Flex Ltd (FLEX) 2003 Q1 法說會逐字稿

Good afternoon and thank you for holding. All participants will be able to listen only until the question and answer session of the conference. This call is being recorded at the request of Flextronics. If you have any objections, please disconnect at this time. I would now like to turn the call over to Mr. [Bob] Dykes, Chief Financial Officer. Thank you sir. You may begin.

Thank you. Ladies and gentlemen, thank you for joining the conference call to discuss the results of Flextronics' first quarter ended June 30, 2002. Michael Marks is [traveling] outside of the country and an unexpected conflict occurred so he is unfortunately not able to join today's call. He has asked me to handle [INAUDIBLE] and Thomas Smach is with me to help in answering your questions. To help communicate the data in this call, you can also view our presentation on the internet. Go to the 'Investor Relations' section of our website and select '[INAUDIBLE]' presentation. You will need to click through the slides, so I will give you the slide number I am referring to. While waiting, I will get a slide [INAUDIBLE]. Please note that this conference call contains forward-looking statements within the meaning of the [INAUDIBLE] including statements related to trends in our industry, new customer activities, relationships with key customers, [INAUDIBLE] leverage, operating results, profitability, changes in our cost structure, and restructuring activities and benefits. These statements are subject to attendant risks that can cause actual results to differ materially. Information about these risks is noted in the [INAUDIBLE] press release at the end of this presentation and in our SEC filings. Slide three is the financial summary. As announced in the press release, revenue in the quarter was $3.1 billion up, by $16 million from a year ago. [INAUDIBLE] income was $30 million or $0.06 per diluted share, including [_____] restructuring charges of $ 158 million and amortization of $3.2 million our GAP net loss amounted to $131 million or $0.25 per diluted share.

Slide 4 - Restructuring. The company incurred pretax restructuring charges in the June quarter of $208 million or $158 million after tax, which is in line with our previously communicated estimate. The pretax charge includes $77 million of severance, $74 million of asset write-offs, and $57 million for contractual obligations and for [INAUDIBLE] costs. We estimate the cash portion of the [after tax] restructuring charge will amount to approximately $84 million. This restructuring included the closure, sale, or downsizing of many locations around the world resulting in the elimination of approximately 1.5 million manufacturing square feet and [shrinking] of employee expenses by approximately 5%. Slight 5 - Trends. Excluding restructuring charges, gross margin in the quarter was 5.3% of sales. As we had previously discussed, the decrease in gross margins from the prior quarter resulted from a sequential decline in sales, overall pricing pressures, and an initial cost associated with accelerated transitional programs in the low-cost regions. SG&A was 3.7% of sales, a decrease of approximately $5 million from the previous quarter. [ROIC ] in the quarter was 4.6%. We are restructuring the business to [INAUDIBLE] to retain margins in the 8% range for gross margins and 5% range for operating profit, which will generate a 15% [ROIC]. This of course indicates that we expect to drive SG&A to around 3% of sales. The tangible amortization was approximately $3 million in the quarter or about half of $0.01 in earnings per share.

Slide 6 - Balance Sheet. We have been able to continue to show improvements in our balance sheet matrix. At the end of quarter we had $827 million in cash, up from $[745] million at the end of last quarter. In addition, total debt was reduced by more than $115 million from a total of $1.16 billion to $1.05 billion. [Leverage] is being reduced to 19% from 21% at the end of the last quarter and we have a credit line of $800 million, all of which was available at quarter end. Please remember that $500 million of the credit line is a three-year maturity that runs through March 2005. Our total liquidity was in excess of $1.6 billion at quarter end, which should be sufficient to fund payments of approximately $450 million in the September quarter in connection with our previously announced [Penguin] acquisition. Depreciation and amortization was $82 million and capital expenditures were $54 million. Slide 7 - Cash flows from operations. Cash flows from operations generated approximately $348 million during the quarter. We expect to be able to continue to generate positive cash flows from operations for the remainder of the fiscal year. Slide 8 - Cash conversion cycle. Flextronics continues to [INAUDIBLE] cash conversion cycle performance. Inventories decreased by $10 million and turns remained at 9.2 times, receivables decreased by $136 million, and DSO remained at 52 days. Accounts payable increased by $62 million and days payable outstanding increased to 61 days, which accounted for our improving on cash conversion cycle to 31 days at quarter end. We continue to work towards improvement in our inventory turns and DSOs.

