Celestica Inc.
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

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

[Manny Panesar:]

Thank you, Tiffany. Good morning, and thank you, everyone, for joining us on Celestica's Second Quarter of 2013 Earnings Conference Call. On the call today are Craig Muhlhauser, President and Chief Executive Officer; and Darren Myers, Chief Financial Officer. This conference call will last approximately 45 minutes. Darren and Craig will provide some brief comments on the quarter, and then we will open the call for some questions and question and answers. During the Q&A session, please limit yourself to 1 question and a brief 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 involve risks and uncertainties that could cause actual outcomes and results to differ materially. We also refer you to our cautionary statements regarding forward-looking information 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 6-K, filed with the Securities and Exchange Commission, which can be accessed at sedar.com and sec.gov. During this call, we'll 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, 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 as presented by other companies, including our major North American 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 the reconciliation of the non-IFRS measures to the corresponding IFRS measures where a comparable IFRS measure exists. Unless otherwise specified, all references to dollars in this call are to U.S. dollars. I will now turn the call over to Darren Myers.

[Darren G. Myers:]

Thank you, Manny, and good morning, everyone. Celestica delivered a solid second quarter with revenue and adjusted earnings per share above our guidance range, driven primarily by stronger-than-expected demand in our communications end market. We generated strong free cash flow and increased our return on invested capital as a result of higher earnings and working capital performance. Second quarter revenue of approximately $1.5 billion increased 9% sequentially. Compared to the second quarter of 2012, revenue was down 14% primarily due to the wind down of manufacturing services for BlackBerry in the second half of 2012. Excluding revenue from BlackBerry for the second quarter of 2012, second quarter revenue increased 3%. Some additional highlights for the second quarter include

[Craig H. Muhlhauser:]

Thank you, Darren, and good morning, everyone, and thank you for joining us today. Celestica delivered a solid second quarter with strong execution, as we were able to fulfill considerable revenue upside late in the quarter particularly for our communications customers. Overall end market demand continues to vary by end market. Success of customer-specific programs and the time-to-volume of new program ramps. We have yet to see indications of significant improvements in end market demand and visibility to forecast beyond 90 days is limited. Despite this challenging economic environment, we continue to make progress in diversifying our revenue and customer base, and we're very encouraged by the number of new program wins, our win rates across all segments of the business. Bookings performance for the first half was very strong and we expect this momentum to continue as we move through the second half of this year. From an end market perspective, for the second quarter, we experienced strong demand across our customer base in communications end markets, resulting in double-digit sequential and year-over-year growth. In the third quarter, we expect communications to be relatively flat with the second quarter, however, we anticipate growth in the mid to high single-digit percentages on a year-over-year basis. This is driven by new program wins with current and new customer program ramps and with the transfer of a major program from a competitor. Within our diversified end markets, we continue to make steady progress. In the second quarter, we experienced double-digit sequential growth across all areas of the business with the exception of health care. While we had strong sequential growth in the diversified end markets, the increase was lower than expected, primarily due to weak continued demand in our semiconductor business and from several industrial customers. For the third quarter, we expect continued growth in our diversified end markets, with mid single-digit sequential growth and double-digit year-over-year growth. During our last call, I provided an update on our semiconductor business, which is currently operating below capacity as we make continued investments in our future that are negatively impacting our short-term margins with the backdrop of this weak demand environment. Although we're seeing some improvement in revenue, semiconductor demand is moving slower than we expected. We continue to make progress, booking new business with our current customers and attracting new customers, and expect the overall segment to contribute to our profitability to improve as we ramp new programs throughout 2014. Within our server end market. At the beginning of the second quarter, we had expected a negative impact of $35 million to the second quarter due to a customer decision to in-source a lower-margin assembly program. While the second quarter impact was lower than the $35 million we anticipated, the transfer will be completed in the third quarter. And as a result, we're projecting a double-digit sequential decline in our server business. We experienced sequential growth in the second quarter in our storage business with improved demand from a number of customers, and we expect sequential growth in the third quarter in the mid- to single-digit range. Within our consumer business, we experienced sequential growth in the second quarter. But as we continue to deemphasize certain programs, we are forecasting a double-digit sequential decline in the third quarter. At the beginning of this year, we projected an operating margin of 2% to 2.5% for the first half of this year. Through our transition this year, we have made steady and consistent improvement in our performance with an operating margin of 2.5% for the first quarter, 2.9% for the second quarter and we're projecting 3% at the midpoint of our guidance for the third quarter. We remain confident in our strategy. We're focused on profitable growth, continued operating margin improvements, quality and operational excellence while making the investments that are necessary to enable our customers' success. In addition with our current business model, we expect to continue to generate free cash flow, which, combined with one of the strongest balance sheets in our industry, gives us a very high degree of flexibility. We continue to be responsible stewards of our cash and cash deployments. While our current priorities for cash or investments in the business is to drive value for our current customers as well as attract and develop new customers, we will continue to take a balanced approach in deploying our cash to increase shareholder value. For the second half of this year, we continue to drive revenue growth, the successful ramping of new programs and increasing our productivity and free cash flow through disciplined cost management and inventory performance improvements. Our priorities remain to continue to create value for our customers and our shareholders by delivering unique and innovative supply chain solutions, with continuous improvements in our operating and financial performance through margin expansion, increased ROIC and consistent free cash flow generation, while continuing to make investments necessary to support our growth and return excess cash to shareholders. That concludes our prepared remarks. Tiffany, please open the call for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Amit Daryanani with RBC Capital Markets.

