Celestica Inc (CLS) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by.

Welcome to the Celestica third 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. [Caller Instructions] I would like to remind everyone that this conference call is being recorded on Thursday, October 21, 2004 at 4:30 p.m.

Eastern time.

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

Good afternoon, everyone, and thank you for joining us on the Celestica's third 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 the 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.

Good afternoon, everyone.

I'd like to cover a few topics before Tony takes you through the third quarter financials in detail.

When I look at the September quarter, the best word I can use to describe what we saw is volatile.

September was quite problematic for us, as we saw indications of severe cuts and then some late in the quarter upside that took us slightly above the top end of our revised guidance.

It's clear from our customers that the demand uncertainty and end market softness continues into the fourth quarter, where we're not seeing as significant a fourth quarter bump as we would-- seasonal bump, as we would normally expect out of our traditional IT and comm sectors.

We have increased the range of our forward guidance as a result.

Regardless of the volatility of the end markets, I view our job as driving better returns, even in a limited visibility environment.

To that end, I'm very pleased with the continued progress that we've made in the past nine months in terms of improving profitability and refocusing the business.

Despite a 6% drop in revenue sequentially, we improved margin 30 basis points this quarter and 210 basis points year-over-year.

The most dramatic improvements have come from Europe, where the operations have recovered from a quarterly loss of $21 million in September quarter a year ago to an operating profit of $3.2 million this quarter.

Asia operating margins were also up, about 100 basis points from a year ago.

And the Americas, which has had to absorb some pretty significant losses associated with our 64-bit reference design activities, has also shown increases.

I expect continued solid improvement into the fourth quarter.

Driving these margin improvements are our restructuring initiatives, which we announced earlier this year and expect to complete by the March, 2005 quarter.

The consolidation of facilities associated with the latest restructuring plan is approximately half completed and proceeding to plan.

Also contributing to the margin recovery are our successes in lean manufacturing and Six Sigma.

By year end we'll have over 700 black belts and green belts, and we will have initiated lean value stream transformations in all of our plants.

In the Americas, for example, we've initiated 42 value stream transformations with 50% completed and the balance to be completed by year-end.

This adds up to about 328 Kaizen events this year in just the Americas alone.

The benefits clearly continue to show up in operating margins in the region, where despite a decline of revenue, overall margin increased 60 basis points; with lean being one of the contributing factors.

All other regions are also thoroughly engaged in implementing and training and initiating value stream transformations that benefit both our customers and us.

Further driving the future margin expansion are actions that we've taken to exit some non-profitable, non-core businesses while realigning other activities that aren't delivering our return expectations.

In this regard, we've made progress in three areas.

Specifically changing our approach as to how we'll support the 64-bit marketplace, divesting the Power Systems division, and exiting relationships that don't meet our ROIC requirements.

In the 64-bit area, we've chosen to exit our channel activities and realign our design resources to directly support the product road maps of our major customers.

This means that we will not be developing our own specific designs, but will instead be applying our design teams directly to support the OEM development projects.

Because our server teams have been working on products that are in the market today, we have obvious credibility in server product design.

However, we're finding the 64-bit market is just developing too slowly for us to economically invest in designs to be sold through independent channels.

In order to ensure that we have a broad product line-up available, we'll be supplementing our own capabilities and solutions by partnering with others to offer our customers an even broader range of solutions that we could develop ourselves.

With this approach, our customers get broad product road maps from which to select, they get our skilled product development teams delivering their customized designs and they get our world class global manufacturing and support network.

Our partners get greater market access through our customer units and we get a better economic model for providing the range of services that our customers value.

In short, our approach will be to take the best of what we do in terms of design, manufacturing, fulfillment and after-market services, and blend it with our customers' product development expertise; complemented, if necessary, by base designs from other partners to provide the broadest product portfolio.

We view this as the most targeted and cost-effective way to manage the product development and support needed by our server customers.

We are changing our approach, but remain fully committed to supporting enterprise-wide server solutions for both proprietary and industrial standard platforms that involve product design, manufacturing, fulfillment and after-market services.

The divestiture of our Power Systems division is another example of our intent to have a laser focus on our core strategies and operations while creatively developing win/win partnerships with leading suppliers, such as C & D, to provide an even more compelling integrated supply chain offering to our customers.

Lastly, we've made a host of other adjustments to our portfolio of activities to prune out what's not been adding value and ensuring that we are investing in those that will provide strategic benefit to the company.

Another positive change this quarter was our cash flow.

Where, after five quarters of negative performance, I'm very pleased to say that we delivered a very solid $131 million in cash from operations.

But while working capital and absolute inventory dollars are down sequentially, inventory remained flat this quarter and not yet at the levels that I know are achievable.

However, given the late demand reductions that we saw in the quarter, I'm pleased with the significant inventory mitigation results that our operations teams achieved this quarter.

I feel there's plenty of room for additional adjustments--or improvements in inventory management from within our operation and we'll continue to drive these in the fourth quarter and beyond.

