Celestica Inc (CLS) 2006 Q1 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by.

Welcome to the Celestica first quarter results conference call. [OPERATOR INSTRUCTIONS] I will now turn the conference call over to Mr. Paul Carpino, Vice President Investor Relations.

Please go ahead sir.

Thank you [inaudible].

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

On our conference call today will be Steve Delaney, Chief Executive Officer, Tony Puppi, Chief Financial Officer, and Craig Muhlhauser, President and head of business development.

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

Copies of the support slides accompanying this webcast can be viewed at Celestica.com during this 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 in the queue after you ask your questions.

Before we begin the call, I'd 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 operational results and performance that is based on current expectations, forecasts and assumptions involving risks 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 6K filed with the Securities and Exchange Commission, which can be accessed at their Tdar.com and SEC.gov.

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 www.celestica.com.

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

Thank s Paul and good morning every one.

Tony will take you through specific details of the quarter but I'll open with some comments on the business environment, our operational performance and our outlook for next quarter.

After three years of some very volatile end market demand, results in the first quarter and for the outlook in the second quarter are starting to show some benefits of our growth and diversification efforts.

Let me highlight a few areas.

First, our non-top 10 customers represent 38% of business this quarter compared to 27% in 2003 and 15% in 2002.

Our non-communications and not IP segments grew 12% on a year- over-year basis, now represent 24% of the business, versus approximately 10% in 2003.

This has occurred despite the triage of some of these programs last year and in late 2004 that we initiated to improve our profitability.

We've been working on some major new consumer wins that have constituted significant investments but are not yet generating much revenue.

They're just now starting to go into volume productions.

We will be ramping this business as we go into what are their seasonally strongest quarters.

This should give us some healthy top line traction and some stability to our revenue base as we head into the more volatile September quarter.

We view this as a very positive accomplishment given that the consumer segment was virtually nonexistent for us 2 years ago.

Our Asia region also crossed 50% of revenue threshold to the company.

For the first time in our history.

This success is reflected with this region's advanced capability to build the most complex products at low cost region.

Though Europe and the Americas are still in transition mode, we've been spending considerable effort and investment in preparing them for the growth from both traditional and new customers that should begin in the second quarter.

We're pleased that the launching new business combined with a modestly better end market demand has created a more encouraging environment than we've had for the last couple of years.

Operationally, we're in the final phases of the very aggressive restructuring program that we began early last year. though our margins in the Americas and Europe continue to be impacted by the transitions ramping and structuring activities, we are committed to establishing sustainable, highly effective low-cost capabilities in these 2 major regions by the end of this year.

This year, Mexico will become our largest manufacturing operation in the Americas.

This quarter we expect the site's revenue to be more than double the revenue that it experienced in the third quarter last year as a result of the transfer from high cost geography plants, mixed business strength and new business wins.

Naturally, this amount of growth has required investment in people training and equipment.

On the working capital front, our performance was weak this quarter, due primarily to a modestly constrained environment for parts.

This resulted in a more back end loaded quarter, which impacted inventory levels, revenue, and receivables, therefore cash flow.

We will be working hard to reverse part of this trend in the second quarter, but will support the growth needs of our customers as volumes increase and transitions are completed.

[Man tone] and new program volumes continue to look positive and we expect all regions to show sequential top and bottom line improvement in the second quarter.

As you can see in our guidance, we expect an improvement in profitability in the second quarter for the revenue growth and the restructuring.

Growth effects and the new launches under way do however affect the short-term efficiency in our Mexico and Eastern Europe operations.

We expect improvement in operational efficiencies as our people progress through the learning curves [inaudible - technical difficulty].

Let me turn the call over to Tony who will take you through some additional details.

Thanks Steve.

Revenue for the first quarter was $1.934 billion coming in at the midpoint of our guidance and reflecting our first quarter seasonality.

On a year-over-year basis, revenue was down 10%.

Our base business experienced strong demand through the quarter.

While this positive end market bodes well for a strong start in 2006, we did face associated challenges with component constraints while addressing the demand increases we experienced.

The supply chain tightening coupled with the ramping of several major new consumer programs created a very back end loaded quarter in terms of production volumes.

Revenue segmentation for the quarter was as follows.

Enterprise Communications represented 30% of sales, up from 28% in the prior quarter, while Telecom was flat at 19% of revenue.

The server segment represented 17%, down sequentially from the fourth quarter and storage remained at 10%.

Our non-com, non-IT segments were flat sequentially.

The industrial, defense, aerospace group was 11% while the consumer, automotive, medical represented 13%.

Overall, the mix remained stable.

Moving to our customer mix.

Our diversifications efforts continue to positively shift our concentration numbers.

