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spk08: Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Celestica's fourth quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's presentation, there will be a question and answer session. If you'd like to ask a question at this time, please press star followed by the number one on your telephone keypad. If you have any difficulties hearing the conference, please press star zero. Thank you. Craig Oberg, Vice President of Investor Relations and Corporate Development. You may begin your conference.
spk12: Good morning, and thank you for joining us on Seleska's fourth quarter 2021 earnings conference call. On the call today are Rob Mayonis, 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 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 other public filings, which can be accessed at sec.gov and cdar.com. We assume no obligation to update any forward-looking statements except as required by law. In addition, during this call, we will refer to various non-IFRS financial 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, lifecycle solutions revenue, and adjusted effective tax rates. Listeners should be cautioned that references to any of the foregoing measures during this call denote non-IFRS financial measures, whether or not specifically designated as such. These non-IFRS financial 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 financial measures to describe similar operating metrics. We refer you to yesterday's press release and our Q4 2021 earnings presentation, which are available at Celestica.com under the investor relations tab for more information about these and certain other non-IFRS financial measures, including a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements. Unless otherwise specified, all references to dollars on this call are to US dollars and per share information is based on diluted shares outstanding. Let me now turn the call over to Rob.
spk06: Thank you, Craig. Good morning, everyone, and thank you for joining us on today's conference call. In the fourth quarter, Bustic achieved several important milestones, capping a challenging but successful year. A company closed the acquisition of PCI, our first acquisition in three years, which has been immediately accretive to our financial performance. and accelerated our portfolio diversification efforts. We achieved a return to top-line year-over-year revenue growth in the fourth quarter after successfully disengaging with Cisco, and we recorded the highest non-IFRS operating margin ever for the second straight quarter in a row. In spite of our dynamic macro environment, Celestica continues to execute well on our key objectives while advancing our long-term strategy. Our fourth quarter revenue came in at $1.51 billion, slightly higher than the midpoint of our guidance. While non-IFRS adjusted EPS of $0.44, our highest quarterly adjusted EPS in more than 20 years came in well above the high end of our guidance range. Our non-IFRS operating margin of 4.9% was another high watermark for Celestrica. This represented our eighth consecutive quarter of yearly operating margin improvement and was higher than the guidance midpoint of 4.5%. With our solid progress on margin expansion over the last two years, we believe we are in a strong position to maintain our operating margin in our target range of 4% to 5% for 2022. 2021 was a great year for our CCS segment. as our hardware platform solutions business, or HPS, achieved a record 1.15 billion in sales, which represented growth of 34% compared to 2020, as we continue to gain share and grow faster than the market. Despite the challenges presented by the constrained global supply chain environment, demand from service providers in our HPS business is expected to remain a driver of growth in CCS for 2022. Our HPS segment saw strong revenue growth in 2021, led by our capital equipment business, which achieved sales of approximately $750 million. We also experienced a return to growth in the fourth quarter of 2021 in our industrial business. Looking ahead to 2022, we expect revenue growth in ATS of 10% or more. Our outlook is supported by continued strength in our capital equipment business, incremental growth in our industrial business, further accelerated by the addition of PCI, and continuing commercial aerospace recovery aided by new program ramps in defense. While 2022 is by no means anticipated to be without its share of challenges, we expect to build on the positive momentum we have established in 2021 and lead the company to another strong year of financial performance by executing on our strategic and operational objectives. Before I offer some additional detail on our business outlook, I would like to turn the call over to Mandeep, who will provide you with additional color on our fourth quarter financial performance, as well as our guidance for the first quarter and our outlook for 2022. Mandeep, over to you.
