Celestica Inc (CLS) 2010 Q2 法說會逐字稿

Good morning.

My name is Michelle, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Celestica second-quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

At this time, I would like to introduce Mr.

Paul Carpino, Vice President of Investor Relations.

Mr.

Carpino, you may begin your conference.

Thank you Michelle.

Good morning everyone.

Thank you for joining us on Celestica's second-quarter conference call.

On our conference call today will be Craig Muhlhauser, President and Chief Executive Officer, and Paul Nicoletti, Chief Financial Officer.

Craig and Paul will provide some brief comments on the quarter and then we will open up the call for Q&A.

Copies of the supporting slides accompanying this webcast can be viewed at Celestica.com during this conference call.

During the Q&A session of this call, please limit yourself to one question and one follow-up to ensure everyone on the call has an opportunity to do so.

You are welcome to get back in the queue after you ask your question.

Before we begin, I'd like to remind everyone that, during this call, we will make forward-looking statements related to our future growth, trends in our industry and our financial operational results and performance, and financial targets that are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially.

We refer you to our cautionary statements regarding forward-looking information in the Company's various public filings, including the Safe Harbor statement in today's press release.

We refer you to the assumptions, risk factors and uncertainties discussed in the Company's various public filings which contain and identify factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

These filings include our Form 20-F and subsequent reports on Form 6-K filed with the Securities and Exchange Commission, which can be accessed at SEDAR.com and SEC.gov.

Please note that we will refer to certain non-GAAP financial measures during this call which include adjusted gross margin, adjusted SG&A, adjusted operating margin, or EBIAT, adjusted EPS, and free cash flow.

These non-GAAP measures do not have any standardized meaning prescribed by GAAP and are not necessarily comparable with similar measures presented by other companies.

We refer you to our press release, which is available at Celestica.com, for more information about these non-GAAP measures, including a reconciliation of the non-GAAP measures to the corresponding GAAP measures as appropriate.

Just a reminder, this call will last approximately 45 minutes.

I'll now turn the call over to Craig Muhlhauser.

Thanks Paul, and good morning everyone.

Thank you for joining Celestica's second-quarter 2010 earnings call.

Celestica delivered another strong quarter with year-over-year revenue growth, strong returns on invested capital, and stable operating margins.

Our revenue of $1.59 billion was at the high end of our guidance range and reflected 13% year-over-year growth and 4% sequential growth.

The year-over-year increase was driven by growth across all segments except telecommunications.

The sequential quarter-on-quarter growth was driven by higher revenue in our enterprise communications and server end markets, and growth in our industrial aerospace and defense and healthcare segments of the business, reflecting the impact of both stabilized end markets and the impact of new wins.

Operating margins were 3.4%, consistent with the first quarter of 2010, and up from 3.2% in the same period one year ago.

ROIC was 23.9%, up 600 basis points from 17.9% in the second quarter of 2009.

These strong and consistent financial returns reflect the predictability and flexibility of Celestica's business model.

Celestica's year-over-year revenue growth this quarter reflects the progress the Company continues to make toward achieving our revenue growth, market segment mix, and operating margin objectives.

We are encouraged by the increased momentum this quarter with new program wins across all segments of the business, including consumer, computing, and the industrial segments, as well as our aftermarket services business.

Some of the highlights for the second quarter are summarized as follows.

First, in the server end market, Celestica was selected by one of our major customers as the exclusive partner for a global product portfolio, including design support, new product introduction services, PCBA manufacturing, system assembly, direct order fulfillment, and aftermarket services for the complete product portfolio.

This program involves transferring multiple product platforms from several competitors and launching additional new products over the coming quarters.

While the pace of the program transfers is done in collaboration with our customer, the overall transfer is slightly behind what we had originally expected.

We currently expect the programs to begin to ramp late in the third quarter of 2010, and for the transfers to be largely complete by the end of the first quarter of 2011.

Second, a number of new program wins in the Consumer segment are expected to ramp to volume late in the third quarter of 2010, with target volumes achieved in the fourth quarter this year in both the product and aftermarket services areas.

