Celestica Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 10 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Celestica Q4 2023 Earnings Conference. This call is being recorded on Tuesday, January 30, 2020 4. I would now like to turn the conference over to Craig Oberg, Vice President of Investor Relations and Corporate Development. Please go ahead.

Speaker 1

Good morning, and thank you for joining us on Celestica's Q4 2023 earnings conference call. On the call today are Rob Mionis, President and Chief Executive Officer and Mandeep Chawla, Chief Financial Officer. As a reminder, during this call, we will make forward looking statements within the meanings of the U. S. Private litigation Reform Act of 1995 and applicable Canadian securities laws.

Speaker 1

Such forward looking statements are based on management's current expectations, forecast and assumptions, which are subject to risks, uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions, forecast or projections expressed in such statements. For identification and discussion of such factors and assumptions as well as further information Our most recent Annual Report on Form 20 F and our other public filings, which can be accessed at sec.govandsedarplus.com. We assume no obligation to update any forward looking statement except as required by law. In addition, during this call, we will refer to various non Financial measures, including ratios based on non IFRS financial measures consisting of non IFRS operating margin, adjusted gross margin, Adjusted return on invested capital or adjusted ROIC, adjusted free cash flow, gross debt to non IFRS trailing 12 month adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, adjusted SG and A expense, adjusted effective tax rate and operating earnings. Listeners should be cautioned that references to any of the foregoing measures during call denote non IFRS financial measures, whether or not specifically designated as such.

Speaker 1

These non IFRS financial measures do not have any standardized meanings and may not be comparable to similar measures presented by other public companies that report under IFRS or who report under U. S. GAAP and use non GAAP financial measures to describe similar operating metrics. We refer you to yesterday's press release and our Q4 2023 earnings presentation, which are 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 financial measures to the most directly comparable IFRS financial measures from our financial statements and a description of recent modifications to specified non IFRS financial measures.

Speaker 1

Unless otherwise specified, all references to dollars on this call are to U. S. Dollars and per share information is based on diluted shares outstanding. Let me now turn the call over to Rob.

Speaker 2

Thank you, Craig. Good morning, everyone, and thank you for joining us on today's call. We ended the year with a very strong 4th quarter, achieving revenue of $2,140,000,000 which was towards the high end of our guidance range, Well, our non IFRS adjusted EPS came in at $0.76 exceeding the high end of our guidance range. Our non IFRS operating margin was 6%, exceeding the midpoint of our revenue and non IFRS adjusted EPS guidance ranges. The outperformance in the Q4 relative to our guidance was driven by continued strength in our CCS segment, Supported by the sustained growth of our hyperscaler portfolio.

Speaker 2

We continue to see the benefit of improved mix to our CCS segment margin, Which reached yet another new high of 6.7% in the 4th quarter. In our ATS segment, Revenues were down slightly year to year as incremental demand softness in our industrial business and continued demand headwinds in our capital equipment business More than offset strong growth in our A and D business. Our solid performance in the 4th quarter And consistently delivered on our financial objectives. In 2023, our business generated revenue of approximately $8,000,000,000 10% higher than 2022, driven by strong growth in both our CCS and ATS segments. Our non IFRS adjusted EPS of $2.43 was up 28% versus the prior year, While non IFRS operating margin of 5.6% was higher by 70 basis points, with both results marking the highest in the company's history.

Speaker 2

Our strong profitability and working capital management Allowed us to generate non IFRS adjusted free cash flow of $194,000,000 exceeding our full year target of $150,000,000 Before I provide an update on the market outlook for each of our businesses, I would now like to turn the call over to Mandeep, who will provide further details on our Q4 financial performance and our guidance for the Q1 of 2024. Mandeep, over to you.

Speaker 3

Thank you, Rob, and good morning, everyone. 4th quarter revenue came in at $2,140,000,000 towards the was 70 basis points higher year over year and marked the highest quarterly results in the company's history. Our margin segment. Non IFRS adjusted earnings per share for the Q4 was $0.76 exceeding the high end of our guidance range. This result was $0.20 higher year over year, driven primarily by higher non IFRS operating earnings as well as lower interest costs, A more favorable non IFRS adjusted effective tax rate and lower shares outstanding.

