Celestica Inc (CLS) 2008 Q3 法說會逐字稿

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

Welcome to the Celestica third quarter results conference call.

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

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

Instructions will be provided at that time for the queue up for questions.

(OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Thursday, October 23, 2008 at 4:30 eastern time.

I will now turn the conference over to Mr.

Paul Carpino, Vice President of Investor Relations.

Please go ahead.

Thank you, Eric.

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

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

Craig and Paul will provide some brief comments on the quarter and then we'll open up the call for Q&A.

Copies of the supporting slides from this webcast can be viewed at Celestica.com during the conference call.

This call will last approximately 45 minutes, but we can be reached for follow-up questions after the call 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 would like to remind everyone that during this call we will make forward-looking statements related to our future growth, trends in our industry and our financial 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 to you to the risk factors and uncertainties discussed in the Company's various public filings which contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

These filings include our Form 20F and subsequent reports on Form 6K filed with the Securities and Exchange Commission, which can be accessed at 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 afternoon, everyone.

In an environment of economic uncertainty, Celestica had a very strong results in the third quarter.

On the top line, revenue came in slightly above the mid-point of our guidance, driven primarily by our consumer segment, which benefited from a seasonally strong quarter as well as additional revenue from ramping new programs.

Our industrial aerospace and defense segment also provided double digit sequential and year-over-year revenue growth as established customer relationships continued to expand and new customers begin to ramp.

Our focus on diversifying our end markets, strengthening our customer base and improving our operating performance have been the cornerstones of the Company's improved results.

Three years ago we had very little revenue in either of these segments and our other category which represented all revenue outside of our communications and IT infrastructure segments, represented only 21% of our business.

Today our consumer and industrial aerospace and defense end market segments now represent 36% of our business.

In order to further diversify into these end markets and ensure we could participate on a sustainable level, we have built our engineering and supply chain capabilities and established a robust global footprint to support the unique needs of these markets.

To further strengthen our position for future growth and end market diversification, we've invested in our operating network.

We begin to focus and discipline our approach to increasing our market share in these segments and the steady ramping of current and new customer programs.

Our increasing and overall profitability during this growth is a proof point that our strategy of focusing on key industries, target customers, and operational excellence is delivering consistent sustainable results.

Profitability improved this quarter as evidenced by our gross margins which climbed to 7.4%, our strongest performance since 1999.

This was achieved as the Company continued to deliver strong operational performance and improvements throughout our global network in the areas of quality, cycle time reduction, delivery, and cost productivity.

Operating margins were 3.2%.

This represented the second consecutive quarter with operating margins within our 3% to 3.5% near term target range.

This is also achieved despite SG&A being $15 million higher on a sequential basis due to unprecedented currency fluctuations during the quarter, which Paul will take you through in more detail.

Inventory turns were 9.1 times, another solid performance, which also included the impact of ramping several new programs in the quarter.

The combination of these solid inventory turns and better operating margins, I'm very pleased to report that our return on invested capital including intangibles was 13.9% as compared to 11.8% in the second quarter and 9.1% in the third quarter of last year.

At this level of return, the Company is now generating a return in excess of its weighted excess cost of capital.

This achievement meets one of our key mid-term financial targets that we set at the beginning of our transformation in January of 2007, and represents the first time the Company has generated this level of returns since 2000.

This result is also confirmation that our strategy of focusing the Company's resources on working capital and operational efficiency at every level of the supply chain, not only provides customers with the lowest total cost of ownership for their products, but also generates improving returns for our shareholders.

We have longer term goals to generate higher returns, but reaching this mid-term target demonstrates that we can set our sights for higher returns over time.

While the quarter was very strong, our journey has only just begun and we now turn our attention of all of Celestica's business leaders to understanding how the current economic crisis will impact our business and how we will capitalize on the opportunities that lie ahead.

We are operating in unprecedented times and today's economic financial crisis is clearly something not seen in decades, if ever, and the full impact of this situation is still unclear.

