Celestica Inc (CLS) 2007 Q2 法說會逐字稿

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

Welcome to the Celestica second-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'd like to remind everyone that this conference call is being recorded on Thursday, July 26, 2007 at 4:15 PM Eastern time.

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

Please go ahead.

Thank you.

Good afternoon everyone and thank you for joining us on Celestica's second-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 will 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.

This is a busy day for earnings announcements so 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 your question.

Today's call will last approximately 45 minutes and we will also be available after the call for any additional follow ups.

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 in our financial and operational results and performance that are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual options and results to differ materially.

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

These filings include our Form 20f and subsequent reports on Form 6-K filed with Securities Exchange Commission which can be accessed at SEDAR.com and SEC.gov.

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

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

I will now turn the call over to Craig Muhlhauser.

Thanks, Paul, and good afternoon everyone.

Celestica's second-quarter results reflected the steady progress being made as a result of the operational initiatives our global teams have implemented in the past two quarters.

Some of the second-quarter highlights and improvements included revenues increasing by 5% sequentially; positive cash flow from operations of over $56 million; inventories declining sequentially by over $100 million; in inventory turns improving to over 7 turns.

These are all positive events and as our guidance reflects for the third quarter, we anticipate further improvement in the coming quarter.

As we have discussed previously, we've established five priorities or business imperatives for 2007.

They are increasing customer loyalty; improving our operating and financial performance in Mexico; returning Europe to profitability; increasing inventory turns and asset utilization; and driving speed and efficiency through simplicity and the elimination of waste.

In most of these areas we've shown stability or improvement in the second quarter.

With respect to customer loyalty, we've seen significant improvement year-over-year and we're very encouraged to see that the positive trend is continuing.

On an operational basis, Mexico continued to show improvement.

Our major customers on this site are very pleased with our progress and have awarded us new business as a result.

Since December 31, our quality has improved 50% over Q1 and 10 times over 2006.

Our on-time delivery to customer commitment is improved to 97%.

Our inventories have come down by 45%.

We've consolidated the number of external warehouses down to four compared to nine.

We've reduced the number of park numbers by almost 50% and six of the nine planned program transfers to other sites or customer disengagements have now been completed.

On a financial basis, Mexico incurred losses in Q2 which were higher than Q1.

While the execution in cost structure associated with the ongoing business has improved, we incurred higher-than-expected costs due to customer disengagements.

While operationally we are encouraged by the progress made in quality, delivery and productivity on the ongoing business in Mexico, we are a quarter behind where we planned to be on a financial basis due to three factors.

First, a revenue shortfall of about 20% due to the demand softness in our core customers.

Second, two customer disengagements planned to be complete by June were delayed until July and one customer program transfer is delayed until December at the customer's request.

Finally, we've retained additional indirect headcount associated with material management to implement the required processes, software tools and IT systems to drive best practice at this site.

We expect Monterey to show financial improvement in the coming quarters and our third-quarter guidance reflects this improvement.

We believe we have every competitive offering with our operations in Romania, the Czech Republic and in Spain and our operating performance continues to improve with quality improving 50% over our internal planned targets and on-time delivery commitments to over 97%.

In Europe, operating losses were unchanged quarter to quarter as we incurred additional costs associated with customer disengagements, and program transfers ramping costs for new programs and overall revenue being down 6%.

Our recent wins for our European sites have yet to start ramping but are expected to contribute to the top line later this year in 2008.

From a working capital perspective, we showed strong sequential improvements.

Our inventory turned at 7.3 times and the total inventory declined by $126 million quarter to quarter.

Our push to drive efficient supply chain solutions for our customers is gaining momentum and we expect turns in efficiency to continue to show gains in future quarters.

We continued to win new programs at a steady pace this quarter and with the addition of these wins combined with the wins achieved in the first quarter, we produced a solid book of new business for the coming years.

If the new programs succeed to the levels our customers anticipate, the total wins in the first half of 2007 should provide a good base of business for future years and offset any customer and program disengagements.

