Celestica Inc. (CLS) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day. And thank you for standing by. Welcome to the Celestica Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Craig Oberg. Please go ahead. Craig Oberg: Good morning. And thank you for joining us on Celestica's second quarter 2021 earnings conference call. On the call today are Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer. Rob Mionis: Thank you, Craig. Good morning, everyone. And thank you for joining us on today's conference call. Our strong performance in the second quarter is attributable to the execution of a multi-year transformation. It also reflects the stability and resilience of our global operations and our ability to operate under challenging conditions. Mandeep Chawla: Thank you, Rob. And good morning, everyone. Second quarter 2021 revenue came in at $1.42 billion at the high-end of our guidance range. Revenue decreased 5% year-over-year and increased 15% sequentially. Our non-Cisco revenues grew 6% year-over-year and grew 15% sequentially. We delivered non-IFRS operating margin of 3.9%, 40 basis points ahead of the mid-point of our guidance range, driven by stronger than expected performance in both segments. Non-IFRS operating margin was up 50 basis points year-over-year, and up 40 basis points sequentially. The year-over-year improvement was driven by improved operating leverage in ATS, resulting from double-digit revenue growth and improved CCS performance, including higher HPS revenue concentration. The sequential improvement was due to higher volumes and favorable mix across several businesses, as well as strong performance in our CCS business. Rob Mionis: Thank you, Mandeep. Our financial metrics are beginning to reflect the benefits of the critical decisions we made to improve the business over the last 24 months. We believe we have strong momentum and are opportunistic regarding our ability to capitalize on the opportunities that lie ahead. However, the road ahead does not come without its challenges. Material constraints are becoming more severe in the second half of 2021, and in certain geographies, concerns are rising regarding the resurgence of COVID-19. To the best of our ability, we have factored these dynamics into our outlook and feel confident that our talented team can effectively address any challenges ahead. Now turning to the outlook for our segments. In ATS, we remain on track to achieve our targeted 10% revenue growth in 2021. With continued strength in Capital Equipment, growing momentum in industrial and an expectation of a modest recovery in Commercial Aerospace, as we ramp new wins in the second half of the year, we are on our way towards reaching our target segment margin range of 5% to 6% by the end of the year. Our Capital Equipment business continues to experience very strong growth, supported by demand tailwinds and market share gains. The demand environment in the semiconductor Capital Equipment market remains robust. As we have noted before, we believe that the factors driving this growth have an extended runway and are not short term in nature. We expect these conditions to persist for the remainder of the current year and into 2022. In the display market, we believe that spending is shifting to subsequent periods, as component shortages are delaying new program ramps and capacity expansion plans. We continue to anticipate CapEx spending growth to resume in future periods, supported by new OLED technology shifts and demand tailwinds in key end markets, including mobile, TV and IT applications. We reiterate our expectation for our Capital Equipment business to exceed $700 million in revenue in 2021, which would represent 30% plus growth compared to 2020. In Industrial, we are seeing the beginning of a demand recovery with double-digit growth during Q2 2021 compared to the prior year period, driven by new wins, largely in energy storage and EV charger markets. As an example, we are excited by our recently announced win with Luminar where we will partner to produce its Iris lidar system. With engineering-led wins like this and continuing demand strength across our industrial business, we expect year-over-year growth in Industrial to continue into the second half of 2021. In A&D, while demand appears to have stabilized on a sequential basis, headwinds in the Commercial Aerospace market persists, and the market remains meaningfully softer than a year ago. While we expect demand in Commercial Aerospace market to remain depressed compared to pre-COVID levels into 2022, we do expect a modest recovery to materialize in the latter half of this year and should begin to see sequential improvement as new programs begin to ramp. In our HealthTech business, demand remains robust, supported by new program ramps and COVID-19 related projects. Our outlook calls for continued year-to-year growth for the duration of 2021. In the second half, while we do anticipate a moderation in demand for some COVID-19 products, we expect growth in other programs such as surgical instruments. Now turning to CCS. Our CCS segment continues to perform well. The strong performance is driven by our portfolio reshaping initiative and the continued growth of our HPS business, both in absolute terms and as a portion of our CCS segment revenues. We expect both of these factors to continue to support strong margins in our CCS segment into 2022. Although CCS revenues remain lower on a year-to-year basis, our non-Cisco CCS business is up nearly 8% year-to-date