Celestica Inc (CLS) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Celestica fourth-quarter and year-end 2004 financial results conference call. (OPERATOR INSTRUCTIONS).

I would like to remind everyone that this conference call is being recorded on January 27, 2005 at 4:30 PM Eastern time.

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

Please go ahead, sir.

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

On the conference call today will be Steve Delaney, Chief Executive Officer;

Mark McGhee, President, and Tony Puppi, Chief Financial Officer.

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

Our call will run for one hour, and in order to accommodate as many questions as possible, we ask that you limit yourself to one question as well as one follow-up.

There are some support slides that will be shown as part of our webcast, and copies of those slides will be posted on our website once the call has been completed.

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 facts may involve risks and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements.

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

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

I will now turn the call over to Steve Delaney.

Thanks, Paul, and good afternoon, everyone.

We were very pleased to see the fourth quarter snap back after a very volatile September quarter.

Revenue came in slightly above the high end of our guidance as revenue from many of our largest customers in communications and IT experienced healthy end market growth.

Operating margins, a prime focus for us this year, came in at 2.6 percent, which represented the best levels for Celestica in two years.

This improvement was based on the benefits from restructuring, better utilization, benefits from our lean manufacturing initiatives and continued cost controls, which drove gross margins to 6 percent and continued declines in SG&A.

On the balance sheet and in our working capital performance, we made good progress as cash cycle came down by six days, inventory turns improved a full turn, and our overall inventory dollars declined.

So overall on an operating basis I was pleased with our progress.

However, I was disappointed with the significant charges we incurred this quarter.

The goodwill and deferred tax impairments that are reflective of both the current and expected recovery levels in our high-cost geographies.

While we continued to transition these geographies to provide other services such as repair, fulfillment and design, these regions are still undergoing major transitions to their new roles.

The other major charge incurred is associated with an increase in allowance for doubtful accounts and related inventory provisions as a result of a change in the financial condition for one specific customer.

Though we have been working with this customer for more than three years, the recent challenges they experienced increased the likelihood that certain receivables may not be collected and certain inventory would have to be written down.

Tony will step you through these items in more detail, but clearly these charges are disappointing and moderate our enthusiasm on what otherwise was a very good quarter in terms of operational improvements.

When we began reevaluating the Company over nine months ago, we knew we had to take some initial steps to restart growth, improve operating margins and better position the Company's manufacturing footprint.

Through these actions, we were able to make progress in several key areas.

We saw our revenues grow again aided by a modestly better economic environment, a solid acquisition in MSL, and adding new customers in some diversified markets.

We were able to drive improvements in manufacturing by growing out our lean culture throughout the global network and delivering higher customer satisfaction.

We continued to improve our footprint through expansion and lower-cost geographies and the expansion of services to meeting the growing outsourcing needs of our customers.

And importantly, we delivered marketing expansion every quarter in 2004.

Though we are encouraged by our progress, the reality is that our returns are still below where they need to be to earn our cost of capital.

As a result, after evaluating the needs of our customers and assessing the best roadmap to get back to sustainable and acceptable levels of profitability, we have made the decision to significantly reduce the amount of excess capacity in our system through a new restructuring program that will bring our utilization rates higher and accelerate margin expansion.

In the fourth quarter, our capacity utilization returned to just over 60 percent the first time in two and half years.

At the completion of this major initiative, we would expect our EMS production utilization to get to the 70 percent range.

At this level, the Company will be able to earn its cost of capital on a more consistent basis while still giving customers the flexibility for upside growth.

In the past year, we have delivered hard benefits from our recent restructuring activities.

And upon the completion of this new initiative, we believe Celestica will have the highest proportion of capacity in the infrastructure and low-cost geographies among the Tier 1 EMS providers, while still having the necessary capacity and capability in the high-cost regions in order to offer broad-based outsourcing solutions to our customers.

In summary, we have worked hard in 2004 to show improvements throughout our operations, and I think we have delivered positive results.

What is encouraging is that we believe that there is more improvement to be gained, and our team is focused on delivering just that.

I would like to thank and congratulate all of our employees for what they have achieved in the past year, and I know we will continue to make additional progress this year.

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

Thanks, Steve.

Starting with the topline, revenue for the fourth quarter was solid, coming in at $2.33 billion or above the top end of our guidance range.

Sequentially we were up about 7 percent with strong contributions from our telecom and servers segment.

Year-over-year topline growth came in at 21 percent, reflecting the moderately better end market conditions in 2004 combined with organic wins in our MSL and NEC acquisitions.

End market revenue segmentation for the quarter was as follows.

Enterprise Communications was flat quarter to quarter and represented 26 percent of sales, while telecom was up shortly, growing about 21 percent sequentially and represented 22 percent of revenues.

Servers also demonstrated significant strength, up 22 percent sequentially to represent 18 percent of sales.

