Celestica Inc (CLS) 2010 Q1 法說會逐字稿

Good morning.

My name is Tracy and I will be your conference operator today.

At this time, I would like to welcome everyone to the Celestica first-quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Mr.

Carpino, you may begin your conference.

Great.

Thank you, Tracy.

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 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 shareholders meeting that will start at approximately 10.10 a.m.

and can be listened to at Celestica.com.

During the Q&A session of the call, please limit yourself to one question and one follow-up to ensure everyone on the call 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 relating to our future growth, trends in our industry, our financial and operational results and performance and financial targets that are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially.

We refer you to our cautionary statements regarding forward-looking information in the Company's various public filings, including the Safe Harbor statement in today's press release.

We refer you to the assumptions, 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 20-F and subsequent reports on Form 6-K filed with the Securities and Exchange Commission, which can be accessed at SEDAR.com and SEC.gov.

Please note that we will refer to certain non-GAAP financial measures during this call, which include adjusted gross margin, adjusted SG&A, adjusted operating margin or EBIAT, adjusted EPS and free cash flow.

These non-GAAP measures do not have any standardized meaning prescribed by GAAP and are not necessarily comparable with similar measures presented by other companies.

We refer you to our press release, which is available at Celestica.com, for more information about these non-GAAP measures, including a reconciliation of the non-GAAP measures to the corresponding GAAP measures if appropriate.

I will now turn the call over to Craig Muhlhauser.

Thanks, Paul and good morning, everyone.

Thank you for joining Celestica's first-quarter 2010 earnings call.

Celestica delivered another strong quarter with year-over-year revenue growth, strong return on invested capital and consistent operating margins.

Our revenue of $1.52 billion was up 3% year-over-year.

This is the first quarter of year-over-year revenue growth since the third quarter of 2006.

More importantly, the year-over-year growth was achieved with an ROIC of 23.3%, up 4.5% from the first quarter of 2009.

Celestica has delivered eight consecutive quarters of ROIC at or greater than our weighted average cost of capital.

Clear evidence that our disciplined approach at achieving profitable growth is delivering positive results.

The end-market demand continues to improve as evidenced by performance of our telecom sector in the first quarter.

We achieved 10% sequential revenue growth from December to March quarter despite this being our seasonally slowest quarter.

This increase was driven by higher demand from existing programs and current customers.

It supports the view of the modestly improving environment.

On an operating efficiency basis, our execution throughout our global supply chain network continues to improve.

Despite a higher mix of consumer revenue this quarter, the adjusted gross margin was 7.2% and operating margins were 3.4%.

Operating margin performance has averaged 3.4% over the past eight quarters despite the challenging environment.

This performance was driven by consistent operating efficiency improvements and our success at reducing SG&A.

Our adjusted SG&A expense has decreased by 13% on a year-over-year basis even with revenue increasing 3% from one year ago.

The inventory increase this quarter was due to improving demand environment and material supply constraints.

Despite this situation, inventory turns were 8.1 times, which we believe is again at or near the best among our North American peers this quarter.

Our continued success in improving inventory turns and reducing receivable days have been key success factors in driving our strong returns.

The increased inventory velocity has also provided our customers the ability to break the bottlenecks of constrained materials and the ability to reduce the potential liability and waste of excess and obsolete material that the demand environment changes rapidly.

The first quarter also marked a major milestone at Celestica as we purchased the balance of our 2013 notes.

Celestica has a very strong capital structure.

Now that we have no long-term debt, we have unprecedented flexibility for investments as we evaluate a wide range of strategic opportunities for our future growth and profitability.

With our strong net cash position, our current priority is to invest in profitable revenue growth opportunities.

We have established priorities for our investments and are investing to expand our service offerings in areas such as repair, design, fulfillment and other supply chain or engineering solutions, and accelerate our growth in targeted markets such as commercial aerospace and defense, industrial, healthcare and green tech.

We are encouraged by an increasing number of global opportunities in our targeted service segments into new vertical markets and with our current customers.

We expect to share more details in the future as we close a number of these opportunities and begin to ramp the new business.

With the number and breadth of new revenue growth opportunities, we will maintain the same discipline we have demonstrated over the past three years to ensure value is created for both our customers and our investors.