We would expect the full-year impact of these programs in 2011.

Third, we had a strong bookings quarter in the second quarter with Industrial and Defense segments, which include four new customers for Celestica.

We expect these programs to ramp throughout 2011 to their expected volume targets.

Finally, in an effort to accelerate our progress in the healthcare market, we announced this morning the signing of a definitive agreement to acquire Allied Panels, an Austrian-based healthcare engineering and manufacturing service provider that offers concept-to-delivery of complex healthcare devices and systems.

Allied Panels has a strong track record and experience serving leading OEMs in the healthcare industry.

Allied Panels' capabilities include electro-mechanical design, firmware and software development, and high-level assembly for subsystems and complex medical devices, with their primary focus today on diagnostics and imaging products and systems.

Allied Panels' main engineering development and manufacturing center is located in Frankenburg, Austria, which is near Salzburg, with a satellite engineering and manufacturing service center in Madison, Wisconsin.

Allied Panels annual revenue is approximately EUR40 million, and they currently employ approximately 130 people.

Allied Panels' customer relationships, technical expertise, industry knowledge and experience and their track record of serving the diagnostic and imaging industry will strengthen Celestica's healthcare offering throughout Europe and North America.

As we have discussed over the past several quarters, Celestica's Healthcare segment is one of the key growth segments we have been targeting for additional investment.

We plan to leverage the Healthcare specific capabilities that Allied Panels brings to the Celestica proven supply chain management expertise and our global network to further accelerate our growth in this segment -- important market segment.

We expect the transaction to close in the third quarter of 2010, and we look forward to welcoming all of the employees, the customers and suppliers of Allied Panels to the Celestica team.

In addition to generating long-term value through investments like the one we just have announced at Allied Panels, we also announced this morning that we intend to initiate a stock buyback program.

Subject to the approval of the Toronto Stock Exchange, our normal course issuer bid will allow us to repurchase, at our discretion during the next 12 months, up to 9% or $18 million of the Company's subordinate voting shares on the open market.

The Board supports that buying back our stock is a very efficient use of our cash, based on the intrinsic long-term value of our company, which currently delivers an ROIC above 20% and has approximately $700 million in net cash, operates with no debt, and has a strong, profitable portfolio of customers across a wide range of markets and industries.

We will continue to execute well throughout our global supply chain and manufacturing network, and we are winning new programs.

We expect these wins will start contributing to further revenue growth in the fourth quarter and beyond, and we remain confident that we will continue to have the flexibility in our capital structure to support the future investments in Celestica's growth strategy.

Let me conclude my comments with a few thoughts on our outlook.

Let me separate my comments in terms of both end market demand and new program wins.

First, in terms of end market demand, we see stable end market demand across all segments of the business, which is reflected and our Q3 guidance.

At Celestica, we continue to be in a very strong position to capitalize on the near-term opportunities while making the investments to build a strong foundation for future growth and profitability.

We are encouraged by the progress we've made this quarter.

The number of new opportunities continues to grow as our investments in our customer-facing employees globally are now supported by a strong solution architect organization and beginning to deliver results.

In summary, we remain confident in the direction we have set for the future of Celestica.

We believe our execution, our flexibility and our responsiveness is among the best in the industry.

We will never be complacent, and we remain thoughtful as we balance the revenue growth, end market mix, and operating margin challenges with what is right for our customers, the short-term expectations of our investors, and what is best for Celestica and its shareholders over the long term.

The bottom line is that Celestica is positioning itself to win in a highly volatile and increasingly competitive and complex global environment.

I'll continue to look forward to sharing our continued progress with you as we navigate this journey together.

Now, let me turn the call over to Paul Nicoletti.

Thanks, Craig.

Good morning.

Revenue for the first quarter was $1.59 billion, or a 13% increase from $1.4 billion in the second quarter last year, and up 4% sequentially from the first quarter of 2010.

As Craig noted, year-over-year improvements have come from virtually all sectors, and sequential strength was from the key markets we are targeting to grow.

Looking at our revenue by end market, the Consumer segment was 28% of sales and was relatively flat sequentially.

