Celestica Inc (CLS) 2002 Q1 法說會逐字稿

(Webcast Joined In Progress)...first-quarter 2002 financial results conference call. During the presentation, all participants will be in the listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press P1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, April the 17th, 2002.

I would now like to turn the conference over to Mr. Eugene Polistuk, chairman and chief executive officer with Celestica Inc. Mr. Polistuk, please proceed.

Good afternoon, and thank you for joining us on Celestica's first-quarter 2002 conference call. Since this is a busy reporting day for all of you, and since results have been out since this morning, Tony Puppi, our CFO, will briefly summarize our financial results, and then we'll go directly to your questions. Also joining Tony and I today is Mark MaGee, president and chief operating officer.

Tony.

Thanks, Eugene. Before we begin, let me express to you that any statements that are made today, which may be forward-looking and not historical fact, may involve risks and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statement.

Despite the continued challenges faced in technology markets, Celestica was able to achieve its revenue margin and earnings guidance and continues to show improvements on some of -- some of its key efficiency objectives. Revenue in the quarter was 2.2 billion, down 20 percent from the first quarter last year, and in line with our $2.1 billion to $2.5 billion guidance announced in January. Though the first quarter is our seasonally weakest quarter, the year-over-year decline continued to reflect the challenges in IT and communications and markets.

On a sequential basis, organic business was down 12 percent, with no material impact in acquisition revenue in the quarter on a sequential basis.

End-market segmentation broke out as follows: Communications revenue was 46 percent of revenue; server sales was 28 percent; storage and other was at 19 percent; workstation and PCs was 7 percent; and based on the smaller percentage of the revenue that these two end markets now represent to us and the blurring lines of technology between these two product lines, we will report these two as a combined segment on a going-forward basis.

During the quarter, Sun, IBM, Lucent and HP were each over 10 percent of sales. Our top five represented 72 percent of revenue, and the top 10 represented 88 percent.

Capacity utilization was between 40 to 45 percent, in line with the seasonal effects on volumes.

Our operating margins came in at 3.5 percent, meeting our guidance of 3.5 to 3.9 percent.

We were particularly pleased with our cost management over the last year and their reflection in the quarter. Our restructuring benefits, in addition to other cost-reduction actions, largely offset the effects of the 12 percent sequential decline in revenue. A further indication of solid expense management is the 14 percent drop in absolute SG&A spending.

After ongoing our -- undergoing our restructuring last year, having two quarters of GAAP debt losses, GAAP net earnings turned positive again in the first quarter to $39.7 million. Adjusted net earnings were $63.4 million in the quarter, or $26 cents per share, compared to $87.3 million, or $39 cents per share, from one year ago. This was also in line with our guidance of $25 cents to $32 cents per share announced in January.

Our working capital performance continues to fuel cash flow and further strengthen our balance sheet. Cash flow from operations was $274 million, exceeding our cap-ex and acquisition costs in the quarter by more than $140 million. It was also our fourth consecutive quarter of positive cash flow.

Inventories, despite adding the NEC acquisition assets on March 31st, decreased by an additional $135 million, with turns improving sequentially to 6.1 times compared to 6 times in our seasonally stronger fourth quarter.

Cash cycle continued to improve, dropping to 28 days, as a result in more stability in our working capital flows in the quarter. Overall, these improvements increased cash balances by $140 million, bringing the balance to $1.5 billion at the end of the quarter. The company also continues to be undrawn in its $1 billion in credit facilities, and we continue to be conservatively capitalized with a debt-to-capital ratio of 21 percent.

In summary, we all would like to see the beginning of an end-market recovery; clearly, we haven't. In this environment, we continue to be intensely focused on execution and efficiency, and our strong balance sheet and stable operating profitability are clear outcomes of this.

Let me move to our forward guidance, where visibility continues to be limited. As you have heard from many of our customers, uncertainty in the technology marketplace is still broad-based. As a result, our expectation for revenue in the second calendar quarter of 2002 is approximately $2.1 billion to $2.4 billion, essentially the tone of a flat market. We expect operating margins in the 3.5 to 3.7 percent range and result in adjusted earnings per share of $25 cents to $31 cents. So steady as she goes in the upcoming quarter, where we also expect continued operational cash generation as well.

I'll now turn it back to Eugene for his closing comments.

Thank you, Tony.

While near-term demands remain volatile, the trend for outsourcing is alive and well. On the organic side, we continue to win program and are either holding or gaining total share with our total -- with our top customers. As you know, we do not disclose new-program wins since their impact is always difficult to predict, particularly in this environment. But it is clear to us that this new outsourcing is continuing.

On the acquisition front, there continues to be numerous opportunities, and we have the financial firepower to participate in any transaction that fits our strategic rationale.

While end-market visibility remains limited, we have built a strong, sufficient and...

