Celestica Inc (CLS) 2015 Q2 法說會逐字稿

Good afternoon, I would like to welcome everyone to the Celestica second quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

Jim Fitzpatrick, Vice President of Investor Relations and Communications, you may now begin your conference.

Thank you Ian.

Good afternoon, and thank you for joining us on Celestica's second quarter 2015 earnings conference call.

On the call today is Craig Muhlhauser, President and Chief Executive Officer, and Darren Myers, Chief Financial Officer.

This conference call will last approximately 45 minutes.

During it Craig will provide some comments on the quarter.

Then we will open up the call for questions.

During the Q&A session, please limit yourself to one question and a brief follow-up.

We will be available after the conference call for additional follow-up.

Please visit our website at Celestica.com to see the supporting slides accompanying this webcast.

As a reminder, during the call we may make forward-looking statements related to our future growth, trends in our industry and our financial and operational results and performance and financial guidance that are based on management's current expectations forecasts and assumptions that are subject to risks and uncertainties that could cause actual outcomes and results to differ materially.

Please refer to our cautionary statements regarding forward-looking information, in the Company's various public filings, including the cautionary note regarding forward-looking information in today's press release.

We also refer you to the Company's various public filings which contain and identify material factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements, and which discuss material factors and assumptions on which such forward-looking statements are based.

These filings include our Annual Report on Form 20-S, and subsequent reports on Form 6-K filed with or furnished to the Securities and Exchange Commission, and our Annual Information Form filed with the Canadian Security Administrators, which can be accessed respectively at SEC.gov and SEDAR,com.

During this call we will refer to certain non-IFRS financial measures, which include adjusted gross margin, adjusted SG&A, adjusted operating earnings, or adjusted EBIAT, adjusted operating margins, adjusted net earnings, adjusted EPS, return on invested capital, or ROIC, inventory turns, cash cycle days, free cash flow, and adjusted tax rate.

These non-IFRS measures do not have any standardized meaning under IFRS, and may not be comparable under non-GAAP or non-IFRS financial measures presented by other public companies including our major competitors.

We also refer you to today's press release which is available at Celestica.com, for more information about these and certain other non-IFRS measures.

Including a reconciliation of the historical non-IFRS measures to the corresponding IFRS measures, where comparable IFRS measures exist.

Unless otherwise specified all references to dollars on this call are to US dollars.

I will now turn the call over to Darren Myers.

Thank you Jim.

Good afternoon everyone.

Celestica delivered a solid second quarter with revenue and adjusted earnings per share above the midpoint of our guidance range.

Revenue of $1.417 billion was above the midpoint of our guidance range, driven primarily by strong demand in our communications, storage, and semiconductor end markets.

Second quarter revenue increased 9% compared with the first quarter of 2015, and decreased 4% compared to the second quarter of 2014.

Some highlights for the quarter include adjusted operating margin of 3.4%, improved 30 basis points compared to the first quarter of 2015.

Adjusted earnings per share of $0.25, were $0.02 above the midpoint of our guidance range, and up from $0.19 from the first quarter of 2015.

IFRS net earnings were $24 million, or $0.14 cents per share.

We generated free cash flow for the quarter, which included approximately $50 million of investments, in support of our energy and aerospace and defense businesses.

We achieved ROIC of 19.6%, and we repurchased and canceled 26.3 million subordinate voting shares to our substantial issuer bid.

Looking at our revenue from an end market perspective, we delivered quarter-over-quarter revenue growth from four of our five end markets.

Our communications end market represented 40% of total revenue for the quarter.

Communications revenue increased 9% sequentially, which was higher than expected due to strong demand, as well as new program ramps.

Compared with the second quarter of 2014 communications revenue declined 5%, primarily due to program completion partially offset by new wins.

Our diversified end markets comprised 28% of our total revenue for the second quarter of 2015.

Diversified revenue increased 7% sequentially, driven primarily by growth in our aerospace and defense, and semiconductor which more than offset the sequential decline in our energy business, as we transition part of our operations from North America to Asia.

Compared with the second quarter of 2014, diversified revenue decreased 3% largely due to the transition of our energy business, which was partially offset by growth in semiconductor, as well as revenue from the Honeywell transaction we announced during our April earnings call.