We continue to see a steady pipeline of new business opportunities in each of our end markets and as a result anticipate steady win rates in the second half of this year as well.

Since we last spoke in April, the proposed acquisition of Solectron by Flextronics was announced.

Overall we believe this is a good transaction for the industry as it will help address the excess capacity in the industry and may help improve the pricing environment.

Both Flextronics and Solectron are good organizations so I'm sure they will do a good job in servicing their customers but we will pursue all business opportunities that present themselves as a result of this merger and as long as the business generates an acceptable return.

As to whether or not there will be any further consolidation, the MS landscape is dominated by public companies and has excess capacity so there will always be possibilities or speculation.

Regardless of this backdrop, Celestica's priority remains on executing our recovery plan, to deliver consistent profitability for our shareholders and provide exceptional levels of service and value to our customers.

Assuming the CEO role late last year, we've made many changes to the organization and have put together a very talented and highly motivated team.

I'm encouraged with our progress to date and remain very confident with our global team's ability to execute our plan.

We were able to demonstrate the progress in the second quarter but recognize that we still have continued opportunity for improvement.

We still have more challenges and opportunities ahead but as our guidance for the September quarter indicates, we anticipate delivering further operational and financial improvement in the third quarter.

I'd like to take this opportunity to recognize the entire global Celestica team for their continued passion and commitment to transforming our Company.

Now I'll turn the call over to Paul Nicoletti who will take you through the Company's financials in more detail.

As you know, Paul was officially appointed to the role of CFO this quarter, so let me take this opportunity to congratulate you again, Paul.

Thanks, Craig, and good afternoon to everyone on the call.

Revenue for the second quarter was at the midpoint of our guidance at $1.937 billion up 5% sequentially and down 13% on a year-over-year basis.

The sequential improvement was driven by strength in the server segment while the year-over-year decline was primarily driven by lower volume from the telecommunications market as well as customer disengagements primarily in the industrial market.

Looking at our revenues in the quarter by end markets, Enterprise Communications represented 29% of total sales, down about 5% sequentially.

Telecom was 14% of revenue, up 16% quarter to quarter and better than our expectations.

The server segment represented 20% of sales, up 15% compared to the first quarter.

Storage was 11%, unchanged from the first quarter.

Industrial Aerospace Defense was up 10% sequentially; finally the consumer market represented 18% of sales.

Our top 10 customers represented 64% of sales for the quarter with revenues for Cisco and Sun Microsystems each greater than 10% of total sales for the quarter.

Moving to profitability.

The Company posted GAAP net earnings for the second quarter of $24.9 million or $0.11 per share compared to a GAAP net loss of $30.3 million or a $0.13 per share loss for the same period last year.

Included in GAAP net earnings for the quarter are the impacts of a $32 million net deferred tax recovery related primarily to the tax benefit of previous year's write-down of a restructured Canadian operations as well as restructuring charges of $2.5 million.

Adjusted net earnings for the quarter was $0.02 per share slightly above the midpoint of our guidance and a $0.06 improvement from the adjusted net loss of $0.04 per share in first quarter.

For the same period last year, adjusted net earnings were $0.13 per share.

Gross margin was 4.7% of revenue in the second quarter of 2007 compared to 5.6% for the same period in 2006 and up 40 basis points from 4.3% in Q1.

The year-over-year decrease in margin reflects the impact of lower volumes, the higher losses in Mexico and continued underutilization of facilities in Europe.

SG&A expenses for the second quarter were down 4% sequentially to $71 million or 3.6% of revenue.

This compares to $76 million or 3.4% of revenue for the same period in 2006.

The percentage increase primarily reflects the lower revenue in second quarter of 2007 compared to 2006.

The absolute year-over-year decrease in SG&A expense reflects lower variable compensation expense and the benefits of restructuring actions.

Operating margin for the second quarter of 2007 was 1.1%, up sequentially 80 basis points from 0.3% in the first quarter.

Mexico's operating losses in the second quarter calculated as gross profit less SG&A was $21 million.

