Celestica Inc (CLS) 2005 Q2 法說會逐字稿

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

Welcome to the Celestica second quarter results, conference call.

At this time all participants are in listen only mode.

Following the presentation we will conduct a question and answer session instructions will be provided at that time for you to queue up for questions.

If anyone have any difficulties hearing the conference please press star zero for operator assistance at any time.

I would like to remind everyone that this conference call is being recorded on Thursday, July 21st, 2005 at 4:30pm eastern time.

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

Please go ahead, Mr. Carpino.

Thank operator, good afternoon, everyone.

And thank you for joining us on Celestica's second quarter conference call.

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

Copies of the support slides accompanying this webcast can be viewed at celestica.com during this call.

During the Q&A session, please limit yourself to one question and one follow-up to ensure everyone who has a question has the opportunity to do so.

You're also welcome to get back in the queue after you ask your question.

Before we begin the call, let me express to you that any statements that are made today which may be forward-looking and not historical fact, may involve risks and uncertainties which could cause actual results to differ materially from those expressed in the forward looking statements.

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

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

I will now turn the call over to Steve Delaney.

Thanks, Paul.

And good afternoon, everyone.

Tony will provide you with a little more detail on the quarter but let me give you some general comments first.

Overall I was very pleased with our second quarter results.

We had a very stable quarter with a typical seasonal pickup across our major markets and our largest accounts.

Our margin recovery plans including restructuring Lean implementations and other efficiency initiatives had an intense focus here and they continue to contribute to our dramatic year-over-year improvements.

For example, in the past year-and-a-half, we've gone from quarterly operating losses, to margins in the second quarter that put us about halfway to our 4 to 5% targets, and returns on capital of just over 10%.

We are not quite earning our cost to capital at these levels yet, but we feel very good about the structural changes that we've made and how they should help us improve on these returns in the future.

What is particularly satisfying, is that this significant improvement has occurred despite quarterly revenues that have been relatively flat over the past year.

Our working capital progress also continues to be positive.

Cash cycle came down by two more days compared to the first quarter, and inventory turns improved to 7.7 times.

With these improvements were able to generate more than $100 million of free cashflow in the quarter.

Our restructuring activities are under way and the organization is doing an effective job at taking good care of our customers during the transfer process.

And on the manufacturing front, our Lean activities continue to generate benefits for us and our customers.

Recently we've been recognized for our accomplishments in this area by Juniper Networks.

And I feel that with our Lean initiatives, we're building a distinct advantage in our Company.

In terms of outlook, I have to say that I'm disappointed with the recent weakening in the end-market demand that we have seen in the last month or so.

While the June quarter was pretty predictable throughout the period, the order book in July has shown reductions particularly in our largest segments caused by what appears to be more than the normal seasonal summer slowdowns.

This is in contrast to a June quarter where our largest customers had steady and seasonally positive growth throughout the quarter.

Actually, we expect to grow our revenue among our non top 10 customers going into Q3.

But this is being offset by the marked weakness that we see across our communications and I T segments.

While our top line growth is reflecting this challenge, we're aggressively working at keeping margins and returns stable based on the forecasted revenues.

We've done a pretty good job of driving margins without much revenue strength over the past year and our efforts to appropriately respond will continue.

We also continue to work towards our 3.5% operating margin objective and to exceed our cost to capital for the December quarter.

But we'll need a strong recovery from the loss of the top line momentum in the third quarter, in order to achieve these results.

At a minimum, we still anticipate that we can drive improved returns and margins in the second half of the year, based on restructuring benefits and the Lean rollouts.

Though I'm not pleased at the revenue that will be done in the third quarter, I do not foresee the need for any incremental restructuring at this time.

However, the end-market demand will ultimately determine the decisions in this regard.

The reason I feel our footprint remains in good shape, is that when our current restructuring program is completed, we will have over 80% of our EMS structure and 85% of our people in low-cost regions.

These numbers still feel right to us based on the outsourcing and service offering opportunities and the unlaunched new business backlog that we are carrying.

While restructuring has been a focus for us, growth remains our other major priority.

We have been successful at winning new programs this year which we anticipate will contribute to our base business in 2006.

Though I won't give the customers' names and numbers that this time, several of these new customers are outside of our current top-10 names which in addition to contributing growth will assist in our customer and end-market diversification efforts.

We are committed to growing the business.

We have made changes in the organization to achieve this.

This includes bringing in business development specialists to go deeper into the cogs of our main markets, as well as the hiring of specialized professionals for growing our services business and increasing our share in markets outside communications and IT.

In addition, we have also made changes at the most senior level with the addition of Craig Muhlhauser, as President and Executive VP of Worldwide Sales and Business Development.

I've worked with Craig in the past and know his experience in enhancing customer value will be a positive one for Celestica's customers.