Second quarter revenue from our storage end market came in higher than expected, and represented 19% of revenue for the quarter.

Storage revenue increased 17% sequentially, due to seasonality and overall strong demand.

Compared to the second quarter of 2014, our storage business grew 10% driven by strong demand in new program ramps, as well as strength in our JDM business.

Second quarter revenue from our server end market was relatively flat sequentially, representing 10% of total revenue for the quarter.

Server revenue declined 6% compared to the second quarter of 2014, primarily due to softer demand.

Finally our consumer end market representing 3% of total second quarter revenue increased 14% on a sequential basis.

Consumer revenue for the quarter decreased 38% year-over-year, primarily due to our continued deemphasis of certain lower margin business in this space.

Our Top 10 customers represent 68% of revenue for the second quarter, up from 64% in the first quarter.

For the second quarter we had three customers individually contributing greater than 10% of total revenue, up from two customers in the first quarter.

Moving on to some of the other financial highlights for the quarter.

Adjusted gross margin of 7.1% came in generally as expected.

Sequentially and year-over-year our gross margin was negatively impacted by the transition of our energy business, as well as certain program ramps.

We recorded $9.5 million of other charges in the second quarter.

$4.2 million were noncash and related to the write-down of certain equipment within our semiconductor operation.

The remainder of the charges were primarily related to work force reduction, as we continue to optimize our business and drive productivity.

Adjusted SG&A expense was better than expected and came in at $46 million, a 9% year-over-year reduction.

The year-over-year improvement was primarily due to continued cost containment efforts, and the timing of certain items.

Adjusted operating earnings for the current quarter were $48.3 million, or 3.4% of revenue, an increase of 30 basis points sequentially, as a result of increased revenue, and our continued focus on cost productivity.

Our adjusted tax rate in the second quarter was 11.7%, within our expected annual tax rate range of 11% to 13%.

Adjusted net earnings for the second quarter were $41.7 million, or $0.25 per share.

Compared to adjusted net earnings of $44.9 million, or $0.25 per share for the same period of 2014.

Second quarter IFRS net earnings were $24.2 million, or $0.14 per share, compared to $40.9 million, or $0.22 per share in the same period of 2014.

The year-over-year reduction is primarily a reflection of the restructuring charges this quarter, as well as one-time recoveries realized in the second quarter of 2014.

Return on invested capital was 19.6%, up from 16.8% last quarter, and 19% in the second quarter of last year.

Turning to our working capital performance, our inventory increased $64 million from the first quarter to $818 million at June 30.

Inventory turns for the quarter were 6.7, relatively flat sequentially and year-over-year.

Capital expenditures for the second quarter were $18.5 million, or 1.3% of revenue, within our estimated range of 1% to 1.5% of revenue.

Cash cycle for the second quarter was 42 days, compared to 47 days in the first quarter of 2015, driven by a five-day decline in Accounts Receivable days.

For the second quarter of 2015, we generated $2 million of positive free cash flow, compared to the $41 million for same period last year.

Free cash flow in the quarter includes the approximately $50 million that we invested in the quarter, related to the expansion of our energy business into Asia, as well as the Honeywell transaction that we announced last quarter.

Moving onto the balance sheet, let me recap the results of our substantial issuer bid, that we announced in our last quarterly conference call and which we completed in early June.

We spent $350 million to repurchase and cancel 26.3 million subordinate voting shares, at $13.30 per share.

The buy back represented approximately 15.5% of the total multiple voting shares, and subordinate voting shares outstanding, prior to the SIB's completion.

We funded the bid through a combination of a $250 million term loan, $25 million from the revolving portion of our credit facility, and $75 million in cash.

At the end of the second quarter we had approximately $142.9 million subordinate and multiple voting shares outstanding.

Our cash balance decreased $72 million from last quarter to $497 million as of June 30th, primarily due to the $75 million of cash used to partially fund the substantial issuer bid.

Our net cash position at June 30th was $222 million, which includes $497 million of cash, $255 million drawn on our term loan, and $25 million drawn on our credit facility.

Moving forward to our guidance for the third quarter of 2015, for the third quarter we are projecting revenue to be in the range of $1.4 billion to $1.5 billion.

At the midpoint of our guidance, third quarter revenue is projected to increase 2% sequentiality, and 2% year-over-year.

