Celestica Inc (CLS) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Celestica third quarter results conference call. [OPERATOR INSTRUCTIONS].

I would like to remind everyone that this conference call is being recorded on October 20th at 4:30 eastern time and will now turn the call over to Paul Carpino, Vice President of Investor Relations.

Please go ahead.

Thank you for joining us on Celestica's third 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-and-a.

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

During the Q and A session please limit yourself to one question and one follow-up to ensure everyone on the call has a chance to ask a question.

You're welcome to get back into 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 than those expressed in the forward-looking statements.

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

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

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

Thanks, Paul and good afternoon, everyone.

As we highlighted in our last call in July, the September quarter was challenging for us as our largest end markets in communications and IT were expected to experience weaker demand in what's already a soft quarter in our business.

Demand from our top ten customers, which has made up over 65% of our revenue in past quarters was especially hard hit.

Nine of our top ten represented an aggregate 18% decline in this group.

While some of this decline relates to the seasonality that our customers experience during this quarter we're definitely seeing an overall softness across our IT and communications segments relating to enterprise and carrier spending.

All of our top ten are in the communications and IT segments.

It's also important to note that sequentially, the decline of sales associated with program losses was insignificant.

Our industrial segment declined modestly, while our consumer automotive and medical segment was very strong.

This segment improved over 30% sequentially on the back of new programs won in the past year particularly in the consumer segment.

Combined is the consumer industrial segments represent 24% of our total revenue in the third quarter.

Unfortunately, the effects of our successful penetration into some of these areas were negated by the declines in our base business.

The disappointing second half slowdown in the infrastructure-related products for the second straight year highlights the importance of our diversification efforts at Celestica.

We will continue to make progress in future quarters on this though, as approximately 40% of our backlog of new business for 2006 is in these sectors.

On the strategic front, we've expanded our offering by making two small acquisitions in the quarter: Coresim which brought us unique capability and advanced design analysis that enables us to accelerate product cost reductions for our customers and Ramnish Electronics, an EMS company located in Hyderabad, India and a spring board to servicing that growth market.

Though these acquisitions are small, they both enhance our offering with a proven management team.

We are already introducing new capabilities to our customers who are excited about the value proposition these capabilities support.

You're all aware of the significant spend reductions that we've been making at Celestica over the past 18 months with our restructuring programs.

We've been making good progress on margin and ROIC improvement but third quarter was a setback due to the acute revenue declines which we saw which impacted our operating margins by about 30 basis points quarter to quarter.

While I'm disappointed with the margin setback sequentially, it's important to note that our operating margins are up about 50 basis points year over year despite an 8% year-over-year decline on revenue.

This underlines the effectiveness of our cost cutting efforts which have mitigated what could have been dramatic effects of the profitability as a result of the weak demand.

The combination of lower cost structure, new business launches and greater diversification should allow for more consistent performance in 2006 and beyond.

I was also pleased with the success that we had on SG&A reduction, which has trended down steadily for several quarters now.

We have aggressively targeted spend reductions in this area by activities such as outsourcing some of our transactional back office functions, and we think that this is an area where we can continually manage effectively and get leverage as new revenue starts to kick in next year.

Another area that we were hit hard by the revenue weakness was in working capital performance this quarter.

Despite some of the good progress that we have made throughout the year with improving inventory, our turns performance declined to 6.9 turns as we were unable to shut off the component pipeline commensurate with the demand reductions.

I'm not going to offer excuses or rationalize these disappoints other than to say we're adjusting to the significant swing in demand and expect to show improvements in the fourth quarter.

As we look into the fourth quarter, we see marginal recovery in revenue.

Certainly a lot less than I would expect from a normally strong December quarter.

This weakness seems to be more concentrated in server storage and telecommunications areas, continuing the weak demand profile in these areas relative to what we saw in the first half of this year.

While the immediate demand is disappointing, I'll highlight what we've been doing about it.

Despite a tumultuous demand environment we've been executing well, generating good customer satisfaction from our efforts while making dramatic improvements in our costs.

We've stepped up our sales efforts by adding talent and making propositions where we can improve our customers' performance and focusing our efforts on the customers programs that can provide us with the growth that we seek.

There's a natural lag between booking new business and the launch of revenue but we've seen our bookings performance improve substantially over the last year, on an improving trend, leaving us with a nice backlog of new business to be launched in 2006 and beyond.

I find that our offering is stronger than ever with an ever more competitive footprint, distinction in lean manufacturing, strong execution, attractive supporting services, and a continued leadership in technology.

Those qualities are appreciated by our customers, and those new customers contemplating outsourcing.

So our plan is to drive growth by being proactive and offering value opportunities for those customers with a special focus on new markets and a broader penetration of products across our core customers.

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

Revenue for the third quarter was $1.994 billion, down 11% from the third quarter.

On a year-over-year basis, revenue was down about 8%.

Year to date, our revenues were about 6.4 billion.

Down 2% compared to the same period last year.

During the third quarter demand remained weak.

