Celestica Inc (CLS) 2015 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Celestica fourth-quarter results conference call.

(Operator Instructions)

I will now turn the call over to Jim Fitzpatrick, Vice President of Communications and Investor Relations.

You may begin your conference.

Thanks, Mike.

Good afternoon, and thank you for joining us on Celestica's fourth quarter of 2015 earnings conference call.

On the call today are Rob Mionis, President and Chief Executive Officer; and Darren Myers, Chief Financial Officer.

This call will last approximately 45 minutes.

And Darren and Rob will provide some brief comments on the quarter, and then we'll open up the call for questions.

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

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

Also, please visit our website at Celestica.com to view the supporting slides accompanying this webcast.

As a reminder, during this call we make forward-looking statements related to our plans for future growth, trends in our industry, 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 notes regarding forward-looking information in today's press release.

We also 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 filed with, 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 Security Administrators, which can be accessed, respectively, at SEC.gov and CEDAR.com.

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

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 also 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 a historical non-IFRS measures to the corresponding IFRS measures where a comparable IFRS measure exists.

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

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

Thank you, Jim.

Good afternoon, everyone.

Celestica delivered solid operating results in the fourth quarter with sequential and year-over-year revenue growth, along with strong free cash flow and ROIC.

Fourth-quarter revenue of $1.5 billion was above our guidance range, driven primarily by strength in our storage and server markets and the ramp of our solar business.

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

Revenue in the quarter increased 8% sequentially and 6% compared to the fourth quarter of 2014.

Revenue from our diversified markets represented 30% of revenue, increasing 6% sequentially and 18% year over year.

Non-IFRS operating margin was 3.5%.

Adjusted earnings of $0.27 per share was at the low end of our guidance range, driven by higher costs to ramp our solar business and higher-than-expected income tax expense.

IFRS earnings were $12.1 million or $0.08 per share.

We generated $76 million of free cash flow, and we were achieved return on invested capital of 21.4%.

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

In a difficult demand environment, our full-year 2015 revenue of $5.6 billion was relatively flat compared to 2014.

We continue to improve our mix, with growth in our storage and diversified markets offset by reductions in consumer, while server and communications were unchanged year over year.

Full-year adjusted operating margin of 3.5% was flat compared to 2014, in part due to our investments in our Aerospace and Defense and Energy businesses.

Adjusted earnings per share were $0.92, down $0.08 from 2014 due to higher year-over-year income tax expense.

IFRS net earnings were $67 million, or $0.42 per share, compared with $108 million, or $0.60 per share in 2014, due primarily to higher income tax expense and stock-based compensation.

We generated free cash flow of $113 million, which included approximately $60 million of investments to support growth in our Aerospace and Defense and Energy businesses.

This compared to $177 million of free cash flow in 2014.

We achieved full-year ROIC of 19.8%, up slightly from 19.5% in 2014.

And we continue to return capital to shareholders by repurchasing and cancelling over 32 million, or 19%, of our outstanding shares at the beginning of the year.

Moving on to the fourth-quarter details, relative to our beginning-of-quarter expectations, we had stronger-than-expected revenue performance from our Storage, Server, and Diversified businesses.

Looking at our revenue from an end-market perspective, our diversified markets comprised 30% of our total revenue for the quarter.

Diversified revenue increased 6% sequentially, which was better than our expectations of a relatively flat quarter.

The strength in diversified was led by new program ramps in our Energy business.

Compared with the fourth quarter of 2014, diversified revenue was up 18% driven by new program ramps in Aerospace and Energy.

Our communications end market represented 38% of total revenue and was relatively flat from the third quarter.

Compared with the fourth quarter of 2014, communications revenue increased 2% based on strength from certain customers offset by general softness in this market.

Our storage business had a very strong quarter, representing 19% of total revenue.

Storage revenue increased 20% on a sequential basis, which was better than expected, in part due to the seasonality and demand strength.

