Celestica Inc (CLS) 2001 Q2 法說會逐字稿

Ladies and Gentlemen thank you for standing by and welcome to Celestica Incorporated second quarter 2001 financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards you will be invited to participate in the question and answer session. At that time, if you have a question you will need to press the 1 followed by the 4 on your telephone. As a remainder, this conference call is been recorded today Wednesday July 18, 2001. I would now like to turn the conference call over to Mr. Eugene V. Polistuk Chairman and Chief Executive Officer with Celestica Incorporated. Please go ahead sir.

Good afternoon and thank you for joining us on Celestica second quarter conference call. I know earnings season is very busy for all of you, so we are going to keep our comments brief in order to provide plenty of time for your questions. Before we begin, let me express to you statements that are made today, which may be forward-looking and not historical fact and may involve risks and uncertainties which can cause actual results to differ materially from those expressed in the forward-looking statement. Joining me today is J. Marvin Magee President and Chief Operating Officer and Anthony P. Puppi our Chief Financial Officer. Tony will take you through our financial performance, but first let me make some brief comments on the quarter. We are pleased to report that despite the current economic environment, Celestica had revenue in the second quarter of $2.7 billion, up 27% from the second quarter last year. Adjusted earnings per share were $0.41 cents up 37% from Q2 last year, and margins expanded 50 basis point to 4% compared to 3.5% last year. This performance is inline with our previously provided guidance for the second quarter, which was provided when we released our first quarter results. The current business environment has remained challenging for all of us and in fact for all the technology related companies. However, the second quarter results have been extremely busy ones for Celestica on the acquisition front. In the quarter, we announced our closed transactions that bring to Celestica key new geographies, capabilities, and customer relationships that strengthen our position as we move forward. On the OEM divestiture front, we began integrating in our wire acquisition and we announced and enclosed our [Seagam] acquisition. These two acquisitions will add over $800 million in annual revenue as well as support many of our strategic initiatives. These include expanding the customer base with two new customers where Celestica is positioned as the primary EMS provider broadening our communication portfolio in term of end market and heading to our footprint.

We also participated in the ongoing consolidation of the EMS industry with the announcements of definitive agreements to require Omni Industries and Primetech Electronics. These two companies offer numerous advantages to Celestica including broadening our customer relationships and in the case of Omni significantly adding to our Asian infrastructure and bandwidth. These two acquisitions were closed later this year and are expected to add over $1.5 billion in annual revenue. Cost management also continued to be a key focus in the quarter, as we began implementing some of our restructuring initiatives. This included a previously announced head count and capacity reductions primarily in the Americas. We have also decided to further expand these cost cutting initiatives and we will be taking an additional $30-$40 million charge in the third quarter to further reduce head count and further optimize our global capacity. I will now turn it over to Anthony P. Puppi to step you through a more detailed discussion of our financial results in the second quarter.

Thanks Eugene and good afternoon. Let us begin with revenue. Revenue in the quarter was $2.7 billion, a 27% increase over the second quarter of last year and inline with our $2.6 to $2.8 billion guidance announced in April. Acquisitions accounted for most of the year-to-year growth with small gains organically due to the severe end market environment. End market revenue segmentation for the second quarter breaks out as follows. Service at 33%, communications came in at 32% of revenue, storage and others represented 18% of revenue, and workstations and PC were 12% and 5% respectively. With respect to our customer concentration for the quarter, our top five customers represented 63% of our total revenue down slightly from the 67% in the first quarter. Our top ten came in at 83% with Sun and IBM the only customers are over 10%, essentially no change here. Let us move to operating margin, which I am pleased to say expanded 10-basis point from the first quarter of this year to 4%, despite a flat revenue in environment and was up 50 basis points from the second quarter last year. By regions the margins in the Americas were 3.2% compared to 2.8% in the second quarter last year, European margins came in at 4.8% versus 4.2% last year, and in Asia margins were 5.1% compared to 4.2% last year. The bottom line also showed continued improvement. Adjusted net earnings or cash earnings, which exclude the aftertax impact of amortization of intangible assets ... integration costs related to acquisitions and other one-time charges were $93.1 million in the quarter up 46% from one year ago. Cash earnings per share for the quarter on a diluted basis were $0.41 up 37% year to year. The earning per share increase was driven by higher revenue, improved margins, and a lower tax rate. The companies tax rate on a GAAP basis also dropped in the second quarter from 24%, which was our number in the first quarter to 17%. And this contributed about $0.2 earnings per share in the quarter due to the higher mix of business and lower tax geographies. We see this tax rate as sustainable for the foreseeable future.

In the quarter, we took up $53 million charge for restructuring activities. These charges include about $20 million in severance costs with the balance in facility consolidation and surplus equipment disposal costs. Cumulatively, today our head count has been reduced by just over 10% before adding in acquisitions. Over to the balance sheet. We are very pleased that in the second quarter, inventory decreased by more than $200 million with turns improving to over 6.1 times from 5.9 times last quarter. Meanwhile, average accounts receivable in sales outstanding were down by two days compared to the first quarter. This was accomplished despite the continued [order churn] and a lack of linearity in business flows in the quarter. In addition, we had positive cash flow from operations of $212 million and ended the quarter with $1.3 billion in cash. Our bank facilities are $550 million also remain un-drawn. Capital expenditure spending was $59 million down from $77 million in the first quarter. Additionally, the acquisition costs amounted to $82 million in the quarter. On restructuring, as Eugene highlighted, we have decided to expand our current restructuring activities by an additional $30-$40 million to be recorded by the end of the third quarter. We are taking further actions in staffing and capacity reductions as a result of continued end market weakness and continued lack of visibility by our customers. Again, we will make these adjustments without impacting our core growth engine while comfortably paying back such charges within a one-year period. Let me now move to our forward guidance.