spk12: Thank you, Rob, and good morning, everyone. Fourth quarter 2021 revenue came in at $1.51 billion, in line with the midpoint of our guidance range. Revenue was up 9% year-over-year and up 3% sequentially. Our return to year-to-year growth was driven by double-digit organic revenue growth in our ATS segment, further accelerated by our acquisition of PCI. We delivered non-IFRS operating margin of 4.9%, 40 basis points ahead of the midpoint of our non-IFRS adjusted EPS guidance range, driven by strong performance in both segments. Non-IFRS operating margin was up 130 basis points year-over-year and up 70 basis points sequentially. Non-IFRS adjusted earnings per share were 44 cents, above the high end of our guidance range of 35 to 41 cents. This was up 18 cents year-over-year and up 9 cents sequentially. In late 2021, we experienced a brief IT outage that temporarily impacted our operation. Based on the nature of the incident, it did not have a material impact on our financial results in Q4 2021. Our operations are functioning at normal capacity, and we do not expect any material impact to our Q1 2022 financial results from this brief outage. ATS revenue was up 23% year-over-year, in line with our expectations of a low 20% year-over-year increase. Sequentially, ATS revenue was up 8%. The year-over-year revenue growth in ATS was driven by continuing strength in capital equipment, organic growth in our base industrial business, and two months of contribution from the PCI acquisition. We are pleased that ATS has achieved 10% or more of year-over-year revenue growth for the past three quarters. CCS segment revenue was up 1% year-over-year and slacked sequentially. Year-over-year, the Cisco disengagement offset the 5% growth we experienced from our non-Cisco portfolio, driven by strengths from service provider customers. Note, going forward, the disengagement from Cisco will no longer impact our comparatives. Communications revenue increased by 1% year over year, in line with our expectation of a low single digit percentage increase, and was up 4% sequentially. Year over year, results were driven by growth in our HPS business, which was largely offset by the Cisco disengagement. Enterprise revenue in the quarter was flat year over year, better than our expectation of a low single digit percentage decrease. Sequentially, Enterprise revenue was down 7%. Our HPS business delivered revenue of $350 million in the fourth quarter, up 66% year-over-year, led by demand strength and new program ramps with service providers, supported by continuing data center growth. Turning to segment margins. HES delivered a segment margin of 5.6% in the fourth quarter, up 170 basis points year-over-year, and up 130 basis points sequentially, we are pleased to have delivered on our goal of having our ATS segment margin enter our target margin range of 5% to 6% in Q4 2021. This also represented our eighth straight quarter of sequential margin expansion in our ATS segment. CCS segment margin of 4.4%, the highest since 2015, was up 100 basis points year-over-year and up 30 basis points sequentially. The year-over-year margin increase was driven by continuing strength in our HPS business. Moving on to some additional financial metrics. IFRS net earnings for the quarter were $31.9 million, or $0.26 per share, compared to net earnings of $20.1 million, or $0.16 per share, in Q4 2020, and net earnings of $35.2 million, or $0.28 per share, last quarter. Adjusted gross margin was 9.6%, up 120 basis points year-over-year, and up 80 basis points sequentially. The year-over-year improvement is driven by growth in our HPS business and our ATS segment, as well as lower variable spend. Non-IFRS operating earnings were $74.3 million, up $24.3 million year-over-year, and up $13.0 million sequentially. Our non-IFRS adjusted effective tax rate for the fourth quarter was 16%, an improvement of 3% year-over-year and sequentially. For the fourth quarter, non-IFRS adjusted net earnings were $55.2 million compared to $33.3 million for the prior year period and $43.4 million in the last quarter. Fourth quarter, non-IFRS adjusted ROIC of 16.6% was up 4.2% year-over-year and up 1.4% sequentially. Moving on to working capital. Our inventory at the end of the quarter was $1.7 billion, up $606 million year over year, and up $291 million sequentially. We continue to maintain higher inventory levels to support growth across lifecycle solutions, while also increasing strategic inventory purchases in light of the current supply chain environment. The increase in inventory was also driven, in part, by the PCI acquisitions. To offset the working capital impacts of higher inventory, we continue to work with our customers to obtain higher cash deposits when appropriate. Inventory turns in the fourth quarter were 3.5 turns, down from 4.4 turns in the prior year period and down from 4.1 turns last quarter. Capital expenditures for the fourth quarter were $14.4 million, or approximately 1% of revenue. Capital expenditures for 2021 totaled $52 million. Non-IFRS free cash flow was $36 million in the fourth quarter, compared to $19 million in the prior year period and $27 million last quarter. This is our 12th consecutive quarter of delivering positive non-IFRS free cash flow. Our free cash flow generation in 2021 was $115 million, delivering on our target of at least $100 million in annual non-IFRS free cash flow. Cash cycle days were 75 in the fourth quarter, up two days year-over-year and up three days sequentially. Cash cycle days increased on a year-over-year basis, primarily due to higher inventory. Moving on to some additional key metrics. Our cash balance at the end of the fourth quarter was $394 million, down $70 million year-over-year and down $83 million sequentially. Combined with availability under our recently expanded revolver, we continue to believe that our current liquidity of nearly $1 billion is sufficient to meet our anticipated business needs. Following the closing of the PCI acquisition in November, we ended the quarter with gross debt of $660 million, up $220 million from the previous quarter, leaving us with a net debt position of $266 million. Our fourth quarter gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 2.0 times, up 0.6 turns sequentially, and up 0.4 turns from the same quarter last year. At December 31st, 2021, we were compliant with all financial covenants under our credit agreement. We ended the quarter with 124.7 million shares outstanding, a reduction of approximately 3% from the prior year period. In early December, the TSX accepted our notice to launch a new normal course issuer bid, allowing us to purchase up to 10% of the public flow or up to approximately 9 million shares through December of 2022. Now turning to our guidance for the first quarter of 2022. We are projecting first quarter revenue to be in the range of $1.4 billion to $1.55 billion. At the midpoint of this range, revenue would be up 19% year-over-year and down 2% sequentially. First quarter, non-IFRS adjusted earnings per share, are expected to range from $0.31 to $0.37 per share. At the midpoint of our revenue and non-IFRS adjusted EPS guidance ranges, non-IFRS operating margin would be approximately 4.2%, an increase of 70 basis points over the same period last year and a decrease of 70 basis points sequentially. Non-IFRS adjusted SG&A expense for the first quarter is expected to be in the range of $57 to $59 million. We anticipate our non-IFRS adjusted effective tax rate to be approximately 18%, excluding any impacts from taxable foreign exchange. Turning to our end market outlook for the first quarter of 2022. In our ATS end market, we anticipate revenue to be up in the low 20s percentage range year-over-year, driven by continued demand strength in capital equipment, a continuing recovery in A&D, as well as the first full quarter of contribution from PCI. In CCS, we anticipate our communications end market revenue to be up in the high teens percentage range year over year, driven by strong demand from service provider customers supported by our HPS offering. In our enterprise end market, we anticipate revenue to increase in the mid-teens percentage range year over year, supported by strength in storage demand. Finally, we would like to reiterate our outlook for 2022, which we discussed last quarter. We expect revenues to be at least $6.3 billion, with lifecycle solutions growing at least 10% organically, and our non-IFRS operating margin between 4% and 5%. I'll now turn the call back over to Rob for additional color on our end market and our overall business outlook.
