Celestica Inc (CLS) 2014 Q4 法說會逐字稿

Good afternoon and welcome.

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

At this time, I would like to welcome everyone to the Celestica Inc.

fourth-quarter results conference call.

(Operator Instructions)

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

Thank you, Kirk.

Good afternoon and thank you for joining us on Celestica's fourth-quarter 2014 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 questions.

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

We will be available after the conference call for additional follow-up.

Please visit Celestica.com to view the supporting slides accompanying this webcast.

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 capital to our shareholders, our financial and operational results and performance, and financial guidance that are based on management's current expectations, forecasts, and assumptions that are subject to risks and uncertainties that could cause actual outcomes and results to differ materially.

Please refer to our cautionary statements regarding forward-looking information in the Company's various public filings, including the cautionary note regarding forward-looking information in today's press release.

We also will 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, or furnished to, 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.comment.

During this call, we will refer to certain non-IFRS financial measures, which include adjusted gross margin, adjusted SG&A, operating profit or adjusted EBIAT, operating margin, adjusted net earnings, adjusted EPS, return on invested capital or ROIC, inventory returns, cash cycle days, free cash flow and adjusted tax rate.

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 public companies, including our major competitors.

We refer you to today's 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 is to US dollars.

I will now turn the call over to Darren Myers.

Thank you, Manny.

Good afternoon, everyone.

Celestica continued to deliver solid operating margin and free cash flow performance in the fourth quarter while continuing to return capital to shareholders.

Forth-quarter revenue of $1.424 billion was in line with the midpoint of our guidance range, as strength in our storage business offset demand softness in telecom and solar.

Revenue in the quarter was relatively flat compared to the third quarter of 2014 and decreased 1% compared with the fourth quarter of 2013.

Let me start with a few highlights for the fourth quarter.

Our non-IFRS operating margin of 3.6% increased 30 basis points compared with the fourth quarter of 2013.

IFRS net loss to $4.4 million, or $0.03 per share, includes a non-cash goodwill impairment charge of $41 million or $0.23 per share.

Adjusted earnings per share of $0.23 was $0.01 below the mid point of our guidance range, and included a negative impact of $0.02 per share related to higher income tax expense resulting from certain foreign exchange fluctuations.

We generated $60 million of free cash flow, and we achieved ROIC of approximately 21%.

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

In 2014, our revenue mix continued to improve, with growth in our strategic areas of storage and diversified, offset by reductions in the lower-margin areas of server and consumer, while we continue to experience lower demand in our telecom end market.

Full-year 2014 revenue of approximately $5.6 billion decreased 3% compared to 2013.

2014 IFRS net earnings were $108 million, or $0.60 per share, compared with $118 million, or $0.64 per share, in 2013.

Adjusted operating profit, or adjusted EBIAT, grew 15% year over year.

Full-year 2014 adjusted operating margin of 3.5% increased 50 basis points compared to 2013, despite lower revenue year over year.

Adjusted earnings per share were $1 for the year, an improvement of 20% year over year.

We generated free cash flow of $177 million, an increase of $79 million, or 81%, from 2013.

We achieved full-year ROIC of 19.5%, up from 17.9% in 2013.

And we continue to return capital to shareholders, repurchasing and canceling approximately 8.5 million of our subordinate voting shares for approximately $91 million.

Moving on to the fourth-quarter details, looking at our revenue from an end market perspective, relative to our beginning of quarter expectations, strong revenue performance from our storage business was offset by the continuing demand softness in our telecom end market as well as lower-than-expected revenue from one of our solar programs.

Our diversified end markets comprise 27% of our total revenue for the quarter.

Diversified revenue decreased 9% sequentially, which exceeded our expectation of a mid-single-digit decrease, largely due to reduced volumes in solar.

Compared with the fourth quarter of 2013, diversified revenue was relatively flat, as growth from new industrial programs was offset primarily by lower volumes in solar and the timing of new program ramps.

Our communications end market represented 40% of total revenue and was relatively flat from the third quarter.

While we had expected modest sequential growth at the beginning of the quarter, we experienced lower demand from a few customers.

Compared with the fourth quarter of 2013, communications revenue declined 5%, primarily due to lower overall demand.

Our storage business had a very strong quarter, representing 20% of total revenue.

