Celestica Inc (CLS) 2009 Q1 法說會逐字稿

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

Welcome to the Celestica's 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.

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, April 23, 2009, at 8:00 a.m.

eastern time.

I will now turn the conference over to Paul Carpino, Vice President of Investor Relations, please go ahead, sir.

Thanks, Joanne.

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

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

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

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

We 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 a.m.

and can be listened to at Celestica.com as well.

During the Q&A of the call please limit yourself to one question and one follow-up to insure 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, the 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 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 SEDAR.com and SEC.gov.

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

The corresponding GAAP information in the 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 delivered another very strong quarter against the backdrop of one of the most difficult economic environments our industry has ever seen.

With our results we continue to demonstrate one of the best track records in the industry in terms of operating margin flexibility and working capital performance.

We reported operating margins today of 2.9%, making this the sixth straight quarter where operating margins were 2.7% or higher.

We are very proud of this performance given the difficult economic environment.

In 2003, just after the tech bubble, Celestica's revenue was $1.6 billion, our operating margins were negative and our gross margins were below 4%.

By comparison, this quarter we generated the highest gross margins in the Company's 10-year public Company history on revenue levels which were 7% below the low point during the last downturn.

Dramatic improvement in our business model is also evident when you look at the midpoint of our revenue guidance for the second quarter.

We're at less than $1.4 billion.

We anticipate that our gross margins can remain in the 7% range and operating margins at approximately 2.5%.

Generating these margins in the current economic environment reflects the strength of our operating model and positions the Company well as end market recovers.

The Company's discipline on operational excellence is driving flexibility and sustainable operating margin performance in the wake of demand, declines and volatility.

Celestica's operating performance has been exceptional.

We're very pleased that we've begun 2009 with the same strength and consistency that we delivered in each quarter of 2008 despite the many challenges of the current economic environments.

We continue to focus on further improvements in working capital and inventory turnover.

We generated free cash flow this quarter and delivered 7.3 times inventory turns despite the 24% sequential decline in revenue from December quarter.

We reduced inventory levels by $92 million or 12% sequentially from our December quarter.

With our strong performance in working capital and operating margin, our return on invested capital including intangibles continue to drive higher.

We achieved a return on invested capital including intangibles of 16.9% this quarter, representing a 61% improvement from the 10.5% return in the first quarter last year despite a 20% year-over-year revenue decline.

With balance sheet perspective we continue to be the strongest DMS Company in the industry.

The cash position of $1.1 billion, long-term debt of $585 million, we have the strongest net cash position among our North American peers with no debt maturities until 2011 and 2013.

We took advantage of this strength in the first quarter to repurchase $150 million of our bonds, demonstrating the confidence we have in our ability to continue to generate operating cash flow.

We are well positioned to use our balance sheet to capitalize on further opportunities in the current environment, for future growth and debt reduction.

The strong financial foundation and an operating platform now in place, we are increasing our focus and emphasis on profitable revenue growth.

But to be clear, delivering revenue growth while generating the appropriate returns will be our focus.

We spent the past 24 months restoring customer confidence and eliminating aspects of our business that were destroying value, unprofitable customer relationships, product and service offerings that weren't properly focussed, and sites that were not performing up to our standards.

We have implemented and invested in a targeted and disciplined approach to profitable revenue growth, which is critical in the current environment in order to ensure the Company maintains a strong financial foundation for the future.

As we look ahead to our second quarter and throughout 2009, we expect the demand environment across all segments to remain challenging, though the revenue declines are not as severe as the changes we experienced in January and February.

Whatever the end market conditions are, our focus is to ensure we have the most flexible and most cost competitive operating network that will allow us to generate consistent returns in the most challenging marketing environments.

Obviously, we're not immune to the impacts of lower revenue.

But as our operating model indicates, we are able to continue to deliver very solid returns in a very volatile environment.

The market environment remains highly competitive for new programs and the pricing dynamics are challenging.

We are taking the same disciplined approach that we applied to driving financial and operational improvement over the last two years and applying that discipline to pursuing profitable growth in our targeted markets where we have unique advantages.

