Celestica Inc (CLS) 2002 Q4 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the Celestica Incorporated Fourth Quarter and Year-End Financial Results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time, if you have a question, please press one followed by four on your telephone. And as a reminder this conference is being recorded Tuesday, January 28th 2003. And now I will like to turn the conference over to Mr. Eugene Polistuk, Chairman and Chief Executive Officer of Celestica Incorporated. Please go ahead sir.

Well, good afternoon and thank you for joining us on Celestica's Fourth Quarter 2002 conference call. Joining me today is Mark MaGee, President and Chief Operating Officer, Anthony Puppi, Executive Vice President and Chief Financial Officer. Tony will summarize the fourth quarter result and I will conclude with some additional comments before we open it up for questions. In addition to our discussion as following, I will encourage you to refer it to the extensive and very detailed disclosure provided in the press release. Tony.

Thanks Eugene. Before we begin let me express 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. These risks and uncertainties are discussed in the company's various public filings.

We start with revenue. Revenue in the quarter was just over $1.9b, down 22% from one year ago and down 2% sequentially. The revenue was in the top end of our guidance range of $1.7b to $1.9b. During the quarter IBM, Lucent and Sun were each over 10% with our top five customers representing 61% of revenue, while our top ten represented 81%. Both these concentration figures are down slightly from third quarter. As you have heard from discussions in the past, we continue to work on reducing our customer concentration and we are encouraged that revenue from our non-top ten customers grew 18% sequentially from the third quarter to above $360m. Eugene will provide additional information on our revenue activity during his remarks. End market segmentation for the quarter listed as follows, communications at 45% of revenue, Server was 24%, storage and other was 25% and workstations and PC's came in at 6%. So virtually, no change from the prior quarter in each mark, ten-market segment.

By geography, revenue from Europe was 23%, the Americas represented 48%, and Asia represented 29%. Of particular note the growth in Asia, where last year the Asia region represented only 9% of revenue. Faster utilization improved in the quarter to about 50% reflective of our restructuring actions. [Selective] and operating margins or earnings before amortization of intangible assets and interests came in at 2.2%, down 80 basis points from the third quarter. Virtually all of this declined with the result of disappointing results in Europe. Despite increased sales in Europe, the quarters operating loss of $24.7m grew by $11m quarter-to-quarter as anticipated cost reductions did not materialize on schedule. Specifically, increased costs were experienced due to higher than expected spending associated with production trends for activities, [inaudible] restructuring and some process for rapid related inventory issues. Further more, the expected gains from increased revenue quarter-to-quarter were offset by the change in mix with more final system ship, their versus credit circuit board assembles. Specific action is being taken to address these issues on our additional restructuring, corrective operational actions and controls, continued efforts to reduce concentration in the region, which would smooth out some of the revenue dynamics.

As we've discussed in the past, our restructuring activities are focused in the Americas and Europe. We have been able to progress the [factors] with restructuring in the Americas, while restructuring in Europe takes longer to effect. We expect Europe will improve throughout the year with further restructuring. Margins in North America held up nicely at 3.7%, while those in Asia saw a slight decline as a result of pricing pressure in the quarter. Year-over-Year the fourth quarter saw our SG&A spending come down by 21%, virtually in line with revenue over that period. We're very pleased with our traction on SG&A spending, which has been, reduced another 6% from the third quarter. Adjusted net earnings defined as net earnings before amortization of intangible assets, integration cost related to acquisitions and other charges net of tax were $39m in the quarter or $0.15 per share, compared to $76m or $0.31 per share in the fourth quarter of last year.

Net loss on a GAAP basis for the fourth quarter was $435m or $1.90 per share compared to a net loss of $72m or $0.33 per share for the same period last year. A loss this quarter includes a $541m pretax charge; let me break up that $541m charge for you. $255m was associated with the company's previously announced restructuring program. Of this, $130m were cash related charges. This $255m brings the total of 2002 restructuring charges to $384m versus the $300 to $375m range we estimated back in July. The quarter charge also included $204m in non cash goodwill impairment charges and further more, $82m in non cash long-lived asset impairment charges, primarily impairment of other intangible assets. These impairments reflected worsened end market assumptions in our high cost geographies. Let me now address our balance sheet performance, which continues to be very strong. Total cash cycle days defined as inventory days plus receivable days less days of trade payable including accruals improved from 15 days in the third quarter to five days this quarter. This represents the best cash cycle performance ever for the company. Inventory levels declined by $170m or 18%. Inventory turns increased from 7.1 times in the third quarter to 8.4 times in the fourth quarter. Importantly, our receivable days dropped from 47 days in Q3 to 41 days in the fourth quarter.