Speaker 3

Moving on to our segment performance. ATS revenues in the Q4 were $803,000,000 down 2% year over year, slightly below our The year over year decline in ATS segment revenue Was driven by demand softness in our industrial business, primarily as a result of slowing demand in certain programs, as well as continued demand headwinds in our capital equipment business. These declines were partially offset by solid performance in our A and D business, which saw growth of more than 20% compared to the prior year period. ACS segment revenues accounted for 38% of total revenues in the 4th quarter compared to 40% in the same period last year. Our 4th quarter CCS segment revenue of $1,340,000,000 was up 10% compared to the prior year period, driven by very strong growth in our enterprise end market, partially offset by anticipated demand softness in our communications end market.

Speaker 3

CCS segment revenue accounted for 62% of total company revenues in the quarter compared to 60% in the prior year period. Enterprise end market revenue in the Q4 was up 46% year over year, meaningfully above our expectation of a high 20s percentage increase. This growth was driven by ramping programs and strengthening demand for AIML Compute from our hyperscaler customers. Similar to last quarter, the decline was driven primarily by tough comps as some of our customers continue to digest inventory purchased in the prior year. HPS revenue was $484,000,000 in the quarter, 1% lower year over year.

Speaker 3

HPS revenues were 23% of total company revenues in the Q4 compared to 24% in the prior year period. Turning to segment margins. ATS segment margin in the 4th quarter was 4.7%, up 30 basis points year over year, driven by strong productivity and favorable mix. PCS segment margin during the quarter was 6.7%, up 80 basis points year over year driven by higher volumes and improved mix, including significant growth with our hyperscaler customers. During the Q4 and for 2023, we had one customer which accounted for more than 10% of total revenues, representing 29 In the areas of networking and compute, the products we build are highly complex and as a result, the majority of these programs are single sourced.

Speaker 3

In addition, we are pleased that as a result of our strength in engineering and solid operational execution, we continue to win new programs with this and expect to see demand strength continue through 2024 and into 2025. Moving on to some additional financial metrics. IFRS net earnings for the Q4 were $84,000,000 or $0.70 per share compared to net earnings of $42,000,000 or $0.35 per share in the prior year period. Adjusted gross margin for the Q4 was 10.4%, up 100 basis points year over year due to improved mix and production efficiencies. 4th quarter non IFRS adjusted effective tax rate Was 20% in the quarter compared to 23% in the prior year period.

Speaker 3

Non IFRS adjusted ROIC for the 4th Moving on to working capital. At the end of the Q4, our inventory balance was $2,110,000,000 Down $155,000,000 sequentially and down $244,000,000 year over year. Cash deposits were $905,000,000 at the end of the 4th quarter, up $30,000,000 sequentially and Higher by $79,000,000 compared to the prior year period. When accounting for cash deposits, inventory at the end of the 4th quarter was lower by $323,000,000 on a year over year basis and lower by $185,000,000 sequentially. Inventory days, net of cash deposit days were 62 in the Q4 compared to 79 in the prior year period.

Speaker 3

We are pleased with the improvements we are seeing in inventory as material constraints continue to improve and compulse and lead times normalize. Cash cycle days were 72 during the 4th quarter, flat sequentially and 8 days higher than the prior year period. Capital expenditures for the quarter were $33,000,000 or approximately 1.5 percent of revenue compared with 1.6 percent of revenue in the Q4 of 2022. For the full year, capital expenditures were $125,000,000 or 1.6 percent of revenue as we continue to invest in growth across our network to support customer demand. As we look to 2024, we expect our capital expenditures to modestly increase to between 1.75% and 2.25% of revenues With a higher level of spend in the first half of the year, our increasing level of capital expenditures is geared towards capacity We are currently building out over 100,000 square feet of additional capacity with the first phase expected to be online in the Q1 of 2024 And the second phase expected to be completed in the first half of twenty twenty five.

Speaker 3

This expansion is being partially funded by a co investment with 1 of our hyperscaler customers To facilitate demand for highly specialized data center products. And in Malaysia, we are building more than 80,000 square feet of capacity to support strong demand from customers in our CCS segment, including our HPS business. This addition is expected to be online in the first half of twenty twenty four. Turning to non IFRS adjusted free cash flow. We generated $84,000,000 in the 4th quarter This result brings our total free cash flow for the year to $194,000,000 ahead of our full year outlook of $150,000,000 and approximately double our results from 2022 of $94,000,000 The outperformance was driven by strong profitability and working capital management.

