Celestica Inc (CLS) 2010 Q4 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 Celestica's fourth 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).

I would now like to introduce Mr.

Paul Carpino, Vice President Investor Relations.

Please go ahead, sir.

Thank you, Michelle, and good morning, everyone.

Welcome to our fourth quarter conference call.

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

This conference call will last approximately 45 minutes.

Craig and Paul will provide brief comments on the quarter, and then we'll 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 and 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 to the queue after you ask your question.

Before I begin, I would like to remind everyone that during this call we will make forward-looking statements related to our future growth, trends in our industry, our financial and operational results and performance, and financial targets that are based on current expectations, forecastings 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 this 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 & 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 [EBAT], adjusted EPS, and free cash flow.

These non-GAAP measures do not have any standardized meaning described 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 if appropriate.

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

Thank you, and good morning, everyone.

I'm pleased to report Celestica a delivered strong financial result in the fourth quarter, highlighted by 21% sequential revenue growth, with growth in all end markets and the highest returns on invested capital since the Company went public in 1998.

Most notable were our server and consumer end markets, which grew sequentially 56% and 24% respectively as a result of new program ramps and improved end-market demand from our existing customers.

The industrial, aerospace, defense, and healthcare market, key areas of growth for us over the next several years, delivered 13% sequential growth in the fourth quarter, with additional new programs and customers ramping throughout 2011.

While revenue growth was strong, we delivered a 20 basis point sequential operating margin improvement from the third quarter, despite a larger than forecast mix of server and consumer business.

This performance moved the Company back in line with its three-year operating margin target of 3.5% to 4%, better than we originally anticipated for the fourth quarter.

We continue to target 3.5%to 4% operating margins as we focus on increasing our market share in a growth and emerging end market, and as new program ramps reach their quoted production volumes, and achieve the expected efficiencies.

As we discussed in October, we expect our margins for the first half of 2011 to range between 3% to 3.5%, withsteady improvements throughout the year.

And we expect margins to be at the 3.5% to 4% range for the second half of the year.

Working capital performance continues to be strong.

Our industry leadership position in inventory turns was sustain this quarter as we achieved 8.7 turns for the fourth quarter of 2010.

This solid performance in operating margins and working capital resulted in a return on invested capital of just under 30%, an all-time high for Celestica.

On top of our strong financial results, we also drove additional value for our shareholders by aggressively repurchasing and canceling more than 11 million shares this quarter.

With the Company's strong results, exceptional balance sheet, and solid Q1 outlook, we believe our share buyback program has been a good use of capital for our shareholders.

Paul will provide additional details in our results, but overall it was a great way to finish the year and an outstanding way to start 2011.

As we look to the coming year, we see continued opportunity to create additional value for our customers and shareholders.

In 2011, we'll be increasing our investments in design and development, in capital expenditures to support organic growth initiatives, and closing on targeted acquisitions that strengthen our services offerings to allow us to accelerate revenue growth in our targeted end markets.

The increased investment in design and development will be focused on expanding our design efforts in Asia to provide our customers in greater value in enterprise and communications systems and solutions.

Our capital spending will be primarily focused on supporting organic growth opportunities that exist with our customers.

Based our solid track record of execution, many of our customers are looking to further expand their business with Celestica, and we remain very committed to supporting their growth initiatives with continued investments in information technology, process capability, manufacturing, laboratory, and assembly and test equipment.

Our strategic filter on these opportunities and investments continues to be based on building an balanced revenue portfolio that will deliver 3.5% to 4% operating margins and return on invested capital greater than 20% over the near to medium term.

2011 potential investments for Celestica and acquisitions will target those that enable us to grow our services, such as design, repair, fulfillment, or other supply chain solutions, or that support revenue growth and diversification in areas such as industrial, aerospace and defense, and health care.

Our investments in these growth and emerging markets over the past several years is beginning to drive growth, as demonstrated by the 13% sequential revenue increase we delivered in the fourth quarter.

As an example, we have continued to build a leadership position in the aerospace and defense markets with multi-year investments made in our Asian, European, and North American global operations.

These investments have resulted in new program wins and establishing broader and deeper relationships with our customers.

