Celestica Inc (CLS) 2013 Q3 法說會逐字稿

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

At this time I would like to welcome everyone to the Celestica third 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)

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

Thank you Kirk.

Good afternoon everyone and thank you for joining us on Celestica's third quarter 2013 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 min.

Darren and Craig will provide some brief comments on the quarter and then we will open up the call for Q&A.

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 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 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 20F, and subsequent reports on Forms 6K filed with the Securities and Exchange Commission and our annual information form filed with the Canadian Securities administrators which can be accessed respectively at sec.gov and sedar.com.

During this call we will refer to certain non-IFRS financial measures which include adjusted gross margins such as SG&A operating margin or adjusted EBIAT.

Adjusted net earnings, adjusted EPS, return on invested capital or ROIC, inventory terms, cash cycle days, 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 presented by other companies, including our major North American competitors.

We refer to our press release which is available at celestica.com for more information about these and other non-IFRS measures, including a reconciliation of the historical non-IFRS measures to the corresponding IFRS measures where a comparable IFRS measure exists.

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

I'll now turn the call over to Darren Myers.

Thank you Manny and good afternoon everybody.

Celestica delivered a solid third quarter with revenue and adjusted earnings per share above the midpoint of our guidance range, driven by strong demand in our communications and storage end markets.

Third quarter revenue of approximately $1.5 billion was essentially flat relative to the second quarter of this year and was down 5% compared with the third quarter of 2012, primarily as a result of the BlackBerry disengagement.

After excluding revenue from BlackBerry, third quarter revenue grew 5% compared with the third quarter of 2012.

Some additional highlights for the third quarter include non-IFRS adjusted earnings per share of $0.22 came in above the midpoint of our guidance range of $0.17 to $0.23 per share.

Non-IFRS operating margin of 3.2% was sequentially up 30 basis points.

We delivered strong IFRS net earnings of $57.4 million or $0.31 per share and we generated approximately $10 million of free cash flow and return on invested capital of 19.8%.

From an end market perspective our diversified end market comprised 26% of our total revenue, up from 21% in the third quarter of 2012.

Third quarter revenue from our diversified end market was up 6% compared with the second quarter.

Compared with the third quarter of 2012, diversified revenue grew 16% with double-digit percentage growth in our industrial and aerospace and defense end markets, driven primarily by new programs.

Revenue from our communications end market contributing 45% of total revenue for the third quarter increased 7% compared with the second quarter.

On a year-over-year basis communications grew 16%, primarily from new programs and higher demand across some customers.

The storage end market revenue, representing 14% of total revenue in the third quarter, increased 10% compared with the second quarter driven by higher demand across a number of customers.

Storage revenue grew 6% with the third quarter of 2012, primarily due to demand improvements and new programs.

Our servers end market comprising 9% of total revenue for the quarter declined 33% sequentially due to overall weaker demand, as well as the insourcing of a lower margin assembly program as previously disclosed during our first-quarter conference call.

Servers revenue declined 30% compared with the third quarter of 2012.

The majority of the revenue decline in servers, both on a sequential and a year-over-year basis was due to lower demand and the insourcing of lower margin assembly program.

Finally, our consumer end market, comprising 6% of total revenue for the quarter, decreased 16% compared with the second quarter as expected, due to program transitions as we deemphasized parts of our consumer business.

Third quarter consumer revenue declined 64% compared with the same period last year, primarily as a result of the BlackBerry disengagement.

Our top 10 customers represented 65% of revenue for the quarter, down from 67% for the third quarter of 2012.

We had two customers in the third quarter contributing greater than 10% of total revenue.

Moving on to some of the other financial highlights for the quarter.

Non-IFRS gross margin of 7.1% in the third quarter increased 50 basis points compared with the second quarter, primarily due to mix and our continued focus on driving cost productivity.

Non-IFRS adjusted SG&A expense for the quarter was $53.4 million, slightly higher than our expectations, as a result of a net foreign exchange loss recorded in the quarter.

