Celestica Inc (CLS) 2001 Q1 法說會逐字稿

1 CELESTICA FIRST QUARTER CONFERENCE CALL

Good afternoon and thank you for joining us on Celestica's First Quarter Conference Call. Since this is a busy reporting day for you and since our results have been out since this morning, we will be very brief with our comments in order to get to the questions. Before we begin, let me express to you that any statements that are made today which are forward looking and not historical facts, may involve risk and uncertainty which could cause actual results to differ materially from those expressed in the forward looking statements. As usual, all figures are in US currency, and all per share information is on a fully diluted basis. Joining me today is Marvin MaGee, President and Chief Operating Officer, and Tony Puppi, our Chief Financial Officer. Tony will take you through our financial performance, but first, let me make some brief comments on the quarter. Celestica is pleased to announce that despite the difficulty technology environment, Celestica was able to achieve its revenue and earnings goals again. Revenue for the first quarter was $2.7 billion up 67% from the first 2 quarter last year. Adjusted earnings per share were 39 cents, up 95% from first quarter last year, and margins expanded 60 basis points compared to the first quarter last year. We are also pleased that our revenue growth for this seasonally slowest quarter continues to be driven by solid organic growth rates in excess of 50% as we continue to benefit from the diversity of our customers and markets. In the first quarter we saw growth in all geographies, in the America's revenue was up 43% to $1.2 billion. In Europe we saw revenue increase a 160% to $900 million, and Asia, finished the quarter up 39% to $215 million. Over the past few years you have heard us talk about the portfolio factor of Celestica where we believe you can never have enough diversity, diversity by customer, diversity by geography, diversity by end market, and diversity by organic and acquisition growth.

Celestica's portfolio of customers and businesses combined with the positive trends, growth forcing has been the key reasons why we have been able to continue to grow in this very challenging environment. We expanded our portfolio this quarter with the announcement of a major new manufacturing and supply relationship with Avaya Communications. The deal involves a 3 five year global supply agreement worth approximately $4 billion dollars that positioned Celestica as the Avaya's primary outsourcing partner in the area of printed circuit board and system assembly and test, repair and supply chain management through a broad range of its telecommunication products. As you saw this morning, we announced the restructuring charge through the second quarter, which will focus on some facility consolidations as well as up to 10% workforce reduction, this restructuring alliance with our strategic initiative in the areas of market expansion without disrupting our core growth engine. I will now turn it over to Tony Puppi to step you through a more detailed discussion of our financial results.

Thank you, Eugene, and good afternoon. As Eugene said, we'll be brief, so we can get to your questions. Let's begin with revenue. Revenue in the quarter was $2.7 billion, a 67% increase over the first quarter last year, and in line with our $2.6 to $2.7 billion guidance announced in January. If we eliminate the growth effects of acquisitions in the year-to-year comparison, our growth rate of 67% reflects 29% organic growth and 38% 4 acquisition growth. Sequentially, we are down 22% on the top line, largely as a result of the anticipated seasonality of our higher product end-markets and also the general economic slowdown. End-market revenue segmentation for the first quarter breaks up as follows. Servers at 32%, represents year-to-year growth of 128%. Communications came in at 34% of revenue and represented growth of 83% year to year. Storage and others represented 17% of revenue or an increase of 81% and workstations and PCs were 11% and 6% respectively. With respect to our customer concentration for the quarter our top five customers represented 67% of our total revenue. Our top ten came in at 83% with Sun and IBM, the only customers over 10%, essentially no change here. Lets move to operating margin, which I am pleased to say, continues to expand per our goals. At 3.9% our operating margin was up 60 basis points from the first quarter last year and shows the traction our margin expansion continues to have. In addition, we managed costs aggressively and rebuilt the whole margins despite a 22% sequential decline in revenues and much more to turbulence in the quarter.

