Celestica, Inc.

Good morning, ladies and gentlemen, and welcome to the Celestica 4th quarter 2024 earnings call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call, we require immediate assistance, please press star 0 for the operator. This call is being recorded. I would now like to turn the conference over to Craig Oberg, Vice President of Corporate Development and Investor Relations. Please go ahead.

Good morning and thank you for joining us on Celestica's

Q4 2024 earnings conference call. On the call today, we have Rob Mayones, President and Chief Executive Officer, and Mandy Piaula, Chief Financial Officer. Listeners should note that, as previously communicated, all of our financial results, including historical comparisons, will now be reported on a US GAAP basis, having transitioned from reporting under IFRS previously. Please note that our guidance for Q4 2024 was issued on an IFRS basis and has not been restated due to our assessment that the impact of the transition to US GAAP standards did not have a material impact on these figures. Please note that during the course of this call, we will make forward looking statements relating to the future performance of Celestica, which are based on management's current expectations, forecasts, and assumptions. While these forward looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast, or projection in the forward looking statements made today. Certain material factors and assumptions are applied in drawing any such statement. For identification and discussion of such factors and assumptions, as well as risk factors that may impact future performance and results of Celestica, please refer to our public filings available at sec.gov and cedarplus.ca, as well as our investor relations website. We undertake no obligation to update these forward looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAAP financial measures, including adjusted operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, free cash flow, gross debt to trailing 12-month adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, adjusted SG&A expense, and adjusted effective tax rate. We have included in our earnings release found on our investor relations website a reconciliation of non-GAAP financial measures to the most comparable GAAP measures. With respect to our Q1 2025 and 2025 annual outlook, our earnings release does not include a reconciliation of forward looking non-GAAP measures to the most directly comparable GAAP measures on a forward looking basis, as items that we exclude from GAAP to calculate the comparable non-GAAP measure are dependent on future events that are not able to be reliably predicted by management and are not part of our routine operating activities. We are unable to provide such a reconciliation without unreasonable effort due to the uncertainty and inherent difficulty in predicting the occurrence, the financial impact, and the periods in which the adjustments may be recognized. The occurrence, timing, and amount of any of the items excluded from GAAP to calculate non-GAAP could significantly impact our Q1 2025 and 2025 GAAP results. Unless otherwise specified, all references to dollars on this call are to US dollars. All per share information is based on diluted shares outstanding and all references to comparative figures are a year over year comparison. Let me now turn the call over to Rob.

Thank you, Craig, and good morning everyone and thank you for joining us on today's call. We delivered strong performance in the fourth quarter with revenues of $2.55 billion at the high end of our guidance range and adjusted EPS of $1.11, exceeding the high end of our guidance range. Our adjusted operating margin of .8% exceeded the midpoint of the revenue and adjusted EPS guidance ranges. This result was driven by robust demand in our CCS segment, which delivered solid growth of 30% year over year as we continue to see strong demand from our hyperscaler customers. ATS segment revenues met expectations in the fourth quarter, reflecting anticipated market dynamics. While we continue to see a moderation of demand in our industrial markets, we are encouraged by the strength in our capital equipment business, which achieved nearly 30% year over year growth. Overall, 2024 was an outstanding year for Solstice, in which we continue to build on a positive momentum. For the full year, we achieved $9.65 billion in revenues and adjusted EPS of $3.88, representing growth of 21% and 58% respectively, along with 100 basis point improvement in our adjusted operating margin. We are pleased with the company's performance and the significant progress we have achieved over the past several years. The growth of our AI platforms, along with the exceptional execution by our entire team, continue to be the engines of our strong performance, and we are optimistic about continuing this momentum in the years to come. Before I provide you with some additional color on the outlook of each of our businesses, I would like to hand the call over to Mandeep, who will provide you further details on our financial performance during the fourth quarter and our guidance for the first quarter of 2025. Mandeep, over to you.

