Ladies and gentlemen, thank you for standing by, and welcome to the Celestica Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Craig Oberg, Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead, sir.

Good afternoon, and thank you for joining us on Celestica's Fourth Quarter 2019 Earnings Conference Call. On the call today are Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer. As a reminder, during this call, we will make forward-looking statements within the meanings of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. Such forward-looking statements are based on management's current expectations, forecasts and assumptions, which are subject to risks, uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions, forecasts or projections expressed in such statements. For identification and discussion of such factors and assumptions as well as further information concerning financial guidance, please refer to today's press release, including the cautionary note regarding forward-looking statements therein, and our annual report on Form 20-F and other public filings, which can be accessed at sec.gov and sedar.com. We assume no obligation to update any forward-looking statement, except as required by law. In addition, during this call, we will refer to various non-IFRS measures, including operating earnings, operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted net earnings, adjusted EPS, adjusted SG&A expense and adjusted effective tax rate. Listeners should be cautioned that the references to any of the foregoing measures during the call denote non-IFRS measures, whether or not specifically designated as such. These non-IFRS measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies that use IFRS or who report under U.S. GAAP and use non-GAAP measures to describe similar operating metrics. We refer you to today's press release and our fourth quarter earnings presentation, which are available at celestica.com under the investor relation 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. Let me now turn the call over to Rob.

Thank you, Craig. Good afternoon, and thank you for joining today's conference call. Our fourth quarter results reflect solid execution across our business with revenue above the midpoint of our guidance range and non-IFRS adjusted EPS at the high end of our guidance range. We remain focused on cost productivity initiatives, executing our portfolio actions and ramping new programs to deliver another quarter of sequential operating margin improvement while generating strong free cash flow. In addition, our efforts to diversify our end markets and customers continued to progress, with ATS now representing 39% of our revenues, up from 33% a year ago. Within the ATS segment, we posted improved profitability sequentially, delivered improved performance in our capital equipment business and executed new program ramps across our industrial and healthtech businesses. Our CCS segment performance continued to benefit from our portfolio actions, delivering sequential margin improvement for a third consecutive quarter and operating at the high end of our 2% to 3% target range. I will provide some additional color on our end markets and outlook shortly. But first, I will turn the call over to Mandeep to give you some details on the fourth quarter and our first quarter of 2020 guidance.

Thank you, Rob, and good afternoon, everyone. For the fourth quarter of 2019, Celestica reported revenue of $1.49 billion, above the midpoint of our guidance range, primarily driven by program-specific demand strength in enterprise. Revenue decreased 2% sequentially and was down 14% year-over-year. Our non-IFRS operating margin was 2.9%, above our guidance midpoint of 2.8% and down 60 basis points year-over-year. Non-IFRS adjusted earnings per share were $0.18, at the high end of our guidance range primarily due to favorable mix and $0.01 per share of favorable taxable FX. Our ATS segment represented 39% of our consolidated revenue, up from 33% compared to the fourth quarter of last year. ATS revenue was up 5% sequentially, up 3% compared to last year and was in line with our expectations. On a year-over-year basis, growth in our capital equipment business and new programs in our industrial and healthtech businesses were partially offset by planned disengagements of nonstrategic programs in our energy business. The growth was primarily the result of stronger demand and new program ramps in capital equipment. Our CCS segment revenue was down 22% year-over-year but was above our expectations due to demand strength in our enterprise end market. Sequentially, CCS segment revenue was down 6%. Within our CCS segment, the communications end market represented 39% of our consolidated fourth quarter revenue, consistent with the fourth quarter of last year. Communications revenue in the quarter was below our expectations and down 15% year-over-year due to continuing program-specific weakness. Our enterprise end market represented 22% of consolidated revenue in the fourth quarter, down from 28% in the same period last year. Enterprise revenue in the quarter was above our expectations, driven by demand strength, but was down 32% year-over-year largely due to planned disengagements in connection with our CCS segment portfolio actions.…