Enterprise Communications represented 22% of total sales and grew sequentially by 11%.

The Server segment represented 14% and grew sequentially by 17%.

Storage was 12% of sales and was down sequentially by 4%.

Telecom was 13% of revenue and was down sequentially by 5%.

Finally, Industrial, Aerospace Defense, Healthcare came in at 11% and grew sequentially by 14%.

Our top ten customers represented 72% of sales for the quarter and our top five were 51% of sales.

We had two customers with sales of greater than 10% in the quarter, with our largest customer at 20% of sales.

The company posted a GAAP net loss for the second quarter of $6.1 million, or $0.03 per share loss, which included restructuring of $23.8 million.

These results compare to GAAP net earnings of $5.3 million, or $0.02 per share for the same period last year.

Adjusted net earnings for the quarter were $48.3 million, or $0.21 per share, compared to adjusted net earnings of $31.1 million, or $0.14 per share for the same period last year.

Adjusted gross margins were 7% compared to 7.5% one year ago.

The year-over-year change was primarily driven by a change in revenue mix, pricing, and investments we are making to support new program ramps.

The Company continues to effectively manage its spending with adjusted SG&A down on both an absolute dollar basis and as a percentage of revenue.

In the second quarter, adjusted SG&A was $54.7 million, or 3.5% of revenue, compared to $57.2 million or 4.1% of revenue in the second quarter last year.

Year-over-year, adjusted SG&A was also lower on an absolute basis by 4% on the back of 13% revenue growth.

While we continue to make long-term investments for future growth, we believe we can hold SG&A spending in the $55 million to $60 million quarterly run rate for the next several quarters, which we would expect would allow us to show some leverage on our cost base in the future as revenue growth resumes.

Pretax return on invested capital remains well above our cost of capital at 23.9% compared to 17.9% one year ago.

In terms of a restructuring update, during the quarter, we recorded $23.8 million of restructuring charges and to date have recorded $150 million of the $150 million to $175 million restructuring programs announced in 2008 and 2009.

We are coming to an end on these restructuring activities and expect to complete them by the end of this year.

The adjusted tax rate was 10%.

While we did see the GAAP tax expense go up this quarter versus the recovery last quarter, we continue to expect the adjusted tax rate to be 10% for the year.

Moving to our working capital performance, inventory turns remain strong.

Inventory was down in absolute dollars $47.5 million or 7% from the first quarter of 2010 despite the 4% sequential increase in revenue in the second quarter.

We continue to lead our North American peers in inventory performance with inventory turns increasing to 8.4 times in the second quarter compared to 8.1 times in the first quarter of this year.

Cash flow used in operations was negative $4 million, driven primarily by a four-day decrease or $103 million in Accounts Payable days -- Accounts Payable -- reflecting the timing for payment of inventory purchases.

In this constrained component environment, we continue to work very effectively for our customers.

As we ramp more programs, we do anticipate higher working capital requirements but are targeting to keep our strong inventory turns performance.

While the tighter component environment did not result in any significant revenue impact for the quarter, we did see an impact on a month-to-month basis.

What this does is it disrupts the cash cycle from the perspective of when we procure parts to when we use them in production and then to when we realize the revenue and collect the cash.

CapEx for the quarter was $11.9 million, which remains at the low end of our anticipated run rate of approximately 1% of annual revenue.

Despite the tighter supply environment, cash cycle for the quarter was 32 days, a one-day improvement from the first quarter.

Improvements in AR days and inventory days were offset by the decrease in AP days.

On a year-over-year basis, our cash cycle has improved by 10 days, decreasing from 42 days in the second quarter last year.

Moving to the balance sheet, cash at quarter end was $684 million, and the Company remains debt-free.

In addition to the strong cash position, our $200 million credit facility remains undrawn and fully available.

We continue to maintain the strongest net cash position amongst our North American peers, which gives us ample capacity to make targeted investments in key capabilities such as our acquisition of Allied Panels and, as Craig noted, launching a share repurchase program.

