Celestica Inc (CLS) 2007 Q3 法說會逐字稿

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

Welcome to Celestica's third 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 to queue up for questions.

In anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at anytime.

I would like to remind everyone that this conference call is being recorded on Thursday, October 25th, 2007 at 4:30 P.M.

Eastern time.

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

Please go ahead.

Thanks, [Garon].

And good afternoon, everyone and thank you for joining us on our third quarter conference call.

There are telephone problems in the area in front of here right now, so our line may sound a little bit weak here, so if there is any problems, we'll let you know.

If you can't hear us, please let us know, as well, too.

On our conference call today will be Craig Mulhauser, President and Chief Executive Officer and Paul Nicoleti, 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.

Copy to the Support News Live at [Press Release available] at celestica.com during this conference call.

During the Q&A, 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 do so.

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

Today's call will last to approximately 5:30, and we will also be available after the call for any additional follow-ups.

Before we begin, I would like to remind everyone that during this call, we will make forward-looking statements related to our future growth, trends in our industry, and our financial and operation result and performance that are based on current expectations, forecasts and its option involving risks and uncertainties that could cause actual outcomes and results to differ materially.

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

These filings include our Form 20F and subsequent reports on Form 6K filed with the Securities & Exchange Commission which can be accessed at cdar.com and sec.gov.

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

The [conference] and GAAP information and the non-GAAP measures are included in our press release available at celestica.com.

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

Thanks, Paul.

And good afternoon, everyone.

With nine months having passed since we initiated our turnaround plan, I'd like to provide you with an update on our progress and results in three primary areas of emphasis, improving our asset utilization, increasing our operating margin and improving customer satisfaction to drive new revenue growth opportunities.

Let me start with our working capital performance.

I'm pleased to say that our aggressive plans, actions and investments to drive significant improvements in supply-chain effectiveness and inventory velocity continue to deliver exceptional results in the third quarter.

Inventory turnover increased a full turn from the prior quarter to 8.3 turns for the third quarter, which represents the best results reported to date as compared to our North-American peers.

These results also represent a full 2-turn improvement from the 6.2 turns in the first quarter.

During the quarter, inventory was all reduced by $28 million compared to the second quarter.

Overall we reduced start inventory in 2007 by $271 million or 23% while growing revenue 13% from our first quarter.

Our supply chain organization has implemented several major initiatives this year designed to streamline and better link our supply base to our customers and our plants, and the results have been impressive.

The strong inventory performance and improved earnings in Q3, we generated over $200 million of free cash flow this quarter.

Thus, we were able to add more than $200 million of cash to the balance sheet while growing the company revenues 7% sequentially.

We continue to have a strong balance sheet which provides us with significant flexibility to complete our turnaround and pursue a range of investment opportunities for future growth and profitability.

Now moving to operating margins, the transformation over the first nine months has also resulted in improvements.

Our third quarter margins were 2.3%, an improvement of 200 basis points from the 0.3% in the first quarter of this year.

Several factors have driven this improvement.

First, our aggressive implementation of the Celestica lean operating system has continued to deliver significant improvements in quality, delivery, cost productivity, and lead-time globally.

Despite weakness with our key telecom customers, relative to our plans at the beginning of the year, the operating loss in Mexico for the third quarter has been cut in the [half] compared to this quarter.

Our quality, delivery and customer satisfaction metrics continue to improve, and now Mexico is ranked among the best sites in our network in these important areas.

We are very encouraged by this progress in Mexico and expect further from this in the fourth quarter.

Just like flat revenues, Europe also showed improvement this quarter, and we are working to accelerate the rate of improvement as we are now introducing several new programs with new and existing customers.

Our operational performance is improving and our customers are recognizing this.

Celestica Romania was recognized by one of our largest customers as their best performing EMS site in their entire supply chain network globally.

Profitable revenue growth remains a priority for us in Europe, and we'll continue to pursue opportunities with the existing and new customers in our target market segments.

And finally, in terms of revenue growth, we have shown steady growth each quarter this year, despite program disengagement that demand volatility with some of our key customers and markets.

Our new wins this quarter showed continued improvement over the first half growing rate as we focus our efforts on gaining share with turned customers and winning new customers across all of our targeted end markets.

Our diversification efforts have shown benefits in our consumer end market which was our second largest segment in this seasonally strong quarter.

Competitive take aways and market share gains over the past year have helped deliver a very strong quarter.

Despite the large year of - - year declines in telecom, the telecom segment has been stable, and shown some modest sequential growth each quarter this year based on demand improvements.

In enterprise communications, revenue was lower sequentially as a result of some disengagement activity, though we expect recent competitive take-aways and new program ramps to offset the starting of the second half of 2008.

In the Information Technology Sector, the storage segment showed some strength driven by multiple customers while the Server Segment was seasonally down.

The Industrial Segment had a strong quarter for new business wins as it won new programs in aerospace and defense, renewable energy, power management, and professional broadcasting.

We expect all these programs to ramp in the first half of 2008 with more volume production commencing in the second half of next year.

Customer satisfaction remains strong across Celestica in the third quarter, especially in the Industrial Segment, where Celestica received rate beyond [missile] systems, prestigious 3-Star Supplier Excellence Award.

This award is given in recognition of outstanding performance, and this is the second consecutive year the company has received this honor.

Overall, we showed some progress in revenue growth this quarter with 7% growth over the second quarter and 13% growth over the first quarter.

As we look forward, the demand environment appears stable and at the mid-point of our guidance, we would expect margins to improve slightly from the third quarter.

We expect further improvements in inventory turnover which will generate additional free casual in the fourth quarter, further strengthening our balance sheet.

Overall in 2007, while a couple of quarters of operating and financial improvements is encouraging, we know we still have significant opportunity to further improve the business and build a solid foundation for future growth and profitability.