By region, the margins in the America's 5 were 3.1% compared to 2.7% in the first quarter last year. European margins came in at 4.6% versus 3.6% last year, and in Asia, margins were 4.9%, down slightly from 5.1% last year. With continuing top line growth and expanding margins year over year, we continue to have faster growth on our bottom line. Adjusted net earnings or cash earnings which exclude the after tax impact of amortization of intangible assets, the integration costs related to acquisitions and other onetime charges were $87 million in the quarter, up 121% from one year ago. Cash earnings per share of the quarter on a diluted basis were 39 cents per share, up 95% year to year. Included in our results was $3.8 million onetime charge taken for restructuring some of our smaller operations. This is part of our announced restructuring, which I'll expand upon in a minute. Over to the balance sheet, I must introduce our capital management performance by discussing the significant and unprecedented turn we experienced with customer orders and forecasts during the quarter. We witnessed significant order re-sizings, re-schedules, and cancellations throughout the quarter, which adversely affected our closing inventory position by about $300 million. Thus bringing our inventory returns 6 down to 5.9 times in the quarter. Despite the sequential decline, we are confident in our ability to realize ongoing improvement in our cash psychometrics going forward, especially since we have already seen more order stability since the quarter end. Our cash position at the quarter end was $483 million, down from $884 million as of December 31, 2000.

Again, reflective of these temporary working capital management challenges and more specifically, the higher inventory position. Our $500 million in bank lines remain un-drawn. Capex spending in the quarter was $77 million and we expect total capex for the year will run at lower rates than historical, given market conditions. As Eugene highlighted, we have announced a $40 to $60 million restructuring charge to be recorded by the end of the second quarter. This provision is anticipated to cover plan consolidations and the elimination of up to 3000 jobs, on a global basis. We are taking these actions to resolve surpluses as a result of current general market conditions, and to manage more conservatively in light of visibility remaining poor. Taking these actions now, in addition to our strong ongoing cost management 7 initiatives, should keep us on track to achieve our margin expansion objectives even under a flat volume scenario. Importantly, we expect to reduced cost realize as a result of this restructuring will comfortably pay back within a one-year period, and will not affect our strategic capabilities. Let me now move to our forward guidance. Continued difficult end market conditions requires us to continue our cautious tone on forward guidance. We anticipate revenue of approximately $2.6 to $2.8 billion for the June 30th quarter, with adjusted earnings per share of between 40 cents and 42 cents. We also believe, as I alluded to earlier, that we can continue to improve both our margins and cash cycle sequentially. Looking beyond the next quarter, we believe it is prudent to limit specific guidance to one quarter at a time, consistent with the vast majority of our

customers, who believe their visibility continues to be poor. Throughout the first quarter we witnessed increased volatility, and despite more recent stability, we are not at the level of comfort yet, to take anything other than this conservative position at this time. We are in the midst of a significant end-market correction. However, we continue to feel a 8 longer term goal of $20 billion in sales by 2003 is still on track, as are our margins and return on capital objectives. I'll now turn it back to Eugene, to provide some closing comments.

Thank you Tony, as you can see from our first quarter results, Celestica is still in a growth environment, built a level of growth, is less predictable as customers don't have high levels of visibility. This does create challenges for us, but the flexible business model we have built will allow us to manage our company well in either high growth or lower growth environment. I don't want to leave you with the impression that we are too old here but our teams have lived many lives in both types of environments and have performed well in either and I expect we will do the same now. Outsourcing trends remain intact and we will be one of the beneficiaries whether it is additional organic outsourcing or acquisition related opportunity. The key message, I really view is that Celestica is one of the premier EMS companies with an excellent portfolio of costumers with exceptional long-term prospects. I can assure you that we will aggressively manage our business both long term and short term in 9 order to capitalize on those opportunities and achieve those stated goals by the year 2003, that in their final remarks, and I will now ask the operator to open up the lines for questions.

Thank you, ladies and gentlemen. If you wish to register a question for today's question and answer session, you will need to press for 1 followed by the 4 on your telephone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your polling request you may do so by pressing the 1 followed by the 3. If you are on the speakerphone, please pick up your handsets before entering your request. One moment please for your first question.

The first question is from Ellen Chae at Prudential Securities. Please proceed with your question.

Thank you. Good afternoon gentlemen. Could you just give us a little bit more color on the order stability that you saw at quarter end and then may be some detail by product category or geography will be helpful? 10

Can not break it up by geography, I would say that lot of the turbulence and reductions occurred through the first quarter, a lot of it by the middle, and towards the last four weeks the quarter started to stabilize, and the last four weeks or so have been relatively stable which we would like to believe is a positive sign, but only time will tell. Does that answer all your questions?

Sir, is that broadly speaking across a number of product categories or would you say that it was isolated and say the [_______________] sector versus networking sector.