These changes are starting to bear fruit, and I'm confident that our results will demonstrate this momentum in coming quarters and in particular in 2006.

Let me now turn the call over to Tony Puppi who will give you more details on the quarter.

Thanks, Steve.

Revenue for the first quarter was 225 billion, up 5% from the first quarter and at the midpoint of our guidance.

On a year-over-year basis, revenue was down 3%.

Though this year's results reflect the impact of over 100 million of discontinued businesses from the previous year, a similar to affect what we had in the first quarter of this year.

Our end-markets were relatively stable through the quarter with revenue segmentation for the quarter as follows: Enterprise Communications was 27% of sales.

Telecom was up 13% to 23% of sales.

Servers was that 18% of sales, storage at 13.

Industrial Defense and Aerospace as a group represented 10%, and consumer automotive and medical as a group came in at 9% of total sales.

Moving on to our customer mix.

The top ten customers represented 68% of our business.

The top five represented 49% and IBM and Sysco were the only two accounts over 10%.

On a geographic basis, Asia continues to show solid growth increasing 13% sequentially.

The region now represents 48% of the Company's second quarter revenue on the back of both new programs and some end-market growth.

The Americas were flat and represented 36% of revenue and Europe declined 6% sequentially to 16% of sales.

Moving to profitability, the Company posted GAAP net earnings of 12.6 million or $0.06 per share for the second quarter compared to a GAAP net loss of 7.9 million or a loss of $0.04 per share.

Included in the GAAP earnings is a $14 million recovery of amounts previously written down for a customer we highlighted earlier this year that has ceased operations.

On an operating basis, margins in adjusted earnings continued to expand.

Adjusted net earnings were 39.8 million or $0.17 per share for the quarter compared to adjusted earnings of 22.8 million or $0.10 per share one year ago.

The 75% improvement in earnings on the back of a 3% year-over-year decline in revenue demonstrates the benefits from our restructuring and efficiency initiatives.

Operating margins came in at 2.6% a 110 basis point improvement from one year ago, and a 30 basis point improvement from the first quarter.

Gross margin was 6% compared to 5.3% for the same period last year.

While SG&A was down by over $13 million from one year ago.

Segmenting our operating margins by geography, Asia's performance was strong with margins of 4.1%.

The Americas also had improved margins despite the lower revenue base.

A year ago, the Americas have revenue of more than 1 billion, yet its margins we're only 20 basis points.

For the June quarter, despite a 21% year-over-year decline in top line, that's over $200 million in revenue, the Americas margins came in at 2%.

This improvement reflects benefits from restructuring, exiting unprofitable businesses, as well as other initiatives such as our Lean deployments.

Quarter-to-quarter, profitability and Europe eroded $2 million on the back of the revenue decline.

The region is at a critical mass level, an absence of better demand environment in the region, we do not see any major improvement and these levels until restructuring benefits start to take hold in early 2006.

Companywide, our utilization was between 60 and 65% in the quarter.

I will now provide you with an update on our restructuring activities.

In January, we announced a restructuring program with the estimated charges of 225 to $275 million with cash costs representing about 80% of that total.

The program will reduce the global workforce by about 5500, particularly in high cost geographies and we expect the majority of the program to be completed by March 2006.

As of June 30th, 2005, we had reported severance costs related to approximately 2,000 employees.

To date, five plants in the America's and three plants in Europe are working through their closure and transition activities.

We anticipate that most of the Americas activities will be completed by the end of 2005.

With European activities to be expected to completed in early 2006.

As these activities are completed, these actions should drive robust margin expansion for these regions.

In total, we are expecting to remove 125 to $150 million in annual costs.

There is really no change in this expectation.

About $65 million in charges have been recorded so far in 2005 with about $48 million being cash costs paid out.

Moving to the balance sheet and working capital performance, I'm pleased to report another solid quarter.

Cash at quarter end was 1.3 billion, which includes the proceeds from the $250 million high-yield offering completed in June.

Balance sheet was strengthened with solid working capital performance.

We generated free cash flow of 104 million for the quarter, and our cash cycle sequentially improved by two days to 13 days.

Inventory turns also improved up 20 basis points from the first quarter to 7.7 times as Steve mentioned.

As you know, we have LYONs convertible notes which will get put back to the Company in August.

The 352 million committment for the LYONs will be settled with the proceeds from the offering in June plus the increased cash from operations.

When completed, our debt to capital will be a healthy 25% which remains among the strongest in the industry.

CapEx for the quarter was $31 million consisting primarily of investments we are making in low cost geographies.

We continue to manage CapEx in line with the cautious end-market environment.

Overall, we had a very solid quarter across all key metrics.

Our focus has been on driving operating performance in a very low growth environment and I'm pleased to say that we're delivering on this.

