Benchmark Electronics Inc (BHE) 2003 Q2 法說會逐字稿

Hello and welcome to the Benchmark Electronics second quarter 2003 earnings release teleconference. Following the presentation, there will be a question-and-answer session. Until that time, all lines will remain in listen-only mode. At the request of the company, this conference is being recorded. Now, I would like to introduce today's host, Gayla Delly, CFO, you may begin.

Good morning and welcome to the Benchmark Electronics second quarter 2003 conference call. We realize this is a busy day today for investors following our industry and thank you for being patient over the last couple of minutes to allow people to log into the call. First today I would like to introduce our team with me. I'm Gayla Delly, the CFO of Benchmark Electronics; with me is Cary Fu, our President and Don Nigbor, our C.E.O. Don will provide an overview and I will present the financial information. Cary and I will answer your questions.

We will hold this conference call to one hour. Before we begin, I will read the forward-looking statements. During this call we may make projections or forward-looking statements regarding future events or the future financial performance of our company. We would like to caution you that those statements reflect our current expectations and that 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 recent filings on form 10-K, 10-Q and the AKs and S3s which identify important factors which could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update those projections or forward-looking statements in the future. Don.

Thank you, Gayla and thank you for joining us today for the update on Benchmark's activities. Second quarter 2003 found no less challenging than prior quarters during this downturn was quite exciting. We continue to book business at rapid pace and expand relationships with exixisting customers. I don't recall a single quarter in our history where bookings level excelled at the pace we have seen over the past quarter. I will take this opportunity to thank our sales and operating teams for their performance. Well, we like other members in the technology field are optimistic because of overall improvements in a variety of marketplaces. We have not seen consistent growth demonstrated across sectors that we serve. That will be something we hope to see in the not-to-distant future and our teams are well prepared for that.

We have from time to time discussed how the trends toward outsourcing gains momentum during a downturn. This trend is occurring and we are pleased to being actively participating and winning new opportunities as OEMs look to join forces with strong organizations to assist them in design and production. Now, over to California Gayla to go over financial performance for the quarter.

Thanks, Don. We completed the second quarter of 2003 with revenue of $449 million, which was at the upper end of our guidance provided during our last conference call wherein we provided guidance for revenue in the range of 430 to 450 million. Our second quarter revenue was slightly above that of last quarter and was 11% higher than the second quarter revenue for the prior year. Our diluted EPS was 46 cents per share. Also at the upper end of our guidance, which was 42 to 46 cents per share, and again I will point out that is on a GAAP basis.

For the same quarter in the prior year our diluted EPS was 33 cents, this represents year-over-year growth in EPS of 39%. For the second quarter, our cash flows from operations was $29 million. Our inventory level was $186 million at June 30, which was a decrease of $11 million from Q1 and our inventory turns were 8.9 for the quarter compared to 8.4 in the previous quarter. Our gross margin for second quarter was 8.2% of sales, this compares to prior quarter gross margin of 7.9%. The benefits of capacity utilization improvement, cost control, supply chain management and our efficiency gains are demonstrated in this margin improvement. The goal set forth for 2003 and early 2001 were to align our business model and our cost structure to achieve 8% growth margin and 3.5% SG&A percentage. Deriving operating margin of 4.5%.

During the second quarter we achieved 4.5% operating margin goal exceeding this gross margin goal by.2% falling short of SG&A goal by .2%. Our SG&A in whole dollars was $16.4 million, which approximates level of the previous quarter and will move closer to our goal of 3.5% as we grow our top line revenues. Interest expense was 2.3 million for the quarter. Interest income was .3 million with other expenses of approximately $427,000 which is primarily made up of foreign currency losses due to the continued U.S. dollar weakness. The tax rate for Q2 was approximately 34.7% which equates to a slight increase on our overall estimated annual rate from prior quarter where we estimated annual tax rate at 32%, that rate is now estimated to be 33%.

In accordance with GAAP, the current quarter includes catch-up to get from 32% to the 33% which a derived single quarter tax rate of 34.7% for the second quarter. Our weighted average shares outstanding, including dilutive effect of convertible debt was 27.425 million and we added a table in the press release we hope you will find informative and helpful as you calculate the dilutive effect. Looking at balance sheet, cash balance for June 30 was approximately $336 million, increase of $13 million from March 31. I must again compliment our team for diligently managing working capital. Receivables were 192 million compared to 195 million for first quarter of 2003. Days sales outstanding were 39 days, constant with that of the prior quarter.

Although if you tear that out a decimal we showed improvement in this metric. Inventory was 186 million compared dollar $197 million last quarter. Inventory turns were 8.8 times in line with our expectations for our service model with our customers. Cash cycle days were 31 days, one of the lowest in our industry. Current assets were approximately 735 million and the current ratio was 2.4 to 1. Our capital expenditures for the second quarter was approximately $2 million. Our depreciation expense was approximately $7.3 million. Total debt was approximately $113 million, compared to $130 million in our previous quarter, having paid down both our quarterly payment on our term loan and our Thailand loan balance outstanding during the second quarter. We have no amounts outstanding under our revolving credit facility of 175 million and we remain in compliance with our debt covenants.

Again cash flow provided by operation were $29 million. Our revenue breakdown for this quarter approximates as follows: High-end computers represented 63%; telecommunications represented 12%; medical represents 9%; industrial control 12%; and test and instrumentation 4%. You will note the only change with the decrease in telecom by 2% and likewise increase in test and instrumentation of 2% compared to the prior quarter. Our top three customers from last year represent 64%, which is down 2% as compared to our first quarter revenues with the revenue from top customer remaining consistent this quarter as compared to last quarter. We continue to expect that the level of concentration among our top three customers will decrease. Our goal is at the beginning of the year to dilute concentration of our top customer to upper 30% range of quarterly revenues in the Q4 to Q1 timeframe while maintaining a modest revenue growth plan and doing this through adding new customers and new programs. We believe we are on track to do this with next quarter showing top customer percentage down in the low 40% range. This is a great achievement by our team as Don said, we have been growing and winning new business.

During this quarter we booked numerous new programs. Some examples of our recent wins are with new customers which we welcome to our customer portfolio, such as Emulex andSiemens. This and other programs are expected to generate in excess of any recent single quarter of announced revenue on an annual basis. So I will only quantify them by saying I expect them on the low end to exceed $150 million and leave the upper end unquantified because we are currently working with many new customers and new programs on sizing and identifying the total opportunity. In another recent event we leased a facility as natural expansion of our relationship with Agilent in support of their high-end system integration efforts.

Our pipeline of quotation and outsourcing activities remains very robust. The component markets have not changed significantly over the past quarter, couple of quarters, as demand lags capacity in most markets. However, we see lead time and pricing for some components such as Dram to begin increasing. The temporary disruption caused by the SARS virus has subsided and the qualification for production in our China facility are ramping. We are thankful the impact that SARS had was minimal and did not have any impact beyond the qualification process at our facility and appears to have been contained in the demand for consumer electronics primarily and the sale of customer products were not negatively impacted.

As we indicated at the beginning of this year, we see our revenue from top customer declining to the mid-30% range while we see our 2003 revenues experiencing modest growth, even though end markets are not yet seeing significant improvement in demand. We're pleased to provide Q3 guidance with revenues expected to be in the $445 to $460 million range with revenue our top customer expected to be in the low 40% range. While the overall feeling in the technology market has improved, there is yet to be any real quantifiable broad spending improvements.

That illusive improvement at Benchmark we have seen expansion of the number of programs we support for existing customers, as we increase market share, as well as the increase in our customer base through the addition of new customers. These two significant underpinnings provide excellent path to revenue growth when demand improvements do take place across the market. As the market has not yet provided track record for consistency, Benchmark will continue to upon provide forward guidance for only one quarter until additional long-term information is made available from our customers. Any guidance provided side based upon information available to us at this time.

As I mentioned earlier, we currently expect 2003 revenue for third quarter to be in the range of $445 to 460 million based on those indications from customers and their corresponding GAAP range in the range of 44 to 48 cents. We believe that strong corporate spending controls remain in tact and the optimism today in the market place is driven by the lack of a further decline in technology spending rather than a solid increase spending. Our teams have executed well on behalf of new and existing customers. And we are being rewarded for that execution, which is witnessed in our revenue guidance. Now, over to Cary before we go to Q and A session.

Thank you. Our second quarter performance exceeded our expectations. We improve our continue along with resources and leverage our capacity effectively. Most importantly we had record new booked business. Technology companies across all industries face great growth challenge in the coming out of the recession. Outsourcing pace did accelerate. Benchmark possibility is easy for customers who do business with us has been very importantflagship. Our flexibility allows our customer transitionto be done at their pace, slow and the priority and our customers tell us this level of flexibility and support is critical to the success of our relationships. We are very excited about achieving the operation goal of 4.5% operation model.

By exceeding the grossmargin)by .2% expenditures. The number of customers require our team to maintain this level of excellence. Our G&A percentage of revenue, as well as absolute dollars continues to be one of the lowest in our industry. We are pleased to have achieved the operating performance level we have in the past quarter. We all continue to focus and alinercost structure and resources to remain competitive in this environment. As Gayla indicated, in the earlier discussion the challenge has been increase the level of qualification and we expect to start volume shipmentin Q3. As indicated in the last conference call, we are beginning to evaluate a opportunity in Eastern Europe, but have not yet identified the best solution for their geographies. At this point in time, I would like to turn to Gayla to start the Q-and-A session. Gayla the session.

Allow yourself to one question and one follow-up question. Operator.

Thank you. If you would like to ask a question, press* 1. To withdraw a question press * 2. That's * 1 if you have a question. One moment while the questions register. Our next question comes from Patrick Parr from UBS Warburg.

Good morning. Could you give us a breakdown of your geographic performance in terms of sales and profitability?

The geographic breakdown, as reported in our Q each period, I do not see a significant swing in any of that performance. Europe still is weak. If I were to look without having finalized data for the Q, the geographic revenue breakdown would be approximately $347 million in the U.S., approximately $85 million in Europe and $17 million for Asia and Other.

And Gayla, no real directional changes from the first quarter?

No, no I have not seen any significant changes there.

Thanks.

Thank you. Our next question comes from Thomas Hopkins from Bear Stearns.

Good morning. First question. Looks like you've announced two material new customers Emulex and Siemens and some sort of expansion of the relationship with Agilent. I think Gayla for Emulex and Siemens you said at the low end of what they could do incrementally would be $150 million per year or $150 million per quarter? I want to be clear on that.

Tom, thank you for asking if we were not clear on that point. The indication I gave was $150 million annual run rate and it was for new programs which were also including Other customers and other programs beyond Siemens and Emulex, but Some people wanted to have names, real color to some of the relationships we have been expanding. Therefore, we offered up those two as examples of some of the customer relationships that we are expanding.

Okay. Quickly, can you give us little color on what percentage you are doing for Siemens and Emulex?

Probably not. Siemens is medical and I don't have detailed product information as to the nature of the product. Emulex is in the IT space and I know we use it in our IT operations, but beyond that I do not have a great deal of detail to be able to offer up.

Okay. And the Agilent relationship, looks like there is some sort of expansion. I think in the past maybe Cary characterized that as 50 to 100 million relationship per year. Are those numbers realistic or what kind of parameter should we think about for that?

It would be qualified in numbers at this point in time. It is important to recognize, Tom, the test and instrumentation side of the business in the low end of the cycle for a long time. We did see an opening in that segment and we anticipate that revenue coming up and still maintain that revenue relationship continue to expand. If you can recall, two years ago when we announced this relationship, this had potential of $200 million in the good old days. That is picking up and the number is not out of the range.

Okay. Last question. How, I guess what some people are going to be curious about. How is it that you can achieve the kind of gross margin expansion you are getting and operating margin expansion that you are getting in a quarter when Sun obviously cut prices on some of their products you are doing? Just can you walk -- I think it is worth while working people through how you can improve your margins given 20% price cut for some programs for some of your key customers.

Tom, we just had (inaudible), I guess. Just joking there. You have to look at the whole industry. We are in it today not because -- the customers price changing, as well as in and out of variable factors. Most importantly, we really don't have any (Inaudible) excess capacity impacted. Asset capacity like competitors, which they acquired quite a bit in the so-called OEM diverse process. Those capacity, unused capacities still drag and are earning significantly. For the last 21 months Benchmark has been very, very focused on realigning our cost and the supply chain segment, very diligently. More importantly, we put our team resource where it should been. As Gayla indicated earlier in the conference call, we continue to do realignment in our resourcing, including people, equipment and real estate. Even We accomplished the performance level we have in the last quarter. We have not reported this under the so-called one-time charges or restructuring charges. Those are continued process our Benchmark continued to deliver numbers to what we reported this quarter. (inaudible) it is very diligent teams and Gayla and Don both indicated earlier in the conference call, our team are being very, very focused. We have not been deriled by A lot of the client closures and changing locations , those are the big no-nos in the industry. It is downturn, we took advantage of that. We were able to maintain our capacity, maintain our team, attract new business, the new program continues and matures. Cost pressure is always there. We counter that by execution and continue to realign our resources to the most effective way.

Tom, one thing I would like to point out in this, if you look at some of the people in our industry that have difficulties, in some cases I believe you would find for instance in some of the players who are vertically integrated, it may different portions of the market they serve, such as Baer PCBs that are causing hardships and dragging down numbers. In other instances where players are not vertically integrated, you will find that in some cases square footage and cost structure is very similar to Benchmark, but revenue is significantly lower. I think that very well demonstrates for investors what a leverage model will do.

Okay. Can you guys and I will get off, can you guys because you are going to get a lot of questions about it anyway. Can you quantify and put program parameters around this large bookings quarter that I guess all three of you commented on? I know you don't give book-to-bill or backlog, but if you could put a number around it to help people understand?

I guess, Tom, some of the key things to point out there would be there have been 12 new relationships, not just new programs with existing customers, but 12 relationships that are more sizable than most of the relationship that have been developed in a quarter of a quarter basis we are very excited both about the size of the program , quality of the customer base and what we have seen. Hopefully that gives some indication of the types of relationships that we are developing. The quantification and the reason I hesitate to give out more specific numbers is I think that we wanted to give some quality barometer, rather than just throw a number out. I think so many people were starting to throw out very large numbers that weren't able to indicate for you what it really meant to them looking forward. Hopefully you can take away from some of the names we've shared and the 12 new customer relationships that these are sizable opportunities that we're talking about.

Great. Thanks.

Thank you. Our next question comes from Shawn Severson from Raymond James.

Thank you. Good morning. Kind of talk through the new business wins and how you're winning them? I mean, you are having a lot of momentum and increasing success. Has the strategy leveraging off skill sets from Sun and direct order fulfillment or on the design side? Give color on why you are having success lately?

Shawn, it is interesting, but success builds about success. What we found, I went through and tried to break down the wins and get to kind of the root cause analysis. It was interesting to find it wasn't isolated one geography. It wasn't isolated to one type of board or process or one industry. It really was an indication we are winning additional programs from existing customers because of our execution. There's new outsourcing opportunities from OEMs that are looking to not reinvest in their internal production. We're winning programs from first tier suppliers and second tier competition. It is based primarily upon execution difficulties those have had. In some cases, the financial instability others have. When you look across the program wins we've had, it is really coming from multiple directions and multiple industries.

Another point there is you look in the outsourcing process evolving. In the early days You had PCB and the Pc have outsourcing. Now we haven't seen a lot of investor control, medical customers, those are very much in the higher mix production and outsourcing process. Look at the whole EMS universe, you know, that's all we're good at. People come to us because of that.

Are you finding as you pursue new business you are competing with internal resources so you're not the only one bidding on it, but finding it is more of a selective process of one or two maybe EMS companies pursuing that business or are you finding that you're running into four or five or six companies competing for the business?

I think at first blurb, you would find all our friends are there. As the selection process moves through, some customers very quickly whittle down the participation to identify what is a decent fit and what is a good fit for them to make sure they have the execution model they're looking for. So, I guess technically you could say it is more limited group, but at the outset it is usually all the names we know and love.

Thank you.

Thank you. Our next question comes from Amy Hudgins with Robert W. Baird & Company.

Last quarter you talked about a couple customers on the medical side that were doing revision to products which resulted in sequentially lower sales. It looks like sales kind of stayed stable this quarter. So, did those sales not come back? If not, are you expecting those to come back in the third or fourth quarters?

Amy, I don't have any real specific insight into whether those actually come back or whether the sales opportunity is lost. I believe that we will see medical go up specifically with the number of the programs we've won. Some of the programs that we support currently are maturing and are somewhat flattened out. But we do expect medical to go up because we've won a number of new programs.

Okay. Just kind of along those lines, since a number of top three customers went down by 2% but top customer stayed the same, can you just tell us if that other 2% came out of the second largest customer or third largest continued to deteriorate further?

It's really a number that -- I don't have it in front of me right now. I think it was probably a one and one.

Okay. Finally test and instrument went up, you mentioned. Is that primarily because of Agilent and the announcement there?

I think as Cary indicated Agilent(Indiscernible) said, overall, we saw improvement or I hate to be overly optimistic, but we did see some indication there might be improvement in that industry coming forth.

Great. Thank you very much.

Thank you. Our next question comes from Joseph Wolf from Banc of America Securities.

Thank you. One question with the new relationships and the expected customer concentration drop-off at the top next quarter in your guidance. Is that assuming high end of your guidance, low end our any point in the guidance?

Any point in the guidance, just the guidance has sensitivity kind of with that in mind. How about that?

Okay. When you look at performance on the gross margin side, could you walk us through a little bit how that's -- if at all is broken down between capacity utilization issues or enhanced MPI opportunities of higher gross margin?

It is really a combination of all. I don't get into the slice and dice to try to identify the true detail underpinnings because their capacity utilization by far is the most significant driver of that. MPI can be supportive of it, but the maturing of some of the product lines has a favorable impact because you get a lot of velocity on through-put. The new programs have a downward drag because you have start-up costs. You continue to develop and work the supply chain. So, it's really a combination of multiple factors, but clearly the one most important of all is maintaining a good level of capacity utilization.

Okay. Great. Thank you.

Thank you. Our next question comes from Michael Walker from Credit Suisse First Boston

Good morning, guys. Couple of questions. Since you powered through your operating marginand I know gross margin targets here. I'm wondering where -- if you have a new target and see upside to that, what kind of parameters could cause that to keep going?

At this point, we will maintain that same goal. The reason being, with the number of new programs and the size of the new programs we have, even that can be quite a challenge for my team. I am sure some of them are sitting and shaking their heads, how can you expect more of us. That is exactly what we will continue to do is to expect as much out of our team and the front-end cost associate wide start-up of new programs, as you know, is front-end loaded. You will have those start-ups where you get in the learning curve. With the number of new programs out that is why we won't re-up, if you will, the guidance or the expectation.

Okay. And then, where's your capacity load factors currently?

We're currently in the mid to high-60 percentage points.

Okay. Can you explain the rationale again behind the higher assumed tax rate going forward?

Uh, probably not most officially. It really has to do with the mix of operations. You know, U.S. and several other geographies have higher tax rates. But, percentage point is the overall difference in the tax rate.

So, the take away there is there actually might be more work getting released, more new work getting done in higher cost locations that have higher tax rates?

The overall estimate for the year went from 32 to 33%. So, more of it was in countries such as U.S., Mexico, et cetera, where you have higher tax rate as opposed to the high dollar high volume of programs being in the countries such as Asia where you have a low tax rate. Does that help?

Great. Thanks.

Thank you. Our next question comes from Michael Morris with Smith Barney.

I want to be crystal clear on the 150 million dollar figure Gayla quoted. Was that the sum, low end estimate for the very successful quarter you had this quarter in terms of bookings or is that a cumulative year-to-date kind of figure, that's the first question?

Thank you, again. That is this quarter's bookings. That is part of the reason that we're clearly excited about it, it is over 150 million at the low end in quarterly bookings for this quarter.

Got it. Thanks very much. It is interesting, sales were pretty flat, inventories down, yet you have a lot of new programs. Is it should we expect your inventories to tick up and terms to tick down as you begin to ramp these or is it sustainable performance on the inventory side?

Thanks again for asking that because I think as you all know, we have pushed our teams very hard and I am very pleased with their performance. Yes, as new programs start-up, we do have to get the pipeline of inventory and we will put forth no less of a challenge for our teams going forward, I would expect our inventory terms will go closer to 8.4 versus 8.8 times or 8.9 times. We will see those probably trending down a bit in the third quarter.

Okay. Great. I will limit it to the two. Thanks.

Thank you. Our next question comes from Chris Lippincott with McDonald Investments.

You were saying you are seeing indefinate market share gain and good penetration. Could you add color on where you really feel you are getting the most market share and perhaps how? Follow-up, you're talking about new wins, do you think it is new wins and the quality of the wins that is helping boost your margins? Thanks.

I think it is the again, the capacity utilization, the execution of our team, the realignment that we've done that provides for a favorable margin, as well as the supply chain management. Likewise, continuing to add the new programs is -- we're not seeing that isolated to one geography, not seeing it isolated to one industry or one type of product. So, I would like to be more specific, but realistically, we are seeing it across basically any way you want to dissect the information. I believe we see it in basically every different area.

Do you feel the customers that you're talking with at this point, dow feel their forecast and guidance seem to be fairly reliable? What are they telling you in their view?

All our customers forecasts are absolutely accurate. No, I think we are seeing that forecasts at this point in time probably have more credibility than they did over the past couple of years. People have I guess somewhat come to have lowered expectations and therefore are not stretching their forecasts. Likewise, since they are not going out for a long period of time, they are more attentive to the close-in period and they seem to be more realistic.

Great. Thanks a lot.

Thank you. Our next question comes from Jenny Chin with Fred Alger Management.

Hi, question on how much of Sun Microsystems was part of your revenue? Also you talk about new programs. What is the timeline for these and can you give us a few on the side? Also, what about the new Medtronics, can you give us color on that? And can you tell us a little bit about your business with Lucent and EMC? Thank you.

I think that was a set of multiple questions. I will try to tick through some of the questions just generically, we do not speak to any customer detail level of information to the extent they were not our top customers. I think we've given our information as appropriate there. Uh, other than the specific customer questions, what other question, I'm sorry, I missed a couple.