Well, you know, it is interesting, in this environment like the lot of our key costumers are still experiencing single digit growth. It depends on the product line, it depends on the company. Certainly in the communication sector there was more of a down graft and in some cases it is flat or downward. I think our mix of about 33% in communications was a good thing versus a 50%. Our higher participation and infrastructure IT, I think helped, and we had a fairly low concentration and things like PCs, consumers, and mobile handsets, which were probably a little rougher relative to 11 the down graft.

And you also had a big pay down your accounts payable in this quarter. Could you just give some sense as to what drove that?

Well Chae, that has to do with the working capital challenges that I alluded to. You start a quarter, you build up inventories expecting a certain level of demand, as we missed significant order reschedules, but the timing difference between settling your payables and getting the inventory off the books are managed downwards in lieu of the demand equation takes some time, and that is exactly what we have experienced.

And the final question. Could you tell us what your outlook is for inventory trends as you go through the year?

Well, in this kind of markets its hard to give an outlook. We thought we did make better progress than we did in the first quarter. Unfortunately, given the volume instability and order instability we did not quite get there. I do say that given the more 12 recent stability, we should expect improving terms as we dissipate the materials for our costumers, as we manage the orderly times more aggressively and I think we will be in a better position. Exact numbers Allen, I can't tell you, but I am telling you that were very focused on improving markedly our cash cycle performance.

So we obviously want to restore ourselves to where we were in the fourth quarter and then Tony's comments apply there and through that inventory buildup, I will emphasize again that we have no risk associated that inventory, and I think that is a very important factor.

That's great. Thank you.

Your next question is from David Parish of RBC Dominion Securities, please proceed with your question.

Good afternoon , a great quarter. Can you just tell us what you expect will be the largest contributor to improve the operating margin performance over the next couple of quarters, given the economic environment and the restructuring plan that you now have in place. 13

Well, I think, it will be a combination of what we already have underway which we have had underway for a long period of time in terms of our world class manufacturing initiatives or best practices deployment etc. I think all of those factors are importance in this kind of environment to continue. I did also said that the restructuring has a very important benefit as we roll that out and it will take us few quarters to fully implement that. As I said earlier, the payback is well under 12 months. So we will get some margin expansion even in a flat volumes scenario from that. So it will be on both fronts.

Are you seeing an acceleration in the migration of business to low cost regions and does your restructuring plan , kind of, focus on consolidating some facilities in North America to favor some lower cost regions.

Marvin might want to comment on [_______________].

Okay, I think in terms of demand that we see, there continues to be a 14 balance demand from our customers in both high-cost and low-cost geography, so the trend that we used to support our customers needs in the past continue relative to the restructuring, it's balanced across our business to make sure that we continue to upgrade our production capability and facilities, but you know, it is not concentrated in one geography.

To get an idea of some of the favors and things that are in process and announced, you know, where we had, for example, 3 design labs for power. We were consolidating to two, and close the one we have in New York State. We have the repair facilities in the UK. We had three, we are consolidating to one and migrating to our newest and best design facility, so it's a very much a kind of upgrading to give us the best efficiencies, our best buildings, our best equipment and most efficient design point.

Tony, can you just talk about linearity of this past quarter and kind of what your expectations are for June?

Well, I have never seen anything like the last quarter as it was quite a roller coaster, certainly, in terms of the demand 15 equation. I think that it eventually ended up pretty consistent with the third one always been quite a bit stronger than the other two I think that's historically an element of our server, our infrastructure, and our product mix. But within there I think the bigger issue was just the order fluctuation, which we are anticipating going forward, as being a lot more stable. We hope it is a lot more stable and the linearity would be a lot better where our working capital matrix become better aligned. O0:17:50 EUGENE POLISTUK: It is just a general comment here. I think, we know we must remember we are coming from a constrained environment where I think there was a lot of extra planning in the system to compensate for the component availability. We really see an environment where most of the OEMs have really cleaned up in their demand and are sitting there with real demand, which is visible to us.

Great, thank you. Nice job.

Your next question is from H. Francois of Credit Suisse First Boston, please proceed with the question. 16

Yes, thank you. Can you talk about the forecast which you are giving for the June quarter on revenues. On the worst-case scenario, looking to be down about 3.5%, some of your competitors and even some of your costumers looking for their June quarter revenues to have a deeper sequential decline. So, I suspect that has been made up with some, perhaps, new programs that you want in a quarter. Can you give us any color on that or perhaps where some of that off-set is?

Let me comment again that not everyone is going down and not all products are going down.

