Celestica Inc (CLS) 2018 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Celestica Second Quarter 2018 Earnings Call.

(Operator Instructions) I would now like to turn the meeting over to one of your hosts for today's call, Paul Carpino, Vice President, Investor Relations.

Please go ahead.

Good afternoon, and thank you for joining us on Celestica's Second Quarter 2018 Earnings Conference Call.

On the call today are Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer.

This conference call will last approximately 45 minutes.

Rob and Mandeep will provide some comments on the quarter, and then we'll open up the call for questions.

(Operator Instructions) Please visit celestica.com to view the supporting slides accompanying this webcast.

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, including those related to our strategies and plans for future growth; our priorities and initiatives; our anticipated financial and operational results; our non-IFRS operating margin goals and other financial guidance; potential financial or other operational impacts associated with any disengagement from less profitable CCS segment programs resulting from our review of our CCS segment customer portfolio; trends in our industry, end market and segments; the impact of prolonged materials constraints; the ability of our diversification strategy and cost-reduction initiatives to further improve our revenue, mix and margins; our restructuring actions, capital expenditures and other working capital requirements; the impact of our acquisition of Atrenne Integrated Solutions; and the anticipated timing of the sale of our Toronto real estate property.

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 the material assumptions on which such forward-looking statements are based as well as further information concerning financial guidance, please refer to the company's various public filings.

These include our most recent MD&A and annual report on Form 20-F, including the Risk Factors section therein filed with and in reports on Form 6-K furnished to the U.S. Securities and Exchange Commission and as applicable to Canadian Securities Administrators.

Please also refer to our cautionary statements regarding forward-looking information in such filings and in today's press release.

Our public filings can be accessed at sec.gov and sedar.com.

We assume no obligations to update any forward-looking statements except as required by applicable law.

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

These non-IFRS measures do not have any standardized meaning under IFRS and may not be comparable with other non-U.

S. GAAP or non-IFRS financial measures presented by other issuers.

We refer you today to today's press release, which is available at celestica.com under the Investor Relations tab for more information about these and certain other non-IFRS measures, including a reconciliation of historical non-IFRS measures to the most directly comparable IFRS measures from our financial statements.

Unless otherwise specified, all references to dollars on this call are to U.S. dollars.

Before turning the call over to Rob, we would like to remind you that commencing last quarter, we completed the reorganization of our reporting structure, including our sales, operation and management systems into 2 operating and reporting segments: Advanced Technology Solutions or ATS and Connectivity & Cloud Solutions or CCS.

All this -- although this reorganization commenced in the first quarter of 2018, we have now generated historical segment revenue, income and margin information in order to provide prior period comparative.

See the index of the slides accompanying this presentation for segment revenue, income and margin information, including reconciliations to IFRS earnings before income tax for fiscal 2016, fiscal 2017 and subsequent quarters.

I'll now turn the call over to Rob.

Thank you, Paul, and good afternoon.

Our second quarter results reflect strong revenue growth from both our ATS and CCS businesses as well as improving margin performance in CCS.

In ATS, we reported record revenue of $553 million, up 15% from the same quarter last year and up 4% sequentially.

This growth was primarily led by strength in our aerospace and defense end markets as well as growth in our semi cap business.

Our ATS segment has now grown year-to-year for 12 straight quarters, excluding the impact of exiting our former solar panel business.

In terms of profitability, segment margins in ATS remained stable at 5.1% and were up 40 basis points from 1 year ago.

We are seeing revenue growth, improving mix and are achieving scale in key end markets, all of which are contributing to strong performance in this segment.

Additionally, total demand in our ATS end markets, combined with greater levels of outsourcing, drove another consecutive quarter of record bookings.

Our second quarter results reflect the positive impact of our growing our ATS portfolio.

In Q2, ATS represented 33% of our overall company revenue and contributed over 53% of total segment income for Celestica.

This is the third straight quarter where ATS has contributed over 50% Celestica's income, which is one of the key goals we set out when we accelerated our diversification strategy 3 years ago.

As we move forward, we are targeting to further increase the percentage of income coming from ATS as revenue from this segment continues to grow.

