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Celestica Inc
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Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Celestica's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]Craig Oberg, Vice President of Investor Relations and Corporate Development, you may begin your conference.
Good morning, and thank you for joining us on Celestica's Fourth Quarter 2021 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 forward-looking statements, please refer to yesterday's press release, including the cautionary note regarding forward-looking statements therein, our most recent Annual Report on Form 20-F and other public filings which can be accessed at sec.gov and sedar.com. We assume no obligation to update any forward-looking statement except as required by law.In addition, during this call we will refer to various non-IFRS financial measures, including operating earnings, operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted net earnings, adjusted EPS, adjusted SG&A, Lifecycle Solutions revenue, and adjusted effective tax rate.Listeners should be cautioned that references to any of the foregoing measures during this call denote non-IFRS financial measures, whether or not specifically designated as such. These non-IFRS financial 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 financial measures to describe similar operating metrics. We refer you to yesterday's press release and our Q4 2021 earnings presentation, which are available at Celestica.com under the Investor Relations tab.For more information about these and certain other non-IFRS financial measures, including a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements. Unless otherwise specified, all references to dollars on this call are to U.S. dollars. And per share information is based on diluted shares outstanding.Let me now turn the call over to Rob.
Thank you, Craig. Good morning, everyone, and thank you for joining us on today's conference call.In the fourth quarter, Celestica achieved several important milestones, capping a challenging but successful year. Our company closed the acquisition of PCI, our first acquisition in 3 years, which has been immediately accretive to our financial performance and accelerated our portfolio diversification efforts. We achieved the return to top line year-over-year revenue growth in the fourth quarter, after successfully disengaging with Cisco and we recorded the highest non-IFRS operating margin ever for the second straight quarter in a row.In spite of a dynamic macro environment, Celestica continues to execute well on our key objectives, while advancing our long-term strategy. Our fourth quarter revenue came in at $1.51 billion, slightly higher than the midpoint of our guidance, while non-IFRS adjusted EPS of $0.44, our highest quarterly adjusted EPS in more than 20 years, came in well above the high end of our guidance range. Our non-IFRS operating margin of 4.9% was another high watermark for Celestica. This represented our eighth consecutive quarter of year-over-year operating margin improvement and was higher than the guidance midpoint of 4.5%.With our solid progress on margin expansion over the last 2 years, we believe we are in a strong position to maintain our operating margin in our target range of 4% to 5% for 2022. 2021 was a great year for our CCS segment, as our Hardware Platform Solutions business or HPS achieved a record $1.15 billion in sales, which represented growth of 34% compared to 2020, as we continue to gain share and grow faster than the market. Despite the challenges presented by the constrained global supply chain environment, demand from service providers in our HPS business is expected to remain a driver of growth in CCS for 2022.Our ATS segment saw strong revenue growth in 2021, led by our Capital Equipment business which achieved sales of approximately $750 million. We also experienced a return to growth in the fourth quarter of 2021 in our industrial business.Looking ahead to 2022, we expect revenue growth in ATS of 10% or more. Our outlook is supported by continued strength in our Capital Equipment business, incremental growth in our industrial business, further accelerated by the addition of PCI and continuing commercial aerospace recovery, aided by new program ramps in defense. While 2022 is by no means anticipated to be without its share of challenges, we expect to build on the positive momentum we have established in 2021 and lead the company to another strong year of financial performance by executing on our strategic and operational objectives.Before I offer some additional detail on our business outlook, I would like to turn the call over to Mandeep, who will provide you with additional color on our fourth quarter financial performance as well as our guidance for the first quarter and our outlook for 2022. Mandeep, over to you.