...and payables, we use the cost of sales instead of the revenue on the same formula basis.

unid|||||f: Mm-hmm. Yeah. I'm just -- I'm just pretty far off from what you've got there.

Well, when you -- when you -- when you do the calculations,

, our numbers say that on the receivables side, our days sales outstanding are 45 in the quarter. Our inventory came in at 59 days, which is an improvement of two days sequentially. And the payables, or non-interest-bearing liabilities, came in at 76 days versus 60 days in the prior quarter.

OK. I guess that's where my disconnect is. Just along those lines, your payables really kind of helped you improve your cash-conversion cycle.

Yes, it did.

Do you think that you can keep your payables extended at this level?

Actually, what we think is transpiring here is a stabilizing of the working capital flows in the business to more reasonable levels or at least levels that we experienced in years such as the year 2000, where the inventories that we acquire are more current, let's say, rather than being around for a while and having an overhang effect, which, as you know, we -- the whole industry's faced last year. So the inventories are fresher, meaning that, at the end of the quarter, more of the payables will be outstanding relative to that inventory level. So I think that's the key difference here. Obviously, terms are something we continue to leverage, but that's a small part of the game quarter to quarter.

And did you have any receivable securitization in the quarter?

We continued to utilize our AR -- financing program or facility to the same level we had in the fourth quarter, so $400 million.

Great. And one last question. We're getting the sense, from the comments coming out from component suppliers and semiconductor companies, that they're feeling a lot more optimistic about the second half, and that's -- just wanted to find out if you could -- I know you haven't done any guidance for the second half, but if you could kind of look out that far and give us a sense of how you're feeling.

Well, we see glimmers. Things have stabilized, and we see positive signs here and there. But we have not seen the pervasive, across-the-board, upside kind of environment yet. So we keep looking, and we do detect optimism in many quarters, but nothing that is compelling enough for us to start declaring a party.

Any sense why they might be more optimistic? Is it kind of inventory restocking going on, you think?

It's hard to say. It's hard to say.

OK. Thank you.

Our next question comes from Mr.

with AG Edwards. Please proceed with your question.

Thanks. I wonder if you could characterize the weakness that you're experiencing. Is it -- you know, how much -- how much would be just a decrease in your core programs? You know, what to what extent do new programs not delivering as expected? And when would you expect some positive impact from the end-of-inventory corrections?

Well, inventory corrections, I think, are mostly behind us. We are seeing new programs. We are seeing existing program -- it's a mix in there. I don't know quite how to answer it. It's a very broad brush that you're asking.

Well, I guess I'm just trying to get a sense for if inventory corrections are over, and, you know, hopefully there's some stabilization in core programs. I guess I'm wondering how come the second quarter, you know, shouldn't be up a little bit for two reasons: one, seasonality -- there should be some upside; and two, also, the NEC transaction closed at the end of the quarter, which, you know, should add anywhere from 120 million to 125 million in the quarter, assuming a pretty full ramp.

Well, the NEC -- we do expect it to add about 100 million in the next quarter. And I think if you took the midpoint of the range as being suggestive of a trend, OK -- trend you'd find that our base business or core business has a flat tone to it, which I alluded to in my opening comments. So I think it's across the board. I think there's still weaknesses in the communcations side, particularly in telecommunications. And in the enterprise spending, we're just not seeing the kind of uptick one would experience on a seasonal basis.

So there still may be some inventory, though I do agree with Eugene that I think a lot of that is behind us. There may be some of that still at work here and affect our demand -- or demand on us, but I think it's pretty broad based.

Great. Thank you.

Our next question comes from Mr.

with RBC Capital Markets. Please proceed, sir.

Good afternoon. Were there any unusual factors tied to the sequential decline in revenues in the European market in the quarter? And can you also give us a sense as to capacity utilization in each of your three regions?

I think the -- in terms of the quarter -- sequential quarter to quarter, there obviously is the normal seasonality from the fourth quarter to the first quarter. And I think as Tony -- Eugene just mentioned generally looking forward, a sense of stability. And to your point on capacity utilization, it's very consistent with that. We're still in the range of 40 to 45 percent, which is close to where we were in the fourth quarter, and that's sort of the overall view of where we are.

And, you know, our view is we manage the financial results to the levels we've shown here within that utilization, and that does give us room to respond to any incremental demands that we see.

That utilization rate consistent between the geographies?

It varies, but, you know, not in a -- in a significant way.

OK. And then just looking at the revenues by geography, I mean, Europe was down 24 percent, and then North America and Asia were down, you know, mid-single digits. Is there any -- was there any shifting of business out of the European market that would have accounted for that?

I wouldn't say specifically to Europe. I'd say certainly the trends that I think we've spoken about before on low-cost geography, there is -- continues to be higher levels of interest from our customers for that -- for that region.

OK. And then can you just provide us an update on the ramping business at your new location in Salem, New Hampshire, that you're subleasing from Cisco?