We have previously described our transformation plans in terms of stabilizing, standardizing, and optimizing the business in our 2007 quarter-on-quarter improvements, and our financial performance and our Q4 guidance indicate that we're beginning to make progress in the key areas of the business.

However, there remains more work to do to eventually set the benchmarks for our industry.

First, we will continue to drive our working capital performance to become the industry bench market.

Second, our progress in getting to our 3% plus operating margin target has been short of the mark, as we have been challenged by weekend market demand primarily in our Communication Segment.

We're implementing additional cost productivity actions with the goal of achieving this benchmark as we rebuild revenue momentum.

In the fourth quarter, the midpoint of our EPS guidance reflects slight improvement in operating margins despite flat revenue.

As we look beyond the fourth quarter to the first quarter of 2008, we expect revenues will be affected negatively by a greater seasonal impact associated with our higher percentage of consumer revenue.

Although we are not giving formal guidance for the first quarter at this time, this seasonal impact , along with the timing of new ramping customers and programs, offset by customer disengagements will have some impact on the revenue and [certain] outlook in the first quarter.

We do expect operating margin and revenue momentum shown based on new program ramps and seasonal increases throughout 2008.

We expect to finish 2007 in one of the strongest financial and operational positions we have been in several years, and fully expect that our further progress in 2008 will build on these improvements in working capital, operating margins, customer satisfaction and revenue growth.

Thank you for your continued interest in our company, and I'll now turn the call over to Paul

Thanks, Craig, and good afternoon.

Revenue for the third quarter was $2.08 billion up 7% sequentially, and down 13% on a year-over-year basis.

The majority of the sequential revenue improved as driven by the seasonal strength in the Consumer Segment while the year-over-year decline was primarily driven by lower volume from the telecommunications and enterprise communications market and customer disengagements primarily in the industrial market.

Looking at our revenues in the quarter by end markets.

Enterprise communications represented 26% of total sales, down 6% sequentially.

Consumer represented 24% of sales, up 37% sequentially in its seasonally strongest quarter.

Telecom was 16% of revenue, up 22% quarter-to-quarter, and better than our expectations going into the quarter.

The server segment represented 18% of sales, down 3% compared to the second quarter.

[It's down] to 10% up 7% from the second quarter, and finally, the Industrial Aerospace Defense Segment at 11% sequentially.

Our top 10 customers represented 62% of sales for the quarter with some Microsystems being the only customer greater than 10% of total sales.

Moving to profitability.

The company posted GAAP net earnings for the third quarter of $51.5 million or $0.22 per share compared to GAAP net loss of $42.1 million or a loss of $0.19 per share for the same period last year.

The primary driver of this year-over-year improvement was significantly lower restructuring cost in 2007 compared to 2006.

Adjusted net earnings for the quarter was $29.3 million or $0.13 per share above the high and the bar-guidance range and an $0.11 sequential improvement from $0.02 per share in the second quarter.

The majority of the sequential earnings growth was driven by operating margin improvement, resulting from higher revenues, restructuring benefit and general improvements in manufacturing efficiencies particularly in Mexico.

Adjusted earnings per share was also impacted positively by 1.0% based on the net impact of higher interest income on higher cash balances and a mark-to-market gain on financial instrument accounting offset by the higher tax rate.

Our adjusted tax rate for the year is now expected to be 25% as the strengthening in the Canadian dollar has resulted in an increase in deferred tax liability expense.

Gross margin this quarter was 5.9% of revenue, compared to 5.6% for the same period in 2006, and up 120 basis points from 4.7% in the second quarter of this year.

The sequential improvement in gross margins reflect the benefits from higher revenues, the reductions and losses in Mexico, as well as benefits from our restructuring activities.

SG&A expense for the third quarter were $74 million compared to $71 million in the second quarter and $71 million in the third quarter of 2006.

Operating margin for the third quarter of 2007 was 2.3%, up sequentially 120 basis points from 1.1% in the second quarter.

Mexico's operating losses in the third quarter calculated as gross profit less SG&A was $10 million, down from a $21 million loss in the second quarter of 2007.

This improvement reflects the continued progress at increasing efficiency at the operation, despite the revenue challenges the site has been experiencing this year associated with weakness in its telecom revenue.

As Craig mentioned, we expect Mexico to show additional improvements in the fourth quarter though more modest in the significant progress demonstrated this past quarter.

Europe also showed modest improvement this quarter as the region had an operating loss of 10 million, down 1 million from the second quarter.

As Craig mentioned, we expect Mexico to show additional improvements in the fourth quarter, though more modest in the significant progress demonstrated this past quarter.

Europe also showed modest improvement this quarter as the region had an operating loss of $10 million, down $1 million from the second quarter.

We do expect improvement in the fourth quarter as we get further up the volume curve of these new programs.

In terms of a [restructuring], we recorded restructuring charges of $2.7 million during the third quarter of 2007, and $13.2 million year-to-date.

As originally announced at the beginning of the year, we continue to anticipate incurring up to the full $40 million in restructuring charges in the coming quarters, though we now expect to complete the remainder of our announced restructuring activities by mid-2008.

As of September 30th, 2007, we have recorded termination costs related to approximately 7,200 employees.

Approximately 7,000 of these employees have been terminated as of September 30, 2007, with the balance of the terminations to occur by mid-2008.

Moving to the balance sheet, we demonstrated exceptional performance in working capital management and free cash-flow generation this quarter.

Cash at the end of the quarter was $953 million, representing approximately a $200 million sequential improvement.

We also generated a free-cash flow of $206 million on the quarter.

As Craig noted, our inventory performance was very strong with turns increasing sequentially a full turn to 8.3 turns and two full turns compared to 6.2 turns in the first quarter of this year.

