Celestica’s turnaround story

By Mark Zetter

Celestica CEO Craig Mulhauser has repeatedly been saying he believes the EMS company's turnaround story is on track.

Last quarter, earnings margin before the deduction of interest, tax and amortization expenses (EBITA) was 2.9%. Celestica's EBITA margin is expected to increase to 3% to 3.5% in the second half of 2009. Mulhauser's goal for 2010 is 4%.

Provided EMS revenue growth picks up in the second half of 2009, a 4% EBITDA margin might be doable as long as Celestica can grab some of that revenue growth.

Celestica has a strong balance sheet with more than $1 billion in cash and almost $600 million of debt. In February of this year, the Company bought back $150 million of its 7.875% debt.

Looking at liability in more detail, Celestica has also indicated it could reduce inventories by $200 million to $300 million in the coming quarters because the Company can carry less finished goods now that it is connected to its 700+ suppliers in real-time. This could also help Celestica to increase inventory turns to 8x or 9x from 7x in Q1. Since the materials cost of good sold (MCOGs) can be 75% to 80% (even higher) for product built, going from 7x to 9x is something to trumpet.

Celestica's labors have also contributed to winning the fruits of additional business with Research In Motion (RIM). The Company first started working with RIM by doing warranty and repair but then expanded its roll into a more complete offering including manufacturing and fulfillment.

What's changed?
Since Mulhauser took over the CEO reigns more than 2 years ago, he has been relentlessly focused on improving operational efficiency to drive up EBITA margin. Successes to date have been driven by focusing on higher margin activities, turning the losses in Mexico and Europe to profits, and the latest round of restructuring. At the beginning of his journey, the company's EBITA margin was around 1.5%. Comparing Celestica today with then -- not bad.

So far, Mr. Mulhauser has made good on his goal toward expanding EBITA margin. Meanwhile, even as the economy weakened and Celestica revenues came under pressure last quarter the Company responded to concerns of focusing on EBITA margin in spite of a 24% year-on-year decline in revenue. (See: Flextronics' 28% year-on-year revenue decline)

Celestica has said the Company is still targeting 3% to 3.5% EBITA margin for the last two quarters of the year.

Other good news

7.6% recent gross margin (highest in the Company's 10-year public history).
Positive free cash flow.
16.9% ROIC (up from 10.5% a year ago)

VentureOutsource.com, June 2009

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