Clearly, our investments in ATS over the past 3 years are producing solid results.

For example, Atrenne, acquired in Q2, is integrating well and delivering on the capabilities, growth opportunities and returns as the leading designer and manufacturer of ruggedized electromechanical solutions.

The quality of this operation was highlighted in the second quarter when Atrenne received Honeywell's New Product Development Supplier Excellence Award.

This Supplier of the Year Award is Honeywell's most prestigious award and reflects the 2 decade-long, value-added relationship Atrenne has established with this important customer.

This award for product development is a further testament that our product life cycle solution strategy is materializing.

Turning to CCS.

After a volatile Q1 in our CCS business, revenue and margins delivered solid progress in the second quarter.

CCS revenue came in above our expectations, up 18% from the first quarter of this year and up 6% year-over-year.

We saw strength in both communications and enterprise, with communications up 21% sequentially and up 2% from 1 year ago.

This year-over-year revenue growth in communications was driven by strength in networking, new program ramps and stronger demand, including in our optical business.

Our JDM networking business also remains strong as our CCS networking customers continue to see growth in their cloud products and service offerings.

Enterprise growth was robust, up 12% from 1 year ago as well as up 14% on a sequential basis.

This year-over-year growth was driven by strength in both flash and HDD storage program.

Segment margins in CCS improved 50 basis points sequentially to 2.2% and are now operating back in our targeted range.

The margin improvements were driven by stronger revenue growth as well as benefits from our cost efficiency initiatives.

Through smart investments and an experienced and dedicated team, Celestica has established a strong ATS foundation that continues to diversify our revenue and stabilize our financial results.

While we continue to build on this ATS space, our CCS team is focused on identifying opportunities to further improve returns.

As part of this process, we are undertaking a comprehensive evaluation of our overall CCS revenue portfolio.

We must ensure our resources are focused on programs that deliver the best long-term outcomes for our customers while also providing appropriate returns to Celestica.

It is key.

Returns are commensurate with the meaningful investments committed to both programs.

As part of this process, we are engaging in commercial discussions with customers to establish near-term road maps, road maps which drive improved and sustainable ROIC performance going forward.

As we complete our portfolio reviews and corresponding commercial discussions, we could ultimately see declines in portions of CCS revenue if we determine sustainable financial terms are not attainable.

However, we are still targeting to deliver improved consistency in Celestica's financial performance through any transitions.

To be clear, Celestica's journey to drive long-term success will be built on having strong franchises in both our ATS and CCS businesses.

To further strengthen our CCS portfolio going forward, we are simultaneously investing in key areas such as our JDM business that leverage our significant design capabilities and can drive improved financial performance.

We have strong capabilities and a proven track record in JDM.

We continue to commit significant resources to these advanced design capabilities in order to deliver value-added support to our customers' product road maps.

I am pleased we delivered a solid second quarter and anticipate continued revenue and margin growth going into Q3.

As highlighted in our third quarter outlook, we expect strong ATS and CCS revenue growth to continue on a year-over-year basis.

The ATS segment will benefit from program wins and the Atrenne acquisition, and we are targeting another quarter of double-digit growth.

While ATS is exceeding our growth goal this year, we continue to target growing this segment by approximately 10% per year, on average, over the long term.

In CCS, our business will remain dynamic in the coming year as we reshape our revenue portfolio.

However, we will also see new business added in CCS associated with new program ramps and continued growth in our JDM business.

In addition, we also anticipate both ATS and CCS to deliver improved margins in the third quarter.

As we head into the second half of the year, we continue to operate in the midst of one of the tightest component markets in recent history.

We expect this constrained inventory environment to continue into the third quarter and for the remainder of 2018.

However, we continue to work on various supply-based cash cycle initiatives to help offset the elevated levels of capital needed to support the current environment.

Our commitment to a balanced approach to capital allocation, including returning capital to shareholders, remains unchanged.

Since announcing our NCIB program last November, we have completed over $58 million in stock repurchases and have canceled 5.5 million shares.

We view our share as an attractive investment, and we'll continue to be opportunistic with this program.

