Celestica Inc (CLS) 2011 Q1 法說會逐字稿

Good morning my name is Alicia and I will be your Conference Operator today .

At this time I would like to welcome everyone to Celestica's 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.

Paul Carpino, Vice President of Investor Relations, you may begin your

Great thank you, Alicia.

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

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

This conference will last approximately 45 minutes.

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

We can also be reached for follow-up questions after this call.

Copies of the supporting slides accompanying this website can be viewed at celestica.com during this conference call.

We will also be holding our annual shareholder meeting later this morning at 10 AM.

The webcast of our shareholder meeting will start approximately at 10.10 AM and can also be listened to at celestica.com.

During the Q&A session of this call, please limit yourself to one question and one follow up to ensure everyone on the call has an opportunity to do so.

You're 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, 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 segments 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 have adopted international financial reporting standards, or IFRS, this quarter and comparative results have been restated to reflect this change.

We will refer to certain non-IFRS 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-IFRS measures do not have any standardized meaning prescribed by IFRS and are not necessarily comparable with similar non-GAAP financial measures presented by other companies including our North American peers.

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

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

Thank you, Paul, and good morning, everyone.

Before I comment on our first quarter performance and the outlook for the second quarter, I'd like to make a special reference to our Celestica employees in Japan.

Our team in Japan, their families, friends and our customers have been in our thoughts and prayers daily and have served as an inspiration to all of us as they deal with the aftermath and devastation of the March 11 earthquake, tsunami and subsequent aftershocks.

Celestica has three operations in Japan.

They include a sales office in Tokyo, repair facility in Kawasaki and a manufacturing site in Miyagi.

Our Japan operations have been a part of the Celestica family since 2002 when Celestica entered the Japan market place through and acquisition and supply agreement with NEC Communications.

As you can see on the map our Miyagi facility was very close to the epicenter of the earthquake and it was the site in our network that was most effected.

Approximately 460 people work at this facility and thankfully none of our employees were injured.

Conditions were very difficult for our people during this period.

Not only were our employees dealing with the tragedy of this event, they also had to endure with the very real and practical issues of not having the essential services for their families such as food, gas, electricity and water.

Despite continued aftershocks since the initial earthquake, our employees and their families lives have in slowly getting back to normal and the site has resumed production.

We'd like to express our sympathy and support to the people of Japan for the loss they have suffered and pledge our continued support for our customers, employees and their families.

Celestica Japan has been an inspiration to us.

We are very grateful by how they have responded to support our customers and supported our Company commitments during this difficult time.

In addition, we'd like to take this opportunity to acknowledge and express our deep gratitude to NEC, our primary customer in Miyagi whose provided aid and supplies such as food, water and safety equipment to our Miyagi operations by utilizing their own trucks in supporting us through these very difficult times.

In just over 6 weeks, the site has returned to planned production levels and all of our employees in Japan continued to be resolute in their efforts to never give up and to emerge from this natural disaster stronger than ever.

Now some comments on Celestica's first quarter and some thoughts on our outlook.

Celestica delivered another solid first quarter result with revenue growing 19% on a year-over-year basis.

On a sequential basis, revenue was down 4%, a much lower first quarter seasonal decline than we've experienced in prior years as we continue to benefit from new program wins and the lower seasonality in the current mix of our consumer business.

Our enterprise and communications consumer segments both performed very well with each segment showing sequential revenue growth.

Consumer was 26% of sales, up 2% sequentially and up 10% on a year-over-year basis.

Enterprise communications represented 25% of our total sales, up 1% sequentially and up 34% from the first quarter of last year.

The server end market represented 15% of our revenue, an increase of 46% year-over-year and down 16% sequentially.

The sequentially lower revenue was due to typical seasonal declines across our server customer base in the first quarter.

As we entered the quarter, we had anticipated stronger revenue from this end market, but the end market demand for some of our newly ramped server programs was lower than our forecast.

Storage was 12% of sales, down 4% sequentially and up 3% from first quarter of last year.

Industrial, aerospace and defense, healthcare and green technology were 11% of our total revenue for the quarter growing 27% year-over-year and declining 6% sequentially.

Telecom was 11% of our revenue, down 7% sequentially and down 5% year-over-year.

Our top 10 customers represented 74% of our sales for the quarter, and our top 5 represented 54% of our sales.

We had 2 customers with sales greater than 10% in the quarter, with our largest customer representing 21% of our sales.