compared to the first half of 2020. Our Hardware Platform Solutions business continues to deliver strong results with year-to-year growth of 24%, primarily driven by robust demand from service providers in our communications end market. Our order book and general market outlook continue to be very positive, and we reiterate our expectations for HPS to achieve double-digit percentage revenue growth for 2021. In the Communications end market, we expect market demand to remain strong in 2021, largely comprised by service provider customers. Both of these customers has backfilled our capacity from the Cisco disengagement. As noted, although we expect Communications year-to-year revenues to be lower compared to 2020 as a result of the Cisco disengagement, we expect Communications revenue growth to resume on an unadjusted basis in the fourth quarter compared to the prior year period. In our Enterprise end market, the demand environment continues to be relatively soft, notably from server customers. We expect that these market conditions will persist for at least the duration of the year. As we enter the second half of 2021, we are pleased that our transformational efforts are yielding results. Our momentum continues to build, and we believe we are positioned where we need to be in order to achieve our strategic goals and financial targets. Our areas of focus for the balance of the year remain unchanged, a return to absolute growth margin expansion, including ATS returning to its target margin range and executing a disciplined capital allocation strategy. As we look to 2022, we expect the market to remain dynamic. However, we believe that robust secular tailwinds, strong operational performance and the ramping of new programs bode well for Celestica. As a result, assuming that the severity of supply chain constraints expected for the remainder of 2021 do not worsen, we anticipate revenue to grow in 2022 compared to 2021 and are targeting to generate $6 billion or more of revenue for 2022, with operating margin within our target range of 3.75% to 4.5%. We are also anticipating that adjusted EPS will expand by approximately 10% or more in 2022 compared to 2021. Our entire team remains focused on executing our game plan and driving the evolution of our business, while effectively navigating any challenges. Their commitment, talent and resiliency of our entire global team remains the driving force behind our success. Their ability to consistently meet the challenges faced by our business and deliver on expectations instills me with the utmost confidence and optimism for the immediate and long-term future of our company. We look forward to updating you on our progress over the coming quarters. And with that, I would now like to turn the call over to the operator for Q&A. Operator: Thank you. Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Please go ahead. Thanos Moschopoulos: Good morning and congrats on the very strong quarter. Rob, historically, you haven't been as specific in terms of providing color on the subsequent year, and so just curious as to what more did you do to do that this time. Do you have a higher level of visibility perhaps given the supply constraints - are customers giving you maybe longer lead times as a result of that? Or does that also speak maybe to your confidence on the sustainability of some of the macro trends like in Capital Equipment? Rob Mionis: Yeah. A little bit of both, Thanos. And thanks for the recognition on a strong quarter. In much of our business because the supply chain constraints are so prevalent and the lead times have extended, we have several customers that are saying they're extending their order horizon and basically saying listen, if - as you could build it, we will take it. So that's giving us some increased confidence. And then just looking more broadly at our wins over the last 18 to 24 months in terms of what we've been able to book gives us this confidence. And then lastly, I would say, just the broad secular tailwinds that we're seeing in the majority of our markets. And I would even say, even in A&D, we're starting to see you know, recovery starting to happen, gives us the confidence to kind of do some foreshadowing of what we think 2022 coming on. Thanos Moschopoulos: Great. And in terms of the supply constraints, it was a $30 million impact on revenue this quarter. What are you assuming it's going to be in the upcoming quarter? I think you commented that it seems to be getting worse rather than better. Rob Mionis: Yeah. It is certainly getting more severe. You know, just stepping back for a minute - I think we got a jump on it. We saw this happening in the second half of last year. So we extended our lead times with our suppliers. We asked - worked closely with our customers to make sure they open up their order books. So for the first half of this year, I think we were only modestly impacted. Going into the back half of the year, I think everyone else has caught up, frankly. So it's going to get a little bit more severe. That being said, the demand that we're seeing is largely not perishable. In fact, the demand is coming in stronger than our guidance range. So if we're able to push through and solve some of these shortages, there's a possibility for upside as well. And lastly I would say that, within HPS, we've got a lot of supply chain resiliency into our design process, which has proven to be a benefit and being a design authority within HPS has given us some incremental leverage versus some of the