Revenue segmentation for the quarter was as follows: Enterprise communications declined by 8% sequentially, and represented 28% of sales.

Telecom and server markets each declined by 23%, and represented 20 and 16% of sales respectively.

And storage was down 19%.

While some of these declines are attributed to seasonal swings for our customers during the quarter, the majority of the decline was due to softer end markets for the products we participate in.

In our non-com non-IT segments, the industrial defense aerospace group declined by 6% and represents 11% of sales, while our consumer automotive and medical segment grew by a very solid 36% and now represents 13% of sales.

Moving on to our customer mix.

Our top ten customers, who were all communications and IT based customers declined to 63% of total revenue or by $273 million sequentially.

Our top five represented 45% of sales, and we're down about $200 million sequentially and IBM and Cisco remained over 10% customers.

On the geographic basis, revenue declines from our key end markets impacted each region quarter to quarter.

Asia represented 49% of our third quarter revenue.

The Americas came in at 34% and Europe was at 17% of sales.

Moving to profitability.

Company posted a GAAP net loss of 19.6 million, or a loss of $0.09 per share for the third quarter compared to a GAAP net loss of 24.4 million or $0.11 per share last year.

Restructuring charges amounted to $41 million in the quarter, while our option exchange program represented a one-time cost of $7 million.

Additionally, we realized a $14 million accounting gain on the full redemption of our LYONS convertible notes.

Adjusted net earnings were 27.1 million or $0.12 per share for the quarter compared to adjusted earnings of 25.3 million or $0.11 per share one year ago.

Operating margins came in at 2.3%, down 30 basis points sequentially despite the $256 million decline sequentially in revenue.

We did a solid job of managing costs and reducing expenses to mitigate the operating impact of that 11% sequential revenue decline.

On a year-over-year basis, margins were up 50 basis points despite $182 million decline in revenue over the same period.

Our restructuring benefits have consistently delivered benefits, though revenue declines have muted their full impact.

Gross margins came in at 5.7% compared to 5.5 for the same period last year and 5.8% in the second quarter.

Company-wide our utilization was about 60% for the quarter.

Our SG&A performance was strong this quarter, down 12% year-over-year and down on a sequential basis as well.

So this level is moderately lower than what we expect on a go-forward basis due to the timing of some expenses, we have been aggressive in managing expenses under a difficult demand environment as Steve suggested.

In aggregate, we reduced total company spending by just under 10% sequentially.

Reflecting all the costs and expense actions we are taking, including restructuring, LEAN and other initiatives.

Segmenting our operating margins by geography, margins declined in each region on the back of revenue weakness, with all regions executing well on costs, production and serviceability.

Asia margins were 3.8%.

The Americas came in at 1.6% and Europe was a negative 1.1%.

We expect these regions will continue to execute well in the coming quarters as more restructuring is completed and new programs contribute in 2006.

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

As of September 30th, 2005, we have recorded severance costs related to approximately 2400 employees.

To date, six plants in the Americas, three plants in Europe are part of the restructuring program, and we are working through their closures and transition activities.

We anticipate that most of the Americas' activity should be completed by the end of 2005.

The European activities expected to be completed in mid 2006.

Though some of these activities could extend by a quarter, due to customer decisions around the timing of program moves.

We announced our program at the beginning of the year, and estimated restructuring charges of 225 to $275 million.

We expect this program to reduce the global workforce by about 5500 employees.

Particularly in high cost geographies, and we expect the majority of the program to be completed by March 2006, though this could extend by about a quarter as I just mentioned.

We believe we will migrate to the higher end of the range considering the end market pressure.

When completed, we continue to remain comfortable that we will remove 125 to $150 million in annual costs, and other utilization factors and margins will expand as a result. $105 million of charges have been recorded so far in 2005 with about $90 million of cash costs being paid out this year.

Cash at quarter-end came in at $896 million, which reflects the 352 million spent in the quarter to repurchase our LYONS convertible debt.

Cash used in operations was 17 million and cash cycle was 14 days, down from our Q2 results by a day.

Inventory was flat.

Returns came in at 6.9 times down from 7.7 in the prior quarter.

Further revenue weakness and churn in the quarter affected our ability to mitigate component in-flows at the speed we wanted to but we expect to see corrections in the fourth quarter.

CapEx for the quarter was $43 million, again representing our expansion plans and low cost geographies, specificly in Asia and in Romania.

At the end of the quarter, debt to cap was a healthy 25% as expected.

So those are the results.

Let me now look forward with our guidance for the fourth quarter.

Indications from our customers continue to reflect sloped demand patterns in the fourth quarter and we expect revenue to be in the range of 1.9 billion to 2.1 billion.

We expect adjusted earnings per share to be between $0.10 and $0.18, commensurate with the revenue range.

At the midpoint, this reflects our expectations of increasing margins despite flat revenues.

In net we executed well on the income statement relative to the weaker demand of market for infrastructure products.

