Celestica Inc (CLS) 2005 Q4 法說會逐字稿

Welcome to the Celestica fourth quarter 2005 financial results conference call. [OPERATOR INSTRUCTIONS] I would like to remind everyone that this conference call is be recorded on Thursday, January 26, 2006 at 4:30 p.m.

Eastern time.

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

Please go ahead, sir.

Thank you, good afternoon, everyone and thank you for joining us on Celestica's fourth quarter and year end conference call.

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

Tony Puppi, Chief Financial Officer; and Craig Mulhauser, President and head of Business Development.

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 the conference call.

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

You are welcome to get back into queue after you ask your question.

Before we begin the call, I would like to remind everyone that during this call, we will make forward-looking statements related to our future growth, trends in our industry, and our financial and operational results and performance that are based on current expectations, forecast and assumptions involving risk and uncertainties that could cause actual outcomes and results to differ materially.

We refer you to the risk factors and uncertainties discussed in the Company's various public filings which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

These filings include our Form 20-F, and subsequent reports on Form 6-K filed with the Securities and Exchange Commission, which can be accessed at www.sec.gov and www.candr.com.

Please note that 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.

Overall we are pleased that the fourth quarter had some modest revenue recovery after what was a weak third quarter.

In the quarter we saw sequential growth of about 4% which is a small rebound in IT volumes specifically in our server segment.

This segment produced sequential double digit growth and recovered to approximately the same levels that we experienced in the first and second quarters of this year.

Though the revenue was at the high end of our guidance range, the growth was below the historical seasonal expectations which we believe reflects the continued choppy growth within IT and communications.

We did, however, see seven of our top ten customers grow compared to the challenges this group experienced in the prior quarter.

On a sequential basis, operating margins were flat at 2.3%, while returns on invested capital increased to 8.7%, up from 8.1%.

Given the stronger revenue, we typically would expect better profit performance, but this was not the case, as we incurred higher costs in our Americas region to support the major program transfers that occurred throughout the region.

Specifically, the transformation of one particular plant was significant.

With major growth in head count, space, and equipment as a result of transfers and demand increases.

In addition to programs transferring from other sites this plant is also ramping through new wins and additional customers in the first quarter.

While I won't give specific customer names these new wins include a major consumer win with a Japanese OEM that will be ramping in both the Americas and in Europe, and multiple new programs in some major aerospace and communications companies.

To support this activity we will incur ramp costs due to the learning curves and we will deploy more resources in the short term to ensure strong execution in the first quarter.

This will have a moderating effect on margins for the March quarter as well.

However, we are comfortable and excited with the prospects for this region as we progress through the year.

Asia continued to be our strongest region for the Company and our teams continued to deliver solid results.

Margins improved 20 basis points sequentially to 4% and customer satisfaction levels continue to be very high.

In Europe, we continued to experience quarterly operating losses, though the completion of our restructuring over the next two quarters should get the operations back to positive operating profit later this year.

In the areas of working capital, I'm pleased that we showed sequential improvement in the fourth quarter.

Our volatile quarter-to-quarter revenue pattern and major program ramps are definitely not helping us in this area here, but I'm pleased that the inventory has declined and free cash flow turned positive.

As I reflect on the full year 2005, I note that we experienced two very different environments during the year.

It made for a challenging year but we are still able to produce improved results over 2004.

The first half provided a more stable revenue backdrop that allowed us to deliver margin improvement, despite very moderate end market growth.

However, in the second half of the year, we saw unexpected revenue declines and a muted fourth quarter seasonality which limited the full year benefits that we had expected to see from our cost reduction efforts.

Despite the 4% full year-over-year decline in revenue in 2005 we were able to improve operating margins by 88 basis points and increased ROIC by 400 basis points while reducing SG&A spending by $37 million.

Another year of improved earnings, but short of our expectations, of earning our way to cost-to-capital by the fourth quarter.

As we enter 2006 we look forward to making substantial progress in our results, as we benefit from the improvements that we've made in our business the last couple of years.

In terms of management we've added new high caliber members to our management team in the areas of business development, services, supply chain, operations, and IT, to support the incredible opportunity and complexity in this industry.

In terms of capability, we have made some small, yet targeted acquisitions in areas such as design and repair that continue to fill out our offering.

In terms of diversification, we have made significant end roads into new end markets such as consumer, aerospace, and defense, that will allow us to grow our business with new market leading customers.

In terms of cost reductions we have taken one of the most aggressive approaches in our industry, to reducing our footprint in high cost geographies.

When our program is completed in 2006, we will have 80% of our capacity in low cost GOs.

This footprint includes new expanded operations in China, Thailand, Mexico, and Romania which provide both the cost structure and the capability to compete effectively and profitably.

These are meaningful changes and given the success we have had with winning the business we believe our customers agree with the direction the Company has taken.

In terms of outlook, the visibility is still limited in our core end markets and we are not prepared to give specific guidance beyond a quarter; however, we'll be working with the following expectations as we head into 2006.