Storage revenue increased 20% on a sequential basis, in part due to seasonal demand but also strength from our certain new programs.

Compared to the fourth quarter of 2013, our storage business experienced 33% growth, driven by new programs across a number of customers.

Forth-quarter revenue from our server end market, representing 10% of total revenue for the quarter, increased 7% compared to the third quarter, which was consistent with our expectations.

Server revenue decreased 9% compared with the fourth quarter of 2013, primarily due to lower overall demand.

Finally, our consumer end market representing 3% of total fourth-quarter revenue decreased 27% on a sequential basis, consistent with our expectations.

Consumer revenue for the quarter decreased 47%, compared with the fourth quarter of 2013, primarily due to program completions and the deemphasis of certain lower-margin business in this space.

Our top 10 customers represented 69% of revenue for the fourth quarter, up four percentage points from the third quarter, primarily due to strength within our storage end market.

For the fourth quarter and for the full year, we had three customers individually contributing greater than 10% of total revenue.

For the full year Cisco, IBM, and Juniper individually contributed greater than 10% of our total revenue.

Moving on to some other financial highlights for the quarter, adjusted gross margin of 7.5% was down slightly on a sequential basis due to one-time items record in the third quarter of 2014.

Adjusted SG&A expense for the quarter was $50 million, which was within our expected range of $49 million to $51 million.

SG&A expense increased sequentially, mainly due to the timing of certain spending in a foreign exchange recorded in the third quarter.

Adjusted operating profit for the quarter was $51.5 million, or 3.6% of revenue, a sequential decrease of 30 basis points, largely due to the higher SG&A in the fourth quarter.

Compared with the fourth quarter of 2014, despite lower revenue, our adjusted operating margin increased 30 basis points, driven primarily by improved program mix and our continued focus on cost management.

Our adjusted tax rate in the fourth quarter was 20.1%, above our estimated annual range of 10% to12%, impacted by foreign exchange fluctuations, most notably the weakening of the Malaysian ringgit against the US dollar.

Full-year 2014 adjusted tax rate of 8.6% was below our expected annual range of 10% to 12%, mainly due to net income tax recoveries recorded in the first quarter of 2014.

Adjusted net earnings for the fourth quarter were at $40.3 million, or $0.23 per share, compared to $44.4 million, or $0.24 per share, for the same period of 2013.

Despite the higher adjusted operating profit in the fourth quarter of 2014, adjusted net earnings were lower year over year, mainly due to tax recoveries recorded in the fourth quarter of 2013.

Forth-quarter IFRS net loss of $4.4 million, or $0.03 per share, includes a non-cash goodwill impairment of $41 million, or $0.23 per share, relating to our semiconductor business.

Forth-quarter IFRS net earnings decreased $27 million, or $0.15 per share, compared to the fourth quarter of 2013, mainly due to the non-cash goodwill impairment charge, partially offset by lower restructuring charges in the fourth quarter of 2014.

The decrease from the same quarter of 2013 is also due in part to certain income tax recoveries recorded in the fourth quarter of 2013.

Let me provide some additional color on the impairments.

Our semiconductor business, which arose from acquisitions in 2011 and 2012, has experienced operating losses and has continued to underperform, as mentioned during our previous conference calls.

Performance has been impacted by overall demand weakness in the semiconductor industry, the cost of investments, as well as operational inefficiencies and commercial challenges associated with the ramping of new facilities and new programs for a particular customer.

As a result, upon completion of our 2014 annual impairment assessment, we recorded a non-cash goodwill impairment charge of $41 million for our semiconductor business.

We remain committed to the semiconductor capital equipment space, and are working with our customers as well as driving operational initiatives to accelerate our progress.

Turning to working capital performance, we had strong working capital performance in the fourth quarter.

Our inventory decreased $56 million from the end of the third quarter to $719 million at December 31.

Inventory turns for the quarter improved to 7.1 turns from 6.8 turns in the third quarter.

Capital expenditures for the fourth quarter were approximately $17 million, or 1.2% of revenue, within our estimated range of 1% to 1.5% of revenue.

For the full year, our capital expenditures were $61 million or 1.1% of revenue.

Cash cycle for the fourth quarter was 44 days, one day lower compared to the third quarter.

For the fourth quarter, we generated $60 million of free cash flow.

Moving on to our cash position, our cash position remains strong.