Our top 10 accounts represent 62% of sales, down from 67% a year ago.

Our top 5 represented 43% in sales and IBM and Cisco remained over 10% customers.

On a geographic basis, Asia eclipsed $1 billion in sales, representing over half of our business for the first time at 51%.

The Americas was 34% and Europe came in at 15% of sales.

Moving to profitability.

The company posted a GAAP loss of $17 million or a loss of $0.08 per share for the first quarter including a pretax restructuring charge of $17 million.

This compares to a GAAP net loss of 12 million or a loss of $0.05 per share last year.

Adjusted net earnings were $17 million or $0.08 per share for the quarter and at the midpoint of our guidance.

Operating margins came in at 1.8% compared to 2.3% last year and 2.3% in the prior quarter.

As discussed last quarter, profitability is being affected short term as a result of the seasonal sequential decline in the extra resources and costs we are deploying in Mexico.

Further affecting operating performance was the non-linearity of component supply, driving later shipments in product volumes.

Gross margin was 5.5% compared to 5.8% for the same period last year and 5.8% in the fourth quarter.

Company wide, our utilization averaged about 60% for the quarter.

Our SG&A was 73% -- $73 million, excuse me, in the quarter, down 2% year-over-year and unchanged sequentially.

Segmenting our operating earnings and margins by geography, Asia continues to perform well at 3.8%.

These margins combined with more than 50% of the company's revenue now coming from the region demonstrate the positive benefits we are starting to achieve and starting on our major footprint transition over the past few years.

Margins in the Americas which were just above breakeven at 0.4% of sales and were adversely impacted by an 11% sequential decline in sales and by our performance in Mexico, which is growing very rapidly and where we experienced the biggest challenges in terms of non-linearity.

As we remain committed to deploying all the necessary resources to accommodate our customers and their growth in Mexico, we believe it will take us a couple of quarters more to achieve the performance we expect and to eliminate the $0.05 per share cost this transition and investment had in the first quarter.

In Europe, operating margins were a negative 2% on the back of a 16% sequential decline in sales and the ramping impacts of an important consumer program.

Margins should improve in the second quarter as volumes of a new program scale and restructuring benefits start to flow through.

Clearly margins in both Europe and the Americas are reflective of the major transitions in the regions as they both absorb new growth and restructuring related transfer activities.

In terms of a restructuring update as of the end of March, we have recorded $177 million and $275 million program announced in 2005, with cash charges of approximately $135 million paid to date.

We are making good progress on our facility closures with the Americas largely complete and European actions announced.

As of the end of March, 2,500 employees were released of the 5,500 or so anticipated.

Upon completion, we continue to expect this program to generate approximately $150 million of annual cost savings.

To date, we are about halfway to realizing this goal.

Unfortunately, the impacts of Mexico are temporarily offsetting these benefits and driving growth to the bottom line.

Cash at the quarter end was $776 million, down approximately $193 million sequentially.

Cash cycle was 15 days, which was flat to the first quarter last year, and an increase of two days from the December quarter.

Inventory grew $100 million in the quarter and inventory turns decreased to 6.6 turns versus 7.3 turns in the December quarter.

The higher inventory and lower turns were as a result of supporting growth into the next quarter.

While we are clearly not satisfied with declining turns, it is important to highlight that four returns have been virtually flat at 7 turns for the last 2 quarters and as we exit the March quarter.

Receivables were up 6 days to 47 days, exclusively due to the back end skew of shipments.

Our capital spending of $55 million in the quarter was focused on the new programs being ramped in low-cost geographies.

In addition, we spent $19 million for our Powerweave acquisition, which closed late in the quarter.

At the end of the quarter, debt to cap remained at 25%, despite the timing impacts on cash, our balance sheet remains strong.

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

On the top line, we expect revenue to be between 2.050 billion and 2.25 billion.

Adjusted earnings per share of between $0.08 and $0.16 per share.

This guidance reflects growth in our new programs and delayed efficiencies from the high growth in our low-cost facilities.

That concludes our remarks.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Michael Walker from Credit Suisse.

Please go ahead.

Thanks and good morning.

Question on margins.

In the past you talked about getting the 3.5% operating margin by December.

It looks like margins were a little lower than you might have been looking for in March.

What are you looking for in June?

Are we going to pass 2% operating margin.

And if we are approaching 2%, is 3.5% still realistic.

And the I have a follow up.

Okay, good morning Michael.

In terms of our margin performance, yes, we expect margins to be north of 2 in the following quarter, in this quarter.

And that is reflected in the EPS guidance that - as you've heard.

And going forward, I think the delays that we have seen in that margin expansion on the back of growth could, from where we are today, impact that target.