We anticipate stock exchange approval for the buyback program in early August and for the program to terminate 12 months thereafter or sooner, at our discretion.

Purchases are expected to be made through both the New York and Toronto stock exchanges at prevailing market prices.

Any subordinate voting shares purchased by the Company under the bid will be canceled, except for those used to meet our equity compensation plan obligations, estimated to be approximately 3 million shares.

In terms of our third-quarter guidance, we are guiding modest sequential and year-over-year revenue growth, primarily due to new program launches being more heavily weighted to the fourth quarter, compared to our previous view that some of the volume would've started in the third quarter.

We anticipate revenue to be in the range of $1.55 billion to $1.65 billion and we generally see stable end market demand.

While we are not giving guidance for the fourth quarter, we believe we will start to see a more meaningful ramp of our new program wins, depending on the pace of transfer in the fourth quarter compared to the third quarter.

We are adding more resources as we ramp this business, so full efficiency of this revenue will not be reflected until later in 2011.

Notwithstanding, we still anticipate operating margins to remain in the 3.5% area as these ramps are implemented, and for overall company returns on invested capital to remain greater than 20%.

For our adjusted net earnings per share, we anticipate a range of $0.20 to $0.24.

At the midpoint of our guidance, we anticipate operating margins of approximately 3.5%.

We anticipate a $0.06 to $0.11 per share negative impact for the following items -- quarterly stock-based compensation; amortization of intangible assets; and restructuring charges.

That concludes our formal comments on our second-quarter results.

I'll now ask the operator to open up the call for any questions.

(Operator Instructions).

Sherri Scribner, Deutsche Bank.

Thank you.

I just wanted to dig a little bit into the revenue growth.

It looks like we are having a pause here in the third quarter, and you made it quite clear that you have some product ramps that are taking a bit longer and won't ramp until the fourth quarter.

I guess my question is, is the timing really the biggest issue with revenue?

Have you seen any impact from the economy or anything else?

Also, as we move into the fourth quarter, can you give us some sense of what type of revenue growth do you expect to see longer-term and into fiscal '11 based on these new deal wins?

Thank you.

Good morning.

It's Craig.

The impact of the scheduled slips that we talked about is the large impact; it's the largest impact on our third-quarter guidance.

We do expect to see new momentum in the fourth quarter on the basis of the current forecasts.

Over the longer term, we are sticking to the revenue growth guidance that we've given in the past, which is 6% to 8% as we look to the future.

Then in terms of the component constraints, you guys mentioned in the script that you did have some component constraints, but your inventory was actually down versus some of your peers, which saw significant inventory impact.

I'm just curious how you were able to manage that better than some of your peers, and then maybe a little more detail on the component constraints would be helpful.

Well, I think it's speaking to the business model.

As I mentioned, I think flexibility and responsiveness in this market requires a level of information technology at the front end and demand forecasting, as well as the link with your supply chain, as well as a very, very I'll say well-designed supply-chain strategy at your site.

So the revenue miss due to material constraints for Celestica was very -- is, frankly, immaterial.

So, I think the good news is we are driving the material, we are meeting our customer delivery requirements, and we are reducing our inventory in what is a market that is very component constrained.

I think it lends a lot of credibility to the flexibility and basically the pitch that speed and flexibility trumps size and scale in these markets.

Do you expect the component constraints to ease anytime soon?

No we don't; we expect them to continue.

Thank you.

Thank you very much.

William Stein, Credit Suisse.

Thanks.

Craig, the buyback would suggest that the acquisition you're doing today is perhaps the only one that you think might get closed in the near term.

Is that the right way to think about it, or are you still trying to find good technology bolt-on acquisitions?

No, we are still -- no, it doesn't -- certainly, that is not the intention.

It reflects, frankly, our confidence in our company and our ability to not only continue what we are doing but actually with the strength of the balance sheet and its debt-free, so our ability to continue to work through the challenges we face, manage our inventory balances, improve our cash cycle.

So the short answer is no, absolutely not.

We are still very committed to bolt-on acquisitions that build capability.

We are not going to throw a Hail Mary here, but we are going to continue the strategy and we think we've got room on the balance sheet.

