Celestica Inc (CLS) 2013 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Celestica Incorporated fourth-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)

Thank you.

I would now like to turn the call over to Mr. Manny Panesar, Director of Investor Relations.

Sir, you may begin your conference.

Thank you, Jeremy.

Good afternoon, everyone, and thank you for joining us on Celestica's fourth-quarter 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 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 also refer you to our cautionary statements regarding forward-looking information on 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 form 6-K filed with the Securities and Exchange Commission, and our annual information form filed with the Canadian Securities Administrators, which can be accessed respectively on SEC.gov and SEDAR.com.

During this call, we will refer to certain non-IFRS financial measures, which include adjusted gross margin; adjusted SG&A; operating margin or adjusted EBIT; adjusted net earnings; adjusted EPS; return on invested capital or ROIC; inventory turns; 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 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 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 will now turn the call over to Darren Myers.

Thank you, Manny, and good afternoon, everyone.

Celestica delivered fourth-quarter revenue and adjusted earnings per share in line with our guidance with continued profitability improvement.

Fourth-quarter revenue of $1.437 billion was below the midpoint of our guidance range of $1.4 billion to $1.5 billion, primarily due to demand softness in our communications end market.

Revenue in the fourth quarter declined approximately 4% sequentially and 4% compared with the fourth quarter of 2012.

Some additional highlights for the quarter include, non-IFRS earnings per share of $0.24, came in $0.01 above the midpoint of our guidance range of $0.20 to $0.26 per share.

Included in our adjusted earnings is a $0.02 per share favorable impact resulting from a lower-than-forecast adjusted tax rate.

Our non-IFRS operating margin of 3.3% was sequentially up 10 basis points and 20 basis points, compared with the fourth quarter of 2012.

We delivered IFRS net earnings of $22.1 million or $0.12 per share.

We generated approximately $24 million of free cash flow and we delivered 19.2% return on invested capital.

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

Full-year 2013 IFRS revenue of approximately $5.8 billion declined 11%, compared to 2012, primarily due to our disengagement from BlackBerry.

Excluding BlackBerry, 2013 revenue increased 1% from 2012.

IFRS net earnings for the full year were $118 million or $0.64 per share, compared with $118 million or $0.56 per share in 2012.

Full-year non-IFRS operating margin of 3% was down 30 basis points, compared to 2012, on lower revenue.

We achieved full-year ROIC of 17.9%.

We repurchased and canceled $4.1 million of our subordinate voting shares for approximately $44 million, and we generated free cash flow of $98 million for the year.

Moving on to the fourth quarter details, relative to our beginning of quarter expectations, we experienced softer demand in our communications and storage end markets, while revenue performance in the other end markets was generally consistent with our forecast.

Our diversified end markets comprised 27% of our total revenue for the quarter, up from 23% in the fourth quarter of 2012.

Fourth-quarter revenue from our diversified end market was down 2%, compared with the third quarter.

Within diversified, we experienced sequential growth from our semiconductor, industrial and healthcare markets, which was more than offset by a sequential decline in solar.

Compared with the fourth quarter of 2012, diversified revenue grew 11% with strong growth in industrial, semiconductor and aerospace and defense, driven primarily by new programs, while our healthcare business declined due to program transitions.

Revenue from our communications end market contributing 41% of total fourth-quarter revenue, declined 12% compared with the third quarter.

Although we anticipated a sequential decline for the quarter, we experienced lower-than-expected demand from some of our key customers during quarter.

On a year-over-year basis, communications revenue grew 6%, largely due to new programs.

Our fourth-quarter revenue from our storage end market, representing 15% of total revenue, advanced 7%, compared with the third quarter, which was slightly below our expectations.

On a year-over-year basis, storage revenue grew 9%, primarily driven by new programs.

Our server end market, comprising 11% of total revenue for the fourth quarter was up 10% sequentially as expected, due to improved demand.

Compared to the fourth quarter of 2012, server revenue decreased 39% due to overall weaker demand and the in-sourcing of the lower margin assembly program that we had previously disclosed.

And finally, our consumer end market, comprising 6% of total revenue for the fourth quarter, was up 2% sequentially.

Relative to the fourth quarter of 2012, consumer revenue decreased 36%, due to program transitions that reflect the de-emphasis of certain parts of our consumer business.

Our top 10 customers represented 65% of revenue for the fourth quarter.

We had three customers in the fourth quarter contributing greater than 10% of total revenue.