Right, right.

We have a mix dependancy there. And I think our mix is got a good mix which is resulting with a fair amount of stability and we are continuing to win new business and that is all factored in there. And I think, the key point here is we are factoring and designing for a flat environment but that wouldn't necessarily be like that.

And then just lastly, can 17 you talk about still the asset acquisition opportunities out there. Are you still kind of predisposed, to be looking at asset acquisition opportunities right now, considering the economic environment that we are in right now, would you prefer to try to, kind of, clean up and consolidate what you have internally, before looking at any other asset acquisitions from the potential customers out there?

First of all there are more acquisition opportunities than we have ever seen. So there is a lot of out sourcing uptake in the down environment is happening. There are lots of things we are looking at and when we find good fits we will still be interested in making acquisitions to continue to grow our capability, grow our relationships, even while we are finessing, if you will, our capacity and our efficiency. So we are still interested.

Okay, great, thank you very much.

The next question is from Thomas Hopkins. Please proceed with your questions.

Yeah sure. A great 18 quarter, guys. Tony I just want to pick up on the margin questioning again. You did a pretty good job of explaining some of the things you guys have been doing. How long can you sustain this? And now you said even with the flat volume environment, how long would you be able to, to your estimate, one quarter, two quarters and three quarters of the gross margin up taking even a few basis points or I should be looking more at SG&A and the operating margin, and with that, where is the biggest impact from the restructuring going to come, the gross margin or the SG&A line?

Well, I think it will come in both. I think our hope is that the bigger share of it will come on the gross margin side. That is clearly where we have a bigger gap versus others, and as you know, we have been hard at work at trying to close that gap. I think it is hard for us to predict, you know, when it is all going to run out, and I do not believe it should ever run out. We'll always have things to do, but clearly we are looking beyond three quarters as clearly a road map of continuous improvement in that regard. And whether it is in SG&A or whether it is in cost or sales, we expect we will 19 attack both elements.

So just to sort of elaborate that, we are very intent for making the margin improvements that we talked about, in spite of this environment, and if the environment uptakes which we hope and believe will happen at a point in time, then we will be ideally positioned to participate in that growth, have a better cash flow. It will be just, you know, all things will line up, so it's a kind of we want our cake and eat it too.

Great, and just a quick follow-up. The Japanese outsourcing, almost daily we are hearing that situations heat up very quickly as things deteriorate there. I was on record as saying that there are some things coming in the near term. How do you see yourself position in low cost China or in Asia in general to take advantage of some of these opportunities?

Tom, Marvin might want to show how we are expanding our capability and that it will be,

I think certainly in terms, if you look at the performance in Asia, 20 then we have good track record both from an operating and financial perspective. So we have a very deep team in Asia including two facilities in China already. So, in terms of supporting Japanese customers locally, I think we have a capability there. The Japanese out-sourcing, we feel that we have good relationships, we have established our presence in Japan and developing relationships with those customers and we already have, as you know, a significant operating base with some Japanese customers already.

Okay, great. Thank you.

Just to elaborate, we see a lot of momentum building up there, and it's kind of interesting because, a lot of people want to, but by the same token, culturally it's difficult for them. Because, you know, basically they were the masters of manufacturing and it takes time to do it, but there are a lot of pent-up opportunities.

The next question is from Jerry Labowitz of Merrill Lynch. Please proceed with your question.

Yes thank you. You know 21 I am wondering, as you look at next several months and continue to see asset divestitures on the OEM side, you think we are going to see a different nature of transaction, such as, would we see asset sales without facilities, for instance?

Interesting speculation. We have seen all sorts of different opportunities. We saw a definite trend towards the prices coming down, we have seen some of our transactions have [_______________] book. We have seen a lot of places that nobody has picked up on. I think it won't get any choosier, so it's a perfect environment, demand, opportunities are up, prices are dropping and everyone is being very selective. So this is a sweet time from the point of view of asset divestitures from the OEM, and I think everyone is behaving responsibly, and I think it is going to be another dimension of how the market, the economic situation will be a catalyst for outsourcing growth.

Thank you.

The next question is from Michael Zimm with Goldman Sachs. Please proceed with your questions. 22

Yes, Good afternoon, nice job gentleman. Just wanted to touch upon the margin improvement or the margin stabilization in the March quarter relative to the sequential drop in revenue. It seems to me, just looking at the numbers, that you had a significant improvement in margin in Asia, in particular, even though you had a pretty significant sequential decline in revenue, can you just touch upon that? And I think there was a similar trend in Europe where you had a sequential drop in revenue, but you had at least a stable margin, if not a slightly better margin?