Compared to the fourth quarter of 2014, our Storage Business revenue was essentially flat.

Our Server business was also very strong in the fourth quarter representing 10% of total revenue.

Server revenue increased 31% sequentially, which was higher than expected, and 11% year over year based on strong demand and the new program launch.

And, finally, our consumer end market, representing 3% of total fourth quarter revenue, was flat sequentially consistent with our beginning-of-quarter expectations.

Our top 10 customers represented 68% of revenue for the fourth quarter, similar to the third quarter, and down from 69% in the same period last year.

For the fourth quarter and full-year 2015, we had three customers individually contributing greater than 10% of revenue.

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

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

Adjusted gross margin of 7% was down 50 basis points sequentially and year over year.

Gross margin was negatively impacted in the quarter by ramp costs associated with our solar expansion, as well as our overall mix.

Our adjusted SG&A expense for the fourth quarter was $45 million, below our expected range of $47 million to $49 million, due to cost containment across our business.

Adjusted operating earnings for the quarter were $53 million, or 3.5% of revenue, a sequential decrease of 30 basis points, largely due to the higher costs associated with our solar ramp in Asia.

On a year-over-year basis, operating margin decreased 10 basis points, driven by ramp costs in solar offset in part by improvements in our semiconductor business.

Our adjusted tax rate in the fourth quarter was 22.8%, above our expected range of 14% to 16%, due primarily to year-end transfer pricing adjustments.

Adjusted net earnings for the fourth quarter were $39 million, or $0.27 per share, compared to $40 million, or $0.23 per share, for the same period of 2014.

Adjusted earnings came in at the low end of our guidance, due to the additional cost to ramp our solar business and higher taxes within the quarter.

Fourth-quarter IFRS net earnings were $12.1 million, or $0.08 per share, compared to a net loss of $4.4 million, and $0.03 per share, in the fourth quarter of 2014.

The IFRS net earnings for the quarter included $12.2 million, an $0.08 per share non-cash impairment charge related to property, plants and equipment as part of our annual impairment assessment.

Return on invested capital for the quarter was 21.4%, up from 20.8% for the same period last year.

We had strong working capital performance in the fourth quarter.

Our inventory decreased $54 million from the end of the third quarter to $795 million at December 31, 2015.

Inventory turns for the quarter improved to 6.9 turns, up from 6.3 turns in the third quarter.

Capital expenditures for the fourth quarter were $16 million, or 1.1% of revenue, within our estimated range of 1% to 1.50%.

For the full year, we paid approximately $63 million for capital expenditures or 1.1% of revenue.

Cash cycle for the fourth quarter was 42 days, an improvement of four days compared to the third quarter.

For the fourth quarter, we generated $76 million of positive free cash flow, compared to $60 million for the same period last year.

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

Our cash balance increased by $49 million sequentially to $545 million.

Our net cash position at December 31, 2015, was $282 million, which includes $545 million of cash less $238 million drawn on our term loan and $25 million drawn on our revolving credit facility.

At the end of the fourth quarter, we had $143 million subordinate and multiple voting shares outstanding.

Moving forward to our guidance for the first quarter of 2016.

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

At the midpoint, revenue is projected to increases 4% year over year.

Sequentially, revenue is expected to decrease 11%, largely due to seasonality and our strong fourth quarter.

At the midpoint of our guidance, we expect non-IFRS adjusted operating margin of approximately 3.1%.

Our margin is being negatively impacted by the sequential revenue decline and the continued ramp of our solar business.

We expect to improve our operating margin through the course of 2016.

First-quarter non-IFRS adjusted earnings are expected to be in the range of $0.19 to $0.25 per share.

Adjusted SG&A expense for the first quarter is projected to be in the range of $45 million to $47 million.

And we estimate an annual adjusted tax rate range of 17% to 19%.

Our first-quarter guidance assumes the annual rate, and excludes any impacts from taxable foreign exchange.

Our tax rate is sensitive to currency changes, in particular in China and Malaysia.