spk06: Thank you, Mandeep. As we take stock of our performance for the past fiscal year, we are pleased with our financial performance and the progress we have made towards our long-term objectives. Our return to year-over-year revenue growth, record operating margin, and near-record adjusted EPS demonstrates that we have been effectively executing against our strategy and our transformation is complete. We are also pleased that our shareholders were rewarded in 2021 as our share price, which outperformed the primary Canadian and U.S. indices, reflected our strong performance. However, we have no intention of resting on our laurels. and we are constantly striving for further improvement. Our focus is now squarely set on meeting our performance expectations for 2022, which includes solid top-line growth in combination with anticipated record non-IFRS operating margins for the year, which, if achieved, will lead to the highest ever annual non-IFRS adjusted EPS. Our efforts to diversify our commercial portfolio remain our centerpiece of a long-term strategy. and we are pleased with the progress we are making. Our lifecycle solutions business saw another quarter of solid revenue growth, up 36% year-over-year in the fourth quarter, recording nearly $1 billion in sales, and accounted for a record 65% of total revenue during the quarter. For the full year 2021, lifecycle solutions accounted for 61% of total sales, compared to just 39% in 2017. Looking forward to 2022, we reiterate our expectation for lifecycle solutions revenue growth of at least 10%. As I mentioned in my opening remarks, the year ahead will not be without its share of challenges. The global supply chain environment continues to be the most challenging we have dealt with in recent memory. And the new viral variants leading to further outbreaks of COVID-19 may further exacerbate these issues. The fact that these hurdles have not stood in the way of us meeting our financial performance objectives is a testament to the resourcefulness, effort, and commitment of our entire global team. However, we believe that the component shortages do gate our true growth potential, as we believe the demand backdrop with our customers support materially higher revenues in the absence of these challenges. Our first quarter and full year 2022 outlook have accounted for these macro conditions to the best of our ability, and we expect the supply chain environment will remain constrained for the medium term. Now, turning to the outlook for our segments. In our ATS segment, we achieved two important goals in 2021. First, we realized a long-term annual revenue growth target ending the year with 11% growth compared to 2020. Second, we achieved our goal of reentering our ATS segment target margin range of 5% to 6% with a strong fourth quarter. We continue to target a long-term annual revenue growth rate of 10% in our ATS segment. For 2022, as a result of organic growth and the addition of PCI, we expect ATS segment revenue of approximately $2.8 billion and segment margin of approximately 5.5%. If achieved, this would represent approximately 20% revenue growth compared to 2021, and approximately 100 bps of year-to-year segment margin expansion. Our capital equipment business continues to exhibit exceptional strength, driven by market share gains, new wins, and a robust demand backdrop, which we expect to continue through all of 2022. Our outsized growth is supported by a global footprint, which we believe is tailor-made for success in this market, including our presence in South Korea, which we are leveraging to capitalize on significant semi-cap growth opportunities in that geography. Our industrial business is expected to be a key contributor to ATS revenue growth in 2022, supported by both organic growth in our base industrial business, coupled with the addition of PCI, a number of new program ramps, as well as secular demand tailwinds in several areas, including EV charging, smart metering, factory automation, and telematics, are expected to drive year-to-year gains, which are expected to be accretive to our targeted long-term ETS revenue growth rate. Demand in our A&D business continues to stabilize, posting modest year-to-year growth in the fourth quarter. We expect commercial aerospace demand to experience a modest recovery in 2022, compared to the trough level seen in 2021, as commercial air traffic begins to normalize. While overall defense spending is expected to remain stable in 2022, Celestica has a number of new program ramps supported by a new facility in Maple Grove, Minnesota, which reopened in July of last year. In our health tech business, while we expect to see some softness in early 2022, due to ramping down of certain COVID-19-related programs, We expect this demand to be replaced by new program ramps throughout the year in surgical, imaging, and patient monitoring equipment markets. Turning to CCS. Our CCS segment recorded its highest CCS segment margin in the past five years. With a strong demand from service providers expected to continue supporting HPS growth, we reiterate our view that CCS will maintain strong segment margin in 2022. The margin outlook for our hardware platform solutions business remains strong, supported by robust demand from our service provider customers. We expect another year of strong growth in 2022, despite the challenges presented by the current supply chain environment. We continue to anticipate HPS to deliver strong growth compared to 2021. In the communications end market, we anticipate year-to-year growth to continue throughout 2022. driven by strong demand from service provider customers, particularly in our HPS business. Though as mentioned, we believe that our growth prospects will remain tempered relative to their potential as a result of component constraints. In our enterprise end market, we anticipate that year-over-year declines in our enterprise business have largely stabilized. We expect for annual revenue to be higher in 2022 compared to 2021. We continue to operate in an unprecedented environment. As we turn the page on another year, we enter 2022 with a sense of optimism and the confidence that our company is solidly positioned to deal with the challenges ahead and capitalize on the opportunities at hand. Our recent successes in the context of these challenges speak to our ability to execute on our plan and serves to validate our strategic vision. I would like to thank our entire global team, and commend their efforts during 2021. With your dedication and focus, our company will push ahead once again in 2022 and continue to make that vision a reality. And with that, I would now like to turn Nicole over to the operator for Q&A.