We believe our global operating network allows us to be more agile, adaptive and flexible in capitalizing on the revenue opportunities as we continue to pursue to consistently deliver the industry's leading returns.

We are confident that by focusing on the target markets, customers and key technologies that are aligned with Celestica's strength and quality, technology, responsiveness and flexibility, we will deliver increased shareholder value over the long-term.

In summary, our operations are performing extremely well.

Our operating margins continue to be solid, our customer satisfaction is the best we've experienced in many years, and our balance sheet is the strongest in the industry.

We're very proud of our accomplishments to date but we're not complacent.

Our results demonstrate to our customers, employees, suppliers and shareholders, that we have truly reestablished Celestica as a major supply chain partner in the EMS industry.

Now let me turn the call over to Paul Nicoletti.

Thanks, Craig, and good morning.

Revenue for the first quarter was $1.47 billion compared to $1.84 billion in the first quarter last year and $1.94 billion in the fourth quarter of 2008.

The year-over-year decline in revenue was driven by the challenging economic environment across all sectors, specifically in enterprise communications, servers and storage.

These declines were partially offset by a 20% year-over-year growth in our consumer segment as a result of new wins in 2008.

Looking at our revenues by end markets.

The consumer segment was 29% of sales.

Enterprise communications represented 21% of sales.

Telecom was 18%.

The server segment represented 13%.

Industrial, aerospace, defense and other segment came in at 11%.

And finally, storage was 8% of sales.

We've made a slight change on our external segment reporting starting with our just reported first quarter.

Our healthcare and automotive business, previously reported in our consumer segment, have been moved into our industrial aerospace defense segment.

In first quarter 2009 approximately $35 million was moved out of our consumer segment and into our industrial aerospace defense segment.

This change was reflected in the percent revenue segmentation I just provided.

Using this methodology last year for first quarter 2008, our consumer segment last year would have been 19% instead of 22% and our industrial aerospace defense business would have been 10% instead of 7%.

Our other segments are unaffected by this shift.

For each quarter going forward in 2009, we will provide the previous year's segmentation using this new breakout for comparability.

Moving to our customer concentration.

Our top 10 customers represented 69% of sales for the quarter.

Our top five were 48% and we have two customers with sales of greater than 10% in the quarter.

Despite a 20% and 24% decline in revenue on a sequential and year-over-year basis respectively, our profitability metrics remain strong.

The Company posted GAAP net earnings for the quarter of $19.2 million or $0.08 per share, compared to GAAP net earnings of $29.8 million or $0.13 per share for the same period last year.

These results include restructuring charges and a non-cash charge associated with repurchasing our bonds of $12.5 million compared to $3.3 million for the same period last year.

Adjusted net earnings for the quarter were $29.3 million or $0.13 per share, compared to adjusted net earnings of $35.4 million or $0.15 per share for the same period last year.

The relatively stable earnings, despite the lower revenue levels, were driven primarily by continued improvements in gross margins and operating margins.

Gross margins of 7.6% were the highest in the Company's ten-year history as a public Company.

These results were driven primarily by greater operating efficiency in all regions and are focussed on business programs that generate sustainable returns.

After several quarters of higher SG&A expenses driven by volatile exchange rates, SG&A in the first quarter stabilized to $67 million.

Operating margin for the quarter was very strong at 2.9% compared to 2.7% in the first quarter last year, despite the year-over-year $366 million decline in revenue.

With the Company's continuously pushing for greater operational efficiency and additional cost reduction opportunities, we believe we can continue to maintain healthy gross margins and operating margin performance even in the lower revenue environment.

Finally, our pretax return on invested capital calculated as operating earnings divided by average net invested capital, or net invested capital, consists of total assets less cash, accounts payable, accrued liabilities and income tax payables was 16.9%, our sixth straight quarter of double-digit returns.

We are very pleased with the progress made in all of these profitability metrics.

Although lower revenue will impact these metrics to some degree, we are very focussed on maintaining respectable levels of profitability, even at this low point in the economic cycle.

