Celestica Inc (CLS) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Celestica third quarter, 2002, financial results conference call. During the presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question and answer session. At the time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, October 16, 2002. And now I would like to turn the conference over to Eugene Polistuk, Chairman and Chief Executive Officer. Please proceed, sir.

Good afternoon and thank you for joining us on our third quarter conference call. Joining me today is Tony Puppi, our Chief Financial Officer. And Marvin MaGee, our Chief Operating Officer. Tony will summarize the third quarter and I will conclude with some commentaries. The three of us will answer any of your questions afterwards. 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 statements. After four consecutive quarters of relatively stable revenue flows, third quarter results reflect the impact of additional weakness in some of our key-end markets, particularly at the end of the quarter.

Revenue in the quarter was $1.96 billion, down 11 percent from one year ago and down 12 percent sequentially. The revenue was in the middle of our revised guidance of 1.9 to $2 billion. As we said on our guidance update conference call in mid-September, the weakness was in a few key customers in both communications and IT segments. During the quarter, Sun, IBM, Lucent and HP, were each over 10 percent and no single customer was over 15 percent. Our top five customers represented 62 percent of revenue, down from 67 percent in Q2. And our top ten represented 85 percent. About the same as the prior quarter. This implies the top five were down 20 percent sequentially, while the rest were up slightly. Europe and the Americas saw sequential declines of 20 and 21 percent respectively, reflecting the lower demand on higher complexity products; while Asia posted a 12 percent sequential increase.

And market segmentation for the quarter broke out as follows. Communications revenue was unchanged at 46 percent of revenue. Server declined to 22 percent from 27 percent in the prior quarter. Storage and Other increased to 26 percent from 20 percent. And Work Stations and PCs was about the same, at 6 percent of total sales. Capacity utilization was about 40 percent in the quarter, down from approximately 45 percent in the second quarter. Our operating margins came in at 3 percent, compared to 3.6 percent in Q2. Specifically, margins were negatively impacted by the size and timing of the revenue reduction and its impact on utilization rates as well as the mix and location of production.

Europe experienced the most significant weakness in margins, virtually all due to late quarter cuts on higher value ad products. Offsetting weakness in Europe was improved operating efficiency, higher value added product mix and the effects of restructuring in the Americas, higher volumes and utilization rates in Asia and overall lower variable compensation costs. Adjusted net earnings defined as net earnings before amortization of intangible assets. Integration costs related to acquisitions and other charges net a tax were 51 million in the quarter or 20 cents per share, compared to 69 million or 28 cents per share in the second quarter.

On a GAAP basis, the company had a net loss of 91 million, or 40 cents per share, compared to a net loss of 39 million or 20 cents per share for the same period last year. Included in the GAAP loss is a $128 million charge associated with our previously announced, 300-375 million restructuring program. This includes cash charges of 59 million, of which, 15 million of that was expended in the September quarter. The restructuring program commenced in the third quarter with announcements in Canada, the U.S. and Europe. The benefits of these activities will begin to flow into the fourth quarter and grow throughout 2003. The remaining restructuring charge will be incurred in the fourth quarter as additional [length] actions are announced. Given continued low utilization rates, we expect to be at the high side of our restructuring range.

Let me now address our balance sheet, which has improved further despite this very difficult environment. Cash flow from operations was 371 million on the back of a healthy improvement in cash cycle. Total cash cycle days, defined as total inventory days plus receivable days less days of trade payables, including accruals, improved from 21 days in the second quarter to 15 days this quarter. This represents the best cash cycle ever for the company. Inventory declined by 171 million and despite the major drop in revenue, turns held at 7.1 times per year. In fact, had we not had such late quarter push-ups in September, our inventory turns would have been about eight times. This working capital efficiency and operating cash flow was put to good use as follows.

We fully redeemed our senior notes for 137 million, reducing our leverage and lowering our interest expense going forward. We spent 17 million buying back 1 million of our common shares under our normal [chorus] issuer bid, which allows us to buy back up to 9.5 million shares over a one-year period. We also opportunistically chose to further reduce the leverage of our balance sheet by repurchasing some of our outstanding line’s convertible debt in the open market for a total of 48.3 million. There was a one-time gain of $4 million included in GAAP earnings associated with this purchase, but this gain was not reflected in our adjusted net earnings. We may from time to time chose to purchase additional LYONs in the open market and our Board of Directors is authorized the company to purchase up to an additional $100 million, subject to market conditions. The amount and timing of any such purchases will be at the company’s discretion. We feel that the combination of debt and stock repurchase were value creating and risk mitigating uses of capital. We spent 44 billion in Capex in the quarter. About half of this was for IT investments associated with our supply chain initiatives, and the balance shared between low cost geography investments and maintenance Capex.

