Good afternoon, ladies and gentlemen, and welcome to Celestica Earnings Call for the Third Quarter of 2017. [Operator Instructions] . I would now like to turn the meeting over to one of your hosts for today's call, Lisa Headrick Harpell, Senior Director, Investor Relations. Please go ahead.

Thank you. Good afternoon, and thank you for joining us on Celestica's Third Quarter of 2017 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 will open the call for questions. During the Q&A session, please limit yourself to one question and a brief follow-up. We will be available later this afternoon for additional follow-ups. Please visit www.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, priorities, trends in our industry and end markets, our anticipated financial and operational results and performance, and financial guidance. 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, including our most recent MD&A and annual report on Form 20-F, including the Risk Factors section therein, filed with and reports on Form 6-K furnished to the U.S. Securities and Exchange Commission and, as applicable, the 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…

Good afternoon, everyone, and thank you for joining today's call. Celestica delivered third quarter results within the guidance range, delivering $1.53 billion in revenue, with 3.6% adjusted operating margin and adjusted earnings per share of $0.31. We delivered adjusted earnings per share in line with the midpoint of our expectations, despite challenging revenue headwinds, which were largely driven by new program ramp delays and high levels of demand churn since the beginning of the quarter. Overall, I am encouraged by our focus and our progress towards executing our strategy. Before I turn the call over to Mandeep to discuss the details of the quarter, I want to talk about a few recent highlights. As part of our strategy to enhance our capabilities in aerospace and defense and grow our leadership position in this market, we have signed an operate-in-place agreement with a major aerospace OEM. This is the second operate-in-place agreement that we have signed. As part of this 10-year agreement, Celestica will provide manufacturing and aftermarket repair services for electromechanical and electronic assemblies across a wide array of technology at the customer's facility. This agreement furthers our strategy to grow our aerospace and defense business, by accelerating our aerospace customers' transformation road map. It also enhances our capabilities and leadership in providing end-to-end product life cycle solutions for our aerospace and defense customers. As many of you know, we also launched our new brand. Our customers have grown and evolved and we have been transforming as well to help ensure that we continue to meet their needs today and in the future. The new brand is about the power of the partnerships we create, and the experience we deliver. I'm proud of the partnerships we have formed with our customers, and I'm excited for the future as we continue to focus on driving value for our customers and shareholders. I'm also pleased that Mandeep Chawla has been appointed Chief Financial Officer. Mandeep has been Celestica's Interim CFO since June, and was appointed following a search process that included both external and internal candidates. Since joining Celestica in 2010, Mandeep has held progressively senior roles in the organization, most recently as Senior Vice President of Finance. Mandeep will continue to play a critical role as part of my executive leadership team in driving Celestica's strategy, as we continue to chart our company's transformation. Now, I'd like to turn the call over to Mandeep, our new CFO, to provide an update on our financial results for this quarter.

Thank you, Rob, and good afternoon, everyone. In the third quarter, we delivered results within our revenue and adjusted EPS guidance notwithstanding the challenging dynamics during the period. Third quarter revenue of $1.53 billion was slightly below our guidance midpoint and down 2% year-over-year. Some highlights for the third quarter include: we delivered 2% year-over-year growth in the communications market. Revenue from the Advanced Technology Solutions or ATS market represented 31% of total revenue, consistent with last quarter. Revenue from the ATS market declined 4% year-over-year. However, excluding the impact of solar manufacturing business, which we exited in late 2016, the ATS business grew 2% compared to the third quarter of 2016. IFRS net earnings were $33 million, down $1 million relative to the second quarter of 2017 and down $20 million year-over-year. Non-IFRS operating margin was 3.6%, and slightly below 3.7%, the midpoint of our expectations. Adjusted earnings per share of $0.31 was at the midpoint of our guidance, down $0.01 relative to the second quarter of 2017, and down $0.12 relative to the same period last year. And we achieved adjusted return on invested capital of 18.9%. Moving to our revenue from an end-market perspective. Our Communications market performed in line with expectations, representing 45% of total revenue and was down 2% sequentially due to softer demand after a strong second quarter of 2017. Relative to the same period last year, the Communications market grew 2%, driven by new program, including in fulfillment services and Joint Design and Manufacturing programs. As expected, we are seeing Communications growth normalize when compared to a strong third quarter of last year. Advanced Technology Solutions revenue represented 31% of total revenue and was below our expectations, driven by ramp delays and material constraint. Sequentially, Advanced Technology Solutions revenue was relatively flat. On…