But we remain committed to achieving that level of margin profile as well as the return on capital being north of our cost of capital by the fourth quarter.

So as things look out and as we continue to drive, if you will, performance, that we need in Mexico and some of our other low cost facilities that are ramping quickly.

It may seem a little harder to get to, but we remain committed to that direction.

Okay, and the my follow-up is on your demand comments.

You are seeing demand modestly better, could you drill down a little bit, is that on the IT side, is it on the non IT side.

I was a little surprised to see - obviously consumers is down seasonally in the quarter, but you've got a pretty well-known program with Microsoft ramping up right now.

Do you see the consumer becoming a big grower here in the coming quarters?

Just some general color on the demand environment.

Michael, this is Steve here.

I'd say in terms of the growth that we expect sequentially from first quarter to second quarter, maybe half of that growth or maybe even a little less than half of that is coming from some of these new launches like the new launches that we talked about with the remaining of it being in a pretty strong overall environment.

I would say that our communications segment has remained pretty strong all the way through first quarter and looking into second quarter.

IT - we had sort of the seasonal dip that we expect in first quarter and that should strengthen in second quarter.

Okay.

Thanks a lot.

Your next question comes from Dayle Hogg from GMP Securities.

Please go ahead.

Thanks.

I was wondering if you could just give us some color on the magnitude of the consumer business and the margins on that looking maybe into Q3, Q4.

I wouldn't want to give any guidance on that [inaudible - background noise] in terms of margins and guidance.

I guess, let me put it this way, with consumer business as a general rule, our expectations on margins isn't as high as we would expect on a higher mix, lower volume kind of business.

However the inventory turns and the working capital investments are lower, so we do expect still it to generate our cost to capital in terms of ROIC.

In terms of the magnitude of it, I think I've mentioned in the past that I would expect us, certainly by the end of the year to be running at north of a $5 million run rate.

I think we're comfortably at that.

And you will be doing production in all 3 geographies with your total consumer business?

Yes.

Okay. thank you.

Your next question comes from Todd Coupland from CIBC World Markets, please go ahead.

Yes, good morning every one.

I think you did reference the consumer programs ramping maybe muting traditional seasonality in the third quarter.

Are you trying to say there that you may see actual sequential the improvement in the third quarter -- just provide us a little color on that, thanks.

Tom, I tell you, after the last two years I was surprised in the middle of the year by the weakness that we saw.

So it was very late and very unanticipated.

So my comments, or maybe my conservatism on this is really based on the last couple of year's experience.

Our visibility right now in traditional markets, let me say, in the third quarter, is not very good, never has been, I don't know that it ever will be.

And so I guess my expectation would be, if we see a similar kind of weakness in the second half of - or I'm sorry in the third quarter, that we would expect the consumer business to offset that.

That was -- the traditional market remains strong, that's obviously a nice benefit for us.

Okay, secondly, could you just tell us with the supply constraints of components, do you feel that that potentially will cause you to have shipment issues in the coming quarters as these production volumes ramp and make it difficult to hit revenue targets?

Thank you.

Okay, I guess I would say, let me give you a little color on the material problems I think that warrants a few comments.

I think in the past, over the past couple of years with a largely surplus industry or an industry with largely surplus capacity.

We've been able to find a way to get components inside lead times.

We found all kinds of ways of achieving growth supply with very short, with a short responsiveness time.

What we're seeing now is certainly a tightening or a constraining in the environment on some standard components.

But a number of our problems that we had in the first quarter with respect to component supply were on customer specific or customer unique components where there weren't other sources, other options to go to.

I expect as we go into the second quarter, things will even out a bit.

The demand has been laying on them for a while longer so we've got that going for us.

And things certainly, at the start of this quarter, are running better than the start of last.

We are still expecting an improving environment through the remainder of the quarter.

I would say though that we're still expecting an improving environment through the remainder of this quarter in the material supply environment.

So I'm hopeful that we'll get this behind [inaudible - technical difficulty]

Great.

Thanks a lot.

Your next question comes from Jim Suva from Citigroup.

Great.

Thank you very much.

Can you comment a little bit about your June visibility that you have and if you can -- especially as you compare the revenue outlook that you have and at the high end it's basically in line with what you had a year ago.

Maybe the visibility that you have now versus one year ago and if you can comment on that please?

Yes, Jim, I'll say this -- the second quarter of last year wasn't really any surprise.

I think it turned out just pretty much how we expected.

It was the third quarter that wound up being the surprise.

So, I'm not - I guess at this point, it feels like a pretty solid revenue environment -- certainly, there is upside potential to the numbers.

Okay, and could you maybe as a follow up, give a little bit of commentary on April tracking April's pretty much done according to plan?