So, to recap our balance sheet dynamics, we generated 371 million in operating cash flow in the quarter. We utilized 137 million to repurchase our senior notes; 17 million to repurchase shares, 48 million to repurchase convertible debt, and we invested 44 million in strategic Capex and added 164 million to our cash balance. We ended the quarter with 1.85 billion in cash while remaining un-drawn on our credit facilities. Our resulting capital to debt ratio declined to 18 percent, again treating the convertibles as debt. The upshot is that amidst this difficult environment, we have established the most conservative capital structure in our industry. Importantly, this strength offers customers the certainty and stability that is required in a quality EMS provider.

Let me now turn to our guidance. Looking forward, we feel that the end-markets we serve are continuing to show weakness and visibility continues to remain limited. As you know, we have a significant base of business in the higher-end communications and enterprise markets, and those sectors, particularly over the past 30 days, have become more cautious. Against that backdrop, we believe that our revenue for the December quarter will now be in the range of 1.7 to 1.9 billion with adjusted net earnings per share of approximately 13 cents to 21 cents per share. In the past there has been a historical seasonal up-trend in the fourth quarter for our mix of business, but we do not see this pattern in aggregate at this time. Based on our current view of fourth quarter revenue, capacity utilization will remain about 40 percent. And we expect operating margins to be in the 2.2 to 3.2 percent range. The wide margin range and EPS range reflects the profit sensitivity at business levels approaching break-even.

In other words, lower levels of business. Expressed differently in current lower business levels, a higher portion of our total costs are fixed in the short-term. Raising our restructuring to the higher end will help reduce that fixed cost base over time. Obviously, some of our goals related to margin expansion are impacted and delayed, based on reduced business levels. But we remain focused on pursuing our 5 percent operating margin target. Our history shows that when our reach in that stable level and utilization factors of around 65 to 70 percent, then a 5 percent margin profile is realistic. Let me now turn it to Eugene for his final comments.

Thanks, Tony. Truly these are challenging times. But, let me comment on our performance by focusing on three topics; our balance sheet, margins and revenue growth, which I think are the three areas to talk about today. First, our balance sheet has continued to improve in a very sustainable way. As was mentioned, our balance sheet is strong and getting stronger. In addition to the 1.85 billion in cash, I think we have an exceptional 18 percent debt to cap that just keeps improving. We are strong on cash flow, generating over 2.4 billion in cash flow from operations over the past six quarters. Returns on capital are amongst the best and our cash cycle improvement is meaningful, having improved 78 percent from 1 year ago to the 15 days that was just mentioned, taking us past the 25 days that we committed last year for cash cycles. You should expect continued strong performance in this area.

The second item is operating margins, an area where we have been consistently profitable at an operating margin basis and relatively stable, considering the declining end-market revenue effects that we have all seen. We have a stated goal of 5 percent and as Tony mentioned, we feel strongly that this is an achievable long-term goal. We see this performance in Asia today and have seen it over multiple quarters in that region. We’ve also achieved this performance in different regions at different times. So, we’re comfortable about what is needed to get there. And the issue is for us to get all three geographies doing it at the same time. Certainly we have been impacted by these near-term reduction of volumes that have slowed our progress. The time lag on margin improvements versus the revenue decline is unavoidable, but during this environment, we continue to right-size our structure and reorient our geographical footprint. I think most of you know us as a pretty pragmatic company. There’s no denial here, no tree-hugging, as I would say. And no waiting for some sort of major event to improve results. We do and react, based on what’s ahead of us. And if we need to do more restructuring, for example, we will do it.

Finally, balance sheet and margin improvements have to be complemented by revenue growth; whether organic or true acquisitions. On the [M and A] front we are today, looking at as many opportunities as we have in the past, however they are smaller and we are extra focused on convincing ourselves that they can add real, long-term value. As a company, we are prepared to take any near-term criticism of not being aggressive enough on acquisition opportunities. I find this, by the way, ironic, given that we’ve been criticized in the past by our competitors as being too aggressive. But, it should be clear that we have the financial means, we have a finely tuned integration process and we have a proven track record to enhance business through acquisition opportunities if we see true sustainable value.

On the other side of the equation, the organic growth side, we’ve also been very, very active. Today we have approximately 100 customers of which 20 percent are in the non-IT, non-communication segment, which we haven’t talked about in the past. This year we’ve added 28 new customers to date. And over a third of these have been in areas such as industrial, medical, consumer, automotive and military aerospace. While their revenues as a percentage of total company sales is still in the low single digits, it does highlight our growing success in these new, for us, markets.

This success is clearly seen in our non-top five customer revenues which has grown this year. We’ve enhanced these program wins with new programs from most of our existing customers as well and we can say that our historic win rate is unchanged. The overall end-market of our customers has, however, overshadowed a lot of our successes to date from these actions. The reality is that we have signed up more customers, won more programs and aggregates, and expanded into more of the electronics costs over the past year. Some of you have shared your comments with me about us under advertising our wins. But we think this approach has always been part of our culture; under-hype, over-deliver, don’t mislead. This approach is consistent with today’s environment where investors are as concerned about corporate behavior as they are about any other aspects of the company.

