Celestica Inc (CLS) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Celestica first quarter results conference call.

At this time all participants are in a listen-only mode.

Following the presentation we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Thursday, April 24, 2008 at 8:00 a.m.

eastern time.

I will now turn the conference over to Paul Carpino, Vice President, investor relations.

Please go ahead, sir.

Great.

Thank you, Joanne.

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

On our call today will be Craig Muhlhauser, President and CEO, 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 call.

We know this is a very busy earnings day for all of you and we also have our annual shareholder meeting this morning at 10:00 a.m., so this call will last approximately 45 minutes.

We can be reached for follow-up questions after the call, as well.

There is also a webcast of our shareholder meeting that will start at approximately 10:10 and can be listened to at celestica.com, as well.

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 are welcome to get back in the queue after you ask your question.

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

We refer you to the risk factors and uncertainties discussed in the Company's various public filings, which contain and identify important factors that 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 cdar.com and sec.gov.

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

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

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

Thanks, Paul, and good morning, everyone.

Celestica announced strong first quarter results this morning and issued second quarter guidance showing continued strength.

On the top line, we were able to maintain flat revenue on a year-over-year basis, despite approximately $150 million of revenue disengagement activity between first quarter in 2007 and first quarter in 2008.

With operational execution continuing to improve throughout our global operating network and a customer-centric organization targeted to secure supply chain solutions that best fit our capabilities and strategic direction, we are winning new business and making good progress on the priority of rebuilding our revenue momentum for the Company profitably.

And working towards this priority we fundamentally believe you don't have to be the biggest company to succeed in this industry, but we do believe you do have to be the best.

Moving to operating margins, we are very pleased to report that we achieved 2.7% in the first quarter of 2008, our best Q1 operating margin since 2002.

Our margins were flat when compared to our seasonally-strongest Q4, despite almost $400 million lower revenue.

We are starting to see some very tangible benefits from the implementation of Celestica's operating system throughout our megasite network, which is clearly visible in our gross margin improvements, which increased by 30 basis points to 6.3%, despite the lower sequential revenue.

The Company continues to focus on streamlining and simplifying the organization and aggressive cost management, as demonstrated by the reduction in SG&A.

With this strong start to the year, we continue to believe that we're on track to achieve our midterm goals of 3% to 3.5% operating margin in the third or fourth quarter of this year.

After leading our major North American-listed EMS competitors last quarter in inventory turns, I'm extremely pleased to report we delivered 8.6 turns in the first quarter of this year.

This is the highest inventory performance we've ever delivered as a company in the first quarter.

With the seasonal decline in revenues in Q1, inventory turns tend to be the lowest during the first quarter and then ramp up each quarter from these levels.

We expect to follow a similar pattern this year, and given the strong starting point for inventory turns in Q1, we'll be looking to demonstrate continued improvement in working capital performance in 2008 and maintain our leadership position in the EMS industry.

Our return on invested capital, including intangibles, also remains strong at double-digit levels in the first quarter, as we generated an ROIC of 10.5%.

Our profitability, working capital, and customer satisfaction metrics continued to show progress in the first quarter.

We are delivering these improved metrics from a simplified, cost competitive, flexible global operating network, which gives us the opportunity to deliver additional improvements in the future.

In addition to these improving returns, the Company's balance sheet continues to be strong, with $1.15 billion in cash.

We have one of the best net cash positions among our North American peers, giving us significant financial strength and flexibility going forward.

Finally, I'd like to comment on our Mexico and European operations.

I am very pleased to say we achieved another major milestone with respect to Mexico this quarter, in that we have succeeded in turning the operation around from losing over $100 million during the past two years to break-even in the first quarter of 2008.

While the financial benefit is obvious, the significance is that this was achieved in such a short period of time with a dramatic improvement in customer satisfaction, and despite a 25% decline in revenue from a year ago at the site.

Today customer confidence continues to grow in Celestica Monterey, as evidenced by new customer program wins and our expanding business with our current customers at the site.

We anticipate delivering year-over-year top-line growth in 2008 in the site on a fundamentally sound operating platform, with an outstanding leadership team in place to drive further improvements in the future.

