Good morning. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Celestica Inc. First Quarter Results Conference Call. [Operator Instructions] Thank you. Mr. Manny Panesar, Director of Investor Relations. You may begin your conference. .

Thank you, Jonathan. Good morning, and thank you for joining us on Celestica's first quarter of 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 Q&A. During the Q&A session, please limit yourself to 1 question and a brief follow-up as we have our Annual General Meeting immediately following this conference call. We will be available after our Annual General Meeting for additional follow-up.

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

As a reminder, during this call, we make forward-looking statements related to our future growth, trends in our industry, our intentions concerning the return of cash to our shareholders, our financial and operational results and performance, and financial guidance that are based on current expectations, forecasts and assumptions that involves risks and uncertainties that could cause actual outcomes and results to differ materially.

We also refer you to our cautionary statements regarding forward-looking information in the company's various public filings, including the Safe Harbor statement in today's press release.

We refer you to the company's various public filings, which contain and identify material factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements and which discuss material factors and assumptions on which such forward-looking statements are based.

These filings include our annual report on Form 20-F and subsequent reports on Form-6K, filed with the Securities and Exchange Commission and our annual information form filed with the Canadian Securities Administrators, which can be accessed at, respectively, at 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 EBIAT, 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 U.S. dollars. .

I will now turn the call over to Darren Myers. .

Thank you, Manny, and good morning, everyone. Celestica delivered first quarter revenue within our guidance range, while adjusted earnings per share came in above the guidance range as a result of an income tax benefit recorded in the quarter. .

First quarter revenue of $1.312 billion was at the lower end of our guidance range of $1.3 billion to $1.4 billion, primarily impacted by demand softness in our Communications business and the delayed program in our Diversified end markets.

First quarter revenue decreased 4% compared with the first quarter of 2013 and declined approximately 9% compared with the fourth quarter of 2013. .

We delivered IFRS net earnings of $37.3 million or $0.20 per share. Non-IFRS adjusted earnings per share of $0.26 was above our guidance range of $0.17 to $0.23 per share. Included in our adjusted earnings is a $0.06 per share net income tax benefit that was recognized in the first quarter.

Non-IFRS operating margin of 3.1% improved 60 basis points compared with the first quarter of 2013. Free cash flow was negative $16 million driven by variable compensation payments in the first quarter. And we delivered 16.1% return on invested capital. .

Looking at revenue from an end market perspective. Our diversified end markets comprised 28% of our total revenue for the quarter, up from 24% in the first quarter of 2013. First quarter revenue from our Diversified end markets was impacted by the push out of a program into the second quarter.

Diversified revenue grew 10% compared with the first quarter of 2013 with strong growth in our semiconductor, industrial and aerospace and defense sectors, partially offset by declines in solar. Revenue from our Diversified end markets declined 5% sequentially, largely driven by the previously mentioned delayed program.

All revenue performance in other areas of Diversified came in generally as expected. .

Revenue from our Communications end market represented 40% of total first quarter revenue. Compared with the first quarter of 2013, Communications revenue declined 3%, primarily due to reductions in telecom and lower overall demand, partially offset by revenue growth from new programs.

Communications revenue declined 10% sequentially, which was higher than expected as a result of lower demand across a few customers. .

First quarter revenue from our Storage end market representing 16% of total revenue increased 22% year-over-year, primarily driven by new programs. Storage declined 4% sequentially driven by lower-than-expected demand from 1 customer, partially offset by new programs. .

Our Server end market, comprising 10% of total revenue for the first quarter, decreased 43% compared to the same quarter a year earlier due to overall weaker demand and the in-sourcing of a lower margin assembly program that we previously disclosed. First quarter server revenue declined 16% sequentially mainly due to seasonal impacts. .

And finally, our Consumer end market, comprising 6% of total revenue for the first quarter, decreased 18% year-over-year due to program transition -- transitions that reflect deemphasis of lower margin areas of our consumer business. On a sequential basis, consumer was down 16% mainly due to seasonal impacts. .

Our top 10 customers represented 64% of revenue for the first quarter compared to 65% in the fourth quarter and 66% from the first quarter of 2013. We had 3 customers in the first quarter contributing greater than 10% of total revenue. .

Moving onto some of the other financial highlights for the quarter. Our non-IFRS adjusted gross margin of 7.2% in the first quarter increased 60 basis points compared to the first quarter of 2013, primarily due to favorable program mix and cost containment. Adjusted gross margin decreased 20 basis points sequentially on lower revenue. .

Non-IFRS adjusted SG&A expense for the quarter was $48.3 million, slightly below our expected range of $49 million to $51 million. Non-IFRS adjusted operating profit or adjusted EBIAT of $41.2 million or 3.1% of revenue was in line with our expectations.