Operating losses increased sequentially due to higher than expected costs of disengaging with certain customers.

Excluding these disengagement costs, operating performance continued to improve in Mexico during the second quarter.

Though we expect Mexico to continue to incur operating losses for the next several quarters, our third-quarter guidance reflects some of the improvements we are anticipating.

Mexico remains a strategic part of our operations and we anticipate gradual improvements throughout the rest of the year.

Operating losses for Europe were $11 million, flat sequentially despite the 6% decline in revenue.

We have some new business coming online in Europe in the next twelve months including additional repair business with a major consumer customer.

As these programs ramp up over the coming quarters, this should improve the overall loading.

Europe continues to be a strategic market for Celestica and we expect better financial performance as volumes improve.

In terms of a restructuring update as of June 30, we recorded restructuring charges of $2.5 million during the second quarter of 2007 and $11 million year to date.

We continued to anticipate incurring between $20 million and $40 million in restructuring charges for 2007 and we expect to complete the remainder of our announced restructuring actions by the end of 2007.

As of June 30, 2007, we recorded termination costs relating to approximately 7200 employees.

Approximately 6100 of these employees have been terminated as of June 30, with the balance of these terminations to occur by the end of 2007.

Moving to the balance sheet, we recorded very positive improvement in working capital.

Cash at quarter end increased by $43 million and we ended the quarter at $747 million.

We generated $56 million in cash from operations and $42 million in free cash flow.

Our inventory performance was strong with turns increasing to 7.3 times compared to 6.2 times in the first quarter.

On an absolute basis, we reduced inventory by $126 million sequentially reflecting the steady progress made in Mexico as Craig noted.

Our cash cycle for the quarter increased sequentially to 26 days compared to 24 days in the first quarter primarily due to the timing of payment to suppliers.

This was partially offset by lower AR days and improved inventory management.

During the quarter, we sold approximately $250 million in accounts receivable.

This compared to $275 million in the first quarter of 2007 and $320 million at December 31.

Capital expenditures for the quarter were $23 million.

Our balance sheet remains solid with a healthy debt to cap ratio of 26%.

In addition to our strong cash position of $747 million, our credit facilities of 300 million remain undrawn.

Overall we are very pleased with our strong financial position and working capital improvements in the second quarter.

Our plans are gaining traction and we expect gradual improvement to continue in the second half of the year.

Now let me move to our third-quarter guidance.

We expect revenue to be in the range of $2 billion to $2.2 billion.

The quarter-over-quarter growth of 8% at the midpoint of the range is being driven by seasonal growth in our consumer businesses.

We expect that adjusted earnings per share will be in the range of $0.04 to $0.12 reflecting the benefits of continued operational improvements in Mexico as well as higher revenues.

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

Operator, we will take our first question.

Thank you (OPERATOR INSTRUCTIONS) Bernie Mahon, Morgan Stanley.

Good evening.

A question for you on Mexico.

I didn't quite catch it on the call but what were the losses there in the June quarter, did you say?

It was 21 million, Bernie.

Okay.

And then you said you don't expect to be profitable for a few quarters.

So it doesn't sound like it's going to be a 2007 event.

Do you think you can get it profitable in the first half of 2008 or do you think it is more a second half of 2008?

Bernie, we're pretty encouraged by the progress we're making operationally.

I think the ultimate answer to the question is going to somewhat depend on end markets and how they are performing.

So that site in particular has more weighting on the telecom side than the overall company.

As you know those markets have not been very strong for us.

Our objective obviously is to turn it to profitability as quickly as we can, somewhat tied to how those end markets perform.

Do you think it would be kind of -- make say linear progression toward profitability like maybe next quarter you get down to 15 million and then down to 10 million?

Would you be expecting that or is it more kind of a larger step function?

Bernie, I think you will see some quantum improvements and short order and then from there get more linear.

So as we mentioned, we incurred some disengagement costs this quarter and we consciously held onto some resources to ensure that we really have stability.

A lot of those folks have now left the business.

