Celestica Inc (CLS) 2012 Q3 法說會逐字稿

Good afternoon, my name is Megan, and I will be your conference operator today.

At this time, I would like to welcome everyone to Celestica's 2012 third-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.

Manny Panesar, Director of Investor Relations, you may begin your conference.

Thank you, Megan.

Good afternoon, everyone, and thank you for joining us on Celestica's third-quarter 2012 earnings conference call.

We apologize for the delay today, however, as usual, we are available after the call for follow-up questions.

On the call today are Craig Muhlhauser, President and Chief Executive Officer, and Paul Nicoletti, 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.

As a reminder, during this call, we 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, 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 our 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 EBIAT, 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 to the corresponding IFRS measures, as appropriate.

I will now turn the call over to Paul Nicoletti.

Thank you, Manny, and good afternoon, everyone.

Celestica delivered consistent profitability with solid returns and strong free cash flow in the third quarter, despite the challenging environment.

Third-quarter revenue of $1.58 billion was slightly below our guidance range, due to overall demand weakness.

Revenue in the third quarter declined 10% sequentially, while on a year-over-year basis revenue was down 14%, with the majority of the decline due to the wind down of our manufacturing services for RIM.

Excluding RIM, third-quarter revenue was down 1% sequentially and was down 5% compared to the same period of 2011.

Some additional highlights for the third quarter include non-IFRS operating margin of 3.3%, which was flat on a sequential basis despite lower revenue; adjusted earnings per share of $0.26, which was above the high end of our guidance range and included a one-time positive tax impact of $0.05 per share; IFRS net earnings of $44 million; strong free cash flow of $60 million; we repurchased and canceled 2.7 million shares in the quarter as part of our current stock repurchase program, with total repurchases of 13.3 million shares this year; we completed the previously announced acquisition of D&H Manufacturing, and ending cash balance was $598 million with no draws on our credit facility.

From an end-market perspective, while we experienced overall weaker demand in the third quarter across a number of our customers and end markets, we realized modest sequential growth in our diversified and communications end markets.

Our consumer end market, representing 15% of total revenue, declined 35% sequentially and was down 48% year-over-year, predominantly due to the wind down of manufacturing services for RIM.

Our diversified end market was up 3% sequentially.

On a year-over-year basis, diversified was up 14%, driven almost entirely by organic growth.

While we experienced growth in diversified, overall demand in this end market is, however, lower than what we expected, particularly in the semiconductor segment.

The diversified end market now represents 21% of our total revenue, up from 16% in the third quarter of 2011.

The communications end market, comprising 37% of total revenue, was up 2% sequentially, which was lower than expected, primarily due to the push out of a customer-specific program.

On a year-over-year basis, communications was down 9%, due to demand declines across a number of customers.

The server end market, which represented 14% of total revenue for the quarter, was down 17% sequentially, in part due to a strong second quarter from one of our top customers.

Revenue from the server end market was down 9% compared to the third quarter of 2011, due to weak overall demand.

Storage end market, representing 13% of total revenue in the third quarter, was down 6% sequentially and was relatively flat year-over-year.

Our top 10 customers represented 67% of revenue for the quarter, down from 70% for the third quarter of 2011.

We had one customer in the quarter with greater than 10% of total revenue.

RIM represented just under 10% of total revenue in the third quarter, down from 17% of total revenue in the prior quarter.

We posted third quarter IFRS net earnings of $43.7 million, or $0.21 per share, compared to IFRS net earnings of $50.2 million, or $0.23 per share, for the same period last year.

We recorded pre-tax restructuring and other charges of $8.9 million in the third quarter, compared to a recovery of $2.6 million in the third quarter of 2011.

Tax for the third quarter was a net recovery of $13.3 million, compared to an expense of $8 million for the third quarter of 2011.

The recovery for the third quarter was driven predominantly by two items.

First, we recorded an income tax recovery of $10.6 million arising from changes in our provisions relating to a certain historical tax uncertainty.

And second, as a result of the D&H acquisition, we recognized $10.4 million of previously unrecognized deferred tax assets.