Consistent with our approach over the past 3 years, our priorities for capital allocation remain focused on pursuing targeted and on-strategy acquisitions intended to drive growth and capabilities that generate appropriate risk-adjusted returns and integrate efficiently into our operations and enhance the company's margin profile; returning capital to our shareholders through share buybacks; expanding our network capabilities through targeted CapEx initiatives; and finally, investing in cost management programs to accelerate our productivity.

Through this balanced approach to capital deployment, we believe we can grow our business in a disciplined manner while driving long-term value creation for our shareholders.

As we enter the second half of the year, we are operating in a very dynamic market, where solid revenue growth is being achieved against the backdrop of significant material shortages and some economic uncertainty associated with global tariff volatility.

However, despite this environment, we are delivering the strategy we put in place 3 years ago.

We are committed to delivering additional margin improvement and a more profitable revenue mix throughout 2018 and beyond.

Our ATS business is operating well, and we feel optimistic with the opportunity to capitalize on the growth dynamics and outsourcing trends in this segment.

In CCS, we are back to operating within our targeted margin range, and we are further evaluating our portfolio to ensure we are focused on programs that deliver the best long-term outcomes for our customers and best returns for our shareholders.

Our strategy is making solid progress, and we are excited with the opportunity to create additional value as we move forward on this journey.

Let me close by thanking our global team.

Their focus and dedication to our customers has always been the bedrock of our success.

Over the past 2 decades, they have earned the trust of our customers by consistently providing them with services and solutions that help them succeed in the rapidly changing and highly competitive environment.

Our teams are proud of what we help our customers accomplish each and every day, and we remain committed to driving their success in the future and the best solutions and service in our industry.

Thank you for joining us.

And now let me turn the call over to Mandeep for additional details.

Thank you, Rob, and good afternoon, everyone.

Let me begin with a reminder that we adopted IFRS 15 in the first quarter of 2018, and we'll provide required restated comparatives each quarter.

Now for a couple of consolidated highlights.

Celestica reported strong revenue of $1.70 billion, an increase of 9% year-over-year and exceeding the high end of our guidance range.

Our non-IFRS operating margin was 3.1% compared to 3.2% at the midpoint of our guidance range.

And our adjusted earning per share were $0.29, $0.01 above the midpoint of our guidance range.

While we continue to deal with a significant material constrained environment and the working capital inefficiency it drives, we also saw modest improvements in inventory turn and cash cycle days, and we achieved adjusted ROIC of 16.0%.

Growth in ATS continues to be strong.

In addition to a full quarter of Atrenne activity, we also benefited from new program revenue in aerospace and defense and strong demand in semiconductor capital equipment.

For the second quarter of 2018, ATS income was $28.2 million and ATS margin was 5.1%.

This represented the fourth consecutive quarter where ATS margin was above 5%.

For your reference, in the appendix of this presentation, we have published segment margin for both ATS and CCS for fiscal 2016 and by quarter for 2017 and 2018 year-to-date.

As this added transparency shows, the investments made in ATS since beginning our transformational strategy 3 years ago are delivering their intended benefits.

Our CCS business also showed strong revenue growth and accounted for 67% of total revenue for the second quarter of 2018.

CCS income was $24.9 million, translating to a margin of 2.2%.

The improvement reflected improved mix during the quarter, including higher JDM.

CCS is now back in our targeted segment margin range as we are starting to see the benefits from our restructuring and productivity efforts.

Within our CCS business, the communications end market represented 42% of our consolidated revenue in the second quarter.

Communications was up 2% year-over-year, driven by strong demand from new programs, including JDM.

Sequentially, communications revenue was up a healthy 21%, driven by seasonal demand and new program wins.

Revenue from our enterprise end market represented 25% of consolidated revenue in the second quarter.

In our enterprise end market, revenue increased 12% on a year-over-year basis, driven by strong program demand in storage and was up 14% sequentially driven by seasonality.

Our top 10 customers represented 71% of revenue for the second quarter, unchanged from the first quarter of 2018 and the second quarter of 2017.

For the second quarter, we had one customer individually contributing greater than 10% of total revenue.