Those termination costs are behind us.

So while we're not going to get specific we do expect a meaningful improvement here in Q3.

Okay, that is great.

Thanks.

Tom Dinges, JPMorgan.

Good afternoon, guys.

I was hoping you could provide a little bit more color around the commentary about new wins that you guys have -- companywide not just specific to Mexico -- that you guys were thinking would be able to offset many of the disengagements.

Just kind of a little more help in terms of where do you think you are in terms of customer disengagements?

You gave us the metrics that you've got on Mexico but maybe kind of companywide, where are you in kind of the whole disengagement process?

And then what kind of revenue are you talking about in terms of disengagement versus what you are going to potentially offset this with?

And I think you are probably talking about 2008 more than anything else.

Yes, so Tom, first I think it's important to note obviously if there was anything material as far as a disengagement, we would be talking about that more specifically.

As you know, we won't get into customer specifics.

It is our expectation that through time our new wins offset our disengagements.

That's been our history and we would expect that to continue.

But beyond that we are not going to get any more specific.

Okay, thank you.

Brian White, Jefferies & Co.

Paul, you talked a little bit about Mexico and how you expect that to improve.

Could you talk about Europe?

We've been in losses in Europe for quite a while now.

When do you think we can reach break even in Europe?

I think that will be into 2008, Brian.

So Europe as you know certainly as we look at the next quarter which we have very good line of sight to, Europe seasonally -- is Q3 is not a strong quarter so I don't expect any significant improvements from where we are.

As we mentioned in our prepared comments, we do have some new programs that are ramping in Europe.

Some of those will ramp in '07.

I think as far as getting to breakeven, I think we're looking into '08 for that.

Okay.

And then just to follow up, are there any markets other than consumer that you expect to grow sequentially in the September quarter?

I think consumer is the bulk of the growth, Brian.

I mean after that, there is some minor pluses and minuses that we see here but I think the real story is on the consumer side.

Okay, thank you.

Jim Suva, Citigroup.

Great, thank you very much.

Can you just discuss or help us understand a little bit more about all the commentary around the customer disengagements?

Is that you guys saying that it doesn't make sense for you to manufacture in certain locations like Mexico or is that the client that is dissatisfied with the service they are getting?

Or is it you just competitively can't make money doing it?

Or -- and are they disengagements completely from the entire company or just certain specific sites?

So our comments around the disengagements first in regard to Mexico, as you know, we had several accounts in there that should not have been there.

So some of those accounts we disengaged at our choice as a result of the profitability impacts.

Others have disengaged from Mexico at their choice just as a result of the performance that they had in 2006.

I think it's important to note that the performance of the site has been very strong in the a first half of this year and we're not seeing any disengagements occurring as a result of the performance that we are experiencing here this year nor has there been anything new coming out of Mexico along those lines.

So the bulk of the activity we're talking about is through Mexico.

We mentioned some of the industrial accounts, some of those accounts were in Europe as well in 2006 so the year-to-year impacts also did occur in Europe.

That is generally the color around it.

And my follow-up is when we talk about profitability, there's two functions to that.

One is the selling price which is a very competitive environment.

The other one is the cost aspect.

So it almost sounds like that Celestica is just really struggling to get its cost in line to competitively make money at these things.

Is that a way to think of it or am I just being a little too harsh?

Jim, I think that's harsh.

In my view I think the disengagements that we've had, again back to Mexico, really relating to the performance issues that we had in '06.

So for many customers we did not serve them well in '06 in Mexico and we suffered the consequence of that.

I would certainly not agree with the statement that says Celestica has a cost problem.

And while we're not giving full visibility as we have in the past on our Asia operations, suffice to say those operations are performing at a minimum of what we were if not better levels historically continues to perform very well for customers and our financial performance has been consistent with what we've seen in the past.

From that point of view, I don't think we have a cost issue.

Okay, thank you.

Kevin Kessel, Bear Stearns.

Great, thank you, guys.