Thank you, Rob, and good morning, everyone. Fourth quarter revenue of $2.55 billion was up 19% and at the high end of our guidance range. This strong performance was fueled by significant demand from hyperscaler customers in our CCS segment, primarily for networking products within our HPS business. Adjusted gross margin for the quarter was 11.0%, up 50 basis points, driven by higher volumes and favorable mix. Fourth quarter non-GAAP operating margin was 6.8%, an increase of 80 basis points, driven by higher volumes in our CCS segment and better mix due to higher HPS revenues. Our fourth quarter adjusted earnings per share was $1.11, exceeding the high end of our guidance range and an increase of $0.34. Our adjusted effective tax rate for the quarter was 19%. And finally, our fourth quarter adjusted ROIC was at 29.1%, a significant improvement of 550 basis points, attributed to higher operating profitability and effective working capital management. Moving on to our segment performance for the quarter. HPS segment revenue totaled $806 million, approximately flat and in line with our guidance. The performance this quarter was a result of lower revenues in our industrial business, offset by continuing strength in capital equipment and aerospace and defense. Our ATS segment accounted for 32% of total revenue. Our CCS segment revenue reached $1.74 billion, up 30% due to very strong growth in our communications end market. The CCS segment accounted for 68% of total company revenue in the quarter. Revenue in our enterprise end market was lower by 10% in line with our guidance due to the anticipated technology transition in an AI ML compute program with one of our hyperscaler customers. This was partially offset by favorable demand dynamics in certain storage programs. Revenue in our communications end market saw an increase of 64%, exceeding our guidance of a high 50% increase. This growth was primarily attributed to stronger demand for our HPS networking products. HPS revenue increased by 65%, reaching $807 million in the fourth quarter, representing 32% of total company revenue. This exceptional growth was driven by hyperscaler customer demand for our 400G networking switches, as well as ranking programs for 800G switches. Now shifting our focus to segment margins. ATS segment margin in the fourth quarter was 4.6%, down 10 basis points, primarily due to reduced operating leverage in our industrial end market, partly offset by expanding margins in our capital equipment business. CCS segment margin for the quarter reached 7.9%, an improvement of 110 basis points, driven by increased operating leverage and a higher mix of HPS revenues. During the quarter and for the full year, we had two customers that each accounted for over 10% of total revenue. During the fourth quarter, they represented 24% and 12% of sales, respectively, while for the full year the same two customers accounted for 28% and 11% respectively. We currently support each of these customers across a number of different programs and continue to win new engagements with them, which are expected to ramp through 2025 and beyond. This diversification provides us comfort with our current levels of customer concentration. Now moving on to working capital. At the end of the fourth quarter, our inventory balance was $1.76 billion, a sequential decrease of $60 million and a -over-year decrease of $344 million. We are pleased with a reduction in our overall inventory levels, while still being able to support significant growth in customer demand. Cash deposits were $512 million at the end of the quarter, down $9 million sequentially, and down $393 million -over-year, as we continue to return some deposits to customers as gross inventories declined.

Cash cycle days during the fourth quarter were $69

million. Turning our attention to cash flows. Capital expenditures for the quarter were $48 million, or approximately .9% of revenue, compared to .5% in the fourth quarter of 2023. Net capital expenditures for 2024 were .7% of revenue, in line with our full year outlook. In the fourth quarter, we generated $96 million of free cash flow, $10 million higher than our prior year period. For the full year 2024, we generated $306 million of free cash flow, above our most recent annual outlook of $275 million. We are pleased with our ability to continue to generate consistent and growing free cash flow, while making the necessary investments to support the strong growth in our business. And moving on to the balance sheet and capital allocation. At the end of the fourth quarter, our cash balance was $423 million, combined with $750 million of borrowing capacity under our revolver. This provides us with approximately $1.2 billion in total liquidity, which we believe is sufficient to meet our projected business needs. Our gross debt at the end of the fourth quarter was $741 million, resulting in a net debt position of $318 million. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 1.0 turns, down 0.1 turns both sequentially and year over year. As of December 31st, we were in compliance with all financial covenants under our credit agreement. During the fourth quarter, we repurchased approximately 300,000 shares for cancellation under our normal course issuer bid, for a total of $25.5 million. This brings our total share repurchases in 2024 to $152 million, resulting in a reduction of .4% of our shares outstanding. We expect to continue to generate solid free cash flow in 2025, and will maintain our approach to repurchase shares on an opportunistic basis. Now let's turn to our guidance for the first quarter of 2025. Revenue is projected to be between $2.475 and $2.625 billion, representing growth of 15% at the midpoint. Adjusted earnings per share are anticipated to be between $1.06 and $1.16, signifying an increase of $0.28 per share, or 34% at the midpoint. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin would be 6.8%, an increase of 90 basis points year over year. We expect our adjusted effective tax rate for the first quarter to be approximately 20%. Finally, let's turn to our end market outlook for the first quarter of 2025. In our ATS segment, we anticipate revenue to be approximately flat, as demand strength in our capital equipment and aerospace and defense businesses are being offset by softness in other end markets. In our CCS segment, we project revenue in our communications end market to grow in the low 80s percentage range, fueled by ongoing demand strength for our networking switches, including accelerating ramps in our 800G programs. In our enterprise end market, we expect a mid 40% decrease in revenue, resulting from a temporary decline in volumes due to a technology transition in a single source AI ML compute program. With that, I'd like to turn the call back over to Rob to discuss our updated annual financial outlook for 2025 and provide some additional color on our businesses.