Continued difficult end market conditions and lack of customer forward visibility requires us to continue our very cautious view on forward guidance. We anticipate revenues of approximately $2.2 billion to $2.5 billion for the September 30, 2001 quarter; about a 10% sequential decline at the average. We are expecting adjusted earnings per share between $0.27 and $0.35 per share for the third quarter on the back of our operating margins expected between 3.2% and 3.7% and these margin declines commensurate with the reduced revenue range. We are very pleased with our restructuring progress today and we expect to be back on track in terms of our margin expansion as revenue stabilizes. We expect to be even in a better position with a restored growth in end markets. I will now turn it back to Eugene to provide the closing remarks.

Thank you Tony. Despite the challenges of today's current market place, we are pleased with our second quarter results as they reflect the organizational stability to adapt, which in the second quarter translated into many items. One [meeting] guidance for the 12th consecutive quarter, two reducing inventory by more that $200 million and improving inventory returns, three generating significant positive cash flow from operation, maintaining a very strong balance sheet, participating in new customer wins through OEM divestitures and organically and announcing the future acquisition of two excellent EMS company that will better position us for the significant opportunities that lie ahead of us. In the short run, we do expect end markets to remain uncertain and as a result are maintaining a very cautious approach to near term guidance while being more aggressive in aligning our cost base for this environment. However, we continue to be very optimistic on our future as out sourcing continues to grow. Because of out sourcing, our OEM customers are stronger today and the EMS model allows them to concentrate their resources on the other critical aspects of their business without sacrificing any of the responsiveness, flexibility, or quality of their manufacturing operations. In fact in nearly all cases significantly improving on it. It is this type of competitive advantage that continues to support our positive long-term outlook for the EMS industry even in this current environment. I have often talked about the five ways of out sourcing namely North American IT, North American communications being way two, Europe being way three, Japan being way 4 and sort of going to the full virtual model where the customers ... basically the OEMs go right out of the manufacturing all together as being way five. Today, we see the all five ways active and we see significant opportunities in all those places. We believe that with the base of activity that is going on and what we are seeing in the strategy that our customers are sharing with us this supports the industry analyst projection of an EMS market growing over $200 billion in the next five to six years. That being both through organic ... significant organic growth and also through more divestitures. This all supports [final] goals that we have set for Celestica. Now, that ends our formal remarks and I would like to ask the operator to open up the lines for questions.

Ladies and gentleman if you wish to register a question, please press the 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 with polling request, you may do so by pressing the 1 followed by the 3. If you are on a speakerphone, please pick up the handset before entering your request. Your first question is from David Parrish of Dain Rauscher Wessels. Please proceed.

Yeah Good Evening. Could you just comment on the current outlook for Omni given the deterioration in the overseas market and whether 34% top and bottom line growth on that business for this year is still appropriate?

We still believe that all of that guidance that the Omni Management Team and that we expressed in our call when we announced that acquisitions are intact.

Okay. Can you give us a sense as to the timetable for facility closures ... as and how quickly will you be able to see the cost benefit from that?

I think we are already starting to see the cost benefit in the quarter. We announced we will see more of it in the third quarter and I expect that by the end of the end of the first quarter, we will have implemented the lion share of the restructuring.

Okay as far as security closures go ... is that going to start to take shape over the next couple of quarters where we hear announcements about which facilities you are closing etc.

We will be taking various forms of restructuring and we will be announcing as appropriate.

You had about a $200 million inventory reduction in the quarter ... what portion of that, if any, was related to push backs back to the OEM.

I think we continued to manage our inventory across all fronts, but the decline in inventory is a cumulative result of managing our supply chain.

Okay. Lastly can you talk about order trends over the last several weeks relative to what you saw in June?

Relative to the order trend, we are trying to reflect some of that in our outlook, but we are seeing some customers with some increases. You have to look at all the customers differently. Some are straining to increase, some are flat, and some are getting decreases. So, across the board and even in a any given OEM it depends on the particular products. So, I don't know how to ...

Overall would you say it has been worst over the last three weeks than it was in the month of June?

Obviously, in total composite our revenue projection shows a sequential drop. But we do not see what I call significant downward swings, the biggest event that occurred was in the first quarter and it was more residual.

So, does that end your question sir?

Yes it does. Thank you.

Your question is from Ellen Chae of Prudential Securities. Please proceed with your question.

Good afternoon. Could you step back a little bit and tell which industry segments and geographies you are most concerned about in order to take your outlook down sequentially in such a sharp manner. Secondly, could you tell us if you expect to see a similar kind of inventory reduction in the next quarter as well?

We will probably ... also where we want to be an inventory by another couple of $100 million ... we expect to continue to work that down and work towards the kind of inventory levels turnovers that we had in the past. What is your previous question I am sorry I forgot.

I just wanted to get a sense of which industry segments and geographies in particular are you mostly concerned about going into the September quarter and just kind of what drove the sequential expectation to drop so much for the September quarter?

Well the job is primarily ... we all know that the communications sector has been very hard hit and certainly on the career side on the communications sector we continued to see that. I think we are starting to some dreadful effects in the IT side in terms of forward looking and in terms of geography, we are starting to see some [contingent] impacts potentially [contingent] impacts in Europe.

Great thank you.

The next question is from Lou Miscioscia of Lehman Brothers. Please proceed with your questions. Ms. Lou Miscioscia your line is open. We will proceed with the next question. The next question is from Jerry Labowitz of Merrill Lynch.

Can you tell us when you look at the quarterly results, if you go on a month-to-month basis, other than the comment you just made Tony about Europe so slowing ... was there any other trend that you saw in the quarter that you got to share with us on a month-to-month basis. Did certain things start to show some more life or certain areas started to weaken further?