I’d like to comment that this is the first quarter where we will be providing certification of our financial results and obviously, we will be doing so. This should not be a surprise who anyone who knows it, since we have always conducted our business affairs with a very values-driven approach, whose principles are based on trust and integrity. The employees, the management team and the Board of Directors practice these principles and because of this, we believe, that we’ve always had effective internal processes and governance to make this certification a non-event and we do so voluntarily on a quarterly basis. That concludes my remarks and now I’ll ask the operator to open it up for questions.

Thank you, ladies and gentlemen. If you’d like to register a question, please press the 1 followed by the 4 on your telephone. If your answer has been already answered, please press the 1, followed by the [technical difficulty] your registration. Our first question is from Scott Craig, Morgan Stanley. Please proceed.

Hi. Good afternoon, thanks. Just two quick questions here. First of all, on the storage side, you guys seem to be doing a pretty good job there and revenues are actually up. Can you describe a little bit about what’s going on in that group? And then secondly, on the restructuring side, Eugene, you know, business has taken a downturn here since you guys announced the 300-375. Do you think you’re going to have to go above that 375 over the next couple of quarters and maybe do a little bit more restructuring? Thanks.

On the restructuring, we have commented here that we’ll be at the high end of the range. You know, speculating beyond that depends on what happens over the next two quarters. Now, what was the --

In terms of the storage performance, yeah, we’re pretty pleased with that sector. It seems to have hung in there a little better than the others and the growth sequentially was on multiple customers.

The next question is from Jerry Labowitz, of Merrill Lynch. Please go ahead.

I was wondering if you can give us just a little more color. You said you added 28 new customers this past year. That’s very impressive. But, what I was wondering is, if you look out, over the next year, can any of these 28 become significant in any single way? Could they become top ten customers for instance or is there any real [fee] change with any of these customers, appreciating, out-sourcing perhaps for the first time and doing significant business in a short period of time?

I would comment that over the next 12 months, not in the top ten. What we see is meaningful relationships that will grow. Some of the customers are small and some of the customers are medium size and some of the customers are large. Certainly, I think it’s part of the overall trend to do more out-sourcing and we see meaningful opportunities in that space. But, relative to those non-communication IT, I remind everyone that that represents, you know, probably 15, depending on how you count it, percent of the total electronic cost. So, I still think the majority of our business will still be in the communications IT. But there’s a very appropriate diversification and we’re very pleased with the reception that we’ve gotten so far. Does that answer your question?

Sure. Thanks.

The following question is from Tony Boase from A. G. Edwards. Please go ahead.

Can you comment as far as customers or programs, did you lose any customers or lose any programs in the quarter? It didn’t sound like you lost any customers, but what about programs?

Not in the quarter, we haven’t.

And what kind of revenues would your footprint support at the conclusion of your restructuring program?

Generally, as we go through the restructuring, we try to make sure that we’re careful to have the capability for outside. We should see, generally, our footprint on a global basis reducing by about 20 percent, so there’s significant room for responding to any significant growth in the business.

So, if today you’re at about 4.5 billion, you would get down to about 3.6 billion per quarter at the end of the restructuring?

Sorry, did you say 4.5 billion? I wish it was. Are you talking about capacity? Total revenue capacity, 4.5 billion. [multiple speakers] If we stay at less than 50 percent rate of growth, not a problem.

And would you say that you’ve accelerated your pursuit of consumer or automotive markets given what’s transpired over the past quarter?

The results we’ve had -- we basically, made the decision earlier than this quarter. We’re being a little bit more vocal in sharing to it. And quite frankly, responding to the fact that people were starting to comment that we’re not winning anything, because we’re not saying anything and therefore, we thought we should give you some more granularity on how we’ve been doing this quarter and reinforce the fact that we are diversifying.

And lastly, can you comment on some of your major acquisitions as far as where they stand with respect to original expectations? For example; Avaya, Lucent, Omni and NEC?

I think all of them have, to a certain extent, been impacted by the end markets. They are, as you know, are in segments that we were targeting aggressively; in areas that we feel in the long haul will continue to present a very significant opportunity to us. And as the [indecipherable] market decline, the results of those expectations have also done the same. But, as you’ve seen or as you may have heard, we’re taking action, together with our customers, to adjust the contracts that we have such that we can still present a very strong cost reduction formula for them as they try to weather the same storm we’re under.

And certainly to your comment on Omni, our significant shift into lower geography; that was very complimentary with that strategy.

Great, thank you.

The following question is from Roger Norberg with J. P. Morgan. Please proceed.