Excluding the net foreign exchange loss, non-IFRS SG&A expense was within our anticipated range of $50 million to $52 million.

Non-IFRS adjusted operating profit, or adjusted EBIAT of adjusted $47.7 million, or 3.2% of revenue was up $4.1 million and 30 basis points compared with the second quarter.

Compared with the third quarter 2012, adjusted EBIAT was lower by $4 million and 10 basis points, primarily as a result of lower revenue, partially offset by lower spend in the third quarter of 2013.

Our adjusted tax rate was 11.9% in the third quarter and 11.1% for the first nine months of 2013, which is consistent with our forecasted adjusted tax rate range of 10% to 12% for 2013.

Non-IFRS adjusted net earnings for the third quarter were $41.5 million, or $0.22 per share, compared to non-IFRS adjusted net earnings of $54.8 million, or $0.26 per share for the same period last year.

Third quarter IFRS net earnings of $57.4 million, or $0.31 per share compared with IFRS net earnings of $43.7 million or $0.21 per share for the third quarter of 2012.

Third quarter IFRS net earnings included $24 million or $0.13 per share of recoveries from legal settlements.

Compared to the third quarter of 2012, IFRS net earnings were higher by $13.7 million or $0.10 per share, primarily due to the recoveries just mentioned and lower restructuring charges.

Offset in part by lower income tax recoveries in the third quarter of 2013.

Finally, pretax return on invested capital of 19.8% for the third quarter improved sequentially by 150 basis points.

As an update to the restructuring program we previously announced in 2012, we expect to come in at the higher end of our $55 million to $65 million range.

For the third quarter we did not record any restructuring charges.

Our restructuring charges to date under this program total $55 million.

We expect to complete substantially all of our planned restructuring actions by the end of 2013.

Turning to working capital, while we had a solid quarter overall our inventory performance was impacted by customer program transitions and increased forecast variability that we are experiencing with certain customers.

As a result, our inventory increased by $41 million from the end of the second quarter to $882 million at the end of the third quarter.

Inventory turns for the third quarter were 6.4 turns compared with 6.9 turns for the second quarter.

Capital expenditures for the third quarter were $17 million or 1.1% of revenue, consistent with our expectation of 1% to 1.5% of revenue.

Cash cycle was 40 days, 3 days higher than the second quarter, due primarily to the increase in inventory days.

We continue to generate positive free cash flow as we delivered approximately $10 million in the quarter.

Year-to-date we have generated $74 million of free cash flow.

This was the 10th consecutive quarter of positive free cash flow for Celestica.

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

Our cash balance at September 30 was $547 million, $7 million lower than the end of the second quarter.

At quarter end we did not have any outstanding debt and our credit facility remained undrawn.

As an update to our share repurchase program previously announced in August 2013, during the third quarter we repurchased for cancellation, 1.7 million subordinate voting shares for approximately $19 million.

As a reminder, our current share repurchase program allows us to repurchase until August 2014 up to approximately 5% of our outstanding shares.

At the end of the third quarter, we had 182.9 million shares outstanding.

Moving on to our guidance for the fourth quarter, the overall demand environment in our end markets, while stable, remains challenging.

Consequently, we are exercising caution with our fourth quarter guidance.

For the fourth quarter, we are projecting revenue to be in the range of $1.4 billion to $1.5 billion.

At the midpoint of this range, fourth-quarter revenue would represent a sequential decline of approximately 3%.

At the midpoint of our guidance, we expected to deliver adjusted operating margin of 3.3%.

Fourth-quarter adjusted net earnings per share are expected to range from $0.20 to $0.26.

Our non-IFRS adjusted SG&A expense for the fourth quarter is projected to be in the $50 million to $52 million range.

To summarize, while the overall business environment continues to be challenging, for the fourth quarter we are projecting double digit year-over-year growth within our diversified, communications and storage end markets, offset by declines in the lower margin servers and consumer end markets where we continue to deemphasize certain programs.