We're also pleased to report that Europe has shown significant improvement in the first quarter.

Operating losses in Europe were $3 million, representing a 70% improvement from the first quarter of 2007, despite 6% less revenue.

Overall Q1 was a solid quarter in all areas and we're very pleased with our progress.

However, we have additional opportunities to capture value and we are expecting to deliver continued improvement throughout 2008.

With the foundation of improving customer satisfaction and working capital and profitability metrics clearly on track for our Company, we will be increasing our efforts on profitable revenue growth opportunities that are aligned with our capabilities and the needs of our customers.

But to be very clear, delivering revenue growth without generating appropriate turns -- returns are not part of our strategy.

We spent the past year getting our act together and eliminating things that were destroying value in this Company; unprofitable customer relationships, product and service offerings that were not properly focused, and sites that were not performing up to our standards.

Company-wide we will continue to pursue opportunities for profitable growth and are making new investments in new capabilities to support new markets, new customers, and new program ramps.

As I mentioned, we're not going to be focused on getting big just to be big.

We're going to get focused on become the best in the world at whatever we choose to do, growing this Company profitably while driving our operational performance to be the highest levels in every aspect.

As we look forward to Q2, the demand environment appears to be unchanged, with some new programs beginning to ramp and our new investments to support these programs.

Over the past year we've spent a significant amount of time and effort to position this business well for 2008.

We are very encouraged with our progress and we remain vigilant in ensuring we can deliver additional improvement in the future.

Now, let me turn the call over to Paul Nicoletti.

Thanks, Craig, and good morning to everyone.

Revenue for the first quarter was $1.84 billion, unchanged from the first quarter last year.

As Craig noted, we replaced some programs associated with disengagement activity last year and backfilled them with new business generating better returns.

Looking at our revenues by end markets Enterprise Communications represented 27% of total sales, the Consumer segment was 22% of sales, the Server segment represented 18% of sales, Telecom was 15% of revenue, s Storage was 11%, and Industrial Aerospace Defense came in at 7% of revenue.

Each of the segments was generally in line with the seasonal trends of our first quarter.

Moving to our customer concentration, our top-ten customers represented 60% of sales for the quarter, our top five were 38% of sales, and no customers were greater than 10% of sales in the quarter.

Profitability continued to improve in the first quarter.

The Company posted GAAP profit for the first quarter of $29.8 million, or $0.13 per share, compared to a GAAP net loss of $34.3 million, or a loss of $0.15 per share for the same period last year.

These results included restructuring charges in the quarter of $3 million compared to $8 million for the same period last year.

Adjusted net earnings for the quarter were $35.4 million, or $0.15 per share, compared to an adjusted net loss of $9.1 million, or a loss of $0.04 per share for the same period last year.

Our quarter one results were $0.04 per share above the high end of our previous guidance.

The stronger earnings were driven by year-over-year improvements in gross margins and operating margins.

Additionally, our tax rate on adjusted net earnings has been reduced to 15% and we expect that 15% is a sustainable rate for adjusted net earnings for 2008.

As Craig highlighted, we also saw a significant $17 million improvement in operating results in Mexico on a year-over-year basis, as Mexico achieved break-even one quarter sooner than originally anticipated.

We are also pleased to report that Europe has shown significant improvement in the first quarter and anticipate Europe exiting the year with operating margins at break-even levels.

Gross margins this quarter was 6.3% of revenue compared to 4.3% for the same period in 2007.

This was the Company's highest quarterly gross margin since 2002, driven primarily by greater operating efficiency in all regions.

Adjusted earnings per share were also positively impacted by lower SG&A.

SG&A in the first quarter was $65.5 million, or 3.6%, compared to $73.8 million, or 4% last year.

The decrease in spending was due to lower compensation expense, as well as higher foreign exchange gains recorded in the quarter.

Finally, our net interest costs have decreased due to lower interest rates and higher interest income on larger cash balances.

Operating margin for the quarter was 2.7% compared to 0.3% in the first quarter of 2007.

The operating margin performance was significant in that it was achieved despite revenue being flat year over year.