And storage was 12 percent of sales on the back of 5 percent sequential growth.

The other category was 20 percent of sales unchanged, and workstation PCs came in at 2 percent.

Moving on to our customer mix, the top 10 grew to 66 percent of our business and increased 12 percent sequentially.

The top five grew 13 percent sequentially to 48 percent, and IBM and Cisco were the only two customers over 10 percent.

Our non-top 10 remained flat quarter to quarter.

On a geographic basis, we reached an important milestone as Asia has now become the largest region for the Company at 41 percent of total revenues.

The team in Asia has done a tremendous job of absorbing high growth and significant program transfers while growing customer satisfaction and profitability.

The Americas represented approximately 40 percent of sales and grew about 4 percent sequentially, and Europe was flat on an absolute dollar basis and represents 19 percent of sales.

Moving to profitability, net loss on a GAAP basis for the fourth quarter was $810 million or a loss of $3.59 per share.

Let me drill down on the approximately $836 million in charges that drove the GAAP loss, starting with the impairment charges.

Fundamental premise behind these after completing our plans for 2005 and beyond is that our volumes in the Americas and Europe will be lower than previously expected.

This adversely impacts the assessment of the carrying value of goodwill, long-lived assets and deferred tax assets, as well as being an important backdrop to the additional restructuring we are planning in 2005.

So as a result of the Company's annual testing, we wrote off the following.

We wrote off 288 million in goodwill, representing all the goodwill we had in the Americas and Europe. $99 million in long-lived assets, of which one-third were intangible assets, while the rest were plant assets that are being planned for closure.

And 248 million in deferred tax assets in the Americas and Europe where we felt it was more likely than not that future deferred tax assets will not be realized based on profit and restructuring expectations in those jurisdictions.

So in total we have 635 million in write-offs driven by that impairment testing and the charges I just outlined.

The other charge booked in the quarter relates to the significant deterioration of the financial condition at one of the Company's customers, which has increased the likelihood that certain receivables may not be collected and certain inventory will have to be written down.

As a result, we have taken a total charge of $161 million.

Of this amount, $116 million reflects an increase in our allowance for doubtful accounts reflected in our other charges, and $45 million represents the write-down of inventories reflected in our GAAP cost of goods sold.

This customer is in the process of attempting to recapitalize itself.

At this time, there are no assurances that the customer will be successful in this process, and accordingly we have increased our reserves on a conservative set of assumptions.

The Company continues to operate, and we will not disclose the Company's name, what sector it is in nor its location.

And in addition to these charges, 45 million in restructuring charges were incurred in the quarter associated with the Company's previously announced restructuring initiatives announced earlier in the year.

This essentially rounds out the total charges in the quarter of 836 million.

Clearly these charges are disappointing and tarnish what otherwise is a strong operational improvement in the business.

So let me get to that.

On an operating basis, we continue to make strong progress, and are very pleased with our fourth-quarter performance.

Adjusted net earnings were 43.2 million or 19 cents per share for the quarter compared to an adjusted net loss of 8 million or 4 cents loss per share for the fourth quarter of last year.

Operating margins came in at 2.6 percent, a sequential improvement of 80 basis points with all aspects of our profit improvement planned -- better utilization, restructuring benefits lean all at play.

On a sequential basis after factoring out the 44.6 million provision for inventory noted earlier on the credit issue, gross margins increased 50 basis points to 6 percent, while SG&A declined to 3.4 percent of sales.

Cementing our performance by geography, Asia contended its strong track coming at 4.1 percent operating margins.

The Americas had a solid 120 basis points improvement and came in at 2 percent.

On the back of restructuring benefits, the exiting of non-strategic business and greater efficiencies achieved from the implementation of lean manufacturing.

Europe was profitable though unchanged in the quarter with margins of .7 percent.

On the balance sheet, we had strong working capital performance.

Cash at quarter end was just under $1 billion at 969 million.

Cash flow from operations was -6 billion.

Our receivables sales from the AR sale facility was reduced by 74 million quarter to quarter, offsetting a $68 million improvement in other operating cash flows.

During the quarter, as per new accounting requirements under Canadian GAAP, the Company earlier adopted an amendment that requires the convertible debt to be classified between debt and equity.

Of the total 334 million in LYONs, 124 million has been reclassified from equity to debt on the balance sheet.

The remaining 221 million stays as equity with accretion charges now reflected in interest expense.

Full details of this accounting change are outlined in the notes to our financial statement.

There is also no impact to adjusted EPS from this change.

On an operating basis, cash cycle defined as inventory days plus receivable days less days of trade payable including accruals was 17 days, down 6 days sequentially primarily due to the improvements in our inventory turns.

Inventory was down 109 million from the third quarter with inventory turns growing a full turn to 8 times a year compared to 7 times in the third quarter.

