Celestica Inc (CLS) 2012 Q2 法說會逐字稿

Good morning, my name is Katie and I will be your conference operator today. At this time I would like to welcome everyone to Celestica's 2012 second quarter 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. I'd now like to turn the call over to Manny Panesar, Director of Investor Relations. Mr. Panesar, please go ahead.

Thank you, Katie. Good morning and thank you for joining us on Celestica's second quarter 2012 earnings conference call. On the call today are Craig Muhlhauser, President and Chief Executive Officer, and Paul Nicoletti, Executive Vice President and Chief Financial Officer.

This conference call will last approximately 45 minutes, Paul and Craig will provide some brief comments on the quarter and then we will open the call for Q&A. During the Q&A session please limit yourself to one question and one follow-up. Copies of the supporting slides accompanying this webcast can be viewed at Celestica.com.

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 our Company's filings and 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.

During this call we will refer to certain non-IFRS financial measures which include adjusted gross margin, adjusted SG&A, adjusted operating margin or ABS, adjusted EPS, ROIC and free cash flow. These non-IFRS measures do not have any standardized meaning under IFRS and are not necessarily comparable with other non-GAAP financial measures presented by other companies including our major North American competitors.

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 and the corresponding IFRS measures as appropriate. I will now turn over the call to Paul Nicoletti.

Thank you, Manny, and good morning, everyone. Celestica continued to generate cash and delivered solid returns on invested capital for the second quarter despite a soft demand environment and the start of the wind down of our manufacturing services for research in motion. Second-quarter revenue was slightly above $1.7 billion coming in at the high end of our guidance range. Second-quarter revenue grew 3% sequentially while on a year over year basis revenue was down 5%.

Some additional highlights for the second quarter -- IFRS net earnings of $23.6 million. Adjusted earnings per share of $0.22 came in slightly lower than the midpoint of our guidance and included a tax impact of $0.02 per share. Non-IFRS operating margin of 3.3% was sequentially lower by 10 basis points. ROIC continued to be strong at 23.4%.

We generated approximately $17 million of free cash flow for the quarter; we repurchased and canceled 4.6 million shares as part of our share repurchase program; and we recorded restructuring charges of $20 million primarily related to the wind down of our manufacturing services for RIM.

From an end market perspective we experienced sequential growth across all end markets with the exception of consumer. Our consumer end market, which represents 21% of revenue, declined 6% sequentially and was down 17% year over year primarily due to weaker demand.

Our diversified end market increased 1% sequentially and on a year over year basis grew 39% driven by new program wins which accounted for approximately one-third of the increase with the balance coming from the acquisition of Brooks' contract manufacturing division in the second half of 2011. The diversified end market now represents 19% of our total revenue, up from 13% in the second quarter of 2011.

The communications end market, which represents 32% of total revenue, was up 3% sequentially. On a year over year basis communications was down 11% as we experienced demand declines across a number of customers.

As expected, storage and server end markets experienced strong double-digit sequential growth. The server end market, which represented 16% of total revenue for the quarter, grew sequentially by 10% driven by two of our major customers. Revenue from the server end market was down 11% compared to the second quarter of 2011.

The storage end market comprised 12% of total revenue in the second quarter and grew sequentially as well as on a year over year basis. Storage was up 20% sequentially due to strong demand across a number of customers and was up 4% year over year mainly from strong demand from one major customer.

Our top 10 customers represented 71% of revenue for the quarter, down from 72% for the second quarter of 2011. Our top five customers represented 52% of revenue, down from 54% for the same period last year. We had three customers in the quarter individually with greater than 10% of total revenue. RIM represented approximately 17% of total revenue in the quarter, down from 19% of total revenue in the prior quarter.

The Company posted second-quarter IFRS net earnings of $23.6 million or $0.11 per share compared to IFRS net earnings of $45.7 million or $0.21 per share for the same period last year. IFRS net earnings in the second quarter were lower on a year over year basis primarily due to higher restructuring charges and lower volumes.