So in summary, we had some very positive operational and financial achievements in the third quarter, despite the demand volatility.

And we continue to work on retuning the Company to ensure that there'll be appropriate returns from the capital we have invested in this business.

We'll be unrelenting in our pursuit of earning our cost to capital by the year-end next year and continue to drive the operating efficiencies and execution performance that our customers expect.

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 for the third quarter was $2.176 billion, slightly above the top end of our revised guidance range.

Sequentially, we were down 6% based on marked weakness from some of our largest communications and IT customers.

The magnitude of order and forecast change experienced in September has certainly affected the visibility we are seeing in our higher mix of infrastructure business into the fourth quarter.

However, the year-to-year comparatives are still strong, reflecting a growth rate of 33%.

End market segmentation for the quarter was as follows: Enterprise Communications was about flat quarter-to-quarter and represented 28% of sales;

Telecom was down 17% sequentially and came in at 20% of sales;

Servers were similarly down quarter-to-quarter and represented 16%;

Storage achieved 12% of sales on the back of 13% sequential growth;

Other grew 11% sequentially to 22% of sales, and PC Work Stations has wound down to 2%.

Clearly, a lot of movement within end market segments, but most of what we experienced was indicative of demand constraints from our infrastructure customers.

Moving on to our customer mix, our top ten was unchanged from the second quarter at 64% of our business while the top five dropped 10% sequentially and represented 46% of sales versus 48% in the second quarter.

IBM and Cisco were each over 10% customers.

On a geographic basis, the Americas represented 41% of sales and Asia 39%.

These regions declined 12% and 6%, respectively on a sequential basis, as these regions experienced the highest proportion of revenue churn in the third quarter.

Europe represented 20% of total revenue and was the only region to show growth during the third quarter with revenue increasing 2% sequentially.

Moving to profitability, net loss on a GAAP basis for the third quarter was $22 million or a loss of 11 cents per share compared to a net loss of $65 billion, or 30 cents per share, for the same period last year.

The net loss includes pre-tax charges of 47.7 million, primarily associated with the Company's restructuring activities.

The aggregate charge includes 16.6 million in inventory write-downs, reflected in the cost of sales associated with the restructuring of the Company's 64-bit channel and product development activity; as well as a gain of $12 million associated with the sale of the Power Systems business.

On an operating margin basis, I'm pleased to say that despite the lower revenue in the quarter, we continue to show improvements across the board and we continue to execute on or ahead of plan on each of our margin improvement initiatives.

Adjusted net earnings came in at 27.4 million, or 11 cents per share, for the quarter compared to an adjusted net loss of 4 million, or 4 cent loss per share, for the third quarter last year.

On a sequential basis, after adjusting for the one-time inventory write-down of 16.6 million associated with our reference design business restructuring, we saw gross margins increase 20 basis points to 5.5%.

This, despite a 6% sequential decline in revenue and quarter-to-quarter foreign exchange impacts associated with the weakened U.S. dollar.

Normalized gross margins increased sequentially, primarily as a result of restructuring benefits and gains in operating efficiency.

While SG&A spending declined sequentially $9 million, coming in at 3.5% of sales.

R&D spending was roughly flat quarter-to-quarter, so the decline in SG&A came primarily from restructuring and MSL synergies.

Together, operating margins expanded sequentially 30 basis points to 1.8% and 210 basis points year-to-year for the quarter.

Importantly, all three of our operating regions contributed to the growth in operating margins.

Europe is benefiting from restructuring and lean activities as well as new business growth, while also seeing a more stable revenue base over the past two quarters.

The Americas are benefiting from restructuring, efficiency gains from lean and reduced cost in our 64-bit business.

These factors offset the adverse volume-related dynamics.

Asia continues to be performing solidly at 3.4% operating margin, despite the volume erosion.

We expect all three regions to show additional improvement in the December quarter.

On the balance sheet we had a very solid quarter.

Cash at quarter-end was just under a billion dollars at $975 million, reflecting a 172 million increase from the second quarter.

This increase includes about $50 million from the sale of our Power division and $131 million in positive cash flow from operations.

Debt-to-cap, treating the lions as debt remains strong, and among the industry's best at 21%.

On an operating basis cash cycle, defined as inventory days plus receivable days less days of trade payables, which includes accruals; was 23 days.

Up marginally from 21 days in the second quarter due to the reduced amount of accounts receivables sold under our AR sales facility; which realized liquidity of 375 million at the end of the quarter.

Inventory was down 37 million from the second quarter to $1.17 billion.

Inventory turns, despite the late cuts in revenue, were essentially flat at seven turns for the year on an annual basis compared to 7.1 times in the second quarter.

We had considerable success in de-expediting part orders late in the quarter while also making systematic improvements in our processes.

CapEx came in at 17 million for the third quarter, down from 41 million in the second quarter.

With our investments in increasing -- increasing in low-cost capacity, specifically Romania and China; in the coming quarters, CapEx should increase from the current levels in the next few quarters, but remain in line with our expected annual spend rate of 1.5% to 2.5% of revenue.