The cash cycle improvements drove cash flow from operations in the quarter to $101m, which already includes the net effects of an $80m reduction in our accounts receivable sale program. This operating cash flow was used as follows. To repurchase another 1m shares for $15m as part of our normal [Inaudible] which allows us to buy back up to 9.6m shares over a one-year period. In 2002 we repurchased per cancellation, a total of 2m shares. We also reduced our leverage by repurchasing additional LYONs, convertible [debt] at the open market for a total of $52m. In 2002, the company paid a total $100b to repurchase LYONs, with a principle amount of maturity of $223m. Including the third quarter redemption of our 10.5% notes, year-to-date, Celestica spennt approximately $270m to repurchase senior subordinated notes, LYONs and subordinated boarding shares for cancellations. Today, we are also announcing that we have been authorized by the board to spend up to an additional $100m for the repurchase of LYONs. This is in addition to the announcement we made in October, where we announced that we will spend up to $100m to repurchase LYONs of which $48m remains. Lastly, during the quarter, we spent $32m in CAPEX including expansion in our low cost geographies and ongoing investments in IT and supply chain.

For the year, our cash flow generated from operations was $983m, and we ended the year with $1.85b in cash while remaining un-drawn on our credit facilities. Our debt to capital ratio was 19% treating the convertibles as debt, giving us the strongest balance sheet in the industry. During the quarter, the company successfully renewed and expanded an unsecured 364 day extendable revolver to $350m. Concurrently we cancelled our $250m global unsecured [Inaudible] credit facility, which was due to maturity in June of 2003. This facility was deemed to be in excess of our foreseeable needs, giving our cash balance and expectations for continued strong cash flow from operations. As a result, the company now has $850m in revolving credit capacity, which remains un-drawn and is available for general corporate purposes, including acquisitions.

Let me now look forward to the first quarter of 2003. Within the current environment of constrained visibility, our guidance on top line is for revenue in the range of 1.5$b to $1.7b. This reflects seasonality and continued challenges in communication, in IT infrastructure and markets. In terms of earnings, our adjusted earnings per share guidance is between $0.04 and $0.10. This reflects seasonally the lower volume levels and product mix as well as steady challenges in Europe and ongoing pricing pressure resulting from excess capacity in our industry. [Inaudible] to get to our profitability track, we are back on track, in that regard, as soon as possible. We are announcing today to further reduce of our manufacturing capacity. This reduction in capacity will result in a restructuring charge between $50m and $70m to be reported during 2003. Of the charge, the company expects the cash cost to represent about 80% of this charge, primarily due to future reductions in the work force. Restructuring will be focused primarily on further improving the cost structure in our European operations. I'll now turn it over to Eugene for his closing comments.

Thanks Tony. Before, we open it up for questions; let me provide some perspective one our outlook. While our new term outlook still reflects limited visibility and challenges in our mix in business and end markets. I do feel that our business may be bottoming here in the first half, second quarter as [Inaudible] begin to offset the contraction of the base business. They can’t make the call where customer's end markets will do or what the geopolitical environment may mean to the global market place. But, I do see a greater inflow of new organic activities starting to wrap particularly in the second half of the year. Lower revenue doesn't show yet, we are seeing a fair amount of success in our organic activity and I'm encouraged by the momentum.

During the year, we had 40 new customers, bringing our larger customer count to just over a 100. As you know, we are reluctant about discussing details on our new program. This is due to primarily to the volatility of new business projections and timings were customers expectation per volume can differ significantly from actual volume. And actuals are the only volumes that really count in the end. However, the winds are encouraging into many new programs and services with companies such as Sun, Juniper, Alcatel, Raytheon, Cisco, Motorola, Harris, IBM, Apple, Fuji [inaudible], Palm, Andrew, Cummins, Power Wave and Dell-- that gives you sort of an idea of some of the customers that we have added through a business that we've won in this period. We are also adding diversification in the end markets with these wins. Of the new customers, approximately one-third are in the industrial, medical, consumer, military, aerospace, and automotive sections, which we expect will continue to grow especially as customer's in these markets continue to pursue more pervasive outsourcing strategy.

We believe there is additional opportunity to enhance this organic activity with acquisition. As you know, Celestica was the least acquisitive among the major UMS providers in 2002. In fact, over the past 14 months, the only acquisition we have announced was our NEC acquisition in Japan, which was closed in march and which contributed approximately $300m last year. This compares with significantly more announced deals worth billions from our major competitors over the same period. Well, we do believe that our approach has been prudent but can't view our recent limited participation as the lack of interest. The keys of our mind to participating in any future transactions continue to be valuation, the structure of the supply agreement, the ability to generate sustainable cost reductions for our customers and the value creation opportunity for our shareholders. We obviously have the financial capacity and we have the experience to participate in any type of transaction but you should not expect us to stray from our disciplined approach.

So, in general, I do feel better about the revenue opportunity that’s here. I think our momentum is positive in terms of gaining new customers and winning new programs with existing customers. For our near term outlook, it's still been impacted on a relative basis by our minimal acquisition activity, our customer concentration and end of market demand with some of our existing business. I would anticipate, there was a gradual improvement in revenue plus the benefits of restructuring our margins and EPS will get back on track. You should continue to expect the margin expansion will remain a major priority at the company and our behaviors will reflect it. Current industry excess capacity will contribute to pricing pressure and will impact the rate of improvement. But we will get benefits as utilization improves. Currently restructuring the the Americas is progressing as expected. In Europe, we are aware of the weak areas and we are fixing them and Asia has historically performed well.