Despite the sequential revenue decrease we are forecasting further margin improvement into the fourth quarter.

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

Thank you Darren and good afternoon to everyone on the call and thank you for joining us.

Celestica delivered us another solid quarter with sequential growth in operating margin and return on invested capital despite a challenging demand environment.

We continued to deliver strong operational execution to our customers, while driving productivity improvements across our network.

Overall we are pleased with our year-to-date performance and our ability to effectively manage the impact of the disengagement with BlackBerry.

Despite an overall soft demand environment and headwinds in parts of our business, including challenges in our servers end market, we have invested in our business and achieved continued improvements in operating performance throughout 2013 with 2.5% operating margins in the first quarter, 2.9% in the second quarter, 3.2% in the third quarter, and are targeting 3.3% at the midpoint of our fourth quarter guidance.

While a part of the improvement has been a result of effectively managing our portfolio, a significant portion has been driven through our teams' relentless focus on quality and continuous improvement.

We are continuing to harness technology through investments in systems, processes, application software, new tools and talent to drive further operational improvements with higher quality, lower costs, and higher velocity throughout our supply chain network.

We had a strong booking performance across the business in the third quarter and we continue to win new business with the industry leaders in our target markets.

Now let me address some of the dynamics in the end markets and our near-term outlook.

For the third quarter while the overall revenue performance was within our expectations, the mix was slightly different than our beginning of quarter forecast, due to the variability in customer demand.

Relative to our expectations at the beginning of the quarter, we experienced stronger demand in our communications and storage end markets, partially offset by significant weakness in the server end market, while revenue from our consumer and diversified end markets was consistent with our expectations.

Third quarter revenue from our communications end market was the highest since the fourth quarter of 2010, driven by the supplier consolidation from one customer and strong demand, as well as new programs ramping with current and new customers.

For the fourth quarter, communications revenue is expected to decline on a sequential basis by mid to high single percentages based on the current customer demand forecasts and uncertain market outlook.

Typically, with respect to seasonality, the third quarter has been the highest for our communications revenue.

On a year-over-year basis, communications revenue is expected -- is projected to grow in low double digits, primarily as the result of a previously mentioned share gain with one customer.

As I provided some details on our semiconductor business during our last conference call, let me provide a brief update, since it continues to negatively impact our operating margins.

While overall diversified revenue performance in the third quarter was generally in line with our expectations, progress has been slower than originally expected in our semiconductor business, primarily due to demand softness, as well as the investments we have made and continue to make in ramping new programs, in building out a world-class global supply chain for the complex mechanical business.

We expect modest and continued improvement in the financial performance of our semiconductor business, as we carefully balance the time and investments necessary to achieve the required program and customer qualifications to build a solid foundation for market leadership in this important segment.

Looking forward we are in the early stages of growth in the semiconductor market as we anticipate 2014, both from a base and demand and new wins standpoint, which we are beginning to ramp in the fourth quarter.

We continue to believe this end market provides tremendous opportunity and is an area where we will have clear differentiation in quality, delivery, and flexibility to meet the rapidly changing customer requirements.

We continue to win new business with leading semiconductor capital equipment OEMs and specific actions are underway to accelerate our progress in every aspect of the business.

We remain confident and committed to becoming the global supply chain partner of choice in the semiconductor industry and delivering superior value to our customers and our shareholders as we look to the future.

For the fourth quarter we expect our diversified revenue to be down slightly on a sequential basis, as growth in semiconductor is expected to be offset by lower demand in our solar business as certain customer programs were completed during the third quarter.

On a year-over-year basis, we expect low double-digit growth driven largely by industrial, semiconductor, and aerospace and defense.

Our solar business is expected to be relatively flat on a year-over-year basis.

Within our server end market, overall third quarter revenue performance was impacted, not only by the insourcing of a program that we have previously mentioned, but largely due to weak demand.

For the fourth quarter, in part due to the relatively soft third quarter, we are expecting sequential growth in the mid to high single digits.

