Celestica Inc (CLS) 2011 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Celestica's Third Quarter Results Conference Call.

(Operator instructions.)

Thank you.

I would now like to turn the call over to our host, Mr.

Manny Panesar, Celestica IR.

You may begin your conference.

Thank you, Andrea.

Good afternoon, everyone, and thank you for joining us on Celestica's third quarter earnings conference call.

On the call today are Craig Muhlhauser, President and CEO, and Paul Nicoletti, EVP and CFO.

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 the Q&A session, 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 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 risk 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 projects or forward-looking statements.

These filings include our Form 20-F and subsequent results 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 in 2011, our financial results are reported under International Financial Reporting Standards, or IFRS.

Comparative results reflect this change.

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

These non-IFRS measures do not have any standardized meaning under IFRS and are not necessarily comparable with 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 the non-IFRS measures to the corresponding IFRS measures, if appropriate.

I will now turn the call over to Craig Muhlhauser.

Thank you, Manny, and good afternoon, everyone.

I will provide you with the highlights of Celestica's third quarter financial results and then as Paul Nicoletti to summarize the details of the quarter.

Despite the backdrop of continued end market volatility, Celestica delivered strong third quarter results, with year-over-year revenue growth of 18%, adjusted EPS growth of 44%, IFRS earnings growth of 136%, and continued strong margin and free cash flow performance.

Revenue of $1.83 billion and adjusted EPS of $0.26 was essentially at the midpoint of our guidance.

On a sequential basis, revenue, adjusted EPS and operating margins were essentially flat with the second quarter.

Our operating margin of 3.7% continues to be in line with our targeted 3.5% to 4% annual objective.

Our return on invested capital of 26% continues to be among the best in the industry.

Our third quarter results reflect the continued progress we're making on revenue diversification, with 26% sequential and 55% year-over-year growth in our diversified end markets, which include industrial, aerospace and defense, healthcare, and green technology.

Overall for the third quarter, I am pleased with the Company's performance and the progress towards our strategic objectives while delivering strong operational and financial performance despite the continuing economic uncertainty and volatility which is impacting our customer demand.

As we look to the future, we continue to see increased uncertainty and demand volatility, with a softer demand outlook and reduced visibility.

At the midpoint of our fourth quarter guidance, we anticipate revenue to be down sequentially about 3%, with demand reductions across our traditional end markets, offset slightly with approximately 10% growth in our diversified markets.

We anticipate our diversified markets business will grow sequentially and year-over-year as new programs ramp to production volumes.

We continue to target to achieve 25% to 30% of our revenue from diversified markets and expect this end market will represent approximately 18% of our total revenue portfolio by the end of the fourth quarter versus 11% in the fourth quarter of 2010.

Despite this challenging environment, Celestica remains focused on providing industry-leading flexibility and responsiveness to support our customers' success and delivering on our 2011 revenue growth, operating margin and ROIC targets.

Before I conclude, I'd like to discuss the situation in Thailand and the devastating flood conditions that the region is currently experiencing.

I'm inspired by the spirit of the Thai people as they respond to this developing situation.

And on behalf of Celestica, our thoughts and prayers are with the people of Thailand as they continue their efforts to overcome this adversity.

To date, our operations in Laem Chabang remain unaffected by the heavy rainfall and flooding, and we continue to monitor the situation closely and to address any issues that may arise, particularly from a supply chain perspective.

In closing, I'd like to thank each of you for your continued interest and support of Celestica, and I want to assure you that Celestica remains focused on supporting our customers' success by providing industry-leading speed, flexibility and operational performance while delivering on our commitments and ensuring appropriate returns for our shareholders.

Now I'd like to turn the call over to Paul Nicoletti.

Thanks, Craig, and good afternoon, everyone.

Craig provided some highlights on the third quarter.

I will provide some specific commentary on our end markets, profitability, returns, balance sheet and fourth quarter guidance.

As Craig mentioned, our third quarter results reflect the continued progress we are making on revenue diversification, with strong sequential and year-over-year growth in our diversified end markets.

Revenue from the diversified end markets grew 26% sequentially and now represent 16% of our total revenue, up from 13% in the second quarter and 11% in the first quarter.

On a year-over-year basis, our diversified end market grew 55%.

Enterprise communications represented 26% of revenue and was unchanged from the second quarter.

On a year-over-year basis, enterprise communication revenue grew 22% primarily as a result of new program wins.

Our consumer end market was 25% of revenue and was also unchanged from the second quarter.

On a year-over-year basis, consumer revenue is up 27% as a result of new program wins with existing and new customers.

The server end market represented 14% of revenue, down from 17% in the second quarter.

On a year-over-year basis, server revenue grew 20% due principally to program wins from 2010.

Storage was 11% of revenue, with revenue up 6% on a year-over-year basis.

And finally, telecommunications came in at 8% of revenue, down from 9% in the second quarter.

Revenue from this segment is down 27% on a year-over-year basis.

Our top 10 customers represented 70% of revenue for the quarter, and our top five represented 52% of revenue.

We had two customers with revenue greater than 10% in the quarter, with our largest customer representing 18% of revenue.

The Company posted third quarter IFRS net earnings of $50.2 million, or $0.23 per share, compared to IFRS net earnings of $21.3 million, or $0.09 per share, for the same period last year.

The third quarter net earnings represent the highest results since the third quarter of 2007.

Adjusted net earnings for the quarter were $57.4 million, or $0.26 per share, compared to adjusted net earnings of $42.5 million, or $0.18 per share, for the same period last year.

We continued to maintain our strong cost control discipline during the quarter, with adjusted SG&A at $57.6 million, or 3% of revenue, which was relatively flat compared to the second quarter.

Our SG&A performance was also strong on a year-over-year basis, where, despite revenue growing by 18%, or $284 million, our SG&A was $3 million lower on a year-over-year basis.

Adjusted operating margin was 3.7%, flat to the second quarter and higher by 60 basis points from a year ago.

Our performance is within our targeted 3.5% to 4% operating margin range.

Finally, pre-tax return on invested capital was a strong 26.4%.

Moving to working capital performance, our inventory position improved by $71 million, and we generated free cash flow of $105 million in the third quarter.

Once again this quarter, we negotiated with one customer to fund higher inventory levels that we were holding for them and received a $100 million short-term cash deposit that is reflected in our cash and account payable balances for the quarter.

CapEx for the quarter was $19 million, consistent with our expectation of approximately 1% to 1.5% of annualized revenue.

Cash cycle was 36 days, a one-day increase from the second quarter.

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

Cash balance at September 30 was $586 million, up $33.5 million from the second quarter.

During the quarter, we repaid $45 million that was drawn on our credit facility which, as you may recall, was utilized to finance the portion of the acquisition of the Brooks contracting manufacturing operations in June of this year.

Let me now turn to our fourth quarter guidance where, as Craig noted, reflects volatility and limited visibility as a result of the overall economic environment.

We anticipate revenue to be in the range of $1.7 to $1.85 billion.

For our 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 December quarter.

SG&A is expected to be relatively flat, and we also expect positive free cash flow in the fourth quarter.

As Craig noted, we continue to see a softer demand outlook in most end markets, with modest growth in our diversified markets.

Despite the sequential revenue decline in the fourth quarter implied at the midpoint of our guidance, we expect to maintain our operating margin and ROIC performance and to generate free cash flow.

That concludes our formal comments, and I would now like to open up the call for questions.

(Operator instructions.)

Wamsi Mohan with Bank of America Merrill Lynch.

Yes, thank you very much.

Can you comment on what is happening in the server portfolio?

Was the sequential slowdown more related to a sort of rollover of one of your high-end customers lapping an introduction last year, or was it a more broad-based slowdown that you saw within the server portfolio?

Hey, good afternoon, Wamsi, it's Paul.

I think essentially it's all relating to demand that we're seeing for the customer set that we have.

So certainly last quarter, as well as last year, we saw some very strong growth, strong demand.

Suffice it to say it's just reflective of the demand that we're seeing right now with the customer set that we have.

Okay.

Thanks, Paul.

And then, as a follow-up, maybe it's too early to comment on this, and I'm glad that you didn't see any direct impact from the flooding in Thailand as it pertains to your facilities, but can you give us some sense of the potential indirect impact as it pertains to the server and storage businesses in particular, given that the hard drive industry comments have been fairly negative from supply constraints?

Is there any way to ballpark that and think about it as it pertains to your business?

Yes, sure, Wamsi.

So just to -- as Craig mentioned, our operations have been unaffected, so we're really not in the range of flooding areas at all.

So, so far, our operations are running business as usual.

As far as the impacts to the supply chain, we have seen some nominal impacts, and I'll emphasize nominal, that we're pretty confident that we will be able to work through.

So overall, as it sits here today, we don't expect any material impact at all.

Okay, thank you very much.

Nice margin performance, guys.

Thank you.

Thanks, Wamsi.

Matt Sheerin with Stifel Nicolaus.

Yes, thanks.

So just looking at the guidance, you talked about sequential growth in the diversified markets and weakness in others.

Does that mean that you expect each of those other markets to be flat to down?

Could you just be a little bit more specific about what you're seeing?

Because it sounds like there's sub-seasonal expectations across the board here, and I just wanted to see if you can be a little bit more granular.

Thanks.

This is Craig, Matt.

In general, as we mentioned, the traditional markets -- consumer, communications, storage and server -- in general are down single digits across the board, by and large, and the demand is softening pretty much across the patch, and obviously that's offset, to some extent, by the growth we continue to see in the (inaudible) vertical space, which we assume to be about 10% at this point.

So down mid single digits sequentially pretty much in those segments?

Yes.

And are you getting a sense that there's too much inventory at customers, because there looks like some of the subsegments for the September quarter were below what you had expected.

So did you start to see orders slow down earlier than September, which led to kind of the weakness in the September quarter, or have you seen customers be more cautious over the last few weeks?

Yes.

I mean, I think we've seen them be more cautious.

If you look back to the third quarter sequential change, I mean, you'd see kind of half and half, where some were up slightly, some were down slightly, so on a net-net basis it was essentially flat.

Now we see them all down single digits again, I'd say.

So in general, it's the lack of -- it's an uncertainty.

It's obviously companies are very cautious at this point.

The European situation I'm sure is exacerbating some of the concern.

But in general, people are very uncertain.

And the other thing is the volatility.

So we see a lot of late cycle changes in the operating plan, but obviously our guidance reflects a range, and this is the -- the current outlook is that uncertainty, that volatility gives us caution as to how we set the midpoint.

Sure.

And then on the consumer side, mobility, you look like you saw some seasonality there.

Do you expect to see a seasonal uptick in the fourth quarter as well?

Hey, Matt, it's Paul.

I think that, as we mentioned in our formal comments, while we expect growth in diversified, everything else is just slightly down.

So difficult for us to say in this environment what is a typical seasonal trend into fourth quarter.

So as we mentioned, I think we expect pretty much everything to be slightly down except for diversified.

So consumer as well?

Okay.

All right, thanks a lot.

Thank you.

Thank you.

Brian White with Ticonderoga.

Okay, great.

You've seen some more cautious [stance] by your customers' decreased visibility.

Are customers cutting orders?

Hey, Brian, it's Paul.

Certainly, as we sit here today from where we were 60 days ago, the answer would be yes.

And so we have seen demand come down, so it hasn't been as a result of -- basically it's been just fundamental demand declines across the board.

As you know, when we look at our numbers, it's a combination of orders and forecast, so I won't delineate specifically between those two, but suffice it to say that what the message is we've been getting from our customers, again from where we would have saw last time we spoke, is down.

Okay.

And then group automation, could you just update us how that's integrating, success stories?

What are you seeing there?

Sure.

So the integration itself as far as the operations has gone extremely smoothly.

They continue to perform very well for their customers.

Certainly it's not been immune to what's been going on in the semiconductor space.

So while our overall diversified revenues are up, as you saw, quite nicely, clearly the semi-con revenue is not what we expected to see.

So we are seeing some cyclical downturns there.

We're encouraged by the capabilities that it's brought, and we're seeing some early signs as being able to leverage those capabilities, particularly in the mechanical, electro-mechanical side into other verticals within diversified.

So obviously we're disappointed that revenues are down, but as far as the strategic thesis of it, we continue to be pretty optimistic and feel pretty strong about what it's going to do over the long-term.

Okay, great.

Thank you.

Thank you.

Thank you.

Lou Misciosciawith Collins Stewart

Hey, thank you.

I was wondering if you could actually maybe talk a little bit about the consumer strategy in the sense of are you going after a lot of business there still, or you sort of trying to de-emphasize that?

And maybe give us also some thoughts as to consumer overall in first quarter, given that can normally be a very down seasonal quarter.

Well, our consumer strategy, as you know, Lou, is aligned largely in the SmartPhone space.

Obviously we have other customers in the business, primarily in the set-top box space.

We've moved away from the gaming industry and don't have the seasonality we've had in the past.

Obviously it's to continue to build the business around our major customer and to support the growth of that customer and the aftermarket, as well as serve other customers in the consumer space in the aftermarket server space.

So that's, again, part of our portfolio strategy.

Obviously the concentration of consumer today is at 25%.

You should note the combination of the enterprise communications and telecommunications business combined.

We put that at about 30%.

So obviously the 20%, 25% mix of consumer is in line with our strategy, and it's a high growth segment with high return on invested capital.

[Initially] the margins are slightly below our targets, but obviously it contributes to the overall portfolio strategy of the Company.

So that's the overall summary there.

And Lou, the second part of your question as far as what we see, going forward, so we're not giving guidance at this point for first quarter.

And again, hard to say what typical seasonality will be in the first quarter.

I mean, all else equal, I would expect to see some seasonality in the consumer segment as well as others.

Clearly, as you know, our main customer's going through a lot of program transitions, so that could -- we could see a surprise on the upside.

It really depends on how their products are doing in the marketplace, which is that -- really too early for us to tell, given that we are in the midst of ramping some of these programs right now.

Okay, thank you.

Thank you.

Thank you.

AmitDaryananiwith RBC Capital Markets.

Yes, thank you.

Good evening, guys.

I have a question on the margin line.

I mean, you guys have obviously done a pretty good job keeping that within the long-term targeted [bandwidth] of 3.5% to 4%.

I'm just curious, could you talk to the levers around this operating margin line, and how low could sales get (inaudible) continue sustaining this margin run rate?

And is there any part -- or are you guys starting to look at cost cuts or restructuring initiatives to defend that operating margin line at this point?

Hey, Amit, it's Paul.

I think, to your question of the levers on margin, I mean, I'd say it's largely changing the mix of the revenue in the Company.

So you know our strategy has been to take that diversified market segment from -- it's been at 10%-ish zone for quite some time up to 30%.

And that really in itself increases the operating margins just by shifting the mix [to] the Company.

So as you can see from the numbers this quarter, we're making good progress along those lines, and certainly that's helped us shore up the margin performance here despite some of the revenue softness.

As far as your other question, specifically do we see any restructuring activity, no, not at this time.

Clearly we're deploying our strategy, making investments along the lines of that strategy, so we don't want to compromise the short-term to sacrifice the long-term.

But as far as any wholesale changes in network, that's not something we anticipate at this time.

Obviously if revenues were to fall off significantly, that's something we would have to revisit, but have no plans at this point.

Fair enough.

And then, just maybe if I could talk a little bit more on the diversified [side], I mean, you guys have clearly seen a lot of growth in the last several quarters out of the segment.

The best you can see, I mean, are these just new outsourcing opportunities that are coming up?

And if so, could you talk about which specific markets are you seeing that in, or are these more kind of [competitive ends] that you guys are benefiting from?

Amit, it's really -- it's Craig.

Good afternoon.

It's really across the board.

I'd say it's new outsourcing opportunities.

It's programs that are offered by customers that have existing outsourcing.

They're looking for alternatives to their current suppliers.

And it tends to be across all of the four major markets - aerospace and defense, healthcare, industrial and green tech, as well as the new semiconductor equipment opportunities that we're seeing.

So companies are also looking.

I mean, during a downturn, more market share begins to change hands, so obviously our financial strength plays into that because many of these companies are served by tier two or tier three EMS partners, and obviously they're looking at business continuity in the wake of what could be a fairly protracted challenging time here.

So it seems to be playing well.

We are fortunate right now, and it seems to be something that's continuing to provide a strong underpinning.

So we're really pleased with the progress.

Obviously we've got a lot of work to do to get to the 30% initial milestone, but we're very confident with the trajectory we're on.

Yes.

If I could just finally ask you, if you do go through a protracted downturn, [if it is] a flat environment, this segment should continue to sustain double-digit growth, I would assume.

And is there some sort of timeline you have that you could share and what you intend to achieve or can achieve 30% of revenues from that segment?

Well, we don't like to put any stakes in the ground too far in the future because we said we'd talk about fairly limited visibility, but the objective -- we lay out a three-year plan here, and obviously those objectives are aligned with that timeframe.

I think it's -- we said this in 2010, so, I mean, I would expect to be there in 2013, from my personal standpoint.

And then, yes, I would expect these -- given the magnitude of the opportunities, I said a robust operating platform.

90% of our customers had us number one or number two on the scorecard, our financial strength.

I should see these -- to achieve those goals, we'd have to continue the double-digit rates, and certainly the opportunities are there.

Perfect.

Thanks a lot, and (inaudible).

You bet.

Thank you, Amit.

Thank you.

SherriScribnerfrom Deutsche Bank.

Hi, thank you.

I wanted to ask about the telecom segment, clearly down a bit this quarter, and it's been declining year-over-year over the past couple of quarters.

Is this an area where you're losing market share, or is it an area that you're de-emphasizing?

Sherri, it's Craig.

Hi.

Good afternoon.

Basically, it's poor demand from our customer mix, so you could infer from that that the customers that we're serving would be losing market share, or the mix of programs that we have with those customers are not seeing the revenue growth, or seeing revenue declines that obviously are impacting our company.

And are those sort of tier two customers, or can you give us any sense of who some of the customers might be in that segment?

Well, I'd prefer not to, but I'll tell you they're tier one telecom infrastructure companies.

Okay.

And then just thinking about the diversified manufacturing segment, you're expecting a lot of growth there.

Some of that seems to be in industrial segment, which we would have thought would have been slow, and you mentioned semiconductor, which we would have thought had been slow.

It's becoming a larger piece of your business.

Can you give us some sense of how each of those different markets breaks out in terms of revenue?

Hey, Sherri, it's Paul.

Right now I think, if you look at the main segments, industrial would be the biggest portion of that, and that's certainly helped by the acquisition of the Brooks operations, and would probably be around half of it.

And after that, the rest are kind of evenly distributed.

The next largest would be aerospace and defense, which, as you know, we've had a leadership position from a market share point of view, and would fall off from there.

But industrial would be the biggest, and followed by aerospace and defense.

Okay, great.

Thank you.

Thank you.

Thank you.

Brian Alexander with Raymond James.

Yes, just to follow up on that, it seems like you're seeing year-over-year revenue declines in all of your segments, excluding diversified, in the fourth quarter, in some cases, like enterprise computing, significant.

So as you grow the diversified business, are you actively pruning in some of these other segments, or is this truly a reflection of what you're seeing in your customer base, particularly around server and storage?

Well, we're selectively pursuing opportunities, so we're not pruning in the sense.

We have strong OEM relationships with the major tier one providers in this segment, Brian.

I think the message here is these generally are demand declines in the key areas of the business that we're targeting, which tend to be at the high end to mid range, and we're not participating in the low end of most of these customers' portfolios largely because of commoditization of those products.

And we are, you know, continuing to focus on those customers as opportunities to move us into more of a joint design and manufacturing relationship, which gives us the opportunity to add more value.

So important segment, major contributor to our success, underpins a lot of the investments we're making in diversified.

But in general, with the exception of storage, quarter-on-quarter storage will be up slightly, but all are down largely based on softening in demand in the areas of the portfolio that we're serving for those customers.

Got it.

And just when did you guys begin to see kind of a more abrupt change in customer order patterns?

Was it toward the end of September?

Was it earlier than that, or was it more kind of in the month of October?

No, I think we signaled a little bit of that in the conference call we had in the second quarter, and then we saw it in the August-September time period and become more pronounced, frankly.

Okay, thanks so much.

Joe Wittine with Longbow Research.

Hi, it's Joe calling in for Shawn Harrison.

Can you hear me okay?

Yes.

Yes.

Hi, Joe.

Thanks.

Maybe real quick, I want to go back to consumer.

I think you said it's going to be down sequentially, along with most of your other end markets.

But I guess I just have to ask, the top customer that makes up three-quarters of that business is forecasting sequential unit growth in the 30% range, let's say.

So I guess just the question is what's going on for Celestica?

Are you involved in [order] programs?

Is it the European business that you mentioned last quarter that's going away that's really doing a lot of their -- or maybe are you just being conservative in the guidance there, given the questionability of a lot of those programs?

Thanks.

Sure.

Hey, Joe, it's Paul.

First, I think it's probably worthwhile just going back a couple of quarters as well.

So specifically, when our biggest customer was showing some volume declines, our revenues didn't track to those same volume declines, and that's probably of note.

So we've seen a pretty steady overall revenue envelope.

I think going forward, you know, [candidly] difficult to track their numbers and any particular provider, so I'll remind you that there are four main providers.

We are a significant provider to that customer, but not the largest.

And really how our portfolio does, it just really depends on the demand on the particular products that we are supporting them on, and so we're not supporting them on every product that they're selling.

So it just really depends on the products you have and what markets you're doing and the timing of when those products are coming to ramp.

Okay, fair enough.

Maybe just as a quick follow-up, anything you're seeing in the component cost environment right now, component prices ticking down, that may help you out from a gross margin perspective?

Joe, nothing in particular.

I mean, certainly our experience is that, when you see downturns, you generally see price reductions, and I think we're seeing a consistent cycle right now.

Okay, thanks.

Congrats on the [EBIAT] margins.

Thank you.

Thank you.

Jim Suva with Citi.

Thanks, guys, and congratulations on going through a difficult time and coming out strong.

Just a follow-up question on helping us connect the disconnect here of your largest consumer mobile customer who indeed is guiding up about 30% this quarter, but you're going down.

You mentioned you're not on every product or program, so one has to wonder, are you not on the new products and that customer is going to materially decline, going forward?

Or help us better understand it, because that's a material part of Celestica that really doesn't match the end market.

Again, they're guiding up 30% and you're guiding down.

It just doesn't match.

So maybe do another take [on] help us understand that better.

Well, Jim, we'll try again.

I mean, again, we -- so we talked about new program wins with that customer, and we are in the midst of ramping some of those programs as we speak, so several of those programs.

With regards to what the revenue guidance is, suffice it to say we put our own spin on what that demand pull-through might be and come to our own assumptions as to what that might be.

And lastly, we provide a range of revenue by design, given that there is some volatility on what demand might be.

And clearly, when we look at the revenue for fourth quarter, we have a large proportion of our revenue that is dependent upon new programs, which, as you know, we're less -- we're not concerned about our ramping them as far as execution.

But clearly there's more risk in the demand when there are new programs.

So I wish I could give you more color than that, but that's essentially the story.

Great.

So it sounds like you are on the new programs, and the concern is that you weren't.

Then the follow-up is on the diversification segment, of getting to 25% to 35%.

Is that organic, mostly, or acquisition-driven?

It just looks like the past few quarters has really been driven mostly by the Brooks automation if that indeed is in that segment, or is it just the numbers aren't manifesting themselves now to show the organic?

Jim, it's Craig.

Certainly in aerospace and defense and healthcare and the industrial and green tech space, industrial and green tech is where we currently log the semiconductor equipment business, and that's seen well over 100% year-on-year as we're outlooking the full year, and that's largely due to the Brooks acquisition.

But every one of the other segments is up clearly in the double-digit space, and the overall verticals are up 50%.

So we're seeing double-digit growth above the 10% across the business, and obviously we've juiced it, to some extent, with Brooks.

That also creates a platform to do even better as we look to the future because of the capability it's brought and the opportunities in semiconductor even with the downturn.

So I think you can feel pretty comfortable that, for the near-term here, we've got our arms around a pretty interesting strategy in diversified, and we're confident in the targets we've set.

Great.

Thanks for the details.

That's very helpful, gentlemen.

I appreciate it.

Thank you, Jim.

Thanks, Jim.

GusPapageorgiouwith Scotia Capital.

Yes, thanks.

Sorry, I have two questions.

Again, just on the guidance -- and I just want to focus on the enterprise segment for a second -- so on that segment, I mean, you're up about 26% year-to-date.

And traditionally, that segment sees a nice bump in the fourth quarter, but sounds like you're guiding that one down, as well.

So can you talk a little bit about what's going on there?

I mean, are you losing programs or customers in that segment, or have you -- it's hard to believe a weak end market demand would result in sequentially down quarter in Q4 for the entire enterprise sector.

Hey, Gus, it's Paul.

So specific to your question, is that the impact of any program losses, no.

I mean, this is what we're seeing for the demand from some of our core customers.

Certainly you know just as -- better than I that many of the customers, even as of the last couple of days, in some of the guidance they've given is less than inspiring.

So it's just reflective of the demand that we're seeing.

And I will say, clearly, we're being cautious, and I will re-emphasize that's why we have a range.

But right now it's just we are seeing overall softness in those core markets, and it's not reflective of program losses, just the demand signal that we're seeing.

Gus, it's Craig.

And it's the mix of the portfolio.

Obviously we're at the high end and the mid-range, and as those strategies play out and the [commoditization] of the low end is where we're not playing.

So the growth associated with the seasonality really depends on which part of the business is seeing that growth.

And right now we just see a general softening in demand, and obviously the outlook's cautious on the basis of the volatility and the limited visibility.

Okay, so my other question is just on the inventory.

So the inventory is down slightly sequentially, but in terms of inventory days, it's relatively flat.

I think, Paul, you suggested we would see the inventory start to come down in the second half.

I mean, do you still -- do we expect that inventory levels will come down in Q4, or is that going to be pushed off to Q1?

What kind of trend should we see there?

Yes.

So -- hey, Gus.

I think you saw some solid progress in Q3, so we're pleased with the absolute dollar reduction.

I think we would expect Q4 to come down, as well.

I will remind you that back, too, there's a bit of a circular formula in there with regards to the cash deposit from the one customer so that the gross inventory number is reflected in the inventory, and the cash offset is the offset.

So you've got to kind of look at those things together if you want to try and normalize what's really going on with inventory from our point of view.

But that aside, we do expect inventory to continue to come down in the fourth quarter.

Both in terms of absolute dollars and inventory days?

Yes.

I think days will come down just because of the [calc], or the two-point [calc], so we're starting the quarter with a balance which is $70 million lower, so the math will get you there.

But in absolute dollars, we'll also come down.

Okay, great.

Thanks.

Thank you.

Thank you.

Todd Couplandwith CIBC World Markets.

Hey, good evening, guys.

One last question on consumer, if I could.

So, Paul, should we read into your answer on the guidance range that a significant portion of that is volatility or potential upside or downside demand within the consumer segment?

Todd, I'll say that, if I look at the -- any particular range, and -- any segment, and if we have to put a range on any particular segment, consumer has a higher vol to it because of -- just by function of us being in the middle of ramping several new programs.

So there's a bigger beta on consumer with certainty, again not to do with our execution but to do with just the end market demand that we'll pull through from that customer.

Okay.

My second question has to do with thinking about your cash balances as we enter into 2012.

Is a dividend on the table, again looking into 2012, or will you focus on M&A and just calibrate buybacks as opposed to sort of a steady payout?

Give us your thoughts on that, please.

Thanks.

Sure.

So Todd, I mean, our priorities continue to want to be to deploy the cash to grow the business organically, and so that's priority number one.

Certainly in this economic downturn, we do expect there to be opportunities, from a tuck-in point of view, where we can look at things and candidly be able to pick them off at a lot lower price than we would have otherwise a few quarters ago.

I think as you've known us now, I mean, while those are our objectives at the end of the day, if we don't see anything that fits with our goals as far as return, and then we'll return the capital to shareholders.

We are consciously holding on right now.

We see opportunities from a tuck-in point of view.

And on the flip side, certainly the macroeconomic view is quite risky right now, and so we're okay to be a bit long in cash.

But we're mindful that obviously, as cash continues to build, that that's something that we can only do for so long.

And so that's how we look at it.

As far as if we were to return capital, it would most likely be in the form of a buyback as opposed to a dividend.

Great.

Thanks very much.

Thank you.

Thank you.

NaserIqbalwith Salman Partners.

Thanks, and congrats in a tough environment on the quarter, guys.

Craig, looking to 2012 and beyond, I mean, you have a long-term target of the 6% to 8%.

Would you think that that's still a realistic range going into next year, or is it that the current macro picture changes your view on that?

Yes.

I think as we -- I mean, obviously those were long-term objectives that we've set for the Company, and obviously as I mentioned, given the volatility and given the uncertainty surrounding 2012, I mean, I think the message is -- I'm not prepared to offer guidance on the full year.

I mean, we had 10% growth in 2011, obviously in the midst of a second half that's been challenging.

And so we're optimistic on the opportunity, but at this time it's too early to be talking about full year 2012.

But the long-term goals -- and obviously the big challenge for us is we're making investments in the future.

We're confident in our strategy.

We're making progress, and we're very bullish on building a foundation here for the long-term.

So the way you can look at it, those goals don't get compromised.

The question is 2012 is something we're going to have to look at as we get closer to the beginning of the year and see how things are shaping up.

Okay.

No, that's helpful.

And just I guess, Paul, on the OpEx side, I mean, you talked that on a pro forma basis, below $60 in the quarter, and even in Q2 below $60 million.

Just that if we're looking at the environment going forward, given there is a challenging environment, do we think that you'll be diligent in constraining your OpEx cost such that we're not going to see big increases?

Yes.

I mean, certainly you can count on us to continue to be diligent.

I think as Craig mentioned, it's just a trade-off between short-term and long-term.

So suffice to say that we've got a total clamp-down on everything controllable that we spend.

The trade-off is not wanting to compromise the future and where we think it's right to invest at this point in time.

So absolutely on things that we think are not going to significantly impact the strategic shift we're making, the investments we're making in the JDM, our growth and diversified, those will continue, but everything else, safe to say, is clamped down pretty hard right now.

Okay.

No, that -- appreciate that.

Again, congrats in a very tough environment.

Thank you, Naser.

Thank you.

Andrea, we'll take one more question.

And just as a reminder, we are available for follow-up questions after the call.

Gabriel Leung with Paradigm Capital.

Thanks a lot.

Obviously the visibility around the current demand environment's awfully limited, but can you talk a little bit qualitatively or quantitatively about new bookings, new program wins that you've made recently that gives you some visibility into organic growth into 2012?

Hey, Gabriel, it's Paul.

So we've been -- as you know, we generally don't talk about bookings, so we're not going to start.

I will say that we've been booking business in all of our key end markets, and you're starting to see the benefits of that in revenue realization.

And you see that in Q3, and it's coming through in the year-to-year numbers.

So bookings are continuing in all of our key markets.

As far as the impact to revenue, that kind of feeds back into Craig's comment earlier about 2012 and where things are, which I think is frankly going to have more to do with just the macro environment as opposed to the traction that we're having on bookings.

All right.

And in terms of the stuff that you're winning, would you say it's more weighted towards the diversified manufacturing verticals?

I mean, it touches all the end markets, and so clearly -- probably worth noting that, clearly, we're looking to shift the mix to 30% diversified.

It's 30%.

In other words, it says we're still generating 70% of our volumes elsewhere.

And so I certainly don't want to leave with the view here that we are de-emphasizing those other markets.

We're just looking to double-down our efforts in diversified and chase the right opportunities in our core markets, utilizing strategies such as, again, our joint design manufacturing, where we see opportunities to drive higher value for the customer and higher margins for Celestica.

And then, lastly, to further penetrate the repair aftermarket business, which for us is still relatively small with our objectives to have that represent a much larger proportion of revenue within Celestica.

That's great.

Thank you.

Thank you.

So Andrea, thank you for your support, and I'd like to thank everyone for their time and interest.

And we look forward to continuing our conversation.

Thank you very much.

This concludes today's teleconference.

You may now disconnect.