Celestica, Inc.

Good day, and thank you for standing by. Welcome to the Celestica Q1 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. And as a reminder, today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Craig Oberg, Vice President of Investor Relations and Development. Please go ahead.

Good morning, and thank you for joining us on Seleska's first quarter 2021 earnings conference call. On the call today are Rob Mayonis, President and Chief Executive Officer, and Mandip Chawla, Chief Financial Officer. As a reminder, during this call we will make forward-looking statements within the meanings of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. Such forward-looking statements are based on management's current expectations, forecasts, and assumptions, which are subject to risks, uncertainties, and other factors that could cause actual outcomes and results to differ materially from conclusions, forecasts, or projections expressed in such statements. For identification and discussion of such factors and assumptions, as well as further information concerning forward-looking statements, please refer to yesterday's press release, including the cautionary note regarding forward-looking statements therein, our most recent annual report on Form 20F, and our other public filings, which can be accessed at sec.gov and cdar.com. We assume no obligation to update any forward-looking statement, except as required by law. In addition, during this call, we will refer to various non-IFRS measures, including operating earnings, operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted net earnings, adjusted EPS, adjusted SG&A, and adjusted effective tax rate. Listeners should be cautioned that references to any of the foregoing measures during this call denote non-IFRS measures, whether or not specifically designated as such. These non-IFRS measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies that use IFRS or who report under U.S. GAAP and use non-GAAP measures to describe similar operating metrics. We refer you to today's press release and our Q1 2021 earnings presentation, which are available at Seleska.com under the Investor Relations tab for more information about these and certain other non-IFRS measures, including a reconciliation of historical non-IFRS measures to the most directly comparable IFRS measures from our financial statements. Unless otherwise specified, all references to dollars on this call are to U.S. dollars. and per share information is based on diluted shares outstanding. Let me now turn the call over to Rob.

Thank you, Craig. Good morning, everyone, and thank you for joining us on today's conference call. Celestica is off to a strong start in 2021, delivering solid first quarter results. Revenue and adjusted EPS were both above the midpoint of our guidance ranges, and I am pleased that our non-IFRS operating margin is up 60 basis points, on a year-over-year basis, reflecting the strength of our strategy and strong execution. Our portfolio transformation initiatives continue to yield results, and our core business is growing. Although revenue decreased 6% in Q1 2021 compared to Q1 2020, the decrease was largely driven by a disengagement from Cisco, whose revenue accounted for 13% of our total Q1 2020 revenue. The revenue of the company's non-Cisco business grew 7% year-over-year. Furthermore, we executed the transition seamlessly, and we were able to meet our revenue and mixed backfall objectives. Within our ETS segment, we experienced slightly better than expected revenue results due to strong growth in health tech and capital equipment. We also reported our fourth consecutive quarter of sequential margin expansion and continue to target being back in our 5 to 6 percent target margin range by the end of the year. Within CCS, after having successfully concluded our Cisco disengagement in the fourth quarter of 2020, we are focused on growth. While CCS revenue in the first quarter was down on a year-over-year basis, primarily because of the Cisco disengagement, our remaining CCS portfolio grew by 16 percent year-over-year. The CCS segment continues to perform well, with our year-over-year improvement in segment margin for the fifth consecutive quarter, and once again operating above our 2% to 3% target range. Our hardware platform solutions, or HPS business, previously referred to as our GDN business, remains an engine for growth within our CCS segment. HPS generated $200 million of revenue in the first quarter, a 46% increase on a year-to-year basis. We continue to expect our HPS business to be a catalyst for both CCS revenue growth and segment margin strength. Last quarter, we also highlighted that we refer to revenue from our HPS business and ATS segment as lifecycle solutions. It is our view that the businesses which compromise our lifecycle solutions portfolio share several key characteristics. that reflect the focus of our commercial strategy. We consider lifecycle solutions revenue to be diversified revenue, and our strategy continues to be to expand this portfolio as a percent of the total company, enabling long-term profitable growth. This strategy includes pursuing markets with high barriers to entry, robust long-term growth prospects, attractive margins, and the opportunity to offer our customers higher value-added solutions throughout the product lifecycle, We are pleased that our Lifecycle Solutions portfolio grew in the first quarter, both sequentially and on a year-over-year basis. I will offer some further color on our end markets and the overall business outlook shortly. However, first, I would like to turn the call over to Mandeep to provide you with some financial details on the first quarter, as well as our second quarter guidance.