Moving on to some of the other financial highlights for the quarter, our non-IFRS gross margin of 7.4% in the fourth quarter increased 30 basis points sequentially and 50 basis points, compared to the fourth quarter of 2012, primarily due to improved program mix, recoveries, and continued cost management.

Our non-IFRS SG&A expense for the quarter was $52.7 million, slightly above our expected range of $50 million to $52 million, primarily due to higher variable incentive compensation.

Our non-IFRS operating profit or adjusted EBIAT of $47.3 million, or 3.3% of revenue, was in line with our expectations, with adjusted operating margin improving sequentially by 10 basis points.

Compared with the fourth quarter of 2012, adjusted EBIAT dollars were relatively flat, despite lower revenue, while adjusted operating margin was up by 20 basis points, driven by improved mix and our focus on driving cost productivity.

Our adjusted tax rate of 4.6% in the fourth quarter was below our forecasted 2013 range of 10% to 12%, due primarily to certain tax recoveries recorded in the quarter.

Our full-year adjusted tax rate was 9.3%, and our IFRS tax rate was 9.8%.

Non-IFRS net earnings for the fourth quarter were $40.4 million or $0.24 per share, compared to non-IFRS adjusted net earnings of $50.3 million or $0.25 per share for the same period last year.

Finally, fourth-quarter IFRS net earnings were $22.1 million or $0.12 per share, compared to $7.2 million or $0.04 per share for the fourth quarter of 2012.

Relative to the fourth quarter of 2012, IFRS net earnings were higher by $14.9 million or $0.08 per share, primarily due to impairment charges recorded in the fourth quarter of 2012.

As an update to the restructuring program we announced in 2012, we recorded $17.5 million of restructuring charges for the fourth quarter, and $28 million for the full year 2013.

Total restructuring charges for the program were $72 million, which was above the higher end of our previously announced range of $55 million to $65 million.

We exceeded our estimate as the result of additional actions taken to further streamline and simplify our operating network in order to accelerate our progress.

Turning to working capital, our inventory decreased by $65 million from the end of the third quarter, to $817 million at the end of the fourth quarter.

Inventory turns for the fourth quarter were 6.3 turns, compared with 6.4 turns for the third quarter.

Capital expenditures for the fourth quarter were $11 million, or 0.8% of revenue, slightly below our expectations of 1% to 1.5% of revenue, due to the timing of certain investments.

Cash cycle for the fourth quarter was 44 days, which is four days higher than the third quarter, as a result of a one-day increase in inventory, a one-day increase in accounts receivable, and a two-day decrease in accounts payable, which was primarily driven by the timing of purchases and payments in the respective quarters.

We continue to generate free cash flow as we delivered approximately $24 million in the quarter.

This was the 11th consecutive quarter of positive free cash flow.

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

Cash balance at December 31 was $544 million, slightly down by approximately $3 million from the end of the third quarter.

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

As an update to our normal course issuer bid previously announced in August 2013, during the fourth quarter, we repurchased for cancellation, 2.4 million subordinate voting shares for approximately $25 million at an average share price of $10.52.

As of the end of the fourth quarter, we've repurchased and canceled 4.1 million subordinate voting shares for approximately $44 million.

As a reminder, our current normal course issuer bid allows us to repurchase, until August 2014, up to approximately 5% of our outstanding shares.

At the end of the fourth quarter, we had 181 million total shares outstanding.

Moving on to our guidance for the first quarter of 2014, the continuing soft demand environment and seasonal impacts are reflected in our first-quarter guidance.

For the first quarter, we are projecting revenue to be in the range of $1.3 billion to $1.4 billion.

At the midpoint, this suggests first-quarter revenue to decline sequentially by approximately 6% and by 2%, compared to the first quarter of 2013.

At the midpoint of our guidance, we expect to deliver adjusted operating margin of 3%, a 50 basis point improvement year over year.

First-quarter adjusted earnings per share are expected to range from $0.17 to $0.23.

Our non-IFRS SG&A expense for the first quarter is projected to be in the $49 million to $51 million range.

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

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

2013 was a year of transition for Celestica.

Despite the challenging environment, we delivered operating margin and adjusted earnings per share improvements in each quarter through effective management of our portfolio and our focus on lean principles and continuous improvement in quality, operational excellence, and cost productivity.

For the full year, we delivered $98 million of free cash flow and continue to generate value for our shareholders through a $44 million of share repurchases.