At the midpoint of our guidance, we expect adjusted operating margin of approximately 3.6%, an improvement of 20 basis points compared to the second quarter.

Third quarter adjusted earnings are expected to range from $0.28 to $0.34 per share.

Our SG&A expense for the third quarter is projected to be in the range of $48 million to $50 million.

We estimate annual adjusted tax rate range of 11% to 13%.

For the third quarter of 2015 we expect to record additional restructuring charges in the range of approximately $8 million to $12 million, as we continue to focus on cost productivity.

I would now like to turn the call over to Craig for some comments on the quarter, as well as our third quarter outlook.

Thank you Darren.

Good afternoon to everyone on the call, and thank you for joining us today.

Celestica delivered a solid second quarter with revenue and earnings per share above the midpoint of our guidance, including sequential improvements in revenue, net earnings, operating margin, and return on invested capital.

We experienced quarter-over-quarter revenue growth across four of our five end markets.

With the strongest growth in our communications and storage end markets, and our semiconductor business.

Now let me turn to the near term outlook in our end markets.

For the third quarter relative to our diversified markets business, we are expecting sequential revenue growth in the high double-digit range, representing growth in four of our five sub-markets.

On a year-over-year basis we expect our diversified end market to increase in the low to mid-double digits, driven primarily by new program ramps in aerospace and diversified, and demand strength in our semiconductor business.

Over the last several quarters we have highlighted some of the operational challenges that we have been experiencing in our semiconductor business.

Primarily relating to production and efficiencies, fixed cost absorption, and the impact of new program ramps.

On our last earnings call, we commented that based on these investments we have been making, and the actions we are taking to improve our quality, cost productivity, and delivery performance, including the streamlining and simplifying of our supply chain network, we expected the semiconductor business would deliver positive gross margin in the second half of 2015.

However, based on a tremendous effort by the semiconductor business team, I am pleased to report that we delivered operational and financial improvements beyond our beginning of second quarter forecast, as evidenced by positive gross margin in the second quarter.

More importantly, based on our current forecast, we expect to further improve the financial performance of our semiconductor business throughout the remainder of 2015.

Driven by year-over-year revenue growth, and further operational improvements.

Although there remains more work to do, I am very pleased with the progress we have made, and expect to make in our semiconductor business.

Our communications end market is expected to increase in the third quarter in the low single digits, both on a sequential basis and a year-over-year basis, based on strong demand and new programs, offset in part by a program completion with one customer in the telecom segment.

Our storage business in the third quarter is projected to decline in the low single digits, primarily due to seasonality.

On a year-over-year basis, storage is expected to grow in the mid-single digits, driven primarily by new programs.

Our server business is expecting a high single digit sequential decline in the third quarter, based on reduced demand, and the delay of a new program launch.

On a year-over-year basis, server is expected to decline in the low single digits, due to demand softness.

In summary, overall we are expecting a quarter-over-quarter and year-over-year revenue growth at the midpoint of our third quarter guidance, as well as a 20-basis point quarter-over-quarter improvement in our adjusted operating margins.

As we look to the second half of the year, we remain focused on continuous improvements in quality, cost productivity, and delivery performance, and accelerating the diversification of our revenue base by winning new business in our target markets with existing and new customers, and launching new programs flawlessly on a global basis.

I also want to announce that Celestica has entered into an agreement for the sale of our corporate headquarters and manufacturing operations located in Toronto, Ontario.

Subject to the successful closure of this transaction, the purchase price will be approximately CAD137 million, of US$110 million based on the 6/30/2015 exchange rates.

The closure of the transaction is subject to various conditions, including municipal approvals, and is anticipated to occur within approximately two years.

As part of the agreement, Celestica will enter into an interim lease for our corporate headquarters and manufacturing operations for a 2-year term, which will be followed by a long-term lease for a new corporate headquarters to be built and located on or near the current site.

We expect that our Toronto manufacturing operations would relocate to a new location in the greater Toronto area within approximately four years.

More details about this property's sale are provided in a press release that was issued a short time ago.

In closing, earlier this month we announced Celestica's Board of Directors has selected Rob Mionis, as the Company's next President and Chief Executive Officer effective August 1st.

As you all know, I announced my intention to retire from Celestica in October of last year.

I will continue with Celestica as an advisor to the Board until the end of this year.