other EMS players. So at this stage of the game, I would say would be - we're starting off the quarter with a higher amount of revenue that's gated by material, hence, our larger revenue guidance range. But at the same time, we got to beat on it in terms of working it down. Thanos Moschopoulos: Great. Thanks, Rob. Rob Mionis: Thanks. Operator: Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Please go ahead. Ruplu Bhattacharya: Thank you for taking my questions. The CCS segment saw a pretty strong sequential margin improvement. I think the prepared remarks also talked about some one-time disengagement gain. Can you just help us bridge the sequential improvement from 3.1% to 3.7% Mandeep Chawla: Hello, Ruplu. Mandeep here. Yeah. So I would say that overall, the strong performance in CCS was in line with our expectations, high concentration of HPS and HPS performed very well in the quarter. And then, of course, revenues were up sequentially. In terms of the recoveries, we're actually quite pleased by it. As you know, we went through a long disengagement. And along the way, there is a number of various items that need to be negotiated with our end customers. We were able to operationally execute very well and had a number of signed releases in the quarter where we were able to you know, essentially get those recoveries that we were have been working towards for quite some time. But even as we go forward, we continue to expect the CCS business is going to perform very well, as the HPS concentration continues to grow. Ruplu Bhattacharya: Got it. Thanks for the clarification on that Mandeep. I wanted to ask on the guidance for fiscal '22. I think the margin guidance is that, you know, you would be within the 3.75% to 4.5% range. I just wanted to clarify that, because even this quarter you were in that range. Are you seeing that you know, for the full year fiscal '22, you're going to be in that range? Or do you think that every quarter of the year you're going to be in the range? Mandeep Chawla: Ruplu, it's probably a little bit early for us to give the specifics on the quarters because, of course, we're not giving guidance for the full year. But what I would say is this, the performance that we had in the third quarter, we're clearly seeing carryforward right now into the back half of the year. And the strength that we are seeing in the second half is continuing into 2022. As you know, we do have a little bit of seasonality in our business in a sense to Q1 is lower than when you look at the trailing quarters. But overall, the fundamentals are continuing to strengthen. We do feel comfortable to be in the target margin range for the entire year and how each of the quarters play out, we'll get more color as we get closer to it. Ruplu Bhattacharya: Okay. Thanks for that. And just for my last question. I think you talked about the display market pushing out a bit. Do you expect that to come back in the first half of next year? Or is there any color on when that market can come back? Rob Mionis: Hi, Ruplu. It's - right now, I think we're seeing the majority of the ramping happening in '23 relative to '22, reason being some of the chip shortages that are slowing down the introduction of new technologies. So the OEMs, the people buying the CapEx equipment are actually flowing new product launches. And as a result of that, it's slowing down some of our capacity expansion plans. So we're expecting the majority of the ramps actually have been pushing away and we expect it to happen until the end of '22 or into '23 at this stage of the game. Ruplu Bhattacharya: Got it. Thanks for all the details and congrats on the quarter. Rob Mionis: Thank you, Ruplu. Operator: Your next question comes from Todd Coupland of CIBC. Please go ahead. Todd Coupland: Yes. Good morning, everyone. I also wanted to ask about 2022, 6% above Factset in terms of $6 billion versus consensus expectations. Between this quarter and last quarter, what's sort of the biggest changes that you've seen in the market? And if you could sort of rank order those as we think about 2022? Rob Mionis: Hey, Todd. You know, thinking about - I think the biggest change is our conviction in what we're seeing in Capital Equipment. The severity of the chip shortages, the spending strength that we see out of the end OEMs on adding capacity. The investments that people are making and we'll be making in the adoption of 3-nanometer nodes is all expected to you know, accelerate and keep semiconductor Capital Equipment spending very robust. So that's giving us a lot of confidence moving forward. On top of that, we've been actually within Capital Equipment. We've been growing much faster than the market. Certainly, this year and looking at the wins that we've been able to clock up over the last 18-months, we're also anticipating to go faster than the market in next year. We've been gaining share in high level assembly and machining and also new investments in robotics. We've picked up some new customers in display. We've been making some investments in new verticals. And frankly, being the largest and the most capable player out there relative to our peers. Our customers are turning to us, especially in these times because we've been able to meet their capacity, you know, basically deliver on time and be able to ramp officially. So that's giving us a lot of confidence. On top of that, the strength that we're seeing in our HPS business in terms of pure data center growth is giving us a lot of confidence as well. And lastly, you