To further accelerate our progress in the industrial segment , we announced our plan to expand into semiconductor equipment market with the acquisition of the contract manufacturing division of Brooks Automation.

The capabilities we are acquiring include complex system assembly and integration services for wafer transportation, vacuum transfer modules and uniquely designed subsystems for industry-leading semi conductor OEMs.

This acquisition brings Celestica to a high-quality leadership team with significant customer relationships, a solid track record of operational performance and experience in the semiconductor equipment market globally.

These new market specific relationships, capabilities and experience do not currently exist within Celestica and will help accelerate our progress to achieve our target of 30% of our total revenue coming from the Company's diversified market segments within the next three years.

The two locations to be acquired in Portland, Oregon and Wuxi, China generated revenue of approximately $135 million for the first six months ended March 31, 2011; and provides specialized manufacturing of complex mechanical equipment and systems, integration services for some of the world's largest semiconductor equipment manufacturers.

Based on our 2010 results in our diversified end markets, combined with the approximately $230 million in annual sales from this acquisition, our diversified markets revenue would have been approximately 15% of our total revenue in 2010.

We look forward to welcoming the very talented Brooks team and their customers to the Celestica family and we look forward to continued investment in this very sound operation for the future.

Now let me conclude with some remarks on our outlook.

Although we have significant opportunities across all major markets, I would describe the overall industry demand outlook as low to moderate growth.

Despite that broader sentiment, we continue to be bullish on the prospects for Celestica to thrive in this volatile environment.

Our current guidance for the second quarter and outlook to achieve 10% to 15% growth in 2011 with improving margins is in line with our current reality and consistent with our plans and expectations.

Thank you for your continued interest and support of Celestica, and now I'd like to turn the call over to Paul

Thanks, Craig, and good morning, everyone.

As a reminder, Celestica is now reporting it's financial results in accordance with the International Financial Reporting Standards, or IFRS, as required for all public companies in Canada.

As we highlighted last quarter, the two most significant changes in transitioning from Canadian GAAP to IFRS relates to the timing of restructuring charges and accounting for pension and post retirement benefit plans.

Our non-IFRS financial metrics are also similar to the non-GAAP financial metrics the Company has used historically to allow investors to compare Celestica's financial results with those of its major North American peer groups.

We have disclosed additional details of the IFRS impacts in our 2010 annual Management discussion and analysis.

Our first quarter financial statements also contain reconciliations between IFRS and the amounts previously reported under Canadian GAAP.

Comparative financial information for each quarter of 2010 has also been reported under IFRS.

Craig provided some highlights on revenue in the first quarter, so let me provide some specific commentary on our profitability, returns, balance sheet and the second quarter guidance.

The Company posted IFRS net earnings for the first quarter of $30 million, or $0.14 per share on a diluted basis, which included restructuring charges of $5.9 million.

These results compare to IFRS net earnings of $28.5 million, or $0.12 per share for the same period last year.

Adjusted net earnings for the quarter were $54.7 million, or $0.25 per share, compared to adjusted net earnings of $43.5 million, or $0.19 per share for the same period last year.

Adjusted gross margins were 6.7% compared to 7.2% in the first quarter last year, and 6.8% in the fourth quarter of 2010.

We continue to maintain our cost control discipline with adjusted SG&A at $57.3 million, or 3.2% of revenue, compared to $59.5 million in the fourth quarter last year.

Our SG&A performance was also strong on a year-over-year basis, where despite revenue growing by 19%, or $282 million on a quarter-over-quarter basis, SG&A only grew $3 million, or about 6% over the same period.

Adjusted operating margin was 3.3% compared to 3.5% in both fourth quarter and the first quarter one year ago.

As we have previously discussed, we expect operating margins in the first half of 2011 to be just under 3.5% as we absorb new programs and a higher mix of consumer and server business won in 2010.

The adjusted tax rate for the first quarter was 6%, lower than our anticipated 10%.

The lower tax rate was driven largely by the composition of our profits in different tax rate jurisdictions and favorable taxable foreign exchange resulting from a weaker US dollar.

This lower tax rate added slightly over $0.01 to our adjusted earnings in the quarter.

Finally, pre-tax return invested capital was 27% for the quarter, in line with it's 27.2% we achieved for all of our calendar 2010 which was one of the strongest in the Company's history.

Let me provide you with a quick update on restructuring.