Thank you, Rob, and good morning, everyone. First quarter 2021 revenue came in at $1.23 billion, slightly above the midpoint of our guidance range. Revenue decreased 6% year-over-year and 11% sequentially. Despite Q1 traditionally being a seasonally soft quarter from a volume perspective, we delivered non-IFRS operating margin of 3.5%, exceeding the midpoint of our guidance range by 10 basis points, reflecting the benefits of our portfolio reshaping activities and improved mix across several businesses. Year-over-year non-IFRS operating margin improved by 60 basis points, driven by a significant improvement in our ATS and market. Sequentially, non-IFRS operating margin declined by 10 basis points, driven by lower volumes in CCS. This was partially offset by higher sequential ATS segment margin, driven by higher volumes and favorable mix. Non-IFRS adjusted earnings per share were $0.22, one cent above our guidance midpoint, and an improvement of $0.06 year-over-year, while down $0.04 sequentially. First quarter IFRS earnings per share were $0.08, up $0.10 year-over-year, and down $0.08 sequentially. Our ATS segment accounted for 43% of our consolidated revenue during the quarter. Our highest level of ATS concentration reported to date, and up from 41% in the first quarter of last year. ATS revenue was down 3% compared to last year. ahead of our expectations of a mid-single-digit percentage year-over-year decline. Sequentially, ATS revenue was up 4%. The year-over-year revenue decline in ATS was driven by weakness in commercial aerospace and industrial, partially due to COVID-19, largely offset by new program ramps in health tech and very strong demand growth in capital equipment. Sequential growth was driven by strength in capital equipment and health tech, offsetting moderate headwinds in A&D and industrial. Our CCS segment revenue is down 9% year-over-year, largely driven by the Cisco disengagement and partly offset by strong demand from service provider customers, including in our HBS business. Sequentially, CCS revenue is down 19%, driven by seasonality in our enterprise business, as well as the Cisco disengagement. With the Cisco disengagement behind us, we are pleased with the growth in the remainder of our core CCS portfolio, whose revenue increased 16% year-over-year. Within our CCS segment, the communications end market represented 40% of our consolidated first quarter revenue, up from 39% in the first quarter of last year. Communications revenue in the quarter was down 2% year-over-year, as the declines resulting from the Cisco disengagement were largely offset by robust demand from service provider customers. Sequentially, communications revenue was down 16%, mainly driven by seasonality as well as the Cisco disengagement. Our enterprise end market represented 17% of consolidated revenue in the first quarter, down from 20% in the same period last year. Enterprise revenue in the quarter was down 21% year-over-year and down 27% sequentially. The year-over-year and sequential declines were driven by program-specific demand softness and seasonality. Our HPS business once again delivered strong growth in the first quarter, with revenue up 46% year-over-year. led by higher demand from service provider customers. HPS accounted for 16% of our consolidated revenue, up from 10% a year ago and 15% in Q4 2020. Our top 10 customers represented 65% of revenue during the first quarter, down 1% year-over-year and 2% sequentially. For the first quarter, no customer represented 10% or more of our total revenue. versus one customer in the first quarter of 2020 and two in the prior quarter. Turning to segment margins. Achieving a margin of 4.0%, the ETF segment achieved its fourth consecutive quarter of sequential margin expansion, up 130 basis points year-over-year and up 10 basis points sequentially. The year-over-year improvements were driven by accretive new programs in health tech and capital equipment, more than offsetting headwinds in our A&D business. CCS segment margins of 3.1% came above our target range of 2% to 3%, up 10 basis points year-over-year and down 30 basis points sequentially. Year-over-year margin improvement was primarily driven by favorable mix. The sequential margin decline was due to lower volumes due to seasonal demand dynamics, partly offset by favorable mix. Moving to additional financial metrics. IFRS net earnings for the quarter were $10.5 million, or $0.08 per share, compared to a net loss of $3.2 million, or a $0.02 loss per share in the same quarter of last year, and net earnings of $20.1 million, or $0.16 per share in the previous quarter. Adjusted gross margin of 8.6% was up 130 basis points compared to the same period last year, and up 20 basis points sequentially, both on a lower base of volume. Year-over-year and sequential improvements were largely driven by a higher percentage of lifecycle solutions portfolio revenue, which is made up of our HPS and ATS businesses, which generate more favorable margins than our non-HPS CCS revenues. First quarter adjusted SG&A of $53.6 million was up $3.7 million versus a year ago, primarily due to higher functional spend and unfavorable foreign exchange impacts. Adjusted SG&A was down $2.9 million sequentially. Non-IFRS operating earnings were $43.3 million, up $5.2 million from the same quarter last year, and down $6.7 million sequentially. Our non-IFRS adjusted effective tax rate for the first quarter was 21%, compared to 24% for the prior year period and 19% last quarter. For the first quarter, adjusted net earnings were $27.8 million compared to $20.7 million for the prior year period and $33.3 million last quarter. Non-IFRS adjusted earnings per share of $0.22 were $0.01 above our guidance midpoint and up $0.06 year over year due to higher non-IFRS operating earnings and lower interest expense. Sequentially, non-IFRS adjusted earnings per share were down $0.04 mainly due to lower sequential non-IFRS operating earnings. First quarter non-IFRS adjusted ROIC of 10.8% was up 1.3% compared to the same quarter of last year and down 1.6% sequentially. Moving on to working capital. Our inventory at the end of the quarter was $1.15 billion, up $62 million sequentially and up $81 million compared to the prior year period. largely to support growth in our HPS business. Inventory turns were 4.0 in the first quarter, down from 4.4 turns last quarter, and from 4.8 turns in the prior year period. Capital expenditures for the first quarter were $13 million, or approximately 1% of revenue. Non-IFRS free cash flow was $20.9 million in the first quarter, compared to $53.8 million for the same period last year. and up from $18.5 million in the prior quarter. We are pleased to have delivered positive non-IFRS free cash flow for nine straight quarters. Cash cycle days in the first quarter were 82 days, up 13 days year over year, and up nine days sequentially. Our cash cycle days are higher than normal, partially due to the lower level of revenue we experienced in the first quarter. Our expectations are for cash cycle days to improve as we continue through 2021. In the first quarter, we incurred $6 million of restructuring charges to further adjust our cost base to align with changing demand levels, primarily in our A&D business. Moving on to some additional key metrics. Our cash balance at the end of the first quarter was $449 million, down $23 million year-over-year, and down $14 million sequentially. Combined with our $450 million revolver, which remains undrawn, We continue to have a very strong liquidity position of approximately $900 million in available funds. We believe our liquidity is sufficient to meet our current business needs. During the quarter, we repaid $30 million of our long-term debt and ended the quarter with gross debt of $440 million, achieving net cash of $9 million. This marks the first time we have achieved a positive net cash position since the third quarter of 2018. Our first quarter gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.4 turns, an improvement of 0.2 turns sequentially, and an improvement of 0.6 turns from the same quarter last year. We are pleased with the progress we have made to deleverage our balance sheet, which we have achieved as a result of strong non-IFRS free cash flow generation and disciplined capital management. At the end of 2021, we were compliant with all financial covenants under our credit agreement. Since announcing our NCIB program last November, we have repurchased approximately 0.6 million shares at a cost of $5.3 million, or an average price of $8.35 per share. As we proceed through 2021, we will continue to take a balanced approach towards capital allocation. We are focused on generating $100 million or more of free cash flow, and utilizing this cash to primarily pay down debt to reduce our interest expense and maintain maximum financial flexibility. We will, however, also be opportunistic towards share buybacks under our existing NCIB program. Our long-term capital allocation priorities remain unchanged. We are focused on generating consistent non-IFRS free cash flow, achieving our annual targets, and returning 50% of that capital to shareholders, with the other 50% to be reinvested in our business. Now turning to our guidance for the second quarter of 2021. We are projecting second quarter revenue to be in the range of $1.325 billion to $1.425 billion. At the midpoint of this range, revenue would be up 11% sequentially and down 8% year-over-year, including the impact of our disengagement from Cisco. For our non-Cisco portfolio, Achievement of the midpoint of our guidance range would represent revenue growth of 3% year-over-year. Second quarter non-IFRS adjusted earnings per share are expected to range between 21 to 27 cents per share. At the midpoint of our revenue and adjusted EPS guidance ranges, non-IFRS operating margin would be approximately 3.5%, an increase of 10 basis points over the same period last year, and flat sequentially. Non-IFRS adjusted SG&A expense for the second quarter is expected to be in the range of $54 to $56 million. We anticipate our non-IFRS adjusted effective tax rate to be approximately 21%, excluding any impacts from taxable foreign exchange or unanticipated tax settlements. Turning to our end market outlook for the second quarter of 2021, in our ATSN market, We anticipate revenue to be up in the mid-teen percentage range year-over-year, driven by continued demand strength in our capital equipment and health tech businesses, and a return to growth in industrial, partly offset by continuing weakness in commercial aerospace as a result of COVID-19. In CCS, we anticipate our communications and market revenue to be down in the low double-digit percentage range year-over-year, driven by our disengagement from Cisco. The remainder of our communications portfolio is growing, driven by strength and demand from our service provider customers as well as our HPS business. In our enterprise end market, we anticipate revenue to decrease in the low 30% range year over year due to market demand softness and very strong performance in the same quarter last year. I'll now turn the call back over to Rob for additional color on our end markets and overall business outlook.