I think we had a confluence of things happening. I think, overall, the trends that we saw within the quarter in terms of the patterns were sitting over to the kind of churn we experienced in the first quarter and continue to provide challenge in terms of working capital management, which I think we did a very very solid job on. In terms of the kind of momentum into the business and into the third quarter, we are talking about providing conservative guidance here and a drop of that on average is 10% and as you know we expect [_____] with a mix of business that has a higher seasonal factor going into the fourth quarter, So none of those trends I think were different and/or unexpected from our perspective at the latter part of the quarter versus earlier in the quarter.

Tony, what do you think from the end of the quarter from the capacity utilization point of view versus what you worked into the quarter.

Generally, we are going to add about half of our available capacity and it is very, very well distributed so that is the level we are at currently.

What was that a quarter ago?

It has been very stable.

Okay. Thank you.

Just another comment in here ... like we are talking about normally 10% and I don't clarify it. We don't see any catastrophic amounts of sector dropping it is just sort of across the board and we are taking a very conservative position and I would say it has been relatively steady through the quarter and what we are not seeing ... the only think that is very definitive is that we are not seeing the recovery that is probably the definitive thing that we are not seeing at this time. We see some positive structures here and there, but nothing pervasive. So, there is an underlying in here of some sector having a massive hit or something like that ... it is just sort of nominally flat with a conservative bands on our part as we watch our various competitors a and customer go through their [ranks]. We have interpreted that we should be fairly conservative in that kind of environment versus some massive supplies or down tilt or run rate drop off rate, and I think in fact it has been relatively steady through the second quarter, and it looks relatively steady going into the third quarter. The only time we had that sort of big jolt was in the middle of the first quarter. So, I don't know how people are reading what we are saying ... it shifts sort of in terms of thinking in terms of very conservative positioning about 10% sequentially, and we only talking about that in the third quarter.

Thank you.

Your next question is from Tony Boase of A. G. Edwards and Sons. Please proceed.

Thank you. Not to be the dead horse, but how much of the decline in the September quarter can you attribute to seasonal forces, and what about lower expectations from acquisitions perhaps dropping your third quarter guidance.

On the acquisition front, I do not believe at all that our view of the acquisition revenue flows is any less than we thought. There is always a seasonal factor and clearly the timing differential between the outsourcing and the end market situation continues to be lag and we are hopefully waiting for the recovery as we go forward. So, nothing extraordinary ... some seasonality.

Are you surprised at all that you have not seen increased out sourcing in the acquisition you have announced and that should start to hit set the declines in the year current customer programs or more?

Can you elaborate on that Tony just a little bit?

I guess I just mean I think some people ... myself included would have expected more in the way of in house production being out sourced now that would have offset your current programs that are declining ...

Yeah, in terms of just the momentum of those programs coming out remember what our customers are facing as well. The impacts that they are facing are more pronounced than the once we are and that there is some natural timing differential between when they feel comfortable and when they want to release some of those programs to us. We are all talking to them. There is certainly that intent, but in terms of lesser variant and short-term evils, you know, there is a cleaning factor to the current workload that as you know it is very difficult to switch suppliers in the short term.

We are [waiting our] organic business it is just meeting out with the end market graph and so that is the part that is invisible in looking at all of this.

Two last questions. On are you surprised at the timing and the second is when does Avaya officially close. I mean are you not surprised that they are being a little bit fast ... a little bit more proactive in out sourcing given that there are also under pressure for return on investor capital goals and ...

There is a lot of activity and there is a lot of acquisition related opportunities that are all time high and probably higher than any quarter that I have seen and relative to organic out sourcing we are seeing a lot of discussions and probably at a unprecedented business level, although the lot of OEMs are distracted with what they are trying to deal with and it takes time for some of those things to get materialized. There is definitely not what I call an instantaneous event. The first event is the end market drop ... it takes a bit of time before you have organic out sourcing and it takes a bit longer to have divestiture out sourcing. You asked the question earlier about seasonality ... we would probably look at the third quarter as probably a typically weaker quarter. We would look at the fourth quarter as typically the stronger quarter and we talked about that in the past to answer that question.

In terms of the Avaya transactions, it is closing in phases. We have closed one piece of it ... it is a very small portion of the transaction in the quarter, but the lion share will come in the early part of the third quarter.

Thanks very much.

Your question is from Mark Lucey of T. D New Crest Securities. Please proceed with your question.

Good evening. I just wanted to ask you a big [picture] question in terms of strategic outlook given the announced merger of [Semina] and SCI ... what are your thoughts with respect to especially as it relates to what Eugene was referring to as way 5 as the necessity of having both the capabilities of enclosures and mechanical combined that with of PCBA especially as it relates to any kind of element of a vertical strategy.

It is the episode of un-layer as how this verticals that include components such as bare boards or PCBs or individual discrete components as semiconductors and something like that. I do not think that I any way relevant or important necessarily for way 5. I think the enclosure area is something that is more important and I think [closely] enough inside the last week we had probably about $350 million of enclosure business already inside our business. The enclosure business, if you dissect the enclosure manufactures, have two pieces to it typically, and then some associated services. One is the metal frame the metal bending that everyone refers to and two it is the population or initial assembly operation we are adding in cables, power, control panels and various other items prior to putting in the PCAs. If you look at your typical company that is in the enclosure side, typically more than half of their business is populating the frame to various degrees. That portion we do and as I said we have in excess of $350 million. What we do not do is the metal frame and that one continues to be of some debate within the industry. Within the top five players, you will find some people who feel strongly and that is totally unnecessary and we have some people in our space that are saying it is necessary and that is the debate that will get sorted out in the market place this week as we go forward and we continually evaluate.

And where would you paint the picture whether you are in that debate ... at one end or the other or squarely in the middle.

Actually we are sitting squarely in the middle because we started off half way there with the kind of capability we have and it is the case of not getting into enclosures ... it is the case of offering the full spectrum of enclosure business.

Can I ask a question for Tony ... what was the depreciation of fixed assets in the quarter?

I will just back to you. So we will just look it up while we take further questions.

Okay Thanks Tony.