In terms of a restructuring update as of March 31st, we recorded restructuring charges of $6.7 million during the first quarter and to date have recorded $42 million in charges related to the $75 million restructuring plan announced at the beginning of the 2008.

Additionally, 85% of these charges will be cash and this program should provide us additional operating margin leverage when the program is completed at the end of this year and when revenue growth resumes.

Our cash flow and balance sheet metrics continue to perform well despite the tougher environment.

Cash flow from operations was $48 million.

We spent $32 million for CapEx in the quarter and generated free cash flow of $16 million.

The higher than typical CapEx spending this quarter relates to the timing of capital additions late in 2008 in support of new programs.

We expect to return to a CapEx spend rate of between 1% and 1.5% of annual revenue in the next quarter.

Cash cycle for the quarter was 19 days compared to 13 days in the first quarter last year and 12 days in the fourth quarter of 2008.

The increase in days was primarily due to the weaker revenue levels in the quarter and a slightly higher than usual amount of revenue in the back half of the quarter.

With the declines in the end markets, we continue to work down our inventory levels.

Inventory was down 12% or $92 million from the fourth quarter and inventory turns were 7.3 turns.

We continue to maintain our exceptionally strong balance sheet in the quarter.

Cash at March 31st was $1.1 billion, long-term debt was $585 million.

Overall, we enjoyed the strongest net cash position amongst our peers.

We further enhanced our financial strength in the quarter with the repurchase of $150 million of senior subordinated 2011 notes.

We recognized a $6.5 million net accounting loss related to the repurchase of these notes.

In April of 2009, we also renewed our credit facility for an additional two-year period.

Capitalizing on our strong balance sheet and to reduce the ongoing commitment fees, we renewed the facility for $200 million, which is undrawn and is fully available.

In summary, despite the very turbulent end market environment, Celestica delivered another solid quarter of strong gross margins, disciplined cost control and strong balance sheet performance.

In terms of outlook for the second quarter, we expect revenue to be in the range of $1.3 billion to $1.45 billion and adjusted earnings per share to be in the range of $0.07 to $0.13.

We are being relentless on managing all aspects of our business to generate consistent and respectable returns, even in a very difficult revenue environment.

Our Q2 outlook demonstrates this and our consistent track record is demonstrating we are doing the right things to achieve this.

The balance sheet is strong, the Company is solidly profitable, and we feel we are very well positioned to manage through this downturn and capitalize on an eventual market recovery.

This concludes the review of the financial results.

I'll now ask the operator to open up the call for any questions.

(Operator Instructions) And our first question comes from Amit Daryanani from RBC Capital Markets, please go ahead.

Thanks, good morning, guys.

Morning.

Morning.

Just a question one of your peers yesterday made a comment that they are starting to see stability in the auto patterns, at least starting in the month of March.

I'm curious, are you seeing similar trends.

Are things stabilizing in terms of the build plans in the autos that you are getting from your customers?

Amit, when we last spoke last quarter we told you that we saw some pretty big declines when we came back from the holidays.

We've not seen the same level of volatility, I would say, in the last month or so.

Obviously, visibility continues to be poor, but suffice to say that we have not seen the same level of volatility that we saw at the beginning of the quarter.

All right.

And then just with the cash position that we have, it is nice to see you guys buyback some debt last quarter.

What type of expectations should we have in terms of cash usage going forward, would you continue to buyback debt or would you look to do something else with that.

We are looking at both the options of -- we have a number of new program opportunities to invest in for future growth and we're also looking at continued improvements to the balance sheet.

So we're looking at both and keeping our options open there.

All right.

Thanks a lot.

Yes.

And our next question comes from Jim Suva of Citigroup, please go ahead.

Great, thanks very much.

Craig, you've been very relentless at cutting costs and focusing on customers that are profitable and disengaging yourself from customers that may not have a long-term profitable interest in conjunction with you.

Congratulations on that.

It seems like, if I understand things correctly, that that disengagement or walking away from those customers is completely all done now.

And accordingly, we all know it is a difficult environment from a demand perspective.

