Jim Fitzpatrick - VP of Communications and IR Rob Mionis - President and CEO Darren Myers - CFO.

Amit Daryanani - RBC Capital Markets Thanos Moschopoulos - BMO Capital Markets Robert Young - Canaccord Genuity Todd Coupland - CIBC Tim Yang - Citi Gabriel Leung - Beacon Securities.

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 Third Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session.

[Operator Instructions] 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 thanks for joining us on Celestica's third 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 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 session, please limit yourself to one question and a brief follow-up. We will be available after the conference call for additional follow-up.

As well, please visit www.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 note 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 the 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 Securities Administrators, which can be accessed respectively at sec.gov and sedar.com.

During this call, we will refer to certain non-IFRS financial measures, which include adjusted gross 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 the historical non-IFRS measures to the corresponding IFRS measures where comparable IFRS measure exists.

Unless otherwise specified, all references to dollars on this call are to U.S. dollars. And I'll now turn the call over to Darren Myers..

Thank you, Jim and good morning everyone. Celestica delivered sequentially higher operating margins and return on invested capital in the third quarter, despite a challenging end market environment.

Revenue of $1.41 billion was at the lower end of our guidance range, driven by weaker than expected demand as well as the slower than expected ramp of our solar business in Asia. Third quarter revenue decreased 1% sequentially and year-over-year.

Some highlights for the third quarter include adjusted operating margin of 3.8%, improved 40 basis points sequentially. Adjusted earnings per share was $0.22. Our adjusted earnings per share was $0.30, excluding $0.08 per share income tax expense resulting from taxable foreign exchange.

Excluding this tax impact, adjusted earnings per share was just below the mid-point of our guidance. IFRS net earnings for the quarter were $11 million or $0.08 per share. We generated $13 million of free cash flow for the quarter and we achieved ROIC of 20.9%. Looking at our revenue from an end-market perspective.

Our communications end market represented 41% of total revenue for the quarter. Communications revenue increased 2% sequentially and 2% year-over-year as expected. Our diversified end markets comprised 30% of our total revenue for the quarter.

Diversified revenue increased 7% sequentially, driven primarily by new program wins in our energy, and aerospace and defense businesses. Despite our growth, diversified revenue for the quarter was lower than expected due to weaker overall demand as well as the slower than expected ramp of our solar business in Asia.

Compared with the third quarter of 2014, diversified revenue increased 2%, largely due to new program wins which was offset in part by the transition of our solar business. Let me provide some additional context about our solar business.

On our April earnings call, we highlighted a plan to transition some of the supply chain and manufacturing capacity and resources for energy business from North America to Asia as part of the global expansion of our energy offering.

This expansion into Asia which includes transitioning existing equipment as well as expanding our capacity began in the second quarter of 2015. We have experienced some delays in the equipment installation and are working diligently to ramp our operations and fulfill current demand.

We expect to grow the energy business in the fourth quarter and plan to complete the majority of the expansion by the first quarter of 2016. Moving to our storage end market. Storage revenue represented 18% of our business in the third quarter. Sequentially, storage revenue declined 9%, which was more than expected due to seasonality and lower demand.

Compared to the third quarter of 2014, our storage business was largely flat. Our server end market represented 8% of our revenue in the third quarter. Server revenue was down 13% sequentially, a higher than expected decline primarily due to the delay of the customer’s product launch.

Compared to the third quarter of 2014, server revenue declined 9% largely due to softer demand. And finally, our consumer end market representing 3% of total third quarter revenue declined 32% compared with the third quarter of 2014, largely due to our continued de-emphasis of certain lower margin business in our consumer portfolio.

Our Top 10 customers presented 68% of revenue for the third quarter consistent with the second quarter and up from 65% in the third quarter of 2014. For the third quarter, we had two customers individually contributing greater than 10% of total revenue, down from three customers in the second quarter.

Moving onto some of the other financial highlights for the quarter. Adjusted gross margin of 7.5% improved 40 basis points sequentially, in part due to improvements in our semiconductor business. Year-over-year, our gross margin was relatively flat. We continue to focus on optimizing our business and driving productivity.

We recorded $12 million of restructuring charges in the quarter, which was at the high-end of the $8 million to $12 million outlook that we provided on our last earnings call. Our adjusted operating earnings for the quarter was $53 million or 3.8% of revenue, an increase of 40 basis points sequentially.