Finally, our pretax returns on invested capital, calculated as EBET divided by average net invested capital, where net invested capital consists of total assets less cash, accounts payable, accrued liabilities and income taxes payables, was 10.5%.

This was also the best return on invested capital we've achieved in a first quarter since 2001.

We are very pleased with the progress made in all of these profitability metrics, and are targeting to make additional progress in each quarter throughout this year.

In terms of a restructuring update as of March 31, we recorded restructuring charges of $3 million during the first quarter.

As we announced last quarter, we anticipate completing 50 to 75 million restructuring actions by mid 2009.

We believe 90% of these charges will be cash and that this program should provide us additional operating margin leverage, as revenue growth resumes.

Working capital, cash flow, and balance sheet metrics also continued to perform well this quarter.

Cash flow from operations was $47 million and CapEx was $16 million.

We also continue to generate free cash flow this quarter, putting another $33 million on the balance sheet.

Cash cycle for the quarter was 13 days, unchanged from the fourth quarter, and 11 days better than the first quarter of last year.

Inventory turns remain very strong at 8.6 turns, despite the seasonally-lower revenue in the first quarter.

We feel our supply chain teams have implemented industry-leading processes to keep inventory turns at the top of our industry, and we anticipate continued improvement throughout the year.

During the quarter, we sold approximately $200 million in accounts receivable, down $25 million from the amount sold in fourth quarter.

In the past year, we have reduced the size of our AR program by $120 million.

We'll continue to look for ways to further optimize the capital structure and increase earnings throughout 2008.

Overall, our balance sheet is very strong and we enjoy one of the strongest net cash positions in our industry.

Our priority with our cash in 2008 will be to deploy the capital back into the business, to support our top-line growth with sustainable, profitable business.

Rounding out the balance sheet, our debt to capital was 26% and our credit facility of $300 million remains undrawn and is fully available.

In summary, our financial performance in the first quarter was stronger than anticipated and we believe this momentum will continue in 2008.

For our second quarter guidance, we expect revenue to be in the range of $1.8 billion to $2 billion and adjusted earnings per share will be in the range of $0.13 to $0.19.

At the midpoint of our revenue and EPS guidance, we would generate approximately 2.9% operating margins.

That concludes our remarks, and we'll be happy to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS) And your first question comes from Jim Suva, CitiGroup.

Please go ahead.

Good morning, everyone, this is Jason Gursky calling on behalf of Jim.

Congratulations on the good quarter.

Thanks, Jason.

Thanks, Jason.

Couple of quick questions.

You mentioned during the quarter on a year-on-year basis that there were $150 million worth of customer disengagements, so wondering if you could just give us a little bit of insight as to what you think the full-year 2008 versus 2007 customer disengagements will be to give us a little bit sense of how you're tracking on revenue growth for the year?

Sure.

Jason, we touched on this a little bit in our fourth quarter call.

It would be in the $700 million range on an annualized basis, full year.

Okay, so no change there.

No,

No.

Okay, and then at this point, what is the revenue gap that you need in Europe in order to get to break-even?

And given the environment in Europe, how realistic do you think it is to get to break-even, given that revenue gap?

Jason, I guess I'd start by saying that our operating teams are performing extremely well, so quite frankly, they're reducing costs at a pace that is quite -- is quite encouraging.

So I would say as we sit here today it's the amount of revenue that we feel we need to get is less than I would have said six months ago.

Overall, our revenues in Europe, as far as the Company are concerned, clearly much smaller than they used to be.

We're not talking about significant annualized revenue to get across a line.

In the past we've talked about annualized revenue about $200 million would do it, so that's the range of what we're talking about, $50 million a quarter there and abouts.

Okay.

And then lastly, you touched on potential uses of cash as being primarily used for redeployment into the business.

Can you just give us a little bit more clarity on exactly what those priorities are as you deploy them back into the business?

Is it a question of acquisitions or organic growth through building inventories, et cetera?

Jason, our focus is on whatever will drive value, so certainly -- as you know, our teams here have been focused on fixing what we have and as you can see, we've made a lot of progress there.