Your next question is from Michael Morris of Salomon Smith Barney. Please proceed with your question.

Yes thanks good afternoon. I am curious about the range of your outlook for the third quarter it is not as tight as your outlook for the second quarter was. I am wondering if that means anything if that connoting up a lower degree of certainty on the part of your own customers in the terms of their ability to forecast the business or if it may imply something about pricing pressures. I am just curious about your response to that?

Partly probably driven by being very cautious folks and not made a [_____] revising our outlooks.

It is nothing like that. I think the range is reflected by the end market. So, someone asked earlier ... we have had a surprise in the timing and we all wish that we had a better end market visibility and use from our customers and unfortunately we cannot say that. So, there is nothing that says we are hitting at the lower end or anything like that and that is not at all the case.

In terms of then the level of pricing pressures are you seeing any abnormal pricing pressure, I guess, that may be the best way to frame the question.

Not abnormal.

Your goals for the $20 billion in sales and above industry average operating margins in 2003, do you still feel that those are on track?

We do and we are committed to them. Obviously, we are in the ramp of getting a little bit higher ... it is a little bit more challenging, but that is what we feel we have to go and as we have often said in the past, any of these long term goals we have put in place we have delivered in all of them and that is our mentality on this one.

Thanks very much.

The next question is from [Alex Blandin] of [Ingleton Snyder. Please proceed with your question.

Eugene, I have read something recently that you have proposed that the reason that the new out sourcing programs that are in the pipeline and there are a lot of them are taking longer than some investors would like and this is because with the end market not growing or down ... what is being talked about is the existing production and not the closing production, which involves the closing of plants or the sale of plants in large amounts, which tells you that these are very large and complex programs and they are taking longer than expected. So to me, it is not surprise that this is happening. Could you comment on that ... is that the way you see it or so?

I think there is also some ... I think there is a lot of [_____] in that because certainly the size of some of the transactions that we are seeing, the opportunity that we are seeing are quite big a 1$ billion a year $2 billion a year and we saw one $3 billion a year and this further reinforces the subsidy for scale and the propensities for the growth to be moving to the top three or four players. When the transactions tend to be bigger like that, typically they are more complexed and take longer to do. So, that is a part of it. The other part of it is as OEMs tried to decide what to out source and what order sometimes they are finding they decide to do part of our product exam A and B and if something is doing very poorly in the market, then they regrouped and said no we are going to move out C and D and that sometimes is taking up time. In other words, how they are doing in the market place and what they are going to out source this change in dynamically.

Following along on that, you have noticed that streets estimates calendar 2002 and for fiscal 2002 have plummeted, and in some case are actually below for some companies than what is expected for this year. It is pretty obvious that these estimates do not have much of this new business from the pipeline included and no recovery in the end market assumed as well. Yet, we all know that there are going to be a large amounts of new business negotiated in the next few months and added to sales for the industry for calendar 2002. Don't you find it frustrating that analyst's are not taking that into account and also, is there a temptation on your part to take them into account ... you have not given them any guidance for next year, and so you have yourself not included any of this new business ...

That is true. And making to the comment relative to including, but we think will be significant new businesses out sourcing potentially with some divestitures and plants. I think the only prudent planning forecasting methodology is not to include it until it is done. And history has shown anyone that starts to try to guess what is going to close, creates a very difficult planning environment. So, we basically forecast without acquisitions and we lay in or tell you or give guidance or do whatever once things close and to do sort of a random guessing of what is going to close and what is not going to close, I do not think would be productive environment. Now, individual analysts who want the fact and I guess it is up to them if they want to do that and I would say that will be very difficult to figure who is going to win and how much and where.

But in the aggregate there will be a substantial increase and ...

In the aggregate, we are absolutely totally certain that it will be more than what is in there because that typically is not reflected in ours or in our competitors.

Finally, would you comment if you can on the story that ran a few weeks ago about the Lucent business that those who supposed to have knowledge of the situation said that you were negotiating with the Lucent and will close the deal in the next few weeks with $600-$900 million, I think, that is the story in the last return.

There are so many stories on these days and ...

We do not comment on any speculation.

Thank you very much.

Just to answer a question that Mark Lucey asked the depreciation of the fixed assets in the first quarter was $43 million.

Your next question comes from Scott Heritage of UBS Warburg. Please proceed.

Just a couple of questions. First of all Tony, on the operating margins, you have advised for the third quarter, you know, the past three quarters or the couple of quarters or anyway with the weak revenues you have been able to keep the operating margins keep hanging in there pretty well. You know you just took some restructuring charges in this quarter and you are going to take some more in the next quarter ... can you comment on the drop and your operating margins guidance next quarter. Are you guys just getting to the point where you don't want to take out too much capacity?

That is a very valid point and we could go deeper, but again we might be compromising the growth engine as we look forward, So, clearly though it would also take some time to get the benefit of the restructuring that we have taken and even though we have announced $57 million in restructuring charges today those are announcements in some cases the actions that we have announced take place going forward. So, we do not have a full effect of that. When you do guide top line that is on an average and that the average is declining by 10% and as you know, the economic model of this industry, it is very difficult to maintain a level of margins. Our view given the margin expansion initiatives is we are still on track on those ... if that, you know, flat revenue scenario, we could improve margins and actually that is exactly what happened in the quarter and so as revenue stabilizes growing forward, as we have some seasonal impacts, but beyond that third quarter we expect a good release on margins and back on track to the path we want.

Okay. Just one another quick question on Avaya and if I understand it correctly ... that business initially will start out on a consignment basis is that correct and we saw, I mean, from the revenue standpoint that is going to have a fairly ... is that correct that it will have a fairly minimal impact on the revenues and the goal?

We should have good impact that hit the books early in the third quarter.

Okay, so that is $800 million a year piece of business or may be was and we could expect something over a $100 million in the quarter from the buying.

Yeah, we have very good expectations.

Okay Thank you.

