Celestica Inc (CLS) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by, welcome to the Celestica fourth quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Thursday, January 31, 2008 at 4:30 p.m. eastern time.

I'll now turn the call over to Paul Carpino, VP of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us on Celestica's fourth quarter conference call. On our call today will be Craig Muhlhauser, President and Chief Executive Officer, and Paul Nicoletti, Chief Financial Officer. Craig and Paul will provide some brief comments on the quarter, and then we'll open up the call for Q & A. Copies of the supporting slides accompanying this webcast can be viewed 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 to do so. You're welcome to get back into the queue after you ask your question. Today's call the last until approximately 5:30 and we will also be available after the call for any additional follow-ups.

Before we begin, I'd like to remind everyone that during this call, we will make forward looking statements related to our future growth, trends in our industry and our financial operational results and performance that are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. We refer you to the risk factors and uncertainties discussed in the company's various public filings, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward looking statements. These filings include our form 20-F and subsequent reports on form 6-K filed with the Securities and Exchange Commission which can be accessed at Sedar.com and SEC.gov. Please note we will refer to certain non-GAAP financial measures during this call. The corresponding GAAP information and reconciliation to the non-GAAP measures are included in our press release, which is available at Celestica.com.

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

Thanks, Paul, and good afternoon, everyone. As shown in our financial results, Celestica delivered a strong fourth quarter and continues to make significant progress on its key areas of focus. As we enter 2007, we have several operational and working capital challenges we needed to address. And we tasked our teams to resolve these issues quickly.

We began the year knowing we had a lot of work ahead of us, I'm very pleased to say that our efforts thus far are having a material impact on improving the operational and financial performance of the company. Not only were our teams able to deliver steady and significant improvements throughout the year, but we also finished 2007 with fourth quarter results representing some of the strongest operational and financial results Celestica has delivered in several years. Let me give you a few highlights for the quarter and Paul will provide additional detail.

I will start with the top line. Though year over year revenues were down as a result of weakness in our communications business, and program disengagement initiatives, the company showed positive revenue growth in each quarter in 2007 and delivered approximately 20% organic growth from first quarter to fourth quarter of this year. Our diversification efforts over the past few years to expand our service capabilities and additional consumer revenue underpinned this growth.

Moving to operating margins, we achieved 2.7% in the fourth quarter of 2007 and recovered back to the levels reported prior to the challenges we experienced in late 2006. Importantly, we've returned to these margin levels despite $180 million lower revenue than the third quarter of 2006 which is the last time we were at these margins and we continue our efforts to achieve our 3 to 3.5% operating margin targets. Driving the improvement in operating margins were stronger gross margins, which ended the year at 6% for the first time since 2002. Improved gross margins were achieved through our focus on operational efficiency, including our lean initiatives, improved quality and utilization and the continued focus on exiting less profitable businesses and focusing our resources on more profitable customer opportunities and emerging markets.

Operating margins also improved due to our initiative to drive SG&A spending below the growth rate of our top line. While revenue grew 20% from Q1 to Q4 in 2007, SG&A only grew 2% in actual dollars and decreased as a percentage of revenue. We continue to develop and implement plans to further reduce the spending to drive additional operating margin as the revenue grows in the future. With respect to working capital. I'm extremely pleased to report that our efforts in this area have been exceptional, and have allowed the company to achieve an all time company high in inventory turnover. And the best performance among our North American peers in the November/December quarter of 2007.

Inventory turns in the fourth quarter were 9.7 turns, a sequential increase of 1.4 turns from September and a 3.5 turn improvement since Q1 of this year. We've generated significant value for both our customers and shareholders in this area as a result of our IT investments, implementing process improvements that leverage our simplified manufacturing network, and partnering with suppliers who support our total cost of ownership philosophy, with the strong inventory turnover performance, we drove meaningful reductions in inventory dollars. Since the March quarter of this year, inventory is down 27% or $289 million, while revenue grew 20% during the same period. The success in inventory management was a key factor in generating significant amounts of free cashflow in the second half of the year, including $167 million in the fourth quarter. The better working capital performance, combined with our improved profitability has also allowed Celestica to finish 2007 with a strong and flexible financial position.

Our cash position at the end of the year was $1.1 billion or $400 million dollars higher than our cash position at the end of the March quarter. With the improvements made in both profitability and working capital throughout 2007, we are now starting to generate better returns. In the fourth quarter, a return on invested capital was 11.9%, our best performance since 2001. To us, this is a great leading indicator that the fundamentals of this company are sound and the focus of our improvement plans are delivering results throughout the company. Overall, our teams demonstrated solid progress in all of our key areas of focus in 2007 and the momentum generated with our fourth quarter results was a great way to finish the first year of our transformation.