CapEx for the quarter was $28 million due primarily to the investments we were making in low-cost geographies.

Specifically new plants in Romania and China that come online later this quarter and next.

We also remain undrawn on our $600 million bank line.

So let me summarize 2004's financial performance before we move to guidance.

We had a very strong start to turning around the operating performance of the company.

First, we had $159 million increase in operating income year-to-year with increasing margins and return on invested capital each and every quarter.

Our geographies each showed improvement in operating performance with Asia executing extremely well with 44 percent revenue growth and a 77 percent growth in operating earnings.

Europe was a $98 million operating profit turnaround story, while the Americas finished strongly and delivered the best margins that they have seen in two years.

Growth returned with a 31 percent year-over-year revenue growth rate.

And importantly, we saw momentum throughout 2004, and we hope to continue this trend this year, 2005.

Let me now move to our guidance for the first quarter of 2005.

For the first quarter, we expect revenue to be in the range of $2 billion to $2,225,000,000, reflecting some seasonality within a moderate growth environment.

We expect adjusted EPS to be in the 10 cents to 18 cents range reflecting the revenue guidance offset by the continued improvements in operating efficiencies and cost savings benefits from our restructuring activities.

And as highlighted by Steve, we have made the decision to accelerate our plans for improved capacity utilization and do additional restructuring.

This program will result in restructuring charges of $225 to $275 million with approximately 80 percent of that being in cash.

This program will be primarily oriented to high-cost geographies where demand has just not recovered to the levels required to achieve improving and sustainable profitability.

Our industry has changed dramatically through the tech downturn with customers requiring their manufacturers to ship more production to low-cost regions in order to compete in their own highly competitive marketplaces.

While we have done that, we also need to accelerate our path to returns that are greater than our cost of capital.

That is what we expect this plan will do.

We expect this program to take approximately 15 months to complete, and we would expect some benefits from this program to start contributing to margin expansion in the June quarter.

These changes are necessary, and we have decisively made a strategic call on what this Company will look like in the future.

We are confident that in the end Celestica will have the most robust, cost competitive footprint in our industry characterized with high capability and a broad spectrum of service offerings.

That concludes our remarks.

Let me now ask the operator to open the call to questions.

(OPERATOR INSTRUCTIONS).

Thomas Hopkins, Bear Stearns.

Tony, I just wanted to be clear on this increase in the reserve.

You have increased it I think you said about 161, 168 million.

But is there a potential that in coming quarters you might still, if this customer does, in fact, is unable to pay, that you might have some risks here in terms of running this due to the gross margin?

We believe that the charge that we took this quarter of $161 million is adequate to cover that eventuality.

Okay.

I guess that speaks for itself.

Could we go back to some of the strength you saw then in the server market and the telecom market?

Do you think it was inventory-related, or was is just the customer's inventory got worked down to a point where they felt comfortable reordering?

Or do you think there was an increase in demand in some of these sectors?

I think -- it's Marv MaGee speaking -- generally I would say there seems to be some strength in the demand for the end of markets in those two sectors that we highlighted.

So it seems to be flowing quite well independent of inventory.

Okay.

Any one area within telecom that looked a little better than the others?

You obviously have a lot of wireless exposure, but you have some wireline as well.

Yes, both of those are grouped in the telecom sector.

So it would certainly be a combination of those two.

Okay.

Thank you.

Lou Miscioscia, Lehman Brothers.

I guess I would want to start off and just ask if we could get the name sector and location of the company that you're taking the charge for actually?

Obviously joking there.

In all serious though, can you I guess compare and help us out with how much of AR is actually getting written off here in the sense that it is obviously looks like a material portion.

I guess I'm just trying to understand just the checks and balances that you go through and how this sort of caught us, and then comparatively are there any other situations that might be similar to this that we should keep an eye on?

Those are good questions.

In terms of the breakdown, 116 million I said was reflected in receivables that at this stage we don't deem given where we are and given where the Company is to be recoverable from an accounting perspective.

And 45 million was associated inventory that we would have to write down should they not be successful in their recovery efforts.

In terms of the situation, this customer is doing quite well, growing rapidly at strong forecast in the fourth quarter as we looked at it, and we supported that company given its track record and products and technology, and the marketplace was very difficult for it.

You know there was a deterioration in their payment timeliness to us to the point where we had to reassess the carrying value of the assets that we had encumbered for that customer.

And so we thought we required to be prudent in our accounting for it and reflected this independent of how successful they will be.

Okay.

So it sounds like there is no recourse in being able to go out and recoup this at some certain point?

I guess I'm trying to understand if you're just taking the write-off 10 percent of AR here and then trying to regain it, or is it actually just written off and it is probably not going to come back?

We certainly would hope that the company refinances itself and that there is an opportunity for us to recoup all of it.

That is certainly something that the company is still trading.