Well, just seeing contrasting, you are right in pointing out that Asia margins actually expanded with declining sales and I guess the variability of costs is at a higher point and that is clearly evident in our day to day operations in Asia and we are proud of that, and having that kind of flexibility. So clearly where we do have more variability we are seeing a better performance on a sequential basis. I think Europe also had a similar improvement quarter over quarter, despite decline sequentially, an anticipated decline 23 sequentially. So the teams were, kind of, well prepared for the seasonality factor to begin with, or used to that, and in addition to that, we were preempted in a lot of the cost management initiatives and taking a very conservative stance, at every turn we managed to defer the items that otherwise we did not have to incur, so we have managed very diligently around the world and we are very satisfied that we can continue to do that.

In the annual meeting today we commented on how we got through the quarter. It's worth emphasizing again that we positioned ourselves correctly from the point of view of not responding to all the demand that we saw, and not putting in the full expense [_______________]and taking a risk, if there was an upside and it materialized and that helped us a lot with our margins and achieving our profitability goal. We could not do that from an inventory point of view, so we obviously had to ride it out, and had the residual inventory overhang, which will be corrected as we go through the second quarter. So we have a good process, we have the high variability, and had a good mix, and we also, I think, positioned 24 ourselves correctly relative to the demand we saw, versus what we put forward and how we positioned ourselves.

And if I can just expound on that, just for another moment. The sequential decline in North America seemed to be from a revenue standpoint, and anyway, less than Europe or Asia. That is a little bit counter intuitive to what we have heard on the economic front. Can you just explain the disparity there?

Well, here again, it depends on the next [_______________] It also depends on the variability of the cost structures. So, I guess that Asia had much more variability in the cost structures to be able to affect a margin improvement, despite decline in revenue.

Were you talking specifically just on revenue or both.

Yeah, I was just referring to revenue.

Okay, I keep emphasizing there, it is an interesting environment here, it gives so much bad news. But, you know, many of our customers and 25 aggregates are growing, they are growing less than what they thought. So, for example, in the IT sector in our mix, we are getting single digit growth. In the communication sector, yes, it is either flat or in some cases down, but here again depends on the specific products scenarios you are in. So, where as you can see a broad base macro economic trend, it depends on the mix of products you have and how you are positioned, and that is why they differ, depending on the diversity you have and where your concentrations are, and we feel good that we have the right mix for this firm.

Okay, thank you.

Your next question is from Tony Boase of A.G. Edwards and sons. Please proceed with your questions.

Thanks. Just another question on margins. Do you think you could maintain your current margins without restructuring?

I think, we can. Our goal is not to maintain. Our goal is to improve.

Okay. 26

Restructuring helps us improve even if we were, you know, fall flat, volume scenario. That is where we are trying to position the company.

Also, when we look at some of your recent acquisitions including NEC, Motorola and Avaya originally revenue expectations on an annual basis for all of them combined was roughly $1.3 billion. Have those numbers changed at all?

No I do not believe they have and, as you know, we have not closed the Avaya transaction yet which we anticipate will close at the end of the second quarter or early third quarter.

Great. Thanks a lot.

Your next question is from Patrick Parr. Please proceed with your question.

Good afternoon guys. I noticed that you receivables picked up a little bit 55 days, is this the same issue as your inventory or there are any issues of being paid by some of your smaller, say emerging communication customers? 27

Overall, we do not believe that we have any material credit issues with our customers set, we manage that very closely, particularly, in these kind of environments. I would say that the linearity of demand was another ongoing factor where we had disproportionate amount of sales in the last month and a quarter, clearly has been having an effect on the ending balance. I think there might be, in some cases, a little bit of management of the receivable on customers payable streams but we believe that already looking into the cash flows into the second quarter, that it was probably more skew than anything else.

Okay.

And, just emphasizing again on the market point of view, we are very selective on the emerging accounts we pick. So, it is, you know, we are careful that way.

Yeah and then I guess to go at the margin question another way. Do you guys quote a capacity utilization number and if you do, perhaps, could you break it up for us even geographically? 28

Well, we do. We have been actually reporting overall utilization rates and, where as we were in the fourth quarter averaging about 70%, you know, I think we averaged about 50% globally, and we do not disclose any geographic performance levels on that venture.