know, just in some of the other segments, we're seeing increased outsourcing in HealthTech. We're seeing a recovery in our Industrial markets. And our Defense markets are starting to pick up based on new program wins, and we're seeing some good growth coming out of Commercial Aerospace, again, moving into the back half of the year and into next year. This has been picking up a little bit. The MRO markets have started to turn. So it's a combination of a lot of different things, Todd. Todd Coupland: Thank you for that. And just on Aerospace and Defense, it sounds like you're being cautiously optimistic. Is that potentially a material swing factor as we go through 2022? Could you just share what some of the upside items could be in that area, what should we watch for in terms of that actually coming through? Thank you. Rob Mionis: Yeah. In terms of 2022 in A&D, I wouldn't call it a material swing factor. We are counting on a gradual recovery of the A&D market. What we're seeing into the back half of the year, we're seeing a little bit of a pickup in Defense, I'll say about - that's about 25% of the growth. The balance of the growth is coming out of Commercial Aerospace. It's being led by new programs wins and market recovery in single aisle, also in business aviation. Some of the dual aisle is starting to pick up a little bit as well. So what the analysts are saying, the industry analysts regarding Commercial Aerospace is they're not expecting full recovery before 2024, but it's more of a modest recovery. And I think we're in line with that modest recovery in terms of how we see our business, our A&D business tracking. Todd Coupland: Right. Just one last question on Commercial Aerospace. You had been on the 737-MAX program. Is - does that need to have a significant turnaround for you to achieve these goals? Or is it - you know, the single aisle and the Defense that can still get you there regardless of what happens there? Thanks a lot. Rob Mionis: Yeah, it's the latter. Our exposure to 737 at this stage of the game from a percent of revenue is very low single digits. So it's just a broad market. Todd Coupland: Great. Thanks a lot. Operator: Your next question comes from Rob Young of Canaccord Genuity. Please go ahead. Rob Young: Hi, good morning. You already reiterated the expectations for the Capital Equipment business at - I think, $700 million, but the Display is pushed out. So the - I guess, the Semi Capital business is materially better than where you thought it was even a couple of months ago. And so I was wondering if you could confirm that, maybe if there's any color around the magnitude of the improvement? And then if the Display business comes back, in the second half of 2022, what does that imply on the margin structure of the Capital Equipment business for those two businesses going strong? Rob Mionis: Hey, Rob. I'll start off, and I'll let Mandeep could have step on that one. So yes, I think our views on the strength of the Semiconductor Capital Equipment business have gotten more bullish as the year has gotten longer. And that's been bolstered by an uptick in our customer's forecast in the mid to - you know, the short to mid-term, I would say, and also been bolstered by some new wins that we have. So again, we're growing much faster than the market. This year, we anticipate to grow much faster than the market next year. So that's giving us a lot more confidence. In terms of the Display market, it is pushing - continues to push to the right. The end fundamentals, and I'll let Mandy talk about the margin profile. But the end fundamentals of that market are still intact in that when the spending does resume based on the availability of just to support the new product launches, it's going to come in the form of increased IT spend. There's broad OLED adoption for PCs and monitors, automotive spending in terms of OLED displays in cars for high contrast and robustness is picking up. Obviously, mobile phones in terms of foldables and new advanced smartphones and large-sized TVs, mini or micro-LEDs, advanced technology OLEDs, all on the horizon. It's just a question of when these product launches will occur and back to that a little bit of time, and that's when spending will happen. And I'll turn it over to Mandeep to talk about the margin profile. Mandeep Chawla: Yeah. Good morning. So as Rob has mentioned, we are growing faster than the overall market right now. We grew over 30% last year. We're attracted towards growing you know, 30% or more this year as well. And a lot of it is because of market share gains overall. So Semi is performing very, very well. From a margin perspective, we're operating at the high end of the target margin range. And that's with Display being at slightly depressed levels. Eventually, we do expect Semi will moderate. But if Display and Semi are both coming in very strong, we do have an opportunity to perform above the target margin range. I think you're hitting on it, though, which is as we look forward, eventually, the Semi demand will normalize, but we have two areas of strength that will, we believe, keep the ATS overall segment in a strong margin profile. One of course, is Display, which still needs to come online. And then Aerospace and Defense, which we expect will be a multi-year recovery, should also help over the coming years. Rob Young: Okay. That's great. And then the HPS revenue expectation, you said over $1 billion in 2021. That is - do you need to be below the pace for this current quarter and the