When exactly should we expect Celestica to return to sales growth?

Well, Jim, you're right.

We have focussed on building the operating platform, strengthening our execution and obviously demonstrating the fact that we are putting the foundation in place for future investments for growth.

You're going to see some seasonality here as we go into the third quarter as our consumer business begins to rebound.

It may or may not rebound to the extent it has in the past, but you'll see that trend continue.

And then obviously it will depend on the rate of success we have.

We strengthened the investments in our front end.

We're moving significant resources to the front line.

We're moving people closer to our customers.

So, we are cautiously optimistic.

It will depend on the rate at which we see further erosion in our base business given the economic uncertainty.

You will see seasonality improve the revenue trends here and obviously you will see the business, I will say, the foundation, the core of the business strengthen as the new wins that we've had and will continue to have over the course of this year begin to feather into the business.

So difficult to predict exactly what the base business is going to do, which is why I'm a bit -- a bit cautious here, frankly.

Okay.

Maybe as a follow-up regarding your profitability at this challenging demand, do you think you can maintain profitability at these levels.

You are at all time ten-year highs here?

Are we kind of -- can you sustain that at the current run rate?

At the absolute that we think the margins will improve in the second half.

Great.

Thank you very much.

Thank you ,

And your next question comes from Alex Blanton of Ingalls & Snyder, please go ahead.

Good morning, just wanted to continue along the lines of the last question here on the margins and maintaining the margins.

Normally when business, EMS business grows the margins suffer a little bit from ramp-up costs.

And if you've been eliminating less profitable customers, have done a good job of getting the gross margin up, but is there new business out there at a 7% gross margin, enough to mean profitable growth and to replace business that runs off.

And also the consumer business is growing.

Could you elaborate on what that is?

Normally that is not a high-margin type of business, but perhaps it is in your case.

Well, we like to think that we are changing the game here in the industry and I think our margin performance is demonstrating that certainly to win business, as you know, we have to be competitive.

If you consider price drives cost, then obviously our philosophy here is to focus on markets where we're uniquely advantaged and then to absolutely relentlessly drive our quality, our cost performance and our velocity to industry benchmark levels.

And as a result of our horizontal model and the flexibility we have got to manage demand volatility and then the fact that we are live connected to our supply chains, to our suppliers through [e to open], speed at which we can change is turning into a huge advantage for us.

Maybe I'll ask Paul to amplify a little bit on how that is translating into our margin performance.

Yes, Alex, I guess I would add that you commented on ramp costs.

We've been focussed on a couple of key metrics and one of them is the time that it takes us to ramp new programs and that scenario we've made a lot of progress on.

Our philosophy here is that we have to absorb those costs in the base business and so far, as you are seeing in our margins, we're doing that.

We have -- despite the top-line moving in the direction that it is, I will tell you we're adding new programs to the Company.

You're seeing that in the consumer segment.

Certainly we're suffering revenue declines in many of our core markets.

Despite that revenue decline and with the ramp costs that you mentioned, we're posting industry-leading margins here.

So we don't see the ramp cost as being something that will drag us down.

Lastly I will add, Craig and I spent a lot of time just focusing on the mix of the portfolio, so it is a fair comment in respect to certain businesses do not have a 7% growth margin model.

So we're managing the portfolio of the Company to make sure that our sales teams are pursuing an equal weighting of business.

Some that will have lower margin and higher asset velocity and some that will have higher margin and lower asset velocity.

So you're absolutely right and, as I said, that is our focus in managing the portfolio.

Well, let me get back and just repeat, what kinds of consumer products are we're talking about here that you're adding that you got to 20% growth?

And you're down 20% year-over-year in volume, so to even get back to where you were, you got to add not only enough to keep -- to make up for what is running off, but you got to increase your volume by 25% and the question is, is there enough high-margin business out there to do that or have you just shrunk down and you've got a core of business at 7%, but the new business that's available is only available at 6% perhaps?

Do you see what I'm saying?

It is not clear at all that you can maintain these margins as you start growing again, at least not to me.

