Celestica, Inc. Q2 FY2024 earnings call

• Second quarter revenues reached $2.39 billion and adjusted EPS was $0.91, both exceeding the high-end of guidance ranges. - Non-IFRS operating margin was 6.3%, above the midpoint of revenue and adjusted EPS guidance ranges. - Continued to generate solid adjusted free cash flow, with $63 million in the quarter and $129 million year-to-date. - CCS segment saw 51% year-to-year revenue growth and 7.2% segment margin, supported by large-scale investments in data center infrastructure from hyperscale customers. - ATS segment revenues were lower year-to-year primarily due to industrial business softness, but A&D and capital equipment businesses had solid double-digit revenue growth.

ATS segment revenue for the second quarter was $768 million, down 11% year-over-year, accounting for 32% of total revenues. ATS segment margin was 4.6%, down 20 basis points. CCS segment revenue in the second quarter was $1.62 billion, up 51% year-over-year, accounting for 68% of total company revenues. CCS segment margin was 7.2%, up 120 basis points year-over-year. HPS revenue was $686 million in the second quarter, accounting for 29% of total company revenues and up 94% year-over-year. Revenue in enterprise end market was up 37% year-over-year driven by AI/ML compute programs, and revenue in communications end market was up 64% year-over-year driven by HPS networking products.

• Third quarter revenues expected to be in the range of $2.325 billion to $2.475 billion, if midpoint achieved, growth of 17% y-o-y. - Third quarter adjusted earnings per share expected to be in the range of $0.86 to $0.96, if midpoint achieved, improvement of $0.26 per share or 40% y-o-y. - Full year 2024 revenue anticipated to be $9.45 billion, adjusted EPS $3.62, growth of 19% and 49% respectively y-o-y. - Non-IFRS operating margin expected to be 6.3%, a 70-basis-points improvement compared to 2023. - Adjusted free cash flow outlook for 2024 remains $250 million unchanged.

• Potential impact of tariff and trade restrictions on business operations and ability to win programs.

Q: Can you update us on where you are from a capacity perspective? Remind us the timing of the new capacity coming online and just in terms of where you are right now, whether you're bumping up against some constraints, or what the dynamic looks like in terms of how much more capacity you still have at the moment?

A: Hi, Thanos, good morning. Yes, we have two capacity expansions going on. One, in Malaysia. We actually opened doors officially in Malaysia on March 1, that's Kulim 2 we call it, and products transitioning and the building is ramping. So, we have plenty of capacity in Southeast Asia. In our Thailand facility, the project is actually going according to plan and we're open for new business in Q1 of 2025. Between now and then we feel like we have ample capacity to support all our customers. Also in North America, we still have ample capacity in our Richardson, Texas facility as well.

Q: And in response to the strong demand you're seeing, is there any change to your CapEx plans as you look out over the next few months, or are you maintaining your prior plans on that front?

A: Right now, we're maintaining our current plans. We don't anticipate any major investments moving forward, but we're always keeping a very close eye on it. It's just very fine line of making sure that we have full factories, but not too full that we're turning away demand. And so far, we've been able to ride that very tight line and keep utilization high and keep our operations and volume productivity very high.

Q: Just regarding the program transitions on the server business, how should we think about that from a timing perspective? So, it seems that Q3 enterprise will be down sequentially. Does that dynamic continue as far to Q4? Or at what point would you expect sequential growth to resume in enterprise as the new programs start to ramp up?

A: Good question, Thanos. This is the benefit of having a diverse portfolio across all of CCS, but within enterprise specifically within AI compute, what we're seeing now is this technology transition on the single-sourced program, it will start plateauing and decreasing towards the back end of the year with the new product ramping mid-2025, I would say. The benefit of a diverse portfolio is we're actually seeing accelerated demand for our HPS networking products and those are actually filling in nicely in the back half of the year and expected to also fill in through all of 2025 as use cases for our networking products increase. Across all of our hyperscaler customers, what we're seeing now is a move towards more distributed regional data centers due to power constraints. And when you have that, you actually have increased requirement for networking products.