Celestica Inc (CLS) 2011 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Celestica, Inc.

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).

Thank you.

Mr.

Paul Carpino, Vice President of Investor Relations, you may begin your conference.

Great.

Thank you, Alicia, and good morning, everyone, and thank you for joining us on Celestica's second-quarter conference call.

On our 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 some brief comments on the quarter, and then we will open up the call for Q&A.

We can also be reached for follow-up questions after this call.

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 into the queue after you ask your question.

Before we 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, 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 starting 2011 our financial results are being recorded under international financial reporting standards or IFRS.

Comparative results reflect this change.

We will refer to certain non-IFRS financial measures during this call, which include adjusted gross margin, adjusted SG&A, adjusted operating margin or EBS, and adjusted EPS and free cash flow.

These non-IFRS measures do not have any standardized meaning prescribed by IFRS and are not necessarily comparable to similar non-GAAP financial measures presented by other companies, including our North American peers.

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

I will now turn the call over to Craig Muhlhauser.

Thank you, Paul, and good morning, everyone.

Despite some revenue volatility this quarter, Celestica delivered another strong second-quarter result, characterized by year-over-year revenue growth of 15%, 23% growth on adjusted earnings-per-share, and continued operating margin expansion.

Revenue of $1.83 billion met the midpoint of our guidance, and our $0.27 adjusted EPS was at the high end.

On a sequential basis, revenue grew 2%, and EPS increased by 8%.

Operating margins expanded 40 basis points to 3.7%.

Succeeded our expectations of delivering operating margins of between 3.5% and 4%, a full quarter ahead of our prior forecast.

Our operating margins were the result of improving revenue mix and better operating margin performance from recently ramped programs.

A return on invested capital of 27% continues to be among the best in our industry.

We achieved this result despite our higher inventory position, which was negatively impacted by additional material requirements for one of our largest customers, as well as inventory associated with the purchase of the contract manufacturing division, Brooks Automation, late in the quarter.

Our second-quarter results also reflect the progress we're making on revenue diversification driven by market share gains and targeted business development initiatives in our diversified end markets of Industrial, Aerospace and Defense, Healthcare and Green Technology.

Revenues from the diversified end markets grew 15% sequentially and now represent 13% of our total revenue, up from 11% in the first quarter.

On a year-over-year basis, this end market growth has been 28%.

Servers grew by 13% sequentially and has grown 41% year over year, principally due to new program wins in 2010.

This end market now represents 17% of revenue compared to 14% in the second quarter of last year.

Enterprise Communications, now one of the largest end markets for this quarter, grew 4% sequentially, and represented 25% of our sales.

On a year-over-year basis, Enterprise Communications has grown 23% on new program wins and market share gains.

Our Consumer end market, which also represents 25% in sales, declined 3% sequentially this quarter.

On a year-over-year basis, Consumer is up 10%.

Storage was 11% of revenue, down 6% from the first quarter and up 2% from last year.

Finally, Telecommunications was 9% of revenue and declined by 14% on both a sequential and a year-over-year basis.

Our top 10 customers now represent 72% of our sales for the quarter, and our top five represented 54% of our sales.

We had three customers with sales of greater than 10% in the quarter with our largest customer representing 19% of our sales.

During the quarter we also completed the acquisition of contract manufacturing division of Brooks Automation.

The capabilities we acquired include complex mechanical and system assembly and integration services for wafer transportation, vacuum transfer modules and uniquely designed subsystems for industry leader semiconductor OEMs.

With this acquisition, we have added to our customer portfolio several new global semiconductor market-leading customers, further accelerating our diversification efforts.

Overall, I am very encouraged with the Company's top-line and bottom-line performance in the second quarter and the operating efficiencies we continue to deliver, especially in the ramps of our new programs.

Now let me conclude with summary marks on our third-quarter forecast, which reflects a softer demand outlook in a few of our end markets.

At the midpoint of our guidance, we anticipate revenue to be down sequentially about 2%, despite the incremental revenue benefit from our acquisition of the contract manufacturing division of Brooks Automation.