Operationally, our design, supply chain manufacturing and services network is performing well, as we now turn our efforts to driving additional revenue to achieve even higher levels of profitability. During the past several years, we've invested significant capital in efforts to reduce excess capacity throughout our operating network. This has allowed us to build a simplified yet highly flexible and efficient integrated supply chain, which will drive further margin improvement with additional revenue growth. The majority of our revenue is now generated through our global mega sites, allowing us to optimize utilization and deliver highly efficient supply chain solutions to our customers. With profitability and working capital metrics solidly trending in the right direction, the final piece of our transformation is to continue to focus our energy and resources in winning additional revenue opportunities with our key customers in our target market segments.

We continue to build the company for speed and flexibility and are looking for growth opportunities that will compliment our capabilities. We have a very focused approach to developing our major customers, and market opportunities throughout the business by market, by geography, and by line of business. As we look into Q-1, the demand environment appears to be stable. and in-line with normal seasonality, and In-line with our expectation for our infrastructure business. Our consumer segment being our largest segment in Q4, and with the stronger than expected demand in the fourth quarter, we will also have a larger seasonal impact on our Q1.

We are unable to predict how or if the economic volatility may affect our business going-forward. But at present, we have not yet experienced any major changes in our customer's demand outlook, due to adverse economic factors. We have made sustainable improvements on our supply chain in 2007, and we expect further improvements in working capital performance in 2008. Inventory turns will be seasonally down in Q1, but at levels we once believed would be our peak performance. From a profitability standpoint, we also believe we made sustainable improvements in our cost structure and this is reflected in our Q1 guidance. Midpoint of our revenue and EPS guidance will generate 2% margins in our seasonally weakest quarters. The last time we were at 2% operating margin in the first quarter was in 2005. But that was in a revenue base that was $350 million dollars higher than the current mid point of our guidance.

I'm proud of the progress the company has made in the past year, but we still recognize we have a lot more work ahead of us. Improvements in 2007 have been meaningful and I want to thank our employees for their exceptional work and unconditional commitment this year. We've undertaken a significant transformation of the company as a result of our efforts, we ended 2007 in one of the strongest financial and operational positions this company has seen in several years. This has been a great accomplishment and we're looking forward to building on the success in 2008. Now let me turn the call over to Paul Nicoletti.

Thanks Craig, and good afternoon to everyone. Revenue for the fourth quarter was $2.2 billion, up 6% sequentially and down 2% on the year-over-year-basis. The sequential revenue improvement was driven by the seasonal strength in the server, consumer and storage segments, offset by lower volumes from the telecommunications segments.

Looking at our revenues in the quarter by end markets, enterprise communications represented 24% of sales, up 1% sequentially. Our consumer segment was stronger than participated. Up 16% sequentially, and represented 26% of sales and was also our largest segment this quarter. Telecom was 13% of revenue, down 13% quarter to quarter. The server segment was seasonally strong, up 21% sequentially and represented 20% of sales. Storage was up, 6% sequentially and represented 11% of sales. And finally, the industrial aerospace defense segment was virtually flat at 6% of revenue. Our top 10 customers represented 61% of sales for the quarter, with IBM being the only customer greater than 10% of sales.

Moving to profitability. The company posted GAAP net loss for the fourth quarter of $11.7 million, or $0.05 per share, compared to a GAAP net loss of $60.8 million or $0.27 per share for the same period last year. Restructuring and other charges in the quarter were $39 million, compared to $60 million in the same period last year. Included in this charge is a $15 million noncash writedown of capital assets. Adjusted net earnings for the quarter were $37.2 million or $0.16 per share. Compared to $6.5 million or $0.03 per share for the same period last year. The earnings improvement was driven by higher year over year operating margin, a 92% year over year improvement in Mexico's operating results, and the exiting of nonprofitable business.

Adjusted earnings per share were also impacted positively as a result of higher interest income on larger cash balances, offset by higher tax rate. Gross margin this quarter was 6% of revenue, compared to 3.9% for the same period in 2006, while SG&A expenses for the fourth quarter were $75.6 million or 3.4% of revenue. This resulted in operating margin for the quarter of 2.7%, a sequential improvement of 40 basis points. Finally, our pretax returns on invested capital calculated at EBET divided by net invested capital where net invested capital includes total assets less cash, accounts payable, accrued liability and income taxes payable was 11.9%. Throughout the year, our better operating margins combined with the excellent working capital performance drove return on capital improvements each quarter. We finished the year at a multiyear high with these results. We were approaching our ROIC target of 14% or greater, which we hope to achieve in the back half of 2008.

Mexico's operating losses in the fourth quarter were down to $4 million, representing a meaningful improvement from the 3rd quarter and down significantly from 21 million in the June quarter. Mexico benefited from some sequential revenue growth this quarter, and our teams continue to do a great job in driving efficiency. The site has been executing well all year, despite overall lower revenue, and the improving financial results reflect this.