first half? So are you expecting maybe a moderation there? And then I was just trying to reconcile that with the comments around the demand from hyperscale and comms, since it is a big driver behind HPS now. How durable is that demand? And how strong is that pipeline? Mandeep Chawla: Yeah. So it's a great question, Rob, because HPS is just performing very, very well. We mentioned that the year-to-date revenue was around $500 million. And the reason that we shared that we expected to be $1 billion or more is to basically confirm that our second half expectations are in line with the first half, if not more. And so we continue to see very strong growth coming into the back half of the year. It also goes to one of their earlier questions in terms of why are we seeing strength for the $6 billion going into next year, as we've been dealing with the mature constrained environment. We have been working with our customers to get longer order lead times, and in some cases, far more POs. And as Rob also mentioned, from a macro perspective, data center growth rates are very, very high. And we believe that that's continuing into next year. And all of that bodes very well for HPS. So basically to say the second half is going to be as strong as the first half or stronger and that momentum should be carrying into next year. Rob Young: Okay. So you're a bit - you're just a bit afraid that material constraints are going to have a bigger impact on these high growth programs. Is that the factor? Mandeep Chawla: Yeah. I mean, we've taken that into account in our guidance. And so you're hitting on it, which is we believe that we have been able to account for what the challenges of mature constrains would be, but we are - we have an order book that is higher than the guidance that we're providing. And Rob touched on this briefly. But so far, the impact from a mature constraint environment has been basically our inability to deal with the drop in orders and upside. It actually hasn't had a material impact on the revenue that we had in the quarter. So on the HPS side, if we're able to secure all of the materials that we want, we could be growing faster than what we're outlining. Rob Young: Thanks a lot. Operator: Your next question comes from Paul Steep of Scotia Capital. Please go ahead. Paul Steep: Could you talk just a little bit - maybe a different way to think about the visibility into the $6 billion. What - how much of that would actually be sort of booked and secured today? Or maybe stated another way, what else needs to occur to sort of exceed the $6 billion range based on what you already have in hand? Mandeep Chawla: Let me start. And I think it's Jim Suva actually on the phone. So is that right, Jim? We're talking to you? Paul Steep: No, it's Paul. Mandeep Chawla: Oh, Paul. Sorry, Paul. Okay. Paul, what I would say is that overall the growth rate that we're expecting on Lifecycle Solutions is 10% or more. And so we talked already about the growth rates that we're seeing on the HPS side. And then the ATS fundamentals, we're targeting 10% or more next year as well. So if we can achieve 10% growth rate in Lifecycle Solutions or more, we feel that we have a very good line of sight to the $6 billion. On the remaining parts of the CCS portfolio, we are targeting growth in key areas that are strategic for us, and that could possibly present some upside opportunity as well. Paul Steep: Great. And then maybe just the other question related to that would be, how far through the sort of, let's call it, portfolio rationalization are we? Like I know you've discontinued a lot and there's always moving parts quarter-to-quarter. But how sort of happy are you with the overall state of the business, things seem to be definitely heading in the right direction. But I'm just wondering how much more is sort of left to be done and which areas do you think broadly? Mandeep Chawla: I'll start and I'll let Rob finish off maybe. But from a revenue perspective, look, the only tailwind right now in our numbers is from Cisco. That's continuing to impact us on a year-to-year growth basis. But when you look at the portfolio, excluding Cisco, we're growing, and our guidance in the third quarter indicated the same thing. When we look towards the fourth quarter, Cisco is essentially going to lapse by then. And so we are targeting to show revenue growth on an absolute basis starting in the fourth quarter. And I'll let Rob talk about the rest of the portfolio. Rob Mionis: Yeah. Hi, Paul. So with respect to the portfolio actions, you know, as I mentioned before, portfolio management is an active part of our strategy. That being said, we're ranking number one and number two on close to 95% of our customer scorecard. I think we've proven that we're pretty disciplined. So we're not pursuing revenue for revenue's sake. We make sure that the revenue aligns with our capabilities and our strategy. So at times, we might feel that it's better to step away, but that would be through a strategic lens. But right now, I think we're happy with our portfolio. And I think we're growing in all the areas that we want to grow in. And just to pick up a little bit on your first question with respect to next year's $6 billion our anticipation. We just finished our strategic planning process that we do. We do it formally once a year and we refresh it quarterly. So we went market-by-market, account-by-account. We went through the bookings. We went through our technology roadmap. And taking all that into account in the micro