Thanks, Mandeep. We are on a multiyear journey to drive sustainable, long-term profitable growth. Despite current headwinds, I believe that we are continuing to build momentum in key areas of our business and execute on our strategy. Our ATS businesses continue to perform well. With this end market, we are establishing strong proof points that align with our value proposition of providing solutions for highly complex products. In aerospace and defense, we believe we are a leader in electronics manufacturing services. We are positioning Celestica to be a leading full life cycle solutions provider for the AV industry, driving improved quality and competitiveness for our customers by providing product design, manufacturing and aftermarket support for high reliability applications. We intend to accelerate growth in new revenue streams through the acquisition of additional life cycle solutions capabilities. We also believe that we continue to maintain a leadership position in semiconductor capital equipment. We are benefiting from strong end-market demand and expect this market to continue to be relatively strong to 2018. We are also preparing for a number of ramps in 2018 in areas within ATS, including smart energy, HealthTech, automated solutions and industrial. We are pleased with the progress we are making in these markets as we continue to establish strong proof points that align to our value proposition of providing solutions to high complexity and highly regulated products. Moving on to the CCS markets. The competitive landscape in the CCS market remains aggressive. We offer our customers in this market a broad range of services. And this quarter, our mix has further shifted towards fulfillment services. While we are pleased to be able to offer a broad range of services to our customers, fulfillment services generally have high ROIC, but the light touch drives lower margin. The mix and…

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

Congratulations to Mandeep on your official appointment to the role.

Thank you, Thanos.

So maybe starting off on the operate-in-place agreements with the aerospace OEM. Can you provide some color in terms of when that'll start to show up in your revenue? And in terms of size, I imagine you won't give us a number, but maybe just qualitatively, would this be comparable to the other agreements that you had signed previously or any larger or smaller?

Yes, Thanos, so thanks for the question. The overall agreement has already been closed; it closed on September 5. So there is a single-digit millions of revenue in our third quarter, but it is in our fourth quarter guidance on a full quarter basis. So -- and because it's an operate-in-place, it's already fully ramped. In terms of overall size relative to the company's size of $6 billion it's not overly material. But we do view it as being material relative to our A&D business.

With that I'd add about 200 very happy employees joined the Celestica team when we closed in early September and we're doing everything from [indiscernible] replaceable units to cables, chassis, sensors, and we also do repair and overhaul for the entire site. We're supporting about 150 aircraft and the portfolio's actually quite diversified. It supports commercial aircraft, general aviation aircraft and defense aircraft as well, 10-year agreement. So it's very sticky with the customer.

Okay, great. And then you alluded to new program ramp delays. Can you provide some more color in terms of where you saw that and when that may be resolved?

Yes, so we did see some program ramp delays. It was primarily in the ATS market. We have resolved those issues and don't expect them to continue in the fourth quarter.

Your next question comes from the line of Daniel Chan with TD Securities.

On this OEM agreement, this customer, is there any opportunity for more of these kind of deals? If it is the customer that -- your biggest A&D customer there, they've undergone some significant changes and are looking to improve free cash flow conversion above 100%. So this kind of lines up with what they want. Is there opportunity for more of these kind of deals?

Yes, we believe so across a broader range of customers. We feel like we've perfected this operate-in-place type of agreement because of our over 15-year history in the aerospace industry. We're very good at being able to not only transition work into various portions of our network, but also put these operate-in-place agreements that create a win-win. So we're engaged with a couple of different major OEMs on these types of agreements. They do take a while to work through because they're complicated. So this one was actually a work in the pipeline for quite some time.

And was there -- similar to the Honeywell deal previously, was there any cash outlay for this one or is it just inheriting the operations?

We are going to be taking over the working capital. It didn't impact our cash flow in the third quarter, but it will be impacting us in the fourth quarter.

And approximately how much will that be?

Around $30 million.