In terms of the top line, we believe there will be some very modest revenue growth in our core common IT businesses and we feel optimistic that we will add meaningful new programs and customers that we have already won, or are in a good position to win.

As a result, we believe we should be able to see year-over-year growth in 2006 on a full year basis.

On the profitability side, we expect to continue to make steady progress on margin improvement, particularly in the second half of the year as restructuring is completed and new programs start to contribute to our top line.

The first half of the year and then particularly the first quarter will show some moderating pressure as we incur the ramp expenses that I highlighted earlier, but we are optimistic that we will be back on track by the second quarter and hit our 3.5% operating margin target and exceed our cost of capital by the December quarter.

Overall we believe the biggest challenges are behind the Company, but recognize there's still substantial work to be completed this year.

We will be a successful business because we will build on the improvements that we have been making over the last two years.

Before I turn it over to Tony, I would like to say thank you to all of our employees over the past two years who have maintained the highest degree of professionalism and commitment as they have worked hard through our recovery.

They dedicated themselves to improving our company and despite some major challenges they've delivered improved results and a healthier company.

Now let me turn it over to Tony who will give you more details on the quarter.

Thanks, Steve.

Revenue for the fourth quarter was $2.075 billion, up 4% from the third quarter and down 11% on a year-over-year basis.

In aggregate, we did experience some seasonality, though it was modest, and predominantly concentrated in our server segment.

Revenue segmentation for the quarter was as follows, enterprise communications increased 3% sequentially, and represented 28% of sales, while telecom increased 4% and represented 19% of revenues.

Our server segment showed some seasonal recovery, growing 23% sequentially and represented 19% of aggregate sales while storage was down 16%, based on some product transitions.

In our non-com, non-IP segments both the industrial defense aerospace group and the consumer automotive medical segment each grew and represent 11 and 13% respectively, of total sales in the quarter.

Moving to our customer mix, 7 of our top 10 customers showed modest sequential revenue increases with the top 10 representing 62% of revenue in the quarter.

Our top five represented 45% of sales and IBM and Cisco remained over 10% customers.

So virtually there's no change in our customer segmentation on a sequential basis.

On the geographic basis, Asia represented 47% of our fourth quarter revenue, the Americas were 36%, and Europe was 17% of sales.

Moving to profitability, the Company posted a GAAP net loss of $28 million or $0.12 per share for the fourth quarter, including pretax restructuring and other charges of $57 million.

This compares to a GAAP net loss of 810 million, or a loss of $3.59 per share last year.

Adjusted net earnings for the quarter were 29 million or $0.13 per share for the quarter, compared to adjusted earnings of 43 million or $0.19 per share one year ago.

Operating margins came in at 2.3%, unchanged from the third quarter.

Despite our revenue increases and some incremental benefits from our restructuring, our profitability was severely impacted as a result of higher than expected costs incurred in one of our America's plants.

These additional costs were as a result of significant transfer activities, new program ramps, and changes in customer demand later in the quarter.

These factors severely impacted our efficiency in labor and equipment, as well as causing premiums to be incurred to execute higher demand.

Furthermore, we had to delay the completion of some of the restructuring to the first quarter in order to assist with the capacity relief in the month of December.

We did not handle the complexity as well as we would have liked or expected.

These issues amounted to an approximate $0.04 per share impact in the fourth quarter.

While we have made many adjustments and changes, we anticipate that we'll be -- that we will not be fully back on track until the second quarter.

As Steve noted, we're also ramping a major new consumer program in the first quarter, which will drive some additional ramp up costs as well.

We believe it is prudent and appropriate to commit all the necessary required resources to ensure these transfers and meaningful ramps execute smoothly for our customers.

So unfortunately some redundancy is required.

Gross margin was 5.8%, compared to 6% for the same period last year, and 5.7% in the prior quarter.

Key dynamics adversely affecting margins sequentially were inefficiencies in the Americas, that I highlighted, some currency impacts, and some new program ramps.

These were offset by restructuring benefits, equipment efficiencies reflected in lower depreciation expense as well as higher volumes.

Companywide our utilization was between 60 and 65%.

Our SG&A was 72.9 million in the quarter, down 7% year-over-year, but up 4.5 million sequentially, due to higher sales levels and some expected increases in variable pay.

Segmenting our operating margins by geography, Asia continues to perform well, up 20 basis points sequentially to 4% on flat revenue.

Margins in the Americas were 1.6%, unchanged from the third quarter, despite a 9% increase in revenue, as a result of the execution issues I talked about.

In Europe, operating margins were a negative 1.5%, and the region continues to be impacted by revenue challenges in the higher costs -- regions of the geography and restructuring benefits which have yet to flow through.

There were some ramp up costs included in the quarter, as well on some new programs.

Of the three facilities announced for closure in Europe, our Barcelona facility has been shut and our two facilities in France are in the midst of being closed.

We expect that the restructuring activities in the region will be completed by the end of the second quarter at which time we would expect margins to become more positive again.