Improvements in Europe also contributed to the company's better overall operating margins this quarter. Operating losses in Europe were $7 million, down $3 million from Q3, due primarily to seasonally higher revenues, as well as additional revenue from recently won programs. In terms of a restructuring update as of December 31st, we recorded charges of $24 million during the fourth quarter of 2007, and $37 million year-to-date. We have recorded termination costs from this program for approximately 8200 employees, primarily operations and plant employees. Approximately 7600 of these employees have been terminated as of December 31st, 2007, with the balance of the terminations from this program to occur by the end of 2008. With the operational and financial improvements we have realized through our global mega site strategy, we have determined that we will undertake additional restructuring actions to further take out less efficient capacity and reduce additional overhead expenses. We estimate that this will cost between 50 and $75 million, of which 90% will be cash, and we'll reduce our global head count by approximately 7%.

This expanded program should provide us additional operating margin leverage as revenue growth resumes and we anticipate this program will be completed mid-2009. Our teams did a tremendous job on cashflow and working capital management this quarter, and as a result our balance sheet finished 2007 in exceptional shape. As Craig noted, cash at quarter end was $1.1 billion, representing $164 million sequential increase. This increase was driven by all time highs in inventory turns, and a sequential reduction of $135 million dollars in inventory as well as continued growth in EBITDA. This improvement in inventory performance was the primary driver in lowering cash cycle by 7 days to 13 days compared to 20 days in the third quarter. During the quarter we sold approximately $225 million in accounts receivable, unchanged from September 30th.

Capital expenditures for the quarter were $15 million. And on the year-to-date basis, Cap Ex was $64 million. With the strong cash generation recovery in the second half of the year, 2007 was also the first full year of free cashflow since 2005. Rounding out the balance sheet, debt to capital at year end was 26%, and our credit facility of $300 million remains undrawn. Overall, our balance sheet is very strong, and our priority with this cash in 2008 will be to deploy the capital back into our business. By deploying this capital and sustainable profitable top line growth, we will drive operating margins higher by leveraging our leaner more efficient manufacturing footprint. Let me now move to our 1st quarter guidance.

We expect revenue to be in the range of $1.7 billion to $1.9 billion. And adjusted earnings per share will be in the range of $0.06 to $0.11. On the balance sheet side, we expect cash to be relatively flat to the Q4 level. We finished 2007 with very positive financial momentum and showed meaningful recovery in all of our key financial metrics. We believe we had made many of the structural improvements in 2007 that will allow us to make additional progress in 2008 on operating margins, inventory turns, return on invested capital and top line growth. I want to echo Craig's remarks on congratulating our employees for delivering such a swift recovery this year, and for their commitment to deliver additional improvements in 2008.

That concludes our remarks and Craig and I will now take your questions. Operator, we'll take our first question.

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (OPERATOR INSTRUCTIONS). Your first question comes from Brian White from Jefferies, please go ahead.

Good afternoon. I'm wondering if you could talk a little bit about the disengagements in 2007, what type of impact does that have on '08 compared to 2007 revenue?

Brian, I guess the lion's share of the disengagement impact is behind us, and we look at the impact sequentially going from -- I'll answer your question, going from Q4 into Q1, the impact is about $50 million. I would say the bulk of the impact is behind us.

Okay. But how much were you impacted in 2007 is the question.

Brian, we're not going to quantify that in total. I will say sequentially looking at our guidance, I would expect about a $50 million impact from Q4 to Q1.

Okay. And when we look at 2008, you expect improvement in your sales from 2007, sales were down 8%. Do you think the company can grow sales in 2008?

Yes, Brian, certainly with the proviso of what happens in the economy, I would say yes. We spent 2007 taking a hard look at our portfolio, and paring out business where we didn't think we could achieve the economic returns. You've seen the benefit of that on the bottom line. The lion's share of the impact is behind us, so we think that the impact of the wins in '07 should have us seeing some growth, but it will be modest.

Okay. And finally, Paul, could you give a little color consumer was much better than you anticipated, telecom was worse, maybe give some color on what happened there?

Overall we saw some strong demand on some of our key consumer customers, as you know, our consumer business is fairly concentrated in a couple of names and we saw some really strong demand particularly in the last month of the quarter.

Was there any product that was stronger than you thought?

No, I mean, again, our names are pretty concentrated, so we're on the game side as well as the flat panel side and it was pretty, actually interesting, it was pretty constant on both of those sides.

Great, thanks.

You're welcome.

Your next question comes from Amit Daryanani from RBC Capital Markets. Please go ahead.

Thanks. A question of restructuring charge for -- whenever you expect to undertake -- can you speak to the cash amount we expect to flow through and what kind of savings and when does it start to kick in again?

