. Okay. Thanks. Thanks, John. Next question, Jack. There are no further questions. I'll turn the call back over to the presenters for closing remarks. Thank you. And in my view, we're doing what we said we're going to do and executing on a strategy. We have some fantastic momentum in ATS. We had record revenue and profits in Q1. And CCS, we are experiencing some headwinds, but we have great experience in navigating through these waters and our actions are starting to yield results. I look forward on updating you on our next quarter results. Thank you again. Thank you, everyone. This concludes today's conference call. You may now disconnect.