Thank you, Nandeep. We are pleased with our company's continuing execution of our strategy, which reflects our team's work ethic and ability to navigate the unique challenges presented by the current business environment. We are off to a strong start with our first quarter results, which we believe position us for a successful 2021. We continue to navigate several challenges in the context of the current macro environment. Supply constraints continue to impact most of our end markets, resulting in extended lead times for components. In the first quarter, due to our advanced planning and proactive approach to securing necessary components and materials, we were able to limit the impact on our revenues to $12 million. While we have accounted for our best estimate of the potential impacts of component shortages in our second quarter outlook, we are seeing further tightening of supply chains, and market conditions are becoming more challenging. We continue to monitor the situation and are working closely with our suppliers and customers to mitigate the impact on our business. We expect these conditions will persist for the remainder of 2021. Despite the challenges from COVID-19, we continue to operate at normal capacity levels across our network. We are seeing the number of COVID-19 cases rise again in certain regions, while many parts of the globe in the midst of a third wave. While some jurisdictions, such as Canada and Western Europe, are responding with additional restrictions, other jurisdictions are easing their restrictions. Our global operations team continues to work diligently to implement the required health and safety protocols, and the health and well-being of our employees and business partners remains our highest priority as we navigate through these dynamic times. Now turning to our segments. In ATS, we are very encouraged by the resiliency of our diversified businesses, and we reiterate that we are targeting 10% revenue growth in 2021 compared to 2020. We also remain focused on reentering our target segment margin range of 5% to 6% by the end of the year, despite the continued weakness in commercial aerospace. Our capital equipment business continues to exhibit very strong growth, primarily led by new wins and market share gains from our Semicap customers. The demand backdrop in the semiconductor space remains quite strong, supported by secular tailwinds. We expect our capital equipment business to remain robust in the second quarter and for the remainder of 2021. In our display business, as noted in our comments last quarter, we continue to anticipate growth towards the end of the year and into 2022. In industrial, demand has largely stabilized on a sequential basis. With the worst of the impacts of COVID-19 on our industrial business now behind us, we expect to return to year-over-year revenue growth in the second quarter. In AMD, headwinds in the commercial aerospace market continue to pressure our results as operators have meaningfully pared back expenditures in the face of lower levels of commercial air traffic. We have taken the actions we believe to be necessary to adjust our cost structure to align with this lower level of demand. Looking ahead, While we expect the commercial aerospace market to remain depressed throughout 2021, we are anticipating higher revenue in the second half of the year compared to the first half as new program wins ramp. In our health tech business, we continue to see strong growth both year to year and sequentially, supported by the ramping of a number of new program wins. We anticipate this strength to continue throughout 2021. Now turning to CCS. Having successfully completed the Cisco disengagement in Q4 of 2020, we continue to see the benefits of our portfolio reshaping initiatives, which have resulted in improved mix and higher year-over-year non-IFRS operating margin, despite operating on a lower base of revenue. Our CCS segment margin once again surpassed our target range of 2 to 3 percent, and we expect full-year margins to be at the high end of the range or slightly higher. As noted, while revenues are lower on a year-to-year basis as a result of the Cisco disengagement, our non-Cisco CCS business grew 16% in the first quarter compared to the prior period. We anticipate further growth for our non-Cisco CCS portfolio in 21 compared to 2020. Our hardware platform solutions business demonstrated another excellent quarter with year-to-year growth of 46% in the first quarter on the back of strong demand from service providers in our communications and market. This growth helps to offset some of the impact from our Cisco disengagement. HPS represented 16% of our total business in the first quarter, up from 15% last quarter and 10% a year ago. Based on the orders we have received from our customers to date, we currently expect HPS to grow in the double-digit percentage range in 2021, higher than the high single digit percentage growth range we indicated in January. In the communications end market, we expect demand to remain robust in our core portfolio of business in 2021, supported by the recent strength in demand from service providers. On a year-to-year basis, however, revenue growth will be pressured by the Cisco disengagement. In our enterprise end market, demand has been relatively soft in recent quarters, and we expect these conditions to persist for the near to medium term. As previously discussed, our HPS revenue and ATS segment revenue together represent what we call life cycle solutions. In the first quarter, our life cycle solutions portfolio grew 7% year to year and grew 1% sequentially. In Q1 2021, our life cycle solutions revenue accounted for 59% of total revenues, up from 52 percent in Q4 of 2020. We continue to expect Lifecycle Solutions to account for a growing portion of our total consolidated revenues and act as a driver of non-IFRS operating margin improvement. Currently, we also expect our Lifecycle Solutions portfolio to grow in the double-digit percentage range in 2021 compared to a high single-digit percentage range outlook in January. With 2021 off to a strong start, We remain as focused as ever on executing our strategy, which is diversifying our end markets, delivering higher value solutions to our customers, expanding our lifecycle solutions capabilities, and flawlessly performing for our customers. We believe this strategy will lead to sustainable revenue growth and expanding operating margins over the long term. I'd like to thank our employees for their incredible efforts and dedication to the company. Our global team's commitment, resiliency, and adaptability during these challenging times is commendable. Our people are the key driver to our success, and their performance instills on us great confidence that we will continue to deliver strong results and execute on our plan for the remainder of the year and beyond. We look forward to updating you on our progress over the coming quarters. With that, I would now like to turn the call over to the operator to begin our Q&A.