If we find something bigger and something we would like to do, we have the ability to go out to the market and raise capital.

If I could just ask a maintenance question?

Paul, I think you said something about SG&A going forward.

Can you restate that please?

Sure.

What we are saying is, for the next few quarters, we do see it in the same range.

You know, between $55 million and $60 million is what we would expect the SG&A spend to be in absolute dollars.

Great, thanks very much.

Brian White, Ticonderoga Securities.

Yes, as we look into the third quarter, what markets are we looking for the greatest strength?

It's Paul.

When we look at the absolute right now mix going into Q3, we don't expect any big changes from what we have in Q2.

So we are kind of seeing a little bit of strength everywhere, but no big shift changes happening.

When we talk about these delayed programs, what was the rationale behind the programs being delayed?

Is it the economic environment?

Is it a component situation, or what happened with the delays?

Well, number one, it's the magnitude of the program.

Number two, it is making sure we do it right and we do it on the basis of making -- maintaining the service delivery performance in our customers' end markets.

So it's the abundance of caution around this pure scale, and obviously we are working with a number of competitors across the patch, so it was a collaborative model around driving us doing it right and then continuing to meet their service requirements.

Specifically, you said it was in the consumer and the server market?

No, we said it was in the server end market.

Server end market?

Yes.

Brian White.

Okay.

Thank you.

Matt Sheerin, Stifel Nicolaus.

Thanks and good morning.

Craig, you talked about sticking to that goal of 6% to 8% revenue growth.

Was that still for calendar '10?

Yes.

So that implies sort of a low double-digit, kind of midteen type of ramp for the December quarter, correct?

Yes.

You also talked about the server opportunity, but also on the consumer side, I know you've got a very concentrated customer there.

Are you looking to diversify your customer base there?

In that new consumer business, is that on the smartphone side or other parts of consumer?

That new consumer business is on the smartphone side.

We do have new business in the area of aftermarket, and we do have new business in the set-top box space.

So we are diversifying from a product standpoint; we are diversifying from I'll say a service mix standpoint beyond manufacturing; and we are looking to diversify from a customer standpoint.

So, the answer is yes across all three dimensions.

Great, thanks a lot.

Amit Daryanani, RBC.

Thanks.

Good morning guys.

I just have a question on the guidance.

I guess I just want to get some clarity over here.

You guys are talking about all the segments being relatively flat, but historically the consumer side has typically seen a fairly big uptick in the September quarter that has resulted in all our sales being up 7% to 8%.

Why aren't you seeing the normal uptick given the fact the big customer you have that you have an overlap with one of your peers, did talk about that segment being up 20%, 25% in their Q3.

Amit, it's Paul.

Going back historically, gaming would have been a much larger portion of that consumer portfolio.

As you know, that's one sector that we backed away from, and that would've really been why you would've seen historically a big Q3 ramp setting up for the Christmas season.

I think what we are seeing now, as far as the portfolio and the smartphones, is a much more linear portfolio, not as much seasonality around things like back-to-school and the holiday season.

As it relates to our competitors and what they are guiding, obviously there's more than one of them serving that big customer, we can't comment on there.

I will say that we all have different portfolios of products serving different regions.

As you know, with that customer, different regions perform in different ways.

So suffice it to say, for the mix of products that we have and for the end markets that those products serve, this is what we are seeing at this point in time.

If I could ask you one more question?

That customer is obviously having multiple new program launches at the onset right now.

Would you come to suggest you probably had better allocation, better mix in the past products than you have on the new ones then?

No, I wouldn't say that.

I think it just depends on -- again, I would say it is more in what end markets you are serving.

So be it -- what I mean by that, whether it is North America, Europe, Asia-centric.

So our mix has been more of a North American one, and then beyond that, I just said we all have different products.

I think, not to get in -- I don't want to get into their business, but suffice to say obviously different product perform at different levels as far as how they are doing in the marketplace, and that has an impact on how things work out.

(multiple speakers)

Got it.

If I could just follow-up, my final question would be the new server ramp that we are talking about, sounds like it's a fairly material ramp when it's fully sized up.