In terms of restructuring update as of the end of the year, we had recorded $160 million in restructuring charges in 2005, the balance of the $275 million program is to be incurred in 2006, of the $160 million charge, cash charges amounted to $149 million.

To date, six plants in the Americas and three plants in Europe have been announced for closure as part of the restructuring program.

Of these, three plants were closed by December 31. with the final three plants expected to be closed by the end of the second quarter.

Over 5500 employees will be affected in total when complete.

Cash at quarter end was a healthy 969 million, virtually unchanged from the year before.

Cash from operations was a positive 100 million and free cash flow for the quarter was $73 million.

Cash cycle improved by 1 day to 13 days sequentially and inventory turns improved to 7.3 turns versus 6.9 turns in the September quarter.

Inventory was down about $40 million sequentially and finished the year at about 1.058 billion.

CapEx for the quarter was $47 million, representing our expansion plans in low-cost geographies, specifically in Asia, Mexico, and Romania.

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

Those are the results for the final quarter of the year.

Let me now look forward to our guidance for the first quarter.

The top line, we expect revenue to be between 1.8 billion and $2 billion, with the midpoint reflecting what we would consider a seasonal decline.

Our major infrastructure segments still have limited visibility, but newer programs should start ramping late in the quarter for us, and incrementally increasing each subsequent quarter, through 2006.

We expect adjusted EPS to be between $0.04 and $0.12, aligned with the revenue range.

While we expect to achieve some restructuring gains and improved cost performance in the Americas in the quarter, we expect much better cost performance as the year unfolds, and as restructuring actions get completed.

At the midpoint, this guidance implies operating margins of 1.9%.

We continue to target operating margins of 3.5% as we exit 2006.

We believe this is a realistic goal, and a necessary result supported by the achievement of approximately $150 million in annualized cost savings upon completion of the restructuring plan.

It's also dependent on modest growth in end markets and expected growth from our business development success.

At 3.5%, we'll be north of our cost of capital and that's a critical milestone in our turnaround.

That concludes our remarks, and Steve, Craig, and myself would be happy to answer any questions you have.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Paras Bhargava of BMO.

Please go ahead.

Good afternoon, gentlemen.

How are you doing.

Good afternoon, Paras.

Just a question about your revenue guidance and your operating margin expectation for Q4.

At what level of revenues in Q4 would you expect to get 3.5% operating margins?

Well, we expect back -- back when we first thought we would hit the 3.5%, we were looking at 2.75 billion and I'm happy to say it will be a number nicely south of that number.

So I would say in the range of 2.4 to 2.6 would be a good comfort zone for us.

So are you -- is that -- that's basically what you are expecting for revenues.

We are not giving guidance but we expect that, with seasonality and even modest end market growth and some of the wins that we do have in hand, that that should be achievable.

No, I understand, you are not giving guidance but that's what you are planning for is what I'm asking?

That's what we think is achievable.

Now, should we get back -- it looks like you probably lost 30, 40 million of savings -- or incurred extra expenses of 30, 40 million in Q4 as a result of the hiccups in moving, I think from Colorado or maybe from other plants also.

Should we expect to get that back in Q2 or will it take longer to get that back?

I'm just trying -- I mean you've given us the fence post of where the -- where you expect operating margins to go to and I assume that,you haven't said anything about it but the same sort of profile for savings from the restructuring but we have got an added element here which is the -- the ramp costs or the added costs that you are talking about.

Yes, Paras, just to correct you, I said on my scripted portion that the impact to our results in the fourth quarter were $0.04.

That's about $10 million.

Yes, I meant annualized.

Sorry.

Yes.

We expect to be back on track by second quarter.

So we'll solve half of that problem, our expectation is solving about half that problem in the first quarter, and being back on track by the second.

And the restructuring ramp savings are the same as you said earlier.

Yes, we are still on track.

We will be back on track in terms of our progress to margin expansion by the second quarter.

Thanks.

The next question, operator.

Your next question comes from Bernie Mahon of Morgan Stanley.

Please go ahead, sir.

Good evening.

A question for you.

So it seems like in the December quarter and in the guidance for the March quarter, that it's negatively impacted by the new programs that are ramping and also, transferring some programs.

I guess I just don't understand why you have confidence that as we go into the June quarter, and the second half of 2006, that those problems will be fixed, given that I would think that there's still some more programs that you are ramping and it seems that just in general, there's always -- there's always programs transferring to low-cost regions.

Bernie, the fourth quarter was a combination of transfers and some pretty high volatility that took place late in the quarter that caused us to really expense some pretty significant dollars to try to execute our customers' requirements.

As we go into the first quarter, we understand what these problems are and the amount of transfers that we have remaining from areas such as the rest of our Americas plants, where there's been a major amount of restructuring is coming to a close.

And so we're going to complete that program.

We understand the problems that we caused for ourselves relative to transfer planning and also then in the second quarter, I'm expecting a pickup coming from some of these new programs, as we start to gain the revenue from some of the launches that take place in the late in the first quarter as well.