Thank you, Mandeep. We are pleased to raise our full year outlook, reflecting strengthening demand in our CCS segment. This increased confidence is supported by strengthening forecasts from our customers through the first three quarters and growing visibility into the fourth quarter. These targets represent our current high confidence view of 2025, and we will continue to assess market dynamics and provide updates accordingly as the year progresses. We now anticipate revenues of $10.7 billion, an increase from our previous outlook of $10.4 billion, reflecting growth of 11%. This translates to a non-GAAP adjusted EPS of $4.75, representing 22% growth based on a non-GAAP operating margin outlook of 6.9%. Finally, we are raising our outlook for free cash flow to $350 million, demonstrating strong earnings conversion while continuing to invest in growth to meet robust customer demand. Next, I would like to provide you some additional color on our businesses for the year. In our CCS segment, we are now anticipating -double-digit revenue growth in 2025, compared to our outlook of low double-digit growth communicated in October. In our communications end market, we anticipate strength throughout the year as new 800G programs with hyperscalers continue to ramp. In our enterprise end market, we continue to expect a softer first half of the year, resulting from the technology transition in an AI ML compute program with a large hyperscaler customer. However, we anticipate revenues to accelerate in the second half of the year, driven by the ramp up of a previously communicated, sole-sourced, next-generation AI ML compute program, further supported by the ramping of AI ML compute and RAC programs with GroK. Moving on to our ATS segment, our 2025 outlook for our ATS segment revenues is approximately flat, as growth is being primarily offset by the decision not to renew a dilutive margin program in our A&D business. The outlook for our industrial business is stabilizing, following a period of softer demand due to macro factors and customer inventory digestion. Based on customer forecasts, we expect volumes to recover in the back half of the year. In capital equipment, the demand environment has continued to improve over the past 90 days, and we anticipate continued growth in 2025 on the back of solid demand and new program ramps. In A&D, base demand within our portfolio remains healthy, supported by new program ramps and new customer wins. Before moving on, I would like to take a moment to comment on the recent discussions surrounding DeepSeq's R1 Large Language Model, which has raised concerns about the future of AI model development. While DeepSeq's disclosures are still being analyzed, we believe this new technology has a neutral to positive impact on Celestica's business over the next few years. Our AI ML Compute business remains well positioned. Today, our Compute solutions primarily leverage custom ASIC designs. These custom chips are optimized for performance and power efficiency in targeted use cases. We are confident that our existing programs and new wins, ramping through 2025 and 2026, remain strategically aligned with our customers' needs. Regardless of advancements in general purpose, large language models. Additionally, networking opportunities are continuing to accelerate. We see a significant upside for our networking business, which represents the majority of our hyperscale revenue. We believe that increased AI adoption, driven by potentially lower training costs, will fuel demand for high bandwidth, low latency networking infrastructure, which could further strengthen our position as a leading provider of networking solutions. We believe this development, rather than hindering investment in high performance hardware, actually highlights the potential for even better cost efficiency, which could accelerate AI adoption. As we look ahead, we're excited about several positive indicators that reinforce our optimism for sustained long-term growth. In particular, we see strong signals of continued customer demand tied to AI-driven data center investments. We continue to engage in discussions with both existing and new customers on a number of programs that we expect will begin to ramp over the next 12 to 18 months and extend through 2026 and beyond. In particular, we're excited to announce two major new wins secured in the last quarter. First, on the networking front, we have been awarded our second 1.6T switching program with another large hyperscale customer, which will begin ramping in 2026. This HPS program award includes supporting our customer with the design and production of a fully AI-optimized networking rack, which will leverage our advanced system-level cooling technology. This program represents an inflection point in liquid cooling applications within data center networking towards an increase in available bandwidth from a reduced footprint. Next, we are also thrilled to announce a significant new HPS win with a leading digital native company who is a pioneer in the commercialization of AI applications. We will be collaborating with them to deliver a full rack, which is an optimized AI system solution built around the customer's custom ASIC accelerator. The program will leverage our proprietary R&D investments and develop expertise in AI ML servers. In addition, this solution will include our 1.6T switch designs marking our third next generation program award and high bandwidth switching as well as rack-level cooling and connectivity. Production for this program is expected to begin ramping in the latter part of 2026, and we believe that demand from this customer at scale could achieve a level similar to those of our largest hyperscaler customers today. These wins will enable us to showcase our full AI system design capabilities and further solidify our position as a leading provider of AI infrastructure solutions. These wins are also a testament to our more than decade-long commitment to building leading edge capabilities within our HPS platform. Our investments in R&D, design, engineering, and IP, along with our team of nearly 900 skilled engineers, enable us to deliver cutting-edge comprehensive solutions. We are pleased to see very strong and broad-based momentum across our CCS portfolio, and we believe that the current strength and demand for data center hardware has a multi-year runway ahead. Before I conclude, I would also like to note that Lorette Kolnar, the current chair of our audit committee, has announced her resignation from the board of directors effective January 31st for personal reasons. Lorette has been a highly valued member of our board for the past 15 years, and we would like to thank her for her efforts during her tenure, and wish her the very best in her future endeavors. The board has appointed Luis Mueller as the next chair of our audit committee. I would also like to thank our global team for their tireless work and a truly exceptional execution in 2024. As we close out, yet another incredibly successful year. And with that, I would now like to turn