But I just want to understand historically when EMS companies have done big program ramps that have typically (inaudible) deleverage essentially as everyone growth through learning curve inefficiencies, could you foresee there risking your model?

If not, how do you kind of work around that?

Amit, I think that hopefully you'll feel that, from an execution point of view, Celestica is in a very solid position today.

And so we feel pretty confident about our ability to execute those programs and to execute them on time and to the cost estimates that we expect from them.

I will say that part of the reason why, when we look at Q3 with revenue -- again, the ramp being a bit slower than what we expected, part of this is us wanting to make sure that we with the customer execute this thing flawlessly.

It is an existing customer, so I think that's important to note.

From the point of view is that we know what we are doing on these products.

And so we are increasing the volume on products that we already manufacture, so we are not having to re-create the wheel here, because we already manufacture those products.

I think, when you add that all together, we don't anticipate any ramp-type issues.

I think we feel pretty confident in our ability to execute.

Perfect.

Thanks a lot guys.

Shawn Harrison, Longbow Research.

Good morning.

I guess a different question on the server business.

In the March quarter, I know there were some product transition issues that you went through.

It looks like, with the revenue growth this quarter, you may have seen that normalize.

If you could just comment on some of the issues that were prevalent in the first quarter this year and how things are standing midyear.

I think, suffice it to say, what you are seeing is a mix of the demand for the customers that we have.

So Q1, the March quarter, as you said, some of our customers were going through product transitions.

I think that's largely behind us.

But I want to step back to make sure obviously I think the biggest question mark -- less of a product transition, more about just end market demand.

So the server arena, as we said in our comments, across all sectors I guess, has been stable.

I think more to do with going forward what does the demand look like I think is something that, when Craig and I look at our forecast, it's more about that, not about the transitions.

So server, when you look at our growth year-on-year, is up 26%, pretty solid, obviously on a sequential basis up 17%.

So we think that whatever the transition issues were in the March quarter are behind us.

Then my follow-up question has to be, within the industrial, I know you've commented that most end markets look relatively stable.

One of your competitors cited a little bit of slowing within that end market yesterday.

If you could comment in terms of what you're seeing, and maybe order rates, if you're seeing a lot of changeover, and then maybe with the acquisition as well, just the margin profile.

I'm guessing that's better than corporate average, currently.

It's Craig.

Basically, we see Industrial, at least in terms of our order rates for the second quarter, actually being one of our stronger year-over-year performance.

Certainly, we see continuing opportunities of the three markets.

Certainly, we are building capability; it was up 23% with a large part of that being the industrial space.

So, we are fortunate in that we are seeing a number of new opportunities with our target customers, and obviously we are building from a relatively small base on an overall standpoint.

But we are bullish about Industrial today.

Your point on the margin profile, obviously, it is richer than the margins associated with some of our more core segments like computing and communications and consumer.

Okay, thank you.

Lou Miscioscia, Collins Stewart.

Sorry, the old mute button got me.

So in your opening remarks and obviously the new wins that you have, did you characterize any dollar amount from the different new wins that you have that are going to be ramping up over the next let's say 12 months?

No, we don't give transparency either on an overall basis or on a customer basis.

Okay, because on the server program, we had heard about that and we had actually heard it could be of a size of anywhere from $500 million to $1 billion.

Could you maybe comment specifically on that one?

If that actually was the case on a year-over-year basis, it looks like the 6% to 8% guidance for 2011 might be very shy, given that you'd get almost 10% possibly just from this one program, and then how would you characterize maybe then the mix of that into everything else?

Yes, so first, per my comment earlier, just recall that that customer is an existing customer.

So part of that is already in our base as far as the numbers that you're looking at.

As far as what the overall growth could be for next year, we are sticking by our 6% to 8% right now.

To the point that we see it being different than that, then obviously that is something we will come forward and talk about.

But as you know, our story here has been managing the mix.

So, it's not just about the absolute growth; it's the right growth getting to the target margins and the target ROIC.