On the balance sheet, we have more work to do in the area of inventory management, to move more quickly in reacting to major demand ships from our customers.

Rest assured that our focus is intense in this area.

That concludes our remarks and Steve and I would be happy to answer any questions you may have.

Thank you.

One moment please.

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

One moment, please, for your first question.

Your first question comes from Alex Blanton of Ingalls & Snyder Please go ahead.

Good afternoon.

My question, first question regards the inventory buildup of components that you mentioned.

Historically the customers have paid for any overages when they have reduced orders and caused an inventory buildup as a result.

But that hasn't always been the case.

What is the case in this instance?

Are your customers responsible for paying for this inventory that you ordered to fill their orders?

Alex --

The original orders?

Yes, Alex.

The take of pay, practice or policy is still in effect here.

This inventory buildup is simply related to, I guess what I would call a short term buildup that occurred because the demand fell out in front of us.

It didn't become obsolete, Alex and so it didn't get -- the inventory that was built up wasn't in the category of inventory that we would put back to a customer because it's expected to be used in the reasonably near future.

So you're going to use up the inventory, and nobody's going to have to write it off, either you or your customers?

Correct.

Okay.

Secondly, you mentioned that because of new wins, which aren't ramping at the moment, but will be ramping in 2006, sales will be up in 2006.

Can you give us an idea of how robust that increase is going to be?

Is it going to be a slight increase, modest increase, or even better?

Alex, I don't want to -- I will say I do expect revenue to be up next year.

I don't want to say -- give any kind of numbers yet.

And the problem is two-fold, just so that you'll understand why I'm not talking about it at this point.

There's two complications in this.

One is what's happening to the base revenue, and clearly we've been surprised here in the second half of this year, with the weakness that we've seen in our base business.

And so trying to forecast that forward and -- is something that I'm finding difficult to do at this point.

The other one relates to, in fact, at what rate of want do new customer programs take place, and as you probably know, those things move around a bit with the normal product development plans that our customers have.

So it's something I don't want to place any kind of, public estimation on at this time.

Okay.

Thank you.

Sure.

Your next question comes from Michael Walker of First Boston.

Please go ahead, Mr. Walker.

Thanks.

Just a couple housekeeping things.

I'm having a hard time coming up with your margins.

Are there some add backs or charges that you added back to gross profit and to the operating margin to get to the 5.7 and the 2.3?

Yes, the option exchange cost which was a one-time that we announced prior to executing that, as you know.

So that was the one that was added back.

Okay.

Our normal adjustments.

And the amount on that was what again?

$7 million.

And my second question was I'm -- I'm having a hard time reconciling the end market performances with what your customers are starting to report.

We haven't heard from the telecom and the Cisco types of guys yet, but we have heard from IBM, EMC, and Unicorp, but I know you get this question a lot but all three of them had pretty strong results and guided nicely for Q4 so --and I heard what you said earlier about not losing any business.

So, just help with the reconciliation there.

Do we have a massive inventory buildup that's underway that's going to last for two quarters because you're not guiding to any increase in December either.

You think if there was an inventory build, you'd be able to flush that out and start to see some orders for December or is it a product specific thing?

Are you guys really centered in kind of the really slow declining products for each of those customers and is there a way that you can diversify away from that?

Yeah, Mike, so -- the answer is in the fourth quarter I don't -- I don't expect there to be -- or that there's any big inventory building uptaking place here.

So this is really our slice of the products of these customers.

As you know, they're big customers and they've got a number of partners that they use.

I wouldn't call them slow, dying products or anything like that.

In some cases it just happens to be what the -- what the particular performance of that product is at that point in time.

So our efforts, of course, this just I think highlights the importance that -- for us as a company to get a broader diversification of segments being supported, as well as a broader penetration across some of these big customers that we have as well.

So we want to be better penetrated across their customer sets as well as introduce these new markets for us.

And we're making some progress today as I indicated with what's in our backlog, but obviously we have -- that work has yet to launch in 2006 and beyond.

A lot of your customers typically see a budget flush at the end of the year.

Do you have any perspective on whether that might not be happening as much this year?

Well, there certainly appears to be less forecasting of that I would say at this point, Mike, but I hear talk of it.

You know, I hear talk of infrastructure replacement after the hurricanes, but I've not seen a lot of that evidence coming to demand at this point so we can be hopeful that we see something, but at this point, my guidance is really based on sort of the hard demand I'm seeing from customers today.

All right.

Thanks.

Sure.

Your next question comes from Steven Fox of Merrill Lynch.

Please go ahead, Mr. Fox.

Hi, good afternoon.

Can you talk about some of the new business a little bit more?

It sounds like as a percent of the total backlog, it's creeping up in terms of nontraditional stuff for next year.

Is there any way you can talk about -- you can qualify that, where it's coming from, what types of business, and secondarily, how much of a offset can that provide if your core market stays sluggish like this?

Steven, I'd like -- I'd prefer not to give any disclosure of any of that right now.