In summary, Celestica continues to deliver on its commitments to our shareholders and our customers with improving financial returns for our shareholders and continuously improving execution for our customers.

As we look to the second quarter, we anticipate continued sequential and year-over-year improvements in both revenue and adjusted EPS at the midpoint of our guidance.

With our global network operating well and our financial position at or among what we regard as the best in the industry, our focus on going forward is on generating long-term profitable revenue growth.

We will maintain our discipline and focus on our longer-term goal of becoming the best performing company within our industry.

We are very proud of our accomplishments to date and we are not complacent as we pursue the next phase of our journey.

I look forward to sharing our progress with you in the upcoming quarters and now let me turn the call over to Paul Nicoletti.

Thanks, Craig and good morning.

Revenue for the first quarter was $1.52 billion or a 3% increase from $1.47 billion in the first quarter last year.

The increase was driven by the ongoing gradual improvements in the economy, combined with the benefit of net new wins throughout 2009, primarily in storage and smart phones.

On a sequential basis, revenue was down 9%, which was significantly better than the 24% reduction in the first quarter of 2009.

This better performance was driven by our enterprise communications and storage segments, which experienced only single-digit declines in revenue while telecom showed sequential growth.

Looking at our revenues by end markets, the consumer segment was 29% of sales.

Enterprise communications represented 21%.

Telecom and storage were both 14% each.

The service segment represented 12% and industrial, aerospace, defense, healthcare, green tech came in at 10% of sales.

Moving to our customer concentrations, our top 10 customers represented 70% of sales for the quarter and our top five were 50% of sales.

We had one customer, Research in Motion, with sales of greater than 10% in the quarter.

The Company posted GAAP net earnings for the first quarter of $25.9 million or $0.11 per share, which included an $8.8 million charge associated with the repurchase of our 2013 notes.

These results compare to GAAP net earnings of $19.2 million, or $0.08 per share for the same period last year.

Adjusted net earnings for the quarter were $43.1 million, or $0.19 per share compared to adjusted net earnings of $33.6 million, or $0.15 per share for the same period last year.

Adjusted gross margins were 7.2% compared to 7.8% one year ago.

The year-over-year change was primarily driven by a change in revenue mix.

Adjusted SG&A at $55.5 million represented 3.7% of revenue in Q1 2010 compared to $64 million, or 4.4% of revenue in the first quarter last year.

Operating margins of 3.4% were our best operating margins in our traditionally seasonally weak first quarter in more than eight years.

Finally, our pretax return on invested capital was 23.3% compared to 18.8% one year ago.

As our first quarter results and multiyear track record of delivering strong profitability metrics demonstrates, the investments we have made to build a highly variable cost business model capable of delivering world-class execution to our customers is clearly paying off for the Company.

In terms of a restructuring update, as of March 31, during the quarter, we recorded $8.1 million of restructuring charges and to date have recorded $127 million of the $150 million to $175 million restructuring programs announced in 2008 and 2009.

These restructuring activities are expected to be complete by the end of this year.

Moving to our working capital performance, the Company continued with its strong and consistent performance.

Cash flow from operations was $12 million and free cash flow was $9 million.

CapEx for the quarter was $8 million, which was slightly below our anticipated run rate of 1.1% to 1.3% of annual revenue.

The lower level of spending was driven by the timing of equipment purchases and we expect to see a more normalized spending level in the coming quarters.

Cash cycle for the quarter was 33 days compared to 30 days in the fourth quarter.

The sequential increase in days includes the impact of the higher levels of inventory.

On a year-over-year basis, our cash cycle days improved by 10 days, decreasing from 43 days in the first quarter last year.

Despite a 7% increase in inventory dollars, inventory turns remained above -- at 8.1 turns.

This compared to 7.3 turns in the first quarter last year.

Moving to the balance sheet, cash at March 31 was $712 million.

As Craig noted, Celestica no longer has any outstanding debt, which gives the Company the strongest net cash position amongst its North American peers.

During the quarter, we paid $232 million to repurchase our remaining 2013 notes.

This resulted in an $8.8 million charge related to the early redemption of these notes.

In addition, the Company has a $200 million credit facility, which remains undrawn.