In our outlook for the coming quarter, some of our customers have reduced demand, delayed new program introductions, or expressed a more cautionary tone and this is reflected in our guidance.

Although these are volatile times, we recognize that the most significant changes in marketshare tend to change hands during economic downturns.

With our strong operating performance, our cash position, and our strong balance sheet, we are working aggressively with customers to offer them unique solutions and to capture these opportunities created by this uncertainty and the liquidity crisis.

In terms of new business wins, Q3 was our strongest quarter this year for the Company with key wins coming in consumer, industrial, and the IT enterprise space.

We also are securing new business and ramping new programs with new customers in key growth industries such as healthcare and alternative energy.

These customers are looking to take advantage of our strong technical capabilities, our global operating performance, and to expand their outsourcing activities to capitalize on their market opportunities and to meet their competitive challenges.

In this environment our traditional OEMs are also looking for broader solutions to reduce costs, increase speed, flexibility, and time to market.

This includes more solutions that encompass a full product life cycle of activities that span from design engagements right through to the after market support.

These challenging economic times will drive major companies to look for innovative solutions and strong financial partners that have the ability to offer breakthroughs in quality, time to market, cost and increased asset velocity.

Celestica has now demonstrated a track record that I believe makes us the best choice for taking on the most technically demanding challenges and delivering in these tough times.

Today our clear imperative is to capitalize and execute on the new opportunities for future growth and profitability.

Continue to build on the improvements we've made at Celestica thus far, and to prioritize the Company to meet the investment challenges that we have in this current market environment.

On the financial side, Celestica is very strong.

The cash position for the Company is in excess of $1.26 billion and we have the highest net cash position among the North American EMS providers.

Our net cash position is a positive $500 million compared to a negative net cash position for most of our North American peers.

We have built this balance sheet on a steady track record of generating free cash flow.

After generating free cash flow of $307 million in 2007, we have generated an additional $144 million in free cash flow in the first nine months of 2008 and expect to generate additional free cash flow in the fourth quarter.

Financial strength is an imperative in this environment and it's clearly a strong attribute that Celestica has the ability to invest in our existing customers and new customers during these challenging economic times.

Today's global business environment is more complex and competitive than ever, but also filled with many opportunities.

We're confident that Celestica continues to be very well-positioned with our customers, and are very confident we will have the ability to leverage our financial strength and our global capabilities to capitalize on the opportunities in the market today.

That concludes my remarks.

So let me now turn the call over to Paul Nicoletti.

Thanks, Craig and good afternoon to everyone.

Revenue for the third quarter was $2.03 billion, up 8% sequentially from the second quarter and down 2% from the third quarter of last year.

The strong sequential growth was driven by both new program wins and seasonal strength in our consumer business; and as Craig noted growing programs in our industrial defense aerospace segment.

Looking at our revenues by end markets: our consumer segment represented 28% of our business; enterprise communications represented 25% of total sales; the service segment represented 15%; telecom was 14%; storage was 10%; and finally industrial, aerospace and defense came in at 8% of sales.

Five of our six segments were flat or showed some sequential growth while the server segment declined.

Moving to our customer concentration, our top ten customers represented 62% of sales for the quarter.

Our top five were 38% of sales and no customers were greater than 10% of sales in the quarter.

GAAP net earnings for the third quarter were $32 million or $0.14 per share compared to GAAP net earnings of $51.5 million or $0.22 per share for the same period last year.

GAAP earnings in the third quarter of 2008 included restructuring charges of approximately $17 million compared to $3 million for the same quarter last year.

Year to year GAAP earnings were also impacted by a favorable tax recovery achieved in 2007 and not repeated in 2008.

Adjusted net earnings for the quarter were $54.3 million or $0.24 per share compared to adjusted net earnings of $29.3 million or $0.13 per share for the same period last year.

