CLSD 2026 Q3 Earnings Call

Please go ahead. Good morning, and thank you for joining us on Celestica's third quarter 2026 financial results and Investor and Analyst Day conference call.

On the agenda for today's call, we'll begin with our third quarter financial results, followed by our 2026 Investor and Analyst Day. At the conclusion of the prepared remarks, we'll open up the lines for Q&A. On the call today, we have Rob Mionis, Chair of the Board and Chief Executive Officer, Todd Ankenmann, Chief Financial Officer, and joining for our Investor and Analyst Day portion, Mandeep Chawla, Group President of Global Markets, Steven Dorwart, President of our Connectivity and Cloud Solutions segment, and Todd Cooper, President of our Advanced Technology Solutions segment.

Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, our business outlook, guidance for the fourth quarter of 2026, our 2026 and 2027 annual outlook, and anticipated trends in our industry and their anticipated impact on our business. These are based on management's current expectations, forecasts, and assumptions as of October 26, 2026. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations, and their potential impact on our results cannot be reliably predicted at this time. For identification and discussion of the material assumptions, risks, and uncertainties, please refer to our public filings with the SEC and on SEDAR+, as well as the investor relations section on our website.

We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAAP financial measures. We've included in our earnings release, found in the investor relations section of our website, a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures. Unless otherwise specified, all references to dollars on this call are to U.S. dollars, all per share information is based on diluted shares outstanding, and all references to comparative figures are a year-over-year comparison. With that, I will now turn the call over to Rob.

Thank you, Matt, and good morning, everyone, and thank you for joining us on today's call. We are excited to be able to share with you more about Celestica's role in advancing AI infrastructure. Today, we will discuss a number of important developments and the long-term outlook of our business. We are seeing unprecedented momentum positioning us for a strong end to 2026 and further acceleration into 2027. Before diving into the Investor and Analyst Day portion of our call, Todd will walk us through our third quarter results, provide our fourth quarter guidance, and share our updated 2026 outlook.

Todd, over to you. Thank you, Rob, and good morning.

It is a pleasure to join you for my first call today in this capacity, and I look forward to engaging with you all. Now turning to our third quarter 2026 performance. Revenue in the third quarter was $5.83 billion, up 83% and above the high end of our guidance range. A strong demand and solid operational execution led to higher than expected revenue in both our CCS and ATS segments. Our non-GAAP operating margin was 8.5%, up 90 basis points, driven by higher margins in both our segments. This once again represented the highest quarterly non-GAAP operating margin in the company's history. Our adjusted earnings per share was $3.30, exceeding the high end of our guidance range and an increase of $1.72 or 109%. Moving on to some additional metrics.

Adjusted gross margin was 11.2%, down 50 basis points, largely due to mix in our CCS segment. Our adjusted effective tax rate for the quarter was 18%. Lastly, our strong earnings growth and disciplined working capital management resulted in adjusted ROIC of 64.7%, up approximately 27 percentage points compared to the prior year period. Before moving on to our segment performance, we would like to inform everybody that we renamed our CCS end markets to better reflect the program composition of our portfolio. Effective Q3 and going forward, our communications end market is renamed Networking and our enterprise end market is renamed Compute and Storage. This update is a change in naming convention only, and the composition of the end markets remains unchanged and does not impact previously reported financial results.

Revenue in our CCS segment in the third quarter was $4.9 billion, up 102%, driven by very strong growth in both our networking and compute and storage end markets. Our CCS segment accounted for 84% of total company revenue. Our networking end market revenue was up 68%, higher than our outlook of approximately 60%, primarily driven by growth in 800G networking, complemented by early volumes on ramping 1.6T programs and solid demand in our 400G programs. Revenue in our compute and storage end market was up 242%, well above our outlook of approximately 190%, driven by ramping volumes in hyperscale and our AI compute, and complemented by stronger than expected demand in storage programs. In our HPS business, revenue was $2.3 billion in the third quarter, representing growth of 70%, driven by ramping 1.6T and 800G switch programs across multiple hyperscaler customers.

Our HPS business accounted for 40% of total company revenue. ATS revenue for the quarter was $957 million, up 23% and above our outlook of a mid-teens percentage increase. The strong growth was driven primarily by an acceleration in capital equipment and supported by higher demand in each of our other businesses. ATS segment accounted for 16% of total company revenue. Moving on to segment margins. CCS segment margin was 8.9% in the third quarter, an improvement of 60 basis points driven by strong operating leverage. Our ATS segment margin was 6.6%, up 110 basis points, driven by improved mix and operating leverage. In the third quarter, three customers each accounted for 10% or more of our total revenue, accounting for 35%, 17%, and 14%, respectively. Turning to working capital. At the end of the third quarter, our inventory balance was $4.5 billion, a sequential increase of $1.1 billion and a year-over-year increase of $2.5 billion, as we support very strong demand with an accelerating growth outlook in 2027.

Cash cycle days for the quarter were 42, representing a 23-day improvement over the prior year and a five-day improvement sequentially. Moving on to cash flows. We generated $128 million of free cash flow in the third quarter and $413 million year to date. Our capital expenditures were $274 million, or approximately 4.7% of revenue, compared to 1.2% of revenue in the prior year quarter. Year to date, our capital expenditures are $767 million, or 5.3% of revenue, and we continue to anticipate spending approximately $1 billion in 2026.

During the third quarter, we completed our previously announced public offering of approximately 11.1 million shares, with gross proceeds of $3.45 billion before underwriting discounts and offering expenses. At the end of the third quarter, our cash balance was approximately $4 billion, while our gross debt was $736 million, resulting in a net cash position of $3.2 billion. We had no outstanding draw on our revolver at the end of the quarter. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.4 turns, an improvement of 0.1 turns sequentially and 0.4 turns versus prior year. As of September 30, 2026, we were in compliance with all our financial covenants under our credit agreement. Our cash balance, in combination with our revolver, provides us with approximately $5.7 billion of available liquidity, positioning us to support strong anticipated future growth.

We did not repurchase any shares for cancellation during the third quarter under our current normal course issuer bid. Now moving on to our guidance for fourth quarter. Fourth quarter revenue is projected to be between $6.275 billion and $6.575 billion, representing growth of 76% at the midpoint. Adjusted earnings per share is anticipated to be between $3.37 and $3.57, representing an increase of $1.58 at the midpoint or 84% growth. Our adjusted earnings per share assumes approximately 127 million diluted weighted average shares outstanding. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our adjusted operating margin is expected to be 8.7%, which would represent an increase of 100 basis points. We anticipate our adjusted effective tax rate for the fourth quarter to be approximately 20%. Next, we will review our revenue outlook for each of our end markets.