Celestica Inc (CLS) 2001 Q3 法說會逐字稿

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Ladies and gentlemen thank you for standing by and welcome to the Celestica Incorporated third quarter 2001 financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a remainder, this conference is being recorded today Wednesday, October 17, 2001. I would now like to turn the conference call over to Mr. Eugene V. Polistuk, Chairman and Chief Executive Officer of Celestica Incorporated. Please go ahead sir.

Good afternoon and thank you for joining us on Celestica's third quarter conference call. Before we begin, let me express to you the statements that are made today, which may be forward-looking and not historical facts and which may involve risks and uncertainties which could 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 give you some brief comments on the quarter. Despite the extremely challenging environment faced by our customers in the third quarter, Celestica generated revenue of $2.2 billion and adjusted net earnings per share of $0.27. We also achieved operating margins in line with our guidance and generated positive cash flow from operations of over $450 million. Tony will provide more color on those results. While the end markets have been weak the outsourcing trend remains robust. During the quarter Celestica won new programs in multiple end markets including servers, networking, peripherals, and others. In short run however, organic outsourcing is being off set by end market weakness. As you have recently seen, we have sold our significant outsourcing agreement with Lucent and completed the acquisition of Omni Industries. Lucent represents our largest OEM acquisition to date. These strategic relationships process our communication portfolio and every indication shows that this is a very positive acquisition for us. With our Omni acquisition we have expanded our Asian presence and significantly increased our low cost manufacturing capacity.

Finally we will be expanding our cost cutting initiatives by taking a pretax restructuring charge of between a $100 and $130 million in the fourth quarter to further optimize global capacity. We feel that there is still uncertainty in our customers end markets and we plan to scale our operations to conservative assumptions on revenue. We believe this cautious approach will allow us to safeguard our profitability. We have very specific goals on restructuring and expect a full pay back on these charges within twelve months. Now I will turn it over to Tony Puppi to step you through a more detailed discussion of our financial results.

Thank you Eugene and good afternoon. Let us begin with revenue. Revenue in the quarter was $2.2 billion and within our $2.2-$2.5 billion guidance announced in July. Customer demand continues to be weak and in fact worsened quarter-to-quarter. Organic revenue declined 25% on a sequential basis, offset by 8% sequential growth from acquisitions. On a geographic basis and as we began to see late in the second quarter, Europe was impacted the most down almost 24% sequentially. End market revenue segmentation for the third quarter breaks out as follows. Servers at 30%, communications came in at 38% of revenue, storage and others represented 18% of revenues, and workstations and PC were 8% and 6% respectively. The communication segment benefitted this quarter from our [Seagam], Avaya, and Lucent acquisitions. With respect to our customer concentration for the quarter, our top five customers represented 67% of our total revenue. With our top 10 coming in at 86% Sun, IBM, and Lucent were each over 10%.

Let us move to operating margins, which came in at 3.2%. As you know, we have been intensely focused on margin expansion. Initiatives we have had coupled with our restructuring efforts and the strategy of having a higher variable cost structure have shot up our margin in a environment where industry margin decreases have been more precipitous. In fact year-to-date margins at 3.7% are still up from 3.5% in the first 9 months last year and equal to the full year average for 2001. We continue to feel confident in our ability to improve margins even in a low growth environment and we expect margins to increase going into the fourth quarter and I will talk about our guidance in a minute. On the bottom line adjusted net earnings or cash earnings which exclude the aftertax impact of the amortization of the intangible assets, integration cost related to acquisitions, and other one time charges were $64.7 million compared to $83.9 million one year ago. Cash earnings per share for the quarter on a diluted basis were $0.27 versus $0.38 in the same period last year. In the quarter, we took a pretax $79.6 million one time charge. This included a previously announced restructuring charge of $43.5 million, as well as an additional non cash charge of $36 million associated with the re-valuing of certain assets, primarily good will and intangible assets. Pretax charges year-to-date are $137 million of which $58 million represented cash charges. We expect to see an acceleration of the benefits of this restructuring in the fourth quarter with an expectation of a cash pay back in less than twelve months.

Turning to cash management. Cash flow from operations was strong providing $450 million in the quarter. We ended the quarter with $966 million in cash, despite using $716 million for acquisitions in the quarter i.e. Lucent and Avaya. Driving this improving cash flows inventory, which came down by $230 million if we exclude about $400 million added from these acquisitions in the quarter. Receivables management was also strong despite less linearity of business flows versus prior quarters. We believe we will generate additional operating cash flow in the fourth quarter and have set a goal of $1 billion cash position in the fourth quarter after paying approximately $475 million in cash for Omni Industries. That is another $0.5 billion of cash flow generation in the quarter. Our bank facilities up a $1 billion remain undrawn and overall we are extremely with our balance sheet strength and liquidity. Today, we announced that we would be undertaking further restructuring in order to position the company for an even more conservative view of revenue levels. We believe this approach will also provide more predictability and momentum to our margin expansion track. We decided to expand our current restructuring activities by an additional pretax amount of between a $100 and $130 million to be reported in the fourth quarter, where half of which will be cash charges. This would bring our total pretax charges for the year to approximately $250 million.