We continue to make substantial progress in executing our strategy, winning new business with current and new customers, and diversifying our customer base and revenue mix.

We had revenue growth in three of our five end markets, while experiencing declines in the lower-margin segments of our business.

Our diversified markets revenue grew 11% year over year, representing 25% of total revenue in 2013, up from 20% in 2012.

Our communications business also had strong performance in 2013 with 8% percent revenue growth, largely driven by new program wins and market share gains.

Our storage end market, while slightly up for the year, is expected to have very strong momentum from new wins in the first quarter of 2014.

We anticipate continued progress in storage as we move through 2014.

Full-year 2013 revenue in our server business declined 27%, primarily impacted by the in-sourcing of a lower-margin assembly program for one customer, as well as the general weakness in the high-end proprietary segments of the server market.

Our consumer business for the full year declined 68%, compared to 2012, largely due to our disengagement from BlackBerry.

In 2013, we continued to make strategic investments in a number of important areas.

Specifically, we increased our investments in joint design and manufacturing, resulting in a very strong year of new wins in communications, storage and server end markets.

Our joint design and manufacturing revenues are continuing to grow as a result of securing new customers and the launch of a number of new program ramps in 2013 with current and new customers.

We continue to receive recognition from the leading OEMs and industry organizations acknowledging our leadership in innovation and our exceptional execution, including recognition from EMC as their 2013 Supplier of the Year, the Devold Gold Award for Supplier Excellence, and Gartner's recognition for our leadership in providing innovative global supply chain solutions.

These awards are a recognition of Celestica's innovation and the result of global collaboration with our customers and other partners to solve our customers' most complex challenges.

To summarize 2013, we continued our track record of delivering strong operational execution, as evidenced by our number one or number two ranking on the majority of our customers' score cards.

Bookings performance was very strong in 2013 across our business.

We also continued to improve profitability through the year, generated cash, while making meaningful progress toward our strategic objectives and creating shareholder value through share repurchases.

Now let me turn to the near-term outlook for the business.

As Darren mentioned earlier, our first-quarter guidance is being impacted by seasonality and a continuing challenging demand environment.

First-quarter revenue from our diversified end markets is expected to remain relatively flat, as compared to the fourth quarter.

Within diversified, we are expecting sequential revenue growth in semiconductor, which is being offset primarily by sequential reductions in our industrial segments.

On a year-over-year basis, diversified is expected to achieve double-digit revenue growth driven by new program wins in semiconductor, industrial, and the aerospace and defense segments.

The semiconductor segment is experiencing double-digit sequential growth from existing base program demand and the new programs awarded in 2013.

As we stated in our October conference call, given the time to ramp programs to volume and the investments necessary to build a market leadership position and complex mechanical assembly, semiconductor segment profitability continues to be below our targets.

We anticipate continued revenue growth and margin improvements in this segment throughout 2014.

Overall, our communications business continues to be solid.

We're generally experiencing better demand from customers and networking and enterprise than from the telecommunications segment.

For the first quarter, our communications revenue is expected to sequentially decline by low to mid single-digit percentages.

On a year-over-year basis, communications revenue is projected to grow in the low- to mid-single digits, mainly driven by new program wins.

First-quarter revenue from our storage end market is expected to remain essentially flat, compared to the fourth quarter, due in part to seasonality.

While on a year-over-year basis, we are expecting strong double-digit growth driven by new program wins, resulting from our JDM offerings with our target customers, as well as stronger demand for our current programs with existing customers.

Our server business is expected to decline in the first quarter by approximately 20% relative to the fourth quarter, due to seasonality and a general weakness in end market demand.

Compared to the first-quarter of 2013, our server revenue in the first quarter is expected to be impacted by weak demand from our current customers and the previously mentioned in-sourcing of a lower-margin assembly program with one of our customers.

Finally, our consumer end market is expected to sequentially decline by approximately 20%, primarily due to seasonality.

Overall the near-term outlook is based on our customer forecasts and indicates a continued challenging demand environment with improvements projected in the second half of the year.

Notwithstanding the challenging environment, there continue to be exciting opportunities and we continue to win business in our target markets.

We are expecting year-over-year growth in the first quarter in our diversified, communications and storage end markets, while we anticipate declines in our server and consumer end markets.

With sequential operational improvements we made in 2013, we believe we've established positive momentum for 2014.

Despite the soft demand environment, our first-quarter guidance at the midpoint represents year-over-year adjusted operating profit improvement of approximately 18% on a dollars basis and 50 basis points as a percentage of revenue.