I am very pleased to welcome Rob to Celestica.

He joins the Company with over 25 years of senior leadership experience from a variety of industries, including the aerospace, industrial, and semiconductor markets.

He has also served as a CEO for six years.

I am confident that Rob is the right leader at this time for Celestica, to build on our momentum and strong foundation, and to accelerate the deployment of our diversification strategy across the Company, in order to achieve future growth and profitability objectives that we have set for Celestica.

As I said when I announced my retirement, I believe that this is the right time to transition to new leadership, as Celestica has a very strong foundation for future growth and profitability.

We continue to focus on accelerating the diversification of our revenue base, customers, and services offerings, while improving our profitability and free cash flow generation.

Our diversification strategy and portfolio reshaping is well underway.

We have deep trusted customer relationships supported by an operational excellence.

Including a supply chain and operating network that in my view is second to none.

All of this is underpinned by what I truly believe is Celestica's greatest strength, our 25,000 talented and dedicated employees throughout the world, who are committed to making our customers successful.

That concludes our prepared remarks.

Ian, please open the call for questions.

(Operator Instructions).

And your first question comes from Joe Wittine with Longbow Research.

Your line is open.

Good afternoon.

Craig best of luck to you.

It has always been a pleasure to talk to you.

Thank you very much Joe.

The semicap improvement is a little bit surprising, given what Intel and some of the others in the supply chain have been seeing.

I understand you guys have operational improvements, that it sounds like have you have partially conquered, but any additional details on why you are seeing an uplift in the top line, which is what it sounds like was happening?

We are serving the top players.

We are serving those players in areas of the market that are seeing strong demand for the new semiconductor technologies, aka the 3D NAND technologies.

It is the right customers with the right programs in the right segments of the market.

Now that we are getting the operating performance, as you can see we are getting strong year-on-year, and it is also the thesis that we had.

The industry needs a powerful global player, it is a highly fragmented industry, especially in the area of machining.

I think this is going to be a very, very, very lucrative area for Celestica, provided that we continue to execute.

It is reconfirming, although it has taken a couple of years to get there.

Part of it is staying with it, learning the differences between electronics.

So when we start doing it the Celestica way, I think we are seeing some real potential growth opportunities and profitability opportunities for this Company.

I leave here very bullish on the traction and the momentum that we've got in that industry.

That's interesting.

Switching gears the cash advance to the solar supplier, can you tell us why it was necessary, and the economics, why the deal makes sense for Celestica, and whether there is any potential risk, or what this kind of business as usual for a cross-continental manufacturing transfer?

Hi, Joe, it is Darren.

The advances, it is more typical in the solar industry.

We have seen this before, from time to time, we have also had deposits to us from some of our various customers.

It is, I would say more or less usual business there.

Part of It is around the expansion of Asia, and we think there are a lot of exciting opportunities for us within solar.

Okay.

Thank you.

Thank you Joe.

And your next question comes from the line of Amit Daryanani from RBC Capital Markets.

Your line is open.

Thanks a lot.

Good evening.

Craig, best of luck to you.

Thank you.

Two questions, one, I think I heard you talk about $8 million to $12 million of additional restructuring that is getting announced in the back half of the year.

It sounds like the demand trend is doing well.

Semicap is kind of rebounding.

Can you help me understand why the incremental restructuring right now?

Absolutely, Amit.

In terms of restructuring, as we look at the portfolio, yes we have got pockets of strength.

We have been winning programs, we have got some momentum now we believe.

We are starting to see that.

But there are always areas where we can find further cost productivity, and I would say that we are striking a balance between investing in the business and investing in sales, investing in design, while looking for further opportunities on productivity, and we still see some room there.

It is choppy in certain markets, and there is always some opportunity, so we are going to capitalize on some of those right now.

Got it.

And then on the real estate transaction you are starting right now, I want to make sure I understand this.

The site will get sold eventually in a two-year process once the approvals are done, but once that is done, you would still need to figure out how to get manufacturing capacity somewhere in the greater Toronto area.

So does that mean you need a bigger uptick in CapEx, as you need to replicate some of the equipment in the manufacturing site that you have?

How do I think of a CapEx plan to create that?

Yes, certainly you will see a couple of things happen.

When the sale is closed in two years, you will see the cash, approximately half of the cash then, and two years later the other half.