That's why I'm confident.

We have our arms around the mistakes that we made relative to transfer planning, but we then we'll start seeing the benefits of some of this new revenue too.

But as far as like the new programs that you are ramping, that's causing some of the problems also it sounds like in the first quarter.

What gives you confidence that when you are ramping programs in the June, or September, December, time frame that we are not going to run into these same problems?

The ramp costs, I guess I would say, Bernie is -- the ramp costs in the first quarter are not problems.

They are planned costs that we know will be a cause of this ramp.

It's a fairly recent consumer win that we have that's ramping very quickly.

And so in order to effectively do that we are going to have to spend some money in the first quarter in order to make those volumes happen in the second.

All right, thanks a lot.

Your next question comes from Michael Walker of Credit Suisse.

Please go ahead, sir.

Thanks.

I guess just more of a philosophical question than anything else.

You have been restructuring pretty consistently now for three or four years.

You are guiding to an operating margin that is going to be lowest in five quarters.

It seems like you are going backwards.

It almost seems like there are forces outside of your control that are counteracting the effects of your restructuring.

You've talked about demand a lot in the last year and a half, and I recognize demand has been a little bit bumpy with some of your customers but the underlying macro demand environment really has not been that bad in the last two years, and now you are having to deal in Q4 and Q1 with a customer demand that's cost you a lot of money.

There's other EMS companies that are experiencing the same issues in terms of inventory.

I guess I'm wondering what the end game here is.

Kind of continuing from the last question, how do we know that we're not going to get the demand environment or the customer demands in the second half of the year that will kind of cause these problems to happen again and again, because it's been several years since we have been hoping for that 3.5% margin to show up through the restructuring.

Yes, okay, Michael.

I would say that when you say the demand environment has not been that bad, I would argue with you in the space that we have been participating and that's been the major reason for our efforts to diversify our revenue outside of such a high concentration in IT and comp.

A few years ago we were something like 95% or so in IT and communications, and we have taken that to 75%, and we're -- our focus here on growing consumer is an area to try and reduce that dependency on specifically those markets.

So my bullishness on our ability to hit a 3.5% operating margin by the end of the year is partially in reducing independency on a market that has been hammered for the second half of the last two years.

Right, I guess -- I guess the question I had then in that case is, why not adjust the strategy more -- to a more, -- approach that's a little bit more direct i.e. if I look at the two EMS companies that are growing pretty quickly they are both companies that have a lot of consumer business.

You are pointing out you are trying to ramp down your infrastructure mix, but why don't you just do something very radical, like sell off the 40% of your business that's infrastructure and somehow acquire your way into the consumer area.

You have got Jabil, a competitor, which is basically acquiring a lot of that business and still hitting numbers every quarter and not seeming to have to deal with a lot of these customer transfers that are costing you money.

So why not just kind of be more radical now and do some major surgery here to get you where you need to be?

Well, because the capability that we have put to go and have been deploying for the benefit of those customers in IT and communications over the past few years is also a capability that's respected by customers in aerospace and defense and even the consumer customers that we've won recently.

I wouldn't want to chop off the arm that's actually delivering some of this value.

It's actually part of the competitive advantage that allows to us win this new business.

Okay.

Thanks.

Your next question comes from Jim Suva of CitiGroup.

Please go ahead.

Hi, thank you.

Given all your changes with restructurings and such, and your different geographic focus and more and more diversified, can you give us a little bit of guidance on where you expect taxes to go forward.?

Are we in the 15 to 20%, do you have NOLs to take it lower or what should we expect on that front?

Well, on a GAAP tax basis, of course, because of the restructuring we can't really estimate that with a high degree of certainty.

But what I will tell you is on a cash tax basis, so the cash rate that we apply to our pretax adjusted earnings is staying relatively stable, and we believe it's sustainable at the 14% level for the foreseeable future.

Okay.

Thank you.

Your next question comes from Kevin Cassell of Bear Stearns.

Please go ahead.

Hi, there.

I just wanted to get some color on Europe.

Sales in Europe were up 5%, the loss expanded a little bit.

You guys said that Barcelona has been shut down.

You still have two more sites to shut down, I think, in France?

Is that the last of what needs to be done in terms of site shutdowns in Europe?

Yes, we don't comment on it, but I would say that there are other resource reduction plans that will be implemented in the region that we expect.

So no more color on that.

The other factor that did affect profitability in Europe was the ramping of an important consumer program, and one other program in the quarter.

So no more color on that.

The other factor that did affect profitability in Europe was the ramping of an important consumer program and one other program in the quarter.

It wasn't a significant cost, but it certainly impacted the sequential profitability marginally.

Okay.

And when you think about your 3.5% target for the full company, where do you imagine Europe is in that mix in terms of operating margin.

Certainly above zero.

Okay.

And when we take a look at your depreciation and amortization in the quarter, I think it was down rather substantially on a sequential basis by about 6 million, is that right?