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

For the third quarter, indications through July have been that we're seeing greater declines than we expected to see in our seasonally more volatile September quarter.

Given this recent trend, we are expecting revenue to be in a range of 1.9 billion to $2.2 billion.

We expect adjusted earnings per share to be in the range of $0.09 to $0.19, which at the revenue midpoint represents flat operating margins despite revenues being lower by 9% sequentially.

This is reflective of the very robust benefits we expect from restructuring and efficiency initiates which will ramp through this year and into 2006.

That concludes our remarks.

Steve and I will be happy to answer any questions you may have.

Thank you.

Ladies and gentlemen, we will now conduct a question and answer session. [OPERATOR INSTRUCTIONS]

One moment please for your first question.

Your first question comes from Louis Miscoscia from Lehman Brothers.

Please go ahead with your question.

Okay, thank you.

When you look to Europe, and actually I was just over there, most of the large OEMs really don't look like there going to be much outsourcing.

Is that really what you need to start to get that region to come back and I guess I'm talking about the Siemens and Ericsson and so on?

Lou, Steve here.

Yes.

I'd say I don't agree with you that there not planning on doing any outsourcing, but I think generally we have an expectation in order for this for that outsourcing market to grow in Europe, obviously people -- some of that work has to go outside.

I think the pressures that those guys have on their own margins, is going to force them to take advantage of outsourcing as they go into the future.

But some of them, especially the ones that are struggling with German unions, or just unions in general, and also facilities that are not growing fast enough that they can outsource the excess and then they still have a capacity left in house.

That, in fact, is the big social problem, I guess that's caused European community in general to be slower then say North American in outsourcing.

So those hurdles still have to be leftover but my expectation still is that will make some progress anyway in the future on that.

Okay, great.

My one follow-up.

You'd just spoken to shareholders last quarter and really talked that '05 was going to be a rather flattish year from a demand standpoint but actually there's some optimism on '06.

Could you give us an update on that.

Are deals are really starting come in that we can actually expect five or 10% kind of growth in '06, or is '06 starting to shape up like '05 is?

I think it's way too early, Lou, to start talking about '06 revenue for us.

We're guiding one quarter out but with the points I made earlier, we have seen certainly improved new business win performance from our Company that's considerably better than it was last year during the first half.

Okay, thank you.

Your next question comes from Michael Walker from First Boston.

Please go have with your question.

Thank you.

Have a question and have a follow-up.

We've heard already from a couple of your customers, not all of them, but a couple of your top customers and we really have not heard this level of negativity when it comes to demand in the September quarter let alone part of July.

I'm wondering if you guys can tell us if there's anything else going on they're and I'm talking about share losses basically.

There's been some talk about it.

This seems rather severe relative to what your customers a sense of there's something that's going out of the model that's contributing to this guidance?

Yes.

Mike, I can't, of course, comment on any specific customers and certainly can't give you any insight into their guidance.

But let me be a little bit more definitive about what we see happening here quarter-to-quarter.

They're are no -- I mean, there no net new business ads going quarter-to-quarter from second to third quarter so that essentially driving revenue up as is some of the non-top-10 customer revenue that we have.

So the decline that you see is coming from volume and end-market related, or at least anticipated volume and end-market related declines quarter-to-quarter.

There's not a share loss from a -- from a new business program extent in that at all.

Do have exposure at certain products within those customers that you think could be part of the problem?

I mean you're exposed to weaker product portfolios?

Well, I mean the product has an affect on what's happening to us and that perhaps can explain some of what's going on, but in general, the product portfolios we're on with these customers tend to be some of the bread-and-butter products of these customers.

Okay, and then my follow-up question is on margins for Q4.

You talked about you still striving for 3.5 but it sounds like you're backing away, saying that you need demand to come back to get to 3.5.

So let's say demand doesn't really come back, and you've printed 9% sequential decline which is your midpoint for September and then you see some seasonality in December but not more -- not enough to get you back to where you've been.

What kind of margin are we looking at that scenario are we talking about 3% or are we falling short of 3%?

Well, I don't think I did say at this point.

Certainly we expect to improve from the mid point level that you see in this quarter.

But it's really pretty dependent on how much seasonality we get coming back, really.

Okay, thanks.

Your next question comes from Steven Fox from Merrill Lynch.

Please go ahead with your question.

Hi, good afternoon.

Regarding Asia, now that it has become such a significant part of your production, just curious how the mix of business there differs from the total corporate mix.

Could you give us some guidance on that?

You mean in terms of the market segments are are you referring to --.

Market segments would be fine,Tony, just relative to the total corporate mix you just talked about by segment.

Is it waited differently, I guess is what I'm getting at?

I don't think it is.

I think it's pretty good is the mirror of the rest of the Company.

Probably a little bit higher mix in the traditional IT and com markets.