Overall, we'd expect the cashout impact -- the cash aspect to be about 90% of the charge. As far as the timing of those charges, we'd expect to see the majority of that be more back half oriented in '08. And as such, we typically see a lag of about a quarter from when we take the charge to when we start seeing some savings, so I think the bulk of that savings, you will see impact more toward late '08, beginning of '09.

Okay. And in terms of looking at the Q1 guidance and customer disengagement impact. Are any of these revenues getting taken out of Mexico or Europe, where you need the revenues the most, and what's the expectation for Mexico and Europe for Q1 and when do we see them breaking even down the road.

The first part of your question, there's some immaterial impact from the disengagements in Mexico. But very nominal. So that in respect of where it is, it's around the company as I said, Mexico, relatively small. We still expect -- I think we've talked about expecting Mexico as well as Europe to get into the break even zone by the middle of 2008, that continues to be our target. Again, subject to -- assuming here that economic conditions remain, that is still what we expect and are targeting to achieve.

All right. Great job on the quarter, guys.

Thank you.

Thank you. From your next question comes from Jim Suva from Citigroup. Please go ahead.

Thank you, and congratulations. A quick question on the restructuring. You talk about most of it being facility closures, could you talk about what your capacity utilization is now, and what you think it will be after that, and do you still have room to grow the business if you're making additional facility closures?

Jim, the utilization of the fourth quarter was over 60%, the highest utilization being in Asia, I'd say these are selective adjustments for the network. The operating performance, the improvements we were making, we still have capacity to grow the business as we look to the future.

And then as a quick follow-up. I know you mentioned customer disengagement down $50 million quarter over quarter from December to March. Can you just give us what that would have been year over year?

It would be more meaningful than that year over year. I think if you look at the year over year impact it would be in the 10% of revenue range on a quarterly basis.

Great. Thank you, and again, congratulations.

Your next question comes from Todd Coupland from CIBC, please go ahead.

Good evening, everyone. Just going back to Europe and Mexico, Paul, I think you had talked about it taking most of 2008 to bring Europe to break even, so are you saying that perhaps you're going to get to break even a little quicker than you thought?

Todd, I -- again, I think we're targeting our teams to get there, and to get there as quickly as possible. We are -- from what we see right now, I'm hopeful that we can get there slightly before the end of the year. But it will be in that Q3 time zone. Q3, Q4.

Okay. So are you saying that that's kind of been your goal all along?

Yeah, I mean, to state the obvious, like we heard driving the teams to get those things to break even now. So, yes.

Okay. Secondly, do you have a view on where you might exit '08 from an operating margin perspective? Will you hit your target or is it going to take longer than that?

We talk about the operating margin target being between 3 and 3.5%, we feel pretty confident we can get it there, -- I think the way we look at it, you look at revenues here, and the margin in Q4 at 2.7%. In my comments, I noted that both Mexico and Europe lost collectively $11 million. So, just getting those to break even is 50 basis points on where we are right now. So that would put us in the middle of that target zone. Now, obviously, revenue at $2.2 billion a quarter helped. So the key is here to -- as we expect revenues to come down seasonally in Q1 to start building back from there, and start to see the impact of some of the wins we've had in '07 and seasonal upticks in some of those core businesses, consumer and enterprise in particular.

Okay. Will you comment on what growth rate on the top line you need for all of '08 to get -- to stay in that range beyond bringing Mexico and Europe to break even?

Todd, I guess as I said, we commented earlier, we're not planning any significant growth for 2008, certainly mid single digits is probably what we would expect at best. So we're our focus here has been while in the past, we've tried to grow into the cost structure we've had. Our focus is to look, take a pretty hard look at the revenues we see and adjust the cost base accordingly, so we're not planning on any significant growth to happen, to drive that top line, as I said earlier, we think of it more on where we are on a quarterly basis, around this revenue levels, continuing to make progress, which we expect to make in both Mexico and Europe. We've been getting in the middle of that margin range, shouldn't be that difficult. Now, the key for us is, you know, Craig and I set an objective here, you can see we've made good progress in getting more variability in the costs, so being able to bring revenues down 19% sequentially at the mid point and have -- there's certainly a margin impact but it's not as significant as -- you've followed the company for quite a while, you would have seen much more significant impact notice past. The key is the revenue and the linearity of that revenue and how we can flex our cost structure, but we think overall we're seeing the benefits of the megasites as Craig discussed and we think that gives us an advantage being able to variablize the cost structure, and achieve those margins on a more steady-state basis, even as revenue flexes up and down.

Okay. That's great, Paul. Thanks a lot.

Your next question comes from Lou Miscioscia from Cowan.

Maybe you can comment deeper about the strategy on the consumer business, in the sense that a lot of folks have moved over more to the vertical approach as they got deeper into the consumer business and wondering if that's something you may have to do sometime in the future?