So to summarize, I do feel the organic revenue growth opportunity is improving, our organic win rate in the programs we choose to compete for are at excellent levels and when the base business fully stabilizes we should start to see the benefits of these wins as the year progresses.

Financially our position is very strong and continue to be only EMS player who is buying back both stock and debt. As we go forward, our balance sheet will continue to be part put to work to drive value for our shareholders. I think our restructuring plans are focused for this environment and I expect benefits from these activities start to flow as the year progresses. We know where the challenges are and we are aggressively going after them. In terms of efficiency, our cash cycle and inventory turns are at all time company highs, despite not having the leverage of predominantly high volume, low complexity mixes that exists in other areas. I am also particularly please with our traction on reducing SG&A spending and we believe our spending should eventually approach 2% of revenue in aggregate particularly as revenue growth resumes. I think you should look at our success in cash cycle management and inventory turn improvements and expect us to put into place the same level of intensity and process improvements to drive SG&A lower.

As we continue to navigate though this bottoming process and encourage you to look at our behaviors and how we have approached building the company, we are a disciplined organization and highly focused on long-tem value creation. We are focused on our issues, and we are pragmatic and realistic about what we need to do. With that, I conclude my remarks and would like to now ask the operator to open it up for questions.

Thank you. Ladies and gentlemen if you like to register question at this time, please press one followed by four on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, you may do so by pressing one followed by three. And if you are using a speaker phone, please lift your handset before answering your request. One moment please before the first question. Our first question comes from the line of Scott Craig with Morgan Stanley. Please proceed with your question.

Thanks. Good afternoon. Just quickly with regards to Europe, Eugene, can you describe in a little bit more detail what sort of actions you are going to be taking there to show up some of the scrap issues? For example, when did you, when did those first become apparent for you guys in the quarter that you're behind schedule there?

Well, the results in our inventory and scrap really came about as a part of our annual physical inventory, products that we do, and in that period we discovered the variants that existed in charges as was required. And that's only one element of the variances or the additional costs and spending increases quarter to quarter.

And then with regards to Europe, how many quarters do you think would take you in a flattish revenue environment to get back to profitability, Tony?

Well, you know I think by the end of this year, we should be in a pretty good position. So, hopefully we will turn the corner in the third quarter and be well positioned for the fourth. That's kind of how we are seeing things today. It will take us some time.

Okay. Thanks. I'll pass it on.

Our next question comes from the line of Jerry Labowitz with Merrill Lynch. Please proceed with your question.

Yes. Can you guys talk a little about the pricing environment over the past six months, especially, -- you guys have done very well on the top line, well up to your expectations and given the high-end of the range, who would have thought, -- little more it would fall to the bottom line?

Well, we would have thought that too, Jerry, I mean if you just look at the impacts of the spending in Europe, we would have had that margin in the fourth quarter. We would have had it in the first quarter. We have a lot more sustainability in that regard. We are going to have to deal with that spending condition in a very aggressive way. Pricing is a factor as well.

Then and if you look at three segments, as I mentioned, we are doing, I think, quite well in Asia and quite reasonable in the Americas, not withstanding the pricing pressures and I think we have a set of very specific issues that we know exactly what to do, and we are going to implement them and they will pull through the way Tony described.

Why not, as you are taking these restructurings? Why not go deeper, sooner?

That's the million-dollar question and certainly we don't want to, certainly give the impression that this is a serial process in our regard. I mean, we've had erosion in end markets that have continued through time and it is going to be a constant question as to, how much capacity we take out? In little of our expectations and what our customers are telling us versus the realities of both of the demand and being-- having the supply there when things do turn. So, that's been difficult for us to do and I don't think we can over rotate and protect the interests of our customers, as well as we are pretty cautious.

Thank you.

Our next question comes from the line of Joseph Wolf with UBS Warburg. Please proceed with your question.

Thank you. Two quick questions. One is you talked a little about new customer wins and the organic growth and sequential growth of those customers in the quarter. Could you give us a target for customer concentration by the end of the year, given the trends that you see now? And, with your bigger customers, specifically with Lucent, could you talk about lead times with projects that are going on there, they seem to have, they have been given some decent guidance for March and I'm wondering how the lead times on that are impacting your business whether that's in your guidance?

Well, it terms of the new accounts that we have, -- we're going to see a continuous improvement in percentage concentration as we look through the year. So, you'll see it increase very likely in the first quarter and continue to time. Again, we're not giving estimates or guidance beyond that, so that's always a challenge. But, we really do believe that we've got the momentum there, particularly on some of the larger programs that we know [Inaudible] in the second half of the year. So, watch for that on a continuous basis. In terms of discussion with any of our customers, as you know, we don't talk about them. Suffice it to say that, when you're looking at our customer's guidance, often there are inventory and channel decisions that need to be reflected and as well, the conditions of finished goods in the inventory that have to be taken into account.