Your next question is from Michael Zimm of Goldman Sachs. Please proceed.

Good Afternoon gentleman. I was wondering Tony if you could just maybe outline the top three or four things on your hit list once you close on Omni in terms of the integration process. Are you still in track to close that at the early part of the fourth quarter?

Yes we are still on track and you know there are regulatory approvals to do and that is clearly why the [statistics] are taking a long time and why we have scheduled the closing in that time frame. But in terms of integration activities, it is our standard list ... in terms of insuring we have one face of our customers insuring that we have in line supply chain and insuring that we are optimizing as best as we can our systems, which by way were on the same platform, and so we do not have hell of a lot to do in that regard as early as possible as we can. So, we do not expect there to be a lot but those are the usual hit lists to focus at.

In terms of elaborating as we do when we evaluate acquisitions looking at the use of integration is always something that we highlight. In fact, we both have had flat platforms that was very attractive, culturally similar IT structures ... this was all very, very much a low risk standard process for us, that starts once we close.

Eugene, there is just something that crossed the news wires just as the conference call was starting. Evidently some of sort of telephone interview with you about ... where you were indicating that you do see some signs of recovery, could you just elaborate on that a little bit, I mean, it did not sound from your prior comments on this call that you really had a whole lot of visibility on that.

I think what I was referring to in the interview is that we are seeing sporadic signs of positive indicators. We are not seeing a grand turn around and that was the spirit of what the comment is and you know I could list ... I cannot do it by customer but in many customers case I can have positive indicators like inventory that have gone away, channels that are cleared up, people that are putting now increases to where they where, better behavior relative to supply chain management ... a lot of I think positive indicators that were in an environment where, I think, some of the negative things that can be overstated, but it is not enough of it to be across the board, but it is positive.

Okay great thank you.

Your next question comes from Roger Norberg of J. P. Morgan. Please proceed with your question.

Good afternoon and just a couple of very quick things. Earlier in the year, it became known that you are going to give up a decent amount of your segment in PC finished, built, and ordered business with HP ... has that still been impact full in the second quarter or it is ramping down in the third quarter or is that pretty much already gone away.

It was not that significant. It was not a big piece of our business and it is impacting the third quarter.

Okay and secondly a couple of your larger server customers have been very active this year in new product role outs. Can you give us any sense in terms of the ramp up phase of new programs, which are larger server customers, are most of those already occurred or are there other things still in the cycle for the second half of the year that would not have been material yet and may be ramping fast in the second half of the year.

This is going to sound like channel checking. There is a lot of activity with a lot of our customers. I think I might get a little specific with the customers ... I think it is a little sensitive.

Generally speaking Roger, I think, we are in the midst of a bunch new programs ... follow on programs to existing works that we have or that our customers have sourced to us and that are at place. So, as end market remain cloudy for them, there that level of uncertainty as to when those new programs hit, you know, how much the old programs prevail, and there is ... from our perspective and then we accessed the range of possible guidance on revenue that was clearly a factor in saying well, you know, given the kind of end market picture it is better to be little bit conservative as to when to some of these programs would kick in.

Okay, a final question ... on your margins again by geography, is there a consistently wide delta between your offshore and onshore operations with the offshore being much higher. Refreshing again is that mostly in mix and then are you going to be able to ever converge your US margins near the level of your offshore margins?

There is a function of mix and I would probably say that half of that is the mix being the system built content that we have. I would say that our restructuring, as both Eugene and I alluded, to [_____] call. It has been [peculiar] to the Americans and we very much focussed on catchup in that regard.

Thanks very much.

Your next question is from Keith Dunne of Roberts and Stephens. Please proceed with your question.

Good afternoon, a couple of questions. As you take a look at your cost structure in this kind of environment with the sales going down roughly as you said 10% across the board, can you decrease SG&A at that same kind of rate or are we looking at half of those declines or how you really control that on a dollar basis?

I know you understand the economics quite well. We do not have some fixed costs in the business ... the material portion, as you know, flows and that is a variable cost. I would you say that as we look at that average margin that we have guided here it would suggest that almost 80% our value add spent is targeted for reduction. So, in another words 80% of the let us say 10% decline is what we believe is possible in terms of our cost.

Is that so say SG&A can fall 8% for very 10% sales fall?

We are tackling every element of cost ... I would say from the SG&A front, it has more fixed element than our cost sales.

And as we look at the gross margins, they clearly sound as though they will be down a little bit that of the volume decline. Would you expect geographically for the pullback relative to the second quarter looking at the third quarter more in Europe because there is summer shutdown in the comments that you see potentially some of that contagion moving over to Europe, so that would be where the sequential margin decline of the margins would be the greatest?

Yes.

One or two more questions. There has been a lot movement with your acquisitions and recent capital raising, where do you see net interest expense next quarter when all these things come together.

So, do not expect a much of a change outside of our current level. As you know, we raised $705 million in May. We will get some sale through impacts on that interest expense and that would be offset by some of the acquisition pipeline closure etc in to the third quarter.

My last question for now please is looking at the inventory, as Avaya goes to turnkey and then you have [Seagam] and Primetech impacting the third quarter ... how much incremental inventories would those three transactions add to the inventory bounce and then may be you can tell also with Omni if you pick that up you are not going to have fourth quarter sales, but you would get a bunch of the inventory ... perhaps you can give us a better figure of the quarter inventory levels.

Well I think when we talked about the inventory level [_____] here. I think we are talking about in the order of about $120 million on [Seagam] and Avaya after it closed ... it is a rough type and Omni wouldn't close in the fourth quarter anyway.

With that I realize is that another 100 or 50 or ...

That would be pretty consistent with what the balance sheet looks like today.

