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Executives

Craig Muhlhauser - President & Chief Executive Officer

Paul Nicoletti - Chief Financial Officer

Paul Carpino - Vice President of Investor Relations

Analysts

Matt Sheerin - Thomas Weisel Partners

Gus Papageorgiou - Scotia Capital

Sherri Scribner - Deutsche Bank

Jim Suva - Citigroup

Steven Fox - CLSA

Ryan Jones - RBC Capital Markets

Brian Alexander - Raymond James

Shawn Harrison - Longbow Research

William Stein - Credit Suisse

Sundar Varadarajan - Deutsche Bank

Celestica Inc. (CLS) Q2 2009 Earnings Call July 23, 2009 8:00 AM ET

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Celestica’s second 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 will now like to turn the conference over to Mr. Paul Carpino, Vice President of Investor Relations. Please go ahead, sir.

Paul Carpino

Great. Thank you, Theodore. Good morning everyone and thank you for joining us on Celestica’s second 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 this quarter and then we’ll open up the call for Q&A. Copies of the supporting slides accompanying this webcast can be viewed at www.celestica.com during this conference call. This conference call will last approximately 45 minutes and after the call we can be reached for follow-up questions.

During the Q&A please limit yourself to one question and one follow-up, to ensure everyone on the call who would like to ask a question has the opportunity to do so. You are welcome to get back in the queue after you ask your question.

Before we begin, I would like to remind everyone that during this call we will make forward-looking statements related to our future growth, trends in our industry and our financial 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 20-F and subsequent reports on Form 6-K filed with the Securities and Exchange Commission, which can be accessed at www.sedar.com and www.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 www.celestica.com.

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

Craig Muhlhauser

Thanks Paul and good morning everyone. Celestica’s second quarter financial results reflect our continued success at driving quality and efficiency throughout the company, while delivering value for our customers despite this challenging economic environment.

The company’s revenue was $1.4 billion compared to $1.9 billion in the same period last year. Our GAAP earnings were $5.3 million or $0.2 per share, compared to $39.8 million or $0.17 per share last year. The adjusted net earnings were $0.11 per share, compared to $0.17 per share for the same period last year. Both revenue and adjusted net earnings were better than the mid point of our guidance.

Consistent performance of our margins and returns also continued in the second quarter. Operating margin was 2.7% compared to 3% last year. The gross margins were 7.3% as compared to 6.7% in 2008. Our return on invested capital, including intangibles was 15.3%, compared to 11.8% last year. Cash flow from operations was $55 million and the company generated free cash flow of $41 million.

These results have been accomplished during a period of unprecedented volatility and uncertainty in the global economy, which significantly impacted overall demand. With our track record for quality, operational excellence and improving financial returns now established, underpinned by a strong balance sheet, we are now investing in customers and capabilities to achieve profitable growth, while delivering higher returns for our shareholders.

Delivering improved shareholder returns even during the low point of an economic cycle is a prerequisite for any industry that wants to attract investment capital and create long term value for its shareholders. We believe that deploying significant capital and resources to build capability, without the flexibility to deliver acceptable returns throughout the economic cycle is no longer a viable model or strategy for this industry.

The leadership of any company must strive to deliver acceptable financial returns at any point in the cycle, and shareholders should expect this from the EMS industry.

At Celestica we remain firmly committed to this basic principle. While our margins have improved during this downturn, our current average utilization is approximately 50%, which is well below our target.

Our improved operating performance throughout our global supply chain network, combined with the uncertainty regarding the length of this downturn, has resulted in the decision to further reduce our cost base globally to meet the demands of today’s competitive environment.

Going forward, achieving further cost reductions and our targeted revenue growth objectives will enable Celestica to continue to improve operating margins beyond our current target of 3% to 3.5%. Looking to the third quarter, the mid point of our guidance indicates we are currently forecasting seasonal growth, and new program ramps, which result in 7% sequential revenue growth.