Our cash balance decreased $13 million from the end of the third quarter to $565 million at December 31 as we increased the cash outlay for share repurchases.

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

During the fourth quarter, we repurchased for cancellation 2.2 million subordinate voting shares for $24 million at a weighted average price of $10.52 per share.

We also launched a $50 million pre-funded program share repurchase, or PSR, as part of our normal course issuer bid.

Subordinate voting shares repurchased under the PSR are expected to be canceled in the first quarter of 2015.

For the full year 2014, we spent $91 million to repurchase and cancel 8.5 million subordinated voting shares, or approximately 5% of our beginning-of-year outstanding shares.

At the end of the fourth quarter, we had 174.6 million subordinate and multiple voting shares outstanding.

Moving forward to our guidance for the first quarter of 2015, for the first quarter, we are projecting revenue to be in the range of $1.275 billion to $1.375 billion.

At the mid point, first-quarter revenue is projected to increase 1% compared to the first quarter of 2014 and decrease 7% sequentially, in part impacted by seasonal demand.

At the midpoint of our guidance, we expect adjusted operating margin of approximately 3.2%, an improvement of 10 basis points compared to the first quarter of 2014.

First-quarter adjusted earnings are expected to range from $0.18 to $0.24 per share.

Our projected adjusted SG&A expense for the first quarter is in the range of $49 million to $51 million.

And we estimate an annual adjusted tax rate range of 11% to13%.

I would now like to turn the call over to Craig for some comments on the full year and the outlook for our business.

Thank you, Darren.

Good afternoon to everyone on the call, and thank you for joining us today.

Overall, Celestica continued to deliver solid operational performance in the forth quarter and throughout 2014, despite a challenging business environment.

In 2014, we successfully improved our business portfolio and drove productivity across the business, delivering year-over-year growth and adjusted operating profit; return on invested capital and free cash flow; and we increased our investments to accelerate the diversification of our Company while returning more capital to shareholders through share repurchases.

While we are very disappointed with the partial goodwill impairment in our semiconductor business in the fourth quarter, we remain committed to this market and have continued to win new business.

While our progress in this area has been slower than expected, we reduced our quarterly losses through 2014 and continued to improve our quality and delivery performance while ramping current and new customer programs.

We are forecasting continued operational and financial improvements in our semiconductor business for the first quarter as we work closely with our customers to accelerate our progress throughout 2015.

Notwithstanding our semiconductor business, our overall operational performance remains strong, as evidenced by solid operating results for the fourth quarter and for 2014, with year-over-year improvements in adjusted operating margin; adjusted earnings per share; and return on invested capital.

For the full year, we also had very strong free cash flow performance, generating $177 million of free cash flow, an increase of $79 million from 2013.

We returned $91 million of capital to shareholders through share repurchases, which was more than twice the amount we returned to shareholders in 2013.

Turning to our near-term outlook in our end markets, while we have a typical seasonal impact from the fourth quarter to the first quarter, we are projecting modest year-over-year revenue growth at the midpoint of our guidance range.

For the first quarter, we're expecting year-over-year revenue growth in our diversified business in the mid-single-digit range.

We are projecting sequential and year-over-year growth in our semiconductor business, driven by new programs.

And we're also expecting year-over-year revenue growth in our solar and commercial aerospace businesses.

On a sequential basis, diversified is expected to be relatively flat, as expected growth from semiconductor and solar is offset by the timing of new program ramps from various industrial and healthcare customers.

As a result of the higher anticipated revenue and continuing operational improvements in our semiconductor business, we're expecting a positive gross profit contribution from semiconductor in the first quarter of 2015 compared to a loss of $1 million in the fourth quarter of 2014.

Our communications end market is expected to remain essentially flat compared to the first quarter of 2014 and sequentially decrease in the mid single digits.

On a year-over-year basis, strength from our enterprise customers is offsetting by lower telco demand.

Our communications end market is continuing to experience overall demand volatility and softness, specifically in the carrier space.

Our storage business in the first quarter is projected to grow in the low double digits year over year, driven by new programs.

However, on a sequential basis, storage is expected to decline in the high double digits due to a very strong fourth quarter as well as seasonal impacts.

Our server business is expecting year-over-year growth in mid single digits, resulting from the ramping of a new program win.

On a sequential basis, server is expected to remain relatively flat, as a new program ramp is offset by seasonal impacts.