I think you know these areas are small enough that I don't want too much customer information out -- out there, so we'll perhaps give you more color of that as we start to launch some things next year.

The point that I would make is that -- that I mentioned 40% of the unwanted incremental backlog of 2006 is represented by these areas.

It's probably swinging a little bit higher towards the consumer segment that we have out of that, but we've got a good penetration.

And then Steve, secondarily when you look at the numbers you reported in your outlook, how much is related just to customers coming back and cancelling or pushing out orders as opposed to you guys expecting orders that never came?

Virtually all of it was declines in stated customer demand.

Okay.

Thank you.

Yes.

Your next question comes from Brian White of Kaufman.

Please go ahead, Mr. White.

Good afternoon.

I'm wondering if you can talk a little bit about what type of trends you expect in some of the bigger end markets for the December quarter, for example enterprise communications, telecom and IT?

I -- I think the -- the indication that I made earlier about where the weakness that we're seeing is in, you know, telco storage and server is probably as far as I want to go with the statements of demand there.

And when I was making that statement, I was making a relative to what my expectations would have been for a fourth quarter, which as you know, two of those segments you would expect to see a pretty good uptick in the fourth quarter, and we're seeing less than expected.

Okay.

But we should expect some growth?

Well, I -- I'd say you in aggregate across the three I wouldn't suggest that that's necessarily the case.

Could be.

Okay.

I mean, there's some offsetting activities going on inside those three in terms of sequential performance.

Okay.

And maybe -- on the restructuring, do you think another round of restructuring is potentially in the cards for 2006?

We've done some terrific work at getting our footprint right and it's -- it's been a bold move, as you know, and it's taken a while to get the capacity taken out and in fact we still have work ahead of us on it clearly but I look at the backlog that we have, the offering that we have in both low cost geographies as well as some of the highest cost geographies and I like our offering there.

So I don't really see any need to make any major adjustments beyond the restructuring plan that we have in place, although as Tony said earlier we'll probably be to the high end of that range.

Just finally, do you expect Europe to be profitable in the December quarter?

I'm sorry?

Can you repeat that?

We had some interference.

Okay.

Sorry.

Do you expect Europe to generate a profit in the December quarter?

We expect Europe until we see their restructuring kick in, which was always most beneficial in the first part of the -- 2006, we expect Europe to kind of be at -- where it is today.

Where it was last quarter.

Kind of limping along around the break-even point.

Maybe a little bit less.

Okay.

Thanks a lot.

Your next question comes from Amit Daryanani of RBC Capital Markets.

Please go ahead.

Thanks a lot.

Tony, I think you mentioned the restructuring charges might migrate to the 225 to 275 million range.

So does that mean the savings will move to the high end of the 125 to 150 range as well at the same time

That's certainly our expectation.

All right.

And Steve, could you talk maybe about the pricing environment right now and we've heard from some of your peers, who are paying to get exclusivity contracts from OEMs, are you seeing a lot of your customers asking the same from you?

I was horrified to read about that activity that took place and so that's -- it's a very disappointing kind of behavior, and I have not seen that kind of behavior repeated by other customers or competitors and I know that that particular competitor pointed out it was a very unique set of circumstances and certainly hope that's the case.

Next question comes from Bernie Mahon of Morgan Stanley.

Please go ahead.

Good evening.

Question for you, Tony.

You guys had mentioned that you wanted to work down the components just you had maybe taken on too much in the September quarter but seeing as though the December quarter's kind of flat sequentially and we'll be heading into kind of a weaker seasonal time frame in March, could you just quantify how much inventory you think you'll work down over the quarter?

Well, we think we've got a -- got about $100 million that we would have liked to have jettisoned by the end of the quarter so that's a program that -- that we've got on our plates right now to execute in the fourth quarter.

I think we can do that.

Okay.

That's by the end of December, you're saying?

That's correct.

Okay.

And then just on the revenue line, in the kind of other category, that includes industrial and defense as well as the consumer and auto, that's flat on the year-over-year basis?

Last quarter it was about flat on a year-over-year basis.

Are we going to begin to see that kind of growth in that area and do you think we'll see maybe double digit growth as some of this backlog comes into revenue?

Are you talking, Bernie about the aggregate because we did see double digit growth sequentially.

No I'm talking about on a year-over-year basis.

And aggregate, it was flat, so it was flat on a year over year.

We do expect to see growth as we start looking into next year and launching some of the bigger programs that we have.

There's always a little bit of wiggling around, I can think of one particular industrial customer whose program is coming to an end as an example and there is no follow-on so you get some of that kind of stuff happening in there as well.

So the numbers -- well, numbers remain on a relative basis small like this, it could be lumpy from quarter to quarter and it would grow to a little bit larger in those areas.

Okay.

Great.

Thanks.

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

Please go ahead.

Good evening, everyone.

If we think about the range for the fourth quarter, is it largely in revenue and EPS, is it -- is the EPS range largely dependent on what demand you see pulling through so the -- the revenue swing or is it also dependent on how much restructuring you're able to conclude in the fourth quarter?

