Celestica Inc (CLS) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Celestica Incorporated first quarter 2003 financial results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question and answer session.

At that time, if you have a question, please press the one, followed by the four on your telephone.

As a reminder, this conference is being recorded Tuesday, April 15th, 2003.

I would now like to turn the conference over to Eugene Polistuk, Chairman and Chief Executive Officer.

Please go ahead, sir.

Good afternoon and thank you for joining us on Celestica's first quarter 2003 conference call.

Since this is a busy reporting day for you, and since the results have been out since this morning, Tony Puppi will briefly summarize our first quarter results, and then I will provide a few comments before we go to your questions.

Also joining Tony and I is Marvin MaGee, President and Chief Operating Officer.

Tony?

Thank you, 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.

For the first quarter, revenue was one billion 587 million; down 26 percent from two billion 152 million in the first quarter of 2002, and down about 17 percent from our December quarter.

This compares with our top-line guidance of 1.5 to 1.7 billion.

Ongoing weakness in our main communications and IT infrastructure markets, combined with expected seasonality, provided the pressure points in the quarter.

Sequentially, the Americas were down 19 percent, Europe was down 26 percent, while Asia was down a seasonal nine percent.

Asia is now our second largest region, representing about 32 percent of total revenue, with the Americas at 48 percent, and Europe, 20 percent.

In response to requests to further split some of our end-market segments, and to better the diversification efforts, we will now be splitting out our communications segments into telecom and enterprise communications, and also separating storage and other.

In the March quarter, enterprise communications, telecom and server were 24 percent, 23 percent and 22 percent, respectively.

Let me cover that again.

Enterprise communications was 24 percent, telecom was 23 percent and servers represented 22 percent of total sales.

Storage represented 14 percent of total sales, other was 9 percent, and workstation/PCs came in at 8 percent.

During the quarter, IBM, Lucent and Sun were each over 10 percent of revenues.

Our top 5 represented 53 percent of revenue, a sequential drop of 28 percent, and a clear indication of weaker spending in infrastructure or high-end products.

Our top ten represented 78 percent of sales vs. 81 percent in the prior quarter.

In aggregate, capacity utilization was between 45 and 50 percent.

Operating margins were .7 percent, down from 2.2 percent in the prior quarter on the back of a 17 percent decline in total revenue.

And, as we highlighted, an even steeper drop in revenues from higher-end, more complex products resulting in a greater margin impact.

Pricing also continued to weigh on profitability.

Our European operations continued to be the most impacted by the current environment, with negative operating profit of approximately 25 million in the first quarter, roughly flat sequentially.

Restructuring plans there are on track, and we expect the region to move back to an operating break-even margin in the second half of this year.

The Americas' profitability declined sequentially on the back of a 19 percent decline in revenues and and

adverse higher-end mix impact.

Margins in Asia were lower primarily on the lower volumes.

In terms of our overall restructuring, we're approximately halfway through what we announced last year.

The additional 50-70 million announced earlier this year will commence starting this quarter, that is, the second quarter, and should be completed by the end of this year.

In terms of work force reduction, 3500 of the anticipated 8,000 separations, if you will, have occurred to date, with the remaining restructuring to follow later this year.

Additional detail on the restructuring is given in the notes of our press release.

Net earnings on a GAAP basis for the first quarter were 3.4 million, or 2 cents per share, compared to net earnings of 39.7 million, or 15 cents per share for the same period last year.

Adjusted net earnings were 12.8 million, or 4 cents per share, compared to 63 million, or 26 cents per share for the same period last year.

These results compare with the company's guidance of 4 cents to 10 cents adjusted net earnings per share.

While we continue to work on diversifying our revenue and rebalancing our global footprint, we continue to deliver on a commitment to maintain an exceptional balance sheet.

was a healthy 18 percent, the best among the majors in our space in cash was 1.76 million.

We continue to fuel cash flow, despite this difficult environment, generating 85 million from operations.

Inventories increased by about 30 million, primarily associated with ramping up new programs.

Inventory turns were 7.6 times, reflecting the seasonality of the quarter, and we anticipate that that number will improve as we progress throughout the year.

Cash cycle continued to improve and fell to two days, down from five days in the prior quarter.

Overall, another effective quarter of working cap for management.

Given the extremely volatile markets and our strong balance sheet, we continue to be active in the--in repurchase activities.

During the quarter we spent 76 million to repurchase 154 million in principal amount of our LYONS.

In addition to our previously announced activities, the Board has authorized the Company to spend up to an additional 100 million for the repurchase of LYONS at the Company's discretion.

During the quarter we also repurchased 6.75 million subordinate voting shares at an average price of $12.01.

As you saw us announce today, we'll be increasing the number of shares that may be purchased under the normal course issuer event program from approximately 9.6 million to about 18.5 million shares.

The increase basically expands the current program from five percent of the outstanding subordinate voting shares to 10 percent.