[Amit Daryanani:]

Just a couple of questions from you. One on the end market side. Could you just maybe talk about, on the communications side, what sort of end market dynamics are you seeing heading into the September quarter excluding the ramp you're going to have, I believe, with one of the competitive wins you've had in that space? And then on the service side, could you maybe just quantify how much headwind will you have sequentially from that program transition?

[Craig H. Muhlhauser:]

So on the communications side, Amit, second quarter was really strong based on the number of customer-specific programs. And as we look to the third quarter forecast, in part, with strength from some programs and you'll see the beginning of the impact of the ramp of competitive takeaway. And obviously, we've got some headwinds with shortfalls in other areas, but overall, communications is flat in the second quarter, which is largely based on the impact of some of the puts and takes and the mix of customers we've got. On the servers side, it's primarily the impact of Oracle and the transfer into -- for the insourcing.

[Amit Daryanani:]

I guess the -- could you maybe just quantify how much headwind, because I believe it was supposed to be $35 million in Q2, it sounds like it was less than that, and you'll see more headwind in Q3, right?

[Craig H. Muhlhauser:]

Yes, we're going to see more headwind in Q3 and it's going to be the order of $35 million or thereabouts.

[Amit Daryanani:]

Fair enough. And then just finally about -- you guys do, obviously, a great job on the capital allocation with the buybacks on a consistent basis. I'm curious what triggers you to come out with a dividend? Is this some sort of event catalyst you're looking at that would make you comfortable with the dividend policy?

[Craig H. Muhlhauser:]

I think at this point, in our transition, Amit, and certainly at this point in the industry, I think what we're looking for is more stability in our ability to predictably -- predict the demand environment and the impact once we stabilize the amount of program transfers that we're implementing at this point and then mix shift to diversified. So it's the combination of those 3 things. I think you're talking about 12- to 18-month period where we go through that, we'll assess it every year. Obviously, we want to make sure when we start to issue a dividend, we continue to issue a dividend. And it's not our confidence in our ability to generate cash, it's the investments we want to make in the future and then it's around the potential M&A opportunities that we see in front of us.

[Operator:]

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

[Sherri Scribner:]

I was just -- wanted to get a little bit more detail on the strength in the diversified end market. I know there's a lot of different pieces in there. Is it any one particular customer? And then, I think you also said in the second quarter there were some weakness on the industrial side. Hoping to get a little more detail.