Speaker 3

Looking forward to 2024, we are expecting $200,000,000 or more of non IFRS adjusted free cash flow, $25,000,000 higher than the outlook we shared in our November virtual investor meeting. Moving on to some additional key metrics. At the end of the Q4, our cash balance was $370,000,000 higher by $17,000,000 sequentially. In combination with our approximately $600,000,000 of borrowing capacity under our revolver, this provides us with liquidity of approximately $1,000,000,000 Which we believe is sufficient to meet our anticipated business needs. Our gross debt at the end of the Q4 was $609,000,000 Leaving us with a net debt position of $239,000,000 Our 4th quarter gross debt to non IFRS Trailing 12 month adjusted EBITDA leverage ratio was 1.1 turns, flat sequentially and down 0.2 turns compared to the same period of last year.

Speaker 3

As of December 31, 2023, we were compliant with all financial covenants under our credit agreement. During the Q4, we purchased approximately 400,000 shares for cancellation under our normal course issuer bid 2% of our shares outstanding at year end at a total cost of $36,000,000 In December, the TSX accepted our normal course issuer bid, which is in effect until December 2024. Under this new NCIB, we are authorized to purchase up to approximately 11,800,000 shares or approximately 10% of the public float. We continue to believe that investing in our share buyback program is a good use of capital and intend to repurchase shares on an opportunistic basis in 2024. Now turning to our guidance for the Q1 of 2024.

Speaker 3

1st quarter revenues are expected to be in the range of 2,025,000,000 to $2,175,000,000 which if the midpoint of this range is achieved would represent growth of 14% compared to the prior year period. 1st quarter non IFRS adjusted earnings per share are expected to be in the range of compared to the Q1 of 2023. If the midpoint of our revenue and non IFRS adjusted EPS guidance ranges are achieved, non IFRS operating margin would be 6.0%, which would represent an increase of 80 basis points over the same period last here. Non IFRS adjusted SG and A expense for the Q1 is expected to be in the range of $62,000,000 to $64,000,000 We anticipate our non IFRS adjusted effective tax rate to be approximately 20% for the Q1, excluding any impact from taxable foreign exchange or unanticipated tax settlement. Our Q1 guidance assumes that our income will be subject to global minimum tax as legislation that has been introduced in Canada may be approved before the end of the quarter.

Speaker 3

If this legislation is not substantially enacted in the Q1, Our estimate for our Q1 non IFRS adjusted effective tax rate would be approximately 15%. Now turning to our end market outlook for the Q1 of 2024. In our ATS segment, We anticipate revenue to be down in the low single digit percentage range year over year, driven by demand softness in our industrial business and Ongoing market softness in capital equipment, partly offset by continued growth in A and D. We anticipate revenues in our communications end market to be up in the low single digit percentage range year over year, driven by strengthening demand in networking from hyperscaler customers, including in our HPS programs. Finally, in our enterprise end market, we expect revenue to be up in the high 60s percentage range year over year, Driven by anticipated demand growth in AIML Compute Programs from our hyperscaler customers.

Speaker 3

I'll now turn the call back over to Rob to discuss the outlook for each of our end markets and the overall business.

Speaker 2

Thank you, Mandeep. Before discussing the outlook for our markets, I would like to reaffirm the following metrics from our 2024 financial outlook that we provided at our virtual investor meeting in November. We continue to expect revenue of $8,500,000,000 or more, Non IFRS adjusted EPS of $2.70 or more and non IFRS operating margin to be in the range of 5.5% to 6 In addition, as Mandeep mentioned, we have raised our non IFRS free cash flow outlook for the year to $200,000,000 or more. We are pleased with our strong performance in 2023 and continue to see Very positive momentum in the Q1 of 2024. As such, we are currently undertaking discussions with our customers and suppliers In order to obtain better visibility into the remainder of the year, and we look forward to providing an update on our 2024 outlook with our Q1 results.

