Celestica Inc (CLS) 2004 Q1 法說會逐字稿

Thank you for standing by.

Welcome to the Celestica first-quarter 2004 financial results conference call. (OPERATOR INSTRUCTIONS).

I will now turn the conference over to Mr. Paul Carpino, Vice President of Investor Relations.

Please go ahead, sir.

Good afternoon everyone, and thank you for joining us on Celestica's first-quarter 2004 conference call.

As you may have already seen in our press release today, the Board of Directors has officially appointed Steve Delaney as Celestica's new Chief Executive Officer effective immediately.

Steve on behalf of our shareholders, analysts, customers and employees, let me congratulate you and pass on everyone's best wishes and wish you continued success in your new role.

Also joining Steve on the call today is Marv MaGee, President, and Tony Puppi, Chief Financial Officer.

Steve and Tony will provide some brief comments on the quarter, and then we will open up the call for Q&A.

Before we begin the call, 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.

We will refer to certain non-GAAP financial measures during this call.

The corresponding GAAP information and reconciliation to the non-GAAP measures are included in our press release which is available at Celestica.com.

I will now turn the call over to Steve Delaney.

Thanks, Paul, and good afternoon everyone.

Let me give you a quick overview before Tony steps you through some of the quarter.

As our press early shows today, we are starting to show some onerous recovery after three years of very difficult times for us and our core customers.

Over the past few quarters, you have been seeing momentum we have been building in top-line by diversifying and adding customers.

But it is clear that we have not gotten sufficient operating leverage from this more positive environment resulting in inadequate returns.

My first 90 days or so on the job, aside from talking to customers and employees, has been focused on this very issue, accelerating our profitability growth.

This is our mandate in the short-term, and this means that we have to step up to reducing the excess capacity that we have in our network and to streamlining our organization structure to better align to our customer needs.

In the last 90 days, we have put these plans in place and begin their deployment.

Unfortunately the result of these plans would require another $175 to $200 million of restructuring charges and a reduction of about 5000 employees in the next twelve months, mostly in the higher cost geographies and including over 20 percent of our executive staff.

Aside from the adjustments that we need to make in our manufacturing networks fixed cost, we remain committed to the path that we began over a year ago with the deployment of lean manufacturing and Six Sigma.

We found both of these methods very powerful and have delivered value to both our customers and us as we have deployed them.

These are not trivial changes, but all of our manufacturing network is focused on implementing our lean production system that will result in efficiencies and more operating leverage.

I have been talking to our customers as well, and they have confirmed to me the importance of our industry in not only their growth plans but in helping them become more efficient in serving their customers.

The opportunity and value proposition of our offering is as compelling as ever, so I am confident this will be a great business again.

The value creation opportunity in delivering our plans is meaningful and achievable, and our team is highly energized to get there sooner rather than later.

I am pleased that our first quarter shows progress.

We have confidence as you will see in our guidance for the second quarter that we will continue to accelerate the improvements.

My approach will be more to let the numbers do the talking, but I believe we are on the right track in turning the Company around while fulfilling the needs of our customers.

Now let me turn it over to Tony to take you through the details.

Thanks, Steve, and congratulations.

A terrific decision by our board for Celestica and our shareholders.

Now I will begin with our top-line.

Revenue in the first quarter was just over 2 billion, up 5 percent sequentially from the 1.9 billion in the fourth quarter and up 430 million or 27 percent from the first quarter last year.

Strong year-over-year growth reflects a better environment for many of our core customers, as well as the successful win rates we have had in the past year.

Even with a $59 million revenue contribution in the first quarter from our MSL acquisition, we posted 2 percent sequential growth versus our typical cyclical decline of between 10 and 15 percent.

We did see somewhat typical seasonality in the quarter from some of our customers, but the better than expected revenue trend is reflective of the organic win rates and strength in the communications market.

End market revenue segmentation for the quarter was as follows.

Enterprise Communications grew 10 percent sequentially to 27 percent of sales.

Telecom was also up 10 percent and now represents 24 percent of sales.

Servers & Storage were each seasonally down about 8 percent and now represent 19 percent and 12 percent of sales respectively.

Workstation and PCs came in at 5 percent.

Our other segments consisting of industrial, aerospace and defense, automotive and consumer businesses was 13 percent of revenue.

This segment grew sequentially by 77 million or 39 percent and almost doubled on a year-over-year basis.

Sequentially MSL contributed about half of the growth in the other segment in the quarter.

In terms of customers, our top 10 represented 66 percent of the business, while the top five accounted for 47 percent.

IBM, Cisco and Lucent were each over 10 percent customers in the quarter.

By geography revenue was flat or up sequentially in all geographies, even when excluding revenue contributions from MSL.