An on absolute dollar basis, we reduced inventory by another $28 million sequentially, despite the 7% sequential revenue growth reflecting a steady progress that the supply chain and operations teams are making.

Our cash cycle for the quarter decreased sequentially to 20 days, compared to 26 days in the second quarter.

During the quarter we sold approximately $225 million in accounts receivable, a $25 million reduction from the second quarter and almost $100 million lower from the $320 million sold on December 31st, 2006.

Capital expenditures for the quarter worth $13 million and on the year-to-date basis, CapEx remains in our 1.0% of revenue range.

Our balance sheet has strength in each quarter this year.

Debt to capital was 26%.

Our cash position was $953 million, and our credit facility of $300 million remains undrawn.

Overall, our teams have done a very good job releasing cash that have been locked up in inefficient working capital this year.

While we expect the pace of cash generation to temper, we do expect additional improvements to continue.

Let me now move to our fourth quarter guidance.

We expect revenue to be in the range of $2 to $2.15 billion and expect adjusted earnings per share will be at the range of $0.10 to $0.16.

At the midpoint of this range, the guidance reflects additional improvements in operating margin offset by a higher tax rate and higher net interest expense.

We also expect that inventory turns will improve again in fourth quarter and that the company will generate additional free cash flow.

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

Operator, we'll take our first question.

Q&A

(OPERATOR INSTRUCTIONS) Your first question comes from Brian White from Jefferies and Company.

Please go ahead.

Hi, good afternoon.

When we look at the December quarter it looks like you're guiding to flattish sales, which seems though a little softer than I would have thought.

What markets are actually going to grow sequentially in the December quarter?

Brian, it's Paul.

First up, can you just confirm, were you able to hear our call okay?

Yes.

Great.

Brian, overall, you know, as Craig mentioned we're seeing end markets, you know, relatively stable.

You know, having said that, I think if I had to point at one market for us that will likely not see growth that historically would have seen mostly in the enterprise comp site.

We do expect to see a slight uptick in a -- in -- in the enterprise IT side as we would reasonably see.

As you know, the market continues to be very choppy, we've provided a range accordingly, but we had to point out a couple that's probably the dynamics we're seeing right now.

Overall, as we mentioned, consumer in the third quarter was very strong for us.

We'll see how the rest of the quarter unfolds.

If you recall back to last year, Q3 was the peak for consumer business for us, so we would expect as we get closer to the end of the quarter that that business will tail off.

Okay.

And then what are you exactly saying about the March quarter?

Should we expect -- I mean what type of sequential decline should we be expecting for the March quarter?

You said in some programs, there are customers that are going to be going away or programs are going away.

You'll have the impact of increased seasonality due to a higher consumer exposure, but -- I mean, you pointed it out for a reason, so how should we think about that March quarter?

Brian, you know, that's not factoring in the consumer declines that we typically would see it.

I think the way to think about it is to model up to continue business separately, and kind of look at the hard fall that we would expect to see in Q1, look at the rest of the base, and, expect to see a more seasonal decline.

When you add it all together on balance you'll see a more pronounced decrease than you would have historically seen for us.

Okay, is there any type of percentage?

We missed the first few seconds of your comment.

Is there any percentage that we can use?

Yeah, Brian we're not giving any specific percentage on that other side.

I think the way to think about it is model our consumer separate from the rest of the base and when we do it that way, and look at the base on a more traditional decline basis, you'll just get a bigger decline than we have normally seen historically at the total company level.

Okay.

Thank you.

You're welcome.

Your next question comes from Amit Daryanani from RBC Capital Market.

Please go ahead.

Thanks a lot.

Ah, guys, here's a real quick question.

Craig, I think in your opening comments, you spoke about the fact you were looking to implement some additional cost [production] to the actions to the goal of 2% to 3% margin?

Could you just flush that out?

Is that another restructuring plan that we are looking at some point down the road, or what, what really is entailed in there?

We are looking at continued implementation of our lean for this model here.

So we're driving productivity.

Obviously, we're doing a tremendous best in improving quality here.

We have made significant progress to the elimination of scrap and waste.

We'll be doubly selective [reductions], various fluctuations in the labor force but nothing material.

All right.

And then you had just -- one other thing -- there has been--there has been some recent commentary about you guys doing some handset business out of Brazil, I believe.

Is the handset market release something we should expect Celestica to go after more aggressively in the future?

Well, we're in the consumer device market.

Obviously, we play an important role with many of the leading players in the device market.

Our role is largely managing their downstream customer care, and today we're not pursuing large-scale production of handsets.

All right.

Thanks.

Your next question comes from Tom Dinges from J.P.

Morgan Please go ahead.

My, good evening guys.

Craig, I wanted to talk a little bit more about Europe.

Obviously, you guys mentioned really nice progress there in Mexico, and that was obviously a big focus for you guys.

I know you have been focusing a lot on Europe.

If you could just walk through a bit, kind of what is the plan there?

Obviously, you've have talked for a long time about just trying to find some higher level of revenue.

Are there some other things as you guys have really turned focus there to try to turn that business profitable?

What are some of the other things you guys are working on there, and any time line you would give for perhaps getting that business back in to a reasonable level of profitability?

We have been, as you mentioned, laser-like focused on Mexico and obviously we've seen significant progress there.

As we look at Europe we have seen some progress.

We haven't seen the rate of progress.

We're looking at a range of options at this point.

It's too early to really comment on what they are.

Obviously we have got a number of new programs ramping this quarter.

We're in our consumer peak in Europe.

As we ramp, as we introduce the new customers we got in Europe, we're evaluating a range of options as to how to build a more flexible, a more competitive cost base than we have today.

So, we will be looking to be rolling those plans out as we look toward 2008 time period.