Speaker 2

Now moving on to the outlook for each of our businesses. Beginning with our ATS segment, Our industrial business recorded annual growth of 29% in 2023, driven by ramping programs in smart energy and EV charging. However, we began to see signs of market softness towards the end of the year due in part to pockets of weakness in the broader economic environment, higher interest rates as well as some delays in new program ramps. As such, we expect to see lower revenues in our industrial portfolio Our industrial business for all of 2024 when compared to 2023. We continue to believe that the structural Trend in markets such as EV charging, smart energy and telematics amongst others remain intact and are supportive to growth in our industrial business In our A and D business, the sustained recovery in commercial aerospace has seen domestic air travel Surpassed pre pandemic levels in many economies, resulting in annual revenue growth of more than 30% in 2023 Looking ahead, we expect to see strong demand across our commercial aerospace submarkets to continue in 2024.

Speaker 2

Our defense business is also expected to see solid growth in the year ahead, supported by new program wins And increased government investment in military capabilities. Overall, we anticipate the solid demand to drive Low double digit percentage growth in our A and D business in 2024 compared to 2023. In our Capital Equipment business, Market forecast continue to suggest that the underlying market demand is operating close to trough levels and we should see flat to Slightly higher demand in 2024. We are maintaining our outlook for modest revenue growth in our capital equipment business in 2024, Supported by the ramping of new program wins and our assumption of base demand holding flat for 2023. We anticipate That the year to year growth will largely be in the back half of the year setting up for a stronger recovery in demand in 2025.

Speaker 2

In our Healthtech business, we anticipate our revenue to grow in 2024 compared to 2023 as we ramp new programs. So for our overall ATS segment, we are currently anticipate that revenue will decline slightly in the first half of twenty twenty four That segment revenue will resume year to year growth in the second half of the year. Overall, we are maintaining our expectation for ATS revenue growth in the mid single digit percentage range in 2024. Now turning to our CCS segment. The demand backdrop Our CCS segment continues to be very strong.

Speaker 2

Investments from hyperscalers and data center infrastructure are fueling significant CapEx spending, Given by growing demand for artificial intelligence and machine learning applications. In 2023, our portfolio with our hyperscalers saw revenue growth of 32% compared to 2022, recording nearly $2,900,000,000 in revenues. This accounted for 62% of our total CCS segment revenues in 2023, up from 51% the prior year. At our recent virtual investor meeting in November, We delved further into this dynamic, which we believe is long term and structural in nature. We anticipate this solid growth to continue in 2024 and believe that this investment cycle has the potential to support several years of strong demand for our CCS segment.

Speaker 2

The demand outlook for our enterprise end market continues to be impressive as a beneficiary of hyperscale's growing deployment of AIML Compute capacity. We're seeing the strong momentum from 2023 continue. And as mentioned earlier, we anticipate significant growth within our AIML compute portfolio as we enter 2024. We expect additional growth in our storage business to materialize in the latter half of the year, driven by demand from new programs. After experiencing some softness in 2023, demand in our communications end market is anticipated to resume year to year growth in the Q1, driven by a resumption of strength in networking demand from hypersales, which is expected to persist throughout the year.

Speaker 2

Within our HPS business, we anticipate to resume year to year growth in the Q1 of 2024 and for the full year. This growth is being fueled by a number of new program wins in both networking, supported by growth in our 400 gs and 800 gs platforms, And to some extent, AIML Compute. For 2024, we are maintaining our previously communicated expectation of low double digit percentage revenue growth in our CCS segment, supported by solid growth in both our enterprise and communications end markets. Although we are seeing some divergence in the short term demand dynamics underlying our various end markets, we believe that the fundamentals Supporting our overall business are very constructive due to the benefits of our strategic portfolio diversification and our consistent execution. We feel that our positioning for 2024 remains positive as we remain confident in our ability to meet our financial outlook and improve on a very strong performance in 2023.

Speaker 2

With that, I would now like to turn the call over to the operator for questions. Thank you.

Operator

Our first question comes from the line of Robert Young from Canaccord Genuity. Please go ahead.

Speaker 4

Hi. Can you give us a little bit of color on the hyperscale business and CCS given the large customer Accounting for 29%. It's a pretty significant chunk. Maybe if you could talk about the business outside of that large customer. Is that driven by the high level of AI compute currently and there's one customer or small number of customers there?

Speaker 4

Or is there some other dynamic going on there.