The transfer's progressing as we planned, and obviously the Cisco relationship is -- remains very important to us.

OK. So are things fully ramped there at this point?

We're still migrating, but it's largely complete.

OK. And then one last question. Are you -- are you seeing any sort of firming in your forecasts on the telecom side of the market? You know, I know there's been some recent wins on the wireless side with Nortel. And I know that, you know, Motorola's infrastructure business or their -- you know, their bookings look pretty decent for the June quarter. I'm just wondering if you're seeing that in the forecasts from your customers.

I think, rather, the -- you know, the communications sector, there's some product areas where there's strength, but, generally, the trend that we spoke about of sort of a steady as she goes kind of view is where we are, and that's what we see.

OK. Thank you.

Our next question comes from Mr. Todd Coupland with CIBC World Markets. Please proceed, sir.

Yeah, good afternoon, everyone. Could you just let us know how much Omni and Lucent contributed in the March quarter?

I think they were reflected in the guidance that we gave. I think, sequentially, the two, where we initially opened the quarter thinking that there would be some positive momentum, I think, overall, they've been affected with the end-market pressures, as have all the other sectors. So, sequentially, there was no gain quarter to quarter.

OK. And if you look at the business -- coming back to this question on the semiconductor parts -- players, who've been announcing positive results over the last couple days -- as you look at your business mix, and you look out to the second half of the year, could you just give us a sense on what pieces of the business you think are going to move first and what pieces are going to lag, given recent outlooks from your customers? Thank you.

...so then I'll go and put -- buy stock in those companies proportionately. It's very hard to call. That's why I'm being very, very careful not to go beyond the one quarter. As I said, if you look at all the individual customers, many of them are optimistic on the second half. Some aren't seeing it yet. It's hard to call. I don't feel comfortable making general pronouncements on how the -- how the industry's going to flow. We're doing it one quarter at a time, and when we see it and it's rock hard, we'll tell.

OK. Fair enough. And then just -- I know you play in the high end of the market. ODMs has been a discussion for a number of the

over the last couple of months. Just give us your thoughts and where you think it fits with respect to Celestica's competitive position. Thanks.

The ODMs are getting more discussion now. They're a -- they're a piece of the business. They've been focused more on low-end devices and the PC space, which, by the way, is a very small percentage of our mix of product. I don't look at the ODMs as the huge threat that some people see right now. I think there's a place for them. I think they're part of it.

As a matter of fact, the world is, in many ways, three different types of place. There's ODM, which is a small percentage of the total outsourcing, if you want to look at it that way. There's the MS model that we talk about. But what we don't talk about and should is that nearly all the MS players are CDMs -- you know, are contract design manufacturers. And all of us help design products and take them to market. So there isn't sort of some magic to buying line there on the -- on the ODMs.

So it's a -- an interesting thing. They have to go into a totally different space than they've been historically. They're not technology innovators, but they have a place to serve in there. But I think we also have a recipe that is just as competitive. And, by the way -- and I would not overrate the -- I would take very much into consideration we are not a threat to the OEMs 'cause there is no intellectual property issues, and many customers do not like that threat, where their providers are also suddenly also competitors in the marketplace, and, you know, we've had conversations like that at very senior levels.

So it's there, but it's not, you know, the big disruptive event. It's been there, and it's still there.

Right. Thank you.

The next question comes from

with Lehman Brothers. Please proceed.

Yes. I just -- I just was talked for a while back and forth about the pipeline. And I guess, you know, with the -- if you go back a little while ago, I guess in January, it felt like the pipeline was sort of drained because so much business has come back out. Do you think that it sort of regenerates itself and, let's say, that it -- the next quarter should see a regain in activity, or do you think that it's still a little lumpy in the near term here?

Lou, are you talking about the acquisition pipeline or just overall business pipeline?

More, you know, OEMs looking to, you know, outsource, you know, big chunks of their assets, you know, sort of like the deal that -- I guess you could say that you all did with Lucent a little while ago.

There's lots of deals out there, and there continues to be a good pipeline. I also think that the environment has changed. All the MS providers have their global footprints; they already have significant relationships. And I think there's a trend where prices are dropping, and the solutions are getting different. Many of us are not buying facilities, even though we're taking on the work.

In many cases, it's really an inventory transition plan rather than a full-scale acquisition. But the opportunities are there. As long as the outsourcing, as a percentage of available market, isn't in the small teens or in the teens versus bigger than that, there's opportunity. So some of it'll come straight organic, and some of it'll come through some kind of divestiture mechanism. And -- but that --but it is changing. It's really becoming transition agreements rather than acquisitions in the classical sense.

OK. Can you actually put a dollar amount on it before -- I'll put around, I guess, a range of $10 billion to $15 billion. Would you adjust that higher or lower?