A little less diversified nation's relative basis but pretty close.

I think overall it's pretty consistent.

And then my second question is looking -- you mentioned a couple times new business wins.

Is there any chance of getting a little bit of a feel for what type of business your winning without naming customers, stuff that can be ramping next year?

Yes.

Let me just give you -- I'll give you a sense in that about a third of our new business, I would say unlaunched in the business backlog is from these non-traditional our diversified markets for us.

Okay?

Okay, thank you.

Your next question comes from Amit Daryanani from RBC Capital markets.

Please go ahead with your question.

Thanks.

In terms of the recent end-market weakness that's leading to relatively lower guidance, is this more just inventory involved issues similar to what we had in the second half of last year, or is it purely weak end-market demand?

Well, Amit, it's a little bit too early to tell as we work our way through the quarter we'll know more.

I know there's at least one case was one customer where there's some inventory adjustments being made.

But as I've said, you've heard me say in the past, there's always things like the communications world, the big contracts or big deals as they were made to sort of come to an end of an implementation.

New ones start at different times and stuff like that.

And just a follow-up to that.

You know last time in the third quarter you guys preannounced that it was pretty much driven by four customers that lead to the preannouncement.

Is that this same set up an issue 3 to 4 customers a leading to a weaker guidance?

I don't recall saying how many customers it was caused by last year, but let me say that the quarter-to-quarter sequential decline was right in the primary customers in our IT and communication segments.

Amit, your memory is pretty good though.

It was a handful customers last year and this year it's still in a group of our core customers and our top ten.

Thanks a lot.

It seems to be driving this.

Your next question comes from Bernie Mahon from Morgan Stanley.

Please go with your question.

Hi, good evening.

Question on the other category of revenue and this is the first quarter that you have a kind of clean comparables from the MSL acquisition.

It looks like year-over-year, if you combine the two industrial defense and consumer and auto, it was down on a year-over-year basis but it sounds like that's where some of your new program wins are.

Could you just talk about what's going on there and what we can kind of expect as a trend going forward?

Well, part of the year-over-year decline as I mentioned earlier it's as a result of some businesses in particular customer relationships that weren't as profitable for us as we would've liked.

So on a year-to-year basis, part of our profitability improvement roadmap, that's one of the things we've been busy trying to do.

So not just growing with the top or the best players in each of those markets sectors, but also making sure were earning good returns on the customers that we do keep.

And looking forward to your question as Steve mentioned, we are seeing growth in those other accounts.

In the non top-10, which are largely characterized, by those other markets that we segment.

So you think we should see that grow in the third quarter on a year-over-year basis then?

Well, we certainly have expectations that we are winning business and it's starting to flow.

Okay.

Then, just a question on the gross margins on this quarter.

Your up 5% sequentially in revenues but your only up ten basis points I think on the gross margins.

Did you not realize restructuring benefits or I would just expect great improvement in gross margins?

Well, gross margins did pretty good in the quarter and your right, we're up.

But as you know we have a couple of operations that are at critical mass.

So certainly the small decline in revenue in Europe had a more dramatic effect in the overall mix of our gross margin.

But there's always the transition cost associated with restructuring that we do have underway too.

Okay, thanks a lot.

Your next question comes from Matt Sheerin from Thomas Weisel Partners.

Please go ahead with your question.

Yes, thank you.

I just want to look out into '06 again.

You talked about the 4.5% operating margin goal.

Obviously, you need some volume increases there but let's suppose we have very low growth are minimal growth in '06.

What are the operating margins look there if you stick to a restructuring plan and don't do anything else?

Well, if you recall, we were targeting to sort of exit this year north of 3.5% margins, and that's not including the significant amount of benefits that we get from 2005 restructuring programs which would flow.

And that was all under the construct of relatively flatish environment with the seasonal pickup in the fourth quarter.

By extension and we should have a flattish, if your question is on a flattish environment going into 2006, we should at least be expecting to crossover 3.5% and through the productivity benefits of restructuring benefits we get to the first half of the year, get close to 4 and hopefully 4.5% over time.

And just a follow-up on the questions regarding your IT and communications being weak.

Could you talk about one versus the other?

Is one worse than the other, or are they both pretty soft?

I'd say there both soft is probably 60/40 -- communications being weaker.

Thank you.

Your next question comes from Thomas Hopkins from Bear Stearns.

Please go ahead with your question.

Just a little more follow-up on a cautious end-market outlook.

It doesn't seem to fit with what we're hearing from some of the OEMs.

I know someone else mentioned this, but as well some of your competitors, Benchmark reported today and actually said that the end-markets were strengthening for them beyond what they're getting from their outsourcing.

And I know you guys share some key customers like Sun and EMC.

So I'm just trying to reconcile what, in fact, it is in the revenue that's different from what your customers and competitors are saying.