Compared with the first quarter of 2013, adjusted EBIAT dollars increased 18% despite lower revenue, while adjusted operating margin was up 60 basis points driven by improved mix and cost productivity. .

Our adjusted tax rate of negative 15.8% in the first quarter was below our forecasted annual range of 10% to 12%, due primarily to certain tax recoveries recorded in the quarter. Non-IFRS adjusted net earnings for the first quarter were $47.1 million, or $0.26 per share compared to $30 million or $0.16 per share for the same period of 2013. .

First quarter IFRS net earnings were $37.3 million or $0.20 per share, compared to $10.5 million or $0.06 per share for the first quarter of 2013.

Despite the impact of lower revenue, first quarter IFRS net earnings increased by $26.8 million compared to the first quarter of 2013 driven by the previously mentioned income tax benefit, lower restructuring charges and overall improved operating results in the first quarter of 2014. .

Turning to working capital performance. Our inventory increased by $9 million from the end of the fourth quarter to $826 million at the end of the first quarter. Inventory turns for the first quarter were 6.0 turns compared with 6.3 turns for the fourth quarter.

Our inventory performance was negatively impacted by a delayed program as well as demand changes late in the quarter from a few customers resulting in additional finished goods, which we expect to ship in the second quarter. .

Capital expenditures for the first quarter were $14 million or 1.1% of revenue within our expectations of 1% to 1.5% of revenue. Cash cycle for the first quarter was 48 days, which is 4 days higher than the fourth quarter, primarily due to reduced revenue and increased inventory.

For the first quarter, free cash flow was negative $16 million, which was driven primarily by variable compensation that is paid out in the first quarter. .

Moving onto the remainder of the balance sheet. The company's financial position remained strong. Cash balance at March 31 was $489 million, down by approximately $55 million from the end of the fourth quarter.

Our cash balance declined quarter-over-quarter as a result of the negative free cash flow and $39 million which was spent on share buyback activities. For the share buyback activities of $39 million, during the first quarter, we repurchased for cancellation 1.2 million shares for $12 million and prepaid $27 million to fund our PSR.

We will cancel the shares purchased through the PSR in the second quarter as part of our normal course issuer bid. We did not have any outstanding debt, and our credit facility remains undrawn. At the end of the first quarter, we had 180.5 million subordinate and multiple voting shares outstanding. .

Moving on to our guidance for the second quarter of 2014. Overall, although certain parts of the market remain volatile, we're expecting demand improvements generally across our end markets. For the second quarter, we're projecting revenue to be in the range of $1.375 billion to $1.475 billion.

At the midpoint, this suggests second quarter revenue to increase sequentially by approximately 9% and decline 5% compared to the second quarter of 2013. On a sequential basis, we're expecting revenue growth from all of our end markets except consumer, which is expected to remain flat.

At the midpoint of our guidance, we expect to deliver adjusted operating margin of 3.3%, sequentially up 20 basis points and 40 basis points improvement compared to the second quarter of 2013. .

Second quarter adjusted earnings per share are expected to range from $0.20 to $0.26. Our non-IFRS SG&A expense for the second 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 current business environment and our near-term outlook. .

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

Celestica's first quarter revenue was impacted by seasonality, demand softness primarily in our Communications end markets, and deferral and delivery of a diversified program.

We delivered first quarter profitability in line to our forecast, despite increased volatility in mix changes and customer demand forecasts late in the quarter, which negatively impacted our inventory and free cash flow.

As Darren mentioned earlier, we're expecting sequential revenue growth of 9% at the midpoint of our second quarter guidance, expected growth in 4 of our 5 end markets. We're also projecting sequential and year-over-year operating margin improvements. .

We're encouraged by the momentum we're building for 2014. And based on the current outlook, we expect to make continued improvement in our financial performance throughout the year. .

Now, let me provide some additional perspective and insight on the outlook for our end markets. We continue to achieve double digit year-over-year growth in our Diversified end markets.

While first quarter diversified revenue was impacted by the delay of a program into the second quarter, revenue from the remainder of the Diversified end markets came in generally as expected with strong year-over-year growth in our semiconductor, industrial and aerospace and defense end markets.

For the second quarter, we're expecting Diversified to grow sequentially in the low double-digit percentages driven by solar and aerospace and defense. Relative to the second quarter of 2013, we're expecting Diversified growth in the low double-digit percentages with growth across all end markets except solar. .

Revenue from our semiconductor business is expected to be relatively flat in the second quarter compared with the first quarter. However, we are expecting a stronger second half as end market demand improves and as we ramp new programs.

Semiconductor continues to be a key strategic area where we are driving to build a market leadership position in complex mechanical assembly and precision machining.

We continue to win new business with the leading wafer equipment OEMs and continue to make investments to establish a highly differentiated global supply chain network of capabilities that deliver the highest quality, speed and flexibility to enable our customers' success. .