Adjusted SG&A expense for the quarter was approximately $47 million, largely flat sequentially and compared to the third quarter of 2014. Adjusted net earnings for the third quarter were $31.4 million or $0.22.

Excluding $0.08 per share of income tax mentioned earlier, adjusted net earnings for the quarter was $43.7 million or $0.30 per share compared to $47.2 million or $0.26 per share for the same period of 2014. Let me provide some further insight with respect to our tax expense in the quarter.

Our adjusted tax rate in the third quarter was 38.5%, above our previously expected annual tax rate range of 11% to 13%. Taxes were higher than expected, primarily due to taxable foreign exchange impacts in Malaysia and China.

During the quarter, relative to the US dollar, the Malaysia currency declined in value by 18%, while the Chinese currency declined by 4%. The total currency impact represented approximately $12 million of the $19.5 million of tax expense recorded in the quarter.

Third quarter IFRS net earnings were $11 million or $0.08 per share compared to $34 million or $0.19 per share in the same period of 2014. The year-over-year reduction is largely attributable to the higher-than-expected tax expense as well as the higher restructuring charges this quarter compared to the prior period.

Return on invested capital was 20.9%, up from 19.6% last quarter. Turning to working capital performance, our inventory increased $31 million from the second quarter to $849 million at September 30. The increases in inventory were largely due to late quarter demand changes as well as inventory to support the ramping of our energy business in Asia.

Inventory turns for the quarter were 6.3, down from 6.7 last quarter and 6.8 in the third quarter of 2014. Capital expenditures for the third quarter were $15.6 million or 1.1% of revenue within our estimated range of 1% to 1.5% of revenue.

Cash cycle for the third quarter was 46 days compared to 42 days in the second quarter of 2015 driven primarily by increased inventory. For the third quarter of 2015, we generated $13 million of positive free cash flow compared to $93 million for the same period last year.

The year-over-year decline was driven by strong free cash flow generation in the third quarter of 2014 as well as increased inventory in the third quarter of 2015. Our balance sheet continues to be strong. Our cash balance was relatively flat sequentially with $496 million of cash at the end of the third quarter.

Our net cash position at September 30 is $227 million, which includes $496 million of cash, $244 million drawn on our term loan and $25 million drawn on a revolving credit facility. At the end of the third quarter, we had 143 million subordinate and multiple voting shares outstanding. Moving forward to our guidance for the fourth quarter of 2015.

For the fourth quarter, we are projecting revenue to be in the range of $1.375 billion to $1.475 billion. At the midpoint of our guidance, fourth quarter revenue is projected to increase 1% sequentially and to be flat year-over-year. At the midpoint of our guidance, we anticipate non-IFRS adjusted operating margin of approximately 3.7%.

Fourth quarter adjusted earnings are expected to range from $0.27 to $0.33 per share. Our non-IFRS SG&A expense for the fourth quarter is projected to be in the range of $47 million to $49 million. Our fourth quarter adjusted tax rate range is estimated to be 14% to 16%.

I would now like to turn the call over to Rob for some opening remarks and additional comments on the quarter, as well as on our fourth quarter outlook..

Thank you, Darren and 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 third quarter and supporting Celestica and our customers.

Along with this being my first quarterly earnings call, I want to acknowledge the outstanding leadership that Craig Muhlhauser has provided the company over the past nine plus years through his dedication and commitment to our employees, customers, suppliers, shareholder and analyst communicates.

Craig’s support and friendship during the transition period is also very much appreciated.

Since assuming the role of CEO in August, my main priority over the first two plus months has been to gain a deeper perspective on the company from both the inside and outside by meeting a number of customers, employees, suppliers and other key stakeholders in order to learn more about the challenges and opportunities in front of us.

And speaking to a number of our customers over the last several weeks, the consistent themes I am hearing from them about why they like doing business with Celestica, include our integrity, our unique customer engagement model, our focus on innovation, our expertise and high complexity and high reliability and the company’s strong execution engine, which is validated by the fact today that we are ranked Number 1 or Number 2 on 90% of our customers’ supplier performance scorecards.

Based on the calibre of the Celestica team, our reputation for operational excellence, our strong list of customers, I am excited about the opportunity to lead the company through the next phase of our evolution.

