Benchmark Electronics Inc (BHE) 2006 Q4 法說會逐字稿

Welcome to the Benchmark Electronics fourth-quarter earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. At this time I'd like to turn the conference over to Ms. Gayla Delly. Please go ahead.

Good morning, everyone. Thank you for joining us; we welcome you to the Benchmark Electronics conference call this morning to discuss our financial results for the 2006 fourth quarter and for the full year. I am Gayla Delly, the President of Benchmark Electronics, and I would first like to begin by introducing our new Chief Financial Officer, Don Adam. And Don will begin our call with an overview of the fourth-quarter and annual results and then our expectations for the first quarter of 2007.

Barbara Sorenson, our VP Corporate Controller, will then discuss our financial metrics for our fourth quarter and the year 2006 in greater detail. Cary Fu, our CEO, will then follow providing commentary on our strategy and an overview of the current marketplace. After our prepared remarks Cary and I will take time for your questions in our Q&A session. We will hold this call, once again, to one hour.

First let me add some color to help you out in understanding the backdrop against which we will be providing information in our forward-looking section. First, throughout the month of December the demand levels remained strong. But consistent with our guidance last quarter, the incremental upside demands which you would typically see at year-end did not occur. This would be the first sign of potential end market softness that we saw.

Secondly, the overall economy remained strong through the year-end and, consistent with that through the year-end, forecasts were not reduced. So with these two data points we believed that the December softness was based on inventory levels and inventory reduction plans common at year-end. However, in early January 2007 we began the year looking strong in terms of revenue growth including the effects of second sourcing activities as well as the product maturities which we have previously discussed.

Then in mid-January we began to see downward forecast revisions from several customers. This last data point would indicate signs of an inventory correction since the changes came through after the inventory positions for the year end 2006 had been determined by our customers. The 2007 forecast for the full year, however, reflects softness. So at this time it appears to be based on our customers' end market expectations as well as some apparent concern over the growth rates in the near-term. We have provided our 2007 forecasted revenues with all of this information in mind.

Another interesting and diverse point of reference, however, is the outsourcing pipeline of opportunities. This remains very strong and some of the larger opportunities, which, of course, by nature are longer-term in the decision-making process, are being undertaken by prospective customers and they are in the works for the upcoming weeks and months.

We're very excited about these and other program ramps which we have that provide renewed growth opportunities for the second half of 2007 even if the forecasted weakness in existing products remains as they currently appear. That's a lot of information regarding the backdrop and we have included each of those data points in our forecast. Now I'll turn it over to Don.

Thank you, Gayla. Good morning. 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 these statements reflect our current expectations and that actual events or results may differ materially.

We would also like to refer you to the Benchmark periodic reports that are filed from time to time with the Securities and Exchange Commission, including the Company's 8-Ks and S-4 filings, quarterly filings on Form 10-Q and our annual report on Form 10-K. These documents contain cautionary language and identify important risk factors that 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.

As announced earlier in January, we did successfully close the acquisition of PEMSTAR Inc. Please note that the forward-looking guidance given later in this call reflects the combined organization. Now I am pleased to share some highlights from our 2006 fourth-quarter and annual results.

During the fourth quarter we were very successful in reducing inventory levels by over $112 million. As of December 31st this had not yet converted to cash in our conversion cycle due to the high level of shipments during the latter half of the quarter, again reaching approximately 60%. Much of this has now converted to cash as during the month of January we have collected approximately $300 million on outstanding accounts receivable. We expect cash flows from operation to approximate 50 to $75 million in the first quarter.

Please note that our fourth-quarter financial results contain two special items, they are as follows -- restructuring charges of $245,000 or $191,000 net of tax; stock-based compensation expenses of $669,000 or $500,000 net of tax. To help in a more meaningful comparative analysis we will present certain financial information excluding these special items during this conference call. We will also call your attention to the fact that these items are excluded when we do so. In today's press release we have included a reconciliation of our GAAP results to our results excluding these items.