Thank you, Rob. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. And please stand by while we compile the Q&A roster. Your first question comes from the line of Robert Young with Ken Accord.

Hi, good morning. I'd like to start in the semiconductor space. I just wonder if you think about that business and the puts and takes around all of the chip shortage news that we're hearing today. I assume that that's more of a positive driver for your business given the potential for capacity expansion in the semi-capital equipment business relative to any shortages that chips might have driving your business. Maybe some comments would be helpful.

Yes, that's correct. As you've been reading, the semiconductor, semi-cap space has been quite strong for us and for the entire industry. We're expecting this year, year-over-year growth and also sequential growth. And we also feel that we'll grow faster than the market this year because of the new vertical investments that we've been making in our semi-cap space. with respect to the inverse of that, the takes, if you will. On the shortage side, I think we've managed it very well in Q1, as we highlighted in the script. Revenue that was gated by material shorts was $12 million, which is, frankly, fairly low. We got ahead of it. We do think that's going to increase as time moves forward, but it's more about tempering the upside than constraining the output. So net-net, I think it's a positive for us, and we're looking forward to a very strong capital equipment year this year and probably likely into next year and beyond based on the forecast that our customers are giving us.

Okay, that's great, Culler. The HPS growth that you saw, I'm curious about the broader drivers. Do you see a bump in demand like that within the HPS? What's driving that exactly? Is that... Is that engineering work that's converting into a bigger manufacturing ramp or is that just an expansion of the demand and the products that you've built? It seems to me that a quick jump in demand there would be less likely than other parts of the business. Help me with that.

Yeah, good question. So what we've seen in the HPS business, it's been a very robust and growing market and it's been really fueled for us by a broader adaption of our product set both within the data center and across a larger set of customers. So, frankly, we're gaining market share. You know, we do business with eight of the ten service providers and been growing share with them. And hypersale growth as percent of total IT spend has been increasing. As a result of that, you know, we've been growing, you know, not just with the market but also faster than the market because we, you know, our product's being used, again, by a broader set of customers and within the data center. finding new uses for our products, you know, based on the offering that we have. And then lastly, our operations team has just been doing a phenomenal job being able to, you know, meet the higher levels of output, you know, based on the relationships we have with ecosystem partners and silicon providers as well.

Okay, great. And then as that Cisco revenue now as you're replacing it, is it the HPS business that you're using to backfill the capacity from Cisco? And then I'll pass it on.