[Craig H. Muhlhauser:]

As we look at the -- Sherri, the primary headwind we're facing in diversified is in the area of semiconductor. So that is really driven by 3 factors. Number one, is the weakness in the end market demand from -- back in 2011 when we acquired some of these properties. The second one is around timing and the time-to-volume of the new program ramps and the program transfers that we have underway with our current customers. And then finally, we're continuing -- not so much of the revenue side but on the margin side, we're continuing to make new -- continue to make investments in building our capacity, strengthening our capabilities and improving our network as we look to dramatically scale this over the course of the next several years. So it's those 3 headwinds primarily. On the industrial side, it's customer-specific. I mean, very, very strong bookings across the business in the first half, significantly better than a year ago. It's the materialization of those new programs that we're looking at. And then rebalancing the portfolio of customers to focus more aggressively on the leaders and outsourcing in the industries. And you'll see some of the puts and takes being us moving away from some of the smaller company customers in our portfolio to the large leaders in the outsourcing space in the diversified markets.

[Sherri Scribner:]

Okay. And I think you made some comments that the demand environment still remains challenging. Have you seen any evidence that things are picking up or do you think it's still relatively stable versus what we saw last quarter?

[Craig H. Muhlhauser:]

I think it's relatively stable from what we saw last quarter. I think what we see is customer-specific and program-specific demand, very volatile demand increases. I mean, that 13% of our revenue shift in the last quarter for the last week of the second quarter. You can sense the volatility.

[Sherri Scribner:]

Okay. Yes, that's helpful. And then on the SG&A. You guys did a good job keeping SG&A relatively flat even though revenue was up, I think, 9% sequentially. Looks like the guidance suggests maybe SG&A comes down a bit. Is that all as a result of the cost-cutting actions you've taken?

[Darren G. Myers:]

Sherri, it's Darren here. Yes, in terms of SG&A, we've continued to really focus on the cost containment, which you saw in the quarter. We also have some benefits from foreign exchange this quarter. So we do see SG&A going up slightly, as I mentioned, into the third quarter, but continue to kind of maintain at that level.

[Operator:]

Your next question comes from the line of Brian White with Topeka.

[Brian John White:]

On the communications, I'm just curious, what drove, do you think, that strength at the end of the quarter? And is it more of a networking-type product or kind of the traditional telecom?

[Craig H. Muhlhauser:]

I mean, it was really across the business. I mean, we had very strong program-specific, customer-specific demand increases and then some late customer drop in orders, if you will. And what's very, very encouraging is our ability to really react and have the flexibility to meet that demand. I mean, I think that's one of the hallmarks of Celestica. So -- but it was across a number of customers, across both networking and telecom. And obviously, it was a tremendous benefit to the quarter. And the fact we could get that revenue out in the quarter and still show the kind of margin improvement we have was just terrific.

[Brian John White:]

Okay. And semi cap, I'm just a little surprised. It seems like other companies are talking about signs of life. Do you see the signs of life and it's going to take another quarter, or you just don't see it?

[Craig H. Muhlhauser:]

No, we see it's improving. But the base that we built sort of our expectations on was back in 2011. So yes, we're seeing improving, we saw some improvement in semicon, but the message is the magnitude of the improvement and the ability for us to continue to, I'll say, improve our margin performance. It's going to be based on us moving more quickly to ramp and transfer the programs and the opportunities that we have in front of us, and balance that with the investments we're making in our capabilities. So yes, we're seeing improvement. We're anticipating continued improvement as we go through the second half and certainly into 2014. But on a relative basis, relative to where we were back in 2011, looking at a fairly bullish outlook, at least for the revenue side, we've got some ground to make up. And that will be through new program wins, competitive takeaways and obviously continuing to build out our network. And we're confident, we're confident. I just want to make sure you understand. We're confident in our ability to get there. It's just taking us a little bit longer than we anticipated based on the kinds of thoughts we had back in 2011 when we made these investments.