Thomas, I'm sorry.

I just can't do any bridging to competitors' and customers guidance that you're getting.

Okay.

Well, how do you think your margin strategy is going to continue to work if your going to see sequentially lower revenues in September?

And would you care to guess on whether or not you'd be able to get the normal seasonal bounce Q4 from enterprise and computer spending?

Well, if you recall last year $150 million sequential decline from second to third quarter and now we saw a pretty significant -- I don't have the numbers right in front of me -- in the fourth quarter.

So my guess is that we're going to see also still a fourth quarter seasonal uptick.

What we're doing is driving, of course, all our costs associated with the revenue declines that we've seen quarter-to-quarter sequentially here.

And obviously, we're getting some help from the fact that we have restructuring programs underway that will be generating some benefits for the rest of this year.

Okay, thank you.

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

Please go with the question.

Hi, good afternoon.

Tony, I think you mentioned the last conference call that you didn't expect any significant cash flow in 2005 as a whole.

But you seemed to do a pretty decent job this quarter and your slightly positive in the first quarter, I'm talking just cash flow from operations.

So can you update us there?

And second, in regards to the weakness on the outlook, was there any differences and geography there as far as the outlook goes?

Thanks.

Well, in terms of the cash flow from OPs, the sequential decline, we should expect to generate a bit of cash.

That's what we should see going into the third quarter based on the pulse of the business.

And for the balance of the year, it really depends on how that seasonal uptick transpires into the fourth quarter and how the build up for that quarter kind of evolves into the third.

So, can't give you, as a good a view of the fourth quarter but on the third I think we're in pretty good shape to generate some cash flow from operations.

In terms of the actual decline by geography, I think it's pretty pervasive and it's pretty broad.

I mean we are producing for these customers globally and as I referred to earlier, they are the top ten in our core accounts that are affected.

So we are seeing softness across the board geographically because of the movement of work through the restructuring programs into Asia, that should be a little more muted than the rest.

Thanks.

Your next question comes from Chris Umiastowski from TD Newcrest.

Please go ahead with your question.

Hi, thanks very much.

Steve, can you talk a little bit more about the restructuring program and just the timing of the savings and when you expect to recognize it.

And can you clarify where you are percentage wise down the path recognizing the total cost savings that you expect to achieve right now?

Well, from the program that we have underway just completed the second quarter, we have virtually none of this savings flowing in this quarter.

So we'll start seeing some of the benefits flowing mostly from the Americas, as some of the Americas reduction in the second half of this year.

And then the Europe savings will be flowing a little bit later.

So more towards the first quarter next year with probably full benefits second quarter so.

So full benefits you be able to see full benefits?

Right.

Okay that's helpful is pretty much coming from more operational squeeze in Lean manufacturing?

Some of the restructuring that we took in the past year.

I think this quarter kind of we got sort of tale land as well as Lean manufacturing and I think very good operating execution in many of our plants.

Okay, and the other question I wanted to ask you, with regards to Europe, what causes you to hesitate to take further action in Europe today?

Well, we still have some restructuring under way.

So the point it I made earlier was that we had I think three plants right now in the process of closing here and Europe and so these reductions are under way and that's what takes really until the first quarter time frame to be complete.

So in terms of other footprint adjustments in Europe, we think as I mentioned earlier, we think that the demand that we have for services throughout Eastern and Western Europe are getting to be just about right, I guess.

Okay, thanks very much guys.

Your next question comes from Paras Bhargava from BMO.

Please go ahead with the question.

Good afternoon gentlemen.

Just a question longer-term question.

Steve, you said that at this time you don't really foresee taking further restructuring actions than are already in the plan.

You must have sort of a medium term one year revenue outlook that you're basing that on.

I wonder if you can share some of the broad outlines I know you can't really share the specifics of it but I'm just wondering what kind of longer-term outlook are you basing that on?

I don't want to go into 2006 earnings at this point.

Given a little surprise here in the last month or so on short-term demand here.

So -- but if anything I think I'll give you the sense that our new business win performance has been improving over the last 18 months or so and we expect that to be generating results.

A lot of many of which started in 2006 gestation period of some of the wins on some of the bigger programs takes a year, to a year and a half for some of these programs to go from award to launch.

I guess I was looking for something even less granular than that.

I mean they looking at a stable kind of environment that you're basing it on?

Are you building a pessimistic view that says you don't need any more restructuring are you think there's a little bit of growth then in markets building in that statement.

I expect to grow again.

So you think the end-markets will start.

We're not expecting a big help from end-markets so maybe low single-digit to going forward in the market growth and growth that we have beyond that will be what we develop and win in terms of this new business backlog that I was talking about plus other new business wins that we have..

Thanks allot.

Yes.

Your next question comes from Chris Whitmore from Deutsche Bank, please go ahead with your question.