The restructuring charges we recorded this quarter impacted IFRS net earnings by approximately $0.09 per share. Adjusted net earnings for the quarter were $47.1 million or $0.22 per share compared to adjusted net earnings of $58.7 million or $0.27 per share for the same period last year.

Our adjusted tax rate in the second quarter was 17.4% versus 6.1% in the first quarter of 2012 and was higher than our typical 10% to 12% range driven by a geographical composition of profits this quarter versus the prior. The adjusted tax rate for the first half of the year was 11.7%, in line with our targeted 10% to 12% range rate. Looking ahead we expect or tax rate to be in the 10% to 12% range.

Adjusted SG&A expense for the quarter was $56.5 million which was slightly lower compared to the second quarter of 2011. Finally, pre-tax return on invested capital was 23.4%.

As per our announcement in June we will be winding down our manufacturing services for RIM over the coming months. We completed manufacturing services for RIM in our Romania and Malaysia locations at the end of June and we expect to complete the majority of the manufacturing services that we provide for RIM in Mexico by the end of the third quarter.

In connection with the wind down, we recorded net restructuring charges totaling $20 million in the second quarter of 2012 of which $13 million were non-cash related and $7 million were cash. Due to the significance of RIM as a customer and in order to improve our margin performance, we plan on taking additional restructuring actions in 2012 throughout our global network to reduce our overall cost structure.

By the end of 2012 we expect to report total restructuring charges of between $40 million to $50 million. This estimate includes the $35 million in charges that we previously announced in June related to the wind down of the manufacturing services for RIM. Of this $40 million to $50 million range, we reported $20 million in the second quarter of 2012 and we would expect to book the balance by the end of the year. Finally, we expect approximately 70% of these charges to be cash charges.

Moving on to total working capital performance -- our inventory decreased by $33 million from the end of the first quarter primarily due to the wind down of the RIM manufacturing services. Inventory and turns improved to 7.3 turns, up from 7 turns in the first quarter.

As in the past few quarters, we negotiated cash deposits from a customer to fund higher inventory levels. As of June 30, the cash deposit was $58 million which we reflect in our cash and accounts payable balances for the quarter. We expect to repay this deposit in August and expect the deposit to be zero by the end of the third quarter.

Capital expenditures for the quarter were $24 million which is within our average CapEx of 1% to 1.5% of revenue. Cash cycle was 34 days compared to 35 days for the second quarter 2011. We generated free cash flow of $17 million in the second quarter with continued strong working capital performance.

Moving to the balance sheet, the Company's financial position continues to be strong. Cash balance at June 30 was $631 million, a decrease of $16 million from the end of the first quarter. While we generated $17 million in free cash flow for the second quarter, we paid $36 million to repurchase shares under our current share repurchase program. At quarter end we had no outstanding debt and our credit facility remains undrawn.

As an update to our current share repurchase program, during the second quarter we repurchased and canceled 4.6 million subordinate voting shares. Under the current program we can repurchase an additional 5 million shares of which we expect to cancel approximately 3 million and use the remainder to satisfy our equity compensation program. At the end of June there were 188.9 million subordinate voting shares and 18.9 million multiple voting shares outstanding.

Let me now turn to our third-quarter guidance. As a result of the wind down of our manufacturing services for RIM and of the backdrop of continued economic weakness, we expect revenue for the third quarter to be in the range of $1.6 billion to $1.7 billion. At the midpoint this would represent a sequential decline of approximately 5%.

Revenue from RIM is expected to decrease from 17% of total revenue in the second quarter to approximately 10% in total revenue in the third quarter. Non-RIM we are expecting overall sequential growth driven by strength in our diversified and communication end markets. For the third quarter we expect our adjusted net earnings per share to range from $0.17 to $0.23 per share.

Non-IFRS SG&A expense for the third quarter is expected to be in the $56 million to $58 million range. At the midpoint of this guidance operating margins would be approximately 3%. While overall margins on consumer types of business are lower than the Company average, operating margin performance is being impacted by our disengagement of manufacturing services for RIM given the contribution impacts associated with the wind down of this major customer.