[Operator:]

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

[Thanos Moschopoulos:]

Craig, can you provide some color what you're seeing in the server business outside of Oracle insourcing?

[Craig H. Muhlhauser:]

Well, I mean, I think it's a very challenging market certainly for us. I mean, obviously, we play at the high end of the service business in the proprietary server space, strong -- really strong customer relationships. We serve really 3 of the top 5 companies. The message there is, as you know, our strategy is to really move our business from an EMS business in contract manufacturing, as this market largely moves to an industry-standard type of ODM-supplied white-box market. And we're being becoming very successful of finding the right opportunities to continue to enhance the margins. But very frankly, server, as a market for Celestica over the long term -- and that's very long term, is a declining market and it's a cost and cash opportunity for us and to expand our high value-added service services to defend the base of proprietary server customers in markets that we serve. So it's certainly a core market to us, but it's changing rapidly, and we're doing very well where we're choosing to participate. So kind of don't measure it so much by the revenue line, it's a large part of enhancing our ability to maintain our margin profile, as you see on the bottom line, and continue to make that a valuable contributor to our margin and our cash-flow generation.

[Thanos Moschopoulos:]

Okay. And then just to drill deeper on why your guidance for communications is flat even though you have large program ramping, does that reflect some other programs that are ramping down? Or is that just reflective of the fact that you had this big rush of demand towards the end? And just given your current visibility, you're not comfortable sort of extrapolating from that?

[Craig H. Muhlhauser:]

Well, I think -- yes, I mean, I think we had that big rush of demand. And we are -- I think I'll say, we are cautious in our guidance in terms of it's not -- we expect to be flat, so we had a big rush in demand, and we have some potential upside. But the question is, based on everything we see right now, we're being cautious. And the guidance you see is to -- which includes really the communication sector being flat.

[Operator:]

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

[Jim Suva:]

When we look at the outlook, and I think if the math is correct it's about a 1% decline sequentially for Q3 versus Q2. Traditionally, looking back -- when you take out the transition change for BlackBerry and things like that, traditionally it's not down 1% for Q3. So can you help us understand that? Is that simply because the consumer is a less-important ramp in Q3 than it has been in the past? Or is that because telecom came in stronger and maybe there's some pull-ins? Or just trying to figure out why the midpoint of Q3 actually wouldn't be profitable versus normal history.

[Darren G. Myers:]

Jim, it's Darren here. In terms of the third quarter, as Craig mentioned, communications we expect to be flat, but I do think you have to take into account on a sequential basis just the extra revenue that we delivered in second quarter. So I think that does skew you relative to kind of history within communications. I wouldn't describe anything as pull forward, but there was extra demand. So when you look at that quarter-over-quarter performance now, you see that being flat. All else being equal, if you exclude RIM, we expect to be up 3% year-over-year, so we're seeing good growth. And as Craig said, I think we're being cautious on our forecast. There's a fair amount of churn in forecast right now, so we're being cautious with our guidance.

[Jim Suva:]

Then as a follow-up on the end segment, since you've talked about major ones. But on health care, can you help us understand there a little bit what's going on that's affected that sector facing some headwind. Is it because of like ObamaCare is causing OEMs to hesitate on their orders? Or is there something else going on in the health care industry?

[Craig H. Muhlhauser:]

Jim, it's Craig. From the health care perspective, I mean, we've been very successful in booking new business. I would say I haven't seen an ObamaCare impact in terms of the opportunities that we've got in front of us. What you can really take from the changes in the Celestica portfolio is, as you know, we have a very focused strategy on the target customers that we feel are best fit with our strategy and our -- really our philosophy of quality, cost delivery, flexibility. In this case, we are remixing the portfolio, and a couple of other customers that really don't fit the long-term strategy of our health care business are moving in a different direction and therefore you see that impact impacting us, specifically, as we get the portfolio right. Backfill that with new opportunities, ramp those opportunities, health care will be an important contributor to the business as we begin to see those materialize in 2014. So again, it's us remixing the business, to get portfolio aligned with our strategy and do that with customers that we think represent the best long-term investments.