Today, revenue from our semiconductor segment represents approximately 1/5 of our Diversified end markets or 6% of our total revenue.

While the majority of our semiconductor operations are generally performing to our expectations, a portion of the business is currently below our financial targets for this segment due to excess capacity and the investments in the capabilities and resources required for the anticipated ramp of new programs throughout 2014.

As a result, the semiconductor business segment continues to perform below our target operating margins and is currently breakeven at a gross margin level.

We anticipate that continued revenue growth from new program ramps, in conjunction with operational improvements, are expected to lead to improved financial performance throughout 2014 and beyond in this area. .

With regard to communications end markets, while we experienced demand softness in the first quarter, we're expecting sequential growth in the mid-single digit percentages with increases across several customers.

On a year-over-year basis, communications is expected to be down in the high-single digit percentages, primarily due to lower demand, particularly in telecom and the Japanese market, partially offset by revenue from new programs. .

Our Storage business continues to be strong, and we're expecting double-digit growth both on a sequential basis and compared to the same period last year.

We believe we continue to have strong relationships with the market leaders, a unique roadmap of offerings tailored for each of the leading storage OEMs underpinned by our strong operational execution.

Our investments over the past few years in design, engineering, development, test and regional configure-to-order capabilities continue to build momentum and are translating into new business and market share gains with current and new customers. .

Within our Server end market, forecasts from several customers indicate sequential revenue growth in the low double-digit percentages from a low base of revenue in the first quarter of this year. Our consumer business is expected to remain essentially flat in the second quarter as we continue to deemphasize certain parts of this end market. .

As per our remarks in the January conference call, we continue to expect improvements in the second half based on our customer forecasts and our current market outlook. Our key priorities to further accelerate our progress towards diversification and profitable revenue growth for the future include:.

First, accelerating our progress in our semiconductor business. We're focused on building a differentiated offering, while continuing aggressively to drive operational improvements for the second half. Two, our inventory levels have recently increased in part due to increased demand volatility.

We are focused on continuing to collaborate with our customers and supply chain partners to leverage advanced planning and demand analytics, to improve our demand forecast accuracy and increase asset velocity. We are targeting improvements in our inventory turns in the second quarter and beyond.

And third, in line with our strategy, while we continue to win new business organically, we are evaluating strategic acquisitions and investments that will enhance or complement our capabilities to diversify our customer and revenue base. .

Despite the volatile macro environment and the challenges in our industry, we're excited by the number of opportunities we believe we can create to make our customers successful, while delivering on our financial objectives and generating value for our shareholders. We look forward to our continued progress throughout 2014.

That concludes our prepared remarks. .

Jonathan, please open the call for questions. .

[Operator Instructions] And your first question comes from the line of Thanos Moschopoulos with BMO Capital Markets. .

Craig, looking at the forecast and the commentary you're getting from your customers, would you say that demand environment is any less volatile than it was a quarter ago? And how is your visibility shaping up for the second half of the year at this point?.

I'd say that the demand volatility is probably, is going to continue. I think the message is though that, in general, the first quarter, I think, was a low point for us. And we're seeing strength across a wide range of customers, and our visibility would be -- at 3 months, I would say 90 days would be the visibility that we would have.

Although we did experience in March some relatively short cycle demand changes in the March time period as we mentioned in Darren's portion of the materials today. So a volatile environment. We've got a capability to meet those requirements and the flexibility to deliver against that. We're encouraged by the demand forecast that we're seeing.

And certainly, our second quarter outlook at 9% growth over the first quarter is very encouraging. .

And just lastly, regarding the quarter end changes in demand and volatility, did that affect any one specific segment, or was that across multiple segments?.

It was generally across the Communications segment. .

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

You guys have made a lot of effort into the Diversification market, which is very admirable. Recently, you talked about some delay there.

Is that due to, I guess, like design delays, the customer not being ready, the market not being ready? And now that we're pretty much through April, most of the month, has it already started to ramp, or is it being delayed permanently because they want to make adjustments to it? Or can you just help us talk -- better understand these delays?.

end market demand, it's the success of the programs that we're on; it's the success of the program -- customers that we're serving; and it's the time to revenue for the ramps. So it's a balance of all those 4 things, but diversified continues to perform at double-digit improvements in growth year-over-year.

And we are encouraged by the outlook for a range of those subsegments that we've got. .

Great. And then for modeling purposes for my follow-up, any -- help us on the tax rate outlook? This quarter, it moved around quite a bit. I assume it was like some NOLs you're able to pull in or some credit recovery.

What happened there? Can it happen multiple quarters in a row, or is it kind of a one quarter thing? And what should we expect for tax rate going forward?.

Jim, it's Darren here. In terms of the quarter, the tax recovery was related to Malaysian tax incentives where we were able to negotiate favorable terms. We're investing heavily in Malaysia, as Craig has mentioned and we've mentioned on previous calls with our semiconductor business. So we had some favorable incentives there.