My last question is when we look the fourth quarter, and I know you are not giving any guidance for the fourth quarter and that is fine, but when we look in the last year the fourth quarter was up 33% from the first quarter and obviously IBM acquisition is a substrate issue there that boosted the fourth quarter. When I look back though the prior two years, the fourth quarter was up 14-19% or around 16% each year third quarter and fourth quarter. Is that more of a typical seasonal pickup that you would expect and is there any reason to expect that would get any difference in a typical seasonal pick up this year?

Well, given the end markets the way they are answering that question is to be loaded in current status given that we are not giving any guidance. Clearly, our concentration on the business in the higher end server and the higher end infrastructure communication product, those products do have seasonality patterns that we hope to translate into increased sales in the fourth quarter.

Thanks very much.

Your next question comes from [Gary Baker] of [Raymond James]. Please proceed.

Yeah Good afternoon. A Couple of questions ... in your revenue guidelines I just want to clarify have you built in Primetech, Avaya, and [Seagam] into those numbers that you have given for the third quarter?

We built in the transactions we announced in part for both Avaya and Seagam and they are both in the books.

Okay and then could you also give us ... in the last quarter you gave us sales breakdown by geography, you did not give it back to us this quarter, do you have that information?

There are in the disclosure.

Okay and then third question ... going back to an earlier discussion on the potential acquisitions as to the divestitures from the OEM and, sort of, we have seen lot of them to date ... I just want to try and better understand the key reasons that these deals may be taking longer to consummate, you know, the [flextronics] of Lucent one of obviously got a lot of publicity and [_____], but in your view what is the key issue ... is it the capacity issue in terms of the NF companies given they only have 40-50% utilization and they do not want to take on as many plants as OEMs wants to divest of it, an employee situation, they do not want to take on employees, is there a price situation, or is it a combination of all of that, or is there a predominant reason.

All those factors would play in different situation I would say definitely I see an environment where prices are dropping EMS players are more reluctant to take on facilities in many cases and if you look at the overall capacity, it is decreasing not only on the EMS side but there are lot of factories that are being closed on the OEM side, so that capacity out there is shrinking. But think the EMS players in general thinking our self are finding a very good environment to be a lot choosier even more than we were in the past. And I think it to be fair to our customers; our customers are thinking what is the best solution for this. In terms of where can we make more faster and more strategic impact to our business if that is what they are saying and so they are doing I think a lot of very thoughtful work on assessing whether or not the closed companies sell them or be a part of them. So, I think it is both the sides of this equation that are lot more in light of the current environment have to be a lot more thoughtful to the future view. The customers very emphatically focussed on the most competitive end point after a potential transaction rather than in the past perhaps looking at disposing an asset. They are looking at what is the most strategic model because we are in a best solution that gives me the most competitive offering and then exploring those and trying to figure out what is going work best for them at the same time EMS players typically certainly by our behavior when we here are looking for the best transaction form a strategic point of view cost base, right strategies, right skills going forward.

So, in your view then Eugene whether it is you, Celestica, or [Celectron or Flextronics] do you think by the end of this year we are going to see some of these "mega" out sourcing deals announced by the end ot this year?

You will see some ... there is a lot in the pipeline and probably each one has a different story. I sometimes, I know, that everyone is getting fatigued from hearing from what we say that there are lot of opportunities in the pipeline. But they are and it is very hard for me to sit here and list them all because they are all confidential. What we see is way 1 through way 5 way activities based on all three continents. Whether it is japan based, European based, or whether it is North American. Whether it is in communications or in IT or even other spaces. We have a problem of excess choices and the environment where the people are very cautious with their capital and trying to come up with the thing that makes most sense in this environment. So, I think that is the backdrop. There is a loss there. How many will end up showing up in the third quarter and fourth quarter and the first quarter I think it will be a lot ... which ones ... time will tell.

From the measuring capacity point of view you have done [Seagam], Avaya, Omni and Primetech ... do you have the capacity to do one two three at the mega out sourcing deals in the next six months, if you can reach an agreement that you find attractive?

We do. I think we have the formula, the recipe, and based on the way we select and the way we can integrate, we have a lot of potential capacity. So, we find the right deals with the right constructs that add value going forward, we are ready to do it. We are not saturated from that point of view.

Yeah, thank you very much.

Your next question comes from Chris Whitmore of Deutsche bank. Please proceed with your question.

Following up on the last discussion I just wanted to try to understand what is more important to the OEMs in terms of upfront cash or asset versus underlying cost savings on a go forward basis.

Un-equivalently with no ambiguity ongoing cost savings.

Secondly with unrelated, how much capacity do you plan to take out as a result of these restructuring initiatives?

In total, probably, we would be looking at close to 15%.

Is most of that going to come from North America?

I think it is spread between North America and Europe ... the majority is North America.

And you suspect that that will be out by the first quarter of 2002. Is that correct?

Yes it is correct.

Thanks a lot.

You are welcome.

Your next question is from Pierre-Yves Terrisse from Yorkton Securities.

Yes Good afternoon, Eugene, with the Omni acquisition and their offering in the [_____] it is a sort of a vertical integration ... is there other areas where Celestica would want to expand their supply chain offering in terms of vertical induration?

Quite possibly and we are exploring many options.

Can you expand on that a little bit?

Not until we are ready to do something.

Okay, Tony on the inventory, can you break it out between the raw material?

Sure In terms of the quarter, about over 70% in raw material with around 10% and finished goods around 15%... that adds up to a 100 or close.

Okay. Thank you.

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

Eugene, early in the call, you mentioned that there are still lot of activity for organic growth new customer when talking to you did not expand that part little bit further ... are there any major new customer additions ... Celestica has won organically or could you give us some sense of some of the types of programs that are new?

The cost for different sectors ... nothing massive in one sector. There are no new customer names that we are going to announce, although there are some new customers, so this is some overall pattern ... I do not know that I am helping on this, but I think you are looking for some more specific.

Okay. That is for now. Thanks.

Your next question is from Paul Fox of Banc of America Securities. Please proceed with your question.