Collectively, this restructuring will not only help us support observe this end market correction in the immediate term. It will better line the scale of our facilities and the number of our facilities and the location of our operations with our strategic needs and goals. Let me now move forward to our forward guidance, which will show sequential gains in revenues, margins, and cash net earnings in the fourth quarter. We expect the revenues in the range of $2.2 billion to $2.6 billion, which include revenues from recent acquisition and as I implied earlier, and even more cautious view of the end market demand. We are confident that we can expand margins in the fourth quarter due to our restructuring efforts, our lower cost base, and continue traction of margin initiatives. We see operating margins sequentially up in the fourth quarter to a range of 3.5 to 3.9% with adjusted net earnings per share of approximately $0.27 to $0.35 range. Now I will turn it back to Eugene to provide some closing comments.

Thank you Tony. Before we move on to questions, I want to leave you with three key messages on the industry and more specifically on Celestica. First, we feel very strongly about growth in the outsourcing market and model. No one is regressing in their commitment to outsourcing and all major regions North America, Europe, and Japan, are all active and either outsourcing more or implementing major outsourcing initiatives. Second, we remain very focussed on driving operating margins higher and we will. We are not waiting for volume to improve in order to increase margins and the prolonging end market drops show the tractions that we have attained with our initiatives. While focussing on improving margins in this environment, we will have an exceptional opportunity for enhanced bottom line when the end markets eventually strengthen. Our longer-term goals of margins of greater than 5% reflect a deep commitment by the company to show leadership in this area, and we stand firmly by these goals. Finally the third item relates to the operating model in our industry and the benefits of running a horizontal model versus a vertical manufacturing model. Now, we are not saying that one is necessarily better than the other because we really have some vertical capabilities ourselves. However, we have deliberately focussed on the horizontal model and structure. With this model we expect to be able to generate consistent higher returns based on increasing all aspect of working capital velocity. As you saw in the quarter, returns were impacted by the environment. We are firmly committed and expect our model to eventually generate ROIC well in excess of 30%. A key to getting there will be driving a very low cash cycle which we have targeted at 25 days by 2003 in a lot lower further out in time.

The benefits are obvious as a significant liquidity that is generated can be deployed directly into the outsourcing goals ahead of us without unnecessary dilution. Getting there will require a highly integrated manufacturing network, running advanced planning and collaborative IT tools. We have already invested in this infrastructure and will continue to do so and we expect to leverage it a lot going forward. The benefits to improve cash cycle will benefit all parts of the supply chain and we believe our horizontal focus will get us there quicker and result in a more predictable and robust model. That ends our formal remarks, and I would like to have the operator open up the lines for questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment please, for the first question. Our first question comes from Tony Boase with A. G. Edwards. Please go ahead sir.

Thank you. Looking at the fourth quarter your are going to have basically all your announced acquisitions in for the full period perhaps Omni will be complete in, but for the most part, and you are looking at a range of 2.2 to 2.6, and if we use the 2.2 and then grow that sequentially through 2002, it looks like you might be flat in 2002 with 2001 on revenues?

Is that the question or is it ...

That is a question. I mean is my analysis somewhat right, is it, you know, what kind of growth would you expect in 2002?

I think we talked about additional program wins that we have experienced and as you know, we have been ramping some of the activities that we have had in those acquisitions. So I would also say that not the full effect of the acquisitions will be reflected in the quarter. I think you have to be a little bit more positive in the view of some turnaround in the end market, but nonetheless even if it was on a flat situation, I think our ability to grow is still there.

Okay. When you look at your acquisitions that you have closed on, have the revenue expectations changed, and if they have not changed that much, what kind of magnitude increases in your core programs have you experienced?

Well, we talked about the sequential impact that we saw in the third quarter and obviously when we are guiding the way we are for the fourth, it does not suggest a very robust kind of organic environment. So that is where we have seen most of the pressure. We believe that the acquisition still have the expectations that we had for them when we made the announcements for them. So you still believe that there is an opportunity to experience that although, let us face it, everyone is challenged in this kind of end market. But clearly what we are seeing is the short-term effects and though visibility is bad we are still optimistic that potentially we are seeing the bottom here.

And just a housekeeping question. What were the inventory turns and days receivable?

Inventory turns for the quarter were 5 if you average beginning 5.1 to an average beginning and ending. If you stripped out the effects of the acquisitions that flowed additional inventories within the quarter, check out the same trooper that came with it. The adjusted inventory turn rate would be about 5.5.

And days receivable.

Days receivable came in at, I will get that for you in a second. Next question, I will get back to you, Tony.

Our next question comes from Ms. Ellen Chae with Prudential Securities. Please go ahead madam.

Good afternoon. Eugene and Tony, could you just give us a little bit more information on what do you expect in the next year to generate some more cash, what will be the big drivers of this and just to clarify, did you say that you expected add amounts to be something like $500 million.

That is correct and inventory reduction and operating profits.

The next question I have is that you have given pretty wide range in terms of your earnings guidance in the fourth quarter. Give us some sense of some of the assumptions that you have used get you to say that the $0.27 to the $0.35 range, that mean by the sense of what kind of environment you need to see in order to hit the high end of the range versus the low end of the range.

Well the high end versus the low end would be largely predicated on the revenue flows that we would get and there we do have a larger range than we would like just because of the end market volatility. So the higher the range, would suggest the higher organic level of business in the quarter which would help us drive higher margins and throughput through our facilities. So that is the key dependancy from the margin perspective, we strongly believe that we will hit the range between 3.5% and 3.9% in light of the range of revenue to 2.2% to 2.6.