Thank you, Rob, and good morning, everyone.Fourth quarter 2021 revenue came in at $1.51 billion, in line with the midpoint of our guidance range. Revenue was up 9% year-over-year and up 3% sequentially. Our return to year-to-year growth was driven by double-digit organic revenue growth in our ATS segment, further accelerated by our acquisition of PCI. We delivered non-IFRS operating margin of 4.9%, 40 basis points ahead of the midpoint of our non-IFRS adjusted EPS guidance range, driven by strong performance in both segments. Non-IFRS operating margin was up 130 basis points year-over-year and up 70 basis points sequentially. Non-IFRS adjusted earnings per share were $0.44, above the high end of our guidance range of $0.35 to $0.41. This was up $0.18 year-over-year and up $0.09 sequentially.In late 2021, we experienced a brief IT outage that temporarily impacted our operations. Based on the nature of the incident, it did not have a material impact on our financial results in Q4 of 2021. Our operations are functioning at normal capacity and we do not expect any material impact to our Q1 2022 financial results from this brief outage.ATS revenue was up 23% year-over-year, in line with our expectations of a low 20 percentage year-over-year increase. Sequentially, CCS revenue was up 8%. The year-over-year revenue growth in ATS was driven by continuing strength in Capital Equipment, organic growth in our base industrial business and 2 months of contribution from the PCI acquisition. We are pleased that ATS has achieved 10% or more of year-over-year revenue growth for the past 3 quarters.CCS segment revenue was up 1% year-over-year and flat sequentially. Year-over-year, the Cisco disengagement offset the 5% growth we experienced from our non-Cisco portfolio, driven by strength from service provider customers. Note, going forward, the disengagement from Cisco will no longer impact our comparatives.Communications revenue increased by 1% year-over-year, in line with our expectation of a low single-digit percentage increase and was up 4% sequentially. Year-over-year, results were driven by growth in our HPS business, which was largely offset by the Cisco disengagement. Enterprise revenue in the quarter was flat year-over-year, better than our expectation of a low single-digit percentage decrease. Sequentially, Enterprise revenue was down 7%.Our HPS business delivered revenue of $350 million in the fourth quarter, up 66% year-over-year, led by demand strength and new program ramps with service providers, supported by continuing datacenter growth.Turning to segment margins. ATS delivered a segment margin of 5.6% in the fourth quarter, up 170 basis points year-over-year and up 130 basis points sequentially. We are pleased to have delivered on our goal of having our ATS segment margin enter our target margin range of 5% to 6% in Q4 2021. It's also represented our eighth straight quarter of sequential margin expansion in our ATS segment.CCS segment margin of 4.4%, the highest since 2015, was up 100 basis points year-over-year and up 30 basis points sequentially. The year-over-year margin increase was driven by continuing strength in our HPS business.Moving on to some additional financial metric. IFRS net earnings for the quarter were $31.9 million or $0.26 per share, compared to net earnings of $20.1 million or $0.16 per share in Q4 2020 and net earnings of $35.2 million or $0.28 per share last quarter. Adjusted gross margin was 9.6%, up 120 basis points year-over-year and up 80 basis points sequentially. The year-over-year improvement was driven by growth in our HPS business and our ATS segment as well as lower variable spend.Non-IFRS operating earnings were $74.3 million, up $24.3 million year-over-year, and up $13.0 million sequentially. Our non-IFRS adjusted effective tax rate for the fourth quarter was 16%, an improvement of 3% year-over-year and sequentially. For the fourth quarter, non-IFRS adjusted net earnings were $55.2 million, compared to $33.3 million for the prior-year period and $43.4 million in the last quarter. Fourth quarter non-IFRS adjusted ROIC of 16.6% was up 4.2% year-over-year and up 1.4% sequentially.Moving on to working capital. Our inventory at the end of the quarter was $1.7 billion, up $606 million year-over-year and up $291 million sequentially. We continue to maintain higher inventory levels to support growth across Lifecycle Solutions, while also increasing strategic inventory purchases in light of the current supply chain environment. The increase in inventory was also driven in part by the PCI acquisition. To offset the working capital impact of higher inventory, we continue to work with our customers to obtain higher cash deposits when appropriate. Inventory turns in the fourth quarter were 3.5 turns, down from 4.4 turns in the prior-year period and down from 4.1 turn last quarter.Capital expenditures for the fourth quarter were $14.4 million or approximately 1% of revenue. Capital expenditures for 2021 totaled $52 million. Non-IFRS free cash flow was $36 million in the fourth quarter, compared to $90 million in the prior-year period and $27 million last quarter. This is our 12th consecutive quarter of delivering positive non-IFRS free cash flow. Our free cash flow generation in 2021 was $115 million, delivering on our target of at least $100 million in annual non-IFRS free cash flow. Cash cycle days were 75 in the fourth quarter, up 2 days year-over-year and up 3 days sequentially. Cash cycle days increased on a year-over-year basis primarily due to higher inventory.Moving on to some additional key metrics. Our cash balance at the end of the fourth quarter was $394 million, down $70 million year-over-year and down $83 million sequentially. Combined with availability under our recently expanded revolver, we continue to believe that our current liquidity of nearly $1 billion is sufficient to meet our anticipated business needs.Following the closing of the PCI acquisition in November, we ended the quarter with gross debt of $650 million, up $220 million from the previous quarter, leaving us with a net debt position of $266 million. Our fourth quarter gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 2.0x, up 0.6 turns sequentially and up 0.4 turns from the same quarter last year.On September 31, 2021, we were compliant with all financial covenants under our credit agreement. We ended the quarter with 124.7 million shares outstanding, a reduction of approximately 3% from the prior-year period. In early December, the TSX accepted our notice to launch a new normal course issuer bid, allowing us to purchase up to 10% of the public float or up to approximately 9 million shares through December of 2022.Now turning to our guidance for the first quarter of 2022. We are projecting first quarter revenue to be in the range of $1.4 billion to $1.55 billion. At the midpoint of this range, revenue would be up 19% year-over-year and down 2% sequentially. First quarter non-IFRS adjusted earnings per share are expected to range from $0.31 to $0.37 per share.At the midpoint of our revenue and non-IFRS adjusted EPS guidance ranges, non-IFRS operating margin would be approximately 4.2%, an increase of 70 basis points over the same period last year and a decrease of 70 basis points sequentially. Non-IFRS adjusted SG&A expense for the first quarter is expected to be in the range of $57 million to $59 million. We anticipate our non-IFRS adjusted effective tax rate to be approximately 18%, excluding any impacts from taxable foreign exchange.Turning to our end market outlook for the first quarter of 2022. In our ATS end market, we anticipate revenue to be up in the low 20 percentage range year-over-year driven by continued demand strength in Capital Equipment, the continuing recovery in A&D as well as the first full quarter of contribution from PCI. In CCS, we anticipate our communications end market revenue to be up in the high-teens percentage range year-over-year, driven by strong demand from service provider customers, supported by our HPS offering. In our Enterprise end market, we anticipate revenue to increase in the mid-teens percentage range year-over-year, supported by strength in storage demand.Finally, we would like to reiterate our outlook for 2022, which we discussed last quarter. We expect revenues to be at least $6.3 billion, with Lifecycle Solutions growing at least 10% organically and our non-IFRS operating margin between 4% and 5%.I'll now turn the call back over to Rob for additional color on our end markets and our overall business outlook.