In the near term, we will continue to be focused on driving profitable growth in our targeted business areas, expanding our revenue base of higher value-added services, continuing our solid track record of operational execution and exercising disciplined cost and cash management, as well over the next number of months, we are completing an assessment of the company’s capabilities and go-to-market strategies for all of our alliance of business.

We expect to have the early phases of this exercise completed in the second quarter of 2016. Now, let me comment on our third quarter results and fourth quarter outlook. Celestica delivered sequential improvements in operating margin and return on invested capital in the third quarter, despite a relatively challenging end-market environment.

Revenues at the lower-end of our guidance was driven primarily by weak end-market demand, as well as the slower than expected ramp of our solar business in Asia. Darren provided additional perspective earlier in the call about the transition we are making within our solar business.

While we are working through the transition, we are pleased with a healthy demand from a number of our energy customers and we are optimistic about our ability to grow our energy business.

Celestica continued its track record of industry recognition in the third quarter as we were the proud recipient of Cisco’s EMS Partner of the Year Award for the second consecutive year and the fourth time in six years.

The award recognizes Celestica for demonstrating outstanding operational performance in all areas measured within Cisco’s EMS scorecard process and for showing strong support in conjunction with all supply chain operations programs and initiatives. Now, let’s move on to the fourth quarter outlook.

Our communications end-market is expected to decline in the low-single digits sequentially due to overall weaker demand. On a year-over-year basis, we expect communications revenue to be flat.

Relative to our diversified market business, we are expecting revenue to be relatively flat driven by the strength in our energy business, primarily offset with some anticipated weaknesses in semiconductor demand.

On a year-over-year basis, we expect diversified end-market increase to be in the low-double digits driven primarily by new program ramps in aerospace and energy. Our storage revenue in the fourth quarter is projected to increase in the low double-digits primarily due to seasonality.

On a year-over-year basis, storage is expected to decline in the high single-digits driven by softer demand. Our server end market is expecting a high single-digit sequential increase in the fourth quarter based on seasonality and the new program ramp.

On a year-over-year basis, server revenue is expected to decline in the mid-single-digits due to demand softness. And finally, for our consumer end market, we are expecting revenue to be relatively flat sequentially.

In summary, while we are expecting sequential revenue growth in some of our end markets, the overall demand environment across our business is mixed.

Although the markets have been challenging, we have delivered sequential operating margin and return on invested capital improvements throughout the course of the year, which is a testament to our ongoing focus on operational excellence and financial discipline.

This company is very well positioned for growth and I am excited by the opportunities in front us. We are focused on accelerating new business wins and revenue realization both in current and new customers while continuing to drive continuous improvement in the areas of quality, profitability and free cash flow generation.

That concludes our prepared remarks. Mike, please open the line for questions..

[Operator Instructions] Your first question is from Amit Daryanani with RBC Capital Markets. Your line is open..

Thanks. Good afternoon, guys. I guess two questions. One, Darren, can you just talk about the free cash flow dynamics? For the last two quarters, I guess, the combined free cash flow has been about $15 million, this quarter it seems like inventory was the driver that spiked up.

So what's going on with free cash flow? Why has it been depressed the last six months and how do you think it shakes out in the December quarter?.

Yeah, good afternoon, Amit. Free cash flow certainly has been a little bit of a challenge starting with this quarter. The late demand changes certainly have impacted our inventory balance. That's a little higher than we would have expected, but we will work our way through that and get some improvement into the fourth quarter.

The other thing just to highlight again, we spent about $50 million with investments between aerospace and defense and in solar, mostly in the second quarter, really in the second quarter, so from a full year perspective that certainly impacted us this year. We are still holding out for achieving our $100 million of free cash flow for the year.

It's going to require a lot of good things to happen in the fourth quarter, require about $65 million of free cash flow, but we are working towards that and we will make as much progress as we can..

Got it. Thank you. And then I guess, Rob, in your initial comment you talked about conducting more thorough assessment I guess of the company's capabilities as you go forward.

I am curious what sort of results do you anticipate in the few months when you are done with this? Is it -- do we rethink the revenue trajectory of the company or the end markets we are participating in or the capital allocation, just wanted to get a sense on what's the end result of this assessment and what sort of vectors are you looking at it end of this..

Amit, thanks for the question. Just a little bit of a backdrop, I've admired Celestica from the outside for quite a bit when I was leading the operations at Honeywell and it was really known for its integrity and customer serve model and operational excellence engine.