Thanks.

One more time here.

Is there any way you can delineate between the enterprise coms group and the telecom or the carrier [INAUDIBLE] group in terms of the outlook?

We don't guide by end-market segments, Chris, as you know.

Suffice it to say that overall communication, as Steve said, was a little weaker than high-end IT.

Okay, and in terms of customer inventory balances and follow on or next generation product launches, can you talk at all providing the color are around where you believe customer inventory levels are, and to some extent or to what extent do you think inventories are being depleted in anticipation for next-generation product launches.

Thanks a lot.

Chris, I don't have a heck of a lot of visibility in the customer inventories at this point.

So I couldn't give you any kind of indication there.

Your next question comes from David Pescherine from Smith Barney.

Please go ahead with you question.

Thank you.

Good afternoon, gentlemen.

If I could just kick a dead horse one more time, in terms of the demands for September, are there any product transition issues that maybe are causing some of that weakness in September meaning that there's some of your larger customers who've had delays in their product transition and maybe some of that is going to show up in the December quarter.

So are you able to see programs that you have today that are a little bit weaker than you expected and you've got new programs that are follow-on that are still yet to wrap that might ramp into December?

None of those are apparent to me, David.

Okay and then on the services side, Steve, you guys have talked about services richening the margins longer term.

So could you talk a little bit about the percentage of business that service is related and how that business is growing versus the assembly business?

I don't have that data with me right now but our services and especially our aftermarket services have been growing nicely and we've got a nice backlog there so we expect to continue to grow that one.

Okay, great.

Thank you.

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

Please go ahead with your question.

Good afternoon.

I've also been asked about this topic of end-market weakness.

Most of the time when you've had a weak third quarter, you really haven't gotten wind of it until the end of August early September and here it is, we're three weeks into July and your already guiding downward for the quarter but you really don't know at this point what the end-market demand is going to be in September, do you?

Well, that's why provide a range.

No, but I mean you've taken the range down.

Yes.

You really don't have a good idea what the end-market demand is going to be in September, do you?

Well, let me put it this way, we get, of course, demand statements from our customers and those demand statements really provide me the indications of what's going on in the markets for those customers.

But that's --

Theres changes and, your correct in that this quarter is typically probably the most heavily back then loaded of any of the quarters that we've had.

So September is going to mean everything to us, I'd just like it did last year as you recall after we had are announced reduction in revenue, strong, pretty strong at the very end of September.

So these are statements from customers of what they want from you?

Yes.

Not statements about their demands?

So you don't know anything about the inventories of the customers, which surprises me because as a partner with customers you ought to know exactly what their inventory situation is.

And secondly, you don't know whether or not there shifting business away from your not, do you?

We do know that their shifting business away from us or not.

And I indicated to you earlier that that was not the effect that we're seeing here.

How would you know that if they chose not to tell you?

There would be an incredible amount of redundancy in the supply chain that would become very visible to us.

If it was in the ERP and in the actual operations.

Test equipment, tooling.

And frankly our relationships with our customers are stronger then ever.

So I wouldn't expect that to happen.

Okay, thank you.

Your next question comes from Gus Papageorgiou from Scotia Capital.

Please go ahead with the question.

Hi, thanks.

Guys want you just tell me roughly the telecom exposure, how much of it is mobile versus fixed line?

Well over 50%.

Yes.

The majority is.

So the majority is mobile?

That's correct.

Okay, and how is that trending, how's that been trending over the say past year?

I no one of segment inside the segment but you could see that, for instance, in the second quarter indicated that we had a pretty strong quarter across our primary customers.

Okay, great, thanks very much.

Your next question comes from Dayle Hogg from GMP Securities.

Please go ahead with your questions.

Thanks, this is Jim in for Dayle.

We've seen some of your competitors and mirror OEMs talk about some consolidations among suppliers I wonder if you could comment on if you seen any of that and if any of the new wins that you are looking at for next year are as a result of this?

Yes, there's been some of that may be even more in the last 12 months more activity in terms of getting consolidation done in the prior period.

And, in fact, some of the incremental business and referred to earlier that had that is going on quarter-to-quarter it is set of results of that.

And I'm not sure if I captured your question, Jim.

Yes, that pretty much covers it, then.

Well, it isn't, I wouldn't say it's a prevalent change going on out they're in the industry but there's some opportunities.

Based on this have you being ahead or behind on any consolidation.

We're ahead.

That's great.

And winning thanks.

Your next question comes from Chris Lippincott from Citibank Capital Markets.

Please go ahead with your question.

Quick question going back in this again, when it last had your warning for a third quarter it seem like there wasn't a lot of visibility at that point.

And clearly in the fourth quarter and later on you actually came out to beat it.