I think there is an interesting perspective here, like when we finished the year without guidance of a nominal growth from last year, and you know flat to some slight growth in our margins to an incredibly turbulent period, which I think quite a testimony relative to the robustness of the model and relative to our positioning, you know a lot things have happened in the last month and that is in someway affecting end markets and we think it is only prudent to be conservative and cautious in that kind of environment as possible. If the environment improves, we are totally well positioned to totally benefit from that. So the case of do you want to be optimistic and bet on the best of the world or do you want to be us to be very, very conservative and totally prosper if things turnaround in this kind of environment; that is the kind of philosophy of how we have positioned ourselves.

The last question I have is, has the visibility improved at all at this point... are you seeing any significant case that things are stabilizing, improving, or any thing getting worse at this point.

The visibility is excellent, the problem is things change, though, can we say that we have an environment where we can look forward and say everything will stay back as it is today for the next three months except the hard part, and we have an environment here where different people put out different changes. Changes with SUN for example and other customers like that, so that is the unknown as to how things will change on a day-to-day basis and who makes what announcements what date.

Thank you.

Next question.

Our next question comes from Jerry Labowitz with Merrill Lynch. Please go ahead sir.

Yes thank you. In your pursuit to expand margins, can you help us understand how much have you cot back capacity, physical capacity from the peak, in the same terms of square porridge and also in terms of people.

Hi Jerry. How we are continuing to manage the capacity is to keep it in the roughly at 45-50% range. So you see some of the restructuring charges that we float, obviously some of those are, we do think the throughput rates on our manufacturing capacity, you think that is the right balance to hold at, to take advantage some of the potential opportunities that Eugene mentioned earlier.

Can you quantify for us so we can understand a little better.

Well, all said and done on the resource side, the workforce, it will be between 25 and 30% reductions in terms of the workforce from the beginning of the year. In terms of our capacity management to date we have done 10% and the number will be when fully complete, including the fourth quarter activities closer to 20% reduction in the capacity.

And underlying there is lot of strategic positioning that is going on. So for example we go from more sites to the less sites we go from smaller sites to more big sites. We are very definite fuel to more to low cost geographies. So all those things are happening underneath and as the things settle down, we will able to show you what the new template looks like, but I think it is a very robust one and takes into effect all the various factors left site, future integration, better IT tools, more capacity and low cost geography, less than the high cost geography. So we are addressing all those issues as we go through the restructuring.

Thank Marvin. When you look at the fourth quarter how much of the sales guidance that you are giving us is incremental from acquisitions that did not previously exist.

Our view is that this up to $400 million would flow, the flow through from a position i.e. getting a full quarter of that so that is the sequential growth of that acquisition plus to another 200 to 250 on Omni if you look at those two trends actions.

Thank you very much.

Back to the question Tony Boase had regarding receivable DSOs, it is 61 days and affected by the linearity. Actually, it is the non-linearity of revenues within the quarter; obviously an area of opportunity going forward.

Our next question comes from Thomas Hopkins from Bear Sterns. Please go ahead.

Yes good afternoon every one. Eugene and Tony, can you talk about the horizontal model Eugene versus some of the vertical opportunities and with each one of their opportunities for margin expansion except the vertical one there is a huge asset drag. When your competitors won the repair and warranty contracts with [X-Box] a couple of days ago and the margins on the repair and warranty side are significantly higher than the margins on the volume manufacturing side. So that is all horizontal, could you talk about the after market? Do you have a chance to earn a fair amount of operating income on lot lower revenue on a lot lower asset employed? Can you talk about whether it is pre manufacturing or the after market, what kind of opportunities there going to 2002 do you see to help at your margin expansion.

Margin expansion activity, we are talking about is operating improvements on what we have. Relative to incremental margins from a repair business, yes there are some higher margins there but it is always on a lower base and to make it a significant and material difference, you need an army of people working in repair; because it is a low revenue kind of activity on the contracts of 10 billion plus kind of operation. On the vertical, the type of things that we are talking about, whether it is [PWBs] or the early part enclosures like the frame of Metal shafts and other components, you are very correct and it is more capital intensive probably and that does translate in our minds into a lower ROIC potential and on top of it which I think is also important in our attitude is that it tends to create more variability. In other words, when times are good the assets are better but when times are bad you really get whacked. So, what we are looking for is something that is more predictable. We liked our kind of performance we are having now where in spite of all the turbulence that we are still basically stable. We are actually frustrated that we have not made more improvement compared to where we want to go, but we have not sustained a big degradation relative to our margins. So we think it is a more robust model and involves less investment and will be the past the highest ROIC in our sector relative to the overall model. We are still haven't inducted that model and I think that is the winning model. Not the case of one is good or bad they have different attributes. We deferred a higher ROIC with the higher stability which I think translates into a more value.

With respect to the horizontal model again you talked about the after market and the margins versus the revenues opportunities what about pre manufacturing on a design side where there are also would you still within an horizontal context significant higher margin opportunities.

There are significantly higher margin opportunities, but if you add up all the design activity across our whole sector it is an in sensible percentage of our total EMS business. So you are not going to get sort of rich on margin by a lot of that stuff unless you want to go right into the product itself and then now it is the new model where the revenue is small. So we are following on all our opportunities to increase margins and we are spending more time on the fundamental business rather than attacking on extra things that might have higher capital risk, higher volatility your unrealistic expectation relative to implementing the overall mix. So, we are doing design ... we are doing repair. It is in the whole new grill fundamentals.

