Celestica Inc (CLS) 2006 Q2 法說會逐字稿

Good afternoon ladies and gentlemen.

Thank you for standing by.

Welcome to the Celestica second quarter results conference call.

At this for time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS).

I would like to remind everyone this conference call is being recorded on Thursday, July 27, 2006, at 430 PM Eastern Time.

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

Please go ahead.

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

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

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

Copies of the support slides accompanying this website can be viewed as 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 gets a chance to ask a question.

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

Before we begin the call, I would like to remind everyone the during this call 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, 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 20F and subsequent reports on Form 6K filed with the Securities and Exchange Commission which can be accessed at Sedar.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 celestica.com.

I will now turn the call over to Steve Delaney.

Thanks Paul, and good afternoon everyone.

I was very pleased with the overall progress made by the Company in the second quarter as both topline and bottom line came in above the midpoint of our guidance.

We posted a very strong 15% sequential revenue growth and almost recovered at the same business level as Q2 last year.

Each of our end market segments grew sequentially, with the consumer auto medical segment posting a dramatic 45% sequential increase as a result of multiple ramping new programs.

In terms of overall end market tone, demand across all segments seemed stable to up modestly, which is similar to the sentiment we had all year.

Our view for the September quarter has a similar feel, while our guidance is muted a bit by historical volatility that we have in the summer quarter.

The consumer auto medical segment growth also helped reduce the customer concentration and improved the end market diversification, with revenue from non top ten customers now at 40% of sales and non-com, non-IT revenue up to 27% of sales.

In terms of the bottom line, operating margins were up sequentially by 40 basis points to 2.2%, and adjusted EPS climbed to $0.13 in Q2 versus $0.08 posted in Q1.

Working capital also showed some improvement, with inventory turns increasing to seven turns.

And return on invested capital climbed sequentially over 200 basis points to 8.5%.

We did continue to see a tight environment for components which again created an abnormally high quarter-ending skew, so we feel there is more efficiency to squeeze from our network as the component supply stabilizes.

As we entered the second quarter, we were looking to improve operating margins, ramp some major new customer programs into volume production, stabilize our rapidly growing sites, and make some additional progress on increasing overall returns.

I'm very pleased to say we were able to make solid headway in each of these areas in the second quarter.

As we discussed in our Q1 call, we've been dealing with some significant programs ramping in Mexico, and to a lesser extent in Europe, which have also been impacting our operating margins.

The scale of these ramps has been steep and significant, and the workforces in the affected regions have been more than doubling in size of the past few quarters and the capacity -- and we added capacity to absorb these new programs.

From a production performance standpoint, both regions have improved allowing with our Mexican and European sites to deliver greater volumes for our customers.

As anticipated, we saw moderate pickup in profitability from these sites, but anticipate a more meaningful improvement this quarter as we complete the ramps and deliver increased efficiencies.

In terms of restructuring, we're entering an important final phase of our major program that we launched a year and a half ago.

When we started this major restructuring initiative in 2005, we feel there was too much underutilized capacity in Celestica and too much idle capacity in the EMS industry overall.

We believe we're undertaking the most aggressive restructuring program in our industry.

And while this ambitious plan came with execution risks, we're confident we'll achieve the [end to date] that we planned with over 80% of our capacity in low-cost regions.

Our goal has been to end up with a very robust and low-cost EMS network capable of supporting a diversified customer base and consistently generating returns greater than our cost of capital.

We're not there yet, and while we recognize that there still a fair amount of work to get completed in the second half of the year, we see a clear pathway to achieving these targets.

For the third quarter, we'll be focused on achieving improved output and efficiencies from our high-growth sites, completing our consumer ramps, improving our working capital performance, and quickly reacting in this dynamic technology market.

That concludes my remarks, so let me now turn the call over to Tony, who will take you through some additional details.

Thanks.

Revenue for the second quarter was $2.224 billion, a 15% sequential increase and near the high-end of our guidance.

On a year-over-year basis, we're down 1%.

The sequential growth was driven both new program ramps and better end market demand from our base business.

As Steve alluded too, constrained component availability certainly impacted the linearity of our production during the quarter.

In terms of revenue by segment, we had a solid increase in our diversity while each segment showed sequential growth.

Segmentation was as follows.

Enterprise communications represented 27% of sales, up 6% sequentially.

Telecom was 20% of revenues, up a healthy 17%.

The server segment represented 17% of sales, up a strong 18% quarter to quarter.

Storage was 9%, up marginally.

Industrial aerospace and defense was 10% and up 7% sequentially, while the consumer automotive medical segment posted a significant 45% sequential growth rate with the segment coming at 17% of sales.