So, I guess, the follow-on is have lead times contracted even further or are things stabilizing in terms of order patterns?

I would say stabilizing.

Thank you.

There's now-- it's really more of an issue of new programs that has been won and that have been significant total programs wins as we look at the things which we have won but they are all based at different times and its a case of how they grow, how they grow through time and then the other variable is what happens to the existing programs that we bottomed out on that or is that, its interesting if the concentration goes down, an upside starts to build up and things start to turn, but we are assuming a steady environment. So the concentration actually makes as less and less of an issue as we go through time.

Our next question comes from the line of Tony Boase with A.G. Edwards. Please proceed with your question.

Thank you. You talked about pricing pressure on the call but you didn't really quantify the impact on the margins. Can you do that?

Well I think if you look at the age and that was primarily pricing and the age of margins were effective that way and we'll be going into the first quarter, we continue to live in that environment overall but it is one of the elements, not the biggest element, clearly dispending issues in Europe are by far a biggest challenge so we so far have been able to mitigate pricing impacts through both our regular SG&A, cost management activities and our restructuring. We think we will continue to do that or we have to get behind us is the cost structure issues that we have in Europe.

And on Europe, maybe you could talk about the difference in your success of implementation, re-structuring there versus in the Americas.

The re-structuring in Americas tends to be a easier and faster and - in the opposite way in Europe, it tends to be more complicated and it takes more time and that's obviously reflecting in here in our ability to bring down costs as fastest we would like. So, there is -- that's a dimension of doing business in Europe versus the Americas, and you could see how things have improved in the Americas as a consequence.

If you could just indulge me, could you give some examples of why it's more complicated? Is it simply the issues with workers and severance; is there, why is it more complicated specifically?

In actual methodology, it requires in some cases a discussion, sometimes there is certain different kinds of notices, there are certain longer time cycles to involve, its a whole-- I think it's fairly generally appreciate the fact that it is harder to do it in Europe. Doesn't mean you can't do it. It just means it takes a little bit longer in an environment where you are shifting a lot of production to low cost geography, you can respond a lot quicker in the Americas, it takes a lot longer, doesn't mean you can't do it but it just means it takes a little bit longer. That time differential can translate into a disappoinment when you need expense reduction rate and that can show up very very quickly in what we are -- and what we are doing. But it is something that falls on time and does correct as you go through time.

Thank you.

Okay.

Our next question comes from the line of [Ellen Chae] with Prudential Securities. Please state your question.

Good afternoon gentlemen. Could you give us what the capacity utilization by region-- I know you gave it overall but by region?

I will give you overall 50% and obviously Europe is at the low-end in between 50 and our European results would be-- North America and Asia is running much high and we don't disclose any finer detail.

To what extent is, say, declining component of pricing a factor and some of the margin outlook that you are providing?

Oh, it's interesting. It doesn't necessarily flow through in the margin side but it does definitely flow through on the revenue side and we are being complimented by a lot of our major customers. What a fantastic job we have done for them on relative to cost reduction, which has benefited them tremendously but it has also deflated our overall revenue with an interesting byproduct but that doesn't really affect the margins, that just really affects the top line.

Okay and you had said that you were surprised that thet have given-- that you saw the high-end of the revenue [Inaudible] but you didn't have better margins and I just want to try to get a sense of what changed from the last time you provided that guidance to today and that made it so much harder to get the higher-end of the margins. I understand that Europe is difficult but is that something that took a dramatic down turn in the last quarter? Could you just give us some color on that?

Well Ellen, it was totally isolated in Europe, so if you look at Europe and saw an increase in revenue. With that increase we would have expected margin improvement on that alone, okay. That margin improvement, as I said in the scripted portion was offset by an erosion in the mix of business to more systems as we closed out the quarter in terms of what was pulled from some of the [Inaudible], in terms of some of the final configurations. Okay? So that was one factor offsetting the volume decrease. The other issues were just our expectations of how quickly we could take cost down and in that regard, it took us a little longer and we are in the midst of a lot of transfer activity so the estimates that were made on [inaudible] and various other things came in higher than we anticipated and those are the factors and as well, we had a physical inventory variance, which is not a big element and that would clearly be a one timer but those are the factors, if you discount all of those, we would have had very favorable operating leverage from the growth in revenue that we would have had in Europe.

Thank you.

Our next question comes in the line of [Alex Langen] with Ingalls and Snyder. Please go ahead with your question.

Thank you. Could you give us an idea of the size of the business in the non traditional areas that you mentioned such as consumer, medical, industrial, aerospace, auto, and so on. Because at the moment, you’ve got it included in these traditional categories in your percentage breakdown. So, how do you assign it to those categories and at what point will you start breaking it up?

We will start breaking out when it becomes more material. Right now this is not - there is lot of activity, a lot of wins, a lot of new programs as a total percentage of our business. It still remains small but the momentum is building up. When it starts to become material then we will break it out into a separate category.