Great thanks Eugene.

Our next question comes from David Parrish with Dain Rauscher Wessels. Please go ahead.

Yeah. Good afternoon. Could you just comment on business trends over the last four weeks since 09/11 and then I have a couple of followups.

The biggest impact on a lot of people are talked about it obviously was destructive in the week following September 11, 2001 but we went through various actions where room make sure all the transportation systems were back up and we are able to make all our shipments. So, it did not affect us financially in that period. But, obviously there was a lot of effort and a lot of working together with all parts of supply chain. I think in our guidance we are also reflecting a higher range because of the higher volatility that we believe may come.

Did you see any changes and pulls with your OEM customers, I guess, in the couple of weeks that follow and so it is that stabilized in the mix of links.

Not from an operating point of view I think that in our mind the issue is general business confidence and how does that affect overall end markets rather than it being in itself disruptive in the supply chain. The orders did not fundamentally change and the products were made ... there were extra challenges to deal with it. So I think the fundamental issue here is just the total end market and people a lot of our products are tied into infrastructure and higher complexity and when will people make the investments and how fast they will make the investments and that is a macro economic kind of issue.

What steps are you planning to take on the semiconductor equipment and substrate business that, I guess, was really a drag on the results for the first half of the year.

We are reviewing all of the options there and they have very good plans in place and we know we will be working with them to optimize the business.

Any likelihood that you might just spin that out.

In what count?

I don't know just sell that portion of the business.

Those parts those are all things that we could consider.

Okay. Then lastly if you could just give us a sense as to OEM finished goods inventories and kind where they may stand on the server side of the business relative to where they were perhaps at the beginning of the quarter.

Are you talking about our customers finished goods?

Yes.

No fundamental comments on that. No bad news or good news just in terms of the spending for it.

Do you have really seen any changes there?

Haven't seen any real issues there.

Okay great nice job in a difficult environment.

Thank you.

our next question comes from Shelby Fleck with Morgan Stanley. Please go ahead.

Eugene, you mentioned you have won some additional out sourcing programs ... did those structures ramp in the fourth quarter or did they help your revenues later in 2002.

Shelby some start in the fourth quarter ... some start later. It is more of a 2002 phenomena. And you know what it is really a testimony that there are organic out sourcing wins, there are acquisition wins, and you know they are being dampened by end market and there is so much that has been written already about the IT end market shrinking 30% or the communication shrinking by a significant amount. Though there is other factors there are taking in. That is why we are still tuned quite optimistic on the long term and it is very much like to get back to even half the kind of growth rates for you we are having prior to this year.

One more question. When you look at the changes in forecast and the different end market sectors, have you seen stability at any other market you said the volatility is pretty equal across all those groups?

I am just having to go through all of the, I think, relatively more stable but obviously there had been an announcement with Sun for example with our higher concentration there that has forward to through to us so that can be stable.

Okay thanks.

Thanks.

our next question comes from Herby Francois from Credit Suisse First Boston. Please go ahead.

Thank you. Can you talk about the restructuring in the fourth quarter ... does that just the restructuring in the fourth quarter does that begin to include some realignment of some of the Lucent assets that you recently acquired.

That does not include any effect. Basically on the Lucent thing that is very important ... the restructuring that is necessary there is all being done and it before it comes over to us and that was all part of the agreement that we did them to optimize their cost. So, the number of employees that are moving to us are a fraction of the employees they had six months ago.

Can you talk about in the fourth quarter now including Lucent and the omni ... still you might have answered this before ... but are you still expecting an inventory work down again in the fourth quarter?

Absolutely.

Then capacity utilization once restructuring is completed lets say assuming end demand has not returned ... if you are around 45-50% right now what kind of improvement can you see there?

As you know the revenue guidance has a range and as I said earlier we would normally manage our capacity around the 40-50% range on a go forward basis because it is not too different from the revenue level that we had in the third quarter ... so we would not see a big change there.

Just for clarity I think that is where are trying to pick the capacity levels that in a depressed environment so clearly your utilization factors and I have checked in this regard would be much higher as the market what we trying to do is maintain a level of flexibility going forward.

Okay, great thanks a lot guys.

And you know just I can have a comment in there. We may all sit around the table here and debate about when things are going to go up, but there is a lot of pressures building up that is at some point it does go up partly by end markets, partly by incremental out sourcing, and very much in our mind is to make sure is that capacity is ready and we are able to totally benefit from that. That is a balancing act that we are going through. So we look at this as very much a temporary transitory point and in the process we are maintaining our margins, putting in plans to increase the margins, and trying to be ideally positioned for any outside problems.

Okay, thanks to you all.

Our next question comes from Lou Miscioscia with Lehman Brothers. Please go ahead.

Okay. Thank you. I was wondering obviously given the weak environment we are having all over the place whether it is appropriate times to look out at 2003, I think that is when you had set one of your guidance targets and we reset that are you going to continue to maintain that at this time.

The cash cycle that we have talked about one time is about 25 days we are not changing that. Our margins goals ... we are not changing that. Our revenues goal ... we probably lost a year relative to getting to the 20 billion by 2003.

So, that is now probably more like at 2004 then?

It depends on what happens. Depending on the magnitude of the rebound and the timing.

Okay. Since there is always I guess some confusion about definitions, can you give us what your definition is of Celestica as it [_____] EMS company and then, I guess, also your views as to what similar vertical tangents that you are really not looking to get into at this time.