spk08: Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from Thanos Moscapolis from BMO Capital Markets. Please go ahead. Your line is open.
spk02: Hi, good morning. On the supply chain, clearly it had a bigger impact on revenue in Q4 than in Q3. Can you provide some color in terms of how you're thinking about that impact heading into Q1 and through 2022? Are you assuming that it gets, you know, stable from here, a bit worse, or what's implicit in your assumptions?
spk06: Hi, good morning, Stan. This is Rob. Yeah, as we go into Q1, we... assuming that the impact in Q1 is very similar to Q4. And as we look out for full year 22, you know, we don't expect any meaningful improvements throughout the year. If you just think about what's going on in the macro environment, the strong OEM growth, the semi-cap capacity that is coming online will probably be late in the year. Inventories are low, lead times are up, pricing is up. So we've aligned ourselves and assumed that we're not going to see meaningful improvement in supply chain constraints throughout the year. You know, that being said, as you can see, we've been faring fairly well through the environment. It's driven by our strong processors, our strong people. And we're also working closely with our customers, on our customer side, just to add some more color. You know, we've been very transparent with them. And as such, they've opened up the horizons, and in many cases, They've increased cash deposits so we could secure our strategic inventory for them. And on the process side, we've developed a series of new automated tools. And in many cases, we actually understand our customers' demand better than they do, which allows us to more clearly communicate with our suppliers and get the critical supply that we need.
spk02: Dan, this is... Sorry, go ahead.
spk12: Sorry, Dan. It's me, DPR. I was just going to add some numbers to what Rafa just mentioned. As you know, for Q1, we are continuing to have a little bit of a wider guidance range, plus or minus $75 million. So we have taken into account material constraints to the best of our ability for the first quarter. And then when we talk about 2022, as you know, we're targeting at least $6.3 billion in revenue. Our demand outlook is north of that. And so we've done to the best of our abilities. We've taken into account the supply environment when communicating the $6.3 billion plus.
spk02: Great. You don't disclose backlogs, but I have to assume that your backlog is growing and the weighted average of your backlog is probably increasing, setting up your longer-term visibility. Is that fair?
spk06: Yeah, that is fair. Our customers' backlog is increasing and sometimes two- to three-fold, and as such, our backlog is also increasing to the same extent.
spk02: And then finally, on cash cycle days, obviously inventory is increasing and drop setting it to some extent with higher deposits. How do you think that dynamic kind of progresses over the coming months?
spk12: Yeah, so it's been a tough environment, as you know, this year, but we're pleased that we were able to generate over $100 million in cash in 2021 despite it. Inventory has been growing, but we've been doing that strategically and then at the same time working with customers on deposits. As we go into 2022, we expect, again, the environment is going to remain largely consistent. Inventory will be elevated for a period of time, but again, supported by deposits. We are still targeting strong free cash flow in 2022, but as that inventory unwinds, we should expect that some deposits will unwind as well. So it doesn't all fall to the bottom line in terms of cash, but we've taken that into account in our projections.
spk02: Great. I'll pass the line, thanks.
spk08: Your next question comes from Robert Young from Canaccord. Please go ahead. Your line is open.
spk09: Hi, good morning. Just a question on the Semicap outlook. Obviously, it's very strong for 2022, but I was curious, relative to last quarter, would you think that the outlook is better or worse? There's been a lot of capacity expansion announcements, and I'm trying to put that into context from what we know in the public domain versus what you might have known ahead of time from your customers. Is the environment better today than it was three months ago?
spk07: Hi, Rob. What do you mean?
spk06: When you say the environment, you mean our Q4 performance relative to Q3 performance within our business or more broadly speaking?
spk09: More broadly, I'm thinking about 2022.
spk06: Yeah, so 2022 is the external environment where we're hearing from our customers. The market should be growing rapidly. about 14, 15% is what we're hearing. Internally here, we are aligned to grow much faster than the market due to the fact that, you know, we've been effectively just taking share and we have a number of new program ramps that are scheduled to happen during the course of the year in areas of high-level assembly, machining, robotics, new customers in display, et cetera. But the external market that we're hearing from is about you know, about a 15%, 14% increase year over year from a week of tab equipment.