We have always said it was around $5 billion to $10 billion, with

things coming in being done and then dropping off. I'd say it's at different points in time going through the quarter, we -- it's been as high as $10 billion and been as low as $5 billion. So they're still out there, but I think because the nature of what people want and the fact that the EMS providers are looking for less assets to procure, the discussions sometimes take longer and are more complex, from that point of view.

OK. Great. And I guess on the improvement of the margin area, I guess we're looking for a flat margin, I think, as per your guidance going forward. Do you think the benefits from the restructuring that you did in 2001 have completely taken hold, or you think -- still think there's a -- more that is going on that will help contribute to a -- margins, or, really, will margins ramp only, really, when organic business starts to pick up?

Well, I think underneath our results, we've had -- you know, the margins actually hold up quite strongly because of the restructuring effort. We continue to know that we still have to complete some of the restructuring activity in the second quarter here and that that will buttress our margins in the quarter nicely. So still there -- think there's an opportunity to expand margins. I think that, again, the range we're giving is there, but at the same time, we do have the, let's say, volatility of the marketplace to deal with. So we feel good that -- with the stability of our margins. That's important to us.

OK. And if tech -- let's say I -- hope it stabilizes, let's say, at March quarter level, would you expect to take any more charges, I guess, in this year for restructuring and, let's say -- given that you're around 40 percent, or would you just wait for the end market to hopefully bounce back and then try to get higher utilization that way?

Well, right now we've got no plans for further restructuring, unless, you know, we're seeing a prolonged lack of recovery or further decline. And then, you know, obviously, we'd be constantly assessing that pulse.

OK. Are you seeing either of those right now or just...

Oh, no. I think right now we're saying steady as she goes.

OK. Thank you.

OK.

Next question comes from Alex Blanton with Ingalls & Snyder. Please proceed with your question.

Yes. I wonder if you could comment on any plans you might have to expand your vertical integration? There are some projects that have been won recently by competitors, who say that it was their expanded enclosure capability and, also, their after-market support and service that enabled them to win the business. And currently there are three of the top-tier companies that do have those capabilities. And I'm wondering if you feel that you might need more of that than you've had in the past.

Well, there certainly has been a lot of discussion about verticalization. We've had -- no customer has told us that, so there's a little bit of mythology kicking around in the marketplace. What is verticalization? Really, you get down to -- it's building metal frames or building PWBs, because we do

and we do enclosure business. Let's say someone like -- let's see, who is one of the larger players there? Say APW. Three-quarters of the business that they did or do, we already do inside Celestica, you know, 'cause if you segment their business from zero to level 5, as they call it, we do level 3 to 5.

So, you know -- so there's a lot of mythology here. We do not have to make the metal shops and make the resulting metal frames. There are ample suppliers all over the world, and it has not been a problem, and it enables us to optimize the supply chain for our customer rather than optimizing our internal operations. So that one's a bit of a mythology.

And on PWB, we find their supply all over the world and, in some cases, at a lot cheaper price than you find with some of the other existing providers that say they get advantage from us. So I think it's over -- it's overrated. It's overrated. And we have not written off any enclosure investments in going down the path of getting that kind of capability, for example. So if they say that, funny the customers aren't saying it.

Well, do you participate in the design of enclosures rather than just metal-bending?

We do. And, you know, it's a case of degree. So, you know, that's something that depends on -- each customer will have a certain passion for how much they want involved in what they've done. But we've designed whole products, including the frames.

OK. And one other question. I'd just like to take another crack at this -- it was asked before. Looking at the base business going into the second quarter and then adding on NEC and adding on new programs that you have won, which you aren't telling us -- you're not disclosing -- there still isn't much of an increase sequentially from quarter to quarter. So are we to assume that the base business is still eroding, that it's flat and you're just not winning a lot of new business on top of it to take the second quarter up more, or just what is the situation?

We are winning business with our existing customers and, actually, if you look at our -- when you look at our top 10 customers, are gaining share, OK? And we're winning new customers, which we don't go and advertise all the time because it can be misleading and, I think, verges on hype. So we are winning business. But our end markets for our customers, in many cases, have shrunk. So you look at some of our customers, and they've come down by 10 percent, 20 percent, 30, sometimes 40 percent. So you have to factor all those fact -- all those items. But we're not losing share; we're winning share. We're winning new customers. We're winning new programs. Existing programs are shrinking in cases because of end-market phenomenon.

Well, I'm just talking about sequentially from the first quarter to the second quarter. If we add on the 100 million from NEC, we get just about to the middle of your range for the second quarter.

Yeah.

So there isn't -- doesn't seem to be anything added by new business quarter to quarter in that midrange projection.

There's new business coming in. There's old programs that are dying out. There's existing programs that might be at lower volumes. There are existing programs that are at higher volumes. It's all an aggregate. It's always -- it always has been that way. So the only way you really know is you'd have to look at the overall share. If you want to do a quick calculation, go look at the overall share. Take the top five pairs and calculate it and see how respective players are growing and shrinking within that -- within that mix.