Lou, it's Craig Muhlhauser, good afternoon, the strategy here is around -- our ring strategy, so we have implemented a mega site strategy where we are working with our target supply base, our partner suppliers to move them to our rings around our plants and rings designate various lead times. We're maintaining a level of flexibility because every customer wants the flexibility to buy from the suppliers or the technologies that they need uniquely, so that's the strategy we're implementing, we're leveraging our mega sites, we're moving our supply base where lead times are no less than four weeks, we're integrating with our customer base to do design and develop work, to facilitate us helping them select the right suppliers, and then we're using that flexibility to give them much more freedom to chose what fits their particular requirement, rather than try to convince them that everything we make is something they should buy.

Okay, following up on a comment earlier, you all said you're adjusting your cost to match the revenues, which obviously is admirable. Can you maybe give us an idea as to how the pipeline looks? I know you obviously commented about you hope to get to a revenue standpoint? But is there a decent amount of business out there, and then just one other quick followup.

There's a significant number of opportunities, I think the smart companies are looking at return on invested capital and delivering on their commitments, return above their cost of capital. And that's our target. And we believe we're on track to do that. And the opportunities will feather in, and then with the solid financial base we have the ability to sustain consistent predictable earnings growth, which is what I think the market demands, the investment community wants, and what we want to deliver. As Paul mentioned, we've been on a mission to get to the target margins, to get to or return on capital that we've been targeting for many years here. And we're moving in the right direction, and then we're feathering a pipeline that will give us the right revenue growth as we look to the future. Our motto here is speed, flexibility and predictability and the consistency around delivering on financials. We're very confident that the operating model we're building offers flexibility, predictability, and financial returns that the industry has been looking for for a number of years.

So maybe more modest growth, but at better profit levels?

Absolutely.

Thank you.

Your next question comes from Kevin Kessel from Bear Stearns, please go ahead.

Thank you very much. I guess the question that I have is around both Mexico and Europe, and at this point it seems like a lot of solid progress has been made in both regions, but what -- in terms of the wins that you've had in 2007, how many of these were targeted for those sites? Is there anyway to quantify that or give us a sense?

I think we've mentioned on previous calls, we've had some good success in Europe. It's -- I mean, we really don't comment on what's targeted to specific sites, the message for Mexico and Europe is the same message that we've got for the company. Get profitable and get your returns at your base revenue levels that we're at today. Deliver the operating performance and sustain that by flawless execution with the new programs, I will say we do have a significant pipeline of new opportunities in Mexico that we're looking at early in the year, and we're optimistic on our chances there.

So Craig, that pipeline that you're referring to, a pipeline of opportunities, that it's possible to win, and if you were to book them, would they actually have an '08 impact or would it be '09?

I think we're talking the '09 impact.

And these aren't like follow-ups to what you do in Mexico, these are brand new?

In some cases they are, but they're larger share of what we've got. And in some cases, they're new programs.

I got it. In terms of the restructuring, that you announced today, where exactly -- where will you be targeting or what will you be targeting when you go about that restructuring?

Kevin, it's Paul. We won't be giving much color as we have in the mast until we've announced it to the impacted sites and folks in the company. Suffice it to say that our network within Asia continues to perform extremely well, while we're encourage with the progress we've made in Europe, in Mexico and in the Americas, it's still not where we need it to be. So our efforts are going to be focused around -- really taking a hard look at what remaining operations do we have in the network that we think we could get more leverage and better return by folding that revenue into some of our mega sites. In addition to that, looking the way we run the company, and it's a continuous journey on overhead and looking for ways to simplify, so you -- certainly will be looking at overall general overhead reductions and seeing where we have business and where we can earn a better return in our mega sites.

All right, Paul. I wanted to clarify, the comments you made about targeting break even and hoping to be able to achieve it in the second half of the year. Is that really predicated on the restructuring that was announced today or --

No, Kevin, I think I mentioned the restructuring actions in general are more back half oriented here, so we don't expect to see any significant savings from those restructurings until '09. And so it's -- it's just again based on the continued progress and efficiency improvements we're making in both Europe as well as in Mexico.

I got it. And lastly, one of your large competitors this week, made kind of a statement that they see a disconnect at this point between their customers and what the customers are saying, customer forecast as well -- and the economic headlines and I think Craig, you referenced that in your prepared remarks, and it almost sounds like you guys have the same sentiment, maybe you can just expand on that?

I think as I mentioned in the opening remarks, we haven't seen any abnormal indications of adverse economic conditions in our customer forecast. That's basically where we are today.

Thank you.

Thank you.

Your next question comes from Steven Fox from Merrill Lynch, please go ahead.