Given this balance sheet strength, Celestica had significant opportunity to grow with its customers and invest in new markets and capabilities in the future.

As we look to the second quarter, we anticipate continued sequential and year-over-year improvements in both revenue and adjusted earnings per share at the midpoint of our guidance.

We anticipate revenue to be in the range of $1.5 billion to $1.6 billion and anticipate improvement across most segments.

At the midpoint, this would represent an 11% year-over-year growth and 2% sequential growth, which is in line with our commentary in the fourth quarter that the first and second quarter would be relatively flat to modest growth.

For adjusted net earnings per share, we anticipate a range of $0.19 to $0.23, which, at the midpoint, would represent approximately 50% growth from $0.14 a year ago as we benefit from the operational improvements and the reduction in interest expense.

While we recognize that our Company operates in one of the most competitive and dynamic industries in the world, we feel that as we move forward, we have the execution engine and financial strength in place to invest in new markets and capabilities that will deliver sustainable top-line growth in the future.

That concludes our formal comments on our first-quarter results.

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

(Operator Instructions).

Matt Sheerin, Thomas Weisel Partners.

Yes, thanks and good morning.

Just looking at the revenue guidance, it certainly is in line with what you talked about on your January conference call and talked about expectations for a bigger ramp in the second half.

Could you give us a feel, Craig, for how you see that playing out?

Are you expecting pretty significant sequential growth in both quarters or is it more back-end loaded and where is that growth coming from in terms of your pipeline?

Good morning, Matt.

We are seeing a strong start to the year, both in terms of new bookings and then we see a very busy schedule beginning now ramping those programs.

So we expect to show continued improvement sequentially quarter-on-quarter as we go through the balance of the year.

Obviously, from the range of opportunities and the outlook that we have, we expect that improvement to be in line with our objectives for the full year that we have laid out over the course of the last several months.

The target for revenue growth, Matt, on a full-year basis is 6% to 8% and we feel very comfortable that we are on track to deliver that.

Okay.

Can you give us an idea of what end markets where you see the biggest opportunities in the second half?

Sure.

We see continued strength in our consumer segment, primarily in the smartphone space, expanding our presence in a broader range of services that we are providing to our customers.

We see strength in both the server and storage segments, so our core business actually is shaping up quite nicely in terms of strength and growth.

And then obviously, as you know, we are placing a significant amount of emphasis on expanding the mix of our business and the growth in emerging markets and the number of opportunities we have in those segments that are very near to conclusion in the first half year are very, very encouraging.

So we feel very, very good I think over the course of the next several months.

As we close these opportunities, we will be giving you more transparency as to how that is playing out.

Okay, thank you.

William Stein, Credit Suisse.

Thanks.

Good morning, Craig.

I am wondering if we can dig into inventories a little bit.

I think in the prepared remarks you stated that the build was a result of higher anticipated demand and some supply chain constraints.

But the guidance, at least for the coming quarter, is only up a couple percentage points, so it certainly looks, I think, to most investors that most of this is driven by shortages.

Can you tell me if that is right and then whether it is more in raw materials, WIP or finished goods and perhaps how much money you might have left on the table from lost revenue opportunities because of those constraints?

Okay, so good morning, Will.

From an inventory standpoint, the majority of the miss is concentrated in a handful of customers.

It represents largely finished goods in segments where the mix shifted and the finished goods that we got either in hubs or nearing completion did not shift.

The question remains frankly from a material constraint standpoint.

We don't think we left a lot of money on the table this quarter as we cleared much of our issues late in the quarter.

And we are also building inventory late in the quarter in anticipation of some of the early demand.

Some of the mix of our products that we are shipping in the second quarter are earlier in the quarter than they might normally be.

So a confluence of factors, but suffice it to say, a handful of customers.

Finished goods did not reflect the end-market demand as we ended the quarter and the bulk of the build-up that is associated with building early demand for April and May shipments, which normally would've been skewed towards the end of the quarter.

Don't think we left a lot on the table.

Obviously, there was a little bit, but nothing material.

That's very helpful.

One follow-up if I can though.

It sounds like you have built some inventory, some finished goods for customers that changed their -- changed the plan of what they took at the end of the quarter.

Can you remind us of how protected you are of that inventory?

Do customers have to take it and if so, how quickly?