We have a very strong balance sheet, can give us a lot of flexibility to invest in organic growth, as well as if there's expansion of our service offering, that makes sense, that drive value for our customers, then obviously we'll look at that, as well.

Okay.

Thanks, guys.

Okay.

Thank you.

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

Please go ahead.

Good afternoon, gentlemen.

How are you doing this morning?

Good, thank you.

Hi, Paras.

I just wanted to know if the SG&A that's lower is sustainable?

Para, so as I mentioned, we did get some foreign exchange benefits in the quarter, which helped us a little bit.

We believe that the SG&A is in the range of $70 million, in the low 70s, so that's kind of where we see it.

Some quarters will be higher, some will be lower, but around $70 million a quarter is a good number, so think about it in that way.

I also noticed that depreciation was down sequentially.

Is that new number sustainable?

I assume that's all in the gross margins.

That is all in the gross margin, Paras, and there's nothing unfolding there, it's just how assets are depreciating so some assets have just reached the end of their life.

So that the new numbers, sort of mid-20s is what we should be budgeting for depreciation?

Yes, I think for the next few quarters, as we see growth opportunities and start to make some capital investments and obviously that will track with that.

Okay.

The other revenue side, Craig, you mentioned a smaller company, and I'm just wondering what you're seeing in terms of revenue visibility.

Are you seeing good visibility out there or is it still a challenging environment?

It's still a challenging environment, Paras.

I think what we do see is based on the dramatic improvement in our operating performance.

We are seeing a significant number of new opportunities, so we are very encouraged by the progress we're making.

Obviously the turbulence in the end markets is something we pay close attention to, but we're bullish that the model that we've got is a very, very competitive model and the opportunities we've got position us well for certainly 2008 and beyond.

Thank you.

And your next question comes from Amit Daryanani, RBC Capital Markets.

Please go ahead.

Hi, this is actually Ryan in for Amit.

Good morning.

Morning.

Guys, I guess could you give me a little bit of a sense for what restructuring charges looked like for Q2?

So Ryan, as I mentioned, we still expect to incur the $50 million to $70 million.

When we announce that program, we talked about that it will be more focused -- you see more of that flow into the second half of '08 and that remains unchanged, so I don't see -- I see some restructuring charges in the same zone of what we had in first quarter, probably picking up a few million.

But certainly the heavy lifting, so to speak, of that restructuring will be more back-half oriented.

Okay, that's helpful.

Then I guess in terms of your Q2 outlook, it looks like revenues are ticking up about 4% and then EPS is ticking up about $0.01.

Can you talk about your margin assumptions -- your incremental margin assumptions and what you're seeing from that standpoint?

Brian, I apologize, you broke up there.

Could you repeat your question?

Sure.

It looks like for the second quarter -- can you hear me better now?

Yes, thank you.

Looks like for the second quarter your revenues were ticking up about 4% sequentially and that EPS is ticking up about $0.01, can you talk a little bit about the margin environment right now and what you're baking in for the second quarter?

Ryan, when you talk about the margin environment, I'll start talking about overall pricing environment, I'd say that it's stable, but certainly we all know it's a very competitive one, so we haven't seen anyone appear to be taking any unreasonable positions, so the market remains competitive.

At the midpoint of our guidance range you can see that, as I mentioned, we expect to see continued margin expansion based on the good work that's happening in improving costs from the operating network, so, overall, our goals of getting to 3% and 3.5% in the near term are intact, we mentioned that in the call.

So overall certainly we're cautious given the end markets, but we think that we're well positioned to achieve that near-term goal here in the second half.

All right.

Can you give me any update on what you would think for CapEx and cash flow from operations for Q2?

So CapEx is in a range of between 1% and 1.5% of revenues and that's kind of how we see it through time.

I think when we look at cash for second quarter, overall it'll be relatively flat.

All right, that's all I had.

Thank you.

Thanks, Ryan.

And your next question comes from [Joe Watine] at Longbow Research.

Please go ahead.

Mr.

Joe Watine, please go ahead.

Hi, good morning.

Can you hear me now?

We can, good morning.

Okay, great.

I was just looking back at your -- at your end markets.