As you recall, we had recorded all of our remaining restructuring charges under GAAP.

However, on a transition to IFRS, $11 million of these restructuring charges were reversed as these actions had not yet been announced and were expected to occur in 2011.

As we announce these actions, you'll see the charges reflected in our quarterly statements this year.

In the first quarter of 2011, we recorded $5.9 million of that $11 million and we expect the remaining amounts to be recorded in the second and third quarters of this year.

Moving to our working capital performance in the quarter.

We experienced some volatility primarily associated with higher inventory levels.

Inventory turns were 7.4 times with inventory up $136 million sequentially from the fourth quarter, or an increase of 16%.

The increase was driven by lower than expected demand from a customer for some of these ramping programs and additional inventory that another customer requested us secure in support of future demand.

This additional inventory was supported by the customer with a $50 million cash deposit, which is reflected in our cash balance.

CapEx for the quarter was $19 million, consistent with our run rate of approximately 1% to 1.5% of annual revenue.

This CapEx was primarily to support the growth related to the ramping of new programs.

Cash cycle was 31 days, a two day increase from the fourth quarter.

And free cash flow for the quarter was negative $52 million as a result of the extra inventory and payment of our annual variable compensation in the quarter.

The balance sheet remains strong as we continue to maintain the strongest net cash position amongst our North American peer group, and we ended the quarter with a cash balance of $584 million .

Additionally, our $400 million credit facility remains undrawn and we continue to have no debt outstanding.

Let me now turn to our second quarter guidance where we anticipate continued sequential growth.

We anticipate revenue to be in the range of $1.75 billion to $1.9 billion.

This guidance reflects the current moderate growth environment.

For our adjusted earnings per share in the second quarter, we anticipate a range of between $0.22 and $0.28.

As we discussed in the December quarter, our recent revenue mix shift with higher growth from our server and consumer end markets will likely result in operating margins in the near term that are slightly below our stated target of 3.5% to 4%.

At the mid-point of our Q2 guidance, we anticipate margins to be slightly below the 3.5% target.

Not withstanding some of the current global inflationary trends and currency volatility, we continue to expect to achieve our 3.5% to 4% operating margin targets in the second half of this year.

While we anticipate the Brooks transaction to close during the second quarter, we have not included any revenue, operating margin or earnings per share impact from this transaction into our guidance.

The transaction will be funded from a combination of cash on hand and the Company's credit facility.

While there have been some-- while there has been some improvement in Japan, our guidance for the second quarter of 2011 includes our best estimates of the potential impact to our financial results from possible business disruptions at our operations or at the operations of our suppliers as a result of the earthquake and tsunami.

As it relates to Japan, we have returned to normal production levels after a full 2-week shutdown in March .

However, any deterioration or unforeseen changes to the situation in Japan impacting our facility or that of our suppliers, could further affect the assumptions we have used in our guidance and could negatively impact our guidance for future financial results.

Tax rate for second quarter is expected to be back in the 10% to 12% range as we move forward.

SG&A is also expected to be approximately $60 million for the quarter, and we expect free cash flow to be negative as we work to improve inventory turns in the second half of 2011.

On an IFRS basis, we anticipate a $0.05 to $0.08 per share negative pre-tax impact on earnings for stock-based compensation, amortization of intangible assets and restructuring charges.

That concludes our formal comments and I would now like to open up the call

(Operator Instructions) Amit Daryanani with RBC Capital Markets.

Your line is open.

Yes, good morning, guys.

Just 2 questions from my side.

One I just want to understand the [solar ramp] dynamic a little bit better.

It appears that I think last quarter we were expecting the solar ramp to happen in tune of like $70 million to $80 million.

Did that ramp not occur to the magnitude that [Japata] would, and if so what did you delay a product transition from a competitor or just an OEM having issues in the marketplace?

Amit, good morning, it's Craig.

First of all, we were executing at a very high level for the customers so our service levels and our lead times were very competitive.

What we saw is our demand did not materialize to the forecast that our-- of our customers expectations.

So it was largely a end market demand miss in terms of expectations, and that's the primary reason for the miss in expectations.

And how much of the 16% increase in inventory was actually related to that?

It was roughly a third of that, I'll say.

And just a second question, could you just talk about the integration process of the semiconductor equipment asset that your buying from Brooks automation?

You mentioned $135 million in run rate, but what accretion should be expect in the back half and what sort of operating margins can we expect from that that you're acquiring?