the call over to the operator to begin the Q&A session.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-down phone. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. And your first question is from George Leng from Barclays. Your line is now open.

Thank you guys. Thanks for taking my question and congrats on the call and the guide. Just two quick ones. Firstly, as we kind of look at the energy of the cycle, just can you talk about kind of any thoughts on continuously pull through on the 4G for this year? And similarly into 2026, you have one, two, three programs on the 1.6T and any thoughts on whether that's going to cannibalize lower speeds or should continue to have strong growth across the energy coexist with the lower speeds as well? Just kind of how to think about those relationships.

Hi, George. Yeah, this is Rob. So, you know, we see 400G and 800G coexisting for quite some time. You know, as we go into 2025, we're obviously wrapping up 800G quite a bit. It'll be up, you know, three to four hundred percent. But 400G is also growing as we get into 2025 as well. And in the out years, again, we see a long tail for 400G. As the price points come down on 400G, there'll be different use cases for that type of technology. So, again, we see these technologies coexisting for a long period of time.

Okay, great. Just a second. I can squeeze in quickly, Rob and Amanda. I'm sorry, but just, you know, it's remarkable you guys diversified customer base kind of versus kind of tier one hyperscalers in the past. And you guys talked about GROK last quarter, but also, you know, another larger scale digital native company can be potentially as large as your largest customer at a peak run rate of revenue down the road. And I'm just curious, maybe you can talk about your differentiation. Everybody knows you guys have a crown jewel asset in terms of the HPS networking. But in terms of the server with the liquid cooling and the power management, maybe you guys are taking share versus some of the incumbents, i.e. the HODMs. You know, can you kind of maybe unpack kind of going forward, maybe potentially the tariff concern kind of ensuring you guys are kind of well positioned, whether from a design perspective, kind of a more so a modular HPS server design, but also kind of a more a power cooling needs can continue to sustain this differentiation versus some of the Taiwanese and Chinese ODMs.