Can you give us maybe a little bit more detail in terms of these consumer programs that you are ramping that you are expecting to growth to be driven by?

What general area of consumer electronics are we talking about here?

What product types?

Largely we're talking the gaming space.

Okay.

And in terms of your -- within your quarter your telecom segment picked up 15% and you guys said that that was surprising.

What drove that strength?

Just stronger than anticipated demand in our core telecommunications customers.

Kevin, as you know the demand there has been pretty choppy.

Visibility has been pretty low.

So we saw some uptick in demand in the last month.

That was obviously a pleasant surprise and obviously we were happy to deliver it.

So major program wins for our core customers in some of the developing markets were some of the basis for that.

But I guess what's implied is that you don't expect that necessarily to continue on a consistent basis going forward?

Kevin, I think on the telecom side, certainly just looking forward into Q3, I think things will stay relatively stable beyond that, as I said, visibility continues to be pretty limited particularly in that segment.

Okay.

Great, thank you very much.

Paras Bhargava, BMO Capital Markets.

Good afternoon, gentlemen.

Craig, you're talking about some new wins and I think, Paul, you said new wins over time should be better than disengagement.

I believe previously you've said this year new wins would, for the full year, would result in more revenue that disengagement.

Is this change in communication or am I reading too much into that?

Paras, I think you're reading too much into that.

So there is no change per se.

I mean, again, when we look at our new inactivity, the bookings we've had in the first half, pretty comfortable about what we're seeing and those that are offsetting, but with disengagements we've discussed in the past.

I think we need to kind of hopefully turn the conversation, because most of the disengagements we're referencing here are related to program issues that we incurred over the 2006 time period.

No, I understand that, Craig.

I'm just trying to model revenue this year and next year and understand when the year-over-year growth turns as a result what you are saying.

Or should we continue to model decline in year-over-year sales; that is what I'm getting at?

I think the message -- that will be clearer as we get visibility on the fourth quarter and first quarter of '08.

Just one last question.

Are you winning at anything other than consumer?

Oh, yes.

Oh, yes.

Can you give us which segments?

We're winning -- I mean in our major markets, we are winning large-scale enterprise programs.

We are winning communications business, and we're winning in the industry segment.

Thanks a lot, gentlemen.

Amit Daryanani, RBC Capital Markets.

Thanks a lot.

Good afternoon, guys.

Just a quick question on Europe.

Can you just remind us what current revenue rate do you have there and what run rate do you need to achieve after all the research initiatives have been done to achieve profitability there?

So, Amit, as we mentioned in our first quarter, we're really moving away from getting specific details by segment.

The revenues really haven't changed quarter over quarter here dramatically.

So things have been slightly down, I would say, is what they were, in the 5% range and the loss basically been flat.

So we've talked before that to increase that region to break even, we would need about $200 million of annualized revenue or $50 million a quarter, and that is still -- those numbers still hold.

All right, fair enough.

And then it sounds like Mexico was a bit worse than expectations this quarter, but you were still able to achieve the midpoint of EPS guidance at least.

I guess where did that upside come from that was offset by more losses at Mexico?

We are just seeing better performance across the network, Amit.

So as I said earlier, our operations in Asia continue to perform extremely well.

We've been managing cost pretty tightly around the Company.

So I would not point to one specific area; just generally we're managing the network that much tighter across the board.

And just finally my question in terms of Mexico.

Could you just talk about what sort of operational headwind range do you have built into your Q3 guidance over here?

Sorry, Amit, can you repeat your question?

I'm not sure I understand it.

Looking at your September quarter guidance, I'm just trying to understand what sort of operational income headwind do you have built into your guidance for Mexico?

So, Amit, as I said earlier, we are expecting a meaningful improvement in Q3.

We're not going to get specific on the numbers, but suffice it to say we've been working very hard over the last six months making operational improvements on disengaging with these customers.

As I said, we took some charges, took some costs this is quarter that were relating to disengaging.

We held onto some resources which we now -- have now left the business.

I expect a meaningful improvement in the numbers, and I think our guidance reflects that, but we're not going to be specific on a number.