So on the first part, our consumer business is in the gaming area, as well as in the SmartPhone area.

There are other aspects, but really those are the lion's share of -- .

Gaming?

As far as, again, our ability, we believe the model -- Craig mentioned earlier that we expect margins in the second half to go up.

We think our operating model is between 3% and 3.5%.

Gross margins at 7%, as I said earlier, will manage the portfolio to deliver those types of margins.

So you're absolutely right, there are pieces of business that don't deliver that.

There are other pieces that deliver higher.

And you see people even in our industry that deliver margins significantly above that on the gross margin lines.

So as I said, that's for us to manage on a portfolio basis.

Lastly, on your year-to-year comment, we're taking costs out of the Company.

That's been a fundamental driver to our margin.

Us being able to maintain margins and improve margins, we are taking costs out of the Company to, frankly, lower the breakeven points and be able to maintain our margin.

So clearly we would rather grow into the structure, but if there is no revenue there, we take the structure out, which is what we have been doing.

Okay.

Thank you.

And our next question comes from [Steven Fox] of CLSA, please go ahead.

Mr.

Fox, go ahead.

Hi, hi, can you hear me?

Good morning, Steven.

Good morning.

Couple of questions.

You talked about business stabilizing a little bit recently and yet we're still looking at sort of a sequential decline in the June quarter.

You guys aren't alone in talking about the high-end business like that.

But I was wondering if you can provide some more color around that.

You mentioned lack of visibility.

So how does that all tie in, in terms of what your customers are specifically telling you.

And when you say lack of visibility, can you just expand on whether that is order volatility within the month, or lack of guidance as to what's going to happen next month?

Steven, welcome back.

It is Craig here.

This is really a number of things happening.

One is the lack of visibility?

We have the lack of visibility in terms of our ability to understand demand from a volume standpoint.

The other one is the volatility in the mix of products.

So the other thing that's happening is customers are waiting to buy to the last minute and then they want what they want, when they want it right away.

So I'm making sure we have got cycle time and supply chains that can deliver the volatility.

The combinations of all of those factors and there are opportunities, as you can see in the range of the guidance, but the current outlook is consistent with what we're hearing and seeing from our customers and many of our core markets, as you see with the concentration of business we have with some of those segments, are still under significant pressure.

So the impact of some of the, I'll say, more stable markets today is less apparent than it might be if they were larger and as part of the Company.

Okay.

Mix of customers, mix of business, large-scale markets that are still under pressure, volatility both on the volume side and demand side has given us kind of a tepid outlook here, but nonetheless we still have opportunity to improve.

And then lastly, within that mix of business when you look at your core customers are you seeing any kind of resurgence or any interest in ramping new products from your major customers or are they still hesitant to bring out new products?

No, we see -- we see new program opportunities with some of our major customers emerging here in the second quarter and obviously materializing over the latter half of the year I think we are seeing -- we're seeing customers that are kind of moving away from program investments where the pay-back is longer than a year.

They're looking for programs that will pay back in the revenues, on the revenues side, which is back to Paul's point on this very, very fast and flexible ability to ramp quickly, so time to market is becoming a key advantage for those that can deliver it.

Great.

That's very helpful.

Thank you.

Thank you very much, Steven.

And our next question comes from Todd Coupland of CIBC World Markets, please go ahead.

Good morning, everyone.

Good morning, Todd.

I don't know if you're able to do this more than once a year, but are you commenting on who the 10% customers were?

No, not at this time.

Okay.

And then just secondly, I'm wondering if you're able to provide any parsing on your business segments in term of outlook?

Not looking for specific guidance line by line, but some color on consumer versus infrastructure and things along those lines.

Hey, Todd, we're not going to guide specifically by end market, but I would say that when you look at -- at the midpoint of our guidance range it is about a 6% decline, not any particular sectors is sticking out.

They're all about the same.

Okay.

Great.

Thanks very much.

Great.

And our next question comes from Sundar Varadarajan of Deutsche Bank, please go ahead.

Yes, hi.

Thanks, guys.