So, it is, about what percentage is it right now?

Low, single-digit.

Low single-digit. So, which category did you put it in?

We put under storage and other.

Storage and other. Okay. Thank you very much.

Our next question comes from the line of [Mark Lucey] with TD Newcrest. Please proceed with your question.

Hi. Just-- I don't know if I caught the customer, 10% customers. Did you say as you did last time whether any of those were over 15% or 10% or just any kind of sizing on one being much large than the other are being fitted in the same range and then I just wanted to get an idea, I sort of beat this one severely, but I understand that the issue with respect to one time events, but I am curious about the ongoing events. I mean, are you dealing here with some sort of management or information control--feedback mechanism or are we or you just nearly naive if I could use that word with respect to your assumptions about the pace of change that you could effect on an ongoing basis in Europe?

Yeah. I think we have the tools and we have the system. So, the way I would characterize it is more of an execution issue relative to executing as fast as we would have liked. We can rationalize the fact that’s it’s a more difficult environment, but we had realistic expectations on how fast we could do it. We didn't do it as fast as we thought we would. There were a few other items in there that augmented that. I wouldn't refer to it as an issue in the pro-senses or the tools or stuff like that. That's why in my mind and in our minds here we feel that the stumping that is unique and it’s fixable, and it's the case of it falling through. I certainly also sensitizes this relative to the fact that we think we want to do more restructuring and bring it down further and that was also announced at the same time.

Mark in terms of your question on the profit on the customers at over 10%, we didn't disclose what each one was, but it's safe to say they are all in the same zone, in terms of percentage of sales.

I appreciate that. Thank you.

Okay.

Our next question comes from the line of Thomas Hopkins with Bear Stearns. Please proceed with your question.

Yes. Good afternoon everyone. Guys,could you address your overall portfolio for the server, for the enterprise computing market, because there are a lot of changes going on now, Wintel, Unix, High-ended Sun not doing as well as it has done, different market shares and you are exposed to Sun, IBM and I believe you have some HP and some of the old Compaq and even some of the Dell from the Wintel side. Can you give us the sense of the portfolio here and are you confident that you are on the winning side of these transitions?

Well. First of all, the portfolio, it is clearly diversified and we participate with just about all the key players relative to the server. We certainly have a very high concentration vis-à-vis proprietary Unix, but we also participate on the Intel side and for example, are now also very active on the IA64 and one of three sources for designs on new IA64 applications. So, that's that. So, we have a very broad diversification and I think it's easy for us to add to the mix or change the mix as we go through time.

Okay. And just following up with that, given that characterization, I just wanted to be clear on why your major customers grew about 4% or 5% in December and you guys were down nominally, admittedly you only did 1.91, but you were still down, even though your customers grew sequentially in the December quarter, and it looks like you are going to be down a little more sequentially than what the server expectations are on Q1. Can you follow up with that?

Well, we don't end up with all of the customers' service products and all the part numbers. But, you end up here with a tyrany of which part numbers you have versus the over all average mix for the customers. So, the customers that we have to strip away, what is the software related, what is the non-related hardware, then you go into the hardware, then which ones do we have, we could find a mid-range unit server doing a little bit better than the high-end or high-end is doing better than the mid-range, it depends on the mix you have at a point in time. So, you could end up at any point in time a little bit less or a little bit ahead, depending on the mix that you have. Then, the added dimension is not matter what your mix is, then it clearly depends on your customers. If your portion with Sun is doing better than your portion with IBM-- or if it’s better than the portion with HP-- they toll back and forth. And that's why I have mentioned before and I'll say again, the highest thing to strive for is diversity and the lowest level of concentration, so you have the highest degree of immunity. So, at different points in time in the past, our mix helped us. At this point in time, it has hurt us, but tomorrow it could start to help us again depending on the overall market and the particular distribution of part numbers and products that we have.

Okay. So you'd characterize that the mix is probably slightly underperforming the server market right now.

Yes, I would.

Great. Thanks Eugene.

I don't consider that by the way a permanent thing, that is just at this point in time.

Our next question comes from the line of Michael Morris with Salomon & Company. Please proceed with your question.

Yes. Thank you, good afternoon. I'd like to talk about the European developments and just be clear in my own mind, if all of the factors that you’ve cited as placing pressure on your operation in Europe or unexpected, particularly the make shift is a little more on the box build side or was that an unexpected development for Celestica?

Yes. That was, we felt we have a more favorable mix of board shipments than specimens.

Okay. And in general Tony, did the mix for your company for the year ending in December '02, did the box build segment grow as a percentage of sales, do you have that percentage for the year?

Yes it did. I think overall for the year, a third of our business is now, you know, final assembly system build.

Was it about 25 last year?

Yes. That is right.

Okay. What about currency, did the weakness of the dollar have any impact at all on this?

No material impact whatsoever.