We remain committed to delivering exceptional value to our customers and our shareholders, driving profitability improvements, increasing asset velocity, and generating higher free cash flow.

Our top priorities are pursuing profitable growth in our target markets, accelerating performance improvement in our semiconductor business, driving continuous improvements across all aspects of the business, leveraging process technology, information technology and software, including analytics, while continuing to invest in the key areas that support our strategy.

In conclusion, 2013 was a strong year for Celestica in many respects, as we position the Company for continued success.

We delivered sequential improvement in our operating margins.

We achieved strong growth in our diversified and communication segments.

We generated $98 million of free cash flow.

And we had one of our strongest years in new business wins.

And we continue to return value to our shareholders through share repurchases.

As we begin 2014, we have established a solid foundation and track record of operational excellence, with a high degree of financial flexibility and a flexible and adaptive global supply chain network, driven by talented and passionate people throughout the world to create value for our customers.

As we look to the future, we remain confident in our strategy and will continue to invest to make our customers successful, while delivering continued improvements in our financial and operational performance throughout 2014 and beyond.

That concludes our prepared remarks.

Jeremy, please open the call for questions.

(Operator Instructions)

Amit Daryanani, RBC Capital Markets

Thanks a lot.

Good afternoon, guys.

A couple questions.

Maybe starting off on the OpEx line.

It was a little bit heavier than I thought it would be, at least in the December quarter.

Maybe you could talk about what are the levers that took it higher?

And more importantly, given all the cost-cutting initiatives you've had, how do we think about SG&A going forward in 2014?

Yes, Amit, it's Darren here.

In terms of our SG&A, it was a little bit higher than the range we provided.

And as I mentioned in the prepared remarks, it really was driven off variable compensation, an increase there.

In terms of the first quarter, we expect it to be in the $49 million to $51 million range and trending in that range as the year continues.

It'll go up a little bit as the year goes on, but generally in that range.

Got it.

That's helpful.

And I wondered, the storage comment that you guys had about a flat sequential quarter, I think, in March, but probably, obviously, much better than historical seasonality would suggest.

You talked about a JDM program that's starting to ramp up.

Maybe you could talk a little bit more about, is that a one-quarter ramp?

Or do you think it will be a sustained ramp for the next couple of quarters?

I'm trying to get a sense of how big this ramp could be and what the margin impact could be, given the fact that it is a JDM versus the traditional EMS business.

Good afternoon, Amit.

As we looked at the storage business -- and obviously a year-on-year improvement of about 30% based on new program wins; that's wins at a number of new customers.

As they are JDM wins it will continue to assist us in improving our operating margin performance, while driving revenue growth throughout the year from this segment.

Craig, is most of the growth that you expect in March, is that all driven by the JDM ramps for right now?

No, no.

It's driven across the business.

We have got diversified, in terms of the growth, the diversified business.

We have got some modest growth, single digits, in the communications space on a year-over-year basis.

Double digit in diversified, and then 30% on the storage side.

So, it is balanced across the business -- the segments we're emphasizing, as you can see, the impact of the segments that we're de-emphasizing, and the server and the consumer space, you can see the impact of, the revenue impact.

And Amit, to ensure you, in terms of storage it is multiple programs, it's not one JDM program.

And it's wins both on base business and through JDM, so it's a combination of a lot of successful things happening there.

Yes, it is multiple wins with new customers, existing customers, and multiple programs.

Perfect.

Thanks a lot, guys.

Thank you.

Jim Suva, Citi.

Thank you very much.

As I'm sure you've seen over the past week or so, IBM is selling its server business to Lenovo.

Can you talk through about are you having discussions about what that means to the Company?

And help us understand how much of that business it represents for you guys?

Jim, good afternoon, it's Craig here.

The x86 series server business with IBM is a very small, non-material impact to the Company relative to our total portfolio with IBM.

Obviously, we're -- this deal has not closed and we don't comment on -- or speculation regarding that.

But certainly we have a very strong relationship with IBM.

The x86, in terms of the share of the portfolio, is a relatively immaterial part.

We will support whatever direction IBM goes here in terms of the transition plan, as well as working to make sure that their transition is successful and Lenovo is successful in the implementation of that x86 opportunity.

Okay, great.

Then, if I heard you correctly, I think you said you had three customers now over 10%.

Can you help us out with which kind of segments or markets those are in?

Then, when we think about all your traction you're getting in diversified, can you help me better understand if diversified is growing so much, how come you have now more customer concentration than, say, a year ago when I think, a year ago, you had one or two customers above 10%?

Hi, Jim, it's Darren.

In terms of the over 10% for the year, we had two customers and they were Cisco and Juniper, who we provided on an annual basis.

In terms of our customer diversification, it has improved a little bit from last year.

It was 67% in 2012 over 10% and in 2013 it's 65%.

So we are seeing improvements.

Clearly you don't see those overnight.

And the other thing I'd add is, in terms of our large customers, we are with the marquee players in the industry, so we are happy to be positioned well with them.

And we're relevant to them and we're helping them on their platforms.

So we think we're got the right mix of customers and the right things happening from a diversification point of view.

Great, thank you.

Wamsi Mohan, Bank of America.

Yes, thank you, good afternoon.

I was wondering if you could comment perhaps on incremental savings that you might see from the higher-than-expected restructuring.

Should that flow in here in the next few quarters?

Hi, Wamsi, it's Darren here again.

I would say, overall, when you look at the whole restructuring, generally we get a one-year payback.

On this one, I would say it's probably about an $8-million annual benefit and a large part of that is reflected in the Q1 forecast.

So from the flow-through after that it won't be a material amount.

Okay, great, thanks.

And then, can you talk a little bit about the weakness in communications?

We've heard that from several EMS companies, but any color you can share on how broad based or narrow the weakness was.

And any particular regions that experienced it more, customers or regions, that experienced it more or less.

Wamsi, hi.

It's Craig here.

I think the message from our side, it's largely the weakness we are seeing is in the telecom space.

The strength in the business right now is in the enterprise and the switching area and then the telecom spaces, largely due to some major project run-offs at some of the major telecom providers or wireless -- or infrastructure guys.

So that is where the weakness is.

Okay, thanks, Craig.

One more for me.

You mentioned leveraging analytics and a flexible supply chain.

I was wondering, do you already have all the base of IT assets that you need?

Or are you building those out?

We continue to invest in information technology.

We have a series of platform offerings today that are application-based software tools that customers are beginning to become interested in.

We use those to run Celestica.

We're beginning to make those available as a cloud offering to our customers.

So, we continue to invest in analytics.

We have a software infrastructure.

We're leveraging cloud technology to mitigate and minimize our direct investments to provide some of those services.

But, in general, information technology will continue to be an area of investment for us.

But we have the infrastructure we need to deliver the value that we are promoting today.

Thanks a lot.

Joe Wittine, Longbow Research

Hi, thanks.

The tone in the semi-cap business sounds pretty confident, which is good.

Are you able to give any more metrics on, for starters, just roughly how big the diversified business is semi-cap these days?

And, where are you on your progression to raising the utilization to where you want?

Maybe within that, is the current profitability, while it's not where you want it, is it above the corporate average, I would assume?

Hi, Joe.

It's Darren here.

In terms of the breakout, we won't give the specific numbers.

I will say it is getting closer to what we bought from the acquisition, so we are starting to get -- from a revenue point of view, starting to get to that level.

But, just as a reminder, at the same time as from the acquisition point of view, we have also expanded with a state-of-the-art facility in Johor, Malaysia -- we are investing there.

So, as a result, we are below the utilization we would like, and we are below the Company average from a margin point of view.

As Craig mentioned, the good news is we are seeing upside and the volume pickup, both from a base demand point of view and from new wins.

But it is a steady and slower ramp in this business to make sure we do it right.

And so will take us time through the year to start seeing the benefits.

But we expect quarterly to keep seeing improvements.

Thanks, Darren.

And then, a quick follow-up.

In storage yesterday we had the big name in the industry talking about changing their end-of-quarter fulfillment strategy, essentially being willing to carry some backlog into the following quarter, having less of a quote-unquote rush to fulfill at the end of the quarter.

I know you won't talk about individual customers, but have you seen that sort of move at all in IT hardware in the past?

Whether you are seeing it or not, what would the impact be on your model?

I presume there could be some -- that these guys are saying, potentially less overtime cost for the factories, et cetera.

Well, Joe, we don't comment on specific customers, as you mentioned.

The bottom line is, all of the customers are looking at their ability to meet what is becoming a very, very high-mix, highly volatile, sort of skewed demand profile in this industry.

We believe we are advantaged, we have the information technology.

We're developing the analytics.

And we have the infrastructure to deliver build-to-order, configure-to-order products anywhere in the world today.

And in some cases some of the companies are already taking advantage of that.

If they want to build houses to stock products, we support doing that, but the economics and the paybacks have to make sense to us from a financial standpoint.

It is an exciting opportunity.

I think our model is well designed to be a major player in providing additional value as we go beyond the manufacturing to the configure to order.

And then in the case -- we are flexible, but obviously we want to make a fair return on our invested capital.

That seems to be something that allows us, as you can see from the numbers that we got, to continue to gain market share in the space.

Got it, thanks.

Sherri Scribner, Deutsche Bank.

Hi, thank you.

I wanted to ask, Craig, your view of 2014 in terms of revenue growth.

If we look at the guidance for the March quarter, it suggests a year-over-year decline.

But you guys are now anniversarying that BlackBerry business, so you should be able to see some growth with the new program wins.

So I'm just trying to get a sense of, for 2014, do you think you're going to see revenue growth even though the guidance for March implies year-over-year decline?

Well, Sherri, good afternoon.

You are asking me to predict the future.

What I can say is, certainly we have tried to emphasize here the progress that we're making is creating a solid platform for growth.

We are planning on growth.

Obviously the assumptions that we are planning on assume that the base business will remain, I'll say, consistent with what we are currently seeing.

And obviously, that is the opportunity we have got.

We have got tremendous leverage now with the volume growth.

But, again, we are being selective in that growth.

We are planning for growth this year.

The amount and how much obviously is going to depend on program ramps, the overall economic environment, the impact on customer demand, do we have the right customers, do we have the right programs.

But, generally, we are optimistic, frankly.

Okay.

You made some comments about the second half.

It sounds like customer forecasts are more positive in the second half.

Would you expect to see that the growth environment improve in the second half, based on what you're hearing from customers?

Yes, we would.

Okay.

And then can I get a little detail on the server strength?

You guys were up pretty strongly in the fourth quarter.

Generally people are seeing weakness in that segment.

What are you guys seeing in server that is helping you do better?

Thanks.

Hi, Sherri.

It's Darren here.

In terms of the quarter, it really came in as we expected from a server point of view.

But, clearly, when you look at our Q1 forecast, you can see the weakness coming in there with a 20% sequential decline in server.

I think we're seeing that same weakness.

But in the fourth quarter, we came in where we thought we would.

Okay, thanks.

Brian Alexander, Raymond James.

Yes, going back to the storage wins, it sounds like you've got a lot of exciting things going on in that business.

First of all, are these new out-sourcing engagements?

Or are you taking market share from other EMS companies?

And then, are any of these wins with emerging/startup-type storage companies that have very rapid growth profiles, or maybe some of the more rapidly growing categories within some of the larger customers that you already serve?

I'm trying to get a sense for the nature of these wins, and if there is a common thread that underpins why they're all hitting at once.

Thanks.

Hi, Brian.

It's Craig here.

I'm not going to comment specifically, but we are expanding our market share with our existing customers.

And we are taking market share in some cases.

We are also growing with new customers.

I won't comment which new customers they are at this point.

But the JDM model is creating opportunities for us to, I would say, serve as a building block and a module supplier to a broader range of a product portfolio.

What we offer is accelerating time to market and time to value, which is turning out to be very attractive to an interesting range of customers.

But, as we know, the established players in the market own the majority of the market share.

We are pleased to say we serve three of the top five there and, as a result of that, we are benefiting from the growth in storage.

What kind of lead would you say you have over your competitors with this JDM model in terms of -- I don't know if you can quantify months or quarters of advantage that you might have versus the competition?

It sounds like this is something that you are uniquely supplying to the industry.

I'm not going to comment on the lead.

I'll just say I don't have enough of a lead.

What we want to do is make sure we take advantage of what we have got.

Obviously it seems to be something that is very, very aligned with what customers are looking for.

As in anything in the industry, we are working to stay ahead of that by expanding our road maps and continuing to develop better ideas.

Okay.

And then, maybe, for Darren.

Starting off the year at a 3% operating margin is actually not such a bad result, given the revenue decline that you are expecting.

On a sequential basis, I think that's maybe an 8% percent contribution margin sequentially, and normally you have a bigger drop off in March.

Given the positive mixed tailwinds I think you have in the business, how should we think about the operating margin progression throughout 2014 off that 3% base?

And I know you can't predict demand, but let's just assume it's relatively seasonal.

How high do you think you can get to in the year?

Yes, hi, Brian.

Following from Craig's comments before, we're not going to provide full-year guidance, but just to give you some color, as end markets pick up and as we see volume increasing and with the productivity that we have, we do expect sequential improvements in our operating margin.

Frankly, we'd be looking to get in the 3.5% range in the back half of the year.

But, again, that is really predicated on demand picking up.

We will see, obviously, how the next -- this quarter and the next quarter go before we can conclude on that.

All right, thanks a lot.

Thanos Moschopoulos, BMO Capital Markets

Hi, good afternoon.

Craig, expanding on the second half optimism you're hearing, is that coming from specific end markets, such as maybe telecom equipment?

Or would you say it is more broad based than that?

I would say it is more broad based than that.

Obviously, as I mentioned, communications, diversified, storage, obviously we have got the tailwinds of some real good progress there.

Servers obviously is anyone's guess at this point.

We were de-emphasizing consumer, so we are not really -- we're becoming less dependent on the fits and starts of the consumer business.

We have got good broad-based demand, our markets are strengthening.

Like in any business, we have got some challenges in areas like solar.

But beyond that, we are pretty bullish on the opportunity we have based on, as Darren mentioned -- should the base markets strengthen, we are going to have a pretty interesting year.

Great.

And then a question on inventory.

We saw through the course of 2013, your inventory turns went down.

I think you said that was because of the ramp of some new programs.

So how do we think about the inventory dynamic as we head to 2014?

Hi, Thanos.

It's Darren here.

In terms of inventory, this year we have been impacted.

I'd say it's by a few things.

One is change in our mix of business, the transfers, some of the program transitions we have had in that regard.

We do expect to improve inventory turns throughout this year in a measured way.

So as we go through all the quarters, we do plan to improve our inventory turns, and continue to generate strong free cash flow for 2014.

Great.

Thanks.

I'll pass the line.

Robert Young, Canaccord Genuity.

Hi, good evening.

The comment just a few seconds ago about hitting 3.5% in higher operating margin later on in the year, with the additional restructuring and, I think I heard that semi-cap is perhaps better than expected, albeit still a drag.

Is that $1.5-billion-per-quarter threshold for 3.5% operating margin, is there any change to that?

Hi, Rob.

Darren here.

No, in terms of -- we are still comfortable at the -- we've talked before about the low $1.5 billion range.

We're still comfortable at that range.

It obviously depends on a number of factors -- mix and a number of things.

As I've mentioned in the remarks, it's going to depend on the -- getting to the $1.5 billion is going to depend on the end markets.

And we will see how those play out.

Okay.

And then a question on the JDM piece of the business.

I wonder if you could talk about, is that a meaningful driver on top line?

Is it a factor where you're able to build stickiness with the customer?

Or is it a benefit to margins?

I was wondering if you could talk about where JDM benefits you the most.

Rob, hi.

It's Craig here.

Where it benefits us most -- it gives the customer the ability to customize a building block and a modular product that they can use across a wide range of applications in their product portfolio.

It builds stickiness because we work with them very closely to customize that.

We work with a supplier base then that offers the opportunity to deliver that.

So they accelerate their time to market.

It is growing and becoming a more meaningful part of the segment that we call communications and enterprise.

And, based on the strength of bookings that we have had in 2013, that will continue to grow in 2014 and beyond.

So it is a very, very collaborative model.

And it is, I'd say, grounded in innovation, supported by the investments we are making as a Company in those road maps.

And those modules we're developing are solutions we are developing.

And then, obviously, the strength of our execution of those programs is creating our opportunity to, what we believe is, gain market share in a different way.

And that is the exciting part of it.

And, Rob, just add to that, as we mentioned earlier, the progress we are making, it's in JDM and non-JDM.

It's throughout.

So we are making good progress in JDM.

It's not overall material yet to the Company, but very good progress there.

And then also winning in other areas, which JDM allows us to have different discussions, as Craig is mentioning.

Okay.

And if I can ask one last tiny one.

The adjusted tax rate for 2014, are you expecting it to be 10% to 12%, the same as 2013?

Is there any change to that?

No change, Rob.

It would be 10% to 12%, is our current expectation.

Okay, thanks.

Naser Iqbal, Salman Partners.

Thank you and thanks for taking my question.

Just following up on Sherri's question that, in terms of, for the year, given the March quarter guidance -- not going into forecasting, Craig, but in terms of new program ramps, traditionally you have had a stronger back half compared to the first half.