The purpose of the strategy refresh that we're doing is overall we feel that the strategy, the company is directionally correct. We are just taking a deeper dive into the specifics around that and try to figure how we accelerate the strategy along those lines to get a little bit more traction on accretive growth moving forward..

Perfect. Thank you and congrats, Rob..

Thank you very much, Amit..

Thanks, Amit..

The next question is from Thanos Moschopoulos with BMO Capital Markets..

Hi, good afternoon. Maybe starting off with the gross margins, you are about flat year-over-year despite what on the surface seems a slightly better revenue mix, can you remind us some of the near term headwinds on margins. You mentioned solar, I imagine there is bit of a drag from the ramp of the Honeywell project.

Anything else going on?.

Yeah. Hi, Thanos, Darren here. I mean, in terms of our margins I'd say overall we're pleased if you look at what we've done this year, we’ve gone from 3.1% operating margins in the first quarter to 3.4% in the second, 3.8% in the third and that the mid-7s [ph] in gross profit, that's relatively good level.

There's always things going on and you are right in terms of solar that that is impacting us on the negative side in terms of the gross margin. I'm pleased with the progress we've made with aerospace and defense second quarter, third quarter and semiconductor. So there is always lots of mix factors to this.

For the fourth quarter I'd expect it to be in similar levels than it is to the third quarter. .

Okay. And, Rob, you commented on some of Celestica strengths.

Just given your experience in the industries you have worked in, what would you say are some of the challenges that need to be overcome in order to get customers more comfortable with outsourcing to a company a like Celestica, what can Celestica do to help address those issues?.

Good question. Thank you, Thanos. Celestica excels in the high reliability, high complexity market and one of the strengths, the glaring strengths of the company is our aerospace practice.

And frankly I just think we need more feet on the ground to promote a very strong message to a broader set of customers and it's, as you know, outsourcing is very, I guess, young in that space.

So it's really convincing folks that it's the right thing to do and that we could add value and then secondly really demonstrate our capability, our world class capability in those markets and try to speed up the rate of outsourcing and adoption of a model that's very prevalent on the other side of our business..

Thanos, what I would add is, just with Rob and certainly Jack which you will see an announcement on that we announced the deeper relationship scenarios like aerospace and defense certainly will go longer way for making those customers get through those decisions to outsource faster..

Great. Thanks guys and congratulations on the new role, Rob..

Thank you, Thanos. .

The next question is from Robert Young with Canaccord Genuity..

Hi, good evening. First question I would like to ask is about the semi cap business, can we assume that it was gross margin positive in the quarter? You said that you are pleased with the improvements there. If you could just sort of give us a little more color on the status there and where it's going to go over the next couple of quarters..

Robert, we were gross margin and EBIAT positive for the quarter and the team has really done a phenomenal job of resizing that business to make it a profitable business.

Moving forward as we mentioned earlier we do see some headwinds, but the operational excellence is alive and well and we think we're in a good position to kind of weather any down cycles that we might see in the coming couple of quarters. .

Unfortunately, Rob, we don't obviously get a chance to celebrate for too long with that. It's been a pretty long journey and the team has done a great job of turning it around and being in the block, but as Rob says, a little bit of headwinds, but some of the forecast say that we will improve in the first quarter next year, but we will wait and see..

Okay.

And then Thanos mentioned the Honeywell deal, could you give us maybe an update on where that is, that management place deal here in Mississauga and is that fully ramping or like the quarter-over-quarter increase in the diversified space, is there anything we can read into by that ramp up?.

Yeah. We’ve seen now the full quarter up. So we had a pretty good quarter in the second quarter. It closed in the middle of April. So now we’ve got the full quarter. We are seeing a nice pickup there, but the base business I’d say in aerospace and defense is a little bit soft.

So that’s a little headwind as well as in industrial, but overall, we still had good sequential growth, a little bit of year-over-year growth despite the solar transition and that should all improve in the fourth quarter and hopefully beyond that..

I would also add, we just had a recent executive review with the Honeywell team and they’re quite pleased with our progress today than the seamless way the transition was handled..

The next question is from Todd Coupland with CIBC..

I’d like to ask a couple of top line questions if I could.

So firstly on the solar transition, approximately how much revenue would you have left unshipped in the quarter?.

I don’t know if we’re going to answer that one today, Todd. I mean, it was one of the -- it’s part of the reason we’re at the lower end, maybe think it’s a third to a little over a third of it. I guess I’m answering it..