Speaker 2

Hi, Rob. So this particular customer, it's a hyperscaler customer. They're making program for this customer and it's comprised of everything from hardware platform solutions to high value EMS to even services. They're an industry leader. We've been doing business with them for over a decade.

Speaker 2

And they're also co investing with us on Some CapEx facility investments over in Thailand. So a very healthy relationship. Across the broader hyperscaler business, we're also seeing strong growth from several others in the same area And we expect the concentration to improve over time as ebbs and flows people's investment cycles.

Speaker 5

I would just add to that Rob that as a reminder we do business with the top 5 hyperscalers and while we are doing a lot of AI and non compute with the We're really encouraged that as we go into the Q1 now, we're seeing growth resume in communications, we're seeing growth resume in hardware platform solutions And those are offerings that we provide across the customer base.

Speaker 4

Okay. Thank you. And then the second question, maybe I'm getting ahead of myself. Given, you're doing so well in the enterprise business in CCS at 6.7% and you're entering that The guide looks like 6%. So it looks as though it's going to decelerate in the back half of the year.

Speaker 4

Maybe if you could just discuss that and I'll pass the line.

Speaker 5

Yes. Robert, I'll talk about 2 things. One is the outlook for the full year and then I can talk to your point on margin specifically. So when we look at full year 2024, we're really pleased with the way we ended 2023. And clearly, we're off to a really hot start now into the Q1.

Speaker 5

And again, encouraged by where we're seeing the demand signals come through both on comps and HPS, but also the demand signals from the hyperscalers continue to strengthen. As you know, in November, we provided the outlook of $8,500,000,000 or more and $2.70 of EPS or more. And right now, we really do see that as being the floor. What we are looking to do as Rob mentioned in his prepared remarks is we're going back out to the customer base and revalidating the second half outlook. We're having we're seeing that increased strength happening in the first half and now what we want to do is go and validate whether or not those increasing level of demand Signals are going to be added to the second half as well.

Speaker 5

So in April, we'll come back with an updated forecast. To your point on the margin profile itself, as we talked about, ATS is expected to see some very minor levels of declines in the first half of this year before resuming growth in the back end of the year. ATS again, we're expecting across all of our end markets to have some level of growth in 2024. But because that growth in the back half is going to be off the back of ramping There is going to be a little bit of margin challenges around there as well. Again, 6% for the Q1, believe the $270,000,000 is the floor.

Speaker 5

And obviously, we're going to be working towards the high end of that 5.5% to 6% range as best we can.

Speaker 2

And one other thing I would add, Rob, I By the end of the Q1, we'll have better visibility into our capital equipment markets. We are seeing some Signs of recovery. We're cautiously optimistic. A lot of some of our customers are starting to restock consumables and spares, Which is a good sign. So I think as capital equipment gets better, so will some of the ATS margins as well.

Speaker 1

Okay. Thank you. I'll pass the line.

Operator

Thank you. We have our next question coming from the line of Maxim Matychinsky from RBC Capital Markets. Please go ahead.

Speaker 6

Hi, good morning. Just on the communications segment, has there been any changes to your expectation for The networking growth to resume in Q1 or is it just the OEM business that's offsetting the hyperscaler strength? I think I see that the guidance implies a quarter. So is that to mean that that is primarily because of the OEM business softness?

Speaker 2

No, as we head into Q1, we expect communications and networking to actually be up, driven by our hyperscalers and both on 4 And 800 gs programs. And there's also HPS driven program. As we head into last year, we had some tough comps. Some of those tough comps are lapsing and now we're seeing comps return to growth.

Speaker 6

Got it. And on the hyperscalers, is there any changes from your last update, I guess in November on your hyperscaler customer programs and your expected demand over the next few quarters. I know you talked about new program wins with your largest customer. Is that something that you anticipated in previous quarters? Is that something that's new?

Speaker 2

Yes, we've been on our hyperscale programs, we've actually been winning incremental share. That on top of increased demand strength has both been positive for us and some of the reasons for Some of the improved outlook that we're seeing into Q1 and potentially for the full year. Hence, that's why we're going to take a quarter to revisit with our customers And take a look at what the full year has to be. But we have been winning some incremental share and been booking Really a significant amount of 803 programs.