All right, thanks a lot.

Steven Fox from Merrill Lynch.

Good afternoon.

How much did the disengagements cost you in Mexico?

A few million dollars.

And those totally go away this quarter?

Yes, it does.

And they are surprised relative to the guidance you gave at the beginning of the quarter?

Is that correct?

Yes, I mean those are not costs we would have expected to incur during the quarter.

We did, as I said earlier, the whole network have been performing very strong and as a result we were able to offset it across the company.

And so just last thing, would just be why were you surprised?

What happened that created the surprise in the quarter in those costs?

You know, there's a certain level of negotiation with customers when you disengage usually around costs associated to disengagement and disposition of final inventories.

There's a certain amount of give and take in that process and we were not as successful as we hoped to be around that.

And as a result ended up incurring those costs.

Great, thank you very much.

Louis Miscioscia, Cowen.

Yes, I guess I have two questions here.

One of them is that very often when new business starts to come in and starts to ramp, it can also unfortunately be dilutive to margins.

I guess as we look out to the second half of this calendar year and into '08, is the situation where restructuring and other benefits might actually be negated by new business coming in and the cost of ramping that up?

Lou, I think in the past certainly we've talked about ramp costs.

To us ramp costs are just a cost of doing business.

I do not expect as new business comes in to be dilutive certainly as new business comes in it won't be hitting the target margins right out of the shoot that we would be expecting to earn.

But I would not expect it to be dilutive.

Okay.

And one quick follow-up would be on inventory.

I guess the route the last two to three years there have been a number of different times when inventory had to be right down generally run through the P&L.

How are you feeling about inventory I guess in the three different geographies?

I guess certainly we've had our challengers with inventory in Mexico.

We feel very comfortable about our position there.

I mean historically we've not had any issues in the other regions.

Suffice it to say obviously with the charges we took last year in inventory, that caused us to take a very hard look across the entire company as to the inventory and how good that inventory is and that we are comfortable with the inventory that we have and the carrying value of it.

So I certainly do not expect anything like that again.

Okay, thank you.

Jeff Walkenhorst, Banc of America.

Good afternoon, guys.

Thanks for taking my question.

We've covered a lot of ground.

I wonder if you could talk maybe on the SG&A side and said it was down a little bit sequentially and where might that trend in the next several quarters?

Is there additional low hanging fruit or areas that you can take further costs out of the model?

I think SG&A will fluctuate but we'll pretty much stay in the low $70 million, so I don't expect any meaningful change here in the upcoming quarters.

There is some further restructuring to do in those numbers.

We may see a little bit of pickup but I think generally in the low 70s is where you should expect to see it.

As you know there's a lot of currency movements around the world so we are seeing some headwinds that are offsetting some of the fundamental costs that we are taking out of the business which is impacting that line.

Are there any areas where you are actually adding headcount to supplement or help out with the new programs that you may be winning?

Region-wise, whether it is high-cost regions, low-cost regions?

No, I would say no.

I think where we are making investments on the OpEx line is continued investments in the IT area.

We believe that the IT tools are critical to getting the flexibility and speed.

I think you are starting to see the beginnings of that benefit on the inventory performance.

Again I think a pretty solid quarter-to-quarter performance that is being helped by the tools we are deploying and we're not done yet.

So I think we will make investments there but as far as adding any people, I think you won't see much activity there.

Okay, great.

One last question.

On the ERP side, system wise, are you where you need to be or you're investing further but you don't expect to have any major challenges on that front as in the past?

You know, I think, we've done a lot of restructuring in this company and as a result we have a very competitive low-cost footprint.

We have a significant amount of revenue that [goes] for you, a handful of sites in our company, the ERP platforms are generally standardized.

We essentially have two ERP platforms in our company that we're comfortable with.

So I don't see any major changes happening along those lines.

Jeff, I think you'll see investments in the applications software to drive utilization of the ERP system much more productively.

So you will see investments as we move through the supply chain both at the front end as we go all the way to the back end.