Just wanted to follow up on that margin-related question.

Could you kind of maybe address the margin question from a fixed versus variable cost perspective?

What percentage of your costs, at least on the cost of goods sold line, is fixed and on the operating expense side what level of revenue do you think you can support with the current expense that you currently have on your SG&A and operating expense line?

So looking at the cost of goods sold, as you know the lion's share of the cost is material costs and certainly that's entirely variable.

If I look at the non-material side it all depends on the time frame that we're talking about.

As I mentioned earlier, we have not been holding on to significant structure waiting for growth.

We're taking the structure out, which is what has enabled us to maintain our margins.

I'll try and answer your question this way, I think if you look at what we did this quarter.

At the midpoint of what we did this quarter, 2.9%, at the mid-point of guidance range it implies 2.5% EBIT margin at revenue of 1375.

It depends on the mix, but I would say that our breakeven right now is probably in the 1.1 to 1.2 revenue range per quarter.

Again, mix will dictate that somewhat, but that is kind of where we are.

And I will say that that is significantly reduced from what we would have been saying a year ago.

So we've been aggressive in our cost actions and certainly in light of the economic environment it has served us well.

Okay.

And you talk about margins improving in the back half.

Are you suggesting that we might see margin kind of decline going into the second quarter, or -- .

Well, as I said, I mean our goal would be to maintain where we are, not backslide.

I'll just say at the midpoint at the guidance range, so that 7 to 13 if you imply a $0.10 midpoint and work backwards you get about a 2.5% margin, which would be slightly down than where we are in first, where we were in first quarter.

And is that more related to mix, because your revenue guidance is only down slightly on a sequential basis?

Yes, mix, and certainly as the revenue comes down it is harder and harder to take out costs.

There is a certain amount of fixed costs in the Company and so that becomes a harder piece to overcome.

But I would say mostly and less about mix, more in relation just to the split between fixed and variable.

As I said , when you look at -- when we look across the industry, how we're -- how we're faring in relation to our competitors, we are pretty pleased at being able to maintain that margin despite, as I said, at the midpoint it being down 40

Great.

And finally could you just repeat the comments surrounding the credit facility.

I kind of missed what you said.

Sure.

So we renewed the credit facility this month.

We extended it for two years and it is now -- it's been renewed at $200 million.

Okay.

And two years takes you to -- okay.

Thank you.

And our next question comes from Lou Miscioscia of Brigantine Advisors, please go ahead.

Okay.

Thank you.

I guess as you're going out there we're now six months into this recession.

Any big change in what your customers are telling you in the sense of if there's rethinking their own manufacturing operations or what they have left inside?

Or is it a really not altering too much their way that they're looking at things and just the continued, I guess, slow plod towards more outsourcing but just not in big chunks.

Lou, Craig here, welcome back.

Thank you.

There is -- I would say overall there has really been no major change in the attitude toward outsourcing.

I would say on maybe a case-by-case basis, there may be certain, I'll say, either competitive reasons or political reasons that they're looking at insourcing, but broadly speaking we don't expect a significant impact.

Okay, great.

Could you talk in general about -- I think you had mentioned some new wins.

I'm just not sure if you all had been articulating any recent new wins and put a dollar amount on it and possibly when they might be coming in?

We've had -- we didn't put a dollar value or we didn't articulate specifically which segment, but overall our trend in new wins is above where it was a year ago at this time.

We're winning broadly across segments and some of those new wins from this year that we've had in the first quarter, we expect to begin to ramp later this year.

So we expect some contribution later this year, but we didn't put a number on it.

As you know, the volatility of the new program volumes as they launch is very difficult to forecast.

Okay, great.

Last question, are you all allowed to do a stock buyback or do you have some covenants that are holding that back, especially obviously, given your cash position?

Hey, Lou, it is Paul.

The notes outstanding have restrictive payments and our flexibility there is pretty low given the historical losses and write-offs from the early years.

So the short answer is couldn't do that with the existing capital structure.

We would have to do something with the debt first.

Okay, great.

Congrats on the profitability, here .