While we are not providing formal guidance beyond our third quarter, we expect our operating margins to remain under pressure in the short-term and to be in the 2.5% to 3% range for the fourth quarter. We do however remain committed to getting our operating margins to the 3.5% to 4% range as quickly as possible. To achieve this margin we would need revenues to be approximately $1.75 billion per quarter. Based on everything we see right now we would expect to achieve this in the second half of 2013.

I will now turn over the call to Craig for some comments on the second half, the overall business environment and an update on our key initiatives.

Thank you, Paul, and good morning, everyone. As Paul mentioned, I'd like to provide you with an update on the remainder of the year, our current market outlook and the status of our priorities. First let me say a few words on our second quarter performance.

Within a challenging environment we continue to deliver solid execution for our customers, maintain a strong balance sheet and we continue to generate returns on invested capital above 20%. We are very pleased with the progress that we've made in our diversified end markets and the organic growth that is now beginning to take place from new business wins.

Furthermore, we see additional opportunities to further expand our share in these markets with existing and new customers. We also completed the second quarter with a strong net cash position, returning capital to our shareholders through our continued share repurchases.

We consider our cash position to be a major strategic advantage that we will continue to leverage to pursue investments which enable us to accelerate our performance and deliver additional value to our customers and our shareholders. As you read from our press release today, we are putting this cash to work in our growth areas by adding more capabilities.

We are very pleased to announce an agreement to acquire D&H Manufacturing, a leading manufacturer of precision machine components and assemblies focused predominantly today on the semiconductor capital equipment market and estimated annual revenues of approximately $80 million.

Based in Fremont, California and located in the North American hub of leading semiconductor capital equipment OEMs, this company's operations provide manufacturing and engineering services coupled with dedicated capacity and equipment for prototype and quick turns support to some of the leaders in the semiconductor capital equipment industry.

This acquisition will not only bring additional capability in the form of large-scale high-quality precision machining, but also a very highly skilled team of 350 employees with extensive engineering and technical depth that complements our capabilities in the complex mechanical assembly and systems integration service offerings.

We see this acquisition as another step forward as we look to enhance our service offerings and increase our market share across a range of diversified markets and end customers. The transaction is expected to close at the end of the third quarter with a purchase price of approximately $70 million to be financed from either our credit facility and/or from cash on hand.

Now moving to the remainder of the year. Our priorities for the second half of the year are to successfully complete the wind down of the manufacturing services for RIM. We continue to build on the momentum we are seeing in the focused growth areas for our Company while ensuring that Celestica continues to be well-positioned to deal with an increasingly uncertain economic environment.

Although we expect lower margins over the short term, we are taking the necessary actions to manage our costs and our resources to further drive simplicity, speed, operational efficiency within our global network. We remain committed to achieving our revenue growth objectives at our target operating margin range of 3.5% to 4% while delivering on our ROIC and cash flow objectives.

While we are taking measures to prepare for an increasingly difficult economic environment we also continue to invest for the future and look forward to capitalizing on the numerous opportunities this environment represents for Celestica.

Our priorities continue to be on productivity improvements to achieve our targeted margins of returns, growth and diversification of our revenue and customer base and continued generation of free cash flow available for investments to accelerate our strategy and deliver value to our customers and our shareholders.

Lastly, I want to make a few comments about the wind down of our manufacturing operations for RIM. We've had an excellent relationship with RIM over a number of years. They have been a valued customer and we have been a top performing supplier. Ultimately the decision was made by RIM to reduce the number of their external manufacturing locations and we are fully supporting them through their transition.

We expect to complete manufacturing operations with RIM later in the quarter and our teams are approaching the wind down with the same high level of quality, service and excellence that is at the core of the Celestica culture. That concludes our formal remarks. Now operator, would you please open the call for questions?

(Operator Instructions). Amit Daryanani.

Two questions from me. One, I'm just going to make sure I have the math right. If RIM is moving from 17% to 10% in Q3 it suggests ex RIM you guys are talking about the business growing 4% at the midpoint. Could you just confirm that? And that guide kind of looks feasible. So what is the offset to the macro headwind you guys are talking about that still is enabling you to guide seasonal excluding the RIM wind down?

Amit, it is Paul. I think overall what you are seeing -- we have been talking about some of the new program wins that we have been booking over the last year and our expectations of those programs coming online in the second half of this year. So I think we are seeing the benefits of that. So these -- again, these are programs that we have been booking over the last year that are in the ramp-up phase right now.

And then you guys are talking about a wind down with RIM, but it still sounds like it's going to be 10% of revenues in Q3. So should we think about it essentially heading toward 0% by Q4? And then when you talk about your longer-term margin profile of 3.5% to 4% can you just talk about a revenue run rate that you guys need to achieve that number? Thanks a lot.

Sure, so we expect to largely be done with RIM at the end of third quarter as far as the manufacturing operations are concerned. So if you think about fourth-quarter, we do not expect to have any material amounts of manufacturing operations in fourth quarter so you will see it fall off pretty significantly at that point.

As we -- to your second question, as we said in our formal remarks, the 3.5% to 4%, we would expect revenues to be in the $1.75 billion per quarter range to get there and that, based on everything we see right now, that would take us into the second half of 2013 before we would see that.

Vamsi Mohan, Bank of America.

Is the right way to still think about the restructuring associated with the RIM wind down as $35 million and the incremental restructuring that you are talking about is just to compensate for the lower revenue levels? And if that is the case, what specifically is that remaining $5 million to $15 million geared towards from a location and function perspective?

It's Paul, good morning. So the $35 million original estimate is within the $40 million to $50 million. We are not going to break them out kind of going forward. Suffice to say the net charge is within that $40 million to $50 million. When we look at the balance it is essentially looking across the Company and looking to reduce overheads to reflect the reality of losing a customer in the magnitude of RIM. So it is essentially actions across the entire network.

But just to be more explicit, Paul, I mean the $35 million original estimate for winding down the manufacturing for RIM still stands, it is not that that number has gone up to $45 million to $50 million, this is incremental actions outside of that?

Yes, that is correct.

Okay, thanks. And then the pace of share repurchases seemed to have slowed down a bit relative to the first quarter. Any particular reason for that? It seemed like there was a little bit lower -- slightly lower shares in our model relative to where you ended up.

Nothing in particular, Vamsi. So I think we bought around 6 million in the first quarter, a little less than 5 million this quarter. And as I said earlier, we would expect to complete the program here in third quarter.

Brian Alexander, Raymond James.

More color, Paul, on how much of the $40 million to $50 million charge is headcount versus facilities or equipment related, and how much of that charge is cash versus non-cash?

Sure. So the $20 million that we have taken so far, $7 million was cash and that largely would be people actions, and the balance was non-cash, essentially writing down assets to fair market value. If I think about the balance, it would predominantly be people actions. So the cost would be severance largely.

When you look at the $40 million to $50 million in aggregate as per -- in our comments about 70%, so 7-0, we would expect to be cash charges.

Okay. And then on the $1.75 billion in revenue to get to 3.5% to 4%, why wouldn't you be able to get there on a lower revenue level, given that you have been at that kind of margin range in the past on similar revenue?

And going forward, your mix should be a lot better. So I guess I would have thought that you can achieve the 3.5% to 4% on something less than the $1.75 billion.

I think overall, certainly when we look at what is going on from a marketplace point of view; there has been I would say some pressures from a pricing point of view. And second for us it's continuing -- we are continuing to invest as far as some of the growth areas that we see long-term.

So certainly we will be trying to get there as quickly as we can. But based on what we see right now regarding the timing, the speed to ramp up new programs and even some of the costs to ramp up these new programs, it will take us into that $1.75 billion to get to that 3.5% to 4%.

Sherri Scribner, Deutsche Bank.

I was hoping to get a little more detail from you, Craig and Paul, about the growth that you are expecting next quarter ex the RIM business. I think you mentioned diversified and communications growing. I guess I was a bit surprised to hear at least that communications was growing; that seems to be a relatively weak segment. So hoping to get some detail from you there beyond the new program. Thanks.

So, Sherri, good morning, it is Craig. I mean although the uncertainty we talked about at the beginning of the call, I mean excluding RIM manufacturing we are expecting sequential growth overall, primarily as we mentioned in diversified end markets and communications.

Within communications is sequential growth, primarily from specific customers, and then we are on winning programs that are growing. And within diversified we continue to see, as Paul mentioned earlier in his remarks, the impact of the new business wins we've had over the course of the last 12 to 18 months. And then we are seeing an acceleration then in the ramp of the volume of those new programs.

So I think you are seeing the benefits of the investments we have made previously beginning to show itself on the revenue line. And then obviously on the storage and server space, we had a strong second quarter and we are expecting a modest decline in the third quarter, but demand appears to be stable on an overall basis. So that is kind of the story behind the story.

Okay, and it sounds like most of the growth is being driven by these new programs. Would it be fair to say that some of your more mature programs are slower in this type of environment, or is that not a fair statement?

No, they are continuing to grow. But I think the relative growth is coming from new programs with new customers.

Matt Sheerin, Stifel Nicolaus.

Just a question on the diversified manufacturing business. You have done some acquisitions in the semi-cap equipment space. And trying to get an idea of the exposure to that market within diversified and what the other end markets within that business are, and whether there is a concern about maybe too much exposure to one specific subsegment given the cyclicality in that market?

Well, clearly, Matt -- good morning, it is Craig. The investments we have been making in diversified have begun to show significant payoff. This specific investment builds capability and the margins for which we expect to deliver in the segment are enhanced by adding this capability. It's a higher value added capability that we believe we cannot only leverage in semiconductor equipment but outside of that in the complex mechanical space.

We are seeing the hypothesis, the thesis around our Brooks investment in that the strength of the offering is dramatically improved in the eyes of our customers. So it is growing very rapidly relative to the other segments given the acquisition. With now the D&H acquisition we would expect semiconductor cap complex mechanical -- I think you can think of it more in the future, at least at this point in time, to begin to emerge as the fastest-growing, largest segment.

But again not -- the capability not totally focused on semi cap. And the real objective here is to build a portfolio of capabilities in healthcare, Aerospace and Defense, semiconductor equipment and industrial that leverages a large vertical called complex mechanical systems capability to be a very, very strong part of the diversified mix, frankly. So that is the strategy, that is the thesis and we are definitely again in to see significant benefits.

So the concentration is clearly something we have recognized as a important risk to manage. Another mentioned reason, as Paul mentioned, why we've taken additional actions on the restructuring is to make sure our fixed cost base is in line with the D&A of Celestica to maintain the flexibility to deliver our return objectives over an economic cycle.

So all in all we think it is a very, very sound strategy. We are very excited about it. And not withstanding the RIM challenge, we think the real focus now is on the future and accelerating our progress.

Okay, great. It makes sense. And then on the consumer business, it looks like you are going to have a little bit of business in that segment left after RIM is wound down. What is the strategy there going forward in terms of consumer?

The strategy -- frankly, we are certainly not going to pursue any additional smartphone applications. So you won't see us participating in the manufacturing space in the multiple handset space. But you will see us participating in the service area. So a large part of the learning around what we have done with RIM is created a base of learning and a base of capability in the support and service of the mobility of markets.

And we have some selective opportunities where we are able to participate in the design of the products. But large -- as we look forward you will be looking at about a 10% share of our Company in this space largely driven by our services offerings.

Lou Miscioscia, CLSA.

Thank you. Thank you for a lot of the guidance, it is really helping us model things. When you look at your comment for the $1.75 billion, you said second-half, could you frame it possibly for September or December? Because that would imply a pretty quick bounce back in revenue growth and maybe obviously it doesn't look like organic demand would drive that. So it sounds like maybe you have got a lot of wins to help there?

Hey, Lou, good morning, it is Paul. We are not going to be specific on third-quarter or fourth, Lou, I will leave that to you as far as your view on end markets. Certainly a lot of it is going to depend upon mix and again, as I said earlier, just the timing and the pace of these programs.

I appreciate that while we don't give specifics on bookings, we have been talking for the better part of a year and a half about new bookings particularly in our growth area. And per the comments earlier I think you are starting to see that in the diversified markets in the growth that we are even expecting from second to third.

So those program wins are continuing. Obviously what the end market demand is going to be is going to be a large factor as to when we get there and that is difficult to predict right now. But we feel confident about the direction and the trajectory that we are on.

And I guess to the last comment, certainly we are balancing the short term and the long term. So we want to continue to make the investments to build upon the franchise that we have. So we are trying to balance that point in short-term earnings versus long-term investments to drive the business beyond 2013.

Okay and then a follow-up on the operating margin guidance for the second half and then obviously pulling RIM out. It seems like you should be able to stay hopefully in the 2.5% to 3% range I guess going forward, probably puts you in an EPS range of somewhere at least in the mid-teens, does that sound reasonable?

Well again, this quarter at 3% the midpoint is $0.20, so it just depends where you park yourself in that 2.5% to 3% range. So again, I think that every 10 basis points would be slightly less than a penny. So you can model that out, Lou.

Yes, but it seems like that will be steady going forward into first-half?

Yes, I mean, certainly barring anything else macro wise, from where we are right now, again, balancing short-term and long-term, 2.5% to 3% is where we would see it in the short term. And as I commented, that is where we would expect to be for the fourth quarter.

Jim Suva, Citi.

Can you just readdress again the question about the sales needing to get to $1.75 billion to get to operating margins of 3.5% to 4%? The way I understand it is RIM would have been meaningfully below corporate average margin, but some of your acquisitions and ramping of diversified such as Brooks and D&H, and maybe D&H isn't an outlook for the $1.75 billion, or maybe it is.

I just would have thought that you would have needed a much, much lower base because you are always ramping business, but yet you are getting rid of the less profitable RIM business. Can you just kind of readdress that structurally? Has pricing got more competitive or kind of what is really changed there in the model?

Jim, it is Paul. I mean fundamentally I agree with you, RIM margin was lower than the Company average. But it is having to do with the absorption impact. So certainly while the fully loaded margin was lower it is -- it was absorbing overhead of the Company.

So given the magnitude of it, it is just a question of that overhead and how long it takes us to back fill the revenue to absorb that overhead. That said, that the reason why we are taking more charges kind of outside of the direct RIM envelope is to bring down the fixed cost to get to the margin profile sooner.

To your second question, has the environment worsened somewhat around pricing? I would say on balance the answer to that is yes. So I think as volumes have been challenged across the board, obviously I think all of our customers are looking for ways to save money on their end. And certainly we have seen some of that in our portfolio throughout the year.

And Jim, it is Craig. I mean one of the impacts of the mix shift in the Company is the number of new program launches and the size of the engagements tends to be a broader mix of customers than some of the large-scale mobility or infrastructure customers.

So I think the combination of all these factors has caused us to take a more thoughtful look at the structure of the Company and then reallocating resources to the growth areas and at the same time driving a leaner cost structure to deliver a higher mix at the same service levels we do for our large-scale customers.

A lot of moving parts, but obviously well in hand. And we are investing before the opportunities emerge to make sure we execute at a very high level.

Todd Coupland, CIBC.

Just wondering about the fourth quarter, excluding RIM should the momentum that you are seeing in the business with the new programs in Q3, is there any reason that shouldn't continue at a similar pace into Q4 or will it flatten out because the new program ramps are absorbed in Q3?

Todd, we are not going to give guidance for Q4 right now. So we did want to give you kind of the corners of the box from a margin perspective. So we are not going to give anything specific quantitative. I will draw you back to our comments earlier.

We have been talking over the last year, year and a half about program wins that we expected to give us traction in the second half of 2012, we are seeing that in the third quarter. So we would expect to see that continue into fourth.

Okay, great, thanks. And then secondly, once the restructuring is complete where would you think SG&A would be on a cash dollar basis? If it is $56 million now where would you hope it to be with the restructuring?

Todd, I think that we would see that come down somewhat but backfilled by some of the SG&A that we will acquire with the acquisition we announced today assuming of course that closes. So I think that when you think of the zone of where it is right now the $56 million to $57 million range, looking forward that is where I would expect it to be. So otherwise coming down but then backfilled by some SG&A we are acquiring with D&H.

Okay, so post-restructuring that is a good place to be and that leverage will come from whatever top-line you can get through market programs, et cetera?

That's right.

Okay, that's great. Thanks a lot.

Gus Papageorgiou, Scotia Bank.

Just on the acquisition, can you give us a little sense on the valuation metrics for that acquisition? I mean the only thing we have here is the sales and it looks like you paid about 80% of sales for that, were you guys trading at about roughly 30% of sales. So just on that metric it seems really expensive. So can you give us a sense of margins and any sort of valuation metrics and when do you expect it to be accretive?

Sure. Gus, so given the nature of the business, the margin profile is much higher than what you see in the kind of standard EMS business. So the margin profile for that type of business is in the high teens overall.

That's EBIT margins?

Yes, operating margin, that is right, yes. So it is a much more profitable business overall than the base EMS. So as far as the accretion, again, assuming the deal closes by the end of third quarter, when we look into fourth quarter I would expect revenues of around $20 million for the fourth quarter, negligible on an earning impact in that there are some integration deal related costs that we would expect to incur within the first quarter, but expected them to be a positive contributor to earnings starting in first-quarter.

And can you -- sorry, just quickly, can you give us a sense of revenue growth? Has the business been growing or is it pretty steady?

It certainly follows a cycle of semiconductor, Gus. But on balance, shaving the cyclical piece off, it has been growing over the last couple of years.

Brian White, Topeka.

When we think about semiconductor -- it sounds like diversified will be strong in the September quarter. How do we think about semi cap in the third quarter?

We had a very solid quarter in the second in semicon. As you've read and we are seeing as well, we are seeing some softness going into third-quarter. So we are not immune there. But notwithstanding that, that has been taken into account in the overall strength that we have been talking about in diversified. But certainly we are seeing a reduction from where we were in the second quarter.

Okay, but diversified will still grow sequentially because of new programs that make up for that weakness?

Yes. So as I said, we have taken the weakness in semicon into account in the numbers we have been talking about here today. And notwithstanding on balance overall, given strength and program ramps in other areas, non-semicon related, we expect the overall diversified markets to grow.

And then D&H, is it adding anything -- a new capability to the portfolio? Is this more vertically integrated than Brooks or is it just an expanded customer base and footprint?

So, Todd, it is adding a new capability. I mean, as we mentioned, it is precision machine components for wafer fabrication equipment, it is manufacturing services and CNC machine capabilities. So it supports the strategy to grow, it adds capabilities directly applicable to the semicon market on the equipment side.

But also the leverage to grow that across and enhance our system integration capability at significantly higher value added to further enhance our value-added space and our margin capability. So it is a level of vertical integration not so much in capacity as in capability and obviously it brings capability, which then we can leverage and bring that capability to our new Asian location to strengthen our Asian presence in support of some of the major companies.

So we view this opportunity as unique, it provides high-value and high precision machine critical components, unlike the more commoditized vertical plays which we have stayed away from. So a high degree of synergy between this business and our existing semicon cap business and expectations we can expand this further in some of the other verticals.

So we are very comfortable not only with the exposure, but the value it is going to bring both to our customers. And what we know on the semicon side and then hopefully what we can leverage on some of the other markets. So, again, it's -- we think it is a real value added play.

Naser Iqbal, Salman Partners.

Just as a first one, Craig, do you think in 2013 as we look for growth in the Company, is it that you expect any more difference in the program win contribution than historical, like you think 2013 could be a big year? Or is it going to be typical of your new program win cycle? And do you think that the end market demands have -- is going to be improving in that year or do you need much of an improvement?

You say a big year, so I mean let me just try to break it down. We have got a historical company that was based on a mix of business that is going to be dramatically different in 2013. We think the RIM disengagement presents a unique opportunity now, they be much more focused in leveraging the capabilities, we will see us growing faster than the macro market based on our new program wins.

And then the real challenge as we build proof points, add capabilities, we see the opportunity to accelerate that. So we expect to be -- to exit the year at 25% diversified. And we've got a much more stable base of business now with stickier customers, large-scale engagements and markets like semiconductor, a growing market position in the Aerospace and Defense market largely in the commercial side and then we've got tremendous opportunity to continue to grow in diversified healthcare and then further expand that with our managed service strategy.

So we are a company that is really doing the things that we set out to do, we are accelerating our penetration in diversified, albeit we are doing some of that on the back of that RIM disengagement. But this is a real opportunity for us to dramatically transform the Company faster than we might have had we not been faced with this RIM challenge.

So all things considered, we are looking for us overcoming the economic headwinds, making our own weather and doing it in a way that allows us to continue to deliver our return objectives and be the leader in the stewardship of the shareholder capital and frankly doing what we say.

Great, no, you sound very excited. So I think we are enthused as well. And just my final question, Paul, I would have thought that given the additional amount of the restructuring you are doing on top of the $35 million, to get to 3.5%. Is it just that investing some of these new initiatives is taking somewhat -- something away that you would have done the $40 million to $50 million and you would have gotten there sooner but you are continue to invest in the business?

Yes, so first I mean the $40 million to $50 million, it's important to remember that the majority of that is associated with RIM and that is where obviously the business has gone and the profit contribution has gone. So we are having to take those charges just to stay flat profitability wise.

So on the additional restructuring, we will follow similar patterns than we have seen before and that is generally paybacks are about a year. We expect to incur those charges again by about -- as we end 2012 and start to see those savings fold out early in 2013.

The market is pretty dynamic right now, I mean I mentioned earlier pricing is somewhat of a challenge. Could we get there in the lower revenue envelope? That will depend on mix and just, again, the timing and the pace of these program wins. So it's possible, but I think as I said, when we take everything into account right now on a balanced basis that's the revenue envelope that we will see. Katie, we will take one more question.

Gabriel Leung, Paradigm Capital.

Two questions, first in terms of M&A, can you talk about sort of the breadth of opportunities you are seeing out there and also sort of valuation points?

Yes, Gabriel, it is Paul. I mean the breadth of opportunity is tied to our focus area. So our interests are in what we can do to add capabilities, add technology that helps us in diversified markets and helps us in our services area. So our funnel of MNA obviously matches up those things to those things.

From a valuation point of view, per my comments earlier, those types of businesses are higher margin type businesses. And so are higher type multiples than what EMS typically trades at. We certainly look at these things -- which I will characterize as tuck-in in nature, capabilities that we think we can build around and help grow our business and to deliver an on the overall margin envelope that we're driving towards.

I guess secondly, with the winding down of RIM, as you alluded to, you are going to have somewhat of a less volatile business. And when you combine that with the free cash flow and the current cash on the balance sheet, does that mean a discussion around dividend is more relevant under this scenario and what are your thoughts on that?

Gabriel, I think our (technical difficulty) will continue to be on share buyback versus the dividend just from the point of view of -- I agree with you the revenue envelope will be less volatile given lower consumer exposure, we are still investing for the business, investing to grow and want to maintain the flexibility to either accelerate or decelerate the pace of our share buybacks based on what we are seeing. So net we don't see dividends as something that we would embark on here in the foreseeable future.

I turn the call back over to the presenters.

Thank you, Katie, and thank you, everyone, for joining us on the call.

And we look forward to seeing you next quarter. Thank you.

This concludes today's conference call, you may now disconnect.