Well, if your share...

aggregate against the total EMS.

If your share of your customers' business is growing and yet your total business is flat...

Maybe their total business has shrunk.

Yes, that's what I'm saying. Yes, has it -- has it shrunk from the first quarter? That's what I'm saying. OK.

It varies by customers, you know.

I think -- I think we need to summarize. I think, at the end of the day, what we're saying is our core business is fine. So you have positives, you have negatives, and it's not netting out to any positive momentum. And that's the bottom line.

OK. Thank you.

OK.

Our next question comes from Mr. Jerry Labowitz with Merrill Lynch. Please go ahead, sir. Mr. Labowitz, your line is now open. Please proceed with your question.

We'll proceed to the next question, which is from Roger Norberg with JP Morgan. Please proceed, sir.

Good afternoon. Just looking through your numbers, it looks like, I would say, concentration has gone up a little bit in the last few quarters, so that when I look at your remaining non-top-10 customers, their business was your revenues were off about 25 percent sequentially. Is that just organic decline, or have you also -- are you also doing some pruning in that segment of your business?

There are clearly some customers that are being pruned, OK? I don't think it's a -- it's a -- overall, a material part of it. I just think maybe some of the smaller customers are having even more difficulty in this kind of marketplace.

OK. And then as far as your views so far on the second-quarter revenue trends by geography, relatively speaking, with the revenue trends by geography, then Q2 looks similar to what Q21 -- to what Q1 was.

I think so. I think we'll continue to see probably more strength in the Asian side of things and more flat on everywhere else. That's kind of our feel right now.

OK. And just looking at inventory turns, Tony, you're up -- you're back at a 6 level. Historically, you've been able to be a 7 to 8 turn business. Is that still a realistic goal, or is the mix and pattern of -- and market customer and such changed such that your previous inventory velocity is not attainable?

No, we still feel comfortable that we're restored to the term rates that you mentioned earlier and look, longer term, to even go better than that.

OK. And just one housekeeping item. Can you refresh on what your current cap-ex budget is for '02?

No. We said we'd try to keep it between 1 and 1 1/2 percent, and that's kind of where we went in the first quarter, so that's pretty much where we want to keep it, in this market.

Excellent. Thanks very much.

OK.

Our next question comes from Mr. Michael Zimm with Goldman Sachs. Please proceed with your question, sir.

Yes. Good afternoon. Tony, earlier in your comments, you mentioned something about cost reductions outside of restructuring. Could you just give us a little more color there and also, you know, how much of that is still left available for the picking?

Well, there's always room. Certainly I am pleased to say that, but I really believe that. In the sense of our ongoing initiatives, if you recall, I mean, we always had like a full-court press across the board, whether it's regionalization of our infrastructure, investments we are making in IT and our supply chain to drive further cost reduction, whether it's in the component purchasing side or whether it's just the efficiency of managing scrap and inventories and things like that. Those are clearly areas where we're making progress, and we continue to have ample opportunity.

Another area is just as we acquired any great acquisitions, with the passage of time, they get more efficient. Obviously, that's part of the design point for our customers in terms of giving them cost reduction paths, so we both share in that path. So I think, again, we have many initiatives above and beyond the fundamental restructuring for operations that we've done.

All right. And just talking about the March quarter itself, can you go -- take us through month by month, relative to your expectations, about revenue? Was it more back-end loaded in terms of the overall quarter than what you expected, or was it pretty much in line with what you were looking for?

Well, it started off as being a little more linear to our historical rates, but I think as the quarter moved on, that became not linear, and so higher skew in the -- in the March month.

Meaning that more of the revenue came in the month of March than what you expected...

At the beginning of the quarter, that's correct.

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

Yes. Thanks. Good afternoon. I wanted to just quickly touch on the inventory situation. You indicated at the beginning of your remarks that the inventory correction had pretty much run its course, I believe is what you suggested. And just so I'm interpreting that correctly, does that mean that you perceive your customers' inventories to be quite lean and that you are essentially seeing the sell-through or is that not the right way to look at it?

I -- it's more like it's less of an issue that it's been. It's kind of -- in our mind, it's just not a big item anymore.

OK. Is that ...

I'd like to -- I'd like to maybe say it a different way. More of a steady state kind of environment.

And it's -- and from our perspective, it's how we look at our own inventories in terms of having more current inventories in our profile than older inventories that we've been dissipating.

OK. And I don't mean to sound dense, but could you then just characterize your perception of your customers' finished goods inventories and whether you are close to seeing some approximation of their sell-through at this moment?

Yeah. I think that, you know, -- the characteristics I see are as our customers win orders in their marketplaces, we see that flow through the supply chain with the normal level of speed that we would have in -- in prior years.