and macro environment, we feel pretty good about our ability to flash to everyone here on the call that we plan on doing $6 billion or more next year. We plan on expanding our EPS, and we expand - and we expect to stay within our target margin range for the full year. Paul Steep: Great. That's helpful. Last one for me. Just maybe a broader market question, Rob. What are you seeing in terms of maybe contracting dynamics within A&D, if we think about you know, more specifically the Capital Equipment business any changes out there in terms of how your competitors are going to market? Or do we think we've sort of sustained a nice, healthy environment with strong demand? Thanks. Rob Mionis: Yeah. Within - well, within Capital Equipment, the supply chain, the order visibility is certainly longer given the ordering lead time. So we have a much more robust slot plans with our customers. So that's certainly helpful. And within A&D, a lot of our growth right now is on - is on the heels of new program wins. And it's also on the heels of just I guess, broad market recovery. If you want to look at some leading indicators, if you look at air traffic and the amount of the fleet that's actually parked, as sort of air traffic picks up and some of these parked aircraft start getting back in service. And the OEM build rates pick up, you know, we're expecting our order book to book up. But the contracting process, it's pretty disciplined. And we haven't seen a lot of dysfunctional behavior I would add. Paul Steep: Perfect. Thank you. Operator: Your next question comes from Paul Treiber of RBC Capital Markets. Please go ahead. Paul Treiber: Thanks very much. And good morning. Just wanted to ask a couple of questions on the production side of the equation. Can you speak at a high level what was the strategy you took to mitigate some of the challenges in Malaysia this past quarter? And then also, you know, to what degree can you move production between various facilities that you may have? Rob Mionis: Yeah. So in Malaysia, the team has been very adept at making sure that we understand the government restrictions with respect to material control orders in terms of where people could go, how many people work at different times. So we've been pretty innovative with shift patterns, and other things along the lines to minimize the impact to our customers and also impact the - impact to our financial performance. We also have a pretty broad network. So if we're not able to fulfill work out of Malaysia, then we're able to potentially fill it out of other regions. And that's been helpful, as we move forward as well to answer your second question. Mandeep Chawla: Yeah. Paul, I'll just add that, you know, to date, when we've seen challenges in various countries because, as you know, we're at 14 countries around the world. And we do get impacted by short term closures. We very quickly are deemed to this point to be in central service. And so while we need to work with the local authorities to get the proper documentation in place, we normally, and as we saw in the case of Malaysia, are able to keep the factors running very soon after. Paul Treiber: And a bigger picture question in terms of production, just in regards to 2022, to what extent is your outlook constrained by production capacity? Or maybe another way to ask it is, at what point in revenue, annual revenue, do you need to expand capacity, you know, either bring more facilities on or add existing lines to those facilities? How do we think about CapEx going into 2022 and beyond? Rob Mionis: Yeah. For the most part, we have ample capacity. There are - I wouldn't say any of the investments that we need to make are going to support 2022. But looking at a long range plan, we probably need to make some investments on building out some additional North American capacity, and those are some of the things that we're looking into right now. Some of it might be in Mexico, some of it might be in other areas as we enter into new lines of business. Mandeep Chawla: Yeah. And just to build on Rob's answer. As he mentioned, we've just gone through a very detailed strategic planning process, which includes understanding the investments that we need to make to support order book that we have. And we feel that for the large part, we have sufficient utilization across the factories to support a pretty robust revenue level of growth. On the investments that we're making in the US, these are really on the back of customer orders and customer requests. When we're investing green dollars in the US for facility expansion as an example, we have an order book that follows behind it. And then in terms of just overall CapEx as we look forward, we continue to think that the 1.5% to 2% revenue range will be sufficient. We don't really need to build out a lot more capacity in order to support the revenue. Paul Treiber: Okay… Rob Mionis: One of the things - just one other thing to add, and later on this week, we're having a grand opening in our New Hope facility in Minnesota. That's our ITAR facility to support increased defense work. So I'm looking forward to seeing our brand new facility and meeting some of our customers there. And not only is the defense side, but it's also supporting some of our HealthTech business as well. And we expanded that facility Paul from 50,000 feet to 100,000 feet from where we were to where we are now. Paul Treiber: Okay, good. Thanks for that extra detail. Rob Mionis: Okay. Operator: Your next question comes from Jim Suva