Although we are encouraged by the positive trends in our revenue for the third quarter, we remain cautious in our outlook as end market demand remains volatile across all industries and visibility remains limited. Operating margins are expected to continue to improve in the third quarter to approximately 3%, which is reflected in the mid point of revenue and EPS guidance.

Celestica continues to execute well in this environment, however our focus on continuous improvement requires us to further raise the bar on our operational performance and financial targets. We are realistic about our expectations relative to end market demand and the competitive environment in the near term and we intend to be at the forefront of the industry in taking the necessary action to drive better efficiency and cost productivity for the future.

We firmly believe the combination of our improved financial strength, operational excellence and the speed and flexibility of our global supply chain network will continue to create a unique advantage for Celestica, as we focus on targeted revenue growth opportunities and our commitments to deliver increasing returns for our shareholders.

Now, let me turn the call over to Paul, who will take you through the financial result in more detail.

Paul Nicoletti

Thanks Craig and good morning. Revenue for the second quarter was $1.40 billion compared to $1.88 billion in the second quarter last year, and $1.47 billion in the first quarter of 2009.

The year-over-year decline in revenue was driven primarily by the challenging economic environment across all sectors, with server, enterprise communications, aerospace, defense, industrial and consumer experiencing the largest declines. Sequentially, consumer had the largest decline, primarily due to product transitions, while the storage segment showed strong sequential growth associated with the ramping of new program wins.

Looking at our revenues by end markets, enterprise communications represented 23% of total sales; the consumer segment with 22% of sales; telecom with 20%; the Server segment represented 12% of sales; storage was also 12% of sales; and Industrial, Aerospace, Defense, Healthcare came in at 11%.

Moving to our customer concentration, our top 10 customers represented 70% of sales for the quarter. Our top five were 48% of sales, and we had three customers with sales of greater than 10% in the quarter.

GAAP net earnings were $5.3 million or $0.02 per share for the second quarter of 2009, compared to GAAP net earnings of $39.8 million or $0.17 per share for the same period last year. The year-over-year change reflects the impact of $474 million lower revenue, primarily associated with the weaker end market demand, as well as a $21 million restructuring charge in Q2 2009, compared to $4 million in the second quarter last year.

Adjusted net earnings for the quarter were $25 million or $0.11 per share, compared to adjusted net earnings of $38.9 million or $0.17 per share for the same period last year. Gross margins remained strong and came in at 7.3%, compared to 6.7% last year on 25% lower revenue.

As Craig noted in his remarks, we have established a very flexible and efficient operation, which allows us to maintain strong levels of gross margin despite the sharp decline in revenue.

Operating margin for the quarter was 2.7%.We’ve done a very good job containing SG&A which was down $5 million sequentially to $61 million. Finally, our pretax returns on invested capital calculated as EBS divided by average net invested capital was 15.3%, our seventh straight quarter of double digit returns.

In terms of restructuring up-data as of June 30. We recorded restructuring charges of $21 million during the second quarter and to-date have recorded $63 million in charges related to the $75 million restructuring plan announced at the beginning of 2008.

As you saw in our press release this morning we have made a strategic decision to aggressively increase capacity utilization throughout our global network. While our financial performance continues to be strong, the company is firmly committed to breaking the cycle of running our network in the 50% to 60% utilization range, which we have been operating at for far too long.

Instead of chasing any and all revenue just to fill our plants we will be increasing our focus and resources on targeted revenue that best leverages our capabilities and network to meet our longer term financial target.

Given our more targeted approach to revenue, we can reduce our existing infrastructure and as a result we are implementing a new restructuring program for $75 to $100 million, to achieve this high utilization initiative. We expect this program to be completed by the end of 2010 with 85% of the charges being cash costs.

As Craig noted, when this program is complete and revenue recovered, we believe we can target margin potentially higher than the 3% to 3.5% profile, we’ve been targeting at these levels of revenue. We also believe, our customers will benefit from the lower cost structure associated with the reduction in excess capacity and we would like to see the rest of the industry aggressively reduce their idle capacity as well.

Moving to working capital, our cash flow and balance sheet matrix continue to perform well. Cash flow from operations was $55 million. We spent $14 million for CapEx in the quarter and generated free cash flow of $41 million. Lower than typical CapEx spending this quarter offset the timing of the higher $32 million capital additions in the first quarter. We expect CapEx will remain in our 1.1% to 1.3% of annual revenue this year.

Cash cycle for the quarter was 21 days compared to 19 days in the first quarter. We also continue to work down inventory in the second quarter, with inventory coming down 9% or $61 million from the first quarter. This performance compare well against a 5% sequential decline in revenue from the first to second quarter, and a 7% increase in revenue at the mid point of our guidance for the third quarter.

Inventory returns were 7.8 turns, which we expect is leading our peer group for the eighth consecutive quarter. The balance sheet continues to be strong for the company, cash at June 30 was $1.12 billion or a $38 million increase from the first quarter and long term debt was $583 million. Overall, we enjoyed the strongest net cash position amongst our peers.

In summary, the operations are driving consistent and positive returns without the benefits of revenue growth, which we believe bodes well for stronger returns when revenue growth resumes.

In terms of outlook for the third quarter, we expect to see sequential revenue improvement as the consumer segment benefits from a typical seasonal increase. We expect revenue to be in the range of $1.425 billion to $1.575 billion, an adjusted earnings per share to be in the range of $0.11 to $0.17.

Depending up on the mix of business, the mid point of the guidance implied a 3% operating margin, which would represent the sequential improvement from the second quarter. We also expect to generate additional free cash flow in the September quarter.

That concludes the review of the financial results. I will now ask the Operator to open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matt Sheerin with Thomas Weisel Partners, please go ahead.

Matt Sheerin - Thomas Weisel Partners

Yes, thank you and good morning. First question is with regard to the restructuring program that you’ve announced. Could you tell us what the capacity utilization rate now is for the company, and what your target would be, and as you to take that capacity offline and you transfer projects to other manufacturing plants. Historically, you’ve had some issues in the past doing that. So, what kind of safeguards or plans do you have to ensure a more seamless transition?

Paul Nicoletti

Hey good morning Matt, thanks for your question. The company is currently operating around 50% utilization. Upon completing these actions, at current revenue levels, we think this will take us up into the 60% range.

As far as program transfers, I think that that’s something we’ve done a good job executing in the last few years. The teams here, consistent with the operating improvements that we’ve seen across the board have been executing extremely well, so we have a very focused process on program transfers and I’m pretty confident here that we won’t run into any issues.

I guess, I should also note to you that overall, while we are not giving any specific details around sites and locations, that the revenue that’s impacted is nominal as far as what’s moving.

Matt Sheerin - Thomas Weisel Partners

Okay great, and my second question, as you look at the pipeline opportunity of new business, you’ve done a terrific job of bringing gross margin up. So, when you look at new business, particularly on the consumer side, how do you weigh the margin targets versus returns in evaluating new business?

Craig Muhlhauser

Well Matt, good morning, it’s Craig here. We have target thresholds for each of the major market segments, and based on the operating leverage we are getting in the improvement and execution, we are using a portfolio approach to balancing the mix and managing the revenue targets, as well as the returns to maintain industry leading objectives frankly, when it comes to operating margin and return on invested capital, and I think you’ll see some of the early results here in the last number of months and quarters here as we’ve executed the game plan.

Matt Sheerin - Thomas Weisel Partners

Okay, thank you.

Craig Muhlhauser

Thank you.

Operator

Your next question comes from Gus Papageorgiou with Scotia Capital, please go ahead.

Gus Papageorgiou – Scotia Capital

Hi, thanks. Good morning. Just had a question on the revenue, just on the consumer I know it was down quite a bit sequentially and whereas storage was up quite a bit, and I would have thought that the trend were going to be the exact opposite. Can you just give us a little bit of color, what happened to consumer and why you are confident that it will ramp as we go into Q3?

Craig Muhlhauser

Gus, good morning. It’s Craig here. On the storage side, the improvement was related to the program win, very successfully and very quickly ramped in the second quarter, so we’re very pleased with that. The consumer shortfall in the quarter was related to actually a program transition where we are moving to end of licensing certain programs and we are ramping aggressively a significant number of new programs in the second half, so.

Gus Papageorgiou – Scotia Capital

Those transitioning of those new programs are they with an existing customer or a new customer?

Craig Muhlhauser

Yes. They are with an existing customer.

Gus Papageorgiou – Scotia Capital

Great, thank you.

Craig Muhlhauser

Thank you.

Operator

Your next question comes from Sherry Scribner with Deutsche Bank; please go ahead.

Sherri Scribner – Deutsche Bank

Hi thank you, I was hoping to get a little more color on the server segment, it was down a decent amount this quarter with storage was up. Is there anything significant going on there, and what would be your expectations when we head into the second half. It seems like commentary has been stabilizing and that there might be upticks, so I just would be curious on your thoughts.

Paul Nicoletti

Sherry, it’s Paul. Forgive us; we are having a bit of a hard time hearing you, could you just repeat your question.

Sherri Scribner – Deutsche Bank

Hi, can you hear me now?

Paul Nicoletti

That’s excellent.

Sherri Scribner - Deutsche Bank

I was on mute, I’m very sorry. I was curious about the server segment. It was down a decent amount this quarter, the storage part was up. There has been some commentary as we go into the second half, that server seems to be possibly coming back. So, I would be curious to get your comments on what happened this quarter with server and what your expectations are into the second half?

Paul Nicoletti

So Sherri, what’s happening with server for us is just reflective of the mix of demand we have in our product. So there’s been, no share shifts or program losses underneath the coverage, just the demand we are seeing. It’s hard to say what’s going to be typical in this environment. Having said that, we would expect that, as we’ve seen in the past, we see a bit of a pickup in the server side as we look into the second half, so that’s what we would expect to see.

As far as storage, as already Craig mentioned earlier, really we’re pleased by what we’re seeing on the back of the new program win that we ramped up during the quarter, and would expect from what we see right now, we expect that to be a part of the range we’ll operate in for the foreseeable future.

Sherri Scribner - Deutsche Bank

Just following up on that in terms of, a bit of a pick up, are you hearing that from your customers? I mean really are you hearing that from your customers that you’ll probably see a pick up or is that more of a seasonal expectation?

Paul Nicoletti

Well, Sherri as you know, visibility continues to be very poor. So we look at everything pretty cautiously here, which is certainly part of the backdrop to why we decided to take out some additional capacity, but let’s say when we look at the forecast and based on our discussions with customers.

Certainly as we look to Q3, we reflected what we think is going to happen in each end market and you’re seeing a pickup sequentially, which is pretty good when we sit back and look at what’s going on with some of the guidance of our customers.

So the short answer is it’s a bit of a mix of both. It’s what we expect sequentially and what we’re seeing in our discussions with our customers and what we see in our order book.

Sherri Scribner - Deutsche Bank

Okay, great thank you.

Paul Nicoletti

Thank you.

Craig Muhlhauser

Thank you.

Operator

Your next question comes from Jim Suva with Citigroup, please go ahead.

Jim Suva – Citigroup

Great, thanks and good job on the execution. My question regarding the restructuring, can you let us know a little bit about the details about, is the majority of this or how much of it is coming out of COGS and plant closures versus SG&A, and just kind of give us some details on the breakdown on where those dollar amount and savings are expected to come from?

Paul Nicoletti

Sure. So I think the majority of it will hit the COGS line. You’ve seen us continue to chip away at the SG&A, and as I commented in my remarks, down $5 million sequentially, which we are pretty pleased with what we have been able to accomplish there, but this specific restructuring, I would characterize 75%, 80% of it will be on the COGS side and a little bit on the SG&A side.

Jim Suva - Citigroup

Okay. On the SG&A side, down around $16 million this quarter is extremely impressive. Is there still some room to go there or are we operating pretty lean now to where we should expect kind of $60 million going forward?

Paul Nicoletti

I think for the foreseeable future, in that low 60 is where you should expect to see it. I mean there is always some SG&A in plants and so as plants shutdown for 2010, we’ll see a bit of reduction to SG&A at that time, but for the foreseeable future I think low 60 is a good way to think about it.

Jim Suva - Citigroup

A question for Craig. Craig your operating margin has been improving very impressively. When you talk about potentially getting above your 3% to 3.5 % operating goal, which you’re at the lower end of that right now, to get above that 3.5 % in addition to restructuring do you need revenue growth or will this restructuring assuming the demand, environment range relatively stable, you can only hope it all improves.

Could we get above or at 3.5 % or do we need some type of top line sales growth and what sales growth or what sales level would you expect to need to get the 3.5 % margins?

Craig Muhlhauser

Good morning Jim. It’s really looking at the vectors here. The restructuring could have reduced the cost base, improved the utilization and frankly solidify this 3% to 3.5% range as sort of the floor for us and then we drive to higher when the revenue recovers.

Obviously mix is going to play a significant role in that as we look at the pricing dynamics of the business we pursue, we see our portfolio management, and then the other thing is we are aggressively investing in higher value added services which we need to expand our customer penetration.

You see we’ve got extremely strong cost controls in place, fairly aggressive disciplined operating model and the bottom line it would be a mix of both obviously. We are raising the bar across the entire company, both in terms of execution as well as margin performance.

So a mix of continued cost controls, solidifying the base based on the outline, the outlook we see for revenue and then driving revenue growth and you’ll see the leverage begins to come with 7% next quarter and obviously the objective is to begin to settle that image as we look at this.

Jim Suva - Citigroup

Great, thank you very much Craig.

Operator

Your next question comes from Steven Fox with CLSA. Please go ahead.

Steven Fox - CLSA

Hi good morning, a couple of questions. Does the restructuring program, the new one imply that you are taking your core eight facilities down and can you just give some more details on where you would be in from a footprint standpoint after you complete this, and then I had a follow-up.

Craig Muhlhauser

Steve, it’s Craig, good morning. Given no impact on the negative sites, we are just selectively continuing to improve the network based on the less strategic site as we look to the future and there would be more of the non-core sites in higher cost geography sectors.

Steven Fox - CLSA

1

Okay, that’s good to hear. Then secondly, you mentioned that you don’t want to take just any business, you want to take the right business, but what does that imply in terms of how you view outsourcing trends overall in the industry today and maybe six or 12 months from now?

Craig Muhlhauser

Well I mean, I think the philosophy is for us to take business, for us to acquire new business or acquire an outsourcing relationship. We have to be clear on the value we can add to the business.

Well, I think the old model of taking over a plant from a major OEM and expecting to run it better, and generate enough value for both companies over the long term is probably the old model. So, we’ve been successful in working with companies in the storage space to create new relationships that are based on this value added models from the value we contribute and then the ability for us to probably get paid for it.

Steven Fox - CLSA

So, sorry just to ask that another way. I guess I’m trying to understand the reasoning behind this latest action. Was there something that you saw in the marketplace over the last quarter or two, related to the long term trends of outsourcing that made you react or is this just more another strategic step that was going to work anyway?

Craig Muhlhauser

Fits to our philosophy here. I think we’ve got an operating model which would allow us to deliver returns to the entire economic cycle. Obviously we’ve been operating at 50% in the past, being much longer than we frankly would have liked to.

We don’t see any near term demand increases in the marketplace. We see continued competitive pricing which we question the fact of the rationality of it based on where we see capacity being, and as we look to the future, we see that this is a prudent move and in line with the reality of what we are dealing with today.

So, it’s basically the fundamental principle by which we are building the future of Celestica. We are going to operate the leanest most flexible cost effective operating network in the world and we are driving to achieve that and move more aggressively around, but it’s not based on any negative outsourcing trends. We are actually developing this strategy. We are actually working to become even more competitive in the marketplace for our consumers.

Steven Fox - CLSA

Great, that’s very helpful. Thank you.

Operator

Your next question comes from Amit Daryanani with RBC Capital Markets. Please go ahead.

Ryan Jones - RBC Capital Markets

Hi, good morning. Actually this is a Ryan in for Amit. Just wanted to ask you about your inventory balance. It’s actually one of the lowest levels on a dollar basis that it’s ever been for Celestica, even going back to 2001-2003. Is that sustainable or should we expect some sort of a build up quarter-on-quarter going forward?

Paul Nicoletti

Hey Ryan, it’s Paul. So, if you go back over the last 24 months, I think we had inventory returns into the 9. I think we peaked up at 9.7, was our highest turn, this quarter it was 7.8. So we actually see our inventory turns going up and our goal is to get it back to where we had it there, free the economic cycle. So that’s another area that continues to operate very well and our goal is to get the turns certainly into the eight’s as we look here into the second half of the year.

Ryan - RBC Capital Markets

Okay. Then kind of continuing along the cash flow statement; cash flow continues to be very good and I was curious about what the cash usage would be like going forward. I know there’s been some discussion about possible acquisition ideas. I wondered if you had any update there.

Paul Nicoletti

Yes Ryan, I think that we continue to evaluate a series of options and it’s a conscious decision for us to hold on to that cash while we look at the best way to deploy it. So, we certainly love to continue to be in the enviable position, to have the very strong balance sheet that we have and to continue to generate cash flow and we think that will continue to give us options.

With that aside, we are not going to deploy the capital just for the sake of deploying it, unless we see a very clear path to generate and sustain returns and that’s the filter we run.

Ryan - RBC Capital Markets

All right. Congratulations on a great quarter.

Paul Nicoletti

Thanks Ryan.

Operator

Your next question comes from Brian Alexander with Raymond James, please go ahead.

Brian Alexander - Raymond James

Thanks. I guess most of the investors would agree that the industry needs to demonstrate more discipline around return on capital; you guys talk about this a lot through a cycle.

So, how confident are you that as we move forward the industry will in fact behave and allow for this to happen? If you can maybe just tie that to the overall pricing environment you’re seeing on some of the new programs you are going after, relative to maybe pricing condition that existed coming out of the last downturn, and then I’ll have a follow up.

Craig Muhlhauser

This is Craig. From my perspective we are going to do what’s right for Celestica, we can’t speculate on what the competition might do. Certainly in this environment, obviously we think for our company and where we are headed as an organization, this is the right thing for us and for the industry.

We are confident with the path we are on, we are confident with track record we built, we are confident with the operating model we’ve got and that we are selectively moving into a new phase, where we are focused on further improving our operating performance, driving improved returns beyond where we’ve been in the past and then targeting selective growth opportunities which align with our capabilities.

Brian Alexander - Raymond James

Okay and then just another follow-up on the restructuring. If the actions you’re taking are going to only drive utilization from 50% today to 60%, I think you said by the end of next year, and you said earlier that you don’t want to run the business at less than 65% utilization levels, granted there would probably be some growth between now and then. I’m just curious, why is this level of restructuring the right level, why not do more pursue it even more?

Paul Nicoletti

Well Brian, I think that if we reflect on how the company is operating, we’ve got some pretty solid margin performance in the company right now, at the current utilization level. The eight mega sites are operating extremely well and as Craig mentioned earlier, I mean these actions are really focused on some smaller sites that are “less strategic”.

There is a balance obviously and our goal is to get up to as I said earlier, to 3.5% to 4%. Having said that, we are not going to take our capacity that we think make strategic bends, this is just a timing issues. So, if we can get the company up to 3.5%, which certainly would be our goal upon completion of this program, I think that’ll be ranked up to the top performance in the industry that we’re seeing right now and that’s where we set our sights on.

Brian Alexander - Raymond James

And you may have said this earlier, but if you didn’t, could you just talk about the linearity of the savings you are expecting over the next few quarters, how should that flow through?

Paul Nicoletti

I think I’ll answer it. Brian, we are targeting to run the company between 3% and 3.5% in the short-term. So as we said earlier, mix comes into play, but with that aside at our current mix and what we are seeing, the mid point of our guidance suggests 3%, and our goal is to run the company in that range. So that’s what we are targeting for.

That will be a mix of continuing operating improvements, which benefits from the restructuring program that we had underway and benefits from this new program. So we are not going to carve it up in the individual pieces. I would just like to say, we are targeting to run the company between 3% and 3.5%.

Brian Alexander - Raymond James

Okay, thanks.

Operator

Your next question comes from Shawn Harrison with Longbow Research. Please go ahead.

Shawn Harrison - Longbow Research

Hi, good morning. Just as a quick follow up on the restructuring, the previous restructuring program, if you can maybe quantify just the dollar of savings still left to roll on over the next few quarters?

Paul Nicoletti

Sure. So we’ve spend $63 million against that program, so there’s a little bit left to go here. I think we said on previous calls, we would expect to be at the high end of the previous range for the $75 million.

Generally speaking, when we take a charge, you usually start to see the benefits in one plus quarter. So if you take a charge in the current quarter, the savings usually come in not this quarter but the one after that. So that’s the rule of thumb, and the second rule of thumb is pay back on a cash basis is typically between 12 and 18 months. So, I think you can build your model that way.

Shawn Harrison - Longbow Research

Okay, so something like 30 million plus of potential savings still to come?

Paul Nicoletti

With the additional program?

Shawn Harrison - Longbow Research

With this prior program based upon timing?

Paul Nicoletti

Yes, of savings?

Shawn Harrison - Longbow Research

Yes.

Paul Nicoletti

Yes.

Shawn Harrison - Longbow Research

Okay, second question has to do with, what you are seeing in terms of the pipeline. Are you seeing more program opportunities, say over the past 90 days. What end markets are looking in these brightest, in terms of outsourcing opportunities, and then kind of following back upon a point that you’ve made with the prior questionnaire.

If you are looking at a 3% to 3.5% EBIT margin long-term, does that imply the newer business coming on may have a lower margin profile, but a higher asset velocity in terms of what are you targeting?

Craig Muhlhauser

Well, what we are seeing, we are seeing a growing funnel of new opportunities quarter-on-quarter and year-on-year. It’s broadly across our four, five major segments, so it’s across the broad market. We see our win rates improving over the course of the quarter-on-quarter performance and our new bookings are up over the first quarter and above last year.

So, as we build financial strength, as our operating expense continues with the level of flexibility we’ve been able to deliver and given the volatility of demand environment, we are very selectively going through these opportunities, but it’s not for a lack of opportunities, it’s the targeted approach we are taking to the growth frankly.

So we are opportunity rich, we are targeted with our rifle looking at the right opportunities, and then we are making sure we are executing at a very high standard for the programs we have, and building our customer relationships in a much broader way to add high value added services in addition to our manufacturing support.

Shawn Harrison - Longbow Research

Okay. So just to close up,, I should not assume then that the 3% to 3.5% target, EBIT margin post the closure of some of these higher costs facilities means that you are just bringing on some mix that maybe a little bit lower than you are right now. You are kind of looking at a broad landscape still?

Craig Muhlhauser

Yes, I mean that’s precisely what we are not doing. We are setting the cost base in line with the reality of the market and then we are managing the portfolio to maximize the margins.

Shawn Harrison - Longbow Research

Okay. Thank you very much.

Craig Muhlhauser

You bet. Thank you.

Operator

Your next question comes from William Stein with Credit Suisse. Please go ahead.

William Stein - Credit Suisse

Thanks. Someone already asked about use of cash and potential acquisitions, I’d like to dig it to that a little bit. What kinds of things would you look at; I’m sure you are not looking at adding capacity, but there could be potential manufacturing technologies and then there is also a vertical option component or other design key facilities. What’s your plan in that regard?

Paul Nicoletti

Well, we are looking across a broad range of markets, so we are looking at our current markets and our new markets. The investments we’re evaluating are a range of investments as you mentioned, they’re not capacity related or intellectual property related, nor they are capability related, and they are aligned with the target markets we’ve established as our key growth opportunities.

So it’s a very selective look at adding intellectual capital and driving to add capabilities that will allow us to expand our relationships and attract new customers and new markets; that’ll part of those capabilities.

William Stein - Credit Suisse

And then, if I can fall back on the end markets a bit, I don’t want to beat this horse more than we’ve already beaten it, but the storage is much better quarter-over-quarter. Is that driven by new incremental outsourcing or new program with existing customers or is this business that you might have taken away from a competitor?

Craig Muhlhauser

This is new incremental outsourcing from an existing customer.

William Stein - Credit Suisse

Great thank you.

Craig Muhlhauser

You bet.

Operator

Your next question comes from Sundar Varadarajan with Deutsche Bank. Please go head.

Sundar Varadarajan – Deutsche Bank

Yes, most of my questions have been answered, but one housekeeping question. Could you tell us what your outstanding balance was under the AR securitization facility at the end of the quarter?

Paul Nicoletti

Yes sure. Hi Sundar, it’s Paul. We sold 30 million at the end of the quarter, as opposed to 100 million at the end of the first quarter.

Sundar Varadarajan – Deutsche Bank

So you did reduce it by about $70 million during the quarter?

Paul Nicoletti

That’s correct.

Sundar Varadarajan – Deutsche Bank

Well, that’s pretty good. Secondly on the restructuring, did you actually give a dollar number for that kind of amount of savings that you expect from this restructuring plan or is it more of the goal towards getting to 3% to 3.5% operating margin target?

Paul Nicoletti

Yes, it’s the latter Sundar. So it’s goal is to get 3%, 3.5% and 4% is a combination of restructuring continued operating efficiency and frankly, up managing the mix to correct point of it being targeted about the business we are bring in the company, so a combination all those things.

Sundar Varadarajan – Deutsche Bank

And these cash payments for this restructuring, could you give us a sense of what the timeline might be. Is it front-end loaded, because you kind of said you are going to compete it end of 2010. So that’s almost a year and half way, so how do you expect to see the timing of this kind of flow through over the next six quarters?

Paul Nicoletti

I think the lion’s share of the cash will come in the first half of 2010. I should mention that there is potential where we would defray some of the cash aspect of it from asset sales. There will be a timing gap, and so we will incur the cash restructuring charge and outlay, and at a point later on we’ll defray part of that cash with asset sales and to give you a bit more color, we think we can defray about half of the cash impact of the restructuring with asset sales.

Sundar Varadarajan – Deutsche Bank

Well great. Thank you.

Paul Nicoletti

Thank you.

Operator

Your next question come from Gus Papageorgiou with Scotia Capital, please go ahead.

Gus Papageorgiou - Scotia Capital

Thanks. I guess, the question’s already been asked as I was kind of in the waiting. This year you bought back some debt, when your kind of cash balance is around $1.2 billion, you are slowly kind of getting back up there. Any plans to do that again any time soon or do you think that you’d rather just keep the cash in the balance sheets and look for other more bases?

Craig Muhlhauser

Yes, listen that’s certainly one other range of options. When we look at our discussions, earlier acquisitions, things along those lines, we do measure them saying “Hey, how does this look like vis-à-vis taking more debt out,” and so that is certainly an option. We’ve not made any decisions along those lines right now, but I would, tell you that that’s something that is on the list of things to consider. No plans at this point, but on the list.

Gus Papageorgiou - Scotia Capital

Great thanks.

Craig Muhlhauser

Thank you.

Operator

(Operator Instructions) Gentlemen there are no further questions at this time, please continue.

Paul Carpino

Okay. Theodore thank you, and thank everyone for their interest in Celestica and calling in today, and we look forward to our continued conversations. Thank you very much.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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Source: Celestica Inc. Q2 2009 Earnings Call Transcript
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