Can you just give us an idea on that?

I think it would be completely dependent on the revenue stream.

That's what's driving it.

I mean, we have demonstrated here, I think, excellent capability of reacting on all our variable costs and going even further than that, so that was clearly evident in the third quarter, so that revenue range is a lot less dependent I think on a very detailed set of cost reduction programs that we have underway that are executing.

Okay.

And I don't know if you're prepared to comment on this, but the last questioner sort of implied a downtick in the first quarter.

You didn't see that much last year.

Is there anything to be said that sales are flat here going into the first quarter, or should we expect some normal seasonality there?

Is there any color you can provide?

I'm not ready to forecast first quarter yet, but if things remain as weak as they are here in the fourth quarter it sure seems like the first quarter would obviously be a less quarter than forecast.

But I'm not forecasting that yet.

And could you just remind us of your operating margin goals for fiscal '06 and just also in that, tell us what kind of revenue growth would be required in order to reach those operating margin goals?

Thanks a lot.

Well, if you recall, you said a couple milestones for the Company in terms of margins.

We set a milestone of 3.5% operating margins for the fourth quarter back in the first quarter this year, and the assumption was that it was a flattish environment which would allow for some seasonality and roughly that would translate to $2.4 billion.

And as we've guided here in the fourth quarter and look at the midpoints of both revenue and expected margins, we're about 100 basis points off that level.

And so with that kind of decline of approximately 400 million or 20% of the top line, I think we're eating into and getting impacted pretty significantly by our operating -- I would say and we expect that as we deploy our restructuring as we continue to focus on LEAN and manage our costs that we expect the same basis point improvement in our operating margins, which as you recall when we guided for it we said hey, by the end of our restructuring programs we thought that the pick left over our year end margins would be about 50 basis points so the 3.5 going to 4.

And we thought that on the back of some growth and some diversification and services we'd get through about an exit rate in 2006 of 4.5%.

And so that was another incremental 50 basis points off the June quarter next year.

So the absolute margin expansion, we feel very confident about as we just look at what we've got on our plates, the kind of business in our backlog and as well the restructuring efforts underway.

So that's kind of how I would see things unfolding in the milestones that I think are important for us.

Okay.

Great.

Thanks a lot.

Your next question comes from Thomas Hopkins of Bear Stearns.

Please go ahead.

Yes, good afternoon, everyone.

First, just wanted to see if you could give us an update on what mode you have your sales force in, your marketing effort,given the -- the continuing revenue deceleration.

You know, how are they incentivized, what's the strategy for getting them really motivated to book some pretty sizable new revenue to make up for some of the customers that are still in structural decline still after three years.

I'm not going to get into the details of our comp plans for our sales or customer units, but the focus of our company right now is highly centered around finding profitable ways to grow with those base customers, in many cases because we're highly penetrated in some, it's in services and also these new sectors that I've identified earlier on in the call.

So -- so it's a -- we're after -- we're after growth in specific targeted customers.

Specific targeted markets, and in some cases specific targeted product lines within those customers that represent the -- if you will.

Okay.

Then just as a followup.

Some of those base customers, the prospects don't really look that bright for them to -- for them to generate maybe the kind of growth that you might need still, so I'm still not clear how targeting some of the base customers which really haven't been growing is going to help you grow.

I didn't want -- I wasn't implying that this is peanut butter spread all over every one of those base customers, right, so we're a bit selective about the customers and programs that we're after, but the diversification point that I made earlier in the call was the -- was the -- the major story that I wanted to leave you with relative to the kind of success that we've been having in the backlog as I mentioned 40%.

I'm not sure what you're trying to get out of your question, Thomas.

You want to give it one more try?

No, I wasn't clear, you mentioned that you want to continue to try to penetrate some of the base customers and my concern is that some of those base customers.

It depends which ones Thomas.

I guess that's the point, right?

Certain customers where we think there are just tremendous fulfillment or after market opportunities that we're unpenetrated in and we think that will be great business for us.

So we'll go drive for those.

There's been some speculation that you guys might be bidding on Symbol.

Any comments about Symbol or any OEM divester activities that you might be looking at?

No I wouldn't comment on any specifics.

Are you looking at any OEM divesters right now?

I wouldn't comment on generalities either.

I will say this.

We continue to look at acquisition opportunities that could fit our strategy relative to growth whether that be capabilities or markets or whatever.

I'd say yeah, we are looking at asset sales and capability opportunities for us and, I think we have quite a full plate as we look forward in terms of what they are.

The question is -- as always, is how do we -- effect those in a way that's best for our company and best for our customers as we go forward?

Okay.

Great.

Thanks.

Your next question comes from Martin Cecchetto of UBS.

Please go ahead.

Thank you.

I just was hoping you could comment on these new programs that you're getting in 2006 and the diversified or noncore businesses.

What are the margins look like on -- on those kinds of projects?

Is it better than what you're seeing in the infrastructure side?

Well, Martin, I guess I'll say this.

