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Good afternoon. My name is Chantel, and I will be your conference operator today. At this time, I would like to welcome everyone to Celestica's Second Quarter 2019 Earnings Call. [Operator Instructions] Thank you. Lisa Headrick Harpell, 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 meaning 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 improvement, the result of improved mix and productivity, resulting from our CCS segment portfolio review and cost efficiency initiative. While the capital equipment market remains soft, we were pleased to see strong performance in the rest of our ATS segment. 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, the 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 the soft demand environment experienced in the first half of 2019 to persist for the remainder of the year. We continue to take actions intended to align cost to current revenue level 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 a nonprofitable energy business customer. 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 communications business. Sequentially, CCS segment revenue was up 3% driven by seasonal demand growth and new programs. Within our CCS segment, 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 driven by demand strength, but down 26% year-over-year due to planned disengagement in connection with our CCS segment portfolio review. Excluding these disengagements, enterprise end market revenue would've been relatively flat to the prior period. Our top 10 customers represented 65% of revenue for the quarter, up from 62% last quarter and down from 71% in the same period last year. For the second quarter, we had 2 customers individually contributing more than 10% of total revenue. Turning to segment margins. ATS segment margin was 2.8%, up from 2.6% in the first quarter of this year as stronger performance in our aerospace and defense, industrial and HealthTech businesses more than offset increased losses in our capital equipment business. Our capital equipment business operated at a loss in the high single-digit million-dollar range, which was higher than expected due to lower-than-expected sequential demand. Relative to the second quarter of last year, ATS segment margin was down from 5.1%, primarily the result of losses within our capital equipment business. Excluding capital equipment, ATS would've delivered segment income within our ATS target margin range of 5% to 6%. CCS segment margin was 2.4%, up sequentially and -- up from 2.2% in the same period last year. The year-over-year improvement is the result of improved mix and productivity, more than offsetting the impact of lower year-to-year revenue. Moving to some other financial highlights for the quarter. IFRS net loss for the quarter was $6.1 million or negative $0.05 per share, compared to net earnings of $16.1 million or $0.11 per share in the same quarter of last year. The decrease was the result of lower gross profit, increased SG&A expense and higher financing and amortization cost. Adjusted gross margin of 7.0%, was up 40 basis point sequentially, as improved productivity, including lower variable spending across the majority of our businesses was partially offset by weaker demand and performance within capital equipment. Adjusted gross margin was up 60 basis points year-over-year, primarily due to improved mix and productivity, more than offsetting weaker capital equipment performance within ATS. Our adjusted SG&A of $56 million was up $8 million year-over-year primarily driven by unfavorable foreign exchange impacts and our Impakt acquisition. Non-IFRS operating earnings were $36.7 million, up $1.6 million sequentially and down $16.4 million from the same quarter last year. Our non-IFRS adjusted effective tax rate for the second quarter was 36%, higher than our expectation as a result of taxable FX cost. Our tax rate continues to be higher than our originally anticipated range due to lower levels of income, including losses in certain low-tax geographies. Adjusted net earnings for the second quarter were $15.4 million, compared to $40.2 million for the prior year period. Non-IFRS adjusted earnings per share of $0.12 represents a decline of $0.17 year-over-year mainly driven by lower non-IFRS operating