Flex Ltd (FLEX) 2002 Q4 法說會逐字稿

Good afternoon. Thank you all

for holding. At this time I would like to remind all

parties your lines have been placed on a listen only

mode until we open up for questions and answers.

Today's call is being recorded. If you have objections

you may disconnect at this time. I would now like to

turn the call over to Mr. Michael Marks, chairman and

CEO. Thank you, you may begin.

Thank you all for joining the

conference call to discuss the results of Flextronics'

fourth quarter and full fiscal year ending March 31st,

2002. To help communicate the data of this call you can also view the presentation on the internet through the investor relations section on our website and select earnings and outcomes presentation. You will

need to click to (inaudible) give you the slide number

I'm referring to. Slide 2. Please note that this conference call contains forward-looking statements within the meaning of the federal securities laws, including statements related to our trends in industry, new customer activities, anticipated growth, earnings leverage, anticipated operating results and profitability. These statements are subject to

attended results that differ materially. Information

about these risks is noted (inaudible) at the end of

this presentation and in our SEC filing. Slide three.

As announced in the press release quarter with a 3.3

billion dollars, up 5.8% a year ago. Pro forma net

income was 61 million dollars or 12 cents per diluted

share. Net income was $5.7 seven million or 1 cent of diluted earnings per share. During the quarter the

company recognized impairment charges on its investment

portfolio of $28.6 million to take into account the

deteriorating conditions in the communications market

and the difficulty environment for new software

companies, many of which Flextronics invest in and work

to create new tools for the industry. Also during the

quarter the company downsized a number of operations

and took approximately $29.6 million in severance

costs. Inaudible) but 1 cent and the investment and

severance charges reduced it by 11 cents. For the full fiscal year revenue was $13.1 billion, up 8.2% from the prior year. Pro forma net income was 310 million, down from $416 million from a year ago. Pro forma diluted

was 61 cents, down from 87 cents a year ago. Slide 4, growth margin in the quarter was 6.5% of sales, approximately the same as two previous quarters, an increase of approximately $10 million over the previous quarter. The increase came from the inclusion from

both Xerox and Pelia, offset by $4 million

in reduction from the existing operation. We expect it as the new operations become integrated and our revenues continue to grow, we will drive SGNA to around 3% of sales. Return on invested capital in the quarter

was 8.3%, down from 10.9% in the previous year. Tangible amortization or about three quarters of one cent of earnings per share. This was approximately the

same in the previous quarter. Looking now at the

balance sheet on slide five we've been able to continue

to show improvement. During the quarter we completed an equity offering raising $500 million in cash. At the end of the quarter we had $745 million in cash, up from $449 million at the end of December. In addition, total of that debt was reduced by more than $300 million to a total of 1.47 to $1.16 million. Leverage

has now reduced from 27% to 21%. We also established a

new credit facility increasing our credit line from 500

million to $800 million, all of which is currently

available. Inventory was down $108 million.

Inventories turns holding at 9.2 times, as seen on

slide six, S & L increased to 52 days and days

purchasing increased to 55 days. Both (inaudible)

somewhat at the end of the quarter. We expect it to

return to more normal level intentionally delayed

payment over quarter end. Depreciation and amortization were $1 million, capital expenditures were $45 million. Inaudible) during the quarter was $70

million, tax from operation which include working

capital changes generated $336 million during the

fourth quarter. Cash flow from operations generated over $1.1 billion during the fiscal year. Our

there's been some confusion about how to calculate this

number, we've provided the calculations for Flextronics

and our competitors on slide eight. Slide nine. Customers continue to require to aggressively move their reduction to the lowest cost location, so eastern Asia and Mexico expand while U.S. and western Europe continue to contract. Approximately 65% of our manufacturing revenue is produced in low cost locations, and we expect this will continue to increase as our customers continue to seek the lowest possible manufacturing solutions. Slide ten. Communications

was up 18% of fiscal 2002 revenues, down very slightly

on a sequential basis. Major customers in this segment include Erickson, Motorola, Nokia, Payment and Telia.

IT infrastructure was 17% down from 19% on a sequential

basis. Major customers in this segment include Alcatel, Dell, ENC, Fujitsu, and Hewlett Packard.

Computers increased to 15% from 13% on a sequential

basis. Major customers include three customers, Dell,

Hewlett Packard, Microsoft and Xerox. We continue to

win market share and new programs from most of these

customers. Consumer customers to customers% to 10% fiscal 2002 revenues, the Microsoft X box is our largest customer in the symmetry investments. They

were 34% of revenues, major customers include Caltadel

flat at about 6% of fiscal 2002 revenues. Slide 11.

The last four quarters we had only a single 10%

customer and that was Erickson at 15%. As the Sharp

phone business is now in a separate company, Sony

Erickson, we expect that Sony Erickson will become our

only 10% company in the fiscal year. Slide 12. Let me

make some comments on the quarter now. It won't be a

surprise notice of you that business conditions are

tough. Variables hours of announcements from leaders

in the technology issue, lower costs effects us all.

To give you an idea of how difficult the environment is

and why visibility is so poor, in the five weeks

between our mid quarter update and the end of the

quarter, four companies which were important companies

in four separate facilities all had major cuts backs

during the quarter and going forward, I cannot remember

a more difficult period although it is representative

of what happens in a severe market downturn, which is

something we see lasting for awhile. Slide 13. On the other hand, as Flextronics we continue to generate strong revenues and cash flow while we're operating profitable, which we feel very good about. We continue to do well with cell phones, (inaudible) PC referrals, printing and imagining products, and we continue to win new customers. So far the rates have offset

deterioration from other customers. In March quarter

both ENC and ABC selected us as a strategic partner.

They have committed to substantial relationships going

forward. We're participating very well in another

trend that often goes unmentioned. We have been

selected as a broad supplier to a host of new companies

in the communications market some of which we believe

will develop into significant companies in the coming

year. Jedi, Broadband, Rhapsody Network were selected,

and we began full scale provision for Calix,

which originally selected us approximately one year

ago. We continue to be extremely busy with new

customer activities. During the June quarter we will

almost certainly have a number of additional

relationships to announce. So while the deterioration

in the communications markets makes daily headlines,

behind the scenes we're building many new relationships

which will add to growth in future quarters and years.

Slide 14. So let me take a few minutes to remind

investors about some of the most important

characteristics of our industry. Downturns draw too

critical activities. First is cash generation both through reductions and working capital from lower sales and in operating profits. Our balance sheets along

with those of several competitors has improved during

this period. Second and probably more important is

that customers continue to restructure their

businesses, which is accruing to our benefit. Let me

give you some examples. As revenue falls customers find they have too many suppliers and necessity begin to consolidate. This almost always accrues to the

benefit of the top tier suppliers. Weak suppliers go

bankrupt like Axe Manufacturing, EM Solutions and MCMS

and their business flows through top tier suppliers,

customers look for additional outsourcing

opportunities, now often considering what used to be

untouchable. This is happening in many companies as we

speak. It takes quite a bit of time but it is

definitely happening. What is even more important to

Flextronics is many more companies are considering us,

are considering using us to provide the full suite of

services we offer. This is more complex than most of

you realize. It involves changing entire supply chain

often moving production not just from one company to

company but from one country to another at the same

time. But with prospect for market improvement somewhat bleak our customers are working with us to find other ways to take costs out of their products, as a consequence, our design, logistics and manufacturing people are busier than we have ever been working through complex engagements with both new and existing customers. As this year progresses we will have some

specific examples to talk about but these activities

take us very bullish about our future even if the end

markets continue to struggle.

Slide 15. At the same time as we're working

diligently with new and existing customers, we're

relentlessly taking costs out of the business. In the

fourth quarter we had about $30 million in expenses

related to severance costs around the world as most of

you Mike McNamara was recently promoted to chief

operations officer and he is busy combining and

consolidating activities around the world. Expenses

this quarter reflect this activity. We're also consolidating sales activities across our many services to provide a more comprehensive offering to our customers. This also is reducing costs. As our

business changes we will continue to react. If there's

further deterioration in the end markets, we will cut

costs more. To determine if we should make changes and

will do so, if appropriate. Again this is not a bad

news only subject. For example, we're extremely busy in Asia, Malaysia is booming and China, we have just completed a 350,000 square foot enclosure facility which is filling rapidly. We've announced the

establishment of an industrial mark in Shanghai area,

and we're planning two new buildings on diamond campus. Mexico continues to do very well. Slide 16. Last year

we took (inaudible) to restructure. I would like to report for you about the outcome of the most significant restructuring and that is in our closure segment. On 5/16 you can see the start last September

This slide shows we started with 40 small factories

scattered around the world. Slide 17. Now on slide 17 you can see where we are now with just ten facilities, we have major new sites in China and in Guadalahara reasonable accommodation where we're moving much of the business. The China site is filling fast with increasing business from Dell, IBM and Microsoft. In Mexico we've been selected for a number of new programs and that cycle will also be filled quite soon. In March quarter closed revenue of $250 million, up 9.9%.

We're not only one of the enclosure suppliers

going forward. Severance charges we took in March we

have provided for the shutdown of Chicago headquarters

for this business as we have now integrated the

enclosure operations with assembly business. So that

business is now exactly where we want it. Slide 18.

Let me direct the outlooks for coming quarter. As I

have just discussed we have a lot of moving parts and

not as much have visibility as we would like. Network

services is performing profitably and well. Design

services is slightly profitable with activity picking

up. Enclosures is in good shape, as I reported. Asia is booming. The printed circuit board business is improving, but will still show losses in the June quarter where six weeks we were hoping for break even performance, this is because of the continuing slowdown in communications products and high end computing. We

have one new business and we can see clear improvement.

Also during March quarter with Irvine facilities to

lower cost sites (inaudible) and combining technology

center with quick turn production. We're extremely

pleased with the results of these. Going forward we

see more of the same for the next couple of quarters. In June we expect revenue in the range of $3.3 billion. Earnings should be in the range of ten cents to 13 cents per share. In the September quarter we expect

some improvements in those numbers, obviously our

performance will expand on the rate at which we can

bring on new business and what happens in the

communications market. I would state our overall view

as cautiously optimistic. This is a good time to be

doing mid quarter updates because things can change

quickly. Overall, though, despite lots of bad news

with regards to our customers and market demand, we

believe that Flextronics is successfully working

through a very difficult environment, maintaining

profitability when many suppliers, customers and

competitors are not. And we will continue to draw sufficiencies so what when the inevitable upturn arrives we should have considerable earnings leverage. We believe that given our current run rate, normalized earnings power, given current mix of business is approximately $1 per share and at $20 billion of revenues we think the earnings power doubles to $2 per share. Slide 19. There are real risks of operating in

this business and an investor should appreciate and

we'll lay out some examples here. Please pay

particular attention to this slide in light of current

flat. I will turn over to the operator. Please limit

yourself to one question and one follow-up.

At this time if you would like to

ask a question, you may press star followed by one. It

will be announced by name to ask your question. Again

press star one. Our first question comes from Alex

Blantonwith Ingles and Sandler.

I wanted to ask you

about the margin situation going forward. You

mentioned that SGNA you thought you could drive down to

3%. What kind of sales volume do you need to do that?

Can you do it just through cost cutting?

I'd say we can do a lot of it

during cost cutting. If you look at what happened in

this last quarter. A quarter ago SGNA was 3.2% of sales which is normal, we picked up SS that we took over during the quarter but we did lower by $4 million during the quarter and we'll do more of that each quarter. We'll absorb and, of course, revenue will pick up a little bit. I think that is very doable. 3.2% in

the near term is a better number to use, 3% a little

bit longer term.

On the other side, gross margin, if you could raise that back to 8% and had 3.2% SGNA, obviously that would be 8.48% operating margin which would be quite a bit above where you are now and your earning power would be almost double what it is now. So what has to happen for that gross margin forgo up? Sales are up but gross margin is down by 160 bases points. What can turn that around?

Whoever is dialing in on this

line, if somebody is listening in, please stop. So a

couple of things. First of all, your analysis is

exactly right. That's one of the reasons we're not

slitting our wrists over here. Some stuff is going to

come back into line. If you look at the gross margins, you know, we get a big improvement gross margin when we stop losing money in Multek. That's obviously has a pretty big impact and the other is that margin -- of course you have no real pricing pressure -- I'm sorry -- no pricing ability in an environment like this everybody scrambles for the business and that returns to normal once business picks up again. But even without that we're going to get improved margins from Multek we will get improvements from enclosures as we move them out of the factories that are being closed and into the factories where they belong, we will get a margin pickup there. The rest is just pure, you know,

factory efficiency which right now a number of the

factories are underloaded and either we're going to

pick up business to where that will take care of itself

or we'll close more factories, it will take care of

that itself. As I've been saying for years now, there's no fundamental margin problems in the business other than that, you know, if you have got a business like Multigroup and Money, it is going to hurt your margins, in a fast downturn you have to adjust the capacity but the numbers you used are exactly right. That's why I ended my prepared remarks

by saying since we've got a dollar earning power right

now and $2 if we see improvement in the business. I

think all of that is true.

How much sales improvement do you need to get that gross margin back up?

That's a tough one. There's

obviously more leverage at? Point it on the

communications side. We already have 65% of our

business, which is awesome. I don't see it ever getting more than 80%, a whole bunch of our business is never going away from the high cost areas so but you know if you look at the 15 or 20%, you know that's in the high cost locations where the margins aren't good right now it is communications product. The whole

telecom section I don't have to tell you how bad that

is. Small improvement in telecom sector will have a bigger impact on margin than a bigger increase in consumer products if we don't get telecom upfront we're not trying to get one, that's why we took out as much cost as we've taken out. We'll continue to do so. So

I think it is not a lot to answer your question now. I

think if we get back up into 3.4, 3.66 billion dollar

range and we get of that with the higher mix, higher

margin business, we'll be fine. I will point out that

in the quarter the two customers that I announced that

we added on a more strategic are ENC and ABC, those are

the kinds of customers that have more leverage. Those are not consumer products those are communications and my end storage products so those are better and we have some more like that we're working on. So I think it

shouldn't take all that long in the business will stop

deteriorating.

One more thing so you don't get misquoted on pricing pressure. How big

is it really? If you are working on all of this

potential new business and everyone else is too, is

there really any huge pressure for you guys to take new

orders right now?

Absolutely. Actually I will

get quoted on this because sometimes I talk to

investors who are unrealistic about what a downward

looks likes. In a downturn there is a loss of pricing power period. Everybody is scrambling, nobody wants to see their revenues go down, people have factories that are underutilized and they would rather have them be better utilized and so pricing goes down. First of

all, remember our customers are all losing money. I shouldn't say all because obviously Hewlett Packard is not, but many of our customers are losing money and they are desperate to take costs out and there is a huge attention to pricing, and I think that's appropriate. That's what you should expect in this market and so there is pricing pressure and to say there isn't is kind of silly. But, on the other hand,

the consolidation of the marketplace is exactly what

you would expect to see. I mean we have gotten

business that came from Axe Manufacturing and from EM

Solutions and from MCMF, those companies that go broke

and there are other companies that have not gone broke

but are struggling and their customers are beginning to

move business away. So this will normalize itself

about the time the real downturn is over, and I mean

everybody guesses is that two quarters or four quarters

or six quarters, I don't know. But in the meantime it will be some pricing pressure but will abate over time.

Michael, for

probably the last six months or so we've been hearing

the word stable a lot from the supply explain both from

EMS, peers of yours and other people throughout the

chain. I think a reasonable interpretation of what

we're here from Flex today is there may not be full

stability, in fact there may still be some downward

bias. Will you talk a little bit about that, how broad

based is it, how are you looking at that?

I can. I would say that the consumer segment, you know, the high volume segment of our business is stable. I'd say stable in some cases, a little bit of upside so that segment of the business I think mirrors the recession. You know, data come, a number of segments of datacomI think are stable or possibly deteriorating slightly. The telecom

factor is deteriorating unquestionably. All you have

to do is read all our reports. Nokia hopes to be down

15% on their infrastructure in the (inaudible) quarter

year over year, that was just fine. That was the

quarter we still end that's what I call deteriorating.

All the operators are lowering their cap execs

requirements last week, two weeks, all of that rippled

through into, you know, reduced forecasts from the

telecom side. So I still think the deterioration of

the telecom sector is reasonably broad based. On the

other hand, and something I want to point out is that

when you look so that's an end market consideration and

I think that's pretty clear. The value being an ENF

company in this environment, as we've said repeatedly,

is that that doesn't mean that our numbers from those

telecom guys are going down because those companies,

for one thing they are consolidating supply base which

works to our advantage. They also are looking to close

more of their own factories and do more outsourcing,

virtually every come in the telecom space we're talking

to, we're talking to about additional outsourcing

opportunities from internal base of operations. On top

of that at Flextronics we have this ability we can give

you a better price if you use our circuit boards, back

planes and all of that sort of stuff. I want to

differentiate that I'm sure that the end market in

telecom is still deteriorating, but I'm not saying that

that means our base is deteriorating. Our base there

is reasonably stable.

And as you

concluded your prepared remarks, part of your

commentary addressed continued assessment of your

facilities, infrastructure and your various assets.

Multek has obviously been a challenge, and I wondered

if you could talk about on you firm your commitment is

to the circuit board business and is that something you

and your team discuss on an ongoing basis, if we're in

for another let's say of two years in pain in telecom,

will that have effect your calculus? Talk about that

in general terms.

It is a good question. I

would like to elaborate on that a little bit. Any

operation we have that gets money gets continual

attention from the management team. I can assure you.

So the guess at Multek will be happy when they are no

longer front and center, but they are at the moment and

that's how you would expect your management team to

operate over here. What we did was Multek was rumors

around they were getting out of the business. Multek

moves we made at Irvine was really a good one. We had

an operation that was primarily a quick-turn operation

and a pretty good one that was also doing, you know,

pressed into high-volume manufacturing during the boom

times because there were a lot of capability in that

factory and we just called a spade a spade. They took

the volume manufacturing out which was good for our

other factories, to improve utilization there and now

we're making it a great quick-turn shop, instead of

being sort of good at both we're in a position and

that's exactly the way it's working out, we're doing a

much better job on quick turn and the volume went to

other factories. We're absolutely committed to the business for the simple reason that we believe and as I've talked now that customers are talking for us about this whole suite of products, we're getting much more traction in talking to customers about you get a better price if you buy everything from us and multi plays very well into that. Most of our footprint in printed

circuit board is where we want it. We have a couple of

small facilities still that we're doing a lot of work

with to see if we can get them, you know, to be more

efficient. If not, I suppose it is possible that we

would consider closing something small but the big

sites are in good shape. We're absolutely committed to

them. Our business is increasing. I mean I want to

make that clear while we know we're going to be two or

three cents a share worth in the June quarter, it is

improving and we think we will continue to improve.

There is a lot of shakiness among the other suppliers

out there, and so we are getting qualified by a number

of customers who are concerned that other smaller

suppliers who don't have the balance sheet that

Flextronics has may go out of business. So I think

that business is going to be fine. It is going to take

another quarter or two. You know, sure, if telecom

never improves that is going to be a bit of a struggle

but we're not too concerned. I think it will be

profitable before the end of the year. In terms of the

rest of the base of our assets, you know we're 65% in

the low-cost countries. We're thrilled about. We

really don't want it to get more than 75%, 75, 80% at

the max. So there's a few facilities that are serving

the communications companies that are eventually at

risk if things really don't turn around, but we don't

see that at the moment. Obviously we'll continue to

evaluate that. But I think our footprint is second to

none in terms of where we're currently operating, what

our current base of assets looks like so we're

reasonably comfortable and we'll just continue to watch

it.

Thanks very

much.

Thank you. Our next question

comes from Lou Mishoiawith Lehman Brothers.

Sure. I guess when

we're looking at the guidance quarter, one thought that

might have been a little bit fee analysis for some of

your customers. Can you talk about how the different

areas as much as you can are breaking down and why in

the June quarter for many areas in tech, not so much

stronger than the March quarter?

I'm not taking from the

answer. In the true consumer segment of the business June quarter is not a good quarter, it is a bad one, game machines and Christmas-oriented stuff. It really

starts to build pipelines. Look at what happens. That business you start to build pipeline in July and you know, you begin to see end sales. I'm talking about

the real Christmas-oriented stuff, which is gaming

stuff and some PC and some kinds of computers that are

entertainment oriented, Christmas oriented. June is a

bad quarter. January tends to be okay in those

businesses because there is still some selling of

pipelines for shortages, which is exactly what we

talked for X box in the March quarter. You should expect from consumer segments to be worse (inaudible) that's right in line. I think in terms of our own

guidance, I mean high end of the range we're projecting

is about the same as the March quarter and you know

that's doable. We signed a bunch of new customers.

Really it is a matter of that range is a function of

how quickly the new customers pick up and, you know,

what happens with some deterioration in the

communication sector, but I mean I think that we're

feeling like it is about flapping down a little bit and

that's what you would expect a little more

deterioration from the consumer side possibly.

Switching over to

telecom area. Some analysts were trying to come out

with the theory if you look at how much we spent by cap

X by wireless service providers in first quarter and

even though we've cut their budgets a number of times,

even if you cut it once again that number is still

generally much higher than if you subtract out what

they spent in the first quarter, thus it seems like

there should be datacom and telecom. Are you not

thinking that might happen in any way, shape or form?

Actually I that I that

analysis is probably right, Lou. We're not experts and

we don't track that much about what happens in the

operators. Look at what's happened on the hardware

side. I think that's possible. I think we're just

being appropriately conservative because we heard this

before. You know, a year ago the upturn of telecom was

going to happen in the second half of the line. Then

the first year of '01 how it is going to be stable and

go up in the second half of '02. I don't see any

reason to believe that, particularly. This is analysts' jobs. Analysts go out there. I hope you are

right. We're not seeing massive deterioration in our

own order book. We continue to watch everybody's

announcements and we're cautious because there's no

doubt in our minds that the first two quarters, the

one, March quarter we just finished and June quarter of

this year are going to be less than people thought six

months ago. So I hope you are right, but we don't see

it necessarily yet in the order book.

Do you think with this whole downturn that a lot of high-end board capacities have shifted out to maybe lower cost areas to either you so when demand does turn, demand in North America from high end won't be the same as it was a couple of years ago?

I believe that in most manufacturing sectors in printed circuit boards, in enclosures, in assembly, in most of the market the orientation is going to be towards Asia and not Europe and North America. So I think that a lot of capacity has come out of North America and Europe and, you know, when the business comes back, it is going to come back in those factories? You know, I don't know. I would

tend to think not. It is very high technology and a

very high technology realm, sure. I mean we ourselves, we have a high-end factory in Germany, we have a high-end factory in Wisconsin, and we think those things are going to spill off. We're going to have to

wait and see how that develops. I think that any companies that have a high footprint in the high-cost locations and low footprint in low-cost locations are at risk over the next couple of years no matter which segment of our business they are in.

Thank you.

Thank, our next question comes

from Jim Savagewith Thomas Wiesel Partners.

Can you in terms of the severance costs, those were cash costs I assume cash expenses?

They were not cash expenses in the March quarter.

They will be cash expenses. Is there any expectation at this point based

on your current sense of where business is that there

may be more of those going forward?

I have a funny answer to this which is, you know, we don't see it at the moment, but I hope, which is what I mean by that is we need to be as a company, we need to be -- have our normal profitability at these revenue levels and plus if we have our normal profitability at these revenue levels if we don't get any pricing power, we're going to have to continue to reduce customers, we're like to your competitors, customers and suppliers are really looking hard at ways we can combine operations, cut costs and all of that. That process I kind of like. I mean not

in the human -- in the sense of human toll because

that's bad and we do everything we can to cushion the

downturns on employees, but we're actively engaged as a

company improving our processes, which are very hard to

do in periods of high growth. And as a consequence, I

mean those costs that we took out in the March quarter

are not going to make us less effective. They are

going to make us more effective and lower our costs. We're continuing to work hard in all areas in sales, finance, in manufacturing, overhead, you know. In

appreciable costs all of this stuff. We're looking for

ways to take costs out. We're going to look to find

more. Whether we're going to get them in big chunks

that I would tend to doubt. I think it will be sort of buried along we took $4 million out of SGNA out of the March quarter that was a separate expense like we closed the headquarters in Chicago. We'll look for

ways. You know, it's tough we've taken a lot of costs

out as you know. At this point we'll all like to see

an upturn in the business to lower our percentages.

Is SGNA in the

network services business a significantly higher

percentage than it is in the manufacturing operations.

Definitely.

So we should not

anticipate that you are going to get down to the low

threes really quickly?

Probably not really quickly.

You've been following the company a long time. Our

target was to get to 3%. Target was to get to 3% in

manufacturing and it's well below 3% in manufacturing

these days. Then we've picked up much shy year SGNA

like Multek and we got back to 3.2% and now we're back

up to 3.66, maybe it will drift a little bit higher and

stay in this range for a couple of quarters we're

pretty relentless about the SGNA, that's a pretty

important company and we'll drive it right down. It

may like three or four more quarters.

I understand that.

With the new strategic relationships with AMC and ENC,

are you anticipating that either of those is going to

be a top ten or even a top 20 customer within the 10 to

20 months?

It could be. These are both

-- both of them are existing customers. But as I

indicated, not very big, and now we're going to get

much more work from them. And neither in the increases

from both of those customers will not really impact our

June quarter. You know, the stuff we're going to do is

going to start late in the quarter, that won't have

much impact but it will help in the September quarter.

Does it include

additional types of operations? I know that you were

doing enclosures previously. Is there going to be PCBA

and other things as well?

They are different. ABC is a

company that does all of their manufacturing in-house.

They have done very small amounts out of house. They

are basically new activities for them all together.

ENC uses a variety of EMS companies, one of them is one

of the ones that went bankrupt here, so that creates

some opportunities. But we think with ENC we're going

to have some opportunities to provide a broader range

of support. So it is probably going to depend on how

well these things go, but you know with most customers

these are relatively sizable companies. There is no

reason to think that if we do a really good job, we

won't be able to get them in to be major customers for

us. And I will add, I will follow-up by that to say we

think there will be a couple more of those in June

quarter. Sales activities are good.

Our next question comes from Paul Foxwith Bank of America Securities.

A couple of things. With respect to the business model, you talked about SGNA. Which should be the range of gross margin when it's a more normalized demand environment? Also with

respect to the customers, you also put on that customer

list Nokia, you've had them as a customer before.

What's going on to discuss them differently at this

point?

I'm sorry. I was looking at

numbers. Would you repeat the part about Nokia?

You had them on the new

customer list as well. You've had them, I believe, as

a customer for a long time. Why discuss them in a

different vein now?

Yeah. Sure. Actually I had

some comments in the opening remarks and I left them

out. We actually have some new business relationship

developing with Nokia in the infrastructure side of

their business. That's the new part. And we're pretty

excited about it. But they didn't want me to talk

about it much. So I'm not going to talk about it any

more than that. It is a new business specter for Nokia

for us. In terms of normalized margins that is pretty straightforward. When it is (inaudible) we've been

there in the not too distant past and that's what we'll

get back to, we believe as the business normalizes.

Then the last thing is

that there's a common notion and you talked about it,

more about how recessionary times can spawn, act as a

stimulus for increased outsourcing. You made reference

to it before, but what are you actually seeing there?

Actually a lot. I think the fact that, you know, just in looking at such times when revenue is up 8, 9% year over year when the average customer base shrunk a lot, that is actually a number I think we ought to calculate and show you, we were talking about that today so you can see how much better our business has been than the base of customers we work with. We'll get that calculation for you. But we

are unbelievably busy now, really busy. I'm not

kidding about this when you see the activities that

we're engaged in with the customer base. We fall into

two categories, as I said a little bit about in the

prepared remarks. One is how many more factories can

we close? So if you look at all the customer base we

have there's still lots and lots of factories in the

customer base. I mean even the companies you might

think of as you know being completely outsourced they

are not. There's lots of factories left. What's

happening now is every time one of our customers goes

out and announces that they have got to take more costs

out of the business and more people, you can almost bet

that that means more outsourcing, and so we're talking

to customers about their factories, the factories are a

pretty ugly story. In by the time is a big-time issue in Japan, as you can imagine. It is all the companies. Still in United States too. So one of the two

activities is that which is bringing more stuff out

from in. ABC is an example company has been primarily

manufacturing in-house and now they've decided to go

outsourcing. All investors want to see. It is

business we win, factories to take over, businesses

that is going to go from their factories to ours, which

is what we want to see.

The second activity in a sense is a more

powerful issue for Flextronics and Flextronics vests

we've been pitching this story about let us do the

whole thing. Let us provide our enclosure, circuit

boards, back planes and logistic services and all of

that. It's been a difficult chore to get customers to

take that for two reasons. One is that our own

footprints in these wasn't good. Until we got our

enclosure factories in low-cost areas where we had the

rest of this stuff, that was a little bit of a hollow

story. We had to bring the product from one of our factories that's not close, it doesn't matter if they bring it from somebody else's factories that's not close, we're fixing it. That's one issue. The second, it's very hard for customers to go from a commodity purchasing mentality to a product purchasing mentality. So they come and they say, great, I want to buy all of this stuff because I know it will be cheaper, we'll have you do the whole product. In their organization they have commodity

team. They have a commodity team that buys circuit

boards, and back planes and all of that. It's been

very difficult for them to break down their internal

organization to buy all of this stuff in aggregate.

Now that their businesses are so bad, they are doing

this. Not only are they breaking down those walls in

their organizations, they are eliminating a lot of

these people in their organizations, making it easier

for us to sell the whole suite of services. This is

where we're the busiest right now. We're the busiest

right now in showing customers how much more savings is

available if they will let us handle the whole suite

for them. That is going to have the biggest impact in

the improvement of our margin, growth of our business

over the next quarters and year.

Thank you. Next question comes

from Jerry Lepowitzfrom Merrill Lynch.

When you look

out over the next year and you look, let's assuming we

continue in a very tough environment, how many of these

high-cost facilities do you have that you could

potentially close?

Not very many more. If you

look at 65%, let me walk through this a little bit.

65% of our business in low-cost location. We have five locations in the United States and we look at them all the time. You know what, we just need them. I mean we

don't -- I mean maybe we can eliminate one. We've

downsized a bunch of them and we took some more

downsizing in this latest quarter but, you know it is

hard to see how we're going to get rid of more than

one. I mean I just can't see it really to be honest

with you. Because we have a lot of products that have to be built in high-cost locations.

What about western Europe?

We have some in western Europe. Again we'll look at it. We have one factory in Germany. Could we get rid of the factory in Germany? Probably. We've got customers there and if

we take out that factory we take out all of those

customers. Probably not. It is not our intention. We have, you know, we've done some consolidated in Sweden, we've done some consolidation in Finland. Look if it

gets worse could we find four or five more factories to

take out? The answer is absolutely. We will. But

most of our factories now what we're doing is really

driving efficiencies, and I would guess when we take

all of our sites around the world, you could find

another half a dozen of any size that we could take out

over time, and we will if that's what it looks like is

the case.

Have you

finished consolidation on Tulelectronics?

That business is so

small you can hardly see it from here. Are you talking

about optical component?

Yes.

No consolidation left

to be there. That business has shrunk to nothing as

you know from everybody. I mean it is still a business

that we've got (inaudible) (cut out on call).

Next question is from Thomas

Hopkinswith Bairds Stearns.

On the telecom

stuff, obviously business isn't doing well right now.

It is well documented. You made comments about Kiso

and concerns about Lucent and what Electrons

are doing, and you guys have a big lead on the

high-volume stuff and low-cost footprint. What is your

thinking or strategy on some of the higher complexity

stuff going forward given those two things?

Well, look, the telecom

datacom sector is a shrinking sector right now. So

your guess about what's going to happen there is as

good as any of our guesses. I mean, you know, if that

business is supposed to grow again, then it will be a

business opportunity. If it continues to shrink the

people have the biggest exposure to it, which is not

Flextronics are going to suffer the most. But I'm

basically a believer. We're a believer in this company

that there's going to be a little more deterioration

and probably not that much. I think one of the other questions I made when someone said that a lot of people think that even though cap X is being cut that the actual revenue don't be down any more. I tend to agree

with that. So, you know, I mean Erickson is a

struggling company. We'll have to see how these

companies do over the longer term. Inaudible) my bet

is we're pretty close to the bottom on that. We'll see

some improvement. More companies that are leveraged

will see more improvement and others like us will see

less.

When you look at

the new business you are bidding on, outsourcing, how

do you see Flextronics to win some of the higher

Complexity new business that's coming out? One of the

things that's often said about a lot of your

competitors is they are not well suited for high-volume

programs, they are not well suited to compete with OEMs

and not very well suited. That's absolutely true. What I'm asking you how well suited going forward and what is your strategy for some of the higher rent product lines?/ how do you see that for Flex?

In some ways that is more

opportunity for us and the reason is what I think our

numbers are 37% or 39% of our business is datacom,

telecom. Multiply that 13 and-a-half million dollars,

you are looking at a big chunk of our business. We're

doing almost all of Siemens frame structure

outsourcing. We have a huge segment of our business is infrastructure outsourcing from Erickson. We have a big segment of our business with Motorola infrastructure, more with Nokia these days and so on.

So we actually do pretty much there. The reason why I

think it is actually a better opportunity for us is

that's the space where our full suite of offering

allows more cost reduction. You know you are making a cell phone or are making a PC peripheral, that stuff has been bought at the product level for a long time.

People aren't building cell phones by getting a printed

circuit board assembly in one country and plastic in

another country. That's long gone. If you look at how the more complex products, that is how they are done.

Back planes come from one supplier in other country

we're driving to get into a single location. That's what we're going to do in Shanghai, Poland and increasingly in Mexico. And to the extent that we're successful with that offering, we should take major market share in those segments.

Just a follow-up.

I just want to be clear on what kind of companies we're

dealing with with Erickson. So Erickson, we're saying, is about 15% of sales on the slide. Is there another

number we should be looking at, 8, 9, 10% for Sony

Erickson, how should we be looking at that split?

That 15% is all -- no.

That's a little bit complicated. You raised a good

issue because it was part cell phone in there.

Sony Erickson is our

larger customer and then it goes through Microsoft and

other companies. Erickson is actually (inaudible).

Sony Erickson

would be 15%?

We don't know that. They

have only be an independent company.

I will follow-up.

I wanted to be clear about, Michael, about what you

were saying possibly some improvement in September

versus June versus June guidance that you gave.

Yeah.

Next question comes from Kevin

Dunnywith Green Murray. Your line is open.

Could I get a sense

of what your benefit from past restructurings was this

quarter, what you expect from next quarter and get a

sense of what your organic business decline this

quarter and what your expectations are for fiscal year

and for '03?

We don't actually break out

the information that way.

I'm trying to get a

sense for you've done a significant amount of

restructuring in the past. If you look at the first

quarter of last year, you know, you look AT A 3.5% SGNA

line. If you have the same exact flat assumptions as

far as 6.5% growth and three and-a-half, you get to the

12 to 13 cent number you are looking for. I'm trying to understand when the benefits are to come from past restructure on the SGNA or on the gross margin line.

If we hadn't done those

restructuring, they would be losing a tremendous amount

of money right now. I'm not sure how you to answer

that. If that capacity were sitting there, we would be

losing tons of money instead of making money.

What is the overall

utilization? Could you break out the PCB part as well?

That is also information we

don't provide. Utilization is 100% in some places. Like most Asia stuff it is 100%, and it varies by location, but it is not a number we track because it is not a particularly meaningful measure because you have to break it down by labor, by factory space, by service and equipment, and it is not a number that we track.

One follow-up. On

inventory situation, would you speak to the book that

came out and it was .98 for printed circuit boards,

could you speak to maybe the high end as far as

inventory, has that been worked through? Do you see

another quarter or two, just give us some more color on

just the whole industry, if you could.

Yeah, I mean I

can only give it to you it is a aggregate not in terms

of inventory printed circuit board business was pretty

good in January. Early part of February we did mid

conference call, booked a bill with positive and we

were more optimistic about what (inaudible) would look

like. It started to decline again. So I mean in March

it was down and April it was down a little bit more.

So I think that's the best data that's available with

kind of across-the-board which is that the business

continues to be difficult.

Thanks.

Next question comes from Chris

Whitmorewith Doiche Bank.

Back to the

board business. It sounded like you are getting about

a two to three cent sequential swing in that business

from Q 4 to Q 1; is that correct? If so, where is that

coming from?

Now what I said was I thought

that we had expected last quarter we had expected break

even in that business, and now we think it is two to

three cents of loss. So I didn't say how much loss

there was in March, but we had some improvement. We

have some improvement, but it is improving at a slower

rate than we had anticipated. Six weeks ago and that's

probably because of the previous question was about

that that business is going down still a little bit.

We're improving. The question really now when will we

get to break even, hopefully that will happen in

September quarter. We're not sure.

If we take that as a given, if we look at the guidance, it implies that earnings could be down, flat down three cents, what's driving that sequential decline in revenue? Is that

primarily telecom? Is telecom responsible for the bulk

of that? Are there other things going on as well?

Guidance is 10 to

13 cents and we did 12. So we may have an improvement in the earnings and we may have some slight lack of improvement, but given all of our moving parts that's just a range, no major trend in there. There is a lot

of different things going on here. Printed circuit

boards would be better or worse, enclosure core better

or close, so on. Basically it is about a flat

projection but maybe a little bit down. We'll just

see.

And lastly, as you think about your footprint and as it evolves going forward, what's the role of Mexico longer term versus Texas? Do you think Mexico will evolve into a telecom centric site? How are you thinking about that?

We do. We do. Mexico is going to wind up doing two things. It is going to provide consumer products that are physically large where quick response to the market is necessary or where NAFTA content is required. We make cell phones in Mexico, but the only cell phones we make in Mexico that require NAFTA content to be sold in Mexico, so there will always be some consumer product like that.

Other than that, it will definitely move into datacom,

telecom center. I don't think it is going to be a center for physically very large products which will get down in Texas but, you know, servers and, you know, larger datacom products, that's the kind of stuff you are going to see in Mexico over time. That's some of

the stuff on the enclosure piece. That will involve in full product line. Things can always change. One of the beauties of this is right now Mexico currency has not devalued. There has been inflation in wages and so it's come back into Asia. But, of course, there could be a devaluation in Mexico tomorrow, so more consumer products will flow back, that can be a little bit of back and forth. But we're going to get into higher

technology there for sure. I will take one more

question.

Last question comes from Ellen

Shaywith Prudential Securities.

Question on net interest expenses is actually higher, even though your debt increased.

Would you repeat

the question.

I was wondering about net interest expense income line, it looked like your interest expense had increased, even though your debt increased. I was wondering if you could explain

what happened there.

I will have to turn that over

to tom.

There is some foreign

currency losses in there, Ellen. It was sequentially

higher than what we expected. I thought that would be

hard to forecast. Then there was also some losses on sales of successes.

Then last question

for you, Michael. You indicated that the orders really

aren't picking up at this point, but could you just

maybe talk about what you are hearing from your

customers, say, on the second half just in terms of

forecast, anything qualitative that they might have had

conversations with you about.

I mean it is a good question.

I wish I knew the answer. We all wish we knew the

answer to this. I would say in general in the consumer segment we actually do have some increases in orders in some of the consumer segments. I think that, you know,

obviously the data and telecom guys are not predicting

much upturn, of course the telecoms are all shell

shocked. Datacom see some improvement in the

enterprise labor later in the year and everybody else

is just wait and see. I don't know how we predict this

because I really believe that people predict upturns

six months out because that's beyond the window they

can see. When the downturn this time last year,

everybody thought the pickup would be the second half,

then it would be the first half, now it will be the

second half of this year, and I think until you

actually see a pickup, really see kind of a broad based

pickup, the rest is just guesswork, and I don't think I

can guess any better than anybody else. So I don't

have much more to add.

Thanks very much for listening in. We'll

give you another update in six weeks. As I said, I

would like to end on this thing that we're cautiously

optimistic because we're adding customer base and we

think our business is in pretty good shape, so we'll

give you another update in another six weeks. Thanks

for calling in. Bye now.

That concludes this afternoon

Flextronics conference. You may disconnect at this

time. Thank you.