It looks to me that the Consumer end market for the first quarter may have trended a little bit higher than we were expecting.

I think there was a 22% sequential decline and on the last call we were expecting something a little bit bigger.

Can you just talk about what happened there, any surprises in that market?

Consumer was down 29% from the fourth quarter.

It's basically the seasonality associated with the second half skew in that business, and there were some small programs that we exited in the Consumer space, but by and large there was no spreads.

Okay, and then just going forward, any additional detail you could provide on end markets?

Any reason to expect, I guess, differences versus typical seasonal results in any markets, either positive or negative?

I think last year we spent quite a bit of time talking about Telecom.

The good news is in the first quarter Telecom demand was stronger than expected.

We're not sure if that's a trend yet.

I think in general you can assume -- we currently see end markets as stable at this point on average and obviously the opportunity here is to now start feathering in new programs and the new opportunities that are in front of us.

So that's -- that's sort of the general picture.

Okay, and then is the expectation for the full year of still in the mid single-digit sequential growth range?

Yes, Joe.

As I mentioned earlier, we're certainly -- visibility here continues to be limited as we -- right now we've seen no major pullbacks from any of our customers.

Certainly there's the regular pluses and minuses.

So visibility hasn't gotten any better, but I'd say we have not seen any signals that suggest that we're looking at any, any pullback, so I would expect to have us see the typical seasonal patterns in the segments that we have.

So, this quarter being a low point for Consumer, seeing some modest growth into second quarter, and then seeing some more significant pickups in the back half of the year.

And again, more typical patterns on the Enterprise side is right now what we'd expect to see.

All right.

Well, thank you.

Thank you.

Thank you.

And your next question comes from William Stein, Credit Suisse.

Please go ahead.

Thanks, good morning.

Offsetting that Telecom strength there seems to have been some weakness on the Server side, it came in slower growth sequentially -- or more -- down more sequentially than I had expected, anyway.

Was that something that you guys had anticipated or was it somewhat of a surprise?

If so, is it demand related or is this part of the disengagements we saw?

It was -- is certainly was a little bit softer.

The skew on the Server business is very back-end loaded and it was -- primarily the new programs that we got didn't ramp as fast as we would have liked, or we were led to believe and the back half of March we had some of the demand for the Servers slip into the second quarter.

But no -- nothing related to the disengagement activity.

Okay.

And regarding that in Mexico, do we see revenue grow sequentially there to help get to profitability?

No, we -- actually quarter on quarter, so the revenues were down 30% from where we expected -- well, not where we expected to be, but based on the fourth quarter, so it's pure productivity based on the cost performance of the changes we put in place and, again, the remix of the customer base in Mexico and now we're in a position to leverage those cost improvements and working capital improvements and dramatically continue to improve the profitability and obviously we're going to do it on the back of relatively-flat revenue.

And Will, if I could add to that, certainly we spent a lot of 2007 talking about disengagements and the impacts to the Company.

You're seeing a positive impact in that frankly, we were focused on disengaging in certain accounts where not only we were not making money, we were losing money, so you're seeing the benefit of that.

Okay, and just one more quick one, if I can.

Craig, you've talked in the past about earning the right to grow, expanding margins and therefore turns on invested capital, and once you've done that, you can focus on growth.

Do you feel that we've gotten there now and so we should look for the focus to transition to growth this quarter to next, or is it not -- do you not think about it that way?

Any comments around that would be helpful.

Will, I really appreciate you bringing that up.

I definitely feel we are now in the phase where we can talk about not only earning the right to grow, but building on the themes that we've put in place with earning the right to grow profitably.

So I do feel this is a real nexus for the Company and the good news is the operating performance is creating opportunities and the leverage we're getting from that and the megasite strategy is beginning to show the benefits that the Company's worked so hard to achieve.

So really encouraged that these calls going forward are going to be pretty exciting.

Very good, thank you.

Thank you very much.

And your next question comes from Sherri Scribner, Deutsche Bank.

Please go ahead.

Hi, thank you.

You guys had pretty operating margins this quarter and I think in the past you've talked about operating margins in the 3% to 3.5% range, do you expect that you would be able to get back to that and get to that 3% to 3.5% range this year?