spk09: Okay, and that does sound better. I think you said the market was 12% growth last quarter, so the market sounds like it's better than it was last quarter. Is that a fair statement?
spk07: It is, yeah.
spk09: The outlook I'm talking about, not about the quarter.
spk06: Yeah, the outlook is higher than it was last quarter, so the outlook is increasing significantly. And it's also extending as well what we're hearing from the market folks and our customers that expect this cycle, if you will, to certainly last throughout 22 and well into 23. And many are asking us for capacity plans through 24 as well to make sure that we're able to go with them.
spk09: Okay. And then on the HPS growth for 2022, 10% or greater, I was just looking at the comms. expectation for Q1 of growth of high teens, and I would think of that normally as a slower quarter Q1, and so I'm trying to reconcile the 10% plus guide with the high teens expectation in Q1. Is visibility just lower as you go through the year, or is Q1 just higher than it might normally be?
spk06: Within communications, the majority of the ramps that we're seeing in comms is coming from HPS and continued demand strength and new program ramps and networking, which is largely fueled by HPS. We're also seeing some demand strength in some existing programs as well, but the high teens is really a reflection of the HPS growth that we're seeing.
spk12: Yeah, and Rob, what I would just add is, goes back to our 2022 commentary, we're expecting growth of 10% or more in lifecycle solutions, which of course is inclusive of HPS. And going back to the comment I shared with Dan of the demand outlook remains robust. What we're doing is we're also taking into account the materials environment when we provide that color. And so as we just look at Q1, which is right in front of us, we're feeling quite comfortable based on the supply environment. But of course, we continue to be cautiously optimistic as you go beyond Q1.
spk09: Okay, great. And then I didn't see an update on the target margins for CCS and ATS. You said 5.5% for 2022. Is the 2% to 3% still relevant for CCS and 5% to 6% for ATS in general?
spk12: What I would say is that, yes, we expect that the performance in CCS is going to continue coming out of 2021. And as you know, throughout 2021, they were above their target margin range. And so we expect strep to continue. On the ATS side, we're pleased that they entered back into their target margin range of 5% to 6%. And we expect strong performance at those levels or possibly higher throughout the year. We gave a full year number of around 5.5%. What I would say in terms of target margins, though, is as you know, we did increase the company's range to 4% to 5% for 2022. We'll relook at what the right target margin ranges are for the individual segments as we go through the year. Frankly, we want to operate in the range for a few quarters first. We also want to complete the integration of PCI. So right now, the higher margins from both segments is being reflected in the total company number, and we'll revisit what the right ranges are over the long term for the segments later on.
spk09: Okay. Thanks for taking the questions.
spk04: Thanks, Mark.
spk08: Your next question comes from Todd Copeland from CIBC. Please go ahead. Your line is open.
spk11: Yes. Good morning, everyone. I wanted to ask you about margins as well.
spk12: I think street expectations for 2022, uh, EPS is a dollar 45 to a dollar 50, and it's more or less implying the low end of your four to 5% target range, 4.1 or something like that. At the start of the year, is that the right place to be in that target range or given you've increased the guidance range should, uh, Should people start to move towards the middle of that range given the momentum in your business? Just a little color around that would be helpful. Thank you. Sure. Thanks for the question, Todd. Yeah, what I would say is that we do know what the consensus numbers are. That's around $6.3 billion in revenue, $1.47 or so of EPS. And then the implied margins are in the 4.2%, 4.3% range. What I would say is that that's at the low end of what we're targeting. As you can see from our guidance for the first quarter at 4.2%, which historically is our weakest quarter based on seasonality, we are targeting stronger margins than 4.2% as we go through the remainder of the year. Also, from a revenue perspective, to reiterate my comments to others, we are targeting $6.3 billion or more as we go through the year. We're just tempering demand right now with some of the material constraints. dynamics. So all in all, we believe that consensus right now is reflecting the low end of what we are targeting. We are certainly targeting higher than that. Okay. And is at this point in the year, beyond seasonality is the biggest swing factor, how supply chain plays out? It is the biggest dynamic, I would say, that could flex our revenue. Again, the demand outlook remains robust. It's remained robust throughout 2021. We think we've done a nice job of managing through it. But the impact is anywhere between $30 million to $50 million a quarter of revenue that we could have done had we not had any supply constraints. So we think we've accounted for that in the $6.3 billion. We don't see it getting significantly worse. At the same time, based on what we're seeing right now, we also don't see it getting better in 2022. Great. And my second question relates to the PCI acquisition. Apologies if you disclose this, but how much did it contribute to revenue and EPS in the fourth quarter? We don't break it up specifically. I will this time because it was a partial quarter in the business closed, transaction closed on November the 1st. It gave us about 1% of our overall growth. So ex-PCI, we would have been about 1% to 2% lower. on a year-over-year basis. And as we're going into next year, as we've communicated, we're expecting an incremental amount of around $300 million or so on a year-over-year basis.
spk04: Great. Thanks for the call. I appreciate it. Thanks, Doug.