I would now like to turn the call over to Rob for some comments on the fourth quarter, 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.

First, I would like to thank the entire Celestica team for their dedication and effort in the fourth quarter and throughout 2015.

As Darren highlighted, we delivered solid operating results in the fourth quarter, with revenue of $1.5 billion, that was above our guidance range, as well as strong free cash flow of $76 million.

Operating margins of 3.5% were at the low end of our guidance range, largely due to the increased costs associated with ramping our solar business in Asia.

Let me take this opportunity to provide some additional context about our Solar business.

On our October earnings call, we highlighted that we were experiencing some delays in ramping our Solar business in Thailand based on the installation of new next generation equipment, while also managing a strong demand environment.

While the equipment is fully installed and our output increased throughout the quarter, we are still working to get the production to the optimum level of efficiency.

Additionally, some of our suppliers have been facing challenges in ramping to meet our requirements.

Both of these factors are leading to higher-than-expected costs in our Solar business.

Despite the increased costs, our Solar business delivered strong sequential year-over-year growth.

We are continuing to work aggressively to get our operations fully ramped.

We expect to make significant improvement by the end of the second quarter.

Despite the near-term challenges, I am excited about the healthy demand we are seeing from a number of customers in this market.

We continue to be confident about our ability to profitably grow our Solar business.

Moving back to Company performance.

For the full-year 2015, Celestica delivered solid financial and operational results.

We increased our investments in the business to accelerate the diversification of the Company, while also returning over $400 million to our shareholders through share repurchases.

We also received a number of customer and industry awards recognizing our leadership in innovation, operational excellence and sustainability.

For example, we received the EMS Partner of the Year award from Cisco for the fourth time in the last six years, as well as other supplier excellence awards from customers, including Juniper and Diebold.

Celestica was also recently named one of the Global 100 Most Sustainable Companies in the World for the second consecutive year.

This distinction is a great source of pride among our 26,000 employees around the world, who are committed to making a difference and enabling Celestica to become a more sustainable Company.

Turning to our near-term outlook in our end markets.

Our communications end market is expected to decline in the low double-digits sequentially, due to seasonal demand weakness.

On a year-over-year basis, we expect communication revenues to be flat.

Relative to our diversified markets business, we are expecting revenue to be down slightly in the low single-digits based on seasonality.

On a year-over-year basis, we expect our diversified end market to increase in the high teens, driven primarily by new program ramps in Aerospace and Energy.

Our storage revenue in the first quarter is projected to decrease in the low 20% range based on seasonality, as well as higher-than-expected revenue in the fourth quarter of 2015.

On a year-over-year basis, storage is expected to be relatively flat.

Our server end market is expecting a sequential decrease in the low 20% range, based on seasonal demand as well as higher-than-expected revenue in the fourth quarter of 2015.

On a year-over-year basis, server revenue is expected to decline in the mid-teens due to demand softness.

In summary, we are expecting year-over-year revenue growth for the second straight quarter in what continues to be a mixed demand environment.

Our short-term profitability is being impacted by mix and the ramp of our Solar business.

And we expect improvements as the years go on.

Before we open the call for questions, let me close by talking about some of our key focus areas as we enter 2016.

As I discussed on our last earnings call, a key priority over the first five months as CEO has been to meet as many customers, employees, suppliers, and other key stakeholders as possible to gain a deeper perspective on the Company and our industry, and to learn more about the opportunities and challenges in front of us.

As a former customer of Celestica, I knew the Company had a strong external reputation for the quality of its people, its operational excellence, and the overall integrity in the way it deals with its customers, suppliers, and employees.

And now having spent close to six months in my current role as part of the Celestica team, it is clear to me that the Company is living up to its wonderful reputation.

Recently, we have been going through a rigorous assessment of our go-to-market strategies to ensure we are well-positioned for the future looking closely at our end markets, our customer and product portfolios, our capabilities, as well as the competitive landscape.