Again, it's going to be a an evolutionary model here.

And there is no, as I've said in Mexico, we'll just like gear up.

There's no quick fix.

Okay.

And then one just really quick one for Paul.

Any thoughts on the tax rate for next year?

Given that now you are kind of hitting -- you are actually starting to accrue some tax?

Yes, we'll provide more formal guidance in January.

As I said the Canadian dollar as been -- quite a tear here, as I'm sure you all know in the last quarter.

It has hit us pretty hard for the year.

You know, we'll be taking a closer look at our profitability plan by country in the January time frame, and we'll give you a bit more specific guidance at that time.

I think at this point in time, you know, it's probably reasonable to use the 25% and as we get in to January we'll give you an update then.

Okay.

That helps.

Thank you.

Okay.

Your next question comes from Jim Suva from [TV] Investment Research.

Please go ahead.

Hi, this is Jim Suva from Citigroup.

They must have got the wrong -- can you hear me?

Yeah, we can.

Jim Suva from Citigroup.

When you talk about Mexico improvement cutting the loss in half from 21 to 10 and a little bit of improvement in Europe from 11 to 10, sequentially I agree that's definite improvement.

But when we look year-over-year it's actually worse.

Can you help me understand why it is worse year-over-year?

Is that the volume thing and when can we look for these things to actually start to turn profitable?

This year it's a volume thing.

So we started the year in the -- frankly with the telecom weakness that we saw.

And as we gone through the year we've had that continued weakness.

So we're making tremendous progress on the operating front.

Now with the operating platform in place, the quality cost delivery we need, obviously the leverage now is on the top line.

We're built customer confidence.

We're bringing new programs to both Europe and to Mexico, and for us it's a volume thing now.

We got quality facilities, quality locations, delivering world class performance and now we can get back the market on very, very level playing field with the other guys.

Okay and as a follow-up in with the customer confidence and such, I notice that Cisco dropped out of the top 10 customer and they've been seeing quite strong trends.

So how can we triangulate around the comments that the highest level of customer confidence and satisfaction that customer dropping out of your top 10?

Well, Jim, it's Paul.

Just for clarity it has not dropped out of the top 10.

It's not a 10% customer this quarter.

I think ,as you know, we go back and look at the last few quarters, you know that a lot of our top customers jump in and out of the 10%.

So I just want to clarify your question.

Cisco remains at top 10, it's not a 10%.

And as I said, I think if you go back to the last few quarters it's become hop in and noted being at 10%.

Okay.

And then Europe --

And we had some excellent growth with the Sun Microsystems.

Yeah, that's for sure, yes.

And year-over-year growth has not been growing it's been declining.

Can you talk to us about when we can potentially see year-over-year with that growth?

Will that be in '08?

The message is we're looking at building momentum quarter by quarter and as we mentioned, the business mix of the company has changed.

The focus here is quality earning, strong cash flow and a great operating platform.

We're going to be rebuilding the revenue line and then we'll be looking for year-over-year revenue growth on a four-year basis.

Okay, great and thanks.

Congratulations especially on the profit improvement.

Thanks a lot I appreciate your support.

Your next question comes from Kevin Kessel from Bear Stearns.

Please go ahead.

Great.

Thank you very much.

My question is in terms of the -- I guess going back to that question earlier on the decline for the March quarter that you guys referenced, I think in this year, March of '07, you know, you were down about 20% and obviously part of that was also attributed to consumer and being more consumer intensive than you have ever been in the past.

Are you saying that it would actually would potentially be worse than that?

Because you are saying it is worse than it has been in the recent past?

Kevin, I don't see us falling that hard as we look forward to first quarter, no.

Okay.

And then in terms of -- in terms of the comment also around that on future disengagements I just wanted to make sure I understood what you were saying, Craig.

You were saying that there are going to be some disengagements in the March '08 where that might exacerbate the trend a little bit, the sequential trend?

Yeah.

Bottom line, Jim and Kevin, I'm sorry, we did not -- this world of losing customers is over.

We did not lose any customers this quarter.

All right?

So our operating platform is absolutely strong as anyone in the industry.

We have the tail on some disengagements, you know we're going through them, we mix them a bit.

the customers based here is we look to rebuild in solid operating margin.

And that's where we are today and we got to tail on somebody's programs carrying over.

Okay.

I got it.

And then lastly, just in terms of the telecom market being up as much as it was for you guys, can you maybe just help us out give us a little bit of detail around that?

We expected -- I mean In terms of the telecom market we had good strength in the number of our customers and obviously, our service levels have improved dramatically.

So we had the opportunity to fill demand that they had, and that was the benefit.

But it wasn't necessarily much in Mexico or -- because you still referenced Mexico --

It was as much as we would have like to see in Mexico, but there was some sequential improvement.

Okay, okay.

Great.

And then Paul, anything on the sale of land that you can update us with?

I'm sorry Kevin you broke up there, can you repeat your question.

Just the sale of land in Toronto?

Nothing new to report at this point, Kevin, so we continue to have some high interest on -- on -- you know, the real estate that we have up for sale.

Nothing new to report at this point.

Okay, thank you very much.

You're welcome.

Your next question question comes from [Rean Grath] CLS Capital Management please go ahead.

Hi guys, really good quarter.

Just a couple of quick questions.

I noticed that your net interest expense was down to $6 million from the previous quarter.

Is that going to continue to fall?

And is that the right number to use going forward?

So, couple of things, so first, obviously as the-- our cash balance was very strong, and as a result of that we were able to get, you know, stronger level of interest income.

I think.

if you - - once you have a chance to go through the detailed financial statement you'll see that.

Just given the movement from the yield curve, there was a $2.1 million impact relating to financial instrument accounting.

So I think back, I'd characterize that more as a one-time event.

