Celestica Inc (CLS) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by. [OPERATOR INSTRUCTIONS]

I will now turn the conference over to Ms. Donna Singh, director of investor relations.

Please go ahead.

Thanks, Julie.

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

On our conference call today will be Craig Muhlhauser, President and Chief Executive Officer, and Tony Puppi, Chief Financial Officer.

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

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

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

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

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 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 the 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 8-K filed with the Securities and Exchange Commission, which can be accessed at www.cedar.com and www.sec.gov.

Please note that we will refer to certain non-GAAP financial measures during this call.

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

I'll now turn the call over to Craig Muhlhauser.

Thanks, Donna, and good morning everyone.

No one is more disappointed than I that, in the first eight weeks of my leadership as President and CEO of Celestica, we have communicated a fourth quarter pre-announce, the need for inventory provision in Mexico due to market demand and the resulting impact of our operational issues and now Celestica 's fourth quarter earnings release and outlook for the first quarter of 2007.

The obvious questions are how could Celestica, with so much promise and opportunity, find itself in such a situation.

The second question is what do we intend to do about it and when will the impact of these actions deliver the earnings in growth that have been expected from Celestica quarter after quarter.

The impact of CMX in Mexico has hurt this Company very badly.

The reality of the situation is that our operational execution issues in Mexico over the past 12 months have resulted in over $75 million of losses for EBIT losses for 2006 and $46 million for the fourth quarter from this one site.

A loss of customer confidence and the need to get this situation under control quickly has resulted in disengagements with some customers.

The failure to deliver timely resolution of the issues and deliver the projected operational and financial results quarter after quarter have undermined our credibility and eroded shareholder value in the Company.

To emphasize what is different from last year, we have just returned last night from Celestica's -- with Celestica's board of directors from a meeting which was held in Monterey for the past three days.

We held an in depth review of the situation, outlined our 2000 plan for recovery, both with the board and with the CMX management team, including a very extensive site tour.

Why did this situation in CMX develop?

We created the perfect storm for the Company and this site by attempting to implement an accelerated transfer plan, which required the transfer of over 16 customers to Mexico, which required over 50 SMT lines with multiple SMT platforms from various North American facilities, over 6,000 people in an 18-month period into a facility with two ERP systems.

The complexity we introduced was over 50,000 active part numbers, over 1,500 ship codes, requiring over 28,000 pallet locations and creating nine warehouses, seven external to the site, and manage the material required to support the customer demand here.

Desire to move rapidly to Mexico and drive the required cost productivity into the Americas has come at great cost to our Company and our shareholders.

What are we doing to resolve these issues and when can we expect to see the results?

Well step one is to simplify this site, to leverage the cost, the quality and the productivity of our world-class operating network in Asia.

We are working with our customers to transfer at least six customers to our Asian facilities, which will be complete by the end of second quarter of 2007.

These program transfers will reduce the parts complexity on the site by over 50%, the number of required pallet locations by over 40%, and reduce the site manpower requirements by 50%.

The number of ship codes will be reduced by 35% and the number of warehouses supporting the site will be reduced from nine to two.

Step two, through these program transfers, we will eliminate the need for multiple platfor -- SMT platforms.

We will eliminate inefficient factory layout, machine programming, and multiple change-overs affecting productivity on the site.

We successfully completed the migration to one ERP system over this past weekend, with the plant coming back online flawlessly at noon yesterday.

We are optimizing the factory layout for efficiency with resources from Asia assigned to assist CMX in developing plans to increase utilization and dramatically improve layered productivity.

Step three is to insure reliable delivery of material to the line where it's needed and when it's needed.

The warehouse consolidation and segregation by customer is under way.

An inventory verification audit was completed successfully the first week of January 2007.

In step four, we're implementing Celestica's best-in-class processes, tools and systems to institutionalize the best practice and consistency with our global network, including training, development, and certification of key skills and competencies, including the relentless application of Lean principals and Kaizen We know what to do to turn around Mexico, and your measure of me and our team will be getting it done quickly and making sure it never happens again.

Now I'd like to discuss the state of our business and share with you the top priorities as we look to next year.

In addition to CMX, we'll focus in 2007 to restore customer confidence of our stakeholders through improvements in revenue growth, operating margins and asset utilization to the target levels for the Company.

I don't want to leave anyone with the impression that this entire Company is broken.

In fact, parts of our Company are performing at benchmark levels of customer satisfaction, operating margin and financial performance, which far exceed the industry averages, such as our Asia operations.

Our quality, delivery and service levels in Europe have improved dramatically over the course of 2006, and we are well positioned to leverage this improved performance to restore customer confidence and build top-line momentum.

Mexico, while still an area of considerable challenges, has improved its customer loyalty rating by almost 20 basis points quarter over quarter, and I'm happy to announce we have a new program win with a large European telecom OEM that we will introduce into our Monterey facility in 2007.

As a Company, we were the recipient of five awards from some of our largest customers in Q4, recognizing us in the areas of quality, on-time delivery, and new product introduction.

In addition, Celestica also received the 2006 Frost and Sullivan award for customer service leadership in the aerospace and defense market segment, an area we are just beginning to gain market share based on a solid track record of flawless execution in this demanding environment.

Let me now provide you with more context on the fourth quarter, which was certainly a challenge to us as our pre-announce reflected.

Our final revenues came in slightly above the high end of the revised guidance, while the adjusted EPS came in at the mid point of our revised range.

Compared to the fourth quarter of 2005 our revenue growth was 9%, with growth in all sectors except telecom and the industrial automotive and defense segment.

However, our revenue declined about 5% sequentially driven largely by a drop off in demand from our Telecom customers and the seasonality in our consumer business.

In terms of profitability, our operating margins were down sequentially by 150 basis points to 1%, and adjusted EPS was down to $0.03 in Q4 versus the $0.18 earned in Q3.

This decline was largely driven by previously announced $30 million net charge related to the inventory provision taken at our Monterey, Mexico facility.

This charge was simply unacceptable.

Remedial actions are in place to correct the issues that caused this problem.

Without this inventory charge, our operating margins would have been 2.4%, while adjusted EPS would have been $0.14 per share.

We continue to be extremely pleased with our operational performance in Asia, as I mentioned earlier.

This team continues to deliver strong profitability, despite market turbulence and volume declines from third quarter levels.

We're obviously disappointed by our performance in Monterey, Mexico and in Europe, as well.

Aside from the inventory charges taken in Mexico, reduced revenue levels and some cost over runs further impacted operating earnings at the Mexico facility.

Europe's performance was also down sequentially, primarily due to a weaker business mix and lower than expected revenues.

Addressing these issues is a top priority, and we have plans in place to turn the performance around in both geographies.

As part of our operating plan process and response to the top-line pressures we're facing with some of our core segments, we've conducted a thorough review of our manufacturing network and cost structure across the entire business.

We've already taken action to reduce the structure and resource levels in Monterey, consistent with the plans I outlined earlier, also in various European facilities and also in our corporate and support organization staff.

In addition to the prior restructuring we now expect to incur an additional $60 million to $80 million of restructuring charges, $40 million of which was already taken in the fourth quarter.

This is to establish the right cost base going forward.

These actions will be completed in -- by the end of 2007.

Our balance sheet continues to be strong, with free cash flow of $23 million in quarter.

While inventories reduced, our turns declined slightly to 6.9 given the lower than expected throughput for the quarter.

Looking back briefly at 2006, I believe it was a year of contrast for the Company.

On the positive side, we continue to diversify our end market segments, with over 50% of our growth realized in our consumer, automotive, and medical segment with some blue chip market leading customers.

In the first half of the year we realized significant revenue momentum from prior wins and a stronger end market.

In terms of cost reduction, we continued with our aggressive restructuring actions that are driving a very competitive low-cost footprint for the Company.

We now have approximately 85% of our operating network in low-cost geographies.

We continue to increase the technical capability of our Asian operations and our business growth and operational execution in the region are a reflection of this.

Clearly we will continue to leverage this capability that we have in this region, as we look forward to 2007 with aggressive growth plans.

With respect to the challenges, our operational execution and our high growth facilities in Mexico and Europe created significant cost and delivery issues for the Company.

This impacted certain customer relationships and has affected the growth momentum into 2007.

Plans are now in place to address these operational issues and restore our customers' confidence.

In terms of inventory management, we've had issues both in Q3 and Q4 largely driven by Mexico and they have developed a comprehensive inventory reduction plan to drive increased inventory turnover throughout 2007.

With the European operational footprint in place and performing at the required quality and delivery levels, we will now be able to aggressively focus our sales efforts on acquiring European-based customers in 2007.

The weakened demand outlook in the fourth quarter and into the first quarter of 2007 in some of our core segments is further driving our ongoing efforts to aggressively diversify both inside and outside of these sectors.

The net of all of this is that we have many strengths to build on and some areas of the business that need dramatic improvement.

As such we're starting 2007 with a clear set of priorities in place to enable us to deliver on our margin, return, and growth objectives.

So our priorities are clear and focused.

First, we must restore customer confidence.

We are already seeing significant improvements in our challenging areas, which will allow us to restore revenue momentum.

The market opportunities we can create.

We will pick the right markets, the right customers and the right technologies and focus on them with our reenergized sales efforts.

Second, we will turnaround our financial performance of our Mexican operations.

Delivery execution is improved and detailed plans for recovery are now in place that will allow us to reduce complexity, drive the acquired efficiencies and significantly augment our supply chain controls and increase the skills and capabilities of our team.

Third, we need to get Europe back to profitability.

We've got the right footprint, we've stabilized our execution and now it's time to drive growth and leverage at the significant investments we've made and continue to make in this very important geography.

We are well positioned to share the communications business -- to drive share in the communications business in Europe, given the strength we have in other geographies.

Fourth, we must dramatically increase our asset utilization, especially in the area of inventory turnover.

This is an industry imperative as well.

We cannot afford to tie up critical amounts of cash in excess inventory that could be much more efficiently deployed for our customers, our suppliers and our shareholders.

We are investing in new tools, new processes and new people to break through this inertia.

And fifth we must drive efficiency through simplicity and waste elimination across the business.

We are reducing our corporate structure.

We are streamlining our business processes, and shared services, and continuing our never-ending pursuit of Lean implementation.

We've got to get cost competitive across the board.

We know what needs to be done.

We know we need to do it.

That's our mandate.

Now I'd like to take this opportunity to thank our employees.

Over the past 12 months they've maintained the highest degree of professionalism and committment as they've worked to transform this Company.

I'd also like to acknowledge the tremendous efforts and dedication they've demonstrated.

Despite some of these major challenges they've delivered improved results for the Company.

And in particular I'd like to result the resul -- the efforts of Tony Puppi, one of Celestica's founding executives who has announced his intention to retire from the Company.

Tony has provided me and the Company strong leadership and dedication to Celestica over the course of his career.

I'm pleased that Tony will continue to provide his support for us to assist in the successful transition to a new CFO.

Thanks, Tony, for your many contributions over the years, and on behalf of everyone at Celestica, I wish you the very best in the years ahead.

Now over to you, Tony, to take us through the details of this quarter.

Thanks, Craig, and thanks to all my colleagues and friends at Celestica who have made my career a deeply-rewarding one.

So let me get on with the results for the fourth quarter.

Revenue for the fourth quarter was $2.262 billion, a 5% sequential decline and above the high end of our revised guidance.

On a year-over-year basis, we're up 9%.

The sequential decline was driven primarily by a sharp reduction in our telecom segment orders and the expected seasonality in our consumer business.

Let me run through our revenues for the quarter by segment.

Enterprise communications represented 28% of total sales, up 2% sequentially.

Telecom represented 15% of our revenue, down a very disappointing 28% quarter to quarter.

The server segment represented 19% of sales, up 19% compared to the third quarter.

This segment came in somewhat stronger than we expected very late in the quarter.

Storage represented 11%, nicely up 10% sequentially.

Industrial, automotive, and defense came in at 8%, down 12%, as we were in the process of some customer disengagements.

Finally, the consumer automotive, medical segment represented 19% of sales, down 16% sequentially and in line with what we expected.

Our customer concentration was fairly consistent with the third quarter.

The top ten customers represented 59% of sales.

IBM was our only customer greater than 10% for the quarter.

For the full year 2006, both IBM and Cisco represented more than 10% of sales.

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

Asia sales declined 8% sequentially and represented 52%of total sales.

The Americas revenues dropped 3% sequentially and came in at 35% of sales, while Europe declined a sequentially 2% and came in at the balance 13%.

Moving to profitability, the Company posted a GAAP loss of $60.8 million or a loss of $0.27 per share for the Fourth Quarter.

Included in this loss was a $59 million pre-tax restructuring charge, which included about $40 million in actions identified and initiated in the fourth quarter, as Craig alluded to earlier.

The $60.8 million GAAP loss compares to a loss of $28.2 million or a loss of $0.12 per share last year.

Adjusted net earnings also worse in quarter to quarter at $6.5 million or $0.03 per share compared to $40.5 million or $0.18 per share in the third quarter and $28.8 million or $0.13 per share in the fourth quarter of 2005.

Gross margin was 3.9% in the quarter compared to 5.6% in the prior quarter.

Our gross margins were severely impacted by the $30 million net charge associated with increased inventory provisions required with respect to excess inventories in our Monterey, Mexico facility.

Excluding this item, gross margins would have been 5.2%.

SG&A came in at at $64 million in the quarter or 2.8% of sales.

This compares with SG&A in the third quarter of 3% of sales or $70.6 million.

The lower SG&A was due primarily to lower performance-based compensation expenses in the quarter.

Overall margins for the quarter that were, therefore, 1% versus 2.7% in the prior quarter and adjusted for the net inventory charge, the operating margin would have been 2.4%.

Segmenting our operating margins by geography, Asia continued to perform extremely well, with operating margins of 5.2% for the quarter.

This margin was higher due to bonus accrual reversals in the quarter.

Exclusive of this, margins were roughly flat sequentially given a stronger mix and solid cost management despite the decline in revenues in the region.

Margins in the Americas were down 460 basis points to a loss of 3.6% of sales or $29 million, largely driven by the inventory provision in Mexico.

Exclusive of the inventory charge, our operating loss grew to $16 million in Monterey due to much lower revenues and some cost overruns.

Fourth quarter losses in Europe worsened to a loss of 2.9 % or $9 million, due mainly to a lower mix of higher value-add business in the region and lower revenues than we initially expected in the quarter.

In terms of the restructuring update, as of December 31st we have recorded approximately $340 million of restructuring charges during the past two years, of which $300 million relate to the program announced in January of 2005.

During the quarter we determined that additional restructuring action that needed to be taken in the fourth quarter and over the next three quarters to further reduce costs and better align with lower revenues and an increased mix of lower-margin business.

We took a $40 million charge in the fourth quarter related to these actions, and we expect to take an additional charge of $20 million to $40 million in 2007.

During the past two years we have paid approximately $200 million in cash towards this program and we expect the total cash element on all of these restructuring actions to approximate $300 million.

Moving to the balance sheet, cash at quarter end was $804 million.

Cash generated from operations was $47.7 million in the quarter.

Our cash cycle for the quarter was 17 days, reflecting a one day worsening in receivable DSO and a slight deterioration in inventory turns from 7.1 turns to 6.9 turns in the quarter from the prior quarter.

Capital expenditures were $27 million in the fourth quarter.

Debt-to-cap remains at 26%, so as you can see, overall our balance sheet remains very solid.

So let me now move to our first quarter expectations.

We are expecting revenues to be between $1.7 billion and $1.9 billion for the first quarter 2007.

Seasonality is accentuated by a growing mix of consumer business.

In aggregate we estimate that seasonality represents, at the mid point, about 60% of the sequential decline.

Another significant impact is the recent broad weakness in the telecom sect -- segment.

This represents about 25% of the decline sequentially.

The remaining 15% reflects the impact of customer disengagements and the implementation of a Lean supply chain by one of our communications customers.

This overall 20% reduction, again at the mid point, has a very substantial impact in our profitability, where we expect adjusted loss per share of between $0.15 and a loss of $0.04 for the quarter, which is clearly not acceptable.

That concludes our remarks, and Craig and I will now take your questions.

Operator, we'll take our first question.

Thank you. [OPERATOR INSTRUCTIONS] The first question is from Michael Walker from Credit Suisse.

Please go ahead.

Thanks, good morning.

I guess I have just kind of a greater macro-type question as to what the real direction's going to be going forward.

Obviously I've been following Celestica for awhile.

The last several years have really been a story of execution issues, customer losses, margins going down, restructuring after restructuring.

We're hearing about another restructuring right now.

I'd almost have preferred it, Craig, if you'd come out today and said more along the lines of, look, we're not really competitive right now.

We don't really see that necessarily changing.

It's a very competitive environment, Asia's getting stronger , the EMS industry needs to consolidate, margins are going down across the board.

We're going to start to do some strategic things to get us into a position where we can downsize or find a seller, a buyer, some kind of a major strategic realignment here.

So my question is what's really different this time?

Is there any kind of strategy around isolating specific segments that might be attractive to a potential buyer?

Is there any kind of mandate from the board along the lines of trying to salvage what kind of operations that we do have to have some value here?

Well, then I think the -- what I'd like to do is say I think the discussion would be totally different if the Mexico situation was on plan with what we intended and committed to deliver.

I mean, the bottom line is you're looking at one operation across a global network which resulted in over $75 million of an earnings impact over the year and $46 million in the quarter alone.

So I'm not here to say -- this franchise, frankly, has a lot of substance relative to the value at least that I've seen customers place on this Company and certainly in the discussions I've had.

When we are at our best, we can perform with the very best in this industry and we can beat them.

When we are at our very worst, we obviously have the kinds of discussions that we're having here.

So I'm not nearly as pessimistic that there isn't a major role for any company.

And frankly, the customers that I talk to are not that satisfied with anyone to say that, should we create the right environment where we have in places like Asia -- let's not forget that every one of our other North American sites was above plan this year with the exception of Mexico -- so I'm not in the camp that say that I'm ready to throw the baby out with the bath water here.

I guess my question is that, with cost of capital exceeding return on invested capital for Celestica since the bubble, so that's a period of seven years, what -- can you give us some kind of indication as to what you want the Company to look like in terms of top-line growth, in terms of margins over a specific time frame, where we can start to see a roadmap towards earning your cost of capital back?

Because if you're of going to continue to destroy returns relative to your cost of capital, it really doesn't make sense to stick around.

Okay, well let's -- let's have the discussion because I'm sure we'll be talking next quarter, so let's start with with fixing Mexico.

We fix Mexico, our discussion gets different.

Then we talk about the opportunity we have to dramatically improve our working capital performance.

And let's face it, a $200 million opportunity exists in Mexico alone.

So let's talk about fixing Mexico.

Our conversation becomes totally different.

Then you look at the application of the new tools, the new processes and the new systems we're investing in to dramatically reduce our lead time, improve our flexibility and improve our service levels to our customers, all right?

Then you look at the network that we've got and you plot that over the network that other companies are trying to manage.

And as we talk given the market turbulence, you tell me that our fixed cost structure is not going to be the lowest in the industry for what we own.

And, therefore, should we be able to implement effectively our strategy of virtual collaboration, we will be the leanest, we will be the lowest fixed-cost structure and we will have the most flexibility in the industry, because none of us can predict the future.

The mandate I have with the board is never lose a customer we want to keep.

Grow with the customers we can win and make money with.

Do not tolerate inefficient, under-performing plants, processes, peoples, or operations.

Double the profitability and get to the top of the industry in term of return on invested capital.

How long that's going to take?

You're going to monitor me every step in the way.

We have our goals here.

We fix Mexico, we take a huge step in that direction, and that's what I want to leave you with.

I am not going to accept that we sell this Company to create the value for our shareholders that they rightly deserve.

Okay I wish you luck.

Thanks.

Thank you.

The next question is from Paras Bhargava from BMO Capital Markets.

Please go ahead.

Good morning, gentlemen.

Morning.

A question, Craig, and Tony, first on the top line.

The Q1 guidance is negative 5% or so year over year and then you're saying some of that's seasonality, some of that's the telecom weakness and some of that is customer disengagements, including Lean.

Is that the sort of pace we would expect for the full year?

Because a lot of these things, except for maybe the Lean, aren't really going to change on a year-over-year basis.

Seasonality, if anything, might even get worse, because the second half of '06 had some significant consumer ramps, so if you could just clarify that, it would help.

Paras, I think the biggest impact is the telecom side in terms of when you look at things on a year-over-year basis.

Plus, as we've added more and more consumer business this year, that sequential impact has been pretty dramatic.

So I will [inaudible] agree with you that going forward, we'll continue to have that dynamic, okay?

But when you look at the actual decline on a year-over-year basis, we've seen some reductions in spending in the fourth quarter.

We saw basically high-end infrastructure spending come off the numbers, caused part of our pre-announce, and in addition , we saw continued toughness here in the telecom side.

Sure and I know Alcatel and Lucent are both customers of yours and who knows when that situation will get better.

So I'm just wondering, there's nothing else, are you seeing new ramps or anything that could help the situation or should we basically, all other things being equal, model the year to be down 5%?

No, Paras, we're seeing -- the issue is we're seeing new customer program ramps as we go through the year, and we would expect to see -- build momentum as we go through the year.

Obviously, now that we've got our execution issues behind us in places like Europe and improving in Mexico -- I mentioned the recent award in Mexico of a major new technology from a major European OEM -- so we're winning new business again in an environment where we had significant issues.

So we continued to expect to see revenue momentum as we build through the year.

And, obviously, the mix is changing here, but we will see dramatic growth in things like the consumer segment, a reenergizing of our industry segment as we remix that portfolio.

And then a large part of how much we grow quarter on quarter depends on how this communication segment unfolds as we go through the year.

And will the disengagement get worse because this is the first quarter we've seen them.

Typically when disengagements start they tend to accelerate, or is this -- is this as much as you're seeing?

Well, getting -- I'm not going to predict the fu -- this is as much as we're seeing at this time.

And then, finally, I don't quite understand.

It doesn't seem to me that even the 20% sequential decline is enough to take you into this much of a loss.

Is there anything else going on or is it just leverage?

Is the situation in Mexico getting better or worse?

No, I mean the message you're seeing is the -- sort of the hangover of the Mexico situation.

I mean, we're not through the woods yet in terms of remixing this thing, so see a -- so we're going to have a six month sort of latency here of the hangover effect of coming out of the issues that we went through, so that's what you're seeing early in the year.

But you should see a $30 million improvement quarter over quarter because there should be a lack of inventory, and it doesn't seem to me that it's showing up.

I mean, if you can give any more color on what the dynamics are in terms of the sequential decrease in earnings it would really help.

Yes, I think, Paras, the one adder to what Craig said that I would make that would reconcile what you're trying to do there is the fact that, sequentially, our mix just does change adversely.

As you know, we have a very high end focus in the fourth quarter with the sequential decline, even historically in both high-end IT, and now even more dramatically in our telecom side that's a significant mix change.

So we're getting impacted by that.

All right, thanks, gentlemen.

Thank you.

The next question comes from Jim Suva from Citigroup.

Please go ahead.

Great, thank you very much.

It seems like you've gone through and done a lot due diligence on figuring out what needs to be fixed and such, but there was absolutely no mentions on timeline and milestones.

Can you layout your expectations for those?

My expectations would be that the first quar -- the first quarter, obviously we're working through the issues that I mentioned before.

The second quarter you're going to see momentum is build as we go through the year.

I would expect to see the inflection point being the mid point of 2007.

Okay, and as a quick follow-up, you -- and I appreciate the breakdown or waterfall effect for the 20% sequential decline in Q1, 60%, 25% and 15%.

Of that 15% you mentioned customer disengagements in Lean.

Can you help me understand the magnitude of how much of that is customer relationships and how much of it is Lean, and shouldn't the Lean be kind of a one to two quarter and then kind of reversal and be back due to timing issues?

Jim, they're pretty evenly split, and yes, you are right about the Lean.

That should be a one-time item, so we'll see that smooth out in subsequent quarters.

Great.

Thank you very much and we look forward to seeing you guys make some progress.

Thank you very much.

The next question comes from Amit Daryanani from RBC Capital -- Capital Markets.

Please go ahead.

Thanks a lot.

Just want to go back to the margin question for Q1.

Could you just talk about what sort of headwind are you building in now from the Mexico side in Q1 in your guidance at this point?

Sorry, what kind of headwind?

Yes.

Well, the biggest headwind in Mexico is its effect on the volumes, so the volumes are affecting Mexico as well.

Oh, I guess from a margin or EPS perspective, how much of a loss do we expect from the Mexico side in Q1?

Well, we don't expect the current level of loss to improve.

The current level of loss in Mexico is about $16 million in the fourth quarter, and despite further reductions in top line based on that seasonality, and we expect the same level of loss, despite the productivity improvements we are getting and the reductions in the staffing we are making there.

And just a follow-up question, one of the issues or concerns around has really been that for you guys to retain a lot of your customers you've had to give pricing concessions around.

Now that we're moving customers from Mexico to Asia, does that sort of transfer initiate some pricing concession from your part, or is that done on an ROIC [inaudible] on a pricing basis?

Well, most of our pricing is done on an ROIC basis, and clearly, you've seen the execution performance we've put up and the numbers we've put up in Asia, so it makes a lot of sense for us to do that.

And obviously we will always work with our customers on providing them a competitive cost point and price them at market.

The good thing about the model is also the execution quality that we get in Asia actually becomes the fly wheel, so the better we do, the more business we get, the more effectively we will be, the more money we make, the more we can invest, so it is absolutely part of the strategy here.

We are going to leverage the Asian operations and, obviously, in these areas where we create the complexity, this team in Asia has demonstrated the ability to execute that to standards that I think are becoming benchmarks in the industry, certainly based on some of the new business wins we've had.

Fair enough.

Just a final quick question.

The researching plan you guys were announcing, $60 million to $80 million, I believe, how much of that is going to be a cash charge and what sort of a pay back are we looking at from this one?

Overall we continue to think it's about at an 80% split on cash, so I think I alluded to the whole program being about about $300 million, if you factor in this addition.

We expect to get about $40 million of annualized costs out of the system with these actions, so that's a pretty important step forward.

All right, thanks a lot.

Thank you.

The next question comes from Brian White from Jeffries.

Please go ahead.

Yes, good morning.

Morning.

I'm wondering if the -- the inventory situation in Mexico, do you think that's under control and there will not be write-downs in the future?

For the March quarter you don't expect write-downs is that correct?

That's correct, Brian.

Okay.

And just when we look at the consumer market -- you talked about seasonality in the March quarter like we always see -- do you think it's a little softer than what you typically see?

I know one of your big customers recently cut their forecast for some of their products.

I'm wondering if it's a little softer than seasonality would suggest?

Well we don't have a terrible amount of experience in consumer and plus we've got a high degree of concentration with a few accounts, so I can't really comment on whether that's normal or not.

I'd say that, as we looked at the quarter for the last little while, it hasn't changed dramatically.

Okay, and maybe just general thoughts on the tech markets from a macro standpoint.

You came out in mid December, you lowered your guidance.

You talked about a slowdown and then you had some issues in Mexico.

How do you generally feel about the world, excluding some of the issues that Celestica's facing right now?

Well, I think as we look across markets, obviously the biggest question mark we have right now is the telecommunications space.

In general we see the opportunity-rich environment being the industry space, the consumer space and obviously, the IP enterprise space, where we're continuing to expand our market position with our key customers.

So for us, to a large extent these recent announcements by some of the major OEM's in the telecommunication space are the ones that have the greatest question marks for us.

Okay.

And just what type of sequential decline could we expect in the March quarter?

Are we talking 5%, 10% or could it be 20%?

The sequential decline?

Yes, in the telecom market, Tony.

It's pretty substantial.

It's north of 20% we're looking at.

Oh, wow.

Okay, thank you.

The next question comes from Dayle Hogg from GMP Securities.

Please go ahead.

Thanks.

Can you give us more color on Europe?

You've had a number restructurings there and closing plants, yet we've had eight quarters of sequential decline.

Just wondering why we're not seeing an improvement over in Europe?

Well, we've taken all of the actions that we certainly required and in the fourth quarter we were disappointed in the mix of the business that we had.

We expected the IT space, in particular, to be strong, as it historically does -- is on a seasonal basis.

That would have given us some certain advantage on the mix side of the business and we didn't experience that, so revenues stayed flat.

We took out costs, but the mix impact affected the profitability.

So the key lever for us in Europe was, and continues to be, despite some early year execution challenges and cost issues, is to drive that scale.

We've got the right footprint.

It's in the right geographies.

We're got the right cost points and now we've got to load it up.

Why has this been -- I guess it's not just a one quarter issue.

We've seen steadily decline.

I would have thought that with restructuring we would have seen some benefit and a return to positive margins?

As I mentioned, the year was a series of contrasts.

If you look at Europe specifically, we started early in the year with expectations.

What happened, certainly in the case of Romania and the Czech Republic, was we started early in the year then with significant operational execution issues.

So we're behind the eight ball in terms of quality and delivery performance.

Obviously, then we build that negative headwind that we've got to overcome in the second half.

The message to you is we've overcome that.

Quality levels, delivery performance, the execution platform is in place now, so we're not here going to be making excuses about why we're not executing.

The big challenge for 2007 will be the top-line momentum that we're working to build in Europe.

So the reason you didn't see it is, on the basis of the pay backs, you expect to bring these facilities up flawlessly.

Obviously our ability to do that and, frankly, our optimism around the time it takes to do that was too great in 2006.

But -- so we're go -- when do you expect to see some improvement?

Would it be in Q1.

Q2 for Europe?

I think the message is it's the same discussion I had regarding the general Company outlook.

I said the headwinds that we are overcoming have an impact Q1, Q2, beginning to break through then on the second half of the year.

Great.

Thanks a lot.

Thank you.

The next question is from Yuri Krapivin from Lehman Brothers.

Please go ahead.

Good morning.

Morning.

You mentioned that you are transitioning six customers from Mexico to Asia.

Do you have plans to transition more customers from Mexico to Asia, and what's the long term plan for Mexico?

Are you planning to bring more business to the Mexican side, or will everything go to Asia in the future?

Well, we're absolutely intending to bring more business to the Mexican side.

I mentioned the recent award of a very exciting new technology program, which we expect to grow dramatically just at the end of the year.

So the bottom line is, as we look to the future, as you look to what's happening in the market, speed to market is obviously becoming a material advantage for our customers.

And the ability to configure to order in these local markets is basically what they're asking from all of us.

So the bottom line is you can see Mexico begin to move to a greater mix of configure to order, supported by PCBA supply out of Asia.

You can see us building more capability in that area and actually growing dramatically in that area.

You will also see us building, then, the local production around markets that require speed and the ability to change quickly.

So we still see a substantial opportunity.

Every company that we work with is looking for a world-class facility in North America to meet their local requirements, and when those requirements require the speed and the ability to change quickly, they like those requirements closer to the end markets.

So we're bullish on the combination of Asia and Mexico offering a gateway to North America that we believe will be best in class.

Okay, and with respect to the March quarter, you mentioned that you are projecting the telecom business to be down north of 20%.

Can you share your expectations for the server and the storage segments?

Well, those segments are down more on the seasonal, so what I've tried to do in aggregate is break down what I thought was normal seasonality, which now includes the consumer business, and give you the focus of what has deviated or departed from that average, which was the telecom side, and the other piece of being the Lean in some customer disengagements, so those are the key drivers.

Everything else is kind of consistent sequentially with the seasonal effects we've seen historically.

And finally, what does the Lean initiative that you mentioned imply for your inventories in the March quarter?

Good question.

That should increase our inventories between $50 million and $60 million.

Thank you.

Thank you.

Your next question comes from Kevin Kessel from Bear, Stearns.

Please go ahead.

Yes, thank you.

Good morning.

First off, how are you guys going to prevent overwhelming Asia similar to the way Mexico was overwhelmed, because clearly, there's a need here to expedite these transfers?

You spoke of six different programs going there.

And maybe you could also share with us what the end markets are in terms of -- in terms of what you're transferring over to Asia?

That's a very good question.

Obviously, we do not want to recreate what we created in Mexico and Asia.

We've thought this through very carefully.

What we've done is actually identified centers of excellence in Asia, so these customers are being transferred to multiple sites where those sites have the specific capabilities those customers need.

In addition we've got our best-in-class material management capability.

We've got one instance of the ERP system over there, so we've got the system in place, we've got the disciplines in place and we've got the processes in place that I mentioned in terms of our world-class processes.

So bottom line is -- and those transfers have been proceeding over the course of the fourth quarter primarily and will be completed no later than the end of the second quarter.

We are already bringing up some of those customers and the current experience has been flawless, actually to the point where it's creating new business opportunities.

So, again, very, very first-class team and these -- this group in Asia manages change at a scale and at a speed that I think is truly where the kernel of opportunity exists here for us to move very quickly.

So end markets, they range from communications to industry and, obviously, as we look to the future and some of the strategic moves customers are looking for and, frankly, there's also the IT enterprise space, so really, three of the major four segments of our business are benefiting from this plan.

And also do you run the risk now, you're moving six of them to Asia and you said you transferred over 50 of them.

Could this cause an issue where the other 44 say we also want to go to Asia at this point?

Obviously not -- I'm being -- that's obviously --

I'm not sure the fi -- the number 50?

Yes.

What was that one?

Well,no, I thought you said you transferred over 50 customers and 16 SNT lines down to Mexico?

No, there were 16 customers in Mexico, of which we've transferred six.

I'm sorry if I misspoke.

Okay, 16.

I said 50,000 part numbers, maybe that was -- I was stumbling there.

No, my mistake.

And then in terms of the disengagements, is there any chance it could be a higher percentage of the actual decline, especially as it relates to telecom, because that's obviously a very significant decline.

Your competitors are clearly seeing weakness in this market, but nothing that's quite that high, and at the same time, your largest enterprise customer now bringing on another supplier.

I didn't know if that's something that could be a risk out further in '07?

The chance of being higher, it is what it is, right so we -- it is what it is.

That's our estimate right now.

So obviously, there have been some changes in the industry in terms of the sourcing of companies acquiring large scale infrastructure from some telecom customers, which has impacted us slightly.

But no, I think we're talking about dealing with the impact of our operational issues and the disengagements we've identified, or disengagements that we've been impacted by.

And a piece of the disengagements would have been the final transfer of some of the work that you're well aware of in terms of the wireline business and the Nortel business.

Right.

So those are known programs and those constitute the last set of transfers.

Okay, so those are still impacting then?

They are in that number, as well.

Yes, those are still -- those are impacting us in the first quarter, and will impact us this year.

And impacted us in the fourth quarter as they have all year.

So that's the final step in that disengagement, if you will.

And then just housekeeping.

Can you give us a sense for what CapEx and D&A will be in '07?

And then lastly on the inventory where you see that going?

And so maybe you can explain -- with all of the write-offs that are happening in inventory, is the case here that you were actually speculating on inventory in terms -- or was there just flat out mistakes in procurement?

Well, in -- why don't you take the first question --

in terms of the CapEx, we do see a reduced rate for sure, so we're looking at between 1.5% and 2% of revenues for CapEx in 2007.

In terms of inventory performance, there's no speculation.

We have customer orders and forecasts, that's what we acquire for and try to execute against.

We have had some issues with all the complexity created in Mexico.

We've got those all itemized in terms of actions, plans under way, progress being made, good results on the physical , so it's not a consequence of taking higher risk, higher profiles of inventory or higher, if you will, hub commitments on our part.

Okay, so then it would, I guess, be mistakes or either that or you're taking the write-off as opposed to the customer in order to keep the customer?

o, it's a big issue with --as we discussed earlier -- in Mexico our ability to handle parts as crisply as we should have.

All right, thank you.

Thank you.

The next question is from Steven Fox from Merrill Lynch.

Please go ahead.

Hi, good morning.

Hi.

First question on the customer defections, it sounds like you got a couple hundred million dollars of annualized sales that are leaving.

Can you talk about when you lost these customers, how many are you losing and what industries they're in?

Well, the annualized -- I mean, it's dealing -- there's also the issue of both customer decision and then, in some cases, our strategic decision.

So over the course of 2006, we experienced the impact and. obviously. in some ways it actually works to improve our profitability in terms of we simplify the business dramatically.

And as we look to the longer term, those are customers that we don't feel represent the best opportunities to invest and grow in.

So how many customers did you lose that you didn't want to lose?

Well, it's -- you want to talk specifically, we lost the Lucent wireline business, we lost the Nortel acquisition that was acquired by Flex, so those would be the two material losses.

Those are concluding this quarter, and then we've also pushed certain disengagements to try to simplify the structure and the work load that we have in Mexico.

And then lastly, can you just be more specific about what the charge is for, what is -- what is being excluded from typical operating expenses?

You mean in terms of the restructuring charges, Steven?

Yes, the new restructuring charge, Tony.

Yes, we're not closing plants as part of this.

It's largely people, trying to get the right cost structure, whether it's in the corporate overhead or in our shared services or support organizations around the world.

We're trying to make this a much leaner, less layered -- delayered Company.

That's part of it, that's a big part of it.

We're also fine tuning, as you know, the level of resources we've got in some of the sites, in some of the operations that are seeing some of the volume declines, and that's what we're stepping up to.

That constitutes the vast majority of the charges we expect.

So largely severance related?

Correct.

All right, thank you.

Thank you.

We'll take one more question.

The question is from Scott Craig from Banc of America.

Please go ahead.

Hi, good afternoon.

Can we revisit the disengagement segment for a second here?

If you look at Mexico, are the disengagements outside of Lucent and Nortel restricted only to Mexico?

In other words, clearly you're manufacturing for customers in Mexico, but you're also doing manufacturing for the same customers globally, so is some of their other global business at risk, and have you assumed any disengagement there?

And then secondly, you guys talked about a telecommunications win in Europe that's going to ramp in '07.

I think it's important for you guys to talk about what you see in '07 as far as further customer disengagements or market share losses as you look out into '07?

It's something that EMS companies have broadly ignored in only talking about wins they get and not talking about offsets to those wins, so if you could provide a little bit of flavor around that it would be really helpful for us.

Thanks.

Well, as I mentioned previously, the two biggest impacts have been the Lucent wireline decision and the Nortel decision, frankly, in the telecommunications space.

The other ones are selective disengagements of smaller customers in most cases and, obviously, to some extent the complexity that they have brought to some of our sites on an economic basis did not make sense and was not profitable.

So by and large, therein lies the remixing of the portfolio, and we're becoming more focused on the target customers that we believe we can win and grow with long term.

So in terms of the outline for the first quarter, that sort of sets up the parameters of what we're looking at through the year.

We expect to -- we've got the operational platform improving virtually across the world.

We're executing in all of our North American sites, so frankly, when we look at -- it's a pretty simple equation, certainly in my experience in the market.

When you execute, people are happy, and when they're happy they give you more business and when they give you more business, you can grow and make money.

So the irony here -- or maybe not the irony -- is our most profitable customers are our most satisfied customers, so that's the message.

The operational platform in Europe, the execution platform in Mexico is improving, and we exper -- we expect to experience continuing momentum as we go through 2007.

So you don't feel that any of the issues that you've had in Mexico with customers are going to impact globally your business with those same customers?

I mean, possibly.

I can't -- certainly customers are looking for companies that can provide the site-to-site discipline and consistency throughout the world, so I won't speculate on that at this point.

Okay, thanks.

Thank you.

The next question comes from Carter Shoop from Deutsche Bank.

Please go ahead.

Yes, I guess I sneaked in here.

A couple quick ones, if I may.

You did!

The restructuring charge in the first quarter, I know we're looking for $20 million to $40 million in 2007.

Can you give us a range for the first quarter?

I think it's in the -- less than half.

Let's put it that way.

I'm sorry?

For the year?

Just less than half --

Less than half.

-- is my estimate right now.

And then also, could we talk about the costs associated with transferring the business to Asia?

Obviously there's always some business being transferred around.

Can you talk about what maybe the impact is in the first quarter to the high level of transfer activity?

Yes, that would've all been reflected in the guidance we gave you, Carter.

Okay, great and last question, just on the recent management turnover.

Tony, obviously sorry to see you go, but in addition to yourself, we've seen pretty much the entire executive suite get turned over here, Craig.

What gives the board the confidence that the current management team is the right one, and can you talk a little bit about your experience in turn around and operations?

Well, I think the message is the board has the confidence in the Company, and I think the early signal to that is I took them directly to the site where we have the biggest challenge and went through a discussion with the people on the floor, so what they see is the alignment between what I'm saying, and what's being said on the floor.

So I think the message there is they believe that we know what to do and the difference between the past and today is they also believe that we now have the understanding of what it takes to get it done, so that's step one.

Step two is I've had the opportunities to work across broad industries, both in leadership roles, as well as working in the marketplace with customers.

And I know what makes successful companies work and it tends to be built on the back of leaders at all levels of the Company, so I believe I have the ability to set the direction.

I have the ability to inspire people, the ability to lead and rebuild the customer confidence.

I know what to do, and the measure of me will be getting it done.

So my experience is that I've been successful in growing businesses and markets and with customers and in building value by creating profitable growth for the long term.

Great.

Thanks.

Best of luck to both of you.

Thanks everyone for joining the call.