Very good, thanks.

Good luck, guys.

You bet.

Thanks.

Yuri Krapivin, Lehman Brothers.

Good afternoon.

I have a question on your inventories.

So do you expect to further draw down your inventories in the September quarter or are you happy with the current levels?

Uri, I think as I mentioned earlier, we are seeing at the midpoint revenues going up 8%.

Obviously that will require some inventory to support that.

Our goal is to keep inventories here relatively flat which would drive a meaningful improvement of turnover.

I don't expect any major movement one way or the other in the absolute levels and those are our targets.

Okay.

And I apologize if I missed it, but what was the growth rate in the consumer to (inaudible) saving in the June quarter?

Uri, hang on one second, I will come back to you, okay?

Thanks.

Todd Coupland, CIBC World Markets.

Will Stein, Credit Suisse.

I'm here, thanks.

You talked a minute ago about gaining share in the consumer end market you cited gaming.

I'm wondering if that is on the manufacturing side or on the services side whether it is with a new or existing customer?

And then I have a follow up, please.

The -- actually the volume gains are largely on the manufacturing side, not necessarily a share gain and the new ramps will be around the repair side with an existing customer.

I'm sorry, I don't understand.

If it is repair, is it service or manufacturing (multiple speakers)?

Repair service.

Okay, so it's with an existing customer?

Is that right?

Yes.

Great, thank you.

The long-term model, can you remind us what the long-term operating model target of management is currently and what you expect the timing is to get there, please?

Todd, we still expect the model in place for us to be able to perform around 3.5% EBIT margin.

As far as when we would get there I think given the timelines of what we discussed earlier about Mexico and Europe, I think we're looking into the back half of '08 before we'd see numbers in that range.

I'm sorry that margin is EBIT operating margin?

EBIT margin, that is right, an operating margin.

Great, thank you.

Just a follow-up for Uri, so Uri I apologize.

In my prepared comments, said consumer represented 18% during the quarter.

That was a 6% growth quarter-over-quarter so from first quarter '07 to second quarter '07 that segment grew by 6%.

Paras Bhargava, BMO Capital Markets.

Thanks, gentlemen.

Just a follow-up.

The improvements you're expecting in Mexico, are they only as a result of volume or is there anything else?

I think you said that you are letting some of the additional personnel are being let go, but I believe there have been a lot of other challenges in Mexico inefficiencies, material inefficiencies and other elements.

And then a second part of that question, I believe you are in the middle of an SAP implementation.

Could you give us an update on how that is affecting Mexico and when this SAP implementation putting everybody on the same version of SAP should be finished?

Sure.

So far as I guess on the first question I'd say the bulk of the improvement sequentially that we would expect to see is not revenue related; is more related to the reduction in costs that we are incurring as a result of improving the efficiency of the operation.

There is some modest revenue strength that we hope to see but nothing materially, it's really on the cost side.

And on the cost side, it's just the people that you talked about, the people you held onto for a little while longer or is there anything else?

No, it's the people, Paris, and as I said earlier some of these costs we incurred in disengaging will obviously not repeat themselves.

And then on the SAP?

There is really no SAP implementation going on right now.

So that SAP implementation in Mexico was completed at the end of January.

Craig, I must have -- at some point in the past you were talking about putting everybody on the same version of SAP.

Are you there yet, Craig, or has that been delayed?

No.

We really have two versions of SAP in the Company and right now the planned are to continue with the two versions.

Okay, all right, thank you.

If that has been stated in the past, we've modified that view.

All right, thank you.

Jim Powell, GMP Securities.

Thank you very much.

Just a question on the consumer service business you were talking about.

Is that only in Europe or is that a global sort of service you are providing?

It is largely in Europe.

Okay, so it is concentrated.

Okay on Mexico then, you stated that you moved six of nine customers out of the site already.

Are those permanent moves?

Are you expecting to incur more charges as you move them to some permanent location after that?