[Jim Suva:]

Okay. Then just a housekeeping question. I assume the EPS outlook does not include any repurchase, if you can just -- of shares, are you going to let me know if that's true or not? And then also any updates to your CapEx?

[Darren G. Myers:]

Jim, you're correct, our outlook does not include the buybacks. And in terms of the CapEx, we'll continue in that 1% to 1.5% range that we've historically been at. So nothing unusual there.

[Operator:]

Your next question comes from the line of Gus Papageorgiou with Scotiabank.

[Gus Papageorgiou:]

Just in the gross margin line, I think you said that the excess capacity on the semiconductor side was causing -- withholding that, the gross margins. Just wondering, can you kind of characterize that? Like, if you do get -- if you can ramp the capacity there, how much of an improvement would it be on your gross margin? And over what timeframe do you think you can kind of bring on the new business on the semi side?

[Darren G. Myers:]

Yes, Gus, Darren here. In terms of gross margin, I mean semiconductor, as we've mentioned, is bringing down the margins. But we're not going to provide the specific color. Needless to say, the capacities impact the overall margins and it is impacting diversified margins, which is below where we would like it to be. And the timing, as Craig mentioned, we're winning new programs or ramping new programs, the end market is starting to recover, but it's going to take us time to start seeing some benefits back into that. And it'll going into, frankly, 2014 for that. At the midpoint of our guidance, though, we do expect to see gross profit improvement as we go into the third quarter, we would expect 20 basis point improvement. So we're focused on just continuously making improvements as we go, as we've shown in the first half of this year and with our forecast year.

[Gus Papageorgiou:]

Do you think that once -- if you can't ramp that business, do you think getting back to kind of 7% gross margin is possible kind of like 2014 and beyond?

[Darren G. Myers:]

Yes, I mean, we're not providing guidance into 2014. But certainly, we're looking to get back to 7% as quickly as we can.

[Operator:]

Your next question comes from the line of Joseph Wittine with Longbow Research.

[Joseph Wittine:]

Just one more quick follow-up on semi cap. You said you're looking to dramatically scale the business. I was just curious, given the bookings you already have today, do you have line of sight to getting the utilization back within acceptable range, or do you need to go out and win a whole a lot more business from here?

[Craig H. Muhlhauser:]

No, given the customers and programs and wins that we are -- we have booked and we will book in the second half, we are -- we have a roadmap to get back we're we need to be to meet our expectations in semiconductor. So it's not going out and inventing something new. We know exactly where to go, where to get it, we've got the relationships, we've got the proof points. Question is, the timing of that is lagging and then the underlying end-market demand that we expect to improve in the second half and into 2014 will also support that improvement.

[Joseph Wittine:]

Okay. Great. And then, Craig, as a follow-up, I think you said bookings were strong during the quarter, which portions of your business where bookings is the strongest, I guess?

[Craig H. Muhlhauser:]

Well, I mean the good news is we had strong bookings across the entire company, frankly, and it was a very, very encouraging. So that's through the first half. And obviously, the funnels are very dramatically improving over the course of the second half and, obviously, our win rates are improving, so we're very encouraged by the outlook for the company. And we're very confident in the strategy. And obviously, we're putting numbers on the board, we're putting improvements on the board, we're moving faster than we thought we would do in the first half and we expect that to continue on the second half. So very excited here.

[Joseph Wittine:]

And if I could do one more really brief follow-up. In diversified -- congrats on hitting the nice around 25% number. How are you thinking about that business going forward just as a percentage of your mix over your mid- and long-term [indiscernible] of things?

[Craig H. Muhlhauser:]

Well, I'd say our long term is -- our planning cycle, which today is 3 years and we expect that to continue to improve over the 3-year period and improve every year.