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

From an IFRS perspective, net earnings for the quarter were $16.1 million or $0.11 per share compared to $34.6 million or $0.24 per share in the second quarter of 2017.

Lower year-over-year IFRS net earnings were driven by lower gross profit and higher other charges, including higher restructuring, Toronto transition and acquisition-related costs, restructuring charges related to our cost efficiency initiatives, which were $8.8 million this quarter.

This brings total program spent to date to $23.7 million.

This enterprise-wide program will run through mid-2019, and total program spend is anticipated to be in the range of $50 million to $75 million.

Adjusted gross margin of 6.4% was down 20 basis points sequentially, primarily due to a higher mix of CCS revenue.

On a year-over-year basis, gross margin was down 90 basis points, primarily due to mix and pricing pressure in CCS and additional provisions for aged inventory, partly offset by improved performance from ATS.

Our adjusted SG&A was $48.3 million, below our expected range of $51 million to $53 million for the quarter and similar to the same period last year, primarily driven by lower discretionary spend and foreign exchange gains recorded in the quarter.

Non-IFRS operating earnings were $53.1 million or 3.1% of revenue, up 10 basis points from the first quarter.

This was up $8.4 million sequentially and down $5.1 million relative to the same period last year.

Our adjusted effective tax rate for the second quarter was 17%, within our expected annual range of 17% to 19%.

Adjusted net earnings for the second quarter were $40.2 million.

Adjusted earnings per share of $0.29 represents a decline of $0.03 year-over-year.

Adjusted ROIC of 16.0% was up 1.6% sequentially and down approximately 5% year-over-year, primarily affected by lower operating earnings and higher inventory.

Under IFRS 15, our inventory at the end of June was $1.0 billion, an increase of $78 million from March 31, 2018.

Inventory turns for the second quarter were 6.6, up 0.2 turns from last quarter but down 1.1 turns from the second quarter of 2017.

The higher inventory levels are being driven primarily by the constrained materials environment as well as stronger revenue growth.

Capital expenditures for the second quarter were $25 million or 1.5% of revenue.

Cash used in operating activities for the quarter was $15 million compared to positive cash flow from operations of $55 million in the prior year period.

Free cash flow was negative $53 million in Q2 compared to positive free cash flow of $33 million for the same period last year, driven primarily by higher working capital requirement and lower earnings.

Our teams continue to implement actions to improve our overall cash cycle despite the headwinds being faced from elevated inventory levels.

While further improvements will take time, we are encouraged by the progress to date.

Cash cycle days in the second quarter of 53 days was a 4-day improvement from 57 days in the first quarter of this year.

While the inventory environment continues to put pressure on free cash flow, we anticipate the sale of our Toronto headquarters to be completed late in Q4 of this year or possibly the first quarter of 2019.

Additional funds could also be received by Celestica on closing if higher zoning densities are approved by city and provincial planners.

While it is not likely we will achieve our annual free cash flow target of $100 million in 2018, given the current inventory environment, our teams continue to work with customers to improve working capital efficiency.

Moving on to our balance sheet.

Celestica continues to maintain a strong balance sheet.

Our cash balance at quarter end was $401 million, down $34 million sequentially and down $181 million year-over-year.

In June, we entered into a new $800 million credit facility, which consists of a $350 million term loan that matures in June 2025 and a $450 million revolving credit facility that matures in June 2023.

The new and higher revolving loan commitment compares to our previous $300 million revolver given the -- giving the company additional capital flexibility to continue to execute our growth and diversification strategies.

We use the new term loan to repay all amounts outstanding under our prior credit facility, which includes funds used to purchase Atrenne.

The new term loan was fully drawn as of the end of the second quarter, and our debt leverage was 1.4x gross debt to EBITDA.

Now turning to our guidance for the third quarter of 2018.

We are projecting third quarter revenue to be in the range of $1.65 billion to $1.75 billion.

At the midpoint of this range, revenue would reflect an 11% increase over the third quarter of 2017.

Third quarter non-IFRS adjusted net earnings are expected to range between $0.26 and $0.32 per share.

