Good afternoon. My name is Chantal and I will be your conference operator today. At this time, I would like to welcome everyone to the Celestica Second Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Lisa Headrick, Vice President of Finance, you may begin your conference.

Good afternoon and thank you for joining us on Celestica's second 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, 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 statements except as required by applicable 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-months, adjusted EBITDA leverage ratio, adjusted net earnings, adjusted EPS, adjusted SG&A expense and adjusted effective tax rate. Listeners should be cautioned that references to any of the foregoing measures during this call denote non-IFRS measures whether or not specifically defined 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 Q2 2019 earnings presentation, which are 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. Now let me turn the call over to Rob.

Thank you, Lisa. Good afternoon and thank you for joining today's conference call. Celestica delivered second quarter results that were in line with our expectations with another quarter of strong free cash flow. Despite lower revenue, our CCS segment delivered sequential and year-to-year margin improvements, the result of improved mix and productivity, resulting from our CCS segment portfolio review and cost efficiency initiatives. While the capital equipment market remains soft, we were pleased to see strong performance in the rest of our ATS segments. Excluding capital equipment, ATS would've delivered low double-digit year-to-year revenue growth with improved sequential and year-to-year profitability. However, given the challenging demand environment, capital equipment business continued to operate at a loss, driving ATS segment margin performance well below our targeted range. In addition, communications end market demand was softer than expected. We expect a soft demand environment experienced in the first half of 2019, persist for the remainder of the year. We continue to take actions intended to align cost to current revenue levels, while remaining focused on our long-term goals and executing on our transformational strategy. I will provide you with additional information on the quarter and our outlook shortly. But, first, Mandeep will take you through our second quarter results and third quarter guidance.

Thank you, Rob, and good afternoon, everyone. For the second quarter of 2019, Celestica reported revenue of $1.45 billion, in line with the midpoint of our guidance range and down 15% year-over-year. Our non-IFRS operating margin was 2.5%, above our guidance midpoint of 2.4% and down 50 basis points year-over-year. Non-IFRS adjusted earnings per share were $0.12 at the midpoint of our guidance range. Our ATS segment revenue was 39% of our consolidated revenue and grew 2% year-over-year in line with our expectations. The increase year-over-year was driven primarily by double-digit growth across our industrial A&D and Healthtech businesses, offset in large part by significantly lower demand in our capital equipment business. Sequentially, ATS segment revenue was down 3% largely due to lower capital equipment demand and our disengagement from non-profitable energy business customers. This was partially offset by stronger demand and new programs in our other ATS businesses. Our CCS segment revenue was down 23% year-over-year, primarily driven by enterprise program disengagement as a part of our CCS portfolio review as well as continued end market demand softness in our communication business. Sequentially, CCS segment revenue was up 3% driven by seasonal demand growth and new programs. Within our CCS segments, the communications end market represented 39% of our consolidated revenue in the second quarter, down from 42% in the second quarter of last year. Communications revenue in the quarter was slightly below our expectations, and down 21% compared to the prior-year period driven by continued weakness in end market demand, partially offset by demand strength and new program revenue in support of data center growth. Our enterprise end market represented 22% of consolidated revenue in the second quarter, down from 25% in the second quarter of last year. Enterprise revenue in the quarter was slightly above our expectations,…

Thank you, Mandeep. Despite the challenging environment, we made solid progress in the quarter in lower working capital, driving strong free cash flow and improving the profitability of our business outside of capital equipment. Within ATS, we had strong revenue growth in our A&D, industrial and HealthTech businesses led by new program ramps, which more than offset continued demand weakness in the capital equipment business. The performance of our ATS businesses other than capital equipment improved sequentially and year-over-year due to improved mix and progress of ramping new programs. As expected, the A&D business continued to be impacted by materials shortages in the quarter. Relative to last quarter, we saw a marginal improvement in materials availability, which drove improved throughput and efficiency. We expect this supply environment in general to gradually improve in the second half of the year. In the second quarter, our capital equipment business continued to be impacted by soft demand in both the semiconductor and display markets. Since the start of the capital equipment downturn, we have significantly reduced our overhead, transitioned a number of programs to our lower-cost regions, and we are in the process of closing four facilities with the goal of lowering the breakeven point of this business and improving profitability. However, in the second quarter, demand was weaker than expected and down sequentially, resulting in higher than expected operating loss. As we look to the third quarter, we are seeing signs of stabilizing demand and expect capital equipment revenue to be flat sequentially. We are taking incremental cost actions to drive improved profitability and while we expect a loss in the third quarter similar to the second quarter, we do anticipate improved performance in future periods. At this stage, we do not see semiconductor demand environment improving in 2019. And on the…

[Operator Instructions] Your first question comes from Ruplu Bhattacharya with Bank of America. Your line is open.

