Good morning, ladies and gentlemen, and welcome to Celestica First Quarter 2018 Financial Results Conference 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 morning, and thank you for joining us on Celestica’s first 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 the call for questions. During the Q&A session, please limit yourself to one question and for brief follow-up. As a preliminary note, as described in our press release issued earlier this morning, during the first quarter of 2018, we reorganized our business into two operating and reportable segments. Advanced Technology Solutions, or ATS, consisting of our ATS end markets, and Connectivity & Cloud Solutions, or CCS, consisting of our communications and enterprise end markets. Management’s remarks on this call correspond to this new segment structure. Segment performance is evaluated based on segment revenue, segment income and segment margin, each of which are defined and described in this morning’s press release. Please visit celestica.com to view the supporting slides and accompanying webcast. Also of note, our Annual Shareholder Meeting will be held this morning at 9:30 a.m. and the accompanying webcast can also be heard at celestica.com. 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 plans strategies and plans for future growth, priorities, trends in our industry and end markets and segments, our anticipated financial and operational results and performance, non-IFRS operating margin goals 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…

Thanks, Paul, and good morning. Despite continued volatility in our CCS segment, Celestica delivered on Q1 non-IFRS operating margin and revenue guidance, driven by strong results in ATS. We reported record revenue in ATS of $533 million, up 8% from Q4 of last year and up 4% sequentially. This growth was primarily led by strength in our aerospace and defense end markets as well as our semiconductor end market. Additionally, not only did ATS achieve record revenue growth, but the segment has now grown year-to-year for 11 straight quarters, excluding the impact of exiting our former solar panel business. Importantly, as highlighted in our new segment discloser release today, our growth in ATS is accompanied by a strong and stable margin profile. Year-over-year, segment operating margins in ATS for Q1 were up 50 basis points to 5.2%. In comparison, CCS segment income was down 44% or 130 basis points on a year-over-year basis. This meaningful growth in ATS segment income highlights one of the key value drivers of our transformation and represents what we believe to be a key turning point for our company. Uniquely, our total segment income this quarter now reflects the opposite split of our total revenue mix. In Q1, ATS contributed 36% of total company revenue and 62% of total segment income compared to CCS, which contributed 64% of total revenue and 38% of total segment income. Importantly, this financial mix shift should help stabilize our overall results from the volatility we’re seeing in our CCS end markets. Although we are still working to diversify our overall revenue, we are now meeting a key objective of our transformational strategy, focus on driving more than half of our segment income from ATS. With ATS now contributing greater than 50% of our total segment income, we are excited…

Thank you, Rob, and good morning, everyone. First quarter revenue of $1.5 billion was above the midpoint of our guidance range and up 1% year-over-year. Non- IFRS operating margin was 3.0%, in line with the midpoint of our guidance range. Adjusted earnings per share was $0.24, $0.01 above the midpoint of our guidance range, and we achieved adjusted ROIC of 14.4%. As a reminder, we have adopted IFRS 15 beginning in the first quarter of 2018, and we’ll provide restated comparatives each quarter. Additionally, as we announced last quarter, we are now disclosing segment revenue and segment income for two reportable segments, ATS and CCS. This will provide additional insight as we continue to move through our transformational strategy. Let’s start with our ATS segment. Growth in Advanced Technology Solutions has contributed significantly to the company’s overall growth and has helped mitigate the impact of the adverse market conditions in our CCS segment. ATS revenue for the quarter was 36% of total revenue and was up 8% on a year-over- year basis, largely driven by new program revenue in aerospace and defense and strong demand in semiconductor capital equipment. Strong semi-demand also contributed to ATS achieving 4% sequential growth. For the first quarter of 2018, segment income for ATS was $27.9 million and segment margin was 5.2%, up 50 basis points from the first quarter of 2017. This is the first time in the company’s history that our ATS business has operated at this level. This margin improvement was largely driven by improved mix and scale benefit from higher revenue. The CCS segment, which is communications and enterprise combined, accounted for 54% of total revenue for the first quarter of 2018. CCS segment income was $15.8 million, translating to a margin of 1.7%. This compares to 3.0% for the first…

[Operator Instructions] The first question comes from Ruplu Bhattacharya from Bank of America Merrill Lynch.

Yes. Good morning. Thank you taking my questions. First on component shortages, Rob, I think, you mentioned that, that is an ongoing thing. Can you quantify if there was any revenue hit from lack of components in the first quarter? And just related to that, in terms of inventory going up $100 million, how much of that is because of the component shortages versus WIP versus finished goods?