So, other than that, you know, once you add that back, I would see that more as a steady state.

So, if you think of it -- with $10 million, think of it more in the $12 million range.

I think that's more of a -- where we're at.

Right.

Yeah, I just didn't couldn't reconcile that last a little bit there.

Secondly, CapEx, you are saying 1% of revenue was -- you are looking at $80 million this year, or $85 million something like that?

Yeah, that's correct.

And that's the same going forward, whatever the revenue base is?

Yeah, I mean, historically we have ranged between 1.0% and 1.5% of revenue, so that's what we would continue to expect to see in 2008.

Okay.

Good.

And lastly, in terms of your inventory reduction, looks like you made some really good progress there.

Do you think that -- you know, I know you said you think it is going to stabilize here.

How much more do you thing you can ring out of it?

Well, I tell you, I mean, I think we can ring out more.

I mean, our internal target there to get into the 9-plus zone.

So, we'll need a bit of demands that they'll help us get there.

But I do think we'll improve inventory turns within the fourth quarter week.

Whether we get to that 9 it can't be determined but that's kind of the zone of what we're targeting for.

Okay.

Great.

Thanks.

Your next question comes from Steven Fox from Merrill Lynch.

Please go ahead.

Hi, good afternoon.

I got cut off a little bit, so I apologize for repeating stuff.

Maybe if we could just go back over some of the disengagements versus some of the wins.

If we put them into those two buckets, you mentioned that you're at the tail end of some of the disengagements.

Can you talk about how that flows through the last two quarters including this one, and what was the reason for those disengagements, what kind of markets, and then the same thing on the new wins so to give us more color there?

Steve, as usual we're not going to give any specifics around, you know, what wins and/or losses we're experiencing from a customer in any points of view.

I think through the year we have been, you know, pretty open that we had experienced some disengagements as a result of our 2006 performance.

Some of those disengagements has the impact of when you see it materialize to revenue, what have been happening end of this quarter, we expect to see a little bit more going forward in to next quarter.

As Craig mentioned, you know, we're pretty much at the tail end of this thing as far as magnitude.

As I said, we're not going to give anything specific.

Suffice to say that our guidance reflects obviously what we see on win-based business and end losses.

As far as new wins are concerned, our pace of new wins this quarter was in line of what we experienced in the first half.

on the going rate, as Craig mentioned.

[Bleeder] programs that are across multiple segments.

We're seeing a lot of traction from the industrial segment, as well as the consumer segments and these are program wins that we would expect to really come on line and make a difference toward the middle of 2008.

Okay.

For Q1, wouldn't we also expect to see some negative seasonality around enterprise and telecom?

Is that something else that is factored in to some of the comments you've made so far or - ?

Yeah, I think that we would expect to see a normal seasonal decline in those sectors, so I would say yes to that question.

But those are weaker in Q4 than you would have thought; is that fair to say?

Yeah, I think the IT side is kind of unfolding as we expected.

For us the portfolio products and the pieces we had coming in and out.

You know, that segment is probably not as strong as it would have been for us, historically on the enterprise com side.

Generally speaking the IT side is following a more typical pattern.

Okay, and then just one last question.

This may be a repeat.

But in Europe, just so I understand -- you are saying you are seeing some revenue improvements.

I didn't quite get what you were saying about -- can you just go over profitability in Europe and then how it was going to unfold in the next couple of quarters again?

Profitability we're going to continue to make quarter-on-quarter improvements in Europe.

Obviously the pace of improvement is what we're after now.

The rate of improvement.

So we get five quarters of inventory performance in quarter-on-quarter in Europe.

We've begun to get our arms around the operating challenges we had.

We're beginning to take costs out.

Now we're going to take costs out at an accelerated rate and I said, as we go through the year with the number of new customers, we're winning and in site, I would say the platform that we're building on will be looking more and more aggressively at how to become more competitive in Europe.

And in the quarter joust completed you saw improvements in profitability in Europe mainly driven by revenues?

Revenues -- revenues were pretty flat in Europe quarter over quarter.

The improvement in profitability, we have been busy trying to improve the efficiency within Europe.

So we saw some benefit there.

Now as I mentioned there are some -- while revenues are flat, we are ramping some new programs and did incur some ramp costs as a result of those we'll release as we kind of move up the volume curve in Europe in the fourth quarter.

So as we look forward to this quarter, you know, expect profitability to improve as well as the revenue to increase.

Got it.

Thank you.

Thank you.

Your next question comes from Todd Coupland from CIBC World Markets.

Please go ahead.

Yeah, good evening, everyone.

Just thinking about your consumer pickup quarter-to-quarter was any of that one time in nature?

And I guess what I'm getting at is, there was a major recall with one of your significant customers, and I would imagine you are probably working on that.

So when we think about the actual demand from a seasonal point of view, would it be a be a bit less because of - - you had to deal with that recall?

I would say at this point that's not material.

Not material.

Okay.

Yeah.

The second question has to do with the Mexican operations.

You know, given your planning and what you see over the next few quarters, when would you expect to bring that business to break-even?

So Todd, it's Paul.

So, you know, I think we're happy obviously with the progress, but we're cognizant with the fact we're still losing $10 million.

So we'll improve that number in the fourth quarter.

I think what you'll see is, you know, as we see a seasonal [downtick] in revenue at first quarter, we'll pause on our level of improvement.

We do have revenue that [fits the bill], I mean as we look forward to the middle of the year.

So I think our break-even time line is towards the middle of the year, you know, the Q3 time frame is probably a reasonable expectation at this point.

Okay.

And, you know, sort of the same question on Europe.

I mean, I know it's not moving as fast as Mexico, but would you expect to bring it to break even sometime in '08?

Or is that going to be an '09 event?

You know, Todd, I think Europe will take us a bit longer.