Okay. My second question has to do with the pricing pressure and as another analyst mentioned, we hate to beat dead horses, but let me just come at it in a slightly different way. You talked about acquisitions and definitely you have not been terribly active over the past year, year and a half. In the early days as you are building out your physical footprint after the IPO, you were pretty busy and inquisitive, and in many cases got supply agreements. As those roll off, typically three, four years supply agreement, have prices been marked to market, so to speak in those supply agreements or have those been pretty much adjusted on a cost plus basis throughout the term of the supply agreement such that it's really not an issue here?

Well in some cases, as you come up with supply agreement that was underpinned by whether it is volumes or cost plus arrangements, that was marked to market. So, that is certainly one of the factors. I wouldn't say that was material in the fourth quarter, but as we go forward, I think that's a factor that put some pressure on our margins, and it is one of the drivers of that. I’d say separately, if you look at the market segments that were-- we have historically done extremely well and have held up nicely through time. I do think we are seeing particularly on the infrastructure side a lot more pressure than market turbulences as you have all seen, even as we see some of our customers trying it in the first quarter. They are all looking for help. They are looking to try to balance their cost structures and it's incumbent on us to try to stay ahead of that pressure, through restructuring and cost actions and unfortunately, we weren’y be able to do that. That's enough. So, we will continue to balance that equation and shift it from our perspective as we look at the benefits of all the restructuring activity.

We are, you know, very confident these are going to the business and it's hard to see them, and I understand that in our results. But it is even harder when you have to deal with some of the issues we had in the fourth quarter and that we’ll experience in some geography. So, going back to the pricing pressure there lately, part of it is material and has been very intense to get the lowest cost as fast as possible, which is very important to have a supply chain of varied efficients . Probably the most intensive pricing pressure is the pressure to move from a high cost solution to a low cost solution and that has been the catalyst for the restructuring that we have gone through. And the problem there is when you do make that move, you have to rebalance your capacity and your cost structure as you move that business over to a low cost geography. And we have done that,-- obviously not a problem in Asia. We have done that relatively well in North America. We have not done it as briskly in Europe and you are seeing that consequence. That's why we believe it as a temporary thing and you know it gets slushed through, rather than something that is sort of a permanent issue. But the biggest pricing pressure of all has been a tremendous movement to the low cost geography.

As a consequence to this restructure, we end up with a very healthy percentage of our capacity in the low cost geography and we’re making that move, we are doing it, I think very effectively and we are getting a lot of very positive comments from our customers on how we are doing it and managing the risk and realizing the cost savings. In fact, we have been referenced in multiple conference calls relative to how we are assisting our customers and cost reduction on the material and the movement of low cost geography, and it is our responsibility to make sure that we adjust our capacity. Like that there are many cases, and in most cases we have done it well. We have done it unsatisfactory to our expectations in Europe on a timing basis.

So if I could just paraphrase, Eugene. Is it the case then when your transfer these programs, you're simply losing loading and efficiencies in the transferee site -- or the transferor site I should say where it's coming from?

Absolutely.

Or because you're running redundant systems, are you building it in two different places now and so you have redundant systems or is it both?

No, what happens is a facility that was running, say with just 50% utilization on average, moved into an Asian operation, their utilization growth got higher and you can see that the profitability in their Asian operations is very healthy and they may drop even further, maybe they go to 40, maybe they go to 30. You correct that by readjusting your capacity-- that has been the catalyst for our restructuring. If you get your timing wrong and don't do it as fast as you should, you get a very visible impact in your results, very visible, very painful, and that's what we've experienced here. And hopefully, I have explained that so you can see the cause and effect.

Michael MorrisNo, it's a good explanation, I think. I just have one last housekeeping question, please. You took the $82m charge within -- of an impairment of intellectual property and intangibles, does the $23m in amortization of intangibles decline in the Q1, that's probably for Tony?

Yes, it does.

Do you have an estimate of that?

Probably around $12m.

12. Thank you very much.

Our next question comes from the line of Keith Dunne with RBC Capital Markets, please proceed with you question.

Yeah. Good Afternoon. Couple of follow up questions-- Perhaps you can step back on the restructuring and tell us you know a little bit-- go back a couple of quarters when you made the July announcement you know, kind of put together with the new restructuring charges. When this is all done, how much will you have taken out in terms of headcount, number of plants per square foot from start to finish and how much have you taken out at this point to date?

So, in terms of the restructuring generally after the announcement time we described it as 10 to 15% of our employee base. So far, which would have translated to roughly around 6000-- so far we are above 2500.

And I assume the number is going up now that you have made another charge. So is that now 8000 or do you have any color?

That's about right.

And what about square feet and number of plants, please?

Well, this is where we are not going to be really informative. In some cases, we haven't made the announcement. We would like to sort of announce them and pull through so the employees hear about it before they read about it.

I wasn't asking for location. You can't give any color on just square feet or number of facilities?

Not at this time.

Have you -- this was kind of touched on earlier a little bit but can you have you changed some of your bidding mechanism to make sure we don't run into, you know, more situations like what's occurred in Europe right now. And related to that this inventory portion, can you quantify that at all and I wasn't sure if that was in part of the charge what was just in operations booked under the [inauduble] line or something.