Good afternoon. Could you comment on the revenue geographically? Asia was up. Is that strictly from indigenous business or was there a component in the quarter that you shifted sights and that impacted the growth rate from other sights and did that impact the growth rates of those sights as well?

It was both.

Can you give me any degree of magnitude?

I think a good assumption is about half-and-half, actually, Roger.

Okay. As far as your low end of your guidance for the fourth quarter would imply something down close to 10 percent and historically you had a pretty good pop in the fourth quarter, up about 15. So, even being lower than flat is a pretty huge swing. Can you comment a little bit more on what you see around that? Is there, in addition to just, you know, having a pretty flimsy looking forecast from your customer, can you see -- how far can you see with your biggest customers in terms of end-market pull? Are you only seeing in the hubs and is there a problem to with hubs that have gotten over inventoried so there’s maybe another cycle of a little bit of an inventory liquidation here that’s making this picture look a little bit worse than your end-markets actually are?

Well, relative to the visibility -- we have the visibility that our customers have, but until the transaction is completed and the product is pulled out of the hub, where hubs are used, it isn’t over. And that’s the variable in the process. It isn’t consummated until that final product is moved from the hub and shipped to the final customer. And that’s the variable right now and that’s obviously a big piece of what happened in the third quarter. And that definitely adds a little bit of ambiguity in our forecasting. And your comment about how our customers are forecasting, you know, that’s probably a valid observation too. So, it’s -- forecasting is becoming a very difficult activity in this environment.

Just one final question. Relative to what’s going on with competition and head-to-head pricing, are you pushing back from a greater level of business right now, strictly over price, than you have been in the last three or four quarters?

I’d say the pricing pressure’s been, you know, fairly heavy and consistent through probably the last six quarters. We expect it to be with our customers hurting even more than we are. So, that continues to prevail. I think we are very focused on ensuring we get the right economics on any of our programs and investments we’re making for our customers. So, we want to make sure we’ve got the right balance of, you know, keeping our factories full, but understanding what the competitive base parts are. So, our key job here is to get to that low-cost producer stage. And when you’re at that level, then you’re in the best position possible, going forward. So, that’s what we’re focused on, primarily, with a lot of the restructuring and other initiatives we have underway.

Thank you.

The following question is from Todd Coupland of CIBC World Markets. Please proceed.

Okay. Good evening, everyone. Not to parse words here, but I just want to understand the market share answer. So, if I understood, what you said, you didn’t lose any programs in the quarter that impacted the quarter and I should also imply from that that there were no programs lost that were any impact in the fourth quarter guidance? Is that correct?

No. There are some programs that are. But, as Eugene alluded to, if you look at the customers we have added, year-to-date, albeit they are small in terms of the individual program sizes, in aggregate, that group, in terms of the revenue generated from that group, is actually much larger than any losses that we would have and their effects in the fourth quarter.

Okay. And if we can just get to the operating margin in terms of an outlook? You talked about how the restructuring would impact the margins. What’s your thoughts going forward in a flattish environment? What kind of quarterly basis point improvement would you get?

Well, I think before, we thought, when you know, when we were running at or with an expectation of flat revenues of 2.25 billion and having utilization rates of 45 and an expectation that upon completion of our restructuring we’d get to close to 60 percent, that we’d be nipping against that 5 percent target, which would take us till, let’s say, the fourth quarter of next year. Obviously, you have to adjust all those plans by the kind of sequential decline we’ve had in this quarter and potentially the kind of caution that is implied in our guidance into the fourth quarter. So, we continue to believe that we’re taking, now, capacity. Unfortunately, it’s not fast enough, given the end-market pressures we’ve got. But that if we had a steady stay basis in a flat volume scenario; 20 to 30 basis points a margin, we can do that. The question is balancing both sides of that equation.

We don’t have an event here that prevents us from getting there. What we have is something that’s delaying us, you know, by a couple of quarters and that’s, I think, the way we should be looking at it. We’re not only looking at our overall capacity. We’re looking at items like SG&A; you’ve seen very significant drops there. Watch that as we go through time. And although our restructuring starts to go through, it’ll go right through -- you know, the capacity, the equipment, the people, the SG&A, all the elements that dropped and we expect we will get to our margin expectations as we go through time. And if you’re looking for credibility on that, you know, look at the individual geographies and you’ll see that one is beyond that already and you know, it’s working on the remaining two to varying degrees. The biggest one we have to work on is Europe and that just seemed to have had a bigger end market problem. And that, but you know, we’ll correct that.

Okay. Finally, in the past, you’ve seen a seasonal down-tick in the first quarter. I know you’re not providing guidance for the first quarter. But, I mean, given what we see today, should we expect a seasonal rollover in the March quarter?