Stronger earnings were driven primarily by year-over-year improvements in our Mexican and European operations.

As Craig noted, all major regions in the Company were breakeven or better in the third quarter as previously targeted, and we expect that to continue into the fourth quarter.

Adjusted net earnings also benefited from a lower tax rate and we now expect our adjusted tax rate for 2008 to be 10% compared to our previous rate of 15%.

Gross margins this quarter were at a nine year high of 7.4% compared to 5.9% for the same period in 2007.

This increase was primarily due to operating improvements in Mexico and Europe as well as continued benefit from cost reductions, restructuring actions, and the impact of exiting unprofitable accounts and overall the streamlining and simplifying of processes throughout the Company.

SG&A in the third quarter, excluding option expenses, was $85.3 million, or 4.2% of revenue.

The volatility and exchange rates for certain foreign currencies, particularly in the month of September, resulted in foreign exchange losses of $12 million for the quarter, more than giving back the $8 million of gains we experienced in the first half of 2008.

Most of the foreign exchange losses were unrealized and resulted from the translation of foreign currency denominated assets and liabilities to U.S.

dollars at September 30, 2008.

Approximately one half of these losses resulted from the precipitous evaluation of the Brazilian real, which fell 18% compared to the U.S.

dollar in the month of September alone.

This occurred at the same time that revenue was growing in the region.

Although the bulk of our local currency costs are hedged, the swing in the Brazilian real was well in excess of any volatility we have experienced in that region over the past several years.

Despite the impact of higher SG&A, operating margins came in at 3.2%.

Excluding the impact of foreign currency losses this quarter, SG&A would have been in our more typical range of between 70 and $75 million.

In terms of a restructuring update, we recorded charges of $17 million in the third quarter.

Year-to-date we've recorded $24 million of the anticipated 50 to $75 million restructuring charges that we had announced at the beginning of this year and we expect to complete this restructuring program during the second half of 2009.

Moving to working capital and the balance sheet.

Celestica is delivering excellent results and enjoys one of the strongest financial positions in the industry.

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

CapEx in the quarter was $31 million and free cash flow was $57 million.

The cash cycle for the quarter was 11 days, a two day improvement from the second quarter, primarily on the back of inventory days declining to 40 days compared to 42 days in the second quarter.

During the quarter, we further reduced the use of our AR sale program to $75 million, representing an additional $50 million reduction from the second quarter.

This is the lowest level this program has been since the program started in 2001.

A reduction in usage of this program reflects the Company's ability to self-fund its working capital, our consistency in generating free cash flow, and the overall strength of our balance sheet.

During the quarter, we extended the maturity date of the program to the fourth quarter 2009 on similar terms.

While we do not foresee utilizing this liquidity given our balance sheet strength, the program is committed and is available to us if we chose to use it.

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

And as a reminder, the Company has no debt maturities until the middle of 2011.

Overall, our balance sheet is in exceptional shape and gives us the opportunity to deal comfortably with a weaker revenue environment and to invest in future growth opportunities.

Looking ahead, visibility is low and forecasting is a challenge.

As a result, we are being prudent in our outlook for the December quarter.

We are providing a wide range for our guidance targeting revenue of between $1.75 billion to $2 billion and adjusted net earnings per share between $0.16 and $0.24 per share.

On the top line, we anticipate our communications and IT infrastructure business in aggregate to show declines in the fourth quarter with our other segments being relatively flat reflecting this lower growth environment.

At the midpoint of our revenue and EPS guidance, the implied operating margin is 3.2%, which is flat to the third quarter's operating margin levels.

Despite an approximate $150 million sequential decline in revenue from Q4 to the midpoint of the Q4 guidance.

We also expect the balance sheet to continue to strengthen as we generate additional free cash flow, further reduce the size our AR program, and maintain strong inventory performance.

Although we are seeing some impact to our top line in this environment, our efforts on driving waste and inefficiency out of the business is paying off.