[Operator:]

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

[Todd Coupland:]

Just a technical question on the buyback and then a couple of market questions. So with the 10% buyback, are you allowed to buy the multi voters as part of that?

[Darren G. Myers:]

No, we are not, Todd.

[Todd Coupland:]

Okay. Secondly, if IBM were to sell its server business, how do you envision that impacting your business?

[Craig H. Muhlhauser:]

Well, Todd, it's Craig. Very marginally. I mean, we are at the high end. So I mean, the good news is, we anticipated, we know exactly where we should play, where we do play. So we have the majority share and are the largest supplier in the proprietary space. So very, very little of our revenue depends on the industry standard piece.

[Todd Coupland:]

Okay. That's what I thought. And then lastly, when you think about the medium-term overall growth for your business, how should we think about that from a planning point of view? I mean, is this a business that grows at 2%, 5%, 8%? What's the potential for the mix that you have right now?

[Craig H. Muhlhauser:]

Well, I mean, I think -- I'll talk here and then I'll let Darren give you his view. But the point is from our standpoint, I mean, this is a company that will grow the combination of the top line on some, I'll say, in a low-growth environment not a fairly, I'll say, up -- relatively optimistic, so you're talking 5% to 8% on the top line, and then you're looking basically on really enhancing the margins in a much faster pace over the longer term.

[Darren G. Myers:]

Yes, I would just add. Obviously, Todd, it's going to depend on the markets and how the markets behave. And some of the industry reports we see out there would suggest 7% CAGRs in the market. But it's going to obviously depend on how the market performs and how we continue to win new business.

[Operator:]

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

[Naser Iqbal:]

Craig, just going back on the Q1 call back in April. Craig, you talked that you had an expectation that the back half was going to be due to these new program wins and ramps. Is it unfolding -- in terms for the back half, is it unfolding as you expected in terms of like all the wins you're expecting there, they're lining up as you expected, and is there any change in either like the new business wins or program declines?

[Craig H. Muhlhauser:]

Well, I mean, I think the wins are unfolding, I mean, at a pace that's slightly above where I thought we would be. Certainly at the end of the first half, we have the opportunity to convert in the second half. What is the variable in this is really the time to revenue realization. So some of the programs are unfolding at a slower rate, some of the programs are unfolding at a faster rate. And overall, the base demand is what really underpins that. And that's what we keep our eyes on. So it's the combination of the base demand. The outlooks are encouraging. You see the volatility, 13% of our revenue shift in the last week of this past quarter. And as we look forward, you see our opportunity to get back at 3.5% operating margins at a slightly lower revenues than we originally thought. And obviously, we're looking to convert faster than we have really seen in the first half on getting our semiconductor equipment business up and running and more quickly.

[Darren G. Myers:]

Yes, Naser, the only thing I would add, I mean, overall, when you look at technology, certainly that's -- I'd say, overall, people are seeing the bullishness compared to probably what they thought at the beginning of the year. So I mean, that semi compounds things from a growth perspective.

[Naser Iqbal:]

I think that's very true that in terms of a strong back half recovering, like, no one's talking about that, and everyone's talks about the demand environment getting muted. I guess my follow-up question, Darren, would be just on the free cash flow. I mean, you've historically talked about, on an annual basis, $100 million to $200 million in free cash. I think for the first half, you've got something like $65 million. So do you still feel comfortable in terms of -- that the second half working capital and everything is going to improve to get you in that range?

[Darren G. Myers:]

Yes, I mean, we do. Things obviously fluctuate quarter-to-quarter. I don't expect to see the same strength in free cash flow in the third quarter. But certainly, I feel comfortable for the year, of generating the $100 million to $200 million at this time.

[Operator:]

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

[Robert Young:]

Just a second ago you said that the -- you want to get back to 3.5% operating margins. And Todd's question about the longer-run model contemplating 5%, 8% growth. I was wondering, is the operating margin target is still 3.5% to 4%? Or is there something new in the business that suggests it'd be lower now, around 3.5%?