spk08: Your next question comes from Paul Steep from Scotia Capital. Please go ahead. Your line is open.
spk11: Hey, morning. Maybe just to go back a little bit, either Rob or Mandy, can we talk about non-hps ccs and just the cadence there obviously the basic math implies that there's been growth in what's called money programs but i think my question is longer term how should we think about recalibrating that portfolio you know we went through a lengthy period of maybe removing you know revenues and client work that might be better placed other places Where are we in that trending? Because it looks like you've replaced capacity and HPS as a percent of CCS will sort of tick down a little bit on a percentage basis of the mix this year. How do I sort of reconcile?
spk12: Hey, Paul, I'll start off. I'll let Rob finish. What I would say is that the non-HPS portfolio in CCS is still very good business. It's about $2 billion of our overall revenue, gives us terrific utilization in some of our key factories, gives us the ability to have better buying power with our suppliers, getting better pricing across the entire network. And so it is a very attractive piece of business. The other thing, too, is that it is becoming stickier because of our HBS business, because when you can service a customer with both the traditional EMS offering as well as HBS offering, you become a more strategic supplier to that customer. And so as we look into next year, if you look at the overall growth rates of markets, it's in the low single digit rate. That's something that is not too far off of what we would expect of our non-HPS portfolio within CCS. But again, we're pleased with the portfolio that we do have. We've already made the tough decisions that we've had to make around portfolio shaping. And so the portfolio we have today, we think is still very strategic for us.
spk07: And the only thing I would add
spk06: The only thing I would add would be that our non-HPS portfolio on the areas of comms and enterprise also enables us to actually gain more HPS content over time. So it allows us to kind of move up the rack and offer full-op solutions to our customers and also transition customers from EMS to HPS over a period of time. So it's an enabler as well.
spk11: Okay. Maybe... by the one who wants to start, and I'll sort of two-part this one. Talk to us about what you're thinking about the global footprint in terms of where production is and maybe shifting factories around. You talked about opening the Minnesota facility last year, but that's against the CapEx backdrop that's maybe been maybe more constrained. I guess the second part of it for Mandeep is, Mandeep, how should we think about CapEx this year and next? And then Maybe the other one, I believe we've cleared most of the real estate opportunity, but I think there still are some owned facilities. What's the opportunity to maybe realize some real estate, unlock some value in real estate, and maybe deploy that capital?
spk06: Good question. From a footprint perspective, there's been certainly an increased trend for regionalization, and we've been capitalizing on that from a couple of different aspects First, from a growth perspective, as supply chains become more complex and also as our customers want to regionalize more, it's actually been increasing the amount of outsourcing that we've seen from the customer base. So we've been capitalizing that and growing specifically to support our new customers' regionalization efforts. And then secondly, based on the footprint that we have, many customers either to divest the supply chain or just to improve total landed costs have asked us to help support multi-node solutions. So we've been kind of supporting them doing that. So that's been a heavy activity, I would say, over the last 18 months or so. It still will be fairly active this year in terms of maybe repositioning some of our customers' products to better align them with where they need it to be. But I think we have the right footprint right now to support our customers. We are looking at niche capacity expansions as our company continues to grow, though, in key spots.
spk12: Yeah, and Paul, I'll just continue on the CapEx front. So we spent about $50 million at CapEx in 2021, around 1% of our revenue, lower than we had originally set out to do. And that's just because some projects that we were anticipating to start at the back end of this year had pushed to the right direction. along with the supply environment. As we look into 2022, we are targeting closer to 1.5% of revenue. You can think about it from a modeling perspective as $90 to $100 billion. That's in line with the guidance that we traditionally give, which is 1.5% to 2% of overall revenue. And we're pleased, though, that where we're spending that money is to support customer programs and new wins. So it's largely growth-oriented. To your point about owned versus leased real estate, it is something that we look at from time to time. And being in 14 different countries, the dynamic is going to be different in various locations. We don't feel right now that there's a compelling reason to take any of our assets at this point and necessarily do a sale leaseback. The business cases don't make sense in various scenarios. But it is something that we constantly evaluate, and we know that that is a source of capital if we wanted it to be.
spk11: Great. Last one, and then I'll pass on. Just obviously closed PCI leverages up, but it's going to quickly deliver at least.
spk04: Paul, I'm sorry. I think your phone broke out. I wasn't able to hear the question. Paul, I'm sorry. I think the reception broke out, so the question didn't come through. Let me give you another chance at that. Otherwise, we can always put you back in the queue as well. Sorry, guys.
spk11: I'll pass the line. I've got bad reception.
spk12: Okay, thanks, Paul.
spk06: If you were using celestial equipment, it would be so much better, Paul.
spk08: Your next question comes from Rupalu Bhattacharya from Bank of America. Please go ahead. Your line is open.
spk00: Hi. Thank you for taking my questions. Can you help us bridge the 70 basis points of margin decline between 4Q and 1Q? I mean, your CCS margin is looks like have consistently been above the 2% to 3% long-term range for over two years now, I mean, for the last eight quarters. And on the ATS side, you're guiding, I guess, for sequential growth in revenues. So I'm trying to figure out, you know, what are some of the factors that are driving that margin decline? Can you help us break that into how much is mix, how much is FX, how much is volume-related? And if you could just give us any guidance on how you're thinking about margins for both segments in the first quarter?