of Citigroup. Please go ahead. Jim Suva: Thank you. And it's very encouraging to hear a company like Celestica talk about 2022. Behind that, can you let us know, is it - you have like contracts that give you more confidence or the Lifecycle business is just much stronger? Or was it - you just want to send a message to people out there? It's just kind of interesting to see that you have so much conviction which is quite positive to talk about, you know, 2022 when we saw six months left in this year? Rob Mionis: Hi, Jim. We do have a lot of conviction as we move into 2022. As I mentioned, when you step back, we've really been working very hard on transforming our business, and we think we're to the knot hole, if you will, we're really pleased with the growth of our HPS portfolio. We're really pleased with the investments that we've made in our engineering capability to drive improved margin across our ATS segment. And going through our strategic planning process, going market-by-market, account-by-account, we thought it was the right time in our transformation as we went from transformation to optimization and that we're going from optimization to growth to kind of let our investors know that we feel really good as we move into 2022. And to kind of set some guardrails where we are targeting our business to be in terms of revenue and margin and earnings expansion. We've been getting, I guess, a little bit of top headline news, headwinds from the Cisco disengagement. And frankly, when you step back from it all, we have emerged a much stronger company and we just want to let our investors know that we feel really good about where we have been and where we're going. Jim Suva: Great. Thank you so much for the additional commentary. And congratulations. Rob Mionis: Thank you, Jim. Operator: Your next question comes from Daniel Chan of TD Securities. Please go ahead. Daniel Chan: Hi, good morning. There are some comments in the industry of the chip shortage lasting even longer than expected. Do you think that potentially extends the semi cap price you're seeing? Rob Mionis: Repeat the second part of that. I missed it, I got the first part in terms of extending, but what was the second part of the sentence stand? Daniel Chan: Yeah. Do you think that potentially extends the semi cap strength you're seeing? Rob Mionis: Yeah. There's different views on how long the chip shortage racks. I mean, we heard from the Intel CEO not so long ago about lending well and through you know, through the end of '23, I think he mentioned. My crystal ball is a little murky right now. I do think the chip shortage probably lasts certainly through the end of this year into mid-next year. But as it gets into CapEx spending, I think the peak of CapEx spending as we see it right now, might be in '22. But then frankly, as you look into '23, '24, '25, some of the adoption of the advanced nodes, 3-nanometer at sellers should stabilize it. So I don't think it's going to be again, my word, I don't think it's going to be a sharp decline. I do think we have very strong secular tailwinds for years to come in this space. And again, we have been and we are anticipating to still grow faster than the market. Mandeep Chawla: Yeah. Dan, just to build on it, which is, you know, while the very strong growth that we've seen in semiconductor has maybe accelerated a little bit because of the mature constraint environment, the industry itself has been growing now since 2019. And so even without a constrained environment, we continue to see various good long-term trends happening in the Capital Equipment space for the things that Rob is talking about, the applications that semiconductor is supporting are increasing and becoming more diverse than cycles before. Daniel Chan: Great. Thank you. Operator: Your next question comes from Kurt Swartz of Stifel. Please go ahead. Kurt Swartz: Hi. Good morning. On the supply side, hoping you can just maybe discuss in a bit more detail, which component areas you're seeing as most constrained right now and whether there have been any particular areas that have significantly sort of pushed out from a lead time perspective over the past three months? And then can you also detail any pricing pressure you may be seeing and the extent to which you're able to pass on those elevated costs to customers? Rob Mionis: Sure. So I think the most constrained would be semi cap -- semiconductors, I should say, excuse me, semiconductor lead times are about 31 weeks right now, which, frankly is about 100% higher than normal levels. Several semi suppliers are asking for order coverage through the end of 2022. We're seeing wafer fabs above max capacity at 95%. Right behind it, we're actually seeing capacitors becoming more constrained, capacitors commodities have seen about a 30% increase in lead times over the last six months, whether it's MLCCs or resistors or capacitors. We expect the lead times to further increase as in the back half of this year. We might even get back into allocation, Kurty time will tell. And lastly, to your point, Kurt, material pricing has been on the rise. But I would say, for the most part, the majority of that has been being passed on through the entire value chain. Kurt Swartz: Understood. And then, maybe just on the working capital and cash flow side, how should we be thinking about cadence through the balance of the year and into fiscal '22, given some of the dynamics you've discussed? Mandeep Chawla: Yeah. So Kurt, we're pleased with the cash generation that