The first phase of this assessment is complete.

And we have validated the key aspects of our strategy.

Overall, we believe the Company's strategic direction is sound and that we are well positioned with the right customers within our target markets.

We have a strong and profitable enterprise and communications business, with a customer list that includes global leaders in this space.

These companies have consistently recognized Celestica as a partner with a strong operational track record and high complexity and high reliability coupled with solid leadership and innovation.

Our joint design and manufacturing, or JDM offering, is one example of how we believe we bring a differentiated offering to the marketplace.

A number of our customers are leveraging our expertise in this area.

And we have already shipped over $1 billion of JDM products to the marketplace over the last five years.

Our expertise in high-complexity products for high reliability applications also aligns very well to the customers in our diversified markets, that being aerospace and defense, energy, healthcare, industrial, and semiconductor, who have very stringent quality, reliability, and regulatory requirements.

Within diversified, we are the EMS market leader in aerospace and defense, an industry that is growing and is still largely insourced, providing some of the most comprehensive end-to-end solutions in the industry, including repair and overhaul.

We also have a strong and growing Energy business, based on our supply chain expertise in our solar panel manufacturing experience.

As I said, overall I believe that the Company's strategic direction is sound and that we are well-positioned with our customers in the enterprise communications and diversified markets, who value our expertise and high reliability on complex supply chain services.

The next phase of our strategy assessment will take place over the next few months.

However, I expect the majority of the changes that we will be driving throughout the Company as we complete our assessment will be centered around how we accelerate our strategy and further enhance our differentiated customer engagement model, rather than making significant changes to the overall direction of the Company.

In the near term, we will continue to be focused on returning the Company to top-line growth, along with strong and consistent operating margins; continuing to generate strong free cash flow and return on invested capital; staying ahead of the cost productivity curve through a continued focus on efficiency throughout the Company.

Longer term, the key focus areas for the business will include evolving our portfolio to drive higher margins and more predictable growth.

Continuing to develop and leverage our capabilities in such areas as joint design and manufacturing, complex and mechanical and aftermarket services.

And building our leadership position in diversified markets, particularly in the areas of Aerospace and Defense and Energy.

As we begin 2016, we are excited about the opportunities in front of us.

The entire Celestica team, 26,000 talented and dedicated employees across the globe, continue to be focused on accelerating value for our customers through innovation, thought leadership, and operational excellence, while achieving our revenue growth objectives and driving improvements in financial and operational performance.

That concludes our prepared remarks.

Please open the call for questions.

(Operator instructions)

Amit Daryanani, RBC Capital Markets.

Thanks a lot.

Good afternoon, guys.

Just to start off with the solar ramp challenge that you guys have.

Would you be able to talk about either in terms of what basis points what impact it had in December and you see in March or dollar impact these ramps are having?

And for you to get to this break even target, I think you said by Q2 or the headwinds to go away at least, is there a faction -- is it a factor that you just need more revenues there or you just need a more optimal supply chain to get there?

Hi, Amit.

It's Darren.

In terms of the quarter, there was good progress obviously on the revenue side.

It's frankly being throw what we need to throw at it to make sure we can execute and get the demand out there.

There is lots of demand for it.

We spent more money than we would like in order to fulfill that demand.

I'd say overall, it cost about 30 basis points for the fourth quarter.

Looking at the first quarter, we're not out of the woods, yet, in terms of the extra costs and the extra effort in order to get the right yields and the right throughputs.

So we do expect further costs put in the range of 20 basis points maybe in the first quarter and we're looking to improve from there as the year goes on.

Got it.

Rob, a question for you.

You talked about the strategic year looked at and you feel good about the portfolio, especially on the enterprise communications side.

I'm wondering where a lot of the customers you have, have their own set of challenges.

Is there a pot process or have you looked at the fact that maybe there should be a more deeper engagement with some of the hyperscale customers directly who might be bypassing your traditional customers right now to build their own network and storage gear and so on?