Based on the results we are pleased with the overall performance in Q4. We do note that we did not see the year-end acceleration of demand which might normally be expected during the month of December. In addition, in mid to late January we began to see some greater than expected end market softness even for a typical first calendar quarter which generally demonstrates demand declines. This is similar to much of what you have heard about in recent news.

The fourth quarter of 2006 resulted in revenues of $737 million; these revenues are at the high end of our guidance of $710 million to $740 million provided in our last conference call and are up 17.9% year-over-year compared to revenues of $625 million in 2007. Our operating margin for the fourth quarter was 4.5% excluding the special items noted earlier.

GAAP net income for the fourth quarter of 2006 was $28.8 -- $28.3 (sic - see press release) million or a 14.8% increase compared to the comparable quarter last year. Excluding the special items, net income was $29 million, a 17.6% increase compared to Q4 of 2005. Diluted earnings per share for the fourth quarter were $0.43. Diluted earnings per share excluding the special items were $0.44 compared to our guidance for the fourth quarter of $0.41 to $0.44 per share. Diluted earnings per share for the fourth quarter of 2005 were $0.38.

On a year-to-date basis we experienced double-digit year-over-year growth in each of the industry sectors that we serve. GAAP net income for the year 2006 was $111.7 million, a 38.6% increase compared to 2005. Diluted earnings per share for 2006 were $1.71 compared to $1.25 for 2005. We continually see positive opportunities throughout our business as OEMs globally continue to seek opportunities to increase the levels of outsourcing and reduce operating cost. With these opportunities we are glad that we are seeing an extremely full sales pipeline.

Looking forward we expect mixed performance among the sectors and expect to continue to see the volatile forecasting across the customer base. So far in 2007 we have seen that customers from most sectors have backed away from earlier forecasts due to softness in the market. We are constantly assessing these challenges and the changes in the marketplace in our overall business planning for the short-term and long-term success of Benchmark.

During the fourth quarter of 2006 our bookings continued to reflect positive demand conditions as we booked five new programs with 46 to $70 million in annual revenues. These new program opportunities are both with new and existing customers and from a mix of industries that we serve including industrial controls, computer, medical and telecommunications. Keep in mind that these are estimates and actual revenues may differ significantly.

In connection with the acquisition of PEMSTAR we expect to incur integration costs in the range of 6 to $8 million over the next year as we integrate the combined organization and make adjustments to our new global footprint in support of our customers and market conditions. Based on this forecast we expect top-line growth of 12 to 15% for the year and earnings growth in the range of 15 to 20% excluding stock-based compensation expenses and integration costs.

We expect first-quarter revenues, based on the current indications from our customers including new program ramps, to be in the range of 735 to $765 million and corresponding earnings per share is in the range of $0.37 to $0.42 per share, again excluding the stock-based compensation expenses of approximately $650,000 or $0.01 per share and integration costs of approximately $2.5 million.

Included in our 2007 guidance are several factors -- the impact of the recent softness in end market demand; the impact of combining the operation of the Company and newly acquired facilities; the impact of new programs ramping; the potential impact of new programs encroaching upon existing products; and the potential second sourcing impacts. Our teams will drive to achieve these goals.

Now I would like to turn it over to Barbara to take you through a detailed review of our financial statements, financial information for the quarter, Cary will then provide some comments regarding our year-end and overview of the marketplace. We will then conclude by answering your questions in the Q&A session.

Thank you, Don. As we reported this morning in our press release, Benchmark had another solid quarter with revenues at the high end of expectations. Q4 of 2006 revenues were $737 million, a 17.9% year-over-year organic growth increase from the fourth quarter of 2005. Diluted earnings per share for Q4 were $0.43 and $0.44 excluding the special items. Diluted earnings per share for Q4 of 2005 were $0.38. GAAP net income for Q4 of 2006 was $28.3 million; excluding the special items net income was $29 million, a 17.6% increase compared to Q4 of 2005.

Diluted earnings per share for the year 2006 were $1.71 compared to $1.25 for the same period in 2005. GAAP net income for 2006 was $111.7 million compared to $80.6 million in 2005. As Don noted, our operating margin for the fourth quarter was 4.5% excluding the special items discussed earlier. Pretax margin was 4.6% in Q4 excluding the special items. Our ROIC was 14.3% for the fourth quarter of 2006. Our ROIC continues to exceed our weighted average cost of capital.

Interest and other income was approximately $2.3 million for the quarter; interest expense was $86,000 and other expenses foreign currency related was approximately $1.2 million. Our effective tax rate was 14.4% for Q4 2006 and 15.2% for the year. Our tax rate has continued to benefit from favorable tax incentives on our expanded business levels in Asia. Weighted average shares outstanding for the quarter were $65.4 million.

Our cash and short-term investments balance was $224 million at December 31st. For the fourth quarter our cash flows used by operations were $28.3 million. Capital expenditures for the fourth quarter were approximately $14.2 million and depreciation and amortization expense was approximately $7.4 million.

Receivables were $463 million at December 31st, an increase of $21 million from last quarter. As just mentioned, this increase was due to the back end loading of the shipments during Q4. Inventory was $420 million at December 31st; our inventory turns were 6.5 times for the quarter compared to 5.4 times in Q3 and 6.4 times in Q4 of 2005. As Don noted, we were able to down our inventory levels during Q4 while challenged by the continuing changes in customer and end market demand. Current assets were approximately $1.2 billion and the current ratio was 2.9 to 1 in Q4 compared to 2.4 to 1 in Q3. We have no debt outstanding as of 12-31.

Comparing the year 2006 to 2005 we have had double-digit increases across the board in all of the industry sectors that we serve. On a year-over-year basis revenues from the medical sector increased 38%, revenues from the computer sector increased 34%, from the industrial controls sector increased 19%, revenues from the test and instrumentation sector increased 18%, and revenues from the telecom sector increased 15%.

The growth in the non-tech industry sectors, specifically the medical and industrial controls sectors, has continued throughout 2006. Comparing 2006 to 2005, the revenue breakdown by industry continues to show consistency. The breakdown is as follows for 2006 -- medical 13%, telecom 12%, computers 58%, industrial controls 11%, and test and instrumentation 6%.

During Q4 we had two customers whose revenue represented approximately 10% of total revenue. These two customers represented 46% of our total revenue for Q4. Now I will turn it over to Cary to provide comments on Q4 and an overview of the marketplace.

Thank you, Barbara. Good morning. First of all, I'd like to take this opportunity to thank the Benchmark team for a job well done in making 2006 a record year for the Company. Looking back on 2006, we achieved an annual revenue of $2.9 billion which is 15% above our 2006 original guidance given in February of 2006. EPS actually was $1.74, which is 20% higher than our original guidance.

We're also effectively directing a very high level of our new program ramps as well as a product transition during 2006. We continue to realize our resources and footprint in anticipation of changing market conditions and customer demand. And also continue to develop our (indiscernible) depth and strength.

So going into 2007 we are seeing an unexpected soft end market demand. We are continuing to be faced with operational challenges to meet our customers' changing forecast requirements. However, we see the pipeline opportunity for outsourcing is robust. As we stated earlier, we are well-positioned for growth. Our 2007 focus will be -- number one, improving our operational fundamental; number two, integrating our newly acquired facility; number three, aligning our footprint with the market and the customer Demand; and number four, further diversify our customer base; number 5, expanding and leveraging our service capabilities.

At this time I would like to open for the Q&A session. Through this session we request that you limit your call to one question and one follow-up question in order to allow enough time for everyone else's questions. Operator, we're ready for the Q&A session, please.

(OPERATOR INSTRUCTIONS). Amit Daryanani, RBC Capital Markets.

Just maybe a clarification. On the press release you guys had said this too. When you're talking about 15 to 20% earnings growth in 2007, we're talking net income not EPS, right?

Yes, our earnings in dollars.

So the EPS at the mid point would be about $1.79 to $1.80, is that reasonable?

Converted to about $1.76 to $1.83, something like --

Cary, maybe -- if the mid point of that is around $1.80, how much of that -- what sort of accretion savings do you have built-in from PEMSTAR in that number?