Okay. One final one from me. Mandeep, while I have you on, you're -- it looks like you've taken CapEx up for the year, but yet, you're putting out a restructuring program. Can you just help us understand the dynamics between 2 of your [ seemingly ] investing scenarios, but pulling back in certain others?

Yes, absolutely. So from a CapEx perspective, we have been spending more than our traditional range. Our traditional range that we share is 1% to 1.5%. Year-to-date, we're at 1.8% already. But we're really pleased with where we're spending that money. We're investing in growth in a lot of different areas. One area to highlight is we are expanding our facility in Romania, which is primarily in support of program growth in our ATS business. And so for this year, we anticipate that our CapEx is going to be at the higher end of our range. We're anticipating 1.5% to 2%. But we do believe that the 1% to 1.5% remains the right target going forward. In regards to restructuring, we are seeing a number of dynamics externally in the CCS space, many of which we had seen for quite some time. We're committed to the strategy in CCS to maintain our overall stability. And we have been seeing pricing pressure, but at the same time, we've been investing very heavily, as you know, for a number of years in JDM, and so we continue to transform that portfolio. One of the things that we've also been talking about recently in CCS is we have been growing our share of our fulfillment business. And so we are pleased that we're able to offer a wider service offering to our customers, we are winning market share. And we've been ramping the fulfillment business probably for the last 6 to 9 months now. We're at those steady state levels. We believe that the mix that we have right now is relatively stable in CCS, but it does require us to drive some cost productivity. Just as a reminder, the fulfillment business is higher material content, lighter touch, so therefore, it's lighter on the margin profile. It is attractive though from an invested capital perspective. It turns quickly. It's a good return in that regard. But because of the margin profile, we do have to adjust our cost structure. And so that's really what we're embarking on right now, which is to set up a cost structure that's more reflective of the business that we have.

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

Jim Suva from Citigroup. Can you talk a little bit about your Communications segment? The linearity for both the September quarter and forward outlook for the December quarter, is it normal, is it being more backward loaded? It just seems like a lot of the OEMs in Communications across industry have had some pushouts or lack of visibility, and we're just kind of thinking and asking about the linearity for both September and December, maybe compared to normal.

Yes, Jim, this is Rob. In overall Communications, I would agree, the linearity is usually towards the back end of the quarter. From a Celestica point of view, and a growth point of view, our Communications business has stabilized in the second half of this year after a very strong first half. We've been outperforming the market. We're up 11% on a year-over-year basis and a lot of that was fueled by new program wins in optical and networking. We're seeing some headwinds as well as the market is in broadband and routing and switching as well. But I would say, broadly speaking, it's not a very linear business. It's very spiky towards the end of the quarter.

Great. And then...

Yes, one thing I would add too -- sorry, Jim, one thing I was going to add to it is we are guiding down mid-single digits to your point. We've had very strong growth in the first half of the year. Overall, some of that lower demand is specifically in the routing and the switching area although we do see some pockets of growth, primarily in areas like networking.

Okay, just to confirm. Your outlook kind of builds in a little bit of softness for those end products or that end market, is that fair to say?

Correct.

Great. Because you had a very strong first half of the year.

You next question comes from the line of Paul Steep with Scotia Capital.

Two quick questions. First one on the operational review, I respect the fact that you haven't gone through the process yet. How should we think about the timing, Mandeep? Do we think that we'll announce next quarter? Would it largely be completed in the first half of fiscal '18, with all charges being taken or is this a broader initiative?

Paul, so overall in the initiative, to your point, we are currently actively in the -- assessing the overall initiative. We do believe that it is going to be of a significant nature. Just to take a step back on what we're looking at, it's really global in nature. We're looking at productivity and SG&A, but we're also looking at productivity in the factories as well. It's early to say right now in terms of the overall time frame. My anticipation is that it would last us through 2018. From a cash perspective, I don't expect that there would be a significant impact in the fourth quarter. In regards to your model, you may want to model in $10 million from a cash perspective. And I would expect that the cash impact would be more in 2018. And right now, from a modeling perspective, I would maybe put it relatively level through the year.