Okay, so we are involved in design, the manufacturing of the PCAs, the manufacturing of the back end of enclosure business, which pretty often is up to two-thirds of the business of enclosure companies. The final system ... the ship the services that go around it is like things like light repair ... items like that. Things we don't include is the components like the metal frames, the [PWBs], various actual components themselves, cables, and some of the services for example after market in stall, call centers, and various services like that. You know the distributors think like we are not including those and I think that it is a model that is focussed, very, very focussed with maximum turnover, optimum asset investment, highest predictability and as I said before what we believe in our hearts they will get though for the higher ROIC on a consistent basis.

And I guess logistics is probably enough portions of that?

Logistics from the point of view of managing the logistics ... that will be part of our delivery relative to having trucks and planes and all the infrastructure soon as we absolutely not. That would not be part of our model. We build that people out there that is all they do and they do it very well.

Okay, then the final question. How would you ... with the acquisition of omni can you give us a percent, I guess, what you would consider a high cost geographies versus some low cost geographies, I guess with it and then obviously you are doing some restructuring that you mentioned closing some facilities and expanding may be some other ones ... just where do you think you might be in twelve months?

We are going to the 30th fairly major shipped I mean just on the point of view of when we did the omni that doubles our capability there. We shipped the low cost geographies is very real. What I am going to suggest is we are going to have an analyst conference in and around the December timeframe and that could be one of the things that we lay out a little more detail and the reason I am kind of hedging here is there are somethings that we haven't announced yet internally, and I am want to make sure it is heard first by our employees and then we can roll it out and then show you, but it will very crisply show how we are repositioning ourselves to these trends.

Good luck in this tough quarter coming up.

Our next question comes from Patrick Parr from ABN AMRO. Please go ahead sir.

Thanks. Good afternoon. First question, in terms of the pipeline in your business that you are looking at would you say it is fairly evenly distributed with new types of server programs, communications, hard work consumer or is there a skew towards anyone end market that you are evaluating right now in terms of your business.

No skew that is different in historical pattern.

All of those end markets remain interesting for you in terms of betting on your business, because a while a ago obviously you were anxious to get more communications exposure, you got it and I am just curious what you would expect the end market mix to be like moving ahead.

The mix would probably be similar. We said communications to be above 40%-50% strategically we are just at the low end there. That could be more and we are not making any massive shift into low end products such as consumer. We tend to do have bias into the infrastructure side in which we think there is a lot of pent up demand that will turn around based on a lot of ways we are picking up so it is fairly consistent and relative to what we have done in the past ... not in the low end stuff on the overall mix point of view.

Then okay what is restructuring one of your competitors talked about restructuring as well as adding new facilities in various parts of the world. Is any kind of an up take in capital expenditure a part of this plan on restructuring or is it mainly rationalizing of what you have.

Rationalizing what we have, you know, our capital expenditure is probably down as we go through this period, and we just try to think massive new plans now up atleast some incremental capacity in places like China next year. So, it is more of a rebalancing rather than, you know, massive building. We are very cautious with our building in this environment looking for the right point and we think that the numbers that you hear relative to utilization, we have a lot of latent capacity to absorb a lot of upside very, very quickly before we have to start turning in those investment.

Then a final question in terms of financing any new deals that was to come along. You mentioned of a goal about having about $1 billion in cash and then another billion un-drawn on a line. Would you be comfortable going on to that line if necessary to get the deals that you want?

Well that is interesting. I would prefer to ... if it is an incredible opportunity we could do that, but I would prefer to find as much as possible what is our improvement in our asset utilization and things like that and inventory and from the margins and operating profits that we will generate and we think we can try to keep that level of cash inline handy for us. Historically, we said that we would love to operate within in debt of gap kind of guideline of 25%-35% ... so obviously that given where we are today even if you include the lines as or the convertible notes as debt, it gives us a level of 22%. So, we have some room even within there to take on more debt depending on the magnitude of the acquisitions in the short-term. So, we would have an appetite to do that. If required our highest preference is to generate it internally.

Let's step back here. We have lines available un-drawn the capacity to add more debt if we want to and cash on hand and a plan that shows that we can generate more cash and free of more cash going forward. In an environment where there is a lot of acquisition opportunities and an environment where prices are dropping, lots of choices, lots of ability to observe, and being very selective in doing it. So, it is a perfect environment relative to positioning from our point of view and that we are going to be busy making wise choices.

Great thanks.

Our next question comes from Mr. Michael Zimm with Goldman Sachs. Please go ahead.

Yes Thank you. I was just wondering Eugene or Tony could you outline again for us in the third quarter what Lucent and [Primetech] contributed individually.

On aggregate our acquisition accounted 8% totally and sequentially ... that is about 200 in change in total. The biggest portion obviously was the Lucent and Avaya. Remember Avaya was also began in second quarter and flowed into the third quarter.

Right okay and going forward in terms of not necessarily the dollar amount of subsequent acquisitions that you might make with say over the 12-18 months, but in terms of the number of acquisitions, I am trying to get a sense as to how we might want to set our expectations in type of acquisitions that your make going forward. Some of your competitors have said that probably at this stage at least in the very near term they are pretty much done with the acquisition of additional PCBA type of operations either from divestitures or if not divestitures then other EMS companies that are primarily PCBA focussed and they are focussed more now on filling in the gap and the services capabilities ... is that something that we can also expect out of you?