Hi Ruplu, it’s actually Mandeep here, and I’ll maybe start trying off to answer that. So there is about $30 million revenue impact in the first quarter due to material constraints. It’s slightly higher than what we’ve seen in previous quarters. Given, and as you saw in the remarks, we are seeing that these trends that are happening are going to be continuing for at least another few quarters, and so we expect likely a similar type of impact in the second quarter, but that’s been built into our guidance already. In terms of the increase in the overall inventory, you’re right, material constraints have driven some of it, which is really being reflected through demand churn as well as buffering from our customers. And then just the extended lead times is driving the remaining piece of that. The majority of the changes in our inventory are happening with some of our larger customers. And we are seeing, right now, that because of the buffering, a lot of it right now is current inventory and its raw materials.

Thanks, Mandeep, for all – for the clarifications on that. And just related as a follow-up on that question, in terms of free cash flow, how should we think about that for the full year? And do you see the component shortages alleviating towards the last half of this year?

Yeah. So I’d say that there is – on free cash flow, as you know, we continue to target $100 million each year. There’s two, I would say, major assumptions right now that we are continuing to monitor. The first one, and you would’ve seen it in our press release, is around the timing of the close for the Toronto property sale. Our expectations right now is that, that closing will happen either at the end of this year or early next year. The impact of that from a cash flow perspective is about $45 million so to meet the targets that we’re working towards, we would be looking for that property sale to close this year. The second thing is around inventory, and it’s very dynamic as you know. Our assumption right now is that the inventory situation doesn’t get any worse. And if the inventory situation doesn’t get any worse, we’ll continue to work towards that target.

Okay. Thank you so much.

Your next question comes from Paul Steep from Scotia Capital.

Great. Thanks. Mandeep, maybe just continuing on the exact same theme. Within inventory, in the restructuring efforts you’ve undertaken, how much could we maybe expect that the restructuring action might help you strip out some of the buffering that’s going on across the platform? Thanks.

Hi, Paul. I would say, as I – let me talk about restructuring first. As we have shared, it’s an enterprise-wide cost productivity program. Our estimation is that we will incur $50 million to $75 million taking us into the middle of next year. I think as I shared on the call last quarter, that range – being at the higher-end of that range would really result in us taking more network-based type of decisions, which I think leads into your question on impact to ongoing business with customers Right now, I would say that we’re continuing to work towards that range. We are anticipating being at the lower-end of the range at this time. And so if we were to see changes to our footprint, that’s how you would see changes in the inventory come through. Right now, we don’t have anything to share in that regard.

Okay. And then just maybe switching for one second back to ATS. Rob, can you talk about what you’re seeing there in terms of demand for, I guess, new programs, new wins? How you are maybe approaching the market, obviously, on the A&D side in the semi, maybe, the go-to-market situation?

Sure. We’re seeing – ATS has been a stronger growth component for us and continues to be a strong growth component. In Q1, we saw heavy demand from semi cap, and we think it’s going to be very good year for semi cap this year. And we also see a good year on A&D as well. A&D is really being fueled by adding Atrenne into our outlook and also our OIP that we announced is coming online and that’s ramping fairly nicely as well. In HealthTech, industrial, those businesses are going through little bit of softness in the first quarter. But some of the old programs are coming offline and some of the new programs are coming online. We expect both HealthTech and industrial and energy, actually, to be strong growth components this year. Hence, we put out a long-term target of 10% ATS growth, organic growth, on a – over the long term, and we feel good about hitting that target this year.

Your next question comes from Thanos Moschopoulos [BMO Capital Markets]. Your line is open.

Hi, good morning. On ATS margins, there were certainly some good year-over-year improvements. Is that predominantly a function of operating leverage? Or was it a function of program costs – program ramp costs going away year-over-year? Or were there other factors that you'd point to? And how much room for improvement would you see in that margin percentage in the coming quarters?

Hi, Thanos. We're very pleased with the performance that ATS had in the first quarter. It was a record performance for that business. Overall, what we're seeing is really lots of trends happening in the A&D business as well as continuing demand strength in semi. So we are benefiting from leverage. Revenue was up on a year-over-year basis, and we are seeing just strong operational performance as well. As we go forward – again, we're pleased with the performance right now. The target margin range for the ATS business would be in the 5% to 6% range, and moving up that scale would come down to mix within the ATS business as well as continuing revenue growth.

And then as we look at the 3.5% margin target for the second half, would that be more weighted towards improvement in the ATS or would that have more to do with CCS, given the restructuring program in place?

More the latter, Thanos. Again, we're going to work to be within that target range of 5% to 6%, but there will be some ebbs and flows as we go quarter-to-quarter as we ramp certain programs as demand shifts from one segment to another. In terms of achieving the 3.2% that we are guiding for the second quarter, it is reflective of some traction that we're making on the restructuring effort, and we continue to feel that we will be in the 3.5% range in the back end of the year, and that's going to be driven by some growth in ATS as well as the integration of Atrenne, but also largely because of the productivity improvements we are expecting to see in CCS. Operator

Your next question comes from Jim Suva from Citi. Your line is open

Thanks very much. On the ATS comments, I think you said up 15% year-over-year next quarter, which is encouraging. Can you let us know organically what would that be because, I believe, that's potentially helped by integration of an acquisition. And then on the CCS has pricing or the dynamics gotten worse or continued to improve or continued to worsen? How should we think about that because now you're doing a restructuring that you announced. It seems like it's kind of things beyond your control. And then I may have a follow up.