The investments made in this important market have transformed four locations into aerospace and defense centers of excellence that delivered to the high quality and reliability standards of the industry's leading OEMs.

As a result Celestica has gained our largest market share among our North American competitors in the aerospace and defense end markets, and we feel additional investments in this target market, as well as in industrial and healthcare markets, are required to gain market share and meet our financial objectives.

So in summary, Celestica finished 2010 and enters 2011 in one of the best financial and operational positions it has seen since going public in 1998.

Our strength is based on the following.

The reemergence of a revenue engine that is highly focused and well positioned to deliver double-digit top line growth in 2011 for the first time in several years.

Strong and growing customer relationships, driven by the flexibility and operational excellence of our global network, and our proactive approach to introducing innovative technology-based supply chain solutions to support our customers' needs.

A multi-year track record for delivering consistent margin performance, which we believe we can further build upon in 2011.

Industry-leading inventory performance, ensuring customers get their products when they need them, and we generate an appropriate return on our working capital.

All time highs on return on invested capital, reflecting the culture of an organization that is committed to delivering profitable growth now and in the future, and deploying capital in the areas that generate appropriate returns.

A strong balance sheet that ensures customer confidence in dealing with Celestica in any economic environment.

And finally, a commitment to returning excess capital to shareholders when returning that capital represents the best opportunity to drive value for them.

Celestica is an exciting, energized and highly effective supply chain solutions company, committed to consistently driving value for its customers and its shareholders.

We have set high expectations for ourselves, and look forward to building on the momentum of 2010 to deliver even stronger results in 2011.

We look forward to sharing our progress with you in the coming quarters.

And now let me turn the call over to Paul Nicoletti.

Thanks, Craig, and good morning.

Revenue for the fourth quarter was $1.88 billion, a sequential increase of 21% from the third quarter of 2010, and a 13% increase from the same period last year.

Looking at our revenue by end markets and their sequential performance versus the third quarter, consumer was 24% of sales, up approximately 24% sequentially; enterprise communications represented 24% of sales, growing by 14%; ourserver end market represented 17% of revenue, an increase of 56% sequentially;storage was 12% of sales, an increase of 22% sequentially;industrial, aerospace, defense, health care came in at 11% of total revenue, growing 13%; and finally telecom was 12% of revenue, up 2% sequentially.

Our top ten customers represented 74% of sales for the quarter, and our top five represented 55% of sales.

We had one customer with sales of greater than 10% in the quarter, representing 20% of sales.

The Company posted GAAP net earnings for the fourth quarter of $25.6 million, or $0.11 per share on a diluted basis, which included restructuring and other charges of $25.1 million.

These results compare to GAAP net earnings of $31.1 million, or $0.13 per share, for the same period last year.

Adjusted net earnings for the quarter were $58.3 million, or $0.26 per share, compared to adjusted net earnings of $49.5 million, or $0.21 per share for the same period last year.

Adjusted gross margins were 6.8%, compared to 7.1% for the fourth quarter of 2009.

Adjusted SG&A was $58.6 million, or 3.1% of revenue, compared to $52 million, or 3.1% of revenue in the fourth quarter last year.

Adjusted operating margins was 3.6%, unchanged from a year ago, and up 20 basis points sequentially from the third quarter.

The team did an exceptional leverages SG&A and keeping the Company within its normalized 3.5% to 4% operating margin profile.

The adjusted tax rate for the fourth quarter was 12%, up slightly from the third quarter.

Finally, pre-tax return on invested capital was 29.5% for the quarter, and 25% for 2010.

Both the quarterly and the full-year percentages represent the highest quarterly and annual ROICs the Company has ever achieved.

In terms of a restructuring update as of December 31, during the quarter we recorded $25 million of restructuring and other charges.

We have now recorded all charges related to the $150 million to $175 million restructuring program announced in 2008 and 2009, and have no further charges planned beyond what will be driven from our changes to IFRS.

Specifically, starting with the March 2011 quarter, Celestica will report its financial results in accordance with the International Financial Reporting Standards, or IFRS, as required for all public companies in Canada.

As you know, the Company currently prepares its financial results under Canadian GAAP.

IFRS is not expected to have any significant impact to the Company's non-GAAP financial metrics, which the Company uses to allow investors to compare Celestica's financial results with those of its major North American peer group.