Hi, good afternoon, a couple things, first of all, once you've completed the restructuring, what percentage of your current assets would be reduced or -- if you look at equipment, I'm just trying to get a handle on the capacity reduction.

Steven, as I mentioned earlier, the bulk of that charge is cash charges, so largely people oriented, costs. So I would expect there to be a very immaterial impact to the overall asset base of the company.

Okay. And then secondly, in the inventory turns, can you talk about the improvement? How much of it was due to seasonality? Like if you were to normalize your seasonality, what do you think inventory turns would have looked like?

I think as Craig mentioned in his prepared remarks, when we look -- I'll answer it this way, when we look at Q1, we'd expect inventory turns to be in the zones of what we thought in the past, was as high as it was going to get. If your call, we talked about turns being 8, 8.5 as being our target. So when you look at Q4, certainly the big consumer flow-through helped. I would no attribute it entirely to, if we end up with 8, 8.5, versus where we ended at 9.7, which was obviously a very strong result. I wouldn't say the full turn of improvement -- the full turn is an impact. The revenue decline quarter to quarter, obviously has an influence there. Probably a couple points, but I think bottom line, our teams executed extremely well. The investments we've been making in our IT tools I'm happy to say are are paying off. And as Craig mentioned, the amount of flow through to the megasites is making a real difference.

Lastly on the charge, you've talked about opportunities on the top line but at the same time you are seeing an opportunity to cut heads here. It seems to me like it's somewhat of an admission that your growth in 2008 is going to be somewhat slower than maybe you would have thought three months ago? Can you comment on that specifically, and then if not, can you give us a sense of where you think top line growth is vis-a-vis the industry qualitatively.

I would say it's a different view from where we were three months ago, we're seeing a leverage in having more revenue flow through the diversified mega sites. Overall, as Craig mentioned, the company is in low 60s utilization rates, we see an opportunity to take some more capacity out which will overall increase the utilization of the company, and help us get above -- at or above the target margins we talked about, so I mentioned earlier, as far as '08 revenues concerned. Kind of unhinged that restructuring from that if we were growing at a faster rate than we expect.

It would likely not be in the sites that we're going to be targeting, it would be in our mega sites at the end of the day. This is more focused around looking long term. It's not a reaction to short term revenue factors, it's long term and us looking at where we think we can get the better leverage in the network and taking out some of the smaller operations as a result. And really, again, more strategic on hinging it on the revenue profile of the day.

Fair enough. But this is another restructuring charge in a series of them. It's kind of hard to figure where the end of this is.

Is there a question there?

Yeah, I'm wondering if this is the last restructuring charge or if we can expect this to continue into next year, 2009.

In the past, I'll never say this is the last restructuring, we think, as I said earlier when you look at what we have in the company and the key initiatives around Mexico and Europe and the improvements that we've made, that we we expect to make, that we'll get into the target margin zones that we discussed. We think that, overall, having more revenue and less sites is better overall for return point of view, better for shareholders and customers, if we see smaller sites, we see opportunity to drive more value for customers by putting them in the mega sites, that's what we'll do. The program we announced today is the program we see. If we saw more than that we would be talking about that. What we see today is what we've announced.

Okay, fair enough. Thanks for the color.

Your next question comes from William Stein from Credit Suisse, please go ahead.

Thank you guys, just a question about the Q1 guidance. First, did I hear you right when you said it embeds normal economic outlook? In other words, you're rolling up your current forecasts and accounting for what you would normally expect in the end market with your customers?

Yes.

Second I'm wondering what you can comment on which end markets we should expect some disengagements so we can model that properly?

To that $50 million I talked about, it's scattered around in a few of the segments. I would say it's pretty much an immaterial amount from two or three of those segments.

And then just finally, regarding the -- also the guidance, what visibility would you say you have today, maybe in terms of number of weeks or months in the customer orders and with regard to how quickly that could be -- could personally fall off if we do see the negative macrodata that's affecting the market right now, wind up impacting your business.

Well, from -- certainly the experience I've had here, I think you're talking probably a 3-month rise and the forecast is a function of the times, so -- , beyond 3 months, I think it gets into the area where there's less information to support the view.

Thank you.

Thank you.

Your next question comes from Sherri Scribner from Deutsche Bank. Please go ahead.

Thank you. You guys did a great job on free cashflow this year, I was wondering if you expect to be free cashflow positive in 2008 and if you plan to be positive in all four quarters?

Hi, Sherri, it's Paul, with regard to the first question, we do think we can generate more cash in 2008, we've had some very strong performance on inventory, we think we can continue with some improvement there. It will be harder to achieve given the strong performance we're at. That along with more overall EBITDA will help drive bottom line cash. As far as every quarter, as I mentioned earlier, expect Q1 to be relatively flat. So it will be -- from there on in, I'd expect to see it build each quarter from there. Somewhat dependent upon the revenue increases that we see and how hard they spike up in putting inventory in front of that revenue peak. But as I sit here today, I expect Q1 to be flat and for us to build from there.