A third from the midpoint?.

Yeah..

Second question, so Flex talked about a pretty strong networking segment last night, you’re up 2%, but calling it the down in the fourth quarter, are there any share shifts going on there?.

No. It’s just the regular dynamics you see account by account, everyone’s programs are happening at different pace. I mean, we’ve been winning business with our existing customers. And so I think it’s just more the ebbs and flows of programs. I mean that market overall, the comp space is still a challenging end market though.

So I can’t comment on our competitors, but certainly that’s a challenging space, I’d say overall..

Certainly that was the commentary, but new programs were delighted as the driver for growth in spite of weak end markets. Okay.

And then if I could just sort of step back from the details of Q4, as you think about 2016 and your book of business, is there an opportunity to sort of break out of this plus or minus 1% revenue in any given quarter or do you need a material change in end markets to actually drive?.

Well, let me try that. When you look at what we’ve done this year with portfolio management and the large drops you saw in consumer and those headwinds, I mean, we’re now -- as you mentioned, we’re in that flat to up or maybe down a little bit. So I think we’re much better positioned for growth.

We have new programs, as an example, solar and other wins that we’ve had in the business, but without knowing what the end markets are going to do, it’s hard for us to say with confidence, what growth will look like next year. We’re certainly targeting growth, but the end markets are going to have to behave to some extent..

The next question is from Jim Suva with Citi..

Hi. This is Tim Yang on behalf of Jim Suva. Thanks for taking the question. I guess, my question is on customer concentration. There are over two customers above 10% of revenue versus three customers last quarter.

Can you talk about which segment is that customer went from above 10% of revenue to below 10% of revenue, which segment and is it due to ramping issue from that customer or do you see the customer will no longer be above 10% of revenue going forward. Thanks..

Hi, Tim. We had two customers as you mentioned. Last quarter was three. The third customer is close to 10% this quarter, doesn’t happen to be over 10. And they would generally be in the communications enterprise space..

Got you. And just like temporary basis, maybe going back to above 10%..

Yeah. It will clearly depend in the ebbs and flows of the business and how everyone performs. I mean, the good news is we’re winning with our top customers. As Rob mentioned, we’re ranked well with our top customers and you just got the Cisco orders, another example of the acknowledgement we’re getting from our top customers.

So we’re pleased that we continue to win business with our very good customers that we have..

[Operator Instructions] The next question is from Gabriel Leung with Beacon Securities..

Thanks a lot. So I have two questions.

First, Darren, just on the tax rate, for 2016, how should we think about the adjusted tax rate range? Should we still consider 11% to 13% or is that really going to be a function of how forex plays over next year?.

Yeah. Hi, Gabriel. I’m not proposing I know how to predict forex, so I mean when that -- generally we’ve never seen a movement this big. So it’s just something that gets absorbed in the rate.

I would say that the -- we’re not giving a guidance the next year, but there is probably more pressure to the rate, not material pressure, but some pressure to the rate, probably more closer to what we’re guiding for the fourth quarter, I would say, is more appropriate.

The other thing just for the benefit of everybody, when you look at the adjustment we had under IFRS, it’s a little bit different. It includes both -- the way this works is when you revalue the assets and the local books and you have US assets, they become worth more and so in essence there is a gain.

For US GAAP, that gain would be more on a realized basis, but IFRS also has a deferred factor to that. So under IFRS, we have stuff on the balance sheet today that also attracted an adjustment..

That’s great. Thanks. And as far my second question, I guess for Rob, I’m sure this will come out post your, I guess your strategic review, but I wonder if I can get your early thoughts on how you think M&A will fit into Celestica’s growth profile over the course of the coming year.

What are you seeing out there and do you think this is the right time for you guys to be augmenting your growth with M&A?.

Yeah. Hi, Gabriel.

Yeah, I think M&A is an essential part of any growth strategy and we’ll certainly look to pull that lever as time goes forward, but we’re going to be very selective and make sure we’re very disciplined in our selection process and make sure that we offer synergies and it fills any capability gaps that we’re looking to help progress accretive growth moving forward..

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

Thank you, Mike. I’d like thank everybody on the call. I’m looking forward, clearly looking forward to leading Celestica over the next good clip of time and thank you for your support and look forward to meeting this community in the very near future..

Thank you..

This concludes today’s conference call. You may now disconnect..