Thank you, Mandeep. As we take stock of our performance for the past fiscal year, we are pleased with our financial performance and the progress we have made towards our long-term objectives. Our return to year-over-year revenue growth, record operating margin and near-record adjusted EPS, demonstrates that we have been effectively executing against our strategy and our transformation is complete. We are also pleased that our shareholders were rewarded in 2021 as our share price, which outperformed the primary Canadian and U.S. indices, reported a strong performance. However, we have no intention of resting on our laurels and we are constantly striving for further improvement.Our focus is now squarely set on meeting our performance expectations for 2022, which includes solid top line growth in combination with anticipated record non-IFRS operating margin for the year, which if achieved, will lead to the highest ever annual non-IFRS adjusted EPS. Our efforts to diversify our commercial portfolio remained our centerpiece of a long-term strategy. And we are pleased with the progress we are making.Our Lifecycle Solutions business saw another quarter of solid revenue growth, up 36% year-over-year in the fourth quarter, recording nearly $1 billion in sales and accounted for a record 65% of total revenue during the quarter.For the full year 2021, Lifecycle Solutions accounted for 61% of total sales, compared to just 39% in 2017. Looking forward to 2022, we reiterate our expectation for Lifecycle Solutions revenue growth of at least 10%. As I mentioned in my opening remarks, the year ahead will not be without its share of challenges. The global supply chain environment continues to be the most challenging we have dealt with in recent memory. And the new viral variants leading to further outbreaks of COVID-19 may further exacerbate these issues.The fact that these hurdles have not stood in the way of us meeting our financial performance objectives is a testament to the resourcefulness, effort and commitment of our entire global team. However, we believe that the component shortages do gate our true growth potential, as we believe the demand backdrop with our customers' support materially higher revenues in the absence of these challenges. Our first quarter and full year 2022 outlook have accounted for these macro conditions to the best of our ability and we expect the supply chain environment will remain constrained for the medium term.Now turning to the outlook for our segments. In our ATS segment, we achieved 2 important goals in 2021. First, we realized our long-term annual revenue growth target, ending the year with 11% growth compared to 2020. Second, we achieved our goal of re-entering our ATS segment target margin range of 5% to 6%, with a strong fourth quarter. We continue to target a long-term annual revenue growth rate of 10% in our ATS segment.For 2022, as a result of organic growth and the addition of PCI, we expect ATS segment revenue of approximately $2.8 billion and segment margin of approximately 5.5%. If achieved, this would represent approximately 20% revenue growth compared to 2021 and approximately a 100 bps of year-over-year segment margin expansion.Our Capital Equipment business continues to exhibit exceptional strength, driven by market share gains, new wins and a robust demand backdrop, which we expect to continue through all of 2022. Our outsized growth is supported by a global footprint, which we believe is tailor-made for success in this market, including our presence in South Korea, which we are leveraging to capitalize on significant from the cap growth opportunities in that geography.Our industrial business is expected to be a key contributor to ATS revenue growth in 2022, supported by both organic growth in our base industrial business, coupled with the addition of PCI, a number of new program ramps as well as secular demand tailwinds in several areas including EV charging, smart metering, factory automation and telematics, are expected to drive year-over-year gains, which are expected to be accretive to our targeted long-term ATS revenue growth rate. Demand in our A&D business continues to stabilize, posting modest year-over-year growth in the fourth quarter.We expect commercial aerospace demand to experience a modest recovery in 2022, compared to the trough level seen in 2021, as commercial air traffic begins to normalize. While overall defense spending is expected to remain stable in 2022, Celestica has a number of new program ramps supported by our new facility in Maple Grove, Minnesota, which we opened in July of last year.In our HealthTech business, while we expect to see some softness in early 2022 due to ramping down of certain COVID-19-related programs, we expect this demand to be replaced by new program ramps throughout the year in surgical, imaging and patient monitoring equipment markets.Turning to CCS. Our CCS segment recorded its highest CCS segment margin in the past 5 years. With the strong demand from service providers expected to continue supporting HPS growth, we reiterate our view that CCS will maintain strong segment margin in 2022. The margin outlook for our Hardware Platform Solutions business remains strong, supported by robust demand from our service provider customers. We expect another year of strong growth in 2022 despite