earnings and higher interest expense. Non-IFRS adjusted ROIC of 8.4% was up 0.5% sequentially and down 7.6% year-over-year primarily driven by lower operating earnings. Moving on to working capital. Our inventory at the end of the quarter was $1.1 billion, an increase of $8 million sequentially. Inventory turns were 5.0, flat quarter-over-quarter and down 1.6 turns from the same quarter of last year. Capital expenditures for the second quarter were $23 million or 1.6% of revenue. Non-IFRS free cash flow was $47 million in the second quarter compared to negative $46 million for the same period last year, primarily driven by improved working capital. We're encouraged by the improvements we've made in our working capital performance over the last 2 quarters. Year-to-date, we have generated $191 million of non-IFRS free cash flow or $78 million without accounting for the Toronto property sale proceeds of $113 million. Cash cycle days in the second quarter were 65 days, an improvement of 4 days sequentially, primarily due to increased cash deposits from our customers. Our customer cash deposits have increased to $139 million as of June 30, up from $120 million at the end of March. As we continue to work with our customers on targeted inventory reductions in the second half of 2019, we expect a partial offset and reduction in cash deposits. Now moving on to our balance sheet and other key measures. We continue to maintain a strong balance sheet and remain confident in our long-term capital allocation priorities. We are focused on generating positive free cash flow, paying down debt, returning part of our capital to shareholders and investing in the business to drive long-term profitable growth. Our cash balance at quarter end was $437 million, down $21 million sequentially and up $35 million year-over-year. We've made progress towards deleveraging our balance sheet in the quarter, by reducing the outstanding balance on our bank revolver from $97 million on March 31 to $53 million as of June 30. Our net debt position at the end of June was $211 million in gross debt to non-IFRS trailing 12-month adjusted EBITDA. Leverage ratio was 2.3x compared to 2.4x as of March 31. In the second quarter of 2019, we repurchased 3.2 million shares at a cost of $23 million, and have bought back the maximum number of shares that we can cancel under this program, which expires in November of 2019. Restructuring charges related to our cost efficiency initiative were $9 million this quarter, including charges related to our capital equipment business, bringing the total program spend to date to $60 million. We anticipate spending at the high end of the $50 million to $75 million program range, with an expected completion by the end of 2019. Now turning to our guidance for the third quarter of 2019. We are projecting third quarter revenue to be in the range of $1.40 billion to $1.50 billion. At the midpoint of this range, revenue would be down 15% year-over-year. Third quarter non-IFRS adjusted earnings per share are expected to range between $0.09 and $0.15. At the midpoint of our revenue and adjusted EPS guidance ranges, non-IFRS operating margin would be approximately 2.5%, flat to the second quarter. Non-IFRS adjusted SG&A expense for the third quarter is expected to be in the range of $53 million to $55 million. Based on the projected geographical mix of our profits in the third quarter, we anticipate our non-IFRS adjusted effective tax rate to be similar to the second quarter and above our previously anticipated annual rate. Turning to our end market outlook for the third quarter of 2019. In our ATS end market, we are anticipating revenue to be down low single digits year-over-year. While we expect steady growth across most of our ATS businesses, this growth is expected to be more than offset by persistent demand softness in the capital equipment market. In our communications end market, we anticipate revenue to decrease in the mid-teen percentage range year-over-year driven by continued end market demand softness. In our enterprise end market, we anticipate revenue to decrease in the mid-30% range year-over-year, primarily driven by planned program disengagement as part of our CCS portfolio review. I'll now turn the call over to Rob for additional color and an update on our priorities.