The model is to get down to six customers in Mexico and we're at nine in terms -- and so there is two that are moving out in July and one more that I mentioned will go through the end of the year and that is at the customer request.

And they are moving -- two are moving out of the company, one is moving to Asia.

Jim, just to follow up on the second part of that question.

We don't expect to incur any charges in relation to that.

If we did, we would obviously have incurred those charges.

I think we have plans that we believe will unfold without any issues.

Any costs associated with that is included in our guidance for Q3.

Okay, great.

Thanks.

Kevin Kessel, Bear Stearns.

Great, just a clarification.

Craig, so, when you said that the majority of the consumer growth you felt would come from the gaming sector, most of your gaming manufacturing I guess is done still in Asia-Pacific?

Yes.

And then when you were stating that at the same time though that you were expecting additional service or repair business in the gaming sector, would that be done in Asia-Pacific as well?

That's going to be done in Europe largely.

That would be done in Europe?

Yes.

In your Europe sites?

Okay.

And then the other question I have is on -- in terms of your I guess your top 10 or maybe in your top five customers at this point, do you expect any displacement whatsoever in those customers going forward?

Well, I think those top five customers move around from time to time.

So they have in the past and I would expect that as we gain more traction with some customers we will see some movement in the top five but beyond that, nothing significant.

We had like one customer enter the top ten this quarter so they come in an out but largely the top 10 customers (multiple speakers).

Just move around.

-- appear to remain the same or will continue to be the top 10 customers.

Okay so none of these --mm.

At least for the near term provided we don't win any major new engagements here with other customers.

Okay.

But none of the disengagements you were referring to that still have to happen revolve around the top 10 customers?

Yes, I think the message is everything we are doing is well within our guidance.

The point of our disengagement discussion is largely around the program impacts that we incurred in 2006, the plans we put in place at the beginning at the year being executed.

And with the level of operational performance, as I mentioned, quality levels, performance levels, that disengagement I would say issue for us has moved to one of dealing with the past rather than -- and leveraging the future now frankly.

Okay so then it wouldn't affect any of the top 10 currently.

What about Toronto, an update on the status in looking to sell the Toronto land?

So we are working with an adviser there.

We've had some very keen interest.

There is nothing to report beyond that.

So we've had some indications of interest but don't have any specific transaction or deal lined up at this point.

And you can't obviously talk in terms of any numbers here?

Yes, no, I think it's too premature for that.

Once we have something lined up, we will be a bit more specific.

Great, thank you very much.

Time for one quick question, please.

Todd Coupland, CIBC World Markets.

Good afternoon, everyone.

On the telecom market, can you talk about whether the improvement in the business was in wireline or wireless?

Not really.

I mean largely our portfolio today is wireless.

Is wireless?

Yes.

Okay.

And when you think about the balance of the year ex the ramp up of consumer in the third quarter, what is your impression of end markets versus the new programs?

And can that drive growth in the business ex consumer?

Todd, make sure we understand your question.

Are you asking -- can you rephrase question because I'm not sure --

What I'm asking is if you think about your business ex consumer and you look at your new program wins versus what you are seeing in the end markets, can that drive revenue growth?

Yes, Todd.

I think as Craig mentioned, we are seeing wins across each of our segments.

And I think last quarter we mentioned particularly strength in the IT server side which we continue to see.

You know as you know, as we enter into the back half of certainly of the year, those are segments that have some seasonal uptick and we see nothing to suggest that that will be any different.

So I think the short answer is, yes, we'd expect to grow when you're looking at the combination of the end market and the wins that we've been able to get through the year.

Okay.

And are you prepared to quantify that at this point?

No, Todd.

I mean as you know, we're not going -- the visibility continues to remain low and so we're not going to guide for Q4 at this point and you'll obviously hear from us in Q4.

Right.

Okay, great.

Thanks, guys.

Great, Todd.

Thanks everyone for listening to the call.

If you have any follow-up, I will be here this evening so please feel free to give us a call.

Thank you everyone.

Thanks everybody.

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

Thank you for participating and please disconnect your lines.