Yeah, exactly. And I would say largely so. Regarding the Cisco transition, frankly, we couldn't have planned it any better. As I mentioned in the call, we've met all our backfill targets with a richer mix of programs, a.k.a. hardware platform solutions. In fact, it's a lot more aligned to our strategy and capabilities. And on top of that, we've had strong demand from our base business. And when we look at the utilization in Thailand where the Cisco business was performed, it's quite strong, and it's driven by a solid mix of HBS products.

Okay. Thanks for taking the questions.

Thanks, Rob.

Your next question comes from the line of Thanos Machopoulos with BMO Capital Markets.

Hi, good morning. Rob, with respect to the component shortages, is that impacting some segments more than others, or is it just fairly across the board?

It's impacting the segments that have higher growth rates than us. So, you know, the segments that have higher growth rates are HPL segment, capital equipment segment, a little bit industrial. Those are the segments that are impacting more. But again, I would... It's kind of tempering the upside versus constraining the base demand. It's a very strong demand environment in these segments, and customers are trying to accelerate their demand, and it's being paced by some of the component shortages. Now, that being said, frankly, we're all over it. We have good order coverage with our suppliers, and the teams are working it very hard.

Maybe, Dan, just to expand on what Rob was mentioning, because of the advanced planning that the team had done, we had been able to largely get ahead of the material constraints. When Rob was talking about tempering the upside, the challenge right now is drop-in orders. When customers want to secure product within the quarter, there's just not enough time to secure the material. So we factored it into our guidance, but it's really tempering maybe additional upsides.

Okay. And then you mentioned that the cash cycle days should improve, which I thought is an interesting dynamic given the shortages. Is that a function of your end market mix or what's driving the dynamic?

Yeah, so cash cycle days, the metric itself is just abnormally high in the first quarter. What we're seeing is a function of the formula. It's a two-point average. As we go through the year, the metric is going to get back more in line with what you would have historically expected from us. But even with the inventory growth that we have been seeing, or frankly, the reduction that we have not yet seen, it is all factored into our outlook, and we still feel comfortable in being able to generate over $100 million of cash, even with the current supply chain environment.

Great. And then finally, can you comment on the semiconductor margins and how they're tracking currently versus what you consider going to be your target margin for that second?

Yeah, so what I would say is that the semiconductor business itself is performing very well right now. So it is in line with our expectations, and we believe that as there continues to be stronger demand in the semiconductor space, that there is an opportunity still for some further margin expansion. On the display side of the business, as we commented, we're expecting the demand to start picking up towards the end of the year. And so there's an opportunity for the margins to improve in that business. And so overall, what I would say is that as capital equipment continues to grow, we do still believe that there's some opportunity for further margin expansion.

Great. Thanks, guys.

We'll pass it on.

Your next question comes from the line of Replu Bhattacharya with Bank of America.

Hi, thanks for taking the question. Rob, the communications revenues came in better than expected. I think you had guided a decline of high single digits, but it was down only 2%. So can you just go into the different end markets within communications, which one outperformed your expectations? And then on the enterprise side, I think revenues came in a little bit lower than what you had guided. but also you're guiding down 30% year-on-year. So if you can just kind of highlight some of the things going on in the enterprise side as well.

Sure, Rupa. So on the comm side, the strength that we've seen is really in our networking business. We also saw some demand strength with existing programs, which is a mix of HPS and EMS. But broadly speaking, The communications upside was driven by HBS. Again, it was offset by the Cisco exit and some demand dynamics. But our non-Cisco revenue was really driven by networking and our HBS business. On the enterprise side, what we've seen is broad demand softness, market softness in HDB and compute, and tougher comps. And we've had a number of ramping programs in 2020 where demand has normalized this year. And operator, there's some noise in the background. Maybe you could figure out if somebody needs to go and mute.

Okay. Thanks for the details on that, Rob. And just to drill a little bit into the component shortages, I mean, which components are you seeing shortages in? on I mean specifically and you know the inventory went up 60 million sequentially was that some of that are you using the strength of your balance sheet to keep some of the raw materials on hand and do you expect inventory to be up sequentially in the June quarter?

I'll take the first part and pass the second part to Mandy. So in terms of the shorts you know right now It's largely on the semiconductor side. Semiconductor lead times, by our measure, have increased by 50% over the last six months, which is, you know, frankly outstanding. The waste of fabs are operating at max capacity, while a negative on our shortages, a very strong positive on our Semicat business. But on the passive side, you know, lead times are also starting to increase. It's been about a 20% increase in lead times in the past over the last six months. And I do believe they will get more constrained as time moves on, tantalum capacitors, MLCCs, resistors. So I do think that will get more constrained as we get further into the year as well. And over to Mandeep in the inventory.

Your next question comes from the line of Paul Steep with Scotia Capital.

One second. I think Mandeep was on mute. Let me ask the last one. But Paul, let me take your question next.

Just to wrap up your question on inventory, the inventory dollars are relatively flat on a year-over-year basis. Two dynamics happening. Number one is we are building inventory for HPS because of the continuing growth that we're seeing. We are expecting HPS to grow sequentially as we go through the year. The other thing as well is that because of the supply chain environment, we were able to work very closely with our customers to secure material and lined up to their orders. And one of the things you'll see is our deposits also increased quite a bit. So they're paying for some of that. In terms of performance as we go through the year, the turns are expected to improve. And so Q1 is expected to be the low point when it comes to major returns. Paul, I'll turn it over to you for a question.