And, given your expectation of new program ramps and new customer wins, do you think to get the growth in 2014, are those historical parameters still valid?

Yes, we wouldn't.

We would anticipate, based on the comments that we've made, that we would plan that revenue growth, sequential revenue growth, quarter on quarter as we go through the year.

The magnitude of that growth, obviously depends on a whole series of assumptions.

But the short answer is, that model is the model you should be thinking about here.

Okay.

And, Craig, no one knows what a normal year is anymore.

But when you started, you talked about growth you'd like in the 3% to 5% on the top line.

What kind of a macro-environment do you think would you need to get that kind of growth for the overall Company?

Is it like the one that we're are in?

Or do we need a stronger macro-environment to get some of those higher top-line growth you've talked about in the past?

It's difficult for me to speculate on all of the factors that go into the ultimate top-line growth of any company in this segment.

It is safe to say that we are in an environment with a lot of uncertainty, a lot of volatility.

We would expect modest improvements in the economic environment as we go through the year, based on where we are starting from.

So, as demands strengthen, as uncertainty becomes less of a concern to companies to continue to invest, you see our diversification of customers is going to mitigate some of this.

Certainly when we are heavy in the consumer segment, we are going to be much less volatile.

So the volatility index on our revenue is going to be much more solid with this new portfolio.

And then, obviously, much of it will depend on the new program take-ups.

Everybody's investing in new programs.

So much of our success depends on the success of being on the right programs with the right customers.

We think we are, and therefore we are confident in the strategy.

It tends to be placed on the market leaders in areas of the business that we think are the growing segments.

And the whole mix of that indicates to us that, in a modestly growing environment that is dealing with less and less uncertainty, both politically and economically, provides that foundation.

Can't put any real numbers on it, other than to say we plan and we expect this is going to improve as we go through the year.

Okay, thank you.

Thanks very much, Craig

Jeremy, we will take one more question please.

Todd Coupland, CIBC.

Hi, good evening, everyone.

Good evening, Todd.

Okay, so I get all this question on growth and leave it at that.

The one thing I was wondering is, you saw a couple of fairly large OEM consolidations this year going from 3 to 2 and have seen it at other OEMs as well.

What does that mean for the EMS sector?

Could a take-away be -- we have seen pretty lackluster top lines for a while here, perhaps we need to see some mergers within the tier 1s and you can still keep the business if the OEMs are going to go with fewer suppliers?

Talk a little bit about how the industry might adjust to these lower growth rates.

Thanks.

The EMS industry or our customers?

Well, both really.

(multiple speakers)

Obviously, Todd, I think the thesis on consolidation, I'm not sure, but certainly the numbers we have looked at says the value creation from consolidation has been zero to nonexistent.

So I don't think that thesis really holds water.

Hanging onto customers post consolidation at a price level that creates value is very challenging.

And portfolios tend to be put up to bid.

I do think there is pressure on OEMs to begin to think about stronger partnering relationships that are grounded based on companies that they can trust and are predictable, and can deliver to the requirements, which are high quality and reliability and heavy regulatory requirements.

And so, I think the market will be driven by the value that each of the companies in this space offers, and the choices will be made.

The challenge for every company like ours is to remain relevant by investing and delivering meaningful value to customers beyond low price.

If it is just a scale gain, it is really value versus risk, because an outsourcing commitment is as much price as it is risk.

Therefore, I think it is going to be a big change in model where companies are going to be looking well beyond scale and well beyond the whole price model of contract manufacturing to a more value-added model.

I will say that the future will be, as OEMs consolidate, probably further consolidation within OEMs of their suppliers.

And there will be fewer better companies that do things differently than they do today.

And then, let's face it, there will be new and emerging entrants that will be challenging the traditional OEMs as this whole disruption around cloud and SDN takes hold.

That's why we think it will be more of a horizontal model with a very, very, very highly enabled information technology and analytics network, supported by a strong track record of execution, which we think we have.

That's great, great, great color, Craig.

And just one modeling question, if I could.

CapEx for 2014, what do you expect that will be?

Hi, Todd.

It'll be in the 1% to 1.5% of revenue range, back to our typical range.

Okay.

On behalf of Celestica, I'd like to thank everybody that joined the call today.

And look forward to our continuing conversations through the year.

And thank you very much for your support.

And this concludes today's conference call.

You may now disconnect.