Speaker 6

And just final one for me just to revisit ATS. I think some of your peers have also been seeing a slowdown in their end markets over the last little bit based on customers working through their Inventory buffers, is that what you're seeing as well this quarter? And can you maybe speak to within Industrial and Capital Equipment end markets specifically kind of what is causing you to expect demand to return by the second half? Is it primarily kind of those new program ramps.

Speaker 2

Yes, good question. So our industrial business in 2023, A way of reminder, grew close to 30%. Again, it was fueled by green energy programs, including EV charging, energy storage, energy generation. As we're exiting the year, demand started cycling down in some of these markets and the markets that were really impacted were interest rate sensitive markets. But moreover, Because the material environment has dramatically improved, our customers were taking the opportunity to reduce their strategic inventory buffers.

Speaker 2

We think those buffers will normalize in the first half of the year. And in the second half of the year, we have new programs, ramps planned, which would In our capital equipment business, as I mentioned earlier, we're cautiously optimistic as we get To the back half of the year and certainly into 2025 that we're seeing some signs of growth and the costs are pretty much aligned There and again we're seeing some spares orders. And as a reminder, some of the headwinds that we're seeing in ATS, we think will be more than offset with our strength that we're seeing in our CCS business.

Speaker 6

Great. Thanks. I'll pass the line.

Operator

Thank you. We have our next question coming from the line of Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

Speaker 7

Hi, good morning. With respect to the full year guidance, I hear you with respect to wanting to discuss the second half outlook With your customers before revisiting the guidance. But certainly from the demand signals you're highlighting, it seems like It'll be a stronger second half. I guess from your perspective, what might be the key areas of uncertainty you want to get further color on before visiting guidance? Would that be on semi Industrial or which areas would be the biggest source of demand variability as you think about second half?

Speaker 5

Yes. Hi, Thanos. Mandeep here. So We were pleased to be able to interlock with our customer base specifically on the hyperscaler side in the Q4 and that has led us to confidently come out with the outlook that we did. Even after our virtual investor meeting in November, we saw incremental improvements to the forecast coming from the hyperscalers.

Speaker 5

And so that's reflected in our Q1 guidance. Again, our outlook is for 14% year over year growth, which is higher than what we would have said probably in November. And we're seeing that demand So the conversations with the hyperscalers are, is there an improvement in material availability on your end? Is there has your deployment Plans changed at all and how does that impact the second half of the year? Is it going to be similar to what we're seeing right now in the first half of the year?

Speaker 5

And then to Rob's point on capital equipment. So our assumption right now is that the base market is going to be flat. We're around trough levels right now, Some encouraging signs as Rob talked about and where we're expecting the growth to be in capital equipment is as we ramp ASML. ASML is a customer of ours for a few years now, but We've won a number of programs over the last year or so and those programs are in the process of being ramped right now and that the demand signals from that specific customer Have not changed. And so what we're looking to do as we go to the rest of the customer base in capital equipment is to understand whether or not some of these early signs that we're seeing in terms of consumables and spares It's going to lead to a demand uptick in the back end of the year.

Speaker 5

And so it's really around hyperscalers and capital equipment.

Speaker 7

That's helpful. And then on the softness in industrial, just to clarify, is that primarily weighted in green energy or is That kind of across the board in your various end markets within industrial?

Speaker 2

Hi, Thanos. It's pronounced mostly in EV charging, Which is kind of being driven by a slowdown in EV sales and also some of the incentives At least in the U. S. Are slow to get out to the marketplace that's having some impact as well as the higher interest rates. But We're also seeing a little bit of a slowdown in, I'll call it, the broader industrial space just driven by the burn down of strategic inventory buffers.

Speaker 2

Again, we expect some new program ramps and the burn down of the buffers for this entire industrial business to start resuming to growth in the back half of the year. Great. I'll pass the line. Thanks.

Speaker 7

Thanks.

Operator

Thank you. We have our next question coming from the line of Daniel Chan from TD Securities. Please go ahead.

Speaker 8

Hi, good morning. Congrats on the strong quarter here. So communications was stronger than expected this quarter. Was that driven by AI demand strength or was that from non AI related cloud demand where we're also starting to

Speaker 2

In terms of comms, it was driven by networking, which Kind of the pull through that we've been mentioning that we would see as a result of AIML demand. And within networking there's I'll call it AIML networking, which is directly driven and we've seen growth in those programs. Networking comes in a couple of different flavors. The 48 volt is really driven by some of the AIML applications and we've certainly seen an uptick in that.