Thanks, Nandeep. Just a couple of quick ones. First one, maybe for Rob. And a little bit higher level here. If you step back and maybe walk us through, can you highlight out either in ATS or CCS with the new programs you've been winning sort of consistently in some of the segments over the last year, year and a half, what's changed with customers? Is there anything meaningfully changing in terms of either your approach to the market in terms of profitability profile or in terms of how customers are contracting and committing and that we'd want to look at?

Good question. You know, on our ATS side, we've been investing in engineering capabilities, you know, across all our segments. And a big change in the margin profile of our ATS business, you know, today and also moving forward is the dramatic increase in what we call engineering-led engagements. So we're not just an EMS provider in our APS segment. We're actually, you know, an engineering partner as well. So that's been, you know, a continuing shift in our strategy and our contracting processes. And similarly on the CCS side, you know, we call that HPS. That's nothing new, if you will. We've always had a strong HPS business, and based on the products that we've designed and some secular projects, tailwinds that we've been seeing, you know, HBS business has frankly just taken off and largely fueled by, you know, engineering capability and the solutions that we're providing to our customers. Hopefully that adjusts your question.

Great. And then maybe the second one for Mandeep, the classic capital deployment question. Just to check in, I think last quarter you were very specific about the tangible book value and how you were approaching the buyback. Any change in view on how you're sort of looking at capital employment now that you've gone net cash positive? And then I got one very fast cleanup. Thanks.

Yeah, of course, Paul. So we're continuing to be opportunistic. We're really pleased with the strength of the balance sheet. As we continue to generate free cash flow, our priority will be to continue to be lever. Again, we paid down $30 million this past quarter, and we have an opportunity to pay down more as we go through the year. And it really serves us in two ways. One is we are very focused on our UPS expansion year over year. And so that is helping lower our interest expense. And then it just continues to give us a healthier and healthier balance sheet, which gives us high levels of flexibility to act when we need to act. When it comes to share buybacks, we will continue to be opportunistic on it. When the shares are trading at very low values, we will be in the market to buy. However, we aren't feeling that that's the first priority. And so we watch it. We will utilize the program whenever we need to. But our first priority right now is to continue to look at deliver.

Got it. Last cleanup one for either of you. Just with the life cycle guidance going from double digit versus single digit last quarter, What's the underlying assumption that has to be true to reach that guide? Or maybe put another way, is all of what you need to hit those numbers already in hand today? Thanks. I'll pass along.

Yeah, so, Paul, it's, of course, a combination of the two. So it is HPS and APS. So APS, we are reiterating our growth expectation of 10%. And we're starting to see that, as you can see in our guidance in the second quarter, just with very strong performance across a number of segments. And then on the HPS side, we have increased our growth expectations to be double-digit, which frankly means 10% or more. And so when you put the two together, it brings lifecycle solutions to have a robust growth profile. On the HPS side, I would say that the outlook for capital equipment is strong at this point, and we do have new program ramps that are driving a lot of the growth in health tech as well as in industrial. And then on the HPS side, similarly, we have firm outlooks from our customers. In some cases, we have firm POs. In other cases, we get POs as we come along. But I would say that the outlook for HPS is stronger today than it was even three months ago.

Thanks.

Your next question comes from the line of Paul Treber with RBC Capital Markets.

Thanks so much, and good morning. I was hoping you could speak to the linearity or the expected linearity of growth in HPS over the year. Is there any, I mean, the 46% Q1 is quite strong, and then the outlook for 10% or more for the rest of the year does show deceleration. How should we think about it between Q2 and Q4?

Yeah, hey Paul. So, you know, we're really pleased with the growth that we're seeing right now in HPS. As you'll recall, the growth last year really went into overdrive starting in the second quarter. And so we are going to start to see some tougher comps. We wouldn't expect necessarily 46% growth in the next couple of quarters. That being said, what we are comfortable with at this point is that we would be seeing sequential growth. And so $200 million in the first quarter, we are expecting more than that in the second quarter. But overall, just very good overall performance. And then when you look at it on a full year basis, it'll be stronger than last year, of course. But we do need to moderate expectations because we just had very tough comps when you go to Q2 and Q4 of last year.

And just, I mean, digging a bit more further into that, like the underlying demand drivers remain intact. So ultimately, is it, you know, do you see this going to go through the year or and the demand and the pipeline from hyperscalers and others continuing to build in that business?

Yeah, I mean, Rob touched on it a little bit, which is we're doing business right now with eight of the top 10 hyperscalers. And the eight that we're doing it with actually represent the vast majority of hyperscaler CapEx. And then when you look at the hyperscaler concentration in terms of total hardware spend, hyperscalers are continuing to take more and more share of the overall market. And so we're participating in that upside with them. We are concentrated in only a couple of customers because of wins that have been happening in the business over the last year to two years. There are a number of programs ramping. And so we do have a diverse set of product offerings that our customers are buying. And we also have a diverse set of customer logos. And the growth that we are anticipating is with a lot of new programs that are in the pipeline already.

And I would also add, I would also add, Paul, that in this segment, particularly because the demand strength is so strong, our growth is really going to be, again, tempered by or governed by our ability to get components. But given the nature of the demand, the design nature of the demand, I would also say that it's not perishable. So, again, we're expecting good, strong sequential growth throughout the year. We do have some tough comps, but good, strong sequential growth. And because of the strong demand environment, we'll probably be more paced by component availability than anything else.

Thanks. That's a good point. So, shifting over to the healthcare business, could you speak to the breadth of momentum in that business? I think, you know, the Canadian ventilator contract ramped up, I think, last quarter. But how do you see outside of that contract in terms of the other opportunities and the breadth of momentum there?