It's a pretty broad set of types of products in that diversified set.

One end of the spectrum, you might see some very high volume, low mix kind of products that you can expect would generate higher working capital returns and lower margins but still be a good ROIC type of program in that -- and the other segment, then you're talking about sort of the opposite case, higher margins but covering a higher working capital load as a result of it.

So, there is one public disclosure of a consumer program with Microsoft X Box 360 that was announced recently and so you know that's in the consumer market but none of the others have been disclosed at this time.

But generally margins and consumer would be at the low end.

Virtually all others you'd expect to be very healthy and above, industry averages today.

And I think the other side of it is if we look at the pipeline, we've been expanding in terms of one business in the margin profiles on that business so there is good business out there for us and I think we're executing on it.

So if I were to talk about specifically like a medical or defense versus a telecom, would you expect to get higher margins in medical defense versus telecom?

Depends what you do.

Probably though.

And then just to follow on on the restructuring, so I'm looking, you have 700 terminations so far.

You're basically three quarters into a five-quarter restructuring program, and you need to get that 700 to 5500.

Can -- can you explain whether or not you did expect these terminations to be more backend loaded or does this indicate that you're behind?

No, we're not behind.

We had a -- we had a plan to deploy most of the restructuring and the heavy lifting if you will in the Americas this year and the follow-on impact in Europe in the first part of next year.

We're continuing to be on that track.

So there is a process around closure and transferring programs and migration of people and -- and work around the network, so I think all of those numbers are on our expectations and I continue to -- continue to see the Americas being done first, as we've said at the scripted portion of the call, those should be largely complete by the end of this year.

Thank you very much.

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

Questions on the savings from the restructuring.

Tony, I think it was you, you reiterated the dollars and savings that you expected, I think $0.55 to $0.65 a share.

How many of that is already in this quarter's numbers?

You came in at the lower end of guidance but your adjusted earnings weren't quite at the low end.

It looks like you're not expecting any gains at all or very little and if you could help us with the profile of the top line, assuming neutral end markets next year, will it be more like this year, or would it be more normal given what you know today?

Assuming normal --- and the reason I'm trying to get at is a profile of your new business.

Well, in terms of the savings I think we had a very healthy amount of cost reduction.

I said that in aggregate we reduced our spending, so that would not include say the component costs in our cost of goods sold, but we reduced our spending in the company by just under 10% on the back of 11%.

You don't just do that.

I mean, there are fixed costs that are not -- that are related to plant and equipment and we did an excellent job, I think, in delivering those savings.

As you look forward into the fourth quarter, there -- there are also dynamics as we introduce new programs and as we've seen our business be very weak at the higher end, some mixed erosion on a sequential basis so the restructuring benefits are kicking in and delivering and offsetting that.

So as I also mentioned on a roughly flat environment in terms of top line, at the midpoint, there is expansion of about 30 basis points implied in that guidance.

So the expectations of restructuring that are continuing to flow and are flowing.

Let me just probe a little bit. 55 to -- the $0.55 to $0.65 a share that you're talking about in savings, how much of that has already happened at the end of this quarter?

We've probably got in the neighbor -- in terms of absolute dollars of costs, between 10 and $15 million.

Okay.

So --

It's hard to -- hard to separate the volume effects from the full cost effects and other actions that we're taking.

Sure.

Thank you.

That answers it well.

Now, if you look at the profile of new business that you have, Steve, when we talked in mid-September, I think somebody asked you a question about the X Box business and you said, listen, remember we're going to start in January and it's going to be performance based, maybe you could tell us -- you're talking about a large pipeline.

Should the pipeline be back end loaded?

Should it start in Q2?

If you could give us the pipeline of new business that you have that would be helpful.

Yeah.

The pipeline, there's -- I'll tell you there's some programs launching in first quarter like X Box and some other new ones in second quarter.

I'd say with the resolution that I've looked at it recently it looks like it starts billing in greater in the second half of the year than the first half.

But there is activity all year long.

40/60?

Would that be sort of a --

I don't want to give you a range.

Your next question come from Carter Shoop of Deutsche Bank.

Please go ahead.

I was hoping you could talk a little bit about your guidance and if you assume the mid point of December quarter guidance, if you could kind of break that down in regard to your top ten customers.

Roughly how many of the top ten do you expect to be up sequentially versus down and any color on that would be helpful.

And if you expect a couple of customers to be down more than 20% sequentially, et cetera.

Any color there would be very helpful.

Carter, it was pretty -- frankly it was pretty unexciting.

It was pretty flat.

Not any huge surprises.

I'd say probably -- where I was most disappointed with my expectations might have been more in telco, but servers were soft as well.

So, probably all I want to say at this point.

So it's safe to say there's not a couple customers that are going to be down more than say 10 or 15% sequentially?

I wouldn't think so.

And if you could talk about restructuring and impact on your top line as a result of that.

You guys have been definitely been pretty aggressive in closing down plants or anticipating to close down plants.