Hi, thank you for taking my questions. I think your target was to get to break even and capital equipment by the end of this calendar year. Based on the current trends that you're seeing; do you think that is still possible? Or would that be delayed?

Thank you Ruplu, this is Rob. Let me take a step back and talk a bit about the capital equipment environment a little bit. So, we're clearly disappointed in the financial performance of our capital equipment business and the impact it's having on the overall company and its result. And I mentioned on the call that in Q2, revenue came in a little lower than expected and that was driven by late quarter demand erosion, so in the near-term we've taken some incremental cost actions, we're also being mindful to preserve the core capabilities that really differentiate us from our competition. Also working with our customers to drive and improve the efficiency and profitability. So, as we're getting into the second half as I mentioned this year, we're seeing signs of revenue stabilizing and as we get into the 2020, we're expecting semi cap revenue to grow and it's really as a result of our new wins converting to revenue. To answer your question, this revenue growth along with a cost actions that we're taking is going to lead this business back to profitability, and furthermore as the market continues to recover, we do expect the capital equipment margins to be higher than our ATS target margins prior to the downturn. This was the case and we knew this would be the case in a more normalized demand environment.

Yes. So Ruplu as we mentioned, we're expecting a law similar to what we had right now in the third quarter. We are in the process of beginning to ramp programs and the cost actions that we're taking are well underway. Right now, we are not calling out the quarter that we are going to be getting to breakeven. But when those -- both of those actions ramping up programs as well as the cost productivity start taking a hold, we're going to be moving back to profitability in the near-term.

Okay, thanks for the color on that. And just for my follow-up, can you give us some more color on the communications end markets? Any color on optical versus eroding and switching? And with respect to the inventory buffer reductions, the buffer and inventory right work down, any color on how long that it's taking? Do you think it will take the whole of calendar 2019 or just one more quarter? And any color on that? Thank you.

Yes. So, it's up to the communications. Last year this time, we had a quite growth spurt. So, we do have some tough comps, so that's a factor. The other factor is the unwinding of inventory buffer as you mentioned. We think that's a Q3, Q4 dynamic in terms of the inventory buffers to wind down. That being said, that's on the backbone of our dynamic market. We do see a bright spot in networking and optical moving forward.

Okay. Thank you so much.

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

Hi, good afternoon. How many capital equipment side can you help us understand where the sequential deterioration came from? Was that more focused on semi versus display? Or vice versa? Or did it come from both segments?

Thanos, it's Mandeep here. Our expectations in the second quarter were to have revenue coming higher than what it did. And so, we've been taking cost actions along the way, but when revenue drops off in a very short period of time, effects our cost structure disclosing it aligned to the revenue levels that we ended up having. So that's what drove the greater loss. We are seeing softness in the semiconductor space. The majority of our portfolio with semiconductor. But we have seen some softness in the display side as well so we're seeing demand reductions in both areas.

And Thanos, just to put it in context, our base semiconductor business is down about 50% on a year-over-year basis in Q2, so it's quite a dramatic drop from where we were this time last year.

And given that you're taking restructuring actions and I think given that you're talking about revenue stabilizing sequentially, why would the loss not be a lower amount the upcoming quarter than it was last quarter?

Yes. So, two things, one is we're in the process of taking the actions and most of them are underway, but they're not yet complete, so we will be completing them during the third quarter. The second one is, is that as I mentioned, we've actually been fortunate to have a number of new wins in the capital equipment space through 2018 and even so far into 2019. We're in the process now of beginning to ramp those programs. And so, we expect those to start coming online in 2020. So, for those two reasons as we execute both those activities, we'll start to see the benefits starting in the fourth quarter.

And then how should we think about working capital throughout the remainder of the year given the programs disengagements I guess the revenue declines, should we expect to see some ongoing improvement in the cash cycle days?

Yes. I mean, we're really happy with the performance that we've seen in the first half of the year. We generated close to $200 million of free cash flow as you know close to $80 million of operational free cash flow. We are continuing to target positive free cash flow into the third quarter. There will be some improvement I think in cash cycle days as we go through it, but I'm not going to call a specific number at this point. But we do think that there continues to be an opportunity in unwinding working capital to the new revenue levels that we have.