Since the Company began its share and debt repurchase activities in the third quarter of 2002, Celestica has used its strong cash flow generation and healthy financial position to repurchase approximately 427 million in senior subordinated notes, subordinated voting shares and LYONS convertible debt.

We hope this

demonstrates both the current financial strength of the Company and our view on our long term prospects.

Let me now move to our forward guidance.

For the second quarter we are encouraged by the trend of out top line, despite limited customer visibility, ongoing economic uncertainty, and continued weak infrastructure spending.

This is based on ramping new outsourcing programs of both new and existing customers in all our key end markets.

As a result, we see revenue in the 1.55 billion to $1.75 billion range.

Given that the Company has not been active in the acquisition market in over a year, this reflects purely organic sequential growth.

On the bottom line we've seen the adjusted earnings per share range

a gain of two cents per share to a loss of 10 cents.

Operating earnings are expected to be affected by continued weakness in infrastructure for high-end spending in IT and communications and the resultant adverse product mix that that causes.

Furthermore, additional cost of ramping new programs will also impact us in the second quarter.

I think it's important to understand that the magnitude of the EPS range is commensurate with the numerous transitions we, as a company, have (at play); introducing new customers, which we had 11 in the quarter, and new programs with existing customers, carefully handling product transfers, continued restructuring and re-balancing our global footprint, and dealing with this short term change in product mix.

Within this environment of challenges and opportunities, our focus will remain on solid customer execution.

Let me now turn it back to Eugene.

Thanks, Tony.

I'd just like to add a few comments on the quarter and outlook before we take your questions.

First on the restructuring, we are comfortable with all our activities that are progressing and we would expect that Europe will improve later this year.

While we continue to proceed with our current restructuring plans, we are now just as focused on planning for the ramping of new programs and new customers that we have been winning and have won further in the first quarter.

Our focus on cash cycle remains intense, as demonstrated by the improvement from 28 days a year ago to 12 days this quarter.

Our focus on working capital efficiency will continue to be a priority, and I believe the trend here will be for continued improvement.

We continue to feel very good about our outsourcing win rates.

We've added 11 new customers this quarter, with six of them in the new sectors that we've talked about in the past.

We have had attractive new wins in telecom and servers.

We have had new wins in all regions and all our key segments.

It's difficult to predict how well these programs will do in this kind of environment, but the momentum is definitely positive.

Any acquisitions we consider on top of our organic success will be based on long-term sustainability and of course would be additive.

As we believe strongly in the long-term prospects of our company and our industry, we announced today that we will be expanding a number of shares to be purchased under our normal course issuer bid by an additional five percent, or up to 18.5 million shares for the program.

And as we've mentioned, we've also authorized to spend an additional $100 million to repurchase convertible debt.

We recognize the near-term focus of the market and the day-to-day concerns that the markets have to deal with.

But we can't help but find buying our shares back at these prices very compelling.

I will now ask the operator to open the call for your questions.

Thank you.

Ladies and Gentlemen, if you would like to register a question, please press the one, followed by the four, on your telephone.

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One moment, please, for the first question.

Our first question is from

of Morgan Stanley.

Please proceed with your question.

With regard to the - on the margin side, if we go forward and look in your outlooks, can you discuss more on a regional basis, as in Asia, North America and Europe, what we're going to see there?

Because if you assume that Europe is flat on a dollar basis, like it was last quarter for the loss, it assumes that we're seeing quite degradation in combined Asia and North America.

So if you could provide some flavor there, I'd appreciate it - thanks.

Well, going forward we don't provide that level of information.

But let me try to extend the performance that we had in the first quarter to kind of give you some of the dynamics there.

In terms of the Americas, as you saw, the volume impact certainly did have an effect.

And I'd say that the mix impact is probably the largest there.

So one can expect that that might continue going forward, and therefore put pressure there.

On the European side, the quarter was largely due to the volume effects that were pretty significant.

If you'll recall, I noted a 26-percent drop in sequential revenues, and of course that has a very adverse effect.

I'd say that that pretty much masked pretty good cost reductions in Europe.

So we will expect to get continued cost reductions, as we said on the call, with accelerated restructuring.

In the quarter, Asia was also impacted by a sequential decline; albeit it was small.

And going forward, I think Asia will continue to be our area of growth.

So where you might have the biggest effects on ramping of new programs, and a slight mix impact there as well.

So that kind of gives you the flavor of the dynamics that are impacting our profitability in the first quarter, and I think are suggestive of what one could expect in gross terms for the second.

OK.

And then just a quick follow-up.

For the March quarter, from the margin side, when you look overall company-wide, Tony, can you maybe break it into how much you thought the impact was mix, for example, or pricing pressure, et cetera, et cetera?

Well, just in terms of what the sequential movement, or?

Yeah, sort of on a, you know, percentage basis; mix was maybe a quarter of the shortfall in revenues, et cetera.

I don't think there was a shortfall in revenue.