the challenges presented by the current supply chain environment. We continue to anticipate HPS to deliver strong growth compared to 2021.In the communications end market, we anticipate year-to-year growth to continue throughout 2022, driven by strong demand from service provider customers, particularly in our HPS business, it was mentioned, we believe that our growth prospects will remain tempered relative to their potential as a result of component constraints.In our Enterprise end market, we anticipate that year-over-year declines in our Enterprise business have largely stabilized. We expect the annual revenue to be higher in 2022 compared to 2021. We continue to operate in an unprecedented environment. As we turn the page on another year, we enter 2022 with a sense of optimism and the confidence that our company is solidly positioned to deal with the challenges ahead and capitalize on the opportunities at hand. Our recent successes in the context of these challenges speak to our ability to execute on our plan and serves to validate our strategic vision.I would like to thank our entire global team and commend their efforts during 2021. With your dedication and focus, our company will push ahead once again in 2022 and continue to make that vision a reality.And with that, I would now like to turn the call over to the operator for Q&A.
[Operator Instructions] Your first question comes from Thanos Moschopoulos from BMO Capital Markets.
On the supply chain, clearly it had a bigger impact on revenue in Q4 than in Q3. Can you provide some color in terms of how you're thinking about that impact heading into Q1 and through 2022? Are you assuming that it gets stable from here, a bit worse, or what's in your assumptions?
This is Rob. Yes, as we go into Q1 we assume that the impact in Q1 is very similar to Q4. And as we look out for the full year '22, we don't expect any meaningful improvements throughout the year. If you just think about what's going on in the macro environment, there's strong OEM growth, the semi cap capacity that is coming online will probably be late in the year. Inventories are low, lead times are up, pricing is up.So we've aligned ourselves and assume that we're not going to see meaningful improvement in supply chain constraints throughout the year. That being said, as you can see we've been faring fairly well through the environment. It's driven by our strong processes, our strong people and we're also working closely with our customers on our customer side just to add some more color. We've been very transparent with them and as such they have opened up the horizons. And in many cases, we have increased cash deposits so we can secure strategic inventory for them.And on the process side, we've developed a series of new automated tools, and in many cases, we actually understand our customers' demands better than they do, which allows us to more clearly communicate with our suppliers and get the critical supply that we need.
Thanos, this is...
Just -- sorry, go ahead.
Sorry, Thanos, Mandeep here. Just going to add some numbers to what Rob had just mentioned. As you know for Q1, we are continuing to have a little bit of a wider guidance range, plus or minus $75 million. So we have taken into account material constraints to the best of our ability for the first quarter. And then when we talk about 2022, as you know, we're targeting at least $6.3 billion in revenue. Our demand outlook is north of that. And so we've done to the best of our ability, we've taken into account the supply environment when communicating the $6.3 billion plus.
Great. Just going to backlog, but I have to assume that your backlog is growing in a weighted average of your backlog is probably increasing setting up your longer-term visibility, is that fair?
Yes, that is fair. Our customers' backlog is increasing and sometimes, 2 to threefold. And as such our backlog is also increasing to the same extent.
And then finally on the cash cycle days, obviously inventory is increasing and you're up-selling it to some extent with higher deposits? How do you think that dynamic kind of progresses over the coming months?
Yes, so it's been a tough environment as you know this year, but we're pleased that we were able to generate over $100 million of cash in 2021 despite it. Inventory has been growing, but we've been doing that strategically and then at the same time working with customers on deposits. As we go into 2022, we expect again the environment is going to remain largely consistent. Inventory will be elevated for a period of time, but again supported by deposits.We are still targeting strong free cash flow in 2022, but as that inventory unwinds, we should expect that some deposits will unwind as well. So it doesn't all fall to the bottom line in terms of cash, but we've taken that into account in our projections.
Your next question comes from Robert Young from Canaccord.
Just a question on the semi cap outlook, obviously take this very strong for 2022, but just curious relative to last quarter, would you think that the outlook is better or worse. There's been a lot of capacity expansion announcements. I'm trying to put that into context from what we know in the public domain versus what you might have known ahead of time from your customers, is the environment better today than it was 3 months ago?