OK. Then secondly, the range for your June quarter is, you know, fairly broad, as has been your pattern lately, and I think that's certainly reasonable, but I wondered if there are -- if you could comment on the swing factors? Is it as simple as customers might take more product or is there some element of Celestica being conservative while customers are being optimistic or is there some product transition issues? Just what are the elements and the swing factors that could make you come at the high end?

I think it's your first two factors. I'm not so sure that product transitions, as we look at it, have a material impact in the second quarter. But the former two items do in terms of our customers' products success in the marketplace as being one, and the fact that, in some cases, that optimism has not borne itself out in the past and we've been conservative. So it's both of those items.

OK. Then just a couple more. I was at your analyst meeting in New York a few months ago, and I got the feeling that you were feeling that things were quite stable as we entered the end of 2001 and the beginning of 2002, and I may have written it down wrong, but I thought someone had said that they were -- they thought it was more stable than at any time throughout 2001 as we entered the end of the year. Do you -- do you still feel that way? Do you still feel things are as stable as they were, let's say, in the fourth quarter? Are they more stable, less stable? Just if you could give us your subjective opinion on that.

It's sort of like we flattened out. It's maybe a teeny-weeny bit more stable, but it -- the -- there isn't the kind of turbulence that we were experiencing the first, second and third quarter. So it dissipated fairly quickly. So it's -- I think it was fairly stable in the fourth quarter. It was a little bit more stable in the first quarter. And I think that's good and a healthy indicator, and as was mentioned by Marv, you know, there's a pretty immediate flow-through on demand now. The channel isn't cluttered with inventory or other factors, and it's a -- it's a -- it's nearly back to usual. The only thing missing is a big uptick in the end market.

The demand-pull part of it.

Exactly.

Yeah. Last question, kind of housekeeping. What...

I should make one interesting comment, just a bit of an aside.

Certainly.

With so many of our customers experience -- having experienced pain because of that correction that occurred, I wouldn't be surprised that everyone's going to be very cautious and, if anything, we'll probably all read the demand down less than it is to be cautious. You know, just an observation.

OK.

Like I -- it's -- it'll be interesting. If there's a strong uptick, you know, we'll probably have other problems.

But you can count on us to continue to be cautious.

Yeah. Fair enough. Just real quickly, Tony, what might we expect for integration costs in the June quarter with NEC coming online? Is there some figure we should have in mind for that?

I think we're -- you know, again, there's a range of these things, and our view is it could be, you know, anywhere from 8 to $12 million in the next quarter all in, so including our other acquisitions.

OK. Thanks very much.

OK.

Our next question comes from Mr.

with Raymond James. Please proceed with your question.

Yeah. Good afternoon. Just wanted to follow up on the operating margins. I'm just wondering if you'd hazard a guess, under a stable environment, how high you could -- you could get the operating margins? And the second part of that question, you -- you've stated your objective as to get the 5 percent operating margins. Can you give us a -- us an idea of what sort of quarterly revenue run rate you would need to achieve a 5 percent operating margin?

Well, I think we feel very good about, you know, being at only 40 to 45 percent capacity utilization and driving out 3 1/2 percent margins. You do get good leverage if you -- if you have the demand pull, as was discussed earlier. Historically, I've said, you know, for every 15 percent gain kind of, this is a rule of thumb. In terms of capacity utilization, we should be able to pick up a full 100 basis points of margin. Now that's borne itself out through time, and it's pretty robust. So I think with that information, you could probably extend your own.

Of course, there's other dynamics, and there's, you know, pricing, the mix of business that you have, the kind of end market segments you participate in, the nature of the business, whether it's system built or not, piece circuit board assembly. You have a lot of factors that are at play, and, you know, again, I'm painting it to you as if there are no change in all of those other mix-related factors and if you just had a demand increase, what the effects would be.

OK. And following up on that, you mentioned pricing. Given the industry still is, in many cases, 40, 45 percent capacity utilization, are you seeing any increased pricing pressures in the last quarter?

I think it's been -- you know, there's a lot of pricing discussions ever since the end market turned down. Obviously, our customers are feeling pain, and it's our responsibility to help them at these times. This is the -- part of the attributes of our model is being able to pass on our ability to defray costs that they otherwise couldn't.

And I'd like to remind everyone, again, that the bulk of the costs are fill and the material, and that's where most of the focus goes and why a good supply chain is -- has so much leverage. And, you know, you go back to sort of

with Dell, you fill those material cost reductions and there has been material cost takedown in this environment, and an efficient chain. That's how our customers get the bulk of their efficiency, so that's where the action is.

OK. On -- and one last question. Eugene, you mentioned in your sort of closing remarks on Japan that you hoped to do more NEC business and other Japanese business. I wonder if you can elaborate on that. You haven't really talked about sort of other Japanese customers, other than NEC to this point.

So we're in dialogue with, you know, multiple customers. With the facilities we have there, we think, are, you know, a significant presence and have very, very significant capability and will be a -- a platform for us to expand with, and that was the whole intent of making that investment. And we're in various dialogues. The Japanese OEMs are very interested in the leverage of this new business model. So the only variable now is how long it takes.