Slide 9 - Production by continent. Flextronics continues to [INAUDIBLE] to aggressively move their production to the [INAUDIBLE]. So Asia, Eastern Europe, and Mexico continue to expand while the U.S. and western Europe continue to contract. Slide 10 - First quarter revenue by category. Communications infrastructure was 16% of first quarter revenues. Major customers in this segment include Ericsson, [Lucent], Motorola, Siemens and [Terria]. IT infrastructure was 8% of first quarter revenues. Major customers in this segment include Alcatel, Dell, [INAUDIBLE], Fujitsu Siemens, and Hewlett-Packard. IT infrastructure includes products such as network switches, hubs, routers, servers, [INAUDIBLE], storage systems, and mainframes. Computers and office automation was 27% of first quarter revenues. Major customers include 3Com, Dell, HP, [Infocus], Microsoft, and Xerox. We continue to win market share and new programs from most of these customers. Personal computers including desktops are included in this category. [Consumer] was 12% of first quarter revenues. The Microsoft XBox is our largest customer in this industry segment. Handheld devices were 31% of first quarter revenues. Major customers include Alcatel, Motorola, Nokia, Palm, Siemens, and Sony-Ericsson. [Roughly] 'Industrial, Medical & Other' was about 6% of first quarter revenue [INAUDIBLE] 10% customers. For the current quarter HP and Sony-Ericsson [represented] approximately [11%] of total revenues. As you can see, there is less concentration in the industry in general. This is the first quarter that HP achieved the number one position for us in revenues resulting in our market share win with this important customer.

Slide 12 comments on the quarter. We [INAUDIBLE] comments for the quarter since we addressed the current situation just a few weeks ago. I would like to reiterate, however, some of the comments from that previous call. The quarter was about what we expected and our guidance forward also remains unchanged at approximately $3.2-3.4 billion in revenues and $0.07-0.10 of proforma EPS for the September quarter. We believe that [INAUDIBLE] is pretty stable. We will complete the [Catfield] transaction [INAUDIBLE] in the September quarter that was as expected, [INAUDIBLE] on profits in that relationship will be reduced [INAUDIBLE] in the September quarter. But our current view is that other businesses should be able to make up for this shortfall. The year-ago revenue trend is slightly better than when we last talked. As discussed several weeks ago, the [Multek] PCB business generated a substantial loss in the June quarter. Revenues are expected to increase and losses are expected to decrease in the September quarter for [Multek] but we do not expect this business to be profitable until some time next year. Unlike some competitive announcements, we believe PCB [INAUDIBLE] as stabilizing most likely because of our low-cost [footprint]. But there is still excessive capacity and until that problem is alleviated, [Multek] will not be profitable. In the meantime key customers continue to recognize that [Multek] has staying power and the most attractive state-of-the-art footprint in the industry. As a result, [Multek's] market share positioning with new and existing customers continues to improve and should provide considerable leverage when market demand recovers. We are moving to take costs out of our business throughout the company. In addition to the expected savings from the restructuring announced during the June quarter, we intensely focussed on lowering costs in all areas over the next few quarters. We hope to improve earnings more for the December quarter.

As we had previously discussed, we believe that we have future [quarterly] proforma EPS opportunities in the $0.25 per quarter range, resulting from improvements at [Multek], improvements in our cost structure, and a conservative amount of new revenue wins. In the meantime we continue to win our fair share of new customer opportunities and continue to be cautiously optimistic about our business even in the near-term where we see little upside to [current] customer [INAUDIBLE]. The focus on improving profitability and cash flow is making our company better. We believe that we have plenty of cash and liquidity as I had pointed out earlier, and are truly well positioned fundamentally. By the way, our new auditors -[INAUDIBLE] - have completed their review and [INAUDIBLE] of our financials for this quarter. Slide 13 - On risks. There are [new] risks of operating in this business that investors should appreciate and we have laid out some examples here. Please pay particular attention to this slide in the light of current market conditions. Let me turn the conference over to the operator to poll for questions. Please limit yourself to one question and one followup. [INAUDIBLE] while the question and answer session is underway. Operator!

Yes. At this time if you have any questions or comments, you can press * and 1 on your touchtone phone. You will be announced prior to asking your question. Again, it is * and 1 on your touchtone phone.

Our first question comes from [Steve Savis]. Your line is now open and please state your company name.

[STEVE SAVIS]: Sure. Goldman Sachs. Good afternoon! I guess that related to the PCB weakness that you talked about, there is loosing money there, and you had indicated about $0.05 a share per quarter. Can you give us a sense of timeframe or what your goal is for breakeven and reaching breakeven, and may be what milestone if you don't hit that towards breakeven? When might you consider further cost reductions on capacity?

Well, I had just indicated in the [speech] that we are expecting a [INAUDIBLE] in the profitability until next year. I am not going to put a specific time on that because it is just too difficult to see the future. But we are continuing to take costs out of our operations. So a milestone that would induce further customer [INAUDIBLE] since past and we continue to take costs out as we can. But we have a good footprint there. We have a tremendous amount of our capacity in too low-cost regions and the capacity that remains in the high-cost regions is focussed on [INAUDIBLE] products and very complex products that our customers want to be in those locations. So we are not looking for further major changes in the structure of that business compared with what we have already done or what we may [resolve] to do. So we think we are safe now for anticipating the upturn and we are going to be in an extremely competitive position as that arrives because we have the lowest cost footprint. We believe in the industry. So we have [INAUDIBLE] major U.S. companies.

[STEVE SAVIS]: Between here and breakeven, is it just fair to assume then incremental progress though - continued losses until you reach that point sometime next year?

There is not going to be a major incremental step. It is going to be lots of minor steps in terms of us continuing to improve efficiencies, improving yields, and pricing, and overall improvement in the demands for these products.