What are your longer-term targets for being able to attain that?

Sherri, it's Paul.

As I mentioned earlier, at the midpoint of the range here for Q2, it implies a 2.9% operating margin.

Certainly if we are fortunate enough to get some revenue strength in the quarter, it's possible we would see us getting to the low end of that 3% to 3.5% range sooner.

Right now our plans -- we feel pretty confident about getting to the 3%, 3.5% in the second half of '08 and so based on the demand that we're seeing, assuming nothing falls apart from an end market here, that's kind of how we see it.

As far as moving forward beyond that, we are seeing some leverage in the operating model.

I think the margin profile will be somewhat dependent on the revenue mix and so certainly portions of the Consumer business have an overall lower margin profile, higher asset turnover, which gets us to the ROIC.

So I think -- our view is right now the model is the 3% to 3.5% range.

That's where we see it.

If mix changes beyond that we can see some changes to that, but I'd say we think our model is in that margin range right now.

Okay, great.

Thank you.

You're welcome.

And your next question comes from Louis Miscioscia, Cohen and Company.

Please go ahead.

Okay, thank you.

Just to stick on the margins for a second, when you said the second half, are you suggesting that both quarters in the second half will be in the 3% to 3.5% range, or are we suggesting that the combination of both quarters would be in that range?

So Lou, certainly we're driving to get to that 3% as quickly as possible and Craig and I have a ver -- a strong theme through the Company in that we don't back slide, so once we get to that 3%, certainly it's our goal to keep it there and grow beyond.

Okay.

And can you mention -- so you mentioned SG&A already, so looks like you're going to run at about $70 million, so looks like you had $5 million of benefits of currency in the quarter?

It was about $0.02 cents, yes.

Okay.

Can you mention -- your tax rate was lower than I thought, is that sustainable beyond '08 and just how did you get there?

How do we get there first first, it's essentially just earning profits in countries where we were generating losses previously, so we have significant tax losses in countries where we were losing money and therefore not setting up any additional recoveries.

Now that we've been turning those countries around, the math is such that the tax rate has come down.

Is it sustainable beyond '08, I believe that it is.

Okay, last question just on the top line.

As we look forward, should we see a normal seasonal kind of pattern to your numbers or do you have -- or could you mention, maybe, how much wins you're ramping up that could also add to that?

Well, I think in the -- this is Craig, Lewis.

I think in the 2008 time period, the assumptions around single-growth in the 4% to 5% for the Company, are the right assumptions.

I think the encouraging thing is as we ramp the new programs for the balance of this year, the objective that we set for the first quarter this year is to show flat year-on-year improvement and a dramatic improvement in profitability and I think this is where we build from here with the Company.

Obviously we're not guiding out to '09, but the trends would continue to be -- as Paul said, we have a theme in the Company.

We don't back slide year on year improvement and it's not the amount of growth, it's the amount of profitability we deliver from the growth.

So the model will be working, but it will be a very disciplined approach to building stronger operating margins, more profitability, better working capital performance on the -- on the back of continued improvement in our revenue growth.

But it will be a more gradual rather than a schizophrenic kind of growth here.

Okay, so we should just see 4.5% revenue growth for 2008 over '07?

Yes, in that range.

Okay.

Okay, thank you.

Thank you very much.

Thank you.

And your next question comes from Yuri Krapivin, Lehman Brothers.

Please go ahead.

Good morning.

You mentioned new business wins several times on this call and I'm just wondering, if you look at your backlog of new wins this year over last year, what's the rate of change?

Is your backlog up to support this 4%, 5% sales growth this year?

Yes, our backlog is in line, our book and bill business that we're booking and can bill within this year is improving and we believe that the trend that we've got and the number of new opportunities that are coming available to us because of our execution is continuing to build, so the short answer is yes in all three respects.

Okay, great.

And then with respect to your Industrial, Aerospace and Defense sector where you had some customer disengagements, on a year-over-year basis that segment is still down somewhere between 10% and 15%, I believe, at what point are you going to lapse these negative comps so that this particular segment turns of flat year over year or starts growing again?