Perfect, thanks. I'll go offline.

Thanks, Thanos.

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

Hi, good evening. Given that you've seen some higher cash, what are your priorities there? Maybe you can quickly give us a sense of your appetite for M&A? How much room is left in the current NCIB the buyback and what options do you have there? I know you said you have some ramps to fund, what other areas would you direct that cash to?

Robert, I'll start off and then if Rob wants to add, he can. So, our focus really right now is on delivering and continuing to generate positive free cash flow. So, we did see our leverage drop to 2.3 times in the quarter. Our total leverage dropped close to $50 million. And so, as we generate more cash flow that is our priority. We're happy with the progress that we've made on the share buybacks. We've bought back 8.5 million shares for the first half of this year and that actually exhaust the amount of shares that we predict, we can cancel under the current NCIB. The current NCIB runs until the December of this year. And so, at this time, we don't anticipate any further share buybacks in the third quarter and so any cash generation we do have would be going to fund internal investment such as CapEx or to continue to pay down debt. On the M&A side, we continue to have an active funnel but that's not an area that we are actively hunting. We always have our filter open to continue to invest in capabilities. But I'll let Rob add on to that if he wishes.

I think you said it Mandeep, we call it favorably unicorn hunting. But if we sign something compelling that really progresses our strategic abilities, we take a look at it, but it would be smaller and tuck-in in nature at this stage of the game.

Okay. Is there a target for -- like in terms of EBITDA that you'd expect in debt, like is there a target there?

Our long-term target has been 2 to 2.5 times and in line with what we see our peer group at and we're glad that we're in that range right now. To be frank, it's a little bit difficult right now to call the terms number because we are at the same time faced with declining trailing 12 months of EBITDA and thus is the nature as we continue to go through this transformation. So, what -- our focus is on maintaining the lowest debt that we can.

And then CCS portfolio review, I think on the contrary you said it was going to be completed in 2019. Is there any appetite to start another portfolio review after that on CCS or more broadly? Is there any thought on extending that program?

Yes. So, we're pleased with the program that's underway right now. As you mentioned, it is on track to be completed. It was probably set around $500 million to begin with. The teams have done an excellent job in working with our customers to do that. It's a part of what we do on a day-to-day basis. We continue to look at and making sure that we're generating the right level of returns for the significant value that we provide. And so, we want to have long-term strategic relationships with our customers. And so, if there are dynamics where that's not the case, we will have conversations with our customers on how to improve profitability. And of course, sometimes you need to part ways in business. And so, I'd say that we're not looking at this time to initiate a new program, but it is an active part of how we manage the business in both the CCS as well as in ATS.

One last little question. Just -- it sounds like the A&D business is very healthy less with the exception of the material constraints. Are there any other -- are there any risk items in that business? Do you see a lot of business around Boeing and -- lot of news around Boeing rather and is there any risk to highlight there to investors? And then I'll pass it on.

With respect to Boeing the impact right now for us is negligible. But to your point, we're pleased that A&D grew in double digits in Q2 and we're showing some gradual improvement in the backlog and the ramping of some new programs both in our base business and for the rate trend. So overall, it's getting healthier and we expect to continue to gradually improve from a material environment as the quarters move on.

Thanks for answering the question.

Your next question comes from Paul Steep with Scotia Capital. Your line is open.

Great, thanks. Rob or Mandeep maybe could you talk a little bit about communications? In your statements here you flag inventory buffering obviously, the transition but inventory buffering in next-gen program transitions is being to the impacted items there. Can you give us a sense of where you think we are in that cycle in terms of sort of burning through what's buffered in the site in the supply chain? And maybe where we are in terms of ramping up these new programs?

Yes. So, we fit the unwinding of the inventory buffers is Q3, Q4 dynamic. And as I mentioned earlier, it is a little bit on a dynamic marketplace a base volume in terms of market adoption and things like that also fluctuate up and down. But we think the buffers is one or two quarter type of dynamic. But then we're also seeing some of our customers transition that products from one generation to next generation. And as that happens and as customers realize that the demand for the older product trails off until the new product comes in, so we are seeing that dynamic as well as some of the product transitions are happening. So those -- both those combinations are giving us lower revenues to the back half of this year.