At a growth level we were at $15 billion run rate in the fourth quarter and we are at a bottom $11+ billion run rate in the first quarter, so that gives you a good indication.

But with your plan restructurings, would that enable you with at least some modest recover in demand to get back up into that 70-75% range where you probably want to be?

Our goal is to get that number up.

Yeah. Great, thanks.

Your next question is from Scott Heritage of UBS Warburg please proceed with your questions.

Yes. Thanks. I had two 29 questions. First of all, there is obviously been a lot of talk about the component inventory situation, in particular with the big charge that Cisco is going to be taking here. Are you are seeing some of your customers, or will some of your customers actually be taking components off your hands and then if so, will that help lead to improvement in the inventory returns of the second quarter?

Well, first of all, I guess, the answer is yes, and we have sent components either to customers or to suppliers. We have canceled the orders. We do not take an inventory risk. I think that the OEMs now realize how important it is to manage the demand, very, very precisely, I think, most of the pain will shift to the component suppliers but even there we are starting to see most kind of see positive signals. For example, with Intel, giving some upbeat message in there at the very front in the supply chain and that is probably where to look for seeing enough kick in the environment.

Is it wide spread across your customer base in terms of them taking components, from you or that is limited? 30

The responsibility for the component or the liability for the components lies with our customers. If it ends up that there is an inventory overhang then we try to mitigate it by sending it back to the suppliers or we try to deploy it across other product lines for similar part numbers, but added due responsibility is with the customers and if they choose at the point of exercising the responsibility and take it back into their facilities or on their books then that is where it goes.

Okay and I had a question on the margins also. Tony you talked about a goal by the fourth quarter of getting operating margins to 5% and you are saying that your operating margin goals are still intact even with fat volumes. So, with that suggested, we saw some improvement in the business in the second half of the year that we could see margins, you know, essentially 10,20, 30 basis points above that 5% level.

Well, remember what we have already said Scott is that, you know, the 5% is clearly and always has been a very important 31 internal target. I think some of the street models that reflected our margins were at levels lower than that and of course, we always try to achieve more than what the analyst might have and what you might have in your models. So, I think it is possible that we do have a recovery, particularly as we restructured a base line here to really capitalize on any upsize in that regard. So that's where we are very very hopeful on, and I think the value creation opportunity that comes from is very significant.

Okay but even with this, I, just to make sure I am clear, even 5% still obtainable by the fourth quarter, just assuming fat volumes.

I think it is possible, we are targeting to keep it there. Recall prior models are a little bit lower than that, but it is still within realm of possibility.

Okay, thank-you.

Your next question is from Lou Miscioscia of Lehman Brothers, please proceed with your question.

Yes, you mentioned that 32 you're bidding, I guess at an all time high, for the different programs setter out there. Would you say it's actually matching your current board to box mix and can you actually also give us where we just finished our first quarter with that blend.

Board to box mix has not really changed. We're still averaging about 25% of our business on the box side, the rest being board assembly and looking at the opportunities in our funnel, it's very much painted the same way.

Okay, switching over to the balance sheet and cash flow statement, I guess [_______________]and I thought that cash flow of some operations might be positive this quarter. I think you're not willing to go too far out but do you think they will get to positive cash flow operations in the June quarter and can you also, I think you might have mention this, but just go into this in a little more detail, accounts payable I guess was paid off a lot more then I would've lot more expected especially in comparison to cash receivable, see if you can comment on that. 33

The answer to your first question is yes. I think we have enough momentum in terms of our inventory management and given the timing issues that prevail in the first quarter. We believe strongly that will be resolved or will resolve itself in the second quarter to generate a positive cash flow. I would also say that to your payable's question that I had answered that earlier and the key issue there being the timing of when we had the inventory in the first quarter settling up with our suppliers per the terms, yet not being in the position at the end of the quarter, where lies the commencer production inventories. So we expect that on all fronts whether it is the receivable front, payables front, or the inventories will be in a better position, going forward sequentially.

Okay, and final question. Some of the checks I have done to the OEMs out there. You know one of them are thinking that someone had to share this inventory pain with them. How would you describe, I guess, your conversations in going over the contracts and the inventory situation? I mean, does it get pretty contentious between the OEMs, you know, 34 your big customers out there.