Let me now move to our guidance for the fourth quarter.

For the fourth quarter we expect revenue to be in the range of 2.075 to $2.325 billion.

While there appears to be some level of seasonality in the December quarter, visibility remains limited and our revenue guidance also reflects some softening in end market demand in our communications and IT end markets.

Our revenue guidance also includes an approximate $50 million reduction in revenues associated with exiting the Power business and the pruning of less profitable activities.

Adjusted earnings per share and operating margins, however, continue to show very solid progress.

We expect adjusted earnings per share to be in the 12 cent to 20 cent range, reflecting the continued improvements we are delivering in operating efficiency as well as the cost saving benefits from our restructuring activities and the economic benefits of exiting certain businesses.

Additionally, we expect cash flow from operations to be positive again as we drive further improvements to our inventory profiles.

So let me summarize where we are.

We witnessed disappointing end market fluctuations with significant demand effects late in the quarter.

We continue to see strong business win rates and better profitability metrics on those wins going forward.

We are seeing significant momentum in all our margin expansion initiatives, which have insulated the bottom line from the demand erosion in the third quarter while providing forward leverage into a less stable and muted demand outlook into the fourth and beyond.

We are showing positive results from our decisions to focus on core service offerings and restructuring underperforming activities.

We delivered a healthy, positive cash flow from operations, arresting a trend of five prior quarters of cash consumption.

We are starting to see greater inventory efficiency, which bodes well for continued cash generation.

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

[Caller Instructions] Your first question comes from Steven Fox from Merrill Lynch.

Please go ahead.

Hi, good afternoon.

Just with regard, I guess, to the fourth quarter first.

Can you talk about the range of guidance, how much is revenue dependent and how much is, sort of, assured from some of the actions you're taking?

And is there any way you can quantify some of the actions involved around the 64-bit and exiting some of these engagements--what it could help in terms of earnings?

Okay, let me start with the revenue range is a primary factor in the earnings per share range, okay?

But nonetheless, the base improvement, if one were to take the mid-point as some indication, would suggest that the change in our business strategy around 64-bit would contribute somewhat.

The losses in the 64-bit were still about 3 cents per share in the third quarter, and so we'll expect those to disappear in the fourth.

So they contribute as well.

Restructuring will also provide some benefit.

As you recall, we talked about getting about half the yield, the annualized -- on an annualized basis, half the quarterly yield by the end of the year in our fourth quarter, and we're on track to achieve that.

So, that should provide momentum into the fourth from the third.

And finally, as we talked about in the call, you know, we continue to get improvements in our cost structure through lean deployment, which is rolling out nicely.

And exiting some of those non-profitable engagements, Tony, is that worth anything in the quarter or is that more over like the course of a few quarters?

That's more over a course.

It's probably a smaller impact in the fourth, but we'll continue to drive those.

Thank you very much.

Okay.

Your next question comes from David Pescherine from Smith Barney.

Please go ahead.

Thank you.

Tony, maybe if I could just to follow up on the last part of that answer, you said the 64-bit was costing about 3 pennies in the third quarter and that should disappear.

So right off the bat, at the low end of your guidance, you know, 12 cents for next quarter.

What would actually make margins backtrack on you in 4Q?

Probably the revenue.

Yeah, but I mean it's about flat though quarter-on-quarter.

Again, there's changes in -- we've seen some volatility, so the business mix could be a factor as well.

We feel very strongly about the things that I talked about in terms of margin initiatives and their particular contribution.

Okay, and then--

Hey, Dave, it's Steve here.

One thing I just want to clarify.

You know, we are keeping this server development capability that we're gonna apply to specific customers.

So while most of that 3 cents disappears, there's still some engineering spending, obviously, because our customers expect those engineers deployed on their programs going forward.

So, you know, we have that-- of course that reduction working with us and of course you know, the revenue element is a big factor as well.

And then we've had some exchange, as you can see from--some of the past quarters, exchange had been working against us.

Right, so maybe along the same lines then, can you give us a sense as to what percentage of revenues is maybe coming from, you know, all of the services that you provide, ex just the basic manufacturing?

So design, repair, logistics -- how much of the revenues today come from those services?

And just a rough idea of maybe the difference in the margins between that and the manufacturing business?

And, again, maybe longer-term where that mix of business might go over time?

Well, in aggregate, it's still -- if you look at services versus our assembly business, the aggregate is still a smaller portion, and one that doesn't warrant breaking out by business -- business unit.

You know, as we look at where we're investing in those service offerings, all of them have margin profiles that are greater than our EMS business, given the higher value-add content.

And as you know, that's part of our overall margin expansion and business strategy is to invest in those areas and deal with the areas where we're not as profitable.

Right, and I mean so, Tony, at some point in time can we envision services being at 15 or 20% of the business or you know, again, how should we look at that longer-term?

Yeah, I would think that those are reasonable.

Remember that, you know, the core of our business is providing EMS service offerings, and so the richer that those are as well is something that we'll try to drive and improve.

Okay, and then one final question.

Steve, you had talked about in your prepared remarks reviewing unprofitable business and just disengaging with some of the unprofitable pieces of business.

Can you give us a sense as to maybe how much has been disengaged since you took over or started this review process and maybe how much of that's been impacting the top line over the past couple of quarters?

Well, actually, you know, the biggest -- I'd say the biggest piece that I would talk about is what Tony mentioned from quarter-to-quarter this year.

So, with the sale of Power, of which we'll still be participating with C & D as a customer, we don't retain all the revenue from that former Power division.

And you know that that division was earning you know -- or revenue was in the $100 million a year range when we had it as part of Celestica.

So that goes away, and Tony --and you know, the rest of it, the other 25 million or so represents these other activities.

Most of which are in place right now.

We'll continue to prune things that are, you know, not meeting our objectives.

They may not be customers.

They could be investment activities that we have to develop capability in something too.

So we've, you know, triaged this work pretty effectively and are on our way.

Well, should we take from that that it's possible that you've actually had some of your biggest customers who had individual programs that were unprofitable that you got rid of specific programs or is it a case where you're getting rid of entire customers?

No, I wouldn't attribute it to the large customers.

Okay, great, thank you very much.

Your next question comes from Patrick Parr from UBS.

Please go ahead.

Good afternoon, guys.

Steve, when you were in New York in August, you, I guess -- I wrote it down and I can't remember whether it was something that was black and white.

But you were talking about exiting the fourth quarter of '05 ideally with a EBIT margin somewhere north of 4%.

Given what happened with the pre-announcement, but all the other things that are going on, is that still something you're shooting for and is that attainable, do you think right now?

You know, we developed that around this, this huge ambition that we have to earn our cost to capital next year, and so we've still got our eye on that mark.

Obviously, you know, the demand scenario is gonna have some influence on that, but it's pretty early to say what's gonna happen next year.

I think right now there's a lot of uncertainty, even into fourth quarter, and I certainly don't want to start predicting into next year.

Okay.

And then with the 64-bit revised strategy, does that mean that you sort of abandoned any kind of an ODM approach type to the business right now?

Absolutely not.

You know, I think we're gonna have to stop using these terminologies of ODM and EMS.

It seems like we're all doing design manufacturing services for customers in one way or another, and there's dozens of different business models, it seems, that are underway.

So you know, we-- probably the biggest piece of this that you need to be aware of is that we decided to exit this channel activity where we have you know, our Celestica product in the channel and instead -- especially in the 64-bit area -- we feel like it's much more valuable for our OEM customers to be focused on their designs.

So we're gonna do that and not take the channel risk and have the channel SG&A associated with trying to move product through there.

Hey, Patrick, it's Marv MaGee.

Let me just add a comment or two.

I think what's attractive to our customers, on taking the experience design capabilities, be that functional design in mechanical/electrical, as well as product knowledge and moving that capability to address their specific product requirements.

Versus, as Steve was saying, trying to anticipate a fairly narrow band of products, like the 64-bit servers, and exercising them through the channels to the market.

So we view this as a much more tailored, more effective service offering of development capability that we can work collaboratively with our, you know, the infrastructure customers that we support.

Okay.

All right, that's helpful.

Thanks.

Your next question comes from Keith Dunne from RBC Capital.

Please go ahead.

Yeah, good afternoon.

Can you give us an update on the restructuring?

In other words, how many head counts have been announced to your employees versus you know, how many have actually been let go?

How many plants have been closed, square foot reductions that have been announced to the employees, et cetera?

Okay, well let me take a stab at that.

In terms of overall termination announcements with our 2004 restructuring, we've made announcements totaling about about 3,600 employees that would be affected by it.

So the balance of the 5,000 is yet to be announced through the system.

And how many plants have you announced shutting and, you know, the Montreal, the Wisconsin, England.

Have there been other plants that have been announced?

Yeah.

Recently we announced Yamanashi in Japan.

That was first of October.

That was just announced.

By the way, 2,500 or so left the business.

And we also consolidated an operation in Shanghai, China.

Yeah.

And the Power gain -- where did you book that?

The power gain is in other charges.

Okay.

So the gain's offsetting in the charge area?

Right, correct.

Okay, and then the last question I have for now is you know, does the work station PC area go to zero?

And when might we expect you to break out the other so we can get a sense of what that 22% is?

The other we'll break out probably next year, Keith, and the server business--

Well, the work station and PC's will be small enough it'll be in Other.

Maybe we'll put in Other.

Okay, great, thank you.

Your next question comes from Thomas Hopkins from Bear Stearns.

Please go ahead.

Yeah, good afternoon.

Just want to make sure.

The entire 15, 15.5 million inventory charge, all that was for the 64-bit business?

The vast majority was.

Other businesses we were discontinued that had a very small charge.

Okay and, you know, obviously there's a lot of volatility out there, as you guys have said, in the near-term; but you do have, you know, one of your more important telecom customers reported yesterday.

Can you give us some kind of sense of what you're seeing and what you're hearing from them more recently, say in the last two weeks about, you know, their outlook?

Is it that they have enough of your product right now and they need that to move first before they can start reordering again?

What are you hearing closer to the near-term?

Well, Thomas, I don't want to talk about any specific customers.

Marv can jump in as well, but I guess I would say that enterprise space overall is probably what's more disappointing in terms of a lack of the seasonal bump that I might expect for fourth quarter.

That's across both comm and IT.

You mean Enterprise network or Enterprise computing?

Both.

Both, okay.

I think, you know, generally if you look at infrastructure as well as the Enterprise area, just given the macro environment, you know, there's just caution.

I think there is a positive trend, but it's much-- much reduced from the first half of this year, and people continue -- our customers' customers continue to make investments, but they're much more cautious and selective about where they make them.

Okay.

And then just finally something -- I used to ask quite a bit about when you had a high amount of Unix exposure and obviously you're in a cost-cutting mode and you're in a restructuring mode.

But just down the road a little bit, is there strategy to really diversify the portfolio here in the business mix, whether through acquisition or outsourcing or whatever?

I mean, something, you know, pretty sizable?

You saw Flextronics try to do this Nortel deal because their consumer business is just too big at this point and they really need to aggressively bring down that consumer mix.

Do you guys have anything that you're thinking about in terms of moves that would, you know, dramatically change your mix over the next 24 months?

I think the main strategy that we had spoken about before is looking into and making progress in different end markets.

So for us, you know, certainly areas like consumer and industrial electronics and defense and aerospace represent markets where we have demonstrated capability.

And we talked earlier about the Other line growing.

Those types of markets are supporting that growth and we're quite optimistic about seeing that growth continue into next year.

Right, but you're a pretty big company, so you're just -- it's gonna take something pretty sizable to change your mix.

Well we've grown that, Thomas, from 11% to 22% this quarter, and I think in the last six quarters-- I think over 200% growth we're north of $470 million a quarter now in this area.

So it isn't insignificant, even for us.

I think as well, Tony mentioned that we continue to be pleased with the win progress and a lot of those wins are, you know, from these newer end market segments for us.

We think it's a good foundation for some further growth there.

Okay, great, thanks.

Your next question comes from Bernie Mahone from Morgan Stanley.

Please go ahead.

Hi, good evening.

Question on the storage and other end markets.

You saw some pretty good growth there sequentially.

Do you expect that to continue into the fourth quarter and also could you give us an idea, was it more new program wins or more end demand or a mix of both?

In terms -- the Server segment certainly was positive for us.

The fourth quarter looks to be continuing at about the same rate.

You know there's several customers in that category, but we're pleased with the revenue progress there.

I wouldn't say there's--it's mostly growth with our existing customers.

We haven't added a major new customer to the category.

Okay, and then also in Europe, you said that was up slightly sequentially.

What end market drove the growth there?

Is it the same Storage and Other?

Or was there anything in particular?

It seems that, you know, the September quarter is usually pretty slow in Europe.

Yeah, I think normally we don't start breaking out by geography, by segment is a bit beyond the division of the revenue that we provide, but--

Is there anything that stands out, I guess?

It's pretty steady as it goes.

We're happy with the mix and progress we're seeing from there.

Okay, thanks a lot.

Your next question comes from Dayle Hogg from GMP Securities.

Please go ahead.

Thank you.

Can you talk a bit about MSL?

Are you exiting any line of businesses there?

And was it accretive in the quarter?

No, we acquired them with the view of diversifying our business and as well picking up some capabilities, as you know in fulfillment and the like.

So all of those are intact, and yes, MSL was accretive and contributing as we expected.

Okay, so none of the underperforming lines of business were part of that acquisition then?

No.

Okay, and maybe just talk about the orders that didn't materialize in the quarter that caused you to revise guidance; were they pushed out or have they more or less disappeared now?

Sorry, can you repeat the question?

Sorry, didn't come over clear here.

Just the orders that you were originally expecting during the quarter, but didn't materialize through the revise guidance.

Were they pushed out into the next quarter or did they just get canceled altogether.

I would say -- as I was saying earlier, you know, I think when you look across both the enterprise sector and the infrastructure area, typically because we're in the higher end, they are pretty lumpy in terms of the size.

And you know, the current investment or macroeconomic environment is causing caution.

I have not heard anything to say that there's cancellation.

There tends to be more just managing the investments prudently.

Okay, thank you.

Your next question comes from Dave Miller from Tradition.

Please go ahead.

Good afternoon, guys.

Just going back to the MSL acquisition, did you guys say what the revenue contribution was?

No, we said last quarter they were about a quarter of a billion dollars and we continue to see, you know, that--that level of business there.

So we did not disclose that.

We said that, as we integrated the operations, it would be harder and harder to separate them; but in all material respects it's about the same level.

And then on the 64-bit area, you had had some, I guess, reference design wins.

How are you guys proceeding going forward with those relationships that you got with customers who wanted to use the solution?

Yes, not quite sure I heard the question correctly.

So it's how do we maintain the relationships that we developed out of our 64-bit activities?

Yes.

Yeah, I think as I said earlier, we're very pleased with the technical talent that's within that organization.

And what our view is going forward is we can partner with other organizations or companies to supplement the skills and the talent that we have inside the Company to, in fact, even have a broader range of reference designs for our customers.

So, we've tried to be quite thoughtful in who we partner with, both to provide the functional capability as well as to provide a broader offering of reference designs to customers.

But-- but guys who may have already accepted the reference design, do you have something in place that you can go forward if they're going to actually manufacturer the product?

Yes, we can support the business engagement that we had.

Okay, thanks.

Your next question comes from David Hutchinson from Reliant Securities.

Please go ahead.

Thank you very much.

A couple questions, first is on capacity utilization.

Can you touch on how that broke down among your geographies?

You know, we haven't been breaking it out by geo; 55 to 60% would be the number I'd give you, and it remains with the same sort of ratio that we've talked about in the past.

Asia being a little bit higher, Americas right around the average, Europe a little lower.

And secondly, I got on the call late, so I apologize if this has been asked and answered.

Can you discuss your expectations for inventory levels by the end of Q4 heading into what is traditionally a slower seasonal quarter for Celestica?

Well, we expect to certainly make improvements in our inventory turns, that's for sure.

And on a sequential basis do you expect a material downtick?

On a sequential basis we do -- we would expect, if seasonality transpired the way it normally it does into the first quarter, we would expect a reduction in inventory in absolute terms, absolutely.

Terrific, thank you.

Your next question comes from Michael Walker from First Boston.

Please go ahead.

Thanks.

You said earlier that you expect the 64-bit business to go break-even in the December quarter.

Does that mean we can hopefully look towards profitability there by the March quarter?

Well, there really is no 64-bit organization in the, you know, in its past form.

So what we're doing is winding that operation down as an independent operation.

We're using -- we kept together our design teams to work on specific OEM contracts, so we won't be breaking that out as a business any longer.

Okay, and then to rephrase kind of a previous question, you had talked about a little bit of a surge in volumes toward the end of the quarter that allowed you to be in your preannounced range.

Should we interpret that to mean that there has been a bit of a pick-up in the last, you know, six weeks or so that's continued into Q4?

I think you can read it as quite a lot of volatility in the market and was, you know, the primary reason why we decided to increase our range.

Okay, and my last question is I think when you sold off the Power Supply business, you were saying that that would reduce a lot of R&D and it looks like you're not breaking out R&D anymore.

Can we assume going forward that's kinda' gone back down towards a much lower level, I guess starting in December?

Yes, you can.

Okay, thanks.

Your next question comes from Michael Ellis from Thomas Weisel Partners.

Please go ahead.

Good afternoon.

I'm just calling in for Matt Sheerin today.

Just two quick questions.

First question, it sounds like September was a very volatile month, causing you first to preannounce and then exceed your guidance at end of the month.

Are you just faced at this point in the cycle, or where we are in the business, with very low visibility and this increased level of volatility?

Or are there steps you can take to mitigate that?

Are you working with your customers?

Just curious how-- if this is prompting you to, you know, change how you manage the business at all?

Well, you know, we've gone through tremendous amount of data and soul-searching to figure out if our processes were broken in the creation of last quarter's guidance and I'll tell you, that's not true.

Our customers didn't know that we were gonna have this kind of change in demand, and I feel quite confident of that.

So, this is -- this is an environment in the third quarter and into the fourth quarter you just have to turn the TV on and see that it's pretty volatile environment in terms of nervousness around the economy and all the factors that we see every day.

But the key in improving it going forward is the diversity that we've talked about on the call.

Today we are seeing just the nature of our business.

It's a little more lumpy -- actually, it's a lot more lumpy than we'd like, and--especially at quarter-end.

So that's something we've gotta work hard to kinda' smooth out.

And secondly, I just wanted to clarify your comments around EBIT targets.

Could you just refresh our memories on what your stated goal is for EBIT margins and the time frame that you have put around those targets?

Well, we continue to believe passionately that, you know, getting EBIT margins up around 5% is something that this industry should expect.

And so when we were looking at the track that we were on, you know, our expectation was to exit this year in a very robust manner, hopefully getting between 2.5 and 3% margin.

That's what we've talked about.

We continue to feel that that's possible, the range of the guidance suggests that that is the case.

Obviously, we'd like a little more wind in our sails with more revenue and a better stability but, nonetheless, the momentum is still there.

We talked about exiting next year at a full 100 basis points improved off that level of 2.5 to 3%, and again, it's hard to tell where we are now; but we're still shooting for those objectives and ultimately getting to the 5% that this industry should expect.

Thank you.

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

Please go ahead.

Yeah, good evening, everyone.

It seems like there was quite a bit of volatility when you look at the geographic performance of some of your core customers there.

And so I was pleasantly surprised to see improved profits quarter-to-quarter.

Should we assume that you've had some success in diversifying the customer base over there so, you know, the concentration you had there maybe a year ago isn't quite as great at this point?

I think in terms of all the geographies, as you say there's, you know, we are much closer now to having a worldwide manufacturing network, so the most common arrangement with the large customers that we have is they operate in the majority of the geographies.

So there's increasing diversification by geography, I guess, is how I'd characterize it.

Okay, great, thanks a lot.

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

Good afternoon.

The first question I have is on the Unix server business.

Do you think that the decline in that business is significant in next quarter's guidance or has that kind of settled down?

If you look at -- we spoke generally about the enterprise sector, and you know, the Server area's not dissimilar from that in terms of the business environment and the sequential trends.

But the move to industry standard that you've felt over the last couple of years, that's sort of gone away or is it still continuing to hurt you?

I wouldn't say it's hurting us.

I think, you know, the strategic trends that people talk about; you can read industry reports on that.

The performance of the Unix space is consistent with our expectation.

Right, so your server business isn't going to be down more because of that effect than just end market demand?

That's correct.

Okay, the second question is, if I look at your guidance, and in context of what your customers are saying; it looks like there's still inventory correction going on at the end markets.

Is that what you think or do you think that we saw a lot of it in September and customers' inventories are where they should be?

I know it's hard for you to tell, but you probably have a better view than we do.

I wouldn't say -- again, if we look closely at our major customers' guidance as well, and that's what I meant by it's a modestly positive environment when you look across their-- generally they're talking single-digit sequential trends.

Then, you know, maybe look at that compared to the types of products that we provide to them.

Steve mentioned quarter-to-quarter sequentially for us there is some offset because of businesses that we're exiting.

So the things that we're portraying here are fairly consistent.

And finally, when we met with you in the summer, you talked about instituting some demand collaboration activities.

I wondered if you could give us an update on where you are and what kind of benefits you're seeing from that?

Well, you know, we saw you know, a really significant decline that caused us to adjust our guidance and we still wound one sequentially a 6% decline quarter-to-quarter in revenue when we thought we were gonna be flat.

And our inventory went down, okay?

That, I think, is evidence enough that the demand collaboration and the supply base you know, intensity that, we've had is good.

I mean, we had -- and our customers didn't know about these until they dropped them on us, and we worked together to very quickly mitigate the inventory effects of that demand reduction.

So, if customers' inventories are maybe settling and they do see a rush of demand near the end of this quarter, do you think you'll be able to see that to react?

I just wonder if it works both ways?

Well--

I mean it sounds like the situation is extremely volatile.

First--

You know, I guess I will say that we've proven ourselves to be extremely good in past quarters and past years at chasing upside demand, okay?

I mean, we are the best at that.

So, I am very confident that, you know, that should we be chasing upside at end of the quarter, that we'll be able to deliver what our customers need.

Alright, thanks very much.

Your next question comes from Steve Savas from Goldman Sachs.

Please go ahead.

Thanks, good evening.

I guess Steve, I just want to talk little bit further about the 64-bit initiative winding down.

I had actually thought all along that you were both pursuing the ODM strategy as well as contract design strategy kind of in parallel.

I understand that you're shifting the ODM engineers towards a contract design-type work and I was wondering if that's a strategic shift where you're basically ruling out ODM-type design efforts in any category over the course of the next, you know, 12, 18, 24 months?

So are you planning, you know, there are no ODM initiatives that you can imagine that you'd get into over the foreseeable future?

You know, I wouldn't say that.

Like I said earlier, I think there's a huge blurring that we're seeing going on between what you called contract design and ODM.

So, you know, for us this investment in this technology and the platforms related to this to be marketed through these independent channels just was not, you know, an economically viable business case.

So we felt we're better off to discontinue that and focus those resources on, you know, on our OEM customer designs.

So as we go into, into the future, you know, what's clear is design capability is something that's desired by our customers and we're gonna provide that.

And are there places then, or other segments out of tech products that you cover where you intend to beef up some design capabilities, not necessarily for an ODM model, but for a contract design-like model?

You already have plenty of engineers that do, you know, optimized manufacturing, et cetera.

Yeah, absolutely.

In fact, we've got other products in the field with customers that we've designed for them.

So-- we're not just server designers, we have-- already have other design capability that we've deployed for our customers.

Okay.

I guess that's it then.

Thank you.

Mm hmm.

Your next question comes from Thomas Dinges from J.P. Morgan.

Please go ahead.

Hi.

Just a real quick one for you, Tony.

Last quarter you talked about the restructuring being somewhere in the neighborhood of about 110 and 140 million throughout the rest of the year.

If I back into it, what was the actual charge for the restructuring this quarter?

Was there anything else in that line item?

And therefore, do we still end with somewhere in the neighborhood of 70 to sort of 90 million next quarter?

And how much of that comes out of cash next quarter?

That's my only question.

Okay.

In terms of the charges in the quarter it was about 50 million, okay?

For restructuring.

In terms of fourth quarter, we're looking at you know, between -- around 70.

So there'll still be some trickle into the first quarter of '05.

In total, we continue to feel that the range of 175 to 200 is in tact.

In terms of the cash impact into the fourth quarter, cash associated with restructuring activities in totality is in the let's say 50 to 60 range.

Okay, thank you.

Okay.

Your next question comes from Terry Daniels from Edward Jones.

Please go ahead.

Thank you.

Most of my questions have been answered.

I was just kinda' -- clarification on the R&D with you not breaking that out.

I guess we're just moving forward just to assume that that is not going to be broken out moving forward and keep that as flat.

And then also heading into the fourth quarter, if you have any guidance on the first quarter regarding capacity utilization.

Do you expect that to be lower moving forward and any type of, I guess, guidance on the margin effects with that?

I know that you have a bunch of initiatives in place from an operating standpoint, but any color on sort of gross margin, I guess?

Well in terms of the R&D, I mean, last quarter we said it was roughly flat quarter-to-quarter, so I guess that's just less than $5 million a quarter.

Right.

And that, as we discussed earlier, as we downsize the amount dedicated to channel design and the Power business, we'll reduce it to a very small amount of R&D.

And so you know, that will be just buried into our total SG&A.

Okay.

And that's the reason for, for, for that.

In terms of looking forward in our utilization factors, you know, continued restructuring.

The prior question referred to the amount of charges that we were taking in the fourth quarter.

So we'll continue to deploy those, that means taking out capacity; and in a roughly flat environment that'll improve our utilization.

And then if you factor in, you know, our guidance on EPS, that certainly has a positive effect.

So, restructuring is a part of improving capacity utilization in a flat environment, isn't it?

So, that's the key drivers of margin expansion that we anticipated in the fourth quarter.

Okay, great, thanks.

Your next question comes from Scott Craig from Banc of America.

Please go ahead.

Hi.

Good afternoon.

Just a question around capacity utilization, Tony.

If you were to assume that all the restructuring was done you know, today or tomorrow or whatever, what would the capacity utilization be based on 3Q or the mid-range of the 4Q guidance?

And then secondly, Steve, from a business opportunity standpoint, when you look outside of your regular communications and IT markets, where do you see the most opportunity for Celestica as you move forward over the next year or so to diversify the business mix?

Thanks.

Just in terms of utilization rates, given the additional restructuring I guess we need to take -- I think that's how your question is phrased.

You know, we would expect that, you know, utilizations would improve between 5 and 10%.

Over to you on the second part.

Then, Scott, on the business opportunity outside of IT and comm.

I mean, we're doing pretty well across that set of aerospace, defense, consumer, industrial...

You know, and consumer tends to have with it some higher volumes, so we might see a little more opportunity in that area, I guess I would say.

Okay, thank you.

Your next question--

And maybe the last question, operator, okay?

Thank you.

Your last question comes from Chris Whitmore from Deutsche Bank.

Please go ahead.

Thank you very much.

Couple questions.

Tony, first, could you run through what you did with the receivables program?

Again, I didn't catch any details there.

Okay, on the receivable program, last quarter we had drawn the 400 amount.

In this quarter we had drawn the 375.

So a reduction of 25.

Okay, great.

Thanks.

Secondly, I hate to ask about Q1, but I feel like I must.

Is there any reason to believe that this year we'll see any different seasonality than what you've seen in past years?

In other words, because there's not much of a pick-up in the enterprise business in Q4, should we read into that you'll see a little bit of a moderating, you know, seasonal decline in Q1?

Is that a fair assumption?

Boy, I don't know, Chris.

You know, we saw -- organically, I think we saw a 1% to 2% pick-up this year from Q4 to Q1.

So I don't think I'd want to try and forecast Q1 at this point publicly.

Okay, and lastly, have you thought at all or have you adjusted your CapEx spending at all, given the poor visibility and given that you're running, you know, currently at about 55 to 60%, I think you said?

Have you thought at all about maybe slowing the expansion in China and eastern Europe once you get a better read on end market demand and maybe higher existing utilization rates?

No, I think you know, we have -- we've certainly been stepping on CapEx.

As a general rule as you saw throughout this-- even this last quarter, but we're gonna continue on those expansions, because we have pretty solid bookings heading for those places.

What's the timing for the ramp of those programs -- of those plants and how large or how much incremental capacity will they add?

China will be ramping in the, call it the second quarter next year, we'll begin to go into production.

Both plants will probably start ramping in the second quarter of next year, and you know, they're sizable facilities.

Obviously modular, so we have the ability to ramp up you know, the capacity to north of $500 million each plant by a significant margin.

Okay, thanks a lot!

Mm hmm.

Gentlemen, I'd like to turn it back to you for final comments.

Okay, thanks, everyone.

As you can tell, we're pretty proud of at least the movement on the margin and a very difficult quarter revenue-wise this quarter.

And we're gonna continue on this plan that we've had our shoulder behind all year-long, and 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.