Well, the first quarter drop was aggravated by the big bubble in the fourth quarter. So, it’s kind of hard to answer. We’re not seeing the bubble in the fourth quarter.

Okay. Great. Thanks a lot.

Our next question is from Thomas Hopkins of Bear Stearns. Please proceed.

Yes, good afternoon. Two questions. First, could you remind us of where the head count is now, what your target is and what are the obstacles, whether they be legal or with customers or with regional or prohibitions? And then I’ll ask the follow up.

Sure. In terms of the employee population worldwide is both 40,000 is where we started when we announced our restructuring. And as you will recall, we said there’d be a 10 to 15 percent reduction from that base through restructuring. So, that’s what we would still anticipate at this point.

Okay. And any difficulties in Europe or in Canada or with customers?

Nothing in terms of -- there are obviously legislative differences in the different environments, but nothing that we hadn’t anticipated when we made the announcements. I think the other part of your point is the thing that’s important for us in all this series of changes is making sure that we concentrate on effective execution for our customers. And that’s clearly the first priority and that’s going well.

Okay. And so the timetable for this -- I guess that would be about 5,000, 6,000 employees. What’s the timetable for that?

Well, we now see the full program, in terms of flowing through the results, could take up to a year.

So, mid next year.

And there’s no ability to accelerate that?

We’re looking at ways that we could accelerate the effects.

Okay. And then the follow-up is just want to see if we can go in a little further on this. With the high end stuff getting so weak and getting weaker -- and I’ve asked this question before -- can you give us a strategy? You might not be able to give us a list of customers, but can you give us a strategy, whether it be in terms of building confidences or regional aspirations in terms of some of the new markets that are opening or out-sourcing, namely automotive, electronics, consumer electronics, medical electronics, semi capital equipment. What is the strategy there?

The strategy is to approach all of those and we have penetration in just about every one of them. And actually quite positive reception. And something I’d like to remind everyone with the facts again, is that as much as that’s a new opportunity, there’s still significant out-sourcing still left in the core. So, our strategy is to participate and pursue both. So, there’s a lot of out-sourcing yet to be done in IT; a lot of out-sourcing yet to be done in communications, and there’s these new sectors that we have historically not participated in, but in 2002, we have aggressively gone after and are now starting to get some idea of the order of magnitude. And you know, something we’ve always talked about is [wave] five, where people are starting to, you know, out-source all of their manufacturing and all of the elements of it and we see tremendous momentum building up on that. So, I mean, the philosophical comment -- everyone’s sort of airing communications and IT as if it’s dead. It isn’t. There’s still a lot of out-sourcing opportunities. It presents short-term dilemmas for us in re-balancing our capacity. Interesting enough and something I’ll share with you here. Is that we’ve had multiple customers that have been holding back out-sourcing. This is the words they’ve used. They’ve capitulated and said it’s no use waiting to out-source, because things aren’t going to get better in the short run and we might as well move to a more competitive model. And this was from areas where we found people were really resisting taking the plunge. And now we see a lot of that opening up. So, there’s still a lot of out-sourcing opportunity. A significant amount that has yet to be tapped. And you know, we, as an industry, we have to go after it and make sure it starts to flow through the EMS sector.

Okay. Eugene or Tony, just one last thing. With the 1.8 billion in cash, I think -- is that where the quarter -- that was the quarter end?

Yes, 1.85.

1.85, 1.9 billion almost. Any intentions to increase the share repurchase program? Or do you just want to be conservative with the cash?

We want to be, first and foremost, conservative with the cash. We’ve announced as well that we repurchased some LYONs in the quarter; that we were authorized to purchase another 100 million, by our Board. So, we’ll continue to view that as an opportunistic use of capital that spreads that [put] date out a little bit and reduces that forward risk. We think that’s smart. And you know, we have to still be poised with ensuring that customers aren’t worried about our financial condition and that we’re there to partake fully when things do turn around.

And a lot of customers have been doing credit assessment of the suppliers and you know, worrying about long-term stability and risk and you know, I think it’s very important to say that we are extremely strong for the long-term. So, I guess the bottom line is a very conservative attitude, but also opportunistic on share buybacks and LYON reductions.

It certainly is tempting though.

Okay. Great. Thanks.

The following question is from Ellen Chae of Prudential Securities. Please go ahead.

Good afternoon. I know again, that you haven’t provided any sort of guidance and you did indicate that any sort of visibility is limited, but when you talk to your customers and you look out into ’03, what are they saying about what they’re expecting, just generally, in terms of the environment? Are they giving you any signals to lead you to believe that your segment is particularly in the calm and service could flatten out or improve or is it still just kind of, there really is not a lot of input into that and so there’s really not a lot of commentary around ’03?

Just cautious and everyone is looking forward to when things turn around. But, cautious and probably for a good part of 2003, but you have to ask each individual customer. They all have their own stories and views.