Thank you, Mandeep. 2019 was a challenging year given the difficult demand environment. In response, we took a number of aggressive measures, including proactively shaping our portfolio, driving cost reduction initiatives and executing program ramps. We continue to focus on providing higher-value-add solutions to our customers enabled by a diversified and more resilient portfolio. The actions we took this past year drove improved operating margin and non-IFRS adjusted EPS throughout 2019. As we exit the year, we believe our lower cost base and stronger portfolio position us for improved performance in 2020. Within ATS, our capital equipment business was presented with a number of challenges as semiconductor and display markets dipped to severe lows. However, our productivity initiatives and new program ramps in capital equipment continued to yield results. In the fourth quarter, we improved our performance and reduced our loss to the low single-digit millions. As we look to 2020, we anticipate improvement in the semiconductor equipment demand through the first half of the year and are encouraged by the anticipated market trends for the second half of 2020. The display market remains depressed. And while volumes are improving, we continue to expect near-term softness, with modest recovery late in the year driven by increased demand for next-generation smartphones and next-generation large form factor displays. As the industry shifts from LCD to OLED, we believe that we are well positioned to support our customers' growth and are already planning new program ramps in 2020. We continue to take a long-term view of this market. And as a market leader, we continue to partner with our industry's leading brands. We expect capital equipment to be generating a profit in the single-digit million dollar range in the first quarter of 2020, driven by our cost productivity initiatives and volume leverage. With…

[Operator Instructions] And your first question comes from the line of Robert Young from Canaccord.

Maybe the first question I'll ask is around the margins. I think you reiterated the 5% to 6% target. I don't know if I missed it, but did you also reiterate 2% to 3% operating margins for the CCS business? Or would you think that, that could go higher given where the recent margin performance has been? And then I think the overall operating margin target of 3.75% to 4.5%. Is that still something that you're driving towards?

Yes. Rob, it's Mandeep here. So yes, I'll take that in pieces. So on the CCS side, we're very pleased with the margin performance that the business has been having. They're performing very well strategically and operationally. That being said, we have seen some favorable mix over the last 1 or 2 quarters. And so we still think that the 2% to 3% range is the right range but are very pleased that they've been operating at the higher end of that range. On the ATS side, 5% to 6% continues to be the right target range. We're pleased that we saw some sequential improvement in the fourth quarter. We're expecting further improvement as we go into 2020 and think that there's some positive momentum happening in different areas. There's a few things that are going to be required to get there, primarily improvements in the capital equipment space, but we've highlighted some other things as well, which are working through some of the challenges and the churn in A&D and ramping some programs. The 3.75% to 4.5% continues to be the target range that we are moving towards. Just to reiterate what needs to be true for that to happen, we expect CCS to be firmly within their 2% to 3% range, and we are looking to grow ATS to the upper end of their range in order for us to get into the 3.75% to 4.5%.

Okay, great. And then maybe just digging into the semi cap demand environment. I think you said that you saw improvement in the first half -- or see improvement in the first half of 2020 and are encouraged potentially by H2. Is that what I heard? Display would still be depressed. I think that's consistent with what you had said last quarter around customers saying that there's a moderate level of demand in the first half of 2020. And so it feels to me like the demand environment is similar to what you saw last quarter. Is that right?

Yes, Rob, that's right. We're probably a little bit more optimistic, I would say, in the second half. The market seems to feel like memory might come back in the second half of next year. We're seeing pricing increases on memory. We're seeing inventories reduce a little bit. We don't necessarily have the order book to support that yet. That's why we're not calling a back half uptick, but the indicators are putting in a favorable direction for continuing strong semi cap in the back half of the year. And on display, it's pretty much the same as last year. For us, revenues are improving on a year-over-year basis. So we're getting improved volume leverage, if you will. But as the 5G, OLED phones get introduced and next-generation OLED TVs get introduced, and we anticipate that really towards the end of 2020, into 2021, that's when we think volume will really pick up.