Anything that's softer or better than expected?

Things, as I mentioned a little bit earlier, we expect kind of an improving material supply environment as we go through the quarter and I would say that we will see that happen still.

Thank you very much.

Your next question comes from Bernie [Mahone] from Morgan Stanley.

Please go ahead.

Hi, good morning.

A question for you on the gross margins.

If we look out over the next couple of quarters, it seems like there are some moving parts where you're ramping some programs, but if they're consumer they're probably lower gross margin programs.

You're almost at the end of your restructuring benefits, but at the same time, you kind of have this headwind of the Mexico -- the issues going on there.

Could you just talk about how gross margins should trend over the next couple of quarters and do you think we could get them to say 6%?

Well Bernie I think you just summarized nicely all the dynamics that we are seeing.

We expect, on the back of and on the net of all of those dynamics that we would improve our margins sequentially on the gross profit level, every quarter.

But we have, as you know, and as I've said, about halfway through that restructuring program being completed so there's still the benefits that flow from that.

We have been ramping and getting prepared, as you know, for some of that consumer business which will have lower margin profiles and effect the mix to some degree, but we have also been carrying operating inefficiencies as a result, so we expect and improvement from there.

And then lastly, just the robustness of overall end market demand I think is - bodes a lot better for us going forward then it has over the, let's say the last three quarters.

So I think all of those things help us develop a level of confidence around the growth in margins sequentially.

Okay, but I guess I'm just trying to figure out, like maybe when the inefficiencies that you're going through right now in North America, when you kind of get past them, do you think we'd see a big jump in gross margins, say 30 or 40 basis points if we look out to the September, December quarter?

Yes, well if you think about it, we've got a $0.05 impact, that's about $11 million of operating earnings impact in the first quarter.

So that has a meaningful effect once that's behind us.

Okay, and that's all on the gross margin line you think?

Yes it is.

All right, thanks a lot.

You're welcome.

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

Please go ahead.

Alex Blanton.

Good morning.

I would like to talk a little bit more about the shape of the sales during the quarter.

You talked about the parts constraints particularly in the custom components.

The indication here was that demand for the quarter was above your ability to supply it.

Would you say that was evenly -- that excess demand or the demand you couldn't meet was evenly distributed over the quarter or did it -- would it have caused an even greater hockey stick effect if you had been able to deliver?

Alex, certainly if the components had freed up to a larger degree late in the quarter, we could have put more - we could have pushed out more revenue and we did carry a backlog, I'll tell you, into second quarter to answer that question of yours.

And just to give you a little bit of color on it Alex, I'd say where - probably a good way to talk about the inefficiencies we saw in the quarter was that we had a significant amount of capacity that was idle in the first part of the quarter as a result of the material constraints that we saw.

That represented capacity lost and money spent, if you will, without the supporting revenue.

Of course as we got late in the quarter that became much more utilized in the final months.

And as we go into second quarter, we expect to be better at utilizing that and especially over the next couple of quarters to get everything kind of cleaned up in terms of growth hiccups and efficiencies [inaudible - technical difficulty].

Where the sales have been within your range, if you hadn't had these constraints?

We - our sales were in the range already.

No, I know but how much higher would they have been?

Oh they still would have been.

I would say they still would have been inside the range Alex.

Okay.

Close to the top end Alex.

[inaudible - cross talk] obviously much closer to the top end.

Okay, second question is on the Cisco lean project that - 2 competitors [Jayble and Selectron] have discussed that in previous calls.

Jayble said that because of Cisco's leaning that they're not pushing inventory back into the supply chain at all.

What they are trying to do is to eliminate as much inventory as possible throughout the supply chain by putting in a pull system throughout the supply chain, not just in one portion of it

So Jayble is implementing that in May and August quarters with a 25% decline in their sales to Cisco in the May quarter and then it jumps up in the August quarter by 100% from the May quarter, this is what they said on their call, because that there is additional consignment sales are going to turn key in the August quarter.

Selectron has similar effects, not as much, though not as severe they said.

And their start in the November quarter with a decline in sales in Cisco because of a reduction inventory and then an increase in the February quarter.

So how are you implementing it?

What's the affect on your sales to Cisco from the implementation of this lean program?

Okay, Alex, let me first say that I don't want to talk a lot specifically about a specific customer but I will say we have a major customer implementing some lean activities that affect us here in this quarter.

And to the degree that those changes affect the different EMS companies varies by way of what products those companies are doing and where they stand really in the creation of the product whether it's a fulfillment related activity or PCBA manufacturing or whatnot.

Our expectation in the second quarter is that those activities will affect our inventory between $50 and $75 million.

Well, what about the effect on sales?