[STEVE SAVIS]: Okay. Thank you.

Thank you. [Jim Savage], your line is now open for questions. So please state your company.

[JIM SAVAGE]: Yeah. Can we talk a little bit about expectations regarding cash flows and what your cash and credit position is going to be three months, six months from now? You said that the cost of pending acquisitions is about $450 million and there is about $80 million in cash on the restructuring at this point... cash impact?

The current restructuring is about $80 million. Over the course of multiple quarters, the restructuring charge is about $240-250 million of cash through the payout on the current and prior restructuring charges. But that is going to be for quite a few quarters and so...

[JIM SAVAGE]: Where do you think the impact is going to be over the next couple of quarters?

Even more than that, I would say. For the current quarter you should look for $400 million to be spent...I mean, cash flow from operations, obviously we would expect it to continue to generate profits and therefore that is going to be generating cash. So I would think that if you conservatively take the [four-fifths] of [$] 800 [million] and there will be some [INAUDIBLE] around that as some of the [numbers] move up and down.

[JIM SAVAGE]: Right. So but it will be probably somewhere between $800 [million] and 400 [million]. Is that what you will have in cash?

I will put it at the lower end. That is a pretty wide range. I would put it [INAUDIBLE] at the lower end.

[JIM SAVAGE]: In the lower end of that. So is it somewhere in the range of $400-500 million in cash and maintaining that credit. So it is all about $1.2 billion in available liquidity at that point?

Yes, that is true. That is the important point as we looked at total available liquidity, not the absolute cash balance. So cash flow from operations should generate somewhere in the $100 million plus range each and every quarter. We are going to continue to strive to improve inventory turns and bring DSO down a little bit. So that should at least be enough to pay the cash impact of the one-time charges. So you would expect cash flow from operations on a net basis to be generating somewhere just north of $100 million with possible upside from further improvement and the inventory turns and DSOs.

[JIM SAVAGE]: Can you go through, in terms of some of the key endmarkets, what your expectations are in terms of inventory turns or where you think you should be able to get if you are not there now, say in the Handhelds, which is about a third of your business...it is probably the single most important part of that then?

I cannot specifically tell you about that. We don't have data yet that would break inventory up by exactly the same revenue categories as we are showing on these slides. But just in general, in the very high-volume locations we have inventory turns in some factories that run over 20 times and it seems that the more complex products that have low inventory turns. What we do have is we have a number of programs underway to continue to drive these inventory turns up and we have our own targets to get to a total turns over the average of the whole company. We have a number of programs underway that we anticipate will get us there. The fact is that I have to say that we had hoped to be there by now. So we will continue to [battle] the fact that the economy has not recovered as fast as we had anticipated and so there is where the negative inventory turns. But we have got a lot of very strong programs underway. That is going to be very effective in driving our turns up.

[JIM SAVAGE]: I guess one other question is...in terms of the progress on having this integrated facilities, particularly in South China, are those now functioning as you had anticipated that they would with integrated production of plastics and PCBs?

Oh yes, absolutely. I am sure that there a number of investors on this call who have visited our operations in Doumen. We have plastics capability there. We have PCBs and we have other vendors in that area. So we have a high degree of integration there and over the next two acquisitions in southern China, we have integrated [true] capability and [metal stamping] capability for high-volume consumer products. So we have capacity that far exceeds all of our other major [EMS] companies in terms of the level of sophistication that we have on our campuses in China, but also in Mexico and Hungary. There is also another high-volume location where we have [metal stamping] and plastics capability, and then, in Poland [INAUDIBLE] the towards the more highly complex products but that is another area of focus for us. So all of these campuses have been put in place over the last five years, and a high degree of sophistication there with our own capabilities either on the campus or very close to them.

[JIM SAVAGE]: In terms of the closures of some of the other facilities that were believed to be having more and more of that integrated capability, I guess that is the point of some of this restructuring.

Yes, you are right. I think that we are further ahead of one of our competitors in driving costs out of the high-cost locations and into the low-cost regions. And it is not just a matter of driving into low-cost regions, it is driving into the integrated campuses that our customers just love...drives a lot of costs out of the whole process and so I think it is putting us in a much stronger competitive position.

[JIM SAVAGE]: Okay, thanks.

[_____ Morris], your line is now open for questions. Please state your company name.

[_____ MORRIS]: Yes, thanks. It is Salomon Smith Barney. Good afternoon! Bob, I think in the prepared remarks you said that overall revenue trends were slightly better than expected. I thought that was worth following up on to see if we could get you to flush that out a little more. If you are seeing that in specific segments, is currency - for example, the weakening dollar - having any impact on your revenue trends? Where is that coming from, please?

First of all, with regards to currency, the currency has had an impact on our balance sheet, it is increasing the [dollars] on several areas on the balance sheet. A lot of the contracts that we write are actually U.S dollar-denominated. So in many instances, it has not had a direct impact on our revenue and profitability. But there are few occasions where revenue is not in U.S. dollars and since every currency has gone up against the U.S. dollar, there is some impact from currency. I would not say that it is a great impact. I think what we are seeing is that a large number of customers are pretty stable. We have a few that were getting little bit stronger business. We have a lot of smaller customers that are coming on board that have been proving high results in the near term. We are just seeing the trend of lots of small incremental [movements] that [INAUDIBLE] should have gone in a positive fashion rather than in a negative fashion. So [INAUDIBLE] one big event, it is such a small event, came to be going in the right direction for a change.