However, let me highlight the two most significant changes as we transition from Canadian GAAP to IFRS.

The first relates to the timing of recording restructuring charges under IFRS.

Although we have recorded all of our restructuring charges under GAAP, our charges for 2010, included approximately $11 million for actions not yet announced by December 31, 2010.

We are recognize these restructuring charges under IFRS during the first half of 2011 when these actions are announced.

The other area of significance relates to the balance sheet, and specifically the accounting for actuarial losses arising from pension and post-retirement benefit plans.

IFRS provides the Company with the option to more closely follow US GAAP, where the balance sheet more accurately represents the economic position of these plans.

Under Canadian GAAP actuarial losses are treated as off balance sheet and amortized to operations over time.

As a result, the net impact of this change is that we expect to see an overall reduction in deferred pension assets by approximately $90 million and an increase in pension liabilities of $40 million, with a corresponding adjustment against opening shareholders equity for approximately $130 million on transition to IFRS.

For clarity, this one-time transitional adjustment impacts our balance sheet only.

When we report Q1 results in April, comparative financial information for each quarter of 2010 will be reported under IFRS.

Again, we expect to see minimal impact to our non-GAAP measures reported through 2010.

Periods prior to 2010 will not be presented under IFRS.

The Company will disclose additional details of the expected IFRS impact in its 2010 annual management discussion and analysis.

The first quarter of 2011 interim financial statements will also contain reconciliations between IFRS and the amounts previously reported under Canadian GAAP.

Moving to our working capital performance in the quarter, I'm pleased to say we managed our inventory and cash cycle very well, despite the significant sequential revenue growth experienced in the quarter.

Inventory was up sequentially in the third quarter by $81 million, or an increase of 11%, which was well below the sequential revenue growth of $330 million or 21%.

This strong performance resulted in inventory turns of 8.7 times, a solid increase from 8 turns in the third quarter.

CapEx for the quarter was $25 million, consistent with our run rate at approximately 1% to 1.5% of annual revenue.

This CapEx was -- primarily supported the growth relating to the ramping of new programs.

Cash cycle showed a solid six-day improvement, going to 29 days from 35 days in Q3, and free cash flow was $31 million.

The balance sheet remains strong, as we continue to maintain the strongest net cash position amongst our North American peer group and ended the quarter with a cash balance of $633 million.

Our ending cash balance includes a $75 million advance from a customer to secure inventory in support of future demand.

At December 31, our $200 million credit facility was undrawn.

In January, we successfully renewed the terms of our credit facility, replacing our $200 million revolver, with a new four-year $400 million facility on similar terms.

Celestica continues to have no debt outstanding, giving the Company's significant financial strength and flexibility moving forward.

During the quarter, we spent $103 million to repurchase for cancellation approximately 11.4 million subordinate voting shares.

The share repurchases were part of the Company's normal course issuer bid approved by the Toronto Stock Exchange in July of 2010, which allows the Company to repurchase up to 18 million or 9% of its subordinate voting shares in the open market until August 2011.

Since the commencement of the program, the Company has spent $141 million to repurchase for cancellation approximately 16.1 million shares at an average price of $8.75 per share.

The total number of subordinate voting shares which may be repurchased for cancellation under the buyback program is reduced for the number of shares purchased for employee equity-based incentive programs, ofwhich we purchased approximately 1 million shares during the NCIB program.

As a result of this activity, Celestica had approximately 214 million outstanding basic subordinate and multiple voting shares as of December 31, with approximately 900,000 shares remaining to be purchased under the normal course issuer bid.

Let me now turn to our first quarter guidance, where I am pleased to report we are guiding for a strong March quarter.

We anticipate revenue to be in the range of $1.725 billion to $1.875 billion, which would represent a 4% sequential decline at the midpoint.

This guidance reflects stable demand and the benefit of new programs won in 2010, and compares favorably with some of our more recent seasonal declines in the first quarter of 15% or higher.

For adjusted earnings per share in the first quarter, we anticipate a range of between $0.20 to $0.26.

As we discussed in the September quarter, our recent revenue mix shift, with higher growth from our server and consumer end markets, will likely results in operating margins in the near term that are slightly below our stated target of 3.5% to 4%.