We believe we can hold profitability levels, maintain returns, and generate additional free cash flow despite the challenging revenue environment.

That concludes our remarks and I will now ask the operator to start the question and answer session.

Thank you.

(Operator Instructions).

Your first question comes from Amit Daryanani from RBC Capital Markets.

Please go ahead.

Thanks, good afternoon, guys.

Just a question looking at your guidance, Paul, I think you talked about you're expecting Comm/IT to be down a little sequentially and the other segments to be flat.

To the consumer part, why do you expect that to be flat other than consumer ramps that were offset and market softness, or do you think the core markets will be flat as well?

Amit, just to clarify you question, are you asking as to why I expect to see consumer to be relative flat?

Yes.

Generally if you look at the composition of our consumer business, Amit, you see some customers who the peak really happens in Q3.

And as Q4 unfolds particularly toward the middle November, the channels are full and revenue falls off for the quarter.

So just given the mix of what we have, we generally think consumer will overall be flat.

So some customers in consumer will be down from Q3 levels, other customers will be up.

Overall, relatively flat.

I guess you do not see any incremental order cuts as signs of essentially that business potentially being down sequentially in December this time around, I take it?

Well, Amit, as you see, we've widened our range this quarter and we think we're being prudent to state the obvious.

The visibility is relatively low, I think more than usual.

I think of note, particularly some of our consumer customers I think the question mark will be more of a first quarter one as essentially the channels are being filled, and if there are sales issues, I think that will reflect itself more in the first quarter.

So overall as I said, we've given a pretty wide range and we think we've captured the volatility that we're seeing right now.

Got it and then just my follow-up would be, you guys have done a really good job on cash generation.

I think both you and Craig talked about how well that's going.

With $500 million in net cash at this point and given where your stock is trading, could you talk about how do you look at all of the net cash you have in terms of debt buyback or share repurchase or issuing a dividend deal potentially?

So, Amit, first, just as a reminder per the terms of our notes we are subject to restrictions with regards to the amount of stock that we could buy back or any dividends.

And that's really as a result of the significant GAAP losses that we incurred early on several years ago.

So, our basket is a $50 million basket in regards to those two categories.

We've talked on this call about looking at debt buyback in the past and I would say it was a conscience decision on our part, given the volatility in the debt markets that we would hang onto that cash.

And quite frankly, we think that this is going to be an opportunity-rich environment for companies who have cash and be able to capitalize on that.

And so, our perspective was that given that we recognize if you take the debt out you're likely not going to get it back, we consciously have held onto it.

Now as the market unfolds, we're obviously generating some pretty solid cash flow here every quarter.

If we do see a window to opportunistically take some debt down, we will.

And you have been seeing us manage it in a fairly seamless way through the reduction of our AR program, and as I said, you can expect to see us reduce that even further.

Fair enough, thanks a lot and congratulations on a good quarter.

Thank you very much.

Thank you, Amit.

Your next question comes from Brian White from Collins Stewart.

Please go ahead.

I'm wondering if you could talk a little bit about some of the trends you saw in September, linearity of the month and what you saw entering October?

In September--this is Craig Muhlhauser.

In September, obviously it's the third month of the quarter.

What we're seeing is--at least in the case of our third quarter, it was demand stayed relatively constant.

A few surprises, I think, but the trends we're seeing are really around the mix change within the month.

Roughly 46% of our volume shipped in the month.

So the benefits of our supply chain strategy gives us, I think, added flexibility now to meet those short-term requirements.

In October, we're--October is within the guidance we've given for the quarter.

So overall we've seen ups and downs, we've seen a cautious tone from many of our customers that's reflected in both the range we've set the fourth quarter as well as the overall mid-point.

So, obviously, as Paul mentioned, the visibility is weak, but we think we have got the flexibility and we're showing the ability to generate improved returns every quarter.

So the way we're managing today allows us to deal with this environment.