Through that time after the two years, we will be looking for our footprint for the future, for the manufacturing, and yes that will require CapEx, and fit-up costs, and what have you.

We are obviously not at the stage of estimating that, but it will be well south of the proceeds of the sale.

Got it.

That's it for me.

Thank you.

Thank you, Amit.

Our next question comes from the line of Jim Suva from Citi.

Thank you guys.

Congratulations to your team.

I wasn't exactly clear on why you are selling your headquarters site and that manufacturing facility.

Is it just to unlock some value of what is happening in the real estate market there, or does the size not quite fit your needs?

And also, can you clarify that the restructuring of the additional $8 million to $12 million, that is separate from your headquarters site, and should we expect more restructuring to then come on after this headquarters sale, or how should we think about those, if they are together or different?

Jim, I will take the first part.

In terms of the property you probably know it, it is the largest contiguous acreage in the City of Toronto.

It is an underutilized site, it is a valuable asset, and it has significant value based on its location.

Due to the current transit plans and it is in proximity to downtown Toronto.

Actually this is exciting news.

It is a 1954 facility.

It is underutilized.

Now we have the opportunity to resite the corporate headquarters, either near or on the same location, and then Toronto's EMS operation will move to a new location, that will give us a more optimized footprint for the business we are doing today, which is high mix/low volume largely in the diversified space, and it will really be tailored to the future and forward-looking business that we expect to attract in Toronto.

What is nice about the transaction is it provides us ample time to find the right facility for our EMS operation, and properly design it and execute a product transfer plans for the customers that we have, and the customers that we intend to capture over the next four years.

So it is very timely, it is a very, very good investment, and it really starts to lay the groundwork for the transformation that we are looking for Rob to really undertake here, and set the tone at the top that everything that we are doing is to build this Company for a very, very successful future.

And Jim just for perspective, it is on 60 acres, so obviously a very large facility in Toronto, that we use a portion of.

To your other question, the restructuring, they are not related.

There is no planned restructure as a result of the sale of the property, it is more us looking at the continued productivity within the business, in areas where we still see some opportunity.

As a follow-up, can you help us with share count, what we should model for the next quarter, given your tender off of the shares?

And how it equates to the average share for this quarter versus what the diluted and share count should be for the next quarter?

Yes, we ended at 143 million, or 142.9 million shares.

I would say add 2 million to that, and use around 145 million for your share count.

Great, thank you guys so much.

Thank you.

Our next question comes from the line of Thanos Moschopoulos, BMO Capital Markets.

Good afternoon.

Both the SG&A and R&D expense came down sequentially.

Was that just reflecting the restructuring or was there some other dynamic at play like currency?

No that was two things, one is just the continued focus on cost, but the other one was just a timing of certain spends, so we expect to be back to normalized SG&A levels for the third quarter.

Okay.

Craig you commented you are seeing strength in the communications market.

Can you clarify on whether that is coming in network or telecom, or across both, and what type of trends you are seeing in those markets?

It is coming largely in networking and the enterprise space.

And essentially it is program specific, customer specific related to the launch and then the take-up rates for the new program that we are participating in.

So obviously we are very pleased with the progress, it looks like we will continue.

We have got a strong mix of business in what appears to be the more stable part of that business today, which is this enterprise and networking space, as opposed to some of the infrastructure around the carrier demand.

We are expecting, the market is challenging today and it is dynamic, but we are expecting to hold our own, and underpin the diversified growth we expect to see in the second half with a good performance this year for communications, and in the right area of the market.

That's great.

Thanks and best of luck on your retirement Craig.

Thank you very much.

There are no further questions on the phone.

Thank you Ian.

Given that, this is my final quarterly earnings call, and I wanted to take this opportunity to express my deep appreciation and gratitude to all of Celestica stakeholders.

First to our 25,000 employees across the Company, thank you for your ongoing dedication and commitment to make Celestica and our customers successful.

I also want to thank all of our customers, suppliers, and other partners for your ongoing trust and support.

And finally, to the analyst community and investors, it has been an honor and a privilege to serve as the CEO of Celestica.

I want to thank each of you for your time, your interest, your effort and support you have given Celestica during my tenure as CEO.

Thank you very much.

Good bye.

This concludes today's conference call.

You may now disconnect.