Well we certainly have a global footprint and we have available capacity and I think that have environment at all have that and the things will come up means prices will drop so that is one conclusion. There might be ... it depends on the particular new structure and may be we define an asset it is better than assets we have, we know that we will upgrade. There are a lot of choices there. The other phenomena I think worth commenting on is that the prices drop what we are really taking about is just buying the inventory. More less on less of it is building less and less of it is equipment, such stuff is going for less than book, and so what we are doing here is buying inventory that very quickly we can free up a lot of our investment by better inventory and supply chain management. So, it is kind of a different world than it was two years ago from an acquisition point of view it is really an additive revenue with an upfront investment of cash which diminishes for that revenue stream as you apply more effective supply chain management and very, very selective at from M&E and very little in the form of building the prices.

Relative to services we have most of what we need there might be some selective as we are not on the hunt for a lot of vertical as we have implemented before. Especially once in our capital intensive and risky from the point of view how what to end up with and relative to the services a lot of the services that some people are taking about we don't think it is fundamental in our business and so we don't see making in investments on that side.

And then Eugene just a followup on the comment that you just made a few minutes ago regarding your sense that you are seeing signs that there is some upward pressure on some of the infrastructure type of work that you are doing ... could you just go down one more layer and just may be categorize what kind of infrastructure you might see and uptake first would it be on the IT side or on the communication side?

I think in this environment we are going to be looking for I think a lot of infrastructure related. Where there is both communications and there is a lot on the IT side as people end up with more requirement for that and more security more robust networks a lot of the things that are happening in our world especially since the last month and lot of conversation lead us to believe that there is a downstream investment opportunity that will translate into business for us.

Okay, thank you.

Our next question comes from Mr. Mark Lucey with T. D. New Crest Securities. Please go ahead.

I just want to ask a point of clarification on the guidance. You mentioned that I guess in the past acquisitions that were announced, but not yet closed typically were not in your guidance and now you are talking sequential organic growth versus approach from acquisition. So, on that basis the year 's organic revenues would have been in the neighborhood of 2 billion and your acquisition revenues would have incrementally given you 200. So, on that basis moving forward into Q4, are we assuming ... when you mentioned earlier that incremental revenues from Lucent and omni ... are those incremental to the levels we saw in Q3 or those are more absolute numbers, therefore just sort of performance that they you are on a flat organic scenario would be $2 billion ... the 200 and the 400 would be on top of that.

Sorry, I was not more clear Mark that those are sequential adds in the third quarter so obviously we are looking at an environment that continues to be troubled in terms of end market and that we are taking very conservative view and aligning our structure against the conservative view.

All right I got it. But may be if I could try to ask further question. On the cash generation side, am I correctly assuming that there was no form of any kind of securitization of working capital whether it is AR sales to financial intermediaries or what have you that we have seen in some common equipment guide and given the significant cash generation in the year anticipating at Q4, sort of, in a steady state environment, would you expect in 2002 i.e. organic growth zero would you be able to anticipate the free cash flow in that environment to your improvement to asset velocity and I guess a correlate to that would be ... when can expect a dividend?

Well, I am excited that is a great question because in that we expect dividend quickly and that is what we are talking about in our fourth quarter and why we think confidently we will be able to [_____]. It looks dividend in cash flow yes. It is not a real dividend. But that is clearly what we are seeing, you know, obviously what we here is a lag effect between an end market correction. It is affecting our topline and then the ability for the company to react quickly in managing our working capital in perfect alignment and harmony with how revenue behaves. So, obviously what we have not seen is that our working capital has not come down fast enough. These are the kind of end market in a revenue equation ... forgetting about and excluding acquisition effects. So as we look forward and looking at the cash cycle that we have which eroded in the quarter and as, you know, because it lagged the revenue as you look forward because we have a stable demand environment, which you suggested may be one assumption, then we would expect as we get to a goal of 25 days or let us say 35 days in a short-term that we will have an immediate release and have very significant release of working capital and translation into cash. So, that is very much our expectation and our goal.

Right and with that any form of securitization is going on?

From time to time we will use what ever form necessary. If we can reduce our cost of capital and that is an effective way of doing it ... we will.

Right thanks.

Okay.

Our next question comes from Todd Coupland with CIBC World Markets. Please go ahead sir.

Good evening every one. Could you just talk a little bit more about the restructuring in terms of where in your footprint you are going to be taking in the fourth quarter?

So, I think on the restructuring intention there is obviously responding to our customers desires for more production and lower cost geographies. So, clearly we are increasing capacity there and making adjustments in higher cost geographies in North America and Europe. So, that is sort of the overall balance. Underneath that, we really are concentrating our activity into fewer larger sites to give us both economies to scale and more diversification at those sites. So, we think that there are yields at the end of the day with a better balance globally and a more effective operating capacity in the higher cost geographies.

You give us a couple of numbers around that in terms of how many sites you will reduce it by number one and number two and when will this be executed by?

As I mentioned earlier, we will roll it all out in December and we want to have the opportunity to roll it out with our employees first.

Okay and just looking past the fourth quarter with the acquisition that you have yet to have either to ramp ... looking into the first quarter do you still expect to see it a seasonal downtick after having folded in the acquisition on a poor ramp basis?

It is conceivable that we run a much more flat environment looking into the first quarter because of the effects that we just talked about.