we've already been able to have about $52 million in the first half of the year. We'll continue to target $100 million for the full year of 2021. And as we look into 2022, we're targeting $100 million or more of free cash flow. We're pleased with the performance that we've had on the working capital side despite the very challenging materials environment. We've generated positive free cash flow for the last 10 quarters, and so we're expecting that to continue as well. And then just in terms of the balance sheet that goes with that, with our leverage at 1.4 times, the balance sheet is very healthy right now. And it gives us an opportunity to really continue to invest in the business by getting money back to the shareholders as well. And so we've been buying so far on our share buyback program. We're buying so far this quarter, and we will continue to be opportunistic on deploying that cash. Kurt Swartz: Great. Thank you very much. Operator: There are no further questions at this time. I would now like to hand the conference back to Rob for any closing remarks. Thank you. Rob Mionis: Thank you. Overall, I'm pleased with our performance for the first half of 2021. Our efforts to diversify our portfolio are yielding results with Lifecycle Solutions, representing 60% of the company's revenue, up 9% from a year ago. And in Q2, the revenue of the company's non-Cisco business grew 6% year-over-year. And in the fourth quarter, we are currently on track to post year-over-year revenue growth on an absolute basis. Additionally, our operating margins continue to expand in Q2, and we posted our sixth sequential quarter of year-over-year non-IFRS margin expansion. As we move into 2022, we are targeting to generate $6 billion or more of revenue with operating margin within our target margin range of 3.75% to 4.5%. We are also currently anticipating that adjusted EPS will expand by approximately 10% or more in '22 compared to '21. We are excited that our efforts to transform our business are yielding results. I'd like to thank our global team for remaining vigilant and keeping themselves and each other safe. And thank you for joining today's call. I look forward to updating you as we progress throughout the year. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.CLS Ratings Summary
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Celestica Inc. (CLS:NYSE) Spotlighted for Bright Future in Tech Sector
Celestica Inc. (CLS:NYSE) has been spotlighted by Zacks Investment Research as a mid-cap technology stock with a bright future ahead, especially for the remainder of 2024. This recognition is not just a nod to its size and scope as one of the leading electronics manufacturing services companies worldwide but also to its strategic positioning within the rapidly evolving tech landscape. Celestica's business model, which spans across Advanced Technology Solutions and Connectivity & Cloud Solutions, enables it to cater to a broad spectrum of customer needs. From crafting low-volume, high-complexity products to delivering high-volume commodity items, Celestica's diverse offerings place it at the heart of the tech sector's growth trajectory.
The company's financial health and growth prospects are particularly compelling. With an expected revenue and earnings growth rate of 14.6% and 36.6%, respectively, for the current year, Celestica stands out among its peers. These figures are underpinned by a robust price-to-earnings (P/E) ratio of approximately 18.25, which reflects investor confidence in paying a premium for Celestica's earnings. Furthermore, the company's price-to-sales (P/S) ratio of about 0.70 and an enterprise value to sales (EV/Sales) ratio of roughly 0.76 indicate a healthy valuation in relation to its sales. These metrics, combined with an enterprise value to operating cash flow (EV/OCF) ratio of approximately 13.72, underscore Celestica's solid financial footing and its ability to generate value for its investors.
Celestica's growth is also mirrored in its operational efficiency and financial leverage. The company's debt-to-equity (D/E) ratio of about 0.37 suggests a moderate level of debt, which is a positive sign for investors wary of over-leveraged companies. Additionally, a current ratio of 1.42 indicates Celestica's competency in managing its short-term liabilities with its short-term assets, further highlighting its operational stability. These financial metrics not only reflect Celestica's current health but also its potential for sustainable growth, making it an attractive proposition for growth investors.
The broader tech rally, fueled by advancements in artificial intelligence (AI) and digital technologies, sets a favorable backdrop for Celestica's growth. As companies and economies worldwide continue to embrace digital transformation, Celestica's offerings in advanced technology and connectivity solutions are more relevant than ever. This relevance is amplified by the U.S. stock market's resilience and the anticipated supportive monetary policies, which are expected to benefit high-growth sectors like technology.
In conclusion, Celestica's strategic market position, coupled with its solid financial metrics and growth prospects, makes it a standout choice for investors looking to capitalize on the tech sector's potential. The company's ability to navigate the complexities of the tech industry, backed by strong earnings growth, cash flow growth, and positive earnings estimate revisions, positions it well for continued success in the coming years.