Thank you, Mandeep. Despite the challenging environment, we made solid progress in the quarter in lowering 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 continues to be impacted by material shortages in the quarter. Relative to last quarter, we saw a marginal improvement in materials availability, which drove improved throughput and efficiency. We expect display 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 4 facilities, with a 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 display side, we are expecting continued revenue weakness for the remainder of the year as lower customer CapEx spending is delaying the ramp of next-generation programs. We have, however, secured a number of new business awards within our semiconductor business, including market share gains and are in the early stages of preparing for these ramps. We anticipate these new programs will begin ramping in 2020 and will yield growth in revenue and profitability as volumes gradually increase. We have built a capital equipment business that includes specialized vertical capability, including precision machining, cleaning, welding and power coding as well as design, engineering and supply chain services. We believe that maintaining the infrastructure and scales we have in these areas is critical to our ability to maximize our growth and profitability when market demand returns to prior levels. In a more normalized demand environment, we believe our capital equipment business will deliver profitability higher than our target ATS segment margin range. We are confident we have the right strategy, relationships and capabilities in place to be successful in this market. Turning to CCS. Overall, this business performed in line with our expectations. The planned enterprise revenue disengagements are on track to be completed by the end of 2019. And as expected, with the full year 2009 (sic) [ 2019 ] impact of just over $400 million relative to last year. Once complete, we believe we will emerge with a more resilient CCS business offering higher value-add solutions to our customers. Our improved year-to-year and sequential CCS segment margin performance is in part due to the improved mix resulting from the portfolio transition as well as productivity improvements. In our communications business, we saw weaker-than-expected demand in the quarter driven by continued unwinding of customer inventory buffers and transition to next-generation technology. This increased softness is expected to persist throughout the remainder of the year. As a result of this and lower capital equipment demand, total company revenue for 2019 is expected to be down in the low teens percentage range on a year-over-year basis reflecting a lower 2019 revenue outlook than we anticipated 3 months ago. As we look to the future of our CCS segment, we continue to believe we are well positioned to serve cloud-based service providers through our higher value-added services, such as JDM. We continually evolve our offering to support this new class of customers and we anticipate that, over time, the growth from these customers will strengthen and stabilize our overall CCS revenue, while diversifying our portfolio. Although the current market and margin dynamics remain challenging, we continue to make good progress in securing new wins across our markets. Year-to-date, we have delivered very strong bookings within ATS, up over 30% year-over-year and at our highest gross margin level to date. Although many of these programs will not fully ramp to peak revenue for several years, we believe these programs will help further diversify and expand our ATS segment and company margins. We're also performing well with our customers. For example, in the second quarter, Atrenne was awarded a Raytheon Integrated Defense Systems 4-star Supplier Excellence Award. This is the fifth time the Atrenne has received this award from a strategic customer. In terms of margins, we continue to work towards achieving non-IFRS operating margin in the range of 3.75% to 4.5%. As highlighted in our last call, there are a number of drivers required for us to achieve this margin range. The first driver is restoring our ATS segment margins to the mid to high end of a 5% to 6% target margin range, which requires a recovery of the capital equipment demand environment, improved material supply and the successful ramp of new ATS programs. The second driver is maintaining our CCS segment margin within its target range of 2% to 3%. Outside of capital equipment, we believe that we are building momentum towards achieving our margin targets. Program ramps in ATS are progressing well and we see materials constraints modestly improving, including in A&D. We're also seeing stable CCS margins. We continue to believe that 3.75% to 4.5% operating margin target is the right goal. We previously communicated that we will focus on achieving this range and our ATS segment goals within the first half of 2020. However, due to the persistence of uncertain demand conditions, it is difficult to predict the timing of a market recovery. As such, the timing for achieving our margin target is also uncertain. While we are disappointed with the current environment and the length of the downturn, we are committed to executing our transformational plan. We believe that the end result will be a more diversified business, which will help dampen the impact of market dynamics in any single market. We believe that our strategy puts us on a path to driving sustainable, profitable growth. In the short term, we are tackling our challenges head-on and remaining diligent in driving productivity improvements. I'd like to thank our employees for their dedication as we manage our transformation and our many long-term investors for their support. We look forward to updating you on our progress. Operator, over to you for questions.
[Operator Instructions] Your first question comes from Ruplu Bhattacharya with Bank of America.
I think your target was to get to breakeven in 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?
Ruplu, this is Rob. Let me take a step back and talk a little 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 results. And as 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 try to improve the efficiency and profitability. So as we're getting to the second half, as I mentioned, of 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. So then to your question, this revenue growth, along with the 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 believe this will be the case in a more normalized demand environment.
Yes. So Ruplu, as we mentioned, we're expecting a loss 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 into breakeven. But when those -- both 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. And just for my follow-up, can you give us some more color on the communications end markets? It's -- any color on optical versus routing and switching? And with respect to the inventory buffer reductions or the buffer and inventory right -- work down, any color on how long that is taking? Do you think it will take the whole of calendar '19? Or just one more quarter? Any color on that.