Well, it was not in the charges reflected in our operating results and the total full scraped inventory their variances was around a little more than a sent impact in the quarter. So it wasn’t a huge piece, it just contributed a little more.

Great. And as far as the bidding mechanisms, have you changed the approval levels of a process on how businesses is hit on so we don't run into you know, a repeat of what's occurred in Europe.

Well, it isn't a case of somebody went off and bid to something and we didn't know about it. We all had and agreed to plan and a portion of it didn't happen exactly how we expected it timing wise, it will happen. And all I have to do is lag a bit you know few months and it's enough to cause us some of the damage.

And my last question please, is SG&A. You made a point of talking about the 6% decline of sequentially. What do we look for in the first quarter SG&A can we anticipate another 5 or 6% decline and how should we look at that going forward with the, you know, perhaps a goal rate by the end of the year when your restructuring is done?

We will continue to trying to take that run rate down and balance it as close as we can with the revenue performance and then a little bit more through time. So part of that will yield this out through a continuing execution of the restructuring actions.

Just a doubt to that. In the first quarter, are we suggesting there is rate there that go down? I would imagine in the first quarter, rate goes up as a percentage of sales?

Yeah. Probably would go as a percentage of sales up, given the decline. In absolute dollars we continue to expect that we can bring the number down, including in the first quarter.

Thank You.

Our next question comes from the line of Todd Coupland with CIBC. Please proceed with your question.

Hi, good evening everyone. Tony, what's the realistic EBITDA number percentage wise once you get the restructuring out of the way in Europe?

Well, again depending on what the volumes are and where we come out on that equation, we would like to think that we can get back to the levels that we have experienced in the third quarter and then some.

Okay, and would you expect to get to those levels in 2003?

Yes, closer to the end of the year.

Okay, great. Thanks a lot.

Our next question comes from the line of Michael Walker with Credit Suisse First Boston. Please proceed with your question.

Thanks a lot. Just the flipside of two questions ago. Do you have a target capacity, load factor, and target low cost percentage of total, in terms of footprints that you are looking to establish, post the new round of restructuring?

Certainly, on terms of footprint capability, we would see our, the low cost geographies representing over two-thirds of our capacity after the restructuring is complete. That's a pretty significant shift from the starting point last year where it was about a quarter.

And on the overall capacity, those factors?

Yeah, it’s certainly there again, there, it depends on the general load restoration in the market. But from a planning perspective, we would ultimately see capacities into the sixties.

Okay. And then, second question is, you talked in the past about, trying to penetrate some of the Japanese OEM's, especially on the enterprise side-- Hitachi comes to mind. I am wondering, if you could, kind of, give an update on what the Japanese enterprise market looks like, with respect of prospecting for outsourcing opportunities?

Well as you know, we set up two plants in Japan with our acquisition with NEC. By the way, that is going very well for us, and is meeting all our expectations and has operated very well and shows very well. We are actively dialoging with multiple customers. We expect to net benefits from that as we go through time. We haven't, - we have other customers we have added but we don't expect this is going to happen over a very short period of time. This is sort of, a long-term investment. But certainly, the activity and discussions for outsourcing is there, it's intense. But I would also say as everybody understood, as we got into this, more complicated than, say in North America or even in Europe.

Is there a kind of, longer curve on the credibility of outsourcing side, there you kind of, have to, I guess prove more or show more to get them, kind of over the curve is?

Yes and I would characterize it this way. If we looked in North America, I would say that overwhelmingly, everyone perceives it is the way to go. If you move into what I call wave three in Europe, I would say it's 60% of the people believe it is the way to go. Mayb, they haven't done it yet, they have a lot more to do. And in Japan, I would say it is a smaller percentage of people that are embracing it and they are doing it very carefully. So, there are some people that haven't embraced it, some people are flirting with it and some people that they are saying, they are going to do it and they are going through the more complicated cycle of re-balancing and scaling down and moving business, in some cases selling assets. As we get swept up into the whole Japanese issue of, ya know, they have a lot of macro restructuring issues over and above resourcing into outsourcing model.

Okay, then my final question is just clarification. You said earlier that NEC program was 300 million in revs in '03. Is that strictly from the new program you signed an year ago, that is, on top of the existing NEC program, correct?

That's correct.

Okay. Thanks.

Two more questions please.

Thank you, gentlemen. Our second to last question comes from the line of Jim Savage with Thomas Weisel Partners. Please proceed with your question.

Hi. I want to just go a little bit further into the high-cost, low-cost area. Where do you -- where are you now in terms of high-cost capacity, and can you do it in terms of people as well as square footage and low-cost capacity? And can you also give us some detail on the number of people that would - what is the percentage of people that would be in low-cost regions at the end of the restructuring?

I think, in terms of, I don't think we tend to break it out in terms of quarter-by-quarter of the distribution of our employee resources. You know, I think, when I go back to the end-point that I described earlier, the footprint is fairly indicative of the employee distribution. There can be mix factors in there that would change site-by-site, depending on the types of products, but you know, I think in terms of analysis, it is -- the footprint, we think, is pretty representative.

