Celestica Inc (CLS) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Celestica second quarter 2004 financial results conference call.

At this time, all participants are in a listen-only mode.

Following the presentation we will conduct a question and answer session.

Instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties during the conference, please press star 0 for operator assistance at any time.

I would like to reminds everyone that this conference call is being recorded on Thursday, July 22, 2004, at 4:30 p.m.

Eastern time.

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

Please go ahead, sir.

Thank you.

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

On the conference call today will be Steve Delaney, Chief Executive Officer, Marv MaGee, President, and Tony Puppi, Chief Financial Officer.

Steve and Tony will provide some brief comments on the quarter and then we'll 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 non-GAAP measures are included in our press release, which is available at celestica.com.

I'll now turn the call over to Steve Delaney.

Thanks, Paul, and good afternoon, everyone.

Let me address a few topics before Tony gets into the details on our financials.

As you know, since the first quarter we've been driving changes throughout our business in order to restore our performance.

We have reenergized our customer organizations to drive accountability for value and results.

We've intensified our cost-cutting energy through adjustments in capacity and corporate structure and reduced our executive staff by 20%.

And we've refocused our operational effort to driving accelerated efficiencies from lean manufacturing at [Six Sigma] Fixing the base businesses is our mandate in the short term and I am very pleased with our progress.

We had a strong quarter in revenue, increasing 15% sequentially, 4% of which was organic.

This was due to strength in most of our traditional sectors and with our successful diversification efforts.

The healthy increase in revenue, along with our operational improvements, generated operating earnings that were more than three times those in the first quarter with both Europe and the Americas running to profitability.

While our margins are not where we want them, I'm happy with another quarter of good improvement.

Cash-flow was somewhat disappointing due to the timing of inventory purchases early in the quarter, while making shipments late in the quarter.

However, we did show a reduction in absolute inventory dollars and an improvement in inventory turns.

I'm comfortable that we will generate positive cash from operations in the third quarter as these timing issues cycle out through the cash conversion process.

With our financials starting to track more positively for the company, I'd like to give you some general thoughts on what we will be focusing on fort second half of the year.

First, is to remain on course with our restructuring plan and delivering the company benefits.

To date, about 60% of the restructuring has been announced as-planned and the remaining will be announced in the seconds half of the year for completion by March 2005 and will generate cost savings that we targeted.

Finalizing the integration of our MSL acquisition is also a priority for us.

So far we've been very pleased with how smoothly the integration has gone and with the performance of these operations that we've acquired.

We are encouraged by the emerging customer opportunities that we are seeing now that the companies are combined, and we expect additional cost synergies for the second half of the year as well.

Continuing to capture operating efficiencies in the plants will also remain one of my top priorities.

Lean manufacturing and Six Sigma implementations started in early 2003 are producing steady results for the company.

All of our plants worldwide have begun their implementations and will continue driving a world class, lean production system through this year and be beyond.

There is considerably more cost reduction needs in our business, so we'll continue driving these kinds of savings as we institutionalize our production system.

We are getting very high marks from our customers on lean manufacturing, and it's these types of action that is make our outsourcing model even more compelling.

In addition to the margin improvement over the remainder of the year, the organization will be very focused on driving meaningful improvements in working capital performance.

The cash cycle should improve in the second half of the year, primarily on the back of better inventory performance.

Our turns are two low at these current levels as we do do not have yet adjustment time profiles that we need.

There is no magic solution here, so we will be focused on lean, supply-chain deployment and better customer demand collaboration.

Despite our infrastructure mix, which tends to turn a little slower I would like to see us at a minimum of eight turns by year end, and the organization is working very hard to hit this target.

At the capital as the Capital Markets go through this earnings season, I know that some concern regarding demand has appeared in the marketplace.

Though we are not able give guidance beyond one quarter, I generally characterize the current, end-market environment for us as stable and in line with how we planned our business as we came into 2004.

We are encouraged that the forecast in aggregates seem to be holding, and we're not seeing wild swings, either way, in any of our market segments.

This stability is what gives us a high degree of confidence that the financial improvements we are targeting should be met.

In terms of new business funnel, we are finding the environment rich with opportunities in both low volume, high mix, and in our high-volume products across all our sectors.

I'm pleased with our success rate in new business wins and in the economics of those wins as we employ our lean thinking to the customer proposals.

I'm also seeing these opportunities gain greater scope and just PC A manufacturing as it once was.