Okay. And perhaps it's a bit early, but any of the China events recently, is there any impact that you see on your business? I know that Wuhan is a bit of a semi hub. Is it too early to understand if there's an impact there?

No, we've been working very hard over the last several days to understand it. First and foremost, we reached out to many of our employees. And as far as we know, they're safe and sound and taking the right actions. In terms of our China exposure, it's fairly limited relative to all of Celestica and our peers. We do about $1 billion a year of revenue in China across 2 large manufacturing facilities in Suzhou and Songshan Lake. A lot of the work they do is dual sourced within the Celestica network and also our revenues are largely back end. Of course, it skewed in terms of how they go out inside of a quarter. As you probably read, the China government extended back-to-work day to February 10. And given everything that's going on, it's a prudent move. But given the February 10 date and checking with our employees and checking with our suppliers, at this time, we don't think it's going to be a huge impact, but it's a very dynamic situation, as you can imagine. And we have contingency plans in place, and we're monitoring the situation very closely.

Okay. 2 other questions, if I could. The Cisco disengagement, I just want to understand the cadence of that. I think you'd said that it wouldn't have an impact in Q1. Has any of it started? And if it's complete by the end of 2020, is there any way to understand if -- the size of that, if you could remind us what that is and how it might play out through the year based on how you understand it now.

Sure. I'll answer the first part and Mandeep will do the second part. So we started transition planning, but the transition itself has not started. So we're still working through that process. In terms of the -- our anticipation right now is still that the majority of it will be transitioned out by the end of the year. And in terms of magnitude, I'll let Mandeep address that.

Yes. So both for Cisco as well as the previous program disengagements, our outlook for 2020 remains relatively consistent. [ We're ] anticipating from the prior program disengagements that were announced to have about $100 million impact in 2020, and on the Cisco piece $300 million to $500 million. It is dynamic. And so we'll keep you updated if that changes, but our outlook right now remains consistent.

Great. And then you mentioned ITAR in the comments. Maybe if you could talk a little bit about how big that business is for you now. And I think you said you're going to expand a facility, wouldn't require M&A to expand that business. How -- maybe if you can talk about the margin impact of ITAR. I mean what you're going after there. And then I'll pass the line.

Sure. So the -- we purchased Atrenne a couple years ago. And one of the facilities -- they do business out of 3 main facilities. And 1 of the facilities in New Hope, Minnesota, which is about 50,000 square feet, is actually running out of capacity. So we've taken the opportunity to lease a brand-new building, a state-of-the-art facility in -- right down the street, if you will. And based on the pipeline of work that we have, which is largely defense related, it will be our new center of excellence for circuit cards and a new set of excellence for a licensing business within aerospace and defense. It will largely cater towards the defense market. And we're doubling the size of the facility and we think we have a strong growth pipeline to support that expansion. The Atrenne acquisition continues to exceed all of our expectations. It's really has a wonderful management team. It's winning awards from our customers and it's performing quite well.

And your next question comes from the line of Gus Papageorgiou from PI Financial.

Sorry, just on the ATS margin goal of 5% to 6%. I don't recall you saying anything about display markets recovering to reach that goal. So can you just talk a little bit about what would have to require for -- from the display business to kind of reach those goals? And you said part of it would require or would depend on new program ramps. Can you give us an idea of how big the new program ramps are for this and next year and how influential that will be on getting ATS back to reach those margin goals?