[Darren G. Myers:]

Good morning, Rob, Darren here. Yes, in terms of target, I mean, we're still working towards our 3.5% to 4%, and continue to focus on balancing our investments, making sure we're doing the right things for the long term. As Craig mentioned on previous calls, I've talked about, we've talked about, depending on mix and a number of factors including semiconductor hitting 3.5% at the $1.7 billion range, we do see that lower. We're performing strong. We're at 3% now. Driving good ROIC, probably in the 1650 to 1700, but it's going to depend on a number of factors. And we continue to work reduce that amount, that level, frankly.

[Robert Young:]

Okay. And one small question on the health care business. Last quarter, you'd expect to decline and it seems like that is going on -- along the line as you expected. Is it there -- is it better or worse than you'd expected? Is it a longer-term segment that you expect to do better? Or is this going to be weak for a while?

[Craig H. Muhlhauser:]

Robert, it's stable. It's where we expected. And now, we're working to accelerate our progress with a target customers that we now have on board.

[Operator:]

[Operator Instructions] Your next question comes from the line of Brian Alexander with Raymond James.

[Brian G. Alexander:]

Just a quick follow-up. How much did the end-of-quarter flurry in the communications segment openly contribute to the margin upside that you saw versus your expectations? I'm just trying to understand, given that you had significant margin upside versus your forecast, was it mostly due to that end-of-quarter revenue as maybe you cost it for a lower revenue base? And then I have a quick follow-up.

[Darren G. Myers:]

Brain, I mean, in terms of margin, I'd say the overall gross margin came in at a percent where we thought we saw good flow through on our fixed cost. And obviously, you get the leverage on the SG&A as well that drove our strong EBIAT performance.

[Brian G. Alexander:]

Okay. And then just back of the communications segment. I guess, as we've listened to all the EMS companies report this quarter, communications has done probably a little bit better than expected, but clearly not to the extent you guys saw upside. So I'm just trying to reconcile why you think you saw such a significant strength at the end of the June quarter when most of your peers didn't? Is it just a matter of customer base and maybe different end-market focus? If you could help me understand that a little better, that'll be great.

[Darren G. Myers:]

Sure. But I mean, it's the right customers with the right programs at the right time. It's just -- we're targeting business that we think is -- the areas of the market that are going to be growth markets and in these particular customers in these particular cases, we saw the impact here. And they have the specific program build-outs or opportunities with their end customers. So strong portfolio of good customers. And as we know, that can be changing quarter-to-quarter, month-to-month, and that's the challenge in the EMS industry.

[Operator:]

Your next question comes from the line of Gabriel Leung from Paradigm Capital.

[Gabriel Leung:]

Just on the acquisition front. Can you talk about what you guys are seeing right now in terms of valuation? Number one. And number two. Just sort of remind us again what you feel some of your priority areas are from an M&A perspective?

[Craig H. Muhlhauser:]

Sure. I mean, we've got basically a funnel of opportunities primarily focused in the higher technology areas of the market across the businesses, looking primarily for intellectual property or capabilities that would add value beyond the manufacturing of our products. So we're not looking to add capacity, we're looking for design-based and engineering-based building blocks and modules that can create more value than manufacturing products on a constant basis for large-scale or medium-scale companies, and that's the focus. The emphasis is in areas such -- in the diversified space. And obviously, at this time, as you can see through our NCIB, we're not in a position to really say there's anything in the immediate term that we think represents the right opportunity for Celestica. And we're continuing to work the process.

[Manny Panesar:]

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

[Operator:]

There are no further questions in queue at this time. I turn the conference back over to our presenters.

[Craig H. Muhlhauser:]

Thank you, Tiffany. And I'd like to thank everybody for joining us today. And we look forward to your continued support and interest in the company. Thank you very much.

[Darren G. Myers:]

Thank you.

[Operator:]

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