No material changes, ups and downs but on an overall basis slightly down from where we had hoped to be but nonetheless, continuing to maintain flat margins.

What is the outsourcing pipeline look like right now?

As things kind of soften--?

I think in terms of the opportunities, actually, our funnel of new business opportunities has strengthened quite significantly in the third quarter.

So we're optimistic.

Obviously as Paul mentioned, our cash position gives us a unique advantage where we're able to make investments in selected opportunities.

Our third quarter was the strongest in new bookings quarter we've had in a full year.

We're up on the funnel of opportunities we've got in the Company today.

So we're feeling--it's going to be tough with the base business, but obviously with these tough times come opportunities.

So we're taking an approach that we've worked hard to get to this position and we're going to work hard to capitalize on the opportunity.

Okay, thank you.

Thank you.

Your next question comes from Jim Suva from Citi.

Please go ahead.

Thanks very much.

In the past you've talked about earning the right of opportunity to now grow the business, but in the prepared remarks you didn't talk a lot about growth is that just because the overall environment has become deteriorated so much?

And as we look at 2009, do you actually think Celestica could grow the year, or is it just the economic environment too challenging?

And specifically for the March quarter, when consumer [activity] typically seasonally declines, can you give us a little bit of parameters of how we should think about 2009 as well as the March?

Jim, it's Paul.

I mean, I think to state the obvious, we're not going to give guidance here today on 2009.

I think as Craig mentioned, we are booking new business, third quarter was a very good quarter for us.

The question mark is obviously around the base and so I commented in my formal remarks around some of the IT enterprise space which for us you would have expected to see a 10% seasonal up in fourth quarter from third.

We're seeing them come down.

The point there is we're not sure what normal means anymore.

Clearly when we look at our revenue numbers, our objective would be to grow from where we're in '07 but as I said earlier and you're aware, I think visibility is certainly the lowest I've ever seen it.

And so the ability to forecast is pretty low.

Our bias is to plan that revenue will be slightly lower than let's say what our rollups are and to set the cost structure accordingly.

And then we'll chase revenue there; we'll put some structure back in.

But we're taking a pretty cautious tone is the way I would characterize it.

Okay, and then as a follow-up, can you talk a little bit about your tax rate?

If I look at this quarter it looks like your tax rate was about 2% which helped EPS by about $0.02.

And you're guiding to I believe it is 10%.

What's the disconnect there?

And what allowed you to beat your taxes by $0.02?

Was that just conservative guiding or something in that quarter, because typically I think you would pro forma things out to make it more effective apples-to-apples.

Yes, so Jim, first the 10% adjusted rate as is consistent in the past.

That's what we forecast out for the full year.

You'll see aberrations through the quarter.

As you know, tax expense is an annual event and not a quarterly event.

What's driving it?

It's composition of the earnings in the countries where we have lower taxes and where we have tax losses that we can benefit.

That's the fundamental driver.

So you have seen some volatility in our tax rate over the last year.

We've been working to stabilize that.

So if you recall we are up at 25, brought it down to 15.

We think the 10% here is a sustainable level for where we're seeing the earnings and the predictability by region.

So essentially it's just where we earned our money and a little bit of conservatism in the 15% earlier in the year.

But for the September quarter it seemed like some income came in from low tax areas or there's something that you weren't expecting because I remember you guided specific to about 15% for September.

Yes, we did Jim, so again that's a timing--it's just timing within the quarter that their guidance on tax has always been an annual guidance and so our adjusted earnings tax rate is where--we're guiding 10% for the year and previously it was 15% for the year.

Great, thank you.

Thanks, Jim.

Your next question comes from Kevin Kessel from JPMorgan.

Please go ahead.

Great, thank you very much.

Craig, I was just wondering if you could maybe talk a little bit about the consumer business?

Obviously it was strong and you mentioned both existing as well as new customers.

Is there anyway to give us a broad sense for how you've diversified that segment of your business in terms of from maybe from a high-level just product wise?