Speaker 8

And then we've seen a lot of new data center leasing activity. So just curious on the timing of this communications ramp as you guys Expecting 800 gs to ramp into 2025. So with all these new data centers coming online, are these new builds going to have 800 gs in them or will they leverage 400 gs to begin with? So just wondering like with them building out all these new data centers this year, Whether they're going to be putting a lot of that next generation stuff or whether they're going with the current generation equipment?

Speaker 2

That's a good question. What I can tell you is that 400 gs is strong throughout the year, 800 gs is Starting to ramp in the first half of the year, very strong in the back half of the year and certainly picking up into 2025. That would lead me to believe it's a little bit of a blend, but to be frank with you I'm not entirely sure. One of the

Speaker 5

things that we are seeing Dan is that within some of our In addition to that, what we're also seeing is that for some of the customers as they as silicon becomes available, They're looking for 400 gs solutions while they wait for 800 gs to be available in 2025, as it goes through So we are seeing a shift of investment towards AI applications and sometimes that's at the expense of more traditional cloud applications.

Speaker 8

Appreciate it. Thanks for that. And the final question, you also mentioned the ramp up of some of these sites. Just wondering whether you have enough capacity To deal with the near term demand that's coming in throughout this year and How those discussions are going on your ability to service some of that demand? Thank you.

Speaker 2

Yes, thanks. We've been Interlocking with our customers and been investing forward on capacity expansions mainly in Thailand. We have a couple of phases and also in Malaysia and a phase is coming online in February ribbon cutting frankly. So yes, we do have enough So they're really producing a lot of productivity.

Speaker 1

Great. Thanks.

Operator

Thank you. We have our next question coming from the line of Matt Sheerin from Stifel. Please go ahead.

Speaker 9

Yes. Thank you. Good morning. My first question, just wanted to go circle back to the guidance for CCS and Understanding, sort of lack of visibility into the back half. But just looking to Q2, I know you have some visibility.

Speaker 9

Obviously, you're going to be up in enterprise high 60s year over year. I know there's a lot of lumpiness in that business where you're up double digits 1 quarter and then there's a digestion period. So what should we think about Mandeep in terms of Modeling at least sort of the first half into Q3 in terms of seasonality and obviously there's not a lot of seasonality, it's Different, but how should we think about that, the cadence there?

Speaker 5

Yes. Good morning, Matt. So we do have from our legacy We are looking for sequential improvement as we go into the Q2. And then again, just wanted to maybe clarify some of the wording, Which is we do have an interlock with our customer base in the back half of the year. And that interlock gives us the Confident to be able to say the outlook that we're giving, which is right now we believe the $8,500,000,000 should be the floor.

Speaker 5

What we have seen though is that after the interlocks Request from customers to say, can you give me actually more product and can you give it to me sooner than what I had originally asked for. And so that's what's filling in right now Q1 and in Q2. So the conversations with the customers are around, have you changed your outlook for the back half of the year? And what's driving that? Is it because you're accelerating data center deployments?

Speaker 5

Is it because there is a better level of your availability, which is happening? And then how does that impact the last two quarters the way it's impacting the 1st two quarters. So positive conversations for sure And we do have a level of visibility to really see if we can increase the numbers or not.

Speaker 9

So based on that, would you expect the Q2 to be up sequentially then again?

Speaker 5

On a revenue basis, yes.

Speaker 9

What's that?

Speaker 5

Yes, we would expect higher revenues in Q2 than we do in Q1.

Speaker 9

From CCS. Okay, okay. Perfect. And then the capacity adds in Hi, Lynn and Malaysia. Rob, could you give us a ballpark in terms of the revenue production capacity In each of those or combined, is that incremental revenue where basically new programs or new capacity Versus shifting from another region?

Speaker 2

What I can tell you Matt is, how much square foot We're adding and that the capacity improvements are a couple of fold. 1, the Phase 1, if you will, which is coming online this quarter is about 28,000 square feet of manufacturing space. It's really a AIML testing facility. So we have it's a test farm for Fully automated test farm for our AIML products. So that's coming online right about now.