The growth in this segment was driven by ramping new consumer programs which we expect will continue to grow through the third quarter.

Moving to our customer mix, we continued to diversify our revenues.

Our top ten customers grew 12% sequentially and now represent 60% of sales versus 62% in the first quarter.

Our non top 10 grew 19% from the first quarter and now present 40% of the business.

On a geographic basis, we saw sequential growth in all regions.

Asia grew 14% sequentially and represented 50% of total sales.

The Americas grew 20% sequentially on the back of significant growth in Mexico and came in at 36% of sales.

And Europe grew 7% sequentially to come in at 14% of sales.

Moving to profitability, the Company posted a GAAP earnings loss of $30 million or a loss of $0.13 per share for the second quarter.

Included in this loss was $20 million of pre-tax loss associated with our previously announced restructuring program, and a loss of $33 million in other charges primarily for goodwill associated with the sale of our plastics business in the second quarter.

This compares to GAAP earnings of 12.6% or $0.06 per share last year.

The non plastics -- non-core plastic business which was sold to a private interest in Asia represented less than 1% of our revenues.

As you may know, we assumed this business as part of our Omni acquisition in 2001.

Adjusted net earnings continued to show improvement at $29.1 million or $0.13 per share, slightly above the midpoint of our guidance.

Gross margin was 5.6% and operating margins came in at 2.2%, compared to 5.5% and 1.8% respectively in the first quarter.

Our SG&A was $76 million in the quarter or 3.4% of sales.

This compares with SG&A in the first quarter of 3.8% of sales or $73 million.

Segmenting our operating margins by geography, Asia continues to perform well with operating margins of 4.4%.

Margins in the Americas were up 20 basis points to 0.6% of sales.

This increase reflects the expected modest improvement in Mexico, which is stabilizing from an operational perspective.

Our Mexican teams have been dealing with significant growth in volumes having scaled over 2x in the last few quarters, while also absorbing significant new customer ramps.

We expect more operating leverage from the site and the region in the next quarter.

In Europe, operating earnings remained at roughly a $6 million loss on the back of higher ramp costs from a major new program in the region.

The third quarter will be an important turning point for Europe as efficiencies take hold and with restructuring benefits starting to kick in.

Clearly, margins in both Europe and the Americas are reflective of the major transitions underway in these regions.

In terms of restructuring update as of June 30, we have recorded $197 million of the $275 million program announced in 2005, with cash charges of approximately $155 million paid to date.

We're making steady progress in our facility closures with the Americas largely complete and European actions announced.

As of the end of the quarter, approximately half of the anticipated 5500 employees have been released from the business.

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

To date, we're running at about 60% of that rate with the ramp issues in Mexico and Eastern Europe still temporarily offsetting these benefits.

Moving to the balance sheet, cash at quarter end was $748 million with cash cycle coming in at 17 days.

Cash flow from operations was $21 million positive in the quarter.

Inventory grew $82 million in the quarter while turns improved to seven turns per year versus 6.6 in the March quarter.

Growth in inventory was driven by the stronger revenue outlook for the September quarter, some dual pipelines for the RoHS transitions, and the second quarter backlog impacts associated with the constrained component environment.

Receivables were down five days to 42 days while AP days decreased 10 days to 77 days, due exclusively to timing effects in the quarter.

CapEx was $69 million and was partially offset by $19 million in net proceeds from the sale of our plastic business.

Increased CapEx in the quarter was associated with the additional vestments being made in our low-cost regions to support our growth and new programs.

So let me net out our second quarter performance.

First, we had solid growth in our topline quarter to quarter both from base products and new programs, with added diversity in terms of end market segments and customers.

We have sum margin and EPS expansion amidst continued operational transformation associated with restructurings, challenging component supply pipeline, and ramp inefficiencies for major new consumer programs.

And, we end the quarter with a balance sheet that remains strong with a debt to cap of 26%, virtually zero net debt and strong liquidity.

Let me now turn to our guidance for the third quarter.

On the topline, we expect revenue to be between $2.150 billion and $2.350 billion and adjusted earnings per share of between $0.12 and $0.20.

As Steve alluded to, we believe our current underlying customer demand to be quite robust while we grow our consumer revenues in the third quarter.

Third quarter has proved to be a volatile one in the past.

However, we feel the new programs will keep us in a growth mode for the quarter.

Our adjusted earnings improvement is being driven by continued benefits from our restructuring activities and increased efficiencies in our Mexico and Europe operations, partially offset by the higher mix of lower value added revenues that are flowing in the quarter.

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

(OPERATOR INSTRUCTIONS).

Steven Fox, Merrill Lynch.