Look at the acquisition and we'll anticipate it originally will be slightly accretive for the year. With the soft market we now believe the transaction will be neutral for the year. Of course, the first half of the year will be less -- it will be dilutive because of the timing of the savings, but all in all I think it will be neutral for the year.

Just as a follow-up, one of the goals we had outlined last quarter I believe was to generate about $50 million or so of cash flow. I realize the quarter is back end loaded so the AR has probably impeded that. But how should we think about cash flow from operations in 2007 for the combined entity?

As Don indicated, during the first quarter -- so we're delayed I guess a quarter, but we do expect cash flow from operations to be generated in the first quarter in excess of 50 to $75 million. So we're one quarter off in that generation.

Thanks a lot, guys.

Scott Craig, Banc of America.

Good morning. On the revenue side, Cary, the guidance implies a pretty steep increase in revenues as we work through the year. Given the environment right now from what you see, do you expect most of that increase to come from new wins as opposed to existing customers? Maybe you can help us out how you're thinking about the end markets from an outlook basis? And then secondly, on the tax rate, what tax rate should we be looking at for next year -- for '07? Thanks.

So we do incorporate the new program ramps, new sales opportunities into our forecast as well as growth with programs that we ramped during the 2006 year. So it's an all-in projection and we do not have it broken down into any percentage of business that is included in that overall forecast. On the tax rate, the tax rate is estimated at about 15% for the 2007 year.

Thanks.

Kevin Kessel, Bear Stearns.

Good morning. Maybe you guys could kind of help us understand in terms of PEMSTAR the revenue impact that you're looking for. I believe the Motorola business was something that was not acquired at closing, but where is PEMSTAR roughly running now in terms of a quarterly run rate?

Kevin, you were cutting out a bit, but I believe I got most of it at least. In general you're correct, the consumer products support has been closed out and that is no longer part of any future revenue stream. And as such the run rate in the soft marketplace that we had, which is, again, down from what 2006 experienced for the acquired entity, will be just north of $100 million a quarter in Q1.

Okay. And then as a follow-up, can you describe some of this customer feedback? Because you guys have spoken about it quite a bit here and the feedback and the order cuts and the fact that you believe it's inventory related. What are the customers saying to you and could it be the case that because this dual sourcing is going on customers are -- maybe they had you build ahead of the additional inventory or buffer inventory which now as dual sourcing takes place they're requiring less?

I don't see that the inventory levels for the -- any individual customer is the only thing that's being looked at. I think that overall customers across the board are looking at making sure that they are targeting the inventory turn in light of the marketplace today. So if I look at IT spending overall and look across the customer base, again the factors that we discussed throughout the year remain constant factors but in a softer marketplace.

So we had several new program ramps which provided, if you will, an overlap of revenues while we had both new generation and old generation products being shipped. As the older generation fades out and the new generation is in a softer marketplace we see that as the most significant change in the forecast, remembering that we had forecasted the second sourcing, we had forecasted the product generation previously in our information and our guidance.

What we did not have incorporated into our forecast would be the soft marketplace. And I think if you look at others in the industry and even other technology players you'll see anywhere 10 to 20% as the downturn that's impacted by the softness -- and that's just based on end market views. And if you look at the book to bill on PCB, I guess that's another data point that seems to have been trending down for about four months now. So it really appears to be mostly impacted by forecasting and estimates of end market demand. Hopefully those are all wrong.

Thank you.

Tom Dinges, JPMorgan.

This is Jason Gursky stepping in for Tom. It sounds as though a good portion of the end market weakness that you're talking about is coming from some of the customers that are at PEMSTAR. Can you just perhaps shine a little bit more light as to what end market that's coming from? Is it the industrial space? And then talk a little bit about where some of the weakness is specifically in the legacy Benchmark business, if you're seeing some downticks in orders there as well?

Again, I think that when we look at the overall industry I don't think it's specifically isolated. Computing is typically down in Q1, it looks like it may be down more so than it typically is. Other industries will have changes specifically related to some of the program ramps and then hitting a soft market. But I don't see any unique point to put forth with respect to the acquired locations or to Benchmark specifically.

I think it's really across the industries and across the customers. No doubt some of what we are seeing in Q1 is what might be considered typical Q1 softness, and then there is just incremental end market softness that is kind of layered on top of that, if you will, which is why you see we are expecting growth in the out-quarters.

Then just a follow-up on the cash flow. Over the last two years you have generated $2 plus in earnings, yet on a free cash flow basis consumed over $2. And I know that you are expecting some positive free cash flow here in the first quarter, but can you just remind us of perhaps the steps that you are taking at this point to improve cash flow velocity as we move throughout the rest of this year?

Well, steps are taken may not be the right way to say it, but clearly with the level of growth that we had last year, we consumed cash. So when you look at -- unfortunately, our forecast doesn't show over 30% growth this year if you look at it in that respect, so I'm not seeing a use of cash based on that kind of growth.

But should we experience significant growth at that level, I would expect you'd consume cash. At this point given the forecast for growth that we have, coming off of a year where we had substantial growth, we would see that as a point of cash generation.

Looking for the industry as a whole and typically when you have revenue growth above 20%, you use cash, and below that you would generate cash. It is just a working capital requirement to (indiscernible) in the business altogether. We see projected revenue up only 12% to 15%. We definitely see a great opportunity to generate significant cash for the year.

Great, that is helpful. Thank you.

Brian White, Jefferies.

I am wondering, Cary, if you could talk a little bit about what markets you think will actually grow for Benchmark, base business in 2007, and what markets do you think will decline?

That is a very interesting question. Of course, when you look at the projections carefully given to you and looking out for another six months, it is really hard to say how accurate the information will be. But looking at the data we have on hand today, we definitely see a strong growth struggle from a test and instrumentation side. And that will be either new customers and customers from acquisitions, and that will be a driver for growth for this year, 2007.

We will definitely continue to see a strength in the medical side. I see several medical projects still in the ramping stage and we will see a percentage as well as absolute dollars go up for the year. Industrial control will definitely see an opportunity there mainly as new projects we're winning. In the telecom we see pretty flat and the computing we'll see slightly downwards from the percentage standpoint of view. But overall with the combination of all those factors I would anticipate about 12 to 15% growth on the top line.

(multiple speakers) what we see is when you look at the growth it's coming substantially from new programs ramping for existing customers and new customers rather than simply increases in an existing program. So that's really the line you can snap to see what really is being driven by the end markets versus what's really being driven by kind of R&D dollars that customers are investing.

Okay, that's helpful. Cary, could you talk a little bit about the expansion in China? I think there was a plant that was going to open in the March quarter or June quarter.

Here is a situation that we see a PEMSTAR acquisition will now have a facility in Tianjin, we'll also have a facility in Suzhou and the (indiscernible) have it already. And so we are looking at the overall footprint and to the timing. The timing will maybe push out a little bit at this point in time and try to -- and we'll value the overall footprint the requirement of (indiscernible) we're going to put into each facility. We're probably going to see that facility be in the second half of the year announcement.

Okay, good. Thank you.

Rich Kugele, Needham & Co.

Just a couple questions. In terms of your product mix or end market mix now post PEMSTAR, how to you expect that to break out over the course of '07?

I think overall we'll see a probably significant chance for computing this versus the test instrumentation. We'll see a probably 5 to 6% drop in computer business, but we'll then see an increase from the test administration for the proportion is about another 5%. So that's part of the major changes from the mix standpoint of view.

Okay. And your anticipation of maintaining or expanding some of PEMSTAR's non-turnkey customer base, any thoughts there?

I'm not quite following the question.

On the non-turnkey, I think that that is the consumer -- kind of what we refer to as consumer, and that was closed out prior to closure of the acquisition.

But the remaining PEMSTAR piece, your conversations with their customers now that the transaction is closed, any comments on your comfort level on maintaining what's left?

Okay, so if we're talking on the same basis, the existing customer base outside the consumer products, we have had conversations with many of those customers and we -- as they are looking forward to opportunities to expand the relationship for the majority of the customer base, I think it's no surprise that customers look to the solid footprint as well as the balance sheet that we can bring forth and we look forward to the opportunities to expand with the majority of the customer base.

Okay, that's helpful. Thank you.

Steven Fox, Merrill Lynch.

Good morning. Just a couple of number questions. On the PEMSTAR -- remaining PEMSTAR business after the divestiture, what type of annual revenues are you looking at for '07 from the acquisition?

What we have done in the comments previously is discuss the Q1 forecast specifically of just north of $100 million. Beyond that we're looking at the opportunities to expand relationships incorporated through expanding the relationship. So going forward I would expect, as in all our acquisitions, that we will no longer refer to it as the entity formally known as PEMSTAR; it's all Benchmark and we'll look at overall Benchmark customer base. So we provided that only as a frame of reference because going forward all the expansion of business would be Benchmark business.

So then on a year-over-year basis I think PEMSTAR, excluding the Motorola business, did $140 million a year ago and now you're saying it's going to be $100 million. That $40 million delta is all related to soft end markets, is that correct?

No, I believe that they had been exiting some customers during the course of the last half of the year and so going forward they were not part of the revenue plan.

Okay. And then on the new win side, can you talk about how many new wins you had in the quarter, whether you want to include PEMSTAR with that and what type of revenues we could see maybe down the road from recent new wins?

We did not include specifically any new win since we didn't have a frame of reference provided to you previously for the acquired entities, but the information we provided in Don's comments were related to our wins of five new programs ranging from 46 to $70 million in estimated revenues annually.

And then last, just CapEx and D&A for the combined company now for '07, please?

The CapEx for '07, approximately $50 million. And what was the other question again?

Depreciation and amortization?

Probably around $43 million.

Thank you.

Jim Suva, Citigroup.

Thank you very much. Gayla, just using your general ballpark of just over $100 million of PEMSTAR sales, it kind of looks like if I do back of the envelope math that fiscal year sales for Benchmark core operations at best will be flat. Is that a good way to think about it, kind of flat to down 5% or do I have some bad math going on there?

Again, when we go through and look at the new program wins, I don't sort them out to say it's a new program win of old or newly acquired entities. I think that it would be wrong to look at it in that way because some of the growth and expansion of business that we have is really the result of the combined entities. So I really gave the point of reference for Q1. No doubt as we go through the year we will plan on expanding business with some of the core business that was previously part of PEMSTAR and no doubt even if they had stood alone they would have planned to do that also, right?

So I don't want to mislead anyone that either Benchmark or the previous -- the acquired entities don't plan to have growth throughout the year. But if you did kind of simple math and said somewhere north of 100, pick your number and added the core Benchmark number to it for Q1, yes, you would see there's softness in Q1 overall in the customer base from Benchmark which is, again, consistent with what you see across the industry.

And then also, can you help us out a little bit about the SG&A and operating profit margins, what we kind of should expect now with the combined new entity's run rate?

We are still looking at the operating margin at 4.5 to 5%. That's our range. We're not changing the business model and the full year we'll probably only see the low end of that range, probably 4.5 to 4.6% for the full year. That's what range we look at.

And for the SG&A though, the dollar run rate of the combined entities, what's the sustainability that you need to have to support the two companies now that they're one?

Again, we're still looking at the total SG&A line and doing analysis. Again, I tried to stay away from [2020] to give a very specific gross margin or SG&A percentage. And because of the (indiscernible) item, we're still looking at this point in time. We're looking at the overall, again, the operational margin between 4.5 and 5%. But for this year we're probably looking at 4.5 to 4.6% for the year.

Okay, thank you.

Michael Walker, Credit Suisse.

Just a quick no risk question. Could you give the end market percentage of revenues just for the quarter?

The end market for Q4 -- medical was 11%, Telecom 13%, computers 58%, industrial controls 12% and test and instrumentation 6%.

Great. And then the other question I had is just you had talked about second sourcing and it looks like that was a pretty big impact organically for the March quarter. Is that mostly done with? Are we expecting your -- some business now to be flat or up, or is it going to be down from here? I'm just trying to get a sense if we're still working through that?

I don't think we can comment. We've been talking about it for two or three quarters now. And so I don't have really any color to add with respect to where the actual process is.

Michael, from the overall year standpoint of view, we believe we have the second source activity and the end of the life for certain products and as well as the new acquired units revenue in our projection already.

Okay, great. Thanks a lot.

Steve Tabb, Tocqueville Asset Management.

According to what we see, PEMSTAR did $196 million in the first quarter of last year, and now you're only projecting $100 million and you said part of it from the closed customer products and $40 million from a drop -- when you bought this company were you expecting such drops in revenue? And are you making any further activities in closings -- any of their operations or anything to compensate for this big drop in revenue?

Steve, we did have some of the activities as they were exiting customers and as they were looking to exit the consumer products market, those were known to us. Much like my commentary at the beginning of the call notes regarding the softness in the marketplace, I don't believe all of that was anticipated by any of us in the industry. So it was somewhat mixed, but a good portion of the consumer products leaving, the customers that they were exiting, yes, that was known to us.

As we look at the model going forward I think it's a constant in our industry that we have to continue to look at the alignment of our footprint. We did know going into the acquisition the facilities that they had, where they were located and where we may be co-located in the same geographic area where we can get some synergies on co-locating those.

And as Cary said, those aren't going to happen overnight and you don't have disruption to the customer activities in order to combine those facilities. But we will look at over the next couple of quarters getting those facilities combined where it makes sense. Obviously probably first on the radar screen is Rochester, Minnesota where we have a leased facility and there is a sizable facility that we can combine our operations in that location.

All right, thank you.

Amit Daryanani, RBC Capital Markets.

Just a quick follow-up, Gayla, since you were talking about some of the sites you guys are combining. Any update on the timeline for combining the sites in Thailand. If I recall PEMSTAR's site is severely underutilized there.

We are beginning that process now. It will take some months to actually get some I guess like a bridge really. We are on contiguous property and there will be some activities to make them actually be connected. So again, that will take a couple of quarters to get that full benefit, but we will be utilizing the available capacity since we had need for additional capacity in that geography.

Probably another angle to look at this business activity -- it's hard to segregate the original Benchmark business as well as the acquired business in we've seen a couple quarters. Thailand will be a very good example. We're moving more business in there. We consolidated two teams and we reduced the overhead expenses and those all happened from day one. And we'll continue to put more business and shift from Benchmark to the acquired units very quickly, it's very difficult for us to determine are those acquired businesses or a Benchmark business unit. And it is a day we look at Benchmark in the whole family and how we'll progress from here.

An answer for Thailand, we desperately need some additional capacity down there. The two teams worked together very closely from almost day one and we're moving the business around and we definitely will see the advantages. The (indiscernible) will need to punch a hole through the wall and go through all the legal implications about they are in a [EPZ] zone, which is a tax-free zone, we are not and we need to change that.

But due to the internal process we are moving the business around, we'll move the two work (indiscernible) together and build a lot of efficiency and procurement and so on and so forth. So we are utilizing the capacity we desperately need in Thailand and with that we anticipate our Asian business will be having a significant increase for 2007 because simply we had additional capacity and customers will continue to move the business down there.

Perfect, that's very helpful. And then just looking at the PEMSTAR customer that acquired (indiscernible) one of the issues that PEMSTAR historically was a lot of their customers are (indiscernible) in terms of the amount of outsourcing dollars they would give PEMSTAR. With you guys acquiring Benchmark, are you seeing a potential to do more business with existing PEMSTAR customers in expanded relationships?

Of course. So here's this issue -- you know our business. It's not the first day, right? You've got to know us a little better and be sure our business model they're comfortable with. (indiscernible) work eventually and it will take a couple months. And even for moving some additional business into Benchmark takes time. Some of the qualifications and so on and so forth. So we will see a benefit of that probably another four or five months down the road and we'll definitely see a very positive feedback from the customers who want to give us more business.

And basically as we say when we asses this particular acquisition, we believe their engineering capabilities as well as the manufacturing capabilities are very good and our (indiscernible) looks very, very strong. And so we will take advantage of that and our acquisition strategy is always built on what we've got and may take us through the six months and convince the customers it's the right thing to do but that's how we'll process.

And there definitely is not going to be an impact on day one, but we'll definitely expect to see the impact probably in the second quarter in Q3 for the additional opportunity. At this point in time we see more customers visiting either at our Benchmark facility or our (indiscernible) facility and vice versa. And we see a lot of customer interest in expanding business with us and not only from our legacy customers, also from our acquired customers.

Fair enough, thanks.

Kevin Kessel, Bear Stearns.

Just a follow up. I'm trying to actually reconcile, Gayla, what you were just saying regarding PEMSTAR. So if you took out Motorola and the Company was running at -- I guess it was running at 200, if you take out Motorola maybe it's running at 140 or so. I still don't quite understand how it declined to 100 unless they lost maybe one of their major customers like an IBM or Applied Materials?

There were no losses of major customers. Yes, there were some planned closeouts. There was also Q1 softness on an ongoing normal basis and then there's in market softness which is also demonstrated across the industry. It's not one single thing and I don't have those dollarized specifically, but there were finalizing some customers and Q1 is normally down in some of the industries that those (indiscernible) serve on an ongoing basis.

So whether that's normally off 5 to 10%, the Q1 softness we're seeing now is above and beyond the normal softness. But no, there is not a customer loss to report. There is not a customer that we are not expecting to be part of the portfolio going forward that you would have been aware of in the historical PEMSTAR organization.

Maybe I guess another way to ask it that would help us is if you were to look at what they disengaged from Motorola obviously was the largest part, how many dollars do you feel they disengaged from or was disengaged versus what they reported in their September quarter?

Kevin, I don't have that number in front of me and I guess whatever it is it is. And we believe the revenue for Q1 is a little bit north of 100 [MIMs] and is reflected in the soft market and also is a traditional weak quarter. And we have a deal from that and I think the look and the capability and the customer base we're definitely going to be expanding them and try to continue to get more additional revenue. I can't go back and reconcile what was two quarters ago, I just don't have those data in front of me.

Just as housekeeping, what share account are you using for your guidance for next quarter is also for the full year?

Add 8 million shares basically.

An additional 8, so 73 is fair?

Correct.

And then what about debt paydown that you're expecting to do in Q1?

We have paid off the U.S. portion of their debt which is approximately $40 million and we anticipate paying the remainder of their foreign debt off this quarter which is probably another 20 to $25 million.

Thank you very much.

Brian White, Jefferies.

Cary, just on some of the priorities for the year, you mentioned expanding services. Can you expand on that a little bit?

First off, we have a significant engineering capability with the recent acquisition. We want to really take advantage of that and we are also looking at some more additional automation capability we acquired from the recent acquisition. And with the significantly larger engineering capability we're definitely going to do a lot more engineering service and the other related service to our customers. And we really try to take advantage of the bigger platform we have and try to offer additional service to our customers as well as attracting some new customers.

I think we'll have time for -- do you have one more, Brian? I'll let one more --

That's it. Thank you.

Okay. We have probably time for one more call and then we can close out.

Michael Walker, Credit Suisse.

Just one quick follow-up which was it looks like -- with the end market data you gave me, it looks like the medical business was down about 20% sequentially or so. What was behind that?

Medical, as you've seen probably over the last few years, Michael, any time we launch and ramp programs they go out with a lot of demand and then it tapers off after the new product launches take place. So that's a normal ebb and flow. And then with each project ramp you'll see kind of growth once again come through. And it always seems to be elusive as to exactly what quarter they actually get approval and launch. But sometime during the next year we'll probably see that same kind of increase and then fall off I'd guestimate around Q2 with some of the project we're launching right now.

Okay, great. Thanks.

Thank you all and I appreciate you all joining the call today. And we'll look forward to hearing from you and seeing you at future conferences. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference. You may now disconnect.