Thanks, Lou.

Thanks, Lou.

And our next question comes from Sherri Scribner of Deutsche Bank, please go ahead.

Hi, thank you.

I was just curious if you could dig into the segments in a little bit more detail.

Obviously, the consumer did really well, but it looks like the telecom segment is doing well and that seems to be carrying through from the fourth quarter.

I was hoping you could give a little more detail on is that new deal wins?

Did you see anything different in the first quarter?

And maybe a little bit of more detail there.

Hi, Sherri, it is Paul.

I think on the telecom side, what we've seen -- I would say more of a trend over the last year where it becomes choppy, just depending upon specific buildouts that our customers are winning, their particular orders.

So, yes, we were pleased with the telcom performance that we saw in Q1 and that are articulated more along those lines.

So our mix of customers and the orders that they're winning in particular regions and particularly in some of the 3G buildouts.

Beyond that, obviously, difficult to predict that it will maintain at that strength level.

That's, again, because it is choppy.

So that's really the color behind that.

On the consumer side, as Craig mentioned, we have been booking some new business there and pleased with what we've seen so far.

Is it fair to assume that your top 10 customers are in your consumer and your communications segments, the top two?

Would that be a fair assessment.

Yes, Sherri, we're not going to give any color there.

I think you have a bit of color on our top 10 customers.

The top few move around.

So I think the names won't be much of a surprise to you, but we are not going to give specific guidance there.

Okay.

And then did you draw on your accounts receivable facility this quarter or is that still undrawn.

We did use it this quarter, Sherri.

And how much did you draw down?

$100 million.

Okay.

I just want to ask one quick question, do you expect your inventory level to come down on an absolute basis next quarter with revenue coming down and so do you expect to manage the balance sheet that way?

Or what would be your expectation for inventory?

Yes, we do expect the absolute dollar amount to come down.

Okay.

Thank you.

Thank you .

And our next question comes from William Stein of Credit Suisse, please go ahead.

Thanks, guys.

I'm wondering if you can give us any view as to end market shifts kind of longer-term.

Should we expect any significant changes from the current mix of end markets, let's say, a year from now?

Will, this is Craig, good morning.

I would say by and large, no.

I mean, we're looking broadly at four new markets that are more in the high complexity area.

But broadly, I think the mix will become more balanced across the Company.

We try to minimize the amount of concentration in any particular market or any particular customer and obviously -- but overall I would not expect to see major mix shifts in the -- in the Company.

Obviously, we have major market positions that we would expect to grow in things like our industrial aerospace and defense businesses.

Okay.

Just to follow up.

Can you talk about -- you have one what's been a traditionally very big customer that was recently announced they were going to acquired.

Any view on changes in potential demand of that customer or outsourcing strategy for that matter.

I think from our standpoint it is too early to speculate on what might happen there.

Okay.

Great.

Thank you.

Thank you very much .

Next question comes from [Joe Whiteheim] of Longbow Research, please go ahead.

Hi, good morning.

Good morning.

Good morning.

You guys, I understand you not wanting to provide detailed guidance, I guess, by market going forward but, I guess, just trying to reconcile the sequential guidance for down maybe 6% quarter at the mid, that with the forecast for consumers upturns easily.

Just directionally, which markets are likely to a fall quarter.

I'm sorry, Joe, could you speak up a little bit, I missed the last part of that comment.

Yes.

So the last part just with the guidance pointing down and consumer pointing up, which markets can we expect a sequential decline in?

Joe, as I mentioned earlier, basically not any particular segment is sticking out right now when we look at 2Q.

So consumer a 6% movement across the board enterprise, we just kind of see them all in the same range right now.

That can change given where we land in our revenue guidance.

But I guess suffice to say, we're not seeing any particular segment, for example, down 20% offset by another.

We're just all about in that single-digit zone right now.

Okay.

Thanks for that.

And then my follow-up is of the SG&A line just kind of curious what we can expect going forward if this level is sustainable or additional savings could potentially [prove] -- .

Yes, so I'll answer this way.