On sales, a one-time reduction of maybe $30 million.

In the second quarter?

In the second quarter.

So its similar to what's going to what's going to happen to Jayble, you're sales will go down during the June quarter and then they'll go back up in the September quarter, the sales to Cisco I'm talking about.

Yes, I don't want to - I didn't listen in to the other competitor's call that you're talking about but [inaudible - cross talk] -

They were quite specific on what would happen.

The hit that we're talking about, the $30 million hit which is built into our guidance, would go away in the third quarter, okay, so it would resume back net because of the onetime adjusted flow --

And you would agree that this is an attempt to put in a pull system throughout the supply chain.

It's not an attempt to push inventory from Cisco back onto the suppliers, right?

Right, I think we're all of the same mind here is that we're trying to make this supply chain as efficient as can be.

With as little inventory as possible, right?

Yes.

Okay, thank you.

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

Please go ahead.

Hi, good morning guys.

Following up on that last one, Steven, it sounds like you'll have a little bit more inventory just specific to this program, but maybe talk now that, say, you say if the component environment maybe gets a little bit better and some of the big moving parts on some of the production moves that you're doing.

Is there a chance that the inventories are kind of roughly flattish next quarter or do you still think there'll be a bit of an uptick there.

And then I just have a real quick follow up.

That's a -- certainly, the component problems have affected us on the inventory side, as the growth as Tony mentioned a bit earlier.

We had expect to see some efficiency or turnover efficiency improvements here that we just haven't got.

Tony mentioned that on a forward-looking basis it's been flat the last 3 quarters and that's been caused by those issues with the non linearity [inaudible - technical difficulty] of the supply.

As we look into next quarter, frankly, most of the inventory affects for next quarter are probably on the way, if you will, right?

In terms of - when I say next quarter I mean second quarter, basically in the works right now.

So I wouldn't expect a material change in the inventory.

Probably driven more by what's happening in the growth, in the area of growth.

As we look into third quarter we really hope to improve that as we see much more stability in the component supply line and get our own efficiencies back to where they need to be.

Okay and then the follow up is just simply what was the total corporate head count end of the quarter and what do you guys expect that to kind of be the end of the year or do you think you're done with a lot of the big heavy lifting on hiring that you're doing to support the growth or do you expect some further hiring corporate wide through the rest of the year?

Tom, we ended up with around 48,000 but underneath the covers, as you know, there is a major shift going on, right.

So we are ramping those programs, it is in low-cost regions and facilities.

So we'd expect hopefully, with a lot of success there, that that number could actually grow.

But it will certainly have a different view than it does today.

Okay.

Thank you.

It's more concentrated on the execution side in low-cost geographies, certainly not out of new corporates.

Okay.

Your next question comes from Steven Fox from Merrill Lynch.

Please go ahead.

Hi, Good morning.

Can you just go back over some of the Mexico issues again?

Specifically the $0.05 drag on EPS.

I guess you're saying it's peaking, I was curious how much was related to a single customer and when exactly are you saying that those problems will be gone now?

And within that answer, could you just talk about what the Mexico plant looks like now in terms of square footage and mix of business and what you're hoping to achieve there?

Okay, a lot of questions there Steven.

Let me try to give you some color on it and I'll have our guys come up with some of these.

With respect to the issues in Mexico, I think, across - I would say across the plant because of the sheer magnitude of the growth, doubling the revenue in nine months is an enormous effort, as you might guess.

And so clearly we had learning curve issues and the issues related to having new people in the site that affect efficiency that really spanned the plants.

It was not just single customer related and so I wouldn't ascribe that impact to one particular customer.

The material problems, the non-linearity of the schedule was maybe a little bit more concentrated on a couple of customers.

One customer related to some drop in demand and another related to some of these unique components that I talked about.

The plant itself is about 375,000 square feet now and the number of people is -

Just as shy of 6,000.

Just shy of 6,000 at this point in time.

And like I said, the revenue of the plant will have doubled at the end of this quarter, or more than doubled from the September quarter last year.

So does that give you what you're looking for Steve?

Yes, that is very helpful.

And just a quick follow-up Tony on options expense.

You are excluding it from your EPS reported and does that option expense number change much going forward?

No, it does not and as you know we use the treasury method on valuation of the option so that is a factor.

So we don't expect much change there.

And you're excluded - it's excluded from the $0.08 that you just --

It is.

That is correct.

Okay, Thank you.

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

Please go ahead.

Good morning folks.

A question on what is exactly going on in Mexico.

One of your customers in their conference call yesterday seemed to indicate that it was mostly learning on your part in terms of the new folks in Mexico.

Where are you now in terms of being able to get materials in and understanding exactly what the [bomb] of some of these complex assemblies is, especially the specific components versus the same time last quarter.

Would you say you've made significant progress?

Secondly, if I look at your - I think you're still saying you can get 3.5% operating margins at 2.4 billion.

I am just wondering if you assume end markets are flat, would you still expect to be able to make $2.4 billion?

I know you don't know what end markets are going to do, but you've got new business coming in and some programs that are going away.

I'm just wondering with those puts and takes is 2.4 still a good assumption for Q4?

On the Mexico question, I would ascribe the learning I talked about in my comments really to an efficiency comment.

So the manufacturing execution of the plant - while costly, it performs on the components that freed up during the quarter.

So we're no longer having the manufacturing execution on the fourth quarter as a result of a bunch of new transfers.

So the efficiency was certainly not optimal, but that isn't what created any kind of a back outgoing into the following quarter.

The component supply problems that I talked about are the things that really wound up very late in the quarter -- full utilization of capacity at then end of the quarter and under utilization early on in the quarter.

And what causes really causes us to carry backlog into the second.

Did I answer that part of the question?

Well kind of Steve, but I mean why is it happening in Mexico and it wasn't happening in Colorado?

And when I talked to your - [Avaya] who has been very public about it, they seemed to indicate that it's not just back end loading.

They seem to indicate that it's other issues.

I know you don't want to go in terms of what your customer's saying, but I just wondering, why is it happening in Mexico?

It wasn't happening in Colorado and maybe you could -- the nickel that you're talking about, you could tell us exactly what is causing that drag.

What kinds of costs are causing that drag?

Is it that you're having to expedite stuff, that you're paying more for inventory, are you actually taking inventory risks now?

What's happening there?

Because it's a little confusing why it's happening now in Mexico, it wasn't happening in Colorado, it just doesn't sound like it should be just back en- loading.

Well, we've certainly seen an improving demand scenario over all.

And look I'm not going to -- I really don't want to get into specific customer comments but an improving demand environment overall clearly is happening in that plant and clearly wasn't happening in Colorado as an example back last year.

So that is one major difference is where we've gone from and to in terms of just the overall demand environment and that causes parts in the [inaudible] and constraints.

But the cost of that you talked about are is principally people costs you're talking about.

We certainly have added manufacturing lines in capacity that will focus in some more depreciation in order to just handle the growth but doubling the size of the plant you expect that to happen.

Thanks.

Paras, just to complete, I think you asked about where we will end up in the fourth quarter, but the way we things now I don't think our trajectory on top line is less than robust than our feelings were before.

In fact, based on the stability we hope that if that continues, we don't get another surprise in the third quarter that'll be even higher confidence in kind of the ranges.

Thanks, thanks gentlemen.

Your next question comes from Kevin Kessel from Bear Stearns.

Please go ahead.

Thank you, good morning gentlemen.

Getting to your restructuring, I just wanted to understand that a little bit better.

Tony, you said you've incurred 177 million of your $275 million plan to date, $135 million in cash and that you're halfway, roughly half way to your annual cost savings of $150 million.

But just help me understand that, when I look at your guidance for June, for example, let's just use that because it's relatively easy.

June of '06, the top end of your guidance range is 2.25 billion and $0.16.

If we look at June of 2005, you actually did 2.25 billion and $0.17.

So even if you maxed out and hit the top end of your range, there's still some degradation in your operating margin it appears, and I'm curious how that can be.

Obviously I understand that there's a little bit of an issue here in Mexico and $0.05 equates to about $11 million.

But to me it doesn't seem anywhere close to you guys getting half of the cost savings, at least it's not apparent, unless some of these cost savings have been given to customers in the form of lower prices.

I'm not quite sure how to make those numbers match up.

Okay, well we do - in fact we don't expect a material improvement -- some improvement, but not a material improvement sequentially in those ramping facilities, okay?

Because that is a very different factor.

We are introducing business that is of lower margin when you look at the year-on-year effects.

So there is a mix impact on margins.

But let's not underestimate the effects of all that ramping and the issue in Mexico as it hits the second quarter.

Those are the key changes.

We are getting the costs out of the business that we targeted.

We are implementing the actions we said we would do.

Certainly there's been a cost here with combining that action and the transitions with the growth and certainly we're not pleased about that.

But those are the key changes when you look at things on a year-to-year basis.

Right, I understand definitely what you're saying about the mix and the go forward and the ramp of the consumer as we go forward.

But just in general just over the last couple of quarters here, it's just not evident where those cost savings went in terms of the margins.

I mean they've been declining essentially almost precipitously ever since you announced the restructuring.

That is kind of where I have a struggle.

But on the restructuring, you said that Americas are virtually complete now.

The Europe, you said it's announced, can you just remind us on what is left over in Europe in terms of still to close?

Well, we've announced certain EMS closures in Europe that are in process.

I mean under negotiation -- final negotiation with unions.

And as well, there's other reductions in forces in various other places of the network, okay.

And even in the Americas, even though there are still a couple of other closures that have still to be affected, there are other reductions in force.

So that's -- the bulk has been done, but there's still more to do.

And that's why I said we are halfway through.

And we'll pick up probably another couple of cents improvement on the cost side next quarter and in this June quarter.

And then as Europe starts to take hold, you;ll see much more material impact to round things out.

And previously, you had stated that you thought Europe would be done essentially by the end of the third quarter I believe.

Has that changed at this point or is that -

That's what we're still targeting that.

We still expect to get the run rate, if you will, savings in the fourth quarter.

Okay and then the last thing is on the - that just ties into your margin comments earlier.

The 3.5% margin that has up to date, been the target - just help me with that because I mean you went through your EBIT margins on a regional basis and when I look now, I see Americas essentially back to break even, I see Europe's losses actually expanding, although obviously sales were down.

And then I see Asia, where you're doing well, over 1 billion, as you point out.

You're running that just barely over 3.5% and that's your best region.

So how do you guys get the other regions so quickly to contribute and actually get yourself up to 3.5%.

It just seems like a longshot.

That goes with the 2 things that we've talked about.

The improved efficiencies in the programs, in the growth we're having in those low cost facilities in Europe and the Americas and the added benefit of the completion of the restructuring.

Those things take -- could take us - and we're targeting that level of operating earning margin by that fourth quarter.

When we talk about that we're really expressing that that's what this company has the capability of doing.

Okay?

It is not guidance obviously, we've seen some effects here that also change that path.

But that we believe is in our hands to execute, given the programs we have, given the market we're in, given the restructuring actions we are taking, and the expectation that the performance, operating performance here, will be improved in those high-volume, lower-cost facilities in both Europe and primarily in the Americas.

Well that's just capability of doing the short term.

I mean I assume that you guys still expect the company can still reach kind of industry average of margins of 4 to 5 --

That is correct.

Okay.

Thank you.

Your next question comes Lou Miscioscia from Cowen.

Please go ahead.

Okay thank you.

I guess as we are looking at things with all the restructuring areas, everything else moving around.

By the - let's say 3.5% implied operating margin, it sounds like you're going to get a big inflection point and it sounds like that inflection is going to be in the December quarter.

Could it be as large as 50, 75 or 100 basis points?

I think it sounds like you need something that level in order to sort of hit the numbers that again, aren't guidance but just sort of something to contemplate.

Well certainly, just given the timing of the major restructuring that's where - and as well the expectation of revenue at $2.5 - 2.4 to 2.5 billion, I mean you get the operating leverage from that.

So there is a step function in the fourth quarter, based on those 2 events.

Okay great.

When you finish up the square footage reductions, could you maybe share with us where you would be from -- maybe not a equipment and people, but more of the square footage for high-cost/low-cost when you are completely done with everything as per the current restructuring efforts?

Why don't - Lou, we will come back with that for a few minutes.

I just want to confirm something here on that okay?

We'll move on and before we end the call I'll tell you what we think that's going to be.

Okay, and then let me just also throw on to that and then I'll let you all move on.

I guess and then the same question for I guess people and equipment.

Because I guess the question is a lot of EMS guys seem to be getting, obviously 70 or 80% low-cost areas for people and equipment, but the footprint is still 50/50.

And I'm wondering if there has been at some point in the future another round to get the footprint down to or closer to the people and equipment level.

Thank you.

Okay, in fact I've just -- someone has just handed me these numbers so I'll handle them right now.

So at the end of this year, potentially, we should be north of 85% of our people, our staffing at the EMS part of our business and low-cost geographies.

I think that's pretty consistent with the number we've been talking about.

On a space point of view, it turns out to be something north of 65% of the actual space in low cost geographies and somewhere in the 80% range of the SMP lines.

Okay.

Thank you.

Just to complete, you mentioned that given the difference between 85% and 65% on the sites would there be other changes necessary.

Well the constitution of what remains in the higher cost will be more the fulfillment where the impact of the facility costs aren't as great, as you know, it has different support structures but it requires a lot more space.

So that expresses the differentiation between -

Okay, so I guess after you're done, you think that, given current conditions, that this should be the last restructuring then?

We think this is a pretty solid footprint for us.

Thank you.

Your next question comes from Carter Shoop from Deutsche bank.

Please go ahead.

Thank you.

Can you tell us how much the Powerwave acquisition added to the top line in the merged quartet and what your expectations are for the June quarter?

A de minimus amount of revenue was realized in the -- because we finished late in the quarter.

And expectations in 2Q?

Of the whole acquisition, we feel would add, over time, as we transition some of their workload, about $100 million more.

That's on an annualized basis.

But it will take us some time to ramp that up.

So something less than a quarter of that.

And can you us about the Lucent transition?

Is that still going ahead as planned and should we see that being a drag in Q2?

I'm sorry, being a drag in Q2?

Yes.

No, we expect that our physically - expect our telecommunications business to remain strong here for the second quarter.

Thanks.

Your next question comes from Chris Umiastowski from TD Newcrest.

Please go ahead.

Thanks very much.

Steve, can you talk a little bit about the consumer product ramp costs.

You talked a lot about Mexico and the $0.05 impact there, both you and Tony have, I should say, what about the consumer ramp?

Where does that contribute in terms of costs in the quarter that inevitably should translate into a profitable business for you?

Yes.

Certainly, in Mexico as maybe $0.02 of that, close to $0.01 of that in preparing that consumer business and there is essentially no revenue.

Okay so the consumer business that you're ramping is entirely in Mexico in terms of at least where it is costing you money?

No no.

It's also costing us about similar amount in Europe.

Okay, so you have a penny of that also happening in Europe when you say similar, you do not mean $0.05.

That's correct.

Okay, so sort of $0.02 total when you're consumer ramp.

And when do you think that will disappear?

This is - we're starting to get into launching volumes right now, volume production so we'll incur -- naturally when you start getting in the volume production you've got somebody, any business you associated with the learning curves during your ramp to volume quarter, which would be this quarter, I expect us to be much more efficient in the third quarter.

And then a follow up would be just around your pipeline.

I know you've talked a lot in the past about unannounced wins, wins that you can't talk about in terms of specific customer names, what else is going on there?

Do you still have a few things in the pipeline that are planning to ramp toward the end of this year that you have not announced specific names of yet?

Yes, we typically don't announce names, as you know Chris, and yes, there are some other new businesses.

Can you quantify it at all?

No, I do not have that on hand and I don't thing that we probably would want to quantify it at this point anyway.

Thank you.

Operator can we have one more question please?

Thank you.

Your last question comes from Matthew Sheerin from Thomas Weisel Partners.

Please go ahead.

good morning, it's Michael Ellis calling in for Matt.

I had a question on supplier consolidation and how that may impact you. obviously there is some well-known ones out there with Lucent and IBM, but excluding them, do you expect to be negatively impacted by any supplier consolidation this year?

And is that implicit in your guidance?

Well, Mike, our guidance certainly reflects everything we expect to be happening in the second quarters so I would not expect to be off by any margin in that regard, on the revenue side from any kind of transitions.

As we go further on you know that, I think it's been publicly disclosed that Lucent has expected to make some transitions and I expect, as I had mentioned a little bit earlier, the Telco business is going to remain pretty strong.

So at this point, I think we're in pretty solid shape, I guess, in preparing for all the things we know are coming.

Just 1 quick second question.

With the Power Wave acquisition, you guys did acquire that small plant in the Philippines.

As you guys are looking at other potential new business wins, are you looking at other potential asset acquisitions of factories?

And if so, how are you trying to structure those to make those more economic?

Or how is that different from a just a straight production deal?

Mike, you were breaking up a bit and so I'm going to try and answer what I think your question was.

In terms of the acquisition market, we always remain sort of diligent and open to finding ways of delivering value for our customers and helping both them and us out with [productive] deals.

However, I'd expect, as we are entering quite a lot of growth right now and certainly our investments in working capital are in this business that it would have to be a pretty darn good deal for us to want to take it on.

And obviously, we had to look at our ability to absorb as we go through the upcoming quarters.

Did I get your question?

You broke up at the end, and I'm afraid I didn't hear your question.

My question was, yes, essentially, when you are looking at a potential deal which involves a factory, how do you -- are you a) looking at those type of possibilities right now; and b) what -- how is your approach different from it would be in a straight production deal?

Okay, the part I guess I didn't answer was how it is different than straight production or acquisition of asset kind of deals.

Last year, we added three acquisitions that were mainly related to capability enhancement, very small asset kind of purchases.

And we remain kind of open to things that will really give us a competitive advantage in that regard.

But I wouldn't comment on anything that we're looking at right now.

And my other comments remain sort of asset deals I guess.

Thank you.

Okay, everybody, thanks very much for listening into this conference call this quarter.

I look forward to talking to you next quarter.

Ladies and gentlemen this concludes the conference call today.

Thank you for participating.

You may now disconnect your lines.