Yeah, thanks, Jordan. I'll provide you a little bit of a background on the digital native win that we alluded to in the script. So this is a major design win and it includes design, the manufacturing and services for a fully orchestrated rack. Now, this rack is optimized for artificial intelligence. And this particular customer, they were looking for a strategic partner with extensive expertise and capability in liquid cool system design and also able to manufacture at scale. And that had our name written all over it. They conducted a rigorous award process and ultimately they decided to select us because we had strong technical knowledge. We had cycles of learning. We had intellectual property. We had significant design and manufacturing capabilities. And we also had a resilient supply chain capabilities across multiple countries, beginning in the USA. This solution that we're providing them includes a 1.16 networking switch and also proprietary compute. It also includes significant services component, which means installation and maintenance. And again, we'll be supporting this across multiple geographies. So I think the fact that we have decades, decades plus experience in this space has led us to win against the ODMs.

Okay, great. I go back to the queue. Congrats again. Thank you.

Thank you. And your next question is from Robert Neal from Panacore Genuity. Your line is now open.

Hi, good morning. On the new win for the integrated rack with a Custom Asic, I was curious to just talk about the relationship with Broadcom, who's been very bullish on the market around Custom Asic. Is this a relationship with Broadcom? Is that influenced by Broadcom? And how is that relationship developing?

Hi, Rob. This is Rob. Are you talking about the hyperscale win, the digital native win? Digital native.

Yes,

on the networking side, this is using our long-standing relationship with our custom silicon providers. Can't go into too many specifics there, but it's the silicon provider that we have been using for the majority of our high bandwidth switches. And on the compute side, the custom compute side, this will be the customer's custom compute silicon, which will be liquid cooling and encapsulating and designing into a fully integrated rack.

Okay. And then you already talked a little bit about the HPS content in this rack solution. To just go in more detail on how deep the Seleska Zodium and IP contribution to this win is, like, is it in just the switch? Is it in servers, in storage? You highlighted cooling. Maybe you just go through the contribution that Seleska is expecting to make from its own IP.

Yes, thanks, Rob. This is a very significant design project for us. It is actually an entire rack. So it includes, as you mentioned before, the switching, the compute module, it includes the cable backplanes, it includes the rack itself, the rack and liquid cooling. And it's not just rack integration we're doing. We're actually doing full rack orchestration. So this is leveraging a significant amount of our IP that we've developed over the past 10 plus years.

And I presume you'll be able to develop that IP further around this?

Yes. And we think to that point, Rob, that when we successfully execute this full rack system, this is just going to be yet another proof point that will lead to further growth for us with this customer and with other similar customers across the industry.

Okay, last one for me is just on the guidance for the year. If you just look at cadence through the year, it looks as though the growth is a little bit weaker in the back half despite all of the ramps in second half. And so I'm curious, I know you don't give guidance on Q2 at this point, but if you give us a sense of maybe the cadence of revenue through the year to better model that, and then I'll pass the line.

Yeah, hi Rob, good morning. You know, I want to reiterate what we said on the call, which is this is our high confidence view. We're pleased to be able to rate the revenue outlook to 10.7 billion from 10.4. That's 11% growth. And then the EPS had 22% growth to 475. But what you'll notice is in the first quarter, those numbers are higher. So we've guided at the midpoint 15% revenue growth. And EPS is growing above 30%. And so we're taking a view right now on what we know is solid in front of us, Q2 to Q4. We have very good visibility and now through the third quarter with our largest customers. But frankly, the fourth quarter visibility is not yet fully locked down. It's improving. We're confident in it and we're having very positive discussion. But these things will continue to solidify as we go through the coming months. So this is our high confidence view. We would of course be looking to

do better than that as we go through the year. Thank you.

Thank you. Your next question is from from VMO capital markets. Your line is now open.

Hi, good morning and congrats from the new customer lens. With respect to enterprise is the program transition, at least for large customer proceeding as expected. And just to clarify, would you expect Q1 to be the bottom in terms of that transition from a sequential perspective or a sequential transition? Or will be your outlook on that?