I'll do my best.

Thanks, Kevin.

Clearly I can't comment on--we don't comment on specific customers, but the majority of growth in this segment is with customers that are leaders in their field.

So first of all we've been targeting leaders in their field.

The segments that we are doing business in today are gaming, smart phones, flat screen TVs and what I'll call the printer-type segments.

So those would be broadly the segments that we're participating in today.

Okay and then also you were mentioning that it was one of the better bookings quarters.

I didn't hear if he said if it was the of year or if this is going back further.

Is there anyway to quantify that or give some kind of text?

I said for the year.

Okay.

And on the--as we look back it obviously was one of the highest booking quarters that we've had in the last three years.

Okay, but you obviously don't want to quantify.

No, Kevin, we're not going to quantify.

As we've discussed in the past, you've got to look at us for the total revenue which is the sum of the new bookings and the base and we're managing both.

As Craig mentioned, we book new business in these segments, consumer in particular, industrial, pretty exciting opportunities and you're seeing that turn into revenue, which is the best part.

Okay, I got it, and then just housekeeping.

Paul, I think last quarter you made the comment that on a combined basis in Mexico and Europe we're just slightly below break even.

Can you just give us a sense for this quarter, were they above break even?

Yes, they were both profitable.

Individually?

Individually and together.

Thank you.

Your next question comes from Joe Whitin from Longbow Research.

Please go ahead.

Hi, this is Joe on the line for Shawn Harris.

My first question is if you look at the revenue guidance, midpoint of the guidance implies about $150 million sequential decline.

You mentioned that you expect the IT communication market to be on the weaker side but that would be a pretty significant decline just for that market.

Are there any other markets looking across your spectrum that could also see a potential decline or at least a little bit worse than typical seasonality?

Well Joe, it's Paul.

So I think as I said earlier, the typical part is the interesting word in this environment as I can say.

We would have typically expected to see server and enterprise comm go up from third quarter to fourth.

And so again going back through history, generally a 10% increase.

We're not seeing that this year, we're seeing declines.

Those will be the two that are just, I would say, are not performing consistent with history.

Those will be the two that are really the bulk of the reduction that you referenced.

Okay.

And then with the restructuring charges that occurred during the quarter here.

When do we kind of expect to see the benefit from that, I guess?

I think you originally said way back when the program was announced that 12 to 18 month full payback but how about the--we start to see some benefit from this piece now that charges have begun?

So, Joe, I think you're seeing some pretty significant benefit today.

Highest gross margins in almost ten years.

So you're seeing the benefit.

Directionally, just to help you with your thinking in your model, I think when you see a restructuring charge in one period, you generally would see a lag and see the benefit two quarters forward.

So a charge today would generally lead to full benefits.

One plus one quarter ahead.

Okay, great and then just lastly with the currency issues that impacted the SG&A line.

Yes.

You expect those to continue or should we be modeling relatively flat SG&A dollars right now?

So, I mean I think an aberration in Q3.

Having said that, as I said earlier, we booked some gains, I think about $6 million in first quarter, $3 million in second.

Obviously took a big hit here in third.

I expect us to be marginally down in the fourth quarter but not anything in the magnitudes that we saw in third.

So that's captured in our guidance range.

Overall, I expect SG&A in the mid-70s.

Great, thanks a lot and congrats on the quarter.

Thanks very much.

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

Please go ahead.

Good evening, everyone.

If I could just talk a little bit about 2009 for some color.

When you think about what you did Q4 to Q1 last year and what you're seeing at this point.

Is that a reasonable benchmark to be using?

In particular the 20% decline that you saw in consumer or should we be widening that out given what you're seeing in the end markets?

Well, Todd, so I think I'll answer it this way.

If you go back you really have to look at what happened from Q3 to Q4 in '07 to begin with.

So specifically we saw a 6% increase versus seeing the decline of almost 8% that you're seeing this year.