Oh, would you venture a guess on how long it takes to negotiate with these Japanese de...

Well, Japanese companies sometimes take longer. Although we've moved very quickly with NEC. And now that NEC has moved as quickly, I think it'll be a role model for others. And there's been some other -- some other EMS successes in Japan, and I think all of those will accelerate the whole process, much the same way as it happened in Europe and as it happened in North America. And that is the very sam -- you know, 20, 25 percent of the electronics worldwide are coming out of Japanese OEMs. So it's an important platform and having a significant presence there is, I think, very important to us.

OK. Thanks very much.

Our next question comes from Mr. Mark Lucey with TD Newcrest. Please proceed, sir.

One quest -- or two questions actually. Clarification on a -- on the rule of thumb that you gave, Tony, on the 15 percent gain in capital -- capacity utilization, leading to 100 basis points and operating margins. I was just curious as to how much of that would show up in gross profit margin as opposed to in some form of SG&A economies? Because when I looked back in history, your, you know, gross margins have kind of run in the 7 to 7.1 percent kind of range, even in an era of higher capacity utilization in the past. And also, a comment as that relates to 85 -- as in the past, you said 85 percent of your cost goods sold is component-oriented, and so, therefore, at most, 15 percent of your cost goods sold is fixed. Given that your capacity utilization is down, is that sort of rule of thumb still true or do you have a higher percentage of fixed costs in your cogs right now?

No. I think when I -- when I'd given you that rule of thumb, it's more on a ratio of 80 percent material; although in some segments, you have higher material content.

And some more.

And some -- yeah -- more. But in the -- I mean, I'm looking at what it's historically, I think, for our industry been around 80 percent. And I expect the benefit to come in both the SG&A percentage, you know, if you assume a hi -- degree of fixed and variable there, it's probably more fixed and variable, you get some leverage, obviously, and then balances in your cost of sales of value added, the manufacturing costs. So you do get it in both. And...

OK. So at this point in time, though, is that 80 percent rule of thumb for materials costs, is that -- is that holding true or as you've -- as your volumes have pulled back here, are you now experiencing -- you know, is it more like only 70 percent or 65 percent right now?

No. I think overall, that ratio has hung in pretty good.

OK. Just a -- maybe I was late coming on the call. Did you mention the organic versus non-organic growth or acquisition-related growth on a sequential basis or in a year-over-year basis at the beginning of the call?

Yeah, we did talk about that, Mark. It was 12 percent sequential and a decline, and that was all on the base business with no addition really from the acquisitions we completed. So in other words, there's no sequential gain acquisition related quarter to quarter.

OK. That makes sense. What about on the year over year?

We didn't disclose that.

OK. Thank you.

Yep.

Our next question comes from Mr. Jim Savage with Thomas Weisel Partners. Please proceed, sir.

Hi, gentlemen. A couple of things. One, first is if you look out to the second half of the year, are there major new programs at this point that are scheduled to ramp that should have a material impact? And I guess the other part of that is in terms of the new programs that you have won on a broad -- on a broad basis, are you still seeing declines or push-outs in terms of the customer forecasts the way you have been over the course of the previous year, or are we beginning to see the forecasts becoming more stable and more predictable?

Well, they're still -- they're still more stable. I think Eugene talked at length about that. But, you know, even as we saw in the -- in the last quarter, there are still some push-outs happening, and certain sectors are feeling the pain a little bit more than others, and certain companies at various points in time may have a better product than someone else and does a little bit better. So that a -- that's all in the ebb and flow of our business, and I think it's indicative of, overall, like I said, a flat environment in the first quarter.

In terms of program wins, we do. We do anticipate that they'll add to our momentum in the second half of the year. Again, it's something that we don't like to put big numbers on because, again, the success rates of various programs have a degree of variability, and overall, it's part of our organic business. And, you know, historically, we found that just giving overall general perspectives is the best way to deal with that. And right now, the visibility overall in our business, base business, looking at the second half is not very clear. That's why we're not giving guidance beyond the second quarter.

We usually do about 1,000 new introductions a month. And, you know, we're not that far off that pace. The thing is how big will each one be, and it depends on the end market.

In general, then, I mean, if you -- if you look at the end markets, obviously, telecom is still over 40 percent of your -- of your business. If you would say that the forecasts for those programs that you are doing, design or NPI, for the world -- are expected to ramp in the second half of the year. Have the forecasts declined over the last quarter on those? Are they remaining relatively stable? Is there a difference between the computing segment and the service segment for you and the -- and the communications segment?

I just -- if you..