Good question. So health tech business continues to exhibit strong growth, very strong growth in Q1 on a year-over-year basis, also sequentially. I would say about half the growth we're experiencing is kind of COVID-related demand in the areas of PPE, point-of-care, patient monitoring, imaging devices. And some of that growth that we're seeing in the first half of the year will probably temper a bit in the back half of the year. But the other half of the growth we're seeing is really driven by new program wins. And I would say they're not directly related to COVID. They're in the areas of surgical instruments, medical hardware, patient monitoring. So when you put those together, we're expecting a rather strong year from our health tech business all in those areas.

And then just lastly for me, just on the A&D business, how do you balance between profitability in light of lower utilization of demand in the near term versus trying to sustain investments in that business because I do think it's a long-term growth opportunity? How do you sort of balance those two here?

Yeah, that is the question that we talk about. The answer is we're trying to grow in our A&D business where the markets are more favorable, and that being in our defense business. So as you mentioned on the call, we are expecting some revenue growth in the back half of the year. It's majority in the defense space, and it's majority driven by some of the wins that we had last year that are starting to ramp in the back half of this year. We're also expecting some slight early signs of recovery in the biz app market. You know, that being said, we do have several sites in the network that are at critical mass. And, you know, we're keeping them at that level so we don't lose capability until the market does recover. But it has been, you know, dragging on our ATS segment. But again, despite that, our ATS segment seems to, is evidently, you know, stronger on a margins perspective, largely fueled by the other verticals we mentioned, you know, Semicap, HealthTech, Industria.

Your next question comes from the line of Todd Copeland with CIBC.

Yeah, good morning, everyone. I wanted to ask about market conditions post the Cisco engagement. With that decision, did it have a noticeable impact on overall pricing in the market with respect to not only yourselves but the overall market? Cisco has traditionally been very aggressive with their suppliers, but with you a major tier one supplier pushing back, are you seeing a bit of the power shift back to someone like yourself to drive better pricing? Is there a better tone in the market as a result of that decision?

I think in core EMS, so in the non-commoditized space, I think pricing usually is reflective of how utilized people's factories are. In some cases where factory utilization is low, some EMS players might make a decision to bring in lower margin work to keep the utilization up, and the inverse is true. So I think the pricing environment is a reflection of the demand environment. With the demand environment being generally robust across most of EMS, I think pricing has been more disciplined. Again, our strategy is to shift away from the lower value add stuff into the higher value add stuff. So there's higher bearish entry, sticky relationships, and the margins tend to be higher because of the higher value add. And that strategy, I think, has proven out for us and will continue to yield results for us.

And post-Cisco, are you happy with the CCS mix, or do you anticipate you'll need to have a regular – sort of upgrading of the mix as you look forward over the next two or three years?

Right now, we're very happy with the CCS mix. Market conditions always change, so we always take a look at it, but the mix within CCS is very good. In the EMS business, it's in the higher value-add areas, and HBS business is growing nicely. And even in the EMS space, we're working with those customers to kind of move up the value chain and to introduce HPS solutions into those customers as well.

And then my last question is, you have the mixes that you have. You have excess capital on the balance sheet for growth. Are there any other verticals where you think you should expand either in ATS or CCS? Just talk about what might make sense over the next two or three years?

Yeah, I think that goes back to our potential M&A strategy. You know, when we're thinking about capabilities, we always take a look at, you know, does it make sense for us to invest organically and build those capabilities, or is there a shorter, more accretive path to buy them? We usually default because of the risk factor to developing those capabilities in-house, and we've been making investments within many of the verticals within capital equipment. We've been working on vertical integration in areas such as well-made, well-painted, and cleaning. Within our health tech business, we've been adding engineering capability. With our industrial business, we've been adding engineering and design capability as well. In terms of broadening spaces, we're always looking at it, but at this stage of the game, I don't think there's anything material to announce or to share with the community.

Your next question comes from the line of Jim Suva with Citigroup Investment.

Thank you so much for the details so far. It's been very useful. I have two questions and so you can ask them in the order you want. Can you give us a little bit of insights or updates on your cloud efforts? I know in the past it's been a bit of a hidden gem in the company of celestica about your cloud doing so well maybe i don't know how much details you can give but um any updates on that and then secondarily you know while a full year guidance is hard to do there are some moving parts this year for the year-over-year comparisons with the disengagement which i believe if my memory's right is around 500 million Can you correct me if I'm right or wrong on that? And if so, do you think consensus for this year, which is around $5.5 billion or down 5% year-over-year, is that calibrated and correctly adjusting for some things? Or I just want to make sure since there's some moving parts that were kind of calibrated generally correctly or any color or direction. Thank you so much.

Thanks, Jim. I'll handle the first one and I'll ask maybe to talk about Cisco. But in terms of our cloud business, you know, we have several sources of growth. As we mentioned on other calls, you know, a comprehensive roadmap is really around all the core technologies in the data center. So within switching, which has been a key driver of growth this year, you know, 400G is one of the key drivers. We have very strong positions with market leaders in other speeds as well, also a healthy white box business. Edge is also a source of growth. We've seen strong data center cloud offering, including HPF solutions. And that's been a driver for us as data center workloads move to the edge. We're seeing some strength from some of our comms customers on the wired side, given some expansion from 4G to 5G. And we're also developing some edge programs in the service space that are resonating with some urgent customers. And we're working with them to make sure that they have the right edge solutions and the requirements. And lastly, on compute, this is a healthy business as well as the data centers continue to expand AI and ML applications. And we also have healthy positions with our enterprise service provider customers as well. Again, all the key technologies in the data center, we have very good positions. That's been a fiber of growth. And it's very sticky business also because, you know, with each successful development cycle and product launch that we have with our cloud providers, there's an increased resistance for a partner to change given the criticality of the products to the customers. So success is beating success. And that's been a key fiber of our growth as well. And the second one, I'll turn it over to Mandy.