But let me say that if you tried to present and look at things from the midpoint of our guidance range -- if you wanted to ask the question that way, what are the additional impacts?

I'd say, first of all, the volumes had a bit of impact, but the vast majority was on the mix side.

Alright, thanks.

You're welcome.

Our next question is from Tony Boase of AG Edwards.

Please proceed with your question.

Thank you.

You mentioned this morning that your restructuring efforts have not -- or the benefits of restructuring haven't begun to take hold yet.

Could you help us understand when those begin to really impact you positively?

And any kind of quantification of the kind of impact would be helpful, too.

The comment was, though all the restructuring hasn't all happened relative to what we've announce, but the financial benefit will flow through by the end of the year.

So, if you looked at restructuring

there actually were benefits both in the fourth quarter of last year and the first quarter, as we've been -- you know, I guess as we said it, halfway through our restructuring.

We don't have the mileage and the traction that we expect on the full program.

So, you can expect to have that full-in by the fourth quarter of this year.

And just a couple of housekeeping.

What was the balance in your accounts receivable, sales?

And also, what were DSOs?

Our accounts receivable, sales remained about $315 million.

And DSOs?

DSOs, if you calculate it with that number, was -- where are DSOs? -- 41 days.

Great.

Thank you.

Our next question is from Steven Fox of Merrill Lynch.

Please proceed with your question.

Yes, good afternoon.

Just to understand Europe a little bit better, it sounds like even though the losses didn't decline, you were saying you're on track with the restructuring, but the volumes hurt more than you would have expected.

Is that a fair way to put it?

That's a very fair way to put it.

And give that, is there a chance that even with the latest round of restructuring, that you could need to do more in Europe later on in the year?

Or, are you comfortable with the footprint that you'll have at the end of the year?

In terms of the plan that we have, we feel comfortable with where that plan is taking us.

You know, the revenue trends that we see going forward are part of that, and the plan is progressing as we had expected.

OK.

And then, the last question on Europe.

You're looking for breakeven-type of numbers out of Europe late this year.

Is that also ...

Yup, that's the goal.

And, you know, we're still targeting, although, you know, with the kind of volume impact we had in the first quarter, I have to hedge that a little bit, but we're still targeting to try to break even by the third quarter.

OK.

And then, one question away from Europe would be, if you looked at the year-over-year percentage change in your top-line, how much was due to lower material costs?

I think in, certainly in the year 2002, the material price reductions were fairly significant; probably in the range of 15 to 20 percent.

That's probably a bit higher than what we normally expect.

OK.

Our next question is from

Please proceed with your question.

Good afternoon, gentleman.

I'd like to go back to the margin question as it relates to the second quarter.

You're guiding basically the higher sales, but lower earnings, and you said that was primarily from further mix effects due to ramp-up of new programs.

Is that correct?

It's the primary...

I'd say price consider continues to be an undertone in our first and second quarter.

And the matter of prices, as was mentioned on the Street recently as being very intense price competition.

Are you expecting it to be worse in the second quarter than in the first?

Is that a reason for your lower margins that you're indicating?

On a sequential basis we expect that there will be a pricing impact in the second quarter.

It is not the dominant factor.

It is a factor.

There's no question.

Versus the first...

Versus the first.

OK, and where are you seeing that primarily?

What kinds of products?

Across the board.

OK.

And the absolute level of profits going down on higher sales, which suggests that as you ramp

that higher sales are do to the ramp-up of new programs -- is this going to mean that the higher your sales, the lower your profits?

Is that the way we should be thinking about this?

And it's got a range here that's quite wide: 12 cents.

Part of the reason for the lower profits is ramp-up costs.

So, the more sales you have, one would assume, the higher the ramp-up costs, and therefore, the lower the profits.

Is that the way we should look at this?

Ramp-up costs are also a factor, as I said in my scripted portion of the call, so we do expect, because of the number of programs, the number of new customers we're introducing, we expect that the ramp-up costs of these programs will actually be larger than the pricing impact.

And, on top of both, we have the effects of continued challenges in higher-end products as they make up a percentage of our business.

And so, if you combine all three, those are the effects that are translated into the guidance we have.

And getting back to the point about the range, I think it also connotes a degree of uncertainty and variability in the marketplace with everything else that's going on on top of all the things we're trying to transition into our business.

So, it's a -- from my perspective -- it connotes a little bit of caution in all the things that we have in play.

gives us some room.

And that talks about the second quarter.

But, if you step back, our restructuring converges by the end of the year, our 70 percent capacity and low-cost geographies converge by the end of the year.

The momentum from these organic wins starts to converge towards the end of the year.

The front-end costs become less and less significant as you move through time.

So, all these things you have to -- you have a near term effect, you have a mid term effect, and you have an endpoint.

And the endpoint, it should be -- it should all wash out.

And I think you'll have an element of normality.

So, what we have here is really us hitting the trough and profitability lagging as the revenue starts to move.

And then, over time, it starts to converge.