Going forward, the tax rate, we're so comfortable at the annual rate of 10% to 12%, but this was more of a one-time nature, a one-time event. .

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

Just my first question, just on the Communications segment.

Could you talk maybe that when we look at your largest customers in that space and they're talking about an intelligent networking and a smarter, intelligent -- do you think there's any cyclical or structural growth in terms of replacement cycle or smarter, intelligent products being higher priced products that's driving this segment?.

Well, clearly, the demand for bandwidth continues to grow, so networking equipment is at the centerpiece of that along with storage and servers. Enterprise and telecommunications applications grow. The hyperscale data centers are having an impact. I think we're in the higher end of that segment in the more complex areas of the business.

And as well as the optical space where a lot of the bandwidth will become optical. So the answer is it will always be very price competitive.

I think one of the key differentiators will be the ability to meet short-cycle shipments as these build-outs occur very quickly, as customers attempt to put new services on their Internet service platforms and scale quickly to meet new consumer demand or create new consumer opportunities. So we're bullish on the outlook for communications.

It'll be the centerpiece of big data and a lot of what's happening in the IT space. And we think we're well positioned with the market leaders. .

Okay, that's great. And then just trying to understand the -- I know it's beating a dead horse.

But on this diversified delay in the program, I mean is it that we -- that the quarter would have been in line with the midpoint of your prior guidance if it wasn't for this shift? I mean is it -- is this all it is, that it was a timing shift from 1 quarter to the next?.

Well, it was a timing shift. I mean the answer is, short answer is no. The program involved would not have been the difference between meeting the midpoint of our guidance and where we ended up. Roughly, it was about $14 million of an impact to the revenue for the quarter.

And the rest was really due to the late March sort of cancellations or changes in the forecast and the mix of products. .

In the Communications segment?.

Yes, right. Yes. .

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

Just so I understand the comms point.

So you're basically saying you saw some contracts get canceled at the end of the quarter, but they're coming back into Q2, which is causing the sequential uptick?.

No, I mean we didn't see -- I mean there was changes in the forecast demand for the quarter. That was just -- we're seeing some increases in our finished goods hubs. And customers did not pull to the extent that they forecast they would pull, so that was the impact. .

I see. Okay. .

So that was... .

And Todd, we would expect those finished goods to ship out in the second quarter and really drive an improvement in the inventory as a result. .

And just one quick follow-up. On the diversified side, we've seen a little bit better performance out of a few of the larger semiconductor companies.

Are you seeing that flow through in terms of demand in that segment of Diversified yet?.

We're seeing increases in both our market share and then the outlook for new program ramps as we go into the second half of the year, so I think that's -- the short answer is yes. .

Okay, and is that a material driver in Diversified growth this year?.

Yes, I mentioned it's about 6% of the total company now. And the growth rates for some of the customers that we've attracted is very encouraging, so we expect that to continue through the second half and be a major contributor to our Diversified growth in 2014. .

[Operator Instructions] Your next question comes from the line of Robert Young with Canaccord Genuity. .

I was wondering if you can talk about the 9% quarter over growth and the outlook. That's a bit better than the seasonal growth in Q2 in the past. I was wondering if you could maybe frame them. I mean the annual growth outlook you've -- in the past, you had 6% to 8% and then 3% to 5% and then below that.

I was wondering if you could frame the annual growth relative to that.

It seems like if we extrapolate 9% going forward, it could be strong growth for the year?.

Well, we don't like to get too far ahead of the headlights here, but 9% is encouraging. The visibility, as I mentioned previously, is about 90 days and the volatility is very high.

But the fundamentals, the foundation of the mix of business, the strength that we're seeing in our Diversified business, the Storage business, improved demand in the Server business, we are building a solid platform from which to grow. Outlooking exactly the growth rates for the full year at this point, I think, would be premature. .

Rob, I would just add to Craig's comments there. Just on the 9%, relative to some historical trends, certainly with the solar program push and just the softer Q1, that's helping the 9% as well. .

Okay, and then second question is on the semiconductor component. It's 6% of total revenue.

Is there any way to put a frame around what you think that can grow to eventually? Are there big deals out there to be won in 2014, or is it going to be a slow grind from here?.

Well, there are certainly significant opportunities for Celestica as we build our capacity and resource to ramp the business. I think it's consistent performance in building with the market leaders, which we have emerging and established positions today. So I don't think it's, it is a long marathon of execution, execution.

But the opportunity is there to build a very solid business, and that's our objective. .

There are no further questions at this time. I will now turn the call back over to the presenters. .

Okay. Well, I'd like to thank everybody for joining the call today. I appreciate your interest and support of Celestica, and we look forward to talking with you again in July. Thank you very much. .

And ladies and gentlemen, this concludes today's conference call. You may now disconnect..