Well clearly the responsibility for the inventory lies back with the OEM and as liabilities go back there, sure there are going to be items which are contentious, but it always ends up and that is where the responsibility lies.

Okay thank-you.

The bigger the amounts, the bigger the contentions obviously and so I think what is important and what customers are realizing is the importance of making sure that the demand equation is appropriately passed on to us.

Your Next question is from Keith Dunne of Celestica please proceed with your question.

Good afternoon and congratulations, we haven't heard that a terrific job in toeing the line and doing things. Couple of comments is, one, your storage markets were especially strong from what I expected. Can you give us a sense of how you would expect, if at all, the market mix to change in the second 35 quarter, or maybe you know venture, I guess, for year end, even if you don't know what the totals might look like.

Generally, I did say that we are seeing pretty buoyant market on the storage side. It seems to be the one in market segment that sagging in across many of our customers, so it is not just isolated on one particular program in that regard, so I would expect that if things continue in terms of general slow down of demand for data management continues to be there and that could pick up a point or two a share, relative to the others, but other than that we don't anticipate a significant change overall in the mix.

Follow on questions, one would be, you know, it is really obviously a lot cloudier for the whole world then it was six months ago. Is this having any impact on the OEMs ability to quickly outsource, in that, are we now looking at potentially two step processes where they have to get a grasp of their internal operations and perhaps consolidate a couple of plans before they outsource the surviving plans or is there any change in their ability to 36 outsource given the visibly has decreased.

I would say all combinations exist. So, some people will that, and other people will go right to the step. So it really is customer by customer depending on their situation, and I think, if you look at things that have been happened in last six to nine months, you will see reforms in all places.

So no net of what that all lead to, you know, as far as net and their ability to outswing, I know the desire is up, but their ability to actually execute, is that....?

I would say it is better than ever, just some of these things just takes some time. Even the process of trying to quantify what are we going to outsource, and how do we describe or how we are going to do it, how to get everybody aligned, how do we go through all of the process of that, it just takes time, but a lot of people are in the process and, I think, talking to all our competitor and they would give you a sound echo on that.

Thank you Eugene. Tony, the inventory you mentioned at $300 million potential lingered over, is that $300 million you 37 expect to go away at this quarter, or this kind of lingers for while as we all work to get inventories down.

I think that we will just focus on the absolute $300 million and what that is composed of, I did say, yeah, that $300 million should resolve itself. We are hopeful is that we don't have any more instability in the second quarter than we have seen in the first. Such that may be there would be more overhang on a different mix. But I don't think that's going to be the case at all.

We are very motivated to convert that inventory into cash that we can use for our acquisitions, effected by facilities with inventory on hand.

One last question and one data question. You know, you guys have generally been conservative, and I am not looking to change any tides that you have already given us on the second quater, but have you allowed for maybe a greater margin of air to reflect the increase, lack of visibility than the prior when you take a look at what you can do in the second quarter, now that you are trimming OEMs forecast maybe a 38 little bit more than you might have historically.

I think we are using the same level of diligence we always do, hopefully like we did this quarter, we get it right. So, I think there is no real fundamental change in our approach to that. I will say that, I think we are getting as Eugene alluded to a more pure demand statement from our customers, and I think that will improve the scenario significantly.

Just to add to that, the component environment we had in last year contributed to a lot of over planning and double planning, and it is very healthy that we see that very visibly disappearing across all our OEM customers. So that we see what they see, it is fairly open and I think that's healthy and it is working through fairly quickly.

Your next question is from Todd Coupland of CIBC World Markets, please proceed.

Yeah, Good afternoon everyone. Couple of questions, we have heard from some EMS players that there is some share shifting to the primary suppliers to OEMs, and I 39 am just wondering did you benefit from any of that, meaning, did you guys get the volumes and someone else didn't.

Not to any great extent. We think we continue to do well with all of our customers whether that's resourcing, I don't think that happened in any material way.

The only trend that we are seeing that a lot of customers are talking about aligning their business with a strongest players, the largest players. People are migrating upto the best possible partners, and I do see some shift of work from those EMS players into the top five.

So would call it chair 2 to chair 1 shift, as opposed to shift within the chair 1 players.

Yeah.

Okay, secondly we have heard a lot about volumes, but I am just wondering, are the OEMs who are going through probably more aggressive the price reductions on their products, are they coming back to you and saying you have to do your EMS services for less, 40 just talk a little bit about the pricing environment.