So just to sort of characterize how we see it as you move through time.

Next question?

Our next question is from Mark Lucey of TD Newcrest.

Please proceed with your question.

Hi.

Just a question related to the--what you had mentioned also in relation to the margin impact was customer transitions, I believe related to the restructuring.

Now, just to clarify from an accounting point of view and from how it flows to the P&L, if you were to do these programs to

customers by, let's say running two lines in two separate geographies for a period of time.

Obviously that's a temporary phenomena.

Is that something that would flow through your restructuring provisions or is that something we'd see in your pro forma EPS guidance and therefore your operating margins?

They're in our operating margins, Mark.

Those are considered period costs.

Alright.

I just wanted to be a hundred percent clear on that.

Thank you.

And the mix shift that you refer to with respect to the high end

, I believe that's the one you mentioned, do you view that as a permanent fixture here?

We've certainly seen your top five customer mix come down dramatically over time.

Your top five customer declines have been--a lot of it has been sitting in the server and mainframe side of things.

In your view, as we move forward here, is this got an element of this is what we should expect from a mix point of view going forward or is this more of a cyclical phenomena that you think will reverse itself in due course?

I think it's the latter; more cyclical

in the first and second quarter and that should wash out as you go through time.

That of course is our opinion at this time.

You know, it depends on how the market behaves, but that's the way we would see it.

And Mark, in addition to

, just for clarity, we also talked about high end communications infrastructure products as well.

And that would include--do you do a significant amount of mainframe type of business, which appears to be going through some sort of product transitions?

Yes, the midrange to high end servers, you know, which would include mainframes.

Thanks for your attention.

Thank you.

Thanks, Mark.

Our next question is from Steve Savas of Goldman Sachs.

Please proceed with your question.

Thanks, good evening.

Clearly, there's end market weakness and uncertainties and mix is working against you.

Last quarter you were very forthright in describing some of your--some of the issues as an execution hiccup.

I was wondering how you're feeling about execution right now.

Is anything in your guidance or outlook for June, is that purely the factor that you've described of mix, new ramps and pricing, and you're not seeing any execution issues?

Yes, we feel pretty comfortable on the plans and the execution of those plans that we have in place.

OK.

And then as you've got new programs coming in, and obviously everybody, you and competitors, are out there trying to sell new business, it's not uncommon for companies that have problems with one segment of revenues kind of falling off to start being a little bit more aggressive on price to help backfill revenue.

Can you talk about your pricing strategy in the past using a premium pricer?

Do you think you might get more aggressive on pricing to help the revenue side and if so, might that have any implications on gross margins or your long term operating margin goals of five percent?

Well, I think, just to correct your point about being premium pricers, we always price for the value of the services that we provide, so I think that's an important differentiation.

In our particular case, one would expect, given the complexity of engineering depth that's required in some of our programs, that we would be afforded a bigger opportunity in that regard, which we have.

And those are the toughest markets in this particular timeframe.

In terms of pricing overall, I mentioned -- we mentioned before, and as you're picking up in a lot of the press -- that it's pretty intense right now.

So, that continues to be an undertone throughout the market.

And I think what we can tell you very confidently is as we look at our programs and we price them that we're ensuring as we price them that we're gonna earn our cost to capital.

That is our litmus test, if you will, in terms of pricing.

OK.

Any change in that five percent operating margin goal?

Nope.

Nope.

OK.

Thank you.

Our next question is from Gary Baker of Raymond James.

Please proceed with your question.

Yeah, guys, I wanted to follow up on the mix effect.

I guess my question is, I mean, going into the second quarter on some of the high-end stuff -- and IBM even reiterated that last night -- you expect to see a bit of sequential improvement in the second quarter off the seasonally worse, seasonally weak quarter.

Is there a permanent loss of high-end programs that

, specifically, has experienced that is impacting your guidance for the second quarter?

We have not lost any programs in this quarter, and there's a lot of programs we've won from competitors in this quarter.

A follow-up on that, then, in terms of giving your revenue guidance as flattish to up for the second quarter, and you're saying the mix of high-end business is coming off, is the high-end business being replaced with sort of lower-margin system-

business, or is it just other lower-end business in the same markets?

No, I think it's a combination.

There is, certainly, some additional system-

.

And there's, as well, some other new customers that we're adding in some of the new programs that are not in the same high-value add category that we're accustomed to, or that we were accustomed to.

So, I do believe -- and we believe strongly -- that eventually the higher-end, the requirements and the demand for, you know, high mainframes and telecom will return.

And we'll see a come-back to more sustainable levels of demand.

Now, there is a point of clarification here.

On the programs that I referenced that we win, they ramp-up at different times.

You know, so some of that -- we'll start to see some of it this quarter, some next quarter, the quarter after, the quarter after.

There's

of activity associated with that, but the full benefit from a revenue point of view will happen over time.

It doesn't happen instantaneously and total in the quarter, as you would obviously understand.

OK.

And one last question.

On the restructuring in terms of impact on the margins, Tony, you know, previously you had turned out numbers sort of hoping to get a 100-basis point improvement in margins over 12 months sort of as the restructuring came in.

Given that we've seen some margin deterioration and we talked about the reasons, I'm just wondering going forward if you can give us any sort of long-term objective in terms of how the margins will improve as a result of the restructuring.

And secondly, would it be fair to say that the restructuring may be a little more difficult or going a little slower than expected?

Or, would you simply explain it by weaker end-markets than expected?

I think a big impact we've had here is the correction in the top-line.

So, the momentum that we've had in the business, in terms of the actual cost take-out -- so, the spending reductions -- is on track.

And if you had added that up, vis-à-vis all the restructuring activity, you know, that would have, at prior levels of revenue, delivered 100 basis points of margin.

So, that's still there.

And we said we were on track; we'll get that out.

We've got more to do, and as you saw in the quarter, we did not take a restructuring charge on that previously announced 50 to 70 million.

That'll unfold.

You'll see more in the second quarter -- or, you'll see some in the second quarter and more later on in the year.

So,

taking that estimate up further.

We don't feel at this point, given the other momentum we have in revenue, that we need to.

So, we still expect that once things stabilize here that we'll get that 100 points of margin.

We just wish that the top-line was a little

, and the end-markets, in particular, were a little kinder.

So, we have to react to that, as well.

And again, dealing with that as a factor and all the other transitions gives us this, you know, short-term issue on margins.

Would you care to put an objective for the company, I mean, assuming, you know, flattish-type revenues, where you could get your margins just on the restructuring by the end of the year?

Well, I think just if you had flat, you know, we continue to improve quarter to quarter, and we really can't provide the guidance at this stage.

OK.

Thank you.

Our next question is from Michael Morris of Salomon Smith Barney.

Yes, thank you.

Good afternoon, everyone.

I just want to follow up on a couple of topics that have already been touched upon.

Tony, last quarter, there were some execution issues that you, yourself, raised and discussed, and one of them was underestimating, to some degree, costs of transferring programs; whether it was for safety stocks or transportation costs, and so on.

My first question is just, have the inefficiencies of the restructuring been greater than expected throughout the past, let's say, three months?

Or, have those been about what you expected after your first adjustment to the impact of those transfers?

No, I think when you take the expected benefits, the costs of restructuring, and the actual execution of the transfers -- which is that period cost that we alluded to earlier and that we track -- in the first quarter, I'd say we're on target.

So, that is all balanced out.

So, there were issues, we were behind schedule, we underestimated, in some cases, the costs of keeping on longer to support programs.

We have a lot at play, especially as you consider the new project ramps and new programs that we are introducing.

So, in a way, that issue is a more positive one.

But getting behind the issues that we had before -- including some inventory items that were more minor, but none the less, prevalent in the prior quarter -- we feel that we've got them, you know, well in hand.

OK.

My second question has to do with the restructuring charges, and I think you've been fairly clear that the 50 to 70 million is still the number and you have a fair degree of conviction in that.

I guess I just want to ask if there's an economic element underpinning your belief that the 50 to 70 million is at sort of the right level.

In other words, do you assume anything in particular for your core end-markets, or anything in particular for the GDP of the nations whose companies you are servicing?

Is there -- what are the assumptions behind that statement?

Well, the key assumption behind our restructuring efforts is, you know, what is our cost point and where should our capacity be to best service our customers strategically.

So, that's where we're most focused on.

Aligning our cost structures and our capacity in the areas that will be robust over the long haul.

And, so that's why we haven't changed it.

We need to have the capabilities and the geographies, including high-cost geographies -- what we call high capability, to support some degree of rebound in this market, and I think the continued trend towards outsourcing, which is still there.

So, that's what we haven't wavered on.

After the 50-70, you think you'll be re-aligned and have the footprint that you want and then the game is go out and win the business and markets begin to recover and that should get you the leverage.

Yes, and based on our projections and the business we're winning, etc., we think the two converge very effectively by the time we end the year.

OK.

And Mike, needless to say, you know that there's volatility in the market and visibility being what it is, and markets can behave differently, so, you know that we're going to leave ourselves open -- if we have to take more out we will.

But then we feel that we're making that strategic tradeoff that, in light of returns for the business, we may have to make.

OK, I just have one final question which I'm not sure you'll be able to give the answer to.

But, in terms of these organic wins, would you care to characterize either the size of the contribution in the upcoming quarter from them; and if you can't do that, can you characterize the nature of the wins?

In other words, are they half market share gains from your competitors and half new programs from new customers, or are some of them new programs with existing customers... just if you could sort of give us the flavor for that contribution in the upcoming quarter.

Thank you very much.

New programs with existing customers, new programs with new customers, wins from competitors, it's across the board.

And, as I said, we're feeling quite positive about the traction we're getting in there.

It has been overshadowed by the end-market erosion of existing business.

But, over time, that stabilizes and you start getting the traction, it intersects with the shift to low-cost geographies, it intersects with the full deployment of our restructuring, it intersects with resolving the residual issues in Europe.

And they all... but it is across the board.

It's not any one.

And, it's across all the different sectors we're playing in, and also in new sectors that we're playing in.

So as it sounds, we've been working very hard and engaging in a lot of interactions with a lot of customers, and we're starting to get momentum on it.

OK, next question.

Our next question comes from Todd Coupland of CIBC World Markets.

Please proceed with your question.

Yes, good evening, everyone.

Just to follow-up on that last question.

What are the swing factors for the range on these new programs into the end of the second quarter.

Is it merely what you said before, which is just a take-up of these new programs, depending on how they do in the market.

Can you just give us a little color on that?

Well, it's two dimensional.

One is how they're placed through time.

Some start now, some start next quarter, some start the following quarter.

Some start next year.

And then, of course, there's the success factor of each of the programs, how they do in the marketplace from an end-market point of view.

So those are the ambiguities.

But, when you look at the number and the expected outcome, then that's fairly positive.

But in this environment we're not counting until we get there.

OK, so we should assume that you're counting on very little at the low end of your range and then if those new programs start to kick in, that gets you the upside for the growth quarter to quarter.

Yes, you can characterize that, but I think it also hedges a bit on--in terms of what the base volumes do and all the volatility that exists there.

OK.

One second question; you had a bit of an inventory build in the current quarter and you spoke about new programs causing that build.

Would you expect that trend to continue in the second quarter?

Would you expect it to accelerate in the second quarter and beyond?

Thanks a lot.

You know, we do expect certainly inventory to be purchased to support new programs, that's for sure.

But what--we are also expecting to get continued improvement in the inventory that we have and how quickly it speeds through the business.

So I think that we could actually show meaningful improvement in inventory, we should show meaningful improvement throughout the year.

On inventory turns.

Our goal has always been to approach zero cash cycle; we're very close to it.

To start approaching zero working capital, excluding cash, we're getting close to it.

I think people now believe that that is possible on the downside.

I think people feel that that's very reasonable in a flat environment and what we want to prove to the world is we can do that on an upside environment.

And when we do that I think it'll be a very positive shift in the business model and that's something we have talked about now for about quite a few quarters.

OK.

One last question, if I might.

So IBM spoke abut a supply problem in its server business last night on their call.

Did that affect you at all in the current quarter?

Thanks a lot.

We don't talk about customers.

Thank you.

Our next question is from Dave Miller of Kaufman Brothers.

Please proceed with your question.

Good afternoon, guys.

Just a quick follow-up.

I appreciate you giving us the further breakout of the--of your end market segments.

What's the threshold that we need to see before we get another new sector broken out?

Is it at the five percent level or something like that?

Something like that, you know.

I think it has to start to be meaningful where it's a material part of our business and I think that's what we responded to in this quarter.

OK.

And so is there any chance that, like say for

or consumer or something like that, could be broken out by the end of the year?

Who knows what that would unfold like.

OK, thanks.

Our next question is from John McManus of Needham and Company.

Yes.

If, as you restructure Europe, close plants, and transition programs, is there a risk that you would lose some revenue?

We don't think so.

We think we're doing the balancing in an effective way and there shouldn't be any customer impacts like you're describing.

And your experience to date over the last two quarters there have indicated that to be the case?

Yes.

And as you complete cutting 8,000 people, where does that leave you as far as utilization, as far as low cost geography location?

The intent--well, first of all, from a point of view of deployment, you know our endpoint at the end of the year is 70 percent of our capacity will be in low cost geographies, that

by places like Asia, Central Europe and Mexico.

So is that the point you're referring to?

How's utilization, please?

Our utilization today, as we said, is about 45 to 50 and I think our overall program was to expand the utilization by 15 percentage points.

And last question.

You know, you talked about the idea of acquisitions there which would have terms and conditions that would protect you.

Is this a new -- is this a new paradigm, as far as OEM's that they're willing to give these type of protections there to you in situations like this?

Well the word that we want to emphasize is

.

In other words, it makes financial strength sense for the long term.

So, in some cases, there are very specific safeguards or there's other factors that say that from a financial point of view it is sustainable.

So, you know, some customers -- many customers are accepting that.

That's why I think the

degree -- a lot of deals aren't going forward because it isn't sustainable and that probably is, you know, a very strong rational for the act that we have been less acquisitive.

You know, historically we've talked about seeing opportunities in the $5 to $10 billion range.

From a revenue point of view, we continue to see that.

It's a case of finding the right ones and in a lot of cases many of us have passed on it because they're only good for a year or two and it doesn't make sense and we have the patience and the courage to pass on the ones that we don't perceive have the right stuff.

Thank you very much.

Our next question is from Michael Walker of Credit Suisse First Boston.

Please proceed with your question.

Thanks a lot.

On the reconstituted end markets, I'm wondering if, by any chance, you have the proportions that were the case last quarter, just so we can do kind of a sequential comp on each?

No, we're providing that -- the actuals on a perspective basis starting in the first quarter.

Let me try to give you some color, through, because I think it's a fair question and it's subject to a lot of works.

So we don't have the exact answer going back and categorizing our various streams.

What I'd say is a safe bet is, that storage and other was probably around 50/50 on an average basis.

If you looked at the two elements part of that overall segment, historically, and when you break out enterprise versus telecom, that has fluctuated more.

I'd say the telecom piece could have been, you know, around 60 percent on average versus the 40 in the enterprise.

But, again, that's subject to my opinion.

I think it's a pretty good estimate -- a pretty good opinion in terms of our understanding of the business without going back and doing the detailed work.

OK.

Thanks.

Second question is, that assuming that PC vertical is not reconstituted, it looks like there are some growth there as opposed to declines in the

end markets.

I'm wondering if that would, obviously, be growth that was not seasonal.

So I'm wondering if it would be fair to characterize the new program/customers as having accrued disproportionally to that vertical?

It had some but, remember, it's the law of numbers you have in terms of the business and the size of the total revenue quarter to quarter.

So it's not a -- not a significant

but it is one, yes.

OK.

That takes care of it.

Thank a lot.

OK.

Our next question is from Keith Dunne of RBC.

Yes.

Good afternoon.

If I look at the fourth quarter -- or the first quarter you just reported and the low end loss of 10 cents in the second quarter, that's about a $37 million swing.

You talk about several items.

Can you give us, you know, some better

?

It sounds like the start-up, you know, is the number one issue more than price.

Is that the number one issue?

Does start-up, you know, represent half of that potential swing?

Does it peak in the second quarter?

Can you give us a little more color, you know, on that criteria?

You know, as I said earlier in the call, I think the mix of the business and the program ramp costs are the two major drivers.

There is a pricing impact, but it's smaller than the others.

And the program ramp, I assume, is what you were referring to later in the call when you called start-up.

You know, are we talking that this is a 40/40/30 kind of split?

Or can you give us any color like that?

And do the new start-up costs peak in the second quarter, or do they get even greater in the third quarter?

Well, because of the number of new customers that are ramping, I'd say the start-up costs probably do peak in this quarter and will subside through time.

And, as I said earlier, what's important to note is what the major items are, rather than giving any further granularity on what the individual elements are.

And one follow-up question.

The performance in the Americas has been, you know, fairly stable all last year, you know, reporting 35 million or so, plus or minus a few million of operating EBITDA income -- sell to 15 million.

Do some of the scenarios that might get you to a loss of 10 cents contemplate the Americas going towards breakeven, or even a potential loss?

Well, as I said earlier when I was giving the quarter-by-quarter dynamics and trying to help you understand how they may play out into the second quarter, we did say that the first quarter did impact -- mix impact in the Americas was a key factor, along with volumes.

We expect that mix impact to continue to prevail into the second quarter.

So, the number could be a smaller level of operating earnings in the Americas.

Thanks very much.

Our next question is from Pierre-Yves Terrisse of Desjardin Securities.

Yes, good afternoon.

Tony, you talked about the capacity utilization being between 45 and 50 percent.

And you said that you're comfortable with the 50 to 70 million charge in the later part of the year.

I mean, in terms of outlook, in terms of what you see out there, you think at this point that's sufficient in terms of charge?

And if it is, how much capacity would that be taken out -- that charge?

Well, Pierre-Yves I think the way we're looking at it now is, yeah, it is.

Albeit, recognize that, you know, there's volatility in this marketplace.

So, you know, if we have to take out more, we would.

And the net benefit of how much capacity would be better utilized is that 15 percent that I told you earlier.

OK.

And in terms of SG&A spending -- and it has been coming down for the last two quarters at a rate of about 4.5 to five million from Q4 and Q1.

What sort of expectation can we have on that front in the following quarters?

Well, we expect to continue to make traction in SG&A.

That's an area that doesn't directly impact, you know, our customers much as the cost of sales.

So, you could bet that that's one of our first targets of improvement, and we'll continue to be focused on that element of cost, that infrastructure.

OK, and one last question about the start-up costs that you've talked about, and going back to the earlier question about the overall magnitude of it.

Is it possible to

a sense of what is the impact of those start-up costs in terms of EPS?

Well, Pierre-Yves, we've said that the two major items driving the earnings dynamic quarter to quarter are the reduced -- the changing mix of the business and the ramp-up of costs.

So those are the primary items.

OK, thank you.

Thanks.

Our next question is from

Please proceed with your question.

Yes, good afternoon.

In light of the weakness in the communications and computing markets, what's your latest thinking on the opportunity for Celestica in automotive, consumer medical, industrial... where do they rank in terms of your development priorities?

Maybe what you could do, if possible, is give us a sense of what they might represent as a percentage of a normalized mix, say, 12-18 months from now.

Thanks.

We continue to win business in those factors.

Our expectation, over time, would probably, at some point in time, get up to about 15 percent of our overall revenue.

And that's not -- that's reasonably indicative of the amount of opportunity there is in those sectors, vis-a-vis the other sectors.

IT and Communications still end up being the largest sectors, largest areas of opportunity.

OK.

Second question.

I wonder if you could talk a little about business patterns within the quarter.

How did March shake up against February vs.

January?

Not too many surprises I don't think.

A typical pattern within a quarter.

So, it's pretty linear?

We don't -- yes, I think the way we normally see things is the third month of every quarter is -- revenues are skewed to the third month in the quarter.

We've had that pattern for a while.

In some quarters, it's a little more accentuated, but this was pretty much normal expectations within the quarter.

OK, thanks very much.

You're welcome.

Our next question comes from Chris Whitmore of Deutsche Bank.

Please proceed with your question.

Good afternoon.

A couple of quick ones.

First, can you provide utilization by geography please?

We don't provide segmented utilization rates, but I could just give you a flavor that Europe continues to be the lowest and below the average, obviously.

America is a bit below the average, and Asia, north of the average.

OK.

Secondly, it sounded like you expect some pickup in the end-markets later this year.

Can you talk about what you're seeing to support that thesis, or what kind of indications and leads you're giving to

end-markets are finally going to start to pick up here.

We didn't say the end-market's going to pick up, we're saying we're having meaningful organic wins, and in aggregate we see a pickup.

If there was an end-market pickup, that would certainly be welcomed and would help even further.

OK, great, and then, lastly: on the payables line, do you think you can continue to run at this level on payables?

No, no, I think the first quarter was kind of a seasonal pattern, so the inventory was effected adversely on a seasonable basis, and the payables were effected positively.

We have not extended terms materially in the quarter.

Great, thanks.

Two more questions, please.

Absolutely.

Our next question is from Michael Urlocker of UBS Warburg.

Please proceed with your question.

Hi, I wonder if you could touch on a couple of issues.

One: It seems to me that there are some product transitions you're dealing with -- telecom equipment providers... can you help us understand?

Is that transition moving products up to the Toronto facility, is that done or is that underway?

I think, you know in terms of the transition of products, I wouldn't limit it to the task in front of us, to one particular market segment or location.

There are products that are moving within North America, as you referenced, but as well a lot of the initiatives that we've taken with customers are migrating products to lower cost regions.

So that ties in with the endpoint that Eugene was describing of much more of our capacity in lower cost regions of the world, and that's reflective of where we're transferring programs as well.

I understand that, but my question still remains; is the one I described, is that completed or is that still underway?

We don't really go into program by program.

OK, thank you.

Secondly, can you touch on--I know the end goal is to have a substantial amount of production in low cost areas and I think you've used a figure of 70 percent by year end.

Can you help us understand, what is your percentage of production today in China?

Well, China is certainly a growing part of our operations.

Again, we wouldn't segment our revenue distribution by country.

Suffice it to say that when we talk about Asia as an operating region, China is a significant part of sort of the three major regions we operate there, namely in the Thailand, Malaysia, Singapore and China.

So it's a significant and balanced part of the total Asian operations.

OK.

And if you set a goal of 70 percent by year end, where are you today by that measure?

We're well past the 50 percent point and moving very quickly on that.

OK, thank you.

And I know this is probably hard to do, I don't want you to reconstitute your revenue, but the rough view of 70--

percent of revenue in the other category, what was that in prior quarter?

was in the prior quarter, the storage and other kind of averaged

.

And it wasn't the prior quarter; it was over all of 2002.

OK.

OK?

And lastly, can you describe in a broad basis--I know there's perception among investors and analysts that a large number of contracts for outsourcing were written one, two, three years ago and there's a view that some of those contracts are up for renewal.

Broadly speaking, could you describe whether you have a measure of a percentage of your business that is up for renewal and renegotiation or is that a specious issue in your view?

That is what I'd call a non-event.

And that's because the contracts frequently renew at all sorts of random periods in time?

Exactly.

OK.

Thank you very much.

Last question?

Our last question is from Gus Papageorgiou of Scotia Capital.

Please proceed with your question.

Just

.

Can you tell me what the headcount was at the end of this quarter?

And if you could just let me know what was your square footage as of the end of 2002; and I think previously you were saying you wanted to get south of eight million.

Are you still targeting that south of eight million or you think you have to reduce it even further?

Well, on your last question on the space, we ended the year about nine and we still view--there's a lot of dynamics underneath, but still eight million is sort of a year end point.

On headcount we're at about 38,000.

Great.

Thank you very much.

And that's worldwide count.

OK, hopefully we've had a chance to answer most of your questions.

If any of you have follow-on questions, please call us and we'll try to respond to them.

I appreciate very much you calling in and we look forward to talking to you at the end of the next quarter.

Thank you very much.