Tony, can you talk about cash flow from operations in the second half of the year and can you also talk about, Eugene, you were just talking about uniquely you see that he customers are more interested in cost savings ... are you seeing that the customers are interested in taking restructuring before actually making the sale of properties to you guys?

In the various opportunities that we looked at there has been a fair number that have indicated that as one of the possibilities and in many cases you end up making multiple proposals ... one with taking the assets and one without and the buyer tends to be more on sustainable cost advantage and competitiveness. So, that is a definite shift as I said from even a year ago and we see that building up, and I think overtime there is going to be less and less appetite on the part of the EMS players to absorb new clients because they are going to have as you saw with the recent announcement with [Mina] and [FCI] it may be over an hundred plants. So, I am sure that is modern enough.

In terms of the cash flow Paul you asked going forward clearly would ... if you look at the model as you grow rapidly, you consume cash invested in the working capital, so we expect our cash position to improve on an operating basis into the third quarter, and we will strongly expect that and we also have more work to do on our inventories, in which we are quite satisfied with our progress thus far, but more to do.

Also on the ... that's it for now I will take more next time.

Okay.

Your next question is from [Chris Lipincort] of McDonald Investments. Please proceed.

Yeah, just coming back to the cash flow item, I am just noticing that the payables are obviously going down and I am just wondering if that kind of trend we can expect that to go forward considering that your are seeing 10% sequential growth or are we going to see continued efforts of pay down at the payables at this moment?

I think our behavior on payables and our treatment of suppliers has always been consistent and extremely fair and according to the terms what we have. What we have alluded in the earlier part of the discussion today was non linearity, so having high levels on inventory and early stronger sales later, so there is a timing pattern where as we are trying to dissipate inventories in this kind of market place you settle before the quarter and you still remain with some inventory sales to collect them. So, that is the pattern that more than anything else has influenced the numbers you see in the quarter and I think in this quarter and in the last quarter.

Okay. Just kind of looking out that in your quarter to a very particular segment that your are especially concerned about and obviously we are seeing the communications, and now we are starting to see certainly what if a more from the struggle from the value of the IT side ... are you seeing any particular concern from your end and obviously Europe as well?

I think we talked about the areas ... it is basically across the board where we are seeing challenges in end market demand and in particular what we are seeing in our third quarter is the effects or heightened effects or catchup effects affecting Europe.

Just one last question, given the Omni transaction are you are getting any responses from customers to begin migrating more production overseas to for lower cost manufacturing?

Absolutely and to our existing base and a lot of interest in our transaction with Omni downstream, so I guess from that answer is yes.

Great thanks.

Your next question is from [Mitchell Shapiro] of Lehman Brothers. Please proceed with your question.

I was wondering if you could expand a little bit on the comment you made about your comfort with Omni numbers going forward and how much diligence you have done on that if you have seen what their numbers are likely to be and also you can comment on the timing of the circular and the other factors going forward in the acquisition. Thank you.

We have still not closed our transaction and we do not disclose any details outside of what they are prepared to disclose externally and then being a public company you have ask them.

Right but I am not asking you what they are ... I am asking you have you seen that and if you are comfortable with that.

I said earlier with that we were comfortable with that and we do very extensive diligence on that acquisition.

Okay. Could you comment on the regulatory process and also the time when we are going forward in rest of the transaction?

We are looking at completing the regulatory approvals with our plan of arrangement in the October and November time frame.

Okay. Do you see any hurdles there?

We do not see any road blocks now.

Okay. Thank you.

Your next question is from Gus Papageorgiou of Scotia Capital. Please proceed with your question.

Thank you. Tony last quarter you said the organic growth rate was about 29%. Can you just give me an idea what it was this quarter and what you estimate it to be for the third quarter?

While the end markets are certainly dampening, obviously, for the organic growth for the year we did have in the second quarter some organic growth, but it was minor most of the growth was the acquisition effects year to year and we expect that trend to continue in the third quarter.

What about the negative organic growth in Q3?

Yes, with the sequential decline in the business and with the additions of the revenue streams we just talked about earlier that is exactly what that implies.

Tony, in terms of the capacity utilization for the third quarter, can you give me an estimate as to what you expect to earning in the third quarter and are you anywhere near the point where volumes are so low and you are going to have some troubles meeting your fixed costs?

Well, at that same time with the restructuring we are attacking the fixed costs base, so that is we believe is more as alluded to earlier. We are running the same level of utilization despite taking actions on a capacity we continue to do that in to the third quarter, but in light of the volume decline, we probably adjust capacity commensurate with the volume decline that the guidance assumes.

Great and just finally, on the EBITDA margins, given the flat volumes and the decline in capacity utilizations on your margins are up ... can you give us a little bit more light on how you are able to increase the margins or may be give the couple of ideas or may be specific programs that you have launched to help the margins.

Gus, I think one of the big parts of our story and one of the biggest focus items for us as a company is our margin expansion initiatives that we have that are quite exhaustive across the board in all geographies and out side etc. So, as we said, we attacked every part of that cost base whether it is operational effectiveness, best practices, the utilization rates, whether we are talking about sharing of services, consolidation of activities, and back office type of work and acquisitions ... all of those things are in motion and yielding. When we talked about in the earlier quarters that we are confident that even in a flat revenue scenario, we could expand margins as because we are getting attractions on all of those fronts. We continue to get that attraction. We just need to time our end market scenario or volume scenario for us to really provide a bigger release and continue the trends that we have.

Thanks.

Your next question is from is from [Will Speigal of Fairline Capital]. Please proceed with your question.

Hi actually the things done first of all a while ago you commented on your acquisition strategy, one of your competitors just announced a substantial acquisition two days ago, in terms of your capacity, are you saying you have enough capacity management wise and financial wise going forward and is there any substantial thought when it comes through?

Yes we did say that and we do have that capability

Any sense on dilution or EPS impacts or that is not an criteria in your mind.