Can you talk specifically about expediting some orders, maybe moving orders around here or there and if that affected the second half of '05 at all?

No, not in a significant way.

As a result of some of the smaller customers chose not to move with us but there were no major effects.

Thank you.

Your next question comes from David Pescherine of Citigroup.

Steve, you talked about 40% of your backlog coming from noncore segments.

Can you help us understand how big that backlog is that you're looking at right now?

Is it in the $500 million range is it in the $1 billion range?

Can you put any numbers on that?

David, let me correct one thing.

I didn't say noncore because those are areas we definitely consider to be core.

You know, they just aren't the part of what we had historically of our base business.

Everyone should understand those are important markets for us and we're going to do well and continue to grow in those areas.

So -- but to answer your question more specifically, I don't want to -- I'm not going to give you any details about how much backlog is out there at this point, but I will tell you this, that if you'll recall that our performance I told you last quarter, if you were listening, I said that our new business bookings performance was double what it was the first half of the previous year.

Okay?

Well, we've continued to -- we've continued to do well in bookings performance and we're -- as I've mentioned earlier, we we're running at a considerable clip better than what we had throughout last year so maybe you want to think about bookings performance level and that 25% or 50% greater range.

Well, I guess I'm trying to figure out you know, you made comments that there's always a lag when new business is booked and when it actually hits your revenue stream, so a lot of your peers talk about having to replace 5 to 10% of your revenues on an annual basis just to stay static, so given that and given your comments last quarter that you expected to return to top line growth, should we expect that the book of business or the backlogs that you're looking at today actually get you to the top line growth still?

Yes.

Yes, I do expect to get back to top line growth

Well, from business that's already sitting in your backlog or business that you still have to book?

I would say probably from business that's in our backlog already I would expect to get there.

Okay.

Great, that's very helpful.

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

Please go ahead.

Hey, good afternoon.

Just a quick question on the SG&A, Tony.

You mentioned that maybe it might not be sustainable at these levels this low.

Can you maybe go into a little bit of detail on what you see as some of the costs moving that up a little bit going forward?

Well, we think of it as a kind of comfortable range just in the immediate future's around the $70 million level for SG&A.

So we have a good amount in the third quarter, fourth quarter's always a -- kind of typically certain payments get made, bonuses, things like that that have an upside to it, then our cost reductions initiatives and it should offset some of that but I think it's a more comfortable level going forward.

Possible we keep things on the flattish level but possibly not.

Okay.

And then just a question on the inventory side of things, I guess I'm a little bit confused on an inventory perspectives, with lead times being so short, and you guys putting a focus on LEAN manufacturing et cetera, I'm curious why we can't turn off the components purchases quite as fast as what needs to be done, particularly in light of those short lead times right now.

Well, the simple answer is the lead times aren't short.

That's the problem.

They're short in our plants, so the product races through our plants in very little time generally, but the problem is a 14-week lead time oftentimes on some of the components coming in.

That's clearly the problem that we have to solve, is our customers are getting much better lead times from us then we're getting from our suppliers.

Guess what we're working on?

All right.

Thanks.

[OPERATOR INSTRUCTIONS].

We now have a followup question of David Pescherine of Citigroup.

Please go ahead.

Thanks.

Steve, yeah, if you could just give a little bit more clarity on which components you're getting those lead times on it would be helpful.

I don't have the specifics with me.

As a general rule they're the unique components, semiconductor-related, probably more often than not, that's probably where they generally are.

But is it a large percentage of your components or a small percentage of your components holding up the whole system?

I think for those kind of dollars there's quite a few components in there.

Remember we were chasing revenue down through the quarter too, right?

So when the demand falls out, you know right ahead of you where the customer doesn't pull when you expect it to pull, you've already got the parts at that point in time.

We haven't seen it change though in the lead times.

Right.

Well, it's just interesting because I think as the prior question was trying to ask, it looks like you guys were within your revenue range just towards the lower end so it's just trying to reconcile where the surprise really came from.

So if you've got the long lead times that explains a lot of it, but the demand seems like it was in the range, maybe towards the lower end but again difficult to understand.

Definitely towards the lower end so we were chasing stuff down the whole quarter.

Very helpful, thank you.

Your next question comes from Terry Daniels of Edward Jones.

Please go ahead.

I had just a quick question in terms of programs and customers as far as scope.

If there's been any rescoping or resizing as far as like a trend goes, either by your top customers or others.

I'm sorry, Terry, can you repeat that question?

So, among the -- the customers that you're bringing on new programs for or programs that are coming up, at the end of life, has there been any trend by customers in terms of either the length or depth of the engagement to -- it basically shrinking or being less involved or are you seeing anything like that?

Well there tends to be some movement around the bottom of our top ten as other -- some customers grow, some customers grow less or shrink, that sort of thing.

But no massive change if that's what you're trying to ask.

I think in terms of opportunity and I think Steve mentioned it earlier, as you look at our base customers or top ten, if you will, growing within those customers, that means expanding the service offerings for them so we have seen it in our backlog and we do have situations where extensions of what we do for our customers is very clearly a pattern.

Thank you for that, Anthony.

I guess that's kind of where I was getting at if customers are more or less willing in terms of you taking on more of their opex or providing more services and coupled with that, that affecting the scope.

That's a definite trend and if you looked at the funnel where the biggest opportunities are, we're seeing a very high level linkage between core PCBA, if you will, and the broader service offering.

Thank you very much.

Your next question comes from Jason Gerske of J.P. Morgan.

Please go ahead.

Thanks.

Good afternoon.

Just a quick question on kind of your sales capabilities and engineering.

Just wondering, going after these new end markets whether you need to make any additional investments either in your design capabilities or in your -- the capabilities of your sales force to go after these new end markets.

Well, we're making investments in the sales force.

I think just this week we have three new guys starting with us.

So that's taking place.

I think you would expect to see good talent out there it matches up with our strategy, we're going to go get it.

In terms of engineering capability, there may be, I would say over time, I was very excited about bringing Coresim into our capability because there's some intellectual property there around scanning and finding methods for cost production of major products and assemblies.

So that's a pretty exciting technology and we're trying to introduce that to a number of customers right now and we think that can really have an interesting value proposition for customers and one that gives us more than just an incremental pricing on an engineer, so to speak.

And maybe just as a quick followup to that maybe you could qualitatively talk about what's the biggest pushback that you're getting from customers in these segments as you try to bring them on board?

I'm sorry.

Customers -- you mean --

In the new segments that you're targeting?

Oh, in the new segments, in general I guess I would have to call it inertia is the biggest problem as it always is in most big companies, many of these customers either have their outsourcing work done with maybe in some cases lower tier suppliers so that's a major consolidation of outsourced effort or in some cases if it's insourced and those are major decisions and major risks that the customers feel like they're taking so you have to get them comfortable that you're going to be able to take care of them.

So there's no obvious holes in the --

Not in the offering.

I like our offering for that.

Okay.

Last question please.

Your last question comes from Chris Umiastowski of TD Newcrest.

Please go ahead.

Hi, guys.

The main question is just to the restructuring in the European plants.

The three that you're closing, can you just talk about -- you know, Tony I know you said they were on track for your original plan but earlier in the call I think you used the term mid-2006 for completing the restructure in Europe, and earlier you had said specifically Q1 closures so are they still on track for Q1?

Some are and generally speaking, is that we have in the whole envelope whether it's not just plants or -- but it's a reduction in force within our network, some of those get timed out later based on customer demands, so I would say that in terms of our European activities, they will happen in the earlier part, the ones that we've talked about here, and when you look at the entire program and possibly with the addition going to the -- the higher end of that restructuring, there will be activities and our expectation right now into the second quarter as well.

Okay.

If I can follow up on that one, of the total -- if we sort of -- if we were to look at the total cost savings that you expect and call it 100% of the total cost savings, is your total number, how much of that do you think you'll see by the end of Q1?

North of 90?

That's -- that's a tough one for us.

I would say in terms of cumulative, that is possible that we'd have that much.

Well, what do you think is realistic?

Well, 75% of what we'd expect.

That's getting close to what you said, I think.

Okay.

And then getting to 100 kind of by what end of Q2?

That would be a good path and as I said earlier, it's -- our thoughts are when it's fully done and as you look at the full quarter impact into the third quarter and we're getting towards 150 level.

No, sorry, I just mean with regards to 100% of your total, are you expecting to be at 75% of the total cost savings achieved by the end of Q1 then and more like 100 by the end of Q2?

Not in millions of dollars.

Percent.

100% would be in the third quarter.

Okay.

Thanks.

It would be 80% or so by -- 85% by the second.

Okay.

And then last question I have for you just with regards to -- it's been fairly publicly commented on that Lucent awarded you the wireless business.

Selectron's got most of the wire line.

Some of the wire line stuff that you guys have, you've talked about that will move away from you, how much total revenue do you think is moving away from that account within 2006 assuming current revenue levels?

I don't want to give any kind of numbers specific to a customer like that.

But wireless was the biggest part of our business.

Okay.

So you consider the rest of it to be a lot less consequential?

I wouldn't say that, but it's less than half.

Okay.

We will be down on that but we will not be disclosing the amounts, but yes.

And even with that you expect , reasonable growth in the fiscal year '06?

Right.

Okay.

Thanks very much.

Okay, everyone.

Thanks for dialing into the call and as you can see, we've had certainly some setbacks on the top line, but we're -- we're going to stay focused on these plans that we've had in place relative to getting the footprint right, getting the restructuring underway, continuing with our LEAN manufacturing across all of our sites and even most importantly right now is the focus on the growth and the diversification of our business as we grow and run our business.

Customers have been trunked so we're going to leverage those customers in order to win in these markets.

So we'll look forward to talking to you in July, thank you -- I'm sorry.

January.

Thank you.

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

Thank you for participating, please disconnect your lines.