And then I was wondering if you had suffered any disruptions from the West Coast Port lock-ups and if that had any impact to your business or the quarter or to your expectations for the next quarter?

We, obviously, monitored the progress and the situation there closely, but there was no significant impact on our business at all. And we had alternate plans in place in advance for the situation.

Did that hurt you at all in the margin front? Was there any, sort of, sharing of costs of using more air freight?

No. In terms of the logistics choices that we had, there was no cost impact. We did see some growth in air traffic by other industries, obviously, that were impacted by those shipping routes, that had to resort to air traffic. But no impact in our rate.

And if you were to see that again, would you be passing on those costs to your customers?

We wouldn’t expect to see any cost impact if the agreement doesn’t get worked-out.

Thank you.

Our next question is from Steve Savath of Goldman, Sachs. Please proceed.

Thank you and good evening. I just wanted to follow-up, I guess, on some earlier questions regarding lost business. And I understand that the new business offsets lost programs. But, just to be specific on some of the lost programs. One was it a loss with a top five customer? Two, is it just one program or multiple programs with that customer? Three, if you can give us a sense of the timing of the beginning of the phase out and when that phase out of a program or programs ends? And then fourth, what would be a particular reason for a loss, if there’s any explanation?

Well, in terms of its effect on the company, we have to say that it’s non-material. If I’m guessing that you’re talking about something that has been rumored out there. I think we should not discuss customer situations -- any losses that we have had, which are few, should not have a material impact on our business.

It’s kind of frustrating that some people start some of these things. And I know in some cases where customers or competitors have said that such and such was lost. And I know one case, for example, we had 80 percent share. They picked up 20 percent share. It was done simultaneously. It was the story. Another case it was a big issue of a loss we incurred. It was a $10 million program that two quarters later was worth zero. So there tends to be a lot of hype and misinformation. I would encourage you to really verify. There’s been some really nasty, inaccurate rumors. I know there’s been one recently. I don’t want to use customer names. We’ve won, you know, big, significant business. We’ve lost some. But, what we’ve won greatly overshadowed what we’ve lost and it was just normal re-balancing that very often happens. So, there’s a lot of -- you got to be careful with that.

Okay. In other words then, in aggregate, the timing and so on for whatever loss is really immaterial with respect to the lower guidance for 4Q. That’s really just related to end-market weakness and general conditions?

Yes. I think that’s the correct way to look at it. I mean, we mourn every loss, but our win rate has been running constant.

Okay. I just wanted to clarify, because, there are a lot of things flying around out there and just to make sure that it is not anything that is effecting the fourth quarter and then coming out you’re saying, even the first quarter that’s not the case. So, thank you.

Our following question is from Mark Lucey from TD Security. Please go ahead.

Hello. What’s the current status of the share buy-back? You’ve given us the numbers at the end of the quarter. How active have you been in the quarter to date and, you know, what do you see -- I’ll just leave it at that, sorry.

Well, we purchased a million shares in the market in our third quarter and we haven’t purchased any since. But we continue to look at that as I said in my scripted portion of the call. We look at [alliance] and anywhere else we think we could end up. We’re authorized to purchase back more than 9 million shares and 100 million on the LYONs opportunistically, at our discretion. In the case of the shares up over a year. We’ve had one quarter so far.

Okay. So, you haven’t been in there since the end of the quarter. And just as a clarification, you indicated that you recognize the asset purchase of [Corvis] in the quarter and booked about 51 million of goodwill associated with that. What was the ratio or the premium paid for those assets, so we can kind of quantify that? And is this the kind of example of the smaller opportunities that you are seeing out there?

There’s no peak -- 51 million, that was actually a pretty minor acquisition in the quarter and it is reflected in our cash flow statement, so we [inaudible] Probably what you are referring to in terms of the dynamics on our intangible assets is summary classification of goodwill into intangible assets that increased and moved from the two accounts based on updates to certain evaluations that we do in the normal course. So, that may be driving your 51 million but it is not attributed to the core of this transaction.

Okay. Thanks for clearing that up. Thanks.

You’re welcomed.

Our following question is from Alex Buenten of Engalls and Schneider. Please proceed.

I just want to go back to the question of the new business coming in again. You’ve indicated that you’re signing up new customers -- signing up new organic business. You haven’t had a plant purchase since earlier this year, although you had ten of them in the past 18 months, but they sort of ended this year. But your sales, sequentially, down 12 percent and that’s a lot worse than any of your competitors are doing right now. And your competitors seem to be signing up enough new business to keep sales at least flat or up slightly sequentially. And you’re not. So, I’m just wondering, how do you explain that? And how do you explain the appearance that you seem to be losing share of new business opportunities. I have a second question also, on a different topic.