We continued to look at and that is an important metric. We want our acquisition to be credited as earlier as possible within a year so that continues to be a focus as our return on capital investment objectives. I think our approach to the economics of any deal is changed. In this kind of an environment thre are obviously different risk factors as we look at a deal.

Thank you very much.

Welcome.

The next question is from [Alex Branton of Ingleton Snyder] Please proceed.

Question on your restructuring program with ... did you mention that you are going to reduce capacity in high cost areas by 15% or all areas ... could you define that better?

Well, most of our capacity reductions are in, let us say, higher cost geographies and in total, the capacity reductions we expect will be 15%.

At the same time, is there any offsetting expansion of capacity in low cost areas, I mean, some of your competitors are doing both like shutting down high cost capacity and opening more low cost capacity in China, and so on do you have any initiatives like that.

We do and we continue to invest in those.

Could you quantify that?

We had [Two] million of capital expenditure in the quarter and we are not going to compromise in the areas of investment that will benefit us strategically.

So you could comment on that is that 15% is net figure or gross figure that is the net capacity reductions.

That's correct net capacity.

Secondly I would like to ask you just a philosophical question that is take the [Seagam] acquisition, I assume that you are not counting that as organic.

No, we are not and that is acquisition related revenue?

But you are simply acquiring manufacturing assets ... you are not acquiring business ... you are acquiring manufacturing assets, so why would not you call that organic ... it would be the same thing you went on built the plan in that location and took that business into that plant ... is that exactly the same thing.

You are in may ways correct and some of our competitors would say that is organic and one of things it would benefit in the industry as a whole is that we have one standard definition and we all defined it in exactly the same way and we are probably characterizing as the most conservative and possible way.

I told you that we agree with you but also and consistent with the way we do the guidance. We guide based on the business we have. We do not give guidance on any acquisitions or what you want to call that because obviously there are many opportunities the timing at which ... we don't want to pressured on based on an assumption of closing.

That is true and relative to the comments about what is organic and what is fact and I think it is a very valid one and if you want to criticize this you could criticize this as we are [lumping] a lot of stuff under acquisition when it really is a kind of organic kind of business.

Well, I am not criticizing ... I am just saying they are actually sort of doing your self at the service in a way by calling in acquisition related when you could categorize it as organic growth ... so I am suggesting.

It is a very good and we are consistent in the way we treated it.

Okay Thanks.

Your next question is from [Todd Coupland] of CIBC World Markets.

Good evening every one. A couple of questions ... some of your competitors have characterized the total dollar value in the divestiture pipeline and billion plus would you agree with that or would you think it is substantially larger than that and if so could you quantify it?

I would say it is atleast that so at a minimized substantiated and I am adding up different numbers that I had right now and could come up with a bigger number I just leave it with that.

I just to understand that how the acquisition are going to work would it be fair for us to take a quarter of Omni revenue and have that impact the fourth quarter?

I think it is prudent that we build your models to wait until that transaction closes at which point in time, we will give more granularity.

Okay that is it. Thanks very much.

We are going to take three more questions.

Thank you sir. Your next question is from [Glenn Jamieson] from Griffiths McBurney. Please proceed with your question.

Thank you. Tony, can you just go back on your commentary on the tax rate being at 17% you suggested that that was sustainable going forward and that there was a geographical mixed issue there ... if I look at the revenue split by geography you provide I don't see any much of a change in the mix ... am I missing something there?

It is the mix of business in the profitability's as well within geographies and in certain countries where we do business.

When you suggested sustainable going forward for the foreseeable future is that extend into 2002.

That is certainly what I would consider a sustainable horizon.

Okay Thank you.

Your final question is from [Robert Davis of TSAM]. Please proceed.

Good afternoon. I just had a couple of questions for you. First, I want you to give us a sense ... you mentioned you are at 50% utilization if I did catch that number correctly ... where that compares to other points you have seen it in the cycle, you know, would you call it a low or near the low and I think you can give me some color on that one and then I want to ask couple of more questions.

First, on the utilization, 50% is near the lower end of the range in the latter part of last year and certainly you could have seen that much higher than that, but as Tony also mentioned our attention is to balance our restructuring efforts to keep our proper balance on the utilization. So, you have the outside capabilities as well.

What would kind of proper balance that you are looking for?

I think at the 50% level we have here now that certainly gives us a lot of up sight.

Secondly, you mentioned a couple of points and then I want to come back to you. One was just the idea of kind of set into your low cost capacity and take out some of the higher cost capacity ... can you give us a sense as to what percentage of the what capacity today over the next year or to and how much of that is likely to be replaced by lower cost in order of magnitude.

So, I think roughly if you look at how things are progressive it is not only the crediting capacity but also how acquisitions work. So, certainly as we add capabilities with activity such as the Omni acquisition that is almost a step function in increasing our capacity and low cost geographies. So, it one very dramatic way to increase our capabilities there that those types of transactions are what we are certainly used to respond to the need of as you see them.

Lastly, if I could ask in terms of Asia where you are seeing a slowdown right now in the US and North America ... do you get a sense that given your quick and relative limited exposure right now there might be another issue to drop ... does that make sense to do it ideal such as Omni at this time or is it just an avenue to get more lower cost capacity or just may be at the current time you are just in need of getting more low cost capacity given the slowdown in the market.

It is regardless of the environment where we are growing and we are more stable getting the mix on low cost geographies is a good thing and we would still proceed and then obviously we are still proceeding with our intent with Omni and I think that you will see that mixed trend changing right across probably what our competitors too.

Thanks very much.

Okay. Thank you very much dialing in. We feel, as I said, very good about the second quarter results, but we have challenges in the third quarter and we expect to continue to work on financial and hopefully end up with the kind of results we did atleast in the second quarter. So with that we will wait till the third quarter to talk to you again. Thank you for dialing in.

Ladies and gentleman that concludes your conference call for today. You may disconnect your lines and thank you.