Hi, Amit.

Within the overall strategy, I think we have a very well run business and our growth in terms of our accelerating our strategy is really going to be focusing on accelerating our leadership position in some of our key markets.

And we also are -- I believe we have some very robust solutions for customers across all our markets.

And to your point, I think the key is getting the right audience within senior leaders within our customer base to make sure that we are able to provide broad solutions versus point solutions and by doing that across all our markets, especially the ones we have leadership positions in should increase our traction.

Hopefully, I'm not sure I addressed your question.

Does that answer your question?

I guess I'm wondering do you go after a newer set of customers in that bucket versus the ones you already have relationships within.

Within our diversified markets, a part of our strategy is certainly to expand our logos and broaden our reach and that is also true within our core EMS market, and we're continuing to do that in terms of in expanding of expanding our logos if you will and making good progress towards doing that.

Perfect.

Thanks a lot and best of luck, guys.

Thanks, Amit.

Andrew Huang, B. Riley.

Thanks for taking my question.

Rob, I guess, since it's your second quarter as CEO on the call, I was wondering if you could share your thoughts towards vertical integration and getting into products like sheet metal, plastics injection molding, or other components.

Hi, Andrew.

You know, at this time we've think vertical integration certainly has a play in certain of our markets but it's not a key focus area.

We would certainly explore that where we think eliminating the margin stack would be beneficial and would give us supply chain flexibility.

But from a broad-brush basis, I would say it's not a key focus area to get more vertically integrated.

Okay.

And then I was wondering if you could maybe share your kind of initial thoughts on the full year with respect to maybe revenue growth or CapEx or margins, or anything like that.

I'll let Darren lead that and I'll chime in.

Andrew, from a full-year perspective on revenue, we're not giving guidance across the board for the full year but I will say starting the year at 4% year-over-year growth is obviously quite positive; we're pleased with that.

The market continues to be quite dynamic out there, so given projections outside of the first quarter, it's just not what we're going to do today, but needless to say we are targeting to grow the Company this year.

You can think of modest growth for the year.

But, again, we're not providing guidance.

From a CapEx point of view, I think the 1% to 1.5% continues to be our target.

And for operating margin, our target for the Company continues to be in the 3.5% and 4%.

Those are the targets as we run our business.

I'm not saying that we're giving guidance in the operating margin for the year, though.

Thanks very much.

Jim Suva, Citi.

Hi, this is Tim Young on behalf of Jim Suva.

Thanks for taking my questions.

Hi, Tim.

Hi.

My question is on impairment charge in the December quarter.

Is that associated with the [semicap] acquisition back in 2014?

No, it was not.

It was part of our annual impairment related to some of the fixed assets we have for two higher cost geography sites that we have.

Got you.

Okay.

Thanks.

And then my next question is on tax rate.

It seems like the guidance for next quarter, 17% to 19%, is higher than the previous guidance for December quarter is 14% to 16%.

So what's the reason for that?

Is it more region mix?

How should we think about the tax rate in full-year 2016?

Yes, for the full year, the guidance is 17% to 19%.

We have seen that creep up really as a function of the mix of where our profits are landing as well as some of the tax rates in the different geographies.

Got you.

Okay.

Thanks.

Thanos Moschopoulos, BMO Capital Markets.

Good afternoon.

I was pleasantly surprised to see the improvement in the cash cycle given the increase in the diversified mix because I would have expected those two variables to be negatively correlated.

And so how should I think about those improvements in the cash cycle which we think about as far as inventory turns and the various elements over the next quarters?

Hi, Thanos.

The inventory certainly was helped by the additional upside that we had in revenue, a lot of it frankly in the last few weeks of the quarter, so we saw that strong growth in server and storage which helped to improve the inventory turns for the quarter.

I would say it's less driven on the diversified side, and that really helped in terms of that inventory turn improvement.