Sales in the Americas grew 7 percent and represented 41 percent of total sales.

Asia grew sequentially 3.5 percent and now represents 39 percent of our total sales.

Europe's revenue seems to have stabilized and was up 8 percent on a sequential basis including MSL.

Without MSL, Europe would have remained flat to the fourth quarter.

This is positive given the region's seasonal sensitivity.

So the top-line stabilized and its strength appears global in nature.

Moving to profitability.

We have been saying and expecting that earnings growth will follow sales growth, and I believe we are starting to see this in the first quarter.

Net loss on a GAAP basis for the first quarter was 8.4 million or a loss of 6 cents per share compared to net earnings of 3.2 million or 2 cents per share for the same period last year.

Included in the loss for the quarter was a pretax charge of 10.9 million primarily associated with previously announced restructuring activities.

Adjusted net earnings defined as net earnings or loss before amortization of intangible assets, gains or losses on the repurchase of shares and debt, integration cost related to acquisitions, the cost of option expenses and other charges net of tax, was 8.2 million or positive 2 cents per share compared to 12.8 million or 4 cents per share for the same period last year.

MSL contributed one penny to these results.

Operating leverage is beginning to take hold as operating margins return to a positive .5 percent compared to a negative .2 percent in the fourth quarter.

Our operating earnings grew by about $15 million quarter to quarter with MSL contributing $3 million towards that.

Driving the higher operating margin was a 60 basis point improvement in gross margins to 4.4 percent.

SG&A grew by about $4 million quarter to quarter primarily due to the weakening of the U.S. dollar and the addition of MSL's SG&A expense.

As we have discussed previously over the past few quarters, we have had various dynamics impacting our profitability.

Let's quickly step through these.

First, we are seeing lower losses from our 64-bit reference design business.

In fact, this quarter was a loss of approximately 3 cents versus a loss of approximately 5 cents in the last quarter.

Second, with the ramping and maturing of new wins and new customers combined with fewer program transfers in our system, we are now starting to see stronger volumes and improved efficiencies.

The third factor has been our mix of higher complexity business, which has now either started growing again or has stabilized.

Business from some of our new markets also intends to produce more stability.

The fourth factor is pricing.

As we have said over the prior two quarters, pricing appears to have stabilized with much more rational behavior given better industry capacity profiles.

Lastly are the benefits we are seeing from our restructuring which are producing incremental operating leverage.

The upshot is that all these items are heading in the right direction, even though as Steve says we have much more work to do.

Operating performance by geographies is follows, starting with our European operations.

Here the operating loss has declined by over $10 million sequentially to an operating loss of 5 million versus 15.8 million of losses in the fourth quarter.

This was achieved as a result of transfer activities winding down and ramping new business combined with aggressive cost management.

Our MSL acquisition also contributed modestly to the improvement in the region, and our goal is to show additional improvement in Europe each quarter this year.

Margins in the Americas also improved sequentially in the first quarter, despite some of the seasonal effects in the region.

Excluding the startup losses from our emerging 64-bit business, our EMS business was positive.

Given some additional restructuring announcements, we expect to make steady improvements throughout the year.

Asia also continued to perform well and had flat margins quarter to quarter despite a lower mix of higher value-added products in the quarter.

With the worst of the end market declines behind us, our balance sheet has remained strong with a debt to cap at a healthy 16 percent.

Cash cycle defined as inventory days plus receivable days, less days of trade payable including accruals, has prepped up to 16 days due to the timing of inventory purchases, growth in AR due to the timing of sales in the quarter, plus the addition of MSL to our balance sheet in mid-March.

Excluding MSL, our cash cycle would have been 15 days.

Inventory turns of 6.7 times reflected 126 million in inventory from MSL.

Excluding MSL, our turns were 6.9 times down from 7.7 in the prior quarter.

This was a disappointing result as we flexed our supply chain at the urging of our customers for more potential upside in volumes and a tightening component environment.

We should see this revert back to a more normal result in the second-quarter.

Our cash flow from operations was a -76 million in the quarter, primarily driven by higher inventory levels and growth in our receivables.

CapEx was $56 million in the quarter, and the CapEx level was driven primarily by investments in Asia and the Czech Republic to support continued growth in these areas.

During the quarter, we also used $52 million to acquire MSL's preferred share, an additional $20 million net of acquired cash to reduce MSL's long-term debt.

In other words, a total of $72 million.

Our resulting cash balance was 831 million.

Before moving to our guidance, let me summarize the effects of the MSL transaction.

We closed the transaction on March 12 for a purchase price of 321 million.

This consisted of the issuance of 17.3 million shares, including options and warrants, and the use of 72 million in cash to acquire MSL's preferred share and extinguish their net debt.