Storage revenue performance was solid overall in the third quarter, driven by improved demand and new programs.

For the fourth quarter we are projecting low to mid-double-digit percentage growth in storage, both on a sequential and a year-over-year basis.

Within the storage end market we are serving a number of the market leaders.

One of the significant highlights of the third quarter was being recognized with EMCs 2013 supplier of the year award.

We were very honored to receive this award in recognition of our leadership in developing innovative solutions for a number of EMCs toughest business challenges, as well as consistent operational excellence and a commitment to sustainability throughout our global network.

This recognition is a testament to the fact that the power of ideas combined with close collaboration with our customers can truly drive transformation.

Recognition such as this is being consistently rated number one or number two on our top customer scorecards serves as a solid foundation and proof point for Celestica in building the required trust and credibility that all customers are looking for when they are selecting their supply chain and outsourcing partners.

Our focus remains on continuing to build momentum by deploying our strategy, which is focused on solving our customers' most difficult and complex challenges, winning new business, delivering uncompromised quality, delivering industry-leading operational performance for exercising financial discipline and controls, with the outcomes of accelerating time to value for our customers and delivering higher returns for our shareholders.

That concludes our prepared remarks.

Kirk, please open the call for questions.

(Operator Instructions)

Jim Suva, Citi.

Hello this is Nick Jones on for Jim Suva.

I was hoping you could talk about, it looks like in December sales are going to be pretty below normal seasonality.

Is this due to the BlackBerry disengagement?

Or is there a new way we should think about seasonality?

Well for the first quarter, based on the demand dynamics, we are guiding someone cautiously.

I think it does reflect the changing mix of our business.

So obviously we're moving in a direction to emphasize communications, diversified, and the storage business, as well as the server business.

But I think in general the overall, I would say, predictability or the volatility of the Celestica seasonality is becoming more damped.

We expect communications to decline slightly due to the strong third-quarter.

Diversified is down slightly, as I mentioned, as the growth in semiconductor is offset by the solar demand as a major customer program was completed.

And we are seeing signs of demand improvement in semi.

And the server, the A&D and healthcare business continue to be steady, servers have been impacted not only by the insourcing, but overall weak demand and we expect that to continue.

Although the quarter over quarter improvements are expected, not providing guidance for the first quarter at this time.

We say it would sequentially be down from the fourth quarter.

The emphasis here is we expect our business in the communications segment, diversified segments, storage segments, and a seasonality impact coming through for servers for the fourth quarter.

Okay.

And one follow-up question.

I heard you say you had two customers over 10%.

Is there anything you are doing to try to reduce your reliance on the top 10 customers?

Well we are diversifying our business.

So we're growing business and it is down from 67% the prior quarter to 65%.

Obviously we have continued objectives to continue to grow our diversified space.

And obviously we expect that to reduce the impact of the top 10 customers that we have today.

And I would say, create less consolidation among our top 10 customers, which are primarily in the core of our business today.

Great thank you.

Next question, please.

Amit Daryanani, RBC capital markets.

Hello how are you guys doing.

Two questions from my side.

One I guess on the com equipment side.

Cold you just talk about, when I think of the 7% sequential growth, it looks to me that a big majority of that maybe the new program ramp and ex that, you guys probably grew 1% or 2% sequentially.

Could you maybe talk about how much is organic and then when you look at December being down mid to high single digits, I hear you on Q3 is the peak, but this seems to be down a whole lot more severe than normal seasonality.

Maybe if you can dig in and tell me what exactly are you seeing in the com equipment side that makes you cautious?

Amit, this is Darren here.

We certainly had a strong quarter in coms, and two strong quarters in a row so we've seen a lot of upside across the customers.

So we are not breaking out the composition between the transfers of programs.

But it has been both transfers of programs and base business and wins that we have had in that area.

When you look over our history we have had seasonality into the fourth quarter, usually coms is down.

And so we are seeing that as well as just really strong third-quarter.

And I just echo Craig's comments before that we expect strong year-over-year growth in coms, in the communications segment in the low double-digits.