Okay, that helps. And then the second one that you could hopefully clarify a little bit, your comments were helpful on inventory. We're seeing that spike up. Can you just give us a sense of -- and you gave us a number of reasons for the lift. When do you think that normalizes, Mandeep? Is it going to take you a few quarters to sort of walk back down into the typical range and get turns back up north of 6?

Yes, so it has been a challenge and you saw that in other areas like our free cash flow. There's a couple of main drivers to it. We are seeing higher demand volatility. And because of the extended lead times that we're seeing in the external space, as well as some of the material constraints, we're having more challenges dealing with that type of demand volatility than what we could probably a year ago. And I think if you look at the overall EMS space here, you'll notice that some of our peers are having similar challenges in terms of managing their inventory levels consistently on a year-over-year basis. We also, though, have been investing in new program growth as well. And so that is driving a little bit of the overall inventory growth. We do expect that inventory will stabilize. The lead times and the material constraints, we're expecting right now to last us probably until the middle of 2018. But we do expect that the inventory levels right now are starting to stabilize, and we're anticipating that over time, we'll be able to draw those down. Rob, I don't know if you want to talk more about the market dynamics that you're seeing.

Yes, we're entering into -- I guess it feels like a very extended period of these extended lead times. And from a industry's perspective, it causes a couple of different dynamics. The industry is not able to respond to short-cycle demand, so it hurts our flexibility to kind of deal with a drop-in. So what customers do in this space, is they kind of overdrive your order book, and while the EMS space is not generally liable for that in the long term, in the short term, it does bloat your inventory levels. It also creates some issues with respect to squaring [ off the kits]. From a Celestica perspective, we're fortunate enough that we have some very, very good advance planning tools. So we are able to mute some of that versus the broader market, but it's still an issue as Mandeep mentioned and as you could see in some of the results.

Great. And one quick follow-up for Rob. Last quarter with ATS, we talked about weakness in the industrial subsegment. You didn't call it out this quarter. Has everything sort of cleared up in that area at this point?

Yes, industrial. We're pleased with the progress. We have been growing faster than the market. In fact, third quarter year-to-date, we've had double-digit growth. We're focusing in areas that play to our strength, that be engineering and high reliability. And we have a lot of new programs that are currently ramping now, some of the investments that Mandeep alluded to that we should see the benefits in the following couple of years.

Your next question comes from the line of Ruplu Bhattacharya with Bank of America Merrill Lynch.

Congrats, Mandeep, on the CFO title. Just on the ATS, just on the margins. The operating margin came in 100 basis points lower sequentially and 100 basis points lower than guidance. I was just wondering if you can quantify how much of that was because of the ramp delays, and how much is because of material constraints. And do the material constraints affect margins also in the December quarter?

Ruplu, I missed a part of that. I'm sorry I had a gap on my line. Can you just summarize that for us?

Sure. So I was just wondering like of the sequential decline in operating margin, 100 basis points, how much of that was because of ramp delays and how much was because of the material constraints? And do the material constraints -- are they impacting your margins in the December quarter as well?

Got it. So the material constraints, as we had indicated in our guidance, we were expecting it to be relatively steady on a quarter-to-quarter basis. The material constraints ended up impacting our revenue by about $10 million more from a guidance perspective. So about $20 million in our revenue. We are expecting that the material constraints are going to continue at the levels that they are at right now. And that is factored into our fourth quarter guidance.

Okay, great. And just real quick on the model. Can you give us some guidance on SG&A? How should we think about that going forward? And you announced a new NCIB, so on buybacks, how should we think about that?