spk12: Sure. Good morning, Luke. So what the margin decline quarter to quarter is reflecting is some moderation within CCS. As you know, we don't give guidance ranges specifically at the end market level, but I can tell you that we are targeting above the guidance range or the target range in CCS, so it's above 3%. But the 4.4% that we saw in the fourth quarter was exceptionally strong, driven by a strong mix and some strong recoveries as well. On the ATS side, we're targeting to be above the 5%. Again, the full year outlook for ATS is 5.5% to thereabouts, approximately. And we are expecting to be at 5% or more. We're working towards that in each of the quarters next year. And then to answer your question, maybe a little more specifically on what's driving some of the moderation within CCS, that is the business where we traditionally see seasonality, particularly with our enterprise customers. And so our goal would be to see margin strength in CCF going beyond the first quarter as well. But it's not unusual for CCF to have its, quote unquote, weakest quarter in the first quarter.
spk00: Okay, Mandeep, thanks for the details on that. Maybe related to margins, I'm going to ask a more theoretical question. You know, as your capital equipment business grows, I mean, that should be accretive to your APS segment margins. I think you reported $750 million of revenues in that capital equipment business in fiscal 21. I'm trying to estimate how much more margin expansion can that business create. Is there a revenue level at which you reach steady state margins in that business?
spk12: We're already experiencing strong margins in the business right now. We've talked about this in some previous calls where As we continue to grow that business, we would expect that it could perform above 6% operating margin. It's not there yet from a consistency perspective. But also going to what we talked about for 2022, we're expecting further growth in CCI. So we do expect incremental margin accretion from capital equipment as we go through 2022. That being said, we want to just make sure that we temper expectations because capital equipment demand will not continue forever. And we do expect that eventually it will moderate. We have been very disciplined on adding fixed costs to that business so that we are able to weather the next inevitable downturn. But the reason that we continue to be optimistic for the ATS business is because our very large segment in aerospace and defense is operating below expectations. And so we do expect that eventually when capital equipment moderates, our A&D business will hopefully be able to come right behind it and pick up any of that margin dilution. So we think we're set up for a good margin story over the next few years, but we just want to make sure that we balance our expectations around capital equipment.
spk00: Okay, thanks for the details on that. I appreciate that. And for the last question, Mandeep, can I ask you about your priorities for use of cash now that you have the new NCIB program How should we think about debt reduction versus share buybacks versus further M&A?
spk12: Absolutely. So it all starts with free cash flow generation. So again, pleased with the cash generation that we had in the 2021, $115 million. We are targeting $100 million or more for 2022, albeit it is a challenging environment. We have a very healthy balance sheet. Our gross leverage ratio is at 2.0 times. It will reduce as we go through the year. And then also our liquidity remains very strong. With our refinance credit facility, it's close to a billion dollars, up almost $100 billion from where it was a quarter ago. So we feel like we have a lot of flexibility. When it comes to share buybacks, we're going to continue to be opportunistic on those buybacks. And what I mean by that is, does the stock price reflect what we are actually doing from an operational execution perspective? Right now, we believe that consensus estimate does not fully reflect what we are aiming to do in 2022. And frankly, the multiple on the company is still trading at a discount relative to historical averages. And so when there is weakness, we are comfortable going in and buying back shares because we think that's a good use of cash for shareholders. That being said, we maintain flexibility to do M&As. Our long-term priorities don't change, you know, 50% back to shareholders, largely through NTIBs, 50% of our cash generation being invested in the business. But on the M&A side, as you know, we maintain a very, very tight filter and it needs to be EPS accretive in year one. ROI has to be above our cost of capital by year two or sooner. It has to be strategic for the business. We have to be able to integrate it well. And so we'll continue to look at M&A transactions as we go through 2022, we have both the balance sheet and the management capacity to do a transaction should the right one come in front of us, but we're going to be very disciplined before we pull the trigger on anything.
spk00: Okay. Thanks for all the details. Congrats on the quarter and the strong margin performance.
spk04: Thanks a lot, Russo.
spk08: Next question comes from Jim Subba from Citigroup. Please go ahead. Your line is open.
spk05: Thank you. I have two questions, and I'll ask them at the same time so you can figure out which way you want to answer them. But one of them is just mostly a clarification. When you mentioned about that you saw some recoveries in the quarter, there's lots of ways to define that. You know, some call it like recovery of COVID costs. Others may call it recovery of utilization rates. Others may call it like recovery from bad debt accruals or lots of other things. Can you just help us understand what you meant by recoveries? And then the second question is, am I right that the Celestica we're looking at now, since it's post the Cisco disengagement, that this is the alignment and kind of the vehicle that we should look at going forward? Or do you still have some things in your portfolio for repositioning that we should be mindful of? I know you, of course, have to do the integration of PCI, but It seems like we're probably close to the point of the true, clear vehicle that we should be looking at going forward.