When we look at the first quarter with the lower revenue point, and we have a 2-point average on our turns, we do expect to start low and then work our way up as the year goes on and as we see some growth in the Company.

Okay.

And then can you provide us with an update on the semi business and how that is performing?

Yes, on the semi business, as we reported last quarter, we were positive.

We were pleased to report that we were both gross margin and EBIAT positive.

As we looked into the fourth quarter of this year, demand was down a little bit, and we were about breakeven for that business.

As the year goes along, and the good news about that, by the way, is we were able to lower our breakeven point from a revenue perspective.

As the year goes on, we expect to continue to improve our cost position and hope to get better tailwinds, if you will, from the end markets.

But the end markets will be what the end markets are and we'll have to wait and see how that turns out.

And Thanos, I would just add that is one of the items that is really pulling down the margin a little bit in the first quarter, the fact that the performance -- we're just not seeing the growth in that business right now.

So the first quarter declines implies a decline year over year in that business?

No, there is improvement year over year because of the work that Rob described and a lot of work that went on by the team, but it's staying flat towards the Q4 levels, just not generating the margin that we would like, yet.

Got it.

Thanks.

Thank you.

Matt Sheerin, Stifel.

Hi, guys, good afternoon.

Question just on the diversified markets, that is one key growth area for you.

I know you've got a bunch of buckets there, industrial, mil aero, defense, the solar business now.

Can you help us understand the mix?

What's the biggest component there?

And as -- and I understand some of the margin headwinds with solar and semicap, but in theory that should be a business that's generating margins above, if not well above, the corporate average.

So what's the timetable?

Am I right there and what is the timetable to get there?

Why don't I take that on.

In terms of the business, the largest one is the aerospace business and then secondly, we have a large industrial which including the semiconductor from a size perspective.

The base business, I would say overall in diversified, is a relatively flat environment.

We're seeing growth from the programs wins we've had, and we're seeing that in the area of aerospace and defense.

We're seeing that in the area of smart energy, in particular, and the solar ramp that we have.

But the base business underneath everything is being relatively flat and semiconductor has been challenging over the last, sort of over the last quarter but the team has done a good job as I mentioned.

From a margin point of view, you're right that within our precision machining business, there are two aspects to the semiconductor business.

There is high level assembly work we do in the precision machining.

Precision machining we would expect at a higher margins than overall for the blend for the two of them, they would be slightly higher than the Company averages but not materially higher because the high level assembly is a bit lower margin.

So the short of all that is that those together should be north of our margins as a Company.

We're not just talking about the semicap but that whole diversified area for you, with the value out there it seems like that should be with the solar business and the aerospace business, certainly should be higher.

Absolutely.

And that's one of our key efforts is to get the margins higher as we ramp our programs and get some hopefully some growth in the markets, but we can't predict that right now.

Okay.

Rob, and you talked a little bit about the strategy and really basically sticking to the game plan, fine-tuning things.

Does or will M&A play a role there?

Obviously, you have got a good cash position again here.

Is that going to factor into the strategy at all?

Yes, M&A in terms of any growth strategy, M&A is a key tool that we look to utilize.

That being said, we're going to be very purposeful and very focussed on any M&A that we do to make sure it passes our stringent financial criteria and truly adds shareholder value and adds capability to the Company.

But it is a tool in the tool box that we will be looking to deploy.

Okay.

Thanks, best of luck this year.

Thank you very much.

Paul Steep with Scotia Capital.

Rob, just on that exact topic we were on.

If we think about it, in the long-term goals you talked about you key areas of investment, maybe bucket them.

On the organic side, the key areas of investment, do you need greater distribution, greater sales, greater capabilities, greater IP?

Where is that investment going?

Based on Darren's comments, it doesn't sound like it's more money, per se, or at least it's within the cost envelope you have today.

And if you could give us that few and then I have got a quick follow-up.

Sure.

On the organic side, we need to continue to invest in the front end of our business with respect to sales and BD resources to get the top line moving.