Yes hi, Amit, good morning, it's Paul.

So as far as the specifics, we're going to give more specific guidance when we release the Q2 results.

So you know the revenue run rates, will say the margins in this business are above the Company's current average.

So we do expect to be accretive certainly as we integrate it in the first few couple of quarters there'll be some expenses relating to integration.

So take us a couple of quarters to get to the run rate of what we expect, but certainly we expect that transaction to be accretive.

Fair enough.

Thanks a lot, guys.

Thank you.

Louis Miscioscia with Collins Stewart.

Your line is open.

Okay, thank you.

Some other competitors had made comments that they were seeing a pretty broad-based slowdown in demand, and just wondered, obviously since your numbers look like they came in okay and I know you made a couple of comments to that, maybe if you could just dig into that a little bit more?

And then I had a follow-up question on Japan.

Sure, Louis, good morning, it's Craig.

The demand environment overall I'd say is low to moderate demand as we see it from our base business.

Fortunately for many of our customers we are in the sweet spot of the markets that are holding up, so I think you see stability in our demand outlook.

I think what you see then in addition to that in the case of Celestica is the impact of our new program wins.

And then the-- so you'll see continued strength as we go through the second quarter, and obviously we're anticipating that strength to continue into the second half.

So, base of business, low to moderate demand in the end markets, improving mix of our business and then we tend to be in the sweet spot of some of our customers programs in terms of their demand environment, so.

Now I realize that when you look at normal seasonality there's been so many odd quarters over the last number of years, I don't know if there is normal seasonality, but let's say that 3% to 4% quarter-to-quarter growth into September and maybe 5% in December is let's call that normalish, is that what you would expect I guess going forward for the rest of the year?

Hi, Louis, good morning, it's Paul.

As you know we talked about 10% to 15% growth for the year, that's something we still feel very comfortable with.

At the mid-point of our guidance for Q2 it would signify year-on-year growth of 15%, backing up what-- the 19% that we saw in Q1.

So that level we're comfortable with.

Exactly how it unfolds quarter to quarter, as you said, we're not sure what normal is anymore, but really based on the strength of the programs we have, the wins we've had in 2010, fell pretty confident with our overall 10% to 15% number.

Okay, then last question is a follow up on Japan.

Could you just talk about whether your plants getting enough power?

We heard that that's been an issue throughout, just consistently getting enough electricity to run things.

And then also that some of your customers do source significant opponents or source material from that area, just could you give us some visibility on that?

Thanks, guys

Sure.

In Japan, at least for the current-- the near term, we see the stable supply of electricity, water and associated services.

I think in terms of the supply chain, we see the ability to mitigate the risk that we see in our business for the second quarter .

I think the bigger question from all of us in the industry is the implications in the third quarter and the fourth quarter.

So, operations at Miyagi are back to normal.

Material constraints are important visibility.

We don't expect any impact to the guidance we've issued, and obviously we're moving our focus to the second

Great, thank you.

Thank you.

Brian White from Ticonderoga.

Your line is open.

Hi, good morning.

On the enterprise communications market, it grew 1% sequentially and typically a seasonally soft quarter.

Is that driven by end market or is that new program ramps?

It's a combination of new program ramps and the end market growth, so we're fortunate to be a part of customers that have growing programs in a challenging market today and we've seen some strength there.

Okay, and when we look into the second quarter, do you expect that growth to continue?

Hello, Brian, it's Paul.

When we look at -- as you know, we don't give specific guidance by end market.

When we look at it, I don't expect any big shifts.

I would expect our, what we call diversified markets, so the industrial, commercial, aerospace, defense, healthcare to grow a bit faster than the rest as we move towards our near-term goals to have that be a larger proportion of the Company.

So and those comments are excluding any impacts from the acquisition we announced today.

So, all in all, I think that we expect are end market distribution to be very similar to what you're seeing here in the first quarter.

Okay, and just on the consumer market, in the second half of the year it's seasonal, should we look forward to seasonality plus new product ramps?

Or is it going to be driven more by just the seasonality in the business?

Okay, Brian, I think that in the consumer programs that we have, it's less about seasonality.

So when we had a lot more gaming in the portfolio, seasonality was a factor.

Now I think it's more about the programs we have and how they're performing in the marketplace more than a seasonal tick up or down.

We are launching new programs in the back half, so I think it'll be more about just the uptick from those program and less about seasonality per se.

Great, thank you.