Would you mean [indiscernible] the environment, you mean our Q4 performance relative to Q3 performance within our business or more broadly speaking?
More broadly, I'm thinking about 2022.
Yes, so 2022 is the external environment what we're hearing from our customers. The market should be growing about 14%, 15% is what we're hearing internally here we are aligned to grow much faster than the market, due to the fact that we've been frankly just taking share and we have a number of new program ramps that are scheduled to happen during the course of the year in the areas of high-level assembly, machining robotics, new customers and display, et cetera. But the external market that we are hearing from is about 15%, 14% increase year-over-year from a wafer fab equipment.
Okay. And that does sound better, I think you said the market was 12% growth last quarter. So the market, it sounds like it's better than it was last quarter, is that a fair statement?
It is. Yes.
The outlook I'm talking, not about the quarter.
Yes, the outlook is higher than it was last quarter. So the outlook is increasing. And it's also extending as well. What we're hearing from the market folks and our customers is that they expect this cycle, if you will, to certainly last throughout '22 and well into '23 and many are asking us for capacity plans through '24 as well to make sure that we're able to grow with them.
Okay. And then on the HPS growth for 2022, 10% or greater. I was just looking at the comps expectations for Q1 of growth of high teens. And I would think of that normally as a slower quarter Q1 and so I'm trying to reconcile the 10% plus guide with the high teens expectation in Q1. Is visibility just lower as you go through the year or is Q1 just higher than it might normally be?
Within communication, the majority of the ramps that we are seeing in comms is coming from HPS and continued demand strength and new program ramps and networking, which is largely fueled by HPS. We're also seeing some demand strength in some existing programs as well, but the high teens is really a reflection of HPS growth that we're seeing.
Yes. And Rob, what I would just add is, it goes back to our 2022 commentary. We're expecting growth of 10% or more in Lifecycle Solutions, which of course is inclusive of HPS, and going back to the comment I shared, but then of the demand outlook remains robust. What we're doing is, we're also taking into account the materials environment when we provide that color. And so as we just look at Q1, which is right in front of us, we're feeling quite comfortable based on the supply environment, but of course we continue to be cautiously optimistic as you go beyond Q1.
Okay. Great. And then I didn't see an update on the target margins for CCS and ATS. You said 5.5% for 2020. Is the 2% to 3% still relevant for CCS and 5% to 6% for ATS in general?
What I would say is that, yes, we expect that the performance in CCS is going to continue coming out of 2021. And as you know, throughout 2021, they were above their target margin range. And so we expect strength to continue. On the ATS side, we're pleased that they entered back into their target margin range of 5% to 6% and we expect strong performance at those levels or possibly higher throughout the year. We gave a full year number of around 5.5%.What I would say in terms of target margin, so as you know, we did increase the company's range to 4% to 5% for 2022. We will relook at what the right target margin ranges are for the individual segments as we go through the year. Frankly, we want to operate in the range for a few quarters first. We also want to complete the integration of PCI. So right now, the higher margins from both segments is being reflected in the total company number. And we'll revisit what the right ranges are over the long term for segments later on.
Your next question comes from Todd Coupland from CIBC.
I wanted to ask you about margins as well. I think street expectations for 2022 EPS is $1.45 to $1.50 and it's more or less implying the low end of your 4% to 5% target range, 4.1% or something like that. At the start of the year, is that the right place to be in that target range or given you've increased the guidance range, should people start to move towards the middle of that range given the momentum in your business? Just a little color around that would be helpful.
Sure. Thanks for the question, Todd. Yes, what I would say is that we do know what the consensus numbers are, it's around $6.3 billion in revenue, $1.47 or so of EPS. And then the implied margins are in the 4.2%, 4.3% range. What I would say is that that's at the low end of what we're targeting. As you can see from our guidance for the first quarter at 4.2%, which historically is our weakest quarter based on seasonality, we are targeting stronger margins and 4.2% as we go through the remainder of the year.Also from a revenue perspective, to reiterate my comment to others. We are targeting $6.3 billion or more as we go through the year. We're just tempering demand right now with some of the material constraint dynamics. So all in all, we believe that consensus right now is reflecting the low end of what we are targeting here, certainly targeting higher than that.
Okay. And is -- at this point in the year, beyond seasonality, is the biggest swing factor how supply chain plays out?
It is the biggest dynamic I would say that could flex our revenue. Again, the demand outlook remains robust. It's remained robust throughout 2021. We think we've done a nice job of managing through it. But the impact is anywhere between $30 million to $50 million a quarter of revenue that we could have done had we not had any supply constraints. So we think we've accounted for that in the $6.3 billion. We don't see it getting significantly worse. But at the same time, based on what we're seeing right now, we also don't see it getting better in 2022.
Great. And my second question relates to the PCI acquisition, apologies if you disclosed this, but how much did it contribute to revenue and EPS in the fourth quarter?
We don't break it up specifically. I will this time because it was a partial quarter in the business closed -- transaction closed on November the 1st. They gave us about 1% of our overall growth. So ex-PCI, we would have been about 1% to 2% lower on a year-over-year basis and as we're going into next year, as we've communicated, we're expecting an incremental amount of around $300 million or so on a year-over-year basis.
Your next question comes from Paul Steep from Scotia Capital.
Maybe just to go back a little bit, either Rob or Mandeep, can we talk about non-HPS CCS and just the cadence there? Obviously the basis as implies that there has been growth in health and [indiscernible] programs, but I think my question is longer term, how should we think about recalibrating that portfolio? We went through a lengthy period of maybe removing revenues and client work that might be better placed on other places, where are we in that trending, because it looks like you've replaced capacity in HPS as a percent of CCS, so sort of ticked down a little bit on a percentage basis of the mix this year. How do I sort of reconcile?
Paul, I'll start off, I'll let Rob finish. What I would say is that the non-HPS portfolio in CCS is still very good business. It's about $2 billion of our overall revenue, gives us terrific utilization in some of our key factories, gives us the ability to have better buying power with our suppliers, getting better pricing across the entire network. And so it is a very attractive piece of business. The other thing too is that it is becoming stickier because of our HPS business, because when you can service a customer with both the traditionally [ NF ] offering as well as HPS offering, you become a more strategic supplier to that customer.And so as we look into next year, if you look at the overall growth rates of markets, it's in the low single-digit rate. That's something that is not too far off of what we would expect of our non-HPS portfolio within CCS. But again, we're pleased with the portfolio that we do have. We've already made the tough decision that we've had to make around portfolio shaping. And for the portfolio we have today, we think it's still very strategic for us.
And the only thing I would add...
Sure, Rob.
The only thing I would add would be that our non-HPS portfolio in the areas of comms and in the Enterprise also enables us to actually gain more HPS content over time. So it allows us to kind of move up the rack and also fill up solutions to our customers and also transition customers from EMF to HPS over a period of time. So an enabler as well.
Okay. Maybe, Rob or Mandeep, either one who wants to start and I'll sort of 2-part this one. But talk to us about what you're thinking about the global footprint in terms of where production is and maybe shifting factories around, you talked about opening the Minnesota facility last year, but that's against a CapEx backdrop that's maybe been maybe more constrained. I guess the second part of it for Mandeep is, Mandeep, how should we think about CapEx this year and next?And then maybe the other one, I believe we've cleared most of the real estate opportunity, but I think there still are some owned facilities, what's the opportunity to maybe realize some real estate, unlock some value in real estate or maybe deploy that capital?
Good question. From a footprint perspective, there has been certainly an increased trend for regionalization and we've been capitalizing on that from a couple of different aspects. First, from a growth perspective, our supply chains become more complex and also as our customers want to regionalize more, it's actually been increasing the amount of outsourcing that we've seen from the customer base. So we've been capitalizing on that and growing specifically to support our new customers' regionalization efforts.And then secondly, based on the footprint that we have, many customers either to be just the supply chain or just improve total landed cost of [indiscernible] help support multi-node solutions. So we've been kind of supporting them doing that. So that's been heavy activity or I would say over the last 18 months or so. It still will be fairly active this year in terms of maybe repositioning some of our customers' products to better align them with where they need it to be. But I think we have the right footprint right now to support our customers. We are looking at niche capacity expansions as our company continues to grow though in key spots.
Yes. And Paul, just continuing on the CapEx front. So we spent about $50 million of CapEx in 2021, around 1% of our revenue, lower than we had originally set out to do and that's just because some projects that we were anticipating to start at the back end of this year and push to the right along with the supply environment. As we look into 2022, we are targeting closer to 1.5% of revenue. You can think about it from a modeling perspective as $90 million to $100 million. That's in line with the guidance that we traditionally give which is 1.5% to 2% of overall revenue. And we're pleased though that we're spending that money is to support customer programs and new wins. So it's largely growth-oriented.To your point about owned versus leased real estate, it is something that we look at from time-to-time and being in 14 different countries, the dynamics may be different in various locations. We don't feel right now that is a compelling reason to take any of our assets at this point and necessarily do a sale leaseback. The business cases don't make sense in various scenarios, but it is something that we constantly evaluate and we know that that is a source of capital if we wanted it to be.
Great. Last one and then I'll pass on. Just obviously close PCI leverage is up, but it's going to quickly delever at least[Technical Difficulty]
Paul, I'm sorry, I think your phone broke out. Wasn't able to hear the question.
[Technical Difficulty]
Paul, I'm sorry, I think the reception broke out. The question didn’t come through. Let me give you another chance. Otherwise we can always put you back in the queue as well.
I'll get on the line and wrap this up.
Okay.
You should be using Celestica equipment would be so much better, Paul.
Your next question comes from Ruplu Bhattacharya from Bank of America.
Can you help us bridge the 70 basis points of margin decline between 4Q and 1Q? I mean your CCS margins looks like you have consistently been above the 2% to 3% long-term range for over 2 years now, I mean for the last 8 quarters. And on the ATS side, you're guiding I guess for sequential growth in revenues. So I'm trying to figure out what are some of the factors that are driving that margin decline. Can you help us break that into how much is mix? How much is FX, how much is volume-related? And if you could just give us any guidance on how you're thinking about margins for both segments in the first quarter?
Sure. So what the margin decline quarter-to-quarter is reflecting is some moderation within CCS. As you know, we don't give guidance ranges specifically at the end market level. But I can tell you that we are targeting above the guidance range or the target range in CCS. So it's about 3%, but the 4.4% that we saw in the fourth quarter was exceptionally strong, driven by a strong mix and some strong recoveries as well.On the ATS side, we're targeting to be above 5%, again the full year outlook for ATS is 5.5%, so they are both approximately. And we are expecting to be at 5% or more, we are working towards that in each of the quarters next year. And then to answer your question maybe a little more specifically on what's driving some of the moderation within CCS, that is the business where we traditionally see seasonality, particularly with our Enterprise customers.And so our goal would be to see margin strength in CCS going beyond the first quarter as well, but it's not unusual for CCS to have "weakest" quarter in the first quarter.
Okay. Maybe related to margins, I'm going to ask a more theoretical question. As your Capital Equipment business grows, I mean that should be accretive to your ATS segment margins. I think you reported $750 million of revenues in that business -- Capital Equipment business in fiscal '21. I'm trying to estimate how much more margin expansion can that business create, so is there like a revenue level at which you reach steady-state margins in that business?
So we're already experiencing strong margins in the business right now. We've talked about this at some previous calls where as we continue to grow that business we would expect that it could perform above 6% operating margin. It's not there yet from a consistency perspective, but like also going to what we talked about for 2022, we're expecting further growth in CCS.So we do expect incremental margin accretion from -- I'm sorry Capital Equipment -- incremental margin accretion from Capital Equipment as we go through 2022. That being said, we want to just make sure that we temper expectations because Capital Equipment demand will not continue forever. And we do expect that eventually, it will moderate. We have been very disciplined on adding fixed costs to that business so that we are able to weather the next inevitable downturn.But the reason that we continue to be optimistic for the ATS business is because our very large segment in aerospace and defense is operating below expectations. And so we do expect that eventually when Capital Equipment moderates, our A&D business will hopefully be able to come right by and pick up any of the margin dilution. So we think we're set up for a good margin story over the next few years. But we just want to make sure that we balance our expectations on Capital Equipment.
Appreciate that. And for the last question, Mandeep, can I ask you about your priorities for use of cash? Now that you have the new NCIB, how should we think about debt reduction versus share buybacks versus further M&A?
So it all starts with free cash flow generation. So again, pleased with the cash generation that we had in the 2021, $115 million. We are targeting $100 million or more for 2022 albeit it is a challenging environment. We have a very healthy balance sheet. Our gross leverage ratio is at 2.0x. It will reduce as we go through the year. And then also our liquidity remains very strong with our refinance credit facility close to $1 billion, up almost $400 million from where it was a quarter ago.So we feel like we have a lot of flexibility. When it comes to share buybacks, we're going to continue to be opportunistic on those buybacks. And what I mean by that is, does the stock price reflect what we are actually doing from an operational execution perspective? Right now we believe that consensus estimates does not fully reflect what we are aiming to do in 2022 and frankly the multiple on the company is still trading at a discount relative to historical averages.And so when there is weakness, we are comfortable going and buying back shares because we think that's a good use of cash for shareholders. That being said, we maintain flexibility to do M&A. Our long-term priorities don't change, 50% back to shareholders, largely through [indiscernible], 50% of our cash generation being investing in the business. But on the M&A side, as you know, we maintain a very, very tight filter.And it needs to be EPS-accretive in year one. ROI has to be above our cost of capital by year 2 or sooner, has to be strategic fit for the business. We have to be able to integrate it well and so we'll continue to look at M&A transactions as you go through 2022. We have both the balance sheet and the management capacity to do a transaction should the right one come in front of us, but we're going to be very disciplined and -- before we pull the trigger on anything.
Congrats on the quarter and the strong margin performance.
Next question comes from Jim Suva from Citigroup.
I have 2 questions and I'll ask them at the same time so you can figure out which way you want to answer them, but one of them is just mostly a clarification. When you mentioned about that you saw some recoveries in the quarter, there is lots of ways to define that, some call it like recovery of COVID costs, other may call it the recovery of utilization rates, others may call it like recovery from bad debt accruals or lots of other things. Can you just help us what you meant -- understand what you meant by recoveries?And then the second question is am I right that the Celestica we're looking at now since its post the Cisco disengagement that this is the alignment and kind of the vehicle that we should look at going forward? Or do you still have some things in your portfolio for repositioning that we should be mindful of? I know you of course have to do the integration of PCI, but it seems like we're probably close to the point of the true clear vehicle that we should be looking at going forward?
It's Mandeep here, nice to talk to you this morning. So to answer your first question, when we're talking about recoveries, it was largely related to premiums that we were paying or freight expenses that we were able to successfully recover from our customers during the quarter and that did help us. I'll let Rob maybe add on to a starting of an answer for the second one, which is, as we have said, our portfolio shaping actions are complete. We went through a multi-year transformation. The transformation is done. We're now in the growth phase. And so what we're really pleased with is that we are now posting absolute growth numbers as we go into Q4 or as we finish Q4 and as we're going now into Q1 and all through 2022, we're looking to see absolute growth across the company.Of course, our strategic objectives are to continue to grow our diversified sets of businesses, HPS and ATS. And again we're targeting 10% or more growth in those businesses in 2022. And we think that as we continue to improve the mix from those very high-reliability businesses, it just continues to strengthen the company. I'll let Rob add on to that.
I think you covered the majority of the points, Mandeep, but I would just say I'm really pleased with the progress we've improved diversification, as a result of that we've improved our margins and our -- we've also improved our customer concentration. So we think we have a much more resilient portfolio and a portfolio that's much better aligned to take advantage of some of the secular tailwinds that we're seeing. So I would mark the transformation as complete, but our work is not yet done because there's always room for improvement.
Congratulations to you and your team for lots of effort and work, which is now manifesting itself.
Your last question comes from Paul Treiber from RBC Capital Markets.
Just could you speak to the labor environment? You mentioned supply chain constraints. But to what degree is -- are you seeing any shortages in labor if any, or absenteeism, or also wage inflation and how do you think about the labor environment through 2022?
Good question, Paul. We're certainly seeing pockets of wage inflation of higher absenteeism, and difficulty in attracting talent. I would call it pockets largely in the Americas on the West Coast and also in the northwest area. In terms of just kicking it off, in terms of absenteeism driven by COVID, we had a rush of it I think earlier in January, but frankly, given the new CDC guidelines, people are back at work and we've returned to normal levels.So it's really for a very short, limited amount of time early in Q1. In terms of the inflationary environment, I do think that's alive and well if you will. We've been taking that into account and working with our customers and re-pricing accordingly.In the terms of finding talent, we're doing our best to our partnerships with local universities and doing all the normal things to find the right talent to enable the strong demand that we have in some key sites, but I wouldn't say it's a broad global issue. We're just seeing certain pockets in certain geographies, Paul.
And you mentioned being able to pass along wage inflation. Is there any explicit cost related to the labor shortages or absenteeism that's constraining you that maybe you just refer to supply chain constraints or is it immaterial at this point?
Right now the labor constraints are probably just impeding our ability to get product out the door in a certain time frame, but we have other tools in mind in terms of overtime or shift patterns or things like that to compensate for that. So I wouldn't view it as a major barrier in terms of fulfilling demand.I think right now the major barrier is really around material. We have the material that could typically get the product out the door. And we've been combating the labor shortage with -- it sounds -- I wouldn't call it a top-tier ratio, I would call it a second tier ratio right now.
Okay. And then the last question from me. The SG&A in the quarter was lower than what we anticipated. Could you speak to -- I know you spoke to margins on a percentage basis, but how do we think about like SG&A dollars in Q4 and then also through 2022?
So I'd say in Q4 we saw a little bit of a reduction in some variable spend items that turned out to be favorable for us. And as you go into 2022, largely we're looking to maintain our SG&A dollars and to see leverage benefit as the top line growth. That being said, there are 2 things I would call out that will add to the SG&A dollars. The first one of course is the PCI integration. PCI's SG&A is going to be somewhere around $1 million a month. So look for about $12 million sort of be added going into 2022.The second one is, is that we would anticipate that as we move towards the back end of the year that travel is going to be picking up from a management team perspective. We're in 14 countries. We travel to those locations frequently. And so we will expect to see a little bit more SG&A spend in that area 2022 compared to 2021. But largely, we are expecting at the top line growth that we will continue to see cost productivity and we are aiming to be very disciplined on our SG&A spend outside of those items to drive good levels of productivity to offset inflation.
We have no further questions. I would like to turn the call back over to Rob Mionis for closing remarks.
Thank you, Julianne. I'm pleased with our performance in the fourth quarter and our full year 2021 results. We continue to execute well through a difficult supply chain environment and we've completed our transformation and now focused on continued growth and earnings expansion.As we head into 2022 with strong tailwinds and continued conviction that we are on the right path, I'd like to thank our global team for a strong '21. I'd also like to thank all of you for joining today's call. I look forward to updating you as we progress throughout the year. Stay safe and best to you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.