Discussions with our customers are going much deeper into their cogs, such as design, logistics, order fulfillment, and repair.

These are areas where we are participating today and we expect this to grow.

Optimizing all levels of the supply chain in a meaningful way is where our customers are focused and we will be a leader in establishing these trends toward deeper relationships in the future.

To summarize, we are making good progress on our results, so I feel strongly that we should be able to show meaningful improvements in margins, working capital performance, and operating efficiency in the second half of the year.

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

Thanks, Steve.

Let's start with the top line, where revenue in the second quarter was 2.31 billion, up 15% sequentially from the 2.02 billion in the first quarter, and up 716 million, or 45%, from the second quarter last year.

The strong year-over-year growth reflects the addition of MSL, a much better demand environment than what we saw last year, and new programs and new customers that have been ramping over the past few quarters.

Organically, our year-to-year revenues grew 28% a quarter.

Our acquisitions contributed just over $250 million in the second quarter.

This exceeds the top-end estimates of 225 million we provided during our first quarter results.

Our base business also showed a respectable 4% sequential organic improvement.

End market revenue segmentation for the quarter was as follows: enterprise communications grew 15% sequentially and represented 27% of sales; telecom grew 5% and represented 22%of sales; servers grew 10% to 18% of sales, while storage decreased by 4 percent, and came in at 10% of the business.

Work station and PCs was up marginally on an absolute dollar basis and came in at 4% of revenues.

In addition, our efforts to diversify our ends markets continue to solidify in the other category -- or our diversified market segment, consisting of industrial, aerospace, and defense, automotive and consumer and peripheral devices -- increased sharply and now represents 19% of revenue.

This segment grew sequentially by 157 million, or 57%, and increased 179% on a year-over-year basis.

About one quarter of this growth has come organically, with the rest from our MSL acquisition.

Moving on to our customer mix, our top ten represented 64% of the business while the top five accounted for 48%, neither representing a significant change quarter-to-quarter.

IBM and Cisco were each over 10% customers, and importantly, each of our top five customers grew sequentially.

Our non top ten gained considerable scale and now represents 36% of sales.

Non top ten grew 114% year-to-year and if we remove the MSL impacts, these customers as a group still grew 73%, another positive indicator of our diversification success.

By geography, we were up sequentially across the board, aided by better demand in a full quarters revenue from MSL.

Sales in the Americas grew 20% and represented 43% of total sales.

Asia grew 15% sequentially and now represents 39% of our total sales.

And Europe's revenue grew 5% on a sequential basis and represents 18% of the business.

Moving to profitability, I'm pleased to say that the Company continued to make steady progress in all regions.

Net loss on a GAAP basis for the quarter was 25.5 million, or a loss of 4.4 cents per share, compared to a net loss of 39.8 million, or 18 cents per share, for the same period last year.

Included in the loss for the quarter was a pretax charge of 51.5 million, primarily associated with the company's previously announced restructuring activities.

Adjusted net earnings came in at 26.7 million, or ten cents per share for the quarter, compared to a loss of 12.3 million, or a loss of seven cents per share for the same period last year.

These results were up sequentially from 8.2 million, or two cents per share in the first quarter of 2004.

A sequential improvement in adjusted earnings was driven by a hundred basis points improvement in operating margins, which came in at 1.5% in the quarter, compared to .5% in the first quarter.

Driving the higher operating margin was a solid 90 basis points improvement in gross margins, up to 5.3%.

Improved operating efficiency and benefits from cost cutting were the key levers in margin expansion.

SG&A spending, as a percentage of sales, remained flat at 3.7% as we continue to manage costs aggressively despite having MSL for the full quarter.

As you will recall, MSL had a 7% SG&A level prior to acquiring them.

Combine these trends laided into operating earnings that more than tripled sequentially.

All three of our operating regions contributed to the margin improvement.

Importantly, we achieved a big milestone in our "get well" plan in that both Europe and America returned to profitability.

In Europe, we delivered just under $1 million in operating earnings versus a loss of $34 million a year ago.

Sequentially, the region posted 140 basis points improvement in operating margin, primarily driven by cost-cutting initiatives and operating efficiencies.

The Americas also turned the corner with a 90 basis point sequential improvement in margins on the back of strong growth in sales.

Included in the Americas results were operating losses in our reference design business that impacted our earnings by 3 cents per share, consistent with the first quarter this year.