Hi, Jim, I'll take your first question and pass the second question to Rob. In terms of the ATS growth rate, so you're right, we made two comments in the script. Without Atrenne, our expectation is that we will be up in the mid-teens year-over-year. And with Atrenne, we expect to be in the high-teens year-over-year. And on the pricing, Rob can give you his thoughts.

Yes. I think the pricing dynamic has something got a little bit more severe in recent history. We have experienced pricing dynamics in the past, and we've navigated through them well in the past. It's really being driven by two factors, the OEM consolidation, i.e., they need less providers and there's excess capacity out there. But the good news is that we have been winning and keeping our share, and now we're just working on the productivity initiatives in order to drive increased profitability, and also working with our customers to increase our value-added services such that we could both be able to move up the margin chain.

Okay. Then my follow-up is, if you mentioned you continue to win your share and not lose share, in your CCS segment, I believe, companies like Cisco and stuff like that are in there, Cisco's growing revenues and things like that. So I'm just kind of trying to bridge the thing of you not giving up some programs yet companies like Cisco growing. So how should we bridge those differences of trends of what we're seeing out there in the marketplace?

Yes, it comes down to the mix of programs that we participate and support versus what the broader – our broader customers participate in.

Got you. And then lastly, so the program that you participate on, are there a lot more in the future like the next 12 months that we should see that are rolling off that you're not on the new ones or are we at the worst part of it now or how should we think about that? Because there's really the divergence of what we're seeing in the industry versus your CCS trends?

I would think about it as, you know, there are some programs that we're on that are trailing off. And there's some new programs that we won that have again picked up. So we see ebbs and flows, especially in our comps markets and, actually, seeing in our results.

Okay. And last thing, any comments on optical?

Yes. On optical, we have very strong – as you know, last year, we were up 30-ish percent, I think it was. So the comps on a year-over-year basis for us are a little bit tougher. But that being said, we have seen weakness here in the first quarter and expect to see weakness in the second quarter as well in optical. We are seeing strength, though, in networking.

And why the weakness?

Well, the comps are a little bit tougher year-over-year and some of the programs that we're on, specifically on optical systems, are trailing off a little bit.

Okay. Thanks so much for the details.

Thanks, Jim. Next question

Your next question comes from Todd Coupland from CIBC. Your line is open.

Hi, good morning everyone. So I just want to make sure I have the rhythm of the cash this year. So is it fair to think about sort of restructuring and real estate to roughly offset each other, and then cash flow and the acquisition to offset each other, so the delta really is the inventory build and it's going to be tough to get that back, given the trends that you're talking about. Is that basically include all the major items?

It does, Todd, and it's a good way to think about it, which is the proceeds from the Toronto sale would be about $45 million. If we were at the low end of the restructuring program, and we were to complete it in 2018, it would imply about $45 million of cash that we would use. Of course, there's a range on that, but ballpark numbers, those offset each other. On the inventory side, if you think about the fact that we are able to typically generate $100 million of free cash flow on historical basis, a lot of that comes in through standard working capital. So if inventory is not getting a lot worse, we would typically be in that range. The other caveat I would say, though, is, is that, as you know, in our industry as we grow the top line, it does consume working capital. And so if demand was to be very strong as we go into the back end of the year, that would be a near-term headwind.

Okay. And in spite of not having sort of a traditional free cash flow in your site this year, did the balance sheet still give you the flexibility to act on M&A and/or buyback or both?

Yes, absolutely. So we have $436 million of cash and net cash position of close to $250 million. With the Atrenne acquisition included, which we closed on April 4, so we funded it on our revolver at this time. We are only at 1.2 times leverage. Our S&P rating, as you may have seen, got renewed a couple of weeks ago, and we continue to believe that we have the ability to lever up to 3.5 times, but we're focused on being under 3 times leverage. But if were to leverage to even up to 3.5 times, we think that we could have dry powder of close to $100 million, which we can continue to deploy on buying back shares, continue to deploy on targeted and focused M&A.

Okay, that's great. And then just to the actual trends in inventory. So you call out auto and IoT. Can you maybe just comment on what types of applications in both of those areas are actually pressing the supply chain? Just a couple of examples and color would be helpful.