Yeah, hey, yeah, things are going as we expected them to be enterprise is down year of year as the sole source program is moving towards end of life. We will see a little bit of a reduction as we go through the first half of the year. The new program that we have won a while ago is on track for ramping in the third quarter and we would expect a return to year over year growth as we get to the end of 2025. So those things are with our largest customers completely on track. And then as a reminder with the win that we announced before with Brock, that program ramp is already working out well. And we're seeing sequential improvement in that program as we go from Q4 to Q1 and that will strengthen as we go through the year. And then with this new customer win that Rob has just been speaking about, it's really nice to see yet another custom server win that will be ramping in 2026. So we are continuing to make some good progress on the server side.

And on that note, is there an incremental clarity you can provide in terms of just the strength of the pipeline you're seeing for additional server and custom rack opportunities?

Sure, there is a very strong pipeline of additional server opportunities. Again, we tend to play on the proprietary compute side and that's where our focus is. And we also tend to play on the HBS side of things. So where there's high design content. And I would

say the pipeline is quite healthy. I'm grateful. Leave it there.

Thanks. Thank you. Thank you. Your next question is from David from UBS. Your line is now open.

Great. Good morning, guys. Thanks for taking my questions. I've got a couple, if you will, as well. So Rob or Mandeep, on the second 1.6 terabyte program that you won with a large hyperscale customer, can we clarify, is that an existing customer as they just migrate to faster speeds or is that a new customer? And along those lines, is there an opportunity to expand the relationship from an optimized networking rack to other parts of the network and or add compute? And I'll give you my second question on the zero native customer. I think I heard Rob say it's across multiple geographies. Is it fair to say that this customer historically has been sort of an InfiniBand based customer and this is sort of an initial opportunity to deploy Ethernet technology from Celestica across, obviously, a more complete solution, but just trying to get a better understanding of kind of how to think about the technological roadmap. Thanks.

Hi, David. Yes, so

on the hyperscaler customer, yes, they are an existing customer. We currently support this customer with both 400G and 800G switches. So this is really a natural extension of our relationship and it's for their next generation family of 1.6T liquid cool networking rack. So again, this is not just a switch, but the entire rack. And we will be the final integrator for the system. Again, this will be a multi node solution for them in terms of both US and Southeast Asia. And on. Oh, and you also asked me see the opportunity to expand our solutions for this customer. Absolutely. You know, based on what we're doing with the digital native customer and also what we're doing with the hyperscaler, we see opportunities to grow a share of wallet with the hyperscaler as well. And with respect to the digital native customer, you know, they have very specific and unique needs for the data center that they're building. I wouldn't say they're an incentive band customer going to Ethernet. I would say this is their own custom design for the data center. We're supporting them with a fully customized rack.

Great. Thanks, guys. Congrats. Thank you.

Your next question is from Stephen Fox from Fox advisors. Your line is open.

Hi, I was wondering if I could follow up on some of these questions from maybe a thousand foot level, which is you've had a couple of landmark wins. Now, the last couple quarters that are diversifying you guys away from your, you know, the large cloud guys. You've been selling to and you're doing it with more complex rack integration and orchestration. So, like from those two aspects, customer diversity and more complexity on Iraq. How is how should we think about the business changing over, say, the next 12 to 18 months or 24 months to, you know, towards those trends? Thanks. And then I have a follow up.

Thanks, Steve. Yeah, you know, if you step back in time, you're keeping it at a high level, you know, back in the day, as they say, you know, contract manufacturers turns to EMS. I think we're clearly in our CCS business in the ODM category where these new wins were actually well under a way to be a product company in the OEM section. So I think these are just further proof points to distance ourselves from ODM into OEM land. And I think that's where our business is going.

That's helpful. And then just on the liquid cooling front, I'm a little, I just want to make sure I understand on these wins. Are we talking about leveraging your own technology at the board level with cold plates as well as at the rack level? And how much of that would you be manufacturing yourself as opposed to just design and integration? Thanks.

Yeah, we're talking about the focus at the rack level and also at the chip level and orchestrating it. And we have ecosystem partners that do the manufacturing and we're integrating it and applying our process, our processes at scale to make sure that we're able to do a fully integrated system.

One of the things that we have been hearing from our customers is the challenge really gets to being able to produce liquid cooling solutions at scale. And we have demonstrated strong capabilities in this area and strong, and we have a lot of experience in that area. That's a lot of the know-how that we're able

to bring to the table as well. Great. Thank you very much.

Thank you. Your next question is from Robin Roy from Stiefel. Your line is open.