Hey, Yuri, it's Paul.

So year over year that segment in dollar terms is essentially flat.

I think we had 7% of revenue, 8% last year.

So as mentioned, that was a segment where we had some disengagement activity.

I'd characterize that as being pretty much behind us now in that segment so that where we are right now is the floor and I expect to see it grow from this level going forward.

Okay, thank you.

I'm sorry, Yuri.

That's an area that I would say that does not have -- the programs are generally smaller, so while we expect growth, in magnitude terms it'll be tempered in comparison to the rest of -- to the other segments.

Okay, great.

Thank you.

Thank you.

Your text question comes from Todd Coupland, CIBC World Markets.

Please go ahead.

Yes, good morning, everyone.

Hi, Todd.

I just wanted to talk a little bit about the third quarter.

You typically see a seasonal pickup largely driven by your Consumer business and I suppose that's maybe the greatest area of risk in economic terms.

I was just wondering if you could provide some color on the leverage into Q3 and if you have any visibility, talk about that as well?

As I mentioned, and certainly you know, Todd, the visibility we get for at least two quarters out is certainly something we've got tempered today.

We don't see any fundamentals, at least at this point, that would give us cause for concern that the programs we're involved with that offer the opportunity for the revenue growth in the third and fourth quarter have any material changes from what we've seen in the past at this point.

Okay, great.

Thanks a lot.

Thanks, Todd.

And your next question comes from Paras Bhargava of BMO Capital Markets.

Please go ahead.

Got back in the line.

A question on the real estate have you in Toronto.

I know you've been looking at and commented on maybe monetizing that at some point.

Maybe you could just give us some color on what you're thinking?

And then as a follow-up to that, in terms of the amount of cash you have on the balance sheet, how much do you really need to operate the business for a single-digit growth environment that you're talking about?

Sure, Paras.

So first on the real estate question, we have been looking at different options through 2007.

As you would expect, the credit markets certainly have not worked with us, with what we've been looking at.

Our view is that piece of property is something that has significant long-term value.

Certainly with the balance sheet the Company has we're under no rush to look to monetize that.

So we'll continue to monitor the market and if the right opportunity comes forward, then we'll consider that.

As far as the amount of cash that the Company needs, certainly there's different cash requirements in different countries and month to month, as we know here, that the revenue month to month is not linear, which does create some choppiness on the working capital side.

I'd say that you probably need in the $500 million to $600 million range generally to run the company.

That's probably the -- for the size of the Company and where it is today.

As the Company grows that number may change, but that's probably the neighborhood of what it is.

So then why not -- why not use the cash to buy back shares or deploy it in another way, if you've got so much excess cash?

So, Paras, as we said, certainly our goal is to deploy it back in the business and generate more return.

As Craig mentioned, our performance with our customers is creating new opportunities for us.

We see some pretty interesting things and that's where we're going to focus our cash.

If there are ways to further optimize the capital structure, we'll have a look at those.

Certainly I'm cognizant of -- in this credit market, if we were to do something as far as -- such as reducing debt, that that would -- I view it as kind of a permanent move, given that once you give that up, you most likely won't get it back.

So we're moving carefully.

I'd say right now we're consciously carrying a little bit of that -- deciding to carry the spread as the business grows and as we still have some cash needs in front of us as far as restructuring and as I mentioned, some of the investments in the growth that we see.

Would it be fair to say that it reflects a certain amount of caution in terms of where you are in the recovery.

You've put up good numbers, you've guided to good number, but you want to see a little more and maybe a signal that you're very comfortable with what's going on would be [that you really need to buy back the debt], because you're still -- your net interest expense is still relatively high.

So, Paras, as you know we've done both in the past, and as you also know we've consistently maintained a very conservative position on the balance sheet, so we've made some good progress here in the last couple of quarters.

We believe we can make more.

As I mentioned, with some of the opportunities we see in front of us, we're taking a more cautious approach with the cash.

As the Company continues to progress, as I said, if there are ways to further optimize the capital structure, then that's what we'll do.

All right, thanks a lot for your answers.

Thanks, Paras.

Your next question comes from Louis Miscioscia, Cohen and Company.