[_____ MORRIS]: Okay, and then I believe it was on the mid-quarter update in early June and I believe Michael said something to the effect that the end of the bottom is near...can you still ratify that statement today? Can we expect to see anything greater than normal seasonal strength in the second half of the year from Flextronics?

Well, I think that it is true that we are [nearing] around the bottom. It is difficult to tell whether we are seeing an upturn or if we just hit a rock by [INAUDIBLE] around the bottom and picked up for a second. So we will have to wait and see. Because we have Christmas season approaching etc. we do expect seasonality improvements through the September and then into the December quarters and anyone who has followed this company for any number of years will note that our March quarter is always down from the December quarter. So expect to see that seasonal pattern which will [INAUDIBLE] expect two quarters of [growth here]. It is very difficult to say that the recession is bottoming out. I think you are better off looking at the overall economic indicators such as consumer confidence and things like that rather than looking to us [directly] because that is where we hope to see how the economy is changing and I think that I was also going to be [INAUDIBLE] the economy in general. But we are looking to improve our market share, some customers, and there is definitely an increasing trend to outsourcing. So while if those existing customers' businesses just go on at a moderate level and comfortable with the numbers, we do think that over time we are going to see continued growth in this company and the industry in general because outsourcing trend is of course even stronger now than it has been in the past because so many customers have an absolute need to drive their costs down and we believe that we have positioned ourselves in the best locations. We have a very skilled team of people to help customers take costs out of their businesses and so it is that overall increase in outsourcing that I think is the strongest [INAUDIBLE] in this industry and this company in particular.

[_____ MORRIS]: Great. Thanks very much.

Thank you. [_____], your line is now open for questions. Please state your company name.

[__________]: Sure. Lehman Brothers. I wonder [INAUDIBLE] give any details [INAUDIBLE] you all have been very focussed on the [ODMs] out in Taiwan and China and that you are doing a couple of things to combat that. Can you give us any comments on that now?

Yes. There are several comments on the [ODMs]. Most of the [ODMs] are focussed on the PC business - laptops etc and that does not get [INAUDIBLE] see ourselves as specializing and so we are not really competitive with them in that area. It is true that some of the [ODMs] have announced [ODM] mobile phones and some other products. We believe that there is opportunity to play in that space. We have some offering in that area with quite a lot of capabilities. We have done a lot of [work] with various customers designing products in that space and so I want to emphasize that we will always be selling to the top line customers. We are not going to be selling [INAUDIBLE] customers. We see our customers as being the likes of Sony, Ericsson, Siemens, Alcatel etc., so that is the focus. So it becomes a large grey area between doing some design work and doing a greater degree of design work in a lot of these areas and so we are looking in some areas more like an [ODM] than we had in the past. That is still a pretty small piece of our business. But you may see that trend increasing. On the flip side, some of the [ODMs] that you see making headlines...actually these are manufacturing services because we have a lot of [shelf] space and definitely lower cost than a lot of the Taiwanese [ODMs] and so we actually are able to do production for a number of the [ODMs]. So we think we have the lowest cost basis. We have about 2000 engineers, quite a number of them are focussed on the same areas as these [ODMs] and so we think that we are much better positioned to compete with the [ODMs] than they are with us in our chosen areas of [specialization], which does not include laptops.

[__________]: Okay, great. Just a followup question, to expand on the footprint questions...obviously we all know that you have a two million plus square footage in China, but [why] are you closing the [1.5], I guess, where do you think you are going to go to? I think also that you could just break that down from a big number. I think you are at about 66% low cost now and the rest high-cost. Where do you think that will end up after the closures?

After the closures, we will have about just under 16 million square feet and of course, we will be bringing on some more manufacturing square footage with [Catfield] and Natsteel, but [excluding] all the acquisitions if you just subtract out all the closures we have about 16 million square feet today. If the closures [INAUDIBLE] about 1.5 million square feet and that centered primarily around high-cost regions that you would expect so that in places like the United States and western Europe and the like.

[__________]: Do you think that will push it the total footprint to about 70% low-cost?

Today, before the [Catsfield] and Natsteel acquisitions, low-cost footprint is just about two-thirds.

[INAUDIBLE] but higher than that...higher than two-thirds. There is quite a lot of scope with the [Catsfield] and Natsteel [INAUDIBLE].

[__________]: Okay, great. Thank you.

The next question is from [Alex Blanton]. Your line is now open for question. Please state your company name.

[ALEX BLANTON]: [Ingleton Snyder]. Could you give us a percent on those two over-10% customers? I do not think that was on the slide.

13% for HP and 11% for Sony-Ericsson.

[ALEX BLANTON]: Sony-Ericsson...that is including all of Ericsson or just...I see both kind of [INAUDIBLE] so that is just a cell phone?