Yes. Gus, Mandeep here. Maybe let me break it down to 2 pieces. One is to get back into the 5% to 6% range, we're really looking for capital equipment to get back to its target levels. Those target levels are north of 6%. When we are in a strong demand cycle, primarily in the semiconductor space, we can operate above 6%. Right now, we are starting to see that demand cycle come back. And so even if display was not to come in incredibly strong but was to come in at levels that are higher than where it is today, we believe that, that will be enough contribution from capital equipment to get us back into the 5% to 6% range. To move upwards into that range, then there's a few other things that we're looking for contribution from. One is for the headwinds in A&D to subside. And there's some good opportunity there, but there's always going to be some unknowns. And then on the ramping of the programs, I won't share the specific numbers on it, but as we've shared in the past, we have seen significant wins in both industrial and in healthtech. Both of those businesses are growing at double-digit rates right now. The ramps are well underway. The ramps are going as expected. And so we don't expect at this point any adverse impacts from that, but we do need to see a little bit more contribution from those ramping programs in order to keep moving. And then when we talk about the display contribution, when we purchased the Impakt business, as we had mentioned, it has a very strong margin profile. And so as we see the display market really return, which is more in '21, we would expect to see a good level of volume leverage, yes. And that's just because of, number one, the margin profile of that business, but number two is we have taken the opportunity over the last year to reduce the cost profile of that business. And so we would just expect better contribution [ as the ] demand really returns strong in '21.

That's great. And on the A&D. So basically, Boeing's facing some challenges, but defense seems to be doing well. Is that about right?

Yes, correct. Boeing is facing some challenges. But to put it into context, we're the leader in A&D for the EMS space. So what we do across many platforms, the 737 inclusive, is we do everything from circuit cards to complete line-replaceable units or boxes that go in the aircraft. And about 10% of our A&D portfolio supports the 737 MAX. So right now, we're working with our customer to balance production while preserving the long term. So A&D, historically speaking, has grown in the mid- to high single digits as a result of the 737 downward pressure, and we don't view that as being a long period of time, based on what we're hearing and what we're reading. We're seeing ranges of 3 to 6 months. So the growth of A&D is going to be muted until production turns on. And then depending on the rate it turns on, we'll kind of determine how quickly it grows thereon. But again, it's -- from a magnitude perspective, it's only about 10% of our overall A&D portfolio, which is also the largest portion of our ATS business.

[Operator Instructions] Your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

You mentioned the year-over-year improvement in inventory turns. How would you expect that to trend through the course of the year? And then what kind of impact should we see on turns from the Cisco disengagement?

Yes. Thanos, I'll put it into the context of overall cash flow. We're pleased right now with the performance that we saw in 2019. Part of it was, of course, because of the declining revenue that we had, but we saw improvement in our overall working capital turns and a lot of that was driven by inventory. And we look at inventory right now in combination with customer deposits because some customers who are unable to unwind their inventory in lieu of that have been providing us with deposits. And so overall some very good benefit. As we go into 2020, we're expecting another year of strong free cash flow generation. We're targeting $100 million to $200 million. And inventory turns improvement is part of that as well. And so we feel right now that we have some pretty good momentum on the cash generation side.

Great. And then Rob, can you update us on M&A? Do you continue to have an active pipeline? Or is the focus this year more on just managing the CCS disengagements and some of the other moving parts in the business?

Yes, primary focus right now is on delevering. That being said, we do have active M&A pipeline. I would say we're looking for niche capabilities. So pipeline is largely focused on aerospace and defense and healthtech. So still evaluating M&A with a very focused lens and opportunistic, and we're looking really for capability plays.

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

Could you guys speak to capital equipment revenue on a sequential and year-over-year basis in terms of Q4 and then also in terms of your expectation for capital equipment in Q1 in regards to revenue?

It's Mandeep here, of course. And we have been seeing some strong growth. Overall, the [ demand strength ] for capital equipment, I would say, dipped to the low in 2019, in the second quarter. We saw nominal growth into the third quarter and the growth started to really pick up as we moved into the fourth quarter. We had a lot of wins early in the year, many of them as market share gains, so competitive takeaways. And so we are in the process of not only seeing some demand uptick right now, but we're seeing the ramping of many of those programs. As we go into the first quarter, we're expecting some additional volume growth over the fourth quarter but albeit not as maybe big of a sequential growth as we just saw in the fourth quarter. And again, that's a combination of both demand strength as well as ramping of new programs.