I wonder if we're going to see something similar to that again, i.e., of this range are looking for in the third quarter, how much of that are we going to see coming back to the fourth quarter and how much visibility do you really have?

That's a fair point.

I think what I would say to that is clearly our customers are much more attentive and not wanting to build inventory in unnecessarily.

So my feeling right now going into this quarter is that customers are probably more conservative than they were going into last third quarter.

And so, time will tell I guess was to go through the quarter, September wraps up and have this strengthens more than we expected to our not.

But that I've seen of customers pretty cautious at this time as to last year.

Is it the customers that are much more cautious or is it that you're that much more cautious on their demand levels.

It's our customers.

Okay, so you think that to be able to get back that casual drop that looks like about $190 million in the quarter they be able to get that back in the seasonal buildup in the fourth quarter?

I'm sorry could you say that again, I just didn't hear.

It, looks like sort of the mid.

You be down about $109 million in the fourth quarter did think the bill while make that up by the fourth quarter and either get back to where you were in the most recent second quarter or perhaps exceed that as we go and typical fourth quarter seasonality?

It's pretty -- were not guiding the fourth quarter at this point and it's a little too early to say what the third quarter is going to land exactly.

Okay, great.

Thanks.

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

Please go ahead with your question.

Yes, hi.

Can we just go through a couple of things having to do with your cash and your expenses?

What your timing on the restructuring expenses are going to be and where you think that there will be substantial further expense?

Do you think that there will be in the September quarter?

In terms of further cash?

Further cash expense, cash out.

Yes, given the time of the exposures more than cash cost of restructuring the fourth quarter, we'll have a healthy amount in the third.

The fourth quarter will be a much higher level then they're will be some in the first quarter rounded up.

Okay, and the retirement of the LYONs?

Sorry?

And can you just talk a little bit about the retirement of the LYONs and what the impact on cash will be there.

Well, that's $352 million, $4 million reduction as a result of those notes being put back to the Company that will happen in August, the beginning of August.

In August, okay.

Yes.

So we raise $250 million.

I'm totally aware that.

And we generated $104 million of free cashflow in the second quarter.

We should anticipate that particularly with the lower revenue base in September you're working capital will decline again said there.

We should get a bit of a pickup there is well.

Okay, can you make any comments on what you think the impact of one will be on in your results and on the competitiveness of the North America EMS industry.

Well, at this stage is only a 2% devaluation but.

I don't think it changes things much.

I'll think it changes things as a result.

So much are you in China at this point, your overall production levels?

We have about half of our people in China right now.

About half of your overall people.

Yes.

Okay.

Is not a material amount.

I'm sorry, half in Asia, we're trying to work the number.

Right, that includes Thailand.

Right.

Right.

Okay, and I guess the last question is in terms of being able to drive this substantial margin improvement, at this point is not being driven by the 2005 restructuring.

That doesn't happen really until 2006.

So everything your going to do, you anticipate between now and the end of the year is really going to be pretty much on the lean side in on just being more efficient?

Well, Jim, we are getting a pickup through the Americas operation.

Yes.

In the quarter that were in.

Okay?

So we haven't are exercising closures in the second quarter.

So we do expect benefits.

You just look at a sequential decline in revenue at the midpoint, again, and holding margins I think that you'll agree that based on fixed cost absorption, the benefits both from Lean and importantly from restructuring are pretty significant here? .

Okay.

We are expecting an improvement.

Is largely the Americas.

Was they're ramping benefit as you accumulate all the sites and the with your coming on stream with the first quarter of next year, that's when will get the full effect.

Okay.

That's fine, thank you.

Okay.

Your next question comes from Mark [INAUDIBLE] from UBS.

Please go ahead with your question.

Thank you.

Just a question on the engineering services side of the businesses could you sort of update us?

How much of a percentage of total revenues that and what kind of growth which are you seen in that business?

Your talking about like the green services, Mark?

Yes, green services all your engineering services.

Including design?

Yes.

Its relatively small in terms of overall revenue because is not much material content on it but it's been growing sharply.

You can't offer any more flavor on what sharply means?

No.

I think that's it's the double digits the mare's-tail but it's important for us to grow.

Just a follow-up.

You talked a little bit about the consolidation efforts.

Of some of your customers.

You could talk specifically about Lucent was your expectation is it going to be a mutual for you guys consolidating down to two vendors are at that for?

I won't talk about any specific customers in these calls.

Okay, thank very much.

Your next question comes from Tom Astle from National Bank.

Please go ahead with your question.

Yes, good afternoon.

Just a quick question on your revenue by end-market.

The com/IT group is still 80% of your revenue.

Where do you see that going?

If you could sort of talked about wins and below your top-10.

Where do you see that going out to have any idea there?

Well, you can I guess surmise that given if something a little bit more than one-third of our new business backlog is going to be in the non IT/com area.