Okay. If we go over to A&D, we talked in the last couple of quarters about the materials constraints and you note in your comments here that's going to pick up in the back half. Can you give us a sense of how much that may have actually you think that might have constrained the business around just those constraints on those higher liability parts? And give us maybe more sense of what it actually did? Did it just mean you held more stuff in the whip or just orders didn't materialize?

In summary it basically means that these -- we have all the orders in-house, we have a lot of the material in-house except for the phasing items. Our customers are very eager to get that product in their hands and to their end customers. And we're trying to burn off this backlog this past year, if you will. And the phasing items is frankly -- several types of the components and commodity groups that are phasing there. And these are -- our suppliers -- and our customers or suppliers are slowly getting healthier in improving their supply to us, but it's not going to be a step function improvement on a quarter-over-quarter basis. It's a jibs and jabs, but we are working hard and we are seeing that backlog gradually improve.

Last one. On the Energy segment, I know it's now a small component of the overall business, but I thought I heard you mention the disengagement with a customer in the period. Can you just give us maybe a little bit more context around that? Thanks.

Yes. Sure. So, our product probably quickly commoditized over a shorter period of time. And as it's been more of a commodity, it's marked by higher cost outs and lower price flexibility with our customers. And our strategy frankly has us playing more of a higher value add given that the commodity nature of the product and the fact that it's loss-generating, we work with our customers and decided to disengage and help transition it to somebody who specializes more on the lower end. So, from a sizing perspective, it was less than 2% of ATS' annual revenues.

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

Good evening, everyone. A couple housekeeping items. In terms of thinking about the tax rate, post-losses in capital, how should we think about that?

Post-losses after we get back to profitability in capital equipment?

Yes.

Yes. So, Todd, on the question on taxes, you know, if you look back at our target rate it was 19% to 21% at the beginning of the year, and if you go back four or five years you'll see that we've more or less operated plus or minus around that range for a number of years. Maybe I'll just double click on some of the -- the two main drivers again. One was mix, we had higher levels of profitability and high tax yields. But the second is -- and you're touching on it which is we've generated losses in capital equipment by dragging restructuring and those losses are landing in geographies, where we pay very little to sometimes no tax. And because of the historical losses in those areas, we're not able to really generate tax credits. And so, as we normalize our capital equipment business and get back to profitability as the restructuring program comes to an end, we would expect at this time that we're going to get back to our target range. And I think the way to consider it right now would be 19% to 21%.

And in terms of the buyback, I thought you said you'd finished it for this year. So, should we expect you to reapply for another buyback? Or will you wait until the end of the year to do that?

Our intention would be to open another buyback, we'd like just for good housekeeping, and to your point to have a buyback program open when available, because we can't have another program open until the end of December. It's something that we would start the paperwork on shortly, but it wouldn't go into effect until the end of the year.

And you called out optical and networking growing under the covers. Can you just talk about what some of the drivers are for that?

Yes. The networking growth and optical growth is really being fueled by datacenter growth and a large part of it is coming from the non-traditional customers. Man?

And on the optical side, we're seeing it more on the systems side versus the component side.

And is it like -- from a telecom perspective, is that just bandwidth in the network? Is it 5G starting to kick-in? What's actually happening there?

Largely data center interconnect.

That's data center as well too on the optical side?

Yes, that's right.

And then last question. So, you're buying a lot of stock back. Your valuation is low here. Does the Board think about whether or not it makes sense for Celestica to stay public given all these transition points and not being terribly well-received by the overall public market maybe just give us your thoughts on that? Thanks a lot.

Yes. So, as the leadership team and as the Board we always look for various ways to return more value to our shareholders. Right now, we're committed to our current strategy. We believe it's sound, we believe it's working. Albeit, it's not progressing as fast as we'd like, which is being really largely driven by the market headwinds we have in capital equipment and to some extent in communications. But we always look at a wide variety of ways to increase shareholder value.

Great. Appreciate the color. Thanks a lot.

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

Thanks very much and good afternoon. Just you mentioned that you're closing four facilities in semi cap. Were those planned at the beginning of the year? Is that an incremental decision? And then can you also elaborate on what regions and the type of facilities that you're closing?

Yes. Some of that was in acceleration of Impakt integration given the low revenue environment we accelerated the integration and some of that was just taking capacity out of the system. A large portion of it was consolidation of facilities in and around West Coast and some of it was actually in again consolidation of facilities to make ourselves more efficient. It's important to note that as we're consolidating facilities and repositioning work to lower cost regions, we are lowering our breakeven point and lowering our cost to serve. So, when the market does come back, we should be a much better position to be able to serve that demand.