And finally, our consumer business is expected to decline slightly on a sequential basis, mainly due to seasonal impacts.

In summary, while end-market demand continues to be dynamic in terms of volume and mix, we are expecting year-over-year revenue growth in the first quarter in three of our end markets.

With the positive momentum in the second half of 2014, the solid operating results, having effectively managed the portfolio towards our targeted revenue mix and the plans we've established for all areas of our business, we will continue to invest in our diversification strategy and are excited about the opportunities that lie ahead for Celestica in 2015.

We'll continue to focus on accelerating our progress, and are targeting year-over-year operational and financial improvements while continuing to invest in the business and generate returns for our shareholders.

Our priorities are clear.

The profitability improvements in 2014 were, in part, due to improved revenue mix.

Our diversified end markets grew 7% and contributed 28% of our revenue in 2014, up from 25% in 2013.

While we made progress in diversifying our revenue and customer base in 2014, we continued to drive further revenue diversification in our strategic areas.

While we had a solid bookings performance in the second half of 2014, we are also increasing our investments in people and resources throughout the world to further enhance our target market and customer coverage to accelerate our business development efforts to increase the bookings in 2015.

Accelerating the turnaround in our semiconductor business continues to be a top priority for the Company.

The start of the year for our semiconductor business is encouraging, with projected sequential revenue growth in the first quarter, with continued improvements in quality and delivery performance.

We're also planning to increase our investments in our joint design and manufacturing offerings to capitalize on the momentum we've established in 2014.

While we increased our investments in 2014 compared to 2013, we're targeting further investments in JDM, which has been a major contributor to our success in our storage business and expand this service and solutions offering to other end markets.

Flawless execution remains a minimum requirement for our customers.

And while we're pleased to be recognized by many customer and industry awards in 2014, we continued to implement numerous initiatives and invest in IT tools and analytics to raise the standards of operational excellence for our industry.

In conclusion, I'd like to thank our talented and dedicated employees for their commitment and passion in driving our customer success and for delivering meaningful year-over-year improvements across our key operational metrics in 2014.

I look forward to 2015, as we continue to drive higher value for our customers and our shareholders.

That concludes our prepared remarks.

Kirk, please open the call for questions.

(Operator Instructions)

Your first question comes from Daniel Chen from Scotiabank.

Good afternoon.

I just had a question about the semi-cap space.

Semi-cap space seemed to be pretty strong last year.

Can you elaborate exactly what, specifically, you're seeing that's causing weakness in that space for you guys?

Well we're actually seeing demand strength, so in the first quarter of the year we're expecting double-digit growth in semiconductor and we're seeing demand strength and we expect that to continue at least through the first half of 2015.

Okay.

I guess my follow-up, then, is 2015 seems to be a pretty strong quarter for semi-cap.

Samsung is building a new factory, we're seeing pretty strong forecasts from some of the semi-cap vendors.

Do you believe you're going to be able to capture a lot of that growth this year?

And if you can give us an update on progress on kind of fixing up that semi-cap business you have?

Well, we believe the demand growth we're seeing is in relation to those kinds of programs and projections.

We will be -- we have a forecast and we have commitments from our customers to capture a share of that demand and obviously it will be tied to continuing the improvements in our operational performance.

Daniel, it's Darren here.

I'd just add to that, we talked a lot about the losses at the gross margin level last year.

We are seeing improvements.

As Craig mentioned in his prepared remarks, we expect to be positive gross profit in the first quarter, so making progress.

We grew the overall business by 18% last year, albeit from a slower starting point, but making progress.

Thank you.

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

Hi, this is Tim on be half of Jim Suva.

Thanks for taking my questions.

Can you give us an update on JDM project?

What's the portion of the JDM related revenue as a percentage of total sales for the past quarter?

Thank you.

Well, we don't spike out JDM as a separate segment in the business.

Obviously, the bulk of our JDM opportunities today are coming from our storage segment, so you can see the market share growth we're seeing, which is beyond the industry growth in the JDM space.

Obviously, that's expanding into the server space, into the communications space and then as we see converged systems becoming an important part of the future strategy of many of the cloud providers, it will be expanding into that space.

It will become a growing and more material part of the Company but today, we're starting from a relatively small base limited to the storage segment primarily, with limited participation in the server space.