At the midpoint of our first quarter guidance, we anticipate margins slightly below the 3.5% range, but as you saw this quarter, we're working very hard to keep margins as close to our target range as possible while we absorb the mix shift in our business.

Free cash flow is anticipated to be negative in the first quarter, as a result of paying for inventory purchased in the fourth quarter to support the higher growth rate, as well as the payment of annual incentive programs which occurs during the first quarter.

On an IFRS basis, we anticipate a $0.07 to $0.11 per share negative pre-tax impact on earnings for the following items; quarterly stock-based compensation, amortization of intangible assets, and restructuring charges.

That concludes our formal comments on the fourth quarter results.

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

(Operator Instructions).

Your first question comes from Brian White from Ticonderoga.

Your line is open.

Hi, good morning.

When we look at the server business, obviously a significant uptick in servers, I think much better than what your peers have been seeing.

How should we kind of parse that out between new programs and just follow-on programs with existing customers?

Well, Brian, we had -- as I mentioned we had -- the bulk of the strength would be from the new program, quarter on quarter.

But as I did mention, we did have strength in all of our core customers, so base business strength, which was very encouraging, as well as a very strong contribution from the new program.

Okay.

And some of the -- one of the newer significant programs that you talked about on the last call, how does that -- is that ramp more in the first quarter, or that ramped more in the fourth quarter, or we haven't seen a high percentage of that ramp yet?

You have not seen the full ramp.

I would say about half of that ramp has been in the fourth quarter -- the contribution to the fourth quarter, and you'll see an equal contribution to that in the first quarter.

Okay.

And just finally, enterprise networking, up 14% you said sequentially, which is much better than what your peers have been seeing, and I think the market has been seeing.

Just, again, is this new program win activity, or is this follow-on business with existing customers?

Again, as you might remember from the calls, I mean we had been doing a lot of work targeting customers, targeting programs.

So, again, it's a combination of both.

Right.

Thank you.

Okay.

Thank you.

Thanks, Brian.

Your next question comes from Wamsi Mohan from Bank of America Merrill Lynch.

Your line is open.

Yes, thank you, good morning.

Good morning.

You seem to have exhausted more of the share repurchase program you currently have.

Should we expect the next six months to be more focused on tuck-in M&A?

Or perhaps you could address the priorities of cash?

Yes, I think the next three months -- or next three to six months, let's say, would be focused on first the organic growth investments we would make in working capital and the associated plant and equipment to finance the organic growth in the new program ramps we've won.

Then you would be talking about increasing our investments in design and development, so on an expense side.

And then you would be talking, as kind of the third priority, tuck-in acquisitions to further facilitate and accelerate our progress in our new vertical markets.

And then the fourth priority would be, once we kind of exhaust those, at least in the near term, we would be looking to more aggressively evaluate other options to return cash to the shareholders.

Okay,thank you.

And as a follow-up, what specifically did you reclass from consumer to enterprise?

They seem like two very distinct segments.

So are you tracking perhaps the adoption of something in the enterprise of a historically consumer product?

Any color would be helpful.

Wamsi, It's Paul.

We have one customer where we serve them both in the consumer and in the enterprise side.

And just looking more closely at it, we thought that the attributes of the product, while a case could be made either way, that one segment of it probably fit a bit better in the enterprise side.

Okay.

Thanks, Paul.

And last one from me.

Can you clarify what was in the $0.03 charge related to impairment of the long-lived assets, and do you expect any further impairments in the next couple of quarters?

Sure.

So the majority of the impairment relates to actions that are tied to, I'll say, restructuring.

It's just the order of how we take the charges.

So we had one particular operation which is going to be restructured.

You kind of book the impairment first, and then you -- what is left you restructure.

So I would say it's essentially all in the same.

Do we expect anymore?

The answer is no.

I mean, we do our annual impairment testing, and based on where we are with the profitability of the Company, we're comfortable with the balance of the assets that we have.

Thanks a lot.

Thank you.

Thank you.

Your next question comes from Alex Blanton from Clear Harbor Asset Management.

Your line is open.

Good morning.

Good morning.

Good morning.

Have you noticed among your customers a trend toward bringing production back from the Far East to Mexico, for example?

Or closer due to the -- any currency changes or cost increases in labor and so on in China?

Well, first, Alex, congrats on your new job at Clear Harbor.

Thank you very much.

And good luck.

Thank you.

In terms of -- we're looking -- I mean, customers are continuing to look at derisking their supply chains, and obviously as freight, as labor costs continue to grow, then as you could expect they are looking at the total delivered cost, so they are continuing to evaluate.

The other aspect is really the rate at which things change in the end markets now.

I'll say lead times take on an increased importance.

So eliminating the need for premium air travel or those long freight lines on the shipping lanes are continuing to create opportunities in markets for us in North America.

Obviously Mexico is an attractive source for us, because we have got a high-performance team down there, both in Reynosa and Monterrey.

And then obviously we're bullish about our prospects to bring the knowledge that we have in Celestica to make our facilities in places like Toronto and Austin and San Jose.

We are very bullish on a balanced approach, and we think Celestica, with our flexibility and the ability to demonstrate to the market we can manage our margins through an economic cycle creates a unique advantage, because we're not -- frankly, we're not vertically integrated, so that creates an advantage for us to tailor our supply chain to these types of changes.

Do you think this gives you some protection against some of the Asian competitors, or are they -- do you think they'll move with this --

We never use the word protection.

We say we think it gives us a unique advantage to be able to compete with their very aggressive cost performance, and obviously on a given day, we think if we target the right markets, Celestica can clearly establish in the minds of our customers a clear advantage.

So the short answer is yes.

Okay.

We think that's -- yes.

And finally, the market shares that you are gaining, who would you say that is coming from?

Your North American -- large North American competitors, smaller competitors who -- where business is shifting to larger companies, or from the Asia competitors?

Where is it coming from?

Well, I mean, again, we're targeting end markets where complexity, reliability and quality matters, so obviously it would largely be coming from the three segments you mentioned.

But, again, large consumer programs that would -- with very little complexity, with few skews, would not be the areas we would be taking share.

So we would be taking share in the target markets, and it would be from a wide range of competitors, both tier 2, tier 3, tier 4, as well as some of our tier 1 competitors.

Thank you very much.

Thank you.

Your next question comes from Sherri Scribner from Deutsche Bank.

Your line is open.

Hi, thank you.

Congratulations on the quarter, you guys.

Thanks, Sherri.

Thanks, Sherri.

In terms of the inventory, it was up about 11% sequentially, and I know you mentioned you ramped some inventory to support new customer programs.

I guess I'm curious, you also mentioned that you want to continue to invest in the business.

Would you expect inventory to trend down in the next quarter, and is any of that related to component constraints?

So, Sherri, with regards to going forward, we're seeing some strong demand here.

Craig mentioned some of the programs that are continuing to ramp.

I don't expect inventory to go down.

I think that our strong performance will continue, notwithstanding that we'll probably see a little bit of reduction in the overall inventory turnover side.

Okay.

So even though revenue is coming down, you are going to still continue to grow that inventory to support programs?

Yes, I mean, it becomes a bit of a mix issue, right?

So some programs turn faster than others.

And so as we look forward, we're seeing a bit of an impact from that, but notwithstanding that, we continue to expect to see strong performance.

I would not say any of that is related to shortages in the marketplace.

I think going back through the year that we have done quite well as far as getting the parts when we need them and haven't had any impacts from a revenue point of view from shortages.

And that trend has continued, and we don't see that changing.

Okay.

Great.

And then in terms of the CapEx and reinvesting in the business, you spent about, what, $25 million this quarter, which is higher than you have been spending on a quarterly basis.

Would you expect the run rate of CapEx spending over the -- through fiscal 2011 to be similar to that $25 million per quarter run rate?

Yes, Sherri, I think that we have certainly been running -- keeping the CapEx low as utilization rates have been low.

We now expected to see it more in our traditional 1% to 1.5% of revenues, even though over the last year it has been more trending lower than that, or at the low end.

I think it's fair to say it will be within that 1% to 1.5%.

Okay.

Great.

Thank you.

Thank you.

Thank you.

Your next question comes from Brian Alexander from Raymond James.

Your line is open.

Thanks, andalso congrats on the outlook.

Thank you, Brian.

You mentioned your server business, Craig, would have been strong excluding the ramp with the new customer, so if I assume the server business would have grown in line with historical trends of about 20% excluding that ramp, it would suggest this program added somewhere close to $80 million in the quarter, and I think you said it's only halfway ramped.

So on an annual basis, perhaps we're looking at $150 million a quarter, or potentially $600 million a year.

Is that in the magnitude of what you are talking about with this new customer, or is that aggressive?

No, I would say it's in the magnitude.

Okay.

And so if I look at your guidance for the March quarter, even without this ramp, it looks like you are guiding revenue better than seasonal.

I just wanted to confirm that's the case, and if so, what are the primary drivers behind that outlook?

Hey, Brian, it's Paul.

I think that, as Craig mentioned on the call earlier, we have been working hard to book business across all of our end-market segments, and I think you are seeing the benefit of that reflecting into our first quarter guidance.

I think it's as simple as that.

And just to -- beyond March, I know we're not giving guidance, but one of your competitors a week ago talked about some lowering of forecast beyond the March quarter across the broad base of customers.

To the extent you have looked at the forecast that far out, is that something you are seeing as well or not?

Brian, I think when we last spoke, we spoke about 10% to 15% growth for 2011, andthat's something that we continue to be very comfortable with.

Okay.

And then, I guess the final question, just on that server customer, they have got some exciting programs that I believe they are manufacturing internally.

Is that potentially an opportunity down the road for you, assuming all goes well with the current ramp, which it seems like so it far is?

I'm not familiar with the programs they are manufacturing internally, so --The programs that we're involved with are a very exciting part of their business.

They are very bullish on continuing to invest there.

So it will -- it is going to be a very program to our future.

Thanks.

Thank you.

Thank you.

Your next question comes from Shawn Harrison from Longbow Research.

Your line is open.

Hi, good morning.

First off just a clarification.

In terms of the consumer ramp as well, are you halfway in to that ramp as well, or is there, I guess, further progress that we'll see into the March quarter?

Well, the contribution to some of the increase for the quarter was related to the startup and very successful launch of our European operation, so we continue to grow market share throughout the world, and it's a continuous ramp of programs and now geographies, and so -- We're more into building a business mobile that's global and competitive, and offers the flexibility that they need to meet demand, so it will be a continued, I'll say, progression, but we expect slightly reduced quarter-on-quarter performance -- quarter-on-quarter revenue.

Slightly reduced for Q1 forthat area.

Okay.

But it sounds as if it is going to be less than seasonal.

[That's not] -- I mean, our consumer business now today is fairly balanced in at least the demand that we see from our particular mix of business does not have the seasonality that Celestica experienced in the past when we were in the gaming business.

So it's kind of a much more balanced business, and it ebbs and flows with -- I would say on a much less volatile basis.

Yes, Shawn, if I can add to that, I think it has less to do with seasonal and more to do with just the programs that we have, and how they are doing in the marketplace, which is something we also look to manage by having a balanced portfolio within that segment and the particular customer.

Will you be expanding outside of smartphones within consumer, either with that customer or with other customers?

Is that something that is on the horizon?

Well, again, we have targets, right?

So we like to keep this consumer business.

We had a slight reduction on an overall basis.

We're targeting to move that segment to about 25% of the overall Company.

The Company is growing, but -- Yes, we're participating actively today in other segments, for example, in the [set-top] space, as well as in the services space.

So it'san important segment of the business, and obviously a contributor to our success.

Okay.

Then a brief follow-up.

as we look to see margins rebound in the second half of the year, how much of that is just getting over some of the hurdles from the initial ramp of the programs, which you seem to have done very, very well so far, versus just more of a richer mix of business coming on?

Again, it is a balance, as we mentioned -- I mean, onewe get to the production run rates, then we have the flawless launches in place and we can work on cost reductions.

And then we move to a phase in the second half where we see some of the more -- the higher margin growth in emerging markets such as industrial, aerospace and defense, and health care kicking in.

So it's a nice balance and gives us more leverage going in to -- I would say roughly 50/50.

If you want some numbers.

At that point in time, incremental gross margins should be in the mid-to-high single digits?

I'm sorry, Shawn.

Clarify the question?

Contribution margins on a gross basis, once you get in to the back half of the year, they'll kind of -- I guess will stay in a steady state of mid-to-high single digits, something like 5% to 8% on an incremental dollar?

Yes, I think that's fair.

It depends obviously on the mix of the particular revenue, but as part of that I'll say -- and you saw it this quarter -- you see our OpEx is pretty constant, and we're seeing good leverage there.

So I think, again, it depends whether you are ramping a server or an industrial program, but I think that's a fair average.

That's the way to think about it.

Okay.

Thank you very much, and congratulations.

Thank you.

Your next question comes from Matt Sheerin from Stifel Nicolaus.

Your line is open.

Yes, thank you, and good morning.

Good morning.

So just following up on Shawn's question or your answer regarding the emerging markets, the industrial, the other markets, where you see -- sounds like you have pretty good visibility into the second half.

Are you winning programs now?

And do you have booked business?

What gives you the confidence that you where going to get that mix shift toward the upper end of that operating margin range?

Well, we had a good year last year.

So we had a good bookings year last year.

We have -- we have very good customers.

We have the quality -- I think the quality of customers.

And then obviously the visibility of those programs on the back of a base business that appears to be fairly strong gives us that confidence.

Okay.

And then looking at -- just a couple of questions on the share count.

What should we assume for share count this quarter?

So as I said in my remarks, Matt, at the end of the year, we're at essentially 214 million shares between [MBS and SBS], and there's only 900,000 shares left on the normal course issuer bid to execute on.

So I think around the 214 million is probably a good number to use.

Okay.

And that $75 million cash that you talked about from a customer --

Yes.

In terms of building for inventory, have you -- does that inventory number that you just published, does that include $75 million?

No, it's a gross number, so -- we have got a $75 million deposit, but the inventory is showing in the inventory line.

So we have not netted the cash against (inaudible -- multiple speakers).

So it is showing.

Okay.

Thanks a lot.

Thank you.

Your next question comes from Louis Miscioscia from Collins Stewart.

Your line is open.

Hey, great.

If I could maybe ask you to summarize it, outside of the server segment, I know you talked about new wins.

Is it completely across all of the categories, or maybe you could highlight some of the areas where you are seeing more new wins in?

Lou, I think it is fair to say it's across all of the categories.

Okay.

Maybe ask, then, a high-level question just about the EMS industry in general.

It does seem like everyone is doing quite well, which is obviously good.

What are you seeing out there in the market that it is not a win or loser kind of situation, at least maybe for the big four or five companies, but it seems that it's a win-win right now.

Well, if you look at some of the industry data, and it says the industry grew 30% in 2010.

Obviously some of the outlooks I have seen more recently say they expect that to be much more muted, maybe 6% to 8% this year.

The good news is we see a lot of non-traditional companies looking at outsourcing for the first time, which is creating opportunities.

I think the best news for Celestica is we're operating at a level where customers are looking to consider us for business that maybe two or three years ago they might not have considered us for.

So we see strong opportunities for the Company, both based on -- not so much the market growth, but more importantly what we're bringing to the market, as well as the new companies entering the market and our ability and track record in some of the high-mix low-volume spaces.

Final question is on the server area.

Do you have any X86 server business, or is it more -- almost all the high-end kind of RISC or mainframe kind of stuff.

Yes, we don't, I'll say, discuss specifics of programs.

Just suffice it to say, when you think of Celestica, you think of us dealing in the high end, high quality, high reliability, more complex areas of the business, so that's where that business will be focused.

Okay, great.

Good luck on the new year, and nice job.

Thank you, Lou.

Appreciate it.

Thanks, Lou.

Your next question comes from Amit Daryanani from RBC Capital Markets.

Your line is open.

Thanks.

Good morning, guys.

Good morning, Amit

Hi, Amit.

Hi.

Just thinking of the March quarter guidance.

My math indicates you guys are basically ramping close to $175 million to $190 million of revenues in the quarter, which to me seems very sizable.

Could you just talk about if there's some concern or cautiousness that is build into our guide, especially in your margins?

Do you ramp [initial] learning curve inefficiencies in the March quarter?

Amit, it's a Paul.

I think that even look about of our fourth quarter, where -- you see it from the numbers -- we ramped some sizable revenue, and notwithstanding that, performed we think pretty well from a margin point of view.

One thing Celestica has done very well here over the last several years is building a solid execution platform, so we don't have any -- much concern about having ramping issues.

We think we have taken everything in to account in our March guide with regards to margins, so feel pretty comfortable with where we are.

Got it.

So I guess, Paul, the March quarter guide looks like margins will be down 30 to 40 basis points or so sequentially.

I would imagine the mix is [going to vary] in March, because consumer business down as well.

So could you just talk about what are the puts and takes for the margins in the March quarter then?

Sure, I think that, while overall we expect some slight decline in consumer, it's not much.

So, I mean, the short answer is, if you think about the server business and the consumer business having a similar margin profile, when we look in to the first quarter, the concentration in those two segments actually will nudge up slightly, just given as Craig mentioned we're only halfway through the other ramp in the server area.

So I would say that's the predominant driver overall.

And as I said earlier, we're working hard to obviously try to not have any margin decline net quarter on quarter, but, on an balanced basis, everything we see today, we're trying to be prudent in setting expectations with you.

Fair enough, and then just finally, you guys talked about an uptick in R&D spending.

Is there any way to quantify how much you expect to increase that through 2011?

Yes, I think it will ebb and flow somewhat, but in our model we don't see that being more than 20 basis points as a percentage of revenue.

And I think that's a good way for you to think about it in your model.

So not starting right out of the chute from that level, but from a model point of view, building to be about 20 basis points of revenue.

Perfect.

Thank you, and congratulations.

Thank you.

Thanks a lot.

And, Amit, I should have mentioned that we will, in fact, be disclosing that as a separate line item in 2011.

So you'll be able to see that distinct from gross margin and SG&A starting first quarter.

Next question comes from Todd Coupland from CIBC.

Your line is open.

Yes, good morning, everyone.

Good morning.

Hi, Todd.

I just wanted to go to the point on the cash.

You listed off the various options.

Medium term, is the read-through that you are thinking about putting a dividend back on the table if you only can find tuck-in acquisitions as a use for cash?

So, Todd, I think that's always an option on the table.

I don't know when you put near term, what time frame you put around that.

I think our view is you're looking at some pretty strong growth here, and we want to invest in the business, and whether that's organically or through tuck-ins, that's probably more of our priority.

So our minds are not really focused on dividend here in the short-term.

Okay.

And then just secondly, in terms of the customers over 10%, so once a server program is fully ramped, is it appropriate for us to be thinking that you'll have two customers at over 10%?

Yes, Todd, that's correct.

Okay.

Great.

Thanks very much.

Thank you.

Michelle, we'll take one more question, please?

Okay.

Your final question will come from Gus Papageorgiou from Scotia Capital.

Your line is open.

Thanks.

Most of my questions have been answered, but just, I guess, Paul, a question for you.

The NCIB, assuming that you execute the remaining 900,000 shares, when can you reissue another share buyback program?

Hey, good morning, Gus.

They are one year.

So under an NCIB, we would have to wait until August before we launched a new program.

As obviously you are aware, there are other ways if we wanted to take a share count down, but under a normal course we would have to wait until August.

Okay.

And -- I mean Craig outlined the priorities for the cash, but you are still in a position where you have quite a bit of excess cash.

I mean, would you look at other options to take the share count down in the midterm, or would you -- do you think the best course is just to wait and reissue the NCIB?

Well, listen, I think we have done a good job so far of returning excess.

We have talked historically that in our minds we need about 400 million or so to run the Company.

So when you consider where we are, the excess cash number is continuing to go down.

But, Gus, we're looking at all the options, and once againI think that, evidenced by even where we end up in revenue for fourth quarter, candidly the growth was stronger than we expected when we entered the quarter.

As you know, the model does consume cash on the way up, so we want to be careful with what we do with the cash right now, given the growth that we are seeing.

Thank you, and congrats on a great quarter.

Thanks, Gus.

Thanks, Gus.

Okay.

I would like to just thank everybody for joining us today.

And look forward to sharing our continued progress.

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect.