Benchmark Electronics Inc (BHE) 2003 Q1 法說會逐字稿

Welcome to the Benchmark Electronics first quarter earnings 2003 conference call. All participants will be able to listen-only throughout the conference until the question-and-answer session of the call, at which time if you would like to ask a question, press star one. To ask a question, you will be announced prior. To withdraw your question, it's star two. Also, today's conference call is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Gayla Delly, CFO of Benchmark Electronics. Begin when ready.

Good morning. Welcome to the Benchmark Electronics 2003 conference call. I'd like to induce our team. I am Gayla Benchmark, the CFO. With me is Cary Fu, our president and Don Nigbor, our CEO. First, Don will provide an overview, and then I will present the financial information and we will conclude with both Cary and I answer your question in the question and answer session. We will hold this conference call to one hour. Before we begin, we would like to read the forward-looking statements.

During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We would like to caution you that those statements reflect our current expectations and actual events or results may differ materially. We refer you to the risk factors and cautionary language contained in the documents we file from time to time with the Securities and Exchange Commission, specifically our filings on Form 10-K, 10-Q, AK and S3 which could cause actual results to differ materially from our projections or forward-looking statements. We under take no obligation to update projections or forward looking statements in the future. Now, I'll turn it over to Don.

Thank you, Gayla. Thank you for joining us today as we provide you with a quarterly review and an update on Benchmark's activities. The first quarter of 2003, once again, reflected a great deal of uncertainty in the end markets. Amidst a weakness in business spending, I am proud to say our management team has performed well, improving on areas within our control. We have added new customers and gained market share with existing customers. We have expanded our level of MJI and JDM service support for customers, managed our capacity and controlled our costs well. Our efforts over the past two years have resulted in efficiency improvements which are reflected in our improved margin and profits. At a macro level we have seen fundamentals improve with many firms enhancing their financial position and reducing excesses over the past year. However, demand growth has yet to be seen as businesses are likely to err on the side of caution for now. The continued downturn provides a positive long-term outlook for the EMS firms. The near-term economic environment remains challenges and competition for new business is intense. We see a robust pipeline of opportunities in this environment across several of our markets. A combination of new opportunities and the focus our team has had on focusing to maintain improvements allow us to remain cautiously optimistic about opportunities later this year. I'll turn it over to Gayla to go over the financial performance for the quarter.

Thank you, Don. As we reported this morning in our press release, we completed 2003 first quarter with revenues of $448m. This was in line with our guidance provided during our last conference call, and that guidance was for revenue in the range of $440m to $455m. Our diluted earnings per share was .66 cents per share on a fully diluted basis, exceeding our guidance of 42 to 46 cents, and this compares to 50 cents per share on a diluted basis in the previous quarter. For the same quarter in the prior year, our diluted earnings per share was 26 cents. During the first quarter, we settled and released various claims arising out of several manufacturing agreements. In association with this, we recorded a gain totaling $8.1 m, representing the settlement of these amounts. This amount has been separately disclosed in our summary condensed income statement included in our press release.

Our quarterly revenues represent a modest decline from the fourth quarter strength we saw, and this was in line with our expectations. For the first quarter of 2003, our cash flows from operations was $14m. Our inventory level was $197m, which was an increase of $2m from the fourth quarter, and our inventory turns were 8.4 for the quarter, compared to the prior quarter of 8.8. Our gross margin for the first quarter was 7.9% of sales. The gross margin was up as compared to the 7.8% experienced in the previous quarter.

The benefits of our capacity utilization improvements, our cost controls and efficiency gains are demonstrated in this margin improvement. The goals we set forth for 2003 back in 2001 were to align our business model and our cost structure so we would achieve an 8% gross margin and 3.5% SG&A percentage, deriving an operating profit margin of 4.5%. We've made significant progress toward these goals, achieving a gross margin of 7.9%, and now our SG&A is at 3.7%. We are still on track to achieve our goals. SG&A for the quarter, first quarter, was $16.5m, which approximates the same level as the previous quarter. Our interest expense for the first quarter was $2.6m, and our interest income was approximately $1.3m, with other at approximately $548,000. Those are primarily comprised of foreign currency losses due to the weakness in the U.S. dollar.

Our tax rate for Q1 is approximately 32%. Our tax rate is primarily driven by the overall tax rate by geographic dispersion of earnings. Our weighted average shares outstanding, which includes the dilutive effect of the convertible debt, were $27.45m. Looking now at the balance sheet, first we look at cash. Our cash was approximately $322m as we ended the quarter. This is an increase of $9m over the December quarter. Our receivables at March 31st were $195m. This compares to the previous quarter, December 31, of $179m. Our day sales out standing were 39 days. Our inventory level for March 31st was $197m, compared to $196m last quarter. As I said previously, our inventory turns were 8.4 times. This is in line with our expectations based on the service model for our customers. Our cash cycle days for the quarter were 33 days. Current assets were approximate by $729m, and the current ratio was 2.3 to one. Capital expenditures for the quarter were approximately $1.9m, and depreciation expense was $7.6m. Our total debt was approximately $130m, compared to the fourth quarter balance of $137m. We had no amounts out standing under our revolving credit facility of $175m and remain in compliance with our debt covenants.

Now, looking at the revenue breakdown by industry for the first quarter. Medical was at 9%. Telecommunications was 14%. Computers was 63%. Industrial Controls was 12%. Test and instrumentation was 2%. Our top three customers represented revenues of 56%, with revenue from our top customer dropping approximately 4% as we expected. This was a slight decline from the previous quarter. This decrease is in line with our expectation, and our level of concentration among our top three customers as we indicated previously we expected this to decrease during 2003 as we ramp new programs.

During the first quarter, we booked five new programs. One is a high-end computer sector. Two were in the medical sector. One was in telecom. One was industrial controls. Together these programs are expected to generate between $40m and $75m in revenues annually. The pipeline and outsourcing activities as well as site visits continues to be high. Looking at the component markets, we have not seen any significant changes over the past couple of quarters, and demand still lags capacity in most marketplaces. However, we do believe the electronics industry may eventually see an impact in the form of logistics disruption if the SARS virus is not contained in the near future.

The outsourcing drive for the Far East for manufacturing and component suppliers may be impacted by this virus. We have seen recently some suppliers moving production away from China to ensure they are not impacted by an interruption of supply, and we could potentially see this impact from OEMs and their demand levels in the marketplace. Q2 revenues are expected to be in the range of $430m to $450m. Included in this guidance, we have considers the current environment, particularly the uncertainty of the impact of SARS, the continued weakness in capital spending and geopolitical uncertainty.

We continue to see the first half of 2003 with flat revenues, which is consistent with what we indicated in our fourth quarter conference call. This continues to believe it is prudent to provide guidance for one quarter until more information is available from our customers. Any guidance provided is based upon the information available at this time. Based on our customer information provided and as we have adjusted it for the market conditions I previously discussed, we expect our second quarter revenues again to be in the range of $430m to $450m resulting in a corresponding GAAP earnings per share in the range of 42 to 46 cents. We believe that 2003 will continue to be challenging as the economic uncertainties and the resulting declines in technology spending can further impact the marketplace as well as events such as SARS. We do remain optimistic given our new continued program and new product introductions, yet we are cautious as we want to recognize the impacts of these events. Now, I'll turn it over to Cary for a few opening comments before we begin our Q&A session.

Thank you, Gayla. Good morning. As Gayla indicated earlier, you heard the goal for the financial forecast. The marketplace today is filled with uncertainty. The full impact of SARS has unknown factors in future developments. With the combination of the SARS and the gee political uncertainty, we provide a temporary disruption in the business environment as a whole. With this environment, Benchmark has continued to perform very well with the increment portion of the business. Our performance today really is attributed to our ability to maintain and also establish new customers. Additionally, we maintain competitively in this environment but focus on our cost structures and the realignments of resources. Our goals of the 8% gross margin and 3.5% SG&A is within reach. The SG&A percent of revenue in absolute dollars is one of the lowest in our industry. We continue to focus and align our cost structures like we do the last 18 months. The Greenfield operation in China has grand opening in Q1 and now starts shipments. With our [inaudible] in the Far East in place, we will begin to evaluate opportunity for a low cost solution in the eastern Europe locations. At this time, I would like to turn the call back to Gayla for the Q&A session. Gayla?

During this portion of the session, we request you limit yourself to one question and one follow-up question in order to allow us enough time for everyone's questions. With that, I'll turn it back over to our meeting manager to open the Q&A session.

At this time, if anyone would like to ask a question, press star one on your touchtone phone. I will announce you prior to asking your questions. If you would like to withdraw your question, please press star two. Once again, to ask a question at this time, please press star one now. First question comes from Brian White.

Hi, guys. Quick question just on the outlook. You mention some of these factors that you've taken into consideration when providing your revenue outlook for the June quarter. What type of decline did you expect from SARS-related activity and geopolitical risks? The top line is softer than what we had and what some other analysts might have might have had.

I think, Brian, as in all quarters, we don't have a specific percentage we have identified or taken a haircut for. But what we have seen and, I believe, has been indicated in the news overall, that in the back end of March there seemed to be some softness and what we really do is take that into consideration as we look at the forecast and the information we have. So while it is not a specific percentage that you can put to it to say this is the expected impact, we have taken a more conservative approach to the forecasting rather than a more aggressive approach.

And when we think about this non-cash gain of $8.1m, can you walk through -- what is that related to? What time period and why it is a non-cash charge?

We are under nondisclosure agreements. Therefore, I will not have much that I can say other than that we were pleased to come to a finalization and settlement on it and have a favorable result. The customer is one in which the decision making had nothing to do with Benchmark. We don't expect there to be any future impact to forecast, and the door is open to have continued business opportunities in the future. This was specifically the result of customer activities, not Benchmark activities.

And if we backed out this charge, we're looking at about a 20-cent impact?

I believe it is calculated, although it is non-GAAP. I would point out it would be non-GAAP. If you did it net of tax, the calculation of the effect of that would be 20 cents.

Thank you very much.

The next person is Thomas Hopkins.

Yes. Good morning, Cary, Gayla.

Good morning

Could you -- you mentioned that your top customer came down 4% as a percentage -- as a percent of sales as you planned for the March quarter, and earlier this year you guys have been saying you're targeting -- you're hoping to get that exposure down to 30% to 35%. Can you walk us through the road map for that for the rest of the calendar year, how you get that exposure down to those levels?

I think Tom, as we've indicated, we have several new programs and new customers that we've added over the past few quarters that will be included in the denominator which, in says sense, dilutes the impact of the top three customers.

Okay. And is there -- I guess should we be looking for it equally balanced? I don't know, 40% in June, 35% in September, 30% in December, or how do you think that's going to track?

We haven't been given any specific guidance for the other quarters. I am not in a position to do guidance for a single customer. That would be inappropriate, I believe. I do see that we would trend that down, not necessarily on a sequential basis equally. I don't have the details at that level, but I do see that trending down over a period of time rather than a specific point in time falloff.

Okay, great. Can you tell us what your current thinking is on acquisitions, if you are even interested in the acquisitions? If you are, would they be OEM divestiture type of deals or other EMS companies? Can you give us color on your current thinking there?

As always, we have focused our attention for M&A on strategic acquisitions, again not focused on top line growth for the sake of top line growth, but looking at opportunities which either incrementally add an expansion of the type of services that we look to be able to leverage against other customer opportunities or geographic locations, as Cary said. We may be looking into Eastern Europe for expansion. There may be some OEM activities where it makes sense to expand a relationship with a customer. So in essence, Tom, each of the areas has some points of interest which may be different amongst and between those decision-making activities. However, we will ultimately line up any opportunity, the cost benefit of the opportunity. At this point in time, I am not aware of any specific EMS opportunities that look enticing, but that is always something you keep on your radar screen also.

Tom, this is Cary. I guess there's a lot of books floating around. At Benchmark, we continue our process. Like Gayla indicated, we only acquire anything involving M&A activity who will benefit for the long term.

Okay, great. Thanks.

Thanks.

The next question comes from Stephen Savas (ph).

Hi, Steve

Good morning. Gayla, I wanted to follow up. I know somebody earlier asked about what the EPS impact was from that $8.1m. Did you say it was 20 cents impact?

Yes. Basically, I derived that to walk through the calculation. If you take the $8.1m and multiply it by the effective tax rate of 32%, you derive an impact net of tax of $5.5m, and then dividing that over the number of shares you result in 20 cents, I believe is the walk-through.

20 cents. The EPS is 46 cents

Right. I guess the way I was looking at backing into it was removing the $8.1m. Was there a tax implication from that $8.1m?

Yes. Non-cash doesn't mean nontaxable. The government still taxes it.

I understand that. That implies that the tax rate on the balance of the business, I think, ends up being a little bit below 30%, more like 27%.

The tax rate is a blended tax rate, considering the effect of all events for on an annualized basis. So 32% is an all-in tax rate which is in accordance with GAAP. The calculation of the expected effect for the whole year of all events.

Okay. Taxes are always interesting.

I understand.

The taxes, like Gayla said, is a combination of the tax jurisdiction that affect the tax rate. As you come into the low tax region, we anticipate the tax will go down.

Right. Going forward, I know you're anticipating about 32%?

For the year that is the expected rate

Okay. And then last quick question related to the China facility you've been ramping up. I was wondering in terms of kind of where utilization is for that facility in particular in terms of the new business you're planning on putting in there. What's the mix between new customers that are being put in there with new programs versus existing programs that are being shifted from elsewhere to there?

The Greenfield facility is probably mostly a less expensive way to start an operation, but, also, take a little longer time to ramp it up. We feel it would transfer the customer into their site. People talk about impact of SARS. It does have an impact and the qualification was slowing down. We see travel restrictions from various OEMs. They're going to have an impact on the start of the situation. Nevertheless, the operation just started and it should have very few impacts on the -- from the revenue stand point.

Are you seeing any impact from your Thailand facility, or that's not as impacted?

No. Definitely everybody is very cautious. We are no different than any other company. We survey our teams to be sure there is no cases reported. We also have a very strict rules who is allowed to come into the buildings, and any travel overseas will be quarantined for a while before they go back to the facility. From the travels, international travel point of view, we’ve restricted travel. Travel to the Far East was essential for our business. Like everybody else, we took all the precautionary precautions. At this point in time we have not seen an impact. Our business in Thailand is doing very.

Okay. Thank you.

The next question comes from Michael Morris.

Good morning. Thanks. I want to talk quickly about the SARS. I know it is getting old for this conference call. Let me just ask, Cary or Gayla, you mentioned that you have seen some tangible behavior shifts. In other words, suppliers moving product out of China, possibly some impact on demand. Most of the companies that have reported so far have cited a more negligible impact so far. My question is, have you seen customers of Benchmark want to move production outside of Asia, and are there production shifts occurring as we speak? Is that having any impact on your outlook for the June quarter? That's my first question.

Let's not overplay the SARS thing. I was there about three weeks ago. I know the impact, how bad it is. I think for someone not looking at a serious situation, it is unwise. I'm looking at this very carefully with our suppliers to discover what their alternative and strategy to handle this situation if this is going to be a longer-term issue. Our position is, if this virus is under control in the near term, it has no impact on our business, no impact on the supply base. If it continues for a while, you will see some shift. They will have a survey of the supply base, shipping production from China back to Mexico to prevent potential interruptions of the logistics supplier. Is there an impact on our business? Not at this point in time. Time will tell. That's why we're taking a conservative approach to our forecast. If the situation has not improved and getting deteriorated for the last couple weeks. We have a very close eye on that. For us not to look at this particular situation, I don't think is due diligence.

For us to have any significant impact, Mike, we believe it is prudent as much as the electronics industry has come to look at the far east as part of our supply chain. I think it is prudent to consider the potential impacts as we look at our forecast. However, we have not seen any specific customer action that is would say that they have factored that into their forecasting. We have kind of considered it. If that helps.

Yeah. That's real helpful. I want to follow up. I don't want to put words in your mouth. Let me try to characterize this relative to your guidance. If SARS does not have a more meaningful impact than it has had so far and it is contained and all else equal, is that -- do you believe that would be sufficient to put your results in June above the low end of the guidance you're offering this morning?

I would say that that would be correct in that we have factored in as potential impact from SARS and, therefore, we wouldn't expect to be at the bottom end should there be no impact and should there be some resolution to the issue going forward.

Okay. I have one more question. Would you be willing to characterize your customers’ inventory and is there any variation by segment. Have you seen any tendencies from your customers to pull from hubs on a more accelerated basis given the concerns about SARS?

I don't think we have seen that yet, Michael. I think customers are still very tightly controlling their inventory level. That wouldn't be something that is unexpected. We do expect that, in this quarter, that could be a potential, but we have not seen real impacts from it at this point.

Okay.

Going back to the customer side, there is not a significant action moving the business, like Gayla indicated earlier. However, everyone, including all the major OEMs are watching this situation very closely, and we have to, in our supply base, report to the OEM on a weekly basis and on the development of the situation. This is -- you look at the market situation as well as the level. In the southern China, there is a significant capacity. For someone in the supply chain to look at that situation and monitor the activity would be -- I don't think would be uncalled for, no.

Thanks very much.

The next question comes from John McManus.

Yes. Good afternoon. Morning, I guess. Could you comment there on the significance of the medical sector being lower sequentially than in the fourth quarter?

During the first quarter, we have some customer that is are doing some revisions to some products and, I believe, that both on the selling side and on the production side, we see some holdback on the level of ordering pattern, specifically related to the new features and functionality that will be added to the new products. So it's hard to say how that will look going forward, but it did specifically have an impact on the production level for Q1.

And would you anticipate that that would also effect to the second quarter?

Again, John, after all these years of working with engineers, I'm hard pressed to identify when they have all the stars in line and feel they are vigorously ready to approach the marketplace with new production opportunities. I would expect, you know, Q2 or Q3 that we would see a comeback on that to a certain level. It's just hard to say how quickly and how that will be received.

And then the telecom sector, that grew as a percent of revenues. Was that a function there of some new customers coming in? You've talked in the past about some new unannounced telecom customers. Is that reflective there of their impact?

I think it is bits and pieces of different factors, John. Some are new programs that we've put in. Some are some new customer that we've put in. It is not a significant one item to point at. It's just a multiple of things that seem to be moving in the right direction in a weak sector.

Lastly, the numbers seem to imply that, possibly, your second largest customer grew as a percent of revenues in the quarter. Is that correct?

Yes, sir.

Thank you very much.

The next question comes from Michael Walker.

Good morning, Michael

Thanks. How's it going, guys?

Good.

A question on the related end market. I assume the audio visual is in testing implementation?

Yes. Audiovisual has gone down to negligible. It is not an area we are focusing on. As we indicated last quarter, we folded that in.

Related to the medical question, if the number two customer grew but medical is down substantially, are the prior transactions you're talking about in the smaller or at least the second tier medical customers?

We have several customers in medical. The impact isn't driven by one or only one customer. Again, we don't speak specifically to any one customer.

Okay. Also, industrial controls seemed to grow a fair amount sequentially. Can you talk to that at all?

Again, I don't see any specific. We've continued to add new customers and new programs in that marketplace. I don't think there's any one underlying event or activity that took place. I think that is kind of sequentially a normalized activity, if you will, of what we expect.

Lastly, there were a couple large new customers that signed up in Q3, two of them. I think they were MPI. You expected to start impacting in the second half. Are you still onboard with that?

We are on target with those programs. What we indicated is those are expected to be, probably, Q1 of 2004 when they come into the production fold.

We have some MPI revenue in the second half and the production should be ramping up in 2004. One of the things probably exciting in Benchmark point of view is involving the next generation on new product for all our major customers in the MPI or [inaudible].

Ultimately, Michael, the MPI or revenues in advance of volume production is not the significant level of revenue.

Okay. Thanks.

The next question comes from Michael Greness (ph).

Good morning, Cary and Gayla.

Good morning.

I had a question to follow up from the last. On the two major programs, are those, indeed, the next generation type programs you talked about?

Yes. Those are next generation programs, new activities. One of them is for a customer that will -- had not previously discussed. One of them is for an existing customer.

Okay. And the previewing the 10-Q and the mandatory disclosures you're going to have. I have the top customer roughly 48% of revenue. The second largest can be roughly 10%. Is that roughly what you're going to put in the 10-Q?

I don't have the specifics. I believe the second customer is -- I believe the second customer is greater than that, Michael.

And with the major customer, you had it said in the past you expect 18 to 24 month product life cycles. We're at, roughly, 17 months right now. Is the expectation of moving the customer to 30%, let's say, by the end of the year a function of that product life cycle, moving down that much? And then eventually ramping up in 2004 with the next generation program you mentioned previously?

I believe there's been -- maybe this is confusing. We've brought out several new programs and several new products this year. This past year so they are -- they aren't at equivalent points in their life cycle. The 18 to 24 months probably has between 9 and 12 months left on the actual volume production level of those, in my estimation. Hopefully, that answers your question.

Okay. And the program is probably 70%, 80% of the total revenue for the customer?

I don't think we've ever specifically identified and don't speak to that level of customer granularity.

Thank you.

The next question comes from Roger Norberg (ph).

Good morning, everybody. Just want to take it one question a little bit. You, obviously, had a strong fourth quarter with some seasonality that came in line with the first quarter here and it is flattish to down slightly in the second quarter. It looks like things are on plan from what you expect. Inventories are up a little bit. Your largest customer has a strong seasonal second quarter. Do you care to comment -- is there excess inventory in front of you? Could you comment if things are in line and flattish, why would I see inventories up?

Roger, what we see is we've got several through programs and several new customers coming on board. Always, we see inventories -- even though it is every so slightly this quarter. Inventories do seem to have growth in them as we start up new programs. So although inventory in and of itself, we like to see it go down. When it's going up for that reason, I don't believe it is a bad reason to have inventories slightly increase. We do want to see them continue at a good clip and a good velocity. 8.4 turns is acceptable when you're ramping new programs.

One follow-up. Revisiting your old margin target, 8% of the gross line. Given that, you know, you've ramped up a lot in the past year and utilization is up and you've done a lot of rationalization, is that still a reasonable top-end target, or is there potential to have that target move up a little bit if you get your utilization statistics higher?

I believe that's a healthy level. You're always going to try to press higher gross margins and then in this marketplace you're constantly going to be driven to pass on improvements to your customers. So we're going to continue to challenge internally the Benchmark team. I don't expect it to greatly exceed that amount. I think we will be doing well to get our capacity utilization in line at 8% growth margin.

Very good. Thanks.

The next question comes from Chris Lippincott (ph).

Yeah. Morning. I was wondering if, just given the absolute dollars on your SG&A, I don't know if you had spoken about it previously on this part of the call. The SG&A have dropped sequentially. I was wondering if A, that trend could continue in that magnitude or is this going to relatively stabilize throughout the rest of the year?

The SG&A line, we walk very closely and try to drive in control. I think, as we discussed earlier, we have one of the lowest percentage SG&A. It might be the absolute dollar SG&A in the industry, compared to site, even smaller than our sites. I think it's getting closer to the bottom and there's not much more we can drop SG&A. You want to keep your infrastructure, spending for you're engineering staff. At the same point in time, you have to keep your costs in place to continue to expand your business. Throughout this last 18 months we have been very focused on cost reduction and the efficiency improvements. By the same token, we have increased our headcount in engineers as well as sales staff. We should focus on the efforts of trying to gain additional business. In a way, I see the SG&A probably will be pretty flat for next quarter.

You think that perhaps there might be a slight up-tick in June or maybe September as you expect to ramp a fuller volume, some of your Asian facilities and new programs? I'm trying to get a sense of magnitude of expansion on an absolute dollar basis?

Only thing we'll probably increase is probably going to be commission related to the top line. It would be significant. I will keep the SG&A line to 3.5 -- a target, which is 3.5%

Given the utilization rate, it sounds like that 8% gross margin sounds fairly realistic.

It's reasonable. It is not easy. We probably are one of the few that have 8% gross margin. We worked very hard to get there. Keep in mind, that growth margin line also including a lot of MPI activity, and -- a lot of the new programs ramping up. Those costs are still in there. We will try to control costs very tightly. At the same time, we have to keep the infrastructure in place to accommodate the revenue increase.

Okay. Thanks.

The next question comes from Kit Morris.

Hi there. Would your largest customer decline as a percentage of revenue even if revenues start out at the current rate? That is, even if no new programs came on? I'm trying to understand if there's just a denominator effect or if there is a numerator effect as well. Thanks.

I don't think we've given any specific guidance. Again, I don't specifically speak to customer activities. However, the area which I think is important to highlight with any electronic product is that, over a lifecycle, both us and our customers vigorously drive to bring product costs down. That is what the marketplace expects. So we will continue to try to gain efficiencies, to drive the price down, to assist our customer in driving the price down, be it the top customer, the fourth customer or the fifth customer or the 25th customer. That is what we drive our team to do in the life cycle of every product. So if you were to put in a few more assumptions, then you would say on a normalized basis, if you're doing the same quantity production over the life cycle of a product, that, yes, unless the volumes increased to offset the reduced price, then you would have a reduction in revenue. If volumes increase, it could stay the same. If volumes go up, it could go up. I'm not trying to try to triangulate to the point we should not given out information we shouldn't given out, but we recognize in all cases our customer products should enter the benefits from efficiency and drive the costs down over its life cycle.

I guess what I'm trying to understand here, and I guess you're fairly unique given you have a substantial portion of your sales to this one customer. In the normal course of business, you're reducing their costs so in a constant volume scenario your revenues are shrinking on purpose making the customary happy and generating more business on more programs. Aisle trying to separate that out from any type of product cycle issue that is that customer has that isn't -- has nothing to do with how you're performing. It's just the fact they have fewer and fewer units as they transition to something else. I'm trying to understand if that is going to impact your business in calendar '03 and that's the reason why we're seeing a sustained reduction as a percentage of sales, or if it's really just the fact that you've got new programs coming on that are growing the denominator and you're assuming flat unit shipments and steady cost reductions, benefits to that customer?

You know, I guess the ultimate answer is, the forecast that we give is a combination of all of the impacts, be it volume, be it pricing, be it SARS. We take that into consideration in our all-in forecast. I do invite people that want to get to greater granularity on specifics of any of our customers to direct those questions to our customers because it is not proper for me to try to discuss in a public forum any of my customers' information.

Are the OEMs asking tow hold more inventory because of SARS?

We have not seen that yet. It would not be unthinkable. Everyone will be in a position where they need to address what their action needs to be and how they need to ensure that they have the assurance of supply going forward. As Cary indicated, what we do see people doing is making sure they understand which portions of -- portion of their supply chain is coming out of the Far East and what the impact and insurance that is in place by those suppliers is so that they cannot have the impact. If it were a case where there was a component or a production that was sourced in from the Far East, I suspect you would see people taking action to beef up their inventories or work their schedules or react appropriately if that were the case.

We have not seen any OEM increase at inventory level yet. As we discussed earlier, a lot of focus is in the reviewing process looking for the potential impact or the timing of this. I want to emphasize. We don't want to play too much the impact of the SARS. We want to take the impact of this situation into consideration in our forecast as well as watching our supply chain very closely. This is just a wise they think to do in a business environment at this point in time.

Thank you.

The next question comes from Shawn Severson (ph).

Good morning

I just wanted to clarify. Is it five new customers or five new programs wins that you mentioned?

Five new programs. I don't think we've delineated between new customers and existing customer programs.

Are any of those new customers for you?

I believe, Shawn, it's three and two, three new customers and two existing customer programs.

This category is the new customers were in?

No. I can't do that on the fly.

All right. Of the magnitude of those, are any of those particularly bigger than the others, or is it, you know, a bunch of smaller pieces?

I think they're all kind of medium sized businesses. There are a couple of them that segway themselves into some nice opportunity that we have not included because we have not been awarded the business yet. There are some that are nice inroads that we're excited about.

I want to focus for a second, if we could, on the storage business and EMC. I know you've been involved in the new product development and the same product category. Is that at the point now where that's being split out amongst other EMCs, other EMS partners, or are you still the primary driver in the SIM business?

I don't think we can comment on that. For specific customers, we learn more about those activities from you all than we do from the questions directed at us.

Can you at least say that was an MPI type product for you, wasn't it?

We did support SIM 6 on the MPI phase, yes. As to where it is in its life cycle and whatnot, you'd have to look to EMC to identify.

And the incremental cost, I know people touched on it. Is China having any impact, now that it's online in terms of depreciation expense or anything else that's incremental there that we would need to worry about before it gets fully loaded and we get past that inflection point?

It is already incorporated into our figures for this quarter since we've brought it on board. So to the extent it is something to worry about, it is already baked in there. It is baked in there without having utilization as we just started up. So I think that the impact is incorporated into the consolidated figures.

Fair enough. Is it loaded with equipment yet, or are you scaling that on as you need to or moving equipment from other locations?

I guess it is scaled to our expectation now, but kind of -- as is with all our facilities been as specific programs come in, you fit it out with incremental machinery and equipment. It is a fully fitted facility at this point.

So does that mean we have, like, you know, you're 30% or 40% of your equipment is in there? I mean, you have expansion opportunity to double? Where are you at over the near term in terms of your plan?

I would say that we're probably in the 40% to 50% fitted out for what it can do. It's fitted out for kind of normal production, but as you get into more specialized production or customer needs, then you do have scalability to, probably 40%, 50%. We could almost double what we have and squeeze more lines in there.

Lastly on Thailand. You mentioned before you have some customer activity and interest there. You know, can you give a quick update on where that stands today?

I think Thailand has progressed very well for us. We've integrated that into our organization nicely. The team has performed very well. We have had quite a few prior to the, you know, issues with travel that have come up in the last few weeks. We've had quite a few customer opportunities where we have both existing Thailand customers who have looked at engaging Benchmark, other facilities to assist them either in their design or in other low to medium volume production. Like ways, -- likewise, we have some prior acquisition Benchmark customers looking at the Thailand facility. That acquisition strategy has worked out well for us.

Thank you.

Thanks.

The next question comes from Keith Dunne (ph).

Good morning, everyone.

Good morning, Keith.

A couple follow-up questions. One, the -- back to the medical end markets and what appears to be an inventory correction. I would like to go into that more given that, you know, if I go back a year ago in the first quarter, you talked about one large medical program, in the $75m to $100m and then there were 3 others in the second quarter over $20m. There's been a lot of medical wins. Two announced today. Can you give us a sense of what your target, you know, percent of sales is for the medical as we, you know, get into early next year?

I would like to see the medical in the high teens. Therefore, that's what we'll try to get to. We disclosed Q3 last year designed to production projects in 2004. We report several medical customers. The challenge in medical customers is difficult to determine for the project. You, basically, involve not only the FDA issues and the product tends to be interrupt easily because if there's any issue coming out, it takes a longer time to kill the issues. Like a PC or computer site, you can do a qualification run. You can do another run. In the medical product, you have a more challenge than that because you have a regulatory issue you have to deal with. We are very excited about all the medical customers. Some are slower than we anticipated, but we're definitely gaining a lot of new customers in the sectors. We're pretty excited about it. The sectors should be going to mid-teens. I personally would like to see it go to 20%. That's going to take a while to get there.

Mid-to high teens is reasonable, for, say, early next year?

That's achievable, yes.

Moving on with industrial, I thought I heard Gayla say earlier that the quarter was sequentially normalized. Does that mean you would expect to grow -- industrial sales quarter to quarter like the, roughly, 10% you grew this quarter, or does that mean that there's roughly $54m run rate is the hold steady rate going forward? What did that mean?

I guess what I was meaning, Keith, is there was nothing unusual in that quarter's activity. That's the level of business activity we have now. Any changes from that would be from incremental business opportunities we have going forward.

So then we should be looking at the -- roughly, towards the mid-$50m as a stable rate for this year?

That would be, -- again, the anticipation would be a normalized rate.

One or two others. We've over-killed the SARS relative to this call. Is it fair to say you only do about 10% of your business in Asia, you have more than 10% capacity, if it had to, everything could come over to the U.S. in time where some other EMS companies can't necessarily say that. Is that true of you? Are there limitations on your skill base or capacity that would prevent you from moving whatever it took?

No. I don't see specifically in our production activity that we would have a significant impact from, you know, the China operation.

Now, let's go the other way. Long-tem, do you have a goal for your tax rate? Clearly as you go overseas and Eastern Europe, your tax rate would come down more?

Long-term we have a goal that, as you could see, we're probably one of the higher in the industry. Long-term, I would like to see it below 30%. It really is driven by getting a higher level of production outside of the high taxation geographies.

One of the challenges, Keith, is we continue building the sub assembly in China and the input into the higher tax region for system integration. It does not reduce your tax impact from the tax rate point of view. Definitely with China, we are taxed heavily in China and low tax in Thailand.

And, lastly, do you expect any new customers over the next couple quarters to break into your top five?

Yes.

Can you give us any color on what end market or maybe even name who your top five are these days?

No, we cannot discuss the customer at this point in time. The important thing, Keith, I do want to point out, we have a conservative assessment of the situation and we have indicated in Q1 conference call our revenue for the first half will be flat and deductible is no surprise to us.

But I did hear you say one new customer should enter the top five that wasn't there this quarter. Is that what I heard?

I don't really know if it will be a percentage plus or minus. We should have a customer move to the top five.

Thanks very much. Good job.

I'll turn it back over to the conference coordinator. I believe we have exhausted our hour. If there's any further questions, we will be available in our offices today. Thank you all for joining us today. Have a good day.

That concludes today's conference call. Everyone may disconnect at this time. - ---- 0