Thank you very much for letting me ask a question. Mandeep, I was wondering, just kind of following up on some of the questions around the extensive development cycle, I guess, with the new customer. Are you thinking about CapEx? Would you have to make any changes to your capacity to support either of these new programs or both? What does it mean for CapEx levels of sales going forward, please?

Yeah, so first of all, welcome, Ruben. Really nice to have you take over from Matt at Stiefel. To answer your question, we're very comfortable with the capacity that we have. We've been growing at strong double digits now three years in a row, and we've been able to maintain our CapEx spend at less than 10%. Just as a reminder, the majority of the CapEx that we spend is on growth CapEx. We only have about 40 basis points of maintenance, and that gives us a lot of discretion on where we want to put those dollars. We have the capacity we need right now to execute all of the demand that's in front of us. We will be targeting some of the growth CapEx that we have in 2025 to areas like continue to expand in Thailand. We have shown that in Southeast Asia, we can bring on capacity in our existing campuses in under a year when needed to support our customer demand strip. And so the way to think about CapEx in 2025 is similar to what we've been saying in the previous year is .5% to 2% of revenue. And I don't really see at this point a need for that to be very different in the outer years either.

Got it. Thank you, Mandy. And then, Rob, thanks for the comments on your early assessment of how to think about TeachSeek. But I guess given that you've given us some thought, the comment around networking, the networking opportunity longer term, maybe you could just give us a little more detail about how you're thinking about that. It sounds like if we do get to a point where we can get cheaper AI to the edge, that could be a good thing. Is that what you're thinking about? But what does that mean for sort of scale up and scale out of the big clusters that we're getting used to? I guess just any more detail about how you're thinking about the networking opportunity. If you have any, it would be great. Thank you.

Thanks, Ruben. Again, welcome. Yes, as some of the industry pundits are saying, increased AI accessibility will drive demand. That's our views as well. And in the middle of all this, networking really remains crucial. It's crucial for scaling all the AI systems, for transporting data, for training, for inferencing. And networking really is agnostic to the type of large language models that are being used today. If you think about networking, it might require real-time analytics. So if TeachSeek is used for real-time applications like high-frequency trading or fraud detection or autonomous vehicle control, the need for minimal latency becomes critical. And high bandwidth switching offers a solution to that. Even if you think DeepSeek will drive distributed computing, again, if it's distributed across the cluster of servers, again, you'll still need high bandwidth switching. So we actually view, in terms of our networking business, this is a very positive development to actually drive growth in our network portfolio.

That's very detailed.

Thanks. Thank you. Once again, that is Star 1 should you wish to ask a question. And your next question is from Paul Treiber from RBC. Your line is now open.

Thanks very much and good morning.

Just

a comment or a question on the win with the digital native customer. And just more broadly speaking in terms of your pipeline, are you seeing a trend towards customers shifting to procuring -to-end full rack solutions versus maybe in the past, procuring individual components?

Certainly the case, Paul, with digital native customers. I mean, this class of customers really want a full solution. As I mentioned with this particular customer, not only is it the full rack solution, we're actually doing services, a fairly sizable service solution. So we think that this win will give us a further proof point to expand our market share with this new class of customers. With respect to hyperscalers, it does depend on the hyperscalers we mentioned in the script that the hyperscaler win that we had on the 1.6T switching was an inflection point. And what we're providing with this customer was a dedicated AI networking rack. And this is again designed specifically for AI ML workloads. And it's optimized, has optimized fabric, it improves efficiency, incorporates liquid cooling directly within the rack and the switch itself. And this will most likely be required for all the latest 1.6T designs. So again, in terms of full rack solutions, this is where we think the market is going and we think we're very well positioned.

And along with that, you made an interesting comment about the shift from contract manufacturing EMS to ODM and then product and the importance of your HPS business to contract wins. When you look at your pipeline and you look at the mix or differentiation from HPS, how do you compare that? How much of a factor is that having to your ability to win these contracts as you look out in the next couple of years?

You know, we've been increasingly investing in R&D and design capability and expanding our design network for the past 10 plus years. I think Mandy will chime in. We're over $75

million we're going to be spending this year and we are comfortable spending up to $100 million in 2025 as well.