Thank you.

Sherri Scribner with Deutsche Bank.

Your line is open.

Hi, thank you.

I wanted to ask about the server business and the comments a little bit earlier in the Q&A that that business did not materialize, demand did not materialize the way the customer had anticipated.

Do you think there is a change in the forecast for that business going forward through the rest of calendar 2011, or does it seem like the forecast that the customer gave you for that new program is still on track?

Well, Sherri, good morning, it's Craig.

What we see basically is a shift in end market demand against the forecast assumptions the customer was making.

It's-- we're not going to speculate on second half demand.

There's a whole series of products in the portfolio, so the a combination of programs that are rolling off, it's the combination of programs that are stable in the base.

And overall, the 10% to 15% in the server segment is okay from a growth rate standpoint.

So, I think the message to you is that it's a complex situation.

There'll be take up rates and obviously we're working through the details there.

Okay, so it sounds like maybe the programs that you initially ramped had a little bit less demand than forecasted but there's a bunch of different programs that are ramping through the year that potentially even that out, is that a fair way to think about it?

So, Sherri, hi, Sherri, it's Paul.

Just to clarify, the 10% to 15% Craig was referring to was the Company not the segment.

So I think the programs that we discussed have been fully transferred.

So there are no additional transfers to come in.

So now it's just about the demand in the marketplace and how again the pull through happens.

So overall as we said, certainly the demand was not as strong as we anticipated that notwithstanding obviously being at the mid-point of the revenue we had guided on balance here we did okay with the Company .

And I said most importantly with what we see in our pipeline that the growth for the Company at 10% to 50% we believe is

Okay, okay, that's helpful.

And then in terms of the Brooks acquisition, it sounds like it's a segment you haven't been in before, who are the primary competitors in that segment?

I would assume Benchmark maybe, Flextronics, but I wanted to see who you expect to compete with head to head in that market.

It would be the Flextronics and the Benchmarks and those customers would be the primary competitors.

Okay, great, thank you.

Thank you.

Thanks, Sherri.

Jim Suva with Citigroup.

Your line is open.

Good morning, gentlemen .

[Ausea] here from Jim Suva's

Good morning.

Could you clarify a little bit on the inventory stuff?

I know you had said part of that was related to the servers program not ramping and if you could clarify the other half where you said you got some cash deposits from a customers to meet improved demand from that particular customer.

Sure, so, overall, I think just to step back, as you know Celestica has led the industry in inventory turns for the better part of 3 years.

So we feel pretty good about out overall capabilities.

I think what you're seeing there as Craig mentioned, as we've discussed, demand on 1 customer not been as strong.

And then similar to what we had last quarter, a customer really in advance of ramps for new programs wanting us to position some inventory and backing us up with some cash for that inventory.

So I think that's largely the story there.

Okay, and then the consumer segment seem like it performed a little bit better than expected on-- seasonally, any comments there that you can clarify, was it related to 1 customer, was it related to a couple of customers on that front?

Well certainly as you know, our biggest customer and the largest portion of the consumer is with RIM.

So as I mentioned earlier on consumer, it's less about seasonality and more about just the products that we are supporting what the pull through is in the marketplace.

And I think as we've talked in the past, we've really focused on trying to make sure we have a diversified set of products with that customer serving them for multiple geographies.

And so last year we had discussed that we were expanding to serve them from Europe as well.

That has worked out quite well for us, which has really underpinned the overall revenue in that sector.

Okay great , thank

Thank you.

Todd Coupland with CIBC.

Your line is open.

Yes, good morning, everyone.

Just on-- one more in the inventory, if I could.

Is the read through on your comments that you take the components and inventory now or ramp in Q2 or over the next few quarters?

I'm sorry, Todd, can you rephrase your question I'm not sure--?

Yes, so what-- I guess what I was-- I'm asking is you got the $50 million deposit for new program repositioning and is that for delivery largely in Q2 or over the coming quarters?

It would I would say principally be in the next quarter, so in Q2.

Okay.

So should we expect more of that?

I mean that customer has certainly talked about multi-billions of commitments with it's supply base.

Certainly, Todd-- so I mean as you know, I mean this deposit not for liquidity concerns overall giving Celestica's balance sheet, this is about us being disciplined on overall pricing and return on capital.

So we're happy-- as you know, there's volatility in demand with respect to models as we've discussed.

And so we do expect this type of construct to be something that you'll see more of in the consumer space, particularly as OEMs look to lock up component supply.

So that is something that we-- this model is something we expect to see more of, not less of.

Okay, second question, so I understand the server point butt we had IBM talk about high-end demand and pretty good server uptake.

I know they've fallen below 10%, but are you seeing uptick in the high-end part of the market away from this core customer?

No, I don't think so.

I mean we're seeing IBM's demand are in line with their forecasts and we see continued improvement into the second quarter.

So more in line with normal seasonality on the server side.

Yes, okay.

Great, thanks very much.

Thank you.

Thank you, Todd.

Brian Alexander with Raymond James.

Your line is open.

Good morning this is (inaudible) in for Brian Alexander.

I just wanted to go back to the server comment.

The customer your ramping has been shrinking it's server business as it tries to improve profitability.

Are you confident that your forecast has sufficiently accounted for this dynamic?

And then just related to that, how are you thinking about seasonality for service overall going forward?

Well we're certainly working with the customer today and we're confident that the forecast they're putting forward in the second quarter is being more realistic and in line with our thoughts.

And obviously we're looking to the second half and there's a number of new programs that are planning to ramp and as we discussed it obviously depends on the take up rates.

But the products that we're working on reflect the strategy of that customer, we're confident in their ability to execute that.

And we think our outlook is in line with that.

And as Paul mentioned, we were able to meet the mid-point of our guidance despite the shortfall, and therefore we remain confident in our ability to deliver on our commitments, which is the important part of this conversation.

And seasonality going forward?

Seasonality, it's--

It should be normal.

It should be normal, so I wouldn't anticipate any material change there at this point.

Okay, and then you'll still have a sizable cash balance following the stock buyback and Brooks acquisition, can you just talk about how you're going to deploy capital between organic investments, buybacks and M&A going forward?

Sure, I mean our primary objective is to deploy the capital back into the business to support organic growth.

Our second really tranche as Paul mentioned is more in line with what we've just done through the Brooks acquisition is to accelerate our traction in the higher value added segments of the business as well as our after market service business.

Our third option then, failing either one of those, is to redeploy the capital back to the shareholder either through a further stock buyback would be our primary consideration at this time.

All right, thank you very much.

Thank you.

Shawn Harrison with Longbow Research.

Your line is open.

HI, this is (inaudible) calling on behalf of Shawn.

I was wondering if you could provide an update to your operating margin goals for the second half of the year and just clarify a little bit, I think you'd said that you'd be slightly below your 3.5% to 4% goal, do you see yourself returning that this year?

Yes, so I think as we had discussed in our December quarter, we expect in the first half to be slightly below the low end of the 3.5% to 4% target, and you saw that happen here in Q1.

As we look to the second half, what we see today, 3.5% to 4% is what we see.

Certainly a large part of that is, as we commented, shifting the mix into those diversified markets and basing the program wins that we have in 2010, which are ramping up.

We feel confident with our ability to deliver that.

Thank you.

Thank you.

Naser Iqbal with Salman Partners.

Your line is open.

Thank you for taking my question.

And so just to clarify that the-- for the Brooks acquisition, the- like all your targets you talked about the 10% to 15% and the improvement in the back half of this year, going back to 3.5% to 4%, those targets, is that independent of the Brooks acquisition?

That's correct.

Okay, okay.

And what do you think are some-- are maybe one of the key risks to these targets on a revenue perspective?

Would it be like the global economy, Japan, or just maybe overall end market demand?

I would rank-- I mean end market demand would be the primary risk at this point.

And obviously end market demand would reflect the overall economy or any major geopolitical shift.

I would not put Japan in that category, frankly, as far as we're concerned, Naser, another major event.

And if I can add to that, certainly as you read the paper these days there's a lot of conversation around inflation around the world, and as you know, we operate in many different countries, be it inflation, be it foreign exchange movements.

I think the industry has become much more disciplined in the last few years, certainly you've seen that from us.

And it's our expectation those types of costs will need to get passed on through pricing, and certainly that's how we are approaching it .

So I think it's really those factors, as Craig mentioned revenue being probably the largest one that would take us off the puck there and just being mindful of what we're seeing on a global basis again with some of these inflationary

And just one final question.

Given that all the restructuring is complete, your respective of the IFRS accounting treatment of it, are you at the utilization level that you're happy with and what is that, if you could just remind us?

Well, again, we're in the 65% to 70% range today.

Obviously better utilization is better so we obviously would continue to look to further improve that as we ramp and continue to grow, and so obviously the target would be get-- the other issue you're considering is the skew on our utilization where we got a third quarter, or a third month skew in each quarter.

So that's-- that makes it challenging, but by and large we're at the 65% to 70% range with expectations to go above 80% as we get to the design point for the Company.

Okay, great.

Thanks a lot.

Thank you.

Thank you.

Gus Papageorgiou with Scotia Capital.

Your line is open.

Thanks.

Just for modeling purposes for the cash flow, so the $80 million for the acquisition you expect to be done by Q2, so within the quarter, that's correct?

Yes, that's correct.

Okay, and on the inventory, do you expect that to correct-- do you expect to get back to normal inventory days by the end of the quarter, so we should see the inventory corrected in the quarter or do you think it will take another quarter?

I think it'll be more into the back half, Gus.

So you expect the inventory level to stay kind of at-- the inventory days to kind of stay at the current levels until like Q3, Q4?

Yes, I look at it more less about the days, more about the dollars, the dollars will be in the zone.

So you think the absolute dollar range should not fall back, on it, we shouldn't expect to go back to previous levels before Q3, Q4?

That's correct.

And then I think what you'll see in Q3, Q4, we do expect some growth, so it just depends on how exactly how that growth unfolds.

Okay, great.

Thank you very much.

Thank you.

(Operator Instructions) Robert Young with Canaccord Genuity.

Your line is open.

Good morning, thanks for taking my question.

I've-- there have been signs of some optical weakness reported by some of your competitors in the market, so I wonder if you have any comments around that or if you see the same dynamic?

In general, we see our optical business in line with our forecast and consistent with our outlook.

So the short answer is no, not impacting our going forward forecast.

All right.

And a question about component availability.

I was wondering if you see any changes there and if there's any risk to margins from higher pricing or lower yields from lower quality components through brokers and such?

And in the inventory, aside from the $50 million provided by the customer, is there any increase that you are holding a large number of components to avoid problems there?

The short answer to both questions is we have not seen the implications of either one of those 2 factors in our business today.

Okay, thanks.

Louis Miscioscia with Collins Stewart.

Your line is open.

Can you talk about the margin structure for the acquisition that you're doing?

Louis, the margins in that business-- so when we talked about our diversified markets, as you know we've-- operating margins in that zone have been north of 5% and this acquisition would be consistent with that.

Okay, so it's obviously not a fix up or turnaround, just obviously buying them for their skills and capabilities?

Yes, this operation is performing at very high levels, has a very Tier 1 customer base.

Our goal here is to take these capabilities and to expand them to other customers, and frankly also expand within the existing customers, which from our point of view they've been held back just given the limitations on scale and footprint.

So that's the plan with this.

Okay, helpful, thank you.

Thank you.

Leo Schmidt with Chubb Corporation.

Your line is open .

Hello, thank you.

As a follow on to that question, could you give us a little more insight what is that you are bringing to this acquisition that you hope to be able to do to help them out?

So is it ability to have scale that you can scale up their current operations, or is it your ability to get into more customers that you can leverage your sales base that you have?

Could you give us some more insight into that, please?

Yes, well first we bring our track record of execution in a space.

So it's the quality of Celestica and the operational performance we've been able to deliver over the past 4 or 5 years here.

Second, we bring our global footprint.

Third, we bring a strong balance sheet and our ability to invest.

By global footprint could you tell us what you mean by that?

So in terms of our ability to offer the customer further capabilities in North America, Europe, and Asia beyond the manufacturing space that they have, to facilitate the growth of their business as well as our supplier business.

The suppliers are also-- or the customers are also looking at opportunities to further consolidate their partners to larger scaled suppliers that offer them better options than the Brooks go it alone strategy.

So in essence, were you offering them a better customer base?

That's the key piece here, or am I mistaken about it?

It's the financial strength, okay the ability to support the investments that Brooks needs to continue to grow with their customers.

The operational performance, access to our supply chain technology and our ability to work with their suppliers to improve the flexibility and speed of response, and then finally the ability to scale as they have further growth.

Thank you.

We have no further questions at this time.

I turn the call back over to the presenters.

Okay well on behalf of Celestica, I'd like to thank everybody for joining us this morning and we look forward to our continued conversations.

Thank you very much.

Thank you.

And this concludes today's conference call.

You may now disconnect.