So candidly we are less focused on the big topline growth and more focused on getting the margin mix.

So right now, we are sticking by those numbers.

If we see something different, obviously we'll talk about it when we see it.

One last question I guess on the same topic -- when you look at the December quarter, as it sounds like that's when some of the ramp is really going to start to kick in, isn't that a bit of a dicey time for a server company to be transferring business, just given that the December quarter is usually the seasonally strongest quarter of the year?

Why wouldn't they put it off until March?

As I commented earlier, I think that, from an execution point of view, and certainly in my years here, Celestica is performing at the strongest level that it ever has.

So, we have an operating network here that we feel very confident with our ability to bring those programs on and to ramp those programs.

So, we are not, frankly, terribly concerned about that aspect of it.

You could -- as I mentioned earlier, hey, we would have liked to transfer this thing even faster.

We agreed with the customer to take it out at a pace that we felt took all the risk out of the equation.

So we are not concerned about that piece right now.

Thanks guys.

Good luck with it.

Jim Suva, Citi.

Thank you and congratulations to you and your team.

My first question is a bit of a clarification question.

Paul, maybe I misunderstood your comments but I believe, earlier in the call, you mentioned that, from a segment perspective kind of in Q3, you expect the segments to all kind of see relatively somewhat similar trends or be consistent.

You'd mentioned kind of smartphones, more linear.

But I would think that Consumer would be stronger on a sequential quarter-over-quarter basis.

Factually, both Q3 is stronger than Q2 and Q4 is stronger than Q3 for sellthrough.

Since you build, it would lead one to believe that Celestica should be seeing similar trends.

Otherwise, the conclusion is Celestica is losing share.

So I want to give you a chance to maybe clarify why I am misunderstanding there, because cell phones and smartphones are definitely not linear.

Then I have a follow-up question just because I probably misunderstood your comment there.

So listen, I guess what we do have during Q3 is we are ramping up several new programs.

And so our experience when that is happening is, certainly at the beginning of the ramp, it takes weeks to get up to the policy expected run rate.

So that does put a bit of pressure overall on the revenue as new programs ramp up and as existing programs ramp down.

So, that's what we are seeing right now.

We don't view it as losing share.

We do, as I commented earlier, we do think there are some dynamics as to which markets you serve.

I think, as you know, our smartphone business is largely North American-centric.

That's the portfolio that we have.

We look -- we are looking to diversify that to serve other markets which have different growth rates.

But for what we see right now, as I said, we don't expect any big shift overall to the overall weighting of Consumer in the portfolio in the September quarter.

Okay, that's a lot more clear.

Thank you for that.

Then maybe just a couple of housekeeping questions -- your guidance, am I correct it assumes no stock buyback, or since you gave a comment that you expect it to be assumed in the beginning of August, are you building any stock buyback in that, or waiting to see how it goes?

Then on the profitability of the acquisition, the price, the restructuring, any type of restructuring need, talk a little bit about what you're going to have to do to integrate that acquisition?

Thank you very much, gentlemen.

Sure.

So, first, on the stock buyback, we have not baked that into the earnings per share guidance.

My comments were that the program, we expect to get approval of the program early in August.

It will be a 12-month program.

We don't expect -- we expect to buy stock over a 12-month period.

So as commented, it's approval for 18 million shares.

Our expectation is to pace those purchases.

As far as the acquisition is concerned, as Craig mentioned in our remarks, currently around EUR40 million.

It's a relatively small acquisition as far as purchase price is concerned.

We are not going to give any specific details until the deal is closed, but suffice to say it's immaterial overall from the perspective of the size of Celestica's balance sheet.

This is not a restructuring play kind of acquisition, so this is an acquisition that we expect will -- we'll be able to leverage the capabilities that they have to win more business.

So even the EUR40 million in itself, they have been growing at some nice rates.

It's relatively small.

The goal obviously is to take the capabilities that they have and to use those and marry it up with the network that we have, and to put those two together and to win more sizable pieces of business through time.

Thank you.

Congratulations gentlemen.

Brian Alexander, Raymond James.