New programs, can you give us color on the size of them and perhaps the timeline for them

Timing of new programs is difficult to anticipate. Another good point to bring up in this call as opposed to maybe the last three or four quarters is we've seen more of a sense of urgency in the programs that we're trying to bring up. Some of them will probably come up in a shorter timeframe than what we saw at the earlier points in the downturn. So, they can range anywhere from 6 to 18 months, depending on whether you're doing a new product introduction and design, that will go at the long end of the spectrum, taking 18 months. In the short end, if there is a pipeline for inventory and we can bring over production, that can be anywhere from a matter of a couple of months to 6 months, just depending on the nature of the product and the complexity of whether it is a system integration. It is very broad range and if it is a sizable program, you typically bring it up in phases. So, I don't have the ability to be more precise and associate specific numbers with specific timeframes at this point.

What about the size of them? How much revenue are they bringing in?

Can you repeat that?

Generally the size of them, are they rather smaller orders or larger ones?

what We saw with greater strength than the overall program bookings this quarter. I do think we need to take the next question. That is several more than what we --

Okay.

Thank you. Our next question comes from Todd Coupland with CIBC World Markets.

Good afternoon. I am sorry I don't know this. What was percentage of your largest customer, I know you said the same versus prior quarter. What was that?

Approximately 46%.

46%. Okay. And then, just so I understand the discussion on product price reduction, obviously it is a volume question for you as opposed to what customers are doing. So, should we assume that you'll continue to get good loading from your top customer even though as percentage of total revenue it is coming down?

I'm not sure I understand the question. Overall, again, in any electronic product as a product matures, we do expect every product to see price decreases across the board in electronics. So, that is the normalcy I think you are referring to, yes.

Yeah, what I am getting at are your assumptions into third quarter for unit volumes to also tail off from your largest customer?

No, I don't get into the math of volume, pricing times quantity, I don't think we get into details on any customers.

Okay. Great. Thanks a lot.

Thank you. Our next question comes from John McManus with Needham and Co.

Good morning. The Emulex business you won, that is for both new and existing (inaudible) designs, did you win that from other contract manufacturers?

Emulex also had a press release today to discuss the award with Benchmark. I will not get into detail. I am very happy we have the business. (inaudible) evolving the Legacy product and new products as well as designs. I think I'm anticipating it to be a very positive relationship and will be a good for both companies down the road.

Great company.

Great customer. I can't say enough about that.

What do you anticipate the tax rate might be as you bring on more of China and ramp up more in Thailand?

I think the tax rate, you know, giving the 33% tax rate. I think one thing we all keep in mind, (inaudible) and when you ship the product (inaudible). That is why we're seeing the tax rate (inaudible)--

Would you anticipate in '04 the tax rate would be lower than it is this year?

We certainly are going to plan for that. As we bring up production in Asia and expand our relationship, yes, we will see decrease in our overall tax rate.

It will take time, but we will get there.

I'm sorry, I didn't hear.

It will take a little time in the main transition to ramp up volume down there. You know, we will reduce the tax rate.

You indicated you have a lot of new programs coming up there both in new and existing programs, are you looking for additional capacity? I mean, can you in Loveland, can you use that plant there for other customers besides Agilent there and can you talk about Eastern Europe and about your strategic thinking there?

We always try to utilize our facility. Looking across the board, we don't have every facility in the high 50% capacity utilization rate. So, it has more room to move around. We did pick up the capital expenditures pace a little bit and try to bring additional capacity in. It's all (inaudible) and you won't be planning your capacity with the ramping of the revenue. Otherwise it will be tough to achieve the operational goal we set for ourselves. At this point in time, we don't plan to expand capacity yet. We still believe in the near term we have enough capacity to handle the increased volume and Eastern Europe will continue to evaluate the options and hopefully will have decisions very quick. But Keep in mind as the top customer continued to reduce, we had to bring additional customer to balance the revenue gap. So, we're very happy with the continued trend.

My last question is if you look at your average revenue guidance which is maybe 3 or 4 million above what you reported in the second quarter, with a number of new programs starting up I would think that the you could be more aggressive on the revenue guidance there. Is there something else going on in mix or what have you which kind of makes you still reasonably cautious about the September quarter?

No, John, but I would love for you to spend sometime here and see all the things it takes to get a start-up into the revenue stream. I asked the same question constantly. Apparently they tell me it is not quite that easy. It is very prolonged process. Even though you bring it up and do qualification builds, the real wheels of revenue don't start turning as quickly as I would like to see them. We've taken that all into consideration. I think we've tried to prudently include the most likely amount, most likely range of amounts that we will be in there. But, I do think that as we said we expect concentration of the top customer to come down. We do expect to be back filling that with a lot of new programs.

Thank you.

Thank you. Our next question comes from Jeff Drummond with Evergreen Investments.

Want to follow-up on the China question. Can you give us a range or drill down more on the increased qualification activity and how many customers over there you do expect, what the mix is between new and existing customers when it begins to ramp in volume second half?

We have several customers down there. The new facility -- Greenfield is the start of the facility (inaudible). Number one, you have to establish history and credibility for your customers and therefore, most of the production goes to the qualification (inaudible). We are extremely busy down there I don't know the number, I do know we have tremendous MPI (inaudible) cycle. So far it is going real well. We anticipate this process really actually the second price a couple of months ago. With all the situations down in the Far East, it will slow us down a little bit. We are very pleased with the progress and the pace is picking up.

You said volume production begins in Q3?

Yes, sir.

Could you say how many customers will be in volume production in Q3, just one or --

Kind of touch and go. I would say probably, I don't know one or two. Depends on the timing, you know. It is tough to say until October 2nd. One or two will be volume and we are pleased with that.

Okay. Thank you.

Thank you. Our next question comes from Shawn Severson with Raymond James.

Couple quick follow-ups. In regards to Sun, can you at least tell us how many products are in that Sun revenue today?

Whatever sales are going to Sun. Several products, we really don't break it out. Shawn, it is historically and we will not disclose the detail of the customer because we just don't know. We are involved in several projects and we are very happy with them.

Shawn, probably one of the questions that may be coming to mind is kind of is the next generation in the revenue flow? No, that is not.

Okay. Just wanted to be clear, too, on the ramp of the $150 million you said that hits full would hit full rate in 12 months or so. Is that right? 12 to 18 months. I'm trying to figure out how we feed that revenue stream into the model?

That is kind of difficult part of the process, Shawn. Some had to go through qualification, some had to go through the Sun phase, (inaudible). Some will be 12 months. I would say I will be real surprised if we don't have all in full production by the end of the 15 months. Ramping up, that was typical quantified exactly the number of the timing. A lot of them it transfer, some a new product. But, the important thing we had, those are the relationships great customers, great men, great program for the future and we're very excited about that. We didn't quantify the top end of the numbers.

Maybe it would be fair to look at it in kind of a linear fashion over four or five quarters or something like that or is there any going to be a particular time when you would see a stairstep function or some type of surge in that revenue?

I don't see, I think linear is probably the best way to think at this point in time. Until You know, potentially we will get some more color on it next quarter. Potentially, you know, from where I sit now, Q1 may have more of -- more than linear, it will be hard to see. We will update next quarter, Shawn.

Thank you. Our next question comes from Eric Saloman with DKR Capital.

Good afternoon. Do you have plans to call or refinance the 6% convert given the large cash balance that you guys have? And the high coupon rate on the security.

We constantly consider it. We are, I think now, at a point in time where we could potentially do something with those notes. But, we have not made any announcements at this point in time or made a conclusive decision on what is the appropriate thing to do with that.

Near term loan, something you might address over the next quarter?

Yes, I think that -- we have addressed it and will continue to look at it to see if there is something appropriate to do.

Thank you.

Thank you. At this time, I show no further questions.

Thank you all very much for joining us today. We appreciate you listening into our call. We will in the office today if there is any additional follow-up. Thank you for your support.

This concludes today's presentation. Thank you for participating and enjoy the rest of your day. (Normal Termination.) The call concluded at 11:57. --- 0