Yes.

But that added about 30 basis points to the gross margin?

About that.

About that?

And so, I guess, without that, you would have seen a rather substantial decrease or is it because of those transfers--?

We saw 30 basis points lower gross margin.

Right.

Yes.

So it's actually part of the structuring program that we have underway.

What's been happening with our mix of equipment is we have been, obviously getting rid of the older equipment through the restructuring process as we have been aligning our capacity, and where we have been growing, in Asia and in our other low-cost locations we have been adding equipment that -- the latest equipment with longer lifecycles and so our average mix for equipment has, in terms of vestable life has gone up, consistent with, I think, the treatment that our competitors have.

But I guess the question is, how does gross margin go down with the revenue going up in December?

Is that all the transfer costs?

That is strictly the issues that we had in execution in the fourth quarter.

Okay.

Yes.

Okay.

Great.

Thank you very much.

You're welcome.

Your next question comes from Brian White of Kaufman Brothers.

Please go ahead.

Good afternoon.

Could you talk a little bit about this transfer.

Did it have any impact on that customer relationship moving forward?

Well, the trend -- there were many transfers that took place in this plant and so I don't know if that's what you are referring to.

And so I think in all -- we threw lots of time, money, and energy at these transfers to get them to execute well.

I don't expect any adverse effects and in some cases we had a very tough time getting out this demand from some of these customers.

But we remain committed to recover and get back on track for these customers.

Okay.

What do you think about these new program ramps in 2006?

Can you give us a ballpark of what we're talking about? 1 billion, 1.5 billion, what type of revenue are we talking about for new programs in '06?

The -- I would say the short-term ramps that are sitting right in front of us today, some of which have been announced in prior years by some of these customers as well, probably in the 0.5 billion range with more stuff happening throughout the year.

Okay.

And the largest percentage of that comes from what market do you think?

Consumer or defense?

Consumer.

Consumer?

Yes.

Okay.

Thank you.

Your next question comes from Chris Umiastowski with TD Newcrest.

Please go ahead.

Thanks very much.

Steve, just wanted to clarify one thing.

First of all, I think the comments were made that three plants had closed in Q4.

Actually it was Tony who made the comment.

Were those specifically North American plants that you were talking about.

Yes, they were.

So you are saying three U.S. plants closed, three still to go, and that those three remaining will be closed by the end of Q2 or in Q1?

Three to go in total.

One in Europe -- two in Europe, excuse me, and France.

And one in the Americas.

Okay, so there's only one more in the U.S. that's left to go.

The ones that we've announced.

Okay.

Perfect.

Just talking a little bit about announced customers, Xbox, obviously, the news is out there, everybody has been talking about it.

Can you talk about if this is something that is helping or hurting your Q1 in terms of knowing that it's a ramp this quarter?

It's certainly one of the launches that we have going on in the first quarter but the significant one I was referring to earlier is a different one.

Yes, no, I understand that.

I just want to know if you believe Xbox to be a positive contributor to your earnings this quarter or negative?

Probably slightly negative.

Okay so -- okay.

So that would help, I guess our confidence in understanding your Q2 and beyond ramp.

So, I mean, is it fair to characterize this period of time, Steve, as one where, over '05 you guys have been talking about ramps that are coming on board.

Those ramps are starting to come on board and that's why you sound so confident that the particular unusual costs you are facing here in Q1 or not going to repeat themselves through Q2, Q3, et cetera?

Yes, that's right.

And a number of these ramps are related to some very significant capacity that we're putting in place with virtually no revenue to cover for it because of the -- of just the way the ramp schedule happens to be working out in these cases.

Okay, fair enough.

And lastly, just on your portfolio facilities.

You talk about return on invested capital for the Corporation as a whole, but have you thought of it as by your geographic basis would there be any reason to be doing business in Europe?

Well, yes.

Some of our customers need European capacity.

And we have been working hard to get our European footprint right and then putting effort and have work going into our -- especially our eastern European plants.

Can you get those western European plants to return on invested capital that's equally cross capital?

Yes, we can.

Okay.

Thank you.

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

Please go ahead.

Just looking at your balance sheet you have a fair amount of flexibility and you guys have done a few small acquisitions, maybe not as dramatic as cutting off your arm but what are your thoughts of using the cash to potentially acquire some diversification and use the liquidity you have from the Com IT segment?

Those are all possibilities Amit.

Can you talk about the pipeline, how does it look?

Are you close to doing something?

Are you looking at deals?

I wouldn't comment on anything, but the reason why we have that kind of cash is to give us that kind of flexibility to jump on great growth opportunities.

And just to clarify the impact you guys had from the transfer activities.

There was a 10 million impact in Q4, you expect another 10 million in Q1, and it was driven by multiple customers from one plant in America; is that correct?

No, we said in terms of the issues that that one plant experienced, and the network within the Americas experienced, would be cut in half within the first quarter.

It won't fully solve the problem.

For the whole quarter.

Expense problem.

The expense problem.

All right, thanks a lot.

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

Please go ahead.

Good evening, everyone.

Did I understand the comment about the guidance being at the midpoint, that's reflecting sort of traditional seasonality in the base business and then the top end of the range will reflect whatever new programs you would be able to ramp?

And get those out the door in Q1?

Well, that would be nice, but I just feel like overall, if you look at the volatility, how demand typically flows for us as a company, there's still a large dependence that we do have in the infrastructure side which has a degree of lumpiness particularly late in the quarter, that's a relative range that for now, we think is kind of normal.

So when you look at the midpoint and try to imply what we're meaning, it's sequentially, it's just a normal level of seasonality on largely an infrastructure business.

Okay.

Todd, I would say that in terms of upside possibilities, I wouldn't -- I wouldn't believe that there's much upside capability coming from the ramps, okay, because that's a pretty solid schedule at this point in time.

Okay.

The top end of the range would really come from the market, kind of our base business, if you would.

Okay.

I misunderstood that.

And then the second comment is you talk about the second half being very important to you, in terms of starting to get the margin leverage; however, you traditionally do suffer negative seasonality in the third quarter.

So are we really talking about a big bump in the fourth quarter?

Is that how we should be thinking about the year?

No, I don't think so, because if you look at our progress on margin, it is very closely tied or we should be closely tied with our restructuring efforts.

So there's a nice phasing as you look through the year and we'll expect to get margin expansion here from second, third, and fourth quarter.

Even if you do have negative seasonality in Q3?

Yes, that might impact volume somewhat, but, again, we are ramping new programs, and that should have a positive effect as well.

The point you should keep in mind is with the number of new consumer programs that's a bit countercyclical to some of the traditional IT and Com third quarter weakness that we have seen so I expect that will dampen that a bit.

The last question is, is how should we be setting ourselves up in terms of expectations for working capital requirements and building of inventory with these new programs?

Should we be thinking that maybe free cash flow and inventory demands -- free cash flow perhaps goes negative over the next couple of quarters and inventory demands increase as you move to meet these customer requirements?

Just talk us through that.

Thank you.

Yes, I think that's a good observation.

I think our first quarter will actually have marginal pressure on the free cash flow as we will ramp a large -- some large growth we anticipate into the second.

So that's clear.

I think separately, though, if you look at the volatility of our revenue flows, it's wreaked havoc on our inventory management over the last two quarters.

So with any degree of stability in the end markets and resolution of some of those issues that we experienced in the Americas, we should get better performance on inventory, such that we actually deplete some of the overage we still have trying to deal with the upside.

So it's another way of saying that I think after that it's possible that after the first quarter, it will either be flat, with growth, or slightly up.

Great.

Thanks a lot.

Your next question comes from Dayle Hogg of GMP Securities.

Please go ahead.

Thanks.

Earlier, you suggested that you had some more actions to do in Europe, beyond the two plants that closed in France.

Would that incur some more restructuring charges?

Yes they would be included in our total restructuring program.

So there's--?

175 million.

So by Q2 of this year?

It will happen throughout the course of the year.

When would we expect the current programs to be completed then?

By the end of the third quarter.

End of the third quarter.

And can you just talk about India?

You made the acquisition, is that an area of focus for you right now.

I'm sorry, I couldn't hear that question.

Just is India going to be an area of focus for you like in 2006?

Well, India is certainly an interesting new market, but the growth that we have been talking about is mainly from our other more traditional regions.

Is that an area where you would go after contracts first or do you not have positions there to grow?

We've already made an acquisition in India.

We have some capacity and availability to grow with what we've got.

Okay.

And can you just repeat what the percentage, the breakdown for the different product areas was again?

One second.

In the interest of other questions we should move on and you can read the transcript.

Please.

We need to get through all the questions.

Your next question comes from Steven Sakwa of Merrill Lynch.

Please go ahead.

Regarding the 3.5% target, Tony, you talked about being at revenues of 2.4 to 2.6 billion, so it seems to be implying revenues would be 3 to $500 million higher a year from now.

How much of that is related to new programs?

Well, a very meaningful part of that will be new programs.

As you know, we also have a few programs that have been announced that will transition out through the course of 2006.

Right.

Okay?

So which you take that into account, and with even just a modest increase in the end markets, I think that reflects very positively on our expectations to grow through new programs.

But I don't want to put words in your mouth but the base of the revenue assumption is on the new business in hand less business you know you've lost and modest growth assumptions.

And some growth that we believe we are in a very good position to win.

Okay.

And then so if you then apply that to the 120 basis point improvement you need in margins, what percentage would be coming from revenues versus the costs that are left to realize?

I mean I just kind of use a rule of thumb here.

We're talking about way out there right now in terms of expectation but just in terms of a rule of thumb, understanding the economic model that we have, I think it would be prudent to model about $0.10 on the dollar as an effect on the earnings and then depending on the relative mix of the programs whether they are in infrastructure or in consumer they would have higher or lower levels on that $0.10 on the dollar.

On aggregate that's kind of what our experience rate has been.

Got it.

Thank you.

You're welcome.

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

Please go ahead.

Oh, good afternoon.

Just a housekeeping question, first.

When you say geographic breakdown is X percent in Asia, are you talking your sales revenue or your production?

Production.

Production.

Okay.

But we ship from plants in Asia.

Okay.

And a related question then, you said that eventually 80% would be in low cost regions.

And what are those regions again?

Our low-cost regions.

How do you define.

Would include all of Asia outside of Japan, it would include Mexico, Romania, and the Czech republic.

All right.

So you have a heavy -- you still have a heavy dose of storage and communications, infrastructure, and things of that nature, but it seems that you've determined that most of that can really be done in these low-cost regions; is that correct?

You are not going to have a lot of capacity left elsewhere.

Alex, one of the things that we have done I think that's distinctive and that our customers are recognizing is put quite good capability in low-cost geographies for these complex infrastructure-type products.

Okay.

So I think we are respected for that and that's been part of our success in some of the new businesses as well.

That's good.

And Mexico would have stuff that has to be close geographically then, right?

Correct.

Third thing is on the consumer side, can you give us an idea of what kinds of products we are talking about here?

Is it consumer electronics?

Is it set-top boxes?

Modems or just cell phones?

What is it?

I would rather not say.

I think at this point in time, we'd best not talk about that.

I mean, you--.

It hasn't even launched.

Oh, I know, but you wouldn't be giving away the OEM's name in doing so, just a category.

Sorry.

I'll think about that later.

Okay.

Finally, when you say transfer, I wasn't clear on whether you are talking these transfer costs were transfers in or transfers out?

Alex, this is -- a lot of the transfers that were going into that plant were transferred as part of the restructuring plan, as we closed some of our Americas sites and moved that work into this other plant.

That was compounded by a new business that was moving into the plant as well as some demand increases that occurred quite late in the process.

So sort of all of those -- a confluence of items really put a lot of pressure on that ability.

Okay.

These are transfers then from other Celestica sites?

Yes, that was -- a good number of them were, yes.

And those other sites are closing?

Yes, those would be some of the sites that we closed in the fourth quarter.

Fourth.

That Tony referred to earlier.

And you are not naming the site that is getting transfers; is that correct?

You are not naming where it is?

I think it's pretty clear to everyone it's in Mexico.

Well, I thought so.

Okay.

Thank you.

Your next question comes from Michael Ellis of Thomas Weisel, please go ahead.

Hi, good afternoon.

I'm calling in for Matt Sheerin.

My question was, well, the simple one first, leading to a more philosophic one.

First, I just want to understand in the end of the fourth quarter, were there customer actual demands to increase production at this facility in Mexico and/or speed up transfers which caused you to incur additional costs?

There were demand increases from the customers as well as transfers that we had planned on bringing into the quarter.

I don't -- I'm not sure I understand your question.

Oh, I just -- my question is, I'm wondering how much of the problems that you experienced in -- or the issues that you experienced in the fourth quarter were not of your own making?

You did acknowledge some mistakes in the transfer plane, but were as a result of customer demands that were unexpected.

I think it was a compounding effect, I guess the way I would put it.

I would -- certainly the -- we had to recover from the mistakes we made in our transfer planning process, as well as allowing these things to get stacked up like this.

But I'm not going to place the blame on anybody else.

Sure, but is that -- are you getting compensated for that, these extra expenses that you had to incur to meet that extra demand?

Is it just an assurance of keeping the current business?

I mean this is--?

Everything that you see is net, that Tony talked about was really net of any kind of premiums paid for, customer increases, if you will.

Right.

Okay.

Just my philosophic question longer term is have you -- what's the level of scrutiny that you put current business and current customers through?

Are you -- do you guys feel you are in a position at this point to bargain with customers to get those returns that you are planning to get?

Or is the balance of power always going to be with the customer in that we see the volatility that you guys deal with and it's just -- I just wonder if you guys can get adequately compensated for that or is that just going to always be a hallmark the business?

Michael, this is Craig Mulhauser.

I think what we're seeing in the market is the value that Celestica can bring to customers today, given the fact that we spent the money and the time and the effort into the restructuring.

Looking forward, our network is going to offer the best cost network for the types of high complexity, high quality and innovative products that we are pursuing.

I think the point is, we need to be more aggressive with our customers to make sure they understand the true value that we are bringing and to really give them the flexibility they need to meet the demand, we've got to making a fair return so we can make the necessary investment.

I definitely agree our performance will speak for itself but we need to be more aggressive in making sure that what we bring to our customers is reflected in the margins that we've delivered to our shareholders.

Thank you for your answer.

Your next question comes from Kevin Cassell of Bear Stearns.

Please go ahead.

Yes.

In terms of the timing of the closures in Europe, the remaining two, are some of them planned to happen in Q1?

It will happen throughout the year.

Okay, but you did say you--?

They will will be complete by the end of the second quarter.

Complete by the end of the second quarter?

Correct.

And that will require still a large amount of program transfers, I would imagine.

When you look at those facilities it pales in comparison with the complexity and the number of program transfers that we had in the Americas.

Okay.

And you recently announced--?

Whatever delays were in Europe are largely customer driven, and/or timing with dealing with unions and things like that, that are normal course.

But you don't expect -- I mean, because France is known for having some of the worst unions in general.

We don't expect any difficulties there, given the less complexity that exists.

Okay.

And then in terms of just Europe going forward in terms of improving it, you recently announced James Rowan as COO and he used to run Europe.

Is someone else be appointed in that role and what is the outlook there?

Jim's acting in that role in the short term and we will ultimately put someone in that role for running Europe.

Okay.

And the last question, Tony, in terms of the 3.5% operating margin, I asked earlier about Europe.

What about the U.S., what would be the goal in terms of the U.S. at a 3.5% level for the Company?

Well, there's no reason the U.S. or the Americas couldn't be north of 3.5% for the time frame we are talking, about obviously, it would be lower.

Our Asia group which represents a substantial portion of our margins are 4%, hopefully they will continue to be robust, and we expect them to be robust, so on the weighted average basis, the Company will be at around 3.5, and the Americas should approach and over time, exceed that level, given the type of business that we will be producing there.

It seems like when I go back and I look over the last six years, Americas have only been above 3.5 or at that level for two quarters in 2002 and otherwise they have always been consistently below.

So you think structurally, this restructuring did a lot in order to change the potential there for margin?

Absolutely.

Just the other thing that this restructuring reflects is placement of programs where we believe that they are most sustainable from a profitability perspective in terms of earning our cost to capital.

So that's part of the architecture here.

It's not just getting the lower cost point but moving the right pieces of business to where it's sustainably profitable.

Thank you very much.

Your next question comes from Thomas Dietz of JP Morgan.

Please go ahead.

Hi.

Just a quick one for you guys relative to some of the transfers and so forth that you had to do.

Can you quantify if there was any inventory that as it was sitting there in transit and so forth was still there at the end of the quarter that maybe could have peeled off?

And then I have a quick one on the restructuring as a follow-up.

Thomas are you talking about from this plant or overall the Company?

In aggregate.

Just trying to get a sense of inventory was down.

How much more could it have been down had some of these things not happened to you guys, just to get a sense of what maybe a cash flow number could have looked like if you guys had been able to actually work through all of these things without having to expedite and so forth?

I'm not sure, especially late product shipments wouldn't probably affect cash anyway.

That's right they would wind up in receivables.

So probably wouldn't have done much in terms of cash flow.

We did have some finished goods clearly at the end of the year but not from customers that needed it obviously.

Okay.

And then Tony a quick one on the restructuring.

Just trying to think about the cash component that's coming out of there.

Is the cash component out of these -- the remaining charges there roughly about the same proportion that you'll have from what's already been spent?

And it sounds as if it's probably Q1, Q2 might be the heaviest component there and then as Steve mentioned it will be pretty well done by Q3 and then by the time we get to Q4 it sounds like we're probably not going to have any on the restructuring charges left.

Is that the correct way of thinking about it?

I think that's the correct way of thinking about it.

We have a high degree of cash content in the entire program.

Okay.

Thank you.

Last question, operator.

Your last question is a follow-up question from Chris Umiastowski of TD Newcrest.

Please go ahead.

Thanks very much.

Just a real quick follow-up for you guys.

ROHS is coming into law within the next six months.

Just wondering how you feel now, maybe compared to a couple of quarters ago?

Do you feel well prepared, and do you feel that when July 1, comes around you're not going to get stung by any surprises?

Or is that a risk?

Well, we're certainly well prepared with our process, chemistries, and all of that.

I think at the end of the day it's going to wind up being a supply chain exercise, just as we've always been talking about.

And I'm sure there's going to be some scrambling frankly, in the middle of the year as some of the customers who maybe don't get deferrals or find some competitive pressure to go ROHS.

One to speed up the interning changes to get their products compliant.

Okay.

So are you saying that could present some risks during the Q2, Q3 time frame at all?

Or can you quantify maybe whether that's in your budget for the year what kind of things you're expecting to happen that could go wrong that you think might?

I frankly think about it as an opportunity.

So as customers wind up changing their plans it's really an opportunity for us to provide some value for which we'd get paid.

Okay.

Thanks very much.

Okay.

Everyone, that will wrap up the call this afternoon.

Let me just close by saying that I'm excited about the new products from customers that we're going to be launching over the next couple of quarters and that we referred to a little bit earlier.

Certainly disappointed with the transition hiccups we had in the fourth quarter, however, we've got the corrections underway and we expect those to be completed in the first quarter so that we can get on with our growth.

So there you go.

Thanks everyone, good night, and talk to you in April.

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

Thank you for participating.

Please disconnect your lines.