So said differently, we came down 17% from fourth to first, but that was on the back of having gone up 6 from Q3 to Q4.

So we're not going to up from Q3 to Q4 so, conversely, I would not expect us to fall as hard into Q1.

Now, where that ends up, as I said earlier, visibility's never been poorer.

But when I look at right now, I'm not seeing the same historical reduction that you would have saw in Q1 of '07 where we came down 18%, Q1'08 where we came down 17%.

I would not expect us to come down that hard because we're not going up as high in fourth quarter.

Do you make those comments with sensitivity to the channel fills and not really knowing what kind of sell through the customer's ultimately will get?

Yes, I mean Todd, listen, as you can expect we're talking to our customers pretty often here and asking them what they're seeing and down judging what they're saying.

To state the obvious, guys just don't know.

I think a lot of our customers just don't know what they're going to sell.

So we're putting our judgment on the numbers that they're giving us.

So as I said, visibility, we're not going to guide here for Q1 at this point but all I can say is the 17% decline was on the back of an increase that we're not seeing this year and so logic would suggest that we should not fall as hard.

Okay.

And just to clarify a comment you made before.

You said you're planning below the rollups that you're seeing.

I mean from our modeling purposes, should we assume that that's flat with 2008 or is there any color you can provide on that?

Todd, we're not going to give any real color on 2008 right now.

I will say that we've made some good traction on operating margins and overall our goal is to hold the margins despite the revenue declines.

So if you look at our revenue range this quarter and the guidance range and translate what that means at the high and the low from an operating margin point of view.

At the low end, we're pretty darn close to 3% on 1750 of revenue.

So that's our goal.

We set a water mark where we want to keep things above three and that's what we're endeavoring to do.

As you know, obviously there's fixed costs in the business and it gets harder and harder to do, but that's what we're driving towards.

Okay, great, thanks very much.

Thank you.

Your next question comes from Louis Miscioscia from Cowen and Company.

Please go ahead.

Okay, great, I guess my question is sort of on that same line.

Your comment on margins that you just made, is that going to take us through, I guess '09 and that's obviously the goal that you're setting to stay above 3% operating margins even with some variability and revenue as you obviously added in a lot of benefits and cost cutting.

Yes, Lou, this is Craig Muhlhauser, and yes that is our goal.

Okay.

Can you give us a comment as to one of the things that does tend to build up a bit when things do slow is just the inventory.

Your returns on a year-over-year basis were good, but absolute picked up just a tad at quarter to quarter.

Just how are you feeling about inventory?

You think that you're going to be able to keep it at a reasonable level as you finish up the fourth quarter?

We think the opportunity to continue to improve inventory is there.

We had a slight build in this quarter due to ramping new programs.

Those should flow through in the fourth quarter.

Obviously we're staying close to our customers as Paul mentioned to make sure that we don't get caught with any excess inventory.

But our inventory balances in terms of our, I would say our non-performing inventory or the inventory that we're holding for orders is lowest its ever been.

So the age of our inventory has improved dramatically.

The velocity has improved dramatically.

We're optimistic and we have plans to achieve further improvements in the fourth quarter and these are the benchmarks we're going to hold for the future.

This is a new model.

You can finally see the Celestica operating model kicking in.

You see the benefits of restructuring.

You see the velocity improving.

You see the cash flowing.

And we are developing, hopefully, credibility with you and other people that this is a model that we can keep going and we'll eventually win.

Okay and just the last clarification.

Paul, I think you mentioned a $50 million basket, and that had to do with the buyback.

Can you buyback, I guess only $50 million of shares because of the debt covenants that you have or did I misinterpret that?

No, you interpreted that correctly.

Okay, and that's something you will consider given where the stock is?

I mean, Lou, as we've said all along.

Our priority is to invest into the business and grow the Company and that's what we want to do.

So, I'm certainly not in the business of trying to second guess what investors think the Company is worth, but suffice it to say when I look at our balance sheet and then look at our stock price, I have a hard time making those numbers work.