At the midpoint of our revenue and EPS range, non-IFRS operating margin would be approximately 3.3% and would improve sequentially by 20 basis points from Q2.

Our operating margin for the third quarter is expected to improve based on continued revenue growth, particularly from our ATS segment.

We also continue to anticipate achieving 3.5% operating margin or higher for the fourth quarter.

Non-IFRS adjusted SG&A expense for the third quarter is projected to be in the range of $49 million to $51 million.

Finally, we estimate our annual non-IFRS adjusted effective tax rate for 2018 to be in the range of 17% to 19%, excluding any impacts from taxable foreign exchange.

Looking at our end market outlook for the third quarter.

In ATS, we are anticipating revenue to be up in the low 20% range year-over-year.

This anticipated year-over-year growth is being driven by growth in our semi, industrial and A&D businesses, including new program ramps and the addition of Atrenne.

In our communications end market, we anticipate revenue to increase in the low single-digits range.

In our enterprise end markets, we anticipate revenue to be up in the mid-single-digits range.

As we head into the second half of 2018, we continue to be focused on key initiatives that support our transformational journey, executing productivity initiatives to drive margin improvement, assessing our CCS revenue base and engaging customers in commercial discussion related to the significant capital we are deploying in their programs in order to improve our adjusted ROIC going forward and continuing to actively manage our working capital in the current constrained component environment in order to improve free cash flow.

In closing, we are pleased with the overall progress of our revenue and diversification strategy.

Our ATS business is operating well, and we look to build on the second quarter improvements made in our CCS business.

We anticipate additional margin improvements as we complete our efficiency initiative over the next 12 months and remain focused on improving our working capital performance against the current backdrop of a highly constrained materials environment.

Now I'd like to turn the call over to the operator to begin our Q&A.

(Operator Instructions) Your first question comes from the line of Matt Sheerin from Stifel.

The first question, in regard to your commentary about reviewing the CCS business and the relationships, is implying that you're going to look at deselecting certain revenue and relationships with customers.

Is there a timeline?

Or is that something that you'll review with your customers that, as you go along, you'll change your contracts and relationships?

Or is that -- or is there going to be something more formal, where you'll come out and make some announcements about that?

Yes.

The portfolio review, I guess, you can consider it ongoing and somewhat evolving.

But Matt, if I may, let me just take a step back and kind of put the portfolio review in the context of our overall master plan that we put in place several years ago.

Frankly, our strategic plan, our long-term goals have always been very focused, has always been very consistent.

That being, we wanted to diversify the earnings and the revenue of the company to drive sustainable profitable growth.

And in that context, our first really focus was strengthening ATS and that we've strengthened leadership team, reshaped the portfolio, albeit we got out of panel solar manufacturing.

We've done smart acquisitions in the name of Atrenne.

And then based on our increased transparency, you could see the progress is pretty evident.

And as you remember, earlier this year, we accelerated our second major initiative around network productivity, and that was aimed across the entire business at driving productivity in our operations, our supply chain and also within our functions.

And we're making some very good progress there.

This third step, which is a portfolio review, is really focused in on the underperforming accounts.

And frankly, given the amount of investment we're making on these certain programs, we want to make sure that we're achieving acceptable returns and also providing our customers with continuous fantastic service.

So this review we're doing will be unfolding over the coming quarters.

And while we think our revenues will likely be impacted, we are targeting that our margins expand through these actions, although our progress may not be in a straight line.

And if our revenues do decline, we're going to be operating on a stronger, more profitable base of business, and we should unwind some working capital if our revenues do decline as well.

Got it.

That makes sense.

And then for my follow-up question, regarding the component tightness, several of your competitors have called that out as an issue that led to missed revenue opportunities and also some margin pressure due to some operational issues regarding that.

It doesn't look like you've had any of those issues.

You're certainly not blaming that on your results or guidance.

So is that something that's baked into your guidance, where there's some expectation, where there may be some limit in terms of revenue upside or other issues?

It's Mandeep here.

If we take a step back and look at the overall environment, I think our viewpoint is, is that the material constrained environment -- not necessarily gotten better.

We are encouraged that we've seen some stability this quarter.