Please go ahead.

Yes, maybe if you could talk about two things as we go forward.

One is the issue of ramp costs.

It seems that often in the EMS space, as new business comes online we get on the call and we hear maybe margins being a little bit softer because a new big customer's ramped, and with that, how much business are you ramping up, or is -- very often you all give us a number in the whatever hundred million dollars range?

So, Lou, I guess just on your first question on ramp costs, ramp costs are just the costs of doing business and in the past, many folks have gotten on the line to talk about ramp costs being as issue as to why margins weren't achieved to expectation.

That's not something you're going to hear from us.

You're just going to hear us guide margins along consistent with what we seel and that may have some ramp costs in it and that's the way we look at it.

So it's not an excuse,, it's just part of the business.

As far as the amount of revenue ramps that we're seeing, at the midpoint of our guidance it's relatively modest.

Revenue growth in second quarter, as Craig mentioned, we see opportunities in the back half, but visibility continues to be limited, so we're not giving guidance for the second half right now, but as I said, right now in second quarter, the overall revenue growth is relatively modest.

Okay.

When -- Craig had mentioned the 4% to 5% revenue growth for the full year, is most of that the Consumer business reramping up in normal seasonality, or does that also imply a significant num -- or material number of wins in there?

It'll be a combination of both of those factors, Louis.

Obviously the opportunity now is to continue to build solid new win performance on the back of our operating performance and the combination of the business we have and the business we've won and the ramps that are involved in the latter half of the year are the 4% to 5% outlook and then, obviously, we're working to improve '09.

Are they about even?

It's difficult for me to say at this point.

I don't have those numbers.

Okay.

Final follow-up question would be on the Consumer space.

It seems that the Consumer space has really been problematic for some providers in this space and can you just mention if you're sticking with not having vertical components?

Are you thinking about doing vertical components?

And do you think that at a lower margin structure, the Consumers are still getting your return on invested capital that you need to have to hit your numbers?

Well, we're very focused on the segments where we offer a significant advantage, and obviously in those segments, our business model, which is a megasite strategy, where we lever -- we tend to leverage more of the technical knowledge in our ring strategy around colocational with suppliers, so we're optimistic for the markets we target and the customers we serve that our model is absolutely the right model.

We're not planning to get vertically integrated here.

We don't look at the mobile phone as something that's strategic to us and for handsets, and obviously the real opportunity for us is the high technology complex products where end-to-end solutions are what the customers are driving.

Okay, thank you.

We're comfortable with our model.

Thank you very much.

Thanks, Lou.

And your next question comes from Celeste Santangelo, Merrill Lynch.

Please go ahead.

Good morning.

Morning.

Just to get back to the top line question, could you be a little more specific, especially in -- I understand the new program ramps will happen progressively throughout the year, but can you talk about Q1 to Q2, could you quantify how much -- how much of the new program were in Q1 and then what you expect in Q2?

So Celeste, as we mentioned earlier -- I'll start with Q1-- revenues year to year were predominantly pretty much flat, but on the back of that, underneath the covers, there was about $150 million of revenue impacts from disengagements, so obviously there was $150 million of new programs that feathered in.

As I mentioned earlier, we're guiding pretty modest growth at the midpoint from Q1 to Q2, so I would not characterize that there's any big pickup in new program revenues from Q1 to Q2.

There is some, but consider it about an equal split between just organic growth on the base and some new programs starting up.

Okay, great.

And then could you just update us on what markets these programs are coming from?

We're seeing program wins across each of our segments, Celeste.

So as Craig mentioned, that doesn't imply that we're chasing everything in each segment, but where our model works we've seen some good traction across each of those segments.

Great.

Thank you.

You're welcome.

Joanne, could we take our last question, please?

We don't have any questions right now.

Great.

Did you want me to repoll for one more question, or that's it?

No, that's fine, Joanne.

Okay.

So I'd like to thank everybody for their interest and support and obviously we appreciate the continued involvement and communication.

The team will be available today to answer any additional questions you may have, so thanks for calling in, and thanks for your support.

Thank you.

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

Thank you for participating.

Please disconnect your lines.