spk01: Thank you.
spk12: Hey, Jim. It's Mandy Pierre. Nice to talk to you this morning. So to answer your first question, when we're talking about recovery, it was largely related to premiums that we were paying or freight expenses that we were able to successfully recover from our customers during the quarter, and that did – help us. I'll let Rob maybe add on to a starting of an answer for the second one, which is, as we have said, our portfolio shaping actions are complete. We went through a multi-year transformation. The transformation is done. We're now in the growth phase. And so what we're really pleased with is that we are now posting absolute growth numbers. You know, as we go into Q4 or as we finish Q4 and as we're going now into Q1, And all through 2022, we're looking to see absolute growth across the company. Of course, our strategic objectives are to continue to grow our diversified sets of businesses, HPS and ATF. And again, we're targeting 10% or more growth in those businesses in 2022. And we think that as we continue to improve the mix from those very high reliability businesses, it just continues to strengthen the company. But I'll let Rob add on to that.
spk06: I think you covered the majority of the points, Mandy. But I would just say I'm really pleased, Jim, with the progress. We've improved diversification. As a result of that, we've improved our margins and we've also improved our customer concentration. So we think we have a much more resilient portfolio and a portfolio that's much better aligned to take advantage of some of the secular tailwinds that we're seeing. So I would mock the transformation as complete, but our work is not yet done because there's always room for improvement.
spk01: Thank you, and congratulations to you and your team for lots of effort and work, which is now manifesting itself. Thank you. Appreciate that.
spk08: Your last question comes from Paul Treber from RBC Capital Markets. Please go ahead. Your line is open.
spk10: Thanks very much, and good morning. Could you speak to the labor environment? You mentioned supply chain constraints, but to what degree are you seeing any shortages in labor, if any, or absenteeism or also wage inflation? How do you think about the labor environment through 2022?
spk06: Good question, Paul. We're certainly seeing pockets of wage inflation of higher absenteeism and difficulty in attracting talent. I would call it pockets largely in the Americas on the West Coast and also in the Northwest area. In terms of just picking it off, in terms of absenteeism driven by COVID, we had a rush of it, I think, earlier in January, but frankly, given the new CDC guidelines, people are back at work and we've returned to normal levels. So it's really for a very short, limited amount of time early in Q1. In terms of the inflationary environment, I do think that's alive and well, if you will. We've been taking that into account and working with our customers and repricing accordingly. And in terms of finding talent, you know, we're doing our best to, you know, have partnerships with local universities and doing all the normal things to find the right talent to enable the strong demand that we have in some key sites. But I wouldn't say it's a broad global issue. We're just seeing certain pockets and certain geographies fall.
spk10: And you mentioned being able to pass along wage inflation. Is there any explicit cost related to the labor shortages or absenteeism that's constraining you that maybe you just refer to as supply chain constraints or is it immaterial at this point?
spk06: Right now, the labor constraints are probably just impeding our ability to get product out the door in a certain timeframe. But we have other tools in mind in terms of overtime or shift patterns or things like that to compensate for that. So I wouldn't view it as a major barrier in terms of fulfilling demand. I'd say right now that the major barrier is really around material. If we have the material, we could typically get the product out the door. And we've been combating the labor shortage with, I wouldn't call it a top-tier issue, I would call it a second-tier issue right now.
spk10: Okay, and then last question for me. SG&A in the quarter was lower than what we anticipated. Could you speak to, I know you spoke to margins on a percentage basis, but how do we think about SG&A dollars in Q4 and then also through 2022? Yeah. Hey, Paul.
spk12: So I'd say in Q4, we saw a little bit of a reduction in some variable spend items that turned out to be favorable for us. And as you go into 2022, Largely, we're looking to maintain our SG&A dollars, and so to see leverage benefits as the top line grows. That being said, there are two things I would call out that will add to the SG&A dollars. The first one, of course, is the PCI integration. PCI's SG&A is going to be somewhere around $1 million a month, so look for about $12 million or so to be added going into 2022. The second one is that we would anticipate that as we move towards the back end of the year, that travel is going to start picking up from a management team perspective. We're in 14 countries. We travel to those locations frequently. And so we will expect to see a little bit more SG&E spend in that area 2022 compared to 2021. But largely, we are expecting at the top line growth that we will continue to see cost productivity, and we are aiming to be very disciplined on our SG&A spend outside of those items to drive good levels of productivity to offset inflation.
spk10: Thanks for taking my questions, and congratulations on the quarter. Thanks, Paul. Thank you.
spk08: We have no further questions. I would like to turn the call back over to Rob Mayonis for closing remarks.
spk06: Thank you, Julianne. I'm pleased with our performance in the fourth quarter and our full year 2021 results. We continue to execute well through a difficult supply chain environment. And we've completed our transformation and are now focused on continued growth and earnings expansion. As we head into 2022 with strong tailwinds and continued conviction that we are on the right path, I'd like to thank our global team for a strong 21. And I'd also like to thank all of you for joining today's call. I look forward to updating you as you progress throughout the year. Stay safe and best to you.
spk08: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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