First of all, our overall share has been fairly constant through this period. You can do the calculations. Relative to the acquisitions, it is a fact, as I made in my commentary, that some of our competitors have made more. Historically in the past we made a lot. We have not seen ones that we thought had long-term sustainable value relative to the acquisition. We will not buy what I call, “empty calories”. And if we don’t think it’s gonna work for us strategically , then we won’t. And if you go through he list and we know all the ones that have been bought, as you do. We would probably on the final list on every one of them and maybe were the finalists. And so it’s a case of choice. And I think in the case of the overall shareholder point of view, it’s a case of making the right choices, rather than just the optics of revenue growth in one quarter or another quarter. So, we continue to look at M and A. Historically, no one can accuse us of not being aggressive and very, very involved in doing meaningful acquisitions. You know, we probably done three dozen of those over the last four years -- four or five years. But, you know, we’re also very choosy on which ones we want to pick. We compliment that with a lot of organic growth. If you look at the overall share, you’d have to now subtract out what people have been getting in these quarters through acquisitions and what’s the real organic growth and that’s, you know, you’d have to do that analysis. We certainly don’t feel we’re losing share and the numbers certainly don’t indicate that.

Well, I’d just like to point out, [Selectron’s] sales were up 3 percent quarter over quarter and they haven’t purchased a plant for 20 months. So, all of that is organic growth. None of that is coming from plant purchases. So, it still looks as if you’re not getting your share of the new business that’s being out-sourced.

I would suggest you go back and you look at your numbers again.

Now, I have one other question on the zero cash cycle goal that you talked about in the last quarter. You seemed to make good progress toward that. Could you update us on that? Because if that became the industry standard, that would be quite stunning.

Well, actually, there’s many different numbers floating around as many different analysts do it different ways. We do include all the accruals, as is shown in the balance sheet. We think that’s the proper and most rigorous methodology. We feel very good about the progress we made the 15 days, but your comment about the industry is a very good one. If you now look at [Flex] products for example with exactly the same methods, they’re at zero. So, this is an industry trend and I think it is a very positive trend. And I think that’s why we have been reinforcing the fact that this is something exciting in our sector. And as various players figure out how to get their operations and logistics systems to behave that way, it’s not only a value generator, not only freeing-up cash, but it also positions us to be able to basically grow, without adding working capital when growth resumes. So, I totally support your enthusiasm there and point to the fact that Flextronics is at zero. We have a very good number. And I think [Jaybo’s] very close to ours too.

Thank you very much.

The following question is from Gary Bake of Raymond James. Please proceed.

Hey. Good afternoon. On your guidance, if you look at the low end, which would be sort of, over 10 percent down sequentially. Is there any differentiation between IT and communications market? Or on the low end are you basically looking for a similar decline in both those end markets?

I think both those areas, particularly in the areas, again, where we play, are pretty cautious right now.

Now follow-up, when we talk about the, obviously the high-end, particularly in services, as being a particularly weak market and the lower end has done better -- I mean, is there an opportunity for you guys with your customers to pursue some of the lower-end server business?

Absolutely. And we do have participation in most sectors of electronic cogs at different price points. We’re not exclusively high-end. We have more than our competitors, but we participate in the whole spectrum.

I guess what I’m asking is will there be any more of a shift towards the lower end or the existing mix you expect to stay the same going forward?

There is still a lot of remaining out-sourcing to be done at the high end, but we’re also striving for maximum diversity, looking at the lower end, looking at the other sectors that I talked about earlier. So, we’re trying to do both at the same time.

And the last question, sort of on the same line of thinking. If we look at acquisitions in automotive or consumer areas, which have become sort of hot areas as people talk about sort of diversifying out of communications and IT, when you look at these acquisitions, do you find the pricing more expensive, because of a lot of your piers are also trying to diversify?

Pricing has been dropping across the board. And as I’ve commented before, there’s a lot of deals that are not happening, because the OEMs are not getting what they thought they would get. And a fairly good discipline in the overall market relative to being choosy. We’re probably a little choosier than most, but still, I think everyone is relatively choosy.

Yeah, I was referring more to is there a differentiation in pricing between automotive and consumer, like some of the new areas, versus some of the more traditional communications or IT areas?

Yes, they should be.

Okay, thank you.

The following question is from Lou Miscoscia of Lehman Brothers. Please go ahead.

Yes, thank you. I wonder if we could turn the topic just briefly to 2003 again. There’s a number of different consulting houses, I guess, that are estimating EMS type growth for 2003, I guess, 5-20 percent above the end markets. I guess, from what you all can see from the pipeline -- and this isn’t necessary [celestial] guidance, just from an industry perspective, where do you think it might end up falling?

I have a lot more confidence on the long-term rather than tell you what I think is going to happen on the EMS base in 2003. And the reason I’m being cautious here -- there has been more out-sourcing and we’ve benefited from it, but we seem to be losing an equal amount on the end-market on the other side. So, how that plays out relative to 2003 --

Even if we just assume a flat end market. Just assume that whatever IT was in [inaudible] --

If the market was flat I could see a growth and the only debate would be how much. Because that’s definitely what’s happening to us. We’re seeing EMS growth and we’re seeing end-market shrink and in a few of our largest customers, it’s totally over-shadowing it.

Okay. Is part of the -- is the bigger resistance that the European and the Japanese companies want to sell their plants and obviously none of you want to buy the plants, and that’s just holding things back. So, that’s a little bit of a logjam?

It is many reasons. Some of it is people waiting for a better day. And that was that capitulation comment I mentioned earlier. In some cases it’s -- you have a bit of that in Europe and Japan. It’s many different factors. Everybody has a different story on why they’re waiting to move to a more competitive model. But, certainly as this difficult market continues, people’s anxiety about doing something is increasing. So, there’s got to be an intersect somewhere along here.

Okay. Current pipeline, would you put it closer to 5 billion or closer to 10 billion or another number all together?

It’s probably in the lower range of the 5 to 10. The difference is the deals, in our minds, seem to be smaller deals on an annual basis. Sometimes they’re bigger if you put more years in there. So there seem to be more smaller ones. But, there’s a lot of discussion about that. So, if you look at the number of activities, as I mentioned, we’re probably are listed even longer than usual. But, whereas in the past you had $10 million deals, now, maybe the biggest you might see is a billion and a half. Besides, that gives you some flavor for it.

Okay. And then two last quick questions. You mentioned that no customer was above 15 percent this quarter. I’m just curious as to if there were any customers and one two if you could provide any of the names. And last quarter, I guess, if you look out to the final quarter for you, do you think that your 62 percent, the top 5 will remain about flat or do you think that’s going to decrease?

I think if you look back, there were probably two customers over 15 percent. And going forward, again, striving for adversity in those markets segments, that we have won some business and trying to as a group, drive that concentration up, I think there might be more pressure on the top five in terms of a lower percentage concentration.

That’s what we’d like to see anyway.

You think you’ll get down to the mid-50s next quarter?

I think that would be way too soon to see that kind of an adjustment.

Okay, great. Thank you.

Okay, two more questions please.

Thank you. Our following question is from John McManus of Needham and Company. Please go ahead.

You indicated you saw some push-outs in Europe as the quarter ended. Were these multiple customers and were these in the server area?

Yes, they were multiple customers and yes, they were in the server area. There was one area that affected as was communications.

And was the drop in the server percentage equally split there between the U.S. and Europe?

The U.S. had also some adjustments, but I would say that the timing of those adjustments were a little more available and visible to us. Although we did get some late quarter impacts there as well. I mean if you just look at the profitability I think it would suggest that our ability to adjust cost was a lot faster. Albeit European utilization rates were running at a lower level going into the quarter.

And you indicated that you gained about 28 new customers for the first nine months. How many did you gain in the third quarter?

We’ve had a good progress in each of the quarters. I think they were an equal amounts, eight or nine a quarter. At least nine, sorry.

And could you give us a feel for what -- looking at your range, what cash flow from operations might look like there in the fourth quarter?

Well, we hope we can continue on the track of improving our cash cycle. I think we have opportunities in inventory. As you know, we’ve announced as well, some LYONs purchases that we hope to be in the market to conclude. So, I expect, hopefully, that we will end the year with even a stronger cash balance.

And last question from me. If the chargers are at the high end of the range, what would be the savings there, at that level?

Well, what we said earlier is that we felt we had comfortably paid back the cash portion of the charges within a year. And we still see the cash coming in at about 150 million in terms of the component of our restructuring -- maybe a touch higher that that, but nothing material at this stage. So, we would expect to see another roughly, $180 million or so through that period of time from just the impact of the restructuring, directly.

Thank you, Tony.

You’re welcomed. Last question.

The following question is from Gus Papageorgiou and from Scotia Capital. Please proceed.

Thanks. A question on the LYONs, Tony. That $100 million that you plan to repurchase, is that principal amount or market value?

Market value.

So, that would reflect roughly 228 million of principle amount?

That’s correct.

And just a final question. Of your 10 percent plus customers, do you expect that that composition will stay relatively constant going into the next few quarters or do you expect some of them to -- maybe some of your other customers to move up from their current position and some of them to drop off?

I think we should. I mean, with some of our key customers, again, the fourth quarter is a strong quarter. Again, we don’t expect too much turbulence in the quarter ahead of us -- the quarter we’re in, excuse me.

So the composition will stay relatively stable?

Yes, there abouts.

Great. Thank you.

Okay. I just want to thank everyone for calling in and we look forward to talking to you exactly three months from today and no time in-between. And we’ll talk to you then. Thank you very much. Bye-bye.

Thank you ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.