Apart from Q4.

Correct.

Yes, thanks very much.

Our next question comes from [Alex Blantin] from Ingleton Snyder. Please go ahead.

Regarding your new business that you mentioned right at the beginning of the call, you said you got new business in servers, networking, peripherals and others across the board in multiple market segments during the quarter. Could you give us a few more details on that?

We get wins every quarter. The real point there is that we are continuing to get them. We do have a history of not issuing a lot of details on which customer and what wins and that is just how we prefer rather than having a string of things just as I think just tends to the high things, so I think the way to look at is broad based ... it is across the spaces we are involved in they are all existing customers and some new customers.

Okay. Secondly on the Lucent transition, you had planned to move print circuit board assembly out of Lucent plans into lower cost plants ... could you give us an update on how that effort is going?

It is all in process and tracking to plan and everything that we said relative to lucent and the actions and the positioning is executed.

When do you think that would be finished?

Though since we went to the first quarter we continue in to the first quarter and at the time last time had an update union ratification that has happened everything is proceeding as per the plan and that is why I think overall it is turning out be a very positive acquisition for us on a capability, on business dynamics, on loading, and dealing with all the issues that we have laid out and all the actions we have laid out.

I assume that the Lucent plans in the US would not be part of your plan to move into larger sites from smaller ones ... is that correct and you are really focussing on moving to lower cost regions ... is that true?

That is true, but these larger sites also tend to be ... essentially with Lucent tend to be associated with large complex systems and have you neat scales and those are part of the new final way of out sourcing from the point of view of people putting out everything ... not only the PCA at the enclosure business and the system and the final system build untouched and those will require certain capabilities. Their skill sets there that were important for us to have and capability is not a lot which existed in North America.

Okay, thank you very much.

Our next question comes from John McManus with Needham and company. Please go ahead.

Could you please give us the full quarter current run rate for Lucent, omni, and Avaya.

We gave you the full quarter run rate and the results and sequentially I also highlighted what expectation additional acquisitions would have.

So, that would indicate that Lucent is doing about may be $500 million a quarter and omni was an end to the entire quarter I wondered how on a full quarter basis what that might look like and may be on a full quarter basis what Avaya might look like.

I eluded to earlier that the omni situation will have 200 to 250 million in the fourth quarter and that the incremental portion of Lucent would be about 200 million sequentially on top of the ramping 100 million we had in the third quarter for Lucent. So, in total let us say 300 million for Lucent, but recognizing that we continued to ramp up the program bringing in workload from other vendors as part of that overall transactions and that would transpire overtime.

And Avaya could you just give us that please?

Though a smaller amount but it was probable without incrementally in the third quarter of about 60 to 79.

Well, then on a full quarter basis, I am just talking about on a full quarter run rate basis what would Avaya give you?

On an annualized basis, I think, it is still running at around 700-800 million.

Thank you very much.

Our next question comes from Mr. Keith Dunne with Roberts and Stephens. Please go ahead sir.

Thank you. When we look at ... you mentioned the core sales there has been a lot of discussion this. When you look at the fourth quarter, if you put all these numbers together, how much do you expect acquisition to add in the fourth quarter versus the third quarter?

I think I said it three times now that we had in the neighborhood of 400 million.

All of them in total.

That is correct.

Okay, at [Primetech] stage of everything else.

That is correct. Sequentially, we have been recognizing that the two key sequential drivers in the fourth quarter are only Lucent.

Great, and is that to say that the Avaya is all-turnkey now?

Yes.

Can you comment on how quickly you expect to be able to evaluate and move on your options regarding the omni semi-equipment operation that you are doing ... how fast might you evaluate and actually act on whatever you decide.

We will act as quickly as we can.

With that in the quarter potentially?

We have a good idea what we are going to do within this quarter for sure.

Okay. Can you give us historically ...can you give us any sense to that and a little color on how it is looking going forward?

I think we actually disclosed in the statements that the operation profit performance meets the geographies with the revenues. Obviously, what we need to see is the impact that the end markets have in North America and in Europe particularly in Europe going forward, I believe, that we talked about continued pressure in those market places. We are seeing more of our trend towards the Asian market place we have seen very strong profit performance margin performance in Asia despite pretty tough end market there are well. So across the board and in looking forward we expect to see margin expansion across the board.

You mentioned ... you talked to early in the comments that you see you are hoping that was a bottom is that suggest that you think absolute sales in the server and workstation have hit bottom in third quarter or fourth quarter will be somewhat similar ... can you give us any color there?

Well my reference there was just looking into the fourth quarter and the guidance that we are giving and if you allow the acquisition it will suggest that we are being extremely conservative and it could be at bottom. We are hopeful that it is again we talked about some of the opportunities going forward that might drive more than that into the infrastructure side and again we don't know certainly when that is going to happen so our expectation at this time stage or more of a bottoming than let us today we are going to look at it quarter ago.

And two last quick ones. Net interest income or expense in the fourth quarter given what do you expect on cash flow and the payment for omni etc ... where would that go from the 5.1 million income this quarter?

Well obviously we would have to draw down some of the interest income we are earning given the omni situation, but it will probably fall neutral to may be negative a touch.

Okay, then lastly capital expenditure in 2001 forecast for the full year and where do you think it might be in 2002 at this point of the process?

Well, our overall expectations in this kind of market place is that we are beginning going to constrain capital as a lot of our customers in the end market are doing recommend certainly.