And to your point there Paul as the demand softened even further than what we were originally expecting in a quarter, we did decide to take additional actions to bring the business back to a level of profitability. And so, we are continuing to sharpen our pencils and to make sure we can get this business back to breakeven and then growing from there.

And then you mentioned that you're not losing or plan to losing the capabilities. So, what's the strategy when you mitigate -- just to mitigate that risk when you do close those facilities? Are there mostly overlapping facilities or do you have them acknowledge or IP you need to transfer amongst them?

Yes. Some of it is transferring work from high-cost yields to low-cost yields. So, with that comes equipment and the knowledge. And some of it is just preserving -- to some extent, we have some overlapping capabilities between Impakt and the capital equipment business. So, we consolidated that extra capacity in those capabilities, so we could serve it more efficiently. But you know every time we do this; we always mark out what's key and what's core in terms of people with processes and capabilities and we make sure that we're not in the risk of losing those things such that we can respond to the market when it does return.

And just lastly on the display programs, you mentioned a pushout from the second half of this year to 2020. I think that was -- you made a similar comment last quarter. Is there -- are you seeing a further pushout or are you just reiterating the same color from last quarter?

Yes. We were tracking a large customer project that we thought would start ramping towards the end of this year and that specific project pushed out to the end of next year. So, that was partially offset by several smaller projects which we expect to start ramping in 2020. Back in the news yesterday there was an N customer announcing some major investments in 10.5G which we were tracking and prior to that announcement, they announcing production in 2021, 2022. So, the long-term fundamentals for the display end market are I think are intact. It's just a question now of timing.

Probably was incremental softness from 90 days ago.

Your next question comes from Jim Suva with Citigroup Investment. Your line is open.

Thank you, very much. You've given a lot of detail so far which is greatly appreciated. On the semi cap orders, have things gotten worse or stabilized or improved? Because it seems, like there's been some other semi cap equipment companies who have started to talk about billings and orders have started to improve. So, I'm just trying to get a sense from you about your visibility, how those orders percolated down to you or stabilized or things still pretty disappointing in that segment?

So inside of Q2, we've done incrementally worse than what we were thinking from the beginning of the quarter. Moving to the back half, we think at Q2 levels, they've stabilized. We've seen some of the recent news and upgrades of some customers' customers if you will at the end markets. We have yet to kind of see that tick up. We're mindful that might happen towards the end of the year, but right now, our views are that that's not going to happen. If it does happen, that might be some potential upside for us and we would be very happy to serve that. The growth that we're actually backing on and looking forward to is probably more in 2020. Again, that's not more for our capacity increases, but that's just converting a lot of the business that we've booked in prior periods converting that to revenue in 2020.

And then switching over to the communications segment, it seems like there are some companies there who have actually been seeing some pretty good strength, whether it be on the enterprise side or service provider or even 5G buildouts. So, is it an inventory digestion? Is it a customer concentration? Or is it you happen to have some programs that just right now are not in favor? I'm just try to triangulate or connect the dots of how that we've seen some strength in those markets, but then maybe it's some inventory or some customers that we should think about. You don't have to name names, but just help us understand and bridge those?

Sure. So, I think the biggest driver is -- on a year-over-year basis are the tough comps. But beyond that it's largely the inventory buffers. And then from a customer perspective, traditional OEMs are probably down the most. And we're feeling that slow down as well and that's being driven by just the overall disruption that's happening in the marketplace, which is probably nothing new from what we've said in prior quarters. The infrastructure as a service and disaggregation and things like that are disrupting the traditional OEMs business model.

We're very happy to see under the covers as we're seeing very strong growth on the service provider side. The JDM investments that we've been making are paying off and so despite the softness that we're seeing in those legacy customers, there is being buffered a little bit by growth in other areas.

Great. Thanks, so much for the details. That's great. I appreciate it,

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

Thank you, Chantal. So, in 2Q, we delivered in line results and it was marked by very strong cash flow. The performance of our business other than capital equipment is performing well. And within capital equipment, we're taking the appropriate short-term measures and eye towards longer-term goals. Again, we believe our strategy is sound and over time, the actions that were taken will improve our diversification, it will improve and enable consistent and profitable growth. I thank you for joining and I look forward to updating you as we progress throughout the year.

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