You can see that we'll be making some growth in that market subsegment going forward.

But no specific targets right now?

No, I don't have anything for you there.

Okay, thanks

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

Please go ahead with your question.

Good evening, everyone.

Could you just give us the flavor on what's the risk of Europe coming in slower than you expected a couple of years ago you had some issues there could you just talk about the planning that's gone into that to give you confidence that you will get it in the first half of '06?

Thank you very much.

We being as this question before we executed a number of restructuring programs here over the last 18 months last year we were restructuring flawlessly.

This one is going well so far.

So we're pretty much on track with all the restructuring that we've announced here in the first quarter.

So certainly European revenue has been soft as Tony indicated earlier, and that given the fact that were at sort of a critical mass right now and untill the restructuring benefits start flowing we're not going to see a lot of improvement in the bottom line of Europe but I don't see us having any kind of problem like we had a few years ago with the major losses in Europe.

I don't see that coming.

Okay, great.

Thanks a lot.

Your next question comes from Paras Bhargava from BMO.

Please go ahead with your question.

Thanks gentlemen.

I've got a second question in.

The question is about mix, Tony.

It looks like the mix maybe wasn't as good this quarter as it was the same quarter last year.

Is there a lot of seasonality in your mix?

And if the mix hangs in where it does, what kind of revenue do you need in Q4 to hit the 3.5 target?

Well, the mix is actually been pretty stable, Paras, sequentially in the year-over-year.

So we have had increases in high-volume products and also decreases in high-volume products.

So I think our mix has been quite stable.

When you look forward and you make that same assumption, and if you extend again what we previously talked about in terms of our goals, from my perspective, we're talking about a number of about $2.4 billion as an expectation which is based on a flattish kind of third quarter and then a seasonal pickup in the fourth and that would've been a very comfortable landing in terms of our expectation at least of a 3.5 margin.

Obviously, the effects of the third quarter, is a volume player right now and as fast as we can execute or accelerate whatever restructurings or improvements that we can make to our cost structure.

So that's what were focused on.

So at 2.5 you'd hit 3.5 operating margins is what you're saying?

I said 2.4.

At 2.4, I'm sorry, 2.4.

That would be a reasonable expectation.

Okay, thanks a lot.

Your next question comes from Amit Daryanani from RBC Capital markets.

Please go ahead with your question.

Thanks.

If we could just look at the mid point of your guidance for Q3, it looks like about 2.05 billion, last year was 2.17, 125 million delta.

How much of that is really attributed to continue operations over in there last year but not in September quarter this year?

Can you repeat the question exactly?

Sure.

I'm trying to see the delta between the Q3 deltas you had last year of 2.175 billion.

And the mid point of this guidance looks like it's 2.05 million, that's about 125 delta.

I'm wondering how much of that is because of discontinued operations that were there last year with one being Q3 now?

I think the numbers actually less than because we have some of that in terms of the year-to-year comparison the first and second quarter is actually less then a hundred million.

Amit, it's about -- well, it's still pretty close to about 90 to 100 million.

Right.

Mr. Daryanani, do you have any further questions?

No, that's it.

Operator will you take one more question please.

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

Please go ahead with your question.

Hi.

Got in under the wire.

I don't have a question about end-market demand.

Thank you, Tom.

Your welcome.

Tony, I wanted to get back with you to clarify a comment that you made and touched on a little bit here about Europe.

In terms of what you guys are expecting and your not expecting the huge falloffs in profitability that you did previously when capacity levels were much higher of there.

But from what you can see an obviously, you alluded to a little bit here the fourth quarter will quite reach which you had expected before, are you expecting that to least get back to a break-even level and then we finally get to start to see some modest levels of profitability as you get into 2006?

Or would you expect it to still remain that kind of a modest loss even into Q4 and then we really will see much a profit recovery there and take it the full revenue, or for full ramp of cost savings as you said probably hit Q1 and then maybe into the first party Q2 next year.

Okay, as kind of hard to say.

We don't expect there'd be a big departure from where it is today or around the break-even point.

For roughly there today.

At a loss of 3 million.

So for all intents and purposes in back of their revenue that's pretty close.

That's where I would expect, it is given the pulse of the business to remain at and that is until we get to leverage from the cost takeouts, that should stay about in that zone.

Of course, we're working to improve that.

And also I have to caution you because we're at a point of critical mass, volumes are very sensitive in terms of the operating leverage there and so off we see in a departure from the weakening that we saw or the further weakening in the fourth quarter, then I might be off all little bit in that expectation but it's not in any way reversion back to where it was a few years ago.

Okay, thank you.

Your welcome.

Okay everybody.

Thank you very much for participating in our call, and will talk to again next quarter.

Lady ladies and gentlemen this concludes the conference call for today.

Thank you for participating please this connector line.