It sounds like you expect to grow free cashflow in 2080 and would you expect it to grow in line with revenue?

Would I expect free cashflow to grow with revenue?

Yes.

I think we can do better than that, Sherri.

Great. Have you guys seen any impact from the snow in China?

No, not so far.

Okay. Thank you.

Thank you.

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

What are you going to do with the cash that's on your -- you have a lot of cash, a lot of debt, and you're paying a lot of interest. Do you have any plans on restructuring the balance sheet?

Our priority continues to be invest it back into the business. Craig mentioned we see a bit of activity in the pipeline, things that look interesting, our goal would be to prioritize it there. As far as that aside, where we would go, looking at the debt is an option, I will say that given the capital markets right now certainly that would have to be a decision that was a permanent one. Since it's our view that capital, once you take it out it may be difficult to get back. Our debt structure has calls coming up later in the year, as they come closer, we'll take a look at that. But right now, no specific plans.

In terms of -- Paul, I think you mentioned 10% of revenues is coming out from Q1, but the mid point of your guidance is much less than that year over year decline. Is that your current segments, showing strength or is that a new win?

That's the impact of the new wins year over year.

Okay. Just wanted to clarify that. In Q4, how much year over year did the customer disengagements affect things?

I don't have the specific number for you there.

Is it on the order of 10%, or more like 5%? I don't need the specific number.

Around 10% in Q1. From Q4 to Q1 is about a $50 million impact. I guess imagine mathematically you could work it backwards from there, I don't have anything more specific at this point.

If we look at your operating leverage in Q4, I mean, the revenues are very strong, but it didn't look like a lot of the increased revenues dropped to the bottom line. Especially if Mexico improved by $6 million sequentially or whatever it was. And you probably saw some improvements elsewhere, is that all mix?

Certainly there was a big mix impact so having stronger consumer overall lower margin profile. Q4 tends to be a quarter where you'll see increased SG&A expenses as well. Expect to see that drop down somewhat into the lower 70s in Q1. But generally, I'd say it's mix and just some of the timing on Q4 annual expenses.

Some of the new wins weren't done at aggressive pricing, which might expect to hit the numbers this year?

I think pricing in the space continues to be competitive. We're -- from my earlier comments about focusing on the bottom line, we're very disciplined about how we approach pricing, so we are pricing for -- to cover our costs to capital on a fully loaded basis and we won't deviate from that.

You're letting go 7,000 people. Is that a net number or a gross number, Paul?

I think it said an additional 7%. Are you talking about the new program?

Yeah, the new program, yes.

I think it said around 6% or 7%.

Sorry, I thought it was 7,000. That's net, or are you going to add -- in the past you've let go people and added them in other geographies. I'm trying to figure out is it net or gross?

That would be the gross number.

What would be the net number be?

You could probably knock a couple thousand off there.

So you are going to bring your capacity down by 3, 4%, that's what you're saying?

Yes, from a people point of view, absolutely.

After this is done, if demand rates remain stable are you talking about 65% capacity? That's my last question?

I'm not sure where the 55 comes --

65.

Forgive me. Yes, I mean, I think again, it depends where we are each revenue of quarter, so 65% in Q1 would be a stretch. But if you look at where we ended up in Q4, 63. Your statement would be correct.

All right. Thanks a lot.

Okay. Thank you.

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

Good afternoon. Question regarding your March quarter guidance. At midpoint, you are guiding sales down about 19% quarter over quarter, which is in line with the trend you experienced last year. So you -- March quarter of '07 you're consumer business was down 23% sequentially, and enterprise communications was down 7, data segments were down between 20 and 30%. Is it fair to say that compared to last year, you'll see a more pronounced seasonality in the consumer, but other segments will be down, but maybe not as much as last year?

Yes, it seems so, with consumers being a bigger piece of the overall revenue profile, I think that's absolutely correct.

So in consumer, we see about 30% decline and then say 10 to 15% drops in other segments?

Yes, I think it will be over 30% as a consumer you would expect it to be down in the 35 to 40% zone. As I mentioned earlier, our consumer business, very concentrated with a couple names in products that are very seasonal around Christmas, so Q1 really goes down from a demand point of view.

Okay, and then on the tax rate, are you still expecting 25%? I think on the last earnings call, we explained that a lot depends on the exchange rate?

I think 25% is what we would expect to see for 2008 at this point.

Okay. Thank you.

You're welcome.

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

Hi, Alex.