This sequential decline reflects a level of uncertainty across a few of our end markets, but is not overly concentrated in any single customer or end market.

Notwithstanding the slight decline at the midpoint of our guidance, we are expecting our diversified end markets to grow in the third quarter, reflecting the continued benefit of ramping new programs and a full quarter of revenue from the contract manufacturing division of Brooks Automation.

We anticipate our diversified markets business will continue to deliver strong growth in the third quarter and is forecasted to represent approximately 16% of our total revenue portfolio by the end of the third quarter.

The dramatic progress we have made in the diversified end markets over the past few years reflects the successful deployment of our strategy to achieve our goal of 25% to 30% of our revenue mix from diversified markets over the next three years.

We anticipate that the global economic environment will continue to drive volatility in customer demand.

And despite this environment, Celestica remains focused on providing industry-leading flexibility and operational performance to support our customer success and delivering on our 2011 revenue growth, operating margins and return on invested capital targets.

Thank you for your continued interest and support of Celestica, and now I would like to turn the call over to Paul Nicoletti.

Thanks, Craig, and good morning to everyone.

Craig provided some highlights on revenue in the second quarter, so let me provide you some specific commentary on our profitability, returns balance sheet and third-quarter guidance.

The Company posted IFRS net earnings for the second quarter of $45.7 million or $0.21 per share compared to IFRS net earnings of $13 million or $0.06 per share for the same period last year, reflecting the benefit of higher operating earnings and lower year-on-year restructuring and tax expense.

Adjusted net earnings for the quarter were $58.7 million or $0.27 per share compared to adjusted net earnings of $50.4 million or $0.22 per share for the same period last year.

Adjusted gross margins were 7.1%, a solid 40 basis point improvement from 6.7% in the first quarter.

As Craig noted, an improving revenue mix and solid execution with the ramping of new programs drove this improvement.

We continued to maintain our cost control discipline during the quarter with adjusted SG&A at $57.2 million or 3.1% of revenue.

This was relatively flat compared to the first quarter.

Our SG&A performance was also strong on a year-over-year basis, where, despite revenue growing by 15% or $244 million, we contained our SG&A growth to $5 million or 9% over the same period.

Adjusted operating margins were 3.7% compared to 3.3% in the first quarter and 3.6% one year ago.

The strong 40 basis point sequential improvement allowed us to achieve our targeted 3.5% to 4% operating margin goal one quarter ahead of schedule and creates a base for maintaining this level for the back half of 2011.

Finally, pretax return on invested capital was a strong 27.4%.

Moving to our working capital performance, we experienced some impact associated with the higher inventory levels required by one major customer, as well as inventory associated with the acquisition of the contract manufacturing division of Brooks, which came late in the quarter.

Inventory turns were 6.8.

Excluding this $39 million associated with the acquisition, inventory dollars declined sequentially by approximately $9 million, and turns would have been 7 times.

During the quarter we negotiated with one customer to fund the higher levels of inventory we were holding for them and received an $83 million short-term cash deposit that is reflected in our cash and accounts payable balances for the quarter.

CapEx for the quarter was $10 million, below our annualized expectation of approximately 1% to 1.25% of annual revenue.

Cash cycle was 35 days, a four-day increase from the first quarter.

Improvements in accounts receivable days were offset by the higher inventory days and lower payable days.

Free cash flow for the quarter was $2 million.

Moving to the balance sheet, the Company's financial position continues to be very strong.

Cash balance at June 30 was $553 million.

During the quarter we also completed the purchase of the Brooks contract manufacturing division acquisition for $78 million, using $33 million of cash and $45 million from our $400 million credit facility.

Let me now turn to our third-quarter guidance, whereas Craig noted, reflects some volatility in a few of our end markets.

We anticipate revenue to be in the range of $1.725 million to $1.875 billion.

For adjusted earnings per share, we anticipate a range of $0.23 to $0.29.

At the midpoint of this guidance, operating margins would be approximately 3.7%.

Our tax rate is expected to remain in the 10% to 12% range for the September quarter.