And it is in our best interest and in their best interests to continue to do so as it looks for strategic partners and whatever.

So if it is successful, then we would hope and we would report whatever recovery we would get from that process.

Okay, great.

And just one other follow-up.

I guess when we look at 2005 as a whole, either if you could comment for Celestica or just maybe an industry comment in general, right now I have got you in mid single digits topline growth, obviously a lot better in bottom line, and it looks like with the first quarter bottom-line guidance maybe we would be able to maintain that.

But do you foresee that it is going to be about a mid single growth year from a revenue standpoint, but then obviously continue on the expansion on margins on the bottom-line?

You know I tell you our industry is just so dynamic that I just don't even want to venture a guess ongoing out a year and spread that kind of guidance out there.

So we will stick with our next quarter kind of guidance like we did this time.

I think that we are in agreement with most of what I hear everyone else saying, in that end market growth in the low single digits is probably what is going to happen at least through the first half.

I don't know that anyone's radar is very good past that.

In fact, our restructuring efforts are put in place in order to make sure that we improve our margins despite that kind of environment.

Okay.

And the opportunity for further outsourcing in either tech telecom or industrial, auto, medical to the industry?

I think still those are valid opportunities that there is more work left inside major OEMs, even in -- some in IT and com as you well know, that there are still represents growth opportunity in excess of end markets for our industry.

Brian White, Kaufman Brothers.

Good afternoon.

When you look at the different end markets, it looks like telecom up 21 percent and servers up 22 percent.

Can that be attributed to the base business that you had, or was there any outsourcing that helped push that into the over 20 percent level?

I would say the majority of it was existing business that in the particular momentum we saw in the fourth quarter, but as Steve was mentioning orders earlier in the call here, the level of opportunities in the market and when we look forward there is a good flow of new outsourcing opportunities coming to the market and a pretty positive environment for those opportunities as we look forward to 2005.

Okay and when you talk to your customers and you get a tone of how they feel about their businesses, what industry do you think could show the strongest growth next year just based on base business when you talk to your server customers, your telecom customers, your networking customers?

Again, it comes back to sort of the same mid single digits trends.

I don't see a big difference between the different IT and the com sector.

They both -- the industry growth forecasts that those industries are projecting seem to be pretty consistent.

So I would not say there is a breakaway of one or the other, just kind of steady positive but small growth as we look forward.

Okay and how about in terms of outsourcing?

What market are you most excited about over the next 12 months?

I think we certainly reported earlier about some of the newer markets for us, the industrial segment, the automotive -- the newer vertical markets as we called them in the past.

You have companies again with reasonable end market growth rates, but earlier on in the outsourcing curve.

So there is clearly significant opportunities there.

I think as well in the services part of our business, you know in terms of everything from design to the aftermarket services fulfillment type things, some very interesting ideas and high propensity for our customers to look at those services as incremental benefits that they can get from outsourcing.

So they two -- the diversified are the newer markets, and the services are very attractive.

Scott Craig, Banc of America.

Could you guys maybe discuss a little bit any changes to your operating profit targets that you have laid out in the past from a percentage of sales basis?

And then secondly, with regards to the China and Romanian facilities that are coming on, I originally thought those were a second-quarter ramp.

It sounds like maybe they have maybe been accelerated a little bit forward.

Dose that have anything to do with you trying to shut down some more facilities going forward?

Tony, can you discuss the costs associated with those ramps of those facilities and how that is going to impact the financial statement?

Thanks.

Scott, Tony and I will tag team on this a little bit if that is okay.

In terms of operating profit, you know I have got us really focused this year on crossing that hurdle of earning our cost of capital.

So the same ranges we have been talking about in the past I think are still valid with our mix of business because I don't see a huge change from where we are today.

So I would not be changing anything there relative to some of the margins.

Now the second question you had was --

Low-cost geographies.

The low-cost geo sites? (multiple speakers).

Well, our plans for the launch of our Romanian and Jinji Lake, (ph) China plants are on plan right now, and right around the end of the first quarter into the start of the second quarter is when those two plants will be launching.

So things are going pretty well there.

You asked as well about the CapEx that we see.

So as we ramp it, we will see a pickup in the CapEx likely in the first quarter as we continue to build out the facilities.

And gradually through the year, we will be adding equipment.

So initially probably in the range of around 25 to 30 million over the next couple of quarters in that regard and then ramping later as certain programs ramp.

We still feel very good about keeping the CapEx within our historical ranges.

Todd Coupland, CIBC World Markets.

When you think about the Q1 range, what are the swing factors top and bottom from a revenue perspective?

So we tried to set the band fairly consistent as we had in prior quarters.

So we feel there is a reasonable range there.

If you're asking end market segment questions, again it is pretty -- the volatility of the movement within segments is not severe.

So I don't see anything that is an outlier in terms of either end markets or anything that is abnormal in the range.

I was not quite sure what you were trying to get at.

There just does not seem to be a lot of growth activity or volatility I guess in the kind of forecasting that we are seeing right now.

But we are only into the first month of the quarter, too.

Okay.

Secondly, with the new restructuring, how should we think about modeling gross margin improvement starting in the June quarter?

Can you just give us some idea on that?

Well, the programs will roll out.

We will get a very good payback on the programs once fully implemented, and I did say that we're going to do these over the course of the next 15 months.

So we should be expecting between 125 and 150 or so million dollars of savings.

They will start to ramp in the June quarter and more progressively in the second half of the year.

Chris Lippincott, KeyBanc Capital.

Just a quick question just back to your goals.

I guess one question you were talking about, by now utilization is around 16.

I think you were talking about 70 in order to get to your -- cover your cost of capital.

Could you talk about where your -- also your basic low-cost footprint is from a percentage perspective, and where you would really like to have that in order to get those numbers?

In terms of the detail behind your question, let me -- I guess I would comment that we expect we will take our population and low-cost geographies to about 85 percent I think is what the number turned out today as we counted it out.

That is spread between Asia, Mexico and Central Europe.

I don't know if that is covering your question properly.

I guess so, and I take it is that more on hard capital, or is that more sort of a headcount?

That is a headcount number, and the space number does not follow it exactly because a lot of the -- really some of the space that we tend to have in the high-cost geographies is fulfillment-related, which by its very nature just takes up more space.

I think if you looked at it from a space, it is probably closer to 70 percent is low cost.

Even if you looked at it in terms of S&P and M&E type of CapEx, it would be about the same as that.

Okay.

And just in terms of trying to get the cost of capital covered, is there any date -- or not a date -- but a timeframe that you would really like to shoot for?

We would like to exit next year there.

So I think that is -- this year starting 2005. (multiple speakers) 2004.

So that is clearly what we have got in our line of sight.

12 months, good.

Thanks.

Paras Bhargava, BMO Nesbitt Burns.

Just a question on the restructuring.

What would you expect your capacity utilization to be in high-cost geographies after the restructuring is done?

I think previously, Tony, you said you have been adding capacity as fast as you can in some of the lower-cost geographies.

If we segregated the two and just looked at the high-cost geographies, what would it go from and what would it go to?

I think we would get the higher cost geographies in between 60 and 70.

It has a range depending on the type of service.

Some will have more of -- I guess the high-cost geographies will have more of a fulfillment system, assembly-type characterization.

So the utilization factors are all over the place when you look at it on an average basis.

But versus, let's say, numbers of less than or around 50 percent today.

That is a pretty dramatic move, and that is where most of us will drive benefits to.

Are you seeing other people sort of doing the same thing?

The reason I'm asking -- the motivation for the question is, if we are seeing demand kind of slow down, it is still growing but slowing down and we still got significant capacity, are we going to start to see pricing come in somewhere in the second half of this year, or do you still see the pricing environment as relatively benign?

We are in a pretty -- we are in a competitive environment, and so our customers expect very efficient delivery of their products.

And so that is where we are going.

I don't know where everyone else is going right now, but that is what we need to do to both meet our customers' needs and at the same time meet the needs of our own shareholders that is delivering our cost of capital.

So that is what is really driving us.

Did you see any increase in pricing in the last quarter, price competition in the last quarter, or is it the same as it has been over the last 12 months?

I think it has been about the same.

We certainly saw improvements over the environment in 2003, but quarter to quarter --

2004.

'04 over '03 I mean.

Finally, did you give what the cash amount of the charge was, Tony?

Most of the cash, most of it was a non-cash charge.

There was only --

Of the restructuring charges, the 225 to 235?

About 80 percent.

80 percent is cash.

Thank you very much.

Michael Walker, Credit Suisse First Boston.

Good evening.

Just a question on the new round of restructuring.

We are coming towards the end of your first round of restructuring, which was expected to get the margins up pretty nicely.

And I guess it isn't really new news that high classifications are a bad place to do a lot of business.

So I am a little surprised I guess that we are kind of going through a whole new round again.

And what, given that this last next four to six to seven quarters or so, what confidence I guess do you have that at the end of that period we're not going to hear about another $250 million round of restructuring?

I'm just trying to understand sort of what was not done the first time around?

Well, for one thing, Michael, throwing every ball up in the air at the same time and undergoing transfers is a very difficult thing to do.

So there is a limited amount of restructuring you can do all at the same time and still protect your execution for your customers, which is the most important thing.

So that is what we did this last year.

I was really pleased with our execution around the restructuring that we did last year.

So I think we have certainly proven to you and to ourselves and to our customers that we can do this and execute at the same time.

This program was launched for a couple of reasons.

One is, we expected the second half of this year to initially as we looked at the first half of last year, the second half was looking before we entered the third quarter like it was going to be pretty strong, and it got weak very fast as you all know I'm sure.

And so the marketing environment is less than we were anticipating it early last year.

And also factored into that is just the do-ability of all this.

Now when you say why not expect future restructuring?

You know we're getting to a point here of 85 percent of our people in low-cost geographies.

That kind of tells you a little bit about what might even be left.

We do have services that customers expect and that we deliver that has real value in these Western market, higher cost geographies.

Okay.

So you have talked in the past about being able to exit the '05 timeframe at at least a 3.5 percent operating margin.

I think a couple of questions ago you endorsed that again.

I was just wondering if the new restructuring was required to be able to accomplish the 3.5 percent, or if now with the new restructuring you, in fact, expect to be able to exceed that by some amount?

I hope to exceed that frankly, but we needed to do this restructuring in order to get further marketing expansion from where we are right now.

Okay and then just my follow-up really quickly is in Q3 your mix worked against you and Q4 your mix worked in favor of you.

But what is your kind of strategy in terms of revenue mix?

Are you looking to focus especially on a few segments, particularly consumer, to be able to diversify your mix in '05?

Well, you know as we have been saying in terms of -- our ambition here is to increase what we have been calling the diversified market sectors, which include consumer, aerospace, industrial and so on, automotive, and so it will continue on in that vein.

I think we're seeing around 20 percent right now, and I would like to drive that higher as a percentage of our total.

So we will stay on that path.

Jim Savage, Wells Fargo Securities.

Can you talk a little bit about your expectations regarding cash flow from operations and what you think you can do in terms of working capital from here?

Obviously the working capital got substantially better this quarter.

What do you think you can do over the next few quarters?

We think looking into the first quarter we expect partly related to the seasonality and as receivables come in, and the rest of the dynamics of the cash cycle to be roughly where we are with hopefully some improvement.

Subsequent to that, the teams are focused very intently on improving our inventory turns and continuing the trend that you saw this quarter.

So throughout the rest of the year we expect to improve that aspect of our business.

Okay.

And where do you think your D&E is going to be?

What was it during this most recent quarter, and where do you think it is going to be for '05?

Our total -- I will get back to you on that.

Okay.

I guess what I'm trying to get at is you do have somewhere in the range of $200 million in cash restructuring that you're going to be having over the next year.

And I am just trying to get a sense as to how much of that is going to be financed through your cash flow from operations.

We are going to assume I guess that things are going to continue to improve, particularly once the restructuring is moving forward.

I'm just looking that up here.

In terms of your profitability (multiple speakers)

You asked me the amortization as well, so I have got to look at the EBITDA and differentiate.

But I will get back to you as we go through the call.

Okay.

Great.

Thank you.

Amet Jeronanni (ph), RBC Capital Markets.

Just the new restructuring programs you guys have and it sounds like it's going to be all in high-cost regions, could you tell us what the split would be between maybe the Americas and Europe in terms of the restructuring?

You know our people will need to hear first where we're going to do it, so I really don't want to start allocating to regions.

Okay?

Fair enough.

And also last quarter you talked about exiting some less profitable non-top 10 customer business.

Could you help us understand what impact that might have had on your revenues this quarter, and are you done exiting all that business?

It is Marv.

Let me take that.

What we're describing there are small customers, so there was no significant impact in terms of our revenue.

It is really an ongoing process to make sure that both the aspirations that we and our customers had when we started working together are still in place.

So I really view that as an ongoing business process of managing the relationships with the right customers over time.

So the program is progressing well, but usually it is smaller customers and no significant impact on our topline results at the Company.

Gus Papageorgiou, Scotia Capital.

Yes, you mentioned that you hope that I guess within a year or two you will have the proportion, the largest footprint in Asia of all the large EMS players.

I'm just wondering part of the attraction of large EMS companies is their capacity for global logistics.

As you are shifting more production to low-cost geographies, do you leave yourself enough flexibility to be able to move production to other areas should variables change, like if the price for transportation goes up and your customers want more production in North America or Europe, do you still have that flexibility in your system, question number one?

And question number two for Tony, based on some of the write-offs you are taking here, do you trigger any kind of covenants in your -- on any of your debt covenants?

I will take the flexibility one.

You know the basis, the going in premises with all of our restructuring sizings that we were doing is to be able to ensure that we can deliver the especially fulfillment and logistics and high serviceability requirements of customers that need Western market footprints.

So we believe that post that restructuring effort we will have adequate capacity in those places to satisfy those customers.

And, in fact, it is a world-class footprint.

So that is where we were heading.

Just one thing to correct your point.

I did not say everything was going to Asia.

I said low-cost geographies.

So that is Mexico, Central Europe and Asia.

Okay?

And no debt covenants were off site as a result of all the charges.

And let me -- after that brain cramp, let me get back in terms of Jim Savage's question.

Our fourth quarter had about $100 million of the EBITDA versus $61 million of operating earnings.

We expect the amortization level as you flow through next year to be about $10 million a quarter.

So if you look at the total D&E as was D&O -- D&A sorry -- as was the question was about 200 million for next year for 2005.

Next question.

I would say we're funding --

We are funding from our cash.

Exactly.

Patrick Parr, UBS.

I just want a clarification on two points first.

Number one, did you say that you intend to or you are targeting exiting '05 at a 3.5 percent operating margin or better?

That is correct.

Okay.

Also, I thought I heard that you had sort of sized the benefits of this most recent restructuring round now at somewhere in the 125 to 150 million annualized.

Is that correct?

That is correct.

Okay.

And I guess you said some of the benefits would be seen in the June quarter, but when would one see the full run-rate?

Probably for '06 I would imagine?

That is correct, second quarter of '06.

Okay.

And then as I think about your growth outlook for this year, what segments would you expect to be some of your stronger ones in terms of where you won new business, where you still a little more end market strength and that would be it?

Thanks.

You know, we have not forecasted segments.

I think I would rather not cover segment forecasting for the year, Patrick.

Okay?

Steve, could you in any way even rank them as far as some better than others or --?

Well, IT and com is still 80 percent of our business.

It will continue to be very substantial for us, and I mean we have seen frankly great opportunities in every one of the segments that we have right now.

Okay.

And then I'm sorry, one final one.

The new plants that you have got in China and Romania that you're working on, would one think that those would -- would you take some of your existing IT and com customers and transition some of them to these new plants, or are these new plants more for some of the new business that you will be expecting to win?

There will be both going into them, so some will be new business won and some will be transitioned from existing facilities that would be coming from high-cost geographies.

Steven Fox, Merrill Lynch.

Just getting back to the charges, is there any way to look at -- from an outsider's point of view, when you look at the company, you have taken a lot of restructuring actions and done an acquisition.

So it is hard to see organically how you have added customers or done things at the individual plants to improve operations outside of closing down plants.

Is there any kind of either internal metrics you could talk about per plant or new customer wins that you could add some color around?

You know I think one of the points that Tony made earlier was our organic growth this year was 18 percent.

So the remainder being the MSL-related or the acquisition-related growth.

So that maybe gives you some indication of how we're doing because I don't think you saw end markets grow that much in any of the cases that we serve.

In terms of -- what was the second part of your question?

On an efficiency basis, is there anything that you can look at existing plants where you improved efficiencies per plant or besides --

Yes.

Sorry about that.

So we actually tracked the amount of dollars saved in lean manufacturing and Six Sigma, and the problem, of course, is we're generating a lot of efficiencies.

We are sharing some of those with our customers.

We are taking some of them to the bottom line.

So I cannot give you numbers that you will be able to put into your model with any kind of effectiveness.

But I guess you can say that we have been pretty routinely seeing .5 to 1 percent of revenue in those kinds of savings.

And in terms of the North American footprint after the restructuring is done, would there be any printed circuit board assembly business in North America and Europe for that matter operation-wise?

Yes, there will be.

We still have customers that are in a variety of industries and for a variety of technology reasons that still want the high serviceability I guess I would call it, capability that we have in those geos.

Bernie Mahone, Morgan Stanley.

A question on the restructuring.

Did you receive any benefits in the December quarter from your restructuring, the prior restructuring plan, and could you quantify that at all?

And also, what should we expect in the March quarter from the prior restructuring plan?

We did receive healthy benefits in the fourth quarter from our prior restructuring.

And if you looked at, let's say, the operating income improvement, I'd probably cut it this way.

Cut it at half of it is volume-related sequentially, and the rest is dominated by both restructuring and the lean benefits that we have been realizing in the business.

That trend basically continues into the first quarter guidance that we have given.

Okay.

So you will receive incremental benefits from the restructuring -- from the old restructuring program in the March quarter?

That is correct.

So what would the effect be on the gross margin line if utilization will be following, but you have the benefits from the restructuring, do gross margins fall then, or can they stay flat?

Well, the gross margins into the first quarter are affected by the volume, the seasonality on the top line.

So you get the absorption impact on one side, but that is offset and continues to be offset not entirely by the efficiency gains that I just talked about.

Right.

And then just on Europe, so the margins there were still less than a percent, although you made good progress.

When do you think we see them kind of come up more towards the company average, or is that going to be when the next restructuring program is kind of finalized, or you think that could be sooner?

Well, the next restructuring program will affect Europe, too, so you can expect that we are still under construction there, if you will, in terms of executing our plan.

Great.

So they will stayed pretty subdued in Europe then for the next little while?

(multiple speakers) short-term (multiple speakers) yes.

Alex Blanton, Ingalls & Synder.

First, sort of a housekeeping question.

I did not see any adjusted income statement in the press release.

Am I missing something?

Yes, you are missing something.

There should be something there, Alex.

We will double-check.

Okay.

Paul, can you get back to me on that?

Yes.

Okay.

Secondly, in terms of the capacity you are closing and how much you are opening in the lower-cost regions, in terms of your total capacity right now what are those respective amounts?

I mean how much capacity as a percent are you closing, and how much of that is being offset?

Do you understand what I'm saying?

Offset by growth --

By expanding capacity in low-cost regions.

You said I think earlier that after the restructuring you would be at 70 percent of capacity.

But there is some other things happening besides the restructuring there.

There is your opening capacity over a season and then your sales will expand presumably, too.

So I'm trying to get a sense of how much each of those contribute to the 70 percent.

The total network will improve by 10 percent.

The net --

The total network.

That is all geographies together.

Total capacity?

Utilization would increase by 10 to 15 percent.

The utilization will go up?

Yes, correct.

But I'm saying that is a product of sales increases, capacity expansion and capacity reduction in different areas.

So what are those three components?

Just in terms --

How do we get to the 70 percent is what I'm asking?

Just in terms of our -- forget about -- let's forget about for a second growth in volume.

Just in terms of our current footprint, this restructuring program would represent between 10 and 15 percent of existing capacity.

That is being taken out?

Correct.

And how much is being added at the same time?

We will add as the revenue gets added.

But you have expansion programs going on in low-cost regions.

How much capacity is being added by those?

Probably -- most of that will happen in the second half of the year.

It is not a -- (multiple speakers) 5 points less.

We are talking about --

5 percentage points.

5 percentage.

So you are taking out 15 percent and you're adding 5 percent, so your net reduction is 10 percent.

Is that it?

Of existing capacity and resources that we have (multiple speakers) restructuring program -- restructuring program, take out 10 to 15 percent.

Okay?

And you're adding 5 percent --?

When this grows, we would add more capacity to meet that and maintain a higher level of aggregate network utilization.

Right.

I'm trying to get the components of it.

And the 70 percent assumes how much sales growth?

Or is it at the current volume level?

It would just be the normal growth that you would see in our business.

Well, what is that?

Which is nothing more than the end markets.

Very conservative is what we are planning our capacity.

Okay.

So the 70 percent assumes --

Look at it this way, Alex.

When we are bringing the plants on, they usually are designed in such a way you can bring on segments.

Right?

So at the time, you don't make those investments without having it aligned with both the revenue growth and the transfer plan.

So that capacity growth is driven by that.

I think the key thing that Tony is saying is the absolute amount that we are taking out of the base in the high-cost geographies.

Right?

I'm just trying to get something that helps you with the model.

The end result is that the margin expansion plan is not dependent upon any growth above and beyond a very moderate end market growth rate.

Okay?

Okay.

That is what I'm sort of getting at.

I wanted to know how much sales growth was assumed in the 70 percent because clearly if you have got additional outsourcing from your customers above end market growth, you're going to be higher than 70 percent.

So, someone else asked me earlier, Alex, what I forecasted for.

Our growth for 2005 and I did not want to answer it.

So you know I mentioned we expect low single digits in terms of end market growth.

That is probably all I should say.

Okay.

One more thing.

On the customer problem -- it was a problem -- I really did not understand what you were saying.

You said the customer is doing well.

They are growing quite rapidly.

But you don't know whether they are going to pay you.

Alex, the customer was doing well (multiple speakers) had continued growth expectations, and that course changed in the fourth quarter.

Okay, so it changed all of a sudden in the fourth quarter.

Yes.

Okay.

Okay fine.

All right.

Thank you.

And, Alex, the press release was fine as well, too.

We just double-checked.

I'm sorry, what?

The press release was fine, so the adjusted savings should be in there as well.

Well, I guess I will have to look more carefully.

Thank you.

Well, Alec, you have got the (inaudible) call next.

I know you guys, so this is the last question, please.

Dave Miller, Tradition.

I know you're talking about having 85 percent of the headcount in low-cost geographies.

How do you guys see the revenues breaking out by geography after you get the restructuring done?

I really don't want to break the forecasted revenues out.

But we had this quarter -- I guess I will say it -- we reached kind of a milestone, didn't we, where for the first time the highest portion of our revenue came from Asia.

So we're going to stay on trends like that, Certainly in low-cost geography trends for the upcoming year.

And presuming that the restructuring is going to impact high-cost geographies the most so, bigger needle mover on operating margins in the high-cost geographies, would you also expect your operating margins in Asia to continue to trend upwards, or is there some sort of plateau you think you kind of hit given that utilization there is probably much better than the rest of the world?

I think we can improve in Asia as well.

Okay, great.

Thank you.

Okay.

Everyone, thanks for listening in and we will talk to you next quarter.

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

Thank you for participating.

Please disconnect your lines.