Yeah. Good morning, Jim. So, you know, I'll stop short of providing full year revenue guidance, but I will double click on the pieces. And so as you hit on it, there are parts of the business that are growing quite nicely. So our lifecycle solutions revenue at the end of last year was just under $3 million. And again, we're targeting 10% or more growth in that overall portfolio, which is our HPS and our APS businesses. So $300 million or more growth is anticipated from there. On the Cisco piece, about $520 million of revenue is coming out year over year. That's the number one thing that's offsetting the growth in Lifecycle Solutions. What I will say is we gave remarks on our growth for the non-Cisco portfolio, so essentially the company ex-Cisco. We grew in the first quarter 7%. The midpoint of our guidance implies 3% growth in the second quarter. and we are targeting growth in Q3 and in Q4 on a year-over-year basis for the non-fiscal portfolio.

That's very useful. Thank you so much for the details. Thanks, Jim.

Your next question comes from the line of Matt Shearing with Stifel.

I wanted to just ask, Just a question regarding your enterprise segment, which is down double digits. It sounds like your outlook, Rob, is more cautious on that group. I know there's some tough comps you're up against, but we are hearing signs of on-prem infrastructure spending gradually improving, particularly as companies get back, as projects that were pushed out get renewed. Are you seeing that or are you just continuing to hear cautious commentary from your own customers?

You know, based on the mix of programs that we have and we're hearing a cautious mix, we've had last year was a particularly strong year for us. So a lot of the comps that we think are really tough, at least for us in the storage side. And also the same on the service side. So that's kind of a key driver of some of the year-over-year comps, the year-over-year lower guidance, if you will, and the mix of products that we have. And in our view, there's general softness in HDD and external storage as well.

Okay. Thank you. And just another inventory question here. uh uh uh regarding um your your outlook i think um you said um that you expected your inventory terms actually to to be um to to improve um as you get through the year and you know even though inventory levels um are higher is that correct that's right matt so we expect that our first quarter revenue is going to be our lowest quarter of revenue in the year and a lot of the inventory that we have on hand

And some of it was very strategically brought in to support some of the growth that we're seeing. And so we expect that our inventory turns will be improving. Okay.

All right. Thank you.

Offer, we can take the next question.

Operator, next question.

Operator?

Your last and final question comes from the line of Daniel Chan with TD Securities.

Oh, hi. Good morning. I just want to drill into the semi-cap opportunity a little bit more. I'm just wondering, like we've seen a number of fabs announce expanded CapEx and then also some of the suppliers take forecasts up. To what extent has that flowed through to you? I'm just trying to get a sense for the opportunity for even more upside to what you've been seeing. So I'm just kind of curious whether you've seen some of those orders really accelerate or you think there's more to go?

Hi, Dan. It's Rob. It's a very strong SEMICAP environment right now. We're the largest or one of the largest in our space and have leading positions with SEMICAP with all the major equipment manufacturers that do outsourcing. So it's been a direct flow through from the fabs to them right to us. And again, this year, a large portion of our growth is not just by a rising tide, but it's really by new programs or share gains. And all those new programs are based on the investments that we made during the down cycle and some new verticals and some capacity as well. So we think we're going to be a direct beneficiary of what we're seeing going on in the NFABs as well.

Okay, that's helpful. Thanks. And then on the communication side, as your customers in HPS continue to gain share and you guys gain wallet share, I'm just curious whether that has any – direct impact on some of the relationships that you have with some of your larger customers? Obviously, you've disengaged with Cisco, but you've got another large network or communications provider there. As you gain wall share, does that change the conversation a little bit?

Not materially. I mean, I think between our cloud providers and our traditional OEMs, I think they view us as an enabler to their success versus anything else. And they're pulling on solutions that we offer, both offer in our HPS business in one way or another. So the conversations have been healthy on both sides. I think they're seeing the value in having someone like Celestica actually design that product for them and also provide other value-added services. So I think the model You know, I think this whole pandemic has kind of shifted that model and accelerated that model moving forward. So it's been a net benefit on all lines of business.

Great.

Thank you. Ladies and gentlemen, that concludes our Q&A portion of the call today. And I will now turn the call back over to Rob for closing remarks.

Thank you, Operator. You know, we're off to a strong start in 2021 after a strong finish to 2020. We feel our efforts to diversify our portfolio are yielding results of lifecycle solutions representing 59% of the company's revenue. The revenue of the company's non-Cisco business grew 7% year-over-year. And additionally, our operating margins continue to expand. And in Q1 2021, we posted our fifth consecutive sequential quarter of year-over-year non-IFRS margin expansion. We're excited that our efforts to transform our business are yielding results. In May, we will be hosting another roundtable discussion for our investors. This time, we will focus in on our capital equipment segment, so please stay tuned for more details. I'd like to thank our global team for remaining vigilant and keeping themselves and each other safe. And thank you all for joining today's call. I look forward to updating you as we progress throughout the year.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.