Well, obviously with the customers being under a lot of pressure, that is the discussion, but I did say the bulk of the improvement in pricing focuses around the material. The material is where the leverage is. Now, not only do we have material that is readily available, but I think that there is material that is a lot cheaper and prices are coming down, and there is an intense focus on how to cycle that new level of inventory or part sources into the products that enables you to get the highest possible leverage. Once again this sector does wonderful, practitioner of that, are being able to take the lowest cost and get about through this, to their end customers as fast as possible. Everyone is trying to emulate that. So, I think a lot of discussion is on, in fact I have had two in the very last very couple of days, how do we improve our supply chain, how do we integrate our supply chain in a way to move the material faster, to get those cost reduction faster, and interesting enough also to reduce the liability of the inventory potential overhang because no one wants to go through the pain of having an 41 inventory overhang or having an inventory right off like some of the OEMs have just gone through.

Okay. One final question, you talked about stability in some of the end markets, are you concerned at all, now that perhaps the United States is stabilizing that, some of the weakness we have seen in the US spreads over to Europe, are you seeing any signs along on those lines. Thanks.

We haven't seen anything pervasive spread out but we are obviously all worried and that's why, you know, we are positioning ourselves for a very conservative environment, trying to improve our margins in a conservative environment and if it does not turn out that way, you know, in the tough side we cannot be in best possible position.

Thank you and your question is from Chris Whitmore of Deutsche Bank. Please you may ask your question.

Good afternoon. Last quarter, you talked a lot about the strong customer winds in the communications space across most product categories, have you seen an 42 increase in fall out rate, over the past several weeks did you do product cancellations, etc by the OEMs.

We have actually seen our number communication customers go up. We have seen our, you know, business from a point of view of percentage of business go up a couple of points, but I also say there has been some cancellations, but in aggregate it is, I think building potential momentum, but there has been some product to cancellation, but there has also been lot of new products wins that are characterized [_______________] mixable.

Can you provide any color on customer or new program wins in other areas of your business such as storage and so forth.

We have had wins in storage, we have had wins in information technology, and we have had wins in communications, you know, and it is part of the, there is organic growth and there is a new outsourcing growth with existing customers and new customers. So it is, just would like more of it so we could have some better than a flat 43 guidance.

Great. Thank you.

Your next question is from Shelby Fleck of Morgan Stanley, please proceed with your question.

Thank you. Tony or Eugene, could you give us a number of how much the Motorola asset acquisition contributed to revenues in the quarter and also back on the restructuring, have you disclosed how many sites you plan on closing.

In terms of the Motorola contribution, I believe, was only about $20 million in the quarter depending on the timing, and it depends obviously on the timing when we closed. In terms of side impacts or facility impacts, we are assessing various alternatives at this point in time.

Alright, thanks.

Your next question is from Alexander Blanton of Ingalls and Snyder please proceed with your question.

Yes, Ingalls and 44 Snyder, I, going back to the question of the inventory, can you give us a better idea of how much inventory you have already, say, put back to OEM customers and how much you would expect will be going back to them this quarter, I mean that's inventory is going to be turned into cash and that they will have to write off, can you give an idea of how, the magnitude that is.

The majority of that went back to our suppliers, so I think that is probably best way to clarify. There was some that was assumed by the OEMs but most of them went back to suppliers and they are netting out and that's why I think it is very important for you to monitor what is happening at the component level, because I think that will tell you when the things flushes through.

So, you delivered it back to suppliers.

We have very large, we do a very large amount of procurement and we have flexible arrangements and then the OEMs had to pay them for, and, is that's the way we worked?

There are lead times, 45 cancellation lead times that we got to either, well it is a combination of both.

Yeah. What about your work in process, is there any significant amount of that that was made out to lead by order cancellations that will now have to be purchased by OEMs then written off.

No.

No. Okay. Thank you.

Welcome.

Your next question is from John McManus of Needham and company. Please proceed with your question.

Yes, could you tell us how much inventory came with the acquisitions in the first quarter primarily in Motorola and how much inventory do you anticipate coming from Avaya in the second and the third quarters.

I think the number on the Motorola was about $30 millions of inventory and if I recall correctly the Avaya in that is still to be determined per the closing, but by the time we close all the transactions, I think the number was between and 100 to 149 million, in that zone. 46

Could you enlighten us on what is driving the European margins higher? ENDS ABRUPTLY