Good afternoon. I was just commenting on the statement you made earlier, that you expect mid single digit growth in 2008, but at some point later you said you expect good consistent -- you wanted to position the company for good consistent EPS growth going-forward. Could you resolve those? Is mid single digits what you're thinking of in terms of EPS or do you expect to get an improved margin on that kind of growth, and if so, how long -- how many years are we thinking of? Or is it just 2008 that you would expect growth to pick up after that, because the industry itself, the outsourcing volume grows significantly faster than that, so you would be losing share if you want to grow at mid single digits.

Alex, so first, just to talk about the top versus the bottom, so we do expect a pretty modest growth from a top line point of view in 2008. I think from a bottom line, the earnings growth on the earnings per share will be pretty sizable. So if you look at the mid point of our guidance range for Q1, which is around $0.08 or so. Versus what we did in the first quarter of '07, by definition of just the improvements we've made through the year, and flowing those through, I think you'll see a very significant earnings per share in growth. I think this year around -- looking where we are now, looking where we ended the year, it kind of in the $0.25 range, $0.27.

This really is a pickup in the margins.

Yes, absolutely, so --

It's kind of a one shot thing in a way.

I'm not sure how to interpret the one shot. As I said earlier, we're at 2.7%, just bringing Mexico and Europe to break even would take us to 3.2%, we expect to go beyond break even obviously, so we recognize that fundamentally, long term to grow earnings, you have to grow revenue.

That's what I'm talking about.

You understand that.

So what is your goal long term for revenue growth I guess is the real question.

Our aspirations are to grow faster than the industry. Obviously we want the financial strength in place to be able to do that on a sustainable basis, and when we get to the cost of capital, we get that mix so you see the transformation here, we're hitting the velocity on asset utilization, we're improving our operating margins, and we're going to earn the right to grow by delivering above our cost of capital.

Your strategy would be to configure yourself for more rapid growth after 2008. Is that the right way to say it?

That's our aspiration. As we've talked about a couple times on this call today, I think looking at '07 to '08, we've won our fair share of business, unfortunately, in some instances, you know, our call, in other instances, customers call, there's been some disengagement activity, bottom line, when we look at the revenue profile in '08, we expect modest growth.

Yes.

But clearly, as Craig mentioned, we believe we built competitive network that can offer value to customers, we're seeing it resonating with customers, so we would expect to be able to grow -- to outpace the industry but certainly no worse than the industry.

The customer disengagements, were they all voluntary on your part? Or were there any involuntary?

That's a mix of both, Alex.

All right. In looking at the involuntary ones, what were the reasons for it, and what have you done about it.

They tended to be issues around execution and the quality and operating performance of the company is operating at the highest levels in a number of years, so from a quality standpoint, delivery standpoint, performance standpoint we're operating at or above levels that we've achieved, we are now achieving.

You would expect the reasons for these disengagements have -- are being mitigated going away, and so you expect less of that in the future.

Yes, the execution issues around Mexico in 2006, tended to impact the number of customers. Those are behind us. The execution of Mexico was among the best in the company, and obviously the nature of what caused those disengagements is no longer the case.

Thank you.

You bet.

Operator, we'll take one more question, please.

Your next question comes from Shawn Harrison from Longbow Research. Please go ahead.

A quick clarification and a follow-up. On the restructuring, should the savings be equivalent to the cash restructuring cost, and the pay back period should be one-year? From the beginning or is it spanning multiple years?

So on balance, Shawn, we've in the past seen a 1-year pay back, I think this will be -- we'll see a similar experience, I characterize between 12 and 16 months pay back is what I currently would expect to see.

And then for 2008, if we could just maybe parse the revenue growth a little bit. Do you expect any end markets to be down year over year, and secondly, what markets would you expect to witness the greatest growth?

So overall, I think for us, in our portfolio Telecom has been an area that has been one -- the weakest. So I think if we were going to see one be down, that may be the one. As Craig mentioned earlier, I think it's important to come back to our visibility as far as looking far ahead, it's pretty limited. We feel pretty good about what we see for the current quarter, beyond that, a lot of volatility in those numbers.

Okay.

I would not pick on any particular segment per se, I would say for us, telecom would be the one that I would expect to be the overall weakest.

And that's tied to customer weakness or just the programs you're on? In terms of potential weakness?

Well, I'm not sure how to separate those two, the customers that we have, and the programs we have with those customers.

Okay. Maybe the better way to ask it, is it program specific or are your customers talking about weakness?

Again, I think echoing what Craig mentioned earlier, we're not hearing customers talk about any pronounced weakness, I think the telecom sector in general has been relatively weak for quite some time, we haven't heard any increased volume so to speak around that weakness, just overall, that's the space that continues from our point of view to be challenged.

Thanks a lot. And congrats on the quarter.

Thanks, Shawn.

There are no further questions at this time, please continue.

I'd like to just thank everybody for dialing in, and your continued support, and we look forward to our continued conversations, thank you very much.

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating, please disconnect your lines.