As you've noticed, our turns have improved by about 0.2 or so.

In terms of revenue, that was gated.

It was slightly better.

I wouldn't say it was a fundamental shift though.

Last quarter, we had about $30 million of revenue that was gated from the constrained environment.

This quarter, it was around $14 million.

And any constraints that we're anticipating have already been factored into the guidance into the third quarter to answer your question.

What I would say, though, is that the teams are working very diligently on it.

They are improving.

We're having very active conversations with our customers, very active conversations with our suppliers.

And I would say that we're getting better at managing it.

You could say at the beginning of the quarter that there may be slightly less constrained environment that we're -- or material that we're dealing with versus 90 days ago but again, not a really fundamental shift in the industry.

Just getting used to it, I guess, after a few quarters of this.

Your next question comes from the line of Robert Young from Canaccord Genuity.

Your competitors were highlighting pushouts in the semi cap space, and so I'm curious why you seem -- you haven't mentioned that or you haven't talked about it in the guidance.

So what's different with Celestica than others?

Celestica, we -- semi cap, we are a market leader, Rob, when it comes to that.

We do high-precision machining and high-level assembly.

And it's really performing well for us through the cycle.

We've been gaining share, and we've also been working on several new programs.

In Q2, we've had double-digit year-over-year growth.

In Q3, we're expecting to have double-digit year-over-year growth.

We do, however, are seeing a pause sequentially in semi cap growth.

We do expect to grow in the full year, but we do think the growth will be somewhat to do over the next couple of quarters.

What our customers are telling us is that the growth should return in 2019.

Okay.

And then the second question I'll ask is in regards to this CCS revenue review.

Can you give us a sense of how you'd be looking at -- would you be looking at these from an operating margin perspective or a return on invested capital perspective?

Like how would you go about evaluating these from a financial point of view?

And I guess I'll pass the line.

Yes.

It all comes together, I guess, with ROIC, and it's a function of asset velocity, mix, profitability.

And those are the kind of general conversations we're having with our customers.

We're also talking to them with a general mix of business.

If we could provide them higher value-added services, it tends to improve the overall portfolio as well.

So these changes would have an impact -- a positive impact on operating margins, is what you're targeting, I guess, where I'm going?

That's correct.

We're targeting that.

It should improve our -- through this transition, our operating margins should improve.

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

Rob, might be premature to ask the question, but I'll try asking it anyway.

In terms of the portfolio review, could you give us a sense, as to order of magnitude, how much revenue might ultimately be impacted?

Might it be limited to sub-10%, sub-20% of revenue?

Or is it just too early to ask that question?

Yes, it's a little early.

We're kind of looking at it with respect to a specific goal in terms of revenue.

We're trying to solve for the longer-term strategic goal of sustainable profitable growth.

Our goal there, our ATS profitability greater than 50% of the whole, stronger ROICs, and in that, we will probably see portions of our CCS business grow as in JDM and services.

And we might also see some other less accretive portions of our CCS portfolio not grow if we're not able to kind of improve that.

Okay.

And in terms of the pricing environment on CCS, given that the near-term demand outlook seems to have improved, has pricing been a little bit more favorable than it had been earlier in the year?

Or does the margin improvement we saw this quarter have more to do with your internal actions you've been taking?

It's Mandeep here.

The pricing environment continues to be challenging and very dynamic.

To the point that Rob was making, we're having a number of conversations with our customers.

They are ROIC-driven conversations.

When pricing is a challenge and if inventory is a challenge, there's a few different levers that you're able to pull.

But I wouldn't say that the pricing environment has improved over the last little while.

Going forward, as we look at the overall business, we are pleased that the margin profile of CCS has improved quarter-to-quarter.

We went from 1.7% to 2.2%.

We're now at the lower end of our range.

We are seeing benefits from the productivity actions that we have been taking, and we're continuing to focus on driving the productivity program and through that as well as the portfolio review really focused on expanding the margins in CCS.

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

Tim Young calling on behalf of Jim Suva.

You have a long-term margin target of 3.5% to 4.0%.