So while our improvement plans are on track and we achieved our better than break-even milestones in Europe and the Americas, much more is expected and being actioned in these regions.

Rounding out our geographic performance was Asia, which delivered solid results.

Here, operating margins came in at 3.4%, a 70 basis point improvement from the first quarter.

Moving to the balance sheet where we ended the quarter with 803 million in cash and a debt- to-cap ratio of 21%, treating the lions as debt, let me highlight, first, our strategic financing activities that we completed in the quarter.

On June 16th, we completed a very successful, 500 million, 7 7/8 senior subordinated notes offering.

Upon completion of the offering, we entered into an interest rate swap agreement, which hedges the fair value of the notes by swapping the fixed rate of interest for significantly lower variable rate.

We used $300 million of the proceeds to repurchase 540 million in principal amounts of our LYONS.

This reduced our convertible debt to 327 million as of June 30th.

We currently have approval from the board to spend up to an additional 200 million to repurchase LYONS, with the amount and timing of such purchases occurring at management's discretion.

Based on current interest rates and Lyon's balances as of June 30th, we would estimate that going forward, the debt offering would impact us buy about one cent per quarter.

Of course, this amount would be reduced further upon further repurchases of the LYONS.

We also amended our credit facilities in the quarter to 600 million and extended the maturity to June,2007.

This facility remains undrawn.

We are extremely pleased with these developments in the quarter, where we feel we have locked in, long-term, the strength of our prior capital structure while also benefiting from historic market lows and debt costs.

On an operating basis cash cycle, defined as inventory days plus receivable days less days of trade payables, including accruals, has crept up to 21 days, as expected, due primarily to the earlier timing of inventory purchases to-date and the associated reduction of payable dates.

This was the principal driver in the negative 188 million in cash-flow from operations in the quarter.

On an absolute basis inventory declined sequentially by about 5%; or $60 million this quarter, and inventory turns climbed back to 7.1 times, from 6.7 times in the first quarter.

Going forward, we expect the timing differences in working capital to stabilize, and barring any major swings in demands, free cash flow should be positive in the September quarter.

Furthermore, as Steve alluded to, getting to our eight turns target in the second half of 2004 would generate in excess of $150 million in cash.

CapEx was $41 million in the second quarter, down from 56 million in the first quarter.

Second quarter Capex reflected the expansion initiatives we have in Asia and Eastern Europe, and came in line with our expected spend rate of 1.5% to 2.5% of sales.

So let me now move to our guidance for the third quarter, which reflects our belief that even with expected summer seasonality, the strength of our profit improvement plans will continue to accelerate our operating margins.

For the third quarter we expect revenue to be in the range of 2.25 billion to 2.4 billion.

This guidance reflects the continued stability in end markets that we are seeing, combined with some seasonality for the September quarter.

We expect adjusted earnings per share to show additional improvement to between 11 cents per share and 17 cents per share.

Driving this expansion in EPS and margin continues to be the improvements we are targeting, namely, number one, the restructuring benefits; number two, efficiency gain from lean and Six Sigma initiatives; number three, stabilized pricing with proactive discontinuation of nonprofitable activities; four, fewer and better managed ramp-ups and transfer activities; and five, growing synergies from our MSL acquisition.

Combined with our anticipated improvements in our working capital management, we should drive continued, meaningful improvements in our return on invested capital performance in the second half of this year.

So that concludes our remarks, and let me now ask the operator to open up the call for Q&A.

Thank you, sir.

Ladies and gentlemen, we will now conduct the question and answer session. [Caller Instructions].

Your first question comes from Scott Craig from Morgan Stanley.

Please go ahead.

Good afternoon.

Just a couple of questions here.

First, Tony, on the MSL cost synergies, can you kind of take us through how much you got this quarter in expectations as you work through the rest of the year to finish that out.

And then referring to the ramps and transfers that are still occurring in Europe, are we mostly through the large once that were causing a little bit of problems earlier?

Can you kind take me through your thoughts on that.

Thanks.

Firstly on the MSL synergy, I think we have just gun realizing those and as you recall we expected between 30 and $40 million in annualized synergies after, basically, the one year of integration that we expected.

In the first quarter, together I think we achieved some of the corporate and SG&A type synergies that we expected right out of the chute.

And MSL continued to be accretive to earnings, as we saw with that last month, I guess, of the first quarter.

In terms of your question on Europe, I'd say a lot of the prior restructuring that we announced is behind us.

There's some more kind of program transfers that are happening, in terms of movement of work to lower-cost geographies.

But as you know, we are continuing to target the area for further restructuring and other cost improvements.

Thanks.

Your next question comes from Paras Bhargava from BMO Nesbitt Burns.

Please go ahead.

Good afternoon, gentlemen.

First a longer term question in terms of what your business model going forward will be.

I mean, previous to the restructuring you announced, it was a seven and two.

Are you still sticking with that, is there a change?

And then I'm just wondering a little more detail on the cash.

It looks like it was more than just working capital; it's hard to work through this.

Was there another big event that took the cash down?

In terms of the gross profit and SG&A mix of our operating earnings, we've continue to hold our operating earning target at the 5% level.

We think that's very doable and something our industry should expect.

Whether the mix is seven and two or eight and three, really has a lot to say about the growth of our services business and some of our product businesses through time.

And as they would grow, they would consume more SG&A as a percent of sales.

So where we are comfortable is really the range between those two that I talked about.

In terms of working capital performance, clearly, if you look at the drop in the networking -- or the increase in networking capital sequentially, that drove most of the cash change, about 188 million.

You had lower levels of CapEx sequentially.

We also had incurred about, I think the number was about $30 million in restructuring charges.

So the level of cash from earnings did come down but it was on the back of that traditional level of restructuring.

Does that answer your question?

Sure.

It just looks like there's something else.

Let me ask a follow up on the gross margin one.

I assume by the talk of additional synergies, you are on-line with the restructuring.

Should we expect to see this 5% operating margin some time in '06 or earlier than that?

I think '06 is a little bit out there, but I mean, clearly, what we are trying to do here is make meaningful improvements to the exit rate of this year.

And we think that getting to 2.5 to 3% is certainly in the realm of possibility, certainly things that we are targeting at.

As we look forward a year and just looking at the momentum we have in the business, could we exit next year at a 4% margin level?

We think that's very doable.

And so that would give us a lot of momentum to get to 5% by 2006.

And that's a little bit out there to predict, but we're putting in place the plans and actioning them to make the improvements in the short term that certainly makes important strides to that level.

Thanks a lot for your answer, Tony.

You're welcome.

Your next question comes from a Lou Miscioscia from Lehman Brothers.

Please go ahead.

Okay.

Great.

Thank you.

Hey, Steve, looking at the lean manufacturing you're doing and you mentioned some of the new vertical areas, vertical areas you've probably been working in for awhile, repair, logistics design and others, do you think you need to add any other verticals maybe on the front end, whether it could be plastics or enclosures to sort of bring in, I guess, part of the pieces of lean manufacturing, or do you looked to do most of that with partners?

Well, Lou, we already have a plastics business as well, as part of our business of acquisition of Omni back a couple of years ago.

So we constantly look at this and with our services strategies, we roll-out our efforts to supply our customers with the kind of cog support that they need.

We take on whatever -- we'll add whatever kind of capabilities we need.

In general, though, I don't think there are a lot of holes in our portfolio right now.

Okay.

Can you mention the size of a plastics business?

Usually we haven't had two many discussions about it.

It's not a material part of our business right now.

It hasn't been.

Okay.

And then just switching, I appreciate the comments you started off with about the end markets.

Could you just maybe add a little bit about what kind of visibility you get.

Obviously, we're through July here, we've a couple more months, obviously, and the quarter you gave us guidance.

But are you getting 30-days kind of POs or up to 60 day kind of POs, or just where that's generally falling?

I think traditionally in our business we've seen pretty good indications for a quarter and not all of them are POs.

I mean, demand certainly can wiggle around as the customers pull from hubs and so on.

But we get pretty decent visibility from a quarter, I would say.

Okay.

Then it just falls back down to fourth quarter trends?

Yep.

Okay.

Thank you.

Good luck with the quarter.

Thank you.

Your next question comes from Stephen Fox from Merrill Lynch.

Please go ahead.

Hi.

Good afternoon.

A question on Europe.

I guess you would imagine that the revenues would be slower in the summer quarter.

Under that scenario, if that's the case, first of all, can you still keep your profitable in the September quarter and if you could explain how that would happen?

Thanks.

Yeah, we in fact do see, obviously, some softening in the third quarter as a result of the summer vacation period.

And you saw that in the guidance that we put forward, relative to sort of flattish guidance as we've kind of been indicating for awhile.

In terms of Europe profitability, we do expect to be able to keep it profitable through the efforts that we've started already around cost reductions.

So we've still got more to do, we've got more benefits to get to our bottom line and expect to continue to be profitable there.

Okay.

Thanks.

And then just any comments on wireless infrastructure trends that you could make about your business?

I don't think I want to make too many comments about segmentation, other than I think as a generation statement, that's had some pretty good strength this year.

Do you expect it to continue?

I hope so.

Thank you very much.

Your next question comes from Todd Coupland with CIBC World Markets.

Please go ahead.

Good evening everyone.

I was wondering if you could give us an update on the revenue ramp of your OEM business, maybe size, and what we should expect in the next couple of quarters?

That's still a small part.

There was certainly growth in that business and -- but it's still a small part, so we certainly wish it was accelerating a lot faster.

And given the pace that you are seeing right now, when would you think it's not a drag to earnings?

Well, that's a question we ask ourselves quite often, actually, almost every day.

And it's really all dependent upon the adoption rates of 64-bit and how that market takes grip, really.

So its very hard to tell, Todd.

Okay.

Great.

Thanks a lot.

Your next question comes from Thomas Hopkins from Bear Stearns.

Please go ahead.

Yes, good afternoon.

I just wanted to talk about inventory a little bit, obviously, a lot of chatter about inventory.

You talked about visibility.

How do you see your customer's inventory levels relative to their hubbing, and their asking you to put certain amounts of finished goods in whips and hubs, and how do you see that over the next month or two as we ramp for back to school?

Oh boy.

I think, Thomas, our business tends to be maybe a little more concentrated on the high-end, so I'm not sure back to school has that big an effect on our inventory levels overall.

I haven't seen a real significant change in what our customers have been asking for relative to hubs.

The trick for us is getting very good demand collaboration so that especially in the high mix businesses, we wind up driving parts that are basically the same configurations that's going to wind up being shipped through the quarter, and getting the timing more matched up with the output.

That, I think, is the big challenge for us going forward.

Okay.

But near term, there's been no change to the order patterns here late in July, in terms of cancellations or push-outs or anything like that?

No, I don't think I've seen anything of note.

Okay.

And then Tony, as we get in further into the year and next year and you start to generate profits again, how should we think about the net operating losses and the taxes?

Well I think the taxes both on GAAP -- and if you look at the cash tax rates this quarter -- are pretty sustainable going forward.

So even as we cycle through all the restructuring activities and the losses, I guess, that come from that, turn around in the operating margins and the earnings, the cash from earning in that respect, should hold to where we are today from a tax perspective.

Okay.

Great.

Thanks.

Your next question comes from Brian White from Kauffman Brothers.

Please go ahead.

Hi.

Good afternoon.

Could you talk a little bit, Steve, maybe about the pricing environment in the June quarter?

Did you see any changes, favorable or unfavorable?

And maybe a little bit about the demand environment in the month of June.

There's quite a few tech companies that saw a slowdown in June;

I'm curious to see what you had to see.

I would say pricing environment-wise, I would say, clearly, we are better -- it's a better environment than it was last year.

I would say I didn't see any significant change in this quarter.

So year-to-year improvement, not quarter-to-quarter, but it's certainly a more favorable environment to be in.

June we did not see a slow down, so we saw a strong June.

Okay.

And if I look at enterprise communications 15% sequential growth, was that organic or was there any acquisition-related growth or even new programs?

Is this driven by end markets or is this new business?

It's all organic.

And if you had to break it down, end market and new programs, how would you do that?

Mostly success of the customers we are doing business with.

Okay.

Thanks a lot.

Your next question comes from Patrick Parr from UBS.

Please go ahead.

Good afternoon, guys.

I was wondering if you could give us a sense of your goals and profitability on a geographic basis.

Would you expect that 4 to 5% operating margin to apply in all three regions, Americas, Asia,and Europe?

Well, I'd say we're focused on earning the cost of capital as an important milestone for us.

So we'll look at ROIC.s.

So you might guess that in a region like Asia, for instance, where we have very high turns on some high-volume product ,we might have a little different expectations on operating margins for something like that.

So that certainly is an important part of the weighting across the regions.

Okay.

And then in terms of your footprint, are you fairly comfortable in terms of the geographic split on that right now?

Do you still see places like Mexico as being areas you might want two expands in, China, et cetera?

I think we are growing in all of our low cost, I know we are growing in all of our low cost geographies right now.

So we're growing in Asia, we're growing in Central Europe, and we're growing in Mexico.

So those will continue to be real growth areas and mainstays for our organization.

Okay.

And then a final quick question.

The other segment you pointed out as growing pretty rapidly from a low base, part of which came from MSL, is this an area of continued focus for you or will you tend to stick more with your computing- and infrastructure-based legacy?

Well, computing and IT infrastructure will always continue to be important.

It's a huge market for us.

These are the customers that we are well penetrating with, we're growing our service offerings with them.

And the diversified markets that we're addressing are just other growth areas.

So we are going to continue to focus in that primary part of our business, but we think we have a lot of to offer in world-class services to these new customers as well.

Okay.

Good.

Thank you.

Your next question comes from[ David Hutchinson from Orion Securities. ] Please go ahead.

Thanks very much.

Just a question on the improvement in gross margin.

Is it fair to say, Tony, that MSL contributed about 30 beeps of that gross margin improvement?

And, secondly, if you look at the base business non-MSL, would that be improvement mix- related, related to the cost cutting and the improved utilization?

Thank you.

I think actually the MSL from gross profit margins mix was less than the 30 basis points, and you guessed that.

So most of that was, most of the improvement sequentially was on the back of the base business efficiencies, whether they were through lean or through the restructuring activities.

In terms of --can you repeat your second question?

Yeah, I just wondered if it was the cost cutting or how much of the gross margin improvement, non-MSL, was due to the cost cutting or just improved mix and utilization?

Well, they all contribute a little bit.

The mix improvement, in terms of higher value-added business, wasn't really a big factor.

Obviously, the pricing environment's a little bit better, which helped.

But I think evenly after that, you have the effects of restructuring, which are pretty material, and the lean initiatives which are pretty successful.

And lastly just on your utilization rate, can you maybe give an update on what your capacity utilization is right now?

And if you could break it down between high-cost and low-cost geographies, that would be great.

Thank you.

We are in the 55 to 60% range.

I think we improved slightly, quarter-to-quarter.

Americas were right around the average, Asia certainly is higher and Europe's lower.

Your next question comes from Thomas Dinges from JP Morgan.

Please go ahead.

i, just a couple of quick once for you, guys.

First off, on the level of OpEx this quarter that was up a little bit higher than the rate of sales, you did talk a little bit about a full quarter of MSL, but if you could help give just a little bit of color around, I would have expected that to trend a little bit less than the quarter-to-quarter growth rate in sales.

And if you could just help us understand, is this kind of a level that you guys feel it's going to be at now in terms of dollars, and kind of gradually goes up a little bit with sales as you see some growth, or is this another area where you are going to see some good cost savings?

And then I have a follow up.

Okay.

Well, we did get, certainly, savings from a lot of the corporate reductions that we implemented in both companies, actually; or one company.

And as we look forward, we're certainly targeting that area for further reduction.

So stay tuned on that front.

Clearly, we are also making investments in certain market segments as you know, and trying to drive growth in our business.

So we won't short those areas, but we'll certainly attack the infrastructure of our business.

So expect maybe a little bit flattish in to down in the subsequent quarter, and then look for more as we roll-out all of our restructuring.

Okay.

And then just a second question.

You had mentioned that the reference design business was costing you about three cents per share on an adjusted basis.

As you see -- I realize that business is dependent highly on the adoption of 64-bit and on shipments from your own customers, but for what you see from customers over this quarter and next quarter as you look at the build rates for those products there, is there any change in that 3-cent per loss number that you can see, or is that away to assume over the next couple quarters that you still are going to see a drag in that sort of range?

Thanks.

I think, frankly, I think for the remainder of this year we will probably see a drag on that business; to what level is kind of unclear, certainly getting out into the fourth quarter at this point.

Okay.

Thank you.

Mm-hmm.

Your next question comes from [Paul Hobalt] from [inaudible] Securities.

Please go ahead.

Thank you.

I'm just following on the 64-bit.

I think you said in the last conference call at about 100 million revenues that there would be a very good level of profitability.

Is that still roughly accurate?

Yeah, I think that's pretty good.

And any hazard of a guess as to what sort of would be a break-even type level of revenue for the business?

That's around the break-even point.

That is around the break even.

Okay.

And I think one of your competitors was saying that for their ODM business that they thought, potentially, they could get a 10% operating margin.

Do you have any thoughts about that?

That certainly has been our expectation to get that business to those kind of levels.

Great.

And just one smaller item.

Within telecom, I'm just wondering if you could give us a split between wireline and wireless.

I think the predominant part of it would be in the wireless.

So wireline is still a declining end market for us.

So through the course of the year we see wireless being the bigger part of the total revenue flow in that.

Certainly the growth was in wireless, right?

Right.

Great.

Thank you very much.

Your next question comes from Stephen Savas from Goldman Sachs.

Please go ahead.

Thanks, good afternoon.

I guess just one question on inventory.

I know you were down about 60 million sequentially and last quarter you had a bump up because of taking on MSL.

I was wondering is this kind of what you would consider a normalized level for this quarter?

I'm sure you're aware everybody is trying to figure do people have inflated inventories because 2Q being a little soft, or are they bringing down inventories.

Do you consider this kind of a a right-sized level for where you're at?

I know it can grow with revenues or something going forward, but how do you feel about inventory level?

Do you think it ended a little bit higher than you would have liked or about right.

No, it clearly ended higher than I would have like.

I think we should be turning better as a company.

And so I think if revenues were flat, for instance, and with the performance that we expect to get, we would see inventory come down.

So it is influenced, obviously, on revenue, but you saw from our guidance going forward we're sort of expecting a flattish quarter revenue-wise.

So we're expected to drive inventory down.

Okay.

Great.

Thank you very much.

Your next question comes from Chris Whitmore from Deutsche Bank.

Please go ahead.

Just one question.

Tony, last quarter you talked about the inventory throughout the year, the telecom, datacom supply chain backing up a bit.

And since then we've seen inventory balances at big customers like Cisco and Lucent continue to grow.

What's your comfort level with inventory level throughout that supply chain, both -- maybe paying a little more attention to your customers inventory balances.

And are you comfortable with future growth rates in that end market over the next quarter or two?

I think if you look back to the first quarter, what we saw was a lot of that optimism start the year and maybe there was a bigger build up.

But since then, I'd say there's been a lot more stability, a lot less of loading to an optimistic forecast, more regular loading of our MRPs to what the demand in the harder orders are on our books.

So there's been that adjustment in the process.

Unfortunately, we still have a little bit of timing issues in terms of how quickly the parts come in and we need to work that through with our customers and improving them.

In terms of visibility to their inventory levels, I don't really see a problem in that area in that would that restrict our demand because they have two much supply.

What we kind of see is we have a pretty high level of transparency, I guess, with what our customers have and what they are asking us to certainly load and build.

And I think it's pretty normal.

Remember, a great deal of what we do isn't stocked material that's stored in finished goods form by our customers.

So a lot of it's configured.

We generally see the orders that come through configured by their customers.

Thanks a lot.

You next question comes from [Tom Astel from National Bank Financial.] Please go ahead.

Good afternoon.

I think you mentioned that MSL contributed 250 million in the quarter, at least acquisitions did, and that was a bit above your expectations.

Anything in particular that drove that?

And do you have any expectation going forward for that.

I think we saw their growth across all their sectors and all their key accounts.

And we ust want that momentum to continue, which is very positive.

So you expect that trend to continue in your guidance?

Yes.

Thank you.

Your next question comes from [Dale Haub from GMP Securities.] Please go ahead.

Yeah, just a question on inventory turns.

You've had a lot of success with the lean roll-out that started in 2003.

I just want to know what type of inventory turns that you've seen with the customer sets that have gone lean, and what percentage of your facts would you say are already converted to lean?

I would say in terms of inventory performance, we measure, often times, the cycle plan performance change that we get from a lean transformation, and often get 30 to 40% improvement in cycle times or the amount of whip on the floor, that sort of thing.

The inventory question gets a little bit more complicated when you talk about some of the demand collaboration stuff.

So the raw parts supply line coming in is something that has been difficult to challenge, even in a lean environment.

So we clearly have more worked to, and that's what I was referring to with my lean supply chain comment.

We believe that we ought to be able to improve our performance in that area.

In terms of your other questions as to how much of our plants would I say are done, I guess I am pretty comfortable that we might be 30 to 50% there, in terms of my satisfaction with our processes overall.

We're getting the benefits but, clearly, we've not gotten all of our facilities to the point that I think that they are strong, sustainable across all of the product lines.

That's great.

So then you'd say that to get to the eight turns at the end of the year, would lean play a big role in doing that?

For a few customers I would say yes.

But in other cases, I think demand collaboration is going to be a big part of it.

Okay.

Thank you.

Your next question comes from David Miller from Tradition.

Please go ahead.

Good afternoon, guys.

Steve, as you've been working on the collaborations for so long, do you have any parts of the business or particular program that are more difficult to transfer to lean?

And I'm thinking about some programs where there's a lot of part numbers, maybe really high mix programs that customer, or you guys, may think that they don't really needing to grow lean?

Certainly.

You know, the profile of what a lean implementation looks like for an ultra-high mix, low-volume kind of product family just looks different from a high volume mix.

That's certainly the case.

And in many cases, the effort that it takes to sort of engineer that process, if you will, gets a little more complicated because you are just managing a lot more part numbers and assemblies and so on.

So I'd say for the low volume, high mix work, it's certainly more, more effort in making a transformation.

Okay.

But the benefits, the benefits I find in both types of businesses.

Okay.

Great.

And then just going back to the ODM business, are you guys able or are you guys trying to design in some of your own, certainly, your power supply business into those reference designs that you're working on; trying to drive that business a little more efficiently?

Yeah.

We're certainly utilizing all of the scale and leverage that we can bring at Celestica in our reference designs.

So all of our supply chain capability is brought to bear on that.

Okay.

Thank you.

Your next question comes from Jim Savage from Wells Fargo.

Please go ahead.

Hi, good afternoon.

Just a couple of very simple things.

First, for next year's revenues, are there significant new programs that you're anticipating that will drive the growth or do you think it's just basically that you're looking for economic growth and maintaining your market share with your existing customers?

I think there will be significant programs as well as some end market growth.

Have any of those programs already been won, and when can we -- in what segments would they be and when can we anticipate that the revenues would start to hit the income statement?

I think in terms of potential win opportunities, obviously, we are very pleased with the customer profile that we have.

And they're not as fully penetrated as we feel they could be in terms of [inaudible] growth that we talked about earlier.

And there's also pretty significant new programs that those customers are launching.

I think the other growth opportunity, I think Tony mentioned earlier, when you look at some of the new market segments that we are addressing, there's even lower penetration rates and hence, significant, probably even on a percentage basis, higher growth rates there.

So that's part of the diversification,Trent, that you see in our revenue profile.

So pretty much in all of sectors that we participate in we see a combination of new customers and higher penetration with existing customers.

So I think the opportunities are spread across the spectrum.

And timing of when some significant programs might actually have an impact on revenue growth?

Well, it's an ongoing process, right?

And we're not, obviously, giving revenue guidance beyond the current quarter, but we expect to see sequential growth from these engagement efforts each quarter as we go forward.

You don't expect any --

Maybe I'm not quite getting your question.

Okay.

I'm just, no, so then you also don't expect then to have a negative seasonal pattern in the March quarter?

No, I think there's win opportunities.

There is real opportunity in smoothing that out.

I think, let me put it this way, the value of the wins we look at every quarter, and it's been growing and it's attractive.

That's great.

Okay.

A couple of other things.

What should we be modeling in now as interest expense, or net interest expense?

I think if we stay kind of where we are in terms of the net position between high yield and the LYONS, you're looking at between 8 and $9 million of interest expense.

Okay.

As we reduce the LYONS, actually the accretive value, that affects the adjusted earning we draw, that looking like [inaudible-microphone inaccessible.]

The adjusted earning would drop?

The adjusted earning would increase.

Right.

That's what I thought.

In fact, the accretive value of the LYONS would drop.

Okay.

And again, that's at current rates, right?

Because we variablelize the high yield.

Right.

Okay.

The last think the 175 to 200 million for the restructuring, at this point you think that's going to be sufficient and then you will be completed with whatever restructuring is likely to be needed.

We are on track.

Okay.

And you feel that that's sufficient?

Yes.

Okay.

Great.

Thank you.

As far as we can tell.

Ladies and gentlemen, if there are any additional questions at this time, please press star 1. [Operator instructions.] Mr. Delaney there are no further questions at this time.

Please continue.

Okay.

Well, thanks everyone for joining us on this call and I'll talk to you again next quarter.

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

Thank you for participating and please disconnect your lines.