Yes, so SG&A, we are guiding towards the $45 million to $47 million range, when you exclude the R&D for the fourth quarter, and so that's what you should be using for your model. We are seeing some favorability right now on year-to-date basis, but that's really being driven by some lower variable compensation and other types of consulting type of spend, but 47 -- $45 million to $47 million. On the NCIB, so we are initiating it. We believe that we continue to be able to generate strong free cash flow. And just as a reminder, I mean, we've been generating $100 million plus of free cash flow for the past 10 years. We are currently challenged on a free cash flow basis partially due to the higher CapEx spend, higher -- partially due as well to the higher inventory levels. But we are continuing to be confident on our cash flow generation as we enter into 2018. We remain committed to M&A, and so I'll just talk for a moment again on our strategy around cash. We continue to stay focused on returning 50% back to our shareholders and investing 50% in the business. And as you know, we've been very heavy towards the share buybacks for a number of years right now, since 2010 buying back $1 billion of shares. We've paused it as of late. We've been building out the M&A pipeline. We're very pleased with our progress in M&A, and building out that funnel. But we wanted to maintain the flexibility along the way. And so right now, we are initiating the NCIB in order to give us that flexibility. It would allow us to buy back up to 10.5 million shares is what our assessment is right now. From a cancellation perspective, because we do have some stock-based compensation out there, in terms of requirements, we would probably cancel up to 8.8 million shares in a 12-month period. But right now, from a modeling perspective, I would put that towards the back end of the 12 months when we would be looking to deploy that cash in a material manner.

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

Just continuing on that as the last line, does -- what you just said, does that imply that you're still more focused on M&A in the near term than NCIB, and NCIB is there to balance out in case M&A pipeline doesn't pull through in the near term?

Yes, I mean, so from an M&A perspective, it completely is a sharp area of focus. We've been doing, as you know, a lot of work in that area, and we're pleased with our progress. I'll let Rob talk about some more specifics on that. But from a cash deployment perspective, we have a very underlevered balance sheet and we believe that we have a lot of dry powder. We are currently in leverage just under 1x EBITDA, as you know, Robert. And from a leverage perspective, we believe that we have the ability to lever up anywhere between 3 to 3.5x, and if you were to look at our dry powder, that could imply close to $850 million to $950 million of cash that we could deploy. So we have a sizable amount of cash that we could deploy. And then as I mentioned on the previous question, we continue to feel very confident in our ability to generate free cash flow. And so if you look over the next 12 months, and if we are able to drive towards our targets of $100 million to $150 million to $200 million of free cash flow, it continues to put us in a good position. Rob, do you want to add to that?

Sure. Rob, from a acquisition point of view, the pipeline is certainly growing. From a color perspective, we're looking at scale plays and capability plays on the scale side. The targets are all within the ATS markets. Our goal there is to really improve diversification in margin, add proof points and add customers. And on the capability side, while we're open to all ATS segments, the pipeline is largely filled with A&D targets, which really bodes well, furthers our leadership position very sticky with our customers and also enables our strategy of developing full product life cycle solutions. We have very good focus, a lot of momentum, but we're also remain diligent and making sure we buy the right targets at the right evaluation so we don't have a gun to our head. But excited about the potential opportunity to create a lot of value for ourselves and our shareholders.

Okay, great. And in the past, you've talked about the ATS growth target at 10%. Ignoring any M&A, is that still the target for 2018 and beyond?

Yes, so excluding the solar panel headwinds, ATS revenue growth was in the high single-digits, which really supports our long-term goal of 10% per year over the long term. The new OIP agreement certainly helps. We have a lot of new programs in the smart energy and industrial. Semi cap remains strong, obviously, the comps are getting a little bit tougher in the back half of the year. As I mentioned earlier, we're seeing double-digit growth third quarter year-to-date and full year guidance on energy and industrial and semi. So we feel like we have a good bead on achieving that target.

Okay. And the last quick one for me. You'd answered a previous question about the cash impact for modeling on this restructuring, you'd give us more detail on. I think you said $10 million in Q4 and then roughly a similar quarterly impact through 2018 as a starting point. Did I hear that correct?

You heard it correctly for Q4, Robert. But we haven't provided guidance on how to look at it for 2018, as of yet, but we would expect that there would be -- most of the cash impact would be in 2018. $10 million as a starting point, and we'll have to give a better number in our next call.

There are no further questions at this time. I will now turn the call back over to Rob.

So thank you, all. After some strong growth that we've seen in CCS, we are experiencing some headwinds. We have some great momentum in ATS. We're making solid progress in M&A. Market headwinds is certainly nothing new for this leadership team and the entire organization, and we will certainly navigate through them. And I really have absolute conviction we're on the right path with our strategy, and we're working our way towards a bright future. We look forward to updating you on our next quarterly call. Thank you all for joining.

This concludes today's conference call. You may now disconnect.