In broad terms, I'd say no profound difference. I would say -- go back to the earlier comment. I think there is a higher degree of cautiousness in all -- in all -- in all areas, so that, you know, from the -- from the point of view of two years ago, people would be optimistic at some level, and now they may -- the programs might be half as big. They might turn out to be the same level as they would have been two years ago, but everyone is being cautious. Because if they forecast a very high program, the engine goes into place, and the next thing you know, you've got a tremendous supply line that goes with it. So there's that mentality of cautiousness I think is a clouding factor here. You know, we may be sitting on more positive news, and everybody in the whole chain is being cautious.

And at this point, are you seeing any tightness in any component group, so that if, in fact, there were to be upside in demand above your customers forecasts -- your cautious customer forecasts, would it be difficult to actually be able to make those upsides?

Certainly, the -- on some of the commodities, there's been capacity reductions, but we still survey on a regular process -- as part of our regular supply chain process, and we're comfortable with our ability to respond at this point.

OK. Great, thank you.

And it's such an interesting comment, you know, is that in a tight environment, everyone orders more than they need, and in this kind of environment, you know, people are probably ordering less than they need. That's an historic. Two more questions.

The next question comes from Chris Whitmore with Deutsche Bank. Please proceed, sir.

Thank you. Good afternoon. A couple questions about your footprint. Can you talk about how you feel about your global footprint and high cost versus low cost, what -- what that split is today? And -- and tied to that, can you speak to the integration of Omni and the ability to transition existing customers into those assets, so forth and so on?

Sure. Yes. I'd be happy to talk about that. I think we've spoken in prior calls how, through the course of last year, we moved from -- probably less than a quarter of our facilities in low-cost geographies to now where more than half of them are in low-cost geographies, so a pretty significant shift in our capabilities, and certainly the Omni acquisition contributed to that shift. Relative to -- relative to Omni itself performing very well, what -- as we've spoke about at the time of the acquisition, the key -- one of the key elements on the strategy was bandwidth and capability in low-cost regions in Asia, and they certainly have brought that to us, and with their existing customer and new opportunities, it's progressing quite well.

No, in general, fair to say that you're pretty happy with your global footprint, and if that's the case, is there any reason at all we should expect Celestica to pay a premium for any manufacturing assets and in an OEM-related transaction?

I think as Eugene was saying earlier, I think that the marketplace in -- in those transactions is -- is changing quite significantly in terms of how they're priced. Today, by far, the largest part of the transaction in price is the value of the inventory. That's certainly the trends that we see in our -- in our engagement.

And, you know, going to the price thing, the prices are dropping. It's very visible. I mean, there may be some exceptions now and then, but it'd have to have very important strategic importance for anyone to pay a meaningful premium in this environment.

And lastly, Tony, should we expect a goodwill write-down in the future?

Oh, well, we're assessing -- we're assessing whether or not any of our tangible assets are fair to pursue in that process. That's the only comment I have on that.

Do you -- do you have a time line for us when we should expect to hear something along those lines?

Yes. By the end of the quarter.

Thanks a bunch.

OK. Last question.

The final question comes from Mr. Pierre-Yves Terrisse with Yorkton Securities. Please proceed, sir.

Yes. Good afternoon. A couple of question. First of all, Tony, is it possible to have a sense on how -- your revenue flow through the quarter? Was it more linear? Was it more -- was there a pickup throughout a -- the quarter?

Well, I think as I -- as I said earlier, we probably had more of a skew towards the end of the quarter, so the month of March was heavier than we normally experienced.

OK. And on your last conference call, you talked about the restructuring charge that you took through 2001 and that you expect 50 percent of that or 135 million to return within 12 months. How much of that has started to return in Q1?

I think in terms of the benefit, we anticipate -- I think sequentially it was about 10 to $15 million of additional benefit in the quarter. And I think we've probably got another quarter like that, getting the full effects.

So is that the explanation why we see the SG&A line going down 10 million sequentially?

That's one of them. Yeah.

OK. And...

Including our other actions.

OK. And can we expect the SG&A to continue to trend down like that going forward or what -- what's the target on that front?

No. If -- no, if you look historically, we've run SG&A percentages that are significantly lower than we are today. And given the adjustment, obviously, if you're starting to run a business and you still need some infrastructure, but we're in the process of trying to better align that SG&A level to the size of the business that we're experiencing. Again, we're cautious to not take out too much such that we can't have the flexibility to respond when the market turns, but, you know, SG&A, as far as I'm concerned, is something that we'll be relentless about in terms of managing it to the historical levels that we did experience and lower.

OK. One last question. Under your transfer of receivable programming, you've got about 400 million that is not recourse, correct?

That's correct. It's a receivable sales program.

OK. And...

That was a non-recourse for the company.

And is that -- was that fully utilizing Q1?

Yes, it was.

OK. OK.

Four hundred million.

OK. Thank you very much.

OK. Well, thanks for -- everyone for dialing in. And we'll be talking to you next quarter. Thank you very much.

Ladies and gentlemen, that does include the conference call for today. We thank you very much for your participation and ask that you please disconnect your lines.

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