Less than 10%...Sony-Ericsson is the 11% customer.

[ALEX BLANTON]: And the rest of Ericsson is less than 10.

That is right.

[ALEX BLANTON]: Okay. And is this on a quarterly or 12-month basis?

Quarterly.

[ALEX BLANTON]: Quarterly, okay. Could you comment also on the changes in the product mix during the quarter. Bob, there was a drop in the datacom part down to 8% from 12% and it did pick up on the computers and automation side 27% versus 21%. What is involved in those two changes?

I think I will take a shot at that. As you know, we cannot comment on specific customer programs but we did highlight the major customers in each one of those segments. In IT infrastructure, just to repeat what we said, the major customers are Alcatel, Dell, [INAUDIBLE], Fujitsu-Siemens, and HP and what was the other category?

[ALEX BLANTON]: Computers and automation.

It was 3Com, Dell, HP, [InFocus], Microsoft, and Xerox. So I think you look at what is going on with each one of those customers in terms of their net sales [recorded], there probably would be some sort of correlation.

[ALEX BLANTON]: So actually some of the same customers in both sectors.

That is because we build multiple products for a particular customer, as you know.

[ALEX BLANTON]: And how is the printer business in general? I am not asking about HP now, but just the printer business. What is part of that computer and automation sector?

That would be too specific. We do not want to get into [INAUDIBLE] customers in that manner.

Let us just leave it to say that as you know, HP now is our largest customer on a quarterly basis and that is the first time that has happened and the [line] shows what we built for HP, not everything, but the [line] shows what we do is [entrepreneurship].

[ALEX BLANTON]: Got it. One more thing...your guidance has gone up. You mentioned it was the same, but really you have now arranged a 3.2-3.4 for the September quarter whereas your prior guidance was just 3.2. Could you comment on that increase? Why is that?

All I can give you is the same answer that I said previously. We simply would not say that we are bullish. We are simply seeing a lot of small points that are going in a positive manner at the moment. This is going to tell if this is a real upturn. Definitely, we have a seasonal pattern going on here. So we are seeing some strength in that regard. We will just have to see how it turns out. Just a number of smaller things moved in that direction.

[ALEX BLANTON]: Okay. Thank you.

Our next question comes from [Thomas Hopkins]. Your line is now open for questions. Please state your company name.

[THOMAS HOPKINS]: Yes, Bear Stearns. Good afternoon! I do not want to talk about specific customers, but Dell and HP are both customers. Any comment at all or in your own planning on how you think Dell's plans for a printer, which is now well-documented today, it is all over the [tape], might impact HP? In addition to that any opportunities. I do not know if Dell has officially said who is actually going to make the printer for them, but would that be something that you guys will be competitive for?

Certainly we are not the authoritative source on this, but I can give you what our understanding is. So Dell represents about 3% of HP printer sales, as we understand it. And you really need to check with HP and Dell on all this stuff. Of that 3%, about half are ink-jet printers and about half are laser printers. What we do for HP today is ink-jet printers, not laser jets. So and then about 50% of that total business is for corporate clients and about 50% is for consumers. As we understand, the corporate business will probably stay with HP. So when you do all that math, hopefully you can follow all that and come out with the same conclusion that we have arrived at, which is really a pretty [mature] impact on what we believe will be our business with HP.

[THOMAS HOPKINS]: Okay, and any insight or how do you view...is that piece of business from Dell that you guys would be interested in...may be I will just put it that way.

[INAUDIBLE] printer at the moment. So I would not comment on where [they] are with regard to that, but Dell will have to provide the design.

[THOMAS HOPKINS]: Okay, great. Thanks.

Next question comes from [Ellen Jay]. Your line is now open for questions. Please state your company name.

[ELLEN JAY]: Sure, it is [Ellen Jay], Prudential Securities. Bob, you mentioned some optimism about the market share gains. Could you just give us some detail on where you think that you might have the biggest successes in terms of market share gains?

I think I am not going to go and start mentioning specific customers, but I think you can see that it is just the change in customer mix that we have been continuing to improve sales with HP and so that is clearly evident. But with regard to other customers, throughout all of our customers we have been improving share with some customers and will be picking up a number of small and new customers.

[ELLEN JAY]: Given how protracted this downturn has been, are you any more concerned about credit quality for your customers and sell what is [INAUDIBLE] taken along those fronts?

We do have reserves [INAUDIBLE] on our balance sheet. In some areas we had to strengthen those reserves, but in general clearly there are larger customers and although we are willing to monitor them, we don't anticipate any [INAUDIBLE] issues there and with our smaller customers we take letters of credit and we insure them. We have good security over their inventory and [INAUDIBLE] our receivables with them. But mainly we are just very very cautious in taking on new customers when they represent credit risks.

[ELLEN JAY]: Okay, thank you.

The next question comes from [Todd Coupland]. Your line is now open for questions. Please state your company name.

[TODD COUPLAND]: Yes. Good afternoon everyone! Your accounts payable stretched out a little bit. Can you just comment on what happened there quarter to quarter?

It is up just a little bit. I think about $60 million if I remember correctly. We do expect sales to increase sequentially and to ramp up sequential increase in sales, we are bringing in inventory at the end of the quarter that we are going to need to inject into manufacturing and ship out in the September quarter. So it is really just a timing issue; $60 million change up or down in payables is just really not [INAUDIBLE] at our level.

[TODD COUPLAND]: And so what should be the range for that line within the cash cycle?

I would say somewhere in the high 50s to 60 days of DPO.

[TODD COUPLAND]: Okay. Secondly, could you specifically comment on the mobile handset outlook and what you guys are seeing? You have seen sequential expectations for improvement from most people under the September quarter. Could you just give us a sense on that and quantify it if you can? Thanks.

I certainly would not quantify it but it is true that we are seeing improvements [INAUDIBLE] into the Christmas season and so we expect that there will be improvements in particular through the September quarter as our customers [vent up] their demand. So we expect to see increases in the near term. I do not want to comment on the entire industry this year versus last year. I think that those customers are [INAUDIBLE] on a very regular basis. So I do not want to get into that picture, but on a sequential basis that is certainly one area for us to see improvement.

[TODD COUPLAND]: Just one followup on that; is it only seasonal improvements that you are seeing or are you benefitting from some of the new designs that people like Motorola and Ericsson have been pushing into the market?

Well, clearly we are benefitting from some new designs that have happened and there are some pretty neat designs coming along as well. So because we make phones for so many in this industry, what benefits one customer may have a different customer, and so there may be some balancing out there in terms of the overall benefit to us.

So our benefit mainly comes from annual increase in the sale of these phones, and for now while consumer confidence stays reasonable, I think that business is going to stay pretty strong for us. Obviously we will be hurt if there is a dramatic decline in consumer confidence. On the one hand we will be helped if [2.5G] starts taking off and there are certainly some benefits. [INAUDIBLE] the way I think that some people are starting some [INAUDIBLE] in the [2.5G] phones that may spur some more buying over the next 12 months. This is what we are looking for.

[TODD COUPLAND]: One final question. Could you just give us a sense of the outsourcing pipeline and whether it is near-term or whether it is going to [INAUDIBLE] out? Thanks a lot.

The [INAUDIBLE] today is $15-18 billion. We are expecting some business to come in at very short timeframes, but this business typically has quite a long sales cycle. So I cannot say that it is being pushed out by any means. I think that more customers are coming to the table to do outsourcing. So in general I would say that our business in that respect is getting better. As I said earlier, [INAUDIBLE] into more outsourcing so existing customers' businesses itself is not getting any stronger.

And may be one followup point on an earlier question that [Ellen Jay] had, is that the $10-15 billion dollar pipeline is very diversified. So it is not really concentrated in any particular industry segment. So a number of broadbased opportunities in that pipeline.

[TODD COUPLAND]: Thank you.

Our next question is from [Chris Whitmore]. Your line is now open for questions. Please state your company name.

[CHRIS WHITMORE]: Good afternoon! Deutsche Banc. Question relating actually to the last answer. Given your line of credit and the available liquidity, is Flextronics willing to use its balance sheet here to take advantage of some of these opportunities in the pipeline?

In general, we like to take...generate business from that customers and use that business into our industrial parks. So when this [opened] to our customers the first [INAUDIBLE] existing plants, and assuming that the existing plants are from high-cost locations, we say that clearly [INAUDIBLE] benefit and move the business out of those plants to the low-cost industrial parks that we have in places like Hungary, China and they should shut these plants down. Even that process involves capital on our part because the bulk of our capital and in fact our working capital we put into that business. So we [first] to turn around and say, 'why should we buy you a plant?'; [INAUDIBLE] because the plant itself is not very expensive. The buildings are quite cheap. It is more the viability that we are being [encumbered] with down the road if we have to shut that plant down and that is the main reason why we don't take on our customer plants. So [INAUDIBLE] as we can. We definitely will be putting our capital to grow the business, but it is mainly a working capital investment.

[CHRIS WHITMORE]: Okay. Secondly, moving to the gross margin outlook, can you talk about what you are expecting the gross margin line to be over the next couple of quarters? and tied to that of all the footprint square footage that has been slated to be removed under the restructuring, what percentage has been written down already and how much needs to [come off] the balance sheet?

On the gross margins we gave a range in revenues for the September quarter of $3.2-3.4 billion and earnings of $0.07-0.10. So if you wanted to sensitize what gross margins could be, take the high end of the revenues and the low end of the earnings and that would give you a pretty good sense for the low end of the gross margins. Do the opposite, take the low end of the revenues and high end of the earnings and that will give you the upper range of what the gross margins could be. We said that we continued to aggressively take our costs everywhere. So we are working very aggressively to continue to lower SG&A. SG&A did come down by about $5 million this quarter and we hope to show continued cost reductions at that line as well. Going out into the future in December, our bias for both December and September, even though I am trying to give you ranges I think you could expect gross margins to be trending upwards. But we are giving you pretty short visibility here. So our bias would be that margins would go up, but you need to do your own sensitivity analysis. I cannot remember what the other question was?

What the $1.5 billion [INAUDIBLE] coming out...obviously that has come out with those [charts]. So that is one of the factors that will improve the numbers going forward. So that has all been written down. Is that what was your question?

[CHRIS WHITMORE]: Yeah. It has been completely written down off the [PP&A] on the balance sheet?

Yes.

[CHRIS WHITMORE]: Okay, thanks.

Our next question comes from [Michael Walker]. Your line is now open for questions. Please state your company name.

[MICHAEL WALKER]: Hi, thanks. It is CS First Boston. Just kind of following up on the last question, could you by any chance give a [ball park] percentage completion rate on the restructuring in terms of facility closures, square footage closures either at the end of the quarter and second question is, do you have a company-wise capacity utilization estimate right now?

In terms of percentage completion, I think you are asking whether we are going to have more closures beyond what we have included in this one-time charge. We believe that this charge will take care of all that needs in the foreseeable future. But I have to emphasize foreseeable because we clearly have been surprised with the depth of this recession and the extent to which customer demand has slowed down. But with what we are currently seeing we do not anticipate that we are going to need more one-time charges to restructure. I would like to think that we are 100% but we have been wrong in the past. We [INAUDIBLE] in very good shape here.

[MICHAEL WALKER]: Okay, on the capacity?

Our capacity is really is in three areas in terms of the capacity percentage utilization of the square footage that we have out there, we are probably running around 60%, a fairly low number. In terms of equipment machine, our equipment is also running may be a little bit higher than that but [still low for] tremendous amount of equipment that we have had in the past and still have available. We have been moving our equipment around from region to region to optimize their use and so they are flexible in the use of that equipment so we still have quite a bit of excess equipment around and a lot of it has been reutilized as it is much easier to move equipment than it is to move a building. In terms of people, much high utilization because we really have been shifting down our people cost to the extent that we can and I would say that our people utilization, which has really been the critical factor in the past in terms of our evaluated growth, is now at pretty high utilization.

[MICHAEL WALKER]: Okay. Just a real quick followup if I could, do you expect the impact of gross margins from production transitions to different facilities to extend past the September quarter?

Yes, I would say yes. We are [INAUDIBLE] right now. This is an ongoing trend. We are expanding, [INAUDIBLE] forecast by the way, but we are continuing to where we have expanded facilities in Asia, we have announced now the closure of a number of high-cost facilities but then the customer transition from one to the other is an ongoing effort and we expect that there will still be customers moving and with the [INAUDIBLE] last quarter and new customers starting up from, of course, the low-cost locations as well. So that trend will continue and our low utilization of the equipment and the plant will continue to impact the margins for a while.

To emphasize what Bob said once again is that all [baked into] the guidance that were given to you guys.

[MICHAEL WALKER]: Okay.

The next question comes from [Shawn Siverson]. Your line is now open for questions please state your company name.

[SHAWN SIVERSON]: [INAUDIBLE] good afternoon. Is it possible to quantify the dollar value of the 5% savings in employee expenses?

Please standby for one moment, please.

[BLANK AUDIO]

Shawn Siverson, your line is now open for question again.

[SHAWN SIVERSON]: Thank you.

I am sorry about that. We ran out of call on the pay phone, the bill has been paid and we are back online.

[SHAWN SIVERSON]: Well, that is important. I was wondering could you quantify the 5% savings that you referred to in employee expenses related to the restructuring?

As you know, there are quite a few thousand employees that are affected by that. They have been notified and over the course of the quarter and so these employees are in a quite a large number of plants and in some instances complete plant closures but in many instances just reducing the number of employees at existing plants.

[SHAWN SIVERSON]: And what would that be in terms of dollar value in that you are saving with ... quantify the 5% in terms of dollar value?

But Shawn it is important you understand we thought the reducing the payroll cost by about 5%. That doesn't mean it is all necessarily cost savings because we have revenue reductions in certain locations that don't want that level of employees so a lot of that is margin protection, as you will, it is not appropriate to think of that as a 100% of savings that's going to generate future profits. There's certainly some element of that but the larger element is we are taking out the number of head counts in certain locations that can't justify the head count because of their revenue levels.

[SHAWN SIVERSON]: Okay. And then does that take into account the addition of all the new employees from the acquisitions that are closing as well?

No, it doesn't.

[SHAWN SIVERSON]: Okay. And then the $1.5 million in square footage: what does that equate to in terms of depreciation savings going forward?

Good question. I don't know [INAUDIBLE] but I would be happy to get back to you guys on that.

[SHAWN SIVERSON]: Okay. And then on HP, we have been hearing that obviously they are consolidating their supplier base going forward but you know the way I had understood that it was going to happen was more through letting products go end of life at the existing suppliers and then ramping up new product launches with those suppliers, the new suppliers of course, of which you are one. Is that still true or have you had any larger product transfers come directly into your fold with HP?

While one of HP's [INAUDIBLE] is that they have very fast product transitions so they [INAUDIBLE] quite sure so I believe most of it is heterogenic product changes.

[SHAWN SIVERSON]: Okay. And then just lastly, when did you see the ASP stabilize in the printed circuit board business and then also were you seeing volume increases this quarter, this quarter being the third quarter?

Earlier this quarter one of our competitors announced that they had seen some substantial pricing declines and anticipated further pricing declines and we found however that during this quarter prices were fairly stable.

[SHAWN SIVERSON]: Unit volumes, did that pick up in the business?

In the September quarter we do expect volumes to be higher over the June quarter.

[SHAWN SIVERSON]: Thank you.

Thanks Shawn.

Our next question comes from [Scott Crig]. Your line is now open for question. Please state your company name.

[SCOTT CRIG]: Thanks Morgan Stanley. Hey Tom, can you talk a little bit on the accounts receivables securitization if that increased in all this quarter and by how much? And then secondly, can you [INAUDIBLE] a little bit of color Bob around the enclosures business as far as profitability and revenue trends go there? Thanks.

Sure. For the first part of the question, receivables securitization increased by about $27 million sequentially Scott so very little of the improvement in the AR dollars could obviously be attributable to the small increase in the ABS securitization. The second question was enclosures as we announced last call actually we longer track enclosures with a separate operation as part of our assembly business and so we don't have specific data on the enclosures business but we have taken a tremendous amount of cost out of that business while the areas where we have been shifting over the last 3, 4 quarters and at the end of the June quarter we actually shut down the enclosures' headquarters operations in Chicago and have absorbed that overhead into the other assembly operation. So, certainly have been improving profits on the enclosures business but it had been operating at a loss.

[SCOTT CRIG]: Okay, thanks.

John McManus your line is now open for question. Please state your company name.

Needham & Company. In the other expense category, was there any other income, which allowed that figure to drop so sharply?

So, John, as we pointed out we paid down quite a large number in terms of dollars of debts so our debt decreased and our cash balances increased so what you are seeing there is a net reduction in interest expense. And then ...

What's your best guess then what that might look like in September?

So in September I would say it should be around $20 million which will probably be an appropriate number to model.

A lot of the cash payments were out towards end of the quarter.

And you can make the argument that I think you have talked before that most of your non-Chinese printed circuit board plants there are losing money. Can you talk a little bit about utilization there and what has to take place there for some of those non-Chinese operations there, board operations there to turn profitable?

Well, I have the same story as I said on the particular second question but we are looking to shift of some expenses certainly improve yields and so the important way that we allow improved profitability but it is not going to be any one dramatic thing so a lot of [INAUDIBLE] and it definitely is dependent upon an improvement in customer demand which will result in high volumes obviously but more importantly in better pricing.

Its [INAUDIBLE] with one follow on point John we did mention on the last call I believe that we are going to close our Hong Kong PCB fabrication unit and pull that business into the China factory so that's really the only plant reduction that we have regarding [INAUDIBLE] the restructuring charge but certainly that will help increase the utilization in China and as we increase utilization profitability level should improve.

And then do you think you can close [INAUDIBLE] by the end of September?

That is the plan.

Right. Okay, thank you.

We will take one more question.

And that will come from [Jury Labowitz]. Your line is now open for question. Pleas state your company name.

[JURY LABOWITZ]: Yes Merrill Lynch. Bob, can you just review with us when you have some of these higher cost industrial complexes in places like Hungary and Mexico as you are migrating products to lower cost Asian facilities. What are you brining in these other operations to fill void?

First of all, we think of Hungary and Mexico have also been low-cost operations and whilst China is lower cost than Mexico and Hungary. [INAUDIBLE] conversation moving to high cost locations we have been talking about...

[JURY LABOWITZ]: I realize that.

...things like that leads to the answer which is there certainly is continued opportunity to move traction from the high cost locations to Hungary and Mexico and then some productions we are moving from Mexico to China. And its all relative degree so there is need to shift down substantially the number of plants that we have in the United States, for example, a dramatic reduction of the plants in United States and this way our business has gone to Mexico at the same time some Mexican business has gone to China and so we are seeing the same thing in Europe where there is a tendency to take the business while we can to Hungary sometimes directly from the Germany, France, and Scandinavia countries directly to China or to Malaysia or sometimes to Hungary and we are replacing other businesses to China.

[JURY LABOWITZ]: Can you help us understand this if we look at the handheld device business this quarter and you take away your largest customer in that sector? When we look at the rest, how much of it is Asian-based customers?

Well, there is little under Asian-based customers the bulk of that is European customers. Our major customers there are Sony, Ericsson and [INAUDIBLE] I would think those as more European based not as Sony is clearly a major party in that but the headquarters for that group is in Europe and then Siemens, Alcatel so these are all European companies and so the rest are all obviously are US-based. So most of our customers are in the high cost locations we have the ends that are Taiwanese [INAUDIBLE] we do have some Asian-based customers. Quite a lot of the production is also in France and Denmark I should say another high cost location and so right now that business is moving, the customers are quite happy with where it is products but it has been products like this that have moved in the past to the low cost locations.

[JURY LABOWITZ]: Yes. Thank you.

Well, I would like to thank you for attending this call and we will see you at the next mid-quarter call.

This will conclude today's conference.