And based on our growth, we anticipate to continue to invest in design capabilities and migrate towards that journey that I mentioned. Yeah,

I know you know this, Paul. We have over 900 design engineers. They are engaging with customers in multiple ways. So as Rob talked about, you know, our OEM type of offerings are we have Celestica products that have a Celestica logo on it that our customers that have been tested and meet our customers' needs directly. But then in addition to that, we have the same engineers who can work with customers on customizing a solution to what they're looking for. And we work in collaboration along the way. And so while some of our wins do fall under the HPS umbrella, because they have a heavy level of our design content, we also use our engineers to help us win on the EMS side. And so we find that our engineering expertise is a key differentiator, which is why again, if you think back like five years ago, we were spending about $25 million in R&D. We're now spending 3X that and going again into 25, it's going to be 4X that and the return on that investment is very high.

And lastly, if I can squeeze in one more, just with the change in the US administration, you talk about tariffs and also enthusiasm for on-shoring. Are your customers, you mentioned Thailand and expanding in Thailand, but are you getting more requests for production in the US and how are you thinking about US facility expansion going forward?

Right now, our customers are in a wait and see mode. But as we've done in the past, we have resilience inside our network. So as tariffs in one area end up causing a customer to want to shift, we feel we can serve them in another area. Right now, we have ample capacity in the US and ample capacity not just means physical capacity, but also means power. We've actually secured power for our CCS business for years to come in anticipation of our growing businesses. So we're keeping our eyes open and we're keeping them open. Right now, customers are in a wait and see mode because every day is a kind of a new direction, if you know what I mean.

And specifically to the US, just as a reminder, we do a lot of semiconductor manufacturing on the west coast of the United States. We do very complex aerospace and defense work in the Midwest. And then we do have in Richardson, Texas, a very large facility, which is supporting our hyperscaler customers. And we've been doubling revenue for a couple of years now in the Texas facility. We will be more than doubling the revenue again in 2025. And again, as I mentioned earlier, all within the CapEx envelope that

we would

expect.

Thanks for taking the questions. Thank you.

Your next question is from Todd from CIBC. Your line is open.

Yeah, good morning, everyone. I wanted to ask about the communications business, specifically on the margin side. So if you could help us bridge your networking margins relative to peers in the market that are nicely into the double digits. And we think about your guide, it implies majority of your business will be in networking by the end of the year. So why shouldn't your margins be a lot higher than they are? Just talk us through that spread. Thanks a lot.

Hey, Todd. So of course our communications business has a lot of growth, is what our networking business is. There's a substantial amount of growth in there. It includes a lot of our HPS revenue, but it also includes EMS revenue as well. We do manufacture communications gear for leading OEMs that are sometimes selling into the small medium business side of things, sometimes selling into the hyperscaler side of things. So you need to think about communications on a blended basis. The way I would characterize the margins overall though is that CCS had record operating margins in the fourth quarter, 7.9%. And our HPS business is a creative to that. And so as we continue to grow HPS types of revenue, it provides an opportunity for continuing margin expansion. The majority of our HPS portfolio today is switches. And so we would expect to see some margin expansion. It'll also lift up the communications numbers. But the best way to think about more of an apples-apples comparison, if you're thinking about an OEM as an example, would be how does our HPS business perform relative to those OEMs.

And we're not that, we're

all in pretty

much the same zip code.

That's great. Thanks for that color. And then I just wanted to go back to DeepSeq as well. So is your takeaway at this point that it's going to drive custom silicon demand at the expense of merchant silicon and that's an incremental driver? Thanks a lot.

Yeah, in terms of the custom

silicon demand, that's where we play. And our view is that that's the growing market. Custom silicon is really around specialized AI applications. And we feel that's the place that we're focusing on where the majority of the

growth will actually come from. Great. Thanks a lot. Appreciate the color. Thank

you. There are no further questions at this time. I will now hand the call back to Rob Mayones for the closing remarks.

Thank you, operator. And again, thank you for joining us this morning. 2024 was a solid year for us. And we're looking forward on building on this positive momentum as we get further into 2025. The products that we have in development, combined with our recent wins, also gives us confidence in a long-term outlook. And our future is certainly quite bright. We look forward to updating you next quarter and have a wonderful day.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.