They have to take it and it varies by customer.

The terms vary in terms of the [dwell] period, but suffice it to say, if it is an extended period of time, we recover the cost of capital on that investment.

Great.

Thanks very much.

Lou Miscioscia, Collins Stewart.

Thank you.

Maybe if you could just expand on that and the finished goods comment a little bit more in the sense of if you can share with us maybe what industry that was in.

And also do you think that's a market condition or it's just a specific product that just didn't hit the market as well as it should have?

Well, we haven't split our inventory by segment, but I will say it is really a customer specific issue, mix shifts at the end of the quarter.

It is not consistent with their original forecast for the quarter.

It tends to be finished good products in the infrastructure space.

Great.

These are current products, so they will sell through.

We are not going to obviously be faced with products that aren't selling.

These are current products with market opportunities.

It was just a question of mix and the timing of purchases by their customers.

Good.

Second question, a little bit of a different topic.

You all have been very, I think, shareholder-friendly in buying back the shares, doing many different things to grow your earnings, so congratulations there.

And also unfortunately the Wall Street question always is what's next in the sense of you still do have a ton of cash on the balance sheet, which is a fantastic position to be in.

Maybe if you could prioritize the use of that cash, maybe share buyback, maybe an accretive acquisition if something -- of things that are pretty attractive out there, maybe you can comment on that or anything else that you see doing with the cash.

Well, I'll start and then I will ask Paul to give you his thoughts.

And thanks for the question.

I mean the number one priority, as we continue to say, returning over a 23% return on invested capital.

Clearly the number one priority is reinvesting in the business and the growth of the Company and what is shaping up nicely this year is the number of opportunities we have to do that.

We are obviously looking at a range of alternatives beyond that.

You saw the Invec acquisition late last year associated with building a spare parts management, warranty support capability from an IT perspective that we feel is very, very important to our aftermarket business.

And then we have identified, as I have mentioned before, a range of acquisitions, which are largely tuck-ins that are going to give us competencies, certifications and the ability to move with greater traction early in the healthcare, green tech and industrial space.

Very strong franchise today in commercial aerospace and we would expect some of those investments to be flowing in that direction as well.

And then I will ask Paul to comment on the other alternatives we've got beyond investment in the business.

Hi, good morning, Lou.

So as Craig mentioned, certainly priority is to put the money to work in the business.

Having said that, as you know, we are pretty disciplined about the returns that we are looking to earn.

So if we don't see the opportunities, I mean certainly looking at further capital structure changes our option, so be that.

Stock buybacks, dividends, so that is something that we are evaluating.

As we look at investment opportunities, we are always mindful of looking at the alternatives and with those two being on the list.

So right now, the priority is to grow the business and we just continue to stay on top of whether the money would be better put to work by changing the capital structure.

I do want to -- Lou, your question that talked about us buying back stock and just to correct, we bought back debt.

The Company has bought back stock in its history but that was quite some time ago.

Are there any restrictions on buying back stock?

No, Lou, we have no restrictive covenants now given that the debt is off the table.

Okay.

Thanks, guys.

Shawn Harrison, Longbow Research.

Hi, good morning.

Two brief questions.

The first on just the June quarter guidance.

Maybe if you could speak of what end markets could push you toward the low end of that guidance, maybe what are kind of countervailing trends out there for you.

And then second, if you could just speak of, as total capacity right now, where you are at, where you think you will be post the restructuring plan given that I guess capital spending is going to be probably a little bit lower than you initially forecast for the full year.

Thank you.

Shawn, in terms of the outlook, I mean I think it would be something we don't know about late in-quarter mix changes or demand changes that we are not forecasting.

But by and large, we see good strength across all of our segments and clearly, our objective will be to get toward the higher end.

So it is no -- I would say we have less risk.

We have less volatility.

I think we are starting the quarter with a pretty optimistic view of obviously where we are going to end up, 11% year-over-year sequential growth and continuing to maintain improved earnings.

So solid performance, we feel pretty good about it and don't really see anything that would give us any indication that we should expect hovering close to the downside of that today.

Now I'll ask Paul to comment on your other question.

Yes, Shawn, I will add to that.

I mean certainly, as you know, visibility in the space always is a challenge.

