Celestica Inc (CLS) 2012 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to Celestica's 2012 fourth quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After our speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you.

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

Thank you, Candace.

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

On the call today are Craig Muhlhauser, President and Chief Executive Officer, and Darren Myers, Chief Financial Officer.

This conference call will last approximately 45 minutes.

Darren 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 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 also 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 identified factors that could cause 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 [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 or non-IFRS 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.

Unless otherwise specified, all dollar amounts referred to in this call are US Dollars.

I will now turn the call over to Darren Myers.

Thank you, Manny.

Good afternoon everyone.

It's a pleasure to be here today, co-hosting my first quarterly results conference call with you.

Celestica delivered revenue and operating profit within our guidance range, generating strong free cash flow in the fourth quarter, despite the negative revenue impact for the wind-down of RIM in a challenging demand environment.

Fourth-quarter revenue of $1.5 billion came in higher than the midpoint of our guidance range.

Total revenue in the fourth quarter declined 5% sequentially and was down 15% in a year-over-year basis, predominantly as a result of the wind-down of RIM.

Excluding RIM, fourth-quarter revenue was up 4% sequentially and grew 6% compared to the same period of 2011.

Some additional highlights for the quarter include adjusted earnings per share of $0.25 came in higher than our guidance range and included a one-time positive tax impact of $0.06 per share.

Non-IFRS operating margin of 3.1% was down 20 basis points sequentially on lower revenue.

IFRS net earnings of $7.2 million, or $0.04 per share, were impacted by other charges totaling $34.5 million.

We generated strong free cash flow of $90 million.

We ended the quarter with a cash balance of $551 million or $55 million drawn on our credit facility.

We successfully completed our substantial issuer bid, returning $175 million to tendering shareholders, and cancelling $22.4 million, or approximately 12% of the outstanding subordinate voting shares immediately prior to the bid.

Before discussing the details of the fourth quarter, I would like to highlight some of the financial results for the full year.

2012 revenue of $6.5 billion was down 10% compared to 2011, primarily due to the wind-down of RIM.

Excluding RIM, 2012 revenue was down 1%, while diversified end markets grew 27% year-over-year.

IFRS net earnings for the full-year were $118 million, or $0.56 per share.

Full-year non-IFRS operating margin of 3.3% was down 30 basis points year-over-year on lower revenue.

We achieved full-year ROIC of 21.5%, which came in above our 20% objective.

We repurchased and cancelled approximately $36 million, or 18% of our then-outstanding subordinate voting shares, and we generated strong free cash flow of $211 million for the year, above our annual target range of $100 million to $200 million.

Looking at the fourth quarter, revenue by end market, we experienced sequential growth in diversified, as expected, and modestly better than expected demand in servers and storage.

Diversified end markets revenue for the fourth quarter was up 3% sequentially, and grew 11% compared to the fourth quarter of 2011, with approximately 75% of the year-over-year increase achieved through organic growth.

The diversified end markets now represents 23% of our total revenue, up from 18% from the fourth quarter of 2011.

For the full year, revenue from diversified end markets grew 27% year-over-year, with approximately one-half of the increase driven by organic growth.

For 2012, the diversified end markets comprised 20% of total revenue, up from 14% in 2011.

The communications end market, comprising 37% of total revenue for the quarter, was down 3% sequentially with weakness from several customers.

On a year-over-year basis, communications revenue was also down 3%.

The server end market, representing 17% of total revenue for the quarter, was up 10% sequentially, and grew 5% year-over-year, driven by strong demand from one customer.

The storage end market, representing 14% of total revenue in the fourth quarter, was up 4% sequentially, and grew 18% compared to the same quarter of last year, driven by strong demand across several customers.

The consumer end market, representing 9% of total revenue for the quarter, was down 42% sequentially, and 69% year-over-year, negatively impacted by the wind-down of RIM, offset in part by growth from several customers.

Our top 10 customers represented 64% of revenue for the quarter, down from 71% for the fourth quarter of 2011.

We had two customers in the fourth quarter with greater than 10% of total revenue.

For the full year, we also had two customers that individually represented more than 10% of our total revenue.

We posted fourth-quarter IFRS net earnings of $7.2 million, or $0.04 per share, compared with IFRS net earnings of $69.2 million, or $0.32 per share for the same period last year.

For the fourth quarter, we recorded pre-tax other charges of $34.5 million, including $16.7 million of restructuring and $17.7 million of non-cash asset impairment charges.

The $17.7 million of impairment charges include a $14.6 million, non-cash breakdown against goodwill, associated with the Allied Panels businesses unit acquired in 2010.

Income taxes for the fourth quarter were a net recovery of $5 million compared to a net recovery of $15 million for the fourth quarter of 2011.

We recorded it -- in the fourth quarter of 2012, was driven primarily by a corporate tax reorganization involving certain of our European subsidiaries.

Adjusted net earnings for the fourth quarter was $50.3 million, or $0.25 per share, compared to adjusted net earnings of $71.1 million, or $0.33 per share, for the same period last year.

Included in this year's fourth-quarter adjusted net earnings of $0.25 per share, was a one-time income tax benefit of $0.06 per share that was previously mentioned.

Without this one-time benefit, adjusted earnings per share would have been $0.19 per share this quarter and within our guidance range.

Our adjusted tax rate in the fourth quarter was a recovery of 9.4%.

For the full-year, our adjusted tax rate tax rate was approximately 2.5%.

Looking forward we expect our adjusted tax rate to be in the 10% to 12% range for 2013.

Fourth-quarter non-IFRS gross margin was 6.9%, and declined 30 basis points sequentially, primarily due to lower revenue.

Adjusted SG&A expense for the quarter was $49.8 million, which was sequentially lower by approximately $6 million, primarily due to lower variable compensation.

Finally, pre-tax return on invested capital was 18.4% for the quarter.

As an update to the restructuring program we previously announced in July, the total estimated charges of $40 million to $50 million, we recorded $16.7 million of restructuring charges this quarter, comprised primarily of cash charges.

For the full year of 2012, we recorded total restructuring charges of $44 million, of which $27.8 million were cash charges, and $16.2 million were non-cash charges.

Based on additional actions that we are taking to further streamline our operations and simplify our organization, we currently anticipate our restructuring program total to be $55 million to $65 million, which includes a $44 million of charges recorded in 2012.

We expect to complete the remaining actions in the first half of 2013.

Moving onto working capital performance, Celestica finished the year on a strong note.

Inventory decreased by $61 million from the end of the third quarter.

Inventory turns improved to 7.2 turns in the fourth quarter, compared to 7.0 turns in the third quarter.

Capital expenditures for the quarter were approximately $17 million, or 1.2% of revenue.

Cash cycle was 39 days, consistent with the third quarter, and we generated strong free cash flow of $90 million in the fourth quarter.

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

Cash balance at December 31 was $551 million, a decrease of $48 million from the end of the third quarter.

While we generated $105 million in cash from operations during the fourth quarter, we paid $176 million, which includes expenses to repurchase shares through our substantial issuer bid.

At quarter end, we had drawn $55 million from our credit facility in order to fund our substantial issuer bid.

We plan to repay the amounts drawn by the end of the second quarter.

Moving onto our first-quarter guidance.

With overall demand continuing to remain soft across a number of our end markets, along with seasonal impacts, we're projecting first-quarter revenue to be in the range of $1.325 billion to $1.425 billion.

At the midpoint of this range, revenue would be down approximately 8% quarter-to-quarter.

Excluding RIM, revenue is projected to be relatively flat year-over-year.

For the first quarter, we are projecting year-over-year growth in our diversified and storage end markets with a decline in the communications and server end markets.

First-quarter adjusted net earnings per share are expected to range from $0.11 to $0.17 per share.

Non-IFRS SG&A expense for the first quarter is expected be in the $50 million to $52 million range.

At the midpoint of our first-quarter guidance, operating margin would be approximately 2.3%.

The sequential decline in the first-quarter operating margin was attributed to lower volume and to a lesser degree, the impact of increased variable compensation.

I would now like to turn the call over to Craig for some comments on our 2012 results, the overall business environment and our near-term outlook.

Good afternoon, everyone on the call.

Darren, thank you for providing the financial overview as our new Chief Financial Officer.

Overall, Celestica's 2012 results can be characterized as mixed.

While we're disappointed that we missed our revenue growth and operating profit expectations for 2012, we are very pleased to have delivered on our ROIC above 20% and free cash flow above our targeted range of $100 million to $200 million, while continuing to invest in the business and returning over $280 million to our shareholders through share repurchases.

After the disengagement of a customer who historically represented up to 20% of our total revenue, our priorities are to achieve profitable growth, further increase the mix of diversified business, and to accelerate the penetration of higher value-added services with our current and new customers.

We remain confident in our strategy, which includes diversifying our revenue and customer base.

We made considerable progress in 2012 towards this objective, as evidenced by the strong annual revenue growth of 27% in our diversified end markets while we improved our share position.

We are also very encouraged by the business wins from 2012 with new and existing customers that will ramp in the second half of this year and into 2014.

As well, we are excited by the pipeline of new business opportunities that we have across all of our targeted business segments and expect to close in 2013.

Every day, our team of talented and highly motivated employees are providing value to our customers using industry-leading tools, process technology and equipment, information technology, and innovative business processes.

In 2012, we were ranked number one or number two on over 90% of our top customer scorecards.

We were recognized by a number of customers in industry groups with awards for operational excellence, for fostering innovative solutions, and for our commitment to corporate social responsibility.

These are just some examples and proof points that give us tremendous confidence that we have the right strategy and a proven track record to take the Company forward and achieve our transformation.

We continue to make difficult decisions and are implementing the required cost actions to address the short-term weak demand with our base business.

Despite this challenging economic environment, we continue to invest to build capabilities and support new program ramps, which we expect to materialize over the second half of 2013 and into 2014 and beyond.

In the near term, with a backdrop of a slow growth environment, and consistent with our comments on our earnings call in October of last year, we are expecting a challenging first half of 2013, with a projected operating margin ranging from 2% to 2.5%, based on our current customer forecast for the base business and the timing of our new program ramps.

We are focused on driving revenue growth and long-term value, as we continue to invest in our Business.

As an example of this is our Semiconductor Capital Equipment business where we are making investments despite expectations of soft demand in the near term.

As a result, our current margins in this Business re below our long-term objectives.

Overall, the integration of our recent acquisitions in the Semiconductor Equipment Business are progressing as planned.

We continue to win new programs since the acquisitions were completed.

We anticipate overall profitability improvements in our Semiconductor Equipment business in the second half of 2013, based on the current outlook for our base revenue, as well as the new program launches for the programs we've won.

Now let me provide some additional remarks on our near-term expectations for our end markets.

Within our diversified end markets, we are building on the momentum created in 2012 and expect a continued progress throughout the year, in particular, in the Industrial business, which include Semiconductor Capital Equipments and Green Tech.

While we have made progress in our Healthcare business, ramping to target revenue has been slower than we originally anticipated, resulting, unfortunately, in the impairment of the goodwill associated with our Allied Panels acquisition.

Despite these challenges, Healthcare continues to be an important part of our business strategy.

We continue to focus on securing and expanding revenue opportunities in our Healthcare business, supported by strong operational performance.

Overall, we expect to see seasonality in the first quarter in our communications storage and server end markets.

Our communication end market is expected to remain relatively stable and to improve in the second half, in part due to a new win with one of our top customers who has made the decision to consolidate their supply base.

While our industry has always been extremely competitive, pricing pressure, particularly in our communications end market, persists.

To offset the pricing impacts, we remain committed to productivity improvements, effective cost managements, and providing higher value-added solutions and services to our customers.

We had strong momentum in our storage end market in 2012.

We anticipate this end market to remain stable, and we are very excited by the opportunities ahead of us.

Within our server business, we have recently been informed by one of our customers that they will be in-sourcing part of their business with Celestica, relating to a lower-margin system assembly program commencing in the second quarter.

While we can not disclose the details of the program, we expect our server revenue to sequentially decline by approximately $50 million in the second quarter.

We believe that the decision to in-source was customer-specific, and is non-indicative of any broader trend in in-sourcing.

Our financial position continues to be strong, and we expect to continue to generate cash to fund our investments and support continued growth and generate returns for our shareholders.

We remain committed to making the appropriate investments required to support our long-term objectives, including strategic acquisition that are necessary for our value creation.

Our focus continues to be on delivering transformational solutions to ensure our customer's success, driving revenue growth, and expanding our margins and returns despite the challenges of a macroeconomic environment.

We're entering 2013 with a very strong foundation.

We are very well-positioned to execute our strategy, to capitalize on the tremendous opportunities in front of us, to deliver improved financial results and shareholder value.

That concludes our prepared remarks.

Now, Candace, I'd like to open the call for questions.

(Operator Instructions)

Wamsi Mohan from Bank of America Merrill Lynch.

This is actually Ruplu filling in for Wamsi today.

Just first, Craig, maybe I missed this, but did you give an outlook for the consumer segment?

Now that without RIM, do you still see that as approximately 5% of your revenues and did you -- or could you give us some color on that end market?

Sure.

We -- I did not and I apologize for that.

It's going to be roughly 5% to 10% of our total revenue mix.

Is that for the full year?

Can we take that to be the case?

Yes.

Okay.

Then, Darren, on -- it seems that restructuring-wise there is an incremental $15 million that you announced today.

I was wondering which end markets are you targeting for that restructuring and total, what annual cost-savings would you expect to see from the restructuring activities?

Hi.

It's Darren here.

In terms of the restructuring, they will be across the overhead.

No specific end markets that we would call out, but really across the market or across our network.

As we look at the impacts of that -- and previously, we've talked about revenue getting back to the 3% to the 3.5 % at [$1.750 billion], this should drop the level, obviously, depending on a number of factors there.

So we will start seeing additional savings as a result of this.

We'll probably be more at a [$1.7 billion] number in order to get to the 3.50%.

But that is going to, obviously, depend on another -- a number of factors.

But this will give us some extra momentum on the savings side.

Great.

That was quite helpful.

The last one for me, if I could.

What was the ending share count as of December 31?

Ending share count was 182.7 million.

Sherri Scribner with Deutsche Bank.

I just wanted to clarify on the different end markets.

I don't know, it seems a -- that the commentary from Darren and Craig was slightly different.

But I think Darren had said the diversified in the storage segment would be up sequentially and the server and communications would be down sequentially?

Is that the right way to think about it?

Is that correct?

Hi, Sherri.

It's Darren.

No, my comment was around year-over-year.

Okay.

Okay.

I mean, generally it is diversified.

You mostly are going to have a seasonal decline as we go into first quarter with the exception of diversified, more or less.

Okay.

Then thinking about the first quarter and that guidance you are guiding to, down about 8% at the midpoint for revenue.

Is most of that decline coming in communications or in server?

Which segments are going to be the most -- the biggest decline?

How will consumer impact that?

Thanks.

We didn't call out one specifically.

Consumer will most likely come down a -- probably disproportionately more than the others.

Then communications and the storage and server will be mixed across those is what we would see.

We had a strong quarter, certainly within storage and servers.

So you start seeing that impact as we go into the first quarter.

Okay.

Seasonal impact.

Okay, great.

Thank you.

Jim Suva with Citi.

This is Nick Jones filling in for Jim Suva here.

Now that the buyback is done, can you give some color on your capital allocation.

Will there be another buyback program or will the focus be on M&A?

If so, what segments would you be focusing in?

Thanks.

I think the focus, at least for the near term, is going to be on the M&A opportunities.

So it's going to be building capabilities to support the continued growth and diversification into the diversified segment.

Then I think as we look later in the year, obviously, we're going to have another year of strong cash flow, if the opportunities are not there.

We will reevaluate that in the second half.

But we've got a strong year of growth.

Capital spending should be in line with our historical levels.

As we see opportunities, obviously, or we consolidate market share with some of these emerging customers that are looking for us to acquire more capabilities to increase our value-added.

So let's say for the first half and the bulk of 2013 it will be largely building capabilities through mergers and acquisitions.

Brian Alexander with Raymond James.

I just wanted to touch on the server comment that you mentioned with the customer in-sourcing starting in the second quarter.

Is that $50 million per quarter?

Is that the full impact that you're likely to see or will there be an incremental impact in the third quarter?

Then just a couple of related questions for that same issue.

Are you the sole source for that customer?

Then on the margin side, is this already reflected in the 2% to 2.5% operating margin target that you are providing, which I think is the same as what you provided last quarter.

So basically, no effect from this lost revenue?

Hi, Brian.

It is Darren here.

I'd say, first of all, the $50 million drop is what we currently see.

We're only giving a guidance out to the second quarter, but it's subject to -- this continues to be an important customer so it's subject to how their programs do.

We'll see how Q3, Q4 will roll from there.

In terms of the sole source, we won't give specifics, as I'm sure you can appreciate on the actual customer and the programs.

Then the third point in terms of the margin, yes, this has been contemplated within the 2% to 2.5% margin as Craig mentioned.

This is really light-touch, low-margin business, and that is going away.

Brian, the customer, in particular, has an existing system assembly operation and they've got under-absorption and excess capacity.

So it is a low value-added, light-touch, lower-margin system assembly business.

We are retaining a significant amount of the demand with that customer.

That is why the impact of the business is well within the guidance we have given in the prior call.

Got it.

Then, Craig, maybe more strategic for you.

You sounded a bit more excited about your pipeline than maybe you had in prior quarters.

So I know you don't really quantify new program wins or the pipeline, but any way to put into more context, relative to your existing revenue base, or relative to how you were tracking in prior quarters for new wins?

Are things getting better on that front or maybe did you just sound more excited about it?

Well, I am smiling here, Brian.

(laughter) I think I come back from the holidays and I see the pipeline.

I actually see the first quarter.

We had a strong year.

I'm very excited by the progress we've made, 27% growth in a tough market, making a transition.

But I am very excited about the front-end of 2013 in terms of the number of opportunities that will close this year.

As a result of that, when I look at the book-and-bill we need to make the revenue forecast.

I look at the momentum we've got on the front end.

I am feeling very positive right now.

Can you just say how they're skewed relative to your existing mix or are they disproportionately coming from the diversified segment?

I would say there are large-scale opportunities in diversified segment but the skew is very encouraging as well in some of the higher margin opportunities we've got in the communications and enterprise space.

So it is pretty broad, with some large-scale opportunities, which typically are unusual in the diversified space.

They are right in front of us, so that's the -- and we've had the fortunate -- been in the fortunate position to close a large-scale competitive takeaway with one of our major current customers in the fourth quarter, so that was key.

Amit Daryanani with RBC Capital Markets.

Let me just follow-up on that question.

Given the optimism you have about these new programs that will ramp-up in the back half, from the sound of it.

Could you help us understand why are you increasing your researching initiative?

I would imagine you'd probably need that extra capacity if all these revenues were to ramp up.

So are there some offsets to that that's leading you to actually increase your restructuring plan?

Well, I think in terms of -- this is the balance we are walking right now.

I think we -- our quote in our pricing groups, our contracts groups, they're virtually at capacity or working very near capacity so we're balancing the capacity.

As you know, some of these facilities that we've got are dedicated to centers of excellence for diversified, some of its -- we share with communications and enterprise.

So we are taking selective, I'll say restructuring, of various sites as we consolidate the business.

And therein lies the skew in our margin profile over the course of the year.

So, predominantly, the restructuring that we spent was around the RIM cost structure and reducing capacity associated with RIM.

But the -- I would say it is more of a refinement focusing the operating facilities more aligned with the strategy in reducing the overhead in those facilities, as opposed to the direct labor and the direct production costs.

Got it.

I just want to clarify, the one server customer that's going in-house, is that [$140] million or $50 million from that?

I think I heard two different numbers.

Then is that just one specific product line that they're bringing in-house or are they taking all of the manufacturing back in-house?

No, no, no.

They're not bringing all of the manufacturing back in-house.

They're bringing back in-house a system assembly capability to put into an existing facility they have that does system assembly that's underloaded.

So it -- and the number that we are estimating in the second quarter, based on their current forecast would be about a $50 million impact in revenue to our prior, I would say, the prior modeling, if you will, based on our base business.

But we are retaining a large portion of that business and providing a higher value-added components to support those system assemblies.

Matt Sheerin with Stifel Nicolaus.

A question regarding your commentary about getting back to the 3.5% operating margin number at $1.7 billion revenue run rate, Craig, you actually do sound optimistic about pipeline.

Do you have any visibility as to whether you think that pipeline will roll on fast enough to get to that number either in Q3 or Q4?

Because I know you've talked about the 2% to 2.5% margin target for the first half.

How fast can you accelerate above that in the second half?

Hi, Matt.

It's Darren here.

As Craig's mentioned, we've got a lot of exciting opportunities in front of us for ramping business, and there are some positive signs as we look forward.

But it's early in the year and what happens with the economy, what happens with demand, end market demand is certainly unclear to us, as I believe it's unclear to most people.

So it is hard for us to predict.

We don't want to predict today when we will get there.

There's just too many variables at play.

I think the biggest assumption, Matt, is the economic environment and the base erosion or deterioration in our base business.

So if our base business holds in line with our current outlook, it's tough to say we've got to book the business before the first half to have an opportunity to execute in the second half.

The big assumption here is the overall macroeconomic market, and the impact that might have on our base demand.

We have strong new pipeline, new opportunities.

They will grow.

The question is meeting that threshold will determine a lot by the overall economic environment right now.

It is too tough to predict, as Darren mentioned.

Okay.

Fair enough.

Then just another question regarding your consumer market, which appears to be holding up better than expected given that RIM has gone away.

Could you be more specific and give color on customer end markets there, and then also the margin profile of that business as you're managing that?

Yes, it's Darren here.

That business is, I'd say it's predominantly aftermarket services, customers.

There's some other customers, and that -- this tends to targeted margins would be higher in this end market, as it relates to the aftermarket.

Yes.

The mix will be -- we've got some other manufacturing services that we provide in this space.

So that particular business is at a higher margin than some of our more traditional business.

Then the bulk of the balance would be either aftermarket service related, or in the area of set-top box.

Okay, so really deemphasizing the high-volume -- the high velocity and you're focusing on the value-add.

Got you.

For sure.

We are really taking this opportunity to transform the Company and to the true niche -- the true opportunity that we have here, which is the value-added supply.

Todd Coupland, CIBC.

Are you able to tell us who the 10% customers were in the fourth quarter?

Not in the fourth quarter.

For the year, it's Cisco and RIM, Todd.

Okay.

Then, when I think about the server line, roughly $250 million, so $50 million is actually quite a large impact to that business.

What does that do to your footprint in terms of supporting that?

Do you need to do a reset in the server area beyond what you've done for RIM?

Maybe just talk a little bit about that.

Well, the short answer is a large part and the bulk of that will be backfilled with the communications customer, which is a similar type of capability.

So the short answer is, no, we don't have to do a reset on the infrastructure.

I think the message is, we have done a reset on the strategy.

We're moving into a higher value-added play in the server space and the storage space with joint design and manufacturing.

We're starting to build more momentum in that.

Then some of the newer programs that we've won over the course of the last 18 -- 12 to 18 months are beginning to move into production volumes, so it will be an important segment.

The bulk of what we are losing was little to no calories, and in an area of the business that seems to be on the decline, frankly.

When we look at your guidance for Q1 and you take out the server business for Q2, should we anticipate a roughly flat revenue quarter?

Or should there be some seasonality and some new programs even in this lackluster demand environment?

Thanks very much.

Todd, it's Darren here again.

We'll leave the modeling to you.

Flat issues is probably a reasonable assumption, but We'll leave the modeling to you on that.

Naser Iqbal with Salman Partners.

Congratulations, Darren, since the last call.

Just following up on Todd's question.

In terms of offsetting the $50 million in the second quarter, do you see any other positive headwinds, probably by some of the program ramps or just your positive pipeline that you are seeing right now?

Yes.

I think offsetting the $50 million in the second quarter will be difficult based on this timing of ramps.

So obviously, the good news is the customers that we're winning or the consolidation that this one customer is doing with their supply base on the communications side that we've won, they want to accelerate the timing of that but it's all going to be gated by the ability to do it and do it well.

So the short answer is that's headwind we're going to have to overcome as we go through the balance of the year.

We will overcome it.

The speed of the ramps, and the largest ramp we'll have going on will be probably in the communications space with this competitive takeaway.

So overall, on a net-net basis, tough to overcome it by the end of the second quarter.

Certainly, you will see the opportunities -- or you'll see the revenue impact, positive impact over the course of the second half.

Okay.

Again, just following on that, my follow-on would be, given how, Craig, how positive you are on the pipeline on the back half, do you think that if the economic macro is where it is now, that the program ramps could provide a good source of growth?

Sure.

I mean that's the -- you are going to see growth rates in the diversified space.

You see 27% this year.

You're going to see continued growth.

One of the important markets where we need to see a rebound in base demand where we've had a very material impact negatively is in the semiconductor capital equipment market.

So if that starts to bounce back and on top of the new program wins, which will be a little bit longer-cycle program wins, that would underpin a very, very, very strong second half, frankly.

Okay.

Thank you very much and good luck.

Joe Wittine with Longbow Research.

With regards to the additional restructuring charges, I'm wondering if you can talk us through where you expect the operating expenses to trend beyond the first quarter?

Do you expect them to go lower given the additional actions you're taking?

If so, how much?

Thanks.

Hi Joe, it's Darren.

In terms of beyond the first quarter, as Craig mentioned, we see a range of 2% to 2.5% for the first half and not giving guidance from there.

We've -- as we also mentioned, we are investing in the business.

So when you put on some growth on top of that investment and you start to get leverage on the fixed cost and the network, we see margins will start to accelerate.

It's going to be a function of the growth.

It's going to be a function of the semiconductor demand turning around.

And then putting on top of that some restructuring, you start to see the margin really, really improve from where we are today.

Okay.

Got you.

Then Craig, when you're talking about having a smile on your face after the new year, I just want to make sure I'm drawing the right conclusions.

(laughter) You had mentioned, well, let me just ask, is it more a function of the bullishness in semi cap or is it more a function of the large comms program that you won?

Just so I'm not jumping to any conclusions here.

I think it's the breadth of opportunities that we're seeing across the paths so toms -- the comms group win was a great proof point.

But then around that are opportunities in the communications enterprise, and then we have major opportunities in the semiconductor space, that we also have opportunities in essentially every major market that we've got right now.

So it's that breadth and that balance across the patch.

It's the timing of those opportunities all look like they're going to closing in the first half.

It is the fact that we seem to be winning with the winners in the markets, which is very encouraging.

Maybe just a final follow-up on that comms business.

Is it your understanding that you won the entire piece that was up for bid or is it split between you and the other providers?

Yes.

We don't comment on that.

So I'll just leave that to the other comps -- other people to explain.

Tina Zhu with Topeka Capital Markets.

Tina Zhu, your line is now open.

Candace, we'll move on to the next one.

Gus Papageorgiou with Scotiabank.

I have a longer-term question.

Craig, since you took over, you've done a great job at delivering a profitable organization with great cash flow, and high ROIC.

But in terms of the top line, it has been a challenge, both macroeconomically and the loss of the RIM business.

I'm just wondering, with the strong balance sheet, how important is top line growth to you guys?

Do you think you definitely really want to achieve, or are you just happier to use the balance sheet to grow the business slowly and improve the bottom line?

Maybe just give us a sense of what your perspective is on growing the overall business?

Well, the first phase -- if you break it into three phases, the first phase, Gus, will be the re -- I will say, it's to backfill the impact of RIM and get back to 3.5% to 4%.

I am very bullish on the strategy of the Company and the ability to transform and grow and make money.

So phase one is to backfill RIM, and get to the $1.7 billion in that 3.5% to 4% threshold as quickly as possible.

Step two is to leverage the investments we are making to grow the Company and increase the share of diversified from what will be -- it's at 20%-plus today.

It will be moving to 30% and hopefully, one day it will be half of the business.

Then finally, it is to maintain the financial disciplines so you have the trust and confidence that we're going to generate strong cash flow.

We're not going to go for a double-digit.

We're going to go for 6% to 8% growth rate, back to the original model, and we want to improve the -- I will say, the operational performance to drive even more cash flow and make this a very solid investment for the long term.

So I am in it to transform it.

I am in it -- but without compromising any aspect of our financial discipline and the credibility we've built.

It's going to take a little bit longer than we thought, but what we've got some really early indicators that make us feel very positive about the market wants a company like Celestica doing the things we're planning to do.

(Operator Instructions)

Candace, we will take one more question, please.

Actually, we have no further questions at this time.

I will turn the call back to our presenters.

Okay, Candace, thank you very much.

Thanks everybody for your interest in calling in today.

We look forward to continuing our conversation.

Thank you very much for your support.

Thank you everyone.

This concludes today's conference call.

You may now disconnect.