Speaker 2

And then Phase 2 will be the first half of 2025 and that's a combined productivity play of where we're combining all our warehousing in Thailand into one facility to Plus of manufacturing space, which is going to support existing and new customers as well, largely around AI and ML. And we think those capacity expansions should take care of us through the next couple of years of growth.

Speaker 9

Okay. And just lastly, Mandeep, you talked about you basically increased your cash flow guidance For the year, while keeping everything else intact. What are the reasons for that? Is that a function of the inventory reduction and working capital reduction And the cash flows from that or anything else?

Speaker 5

Yes. So we continue to be encouraged that the material environment is stabilizing and improving. We're seeing lead times right now, not necessarily at pre pandemic levels for both passes and semis, but we are seeing them Drop pretty close to that level and they've been improving quarter to quarter. We have been unwinding inventory as a result. So we're pleased that we're able to reduce some of that cash.

Speaker 5

Really strong finish to 2023, dollars 194,000,000 We believe that that is the right goal as a minimum for On the back of increasing profitability and inventory environment that we think is going to continue to improve. And so we think the goal of $200,000,000 or more, is reflects a good level of conversion and is the right target at this time.

Speaker 2

Okay. Thank you.

Speaker 5

Thanks, Matt.

Operator

Thank you. We have our next question coming from the line of Todd Coupland from CIBC. Please go ahead.

Speaker 7

Great. Thanks and good morning everyone. I want to step back From these detailed questions and just ask a question on the hyperscaler market, the data global data center market. What's your view on how much of the data center hyperscaler market has been upgraded to support Generative AI, large language model processing needs. How far into that cycle would

Speaker 5

you think we are at this point?

Speaker 2

Good morning, Todd. That's a very good question. I would say we're still in the early innings Of the upgrade cycle, I mean, and I say that by the fact that it just started About a year or so ago and given the amount of compute, which makes up about 50% of any data center that needs to kind of get upgraded. I think we're still in the very early innings of that upgrade cycle.

Speaker 7

Yes. And the customers in terms of their cycles to get that upgraded, a little bit longer The quarter to quarter discussions is I mean, it's obviously going to be demand dependent, but is that a 2 year process, a 5 year process, what's the mindset towards getting that upgrade complete?

Speaker 2

My sense is it's a multiyear process. It's certainly 5 plus years. And again across each of the hyperscalers that we're dealing with, they'll each have different appetites and different phases for deployment. So They won't necessarily all overlap at once, which for at least for Celestica should give us many years of growth. Yes.

Speaker 5

I would add to that Todd. Again, we support the top 5 hyperscalers, but not all the top 5 hyperscalers spend CapEx the same way. And there's a couple, in particular that sometimes are leading with the more complex technologies and then the other hyperscalers sometimes follow. What we're really encouraged about is where we're seeing a lot of our new wins come in and our demand outlook is with Some of the hyperscalers that are at the leading edge of the more complex technologies. Hence, we're seeing the demand strength in AI and ML Compute and we're seeing the wins come in on the 800 gs switches, Some of which are starting to be shipped in 2024 and then a lot more which will be shipped in 2025.

Speaker 5

And as we see some of the other hyperscalers that follow behind It gives us an idea of the fact that this does have an opportunity to be a multiyear opportunity for us. And so when we and to Ross' point, we're really in the early stages right now of the AIML CapEx investment cycle. Of course, nobody has visibility 10 years out on what things Look like, but we are seeing demand signals at least for the next 2 or 3 years.

Speaker 2

And I would just close with the adoption of some custom silicon It's going to drive compute programs and that's going to accelerate in the future. And then investments in AI is also going to drive advanced networking and that's going to be a driver in the future. And then also with our enterprise customers, we expect to see the Internet traffic is going to drive improvements in data center interconnect as well. So this whole upgrade cycle, I think, has a long life to it.

Speaker 7

Appreciate the color. Thanks a lot.

Speaker 2

Thanks.

Operator

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Rob Mionis for final closing comments.

Speaker 2

Thank you. I'm pleased with the that we posted another solid quarter and the momentum is carrying through into the first Thank you again for joining today's call and I look forward to updating you next quarter.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

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Earnings Conference Call
Celestica Q4 2023
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