Okay. And, will that include some expansions of existing facilities in low-cost regions?

Yeah. In terms of the footprint itself, as Eugene mentioned earlier -- the amount of products and programs that are transferring to those locations does imply expansion of our footprints and capacity in those locations. Actually, we are expanding in places like China and other low-cost geography, and you know, in the midst of this restructuring, we are building new facilities in those areas. So, there is a very real rebalancing.

Okay. In terms of -- you haven't made any -- you have been the least acquisitive company in the industry for a while, and yet there seems to have been a breakdown to some extent of operational controls, in terms of the restructuring in Europe during the course of this last quarter. Has there been any IT issues that have arisen as a result of the restructuring or are these purely other kinds of issues?

This is not an IT issue. As a matter of fact, our IT deployment is working very effectively and is pervasive and we have a common base, and I think we are in superb shape, relative to our IT tools and how we are deploying and how common they are etc. So, that's not the issue. I was just underestimating the rate at which we would -- so many things would happen in the context in Europe, apart from some of the more minor things that Tony mentioned. It is not an IT thing, it is not undisciplined management, it is just - we were about a little too aggressive and that's - I think it is - the way to look at it. It is -- the one makes this thing more than it is.

Okay, one last thing. Based on your guidance for the March quarter, obviously, your anticipation is that there will be further margin erosion in the March quarter, both on the gross margin and SG&A side. At what point, do you think that you are going to see the inflection point where margins begin to improve again?

We do hope that to be the first quarter, because in the first quarter we also had the adverse effects of mix [Capex], and I think once we get [Inaudible] and we get more momentum on the restructuring, particularly in Europe. We really strongly believe that would be an inflection point. Again, dependent on total revenues in the company and as we said earlier, we seem to believe that we got a lot of momentum going up.

Okay. And, I also would love for you to start breaking out the other -- as another and not along with storage, where we know, you already have significant business.

[inaudible].

Okay. Thank you.

Thank you, Sir. Our final question comes from the line of Louie Miscoscia of Lehman Brothers. Please proceed with your question.

A small miracle. I was wondering, if you could pull together, I guess with view for the whole year in a sense that you are going through a lot of restructuring now? You generically mentioned that that your profit may be the market quarter was going to be at the bottom. Again, I guess, what I am looking for is that, do you think things are going to start to improve in the revenue in the margin standpoint slowly until the fourth quarter or are you expecting a little bit more ramp to June to September then obviously to December?

I said that we feel this bottoming in the first - second quarter kind of timeframe, the traction will get with the new customers that are coming on screen, the traction we get from all the restructuring that has been fully improved from last year plus the new restructuring we have announced will start building up the momentum. Well, that's kind of where we feel based on everything we are seeing. We are not making any grand pronouncements of the big uptick, we are not saying rates how they are implying relative to coming out of -- out of its flat loan at sort of, our cost of characterization of where we are positioned. Making the other comment there, I think is an excellent way for me to also summarize relative to how things are going. I think, I feel good and I think the management too feels good about how we have focused on the basics, how we have worked on our balance sheets, how we have worked on our cash cycle, how we have worked on things like SG&A and will continue to bring them down significantly as the percentage may go over-time. How we have added new customers, how we have made a very dramatic reshipping of our assets from high costs to low costs, both in terms of plants, and people, and skills, while we have continued to maintain the integrity of our processes and systems, and IT systems and all the other investments. We are now withstanding a little bit of stumble in Europe that stands out poorly this quarter and contaminate this going into the next quarter. I think where we have built a lot of good momentum in an incredibly difficult environment and certainly, no one can get bullish in this kind of environment. We too are making progress and are well positioned and are moving the business in spite of the gloominess of the environment.

As we diversify more, I think we will build more immunity relative to some of the things that have impacted us, because of our high concentration. A big lesson here, I think from business is concentration is evil and it can be wonderful for you sometimes and can really whack you other times, and we are just going to make our basis broad and as effective as possible to optimize the MS model. When you have high concentrations with whether it's three customers or four or one, it's the person who eventually hits you. Well, that's the big object lesson. But on the fundamentals, I think we have made a lot very meaningful progress and I think back to our analyst call or a session in December of 2001, talking about getting down to 25-day cash cycle by 2003, and we barely have five days as we end the quarter, which says that when an upside comes, we are at a point where we can grow without having to invest in any meaningful way, which is an ideal position to be in. So, I still -- as a year overall there is a lot more positive marks than negative marks, and we expect that at a point in time it starts to reflect in our reported results and starts to generate a value and if we get any wind in our sales relative to the overall macro environment. I think that will all service well. So, with that I like to thank you all for calling in and going through all the details, and we look forward to our next call a quarter from now. Thank you very much.

Ladies and gentlemen that does conclude today's conference call. We thank you for your participation, and also you please disconnect your line. Have a good evening everyone.