You know, certainly very dependent on how overall revenues unfold and connect the change [coming].

I would see Mexico breaking the break-even point before Europe does.

Okay.

And in terms of -- you know, if it's going to take a year, still in Europe, are you still of the view that you need to keep the footprint that you have and so you just have to put new programs in there or the markets need to recover?

Or is there any more trimming that can go on over there?

Well, Todd, we think we have put in a very competitive footprint with two sites in Czech Republic, one in Romania and one in staying focused on [IMEX] volume.

We've won business in all these sites.

You know, the question is, is it enough?

Clearly, you know, Craig and I are of the view that we believe we can.

These plans can be competitive.

We can build them up with revenue.

Having said that if that's if that's not going to materialize we'll take whatever action we need to take.

As we figure today, look at the revenue funnel, look at the opportunity that's in front of us.

You know, we see the opportunity You know, about changes, then we'll take the appropriate action.

But at this point I think we have the right footprint and that we can make it work.

Okay.

Great.

Thanks a lot, guys.

Thank you.

Your next question comes from Paras Bhargave from BMO Capital Markets.

Please go ahead.

Good afternoon guys, how are you?

Hi Paras, thank you.

First, just a long term question for you, Craig.

You've been at the helm for awhile now, what do you see doing with Celestica strategically?

Are you, you know, at one time you've talked about thinking about thinking about a smaller company that's more profitable, at other times you talked about a growth trajectory.

There were some talk about about participating in consolidation.

Maybe you could just give us your thoughts of where you are at in your thinking.

Well, this investment community has really got some long-term thinking.

I have been here 11 months now.

Obviously we've had -- from last to first place inventory turnover in nine months.

I think we have an operating platform that's moving in the direction that's going to create the opportunity to leverage the investments Celestica has made in building it.

So I'm very -- much about our flexibility.

I'm very bullish about the rate of improvement I'm very bullish about the number of opportunities and the number of new customers we have been able to attract during a period of this type.

And therefore, I believe we have going to change the game and actually be able to show that the scale advantage can be overcome with speed and knowledge and flexibility.

So I'm very bullish on it.

Does that mean a smaller more focused Celestica or does that mean -?

That means a much -- a company that's valued hopefully among the highest in the industry.

Because of the way we perform, the cash we generate, the operating margins we deliver, and the growth we're rewarded with our customers.

How big we are will be determined by really the target market and the target customers we choose to focus on.

We definitely aren't going to be a company that tries to deal with 12 people.

So, as the landscape changes with Flex/Selectron merger, probably it's logical to think that some of the vertical scale that they are going to have, especially with the board business, some of the traditional segments you're in, maybe the game will change.

How do you see -- you know, -- how do you see your strategy changing when that happens?

I mean, that's an excellent point.

So obviously as markets mature, as technologies become more standard, as the opportunity that we have doesn't leverage our strengths, which I think are technical and quality and information-based, we will move to those segments that do.

And theres billions of dollars in market potential out there for companies that can be able to do that.

So it will put a premium on the choices we make regarding which markets which customers, and the challenge we have in providing that differentiated offer.

So we will be the leaders in focusing on the things we do best and we will be able to execute in a fashion to allow us to continuously deliver increasing returns.

I think one of the returns that is highly differentiated is our ring strategy, our mega site network is the simplest in the industry.

Our ring strategy brings to a level of flexibility and total cost of ownership that we don't think the vertical players can replicate, and we are building cases and references to begin to make that point as we're out in the market today.

All right.

Thanks for that, Craig

Now a couple of detailed questions for you, Paul.

Yeah.

I think you said 25% tax rate.

Is -- for our going forward.

Are you saying -- it was like 23% and change if you just back out -- if you look at what your pro forma disclosure was.

Are you saying 25% next year, is that what I heard you say?

All right.

What I said was that as we look to '07, 25% is basically what we see.

You know, as we look forward to '08 and, you know, I'll be more specific with you in January, you know, for lack of any other indication at this point, I think 25% is a good number to use.

As I mentioned the bulk of this is being driven by the strength of the Canadian dollar, which I guess is partly depends now on what your views are on how much further strength that will occur.

Based on that we're clearly driving it on '07 then just kind of spend it away.

Based on the profitability and we're worried about the possibility, you know, we'll give you beater sense in January as to what I see for the year.

In the past Paul, you talked about the Canadian dollar, you spend about $0.015 change in the Canadian dollar means a penny is a lost to you.

Your overhead structure is reduced a little bit.

Would it be safe to say every $0.02 is about $0.01 is that how we should think about it, before the [hedging] report?

So far, I don't think the trend of change before hedging, we hedged so when we looked at our OpEx line today is pretty much been insulated by the increase that we saw, you know, over the last 90 days, which as you know was significant, but clearly as we push ahead 12 months from now, we'll be approaching the spots that we see today.

So I think that's still a good number.

Clearly, you know, the case looking at lower cost regions is obviously better for all of the functions that we perform, and that's something that's just a reality of our business, and we'll just continue to look at as we have been over the last several years.

So, you know, before hedging at current cost levels you have about a $76-77 million OpEx line is that .

So far -- you know, we got million dollars across the sales and G&A, so just pushing forward probably a bit less than that, but it's probably a reasonable sum.

Okay.

And then just to clarify.

Final question.

Clarify, for Q1, it sounds like you are saying mid-single-digit sequential decline.

Not as bad as last year, but not as good -- not the 7-8% sequential decline we saw the two previous years.

Am I reading your right?

So far as what mentioned earlier, i mean, last year we saw pretty steep decline.

What I think we need to do model is again.

Model the consumer separately.

Taking into account what you would expect to see as far as seasonal declines in our core markets.