Great. And secondly, could you just elaborate on your comment just in regards to the inquiries in the pipeline that you're seeing for the CCS capacity that you'll free up towards the end of the year? And then how should -- or what's your sort of expectation on the profitability of any new contracts that you bring in on the CCS side in comparison against the average, the 2% to 3% target?

Yes. So we've been very pleased at the level of interest that we're getting on consuming the available capacity, and Thailand has been pretty high. As I mentioned on the call, the funnel is very robust. Our intention really is not to backfill the revenue on a dollar-for-dollar basis. We're really focusing on revenue that has high-value-added content, so looking at expanding our customer base within our service provider business. We're looking at expanding our JDM business. We're looking at new enterprise logos. In fact, within our service provider space, we're now doing business with the majority of the top 10 service providers. And within that, we provide a full suite of product solutions across all the technologies in the data center. Our JDM business is actually growing in the double digits -- expected to grow in the double digits in 2020. In terms of the margin profile, I would say the JDM business operates on the higher end of the target margin ranges and would be accretive. That being said, we are counting on a higher mix of JDM business to keep the overall portfolio within the target margin range.

And your next question comes from the line of Ruplu Bhattacharya from Bank of America.

So you're guiding the first quarter up low single digits year-on-year. Do you expect, as we go through the year, an acceleration in revenue growth? And do you think that, exiting this year, you can be back at the 10% or double-digit kind of growth rate in that segment? So any kind of color of what you expect to see as you go through this year in the ATS segment?

Yes, Ruplu. We're pleased with the growth that we're seeing overall in ATS. 2019 was impacted by some market dynamics, specifically in capital equipment. And then as you know, we did take some proactive disengagement actions on some nonstrategic customer programs. When you back those out, we actually in 2019 saw low double-digit growth. We saw 13% growth in the rest of our ATS business. And that's actually after doing 13% growth in 2018 as well. We are anticipating growth in 2020. We always caution people to remember that the 10% growth rate is a long-term growth rate. There are going to be some years where we're above it and some years where we're below it. And so while we're not giving guidance for 2020, we continue to think that the 10% growth rate is the right target over the long term.

Okay, that's helpful, Mandeep. And maybe just for my follow-up, on the communications end market, I think you guys had guided for a decrease of low teens year-on-year, but you saw a little bit worse, down 15%. And looks like, for the first quarter, you're guiding flat, which suggests some improvement. So maybe if you can just touch on the different end markets, what you saw in optical, what you saw in networking. And is there a sense of things getting better? Or is -- the inventory correction you've talked about in the past, is that still continuing? So any kind of color on that end market both in 4Q as well as what you're expecting for 1Q?

Sure. So within 4Q, what we saw was demand weakness with some of our traditional OEMs. We saw some product and technology transitions with some of our customers, and also for us we had some tough comps in networking. At this time last year, people were building buffers due to the tariffs and those buffers were in our revenue numbers last year. This was partially offset with some new program growth that we've been talking about in our service provider space. For Q1, we're guiding flat. What we're seeing is new program ramps in networking. We're seeing demand strength in some of our existing programs. And that's also being offset with some demand weakness that we're seeing with the technology transitions. In terms of inventory buffering, we're not experiencing any of that right now. I think the buffers, at least for us, have largely burnt off. And for us, it's just about supply mix and product transitions and demand dynamics.

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

I just wanted to confirm one point, and then I'll ask a question. So on the transitions, you called out other in Cisco of about $600 million off of 2020 versus 2019. Is that -- did I hear that correctly?