So – this is Rob. So on components, we've seen lead times dramatically increase here. We are in memory, we are actually seeing lead times up about 50% year-over-year, standard lead times, discrete's is about 50%, passives right now are probably the most constrained, MLCCs lead times are maybe upwards of close to one year and it has given the entire industry some pause as well. And linear and logic also are up quite bit on a year-over-year basis. Based on what we're seeing and what we're hearing, we do expect NAN to get maybe a little bit better towards the end of this year. But we are hearing that the balance of the place will be constrained through the balance of 2018.

Your next question comes from Robert Young from Canaccord. Your line is open.

Hi, good morning. Just an additional bit on that last question. How much money on – or how much cash on the balance sheet do you require to run the existing operation? Like because there's certain amount that you need to have there that is not available to M&A sort of that 700 number if you lever up, like what amount would you have to subtract to run the business?

Yes, so let me talk about the dry powder. It does take into account excess cash. We've typically said, Robert, anywhere between 5% to 7% of our revenue will be required. There is a range on that, and I hate to say it, but it depends and what it depends on the geographical distribution of the cash. We have continued to repatriate cash from overseas. We want to do it in a tax-efficient manner. But we believe to run the operations on a day-to-day basis, 5% to 7% is typically a good rule of thumb.

Okay. And then on some of the margins that you've given on the call, I think you said ATS could eventually hit 5% to 6% range. Is that informing this 3.5% in the second half, like should – if I look at 5% and if I pick the midpoint, then that suggests that the CCS business would have to get to around 2%, which would be expansion from 1.7% this quarter. So is that a good way to think about it?

Yes. I would say, operating within that range of 5% to 6% is going to come down to largely mix. There are some segments that we operate in, as you know, that we make significant investments in, there's higher barriers to entry, there's high regulatory. And so therefore, they do drive some higher margin from P&L perspective. We have other segments that aren't necessarily in that same situation. But it does come down to mix. The expansion that we are expecting to get to 3.5% are driven, again, by the restructuring program continuing to take root, the integration of Atrenne as well, which is off to a good start so far since the deal is closed and they're just continuing to perform in ATS. But we do expect, to your point, CCS to get better as we go through the year.

Okay. And I think you said earlier on the call that you expect growth and improvement in margins in 2018 in CCS. Did I hear that correctly?

Yes. As the restructuring program continues to take route, we would expect margin to improve in our CCS business.

Okay. And one last little thing. I think you said that the impact of IFRS 15 on the Q2 guidance was nominal. Was that correct?

Correct. It's immaterial and it's, in fact, in our guidance.

Your next question comes from Paul Treiber from RBC Capital Markets. Your line is open.

Thank you and good morning. I just want to follow up on your – one of your last comments just in regards to Atrenne in the integration plan. So how is the integration going? And then also it's my understanding that Atrenne was a couple of businesses. Are you looking to more closely align and integrate those businesses into the ATS segment?

Yes, so it's still early days, but the Atrenne acquisition is going quite well. In fact, the team was up here in Toronto, the sales team, and our ATS sales team was already doing account mapping and plotting the path ahead in terms of top line opportunities. Our approach right now with Atrenne is to focus on the areas of integration that yield the most synergies, and that's really in some of the areas of COGS and some of the areas on the top line in terms of penetrating new accounts with our expanded offering.

And a follow-up to that is – sorry go ahead.

No. In terms of integrating it into the entire business, Atrenne is reporting into our A&D segment.

And just – yes, the follow-up is in regards to the ATS outlook for 5% to 6% margins, should we think of Atrenne as being accretive to that level, or is that basically inclusive of Atrenne already?

Yes. We haven't disclosed the specific margins for Atrenne, but it is a – we did share, though, that it was purchased at a high-single digit multiple. It is accretive to the company's average. And it is inclusive within A&D.

Your next question comes from Gus Papageorgiou from Macquarie. Your line is open.

Hi, thanks. So you say that there are two customers that account for 10% plus of sales. I'm wondering could you tell us would you have any customers that would account for more than 10% of segmented income?

Gus, on the CCS side, the answer would be yes. Those two customers will carryover. And on the ATS side, I'm going to get back to you on the specific percentage. I don't want to misspeak if they're straddling the line.

And what about in total? Like in total segmented income, would anybody represent more than 10% of segmented income?

We don't break it in that way. And as you know, it's all, again, ebbs and flows within our businesses. So we don't break out profit concentration at the customer level.

Okay. Thanks.

There are no further questions. I'll turn the call back over to the presenters for closing remarks.

Thank you. And in my view, we're doing what we said what we're going to do and executing on our strategy. We have some fantastic momentum in ATS. We had record revenue and profits in Q1. And CCS, we are experiencing some headwinds, but we have great experience in navigating through these orders, and our actions are starting to yield results. I look forward on updating you on our quarter results. Thank you, again.

Thank you, everyone.

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