Yes. So just 3 occasions. Last year this time, we had quite a 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, the wind down. That being said, that's on the backbone of our dynamic market. We do see a bright spot in networking and optical, though, moving forward.
Your next question comes from Thanos Moschopoulos with BMO Capital Markets.
On the 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, Mandeep here. Our expectations in the second quarter were to have revenue come in 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, frankly our cost structure just wasn't aligned to the revenue 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 -- of 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. 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 2 things. One is we're in the process of taking the actions, most of them are underway but they're not yet complete. So that -- we'll be completing them during the third quarter. The second one is that, as 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 2 reasons, as we execute both those activities, we'll start to see the benefits starting in the fourth quarter.
Then how should we think about working capital throughout the remainder of the year given the program disengagements, I guess 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.
Your next question comes from Robert Young with Canaccord Genuity.
Given that you're seeing [ next stage of ] some higher cash, what are your priorities there? Maybe you could 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 that you have some ramps to fund. What other areas would you direct that cash to?
Robert, I'll start off and if Rob wants to add on, he can. So our focus really right now is on delevering and continuing to generate positive free cash flow. So we did see our leverage drop to 2.3x 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 made on the share buybacks. We bought back 8.3 -- 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 December of this year. And so at this time, we don't anticipate doing 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 that says it, Mandeep. We call that favorably unicorn hunting. But if we saw something compelling that really progresses our strategic capabilities, we take a look at it. But it'd be small and tuck-in in nature at this stage of the game.
Okay. Is there a target for, like, turns of EBITDA you'd expect in debt? Like is there any target here?
Well, our long-term target has been 2 to 2.5x 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 turns number because we are all, at the same time, faced with declining trailing 12 months of EBITDA. And that's just the nature as we continue to go through this transformation. So what our focus is, is maintaining the lowest debt that we can.
And then the 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's on track to be completed. It was always at 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 -- 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 would 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 CCS as well as in ATS.
One last little question. Just -- it sounds as though 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 -- a lot of news around Boeing, rather? Is there any risk to highlight there to investors? 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 the double digits in Q2. And we're showing some gradual improvement in the backlog and the ramping of some new programs both on our base business and the Atrenne. So overall, it's getting healthier, and we expect to continue to gradually improve from a materials environment as the quarters move on.
Your next question comes from Paul Steep with Scotia Capital.
Rob or Mandeep, maybe we could talk a little bit about in communications. In your statements here, you flagged inventory buffering, obviously the transition. But inventory buffering and next-gen program transitions has been 2 of the impact 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 those new programs?
Yes. So we think the unwinding of the inventory buffers is Q3, Q4 dynamic. As I mentioned earlier, it is a little bit on a dynamic marketplace. The base volumes, in terms of market adoption and things like that, also fluctuate up and down. But we think the buffers is a 1- or 2-quarter type of dynamic. But in concert with that, we're also seeing some of our customers transition their products from one generation to next generation, and as that happens and as their end customers realize that the demand for the older product trails off until the new product comes in. So we're seeing that dynamic as well as some of the product transitions are happening. So 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 you think 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 high-reliability parts? And give us maybe more sense of what it actually did. Did it just mean you held more stuff in WIP or just orders didn't materialize?
Yes. I think in summary, it basically means that these -- we have all the orders in-house. We have a lot of the materials in-house, except for the pacing items. Our customers are very eager to get that product in their hands and to their end customers. And they're trying to burn off this backlog that's past due, if you will. And the pacing item is, frankly, several types of components and commodity groups that are pacing that. And these -- our suppliers -- and our customers and suppliers are slowly getting healthier, improving their supply to us, but it's not going to be a step function improvement on a quarter-over-quarter basis. It's jerk and jabs, but we are working it hard, and we are seeing that backlog gradually improve.
Great. 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 about a disengagement with a customer in the period. Can you just give us maybe a little bit more context around that?