Meaning still less than 10% of total revenue?

Is that --

That's true.

Thanks.

I guess one more question on the communication segment.

Do you think the weakness is more from top customers or is it more of an industry wide under-perform?

Thanks.

I think from what we're seeing, at least in the case of the customers that we're serving, we're seeing it's coming from an industry in North America.

It's coming from the carrier spending being cut, due to both short-term refocus on whether or not the infrastructure is going to look different as they look to the future.

And certainly we see a major impact from what's happening with NTT Docomo in Japan, where they have pretty much cut back on most of their spending as they reassess their capital requirements going into the future.

So I'd say it's more of an industry phenomenon than a customer specific phenomenon right now, but it's certainly affecting us in that space.

Got you.

Thanks.

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

Hi, just a follow on, on the semi business.

Can you just clarify the timing of why you're taking the restructuring charge -- or the impairment charge now?

Did your outlook change at all from last quarter or is it more that the year-end process forced you to reevaluate the goodwill you were carrying?

Hi, Thanos.

No, it's more of the latter.

As part of our annual impairment testing looking at the future cash flows of the business unit, they just could not sustain the -- based on our projection, sustain the goodwill that we have on the books and there's further disclosures on that in the statements and in the MD&A that I would refer you to.

So our take away should be that relative to last quarter, the outlook hasn't deteriorated; if anything, it might be improving a little?

I would say that it hasn't deteriorated since last quarter and we're showing signs of improvement here as we go.

Okay.

And then just very quickly on the enterprise networking portion of the communication segment, sounds like you're seeing good demand there?

We're seeing good demand there, obviously, in the fourth quarter.

It's being offset by significantly reduced demand in the telco space, however.

Okay.

Thanks.

I'll pass the line.

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

Good evening.

Maybe a question on the overall demand environment.

I just want to make sure I'm capturing your comments correctly, Craig.

It sounds relatively seasonal from everything you've said, with maybe the exception of the carrier business.

I'm just curious if you've seen any change in tone from customers, order patterns more broadly and any impacts from currency with a lot of volatility in currency lately.

Has that affected demand or timing from any of your customers beyond the tax rate issue that you called out?

No, I think Brian, your assessment is totally correct.

What we're seeing is more of a seasonal impact here.

We're seeing the implications for Celestica being driven largely by new program ramp timing and then obviously, as we heard on the semi space some, of the markets are actually firming up so we're not seeing any sort of negative signals on the overall demand environment other in the carrier space and that, I think, is really a reassessment of infrastructure, requirements for many of those large scale carriers.

Right.

Okay, that makes sense.

And then, just back on the goodwill write down, how much of that was related to the semi equipment assembly business versus the precision machining?

I know you had two separate acquisitions during that time frame and when you said you had a $1 million loss, was that gross profit or operating profit, Darren?

And then just finally, related to that, what is your latest timing on getting that business up to corporate average profitability?

That's it, thanks.

That's it in that one question, Brian.

Good evening.

So in terms of the break down between the two, we look at it as a total business but certainly I'd say that the machining with being more capital intensive and longer time to qualify is more of the challenge than on the assembly side, so that would have driven most of it.

In terms of the improvement, we're not giving a specific time.

We're taking it one quarter at a time but we will be looking to improve the performance every quarter and the operating margin of that business.

Your last clarification, that was gross margin that we were referring to.

Great.

Okay.

Thanks for remembering all of those.

Thanks, Brian.

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

Your line is open.

Hi, yes, this is Larry Zhang calling on behalf of Sherri Scribner.

Your storage segment has seen strength, growing double digits over the past four quarters.

I'm just wondering, what's driving this growth and how much longer do you expect this to continue?

Well, primarily new programs and market share gains through either new customers or existing customers that are either resourcing or we're awarding -- getting awarded new programs.

We expect the growth to continue, certainly maybe not to the extent that we've seen in the most recent quarter but obviously we expect that, the growth, to continue throughout 2015.

Okay, great.

Just following up on that, the diversified segment has performed well.

Do you see this growth continuing for it as well and do you expect mix in this segment to increase?

Well obviously, we're rebounding to 7% growth here in the guidance in the first quarter of the year and we expect that to continue to improve as we go through 2015.

Okay, great.

Thank you.

Your next question comes from the line of Mitch Steves from RBC Capital Markets.