I think we have been pretty clear that there are disengagement sale that are going to impact this same first quarter and recognize a little bit of a wild card for you.

Overall, I'd probably again on balance would expect the revenues to fall a bit harder than what we have seen in the past.

But not as bad as last year?

Not as bad as last year.

Okay.

Thanks, a lot, gentlemen.

Okay.

Thank you.

Your next question comes from Louis Miscioscia from Cowen.

Please go ahead.

Okay.

Great.

Wanted to dig on the strategic topic of focusing on consumer customers.

I guess a couple of moments ago, Craig, you sort of highlighted a couple of things that you feel Celestica is good in a technical kind of business and quality.

Generally, that's not what people think about when they think about consumer.

And one of your big competitors recently said that they really have to get vertical as per their customers request or more or less get out of the business.

So maybe can you expand a little bit just back a focus on the consumer side?

Do you think you're going to have to go vertical and how well you are positioned?

And maybe comment on margins there too?

I think on the consumer side obviously a design is an important aspect of being able to serve consumer customers.

We'll building design competencies here which offers some unique advantages with some key customers.

We've got some existing market positions with some varied market accounts.

What we need to do is effectively implement our ring strategy in our Sunshine Lake facility and bring to that site the quality to support the velocity and the lead times we need.

And that's the game plan.

We don't need to build the vertical structure of our own.

We need to provide the flexibility to provide the opportunity for the best suppliers co-locator locate in our facility and then use that as a differentiate offering against some company that says buy everything from us and we'll offer you the most competitive price.

Okay.

So it sounds like you are not going to go vertical but you are going to invest in designs [to go].

So we are going to go virtual collaboration and vertical in the sense that our technical which is our vertical integration.

We have better technical now.

It's the products.

The environment they operate in.

We have the ability to test those products.

Offer design solutions for the products.

Issues they have in the field.

And offer much more value than providing the outplastic part.

Is it mainly going to be TVs and gaming that you are going to try to focus on?

That's where the large emphasis is today.

And obviously, these other areas of the market where we think represents some more opportunities.

Okay.

Thank you.

Your next question comes from Jeffrey Walkenhorst from Banc of America Securities.

Please go ahead.

Good evening.

Craig, i'm wondering if maybe you can talk about a little bit on the macro side, kind of what's been happening?

Some of your competitors that seen weak or saw weakness late in the September quarter and talked about programs not been with the pull-through not being as anticipated and there has been a number of negative kind of equipment data points.

What have you seen and how has the trend been to date in the current quarter?

I think the trend has been relatively stable.

I mean, in line with our outlook and I think we were pretty much right on where we thought we would end up.

So no real surprise.

I mean we're executing, our programs are ramping and the market -- the base business that we've got is holding up.

Okay.

So you haven't seen any material changes, customer plans and programs as you move through the current quarter?

No.

Not at this time.

Okay.

All right.

That's good.

On the inventory side, what's -- I mean, I know there's a little bit more improvement that you may bring out in the current quarter and you are shooting for the 9 turns number, which would be I think the highest level that Celestica has seen in a number of years which is good.

Where is that most of the inventory improvement come from in the most recent quarter?

And how much inventory do you think is still in the channel with Celestica that may be non-performing or underperforming?

It's hard to say when you look at the inventory challenges.

I'm certainly not going to lay out my inventory strategy for our competitors.

But suffice it to say, I came to the company with the understanding and the really expectation that we would make a big impact in working capital and we wanted to demonstrate to prove point that we can deal with pour own company.

So we have been taking a tremendous effort to get very laser like focused on the key input variables that drive inventory.

And then as we look to the future, as Paul said, we expect to have continued improvement.

And that's not what the big mix of self load described.

At the high mix, I complex the medium to low volume [that] to be at these turns levels for our company in nine months.

I think it's a major proof point that we are putting our money where our mouth is.

Okay.

Very good, good luck and nice progress so far.

Thanks.

Thank you.

Your next question comes from Yuri Krapivin from Lehman Brothers.

Please go ahead.

Good afternoon.

I'll go ahead.

The first question is on the SG&A expense that you've ticked up about $3 million sequentially.

Could you comment on that, please?

In basically, we did see some foreign exchange impact in the quarter.

There's a bit of volatility in the spend there.

I think we would expect the SG&A going forward to be in the zones of what we saw this quarter.

Again, depending on how the dollar does.

Maybe ticked down a little bit.

Essentially, I would point to exchange in the quarter.

Okay.

And then going back to the topic of the March quarter, there's been a lot of discussion on this call already about the revenue outlook for March.

What about operating margins?

I guess it's reasonable to assume that a decline on revenue will be a drag on your operating margins as well.

So is it 50 basis points reduction?

More than that?

Less than that?

Any [call] would be appreciated.

Yes, we're not going to give any specific margin guidance here today.

As we typically give guidance only one quarter out.

As Craig and I sit here and look at any revenue dynamics, we thought it important to give you a heads up as to what we are seeing.

When you look at our performance this quarter on margins.

We had, I think, overall good results.It means we're getting some very good traction in some of the problem areas that we have had and making some progress.

We're very hopeful to continue some of that strength going forward to mitigate what historically do the margin and act [with] revenue fall.

But at this point, I guess I'll have to leave it to you to model it out as you see fit.

Finally, can you talk a little bit about your strategy in the medical market?

Because, you know, I believe you have been reviewing your position in medical.

So what's -- what's your strategy?

What's the conclusion that you are after?

We have some Celestica design engagements with some major medical companies that represent opportunities to grow into that market.

We're carefully evaluating those options against the other opportunities we've got.

Obviously, it's the market that's growing fairly rapidly and we will be participating selectively as we build the industry segment of our business.

Thank you.

You bet.

Your next question comes from Alec Blanton from [Ingled] Schneider.