Could you quantify it all Tony?

We will play it as we go. I mean we expanded about $26 million in the third quarter and also expect much more of it in that in the fourth quarter. We are nto going to compromise what we are going from the IT perspective we view that as capital expenditure as well and overall indications in this kind of a market place I do not expect much more than 1% and I probably say between 0.5% to 1% of the revenue is a realistic assumption.

Thanks very much. Good job.

The next question comes from [Gary Baker] of [Raymond James]. Please go ahead sir.

Hi. Hopefully one last question really in the first quarter revenues here ... I am just curious that if we take the lower end of your revenues assumption of $2.2 billion and we accept the acquisition that is implying again a sequential decline of close to 20%. Just looking at forecast what we have seen from some of your major customers, which is a comment from the fourth quarter, I do not see suggestions of sequential declines of that grade in the fourth quarter. Can you comment on that?

If you look at our order book it certainly would go like that, but we are just being very conservative in interpreting that order book. And we have a history of very conservative in how we look of things.

As everybody faxed it in on the potential end market effects post September 11 ... we don't know ... that is an open question.

AS a followup I just want if you can comment on given what is happening in the Japanese market in terms of obviously we have seen a structural change there in terms of the Japanese companies trying to delay people off ... we are seeing the SCI deal with the IBM facilities in Japan. Just one set of general ... what your view is on the Japanese market opening unto the EMS industry ... sort of timing and specifically for you guys what the changes mean for Celestica specifically in Japan.

We are very actively involved in Japan. We see a lot of opportunities across many of the companies. We see the environment there where they are lying off people as more conducive to restructuring and restructuring is a great backdrop for doing more out sourcing. We are very bullish, but we are also realistic in the Japanese contacts. It does not happen overnight, but there is a lot of activity and a lot of discussion and we think we are ideally positioned to participate in that.

Would you expect to see then in the next year some significant out sourcing deals in Japan and secondly given, I guess, the higher cost structure of some of the facilities in Japan ... are the Japanese willing to sort of see these out sourced outside of Japan?

I think long term a portion what is going to be out sourced will be in Japan, but it will be the minority. I think for the Japanese OEMs to achieve their cost goal a lot of it will have to be sourced outside of Japan, but you will have to have some present manufacturing capability in Japan. So, say there is a 100% out sourcing ... a fraction of it will be in Japan and the rest will be elsewhere around the world. It was a biased low cost job.

Do you expect to see then in 2002 some significant deals in Japan?

I expect to see deals in Japan and how big they are that would have to be seen. But certainly there are a lot of discussions and some of them are big.

Okay. Thank you very much.

Two more questions.

The next question is from Chris Whitmore from Deutsche Bank Alex Brown. Please go ahead sir.

Good afternoon. Looking at what your the goodwill and the balance sheet looked like before the impairment and the increase about $250 million sequentially ... I am hoping to get it all clarity there.

Service of the goodwill. Goodwill will grow roughly at $800 million with the omni transaction.

In this quarter, how will be attributable to Lucent?

About a $100 million for Lucent it is just under and about a $100 million for the Avaya transaction, $200 million.

Should we expect any more impairment of goodwill going forward?

Impairment is attached that to make it on an ongoing basis and we approximately evaluate it, I hope, we are where because of our view of the future does not change adversely. If it gets worse out there then obviously there is an opportunity or probably the requirement to compare.

You mentioned earlier about getting to your revenue guidance with Lucent ... you are going to bring some additional workload into the insight ... can you help us understand the timing of that and where it is coming from?

That is coming from other out sourcing areas and facilities within Lucent and we talked about that earlier, and so it is coming mostly in the areas of switching and wireless.

Do you think that will be end by the first quarter?

Some might push out. I guess it depends on the total number of codes that we are introducing, but we expect most of that by the first quarter.

Okay, thank you.

Our final question comes from Mr. Michael Morris with Salomon Smith Barney. Please go ahead sir.

Ah ha! Just under the wire. You have mentioned a number of times gentlemen your preference to take a conservative attack in the way you are sizing your business and in your outlook and I wonder if that might imply that after the fourth quarter charges you would be essentially finished with those rationalization and optimization type of activities.

We certainly hope so. Again, we have seen an unprecedented end market correction and a sustained correction this year. We talked about even the third quarter being in worsening environment where we had to now address our capacity in a more aggressive pattern. We are hopeful, as I said earlier, that this might be bottomed out and therefore our need to do more will be non-existing. So, we all share the same goals.

And I guess that is what I am getting at Anthony is it seems that there may be slight change in your strategic vision as well as desired at the right side of the company for the near terms and I was just wondering if a shift to lower cost geographies, a shift to larger production site etc. I did not tell some chart down the road or that would be sort of part and parcel of what we are seeing now.

I think the view is that any additional charges would be because of further deterioration in end markets. Just a sort of ... end the discussion relative to our strategic vision it has not changed. We see a huge market here and we see huge opportunities for our company. We are also being very pragmatic during the quarters ahead of us as we go through this turbulence and that was many a company that failed going on to a perfect strategic vision. We have a great strategic vision and we are going to operate well in this turbulence too and we are trying to have the balance between them. But there is no erosion relative to where we strategically see ourselves going. So, with that I would like to thank all of you for joining the call and I look forward to talking to all of you again in our next quarter update and final fourth quarter for the year. Thank you very much and good-bye.

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.