Hi, guys.

Thanks for taking my question.

A quick one on the storage side as well.

Looks like you guys are guiding for double-digit declines Q over Q, so I'm curious it that is because there's a significant demand uptick in December or if you guys are seeing softness in March?

I mean, it's really the strong quarter we had this quarter.

As Craig mentioned, we're seeing good strong year-over-year growth in Q1.

It's just we had a very strong Q4 seasonality.

Okay, and then going forward it looks like you're going down to 3.2% on the operating margin side, so at what level do you guys think you guys can get back to that 4% kind of target range?

Well, we're still comfortable at the [1400s] to be in the 3.5% to 4% starting at the 3.5%, and you're seeing margin drop quarter to quarter just based on the leverage of the revenue, so still comfortable at 3.5% of the $1.4 billion.

Okay, thank you.

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

Good evening, everyone.

I just wanted a clarification on the semi-cap loss.

So in prior quarters I think you'd talked about losing $2 million a quarter, so the $1 million that you lost at the gross profit level, would that be comparable to the prior comments?

Yes.

Okay.

And then you're projecting that, that essentially in two quarters has gone from $2 million loss to breakeven in the first quarter.

That's right, Todd.

My second question has to do with the tax rate and its volatility.

Should we -- I know you've guided up a couple points for the year, but given the strength of the US dollar and who knows what's going to happen to FX, could we see a volatile tax rate throughout the year?

Could you just give us a little color on that?

Thanks.

Well, Todd, we're always dealing with quarterly volatility in tax rate and that's why we guide to an annual number.

Certainly this quarter we saw 7% change in the Malaysian Ringgit against the US dollar, so that created taxable foreign exchange.

It's more of the magnitude of the change in the quarter.

I certainly don't expect, I'm not predicting where foreign exchange rates will go, but that type of movement we have not seen before.

All in all, you saw at the mid point of our tax range a 1% increase in the tax rate, so relatively close to this year's rate.

Okay, great.

Thanks a lot.

Thanks, Todd.

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

Thanks for taking my question.

Just following up on the semi cap, it's improving but what do you think, given that it's an issue with a specific plant, what do you think will it take -- is it a combination of a demand improvement or do you need more program wins?

How much of the demand environment of an improvement do you need to bring that to where you think it could be a contributor to earnings on a net basis?

Naser, good afternoon.

It's Craig here.

Basically, it's not a demand issue.

It's a supply opportunity and it's operational improvements in quality delivery cycle times that meet the demand, the tack times of our customer requirements.

It's execution.

We've got a team in place that has that really in hand.

We've got a program in place to make sure we're debottlenecking that facility, specific facility, you mentioned and we, as Darren mentioned, we have a very deliberate quarter-by-quarter improvement plan.

Obviously, there's no quick fix.

It's a measured improvement over time but we have a very good demand outlook and current backlog of opportunity and it's all around the execution side of the business.

That's where we are.

Okay.

I think that helps, that it is an execution issue.

Now, for that particular facility we're also undergoing some changes in the network design to get our capacity utilization up in the various locations that we're going to be operating.

Right.

I think on the prior call you talked about that once you get it to where your target is that it could add about 50 basis points in the operating margin.

Is that still hold?

Yes, I would say it does from the Q4 position.

As we improve that, that amount will diminish but from where we were in Q4 the target would be 50 basis points.

It's a lot of leverage there.

Right.

I just for my follow-up question, as it relates to the demand environment, I guess we're seeing a lot of different moving parts between Europe, China, but just from your own, what you can control, how much of your top line growth is dependent on the macro?

I think, Craig, you talked about a lot of program ramps coming in 2015 and in 2016, so for growth for this year, do you think it's 50/50?

You need 50% from the demand environment and 50% from program ramps, or do you think program ramps could more than offset what's happening on the global macro?

Well, it's very difficult to forecast sort of that far in advance for 2015.

Take up rates is the key assumption.

Revenue realization is the real operative variable that determines where we end up on the -- so it's revenue realization from the existing programs and the programs we ramp and it's really the take up rates for those perhaps and products those customers are developing.

It's -- we think we picked the winners but it's very difficult for us to pick the end market choices that are made today.

We're bullish on the prospects.

We design our strategy to target the winners, the leaders in outsourcing.