Could you quantify the progress in Mexico -- how much of an EPS reduction was it?

And same thing for Eastern Europe, and just update us on quantifying the progress you expect to make this quarter.

In terms of Mexico, we probably picked up $0.02 EPS in terms of the sequential improvement.

In terms of Europe and some of the program ramps, we probably had a 2% -- $0.02 impact there as well.

And then, outside of the consumer ramp going on, what other programs or roughly types of program do you expect to be ramping in Q3?

This is Steve here.

Q3 volume new ramps would be mainly related to the consumer programs, but across other -- maybe the core programs, that's (indiscernible) communications demand seems fairly good.

Paras Bhargava, BMO Capital Management.

Thanks, good afternoon.

Guys, can you tell us if you're still aiming for the 2.4 billion in Q4 and the 3.5% margins?

Because during the quarter I think you made some statements and they seemed to have -- some of them seem to have paid off, but you are going to keep the extra costs around a little bit to make sure the demand gets met.

Is that -- does that mean you're backing away a little bit and looking a little longer-term before we get the 3.5% margins? (multiple speakers)

We're still aiming for the 3.5%.

It's a big jump from where we just ended up, so we certainly recognize that.

It's going to be largely affected by our ability to get these programs launched well, for the demand to hang in there.

It's kind of anybody's guess what fourth quarter is going to look like at this point.

So that's still our target.

Just recognizing were we are right now, I think that's probably what might have impacted some of the comments you heard during the quarter.

So am I hearing you that it's a little more tenuous in terms of reaching it and that's not -- it's a little less firm of a target, Steve?

It's a firm target.

If you are asking me the question on will we actually get there, it's a big step from where we are right now.

So we're aiming there.

Clearly.

And in terms of Mexico, I think I heard you say $0.02 to the last question.

That leaves I think -- that means that basically you have $0.03 extra of charges -- of costs in Mexico still that we could -- that should fall to the bottom line sooner or later.

Is there a timing on that?

$0.03 and more actually; that plant can do even better, all right.

So the impact from the problems we talked about in the past we've said was $0.05.

So yes, you can expect $0.03 and then more as we go through time and that plant continues to improve.

And then final question, Steve, the last couple of years the September quarter has been really tough and I think you have been -- two years ago were caught offside, and last year is a little bit of a surprise and it went back.

How do you see it now versus the last couple of years?

I think it feels much better than it did the last couple years.

I will tell you that for sure.

Part of it, we created a real benefit for ourselves this quarter with a launching consumer business, so that's growing.

That's traditionally going to be the strongest quarter for consumers, so we're happy to get that kind of diversification in our base.

But even for the non consumer related business, I would say right now, it feels a little better.

Despite everything you kind of read in the marketplace around the economy, demand feels okay.

Thanks gentlemen.

Alex Blanton, Ingalls & Snyder.

Good afternoon.

On that point, where do you see the best potential for orders in the next twelve months?

Some of your peers are reporting pretty much across the board strength not only in the orders, but in current sales and ramps.

So it looks as if we may have reached inflection point in the outsourcing demand -- not in in-market demand, but in the outsourcing portion of it.

So where do you see the best opportunities for you in the next twelve months in terms of marketplace, types of products and things like that?

Alex, just to clarify you're talking about new business or are you talking --

New business.

Okay.

We see other consumer opportunities that are targeted in the areas of consumer where we're pretty well focused, as well as other communications and IT platforms, and I should say aerospace and defense.

So we've got -- seems like there are plenty of nice opportunities in this marketplace for us that we feel like we're pretty well positioned.

Okay.

Thank you.

Chris Umiastowski, TD Newcrest.

Thanks very much for taking my questions.

Tony, I just wanted to talk to you a little bit about the 40% of the total 150 million a year that you're saying you're still not getting yet as a result of the issues you have been facing in Mexico and Europe.

When I do the math on that 40% of 150 million, it looks like it's about $0.065 quarter pre-taxes.

First of all, is that right?

And second of all, can you compare that to what you said last quarter which I think was Mexico was a $0.05 issue and Europe was about a $0.01 issue.

It looks on the surface like there hasn't been any change, but I know you're telling me there has been so I must be missing something here.

I'd say when it comes to our restructuring program, we're tracking.

We're getting the cost out through either the facility closures, and other restructurings that we planned on.

So in the last quarter, we probably picked up $0.02 in terms of our restructuring benefit, and that matches what our expectation was.

Is that $0.02 you picked up Mexico related or plant closure related?

In plant closures, so I was referring to restructuring.

So the track is we still got 40% to be realized when your math is roughly right per quarter.