Having said that, you will note that we have narrowed our typical guidance range that we would have historically given, which just a sense for certainly we feel things are much more stable, notwithstanding that we always are subject to whatever customers decide to pull at the end of the quarter.

On utilization, the Company is currently in the low 60%s from a utilization rate, pro forma, completing the restructuring.

As I commented in my remarks, we are really getting towards the end of the restructuring programs here, so I do not anticipate the completion will move it meaningfully above mid 60% as far as utilization is concerned.

So that's currently where we are.

Brian Alexander, Raymond James.

Thanks, good morning, guys.

Craig, you mentioned that you are anticipating strength in consumer for the balance of the year and you are expanding services there.

Can you just elaborate on the services you are expanding and whether you are anticipated strength in consumer is going to be driven by additional share at your largest customer or are you expecting to diversify into other smartphone customers?

And then I have a follow-up.

Sure.

So the strength will be in segments such as smartphone and set-top boxes.

Obviously, we will be looking to expand share on a total available market for us, which includes the overall credit lifecycle.

A large part of the share expansion that we see in the near term will be expanding into the after-sales service in support of those products, so those opportunities are emerging.

We have been successful in gaining some traction there.

So as you think about our customers, it is not just growing our manufacturing share with them, but it's really growing throughout the product lifecycle, which really essentially is our strategy.

So that is shaping up nicely.

There are some follow-on orders in some of our existing customers and then the opportunity to expand those engagements beyond the manufacturing space is largely what I am talking about.

That includes sustaining and winning new programs to maintain our current share in the manufacturing side of those businesses.

Okay, and then on the server business, which was down 5% year-on-year, I know one of your customers reported a double-digit decline in its midrange line due to a product transition.

I think you also have another customer who may be losing a little bit of marketshare, but it sounds like you are optimistic on the server business going forward.

So could you just talk a little bit about what is driving the optimism on the server front and specifically are you going to participate in the next-generation server line from that large customer who is going through a transition?

Thanks.

Thanks, Brian.

That specific customer going through that transition obviously impacted our first half, if you will and we feel optimistic because we will participate in that next generation.

We also were impacted by the demand impact of other major customers in the space, but the traction we are getting with those customers as they consolidate their supply chains is very encouraging.

So that is why my optimism is there in that space.

Great.

Congrats on returning to growth.

Thank you very much.

I appreciate it, Brian.

Jim Suva, Citigroup.

Thank you and congratulations, gentlemen.

Craig, a question -- it sounds like for some of your initiatives with your cash now, given that you have paid back debt and restructured the business and really right-sized the ship, it sounds like we should be looking more at M&A type tuck-in acquisitions as opposed to organic.

And if that is true, I also heard you kind of list off things such as clean tech, industrial and things, but yet it seems like your largest end-market segment is consumer and notably an overweight customer is very large to you.

It just seems like a lot of your commentary was around other sectors.

Are you looking at kind of trying to diversify away from that or did I just misunderstand your body language as it seems like a lot of the M&A stuff really isn't supporting your biggest end market there?

Well, you are correct.

Our interest in the M&A activity, the M&A side is not supporting our largest market today.

I think as we have talked before, Jim, our big mission here is to get the mix of our business in line with our growth objectives and at the same time our ROIC objectives.

So we are obviously very pleased with the progress we have made in consumer and we are participating very, very aggressively in the growth of those products and expanding those engagements.

But what I am saying to you today is I am saying that the investments we are making and the traction we are getting is largely organic and therefore, the opportunity we have is really driven by the investments in our core customers that we have today, which are representing some significant opportunities.

Our new markets that we are targeting, which we feel certainly in commercial aerospace and defense, we are well-positioned and then obviously with the objective of building positions in healthcare, industrial and green tech and then obviously expanding our business into higher value-added services, which include both engineering, as well as aftermarket services; hence the investment in Invec.

So it is not that we want to shrink consumer; we want to expand the balance of the mix to be in line with our profile where consumer would represent 25%.

Our key communications segments would be 25%, our computing segment would be 25% and then our growth in emerging markets would move from 11% to 25% of our business.

And then within that mix of services, we'd obviously like a larger mix of aftermarket services.

So obviously, a real transition underway, but frankly early encouragement, really great encouragement first half of this year at the magnitude of opportunities that we are seeing organically.

Thank you.

And as a quick follow-up, if we look at kind of your full-year outlook as you expect typically to give some type of a brief overview for the year, you said about 6% to 8%.

If I do my math right, it seems like you are expecting to grow a little bit better than seasonally normal each quarter.

Is that a good way to think of it, that it is actually a little bit better than seasonal norm?

Jim, it's Paul.

I think that our goal here is to grow each quarter year-on-year, so we are seeing that.

As far as is it a little bit better than historical, it is hard to say what the new norm is.

Suffice it to say, as Craig mentioned, our goal there is to grow the Company 6% to 8% a year.

We believe we will grow year-on-year each quarter through 2010.

Thank you very much, gentlemen and congratulations.

Thanks, Jim.

Sherri Scribner, Deutsche Bank.

Hi, thank you.

I just had a quick housekeeping question for you, Paul.

I think typically you give the detail on sequential growth in each segment.

I know you gave some rough idea of where it was, but I was wondering if you could give us the specific detail on sequential growth by segment this quarter?

Sure.

So Sherri, as far as dollars or percent?

In terms of percentage.

So I think overall the consumer segment was down 17%, enterprise com was down 3%.

We mentioned telecom being up 10%.

Storage was down 7%, server was down 20% and then the other targeted verticals were down 2%.

Okay, great.

And two quick follow-ups.

It seemed like you were implying that consumer would be up in the June quarter.

I just want to make sure that is true.

And then Craig, for you, I just want to get a sense of why you were planning to sell stock at this time.

Thank you.

So Sherri, first, from an end-market point of view, looking at our 11%, we see all sectors basically being up, so I would not characterize that we'd expect one to kind of significantly outweigh another.

We are seeing growth pretty proportionate across all of them.

Sherri, regarding my program sale of shares, I mean it is frankly my long-term financial planning.

Okay.

Thank you.

Todd Coupland, CIBC.

Yes, good morning, everyone.

Just wanted to clarify on the inventory growth.

So basically what you're saying is the inventory popped because strength in infrastructure straddled the two quarters.

Is that the primary driver?

I think it was mix.

So we had the mix shift, not so much -- it was the shift of the products that we built for the forecast versus the products that customers purchased and the mix of products that we produced was not (multiple speakers).

As Craig said, we are seeing -- so there were two aspects.

That being one and as Craig mentioned, the second being that we're just seeing a bit of stronger demand in the earlier months going into second quarter than we would typically see and as you know, that means we need to bring the inventory in to support it.

Okay.

And then so if we think about the cash flows over the course of the quarter and the impact on inventory, at this point with what you see, would you expect inventory to move down or because of the sequential growth expected into Q3, it is likely to tick up again at the end of the June quarter?

Todd, listen, while we still lead on turns, as you can expect, we're not where we want to be, so our goals here are to bring the dollars down in absolute even though we are planning for growth here in the second half, in the second quarter.

So that is what we are targeting right now.

Okay, that's great.

Thanks very much.

Ryan Jones, RBC Capital Markets.

Hi, good morning.

I just want to revisit the capacity question so we can get our hands around incremental margins for the rest of the year.

What are the revenue breakpoints where you think you might have to add capacity?

I mean you are at 60%-ish right now, so it sounds like you would be fairly far away.

And I guess until we hit the next breakpoint, is it fair to think that SG&A can sit round this mid-50%s, maybe high 50%s range that it has been this quarter and I believe last quarter as well?

Yes, so first, on the SG&A, I mean, listen, we think we can leverage the Company pretty significantly with the SG&A we have.

We have been pretty happy with the reductions that we have made there year-on-year.

So I think in absolute dollars, you will see SG&A be in the neighborhood of what you are seeing this quarter, plus or minus a few million each quarter.

As far as adding capacity, we have significant capacity to grow.

As I mentioned in our remarks, we see CapEx between that 1% and 1.5% of revenues.

We will expect to see that kind of quarter in/quarter out, but I do not expect any significant investment in bricks and mortar until we get, call it, well into the mid-70% utilization rates.

All right.

Thank you.

Gus Papageorgiou, Scotia Capital.

Hi, it's Jason Body here for Gus.

Just had a quick question on gross margins.

In the past, we have seen Q1 as being your highest gross margin quarter and then gross margin trending down as we move through the year.

Do you see that changing given your higher consumer mix this quarter in 2010?

Hi, Jason.

It's Paul.

I think that, as I mentioned a few minutes ago to Sherri, when we look forward to what we expect end-market wise, we don't see any big shifts where consumer, for example, becomes a larger percentage of the total.

So another way of saying that, the gross margin performance we have I think you will see it be pretty in line.

So I would not expect to see the same level of reduction, for example, that we saw in 2009.

So I think we'll see the gross margins be pretty consistent with where we are right now.

Okay.

And then just a second question on use of cash.

What would you need to see before a dividend kind of became a top priority for you guys?

Jason, I think that, as we mentioned, the opportunities I think are very high, as far as what we see to grow the business.

For us, it is not are there opportunities, it is just choices of what the right ones are.

So we believe we are in a growth phase of the Company.

As far as -- if we were to issue a dividend, that would us be concluding that, we just don't see the same level of opportunities.

And certainly that we were going to take a pause as far as M&A was concerned and that is not our frame of thinking right now.

So as we are in a phase of looking at acquisitions, I think that the dividend is on the list, but not a priority.

Okay, great.

Thanks.

Naser Iqbal, Salman Partners.

Thanks and congratulations on the quarter.

Thank you.

Thank you.

Just a question, and I guess I think for some of us, analysts, when we are looking at the different end markets, different environment, we are seeing a lot of strength on a customer basis or different end markets and one of your competitors came out with their results and gave sequential guidance that was maybe a little bit higher than at this time.

But it sounds like, Craig, that all the things you are working on, they are going to kick in in the second half.

Does that -- would explain maybe that if someone was looking for stronger strength, that would come in in the second half as all those opportunities you talked about start to kick in?

Well, we are approaching this as a marathon as opposed to a sprint.

So what I am saying is the opportunities that we have got in the pipeline, those that we've closed in the first quarter of this year and those that we have emerging here in the second quarter, will begin to impact the Company as we look to the second half.

And you must understand that we are also, as we look at our business, we are also ramping those programs and clearly our objective has been to continue to maintain our margin, return on invested capital performance with those investments we are making.

So your answer is correct; we expect to get the 11% sequential improvement in the second quarter.

We expect to continue to improve over the course of the balance of the second half and to deliver our 6% to 8% growth, but it is all about creating a business here that has sustainable growth and profitability quarter-on-quarter for the long term.

And remixing Celestica from the seasonality of the old business to the vision for the future business is really the road we are on and obviously each quarter will be a proofpoint.

So that is the model and you are right in terms of the second half, things will kick in, but we are feathering it in at a rate to allow us to do a number of things, grow the Company, continue to deliver returns and deliver improved profitability.

And that is the Celestica difference we think.

Right.

I think you have been very consistent with that philosophy and theme.

If I could just ask a follow-up, it seems that, given the restructuring, certainly like how it has shaped out, we are seeing the improvement in the margin in that 3.5% range and where it could be at the end of the year.

Certainly tracking what you have been saying.

Is it that we should expect that the GMs will be a little bit better than normal and then it will be in the OpEx in terms of -- to hit that 3.5%, mid 3.5% level, the push and take between GMs and OpEx will be that GMs would be a little bit better?

Hi, it's Paul.

I think that, as I mentioned a few minutes ago, we think the SG&A that we have can leverage more business.

So I would expect that as we add revenue.

You won't necessarily see gross margin percentages pop up, but you will see more revenue dollars, a very -- a gross margin performance in the zone of where we are, but really adding very little SG&A.

So that, at the end of the day, we will leverage it on the operating line and see the operating margin go up.

Okay, great.

Thanks a lot and once again congratulations.

Thank you.

Tracy, if we can take two more calls please.

Deepak Chopra, Genuity Capital Markets.

Good morning.

I have a couple of questions.

What do you think would be sort of the mid to long-term impact to your gross margin, operating margin profile as the services business picks up and becomes a meaningful part of your business?

How should we qualitatively think about that over the course of time?

It's Paul.

So as you know, the services businesses are much higher from a profitability point of view, but are still relatively small as far as the absolute revenue contributions are concerned.

So we've talked in the past about our gross margin goals of being in the 7% to 7.5%.

Nothing has changed from that point of view.

It will certainly help us get to the higher end of that range, but I would not expect it to be something that propels us well above that.

Okay.

And in terms of, from a balance sheet perspective, what do you think the changes will be as that business grows from there?

Obviously I assume it is a slower turns type business.

What are the things we should look out for?

I don't think it will have any meaningful impact to the balance sheet.

Services businesses on balance are less working capital-intensive, so I don't think it will have any material impact one way or the other on the balance sheet.

Okay.

And Craig, just in terms of new programs out there, what are you seeing in terms of -- how competitive is the bid process right now?

There is still a little bit of excess capacity in the industry obviously, so what are you seeing in terms of the bid process?

How are you managing that?

Obviously, you are trying to balance growth versus margin profile.

Just wondering some comments around that would be appreciated and how do you think the new programs as they come in line will impact the margin profile of the Company as they start to ramp up if the Company is successful in securing these new programs?

Sure.

So what we are seeing is we are seeing most major customers evaluating outsourcing consolidation opportunities.

So they are looking at taking their supply base, reducing the number of suppliers.

The new and emerging markets are looking at just, I will say, scanning the range of alternatives.

They will start with a range of suppliers down to like two or three.

We have been very successful getting to the table.

The environment is very competitive, as you would expect.

Obviously, Celestica is using its resume on how we have delivered performance for our shareholders as the fundamental differentiator in how we can deliver the same performance for our customers.

And obviously, as I mentioned, given the range of opportunities that we have won in the first quarter, what we forecast we are going to win in the second quarter, shaping up very nicely to say that the margin mix that we are targeting is something that we will be in a position to continue to do deliver and the message is we are really pitching value versus risk.

So the Celestica value prop, flexibility, predictability, speed and technical base versus the risk of putting it in the hands of someone that hasn't got the same resume.

When you look at that value proposition, what verticals does it play best in and what verticals doesn't it play best in in terms of your current business lines?

Certainly.

In our traditional businesses, it plays best in the high mix, high complexity areas of the business, the high end to mid range of the large-scale computing applications, the high end to mid range of the most complex optical and switching technologies.

And then clearly where there are certifications, quality requirements such as FDA, FAA certifications where quality matters and frankly reliability and supply is essential to the success of large-scale OEMs like Boeing, Airbus or the like.

So it is fits very nicely and I think the program we have got is a very strong platform, a strong resume, proofpoints and now we have Company performance to back it up.

We feel very good about the opportunities for Celestica.

That said, it is still a challenge because obviously the pricing environment is something we have to balance as we look at -- at meeting these targets.

Thank you very much.

You bet.

Thank you.

William Stein, Credit Suisse.

Great, just a quick follow-up, two brief ones.

First, Craig, you have shared customer satisfaction trends with us in the past.

Wondering if you would be able to share that again?

And then also, not sure if this has been discussed yet, but you have talked historically about a 4% operating margin target.

Did I miss comments on that or do you still have that in the crosshairs and if so, any comment on timing?

Well, we have gone to a Company operating goal where we have really a mandate here to be number one or number two on our customer scorecards.

And for the ones we are tracking, we are 95% to that goal.

So we are very, very comfortable to sit here today and say we obviously have opportunities for improvement, but the operating network operating at the highest levels frankly I think it has ever been frankly on a consistent basis.

So that is the customer sat story.

I will ask Paul to comment on --.

Yes, so Will, we have not -- I mean, as you know, our goals are to get our margin between 3.5% and 4%.

That has not changed as far as when we can get there.

I think if you go back to our revenues pre kind of this last tech bubble here, adjusting for the stock-based comp, we were in that zone when revenues got into the $1.9 billion per quarter range.

So obviously there are a lot of factors, including mix, that play into that.

But based on the current mix of business that we have, if we saw revenues in that $1.8 billion, $1.9 billion-ish revenue zone, I think we would be at the top end.

Great.

Thank you.

Okay, thanks, everybody.

We appreciate the interest and we look forward to the call next quarter.

Thank you very much for joining us this morning.

This concludes today's conference call.

You may now disconnect.