SG&A is expected to be up slightly in the low to mid $60 million range, and we also expect higher free cash flow in the third quarter.

On an IFRS basis, we anticipate an aggregate $0.05 to $0.07 per share negative pretax impact on earnings for stock-based compensation, amortization of intangible assets, and restructuring charges.

Despite some headwinds on revenue, we anticipate achieving our 10% to 15% revenue growth target for 2011, and we are encouraged with the traction that we are seeing in deploying our strategy and delivering on our margin expansion game plan.

We look forward to continue to deliver strong performance to our customers while continuing to deliver strong financial returns.

That concludes our formal comments.

I would now like to open up the call for questions.

(Operator Instructions).

Jim Suva, Citi.

A couple of clarifications.

How much sales and EPS is being contributed for your Q3 outlook, and is that also part of your goal to hit 10% to 15% sales growth for 2011?

Sorry, can you repeat the question.

How much is Brooks or your acquisition contributing to sales and EPS in Q3, and is that also included in your 10% to 15% 2011 sales goals?

So our 10% to 15% goal includes the revenues we are seeing from the base and including the acquisition.

We will not be giving specific guidance on the revenue with regards to in the guidance relating to that acquisition.

When we announced the deal, we talked about revenues -- quarterly revenues being between $60 million to $70 million per quarter.

So that is what we talked about when we announced it, but we won't be carving it out specifically.

Finally, we do expect the overall deal to be accretive for the year, slightly below our longer-term goals from return on capital point of view as we incurred some integration spending.

That aside, we still expect it to be accretive for the year.

A quick follow-up.

Your original goal of 10% to 15% I also assume for this year did not include the Brooks Automation acquisition.

But we are trying to do is keep apples compared to apples for the outlook in your full year.

If you can just give us some thoughts, you had mentioned that you continue to expect sales to grow 10% to 15% per year, but it really seems like we are comparing apples to oranges if you could just clarify some there.

Sure.

So as we discussed, certainly we have seen some revenue headwinds in the back half.

And so a fair comment, certainly, previously the 10% to 15% did not include the impact of the acquisition.

But, as I said, we are not going to specifically carve that out.

But we are seeing some strong growth across many of the end markets, but we did mention certainly seeing some headwinds in revenue in the second half versus what we previously expected.

Thank you very much, gentlemen.

Wamsi Mohan, Bank of America/Merrill Lynch.

Amit Daryanani, RBC Capital Markets.

I just want to go back, if I look at the September guidance organically, excluding the $65 million contribution from Brooks, it looks like sales will be down about 5%.

Diversified it sounds like should hold up fairly well.

Can you just talk about are you seeing the pockets of weakness that is leading to what looks like the sub-seasonal guide in revenue degradation in Q3?

Sure.

As we mentioned in our comments, we are seeing it in a few of our end markets.

So when we look at things, things are mixed.

Certainly, as you know, one of our largest customers has commented that overall they do expect volumes to be down.

So it is safe to say that we are seeing an impact there.

But there's a couple other sectors that we are seeing some pockets of weakness as well versus our previous expectations.

Can you just talk more about other segments where you are seeing the weakness?

Because it seems we are getting a couple of mixed data points across the board.

So it would be great to get your perspective on what you are seeing in a couple of your bigger end markets as you get into Q3.

So nothing I would say that it is overly pronounced in any particular segment.

I mean you look at our revenue growth that we have experienced in our Enterprise Communications, which has been pretty strong, so I think it is just a question of, how's the new programs we have won, how they are ramping, what the end market demand is, so see a little bit of movement there.

I would say that telecom going back over the last few quarters for us has been an area that has not been as strong, really reflecting the demand on the products that we report to the customers that we have.

That would be another one that I would specifically comment on.

That is helpful.

I just want to clarify one thing.

You said SG&A would be low to mid $60 million.

Was that accurate?

I'm assuming a lot of it is because the Brooks Automation deal flowing in.

Is there a line of sight we can get it back to sub-$60 million run rate that you have been be running at, or should we think of it to remain as this low to mid $60 million run rate going forward?