Yes. Sure. So our product probably quickly commoditized over a shorter period of time. And as it being more of a commodity, it's marked by higher cost out and lower price flexibility with our customers. And our strategy, frankly, has us playing more in the higher-value add. Given the commodity nature of the product and the fact that it was loss-generating, we worked with our customers and decided to disengage and help transition it to somebody who specializes more on the lower end. From a sizing perspective, it was less than 2% of ATS annual revenues.
Your next question comes from Todd Coupland with CIBC.
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.
Yes. So Todd, on the question on taxes, if you look back at our target rating, it was 19% to 21% at the beginning of the year. And if you go back 4 or 5 years, you'll see that we've more or less have operated plus or minus around that range for a number of years. Maybe I'll just double click on some of the -- the 2 main drivers, again. One was mix. We had higher levels of profitability in high-tax geos. But the second is, and you're touching on it, which is we've generated losses in capital equipment by driving 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 we 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 think about it right now would be 19% to 21%.
Okay. 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, we'll wait 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, the 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 data center growth. And a large part of it is coming from our nontraditional customers.
Yes. 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 it just bandwidth in the network? Is it 5G starting to kick in? What's actually happening there?
It's largely data center interconnect.
Oh, that's data center as well too on the optical side.
Right. Yes, they both are.
Okay. And then just 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.
Yes. So as the leadership team and as the Board, we always look for various ways to return 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, communications. But we always look at a wide variety of ways to increase shareholder value.
Your next question comes from Paul Treiber with RBC Capital Markets.
You mentioned that you're closing 4 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. So some of that was in acceleration of the 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 Korea, 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 in a much better position to be able to serve that demand.
And to your point there, Paul, as the demand has softened even further than what we were originally expecting in the 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 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 lose any capabilities. So what's the strategy when you mitigate -- to mitigate that risk when you do close those facilities? Are they mostly overlapping facilities? Or do you have knowledge or IP that you need to transfer among some of them?
Yes. Some of it is transferring work from high-cost geos to low-cost geos, so with that comes the equipment and the knowledge. And some of it is just preserving. To some extent, we had some overlapping capabilities between Impakt and our capital equipment business. So we've consolidated that extra capacity in those capabilities so we could serve it more efficiently. But 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 so that we can respond to the market when it does return.
And lastly on the display programs, you mentioned a push-out from the second half of this year to 2020. I think that you made a similar comment last quarter. Is there a -- like, are you seeing a further push-out? Or are you just reiterating the same comment from last quarter?
Yes. So 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. However, that was partially offset by several smaller projects, which we expect to start ramping in 2020. In fact in the news yesterday, there was an end customer announcing some major investments in 10.5G, which we're tracking. And according to that announcement, they're announcing production in 2021, 2022. So the -- again, the long-term fundamentals for the display end market are, I think, are intact. It's just a question now of timing.
Paul, it was incremental softness from 90 days ago.
Your next question comes from Jim Suva with Citigroup Investment.
You've given out 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 that started to talk about billings and orders that have started to improve. So I'm just trying to get a sense from you about your visibility. Have those orders percolated down to you or stabilized? Or are things still pretty disappointing in that segment?
So inside of Q2, they got incrementally worse than what we were thinking from the beginning of the quarter. Moving to the back half, we think at the Q2 levels, they'll stabilize. 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 pick up. We're mindful that, 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'd be very happy to serve that. The growth that we're actually banking on and looking forward to is probably more in 2020. Again, that's not more of 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.
Great. And then switching over to the communications segment. It seems like there are some companies there who's actually been seeing some pretty good strength, whether it be on the enterprise side or service provider or even 5G buildouts. So is it 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 trying to triangulate or connect the dots of how that -- we've seen some strength in those markets but then maybe that'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. Infrastructure as a service and disaggregation and things like that are disrupting traditional OEMs' business model.
And what we're happy to see under the covers is we're seeing some 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 some good growth in other areas.
There are no further questions at this time. I will now turn the call back over to the presenters.
Thank you, Chantel. So in Q2, 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 our longer-term goals. Again, we believe our strategy is sound. And over time, the actions that we're taking 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.