In the first quarter, MSL contributed $59 million in revenue, a $3 million in operating earnings, and a positive 1 cent accretion to both GAAP and adjusted earnings.

Included in the acquisition cost of MSL was $35 million in anticipated and accrued restructuring charges which, once completed, will drive between 30 and 35 million of annual operating synergies.

We expect this to be completed in four quarters.

Included in Celestica's second-quarter 2004 guidance, which I will provide next, are the following expected MSL contributions.

Revenue of between 200 and 225 million and adjusted earnings per share of about 1 cent.

Now to the Company guidance.

For the second quarter, we expect revenue to be in the range of $2.15 to $2.35 billion.

This guidance reflects continued stability in end markets.

We expect adjusted earnings per share to be between 7 cents and 13 cents reflective of the improvements we are generating in operational efficiency and leverage from our reduced cost structure from prior restructuring.

In order to accelerate our return to acceptable levels of profitability, we have made the difficult decision to implement further restructuring activities.

These actions will result in the reduction of global capacity in approximately 10 to 15 percent of the Company's workforce or approximately 5000 employees.

Celestica actions will result in pretax charges in the range of $175 to $200 million.

We expect about 75 percent of these to be cash charges and expect to generate between 100 and 120 million in annual operating cost savings once these actions are completed.

These actions will occur over the next twelve months and will better align capacity with customers requirements, eliminate services that are not valued by our customers and accelerate our margin expansion plans.

Despite the typical challenges of integrating MSL, which is going very smoothly thus far and undergoing further restructuring, we believe these to be complementary actions and can be executed more efficiently going forward.

In addition, a more stable end market environment with less churn in our new program and customer ramps will improve the climate further and overall reduce the risk profile of these actions.

In summary, our top-line is stable and growing, while our earnings leverage is beginning to take hold.

Profitability acceleration will continue to be our top priority in the short-term.

With that, let me ask the operator to turn the call over for questions.

(OPERATOR INSTRUCTIONS).

Michael Walker, First Boston.

Good afternoon, Steve.

Great way to get started here.

I am a little confused on the MSL contribution here in Q2.

I think you said it would contribute a penny of EPS in Q2 after contributing a penny in EPS after only two weeks in Q1.

Can you clarify that for me?

A key driver there is we have the additional shares in for the full quarter and the fact that when you look at our first quarter, MSL is traditionally very seasonally or within the quarter skewed to the last month in the quarter.

So the sales and earnings that MSL generated over the last two weeks of the month of March actually were pretty strong relative to what is an average over a whole quarter.

Okay.

Thanks.

And the second question is on the restructuring.

It sounds like MSL is not a big chunk in restructuring going forward.

If I am wrong about that, tell me.

But beyond that or assuming that, I am curious -- is this new set of restructuring something that has been realized recently because I think in prior periods you did not expect to do this much over this amount of time?

So under the new leadership, is there an understanding that there is more work that needed to be done than was done previously?

Yes.

Back to the first part of the question, the lion's share of that restructuring growth will go outside of the MSL acquisition.

Secondarily, certainly we examine our capacity relative to what we think our customers will be needing in all the regions on an ongoing basis.

Clearly my mandate in this Company is to get our margins turned around and get our capacity align so we can eliminate some of that fixed costs and take advantage of the consolidation benefits that we will get especially on these higher cost geography regions.

So that really caused to take another look at the capacity that we had in place, and we made those decisions.

The last question is just on Europe.

You have talked previously about Europe going breakeven in the second half, but you did better than expected -- at least I expected -- in Europe.

Here in March, is it realistic to think that Europe could go breakeven in June?

Well, we are certainly trying to get there as fast as we can, so that is a possibility.

Dennis dos Santos, First Associates.

Congratulations on your quarter.

Just a couple of quick questions, and you certainly proved me wrong on the accretion from the acquisition by the way.

Gross margin, can you give us some guidance, Tony, as to where you think you are going to wind up?

You are a lot higher than where I had modeled at this point in time, and you are about two quarters ahead of where I thought you would be in this quarter.

So could you give us some idea of what level you think it would get to over, say, the next four quarters?

Well, we are going to continue to make progress, and if you look at our restructuring, I think that affects and will affect our gross profit primarily.

So both the effects of restructuring and the lean manufacturing initiatives that we are deploying on a global basis will have a pretty marked improvement rate on our GPA.

So just steady steady as she goes.

Expect with the restructuring underway, we will get more more momentum on that GP line.

At this stage, we are not providing any guidance, but obviously we have good and strong expectations of margin improvement throughout the year.

Do you expect on a sequential basis throughout the year you would improve every quarter?

Could we at least model that in?

Yes, we do.

Okay and just a follow-up.

I will try not to hog the line here.

Similarly on SG&A, perhaps you could just go through where you think you are going to be on there.

You were at about 3.7 percent of revenue.

Obvious with this restructuring, that is going to come down.

What kind of level do you think you are ultimately going to wind up with on a percent of revenue basis?

I think it is a combination with revenue growth and restructuring we are taking, let's say, offset in the short-term because the MSL SG&A levels were significantly higher as you know, and (technical difficulty)--.

In the short-term and as you are looking at the second quarter, we will have growth in the SG&A absolute enough.

Our job is to kind of in the short-term keep at the current percentage of revenue, but as time goes on and as we implement the restructuring try to drive that number down as close as we can to 3 percent hopefully this year.

Okay. (inaudible).

That is fantastic guidance.

Congratulations and you have obviously got off to a good start here.

Scott Craig, Morgan Stanley.

Tony, you mentioned on the SG&A side that it was up slightly this quarter due to MSL and currency.

So you must have done a good job of cost-cutting there.

Can you maybe outline what SG&A would have been as a percentage down in, say, local currencies and excluding MSL?

If we took out the effects of MSL and the incremental quarter to quarter effects, we were down probably $2 or $3 million sequentially.

Okay.

And then on the cash flow side Tony, are customers still asking you guys to flex the supply chain?

Does that worry you from a cash-flow perspective as you move on through the second and third and fourth quarters this year?

This is Steve here.

No, the quick answer is no.

We don't see that kind of behavior that we saw at the start of the first quarter happening right now.

So I expect better inventory performance in the second quarter.

Steven Fox, Merrill Lynch.

On the restructuring, I just had a few questions.

First of all, are you going to be any more specific about what facilities are being consolidated at this point, or if not can you provide generally where the regional impact is going to be?

Secondly, I was intrigued by the comment about eliminating services not valued by the customers.

Can you talk about what services specifically you are talking about there?

You know relative to the announcement of facilities, we will not do that because certainly our own people deserve to hear that internally first.

So I will not talk about this publicly.

At this point though, you can guess that the lion's share of that will be in the high-cost geographies and the Americas and Europe.

On the comment -- Tony's comments about those services -- we obviously take stock of what are the services that we are providing our customers that are of value to them, and we have obviously grown through a number of our initiatives and figured out where we are spending that we can cut the spending and not have an impact to the value we are providing our customers.

You sound reluctant to name those services though at this point?

We will do our work to ramp those things down internally.

Okay and then last question would be a financial one on the restructuring.

Can you break down the savings in terms of how much from fixed costs versus, say, headcount, and how much of it is back-end loaded towards the latter part of this year?

Well, a lot of it is back-end loaded.

Hopefully in the numbers that I talked about in terms of the annual savings 100 to 120 million, we are hitting that run-rate as we exit this year, so fourth quarter.

Clearly a ramp.

Not a big impact in the second quarter actually, okay?

What was the first part of your question?

Just a breakdown of the savings.

Where do they come from?

Most of the savings will be in our structure and given the high cash content this quarter relative to prior restructurings, a lot of it is related to people.

Certainly removing lines and facilities and real estate is a part of it, but I would say the biggest share of the total benefit will be in the form of employee costs.

Patrick Parr (ph), UBS.

I was wondering, Steve, if you could share with us how you are incentivized in terms of compensation and if it is different for your management team as well, if it is different than the prior management team in terms of what metrics you are judged against?

You know, Patrick, it is very similar as we have always had.

However, the stock options issued this year to the leadership were performance-based stock options.

So the resulting value of those are dependent on our progress at improving our position on return on invested capital.

So it is tied to ROIC basically?

Yes.

Then another question about the restructuring.

What sort of footprint are you driving to from a geographic perspective, and at what point in terms of timing, would you expect to achieve it?

Well, we have been saying that we expect to have about 75 percent of our capacity in low-cost geographies.

Depending on the measure, we are near that point right now.

We will at this point hover around that number and continue to tweak things.

Is an increase in CapEx expected to reach that as you were to expand facilities in those locations?

We have some CapEx related to the expansion of our operations in low-cost geographies but not a significant change from past spending levels.

Thomas Hopkins, Bear Stearns.

Tony, just looking at the guidance for the next quarter out, midpoint around 2.25.

It looks about 10 percent, 11 percent up sequentially.

Could you go through that and tell us where the strength is coming from?

It seems like a pretty big sequential increase.

Remember that we are adding in MSL for a full quarter, so that is a big driver of it.

And the rest, I said if the guidance if you take the midpoint of the range, about 3.5 percent sequential, so it is actually pretty modest.

And it is pretty much across all end market segments kind of growing sequentially.

Okay.

And the MSL component of the sequential growth would be about what?

Well, we said that in the quarter MSL would add between $200 and $225 million for the quarter.

That would compare to the first quarter adding 59 million.

Can you tell us of the new charges how much do you expect to be cash and non-cash?

75 percent of the charges will be cash-related.

And what is the timetable for, say, the headcount?

Is it going to track in line with the plant closures, or is it one-to-one, or how do you see that?

Yes.

So it basically tracked with the facility closures, and on top of that, any changes we are making to our infrastructure will happen throughout the year.

Alex Blanton, Ingalls & Synder.

Thank you.

Good afternoon.

You said you did not want to give specific numbers for gross margin and SG&A targets.

But can you do that for the second quarter?

In other words, what kind of assumptions should we be looking at in the 7 to 13 cent range that you gave for the second quarter?

If you took our operating earnings and you took the midpoint of the revenue and EPS range, the operating earnings you would have a ballpark of $30 to $35 million.

Okay?

And they also said that sequentially we will see an increase in the SG&A just due to the full quarter effect of adding in MSL and hopefully keeping the percentage of sales constant.

That should give you an idea that we should get meaningful improvement in GP.

Okay, fine.

On the lean manufacturing program, can you approximate -- and I know it can get fuzzy -- when you started that?

You have had the so-called Six Sigma programs in effect for sometime, but the kind of effort you are making now -- I mean when did that start?

We started that last year, Alex.

At about what time?

Early last year.

Early last year?

How are you organizing that?

Is there someone who specifically whose job it is to get people geared up on that to establish it in a different plan to see that it gets migrated to the workforce and so on?

Are you leaving it up to individual plant managers to do that?

We have developed some expertise across the company that was the set of traders for our larger network, and in our plants and every plant, they developed a team that has learned from those leaders, and actually we have done a number of deployments during the year last year.

As you can imagine, this is a big task in a big plant.

So you have to buy CPL one buy at a time, and that is exactly what we do.

So that expertise has been growing now over the past year throughout all of our sites.

This year we are continuing the process with the ambition of getting our lean production system implemented.

Is this a central group of people that operate out of headquarters, is that what you are saying?

They are operated out of regional staffs, the core treasury.

Is there a czar so to speak, somebody who is providing the leadership for all of this, some one person?

Yes, it is me.

Okay, good.

Well, can you give us some examples of results that have been achieved so far in terms of reducing first base setup time, efficiencies, workforce reductions, yield improvement and so on, some numbers?

Can you give any examples of it?

There are all kinds of examples out there.

I don't want to get into any kind of specific customer units (multiple speakers) or anything.

But we have seen the kind of savings benefits that we have gotten from our lean manufacturing transformations sometimes include the 30 percent increase in the -- 30 percent improvement in the amount of effort it takes to build the product.

We get 30 to 40 percent base reductions very often with reductions in similar ranges.

They have been quite dramatic time and time again.

Well, it would be a good subject for your next analyst day.

That is what I was thinking.

Lou Miscioscia, Lehman Brothers.

Okay, great.

Tony, back at our tech conference in November, we had talked about and you had presented that you expected to grow top-line 10 percent in '04 over '03, and we even back out MSL.

It looks like just taking the first-quarter numbers and annualizing them, that you are more in the 20 percent range.

Can you go into a little bit more of the different wins that you are getting either in the different areas because obviously there have not been that many that have been publicly announced?

Well, we have been talking about the growth we have been getting in those other market segments and the focus that we have been putting in terms of our sales gains in those sectors in order to help diversify the business.

I think as well what we are seeing ultimately here is strength in some of our core markets as well, primarily the first quarter, which has seen some really good strength in communications.

So I think it is a combination of all those factors.

You have seen the end market segmentation and the kind of year-over-year doubling of the numbers there.

So things are happening as we speak and as we are ramping the programs, and hopefully they will continue to increment as we go through the year.

Could you maybe give us a suggestion as to the average size of some of these new wins?

Are they in the $30 million, $50 million range?

I think that is a good characterization of a lot of the business that is in those early sectors, and they maybe thinking a little higher than that, but it is in the ballpark.

Switching over to Steve, if I could ask maybe one or two questions.

You mentioned a 20 percent headcount reduction I guess in the senior management there for the headquarters staff there.

Maybe if you could just explain that a little bit more and maybe if you could point to two or three of the bigger things that you are looking to change now that you are officially the head of the company?

Actually most of that took place last week.

We have made some changes to our organization structure with the eye on streamlining our operations.

It was unfortunate that we had to do that, but I felt it necessary at this time.

So we have got the organization aligned with I think a more effective and streamlined structure, and it will result in lower-cost as a result of it.

I am not sure I got the rest of your question.

Just if there is any couple of other things that you could say since you have taken over the main changes that are you looking to put forth over the next 90 to 180 days?

Sure.

There certainly will be the capacity adjustments that we talked about, as well as getting the operating leverage through lean manufacturing Six Sigma are big parts of the turnaround plan that we have been working on as a team over the last 90 days.

I am pleased with the progress and the launch that we have, and now we have to go execute it.

Great and congratulations on getting back to black here.

Angius Harp (ph), Wind Partners (ph).

First, I guess if we could talk a little bit about the 64-bit program.

You mentioned it was moving closer to profitability.

Once revenue is established at a reasonable level, what sort of support expense levels are we looking at?

Well, let me try a different way of answering your question.

I think the way we are looking at it and, of course, it all depends on the mix of products and the type of channels that are used in terms of that marketplace.

But our view is that with about $100 million of business, we should be doing okay.

You know a little bit better than breakeven and getting real leverage at about 100.

That is annualized?

Annualized, yes.

Okay.

On the free cash flow, if we were to look at it in four quarters now where it has been significantly negative, you mentioned some of the issues impacting this quarter.

Are we going to have to see much higher profitability levels to turn free cash flow back to the positive?

No, I think what we have tried to do is focus on inventory and inventory management.

It certainly helps how we skew our purchases through the quarter and work more closely with our customers in terms of having the flexibility without the commitments if you will in terms of inventory in the pipeline.

We think we can do that.

We are certainly very focused on that as we are on the profitability.

Both affect ROIC in a meaningful way.

Last question.

Can you give us CapEx guidance for the rest of the year?

The current range I guess is about 2.5 percent of sales.

I would like to see that a little bit lower, particularly as we execute our restructuring and utilize whatever assets we do free up in our network.

So I would say in or around the 2.5 percent and hopefully lower.

Joseph Wolf, Bank of America.

I was hoping you could give us some guidance about where MSL is going to fit into your segmenting going forward?

Are you going to break that out all the time?

Are you going to make consumer an area that we can track as its own stand-alone segment, or are we going to keep it in other going forward?

For clarity we decided to not only in terms of the first-quarter results and in terms of our guidance for next year to kind of isolate and show you the effects of MSL so that you can also appreciate clearly how our core business without MSL was doing.

Going forward, as we integrate the two operations, we certainly won't be -- it will be difficult and, therefore, irrelevant really to guide MSL beyond the next quarter.

In terms of the segmentation, as you know, MSL had a meaningful impact on our others category.

Our view of that as each -- any one element or end market segment that grows above, let's say, a meaningful level -- let's say 5 percent -- then we will start to break it out over time.

But at this stage, we are not at that level in terms of each of the units within that other category today.

Can you tell us what MSL would have been for the entire quarter in terms of its own revenues?

We are not disclosing that information.

It is safe to say just looking at the guidance into the second quarter, it was pretty healthy.

Just one last question.

As you look at the restructuring that is going on and the execution issues that arose last year, when you look forward into the new restructuring program, can you outline how it is a little bit different from the one last year if it is in fact and any magnitude of program transfers that will have to take place based on this restructuring?

Well, the restructuring -- the programs we will have in transition this year I think won't have the complexity of some of the really major transitions that we had in last year and even late maybe the year earlier.

So I am confident at this point that we can manage these transfers well without a huge problem.

The other thing that we see stabilizing is because of the growth in those other customers, we have added a lot of new customers and a lot of new programs in those other sectors you know that were happening in and around the same time we were restructuring major portions of our Company.

Our view is that that is a lot more stable today, and I think the experiences that we built up in our prior restructuring will help us be a little more efficient going forward.

Jim Savage, Wells Fargo.

Yes, I have a couple of questions.

First, do you have any real visibility regarding program wins or customer forecasts that would allow you to give a sense as to what the second half looks like in terms of revenues?

General expectations on demand?

I think things -- just looking at customer demand and the program wins that we have had and hopefully they execute the way that we bid the programs and won the programs.

I think we are looking at more stable, sequential growth rates as you go through the year.

Stable meaning at about the level of the sequential increase in the second quarter?

And hopefully more as we get to more, let's say, seasonally stronger quarters.

Okay.

So the fourth quarter should have somewhat stronger.

I am going to go back to the cash flow from operations question, because we are looking at 150 in the next year, $150 million in cash charges.

You are anticipating I assume that you will have positive cash flow from operations in the next quarter based on inventory reductions?

Inventory reduction, approved earnings should certainly help the overall picture in the second quarter.

Okay.

And with that, there still is going to be somewhere -- the normal CapEx is somewhere around $50 million for the quarter.

So would you anticipate that there would be free cash flow from operations prior to the cash restructuring?

That is what we are trying to do.

I am just trying to get a sense as to what the balance sheet is going to look like when the restructuring is done and whether there is going to be any further decline in cash position.

By the time it is done, I think the operating earnings will have a very meaningful effect on our cash flow.

Is there any off-balance sheet financing at this point?

No, there is not.

Good.

Okay and that is enough.

Thank you very much.

Talk to you soon.

Mark Lucey, TD Securities.

Sorry to belabor the point, but I am just trying to get a better sense of the end goals for the restructuring here.

I wonder if you could just clarify a couple of things.

Number one, very high cash costs associated with this.

If you did some fun with figures here, for 5000 people at the midpoint of that range, applying 75 percent cash to it -- your approaching $30,000 a person in terms of cash costs, which is much higher than you have typically incurred.

And you had mentioned that basically you were hoping to maintain a 70/30-ish kind of split between high cost and low cost geographies and that the emphasis of the restructuring program was to rotate more toward high cost or, sorry, low cost I should say.

So I am a little confused as to why the high cost and why aren't we seeing substantially more facilities or productive capacity in these so-called low-cost geographies?

Thank you.

Okay.

Let me try to address all those points here.

Certainly our higher costs reflect toward what Steve talked about some of the restructuring on the executive level.

In addition, and as I mentioned earlier, we will be looking at our structure, our corporate structure, throughout the quarters as we move through time, and that cost is typically a little higher.

In terms of the benefits that we see, I think there is still a very good payback on this overall restructuring.

Ultimately where we want to end up, we would like to end up north of 75 percent of our capacity in low-cost geographies.

We think we will get there with this program.

So we will be much better positioned to gain more operating leverage from that change in mix and reduced cost structure in higher cost geographies.

Right, but in the past you have had, for lack of a more elegant term, let's call it finger problems as some of these transfers have occurred that are inevitable when you go through facility closures.

And now that you are tackling some corporate structure kind of issues, what kind of assurances can we have that this is a lower risk type of program even though it seems like a larger in dollar terms than prior restructuring efforts?

Mark, as we said earlier, there just seems to be more still stability in our network.

We have got the learning from prior restructuring.

We are adding fewer of the smaller accounts that consumes as you know incrementally more resources relative to the bigger programs.

And secondarily when you look at the structure that we had as a business, it was structured for a much higher level of revenue.

We are in anticipation of a quicker return to more significant growth and revenue levels.

That is what we are trying to address right now is restructuring.

So it is difficult, but we need to do it.

I am not so sure that the corporate reductions will affect the implementation and risk factors in this type of structure.

Todd Copeland, CIBC.

Just going back to the ODM question, Tony, are you prepared to give us an idea when you think you can bring your ODM business to breakeven?

Well, I would love for my crystal ball to be able to predict the adoption of the 64-bit in the marketplace.

So it seems that momentum is certainly building, and we hope to ride that momentum.

At this stage, I cannot provide that.

Some of your competitors have talked about a 200 million run-rate by the third quarter of this year.

Would you think that Celestica is pacing with that competitor given the design wins to date and the like?

I think the growth would be similar, but again there is a lot of assumption that maybe that other competitor is making that would provide variability around the number.

So at this stage, I think it is prudent for us to continue to do what we are doing and making sure we have the right capability there and position ourselves for when that adoption is there.

And one of your ODM customers released that they have selected your 64-bit offering.

Can you tell us how many design wins you have in the bag at this point in time?

Well, that is the one that we have announced at this point.

There are a number of other engagements that we are working on right now at this point.

Okay.

And just secondly on the restructuring, I know that you had an issue in terms of the pace of staff reductions in Europe.

In looking at -- and obviously North America is different -- but in looking in North America and perhaps some of this will also bleed over to Europe, have you built that into your plan of twelve months in terms of dealing with those staff reductions?

Could you just talk a little bit about that and how it is different from the prior restructuring?

In terms of what -- I think we talked about our ability to execute, and we have confidence in that just based on our history.

In Europe, you obviously face the regulatory hurdles of the various countries, and that in part slowed the pace at which you can lay people off.

I guess I am wondering if any lessons from that have been built into this plan?

Yes.

Lots of lessons have been built into these plans.

Around the world, it will affect all of our high cost geographies.

Paras Bhargava, BMO.

Good afternoon.

A question for you, Steve, on your long-term operating model.

Previous to the MSL and previous to the latest round of restructuring, you folks have given out some long-term gross margin and OpEx kind of numbers.

It looks like MSL ought to help your gross margin and maybe increase the OpEx a little bit, but bigger restructuring might help.

Do you care to throw something out there in terms of what the long-term number is?

No.

But let me reaffirm the fact that we are still driving for those numbers we have spoken about in the past.

Shouldn't you be able to do a little bit better than that now?

(multiple speakers).

It takes time.

But clearly in terms of the economics of our business and the models that our industry faces, those should be markets we should all be shooting for.

A secondary question on the organic wins from new business.

One of your competitors has put some numbers out there.

It looks like if we just backout what your customers are growing at and assuming your share growth has been the same as in the last few quarters, it looks like you are getting somewhere between 500 and 600 million a year of new business.

Do you expect that to accelerate on a run-rate basis?

One of your competitors has put very large numbers out for what they are getting from organic new business because they are saying secular growth of outsourcing is starting to happen again as people can see what they are own revenue forecasts are.

Would you care to put some kind of numbers on it, round figures on what you expect to see from organic growth from new business?

As we said, we felt that we have seen over the last few quarters we have accelerated our win rates.

They are starting to be manifested in our results, particularly in some of those other segments, and we are starting to get the wind behind our sails in terms of our IT and communications marketplaces.

We continue to win in those sectors as well.

We did the follow-on programs or new programs with new customers there.

So I think we are pretty optimistic that we can continue to accelerate our growth rates here.

A final question on capacity.

After the restructuring is done, if revenues materialize as you expect, what capacity utilization would you expect to be at by the end of the year?

Well, right now we are at about -- I think we are about flat to the last quarter, around 55 percent.

And with the reductions in capacity, we are going to try to ratchet that thing up to 65 percent and hopefully north of that.

Chris Lippincott, KeyBank Capital Markets.

I have a couple of questions.

On the R&D, it looks like the R&D dropped about 34 percent sequentially.

I was wondering a) if you can give us some color on the cause of the drop?

Are we to expect that these current levels of R&D are going to remain where they are today, or are they going to go back up to prior levels?

Looking forward from this one quarter, I think the current levels are about right.

But it is difficult to predict because they are very program-specific development what you have done reference design built and we move on and we decide whether or not there is an opportunity to invest or not.

So that is how we want to maintain a high degree of flexibility in development budget.

Okay.

So the drop is not necessarily a strategic one.

It just happened to be given the market place?

We are maintaining the investments in the technology, and as we engage with new customers and new applications, then we obviously invest in whatever is required to accomplish that.

Okay.

Just on SG&A and margins, you had mentioned I think that you are affecting the percentage of SG&A remained flat, but absent dollars to jump.

And if we are to assume that the midpoint of your revenue line, call it 2.25 or thereabouts, and say a midpoint on the bottom line of revenue 10 cents, the model would suggest a gross margin jump of around 50 basis points or more.

Is that realistic?

You think you can do it, and if so, how?

Yes.

It is doable, and that is what I meant by being meaningful quarter to quarter, and it is as a result of all the actions we have talked about.

Primarily what we are seeing in some of the restructuring in Europe and Americas?

(multiple speakers).

Our network has been subject to a lot of adverse factors, right?

And as I said in the script there, a lot of those are trending positive.

They are all heading in the right direction.

So hopefully we are getting a cumulative effect here of all of those benefits.

Just one last question in terms of a macro picture, it looks like server and storage end markets dipped, and it seems to be happening to a number of your competitors recently.

And from what we are also hearing in terms of some customers, is this a trend we should begin to expect going forward?

What are you seeing from your customers in that general market?

That is a typical cyclical change.

In fact, we have historically expected more of a drop from fourth quarter to first quarter in those IT sectors.

Right?

That is what we said is on average they would come down by 8 percent.

Right.

But we had also heard some less than seasonality aspects.

I was wondering if this seemed to be somewhat sharp, although I am wondering if this is going to be something that we can really see go back to normal trends in June or what are your thoughts?

I think so.

Can we have the last question, please.

Chris Whitmore, Deutsche Bank.

Good afternoon.

A couple of questions.

Tony, when you mentioned earlier some utilization numbers, were those pro forma numbers including MSL, or is Celestica stand-alone?

They were both.

So you're running about the same levels of utilization in both?

That is correct.

Okay.

Secondly, if I look at your telecom business, what is the split between wireless infrastructure and wireline infrastructure?

I think historically it has been close to a 50-50.

Wireless is certainly performing better.

And lastly on telecom, do you have a good feel for where customer inventories are?

It seems like a lot of the EMS vendors are outgrowing their customers sequentially here in Q1.

Was there a little inventory restocking going on in the quarter there, or can you just comment generally on inventory levels in that supply chain?

It is too much.

As we saw in the first quarter, we think the optimism the customers have and their view of potentially tightening supply chains caused everybody to be a little cautious.

I am sure that we had enough supply of material, and for that reason, I don't think it was executed very efficiently in general.

So I look to that to stabilize.

It looks like we have more rational behavior going on right now.

Do you think that is true of finished goods inventory or just raw materials?

Both.

Okay.

Thanks, everybody.

We will see you at the next quarter.

Ladies and gentlemen, this concludes the conference call for today.

Thank you for participating and please disconnect your lines.