Last year we had some pretty big foreign exchange hits which gave us volatility.

We see that stabilized.

So assuming that stability continues, I think there is up -- I mean, SG&A will go down from where it is right now.

So last year we used to talk about it being in a low 70 sustained going rate.

I think right now we see it more in the 65 to 70 range.

So in that zone.

Great.

Appreciate that, thanks.

Okay .

Operator, we'll take two more questions, please.

Okay and the next one comes from Gus Papageorgiou of Scotia Capital, please go ahead.

Thanks.

Just on the balance sheet you clearly have a better balance sheet than most of your Tier -- then all of your Tier One competitors and I am assuming you have a much better balance sheet than a lot of the Tier Two and Tier Three competitors.

Can you discuss a little bit about what that is doing for you guys in terms of attracting new program wins?

Gus, it is Craig here.

I think it has had some success.

Obviously, customers are looking for companies to have the ability to invest now and so it's certainly where Tier Two companies are running into trouble financially.

We've been fortunate to benefit from some of that in terms of us being selected to transfer programs and ramp those programs.

When it comes to new -- when it comes to new business and some of the longer term considerations as this economic environment continues, obviously, our financial strength is turning out to be what we think is a competitive advantage in working with those customers about us being the long-term choice for their new investments.

Great.

Thanks a lot.

Thank you .

And our last question comes from Matt Sheerin of Thomas Weisel Partners, please go ahead.

Yes, thanks and good morning.

Could you just share with us what the capacity utilization now across the Company is and what the footprint is?

Doesn't look like -- I mean, it sounds like you're feeling like we're at the bottom here, you're expecting revenue to come back in the second half, whether it be organic growth or just end markets picking up.

So it seems like you don't want to take anymore cuts out of your infrastructure, but could you just give us a sense of where it stands right now?

Matt, where it stands as of the end of the first quarter is, on an average basis now, because we have volatility during the quarter, as you know, in terms of the output.

But on average we would be roughly at 50% capacity and, as Paul mentioned, we have continuing restructuring plans that we've -- we are implementing here to further refine the network and move to what we call a center of excellent strategy.

But right now we're at about 50%.

Okay.

And that's manufacturing footprint, right ?

So in terms of your people, you are about where you want to be right

Yes, Matt, I think our restructuring program's where we ended up, probably a reminder, we went to a mega site strategy.

We have 85% of our revenues going through eight sites in the Company.

We obviously will flex labor as far as if the volumes are not there, we won't have labor sitting around waiting for volume.

But that piece we will do.

But as far as further network, major adjustments, we think we have one of the most, if not most competitive footprints given the simplicity we put together, with 85% of the revenue going through eight sites.

That is a another big, frankly, reason I believe our margin profile has held up much more solidly than others, because we have a level of complexity which is dramatically simplified to that of our competitors.

We are not going to take that apart.

We think the capabilities we have are strategic.

We do expect through time, obviously, to grow.

Exactly when that happens is going -- is a question mark, given the environment that we're in.

But we're feeling we're well positioned.

Okay.

Great.

And then just a following up on the commentary regarding inventories.

You saw a nice reduction, but obviously revenue fell more dramatically.

How long will it take you, do you think, to get back to that eight and nine-turn inventory level?

Yes, I think we're happy that it came down in absolute levels.

I'll tell you, it was a lot of heavy lifting in the quarter to get there.

I think our target would be to get back into that eight and nine, certainly, by the second half of the year.

As I said, we do expect the absolute dollars to continue to come down in Q2.

We still have some overhang from the demand reductions that we saw earlier in the quarter.

So while we're pleased with where we are, I think we can do better.

So our goal is to get back to the turns that we had last year.

And I think we can get close to that in the second half.

Okay.

Thanks a lot.

Thank you .

Thank you.

Thank you, everyone.

If you have any follow-up questions, give us a call.

And reminder, if you want to listen to our annual meeting it will be on at about 10:10 off of our website at Celestica.com.

Thank you.

Thank you.

Thanks, everybody.

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

Thank you for participating.

You may now disconnect your lines.