We excluded the tax benefit relating to the D&H acquisition from our calculation of adjusted net earnings.

Without the one-time tax recoveries, this year's third quarter IFRS net earnings would have been $22.8 million, or $0.11 per share.

Adjusted net earnings for the third quarter were $54.8 million, or $0.26 per share, compared to adjusted net earnings of $57.4 million, or $0.26 per share, for the same period last year.

Again, included in this year's quarter adjusted net earnings of $0.26 per share was a one-time $0.05 per share benefit arising from the previously mentioned reversal of tax provisions.

Without this one-time benefit, adjusted earnings per share would have been $0.21 per share this quarter.

Our adjusted tax rate in the third quarter was negative 8%.

For the nine months ending September 30, our adjusted tax rate was approximately 6%.

Looking ahead, we expect our tax rate to be in the 10% to 12% range.

Third quarter non-IFRS gross margin of 7.2% was a sequential improvement of 30 basis points, despite the lower revenue, primarily due to favorable mix and one-time recoveries.

Adjusted SG&A expense for the quarter was $55.9 million.

Finally, pre-tax return on invested capital was 20%.

As an update to the restructuring program previously announced at our July earnings call, we recorded restructuring charges this quarter totaling $8.3 million, comprised primarily of cash charges.

Of the $40 million to $50 million restructuring costs expected for the program, we have recorded $27.3 million to date, comprised of $12.3 million of cash and $15 million of non-cash charges.

Based on the projected timing of certain actions, we expect the restructuring program to continue into the first half of 2013.

Moving on to working capital performance, our inventory decreased by $73 million from the end of the second quarter, primarily due to the wind down of RIM manufacturing services.

Inventory turns were 7.0 compared to 7.3 inventory turns in the second quarter.

Consistent with the past few quarters, we negotiated cash deposits from RIM to fund higher working capital levels.

As of September 30, our cash deposit was $30 million, which we expect to repay in the fourth quarter.

Capital expenditures for the quarter were approximately $26 million, or 1.6% of revenue.

Cash cycle was 39 days, an increase of 5 days compared to the second quarter, predominantly due to lower revenue.

We generated free cash flow of $60 million in the third quarter, driven predominantly by earnings.

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

Cash balance at September 30 was $598 million, a decrease of $32 million from the end of the second quarter.

While we generated $85 million in cash flow from operations during the third quarter, we paid $21 million to repurchase shares under our current share repurchase program, and we spent $71 million for the acquisition of D&H, which closed in September.

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 third quarter we repurchased and canceled 2.7 million subordinate voting shares.

We have repurchased and canceled 13.3 million shares this year, which concludes the current repurchase program for shares that we intend to cancel.

At the end of September, there were 186.2 million subordinated voting shares and 18.9 million multiple voting shares outstanding.

As a result of our strong financial position, continued cash generation, and our commitment to delivering shareholder value, we are announcing our intent to repurchase and cancel up to $175 million US dollars of our outstanding subordinate voting shares through a substantial issuer bid.

We expect to launch the bid in the coming weeks and complete the offer during the fourth quarter of 2012.

At the commencement of the offer, we will establish the maximum and minimum price that shareholders may select under the offer.

We will fund the share repurchases using a combination of available cash on hand and cash from our credit facility.

Moving on to fourth-quarter guidance.

With the wind down of the RIM manufacturing now substantially complete, we expect minimal revenue from RIM in the fourth quarter and overall demand to continue to remain soft.

As a result, we are projecting fourth-quarter revenues to be in the range of $1.425 billion to $1.525 billion.

At the mid-point of this range, revenue would be down approximately 6% quarter to quarter.

Excluding RIM, and again, at the mid-point of the range, revenue would grow by approximately 3%, primarily in our diversified and server end markets.

For the fourth quarter, we expect our adjusted net earnings per share to range from $0.15 to $0.21 per share.

Non-IFRS SG&A expense for the fourth quarter is expected to be in the $55 million to $57 million range.

At the mid-point of our fourth quarter guidance, operating margin would be approximately 3%.

I would now like to turn over the call to Craig for some comments on the overall business environment and outlook, and an update on our key priorities.

Thank you, Paul, and good afternoon, everyone.

As Paul mentioned earlier, the overall end market demand continues to be weak amid the current global economic slowdown.

However, despite this challenging environment, Celestica continues to generate cash, deliver solid returns, and continues to invest to strengthen our capabilities and accelerate the diversification of our revenue mix and customer base.

For example, in September we completed the acquisition of D&H Manufacturing Company, which has high quality, new product introduction and manufacturing capabilities, and supports our strategy to grow in the diversified markets.

D&H acquisition brings new capabilities and also complements the strategic investment we made in June 2011 in acquiring the contract manufacturing division of Brooks Automation.

Investments such as these are extremely important to accelerating and achieving our growth and margin objectives.

While we're facing demand headwinds, we remain very confident in our strategy and the opportunities for Celestica to gain market share in our target markets with industry-leading customers.

Our financial position is very strong, as we continue to evaluate the various alternatives for effective deployment of our capital.

While our number-one priority for investment continues to be the growth of our Company, we are committed to generating short-term and long-term returns for our shareholders.

Today's substantial issuer bid announcement allows us to distribute up to $175 million to shareholders who elect to tender, while at the same time increases the equity interest in Celestica for all other shareholders.

We believe that a substantial share repurchase at this time is in the best interests of Celestica and our shareholders, and it's an efficient and prudent deployment of capital.

Over the last three years, and including this new issuer bid, we have returned over $400 million to our shareholders through share repurchases, while investing approximately $380 million back into the business through acquisitions and capital expenditures.

Going forward, we expect to continue to use this balanced approach for the deployment of capital.

In addition to generating value for our shareholders, we continue to be focused on providing value to make our customers successful.

We continue to build further proof points of industry leadership and operational excellence and sustainability throughout our global operating network, as evidenced by a number of customer awards received this quarter.

For example, Cisco recognized Celestica with two major supplier awards, the 2012 EMS Partner Operational Excellence and the Excellence in Partner IT Collaboration.

We are very pleased to have received these two prestigious awards from Cisco that reflect the strategic and collaborative relationship we have fostered with this valued customer.

We were also recognized as the winner of EMC's first annual Blue Sky Supplier Sustainability award for our commitment to sustainability throughout our global supply chain and operational performance, and for our comprehensive global corporate social responsibility program and our contributions.

We believe this customer recognition continues to reflect our commitment to setting the highest standards in our industry and for helping our customers meet the challenges of today's market.

While we're honored to be recognized by our customers, we continue to be focused on raising the bar in operational performance and providing innovative supply chain solutions to enable our customers' success.

Turning to our near-term outlook, despite our lower revenue projection for 2012, we expect to achieve our target annual ROIC objectives of greater than 20%, and our annual free cash flow objectives of between $150 million and $200 million.

Based on our current customer forecasts and the overall uncertainty in our end markets, we anticipate the first half of 2013 to remain challenging, with continuing downward margin pressures.

While we're not providing formal guidance, we anticipate an operating margin in the range of 2% to 2.5% for the first half of 2013, with a reduced revenue outlook sequentially for the first quarter.

As we previously discussed, depending on a number of factors, including our product mix, we would anticipate achieving our operating margin target range of 3.5% to 4%, with quarterly revenue of approximately $1.75 billion.

While we continue to book new business across all of our targeted markets, the overall weak economic conditions, our limited visibility, and the timing and production volume of new programs that we're currently launching, make it difficult to predict the precise quarter in which we will achieve this revenue objective.

We are taking the necessary actions to adapt our cost structure, our capacity, and resources to the reality of this current environment, while continuing to make investments to ensure that we remain strong and well positioned for future growth and profitability.

We remain committed to investing in our strategy and driving value for our customers and our shareholders.

Our focus is on overcoming the external challenges we face today and delivering on our revenue growth objectives at our targeted operating margins, while delivering on our ROIC and cash flow objectives.

That concludes our prepared remarks.

Now, Megan, we're prepared to answer any questions.

(Operator Instructions)

Your first question comes from the line of Joe Whitney from Longbow Research.

Your line is open.

Good afternoon.

I was hoping you could start with EBIT margin.

First off, what drove the (inaudible) versus expectations in the third quarter?

And then secondly, what's going to drive things down to 2% to 2.5% in the upcoming quarters?

Thanks.

Hello, Joe, it's Paul.

I think as it relates to Q3, you know, we had some pretty favorable mix overall in the quarter, which gave us a bit of margin strength.

And second to that, as you can appreciate, as we were winding down such a sizable relationship with RIM, a lot of uncertainties around that.

We just overall ended up a bit stronger than we expected as we completed that wind down.

As we look forward into the first quarter, certainly we're feeling the impact of the overall absorption of losing such a sizable customer, in addition to, as Craig mentioned, our expectation of some seasonal declines into first quarter.

So those two things together are crushing margins down.

Makes sense.

And then second, maybe Craig, I was hoping you could give some additional color on what you're seeing, let's say, organically in the end markets right now.

You mentioned challenging a couple of times in the prepared remarks.

What type of organic growth are you thinking?

Let me take some time to give you some transparency.

Within diversified, we are experiencing sequential growth across all of our areas.

As Paul mentioned briefly, our semi capital equipment -- our semiconductor capital equipment business is going to grow with revenue contribution from our recent acquisitions, but the overall recovery due to the economic environment and the cyclicality of semi remains soft.

Health care, we're ramping; aerospace and defense continues steady.

Within servers, we're ramping new programs, and the strength of existing programs are expected to drive sequential growth into the mid to high single digits.

Storage is relatively flat.

Communications, slight decline sequentially; however, the trend is more customer and program specific.

And the current customer forecasts are challenging in the first half.

And we're not providing guidance.

And as we mentioned, we're going to be under some margin pressure.

But we're very confident in our strategy.

We're very strong.

We continue to invest.

And obviously, it's not a question of if, it's just a question of when we get back to the targeted returns that we've mentioned in the prior calls.

Great.

A really quick follow-up for the consumer business.

Is it still reasonable to assume it's going to be about 10% of Celestica with RIM fully in the rear view now going forward, or will it be a little bit under?

Thanks.

Yes.

You should expect that consumer would fall below the 10% as we go forward.

So as I mentioned in my comments, RIM this quarter was slightly less than 10%.

So in your modeling, take that to zero, with consumer overall at 15%.

So just pro forma this quarter, customer would be around 5%.

I thought RIM was going to stay around a little bit.

Is that not the case any more?

No, as I said, we're done, as far as our manufacturing operations with RIM.

So revenues from RIM in the fourth quarter will be negligible.

So no more services either.

That's right.

So while the overall demand in services has gone down, we'd expect that as we look forward that that would also go to zero.

Great.

Thank you.

Thank you very much.

Your next question comes from the line of Sherri Scribner from Deutsche Bank.

Your line is open.

Thanks.

I just had two quick questions.

One on the margin guidance for the first half of '13.

I think you said, Craig, 2% to 2.5%.

Is that primarily related to volume and fixed cost absorption, and are you guys going to take some restructuring actions to sort of get that back on track?

Well, Sherri, hello, it's Craig.

Basically, the speed of the wind down, as Paul mentioned, we've had a very fast and efficient wind down with RIM.

So the absorption of cost, the rate at which we've been able to take out cost, has not kept up with that.

We've announced the $40 million to $50 million range of restructuring.

We're continuing to make investments and that's one of the major areas.

We're not stopping investing.

So we're looking for your support to continue to invest in our strategy.

We believe it's the right strategy for the business.

So we're not short-changing our future.

Structurally, we think we're strong.

We have a backlog of business.

So it's primarily our cost structure, our investment philosophy to balance short term and long term, and then the timing of the ramp of new programs.

So with the volume uncertainty, the impact on the base, obviously the speed and the volumes associated with the newer programs are a challenge.

So a lot of moving parts, very solid operating platform and very solid investment strategy, very solid execution.

And we're going through a period where we are trying to keep thing in balance, and at the same time have this, I'll say, bottom, if you will, of 2% to 2.5% as we rebuild the top line and gain momentum through the launch of the new programs.

Okay.

That's helpful.

And then following up on the share count for the December quarter and as we move forward with the substantial issuer bid, from the recent buybacks, should we expect share count to go down a bit in December?

And then with the issuer bid, what are you assuming for share count in the December quarter that gets you to the EPS range?

Thanks.

So, Sherri, the share count as of the end of September is the share count minus any impacts from the bid we announced today.

So in other words, the normal course that we had is essentially complete, as far as shares we plan on buying for cancellation.

So where we will be now will depend -- for December quarter, will depend on how many shares are tendered.

So I'll leave that to you as far as how you want to assume.

We haven't taken any of that benefit into account in setting our guidance, given the uncertainty around it.

So the EPS range that we provided does not assume any lower share count from where we ended the quarter.

Okay.

So you assumed a flat share count, you didn't incorporate that?

That's correct.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Matt Sheerin from Stifel Nicolaus.

Your line is open.

Yes, thanks.

A couple of questions.

As you look at the new program opportunities over the next few quarters, and clearly organic growth has been weak for a lot of your competitors, as well, there's industry capacity out there.

Are you seeing any pricing pressure?

Are you seeing any of your competitors trying to fill capacity at lower prices which will put pressure margins even further on top of the issues that you're seeing now?

I mean, Matt -- hello, it's Craig.

Certainly, it's a very competitive environment, certainly in the declining market.

We see price pressure, we see customers making decisions on consolidating their supply base.

And then we see them actually making a trade-off between value versus risk.

So customers are smart enough to know that you pretty much get what you pay for.

And you've got to balance the value you get from a supplier with the risk, especially if it involves transferring programs and outsourcing in this environment, because certainly no customers want to miss their revenue target.

So it's balanced, it continues to be competitive.

But we're taking share.

We're building capabilities.

And I've said before, Matt, we feel very -- feel very, really, confident in our strategy.

And obviously, we have our return objectives that we did once again this quarter.

We're meeting our strong cash flow generation.

So although there is price pressure, you've got our margin targets, you know our floor, you know our targets.

That's the path we're on, and we will manage the business to get there.

You've certainly been quite disciplined in terms of that strategy since you've been at the Company.

You've been running the Company.

So that's my question.

Are you shifting off of that strategy, given the weak demand environment?

No.

Actually, we're doubling down, actually.

Okay.

And just a question for Paul, in terms of the balance sheet.

What cash level were you comfortable with in terms of running the business for working capital and let's say some M&A activity, given particularly post the transaction that you're going to be doing in the next quarter?

Matt, generally as a rule of thumb, we look at needing around between 4% and 5% of revenues in cash to run the Company.

So if you take a $6 billion number, then obviously, that will be around $300 million or so.

That would be the number that we would need.

And that would ebb and flow, depending upon where the growth is.

But that's a good number to go with.

So as far as we announced, $175 million off the $598 billion would still keep us above that number.

And we do expect to generate additional cash flow going into Q4, as well.

So we feel pretty comfortable with the overall been sheet even after this bid.

We may -- as we commented on the comments, we may draw on the credit facility for a period of time, just as we work on moving cash around the enterprise.

As I'm sure you can appreciate, not all the cash is exactly in the spots that we need it when we need it.

But if that were to occur, it will be for a relatively short period of time.

Okay.

Great.

Thanks a lot.

Thank you.

Your next question comes from the line of Brian Alexander from Raymond James.

Your line is open.

Good evening, guys.

Just to follow on Matt's question, to what extent is the revenue weakness maybe being driven by customer disengagements outside of RIM, due to the fact that you are very disciplined on pricing and margins and returns, and perhaps some of your larger competitors that have more capacity are not as disciplined and they're pricing more aggressively?

Or is that not really a big factor, you think it's just more macro at this point?

It's more macro at this point.

It's the rate of the new program introductions and timing of such.

Okay.

And then just to clarify, to get back to 3.5% to 4%, I think you said earlier, Craig, you need to get the revenue back to $1.75 billion, or have you lowered that threshold?

Because based on where we are now, I guess that's about 25% above where the revenue could land in the next couple of quarters.

So I just wanted to confirm that and that you haven't lowered the revenue threshold and that's where you need to get back to.

Brian, it's Paul.

So we haven't lowered it.

I mean, suffice to say that we're looking at everything again.

So even in respect of the restructuring program that we announced, as you know, we had a range on that expected cost.

So in light of the environment, we're certainly going back and taking another look at what we can do, and utilizing some of that program that we had already announced.

So at this point we're not coming out with a different number from the 17.50.

But suffice to say we are looking to take out as much cost as we can, given the environment.

Okay, and I think you said one 10% customer, which obviously wasn't RIM this quarter.

Should we assume that came out of the communications segment?

That's a fair assumptions.

All right.

Thanks, guys.

Thank you.

Your next question comes from the line of Amit Daryanani from RBC.

Your line is open.

Thanks.

Good afternoon, guys.

Two questions from me.

One, could you sum up for the December quarter how much is D&H contributing to the model?

And then excluding that, would the diversified segment still be up in the December guide?

So, Amit, it's Paul.

When we announced the acquisition, we talked about being around $80 million of revenue annualized.

So as far as the quarterly impact is concerned, it's around that number.

And yes, we still would expect some growth, even putting that aside, into the fourth quarter.

Got it.

And maybe if we could go back to your commentary in the first half of 2013 margins being in the 2% to 2.5% range, maybe you can give some more color.

Because even back in late '08, early '09, through the recession time period, you guys never got close to a 2 handle on your margin structure.

And you seem to have managed the RIM transition from margins around 3.3% to potentially 3% into December.

So what is that -- what is so dramatic that's happening the first half beyond the seasonal decline of 7% to 8% potentially that is taking margins down to the low 2% range?

I mean, certainly if you go back from that time to today, I'd say the overall mix of business and the pricing environment would be more competitive today than it was back then, Amit.

And then second, our level of investment today would be higher.

So clearly, we are growing diversified at a rapid pace.

That's our goal.

As you know, our intent was to get that to be at least 30% of revenues of the company.

That was with our consumer exposure.

Clearly today, Craig and I think more of that 50% is where we want to get it to over the next couple of years.

And so we're investing heavily to add capabilities, investing in new ramps to get there.

So if I had to point to a few thing, those would be some of the things that are holding the margin down.

And as Craig emphasized, we're not backing off on the investments that we think are needed as far as driving revenue growth longer term.

Got it.

And then just finally, when it comes to capital allocation, you guys have obviously been aggressive on the buyback process.

You announced one more today.

Why the hesitancy to not have a dividend policy, as well?

It certainly seems your cash and ratio could handle both capital allocation processes fairly well.

That's not something that we've dismissed, as far as strategically.

I would say today, as we look at our business and given some of the volatility clearly in the top line, both positive and negative, we continue to look for acquisition opportunities.

Our view is to be able to meter it with stock buybacks as a preferred method.

That's not to say that over the strategic plan we may not reassess dividends.

But at this point in time, buybacks are how we choose to return that capital.

Thank you.

Thank you.

Thank you.

Your next question comes from the line of Jim Suva with Citi.

Your line is open.

Thank you very much.

Focusing on the topic of capital allocation and the accelerated stock buyback of the 175, the question is, can you help us understand the methodology or the logic behind that versus saving a lot more for accretive M&A?

Celestica's been very attractive at finding tuck-in acquisitions.

Has the M&A pipeline slowed down, or you still have sufficient for it?

Can you help us understand the balance between M&A and that stock buyback?

Jim, it's Paul.

The comments Craig made over the last couple of years, again with this announcement of this buyback being 50% buyback, 50% growth, is a good way to think about it going forward.

As far as is this a signal of less acquisition opportunity, I wouldn't look it that way.

Certainly the tepid growth environment is making our need for working capital investment, as an example, lower.

So when we step back and like that into account, and then also take into account that Celestica's balance sheet, as you know, continues to be unlevered.

And that, as the right opportunity were to come along, we wouldn't hesitate to add some leverage again for the right deal.

So I would not equate it that the pipeline of what we're looking at, or our intent as far as M&A, that we're backing off that way.

But certainly our needs as far as the base business clearly will be lower, given that the revenues are down.

And we think right now, given where Celestica is, it's just a prudent use of capital.

Okay.

And then I think you made a directional comment about Q1 would be -- I think you said down.

Did you mean both year-over-year and sequentially?

And did I hear that statement correct for the sales for the March quarter?

So we didn't give a specific number, Jim.

Certainly year-on-year it will be down, given that RIM will no longer be in the revenue portfolio starting this quarter.

So with certainty, it will be down year-on-year.

Sequentially, as Craig mentioned, we would expect it to be down, as well.

We're not dimensioning that for you here today, but we would expect it to go down, and urge you to make your own conclusions based on history and what you think is happening on the end markets, as far as seasonal declines are concerned.

Okay.

Thank you.

Thank you.

Thank you.

Your next question comes from the line of Brian White with Topeka.

Your line is open.

Yes.

I'm wondering, could you talk a little bit about what the acquisition pipeline looks like.

You've done some great deals here.

How does it look over the next year?

So we continued -- our priority for acquisitions are certainly capabilities that are additive to our diversified market.

So as you mentioned, really feel like we've added some great capabilities with D&H, as far as precision machining is concerned, which really rounds out our offering for the semiconductor market, and also is a capability that we believe through time we can leverage into other areas of diversified, particularly into the aerospace market.

Priority wise from here would be additional capabilities, be it in the services side, on the design side, that again would be focused on us adding more value to the customers beyond just the manufacturing that we do in our facilities.

So I think those would be some of the highlights that we would be focused on.

Again, I think anything that -- I would not say that we're looking at overall capacity, anything that adds capabilities or opens up to new end markets that we currently don't have exposure to.

And when we think about market share in the first half, are there any market share shifts, or is this purely the end markets are weak in first half?

Well, I think, generally I'd say it's an overall end market weakness that we're seeing.

I will say that programs come in and out of EMS suppliers all the time.

Sure.

So that's a normal course function of, as Craig mentioned, suppliers looking to consolidate.

And through time, we feel we get our -- we win and we lose.

So I won't say that there won't be programs moving back and forth, because that's normal course in our business.

But overall, it's end market driven, is the real factor.

Okay.

Thank you.

Thank you.

Your next question comes from the line of Gus Papageorgiou with Scotia Bank.

Your line is open.

Thanks.

Most of my questions have been answered.

Just on the gross margin, do you anticipate the fact that sales are down quite a bit year-over-year, that gross margin hung in there.

Just how much of the gross margin impacted by overhead absorption from the RIM business in the quarter?

And as you go into next year, where do you see the gross margin going?

Gus, it's Paul.

So as far as being able to answer the specific question, that's difficult to do, given that costs were coming out during the quarter.

We executed some revenue.

So I'll answer it more that where do we see it going forward.

With operating margins in the 2% to 2.5% range, gross margins should likely be in the 6.5% to 7% range, that would be where you'd expect to see it, and then for it to build from there as revenue grows.

So you said that you would reach your target operating margin 3.5% to 4% around $1.75 billion.

So if you hit that, where would the gross margin follow, roughly?

I think you'd be in the 7.5% zone at that -- for that model.

Great.

Thank you.

Thank you.

Thank you.

Your next question comes from the line of Naser Iqbal from Salman Partners.

Your line is open.

Thank you.

Hello, guys.

I was wondering if you could walk through in term of the first half of '13, the 2%, 2.5% margin.

You're taking the restructuring charges of $40 million to $50 million.

So I would have thought, given the gross margins were 7.2% in the third quarter and you're guiding for 3% or so margins in the fourth quarter, that in terms of the restructuring charges offsetting some of the under absorption issues, I'm just trying to understand why those restructuring charges wouldn't lead to higher margins or better than the 2.5% to 2% you're talking about.

Naser, it's Paul.

I mean, in our previous restructuring programs, Naser, when you restructure and revenue stays flat, you see more of that savings falling to the bottom line.

Certainly in this case, we're restructuring, but at the same time the revenue is going away.

That said, last quarter we expanded our restructuring program to take a broader approach to overhead, which we are doing.

But clearly with the base end market revenue being weak, and in some instances coming down, that's not helping us as far as overall absorption is concerned.

If you look at things from a gross margin point of view, and to the previous question, things are a lot tighter.

But as the company gets smaller, the overhead or the SG&A impact becomes a larger impact to overall operating margin.

So a lot of dynamics at play, and as I said earlier, are continued investments in some of the growth areas.

So again, as the company shrinks into the first half, those investments become a larger proportion of the total profit pool.

So those are some of the factors at play as we look at the first half.

Okay.

And just, Craig, I think, if we understand that 2014, you talked about it before, that you expect some good program wins to kick in in 2014.

So we're at this gap between 2012 and -- 2013 is the gap for those '14 programs to come in.

Do you think that in term of what you need to win some more programs, is it just that you have everything in place and it's just the weakened demand environment?

Or do you think that that's what the investment and capabilities is requiring to do to expand more your capabilities in terms of winning more business?

So the -- 2013 for Celestica, as you know, is a year of transition.

We've taken the impact of the 20% customer, we've wound it down very effectively.

We have done it at speed.

Part of the speed at which we've wound down has impacted our short-term cost structure, as Paul mentioned.

We're investing.

We're definitely investing for the future.

Do we have everything in place?

We're constantly investing in capabilities to strengthen our market position.

We are winning market share, our diversified business continues to grow.

We're talking about the rate of growth, and at the same time, balancing that against not getting into a -- an era where we start destroying kind of the economic model we've built here, where we give away price to get business that is not aligned with the strategy.

So it's a year of transition.

Unfortunately, we're in a demand environment which makes it difficult to show the immediate benefit of everything we're doing.

Obviously, as Paul mentioned, tough for us to predict the future, but we know we've got an operating model that will adjust and will adjust faster than we -- as fast as we can, and we'll certainly -- we're building that foundation and transition from 2013 to 2014 and 2015 to realize the full benefit.

Now is the time for a company like Celestica to take advantage of the work we've done, create the balance sheet and the strategy that's going deal with not only a tough economic environment but take market share, not on the basis of not being price competitive or price only, but on the basis of the value we deliver.

Okay.

Thanks a lot, guys.

Thank you very much.

Megan, we'll take one more question.

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

Your last question comes from the line of Todd Coupland with CIBC.

Your line is open.

My lucky day.

Good evening, everyone.

Just wanted to confirm, the share count you gave, one technical question.

The share count you gave of 204.9, that's the shares outstanding as of now?

That's not an average number?

Yes, that's right, Todd.

I think it's actually 205.1.

So 18.9, 186.2.

18.9 multiple and 189.2 SES.

Okay.

My second question is, just thinking about the op margin for first half to 2.5%, where would revenue need to be to be at the low end of that range?

Todd, I mean, it's difficult to answer right now, because I'd say we're making decisions dynamically here based on not just the next quarter forecast, but what we see, and what we expect to see, three, four quarters out.

So you know, we're not going to be that specific at this point in time.

I did -- we did -- if you take the fourth quarter and where we're guiding revenue, we did give you an indication that we expect first quarter revenues to go down sequentially.

So I'll let you come to your own conclusions on how much you want to take it down by to get to that 2%.

Okay.

That's great.

Thanks very much.

Thanks, Todd.

We'd just like to thank everybody for their interest and support, and we look forward to our continuing dialogue.

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect.