Celestica Inc (CLS) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Celestica first quarter 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. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Thursday, April 21, 2005 at 4:00 p.m.

Eastern Time.

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

Please go ahead, Mr Carpino.

Thank you, operator.

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

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

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

As our results have been out since earlier today and we already discussed Q1 highlights at our annual shareholder meeting this morning we will keep our keep prepared remarks very brief, and will last approximately 45 minutes.

The slides accompanying the webcast can be viewed at celestica.com during this conference call.

In order to accommodate the busy earnings schedule today and to permit time for all people who may have a question, please limit yourself to one question.

After your question is asked, the operator will remove you from the cue to accommodate the next person..

Before we begin the call, let me express any statements that are made today, which maybe forward-looking and not historical fact may involve risk 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 the call.

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

I will now turn the call over to Steve Delaney.

Thanks, Paul.

Good afternoon everyone.

I was pleased with the steady progress that we made during the quarter or so.

I will make some summary comments and then Tony will cover some of the specific numbers.

On the top line, business came in with the seasonal tones as we expected.

We have been talking about a moderate growth environment now for several quarters.

Though I would like to see a stronger -- some stronger end markets, I'm glad that we're not seeing a lot of significant turn right now.

Year to year we saw 7% increase in revenue, despite reductions in discontinued activities and unprofitable businesses that, in aggregate, reduced our year to year revenue by 7%.

In terms of profitability, our focus on margins and returns are also playing out, with a very solid year-over-year improvement.

Working capital progress is positive.

And our teams are expecting to drive even better performance in the coming quarters.

On the operations front, a drive for greater efficiency throughout our global operations is contributing to our profitability progress, particularly in the areas of Lean Six Sigma.

As you recall, from the quarter our Lean expertise was dually noted with the winning of the prestigious shingo price for excellent manufacturing.

In fact, our Monterey team is accepting the award at a dinner this evening and I would again like to congratulate all of our employees throughout the company who continue to drive the execution and performance in our lean initiatives.

Restructuring is also progressing as planned with cost reductions expected to show up in the second half of this year.

These actions have been difficult for our organization, but I can't say enough about how our people have responded and have been so centrally focused on ensuring our customers are not disrupted by these activities.

About a year ago, we said that, as we recovered, we would let our numbers do our talking.

I'm pleased that, over time, our progress has been steady and positive.

As I look at things on a year-to-year basis, gross margins have increased 150 basis points and operating margins 180 basis points.

SG&A costs are down $2 million despite the significant acquisition of MSL.

Inventory performance has improved 12%.

Return on invested capital improved to 8.7% from 1.5%, and our execution is solid and customer relationship is strong.

The visibility in the end markets remains cautious and we clearly have more work to do as we complete some of the actions that we have been implementing over the past year.

Celestica today has become a stronger and better positioned company than it was a year ago.

Now let me turn the call over to Tony Puppi (ph) to give you more details on the quarter.

Thanks, Steve.

As Steve noted our first quarter 2005 results came in, as expected, across the board.

Revenue for the first quarter was $2.151 billion up 7% from last year and slightly above the midpoint of our previous guidance.

We're pleased that revenue continued to grow despite the moderate growth environment.

In our decisions to phase out more than a $100 million of business that did not meet our returns requirements over the last 12 months.

End market revenue segmentation for the quarter was as follows.

Enterprise communications was 27% of sales.

Telecom was 21%.

Servers was 18% and storage at 14%.

On balance, these segments were consistent with fourth quarter performance, which some expected seasonality.

Starting this quarter, we're breaking out our other category on a go-forward basis.

As you recall and based on the fourth quarter results our other category has grown to about 20% of our revenue and consists of a variety of diversified markets.

We are breaking this into two segments in the results for this quarter as follows.

The first is our industrial, defense and aerospace segment, which represented 10% of our revenues in the first quarter.

The second segment is our consumer, automotive and medical segment, which also represented 10% of sales.

We have also eliminated our workstation MPC category which represented less than 2% of our revenue last quarter and has been winding down over the past year.

Moving on to our customer mix -- top ten represented 67% of our business, with the top five representing 47%.

IBM and Cisco were the only two customers over 10%.

Factoring in the typical seasonality in the quarter on a sequential basis, our customer mix was stable.

Geographically, Asia continues to lead in growth, and represents the Company's largest region and 44% of total revenue.

America's was 38% and Europe came in at 18%.

Moving to profitability, at loss on a GAAP basis fort first quarter was 11.6 million or a loss of $0.05 per share.

Included in this loss is $39.1 million charge primarily associated with our previously announced restructuring, which is also tracking to plan.

On an operating basis we continued to make steady progress on our margin and return of capital objectives.

Adjusted net earnings were 33.4 million or $0.15 per share for the quarter compared to adjusted earnings of 4.5 million or $0.02 per share one year ago.

Eight-fold improvement in operating earnings on the back of 7%revenue growth is reflective of the specific actions we have been taking to reduce excess capacity, exit non-core and unprofitable operations in businesses and to remove waste and its associated costs by deploying our lean initiatives.

Operating margins came in at 2.3% inline with our first quarter expected seasonality and represented 180-basis point improvement from a year ago.

Gross margin was 5.9% compared to 4.4% for the same period last year, while SG&A was down approximately $2 million from a year ago.

Moving the sequential effects of Reduced volumes, operating margins continued to improve systemically.

Utilization came in at approximately 60% in the quarter.

Our margins by geography, Asia continues to perform well, on the back of solid revenue growth with operating margins of 3.8%.

Steady recovery in the Americas continues with benefits from the restructuring programs, exited businesses and lean implementation driving a $21 million year-over-year improvement in operating margins of 1.8%.

On the back of a 13%sequential decline in sales plus the additional expenses associated with ramping our Romanian operation, the European region posted a small operating loss of approximately $1 million.

In terms of an update on our restructuring initiatives, we have provided extensive detail on our activities in the notes to our press release and financial statements.

But in summary, the 2004 initiatives have gone as planned and we expect to see any remaining cost benefits from these activities in the June quarter.

With respect to our 2005 restructuring actions announced in January, we began -- which began in the first quarter, we have closed five plants that were announced and about 35% of the resource reductions in the entire program are now underway.

Buy-closures typically take 6 to 12 months.

So, we don't expect to start seeing the benefits from this activity until the September and December quarters.

As we highlighted when we announced this program we are expecting to remove 125 to $150 million in actual costs when these actions are completed.

There's no change to this expectation.

The balance sheet continues to be strong, with moderate leverage and considerable flexibility.

Cash at quarter end was just under a billion dollars at 951 million.

And the company's debt-to-cap ratio was 27%.

Positive cash flow from operations was $11 million and our cash cycle sequentially improved by 2 days to 15 days.

We are pleased with our inventory performance of 7.5 times.

What is seasonally our lowest quarter, being the first one.

CapEx for the quarter was $38 million due primary to the investments we're making in low-cost geographies, specifically new plants in Romania and in China.

We will continue to manage CapEx in line with the moderate and cautious end market environment.

So, in summary, financial performance continued to reflect the expected progress and operational improvement we are making across the board in the business driving upward turns on capital.

Now let me look forward with our guidance for the second quarter.

For the second quarter we expect revenue to be in the range of 2.1 to $2.35 billion, reflecting moderate growth and quite cautious in markets.

Expected adjusted EPS to be in the $0.13 to $0.21 range, which reflects to continued benefits in operating efficiencies and cost savings we expect to see from our restructuring activities and lean deployments.

I believe we're on track with our goal of achieving our cost of capital targets by the fourth quarter of this year.

That concludes our remarks.

Steve, Marv and I would be happy to take any of your questions.

Operator?

Thank you.

Ladies and gentlemen we will now conduct the question-and-answer session. [Operator Instructions]

Your first question comes from Brian White from Kaufmann Brothers.

Please go ahead with your question.

Good afternoon.

Can you talk about trends you're seeing in the enterprise market and how that plays into your outlook for the second quarter?

Obviously, there's been a lot of questions that have pre-announced or lowered their out look due to weakness in the enterprise market and have significant exposure there.

Can you talk about some of the trends?

Yes.

You know, I think that we entered the moderate growth environment that we talked about is primarily driven by the enterprise market so that's into the guidance we have which is pretty moderate growth quarter-to-quarter for us.

I don't want to get much more in terms much specifics, but I would say that that is in fact the main driver of our guidance going forward at this rate.

Your next question comes from Mathew Sherrin from Thomas Weisel Partners.

Please go ahead with your question.

Thank you.

Can you discuss your new business pipeline, what is that looking like -- areas of opportunity, and I'm specifically curious to whether the ongoing restructuring has been a distraction in terms of getting new business or hindered your chances on bidding on new projects?

Thanks.

Thanks for the question.

We were quite encouraged by the level of new opportunities that we're seeing in the market.

And as always, with the gestation period, if you go on those opportunities that's the unknown part.

But, what is especially important is they're much broader relationships in terms of the range of services that we're providing so we're quite encouraged by the department of the pipeline and how broad it is.

Your next question comes from Paras Bhargava from Nesbitt Burns.

Just a question on your operating margin target.

Operating margin fell off a little bit.

Looked like part of it was due to mix.

I was wondering are you sticking with your 3.5% in target in December?

And, Tony, you mentioned that we shouldn't see too much in the June quarter and maybe even the first part of the September quarter in terms of benefits.

So, should we sort of see a slow down in operating margin extension in the next couple of quarters other than from revenues, of course, and are you still sticking -- does the ROIC (inaudible) imply the 3.5% in December?

Yes.

We're sticking with the 3.5%.

That gets to us north of our cost of capital so that's an important milestone for us, and we're going to continue to-- and we feel we have a real opportunity to get there and have the actions to deliver it.

In terms of the progression to that level, there is a couple of things that continue to, I think, when you look at our guidance, suggest that we are getting benefits.

And, part of it is our 2004 restructuring ,which we basically concluded in the first quarter this year.

We will pick up some benefit from that.

And, then the bridge item beyond that will be the benefits from the 2005 activity that will carry margin expansion both in the third and fourth.

So, I expect to see steady progression through the course of the year.

May be not perfectly linear, but clearly a path that has meaningful improvement every quarter.

Apparently, if you look at the decline in margins you saw from the fourth quarter to first quarter more than explained by the revenue decrease so we have made up in a number of other areas.

We're finding a little headwind on foreign exchange as well so we have made up for that with some of the these efficiencies that we have gotten from all of the programs we have had in place for the last several quarters.

Your next question comes from Thomas Hopkins from Bear Stearns.

Please go ahead with your question.

Yes, good afternoon.

Tony just a question, on the EPS guidance range.

Your guys typically have given pretty big range for those nothing unusual about that.

Just wondering here, with the initiatives that you made on restructuring and some of the cost-savings, I mean, should we take anything about the end market uncertainty when we see this guidance or should we be concerned about where the margins may come in or are you not trying to communicate anything at all, it's just that the business is fluid right now?

No, we're not -- well, we are trying communicate.

We're trying to give you some help on predicting where we're going here on the basis of what we see.

But the range in EPS is strictly, strictly driven by the range in revenue.

We do have fixed cost of the business.

We're not a 100% variable.

So, you would expect some degree of volatility around the revenue number.

That's exactly what we portrayed.

I think that our comfort level with our predictability on the cost side is very high.

So if there's any volatility, it's strictly due to the top line range.

Your next question is from Michael Walker from First Boston.

Please go ahead with your question.

Thanks.

On Europe, which you as you mentioned dip back into a loss for the first time in several quarters you mentioned that the ramp up of the new Romanian plan was an impact there.

If you back out the impact from the plant were you profitable in Europe?

And if not, what has happened there to cause it go back negative?

Thanks.

The answer to your question is, yes, we were profitable.

When you look at, in addition to that, why we turned negative, which we obviously dislike, is because of the volume reduction quarter-to-quarter.

So a lot of the restructuring that will come as targeted for that region, we expect, you know, a rebound over the course of the year.

Next question comes from Patrick Parr from UBS.

Please go ahead.

You had taken over $30 million in restructuring in the quarter and targeted 225 to 275 for the plan you announced yet it sounds like you're a third of the way through in terms of head count reduction.

Could you reconcile that for me?

Thanks.

Well, I don't know how you reconcile it.

I mean, there are different pieces that are in the restructuring charges, whether they're assets or people.

And in terms of the charges that were reflected, I think we, as you quite aptly pointed out that reflects 1900 people that we're taking a charge for, Okay?

Not all of the people are out of the business that will happen over time and various other actions less accelerate through the course of the year.

So we expect that we're still in that range.

Comfortable in that range, with no real change in our expectations from a quarter ago.

Your next question comes from Thomas Dinges from JP Morgan.

Please go ahead with your question.

I will just go quickly on the cash flow side.

Obviously you probably had late quarter down ticks on the down -- that got you stuck with some inventory once you deluded to.

Can you just talk about your inherited in your 3.5% operating margin goal for the year what kind of cash flow do you think you guys are going to generate, all of the restructuring, and those types of items on the free cash flow line for the year?

That would be helpful.

Thank you.

Well, we don't guide beyond the next the next quarter.

Our expectations is in terms of cash flow from operations is that it will be positive, despite the growth that we will see quarter-to-quarter.

In terms of sequential, positive operating cash flow

Your next question comes from Bernie Meyhane (ph) from Morgan Stanley.

Please go ahead with your question.

Good evening.

Could you walk through for the remaining quarters in 2005,could you quantify the actual restructuring benefits that you expect to receive, you know, kind of combined from both 2004 and 2005 programs?

We don't really lay out anything beyond the next quarter.

But the expectation is that -- you know, very similar to last year, we said we would probably get half the yield by the end of the year.

That's what we did get.

And we're getting some additional yield, as I said here, some in the first quarter and some incrementally in the second from last year's activity.

So, I think we're on that path in terms of the 2005 initiatives.

A lot of them are back-end loaded in terms of, you know, closing the facilities in a time frame that allows to us move the work and with subsequent benefits, you know, coming to the table in the first and second quarter of 2006.

So that's as good as I and lay it out for you.

So I think there is good continuity sequentially and to the third and fourth quarter as well.

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

Please go ahead with your question.

Hi, good afternoon.

Steve, can you talk a little bit about the business that you have been exiting so to speak?

Are we pretty much completed with that process?

Was there any sequential loss versus last quarter that you guys gave up some business?

And do you expect anymore going forward?

Thanks.

Scott, the number of business exits we had, a number of them we announced related to the power group, the exit of our 64 bid reference design servers and there were a number of other smaller customers that we have had that were unprofitable business that we moved out of during the course of last year.

So, most of that triage work at this point or the largest portion of it certainly is done at this point.

I would add that there was also some quarter-to-quarter impact but the biggest part was last year.

Your next question comes from Stephen Fox from Merrill Lynch.

Please go ahead with your question.

Hi, good afternoon.

I was wondering if you could talk about your 3.5% target by region.

Where do you think that you would have operating margins by different regions by the end of the year if you hit this 3.5%.

Well, we're not disclosing operating margins by region.

They typically will vary as we move programs around so it's sometimes misleading to offer this around at any one time.

But we expect by the time we are completed across the board, we will have a very healthy business everywhere in this company.

And with all regions trying to achieve their particular cost of capital or return on capital target, so we're focused on that particular metric across the board.

There will be different margins, different turnovers.

But across the board that's what the goal is.

Your next question comes from Jim Savage from Wells Fargo Securities.

Please go ahead with your question.

Hello.

There's been a lot of talk about restructuring.

And I'm sort of looking at the demand side here and I'm wondering, are we looking at anything new coming into the mix, any changes in your overall mix of business between now and the end of the calendar year or anything that would drive substantial revenue growth?

Because, obviously, the mid-point of your range in the second quarter is slightly down year-over-year and I think that generally the expectations are for somewhere in the range of mid-single digit growth true the full year.

Is there anything that's going to change your mix total you have less enterprise less comps of work or any stronger new program business that will drive than that in terms of revenue growth?

Jimmy, obviously there's always programs launching all over companies such as our, so we have got programs moving in and out all the time as certain program I mean, that live and other programs get launched.

So, there's obviously lots of moving parts in the company this big.

Some of those things can cause some movement between these sectors but not anything that I'd want to point out at this point in time.

I see in our business, clearly the first part of last year, we were starting off with really strong demand.

And as you know we start, kind of really significant week I mean, in the third quarter of last year.

So, from third quarter on that has been quite a different environment from last year in terms of end mark demand overall.

And we have sort of continuing on with that state of end market demand right now.

In the meantime, as Marv pointed out earlier, the number of opportunities especially in these kinds of broad service opportunities that range from PCBA manufacturing to a number of other things like after market and design type of offerings are getting more and more encouraging.

Your next question comes from Dave Haub (ph) from GMP Securities.

Please go ahead with your questions.

I was wondering if you could give us some color on your restructuring trade do you include issues like extra training in the cost of earning dual launch during this transition?

Or should we expect to see some immediate margin improvement once you have done restructurings on top and just to a lower cost geography?

No, we do not include any duplicative costs to support the restructuring program.

We just take as included in our charges the cost of severing people, loss of any write-offs of equipment in a longer detail.

Those are typically the vast majority of the charges.

Your next question comes from Dave Miller (ph) Tradition.

Please go ahead.

When you were in New York, a couple of months ago you talked about the dynamic is changing and the conversations between you guys in particular and the OEM community, as far as maybe the additional functions maybe being outsourced and the nature of the relationship changing.

Could you give us an update on that?

I alluded to that with some of my previous comments, Dave.

I think in these new market sectors that we have been growing in over the past year, we have seen some even maybe more creative service type opportunities than even in the traditional ones.

But, even in IT and Com there seems to be a keen interest by the OEM base to outsource more of the cogs as they currently do inside their shops.

I don't know what more have to tell you other than the opportunities in the kind of the breath service in the opportunities across all those markets are pretty interesting right now.

Your next question is from Tom Astle from National Bank Finance.

Good afternoon.

I think you mentioned 60% capacity leveraging.

That number seems to be stuck there for the last year so.

Maybe, am I not correct in that you can correct me?

Did you think that's on industrywide kind of number and do you have any targets for year-end in longer term there?

We do have targets.

We said that once we've completed our restructuring the number that the removal capacity should yield even without a growth beyond in low-end market would be around 70%.

And so, if you just look at the dynamics between our first quarter and our fourth quarter yet, there has been a decline in terms of utilization in last quarter we said the average between 60 and 65% and this quarter was 60%-- over the course of the last year, our utilizations were running even lower than that.

So, the restructuring program was implemented last year, and as, even despite the drop in the end market and in our demand that we saw in the second half of the year, in our capacity utilization improved.

Your next question is from Chris Whitmore from Deutsche Bank.

Please go ahead with your question.

Thanks.

Following up on a previous question, can you comment on the percentage of your revenue that is system build versus PCBA and what is the outlook for that going forward and are there implications to a mix shift in that split going forward?

Thanks.

Well, our mix of system build has just been growing as a percentage that's a faster growing sector than just board assembly, which as you know is much more saturated in the market.

As you look forward, that trend will continue.

On top of what would normally be a lower margin profile of that business, given it's lack of capital intensity and maybe the lower levels of touch labor that would be involved in that kind of activity, supplementing typical system assembly with some of the services, like quarter fulfillment, like some of the back office outsourcing and our customers would like to us take on more of a responsibility for, should augment that.

So, as we look forward that we see that if you just took straight system assembly, that would put down pressure on margin you're dragging in more of the boards that you're building.

But then, after that gives us access to some of those other services that we'd augment the margin again.

So I think targeting 5% plus margins in the next business that we have is something that we should all be all targeting to.

In terms of percentage, I don't have that number with me right now.

I just gave you a rough cut, I think it's around 45% to 50%..

I'll correct that if it's wrong.

Sorry.

Your next question is from Amet Jenani (ph), RBC Capital Markets.

Please go ahead.

Thank you -- under the second round of restructuring that you guys undertaking.

You had looking to reduce that ton by 5500 employees and closed on 5 plants so far.

There's always a concern when anyone undergoes such around the restructuring that there is going to be some program slip of revenue loss is going to be associated with that could you talk if you have seen any of the idea and what steps are you taking to avoid it?

The point that Tony made earlier by the way, Jenani, was that we have announced 5 point closer actually in the process right now I think as he pointed out.

That's always in fact one of the most difficult parts of planning one of these transitions is to make sure that you can retain the customers and have still a solution for them.

Invariably there's sometimes some drop off but I haven't seen anything from the restructuring plant that we put in place that has really a significant effect on us.

Your next question comes from David Hutchinson from Solomon Smith Barney.

Please go ahead with your question.

Thank you good afternoon Steve, Steve I know that you guys haven't offer a full year of growth out look but it looks like you're on target for a low to mid-single digit growth year-on-year.

Can you tell us a little about the business development activities at Celestica?

I know you and the rest of your pierce talk about a very large industry pipeline, but can you talk about the pipeline or backlog of new business programs that you have actually booked over let say the past two or three quarters and that are been a ramp for rest of this year, and the kind of trends in that backlog.

Are you actually seeing your backlog of new programs building over time so that as we start moving into 2006 we can expect the re acceleration in year-over-year growth rates?

I won't get into any specific numbers in terms of backlog -- its not all the fruitful anyway because some of the backlog replaces existing business, some is brand new, work is incremental and so and so its a quite complex set of numbers that we look at internally.

But, I will say that the pace of our new business wins in the last year has increased pretty significantly.

So you can read into that, that in the future that we expect to continue to grow from some of this new business that launches.

I think as Marv mentioned earlier, there's a kind of gestation period for this that is a huge range.

Sometimes the business your book is actually launching next quarter, sometimes its for new programs that are not yet brought to market and they can be 12 to even 24 months out from today and the other part of your question, David is, when you look at the absolute sides of the funnel, that's what is growing.

That's why you hear the positive tone from Steve and the longer run there.

Your next question comes from Chris Lippincott of Keybanc Capital Markets.

Please go ahead with your question

Good afternoon, everyone.

I think earlier this morning in your annual meeting you were discussing goals trying to get inventory terms in the high 8s and exiting 05.

I am just wonder if that is a realistic goal, perhaps walk us through how you might get there maybe what kind of conference we got in it.

We said it this morning, and we say it again, we think it is realist.

There are still certain amount of inventory in orbit secular situation that is better and over hang from the slow down that happened in the back half of last year.

There is, in addition to that, still some waste throughout the network, whether it's on our inventory or whether it's in our customers when we actually profile out our inventory, looking At what we can do.

And I think some good results in the first quarter we think there's a strong ability to get there sooner rather than later.

So there is waste and adopting a lean approach on the supply chain complain should us get rid of that and move to the raw files of inventory.

Your next question comes from Alex Blanton from Ingalls & Snyder.

Please go ahead with your question.

First I have a comment, Paul, and you probably noticed this, that the operator is hanging everyone up, allowing no dialogue at all only management.

There hasn't been a single comment followed in answer to the question.

So I would appreciate the opportunity to have a little dialogue, if I may.

The question is this.

One of the your competitors recently was talking about --

Alex, you're moving around the microphone and we can barely hear you.

Sorry.

I think I was on speaker.

Alex this is Paul here.

At the beginning of call we just introduced that to make sure everyone got a question in, that we would go to the next speaker after they asked a question.

If there's a follow-up question, people can get back in the cue.

But as you have heard a lot of people are asking questions.

You're deliberately not allowing any dialogue with management then.

Okay, well here is my question.

One of your competitors recently talked about the new business they're getting this year and they said that only 4% of the growth for this year was coming from end markets.

In fact, it wasn't important to them at all what the end markets were doing.

How do you feel about that?

You have talked a great deal about the end markets.

And yet most of the growth in this business doesn't come from that.

So do you look for a continuation of what was really a12% year-over-year growth if you X out the hundred million business that you did away with?

Do you look for that to continue?

In the next year or so?

Okay, Alex, Steve here.

I guess I would -- I think I have been saying to most of you that the number I'm seeing in terms of forecast on market growth were low single-digit.

So, the numbers you were talking about certainly fit into that range.

And clearly, if we grow only at end market growth, we're restricted to that.

I think taking into some consideration some possible program moving around inside various commodities.

However, we talked also about the funnel of new business activity that we're pursuing, so we're trying grow faster than end market growth through generating new business opportunities, expansion of our business into new service offerings, the movement into new markets that we had not previously served, as well as competitive take-aways and growing our market share in the traditional areas.

These are all -- you know, at the end of the year, I guess you will see our report card of how well, how good a job we do in those particular markets when you compare our end market growth compared to -- I mean our total growth compared to the end markets.

Your next question comes from Chris McKowsky (ph) TD Newcrest.

Please go head with your question.

Thanks very much.

Just wanted to ask you Steve about lean manufacturing.

Can you give us a an update sort of current report card on where you guys stand in terms of the number facilities that you successfully implemented versus the (inaudible) to struggling,(inaudible) percentage of completion, how far a long the process are you toward getting to what you consider a satisfactory lean approach and how long will it take to get the rest of the way?

That's it.

Okay.

I would say the way I tend to think about it is, at what point -- we have a score card that we use for our plants that rates - we call it a sustainable level of lean a level of implementation that is broadly deployed enough across the plant that I can expect it to continue to improve but not slide backwards without a whole bunch of extra effort, and I would say that 80% of our plants certainly got it over the goal line relative to achieving that point of sustainability.

Now, the bar is raised this year further to our plants.

So we not only expect them just to achieve that level of sustainability but on our little score card we asked them to notch it up one more notch and that has -- that is in effect what all of our plants are doing.

So that means a broader deployment across all of the product lines.

In all cases, it means in the elements of lean, taking it to the next notch of performance, whether that be the full systems or tag time or whatever.

It's an important part of the business processes that we have in the plants, and we built in, into our plant, the capability to actually do these deployments initially and then continue to progress them.

Your next question comes from Martin Chuchetow (ph) from UBS.

Please go ahead with your question.

Yes, thank you.

You talked about the expansion of your business and services.

Just wondering if you can give us an idea how much exposure right now you have to services revenue, how much you expect services revenue will be in a percentage of overall revenue in the next one or two years.

Thanks.

Services right now is sitting in the, say, 10 to 15% range right now total revenue of total services, I'm talking about, So we will expect it obviously to grow beyond that significantly beyond that.

Your next question is comes from Jim Savage from Wells Fargo Securities.

Please go ahead with your question.

Again, with your restructuring and as we go forward at this point you are probably growing about the same speed as the end markets, what will make you competitive and able to be gaining market share or able to be growing faster than your end markets as we go into 2006 and beyond?

Well, I would say, first, I would say, if you consider this last quarter, that certainly as faster growth than the end market.

But, I take your point in terms of the go-forward guidance that we gave you.

There are a number of things of course that we have been doing with our operations network.

All of this discussion that I have had in the past about lean manufacturing is not just about getting us cost benefits or getting us profitability improvements but it's delivering the production system that is known to be the most superior executing production system on the planet.

And that is why we're so intent about lean manufacturing because it's not only good for us in terms of our efficiency but it creates the most competitive offering when we do it.

The discussions that we had around services, I think, have helped us and put us in the position not only been having developed a reputation of having plants in the right geographies but with the right kind of cost points but being able to deploy a significant amount of technical capability and take on, in many cases, and very complex products in the low cost geographies and then also expand the level of service beyond just PCBA manufacturing, with the system built and design and after-market services.

So, what is our value proposition for the customers?

It's all of that wrapped up.

But in our business, you have to execute in order to be distinctive to customers and make it to their final list.

Your next question comes from Stephen Fox from Merrill Lynch.

Please go ahead with your question.

I just a quick follow up.

Thanks for breaking out the other segments.

Can you gave us qualitatively which of the two breakdowns do you anticipate growing faster this year?

For 2005, I guess I would say, I guess I would probably say the industrial aerospace defense segment probably grows a little faster, and then we have some opportunity I think to grow consumer faster maybe starting over next year.

Your next question comes from Shawn Severinsen from Raymond James.

Please go ahead with your question.

Thank you.

Good afternoon.

Could you just give a little more color on the strategy in the consumer business and what you expect to see there over the near term being like six months versus maybe 18 to 24 month time line?

I'm sorry, you said the strategy on the consumer business?

Yes, the strategy of the consumer business.

What areas are you pursuing?

Are you talking more-like hand sets or are you talking gaming or where do you see that business developing over the next six months and then over a longer period?

That's a pretty, since its obviously pretty wide range of consumer capability.

But you might conclude that because of where we come from.

We certainly have ourselves terrific capability and maybe some more complex kind of consumer areas.

But I wouldn't leave anything out at this point.

I don't want get into too many specifics.

Your final question comes from Amet Jenani from RBC Capital Markets.

Please go ahead with your question.

Thanks, quick question on the one customer that you had take a $160 million of reserve last quarter.

The hope was that the customer was able to refinance and come out fine, you would be able to recoup some of the part of the 160 million.

Is there any an update there?

Really, there's no update.

Because the customer in question is still underway in terms of the customer's process of re-capitalizing itself.

So nothing really to report at this time.

Anything material happens we will obviously disclose that.

Mr. Delaney, that was the final question, please continue.

Okay, Thanks everyone for the call and the interest.

I know that there's lots of stuff going on today.

So, thank you very much and we'll see you next quarter.

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

Thank you for participating.

Please disconnect your line.