Do you -- are you still expecting that you can achieve that margin target without customer review or -- in CCS?

Or you have to have some like portfolio adjustment to achieve that given your current end market exposure?

So going back to some of the remarks that we shared in the script.

We are targeting still 3.5%-plus margins for the fourth quarter, and it is taking into account continued expansion of our ATS business as well as driving productivity improvements in our CCS business.

Now to the point that Rob had made in terms of the timing of the portfolio review, there are ongoing conversations, and it's really program by program.

We don't anticipate that there would be any large revenue impacts from that portfolio review in the back half of this year, and so that's not factored into us getting back to the 3.5% margin in Q4.

Just to clarify, on full year basis, do you still expect the -- is the 3.5% to 4% still the target and then you don't have to adjust the portfolio to achieve that target for full year?

Yes.

So getting to the 3.5% margin range in Q4, we would be seeing a similar mix to what we have today with maybe some additional expansion in the margins in both of our businesses, both CCS as well as ATS.

Our goal, as we have stated, is to -- with the mix that we have right now, to be in the 3.5% to 4% range, but our long-term goal is to continue to expand the concentration of ATS profitability overall.

And so as we continue to expand the ATS profitability over time, we'll go to the higher end of those ranges.

Your next question comes from the line of Gus Papageorgiou from Macquarie.

It's pretty technical, but I just -- you said in the comments that you took some aged inventory provisions in your P&L.

Just wondering, I thought that you really didn't take any kind of inventory risks so that those are generally borne by your customers.

So you could just kind of explain what those were.

Yes, and you're right, and you're right.

At the end of the day, the vast majority of the liability for inventory does go back to our customers.

However, as you do know, our inventory has been growing.

It's up almost 25% on a year-over-year basis.

And along the way, inventory has been aging along the way.

We do take provisions along the way as inventory reaches different milestones.

And we, at the same time, work with our customers for recoveries along the way.

So we have taken provisions.

There hasn't been any major change in our overall operating process, and we don't expect that those types of one-off true-ups are going to continue going into the next quarter.

So as you receive the recovery from your customers, is there potential for those provisions to be reversed?

Yes.

I would say, in general, our aging of our inventory is relatively in line with the traditional aging that we would see.

But again, we just have a larger inventory balance.

As we would unwind inventory going forward, we would also expect that those provisions would start to unwind as well.

Okay.

And just quickly on the restructuring, are you still within the confines of the original restructuring plan?

I can't remember, if you could just remind us what you're saying, $50 million to $75 million for restructuring is -- was that pretty much within the range of the initial plan?

Yes, Gus.

So just as a reminder to everyone, what we had shared was that we are anticipating to spend between $50 million to $75 million on restructuring through the efficiency program that's underway.

We started it in the fourth quarter of last year, and we anticipate that it's going to go into the middle of 2019.

To date, we've spent $24 million on that program, and we do still anticipate that the $50 million to $75 million range is the right range.

And we expect to continue to take charges going into the third quarter.

And the focus there is -- will still be increasing automation in your facilities.

Is that correct?

Yes, it's focusing on material and labor productivity, optimizing the network, but we're also looking at corporate support costs as well.

Overall, as you know, we've had significant productivity challenges in the CCS business.

And so they are largely focused towards the CCS business, but there will also be some benefits coming into the ATS business as well.

Your next question comes from the line of Todd Coupland from CIBC.

I wanted to see if you would give us visibility to organic growth in the ATS business both for the quarter and the outlook into Q3.

Yes.

So overall, we're seeing some very strong growth in ATS overall.

While the Atrenne acquisition did help a little bit, it's been largely driven by organic growth.

So we had 16% growth in ATS in the second quarter.

It would have been closer to about 11% if you had excluded the Atrenne business so still above our long-term target of 10%.

As was mentioned, we're seeing some continuing strength going into the third quarter, guiding up the low 20% range on a year-over-year basis and still being close to that range, even if you were to exclude the Atrenne acquisition.

It's really being driven from a number of different areas.

We're seeing strong demand strength in a number of different programs.

We are ramping programs that we've been winning.