Please go ahead.

Good evening.

On the disengagements that you mentioned for the first quarter, and you may have said this, I may have missed it, but are any of those voluntary on your part?

In order to disengage with low-margin business, for example, or business that you don't want for some reason?

Absolutely.

We've got a major effort here to get the operating efforts of the company in line with our targets, and part of that is to remix our business with customers that we see as the right fit for the plans that we have got.

So there are a number of customers in each segment that represent that type of customer and we're working carefully with each one of them.

Make sure those transitions are done very well for both parties.

So that not all of these are due to your -- you said your performance in 2006 or lack of it.

This --

Well, so that -- there is some here that as Craig mentioned.

We're taking a very clinical look at our performance across each of the sites.

All of the customers we have, if we don't see a fit and a potential for profit and growth going forward, then we've taken the action ourselves.

So there is a mix of both impacting revenues.

So what is the mix there, approximately, ballpark of voluntary versus involuntary?

Yes, Alex.

I'm not going to -- we're not going to get specific on that at this point.

Here is another question, on the voluntary, very often the contracts are written so that if -- if it's an EMS provider that disengages, then there's sometimes is -- is some inventory liability.

Inventory that you are holding, you are forced to write-off, because that's the way the contract is written.

If you do the -- if you initiate the termination.

So is there any -- are there any writedowns associated with any of this -- of the voluntary disengagements?

The approach we're taking is these disengagements have mutually agreed so we work to that interest of both parties to make sure they are successful.

Well I know, but sometimes the contract specifies that you have to [it] the inventory as you disengage.

Yes, Alex.

I mean, as Craig said.

We sit down with the customer and have a reasonable discussion and you can assume that if disengaging meant having to take a [big] and that's something we probably wouldn't do.

This is all -- we're very careful with our inventories, we sit down with our customers and come to terms.

I don't expect there to be any material type issues as a result of our choice to exit contracts.

So I know you made a comment with regards to what it's being states on the contract, but generally not what we see.

The take or pay aspect of contract and it survives.

And as I said, sitting down and having a reasonable business discussion with the customer and coming to terms is how we've been handling it.

So I wouldn't by think of it in the context of where we basically send them a letter terminating and deal with it that way.

Okay.

And finally, you don't want to give any guidance on margin, I understand that.

But can you give us any thought as to where ultimately your margins are heading?

Do you have any long-term margin targets or gross margin or operating margin that you can share?

Sure.

We continue to see the model to be at 3 or 3.5% EDF for operating margin for us.

Clearly that's predicated on making inroad on Mexico and Europe and obviously somewhat on just overall revenues and the revenue momentum we're experiencing.

As Craig mentioned we do have new programs we have been booking this year that will come-on line more towards the middle of next year.

That along with continued progress in Mexico and Europe and then some of those revenues obviously are for those sites which will help the possibility there.

The 3 to 3.5 model is what we still see.

That's the target -- that's where we should get to and where we hope to be sometime in the latter half of '08.

Thank you.

Operator, we have time for two more questions, please.

Okay.

Your next question comes from Will Stein from Credit Suisse.

Please go ahead.

Thanks.

Just following up very quickly on Alec's question first.

I'm surprised here at the 3 to 3.5 margin target.

I believe the last time I asked that question I heard 4% and the time before that it was 4 to 5%.

Given the very good traction you have this quarter, is there a change there or maybe did I hear something?

Craig, please re-queue.

Okay.

I didn't like that question.

I think the question was, is there been a change?

First, I don't recall in the last couple of quarters us talking about 4%.

We have been talking about our model being 3 and 3.5%.

That's continued to be the case.

Clearly with the overall revenue envelope that we're seeing, we still expect that that can happen in the second half.

Although '08 is probably with a more realistic time line as when it [then occur].

I guess the important point is for us that's where we see the model.

We'll be adjusting the cost structure to getting the efficiency that the system to get toward that model.

Structurally, that's what we believe we can deliver.

Your next question comes from this Gary Chapman from Guardian Capital.

Please go ahead.

Good morning.

I was just wondering if you can just expand on Mexico a little more.

Just wanted -- the last time it seems to me that you're moving 10 of the products.

You're going 16 down to 6, moving then to Asia that the warehouse is 9 to 3.

Is all of that pretty much done?

What more do you need to do other than put more revenues to the facility?

Well, where we are on program transfers, there is one remaining program transfer at the site to get down to the level of 6.

And then we've got one potential new customer that we're considering adding to the site as we rebuilt the revenue base.

We're down to two warehouses so we think we can go to zero.

Making progress there.

we're on track with all of those metrics.

Some of those [feather] into the fourth quarter in terms of finalizing that.

And then there's further plans to further reduce the cost structure to become profitable as Paul said, get there as quickly as we can.

On track virtually with every major metric in Mexico, very pleased with the progress we've made.

Big congratulations to the team for the effort they put into this.

Sir, how much would your revenues have to rise in Mexico to bring you to that break even?

Sort of a sense of what that hurdle is?

That's very dependent on the mix of business.

What we found over the last year has been a big mix overall.

Much more system assemblies, the film and type business and less PCA type business.

So overall, very dependent on the mix.

I think from the revenue envelope that we see today.

Our plans are predicated pretty much on improving the efficiency to get to the break even that we're looking for.

I think our annualized revenue of $1 billion in that range is kind of how we're targeting and if we can get to that break even in that revenue range.

Obviously if revenues are 1.2 we'd get there faster but that's probably [don't know] what we're looking at.

Okay.

Thanks so much.

Thank you.

Great.

Thanks for joining us on the call.

Our apologies on the phone line.

Hopefully it was good enough, and if there was any follow-up questions, please feel free to give me a call.

Thank you.

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

Thank you for participating.

Please disconnect your lines.