We also are continuing to invest in our JDM profile to help improve more value-add services to our customers.

And lastly, in our factories and across our network, it's important that we stay current with technology and capital equipment and the overall digital experience to keep our factories as productive as possible.

So that has been a large portion of our organic money we will spend.

On the inorganic side, we will largely use the M&A tool to fill any potential capability gaps we think we need and in order to be able to serve our customers in our end markets in a more efficient manner.

That also adds we feel to total shareholder return.

So just to follow on that, likely ties to you or more to Darren.

What do you view as your optimal capital structure and what is your willingness to add meaningful leverage, several turns to leverage on debt to sort of further the goals you just talked about?

Yes, hi, Paul.

From a debt perspective certainly we have -- we're under leveraged still.

We have got a turn of debt and as we've talked about in the past, we felt that was the best use of capital is to give back to shareholders.

We continue to go under the philosophy we want to invest in the business but we will also give back to shareholders and you know in the past, we've had a proxy of 50-50, but it will really depend on what's in front of us.

For the right opportunities, absolutely we would be willing to put more debt on the balance sheet.

I don't want to box us into an actual rate, but certainly a couple turns is not an issue and we have a lot of financial leverage and ability to raise two, two-plus in terms of debt.

But really it's about finding the right opportunities that we can bring value to, and if we can't bring value to it we will look to give back to shareholders.

Great.

Thanks, guys.

Thank you.

(Operator Instructions)

Robert Young, Canaccord Genuity.

Hi, good evening.

I wanted to ask a question on margins.

I think you had said that the solar business is a 30 bps headwind in Q1 and that you're hoping to see some additional costs come out of the semi business and maybe that will get better as we go through the year.

That 3.5% to 4% operating margin target seems as though it's within reach in Q2.

Is that a good way to think about it?

Hi, Rob.

I would say that let's go back to the number we used to give out, $1.4 billion.

That is really the target where I see 3.5%.

So that hasn't changed.

There is obviously leverage depending on how fast we get the throughputs up that we want in solar.

But with $1.4 billion, 3.5% is still a reasonable proxy.

Okay.

Second question is on the -- like you said in the dialogue, two quarters now of year-over-year growth and you have to go back quite a ways to see that previously.

Congratulations there.

But also --

Thank you.

But at the same time, you're looking for modest growth for the full year.

So was there demand pulled in in the server and the storage market into Q4?

Any added expenses in Q1 and Q2 or something like that?

Is there something that -- I'm just trying to reconcile that.

You're hearing my comments just a function of the markets.

The markets are quite dynamic still and still predicting growth for the year is not something we want to go do, but we're starting strong with 4% growth which is a positive, obviously.

To your question, was there demand pull-in.

There was just strong demand with some programs that will make for a tougher repeat next year in Q4, but that doesn't change the full year, though.

Okay.

And last question for me.

Rob, you said I think a couple of times, you mentioned some of the potential for after-market services and I think you said repair and overhaul inside of the aerospace line item, and I don't think I've heard much about that in the past, so is there anything you can elaborate there or is it something that has always been a part of the mix and just not aware of it.

You know, that is part of our aerospace and defense capability.

We are a part -- what they call a part 145, which means a license, repair, and overhaul facility so we have that capability.

We probably don't tout it as much as we should in the open marketplace but that 145 license is very difficult to get and to certify for and it's really a license to hunt.

That being said, we don't generate a lot of revenue from aftermarket services but as our strategies mature and we're able to get some more traction, it's certainly a growth avenue for us.

Certainly.

Given your background, it seems like an area you would probably be interested in growing, I would think.

Yes, we find it a very attractive space, and we think we're pretty unique in that area from an EMS perspective to have a 145 license.

Okay.

Thanks a lot.

I'll pass it on.

Thank you, Rob.

There are no further questions at this time.

I will turn the call back over to the presenters.

Thank you, all, for joining us on the call today and we look forward to the call next quarter.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.