So we are performing very well in coms and pleased with our performance there.

All right, then if you just maybe talk about the buyback program, looks like you guys bought back 1.7 million shares in the quarter.

It seems to be a bit below what I would have at least expected, maybe if you could just outline the buyback thought process going forward from here for us?

Sure, Amit.

We buyback the 1.7 and this is an approved in August of so we didn't get a full quarter.

You should expect to see us, we can buy up to 5%, approximately 10 million shares so you should expect to see us do that over the period, think about it at least for your models in an even way.

It should be done by basically middle of Q3 2014, right?

That's for the road map?

That's right, based on that speed, yes.

Perfect thank you.

Thank you.

Sherri Scribner, Deutsche Bank.

Thanks.

I wanted to dig into the operating margin improvement a little bit.

You guided to 3.3% up a little bit in the fourth quarter and you did a great job on the operating margins.

In the third quarter, it seems like mix is helping you but you also mentioned the actions that you have taken.

Can you give us a sense of what the split is between how much mix is helping versus how much the restructurings that you have done have helped?

Hey Sherry, it's Darren here.

We're very pleased with our operating margin improvement.

50 basis points on ROIC and generating 3.2% EBIAT at 20% ROIC in the third quarter.

So what we have seen there is really a few things.

One, it is the mix of the programs, as well as the portfolio management and cost discipline.

As we have mentioned in the prepared remarks, we've really focused on our portfolio, consumer is an area where we have seen certainly margin improvement by being very specific and particular on the programs that we are going after.

So you are seeing that benefit in the margin.

The midpoint of our guidance is at 3.3% so we continue to see that benefit as we go forward.

And in the past we have talked about at what point are you at the 3.5%.

I mean, we are very pleased to say we see that at a much lower level now, and depending on a number of factors, certainly we see that in the low 1500s.

Based on where we are today in today's mix and that continued focus on cost.

Okay, that's helpful.

Thank you.

Then just on the coms business, I know you guys are benefiting from a customer moving to you.

But can you give us a sense of any sort of specific areas of coms that are doing well for you?

LTE and any of that detail would be helpful.

Thank you.

What I can comment Sherry, hi, it's Craig.

Basically, it is improved demand from a number of customers, it is a number of new programs we are launching with existing customers.

It is the competitive take away.

And it is partially offset by weaker demand from some other customers.

So it is pretty broad-based and across the portfolio of products that we have, both the products in the infrastructure space as well as the optical space.

Thank you.

Thank you.

Thanks Sherry.

Brian Alexander, Raymond James.

Thanks and good afternoon.

Just on the storage business I think your performance was stronger than you expected in the third quarter.

And it looks Ike you are guiding for double-digit growth year-over-year sequentially in the fourth quarter.

Yet, two of your larger storage customers have reported relatively disappointing results thus far this earnings season.

So I know you don't want to talk about customers specifically.

But can you just give us a sense for what is driving the strength and how uniform that is across your customer base and maybe just help us reconcile how you are doing so well in the storage market when the overall market is not growing?

Hello Brian this is Craig.

Really, we have talked about the third quarter, obviously, we have had good demand from a number of our key customers and as I mentioned, we are serving the market leaders or a number of the market leaders so it was across a number of customers in the third quarter.

As we look to the fourth quarter, we have got improved demand, we've got some seasonality obviously.

And then frankly Brian what is really helping us in this business is we are not only expanding our engagements based on the operational performance we're delivering to companies like EMC.

We are also very successful in this segment in what we call the joint design and manufacturing space.

So we're actually adding value to those customers beyond just the contract manufacturing of their products, and as a result of that, that is creating higher content for us.

Just a follow-up, I think you guys had said in the past that you wanted your diversified segment to get to 25% to 30% by 2014.

I don't know if you've updated that since, but you're basically there.

And I'm just wondering, what is kind of the longer-term plans for that business?