It will -- those benefits will flow primarily with the completion of our restructuring in Europe, which will accelerate and gain some steam here in the third quarter.

So that's where the bulk of the additional benefit -- (technical difficulty).

There are other restructurings certainly underway and we expect to be largely complete by the end of the third quarter, so we get the full fourth quarter effect which roughly means, if you took that average, about a $38.5 million operating earnings improvement.

So that's the track we're on that hasn't changed, and we expect that the balance of that 40% will be realized.

Why it's not flowing to the bottom line completely is the other issues.

In that, we had a $0.05 impact where we thought we should be in terms of the Mexico situation.

That improved by $0.02 this quarter, probably improve another $0.03 next quarter.

Okay, so you are done in Mexico -- you're done in Mexico issues by the end of Q3?

There's still more to do there.

Mexico, because of the amount of growth that we expect, the operating leverage that comes from that, in a stable environment we'll drive even more earnings.

And we expect higher eventual productivity there.

Chris, let me jump in with one other piece to maybe clarify a little bit.

If you think about our -- if you did the math actually on our growth with the numbers that we gave you, you'd see that the sequential growth that we have in Q1 to Q2, 40% of it was in these -- in this consumer auto medical space for us.

And most of that is frankly related to the consumer launches that we have.

Those are very fast ramps.

We are not getting a lot of contribution from those right now.

I will not get into any details on those obviously, but you can imagine as we get those things -- those programs launched and start getting some contribution, that 40% of the revenue starts actually delivering some value to us as well.

Okay.

That helps a lot.

Thanks Steve.

Jim Suva, Citigroup.

Great.

Quickly, in the prepared remarks you made a comment about your guidance is muted a bit for the coming quarter.

Is that muted being you guys internally kind of looking at stuff, or are you seeing some in demand kind of muted aspects?

I'm looking at it internally.

I think right now, the demand seems to be holding up pretty well, Jim.

And I know this quarter has been the witching quarter for us.

Right?

So we've seen some weakness occur during the quarter.

So who knows what really will happen in the end, but I feel pretty comfortable that we'll see growth this quarter.

Great.

Glad to see it's your internal thing.

And as a follow on, when you -- with this consumer growth, can you talk a little bit about maybe your consumer margin profile today versus the corporate average, and kind of where you see that shaking out as it matures and ramps?

Thank you.

It's clearly less than our corporate average today because the business is just fledgling at this point.

We really got our first real tranche of consumer revenue this quarter.

So I won't go into it anymore than that.

You can kind of read between the lines maybe there.

And then as we go into the future here and get these programs to their peak and their fully ramped rates that we do expect to get north of the cost capital on these programs.

North of the margins we're currently getting.

Yes, definitely.

Great.

Thank you very much for the clarification.

Matt Sheerin, Thomas Weisel.

Thank you.

I am hoping that you can elaborate in your comment about the component tightness that sounds like led to a more back end loaded quarter.

Could you talk about specific areas that you saw the tightness?

How much of that was related to RoHs, if at all?

And are those issues basically taken care of at this point?

I think the RoHs certainly was a contributor, because we've got a supply base out there that's trying to supply some squared up sets of parts for the old non RoHS components for deliveries in North America or maybe Asia and then for RoHs components in Europe.

So there's clearly a level of complexity that's greater throughout the entire supply chain from us all the way through the suppliers.

It has caused some increase in inventories I know throughout the industry, and clearly made it more difficult to get quicker turnaround times on leadtimes on changes that typically in the past, or at least we've seen better turnaround times on.

And that's again happening throughout the industry.

I'd say probably the components that wind up being highest on the hit parade of components we have trouble getting, they tend to be custom ASICs and even maybe some customer unique parts like plastic and some of these kind things, where in some cases we've had volumes spike quite high with a couple of customers that have frankly exceeded the capacities of some of the suppliers and we have to increase capacity.

Did you miss any potential shipments or opportunities because of that?

We clearly wound up with a backlog going into the next quarter.

I don't think it's not perishable, but there was -- there were unmet orders as a result of component supply, surely.

Yes.

Okay, and then another question regarding Europe -- you talked about basically an acceleration of the plant closures over the next few months.

What kind of risk is out there with regard to product or transitions?

We have seen that in the past when we had plant closures and transitions to other factories where you have had hits to margin.

Have you factored that into your model on your forecast at all?

And what are you doing to basically make sure that we don't see a big spike in that?

Yes, most of our heavy lifting is actually done in terms of the high number and the complex programs that are transferring at this point.

So I think we've gotten certainly over the highest risk items, really over the last probably about three quarters or so.

So what we have left is there are some fulfillment programs and some of these kind of things going on, so not a lot of complexities transferring at this point.

Okay thank you.

Jim Powell, GMP Securities.

Good afternoon.

Question on the RoHS again just following up.

Did you encounter any issues in the quarter that you didn't expect, or did everything go pretty smoothly and most of your customers that were going to transition to RoHS went okay?

The transitions to the -- if you're talking about the technical transitions of getting the products built, having the -- where we went to lead free for instance, having lead free processes run, that all went fine.

I think the point I was making earlier that you may be referring to is really around the supply chain complexity that existed really, because in many cases we are trying to create -- that we doubled the number of products with the way that a lot of the customers had decided to make these transitions.

So nobody wants to scrap all of these non RoHS compliant parts.

And so as a result, we wind up with a European version and North America or non-European version I guess I should say for a number of customers.

I think that's treated some complexity throughout the supply base.

And are you doing that across all geographies or is it primarily for the European plants you're dealing with this?

A lot of our production supports worldwide volumes.

We might have boards made in Asia, but they are shipped to -- they end up in the final markets of both European and the Americas as well.

So often times the same plant is dealing with that same complexity.

[Steve Triggens], American Technology Research.

This is [Steve Triggens] for Andrew.

Question is -- I think last quarter you mentioned about getting your new consumer wins up to $500 million run rate by Q4.

First, do you feel comfortable with that number?

Second, perhaps you could update us on how that's coming along.

Thanks.

You were breaking up a little bit there Steve, but I think you asked the question, do I still expect us to get to a $500 million run rate by fourth quarter.

Is that right?

Yes.

That's correct.

I do.

I think we're on that strong path right now if you do -- if you just take a look at what we're -- what we did this last quarter.

And as we ramp into third quarter, of course it will go up.

What was the second part of your question?

The second part was could you just give us an update on just how that's coming along?

It's sort of the points that we've been discussing really over -- some of the last questions have been related to some of the consumer volume that we have ramping.

We had some enormous ramps going on in a few of our plants.

And they've gone -- they've gone well I guess overall I would say, but when you're on these ramps, you're spending quite a bit of investment trying to get the ramps to go well.

And as a result, early on in these programs, we have not been getting a lot of contribution.

Great.

We do expect that to improve here as we get into the third quarter, achieve the scale and the peak volumes that we expect to achieve and then carry on forward from there.

Carter Shoop, Deutsche Bank.

Question on Cisco and its lean initiative.

Can you comment on the impact of sales and inventory both in the second quarter and what your outlook is for the second half of the year?

I wouldn't comment on a specific customer, but there has discussion in the past about a communications customer that was doing some lean work.

I'll just say this.

That was not implemented in this last quarter.

We have been working with that customer to put the plans in support of what they need to do.

I don't expect that to happen in our Q3 either.

So beyond that, I can't give you any guidance.

But when we do see it on the radar screen, we'll let you know if there is any significant impact on our guidance.

Thanks.

And the second question here, could you maybe comment on the disconnect between what we're hearing from some of your top customers like IBM, Lucent, EMC and kind of reconcile why you guys saw revenue come in as strong as you did?

It was just -- any kind of idea there would be helpful, and also I would be curious to know how you're hedging your outlook based on their results.

Well, I'd say I think we have a couple of factors helping us here.

Clearly some brand new programs that we're launching -- there was no past and so are we are getting the incremental benefit obviously of those.

From some of the base customers that you referred to, I wouldn't get into any specifically, but I would say overall the impact of their revenue on any one of the EMS players is highly dependent on the kind programs that we're in.

And we have certainly been working of the past few years to strengthen our mix of programs in these customers and get ourselves lined up with some of the faster growing products as well.

So perhaps that accounts for some of it.

Like I said earlier, we've seen a pretty robust demand environment.

Thank you.

Bernie Mahon, Morgan Stanley.

Question for you just to follow up on the inventory.

You said that you had built some in ASICs.

Could you maybe say what end market that's related to -- whether it's telecom, enterprise or servers?

And also, as it relates inventory, do you plan to work that down through the third quarter or do think you still need to build some for the reasons you mentioned you built in the second quarter?

Bernie, maybe you misunderstood my point.

The point I was trying to make was some of the components that we're finding in short supply have been related to some of these custom ASICs and some of the custom parts for -- other parts for some of these customers.

So, I would expect as we -- certainly the effects and the difficulty caused by the transition to RoHS in terms of managing the supply chain, I think we've seen the worst of it.

It will get better and simpler as we all start bleeding off the noncompliant inventories in North America and Europe and ultimately we wind up with basically a RoHS compliant supply chain.

This will take a very long time, frankly, because even some of the telco units, there are -- not everyone's required to be RoHS compliant for all six of the compounds even this year.

So it goes out for quite a few years.

But I think the worst of it is behind us in terms of the complexity of supply chain.

In terms of our inventory overall, we see lots of opportunity for us to improve our working capital management and our inventory management.

And I would think at this point, that our inventory -- our turns going forward should improve, put it that way.

So it would be highly dependent on the kind of revenue growth that we see going forward.

I guess you probably through the third quarter expect probably a pretty strong fourth quarter, just given your consumer focus, so you probably build in absolute dollars.

Yes, I would think so.

Okay, and a question on Europe and the profitability there.

So it's been unprofitable for little while now.

But it sounds like you're kind of on a path to profitability there.

What kind of timeframe do you think it is before we get to break even there?

Do think it's in the fourth quarter that it's seasonally strong or do you think it's more of an '07 event?

We're targeting the break even this quarter.

Oh, in the September quarter?

That's correct.

Kevin Kessel, Bear Stearns.

Good afternoon.

Just following up on that question, Tony, could you just outline what's left to still close in terms of sites in Europe versus the U.S.?

There is one site that was announced that's slated for closure in Europe, but that's not complete and it's underway.

We'll give more color as that unfolds.

There's a couple of smaller sites in the Americas that we are doing.

In addition to that, there's structure around the network that's not site-specific, but let's say company-wide specific or regional in character that will be restructured as well.

So you said there's one site announced in Europe.

Can you say which that was?

That's our operation in Italy.

Okay, and does that -- one has been announced, but are there others still to still go or is that last one that is left?

We're not going to disclose any that are not announced, but that is all that has been announced.

But others I guess are slated in terms of numbers of sites, or no?

There are other sites that are slated in the network globally.

And that is -- and that's from -- from the sound of it, it sounds like a lot of that will happen in 3Q.

That is correct.

And is it -- will there be additional restructuring required still in 4Q or will that -- is it pretty much --

There will be some residual restructuring charges in the fourth quarter, but we expect to get the lion's share of the benefits by the fourth quarter.

Okay.

Maybe I missed this, but did you mention 10% customers?

I probably didn't, but we have one 10% customer.

That would be Cisco.

Okay, and lastly, in terms of the cash flow outlook, given the increased investment in working capital by both you guys and others in the industry, but when you think about just yourself, what's the outlook for cash flow from operations in the second half of the year?

I think third quarter we'll consumes and cashier as we build some inventory for a much stronger quarter in the fourth quarter, our seasonally highest quarter.

Offsetting that working capital investment to support that normally 10% increase in business would be the efficiencies we get on the bottom line, the operating earnings contribution that we expect to get.

Tom Astle, National Bank Financial.

Good afternoon.

Steve, you mentioned that when you announced the last restructuring, you were unhappy with utilization levels at both the Company and the sector in general.

It sounds like you're a bit happier with that now.

Can you maybe give us an idea where you think they are?

Our utilizations are right now probably in the mid '60s.

It got pretty high in June.

But there is still room to go a little bit north.

We're about 80% of our capacities now in low-cost geographies.

Okay.

And by the end of the year you expect that number to be a bit higher?

Probably go as high as 85.

Where do you think the industry is at this point?

Industry overall?

I don't have a number for that, but I noted that some of my competitors have announced some new restructuring programs, so I'm happy to see some of that capacity come out.

And just one last question, as we think about business model progress here with consumer ramping, should we think about progress more on the operating line than on the gross margin line?

Is that (multiple speakers)

(multiple speakers) Actually more of the margin growth to come from our gross profit.

That's where we get the biggest bang on the restructuring benefit.

So it's still a gross profit [sort of]?

Yes.

Thanks.

Todd Coupland, CIBC.

A number of the EMS peers have had issues in terms of ramping new programs and it's cost them on margin side.

Have you past those phases of these new programs or is there a risk of some margin issues with these new programs as you get into the quicker ramp phases?

Could you talk a little bit about how you're planning to deal with that?

Yes, I think invariably when you launch some programs -- and some of them have been on extremely fast ramps and you spend some money to get it done.

And that's clearly what has happened to us.

I think we've gotten the worst of it behind us.

My expectations are that we'll improve in these programs because we have gotten past the high investment stage maybe of the ramp.

Okay great.

Thanks a lot.

Sorry.

In some cases we're in areas that are relatively new like in consumer, so our experience curves are not as deep there.

So that is coming along as well.

Okay.

So would you -- do you have any observations on whether or not some of the programs that have been won in the industry have just been priced too aggressively and that is the issue?

I'd say -- no I would not call that -- it's certainly not a general issue that I would throw out there.

We've -- the problems, the issues that we talked about really of the last couple of quarters here with some of our growth and some of the launches as well, some of the transfers, I think we created a fair amount of that problem ourselves, or it's been a part of the investment in a new consumer launch.

So no, I wouldn't ascribe it to a pricing problem in the industry.

Great.

Thanks a lot.

Yuri Krapivin, Lehman Brothers.

Good afternoon everybody.

With respect to your restructuring savings, $150 million, what's the risk here that your customers will pressure you to pass some of those savings along to them?

Well, we do pass some of the savings on to them.

What we're trying to do is set our cost point at a competitive level in those geographies.

And for a period of time where we're helping our customers make that transition to a better, more competitive cost point, they recognize the cost involved, so we will hold off passing those costs until we recover some of them as well.

So that's the kind of nature and dynamic that's underway.

So we have to realize we as a Company need to get our cost points aligned with the marketplace and that takes time to effect, and so the guidance that we give is net of that sharing, if you will, of that benefit.

Okay.

And then I wanted to ask about the seasonality in the September quarter.

Is that a type of quarter where 50% of your total sales are realized in the last month of the quarter?

Yes, we've seen quite of back end loading in the September quarter.

Oftentimes because places like Europe, there's quite a lot of downtime going on in -- not downtime, but demand reductions really in the early part of the summer there.

So it typically would be back end loaded.

I think right now, we're going to see probably little bit better loading in the quarter because of I think a more robust demand environment, plus the fact that our consumer businesses are pretty strong all the way through the quarter.

Michael Walker, Credit Suisse First Boston.

Thanks.

Question on the revenue guidance.

It looks like the midpoint you are guiding up 1% sequentially.

I heard what you said about how it's been the bane of your year in the past, and some volatility, but it sounds like your consumer business is going to be ramping pretty substantially.

I guess my first question is do you expect the consumer ramp to be the same in September as it was in June?

And of so, or even if it's anywhere near that, does that mean the rest of the business is going to be down sequentially?

The growth that we had talked about in the quarter is I guess quite conservative, so the consumer would account for that level of growth and the rest of the business would be level to down slightly.

And like I said earlier, we really used the last couple of years' experience to guide or to develop that guidance.

Michael, I would add to what Steve said by characterizing I think the consumer business will grow as robustly as it did.

And where our guidance reflects any caution is based on our base business which, frankly, has been quite volatile.

You will notice that the guidance range that we gave this time for the third quarter is only $200 million apart, if you will, versus $300 million [last].

Right.

I guess I am trying to square what sounds like the IT part of your business being down relatively substantially in the high single digits with your comments that demand seems stable to increasing.

I think we just couched it that way.

The caution we have given our history has been in our base business.

Right.

And then my follow up is on the margins splicing between the SG&A and the cost of goods sold, I guess more of the cost savings than I had expected accrued to SG&A as opposed to cost of goods sold.

Wondering if kind of 3.5 -- 3.4% ratio in SG&A, if that's sort of stable or if that continues to go down, or if most of the cost savings and margin improvement will accrue to cost of goods sold for the next couple of quarters.

Our expectation is that we'll attack both fronts.

I mentioned that some of the restructuring will be in corporate areas as well, so that will impact the SG&A.

So our expectations will run roughly the same level of spending or expenses and grow the business.

So that means we'll get some leverage there, but most of the leverage, Michael, comes from our restructurings and our gross profit line.

Okay thanks a lot.

Amit Daryanani, RBC Capital Markets.

Thanks a lot.

Just a question on the Mexico operations again, sounds like the $0.03 headwind for Mexico will be gone in the September quarter.

I am wondering how much confidence you have that when Q4 comes around and you have to increase your volumes (indiscernible) again given seasonality, that we won't face similar operational issues and so I assume you probably have to hire more people at that point.

The issues that we had in Mexico have been related to the amount of change that we were creating in there, building -- the [site Exley] has done quite a good job recently of executing the volumes, but it's been a change, some branded consumer stuff in there that it's new to the site, so there is some recent investments in that area.

So I am quite confident that our team in Mexico can deliver the fourth quarter as needed.

And then going back to the September quarter guidance, maybe looking at it a different way, historically that September quarter is down 6,7% sequentially.

That implies 130 million sales downtick versus your June quarter, and you're calling it to be flat roughly right now.

How much of that maybe 125 to 130 million delta is being made up by new ramps versus a little better seasonality in your core end markets?

I would not necessarily call it new ramps.

If you just -- I think we have a stronger slate of products that we've evolved to over the past year as well.

So if you remember last year I think 8 of my top 10 customers we had something like $250 million of revenue reductions, just volume reductions quarter to quarter.

And it just doesn't appear that's going to happen.

And just maybe on that whole thing -- last time I think the issue was you said you probably did not have enough volatility to look into how you fall off a cliff come September.

Has that changed at all for you guys at this point where you feel like you scrubbed on it a little better and you can see that -- you can have better visibility today?

I did not follow question, Amit.

Can you give me one more try?

Yes.

The last time when -- I think it was last year when you had to preannounce your numbers in Q3, one of issues was revenues fell off in I believe the September quarter and you did not have enough visibility when you gave us guidance initially.

I am wondering today when you give me this flat revenue guidance, has something changed in the process the way you [scrub] your orders that gives you better visibility to these numbers?

Remember it wasn't a last year that we preannounced.

That was two years ago.

Last year we saw a big reduction, but we formed that in our guidance for the quarter, and so that even affected that guidance level.

So we have a couple years of experience of this kind of behavior maybe in some of the core products, and that went into this guidance.

So I feel pretty comfortable with this.

Thanks a lot.

Scott Craig, Banc of America.

Good afternoon.

You guys have done a good job on the margin in Asia.

Can you maybe go through what your longer-term goals from a margin standpoint could be in Asia and whether not we are getting impacted there near-term from programs shifting there?

And secondly, Tony, on the cash flow, how do you look at the cash flow shaping up over the next quarter or two?

Because it looks like you guys are ramping quite a bit of business, building some inventories, although you think there are some efficiencies that may reached there.

Thanks.

Asia, as you know, is performing extremely well, so holding it there is getting very significant returns on capital relative to the rest of our business.

So I think if we can continue to get that performance, we'll -- and with the expected growth that region will command, we will get great economic value from that.

In terms of cash flows going forward, I alluded to earlier and you probably didn't hear, but we expect to consume some cash here in the third quarter as we work through the working capital buildup for our stronger fourth quarter.

And we hope it's not a significant amount, but we will consume some.

Yes, I was getting more at the magnitude of it.

Are we talking 25, 50 million or is it possible to be a lot more than that given the ramps you are seeing?

No, it's in that ballpark.

Paras Bhargava, BMO Capital Management.

Tony, just a follow-up on the whole cost savings you are talking about.

Are you saying another dime from restructuring should fall to the bottom line at current revenue levels in December?

Is that the math?

Hello?

Yes.

Just trying to put it into cents for you.

But --

While you are doing that, Steve, I was a little confused on your answer to Tom Astle's questions.

Are you saying that you should be at 85% capacity utilization?

No, no, no.

That was 85% of our people in low-cost geographies.

I think capacity utilization, probably in the 70 range.

And that's machine utilization average for the quarter, right?

Yes.

You can't get -- you probably candidates better than 75 because you've got to have a whole bunch of [hedges].

You're humming at 75 because you do have to do maintenance and that counts away from that time, as well as other change over times and things like that, especially with our mix of business.

I tell you how I get to the $0.10, Tony.

I just -- $0.10, if I look at the $150 million and say 60% of it is to come, and just divide it by your shares and divide it by four, I get about a dime.

So it sounds like you're saying at current revenue levels, that plus Mexico should give you $0.25 a quarter of earnings power in sort of a Q2.

Is that the math?

I am looking cumulative by the fourth quarter, probably about $0.05.

Got a different math here.

So --

In the quarter -- I don't know if you're annualizing it or --

You're saying it should add about -- restructuring in Q4 should add about a nickel of savings?

That's correct.

And the rest of the -- anything else will come from the increased efficiencies in Mexico and revenue increase?

That's correct, and the revenue growth.

Thanks a lot for clarifying it.

Carter Shoop, Deutsche Bank.

Just wanted to follow up on the stock option compensation; it dropped off quarter over quarter.

Can you talk about why that happened and what your expectations are for that going forward?

(multiple speakers) Sorry -- the question is what was the expense level in the quarter?

Stock option compensation, it looked like it was 300,000.

Yes, we have certain options that are performance contingent.

So we do reassessments over time, and we -- our average run rate of option expense came down because we did a retroactive adjustment based on our expectations of how they would vest, at what level they would vest.

So we had about $2.5 million of option expense retroactive adjustment.

Actually half of that, because part of it was in the quarter.

Okay.

What's your outlook for that for 3Q?

Our options expense going forward has been running around $3 million, so that should not change too much.

There no further questions at this time.

Please continue.

Okay.

Everyone, thanks for joining the call.

We look forward to talking to you at the end of our third quarter.

Thank you very much and we'll talk to you in October.

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

Thank you for participating.

Please disconnect your lines.