That's right, Todd. So we are expecting $400 million to $600 million of revenue impact year-over-year as a combination of both the Cisco disengagement as well as the tail end of the portfolio review. On the ATS side, we are targeting growth. We're not providing full year guidance, but we are targeting growth off of the base portfolio. And then for the rest of CCS, we are expecting flat to some level of growth as well.

Okay. And then my question had to do on the carrier space. I know you do some 5G programs. It's been sort of lumpy, so far as the market is trying to figure out when actually to get going. Kinds of indications are you getting for 5G technology for 2020, any color on that would be appreciated.

Sure. We've seen some strength in 5G[ technology ] regional demand strength that's expected to continue through the first half of the year, but broad deployment for 5G, we still think, is pushing out a little bit to 2021 and beyond. Again, for the 5G stuff we'd play on the wired side and support the wired players. So hopefully, that gives you a little bit color. But regionally, we're seeing pockets of growth.

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

I have 2 questions, and I'll ask them at the same time so you can take them in either order, which is fine. If I add up the proactive disengagements that are happening, I believe in total it would be $400 million to $600 million, which I think is [ 100 plus a range of 3% to 5% ] for the other one. Is that for the full calendar year 2020? Or do we need to kind of prorate it? And the reason why I ask is it seems like Q1 will be down about 4% in revenues, but just to set expectations fair without guiding 2020, it seems like that the future quarters would need to decelerate or degrade a little bit based upon the disengagements, unless of course you're winning more to offset that. So I'm just trying to get my hands around the disengagements; the timing of it, kind of; and the full year impact. And then my second question is on aerospace. You mentioned you're seeing some material shortages. Unfortunately, I'm not a pilot or know much about this sector, but other companies who supply to the aerospace indeed concur that Boeing has issues with the 737 MAX, but they haven't really cited material shortages. So can you help us understand what those material shortages are, why you're seeing it and maybe others aren't?

Yes. Jim, I'll take the first question. So you're correct on the revenue impact and it is for the calendar 2020. And the $400 million to $600 million as a combination of the 2 pieces is the right way to think about it. You're right. On a year-over-year basis relative, we are -- to last year, we're showing being down about $60 million. So it is a more rear-weighted impact. And the reason for that is because we expect that the Cisco impact is going to be much more second half of the year. We are continuing to have discussions with them. They are continuing to go through their own transition process of identifying suppliers and developing their own transition programs. And so we haven't seen a material impact from the Cisco disengagement in the first quarter and we will expect it to be much more material in the back half of the year. On the A&D side, Rob can talk about the materials side.

Yes. Jim, I would say it's 2 main factors. One is we're seeing a fair amount of insight to lead time orders, as our customers are working to rebalance their schedules and looking to accelerate some orders and pushing others out largely 737 MAX related. So a lot of the material constraints we're working through is really as a result of trying to expedite things that are well inside of lead time. And the other portion, so while our backlog is turning over, it's not necessarily coming down because of the -- we're adding to it. The other thing I would also say is that in one of our operating places, the process is we take over our customer's supply chain. And the constraints that we're seeing are not overly prolific, but there are spot constraints with some suppliers that we're working with and transition to Celestica preferred suppliers, and that's taking a little bit of time to transition over to our preferred supply base and get them up to speed. So I wouldn't necessarily call it a holistic issue versus a couple of critical folks that are just kind of pacing the line, and that's what we're working through.

There are no further questions at this time. Mr. Rob Mionis, I turn the call back over to you for some closing remarks.

Thank you, Rob. So while our full year 2019 results were [ disappointed ], I am encouraged that the actions we're taking to execute our transformation are gaining traction. I'm also pleased with the sequential margin improvement we saw in the fourth quarter, along with the strong free cash flow generation we experienced throughout 2019. Within ATS, I'm pleased that we're seeing early signs of a broader semi cap recovery. And within CCS, our portfolio is performing well, with margins firmly within their target range amidst our portfolio-shaping actions. Thank you all for joining, and I look forward to updating you as we progress throughout the year.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.