Sorry if I missed this earlier, but on the sequential decline in gross margins that you saw in the June quarter, I think you might have mentioned changes in mix, pricing, and investment for new ramps.

Were those listed in order, or are they about the same magnitude?

More specifically, did mix hurt you from a gross margin perspective, because just looking at the results, I would've thought it helped you.

Sure.

Those comments were more in relation to year-on-year, not in relation to sequential.

So from a sequential point of view, there was no big change in mix.

As an example, with Consumer, basically in the first quarter, it was 29%, in second quarter it was 28% of revenue, so no big change there.

On a year-on-year basis, that was more sizable -- I would say that, from a sequential point of view, more in relation to some of the investments that we are making to ramp these new programs.

So that was the biggest factor?

Yes.

Then in terms of the low- to mid-teen sequential growth that you're hoping to experience in the fourth quarter based on the full-year outlook, in your point about how a lot of this is being driven by existing customers where execution risk is lower, how should we think about the operating leverage in the fourth quarter?

Can operating margins get close to 4%, or is that too aggressive, given the ramps?

So first, I don't think we commented on lower mid-teen -- low- to mid-teen growth in Q4.

Craig commented that the 6% to 8% annual growth that we've been discussing is still something we see as a possibility.

Where we park in that range I think will have more to do with the end market demand, which as you know, the visibility being what it is, it's difficult for us to call at this point in time.

As far as margin performance is concerned, listen.

Our goal is it continues to be between 3.5% and 4%, so I think that even -- and the way we get there is, as I commented, we think our SG&A spend is pretty constant in the levels that it is.

We do expect to see some leverage from a gross profit point of view as we add more business in.

And so we do see ourselves still within that 3.5% to 4%.

Exactly where we would land I think will have more to do with the overall mix by end market than anything else at this point.

Just a final follow-up, I know you don't comment on new wins quantitatively, but qualitatively, have you seen an inflection point or a step function change in the level of new wins?

It just seems like the pace really picked up here, or maybe I'm just misreading your comments.

Thanks.

I think the year-over-year progress has been significant this quarter, so we have seen -- I wouldn't say it's an inflection point.

We've seen -- we have been making a series of investments in the course of the past 18 months, and we've really seen those investments begin to take hold.

It's kind of a broad-based market impact, so we're very encouraged by early signs here.

Great, thank you.

Michelle, we will take one more call.

Naser Iqbal, Salman Partners.

Thanks for taking my call.

Congratulations on the quarter, guys.

I guess I'll make it a quick question.

Craig, without maybe giving away your secret sauce recipe, what do you think are the qualities or characteristics of -- you've announced a lot of program wins in your comments.

Just maybe like what do you think are the factors that are enabling you to win versus maybe some of your competitors?

Just you're looking at the different end markets differently, or just -- maybe just some color there.

Well, we've made investments in moving our people closer to our customers, so I would say customer intimacy.

We are emphasizing really creativity in the solutions we're providing.

Then I think, frankly, the past three years have demonstrated a level of credibility that we take a lot of pride, but we are very humble about the way we manage our company and we deliver what we promise.

So we are building hopefully with you and all of our constituencies a level of trust and credibility that is based on solid execution.

Then from that, we have been able to earn the trust of those customers and they are giving us not only more opportunities, but we are also, as you can see from some of the announcements we make this quarter, they are expanding their engagements with us into broader areas of the business.

So it also gives us a tremendous opportunity to increase our penetration with our existing customers which, as you would expect and as Paul mentioned, is the least risk, I'll say best opportunity to keep this machine moving forward.

We are emphasizing total cost of ownership, and we are moving in a direction of selling the value we deliver.

Obviously, that's beginning to resonate as companies see the impact of not meeting their revenue forecast because they can't get components yet for a company like Celestica.

That doesn't appear to be one of the reasons that we use to explain away the unexplainable.

Great.

No, I appreciate that.

Again, congratulations on the quarter.

I'd just like to thank everybody for their support, their interest, and we look forward to speaking with you again at the end of the third quarter.

Thank you for your time.

This concludes today's conference call.

You may now disconnect.