So, right now our goal is to use that cash, frankly, as a competitive weapon to take advantage of opportunities that I think are going to come down the pipe and that we're not seeing yet because I think companies are still figuring out how to get through their own liquidity issues.

I think it's going to create opportunity for us and that's what our focus is?

Thanks, nice quarter, guy.

Thank you.

Your next question comes from William Stein from Credit Suisse.

Please go ahead.

Thanks.

First question on the level of visibility we have today.

I think Paul you mentioned earlier, worse than it's been in years, perhaps ever.

Can you compare it to 2001?

I think the difference between now and 2001 is the inventory in the system.

So we had a lot more inventory back in the whole pipeline.

Generally speaking, Celestica, you're seeing in the numbers and certainly in the competitors, full inventory performance has stayed relatively good through this environment.

So, I think -- 2001 a long time ago I would say probably a little bit worse right now, overall, is probably is a good characterization.

Visibility is worse now?

Yes.

And then with regard to the haircut you've given to the rollup of customer forecasts.

Should I assume that it's a deeper cut relative to what you normally do?

Do you normally, I would assume you normally haircut that as well when you're giving guidance to the street or is that not the case?

Any comments around that?

So, we typically will down judge what our customers give us and you've seen us come up here and post some numbers over the last couple of quarter, which end up being better than the midpoint and so I'm happy to have been wrong in the scenarios.

Right now what we've done to deal with the uncertainty is we've widened the range.

So I think taking a more pessimistic view and at the same time widening the range of what we're seeing.

Great, thank you very much.

Thank you.

Your next question comes from Edward Lee from Pacific Madrone Capital.

Please go ahead.

Thank you.

Question I have is with respect to your cash balances.

Could you just give us a little bit of color as to what your cash is invested in these days?

Sure.

Good question.

So, through the quarter, we took a very hard look at all of the money the market funds we were invested in.

Got out of any market funds that had the ability to get into any asset backed type security.

I would say the majority of our cash is invested directly in U.S.

Treasuries.

Second to that, invested in direct deposits with highly rated banks.

So if you look at our banking group you'll see a pretty strong syndicate of banks.

So that's essentially what we're doing, direct investments in those banks and/or deposits I should say and/or in U.S.

Treasuries.

U.S.

Treasure.

And just a quick question.

In terms of the two bond issues you have outstanding, are the covenants in there any different just with respect to the restricted payments basket.

The covenants are the same.

They're different notes, but the prevailing one you would have to solve both.

One essentially, so they both give you the same problems, so to speak.

One less restricted because it was issued a little bit before?

Yes, the math may work a little bit different on the timing, but it's essentially--they're both the same.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Alexander Blanton from Ingalls & Snyder.

Please go ahead.

Good afternoon.

Just quickly once this crisis is over and things return to normal, if ever, how high do you think your gross margin can go?

It was 7.4% in the quarter.

Is that the ultimate, or do you think it can go meaningfully higher eventually?

Hi, Alex, it's Paul.

I think as usual it's somewhat dependent upon the mix of the business.

So I'll answer it saying we talked about a near term goal of between 3 and 3.5 operating margin that we believed our model with the current mix was 3.5 to 4% overall margin profile.

We think the SG&A overhead we have in place for the Company can support a lot more revenue than the kind of $8 billion annualized that we have today.

So I think 7.4 gross margin, 7.5 range is probably a good way to think about it.

Overall, SG&A dollar amounts in the zone that you're seeing today.

Okay, thank you very much.

You're welcome.

And now I guess we all have to get off and get on the Flextronics call.

All right.

They promised not to do this again.

Okay.

Great.

Thank you.

Well with that, I guess I would like to thank everybody for joining in and appreciate your continued support and interest in Celestica.

Thanks, everybody.

Thank you.

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

Thank you for participating.

Please disconnect your lines.