We've been seeing some record wins in the ATS business, and it's going across a number of different end markets, seeing strength in A&D but also in semi as well.

As Rob had mentioned, we've seen some good program share wins in that business, and so we're ramping those programs.

And we're also seeing strength in industrial.

And then just on free cash flow, as margins start to tick up in the second half of the year and seems like you're getting at least some improvement in the tightness of components.

Would you expect to be free cash flow positive in the second half of the year?

And if yes, can you give any orders of magnitude on that?

Yes.

So Todd, what we're encouraged by is that we are seeing an improvement in our overall cash cycle days, and as was mentioned, we've gone from 57 days to 53 days.

As I mentioned, inventory has relatively stabilized Q1 to Q2, but 2 points don't make a trend.

But at the same time, we're seeing some positive benefits coming from the work that we're doing with our customers and our suppliers, both in receivables as well as in payables.

We are negative so far this year.

We typically are negative in terms of free cash flow in the first half of the year, and we're typically positive in the second half of the year.

We're targeting positive free cash flow for the second half of the year and through continued performance on our cash cycle days.

We don't have a specific range that we'll provide, but what I would say is that we are also continuing to work the Toronto property sale.

That is anticipated to close at the end of Q4 or early Q1, and that would definitely help towards our cash flow generation.

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

Just looking at the new disclosure on the segment profitability.

ATS margins have been flat sequentially for the last several quarters, and that's despite the addition of Atrenne.

Can you just walk through some of the puts and takes that you've seen in ATS margins over the last couple quarters?

And then what do you see as potential catalysts for further margin expansion in ATS over the next several quarters from here?

It's Mandeep here.

I see there's a few different dynamics that are happening.

So yes, Atrenne has closed.

It closed at the beginning of the second quarter.

That business is performing well and in line with our expectations.

And so we're very pleased to be integrating that business into the Celestica family.

There's a couple of other dynamics that are happening, though, as well.

So semi is performing well.

There's very strong demand strength, and we're seeing scale in that business.

There was a little bit less contribution from semi in the second quarter than what we had anticipated, as we saw some late demand drops in the quarter.

But still, as Rob had mentioned, strong performance on a year-over-year basis.

And we're continuing to see year-over-year strength in semi going into the third quarter.

But we're also ramping.

As we've mentioned, our long-term target is to grow ATS at the 10% range.

Then if you look at the growth so far in this year, it's much higher than that.

So we're in the double -- we're well above 10%.

And that's being driven by a number of program ramps that are happening in some of our not-as-large segments within ATS, and we're continuing to get scale.

And so our anticipation is, is that we will continue to work hard to improve the margins in ATS, move towards the higher end of the target range.

And it's going to really come from developing scale across a number of our segments.

And then you might have mentioned it, but just with the ATS revenue up 16%, I think, in the Q1 call, the outlook was for high teens so slight delta there.

Is that all related to the semi cap business?

Or there are some other things that might have missed your expectations?

No.

We would point probably to the semi one again, strong quarter for semi, just slightly below our expectations for the quarter though.

There are no further questions at this time.

Rob, I turn the call back over to you.

Thank you, Christine.

So we continue to make great progress in executing on our strategy despite the difficult market backdrop.

I think we have some great momentum on ATS, which is enabling us to move faster on our diversification.

And as such, we're turning our attention to some underperforming programs across the business.

We are still targeting margin expansion as we move into the back half of 2018.

Before I close, I'd like to take the opportunity to let you know that Mike McCaughey, who's the President of our CCS business, will be taking some time to deal with health issues over the next 6 months or so.

Jason Phillips will assume Mike's responsibilities on an interim basis.

Jason has been with Celestica for over 10 years.

He has a wealth of experience across our markets.

As the Senior Vice President of Enterprise Markets, he was central to building our JDM business.

He has proven himself to be a formidable leader and is playing a key role in executing on our current CCS strategy.

I know we are in good hands with Jason, and we all wish Mike a speedy recovery and look forward to having him back with us soon.

And we also look forward to updating you on our results next quarter.

Thank you, Christine, and thank you all for joining.

This concludes today's conference call.

You may now disconnect.