Have you thought at all about maybe breaking out the diversified segment into some of the individual components since it's obviously pretty diversified within that group and maybe little bit more transparency on the underlying revenue would be helpful.

Hello Brian it's Darren here.

In terms of our goals, this is a business that frankly we want to keep growing and we don't have a formal objective out there.

But it is certainly in the 40% range for the company.

And as we continue to grow this we will take your feedback, and we have been trying to provide more and more transparency on our calls but we certainly will take your feedback and consider the right time to break out the group as it gets a little bit bigger than it is today.

Great.

And nice job on the bottom line.

Thanks.

Thanks Brian.

Joe Wittine, Longbow Research

Good afternoon.

The tone regarding semicap sounded like you are winning the business, but with an asterisk that it's coming at a measured pace.

I wanted to see if I am interpreting that right.

Especially in light of third-party forecasts for semicap equipment for 2014.

Depending on the third-party they are ranging between the mid teens to the mid-20s.

So I'm wondering if you would caution us from modeling that type of growth for 2014 based on where we stand today.

Thanks.

I think Joe your insight is right on frankly.

We are winning business, we are implementing a very aggressive investment campaign across the network to build out a global supply chain for complex mechanical.

I think if you're familiar with the industry, the quality requirements of the industry are very tight as are the customer qualification processes.

So gating the business right now just in terms of the resources available on both sides, the customer side and our side, to affect the transfer plan.

So obviously we're reading the same industry reports that you referenced.

We expect 2014 to be year that is significantly stronger.

There are reports indicating double-digit growth.

But how that translates into revenue for us will be gated by the transfer plans and the programs that we have with the customers that we have today and are winning business from as well.

So early days, and obviously, as this develops, it will become a more and more important segment of the business.

And as I mentioned, just based on the sheer balancing between execution and the getting the business and the capabilities in place, we are being very deliberate in making sure we do this right.

So a lot of confluence of factors but suffice it to say we're anticipating a stronger year in 2014 from a volume standpoint and we have significant opportunities to improve on that.

That's really helpful, thank you Craig.

And then just as my really quick follow-up.

Were both 10% customers in the communications business this quarter, or was one in storage?

Joe I like your follow-up question but we are not going to disclose the, where or who the customers are, but thank you.

Thanks guys.

Take care.

Thanos Moschopoulos, BMO Capital Markets

Hi, good afternoon.

Craig, I just wanted to drill in a bit further on your comments regarding the demand environment.

It sounds like visibility is still challenging, but relative to this point of the quarter, last quarter, are things any more visible?

Or less visible than it was two months ago?

I would say that they are not more visible.

They are consistent with the visibility we had last quarter.

I think what's different this quarter is that we have got a major buildout in solar running off of in terms of quarter on quarter impact.

And overall the other segments are performing in line with expectations and the demand environment at best is, as you see, just the volatility in demand, the mix is changing and as we look at the end of the quarter frankly, the seasonality is going to be impacted by the buying behavior of customers, given the economic uncertainty.

So just a lot of moving pieces but I would not say there is anything material other than the solar impact to our overall demand outlook.

Our customers are still deriving considerable opportunities that they believe will materialize but we're being cautious in the outlook in terms of our forecast here, our guidance here.

Thanos, the only thing I would add to that is just that it is not about the outlook per se I guess.

It is that the water level has dropped in terms of the server business and the volumes.

Obviously now you have a lower point where we are getting some sequential growth on but that is a, for us, that is a lower margin business.

So hence the ability to maintain and grow our margins here.

So that one is impacting us as we go forward as well.

Just to follow-up on the server business specifically.

So at this point have we seen all of that impact from the insourcing?

Or is there any of that left?

We have seen all that impact from the insourcing so the answer is no.

Great thanks and I'll hop off the line.

Matt Sheerin from Stifel.

Thanks and good afternoon.

A question regarding your comments on inventory.

You mentioned a couple of issues there.

One having to do with program transitions.

Whether that is related to the communications customer, or basically the spinning out of the business back to your server customer.

Whether it is related to that.

You also talked about some customer demand issues.

How do we read into that?

Could you be more elaborate?

Particularly on the second issue in terms of the customer demand.

Yes hello Matt.

What it is really is a few things.

It is the transfers as you've estimated there or you have guessed in terms of our competitive take away.

That one certainly has impacted us.

But it is also as you have seen in company results, a lot of revenue challenges.

So people are not wanting to leave revenue on the table.

They are ordering, we are seeing a lot of dynamics right to the end of the quarter where the exact composition of the finished goods that we're going to be shipping is unknown and nobody wants to be leaving things.

In tech it has been a tough market, you have seen that in our customers' results.

And so, as a result of that we are seeing the churn as well.

I don't have an exact breakdown.

I'm not going to provide an exact breakdown of how much is transferred how much is that.

That's what we're working through and we are working with our customers and we don't see any issues there, just, we have to work through that with them.

Okay and just as a follow-on, on the inventory it appears that lead times on most semis and other components are still relatively short.

So it does not look like -- it looks like you would be in a position perhaps to cut inventory unless you thought that the pipeline going into next year, as you talked about Craig, about some optimism of some new programs, and whether or not you want to be better prepared going into Q1.

Or, would this be an opportunity to maybe generate more cash in the quarter?

Matt, we see it as an opportunity to improve.

And we see improvement as we look forward to the business becoming I would say more mature in terms of the mix of the business that we have got.

And then obviously it is also affected by the timing and the magnitude of a number of ramps that we have got underway.

But we look forward to continuing to improve on our inventory and obviously we have the opportunity to generate additional cash this quarter.

Okay great.

Thanks a lot.

Thank you very much.

Thanks, Matt.

Naser Iqbal, Salman Partners

Thanks.

Congrats on the quarter on the operating margin, guys.

Thank you.

Thank you, Naser.

Sure.

If I could just drill on the server segment.

You talked about the insourcing, the impact being completed.

Q4 is I guess unusually weak, and based on what I would be looking for for a seasonal uptick.

And most of the weakness could be attributed to the servers.

Craig, do you think that in terms of the weakness, maybe at a specific customer or just the general environment, this could be a quarter or two or three phenomenon?

Or do think that by Q1 you expect a return to normalcy?

As you know, Naser, we have obviously had the insourcing of a major program as we mentioned just in the past question.

Which has been completed.

So the water level for servers for our business is substantially lower than it was.

We are part of the new programs that are the follow-on programs to the existing production.

The systems of which are transferred back in-house.

So that will, depending on the take-up rates there.

Then obviously the impact of customer demand overall in the fourth quarter.

We are positioned in the proprietary segment of the market.

Obviously we have a very strong position with the leading suppliers in those segments of the market.

They are investing in the future.

But the market is going through a transition.

And it is difficult to say what is the new normal.

Obviously we are managing it within the overall mix of the business.

We're participating in joint design and development programs for new server products.

But all targeted to maintain our margin profile and make sure we are participating with profitable growth.

I guess that is where I would be, really in terms of use, where you talked about Q2 that you expected the new program ramps and all of these business wins to I guess be meaningful.

So in terms of do you think that post Q4, that given the program ramps and the wins you have had, that Q1 could be, we'd get past this maybe, a lull do you think?

Well at this point, Naser, we're not giving guidance for Q1.

Obviously, the nature of the volatility, the message is we are booking business, we are managing our portfolio, we're going through new program transitions.

And we are, in general, we are high single digit percentage improvements for the fourth quarter in servers.

So, you can use that as kind of a baseline from which we're going to build.

And then just my follow-up question, Craig would be you talked about, before the BlackBerry but a while ago, that based on new program ramps and business takeaways from the competitors, but I guess your target at one point was a 6% to 8% revenue growth.

I think you moderated that to 3% to 5%.

Your operating margins are I think blowing away all of us on the upside.

But in terms of for 2014, just given where you see more market share gains and the business program ramps, what do you think is a realistic target in terms of the growth range for '14?