You see even from the customers that Darren mentioned, we are serving the market leaders and with the right programs and with JDM offerings and we think we have the best balance of risk to manage that revenue risk as we can get and continue to improve.

But it's just difficult for me to give you an absolute rock-solid sort of percentage as to how much is new, how much is existing and how much revenue you're going to deliver this year.

At least that helps us I think frame the -- our outlook, so appreciate that.

Thank you very much.

Thank you.

(Operator Instructions)

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

Hi.

Good evening.

Hi, Rob.

You said that you're comfortable with 3.5% operating margin at $1.4 billion and it looks like we may be moving into growth in 2015 just based on Q1 and the previous answer you said 50 basis points is out there to win in the, I guess, if semi cap gets back to -- or gets to a good level.

Are there any bracket or an envelope around operating margin if we start to see revenue get past $1.4 billion on a quarterly basis.

Is there anything you can help with modeling there?

Rob, I would say at this point I'm not going to give you color on the higher end.

It's just too many variables at play from a mix perspective from volume where it happens, just a number of factors as well as investments we're making in sales and R&D.

3.5% to 4% continues to be the range that we are looking to operate in and as semiconductor improves and we get some volume and leverage on our SG&A, you will see the operating margin improve.

That's really all I could provide you today, I think, Rob.

Are there any other big categories of operating margin improvement beyond those?

Are there any other pieces to be won out there?

Well, there's continually ramping and business that we have in revenue realization for those and then it depends how the current programs do and the mix of those programs and we're, of course, always looking for productivity and where we can further benefit our cost structure.

We're looking at a number of areas to keep pushing our margin forward.

And then a follow-up would be a couple spots.

You mentioned solar as an impact.

I've never thought of that as a large impact on the revenue.

Could you maybe give an update on why that was a factor this quarter?

Is it a meaningful impact?

And then maybe one last little bit is an just an update on the replacement for Craig.

I didn't see an update there so I assume there isn't one, but if there is could you share it?

Well in terms of solar, solar is more of a project business.

As you know, we developed an investment here in Toronto to serve the Ontario Fit program.

We're leveraging that facility and supplying programs and modules to other companies today.

It's in the double digits on the revenue base in the overall scheme of things, but relative to diversified, it has an impact in terms of the quarter-on-quarter and year-on-year revenue growth.

In terms of the succession here, as we've publicly stated, there's a search committee formed by the Board and it's my intention to stay in this role with the Company through the end of 2015.

That's about the latest and best update I can give you.

Hopefully there's news on that, but when it comes it will be publicly made.

Rob, just to further dimension the solar comment, it's less than 3% of our business, just to put it in perspective for you.

It just happened, as Craig mentioned, to be a big swing this quarter.

Okay, great.

Thanks guys.

Thank you.

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

Yes, thanks and good afternoon.

Just a couple of quick ones for me.

First is, you mentioned the three 10%-plus customers for the year.

Were they the same three 10% customers for the quarter or was that different?

We only provide for the full year but they've been top customers through the year.

Okay.

In terms of your EPS guidance, could you give us an share count approximation for that, what that's based on?

Because you have a buyback.

Use 177 for your model.

Okay.

And then just lastly, Craig, as you look and you sound optimistic in terms of some of the program ramps and some of the momentum in semi and some of the other businesses.

Do you have any outlook that you can provide for the year in terms of growth prospects?

Do you think you can grow revenue for the year?

Because one thing is, when you get to the June quarter, you're going to have tough year-over-year comps because I know you had some pretty big program ramps last June.

Yes, I think the message is we're taking it one quarter at a time and we're off to a good start.

As I mentioned, I think you can hear in the tone we've got good programs in place and obviously it's the timing of those ramps, the take up of those products and -- but nonetheless we're remixing the portfolio and I think we're building a stronger base to continue to build confidence as we go through the year.

But I'm cautiously optimistic and I want to reserve judgment until we get to that 90 day window where that can be much more clear with where we think we are.

Okay, fair enough.

Thanks a lot.

Thanks, Matt.

Kirk, we'll take one more question, please?

(Operator Instructions)

We appear to have no further questions at this time.

I'll turn the call back over to the presenters.

Okay, Kirk.

Well, thank you very much, everybody, for calling in today.

We appreciate your interest in Celestica and we look forward to talking with you again in April.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.