Yes, we did pick up some SG&A from the acquisition.

So I think it is probably best to think of it in the low to mid 60s.

Thanks a lot.

Sherri Scribner, Deutsche Bank.

I wanted to get a sense of the improvements in the margin this quarter.

I know that you talked about improving yields on programs that you have been ramping, but I wanted to see if there was anything else that was going on that helped you improve the gross margins in terms of cost reductions, or is it primarily related to better volumes?

Good morning.

It is Craig.

It is really a couple of things.

Number one, it is the execution side of the business, so the ramps of new programs is showing higher efficiencies.

The other thing you see is the benefit of our mix shift as we move more and more of our volume into higher-margin segments like the growth in emerging markets.

The deployment of our strategy really is beginning to take hold.

So you see the revenue mix also impacting the margin improvements.

Okay.

And then just trying to get a sense of what you're hearing from your customers, it seems like from commentary from other companies that demand is a bit soft.

Have you seen your customers take down forecasts for the back half of the year, and what type of visibility do you have right now?

Well, the short answer is yes.

As we mentioned, it is not any one particular customer.

It is kind of a broad base with the exception of the marketshare growth we are achieving and the growth in the diversified segment, if you will.

I mean customers are a bit more cautious about demand.

Obviously, there is a lot of uncertainty, and we have reflected that in our guidance.

I think the other thing that is happening is the volatility of demand, so the visibility of demand in terms of what might happen in various economic -- the things going on around the world are impacting our customers, I will say, forward-looking forecasts.

So visibility is getting shorter.

I mean they continue to see a low growth environment, so a number of companies -- as you look at some of the major telecom, their wireless providers are very careful about capital expansion as consolidation appears to be taking place in the industry.

But the message to, I guess, the group on the phone is our growth this year has been primarily associated with new program wins and marketshare growth.

So we show strong year-over-year performance.

The franchise is very strong.

We show strong deployment starting to materialize, as we mentioned, and we are looking for 16% of our third-quarter revenue to be in our Diversified segment.

The successful integration of Brooks should add additional momentum to that, so I encourage the people to look at the deployment of this strategy in the platform, the flexibility of our platform.

So should demand improve?

You see the range in our guidance and obviously the leverage on the upside.

But it is a very, very uncertain environment.

We do anticipate volatility.

We think whether it is an economic downturn, a customer demand issue, I think through our margin performance this quarter, you can continue to have confidence we can meet those requirements.

It is just what we currently see.

Okay, great.

Just quickly clarifying, the Brooks Automation is in your diversified manufacturing (multiple speakers).

Correct.

It would be in the Industrial space.

Okay.

Thank you.

Matt Sheerin, Stifel Nicolaus.

Just want to ask a question regarding the inventory issue that you talked about and that $83 million or so that was the cash that you got from a customer.

Was that because you are building inventory in anticipation of a big program ramp, or was there inventory sitting because sales didn't come through?

Could you just elaborate a little bit on that?

Sure.

So, certainly, given the I will start to say with the Company's balance sheet strength, we don't need that cash for any liquidity reasons.

We have arrangements with this customer regarding the level of inventory that we would carry, and the pricing formula reflects a certain assumption on inventory turns.

If, for whatever reason, those inventory turns are not achieved, then we look to, frankly, work with that customer to offset the impact, and that is really why we have that cash.

So, certainly, that could be as a function of many different elements, but suffice to say that inventory was purchased, and the demand likely didn't happen.

It is really no different math than what we had last quarter.

So last quarter we had a similar deposit with that particular customer.

So it has been kind of an ongoing way of managing our overall economic return with that customer.

Then just looking at the Consumer business, which was down, you talked about product transitions at a big customer.

Just sort of if you could help us with some visibility there.

Looking at your guidance, backing into it, I imagine that that customer will be down again this quarter, but are you looking at the possibility of a big ramp at some point with that customer?

Sure.

So, as you know, we can't specifically comment on the customers demand.

Suffice to say, I think the particular customer has been pretty public and has reported overall unit declines, certainly in the short term.

We have a great relationship with the customer, so with RIM, as we've commented here over the last several quarters, we have been winning new programs that were ramping in the second half.

So we're in the midst of ramping up several new programs that we expect will have a good impact in the second half.

Exactly what that will be is, obviously, dependent on the pull-through in the marketplace.

We are seeing some dynamics with respect to the decline in volumes, and on our portfolio it has certainly been more pronounced for us in Europe.

So, as you know, historically we have had a very North American centric portfolio and last year commenced supporting them in Europe.

The demand reductions that we have seen have been more pronounced in Europe.

As we work with all of our customers to put the most efficient supply chain in place to meet their needs, as well as meet our returns, as we look at the scenario right now, we do expect that our European demand from that customer will decline and will ramp down by the end of the year.

So that aside, we continue to talk to RIM and with all of our customers looking for additional geographic diversification opportunities.

But, really, it is a function of the dynamics that we are seeing for the particular products that support RIM with.

But by ramp down, does that mean that European program for that customer is going to go away?

That is right.

Okay.

Thank you.

Brian Alexander, Raymond James.

First of all, nice job on the strong margin performance.

Obviously, you overachieved.

I just wanted to clarify in the sustainability of that the guidance implying no deterioration sequentially, and I think you said you are confident you could hold it in Q4.

So should we think of this as a new floor for operating margins heading into next year assuming no material change in demand to the downside?

It is Paul.

I think we talked about our targets being between 3.5% and 4%, and we are absolutely standing behind those.

Where we are in that range I think will be more reflective of just the mix of the business.

So, certainly, while the declines this quarter -- while the declines in Consumer we are overall disappointed with, on a positive you see the impact to the margin on the mix side.

So, I think, frankly, where we will be in that 3.5% to 4% range is more reflective of that.

For my last comments, obviously, that is difficult for us to predict.

But, certainly, the 3.5% to 4% target that we laid out is something that we continue to be very comfortable with.

Is there any way you could dimension the upside you saw on margins between mix and the better ramps you saw with new programs?

I think you came into the quarter thinking you would be below 3.5%.

So at 3.7% how much of that 20 basis points or so came from mix versus the better ramps?

So when we talked last quarter, I think we mentioned that on one particular ramp in the server area that we had some disappointments on demand, and as a result, we are carrying some additional costs.

We turned that around in second quarter.

So I would say that when you look at the margin expansion, probably three quarters of it was in relation to improving the fundamental performance on that program with the balance being a function of the mix.

Then, final one, just thoughts on capital deployment, and, particularly, on share buybacks given that your execution and your operating performance has been quite good, and your stock price is sitting near a two-year low.

So I'm just wondering if you might get more aggressive in buying stock?

Sure.

So, I think that our track record is in pretty good as far as trying to look to deploy capital for growth.

I mean that is our primary objective When we don't see those opportunities to look at the capital structure being debt buybacks and/or buying back stock.

I will say that from a macro point of view, we are somewhat a little bit more cautious in relation to the capital markets overall, and that causes us to want to be a little bit more conservative with our cash.

Clearly we don't have the same level of excess cash that we had a year ago as well as evidenced by the small draw on the credit facility.

But I think our priorities right now would be to bite down on that debt, take a look at what we are seeing as far as the macro is concerned and go from there.

I should comment that we continue to see tuck-in acquisitions as a part of our strategy, particularly as it relates to adding more capability in the Diversified segment and the aftermarket repair side of our business, so that continues to be a priority for us.

So, as the year unfolds, we will take stock of the cash and how cash flow looks and make our decisions at that point.

But, at this point in time, we have no plans to buy back any further stock.

Okay.

Thanks and good job.

Shawn Harrison, Longbow Research.

I guess two clarifications.

The server ramps that you experienced in the first half of the year, are you fully ramped on those programs, or are there incremental pieces to come during the third quarter?

No, the ramps are fully ramped, and the demand impact this quarter was just better than market data.

And then on just working capital in the cash cycle, where would you expect the cash cycle to shake out during the back half of the year given the forecast you're seeing, and would you expect free cash flow for the year now -- for the year to turn positive?

It is Paul.

So we do expect to see positive cash flow in the second half as we work through burning off some of this -- some of the inventory that we are carrying above our targeted returns.

As you know, Celestica has, for the better part of three or four years, led the industry in inventory turnovers based on investments we have been making in IT tools, which really have added to capabilities.

Those elements continue to, obviously, be intact.

Where we are right now is more reflective of just what we are seeing from a demand point of view.

So we will improve the inventory turns in the second half and as a result generate cash flow.

As we sit here, I do expect to be positive on a full-year basis as well as a result.

Okay.

Thank you.

Louis Miscioscia, Collins Stewart.

Obviously appreciate the 2011 guidance.

Anything you can say about next year maybe tied into any wins you booked in the first half, if you can give us any color on visibility on that?

Yes, I think next year, as we have laid out before, I think the model 6% to 8% revenue growth.

And looking at improving mix, as we continue to grow through that 2012 time period and our growth in emerging markets, and, obviously, as Paul mentioned, moving up in the range of our 3.5% to 4% operating margin performance.

Then, obviously, a major part of 2012 for us will be improving inventory and higher cash flow.

So, again, it is a very fundamentally sound strategy.

Our execution platform is strong.

Rollout is growing profitably.

Markets we anticipate withstanding the very challenging economic environment.

On an overall basis, we expect the EMS outsourcing market to go similar between about 7% for the full-year 2012, so that sort of underpins the assumptions there.

We are still sticking to the model.

We have had a good year this year as we have talked about earlier on.

Some of our growth has been disproportionate in Consumer and the Enterprise segments, and obviously that mix will be coming back as we don't get so much of the year-on-year benefit of those large ramps.

But that is a good thing in that our operating performance will improve.

Our cash flow will improve, and we hope the value of the Company will continue to improve.

Okay.

Maybe you could -- I don't know if you get any more insight into that ramp down of some of the European Consumer business and how material that might be and if you've got something to offset that or we should model that down?

Paul, good morning.

So, I think, as I mentioned earlier, we are in the midst of ramping several new programs with our biggest customer.

So how we look at, obviously, that relationship on an aggregate basis, what the revenue will be is just dependent on the pull-through on that demand?

So right now our guidance reflects the impacts of everything that we are seeing, so the guidance for Q3 as well as our comments around the 10% to 15% for the full year.

So I think it is difficult for us to predict because it really depends on the pull-through of those new programs, particularly as we get into the fourth quarter.

Okay.

Great.

Thank you, guys.

Brian White, Ticonderoga.

Paul, on the EBIAT margin, it looks like it is the highest level since the end of 2001, and I'm just wondering if we can exceed this range that you have given recently of the 3.5% to 4%.

How high can Celestica take its margins?

So I think that we talked about the biggest lever there is the mix.

And when you look around the horn at our end markets, certainly the diversified markets and the aftermarket repair is the higher-margin elements of our business, and the areas that should continue being the lowest, they all had a balance out on the return on capital point of view, but the operating margin really is reflecting on how we are doing on the mix.

Our goal is to get to 25% to 30%, as you know, in those diversified markets.

I think when you look at some of the -- our competitors who have even larger weightings in those markets, I think it is safe to say that 3.5% to 4% would probably be a look.

That aside, we are happy with where we are margin-wise.

We want to be -- for a string of a few quarters here of being in that 3.5% to 4% range, but certainly our thinking is that as the mix of the business shift even more in terms of the markets, our thoughts start to think of those margins being about 4%.

Just as a follow-up, it looks like Servers had a good quarter.

Enterprise Communications had a good quarter.

Storage was weak.

Those three markets, as we move into the September quarter, do you expect them all to grow, or how are you thinking about those three markets?

As I commented, I think, with a question earlier, we don't expect all those to grow.

I mentioned -- we mentioned a few of our segments are showing a little bit of weakness.

So Enterprise Comm, as we discussed earlier, has shown some good strength.

I expect a bit of a pause there.

Vis-a-vis the rest, I don't see any big movement.

Great.

Thank you.

Naser Iqbal, Salman Partners.

Just when we are looking between the revenues versus your profitability, I mean it seems that issues or concerns about when revenues fall short, your margins have been, I guess, much higher than what the rest of us on the street have been looking for.

Maybe can you just talk about that even in the face of what you call not adverse demand conditions, currently, or low visibility, it seems that you have some capability and flexibility to offset lower demand with better operational performance maintaining these higher margins.

I think you mentioned -- I mean I think as I mentioned in my remarks, whether it is an economic cycle, a customer demand change or the volatility associated with a forward-looking forecast, I mean as a company we have got the simplest network.

It is a ROIC model, so we are highly leveraged on the benefits of a horizontal model.

And, basically, as a result of that, we talked about it in the early days at Celestica.

It wasn't so much the size and scale as the ability and the flexibility to respond and get a response.

I think you see it in the management team and focus of the organization, simplicity of the company that we have put in place, relationships with our suppliers, and then we are leveraging information technology to be able to move at the speed of change as the markets no longer can really give a company confidence the forward-looking forecasts have the integrity that they might have once had.

So, I think, again, it is comments of how far can we go here.

Well, we are taking it as one step at a time.

This is the next phase of our journey.

Can we demonstrate profitable growth?

Can we maintain our returns?

Can we do it in an industry that in the past has grown on the basis of sacrificing margin and return on invested capital?

We believe it is another proof point for you to have confidence that whatever the story externally is we will be in the position to at least meet our commitments when it comes to the operating returns and the return on invested capital for the Company.

Sure, sure.

I think you guys have been pretty consistent that what you said past couple of quarters you have been actually sticking to it.

And I guess just one on that theme then, someone asked the question about capital deployment.

Craig, you mentioned a couple quarters ago for the first time in a long time about potentially doing a dividend.

Even with all the issues of what is happening on your cash and the balance sheet, where would you put in terms of something like that?

Because it seems that even in a tough adverse environment and all the things on your plate, that a small dividend even would be still very doable regardless of the adverse condition environment.

Well, I think we -- we, obviously as we are in an evolution here, so we have a series of opportunities to further improve the mix of the Company.

So we have goals that we set for the next three years.

And, as Paul mentioned, the major goal right now is to achieve a 25% to 30% mix of diversified end markets as part of our revenue mix.

That is the number one priority, so capital deployed, to fund the working capital to make that happen, to fund the facility investments to further improve our operating performance, and to look for tuck-in acquisitions as number one.

Then we go to looking at our overall operating model.

Now we are going through a transition.

So, as things begin to stabilize and we look at more of a revenue mix that meets those near-term goals, then we look for cash flow, I will say more of a stable cash flow outlook, and a slightly stronger long-term inventory in this Company is $100 million to $125 million of free cash flow.

So that is the second thing we look for is the free cash flow, and then we don't want to be implementing a dividend here.

We will need to change it as we go forward.

Not that we don't have confidence in the cash flow generation, but we want to be sure we are accomplishing things -- first, our strategic objectives; second, our cash flow performance; third, then we look at forward deployment of capital, possibly in the form of a dividend, whereas the other comment was continued -- looking at share repurchase options.

Okay.

Great.

Thanks and congratulations on a great quarter.

Gus Papageorgiou, Scotia Capital.

Most of my questions have been answered, but just for clarity, in the quarter I am assuming that the Brooks Automation sales represented very little, if anything, in the quarter.

So the margin improvement is excluding Brooks Automation.

And as we go into Q3, I would expect that Brooks would be cumulative to margins.

Is that correct?

It is Paul.

Good morning.

You're right.

We closed the deal on June 28.

So we had a day of revenue.

So it was no impact to revenue or to earnings.

For 2Q it is more on the balance sheet side.

As far as the impacts going into Q3, as I mentioned, we expect overall for the deal to be accretive.

We are not going to spike up the margins per se, but we expect the deal to be accretive in the second half.

Not yet at what we target just given some of the integration spending in the first six months, but even with integration for it to be accretive.

Thanks and sorry, just one follow-up.

You mentioned the EMS industry to grow, I believe, around 10% in 2012.

But one of your competitors is suggesting that diversified industrials will have a much faster growth rate than other areas of EMS.

Do you agree with that, and do you think you can tap into that without acquisitions, or do you think that organically your diversified industrials business will grow faster than the average of the industry?

We believe the Diversified segment of our business will grow faster than the industry, and again, a large part of that is strictly market share.

So we are growing on the basis of market share growth, and then the fundamental, I will say, organic business that we have got in the portfolio is growing at or slightly above the 7% rate.

So the short answer is yes.

We expect to see strong double-digit growth.

I mentioned before going from 13% of our portfolio to 16% further improvements as we look through the end of the year in terms of increasing the mix of that business, and then I think the outlook for the opportunities in the segment continue to be very strong for us.

If I can add to Craig's comments, I think that many of those segments when you look at them we really see them as still going through a wave of outsourcing.

So when we look at our leading position, for example, in Commercial Aerospace and Defense where we have the largest market share of our competitors, we still look at that sector and say, it is only penetrated from an outsourcing point of view of somewhere in the 10% range.

So there is a ton of available market that we see in an area that, again, capitalizing on what we think are the strengths and capabilities we have, really looking to accelerate growth in those types of areas.

So each of those sectors be it Healthcare, Industrial, Commercial Aerospace and Defense have different levels of penetration.

But we see a ton of opportunity in them, and so we do expect those areas to grow faster for the industry and for Celestica.

We will take one more question, please.

Wamsi Mohan, Bank of America/Merrill Lynch.

I'm sorry.

I was having technical difficulties before.

So I apologize if this has already been asked.

But I think you noted that some of the improvement in the gross margin and opt margin line was partly because of mix, partly because of better performance in the ramp of some of these new businesses.

Is there incremental opportunity that still remains at other sort of benefits that you can still eke out at the ramp of these businesses, or are they pretty much operating at a level where -- which is consistent with your plan and sort of we shouldn't be expecting incremental benefits from any of those server ramps?

In terms of the operating performance, we are eking the benefits out of the ramps, and then I think as the programs meet their production levels of cost, quality and volume, there are always continued opportunities for further margin expansion, and those will be built into the going forward forecast.

So the short answer is, the continuous improvement mindset, it is all based around lean principles.

There's always opportunities to ring waste out of the operating network.

The real opportunity here will be to continue to ramp, and maintaining these performances is important to our going forward margin opportunities as well.

As I said, we were about a month ahead of where we thought we would be.

We just need to maintain that level of performance ramp-up and further improvement.

Okay.

Thanks for the color.

If I can just follow up, again, apologies if this was already asked.

But can you maybe share your views on the spending environment as you see it when you talk with your customers?

Are you seeing -- you mentioned volatility several times.

But are you actually seeing order cutbacks at this point, or is it more of a worry that there is more uncertainty within customers' minds and that could happen, but we haven't really seen any evidence of it so far?

Well, we are seeing a combination of both.

It is more around the uncertainty, and then the volatility is limiting the visibility, so customers are continuing to try to rebalance.

They are forecast to meet what they think the mix is going to be, and obviously, as things change, we have also heard customers talking about some of the major infrastructure, say, on the wireless side or looking at potential consolidations in the industry, so they have kind of restrained some of their capital spending in line with that.

And then the outlook in the US situation makes it a little bit difficult for companies to really understand consumer demand to the point where they know what the forward-looking demand, say, consumer confidence looks like.

It is really combination of volatility and demand, puts and takes on the type of products, and in some cases the reduction in various products, if you would.

So it is a kind of very broad -- not a very clear answer -- but it is certainly something that we continuously manage.

It ends up being our business.

The question is, can we manage within that and continue to deliver the operating margins and returns that we have committed to deliver?

And we would like to think you would agree that we can.

Thank you very much.

A good job on the margins.

Okay.

I would like to thank everybody for their time, their interest and support of Celestica, and we look forward to continuing conversations.

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect.