Celestica Inc (CLS) 2013 Q2 法說會逐字稿

Good morning.

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

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

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

After the speakers' remarks there will be a question and answer session.

(Operator Instructions).

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

Thank you, Tiffany.

Good morning, and thank you, everyone, for joining us on Celestica's second quarter of 2013 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 some questions and answers.

During the Q&A session please limit yourself to one question and a brief follow-up.

Copies of the supporting slides accompanying this webcast can be viewed at www.celestica.com.

As a reminder, during this call, we make forward-looking statements related to our future growth, trends in our industry, our intentions concerning the return of cash to our shareholders, our financial and operational results and performance, and financial guidance 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 Company's various public filings, which contain and identify material factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements and which discuss material factors and assumptions on which such forward-looking statements are based.

These filings include our annual report on 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 refer to certain non-IFRS financial measures, which include adjusted gross margin, adjusted SG&A, operating margin or adjusted EBIAT, adjusted net earnings, adjusted EPS, return on invested capital or ROIC, and free cash flow.

These non-IFRS measures do not have any standardized meaning under IFRS and may not be comparable with other non-GAAP or non-IFRS financial measures as 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 and certain other non-IFRS measures, including a reconciliation of the non-IFRS measures to the corresponding IFRS measures where a comparable IFRS measure exists.

Unless otherwise specified, all reference to dollars this call are to US dollars.

I will now turn the call over to Darren Myers.

Thank you, Manny, and good morning everyone.

Celestica delivered a solid second quarter, with revenue and adjusted earnings per share above our guidance range, driven primarily by stronger than expected demand in our communications end market.

We generated strong free cash flow and increased our return on invested capital as a result of higher earnings and working capital performance.

Second quarter revenue of approximately $1.5 billion increased 9% sequentially.

Compared to the second quarter of 2012, revenue was down 14%, primarily due to the wind-down of manufacturing services for BlackBerry in the second half of 2012.

Excluding revenue from BlackBerry for the second quarter of 2012, second quarter revenue increased 3%.

Some additional highlights for the second quarter include non-IFRS adjusted earnings per share of $0.21 came in above our guidance range of $0.13 to $0.19 per share.

Non-IFRS operating margin of 2.9% was up 40 basis points sequentially.

IFRS net earnings of $28 million or $0.15 per share were impacted by restructuring and other charges totaling $3.4 million.

We generated free cash flow of $51 million, and we ended the quarter with a cash balance of $554 million.

Looking at second quarter revenue by end market, consistent with our expectations at the beginning of the quarter, we experienced sequential growth across all end markets except servers.

Our diversified end market comprised 25% of our total revenue, up from 19% in the second quarter of 2012.

Second quarter revenue from our diversified end markets increased 11% sequentially, with growth from industrial and aerospace and defense partially offset by a decline in healthcare.

Compared with the second quarter of 2012, diversified revenue grew 14%, with growth across all areas except healthcare.

Revenue from our communications end market, representing 42% of total revenue for the second quarter, increased 14% sequentially and grew 11% compared with the second quarter of 2012 as we experienced better than expected demand across a number of customers.

Our servers end market, comprising 14% of total revenue for the quarter, declined 7% sequentially, as improved demand from some customers was more than offset from the transition of a program to a customer's internal facility.

Compared to the second quarter of 2012, servers revenue declined 23%, primarily due to lower demand and the previously mentioned program transition.

The storage end market, representing 12% of total revenue in the second quarter, was up 8% sequentially, as expected, resulting from higher demand.

Compared to the second quarter of 2012, storage revenue declined 10% due to weak demand from one particular customer program.

And finally, our consumer end market, comprising 7% of total revenue for the quarter, increased 12% sequentially due to overall increased demand.

Our consumer end market declined 72% compared to the same period last year, primarily as a result of the BlackBerry disengagement, which more than offset the ramping of a new program with an existing customer.

Our top ten customers represented 66% of revenue for the quarter, down from 71% for the second quarter of 2012.

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

Moving on to some of the income statement items.

Second quarter IFRS net earnings of $28 million or $0.15 per share, compared with IFRS net earnings of $23.6 million or $0.11 per share for the same period last year.

Despite the lower revenue for the second quarter of 2013, IFRS net earnings improved by $4.4 million compared with the second quarter of 2012.

This was primarily due to lower restructuring charges and income tax expense.

Non-IFRS adjusted net earnings for the second quarter were $38.6 million or $0.21 per share, compared to non-IFRS adjusted net earnings of $47.1 million or $0.22 per share for the same period last year.

Our adjusted tax rate in the second quarter was 10%, consistent with our expected adjusted tax rate range of 10% to 12% for 2013.

Second quarter non-IFRS gross margin of 6.6% was relatively flat on a sequential basis, in part due to ramp costs and the underlying mix of programs.

Our gross margin continues to be impacted by excess capacity in our semiconductor business.

Non-IFRS adjusted SG&A expense for the quarter was $49.2 million, slightly better than our expectations as a result of foreign exchange gains recorded in the quarter.

Finally, pretax return on invested capital was 18.3% for the quarter, representing sequential improvement of approximately 400 basis points.

As an update to the restructuring program we previously announced in 2012, we continue to estimate cumulative charges between $55 million to $65 million.

For the second quarter we recorded restructuring charges of $3.4 million, the majority of which were cash charges.

This brings our total restructuring charges to date under this program to $55 million.

We expect to complete the remaining restructuring actions by the end of 2013.

Turning to working capital, we improved our working capital performance in the second quarter.

While our inventory increased by $52 million from the end of the first quarter, primarily due to program ramps, our inventory turns improved to 6.9 turns from 6.7 turns in the first quarter.

Capital expenditures for the quarter were $18 million or 1.2% of revenue, consistent with our expectations of 1% to 1.5%.

Cash cycle was 37 days, three days lower than the first quarter due primarily to accounts receivable performance, which benefited from increased revenue and changes in customer mix.

As a result of higher earnings and solid working capital performance, we generated free cash flow of $50.5 million in the second quarter.

Moving to the remainder of the balance sheet, the Company's financial position remains strong.

Our cash balance at June 30 was $554 million, an increase of $22 million from the end of the first quarter.

At quarter end we had no outstanding debt and our credit facility remains undrawn.

During the second quarter we repaid the $20 million drawn at the end of the first quarter on our credit facility.

Now I'd like to spend a few minutes on our capital allocation.

Over the past few years, Celestica has been one of the leading North American EMS companies in demonstrating commitment to delivering shareholder value through consistent share repurchases.

From 2010 through 2012 we've completed over $400 million of share repurchases while investing approximately $400 million into the Company.

Over the long term it is our intention to continue to take a balanced and disciplined approach to our capital allocation.

To date and at this time, our preferred method of returning excess capital to shareholders is through share repurchases, as they allow for greater flexibility, which is important at this stage of our strategy as we continue to diversify our business.

Although we have no plans to issue a dividend at this time, we will continue to assess this option as we move forward.

Capitalizing on our strong balance sheet, continued free cash flow generation and commitment to driving shareholder value, we are announcing our intent to launch a normal course issuer bid, subject to the approval of the Toronto Stock Exchange.

If approved, we expect to repurchase for cancellation under the bid at our discretion during the following 12 months up to 10% of the number of outstanding subordinate voting shares, subject to certain limitations.

Pursuant to those rules, we estimate that as of June 30 we would have -- approximately 8 million or 5% of our subordinate voting shares would be available for cancellation.

If the TSX approves the bid, we will make the formal announcement, which will include the actual number of subordinate voting shares available for repurchase and cancellation.

We expect to fund any share repurchases under the bid from available cash on hand.

Moving on to our guidance for the third quarter.

Overall, we expect a challenging economic environment to continue in our end markets.

Nonetheless, we are anticipating continued growth in our diversified business as a result of new program ramps.

For the third quarter, we are projecting revenue to be in the range of $1.425 billion to $1.525 billion.

At the midpoint of this range, third quarter revenue would represent a modest sequential decline of 1%.

Third quarter adjusted net earnings per share are expected to range from $0.17 to $0.23, with a midpoint of $0.20.

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

At the midpoint of our third quarter guidance, non-IFRS adjusted operating margin would be approximately 3%.

I would now like to turn the call over to Craig for some comments on the overall business environment and our expectations to the near future.

Thank you, Darren, and good morning, everyone.

And thank you for joining us today.

Celestica delivered a solid second quarter with strong execution as we were able to fulfill considerable revenue upside late in the quarter, particularly for our communications customers.

Overall, end market demand continues to vary by end market, success of customer specific programs and the time to volume of new program ramps.

We have yet to see indications of significant improvements in end market demand, and visibility to forecast beyond 90 days is limited.

Despite this challenging economic environment, we continue to make progress in diversifying our revenue and customer base, and we're very encouraged by the number of new program wins, our win rates across all segments of the business.

Bookings performance for the first half was very strong, and we expect this momentum to continue as we move through the second half of this year.

From an end market perspective, for the second quarter we experienced strong demand across our customer base in communications end markets, resulting in double digit sequential and year-over-year growth.

In the third quarter we expect communications to be relatively flat with the second quarter.

However, we anticipate growth in the mid to high single digit percentages on a year-over-year basis.

This is driven by new program wins, with current and new customer program ramps, and with the transfer of a major program from a competitor.

Within our diversified end markets we continue to make steady progress.

In the second quarter we experienced double digit sequential growth across all areas of the business with the exception of healthcare.

While we had strong sequential growth in the diversified end markets, the increase was lower than expected, primarily due to weak continued demand in our semiconductor business and from several industrial customers.

For the third quarter we expect continued growth in our diversified end markets, with mid single digit sequential growth and double digit year-over-year growth.

During our last call, I provided an update on our semiconductor business, which is currently operating below capacity as we make continued investments in our future that are negatively impacting our short term margins with the backdrop of this weak demand environment.

Although we're seeing some improvement in revenue, semiconductor demand is moving slower than we expected.

We continue to make progress booking new business with our current customers and attracting new customers and expect the overall segment to contribute to our profitability to improve as we ramp new programs throughout 2014.

Within our server end market, at the beginning of the second quarter we had expected a negative impact of $35 million to the second quarter due to a customer decision to in-source a lower margin assembly program.

While the second quarter impact was lower than the $35 million we anticipated, the transfer will be complete in the third quarter, and as a result we're projecting a double digit sequential decline in our server business.

We experienced sequential growth in the second quarter in our storage business, with improved demand from a number of customers, and we expect sequential growth in the third quarter in the mid single digit range.

Within our consumer business we experienced sequential growth in the second quarter, but as we continue to deemphasize certain programs, we are forecasting a double digit sequential decline in the third quarter.

At the beginning of this year we projected an operating margin of 2% to 2.5% for the first half of this year.

Through our transition this year we have made steady and consistent improvement in our performance, with an operating margin of 2.5% for the first quarter, 2.9% for the second quarter, and we're projecting 3% at the midpoint of our guidance for the third quarter.

We remain confident in our strategy.

We're focused on profitable growth, continued operating margin improvements, quality and operational excellence, while making the investments that are necessary to enable our customers' success.

In addition, with our current business model we expect to continue to generate free cash flow, which combined with one of the strongest balance sheets in our industry gives us a very high degree of flexibility.

We continue to be responsible stewards of our cash and cash deployments.

While our current priorities for cash are investments in the business to drive value for our current customers, as well as attract and develop new customers, we will continue to take a balanced approach in deploying our cash to increase shareholder value.

For the second half of this year we continue to drive revenue growth, the successful ramping of new programs and increasing our productivity and free cash flow through disciplined cost management and inventory performance improvements.

Our priorities remain to continue to create value for our customers and our shareholders by delivering unique and innovative supply chain solutions, with continuous improvements in our operating and financial performance through margin expansion, increased ROIC and consistent free cash flow generation, while continuing to make investments necessary to support our growth and return excess cash to shareholders.

That concludes our prepared remarks.

Tiffany, please open the call for questions.

(Operator Instructions).

Your first question comes from the line of Amit Daryanani with RBC Capital Markets.

Your line is open.

Good morning, guys.

Just a couple of questions for you.

One on the end market side.

Could you just maybe talk about on the communication side what sort of end market dynamics are seeing heading into the September quarter, excluding the ramp that you're going to have?

I believe that's one of competitive [things you've had in that] space.

And then on the server side could you maybe just quantify how much headwind will you have sequentially from the program transition?

So on the communications side, Amit -- and good morning -- second quarter was really strong based on the number of customer specific programs.

And as we look to the third quarter forecast, in part strength from some programs, and you'll see the beginning of the impact of the ramp of the competitive take away.

And obviously we have headwinds with shortfalls in other areas, but overall, communications is flat in the second quarter, which is largely based on the impact of some of the puts and takes in the mix of customers we've got.

On the server side, it's primarily the impact of Oracle and the transfer into -- for the in-sourcing.

I guess, Craig, could you maybe just quantify how much headwind?

Because I believe it was supposed to be $35 million in Q2.

It sounds like it was less than that, and you'll see some more headwind in Q3, right?

Yes, we are going to see some more headwind in Q3, and it's going to be on the order of $35 million or thereabouts.

Fair enough.

And then just finally, you guys are doing obviously a great job on the capital allocation with the buybacks on a consistent basis.

I'm curious, what triggers you to come out with a dividend?

Is there some sort of event catalyst that you are looking at that would make you more comfortable with a dividend policy?

I think at this point in our transition, Amit, and certainly at this point in the industry, I think what we're looking for is more stability in our ability to predictably predict the demand environment, and the impact once we stabilize the amount of program transfers that we're implementing at this point, and then the mix shift to diversified.

So it's the combination of those three things.

I think you're talking about a 12 to 18 month period where we go through that.

We'll assess it every year.

Obviously, we want to make sure when we start to issue a dividend we continue to issue a dividend.

And it's not our confidence in our ability to generate cash.

It's the investments we want to make in the future, and then it's around the potential M&A opportunities that we see in front of us.

Fair enough.

Thanks a lot.

Thank you.

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

Your line is open.

Hi, thanks.

I just wanted to do get a little more detail on the strength in the diversified end market.

I know there's a lot of different pieces in there.

Is it any one particular customer?

And I think you also said in the second quarter there was some weakness on the industrial side.

I'm hoping to get a little more detail.

Well, as we look at -- Sherri, good morning.

The primary headwind we're facing in diversified is in the area of semiconductor.

So that is really driven by three factors.

Number one, it's the weakness in the end market demand from back in 2011 when we acquired some of these properties.

The second one is around the timing and the time to volume of the new program ramps and the program transfers that we have under way with our current customers.

And then finally, we're continuing -- not so much on the revenue side, but on the margin side -- we're continuing to make new -- continue to make investments in building our capacity, strengthening our capabilities, and improving our network as we look to dramatically scale this over the course of the next several years.

So it's those three headwinds primarily.

On the industrial side, it's customer specific.

I mean, very, very strong bookings across the business in the first half, significantly better than a year ago.

It's the materialization of those new programs that we're looking at, and then rebalancing the portfolio of customers to focus more aggressively on the leaders and outsourcing in the industries.

And you'll see some of the puts and takes being us moving away from some of the smaller companies -- customers in our portfolio to the large leaders in the outsourcing space and the diversified markets.

Okay.

I think you made some comments that the demand environment still remains challenging.

Have you seen any evidence that things are picking up, or do you think it's still relatively stable versus what we saw last quarter?

I think it's relatively stable from what we saw last quarter.

I think what see is customer specific and program specific demand -- very volatile demand increases.

13% of our revenue shipped in the last quarter -- or the last -- the last week of the second quarter.

Okay --

To give you a sense of the volatility.

Yes, that's helpful.

And then on the SG&A, you guys did a good job keeping SG&A relatively flat even though revenue was up I think 9% sequentially.

It looks like the guidance suggests maybe SG&A comes down a bit.

Is that as a result of the cost cutting actions you've taken?

Good morning, Sherri.

Darren here.

Yes, in terms of SG&A we continue to really focus on the cost containment, which you saw in the quarter.

We also had some benefits from foreign exchange this quarter.

So we do see SG&A going up slightly, as I mentioned, into the third quarter, but continue to kind of maintain at that level.

Okay.

Great.

Thank you.

Thank you.

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

Your line is open.

Yes.

Hi, Craig.

Good morning.

On the communications, I'm just curious what drove, do you think, that strength at the end of the quarter, and is it more of a networking type product or it's kind of the traditional telecom?

I mean, it was really across the business.

I mean, we had very strong program specific, customer specific demand increases, and then some late customer drop-in orders, if you will.

And what's very, very encouraging is our ability to really react and have the flexibility to meet that demand.

I think that's one of the hallmarks of Celestica.

But it was across a number of customers, across both networking and telecom.

And obviously it was a tremendous benefit to the quarter, and the fact that we could get that revenue out in the quarter and still show the kind of margin improvement we had was just terrific.

Okay.

And semicap, I'm just a little surprised; it seems like other companies are talking about signs of life.

Do you see the signs of life and it's going to take another quarter, or you just don't see it?

No, we see it's improving, but the base that we built our expectations on was back in 2011.

So, yes, we're seeing improving.

We saw some improvements in semicon.

But the message is the magnitude of the improvement and the ability for us to continue to, I'll say, improve our margin performance is going to be based on us moving more quickly to ramp and transfer the programs and the opportunities that we have in front of us and balance that with the investments we're making in our capabilities.

So, yes, we're seeing improvement.

We're anticipating continued improvement as we go through the second half and certainly into 2014.

But on a relative basis, relative to where we were back in 2011, looking at a fairly bullish outlook at least for the revenue side, we've got some ground to make up.

And that will be through new program wins, competitive takeaways and obviously continuing to build out our network.

We're confident.

We're confident.

I just want to make sure you understand we're confident in our ability to get there.

It's just taking us a little bit longer than what we anticipated based on the kinds of thoughts we had back in 2011 when we made these investments.

Understood.

Thanks.

We appreciate it.

Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets.

Hi, good morning.

Good morning.

Craig, can you provide some color around what you're seeing in the server business outside of the Oracle in-sourcing?

Well, I think it's a very challenging market certainly for us.

I mean, obviously, we play at the high end of the server business in the proprietary server space.

Really strong customer relationships.

We serve really three of the top five companies.

The message there is, as you know, our strategy is to really move our business from an EMS business in contract manufacturing as this market largely moves to an industry standard type of ODM-supplied white box market.

And we're becoming very successful at finding the right opportunities to continue to enhance the margins.

But very frankly, server as a market for Celestica over the long term -- and that's a very long term -- is a declining market, and that's a cost and cash opportunity for us, and to expand our high value added services to defend the base of proprietary server customers in markets that we serve.

So it's certainly a core market to us, but it's changing rapidly, and we're doing very well where we're choosing to participate.

So kind of don't measure us so much by the revenue line.

It's a large part of enhancing our ability to maintain our margin profile as you see on the bottom line and continue to make that a valuable contributor to our margin and our cash flow generation.

And then just to drill deeper on why your guidance for communications is flat even though you have a large program ramping.

Does that reflect up some other programs that are ramping down, or is that just reflective of the fact that you had this big rush of demand towards the end, and just given current visibility you're not comfortable extrapolating from that?

I think, yes, I think we had that big rush of demand, and we are -- I think I'll say we are cautious in our guidance in terms of -- it's not -- we expect it to be flat; so we had a big rush in demand, and we have some potential upside.

But the question is, based on everything we see right now, we're being cautious, and the guidance you see is to -- which includes really the communications sector being flat.

Great.

Thanks, Craig.

I'll pass the line.

Thank you very much.

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

Your line is open.

Thank you and congratulations there to your team at Celestica.

The upside was quite impressive.

Thanks, Jim.

When we look at the outlook, and I think if the math is correct, it's about a 1% decline sequentially for Q3 versus Q2.

Traditionally looking back, when you take out the transition change for BlackBerry and things like that, traditionally it's not down 1% for Q3.

So can you help us understand that?

Is that simply because the consumer is a less important ramp in Q3 than it has been in the past, or is that because telecom came in stronger and maybe there are some [pull ins]?

Or I'm just trying to figure out why the midpoint for Q3 actually wouldn't be up versus normal [history].

Good morning, Jim.

It's Darren here.

In terms of the third quarter, as Craig mentioned, communications we expect to be flat, but I do think you have to take into account from the sequential basis just the extra revenue that we delivered in the second quarter.

So I think that does skew you relative to kind of history within communications.

I wouldn't describe anything as pull-forwards, but there was extra demand, so when you look at that quarter over quarter performance now you see that being flat.

All else being equal, if you exclude RIM, we expect to be up 3% year-over-year, so we're seeing good growth.

And as Craig said, I think we're being cautious on our forecast.

There's a fair amount of churn in forecast right now, so we're being cautious with our guidance.

Then as a follow-up on the end segment, since you talked about many of the major ones, but on healthcare, can you help us understand there a little bit about what's going on?

It seemed like the (inaudible) sector is facing some headwind.

Is it because of, like, Obamacare is causing OEMs to hesitate on their orders, or is there something else going on in the healthcare industry?

Jim, good morning.

It's Craig.

From the healthcare perspective, I mean, we've been very successful in booking new business.

I would say I haven't seen an Obamacare impact in terms of the opportunities that we've got in front of us.

What you can really take from the changes in the Celestica portfolio is, as you know, we have a very focused strategy on the target customers that we feel are best fit with our strategy and really our philosophy of quality, cost, delivery, flexibility.

In this case, we are remixing the portfolio, and a couple of the customers that really don't fit the long term strategy of our healthcare business are moving in a different direction, and therefore you see that impact impacting us specifically as we get the portfolio right.

Backfill that with the new opportunities, ramp those opportunities, healthcare will be an important contributor to the business as we begin to see those materialize in 2014.

So again, it's us remixing the business to get the portfolio aligned with our strategy and do that with customers that we think represent the best long term investments.

Okay.

Then just a housekeeping question.

I assume the EPS outlook does not include any repurchase.

If you can just -- of shares -- if you can let me know if that's true or not.

Then also, any updates to your CapEx?

Thank you.

Yes, Jim, you're correct.

Our outlook does not include the buybacks.

In terms of a CapEx, we'll continue in that 1% to 1.5% range that we've historically been at.

So nothing unusual there.

Great.

Congratulations to you and to your team at Celestica.

Thank you, Jim.

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

Your line is open.

Hi.

Thanks.

Just on the gross margin line, I think you said that the excess capacity on the semiconductor side was causing -- was holding back the gross margins.

Just wondering, can you kind of characterize that?

Like, if you do get to -- if you can ramp the capacity there, how much of an improvement would it be on your gross margin, and over what time frame do you think you can kind of bring on the new business on the semi side?

Yes.

Good morning, Gus.

Darren here.

In terms of our gross margin, I mean, semiconductor, as we've mentioned, is bringing down the margins.

We're not going to provide the specific color.

Needless to say, the capacity is impacting our overall margins, and it is impacting diversified margins, which is below where we would like it to be.

And the timing, as Craig mentioned, we're winning new programs, we're ramping new programs.

The end market is starting to recover, but it's going to take us time to start seeing some benefits back into that, and it will go to, frankly, into 2014 for that.

At the midpoint of our guidance, though, we do expect to see gross profit improvement.

As we go into the third quarter, we would expect a 20 basis point improvement.

So we're focused on just continuously making improvements, as we go, as we've shown in the first half of this year and with our forecast here.

Do you think that once -- if you can ramp that business, do you think getting back to kind of 7% gross margins is possible in kind of late 2014 and beyond?

Yes, I mean, we're not providing guidance into 2014, but certainly we are looking to get back to 7% as quickly as we can.

Okay.

Great.

Thanks a lot.

Thank you.

Your next question comes from the line of Joe Wittine with Longbow Research.

Your line is open.

Hi, thanks.

Just one more quick follow-up on semi-cap.

You said you are looking to dramatically scale the business.

I was just curious, given the bookings you already have today, do you have line of sight to getting the utilization back within an acceptable range, or do you need to kind of go out and win a whole lot more business from here?

No, giving the customers -- good morning -- giving the customers and programs and the wins that we are -- we have booked and we will book in the second half, we are -- we have a road map to get back to where we need to be to meet our expectations in semiconductors.

So it's not going out and inventing something new.

We know exactly where to go, where to get it.

We've got the relationships, we've got the proof points.

The question is the timing of that is lagging, and then the underlying end market demand that we expect to improve in the second half and into 2014 will also support that improvement.

Okay, great.

And then, Craig, as a follow-up, I think you said bookings were strong during the quarter.

Which portions of your business were bookings the strongest, I guess?

The good news is we had strong bookings across the entire Company frankly, and it was very, very encouraging.

So that's through the first half, and obviously the funnels are very dramatically improving over the course of the second half, and obviously our win rates are improving.

So we're very encouraged by the outlook of the Company.

We're very confident in the strategy, and obviously we're putting numbers on the board, we're putting improvements on the board.

We're moving faster than we thought we would do in the first half, and we expect that to continue in the second half, so very excited here.

Thanks.

If I could do one more really brief follow-up.

In diversified, congrats on hitting the nice round 25% number.

How are you thinking about that business going forward as a percentage of your mix over the mid and long term?

And I'll step out, thanks.

Well, I'd say our long term is our planning cycle, which today is three years, and we expect that to continue to improve over the three year period and improve every year.

Thank you.

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

Your line is open.

Good morning, everyone.

Good morning.

Good morning, Todd.

Just a technical question on the buyback and then a couple of market questions.

So with the 10% buyback, are you allowed to buy the multi-voters as part of that?

No, we are not, Todd.

Okay.

Secondly, if IBM were to sell its server business, how do you envision that impacting your business?

Well, Todd -- good morning, it's Craig -- very marginally.

I mean, we are at the high end.

So I mean the good news is we anticipated, we know exactly where we should play, where we do play.

So we have the majority share and are the largest supplier in the proprietary space, so very, very little of our revenue depends on the industry standard piece.

Right, thank you.

That's what I thought.

And then lastly, when you think about the medium-term overall growth for your business, how should we think about that from a planning point of view?

I mean, is this a business that grows at 2%, 5%, 8%?

How -- what's the potential for the mix that you have right now?

Well, I mean, I think -- I'll talk here and then I'll let Darren give you his view.

But the point is from our standpoint, I mean, this is a Company that will grow the combination of the top line on some, I'll say in a low growth environment, not -- at fairly -- I'll say relatively optimistic.

So you're talking 5% to 8% on the top line, and then you're looking basically on really enhancing the margins on a much faster pace over the longer term.

Yes, I would just add, I mean, obviously, Todd, it's going to depend on the markets and how the markets behave.

And some of the industry reports we see [out there] would suggest 7% CAGRs in the market, but it is going to obviously depend on how the market performs and how we continue to win new business.

Great.

Thanks, gentlemen.

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

Your line is open.

Thank you and good morning

Good morning.

Good morning, Naser.

Craig -- hey -- just going back, on the Q1 call back in April, Craig, you talked that you had an expectation that the back half was going to be due to these new program wins and ramps.

Is it unfolding -- in terms for the back half, is it unfolding as you expected in terms of all the wins you were expecting?

They're lining up as you expected?

And is there any change in either the new business wins or program declines?

Well, I mean, I think the wins are unfolding, I mean, at a pace that's slightly above where I thought we would be, certainly at the end of the first half.

We have the opportunities to convert in the second half.

What is the variable in this is really the time to revenue realization.

So some of the programs are unfolding at a slower rate.

Some of the programs are unfolding at a faster rate.

And overall, the base demand is what really underpins that, and that's what we keep our eyes on.

So it's the combination of the base demand, the outlooks are encouraging.

You see the volatility -- 13% of our revenue shipped in the last week of this past quarter.

And as we look forward, you see our opportunity to get back to 3.5% operating margins at slightly lower revenues than we originally thought, and obviously we're looking to convert faster than we have really seen in the first half on getting our semiconductor equipment business up and running more quickly.

Naser, the only thing I would add to that is, I mean, overall, when you look at technology, certainly it's -- I'd say overall people aren't seeing the bullishness compared to probably what they thought at the beginning of the year.

So, I mean, that certainly compounds things from a growth perspective.

I think that's very true that, in terms of a strong back half recovery, no one is talking about that and everyone talks about the demand environment still being muted.

I guess my follow-up question, Darren, would be just on the free cash flow, you historically talked about on an annual basis $100 million to $200 million in free cash.

I think for the first half you got something like $[65] million.

So do you still feel comfortable in terms of that the second half working capital and everything is going to improve to get you in that range?

Yes, I mean, we do.

Things obviously fluctuate quarter to quarter.

I don't expect to see the same strength in free cash flow in the third quarter, but certainly feel comfortable for the year of generating the $100 million to $200 million at this time.

Okay, great.

Thank you.

Thanks, Naser.

Thank you.

Your next question comes from the line of Robert Young with Canaccord Genuity.

Your line is open.

Hi.

Good morning.

Just a second ago you said that the -- you wanted to get back to 3.5% operating margins, and Todd's question about the longer run model contemplating 5% to 8% growth.

I was wondering, is the operating margin target still 3.5% to 4%, or is there something new in the business that would suggest it would be lower now, around 3.5%?

Good morning, Rob.

Darren here.

In terms of our target, we're still working towards our 3.5% to 4%, and continuing to focus on balancing our investments, making sure we are doing the right things for the long term.

As Craig mentioned, in previous calls I've talked about -- we've talked about, depending on mix and a number of factors including semiconductor, hitting 3.5% at the $1.7 billion range.

We do see that lower.

We're performing strong; we're at 3% now, driving good ROIC.

Probably in the [1650] to [1700].

But it is going to depend on a number of factors, and we continue to work to reduce that amount -- that level, frankly.

Okay, thanks.

And one small question on the healthcare business.

Last quarter you had expected it to decline, and it seems like that is going along the lines you expected.

Is there -- is it better or worse than you had expected?

Is it a longer term segment that you expect to do better, or is this going to be weak for a while?

Robert, it's stable.

It's where we expected, and now we're working to accelerate our progress with the target customers that we now have on board.

Okay, thanks.

Thank you.

Thank you.

(Operator Instructions).

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

Your line is open.

Yes, just a quick follow-up.

How much did the end of quarter flurry in the communications segment ultimately contribute to the margin upside that you saw versus your expectations?

I'm just trying to understand, given that you had significant margin upside versus your forecast, was it mostly due to that end of quarter revenue, as maybe you costed for a lower revenue base?

And then I have a quick follow-up.

Yes, good morning, Brian.

I mean, in terms of our margin, like I say, the overall gross margin came in at a percent where we saw good flowthrough on our fixed costs.

And obviously you get the leverage on the SG&A as well that drove our strong EBIAT performance.

Okay.

And then just back to the communications segment.

I guess as we've listened to all the EMS companies report this quarter, communications has done probably a little bit better than expected, but clearly not to the extent that you guys saw upside.

So I'm just trying to reconcile why you think you saw such significant strength at the end of the June quarter when most of your peers didn't.

Is it just a matter of customer base and maybe different end market focus?

If you could help me understand that a little better, that would be great.

Sure, Brian.

It's the right customers with the right programs at the right time.

It's just we're targeting business that we think is the areas of the market that are going to be growth markets.

And in these particular customers and these particular cases, we saw the impact here, and they have specific program buildouts and opportunities with their end customers.

So a strong portfolio with good customers, and as we know, that can be changing quarter to quarter or month to month, and that's the challenge in the EMS industry.

Great quarter, and appreciate the color on the end market commentary on the outlook.

Thanks.

Thanks.

Thanks, Brian.

Your next question comes from the line of Gabriel Leung with Paradigm Capital.

Your line is open.

Thanks and good morning.

Good morning.

Just on the acquisition front, can you talk about what you guys are seeing right now in terms of valuation, number one?

And number two, remind us again what you feel some of your priority areas are from a M&A perspective.

Thank you.

Sure.

I mean, we've got basically a funnel of opportunities, primarily focused in the higher technology areas of the market, across the businesses, looking primarily for intellectual property or capabilities that would add value beyond the manufacturing of our products.

So we're not looking to add capacity.

We're looking for design-based and engineering-based building blocks and modules that can create more value than manufacturing products on a contract basis for large scale or medium scale companies.

That's the focus.

The emphasis is in areas such -- in the diversified space.

And obviously at this time, as you can see through our NCIB, we're not in a position to really say there's anything in the immediate term that we think represents the right opportunity for Celestica.

And we're continuing to work the process.

Great.

Thank you.

Thank you.

We'll take one more question, please.

There are no further questions in queue at this time.

I turn the conference back over to our presenters.

Thank you, Tiffany.

And I'd like to thank everybody for joining us today, and we look forward to your continued support and interest in the Company.

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect.