Celestica Inc (CLS) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by.

Welcome to Celestica's first quarter results conference call.

At this 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 that this conference is being recorded today, Wednesday April 25th, 2007, at 4:30 p.m.

eastern time.

I will now turn the conference over to Donna Singh, Director, Investor Relations.

Thanks, Luke.

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

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

Craig and Paul 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 ensure everyone on the call who would like to ask a question has the opportunity to do so.

You are welcome to get back in the queue after you ask your 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 of our industry, and our financial and operational results and performance that are based on current expectations forecast and assumptions involves risks and uncertainties that could cause actual results and outcomes 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 can cause the actual results to differ materially from those contained in our projections or forward-looking statements.

These filings include our form 20S and subsequent reports on form 6K filed with the the Securities and Exchange Commission which can be accessed at www.sedar.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 the non-GAAP measures are included in our press release which is available at Celestica.com.

I'll now turn the call over to Craig

Thanks, Donna, and good afternoon, everyone.

In January, we defined a clear set of priorities to enable the company to deliver on our operating margin, asset utilization, and revenue growth objectives and ultimately to drive Celestica to a leadership position in the EMS industry.

Today I'll provide you with an update on our progress during the first quarter and then I'll turn the call over to Paul Nicoletti to review the financials for the quarter.

During our fourth quarter call, I highlighted five priorities or business imperatives for the company in 2007 which are to number one, build customer loyalty, number two, improve financial performance in Mexico, number three, return Europe to profitability, number four, increase inventory turns and asset utilization, and number five, drive speed and efficiency through simplicity and the elimination of waste through the accelerated transformation of Celestica's LEAN operating system.

We made significant progress in all of these areas of the business over the last three months and I'm also pleased to report that we've gained considerable momentum from a business wins perspective during the quarter and that these new programs will be launching through the network over the next 12 months.

With respect to customer loyalty, our customer survey results for the quarter improved considerably company wide, quarter other quarter, through the the organization, including the satisfaction levels in Mexico, which is have increased by 100% since Q3 of 2006.

In addition, our customers are demonstrating their confidence in our capabilities and the value-added services we offer.

This is recently reinforced when we renewed our manufacturing agreement with NEC.

As part of this agreement, NEC will outsource its optical network system product portfolio to Celestica for two years and we will provide NEC with design, prototyping, new product introduction and full systems assembly.

We look forward are to building upon our existing partnership with NEC by continuing to provide a level of flexibility, responsiveness and cost efficiency to drive NEC's success.

Our customer satisfaction is measured by on-time delivery and quality is improving.

Our win rates have increased and we're booking significant new business.

We are, however, continuing to experience some program losses associated with past service failures, but we do expect the revenue impact of these losses will be overcome by the favorable impacts of our recovery efforts.

We are making significant progress in our efforts to improve the operational performance and turn around at our Monterey facility.

We have a clearly defined recovery plan for Monterey and we're executing on it.

Step one is to streamline and simplify the site and in line with this, we have eliminated two of our warehouses in the quarter, and expect to reduce the number of warehouses by two more in the next quarter.

We have completed about 40% of the plan program transfers out of Mexico in Q1.

We expect to move another 40 to 50% of these program transfers in the second quarter, with the balance to occur before the year-end.

We've reduced the head count by 33% in the site and in the first quarter, we expect further reduction, 5% to 10% by year-end with most of this reduction coming from the temporary workforce.

Despite all of these changes, our customer satisfaction improved dramatically in the quarter.

Step two was to consolidate to one ERP system at the site.

And as I reported last quarter, the migration has been successfully completed.

Third step to insure reliable delivery of material to the line, where it's needed and when it's needed.

The warehouse consolidation that I referred to earlier is improving our ability to deliver material to the lines as required, thus sustaining our improved delivery performance at the site.

This, along with a 45% reduction in the number of component parts in Mexico, has reduced our complexity and takes us closer to the operating targets and performance goals we've established for the site.

The fourth step involved the implementation of Celestica's best in class processes, tools and systems to institutionalize the best practice that we've established across our global network at our Mexico operations.

And I'm pleased to report that we're making good progress in this area, as evidenced by our progress in key areas of the business such as improving our materials management processes and reducing our inventory by 25% at the site during the quarter.

Our work in Monterrey is far from complete, but I'm very encouraged by the early progress and the tangible improvements the team has made in the quarter.

From a European perspective profitable topline growth continues to be our priority for the region.

We've had some wins during the first quarter that are expected to launch in the next 12 months.

But these wins will not get us to the revenue levels we need to be successful, but they're certainly a step in the right direction for operations in Europe.

From an asset utilization standpoint, we reduced our inventory as a company by $117 million in the quarter and as a result, we expect our inventory turnover to improve in the coming quarters.

And finally, with respect to efficiency, we drove improvement that is will become more visible once we begin to see growth in our top line.

And looking out to the next few quarters in 2007, we'll continue to aggressively execute on our game plan and continue to focus on profitably meeting the toughest, most complex and challenging demands off our customers.

Once again, you'll monitor our results through the progress you'll see in our increased levels of satisfaction, momentum in our revenue growth, improvement in our profitability and ROIC and the acceleration and improvement of our operational performance.

My promise is to review our report card each quarter and demonstrate to our shareholders that we are a different company today.

We will prove that, we can deliver on our commitments to our customers and generate returns on our investments and our people, processes, tools and systems, which will drive value for our shareholders.

Now I'd like to turn the call over to Paul Nicoletti, who will take us through the details of the financials for the quarter.

Thanks, Craig.

And good afternoon to everyone on the call.

Revenue for the first quarter was at the midpoint of our guidance at $1.842 billion, down sequentially and on the year-over-year basis by 19% and 5% respectively.

The as expected sequential decline in revenue was driven by seasonality, higher than usual reductions from our telecom customers, due to end market demand weakness and a drop in our industrial end market due mainly to previously discussed customer disengagements.

Now, let me run through our revenues by end market for the quarter.

Enterprise communications represented 32% of sales, down about 7% sequentially.

Telecom was 13% of revenue, down a very disappointing 28% quarter to quarter.

The server segment represented 18% of sales, down 23% compared to the fourth quarter.

Storage was 11%, down 20%.

In both the server and storage end markets, the sequential decline was mainly due to stronger than expected revenues very late in the fourth quarter of '06, and inventory accumulation at some of our customers, both of which led to weaker demand in the first quarter of 2007.

Industrial aerospace defense was 8%, down 27% quarter to quarter.

Finally, the consumer auto medical markets represented 18% of sales, down 21% sequentially, but in line with expectations.

Our top 10 customers represented 64% of sales.

Revenues for Cisco Systems and Sun Microsystems were greater than 10% of total sales for the first quarter.

Moving to profitability, the company posted a GAAP loss of $34.3 million, or a loss of $0.15 per share for the first quarter of 2007.

Included in this loss was an $8 million pretax restructuring charge.

The $34.3 million GAAP loss compares to a loss of $17.4 million or a loss of $0.08 per share for the first quarter last year.

Adjusted net earnings for the quarter was at the low, was at the low end of our guidance at a loss of $9.1 million or a loss of $0.04 per share.

This compares to adjusted net earnings of $6.5 million, or $0.03 per share in the fourth quarter of 2006, and adjusted net earnings of $17.4 million or $0.08 per share in the first quarter of 2006.

Gross margin was 4.3% in the quarter, compared to 3.9% in the fourth quarter of 2006.

Our gross margins were impacted by revenue declines quarter over quarter.

Gross margins for the fourth quarter of 2006 included a $30 million net inventory charge for Mexico.

SG&A was $73.8 million in the quarter, or 4% of sales.

This compares with SG&A in the fourth quarter of 2006 of 2.8% of sales or $64 million.

SG&A in the first quarter was higher relative to the fourth quarter of '06, due mainly to higher variable pay accruals and severance cost incurred during the quarter.

Overall operating margins for the quarter were 0.3% compared to 1% in the fourth quarter of 2006.

For the past few quarters, we have been transitioning the management system within the company and we are now managing the business on a customer centric basis.

Due to this, we will no longer be providing segmented profitability data by region in our financial statement note disclosure.

We will, however, continue to provide details on specific areas of the business that are adversely impacting our results, such as Mexico and our operations in Europe until these issues are resolved.

Q1 results for Mexico were in line with expectations, with operating losses of $17 million.

This loss increased slightly from the fourth quarter of 2006, and was due mainly to the margin impacts associated with lower levels of revenue, which offset the operating improvements we made during the quarter.

The operating costs are still too high.

As Craig detailed earlier, we have made significant progress in simplifying the operations in Mexico, and expect these changes to reduce the costs at the site in the coming quarters.

Revenue for Europe was $246 million with an operating loss of $11 million.

The increased level of losses in Q1 is due largely to the impacts of lower levels of revenues as expected.

As Craig mentioned, we have some new business coming online in the next 12 months, which will improve the overall loading of Europe.

In terms of the restructuring update as of March 31st, during the quarter, we recorded $8 million of the $20 million to $40 million in previously announced charges that we expect to take in 2007.

Since January, 2005, we have reported approximately $346 million of restructuring charges and we have paid approximately $235 million in cash.

And we expect the total cash element on all these restructuring actions to approximate $300 million.

As of the end of the quarter, approximately 5300 employees have been released.

Moving to the balance sheet, cash at quarter end was $704 million.

Cash consumed by our operations was $101.3 million in the quarter.

Our cash cycle for the quarter worsened sequentially by seven days and came in at 24 days driven by accounts receivable DSO, which worsened by four days, due to lower levels of revenue in Q1 versus Q4 '06 and inventory turns, which deteriorated from 6.9 to 6.2 sequentially.

Capital expenditures were a modest $13 million for the quarter, which reflects our continued focus on increasing utilization of the capital already in place.

Our balance sheet remains solid with the healthy debt to cap ratio of 27%.

In early April, we renegotiated the terms of our credit facility, and entered into a new secure agreement with our lenders which matures in April of 2009.

As part of this renegotiations the facility has been reduced from $600 million to $300 million.

While we are very comfortable with our liquidity position and do not anticipate any borrowings in the near term, we currently have full borrowing availability of this facility if it is required.

Now let me move to our second quarter guidance.

it is required.

Now let me move to our second quarter guidance.

We expect revenue to be in the range of $1.85 billion to $2.05 billion.

The quarter over quarter growth of about 6% at the midpoint of the range is being driven by growth in our consumer, server and storer businesses, offset by continued end market softness in the telecom space.

We expect that adjusted earnings per share will be in the range of a loss of $0.03 to earnings of $0.05 for the quarter reflecting the benefits of additional revenue and the operating improvements we expect to achieve throughout the network.

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

Operator, we'll take our first question.

Thank you.

Ladies and gentlemen, we will now conduct the question-and-answer session.

(OPERATOR INSTRUCTIONS).

One moment please, for your first question.

Your first question comes Jim Suva of Citigroup.

Please go ahead.

Great.

Thank you very much.

You guys talk about new program wins, can you quantify that versus what's rolling off?

And as we look forward, are we at a year when where you think we're going to see revenues up or when do we start to see revenues turn up year-over-year?

Jim, as far as quantifying the benefit, we're not going to be giving any forward guidance -- as I'm sure you know, there is a lag with the new program wins and when you start to see them into the ledger, as we mentioned earlier, we expect those programs to come online in the next 12 months.

As far as the year is concerned, certainly some of our core markets continue to remain weak.

That is giving us some head winds.

You know, certainly too early to say how the entire year works out.

Suffice to say some of our core markets continue to be soft at this point.

Maybe if can I switch topics to give a little more granular on something else, then, regarding Mexico, a loss here this quarter, and you're making some progress, getting rid of two inventory warehouses and another two this quarter.

Where do we see the turn break even point for Mexico?

Is it in the June quarter, September quarter, when are we looking at a turning or at least for the next quarter, what do you expect for June, because that's only one quarter out?

It's Craig.

We expect improvement in the second quarter, but the current outlook and revenue is going to put pressure on the timing of the actual turnaround in terms of the return to profitability.

So originally I think we commented we were looking at the second half and as we continue to see pressure in the Telecom space, that's putting pressure on the timing there.

But the improvements may occur quarter on quarter.

But the rate of improvement may not be at the rate we originally anticipated based on the current outlook in the telecom space.

Structurally, sounds like you're going to close two warehouses down there.

Is there anything else down there that you're doing, sounds like laying off more temporary workers and shifting business to Asia, is that the best way to think about it?

It's back to kind of the basics we talked about.

Step one was simplification.

So simplify the site, we're removing program transfers.

We mentioned the rate at which we're moving them, we're on schedule there.

By and large, the bulk of them will be completed by the first half.

That reduces the parts count which is now half of what it was a year ago.

The site head count is down by a third.

SMT lines have been reduced dramatically to eliminate the complexity.

So that's all on track.

And then the ERP system is now down to one instance of SAP.

So we're pleased with the operating results obviously now, certainly the customer satisfaction improvement, on time deliveries improving, quality is improving, on time delivery to customer request is improving.

So, the real challenge for us to take the, I would say, the performance to another level to be able to deal with the volume fluctuations that we may be faced with dealing with.

But no strategy change there, despite softer top line?

Absolutely not.

I mean, it's a solid facility with very good people.

It's building configure to order systems capability, PCBAs in the toughest markets, strong confidence that this site is really headed in the right direction.

Great.

Thank you very much, everyone.

Thanks, Jim.

Your next question comes from Kevin Kessel of Bear Stearns.

Please go ahead.

Yes, hi there.

Good afternoon.

My question is around what you were mentioning with customer disengagements.

You were saying that there were, there continues to be customer disengagements in various sectors but you feel they'll be offset by some of the new wins, is that correct?

That's correct.

Is there any way to give us a sense in terms of a relative size, what would be the relative size or the duration in which these customer disengagements will take place over?

I think what we can say is this engagement we're anticipating is reflected in our guidance and based on the guidance that we've given for the second quarter, you can see the relative impact there.

But by and large, as we look to the quarters coming up as the out years or the out quarters, the real question will be around the, I would say, the fluctuations in the base business.

Right.

In terms of the timing.

Okay.

And then, in terms of the transfers that you mentioned, 40% of them done and another 40% to 50% expected in the quarter that we're in now, can you maybe give us an update on Asia and how that's performing?

You mentioned Europe and you mentioned Mexico.

But how is Asia faring these days?

Have the margins continued to improve, have they come down?

What's the situation there?

Kevin, as we mentioned, we really have changed the way we're running the company so we're not going to give specific numbers about Asia.

I will say that the Asia performance has been consistent through the the years.

So Asia team is very strong, continues to perform.

As they have in the past.

So no surprises there.

Okay.

Thank you very much.

Thank you.

Thank you.

Your next question comes from Thomas Dinges of JP Morgan.

Please go ahead.

Hi.

Good afternoon, guys.

Paul, could you help a little bit trying to understand the SG&A and you talked about it being higher because of the variable pay and also the severance costs, can you give us an idea of what the magnitude was there so we can get an understanding on the go-forward, what you guys are thinking about for a steady state dollar figure there, and I have a quick follow-up for you.

Sure.

As far as steady state, low to mid-70 million is what we would expect to see.

Sequentially, you've got two impacts.

First, in the fourth quarter, we did adjust some of our variable pay comp given the losses that we incurred in the fourth quarter so we saw some pickup there.

And then, coming in to Q1 we see that going in the other direction as we start to book some of those variable comp accruals for 2007.

As far as the executives, the executive severance was concerned, that was about $3 million.

The balance would be a combination of the variable pay accrual along with some is other miscellaneous spending but I'd say essentially, $3 million on the severance and the balance being in respect of the variable accruals.

Okay.

That helps.

And then, maybe you could help also on the cash flow side, obviously, the net income being at the levels where it's at doesn't help.

But there was a sizable cash drain at the operating line.

Perhaps I missed it in the prepared remarks, but can you talk about some of the puts and takes that you saw there in the quarter?

Because obviously with inventory down, I would have expected to see cash flow perhaps break even or a little stronger and what's the view based on a lot of the things that you guys have moving right now?

As you look into the next quarter and your ability to generate some cash?

Sure.

So, in regards to what was driving the cash a couple of things, you just touched on it.

We were at a low level from a EBITDA generation point of view which as you mentioned, is not helping.

The big nugget that is would have occurred during the quarter, we spent $35 million of cash on restructuring in the quarter so that is where we previously booked charges would have been paid out.

We did, our interest payments are twice a year in January and in July.

So that was about $35 million.

That along with we pay our variable compensation while the senior team was largely taken down pretty significantly.

The bulk of the population gets their payments in February.

That would have been in the $30 million range as well.

In regards to inventory, it's just the timing of that inventory reduction, Thomas.

So while we're very pleased with where we ended off on inventory for the quarter, moving in the right direction, would expect inventory turns to pick up here in the coming quarters, it's just the timing of that inventory reduction we largely saw that you late in the quarter.

And so our inventory level earlier in the quarter were higher than what you're seeing and as a result put downward pressure on the payables line.

So those are really the big moving pieces.

As far as what I see going forward, I expect cash to be in pretty flat looking forward over the next quarter.

Okay.

Thank you.

You're welcome.

Your next question comes from Lou Miscioscia of Cowen.

Please go ahead.

Thank you.

I guess I've got two questions.

I guess on the last earnings call, Craig, you talked about the first half was when a lot of the restructuring is going to happen and second half, more or less, a lot of the benefits start to kick in.

And usually, I expect that summer quarter being a September quarter is normally reasonably weak because of seasonality and a lot of high-end enterprise stuff.

So when we with look for maybe inflection point, is it more likely to be the tail end of the year?

Or would you say it's still possible in the third quarter?

I think as we look at the mix, of the current business, we've got the big consumer pickup for us in the third quarter now having diversified our customer base with some leading consumer customers.

So I mean, it's a different profile than history.

And obviously this year should be no different than that.

That's what we anticipate for the third quarter.

So we expect momentum to build obviously, the biggest exposure we've got right now in terms of our top line forecast is the, I would say, the turbulence around the Telecom market and where we're going to settle out.

Not so much on what we're winning but the base business, if you will.

So I guess from a restructuring benefit standpoint and an operating margin standpoint, we should see a pretty linear progression through the whole year of improvement?

Yes, I would say so.

Not NECessarily faster than linear, but yes.

Okay.

And then on the LEAN program, which you had somewhat of an impact in last quarter, generally, that hits the company from a revenue perspective and then eventually it kicks in, usually to a higher level of revenue, i.e., more materials thrown into that.

You expecting that we've hit that inflection point, second quarter, where we'll actually start to see higher levels of revenue due to the LEAN initiative?

Lou, it's Paul.

It really depends where you sit in the supply chain.

We did see a revenue impact in the first quarter.

It was nominal.

It's approximately $20 million.

The overall inventory impact was larger than that, was approximately 50 million.

So if you were looking for a pickup, it would be the pickup of that 20 million.

So overall, pretty insignificant.

Okay.

Thank you.

Thank you.

Your next question comes from Matt Sheerin of Thomas Weisel Partners.

Please go ahead.

I just wanted to clarify your answer on the question of SG&A.

Did you see that it's going to shake out to be the low to mid 70s this quarter?

That's what I expect, yep.

Okay.

And I understand that you've done a lot of head count reduction in the corporate level.

Could you tell us when that's going to show up in the SG&A line?

And will we see that SG&A number go down?

Or obviously the percentage go up?

It just seems like given all the cuts that you're doing, it seems like a pretty high number.

So, as far as the overall expectation, as I said, I expect to see it in the mid to low 70s.

What is happening underneath the covers, the company is continuing to invest in deploying its IT infrastructure so some tools there.

So while we are taking people costs out we are making some investments on the IT side.

There are some head winds moving against us, specifically the weakness of the dollar overall and some of the currencies and where we spend them.

Overall, I'd expect SG&A to be in the, as I said, in the mid to low 70s for the next few quarters.

Okay, fine.

And could you tell us what the capacity utilization rate is for the company overall and by region?

So, overall the company right now is in the high 50s.

That's the overall company average.

If you look across the enterprise and again, while we're financially not going to disclose much by region, you can assume that Asia here has a higher utilization in the 60s and that overall Americas and Europe will be below the average, so at a lower end in the low 50s.

Okay.

And do you plan to address that by maybe taking down more capacity or hopefully growing into that?

Well, certainly, our goal would be the grow into that capacity.

Clearly as Craig mentioned earlier, it's really a question as to how some of those core end markets unfold.

We will see part of the consumer pickup eat into that capacity.

So expect to see that utilization number go up as each quarter here progresses.

So I think it really is somewhat dependant on what you see in the core end markets over the next few quarters.

Okay, thank you.

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

Please go ahead.

Thanks.

Just a quick question.

I think you mentioned that sales in Mexico expected to be soft for the next few quarters doing program transfer.

If I recall correctly, I think last you were talking about a few new programs that should actually ramp in Mexico.With those headwinds, are those ramps not happening at this point?

Could you give us an update there?

I'm not sure if I said that it's soft next quarter.

I spoke incorrectly.

The revenue outlook for the year, I think, is under pressure as we look to the year.

In terms of the telecom space.

But the new winds are ramping on schedule, and we're proceeding in line with basically the plan here.

So I just meant the color is in terms of looking forward may delay the timing of the actual inflection point based on the outlook for the next six months.

Got it.

And can you just talk about, if take the midpoint of your guidance, what is sort of built-in in terms of headwind for Mexico for Q2?

We're not going to guide specifically, as far as profitability for Mexico.

Suffice it to say, as Craig detailed, we've made some real improvements.

It is going to improve.

We expect it to improve the overall profitability in Mexico.

But as I'm sure you can appreciate, there's a lot of moving pieces right now.

So we can't be specific on that.

We expect it to improve, we expect it to improve each quarter.

The timing and the pace of that improvement will be dependent upon the pace of how quickly we're moving and some of the core markets, particularly communications.

Just in looking at CapEx, went down to $13 million.

How should we think about that the remainder of 2007?

Certainly, we would expect CapEx to continue to stay in the 1.5% range as mentioned.

We're really focused on squeezing out and getting that utilization up.

So our investments are really going to be tempered until we see that utilization rate across the company get up into the mid to high 60s.

Just finally, I realize you guys are moving from a region specific model to a customer centric model here, I'm just curious, when you look at the 60-plus customers you guys have, and when you look at them on a customer-centric basis, how many of those customers are profitable for you guys today?

I'd say the majority of our major relationships are profitable.

I'm not going to give you a specific as far as saying which are profitable versus not.

You can assume that many of the customers that are in Mexico, given the amount of issues that have occurred in Mexico that is a major drag on those overall profitability of those customers, but on balance, our relationships are profitable, as far as the specific number, we're not going to get into that.

All right.

Thanks.

Thank you.

Thank you.

Your next question comes from [Barney Annum] of Morgan Stanley.

Please go ahead.

Okay.

Good evening.

A question for you on the gross margins.

So they were down 90 basis points sequentially.

Could you just walk through?

I mean is that all just because of the decrease in volume in Mexico, and then in terms of how it's just kind of how you would expect to improve, is it kind of a step function or are we going to see, is 50 to 80 basis points improvement in one of the quarters of the second half of the year?

So, Barney, the overall reduction in gross margins is not just reflective of volume reductions in Mexico, it's reflective of volume reductions across the network.

So it's the sum of those pieces.

With regards to how we see it unfolding going forward as Craig mentioned earlier, expect to see some linear movement of the benefits here each quarter, I think 50 to 80 basis points per quarter is a reasonable range of expectation on how I would expect GP to move here through each of the quarters.

So you would expect to get above that 5.0 range by the end of the year.

Well, again, we're not going to target specific profitability.

But, our objective here is to improve the overall margins.

But I'm not going to give you a specific number in regards to fourth quarter.

Okay.

Maybe another way to ask it is, how do you get the gross margin to improve?

Is it just fixing Mexico and then on top of that, you need volumes for the overall business to improve.

Are those kind of, we'll get you 90% of where you want to go in the gross margins?

Yes, I think it's fix Mexico, complete the restructuring programs that we had under way and then lastly, certainly as you know, the model works well when you add volume to it and so some volume increases that we would expect to see in some of our, an example, in the consumer businesses, will certainly help the equation.

Okay.

Thanks a lot.

You're welcome.

Your next question comes from Brian White of Jefferies.

Please go ahead.

Okay.

I'm wondering if you could talk a little bit about the NEC contract.

How big this is, when is it going to start to ramp, where is it going to start to ramp around the world?

Hey, Brian, it's Paul.

So that is a piece of business, if you recall, we acquired some facilities from NEC a few years ago in Japan.

And that's, what that is, is just us talking about the renewal of that contract with NEC.

So that business is largely in Asia.

So as far as what it does to the company, that's revenue that is in the company today.

Okay.

And when we think about business moving away from Celestica, what markets are we talking about in terms of end markets?

You're talking, some end market related transfers in the telecom space.

As well as some in the industrial side, Brian.

Okay.

And then, when we look at the wins, it sounds like you have some wins you're going to ramp over the next 12 months, can you give us just a ballpark figure of what we're talking about?

We're talking hundreds of millions are we talking up to $1 billion in business in terms of a pipeline that you've won?

We're talking hundreds of millions.

And aggregate basis, we're talking in the billions.

Okay.

Is there any market that you're, you seem to be winning more than others?

Well, the good news in the first quarter is that we had good traction on the IT enterprise space and we had good traction in the communications space.

And we, we had good traction in the consumer space.

Okay.

Thank you.

Your next question comes from Todd Coupland of CIBC.

Please go ahead.

Good afternoon, everyone.

Just want to speak about Europe for a moment.

I think I recall Celestica mentioning that Europe would be break even around $300 million in revenue or something like that.

And, given where you are today, that seems like a fairly significant growth rate.

So I guess what I'm wondering is, could you restructure that business further at this point?

Or just even downsize more dramatically in Europe and focus on North America and Asia?

Is that any thoughts being given to reshifting of the strategy with respect to Europe?

I mean, I think we like the network in Europe.

We've been through bulk of the restructuring so largely the facilities we've got in Europe are focused around centers of excellence as we mentioned in previous calls.

And so we got a high mix low volume capability in Europe, we've got the ability to do configure to order fulfillment and after-market services in check as well as systems assembly and PCBA manufacture in the Czech Republic and then we have a low cost growing facility performing at world class quality levels in Romania, so we like the network, the job is a challenge but we're winning new business and we still like the plans we've got.

Okay.

As far as the overall revenue, you know, I guess I'd say we're around $250 million a quarter.

To get to 300, I guess you said a high growth rate.

It's not as significant when you think about $50 million a quarter, it just takes a couple of programs to get there.

As Craig mentioned earlier, part of the wins we discussed do hit Europe.

It's just the pace of when we're going to see those, the timing.

Yes, the timing

So, either in programs that you've won or programs that are in your sights, you see business to get you to that level or higher in the next 12 months?

Yes, Todd.

Suffice it to say.

If we see anywhere in the network where we don't see an opportunity to observe what we have, then we'll take a hard look at it.

I think Craig's point is we made a significant investment in adjustment to the network in Europe.

It's performing at extremely high levels for our customers.

The job for us is now to put some of the operational issues that it had previously behind us and book new business and that's something that we're doing.

Okay.

Great.

Thanks a lot.

Thank you.

Your next question comes from Paras Bhargava of BMO Capital Markets.

Please go ahead.

Good afternoon.

First a clarification.

Paul, you said 50 to 80 basis points a quarter of gross margin.

Is that for the rest of this year or is that next year, also?

Paras, I can't think that far out.

The next few quarters, that's the range of expectation we'd like to see.

Okay.

What -- a bigger picture question.

What level of operating margins, Craig, do you want to get your company to in order to, I mean I figure you need to get to 4%.

It doesn't look like even if you do 50 to 80% gross margin improvement, with mid-70s, even low 70s of SG&A, you'll get anywhere near that in the next 6, 8 quarters if I'm let out, and is there any other thing you need to do structurally to this company, Craig?

You had a few months now.

And probably a better view now than when you entered.

Well, we haven't stopped working, I'll tell you that.

So the bottom line is, I think it's changing the way we work so we still see a tremendous opportunity to implement the LEAN transformation in the production area of the supply chain.

I think we've also undertaken an evaluation of the entire business model we've got relative to the overhead structure of the company.

So as those plans unfold, I'm sure we'll have more conversations.

Is that 2008 sort of impact in terms of us?

Or is there --

It's going to be ordinary course and we're going to do it to get the overhead structure and what I'll call business support services in line with what the market will allow us to, will want to pay.

So that's going to be ordinary course as we move through the process and how we reposition the work to get it done more efficiently -- there be opportunity here.

Let me ask it a different way.

What revenue level do you need to be with your current footprint in order to get anywhere near operating margins that are equal that will deliver ROIC equal to your cost to capital, do you need to be at $2.5 billion a quarter, what do you need to be at?

Obviously there's a pretty significant wild card right now in regards to the Mexico and the losses that we are observing in Mexico.

In the past, we have talked about needing margins to get into between 3 and 3.5% to achieve a return better than our cost to capital.

I don't see a change to that overall dynamic.

And what revenue level, Paul?

That's going to depend on the mix.

So the revenue levels we've talked before, we've talked in the 2.25, $2.5 billion range, depending upon the mix of business.

I think that's still something that I would expect would get us to those types of returns.

All right.

Thank you very much.

Thank you.

Your next question comes from Yuri Krapivin of Lehman Brothers, please go ahead.

Good afternoon.

Question with respect to your June quarter guidance.

You mentioned that the telecom market is expected to remain weak and you expect some growth in -- storage and consumer businesses.

I'm just trying to understand what the outlook for the enterprise communication segment in June over March.

I think we expect to see some growth there, Yuri.

But relatively modest

Right.

And then, with respect to the telecom infrastructure market, I think it's interesting that you, as well as your EMS peers, are still talking about quite significant weakness in the space.

Yet some of the electronic component manufacturers talking about double digit pickup in the telecom infrastructure sales.

So are there any signs there that this business may improve materially, say, in the second half of this year?

Certainly, from what we've seen so far, the short answer is no.

I mean, we haven't seen the double digit improvements expected in the second half.

And the visibility that we've got at this time is limited, in terms of what would drive that rate of spend or revenues.

So --

Is it because some of the problems are moving away from you, or does your comment apply to the overall Telecom market?

I think the nature of the industry has changed.

So we've got consolidation in the customer base, so as they consolidate, program consolidations, the companies consolidate product lines.

The other thing in talking to customers that they've said is the world has changed or a lot of infrastructure opportunities are in developing markets.

And those markets have a much shorter lead time in terms of the response, in other words, they don't have the big visibility on the rate at which they're going to close.

So, speed and flexibility into which company can respond the best is the big advantage.

And then the other, the other comments have been around looking longer term at just the some of the technologies in the industry in terms of what technologies are going to win and which companies are going to win.

So it's the combination of customer mix, technology mix, emerging markets, what they say is the other thing, carriers aren't spending money until they absolutely have the infrastructure sold.

So short lead times and visibility is getting much more difficult than it was in the past.

Okay.

Thank you for your comments.

Your next question comes from Long Jiang of UBS.

Please go ahead.

Yes, hi, good afternoon.

Good afternoon.

Looking at your gross margin improved from 3.9% to 4.3, but if I take into consideration the $30 million removal of inventory charge from the previous quarter, I don't see much of the cost improvements based on your actions in Mexico.

So, are you, did you experience any pricing pressure in some of the segments?

Or can you talk about when do you expect to see cost improvements from Mexico --

Sure.

So as I mentioned, in the prepared comments, Mexico in fact lost a little bit more money in first quarter than it did in Q4, due largely to the volume impact sequentially.

So we have made improvements.

At the same time, sequentially revenues were down as we expected them to be.

As I mentioned earlier, we do expect improvements quarter over quarter.

It's a long haul.

The margins don't get back to where they need to be in one quarter.

We're making improvements every day.

The Mexico situation obviously is a very complex one.

I do expect to see improvement in Q2.

The pace of that just, very much dependent upon how the end markets treat us and just how quickly we can make the changes that we're making down there happen.

Sure.

Another question.

Can you just provide some additional color in terms of the pricing environment and the customer relationship situation for the enterprise communication segment, please?

So the pricing environment remains competitive.

I mean, it continues to be competitive.

In line with our past 12 months of experience, we're winning, which is the good news.

And the customer relationship, the customer satisfaction index, as I mentioned for Mexico, was up 100% from where it was in Q3.

It's up double diplomat for the entire company.

I think by and large, much of the challenge we faced in terms of the issues over the past 12 months were moving on a very positive trajectory.

So we're, and the win rate reflects the change.

So the leading indicators are customer satisfaction's improving, employee satisfaction's improving, our win rate's improving.

Obviously, we need to thorn into bottom-line results, which is what we intend to do, at the same time we're getting more aggressive on the plans we've put in place here to make sure that we can withstand what might be some volume fluctuations that we didn't anticipate at the beginning of the year.

Your next question is a follow-up from Lou Miscioscia from Cowen.

Circled around to me again.

So my question is on the management team.

Obviously, Craig, when you got there, you started to put forth a lot of changes, a lot of the old line folks are gone.

Can you maybe update us on how many now have been replaced and how many spots you have open?

And just how long you think it's going to take to pull them all together, that is the new team?

Well, as Paul mentioned, the company's moved to a company-centric market so we have four market makers in their position.

We've got John Perry, based in Hong Kong, leading our global network and the two positions we have open at this point are the CFO position and the CIO position.

We would expect over the next 90 days to certainly have the CFO position resolve and to be well along on the search for the cio.

Okay.

And then, as a follow-up onto the SG&A question before.

I guess when you look at the 2006 SG&A level, obviously it came down in September, was very low in December, but on average, was about $280 million for the year.

And it looks like running at $70 million run rate on a quarterly basis, you're become to 280 I guess I would have thought with all the restructuring that did you and taking out layers of management and everything, SG&A would have come down more from a dollar standpoint, maybe you could help us out with that a little bit.

Sure, Lou.

I guess, you know, I'll say that part of how we, 2006, $280 million was achieved was on the back of much lower variable compensation.

And that's certainly not how we want to achieve it.

So we want to be driving better returns and getting target levels of variable compensation.

So what you are seeing from Q4 to Q1 as I mentioned earlier, are pretty, a reduction that we made in Q4, given the disappointment in Mexico, which kind of took that number down, so $64 million was certainly not a going rate, that I would say is where the company was at.

I think Q1 minus the severance costs that we incurred during the quarter is pretty much where we are today.

That does assume that we will be making our variable compensation targets for the year.

Obviously, if things don't materialize as we planned, then that line will come down.

Okay.

And now, one last question.

For your 10% customers in the quarter, anything different happen there in the sense of, was it that the revenues have been accelerating?

Or was it for both them or was it basically just that revenues in other areas had dipped so they then were pushed up to be then 10% customers?

It's more the latter.

We have a few customers that are around that 10% mark so it just really depends on what's happening in the aggregate as to whether they flip in and out of being 10% customers.

So I'd say that on balance, it had more do with the other customers than to do with the current quarter 10%.

Other than IBM and Lucent, anybody else close to that mark?

Or maybe the next largest?

Lou, historically, those are the ones that have been close to that line.

So no material changes from that point of view.

Okay.

Thank you.

You're welcome.

Your next question comes from Alex Blanton of Ingalls & Snyder, please go ahead.

Thank you.

I have a question on the Cisco LEAN program that was referred to earlier.

You said there was a $20 million impact from that.

Now Selectron and other companies that had a much larger impact on revenue, the revenue impact of Selectron was $240 million.

That consisted of circuit board assembly.

Circuit boards that Cisco was inventorying, they didn't leave Selectron's premises but they were on Cisco's books as a safety stock in the LEAN program is to get rid of the safety stock.

And the first thing that happens is it goes into Selectron's inventory.

But since your impact was only $20 million, it would imply that you're not doing a lot of PCBA work for Cisco.

So, there wasn't a big inventory of PCBA of your PCBA work at Cisco.

Is that a correct assumption or not?

So I think first just to make sure we're talking the same numbers, I said $20 million of revenue and about $50 million of inventory, just a level set.

And I think the revenue impact, first off, it depends on the size of business with Cisco obviously.

So I think comparison is difficult.

It has a lot to do with the velocity that you're achieving fundamentally, forget about whose balance sheet is on.

So I think it's safe to assume that given these types of numbers, our velocities appears to be better.

I can't bridge the two for you.

I can just tell what you the impact was for us.

Okay.

So, well, my question was, are you doing PCBA work for Cisco in line with the final assembly that you're doing?

Are you doing all your own PCBA, or are you buying circuit boards from others?

And doing -- for Cisco?

We're doing PCBA for Cisco, system assembly.

The message is the velocity at which we're producing the product may have a significant advantage.

The inventory is a reflection of information and obviously in our case, they need less inventory than in the other case.

Okay.

Thank you.

Your next question is a follow-up from Paras Bhargava.

Please go ahead.

Paul, maybe you can help us understand how you're getting.

What exactly are the elements that are going to get the gross margin improvement in the next couple of quarters?

And, Craig, you mentioned Mexico is going to take a little longer to fix than you thought earlier.

Is that purely a volume issue or are there other issues that are hitting you?

Well, I'll go first, Paras, it's a volume issue.

It's not cast in concrete, it's just out looking what we're seeing and recognizing the reality around what's happening in Telecom.

And is that only because of Telecom or is that some of the losses you're talking about are kicking in before the win?

That's largely around Telecom demand.

And it was unclear to me, the losses you're getting in total are more than the wins you're getting or less than you're getting.

Absolutely not.

The losses are not -- We're building momentum on the top line and it's mitigating losses that we've had and it's building the new business for tomorrow.

And so the losses are less than the wins you're getting?

Is that what you're saying?

Yes.

Okay.

And are there any changes with any of your major customers' relationships?

Did you say no, Craig, I'm sorry, I didn't hear you.

The answer was no.

Okay, sorry.

Thanks.

It's paras, back to you, a three or four-part question.

Let me try to get mine, what's going to drive the margin improvement?

It's three things.

First, from a Mexico point of view, I mean, just on static revenues, obviously there's some simplification happening and improvements happening on the cost side, which would drive margin improvement, that's probably one of the biggest, followed by the revenue increase.

So as you have seen, generally when you add revenue, the model works and you see the margin improve accordingly on a variable basis.

And then third, getting the full restructuring benefits into the books.

So, those three things.

The first part, the cost is not primarily people cost then.

In regards to Mexico?

Or --

You answered three parts.

Cost, revenues and restructuring.

I would have thought one and three are the same.

But it sounds like they're different.

Costs in Mexico, I think, I'm not going to put it into the same restructuring category.

I think Mexico warrants a whole separate discussion as far as the margin impacts to the company.

So as you know, as I highlighted earlier, a pretty significant loss in the quarter.

So call it restructuring, call it operating improvement that we're making in the site, point being that is a pretty sizable swing on the gross margin line as you sit here today, given where it is versus what it should be earning from a target point of view.

Okay.

Thanks a lot.

Okay.

Operator, we'll take our last question.

Your last question is a follow-up from Amit Daryanani of RBC Capital markets.

Please go ahead.

Thanks.

Hey, just a quick question.

You guys spoke about some new programs ramping in Europe, should we expect this to happen on the Romania side or elsewhere?

I'm sorry, new programs in Europe?

Yes.

I mean-- Romania or somewhere else?

As I recall Romania is relatively underutilized for you guys still?

So, Amit just to make sure we we have got the question clear, are you asking when specific sites the program in Europe will be, it's -- we're seeing new program wins across each of the sites, Amit so would I not single out Romania as being the site that everything is going to.

Just a final question, obviously I saw this in the press but you guys moved your corporate office away from the campus you guys have in the suburbs of the Toronto.

So I'm wondering, are there any plans to sell the real estate that you guys own there, and if so, what would the timeline be for that?

Clearly we're look at all the assets we have and if there's an asset that someone else would value more, then we'll take advantage of that.

So we are in the process of, moving all of our folks and consolidating into other buildings that we have.

And that's something that we will be looking at through the year.

Thanks.

You're welcome.

Okay.

Well, thanks everybody, I appreciate your interest and your support and look forward to our call next quarter.

Thank you very much.

Thank you.

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

Thank you for participating.

Please disconnect your lines.