Naser, we are not going to give guidance for 2014.

It is a very difficult environment.

I think we want to show you that we are managing a portfolio to achieve a balance between the growth of the Company, I would say above market performance on our gross margin and profitability, and return on invested capital in excess of 20%.

And hitting those metrics, growing profitably, delivering the returns, delivering the ROIC, generating cash flow, buying back stock and making investments in the Company.

We are on a long-term deployment of a strategy to do that, and we're just another proof point on the table is this quarter.

Obviously, I understood the need to grow, we are building a backlog, we're winning business across all segments.

When that materializes, there's just so many variables today, it's very tough to predict and right now our visibility is limited to 90 days.

So the best we can do is try to give you a realistic guidance as to what we think we can accomplish in the quarter.

But we believe the business model that we have got is the best model in the industry.

I appreciate it.

And again congrats on a great margin quarter.

Thanks Naser.

Appreciate your understanding there.

Todd Coupland from CIBC.

Hi, good evening everyone.

Craig, I understand you don't want to give guidance for '14.

Do you feel it is appropriate to make a comment that your business can grow in '14 with the bookings you have been able to achieve thus far if the ground stays stable?

Like have you put enough in your pocket where you actually could grow the business if the ground is stable?

The short answer is yes, if the ground is stable.

Okay.

My follow-up question is you continue to build the cash on the balance sheet and your buyback is certainly using some of the cash but not very much, even if you exercise a full buyback.

What's your thoughts on that as you enter 2014 in terms of capital allocation?

Just give us an update on your views on that.

Thanks.

Hi Todd, it's Darren here, as we've talked on the previous calls, it really has not changed from the third quarter, we went through a little bit more detail on that.

It is really the 50%.

As a way to think about it, it's 50% invested in the business, 50% through returning cash to shareholders.

So we look to continue that.

And we are looking at where we can invest in the business and to continue to build a strong franchise here.

Thanks, everyone.

And Todd, just from my standpoint, Q3 without BlackBerry was 5% growth.

So it is not all problems here in terms of growth.

We're showing growth for the Company.

The question is we're showing margin improvement, cash flow generation, and return on invested capital and that is the model here.

That is going to be a model that is built on a solid foundation and we're taking the time to do it.

Thanks Todd.

(Operator Instructions)

Robert Young, Canaccord Genuity.

Hi, good evening.

I wanted to continue a previous question on margin strength, you mentioned mix and some cost discipline.

I wanted to see if you could talk about the benefits from the restructuring.

I know that takes a little while to work through.

Is there a benefit that you are seeing now and is there going to be more benefit from this continued restructuring you're going to see before the end of the year?

Sure, hi Rob, Darren here.

Yes, absolutely, part of the reason we are delivering at the 3.3% range is the benefits of our restructurings so we have done a very good job of taking the costs out and the continued cost discipline.

I would say that most of what we have taken already is hitting our numbers but we have $10 million remaining to go, it is generally a year payback.

So as we move forward and there is obviously many variables, but as we move forward, we would expect to get back into that 3.5% range.

I am calling it today, from today's mix at around 1,500, and the low 1,500s.

So we have certainly brought the water level down, ability to achieve the 3.5%, the over 20% ROIC at a much lower-level so we're very pleased with that.

Okay, and then my follow-up is on the semicap, the merger with Applied Materials and Tokyo Electron, do see any impact positive or negative from that, or too early to tell?

What do you think?

Well Rob, Craig here.

I think Amat is a great customer of ours and we have a great relationship with Amat, and obviously we are not going to comment on their merger.

Okay.

Thank you very much.

Thanks, Rob.

Kirk, we will take one more question please.

(Operator Instructions)

We appear to have no further questions at this time.

I will turn the call back over to the presenters.

Okay I would like to just thank everybody for their interest and support and for calling in today and we look forward to our continuing conversation next quarter.

Thank you very much.

This concludes today's conference call.

You may now disconnect.