Flex Ltd (FLEX) 2003 Q3 法說會逐字稿

Good afternoon and thank you for holding. Welcome to Flextronics third quarter earnings release conference call.

At this time, I would like to remind all parties that your lines have been placed on a listen only mode until we open up for questions and answers, and also that today's call is being recorded. If you should have objections, you may disconnect at this time. I would like now to turn the call over to Mr. Michael Marks, Chief Executive Officer. Thank you sir, you may begin.

Okay, thank you. Ladies and gentlemen, thank you for joining the conference call to discuss the results of Flextronics' third quarter ended December 31, 2002. On the call with me are Bob Dykes and Tom Smach.

We are in different locations, so please bear with us when we get to Q&A. We'll communicate the data on this call. You can also be in touch today from the internet from the investor relations section of our website, and select "Earnings and Outsent Presentations". Then you can click through the slides, so I will give you the slide number I'm referring to.

Slide 2: Please note that this conference call contains forward-looking statement within the meaning of federal security laws, including statements concerning future growth, trends in our industry, new and existing customer activity and market demands, relationships with key customers, earnings and operating results, profitability, financial positions and restructuring activity. The statements are subject to risks that can cause actual results to differ materially. Information about these risks is noted in the earnings press release at the end of this presentation and in our SEC filings. The term "pro forma" used throughout today's discussion excludes amortization and restructuring charges as applicable, and [INAUDIBLE] company slides.

Slide 3: As announced just recently, revenue in the quarter was $3.8 billion, which represents a 12% increase from a year ago and a 15% sequential increase. This figure represents record quarterly revenues for Flextronics. Pro forma net income was $66 million, or 13 cents per share. We incurred $67 million of after tax net restructuring charges during the quarter, of which the cash portion is estimated to be $47 million. GAAP results after restructuring charges and amortization was a net loss of $6.5 million or 1 cent for GAAP earnings per share.

Slide 4: On a sequential basis, gross margin remained at 5.5%, while SG&A declined 30 basis points to 3% of sales. Pro forma operating income increased 35% on a sequential basis. Return on invested capital in the quarter included two percentage points sequentially to 8.2%.

Slide 5: At the end of the quarter, we had $614 million in cash. Total debt was reduced by $39 million during the quarter and our leverage ratio was 20% at quarter end. Liquidity increased to over $1.2 billion.

Slide 6: Depreciation and amortization was $90 million and capital expenditures were $46 million in the quarter. Cash flow from operations were $398 million in the quarter. Slide 7: We continue to deliver a [INAUDIBLE] cash conversion cycle, which came in at 21 days for quarter. Inventory turns increased from just under 10 times last quarter to just under 12 times in the current quarter. And DSO improved for 40 days. Accounts payable increased to 50 days. The detailed calculation of cash cycle days is shown on slide 7.

Slide 8: Customers continue to require us to aggressively move their production to lowest cost locations, and as a result Asia and Central Europe have been growing rapidly. Slide 9: December quarter represents Flextronics' seasonally strongest quarter, due to holiday season spending and year-end capital spending.

December quarter sales are stronger than we expected in a number of end markets, including computer and office automation, consumer hand held devices and industrial and medical. The two toughest end markets, communications and IT infrastructure, were both in line with our moderate expectations. [INAUDIBLE] infrastructure was 14% of third quarter revenues. Customers in this segment include Ericsson, Motorola, Nokia, Siemens, and Talia.

IT infrastructure was 7% of third quarter revenue. Customers in this segment include [INAUDIBLE], Dell, EMC, [INAUDIBLE], [INAUDIBLE], and Hewlett-Packard. IT infrastructure includes products such as network switches, hubs, routers, [INAUDIBLE], storage systems and main frames. Computers in office automation was 22% of third quarter revenue. Customers include 3Com, Dell, Hewlett-Packard, In Focus, Microsoft, and [INAUDIBLE]. We continue to win market share in new programs for most of these customers. Computer devices was 16% of third quarter revenues. Significant customers include Casio and Microsoft.

Hand-held devices were 30% of third quarter revenues. Customers include Alcatel, Motorola, Nokia, Palm,Siemens, and Sony Ericsson. This segment is both the largest and most stable for our company with a broad portfolio of products. In addition, this segment provides opportunities for a full service higher margin offering. We are increasingly providing designs, printed circuit board fabrication, plastic and logistic services to this customer base.

As a result of our strength in this product category, this week we have entered into contract negotiations with one of our existing customers for a substantial new organic outsourcing program, with incremental revenue of more than $500 million per year. Finally, the industrial, medical, and other segment was about 7% of our third quarter revenue.

Slide 10: For the current quarter, Sony Ericsson represented about 12% of revenues and Microsoft represented approximately 10% of revenues. Our top 10 customers accounted for approximately 68% of revenues in the quarter. Slide 11: The December quarter operating results clearly exceeded our range of expectations. Although Christmas was lackluster, we are maintaining through the March quarter with revenue in the range of 3 to $3.3 billion, and 5 to 8 tenth of pro forma EPS.

In addition to the lower hand-held [INAUDIBLE] we are negotiating, we have been selected by additional customers for business that could fall into the latter part of quarter. Although we have limited visibility for subsequent quarters beyond March, based on what we currently see, we remain comfortable with First Call estimates for the remainder of calendar 2003.

In an effort to reduce capacity and operating costs in our [INAUDIBLE] circuit business, we are announced in December that we would close the multi-PCP fabrication operations in Irvine, California and in Kenya, Sweden. We [INAUDIBLE] the business in North America and Europe. This consolidation provides [INAUDIBLE], with improved utilization of factory capacity, resulting in reduced cost structures, reduced capital expenditures and increased operational efficiencies for customers.

It will be completed during the March quarter, so we will not realize the full financial benefit until the June quarter. In the meantime, we expect to lose two cents per share per quarter for Multex.

Slide 12: In line with recommendations of the conference board, we have opted to split the roles of Chairman of the Board and Chief Executive Officer. I will remain as CEO and Richard Sharp, previously the CEO of the Circuit City store and the founding director of [INAUDIBLE] in 1993, has graciously accepted my request that he step into the role of noneffective chairman, effective today. We want to meet the role standard of corporate government, and we believe this move is an important step in that regard.

Slide 13: In summary, I would like to provide some observations about the December quarter and our position in the industry. I'm particularly proud of the company's accomplishments this quarter. While achieving record sales in a very difficult end market is notable, that is not the reason why I'm so pleased with our management team and employees around the world.

Rather, it is the operating metrics that are so important. In 1993, when I began my ten years as CEO of Flextronics, our SG&A were 7% of sales and inventory returns were 4. At this time, I set long term objectives of reaching an overhead rate of just 3% of sales and inventory turns of 12. Our long term shareholders have heard me speak of these objectives often.

In the second quarter, we reached our SG&A objective of 3% of sales for the first time, despite adding high overhead operations, such as printed circuit boards, designs, logistics and network services. In the EMS only sector of our business, the SG&A is less than 2% of sales. During the December quarter, we also very nearly reached our long-standing objective of 12 inventory turns with a figure of 11.7. At the same time, we reduced accounts receivable to just 40 days, and pass through receivables are at record lows for company. Cash cycle days, which continue to be industry leading, improved again to just 21 days.

I believe this metric not only leads the EMS industry, but is also nearly world-class for any industry. Despite paying out nearly $56 million in cash for restructuring activities, we managed to reduce debt and increase cash in a meaningful way. This translated to generating pro forma cash flow of $398 million from operations. That exceeds the motto we have explained for many years, that this industry is capable of generating strong cash flows when growth moderates and restructurings are behind us.

When the market turned down in late 2000, the management of Flextronics became determined to improve what we can control. We cannot influence end markets, but we can influence the efficiency of our operations. Two years later, we are operating about as efficiently as possible. And we haven't stopped there.

We have added customers, reaching record revenues. We have expanded our service offerings. We are investing in design services, OEM product development, and network services, all which can and should improve margins over time. We are gaining share with many of our customers and the pipeline of new customer opportunities continues to be robust. As we continue to win more new business that utilizes existing capacity, our margins will improve. We have many issues to work on.

The printed circuit board business continues to be weak and a drag on earnings. Telecom and datacom sectors have become too small as percentage of our total revenue mix to provide shareholders the stable portfolio we need. Overall, margins and profits are not where they need to be. We will continue to work on these things. But we are now operating very efficiently, and making money in some of the most difficult product categories. We are now very competitive in even the toughest locations. And as end markets improve, we have considerable operating leverage.

We hope that improvement will happen in 2003. Slide 14: There are real risks of operating this business that investors should appreciate and we have laid out some examples here. Please pay particular attention to this slide in light of current market conditions. With that, let me turn the conference over to the operator to poll for questions. Please limit yourself to one question and one follow-up. Operator?

Thank you. At this time, if you would like to ask a question, you may press star followed by one. Again, that is star one to ask a question. To withdraw the question, you may press star two. One moment for our first question. Thank you, Steve Savage with Goldman Sachs, your line is open.

Sure, good afternoon.

Hi.

I guess there has been a lot of talk lately on ODM's and hand sets and things like that, particularly regarding Sony Ericsson. I was wondering, Michael, if you would walk us through a little bit of the history of your relationship with Sony Ericsson, who you're close with, and who really runs the JV for them? And kind of how much manufacturing with the JV?

Sure, I can give you at least some color. I can't give you all the specifics you ask for because there is customer confidentiality here. But we originally made our arrangement with Ericsson before Sony was in the picture. We took over essentially all of the manufacturing and factories and helped the company do a bunch of restructuring and so on. Relatively early into the program, Sony entered the scene and formed this 50/50 joint venture, and basically the joint venture took over the responsibilities and obligations of the original deal we did with Ericsson, so our relationship and in the joint venture, there are people from both Sony and Ericsson and our relationship is very good with these people.

We are the major -- they are our largest customer, we are certainly the major supplier for them. They -- we do more or less all of the manufacturing with a couple of exceptions. They do use some ODMs and Ericsson did before we came on the scene and they continue like the rest of major cell phone customers continue to use some ODMs. We do most of the manufacturing, even on the ODM side of the product. We are ramping up production in Brazil and Mexico where the ODM does not have manufacturing in those locations. We do 100% of logistics management.

So even the products that we don't manufacture, we can do relatively some portion of business, we do all the logistics management. So the relationship is in very good shape. There are all kinds of rumors and speculation. One is that Sony -- that Ericsson was going to sellout their portion of the joint venture, which I don't think was ever a fact. And in fact, I think here in the last day or two Ericsson has acknowledged they will continue to support the joint venture, which is what our expectation was all along.

So the business is in the -- the relationship is in good shape. In other words, there was a rumor last week that was going to get Ericsson was going to get American business and our stock went down, and people called me up and all of that. There wasn't any truth that whatsoever. That was some short seller's report is what we believe and even Quanta immediately acknowledged that they had not had any conversations or anything was in place.

I mean, everything is in pretty good shape here. You know, Sony Ericsson lost market share last year, which everybody knows, it is public information. They have a new line-up of products that looks to be very good. We think business will be up for them and for us in the coming year, and we are delighted to have them as a customer. So I think that is all in good shape.

Okay, thanks. And just quick related question is that overall for hand sets, you have about 15% market share and since you manufacture for a number of ODM's that is reasonable proxy of the share of the ODM manufacturing that you do or is there a way for us to think about that?

I'm not sure I understand exactly when you say -- are you asking are we doing 15% of manufacturing for ODMs in the world --

Correct.

I haven't done that calculation, Steve. I think we could do some looking into that. We do manufacture for about 5 or 6 ODMs and probably will continue to do so, since we have competitive leverage on the cost side of this business. I would say that we should be able to get an equivalent market share in that group, I would say.

Okay, thanks, Michael.

Jim Savage with Thomas Wiesel Partners, your line is open.

Hi Michael First I want to congratulate you on great execution during the quarter. Can you give us any idea?

I know that there are seasonal weaknesses in hand helds and in consumer products and some of the computer and office automation, do you have any sense as to what the overall sell-through is, and what kind of inventory levels your customers are holding at this point, and what your mix is going to look like in the March quarter?

Sure, let me give you a general sense of it. We get asked the questions a lot. We would like to know the answers. We are not experts as following sell-throughs. So it tends to be more anecdotal, but I can certainly give you a mix.

Last year we added Natural Broadway and Casio, which are two additional market segments that are reasonably consumer-oriented so that leads to more of a seasonal bias than we had before those guys. Beyond that, Christmas was not great. I don't think anybody thinks it was. But I don't think was a disaster, either.

I mean, we do not have a sense from our customers -- you may recall in the last couple of conference calls we said you know, we will have to see how Christmas is, to have a look at March, and Christmas was not great, but does not seem to have much of an impact on what we expected for the March quarter. It is still very early in the quarter, so we will see.

The cell phone market, it is kind of interesting to me because there is so much angst, it seems, around the cell phone market in the customer base and you know, some people not being that happy about our mix there. But it is actually one of the best markets out there. So I have always been surprised at the reaction to investors around that issue. Right now, I think that the March quarter is going to be relatively stronger quarter in cell phones than it may have been in other periods. And the reason for that is we are entering a very good cycle for cell phones.

You know, the new phones with color screens and cameras and gprs, and there is even a few 3g hand sets starting to trip on to the market, and there is a lot of excitement in the sector, so you have a couple of things going on. You have the new adoption cycles, you have ASP, higher average selling prices to the products. So part of it, not all of the improvement over our expectation December quarter, is that market has been a little stronger than people expect and we are personally expecting it will be in reasonably good shape in the March quarter.

Printers are very strong, also a lot of use of digital photographs and so on. So -- and I think standard stuff like Casio watches and palm pilots, things that, are typically strong will be weak as you would expect in the March quarter. We think that the OEM's managed inventory as well. And people are doing it with relatively low expectations. And so we don't think there is an inventory issue out there, and it is all very seasonal and therefore we have to maintain guidance for March, which is the lower revenue than December.

Okay, great, thanks.

Thank you. Your next question from Michael Morse with Solomon Smith Barney. Your line is open.

Yes, thank you. Good afternoon. Michael, the last couple of times we heard from Flextronics you referenced a bit higher optimism throughout your company and that customers quantitatively were feeling bet better about the coming year. I wondered if you had an update on that. Do you think the customers are feeling more optimistic or less optimistic versus 60 or 90 days ago?

Yes, I think I can mirror, Mike, some of the comments being made by the other companies that have been reporting. I wouldn't say that we feel too much difference. I'd break it down to a couple of categories. I don't think anybody is expecting a bang-up year in 2003. That doesn't mean it won't be. Because these things tend to be different from people's expectations. But nobody is out there going that all the signs suggest there is going to be a big improvement, and we don't think so either.

On the other hand, what people are optimistic about, and I spend a lot of time with customers and I have been out with customers in the last few weeks, everybody is doing exactly what they ought to be doing, and you can see it in the numbers. There is more cash on balance sheets, there is more selling off of non core assets and more raising of debt and equity capital, there is much more focus on operating performance and operating metrics, just as we did.

And as a consequence of that, you look at our own numbers, I think our operating metrics are spectacular. I couldn't be more encouraged. Profits not where they should be, but we are focused on the fundamentals, we are operating it effectively and know that sooner or later, end markets will take care of themselves and that is what I see on the customer base. So when you ask if people are more or less optimistic, I think that people generally are focused on the right things and that in itself makes them feel better.

They see the balance sheets coming into line and the more time that passes that we are in the downturn, we are now in the third year of it, I think everybody I talk to realizes that this will end. I have been out talking to telecommunications companies and despite articles you read about 3G being dead, you know, Ericsson shipped more than 10,000 3G base stations. They are operating on a number of [INAUDIBLE]. They don't work yet exactly right and the hand sets are not really ready and the battery life and this and that, but you see people planning for a future where the markets will be strong.

So I would say that people are modestly optimistic, which is probably what I thought three months ago as well. And I think also it would be useful to understand our optimism for the market in terms of weak profits is made up of very good profits in many locations.

You know where metrics are strong across the board, etc., we are purposely maintaining capacity, you know, for growth and the number of facilities where it is just a matter of excess capacity that we are purposely maintaining that is depressing the profits. Don't think of this as depressed pricing, and we can't turn things around, things like that. We are purposely keeping capacity open in certain places for what we believe will be an upturn in the market.

Okay. As my follow-up, you referenced meeting with your customers, including telecom customers. You also said you felt that the telecom, datacom, had become smaller for stability, I believe was the phrase you used.

Can you talk about how you remedy that other than organic work in those underlying markets, and would you consider taking assets from traditional telco equipment companies in order to bolster that particular segment and are any of the wins that you referenced that might be in coming quarters in those segments?

Absolutely. So we believe in the portfolio theory, and those of you who are listening who have followed the company for a few years, you remember that two or three years ago when all anybody was interested in was datacom and telecom and people asked why we were pursuing consumer markets, we said it was to maintain a balance of portfolio, which has the advantages that certain segments will be doing well no matter what happens.

And that strategy has stood us very well. So you see right now, we are growing revenue with records and all that kind of stuff. It is decent, we have a lot of good consumer segments. We still believe in portfolios like we did before. We don't want to be just a hand-held company, or just a consumer products company, and we are overweighted in those categories, which look good for the moment but not good in the long term. So we are very aggressively pursuing all the datacom opportunities.

We do have -- we have one new business from a number of companies in this space that I think we have announced. Earlier we are doing work with Tellabs [PHONETIC] and ADT [PHONETIC] in there spaces. We are working on a number of major programs with companies in this space, and it is very high focus for company so we can balance our portfolio.

What I think will happen here is we will win a couple of additional companies, we will get more penetration in the customers that we have, which is many customers and then we will get a turnaround and I think that will come right back into balance. So I think that not in those -- not in '03 but in '04 we will see the sector get back to the 35, 40, 45% of our business, which I think would be more healthy. In terms of taking on assets, we talk to customers every day about taking on assets and as you can see in the industry, there isn't much of this as everybody has gotten religion and mostly have too much capacity any way.

But, in the right set of circumstances with the right customer and right deal, we would consider taking on many assets in the right location. What we won't do is take on additional assets and wind up with more restructuring three years from today. We've sort of been there and done that, and I think we have learned a lesson about that.

Thanks very much.

You bet.

Thank you, Lou Mansiu with Lehman brothers. Your line is open.

Yes, thank you. I looked towards your China location you had the Dell business doing a good portion of actual PC. Can you get that same shipment over to Dell to do the final? Can I get some idea, because I know a while ago you talked about that as another diverse area you could get into, what your thoughts are there?

Yeah. We are growing a relationship with Dell, it is is a very good relationship. We doing more in the PC space. We continue to believe that an expansion into the PC category would be helpful to Flextronics.

We think not only is it a big market segment that we haven't participated in, but per my earlier comments about portfolio theory, this is a big segment and we would like to have some exposure to it. Because the business is so mature, because the major buyers of goods in that space have long-standing relationships,

Our entry into that space is going to be more likely through some types of ODM activities, which we are involved in and we have done some really nice design work for companies in subnotebook and specialty categories. It will be difficult for us on an organic basis to run desktops and notebooks, because the relationships are so mature, but there are changing technologies and we have some regional and logistics capability to offer. So I'm hopeful that sometime in 2003 we will add a more major relationship in the PC sector, but it is not easy for us. The -- the entrenched players in that space are really pretty good.

Great. Shifting a bit, you did mention about possibly expanding I guess your hand held order or area and did you mean cell phones and is that something to do with your phone one product, if you could expand on that?

No, it is not on the ODM side, but I will say something about our ODM activities because I didn't say anything in the script. But, we are continuing to make progress with our own product designs. We do believe that this is going to work as we hoped, which is the relationships, the really outstanding relationships we have in the cell phone sector are going to work well for us here.

We think that this is an added service we will be able to provide, pretty clear that the customers like what we are doing in this, and that will begin to be a mix. We still have this quarter probably no revenue to speak of with our own ODM products, but we do expect to have revenue in the June quarter and as we move into later in the year, I think that will become more of a significant factor.

We are in final negotiation, it is a big order and we will undoubtedly get some additional information [INAUDIBLE] our contract. It is an order of at least $500 million. It is meaningful with one of our existing customers and I would like to leave it at that until we have details that we can share with you, and hope to do so in the next couple of weeks.

That would be great, thank you.

You bet.

Thank you. Alex Blayton with [INAUDIBLE], your line is open.

Hi, Mike. Congratulations, it was a great quarter.

Thank you, Alex.

I'd like to discuss a minute about the guidance despite the strong quarter in December. The mid range, as your guidance pointed out is off about 18%, and a year ago the seasonality was 5%, 5% decline.

And based on what you said earlier about a stronger than expected cell phone seasonality, and so on. I'm just having trouble squaring what you said throughout the conference call with the guidance. Could you just clarify more on that?

Yeah, I can. I think it is straightforward. I think that you know, the seasonality here is pure seasonality and no customers going away or anything like that. This will help you.

Last year when you look at the decline. You had the XBox program in place, which was an increase because it was getting started, where as you don't have that here. You also have Casio, which is a major customer which we didn't have last year, and that is very seasonal.

We have National Broadway, which is almost entirely consumer which we didn't have last year, and that is more seasonal. And now you are full into the swing of the gaming industry, which is most seasonal of all the products, and that is all you that you are seeing here. The December quarter, as we indicated, was better than we expected, maybe March will be better than we expect also.

What happened in the December quarter was the quarter just got stronger and stronger as we went through the quarter. Even when we did the mid quarter conference call, we did not expect these kind of results or we would have told you then. And we provide guidance on purpose. We want to tell investors what we see and this range of what we see for the March quarter, and we have new customers coming on which could help.

But between Casio, Microsoft, National Broadway, and a number of other programs that have seasonality, this is what it looks like. And I think -- but it is perfectly reasonable and within the realm of what we expect with these kinds of approximates.

It strikes me if you didn't see this strent by the end of November, but you were able to deliver the product within the month of December, that's a [INAUDIBLE] flexibility in ramping up, and my second question is sort of related in that I ran the numbers, and your hand held sales were up 35% sequentially in the December quarter.

Um-hmm.

And the other consumer sector was up 67% sequentially. Could you comment on those two, and what was involved there? And also, the computers and office automation part was down 15% sequentially, so that too.

Yeah. Well, again, I think that the biggest reason -- I'm looking at the numbers, these are not numbers that I have right off the top of my head. So let me look at it.

Hey Michael, it is Tom. Let me jump in a little bit. So if you remember in the September quarter, we had the one time benefit from the channel fill for hp on the new product launches.

Right.

That would explain the decline in the computers and office automation that Alex was referring to. The big increase in the consumer relations to a strong quarter for gaming devices and Casio is incremental this quarter versus last. So that would explain the increase in consumer as well.

What about the hand held part?

Hand held is just you know strong, seasonal bills for the holiday season.

But that sector was up almost 30% year over year. No, I'm sorry. Got the wrong quarter.

That was mostly seasonal, the hand held part? Yeah. And also there is also a bit of ASP change going on here, in that more of the higher priced cell phone products were selling, so that helps as well.

And I think that is one of the things that both well for the industry in 2003 in that I think there will be more phones selling, more of the advanced color screen, camera type phone selling. These products doing well and they are more expensive. That really does represent a lot of our seasonality. I think the hand held does represent a strong Christmas season product.

Okay, thank you.

And one more comment to add there Michael. When Alex was looking at the seasonal decline last March, we picked up Xerox facilities that softened or masked some of the seasonal decline in March that obviously we don't have that benefit this March quarter versus last March quarter.

I do see your hand helds were off about 25% last year.

Right.

Okay, thanks.

As I said, I think March quarter -- our expectations for the March quarter are in line with what we expected given the product mix we had. I don't think there is any surprises in there. And hopefully this time next year, the drop will be less, because we will pick up a bit more datacom, telecom stuff which tends not to be as weak. You did see from the announcements of may that there was a bump in even those markets in the December quarter.

Right. Okay, thanks.

You bet.

Thank you, Thomas Hopkins with Bear Stearns, your line is open.

Yes, good afternoon. Congratulations again, Michael, on a good quarter.

Thank you.

I just want to go over the free cash flow, because it looks to be a record. I'm starting with your operating cash flow, 398, and I'm going to take out 55 million for the cash you paid for restructuring, debt part, and then you got 46 million in CapEx, so it looks like you had 398 of operating and about 101 of CapEx and cash charges which would you know get you about 297, almost 300 million in free cash flow, does that sound about right?

That's right.

Okay. That is quite big.

The second question is -- can you -- and I heard Tom there, can you just tell us for quarter what the contribution was for Casio and Net Steel [PHONETIC], in terms of revenue just in aggregate? And incremental revenue?

Yeah, we will look it up and just give us a second. We have it.

[INAUDIBLE] [INAUDIBLE], your line is open.

I'll come back and answer the question, Tom.

Okay.

We will go look it up and come back on that.

Okay. Thanks.

You said that print circuit boards were weak, can you elaborate a little more on that?

I don't think I said that they were weak. I mean, just in general, sure.

Talked about multi overall, that industry continues in pretty difficult shape, our losses which is as much as five cents a share or now we have taken more writeoffs and closed a couple of factories, now we are about two cents a share loss, around $10 million next quarter, and on a cash flow basis that is pretty close to cash flow to break even, there is still too much capacity in the business.

We are going to, you know, live with the capacity we have. We really don't want to take anymore out. We closed two factories, we could have closed four, and been at break even but that would have limited our upside.

Does it get worse this quarter that we are in now, the March quarter?

No, not for us, it doesn't. I don't know what the overall market is. But if you look at book to bill it has been steadily forever, but certainly for the last two years. And you know, the thing is what I said a lot about the print circuit board business is a lot of the capacity utilization is with the products not selling well with big iron, high end servers and the datacom, telecom that uses a lot of capacity.

It will not take much of an increase in those markets to stop up the excess capacity, because it was taken up a lot of the business. Closed facilities and other closed a bunch and guys have gone broke. And factories like ACI in the past quarter have been sold for small amounts of money. We are not overly concerned about it; in fact, when you have this much capacity coming out, as I said, a relatively small upturn will be positive on the operating leverage side, so we keep our costs down as much as we can and we are optimistic that we will be making money in that business before 2003 is out.

But it is not our healthy business, no question about that.

Okay. Thanks.

You bet.

Thank you. Scott Craig with Morgan Stanley, your line is open.

Thanks, good afternoon. You guys have done a good job on the working capital. Have you decided to set any new goals there now that you have reached some previous ones?

[ laughter ] Man, you are tough. I guess I'm thinking about it. To be honest with you, here is what I think about it. In the EMS base, and I go back over the numbers, in your EMS our overhead is now under 2%. I don't think I want to take it down much more than that. It is just frightfully efficient.

I mean, if you look at those numbers compared to our competitors and you compare apples to apples, it is just awesome. And at some point you run the risk that you will reduce customer service, and I don't want to do that. So I think that we probably will not set a more aggressive objective on SG&A, we will keep it there.

And when the [INAUDIBLE] dropped, you know, SG&A as a percent of sales will go up again. We are not reliable at 3%. I think we can be. And I don't think I want to do more. I would rather take the extra money and increase our sales force and increase our customer service and see if we can't improve the business in that way.

On inventory turns, the inventory turns are even better than they show because we have this logistics business and this includes the inventory and logistics area where we carry finished goods, and if you take that out, we are more than 13 times. I think we can slowly drift that up a little bit. But again, we run the risk if we tighten that down too much of not being in a position to provide our customers with the service that they want.

I would say, in that category they are close to where we ought to stay permanently. Receiveable days, it is hard to imagine we can do better than that. We have great customer relationships now. We have very few customers stretching the receivables, that is the best performance that we have ever had. If we can keep it around that or in the low 40s, I would be thrilled.

Payables got as much as 65 days, now they are 50 days, given that we of a lot of 60 day terms, we are paying suppliers like we are supposed to. It is not something that gets talked about on conference calls or analyst meetings, but good companies pay their bills, and we are doing that. So cash like is 21, it blows me away. So to suggest we can do better than, I just don't see how. So I think the focus for company now that we have shown that we can have these kind of metrics, is to make it consistent, because it won't be.

It is going to fluctuate from quarter to quarter, but try to make these numbers consistent and focus on expanding our service offering, expanding the customer base and improving profitability as opposed to driving these metrics more aggressively, I think they are awfully good.

Okay, thanks. And just one quick follow-up, can you talk about the order trends as we enter into January, have you seen anything unusual there? Thanks.

Yeah. No, I don't think so. I mean, I think this quarter, these are the numbers that I guess it has been four or five months that we said -- we thought it would look like, and it's about what it looks like. I think it is about what we expect.

We are closing some nice new businesses again and so you know, we have been selected for three new programs that are at least $100 million each. That we are going through negotiations on that will probably won't happen, probably won't make it into this quarter, but we are seeing good sales opportunities and they are basically organic opportunities, the stuff we want that will put you know, use it from the excess capacity that we have. So I think the tenor of our business appears to be solid, but not spectacular.

Okay, thanks, Michael.

You bet. For the question about Net Steel Casio, that was less than 5% of our revenue.

Thank you, Tony Bose with AG Edwards, your line is open.

Thank you. Was the reason we didn't see anymore leverage on the gross margin line due to mix, and what should we expect for the next quarter, given what we are projecting are lower sales?

Okay, for the December quarter the reason was more on the gross margin line was two factors. One is mix, for sure. Higher volume in the lower margin stuff, and the other is losses in some segments of the business, which are affecting the gross margin lines, and you know, those did not improve in the quarter. So, you know, big losses in circuit boards and a few other odds and ends. So, that explains the December quarter.

March quarter we expect gross margins to be up a bit for the same reason on the side that some of the consumer stuff drops down more with just the lower margin, and so overall we expect the gross margins to trend up a bit.

Great, thanks a lot.

Thank you. Ellen Shea with Prudential securities, your line is open.

Thank you, I would like to extend congratulations on the quarter. Can you give us an idea on where you stand on capacity utilization on the EMS side of the business?

Sure, actually the EMS side of the business is in good shape. We are adding capacity in Asia, we are adding some square footage right now, the operation in Shanghai, the China operation,

We are very busy in Asia, and we are very profitable and that is all going fine. I don't think there is some real issues there. Europe is in surprisingly good shape. I mean, Europe for us has -- is growing and we are profitable in nearly every operation in Europe, and our number is good. So despite people think that is it all about China that is not the case. The capacity situation is in pretty good shape overall. Hungary which was -- which took a big hit when we moved our XBox out of Hungary to China is more is less still up again.

All the layoffs, people have been brought back, we are quite busy there and not a lot of capacity, but even the higher cost locations, we are in good shape in a number of the markets, France, Germany, Switzerland, Austria, the capacity is in pretty good shape. We are satisfied with the level of capacity utilization and profits in Europe.

Americans are more problematic, because we have excess capacity in virtually every place in the Americas, and that is really a function of the fact that our America operation are oriented toward low volume, high mix telecom datacom and industrial kinds of products, and that is going to be a weak market. We see the signs that it could an lot better this coming year. I actually expect that that will come into shape.

If the Americas cleans up a bit, I think our EMS business overall around the world will be in very good shape. You know, the circuit board business we are running at half capacity or less, so that is -- although we haven't proved our capacity utilization on the high company impact in China, the interconnect boards, cell phones, digital cameras, advance watches and so on, that part of our business is in pretty good shape from capacity standpoint, so that is clearly the biggest problem.

Logistics, we have some capacity, but that is improving [INAUDIBLE]. And our design business, not the ODM stuff but just contract designs is improving. It is relatively weak, but the capacity utilization is also getting in good shape. So I think the next quarter or two that should an healthy business again. Overall, we are not in the too bad a shape here. When we get circuit businesses picked up and get a little bit more capacity utilization in the Americas, I think you will see our results come back in line as we expect.

Is your level of operate on the board business better? You talked about some sense that you could see improvement demand wise but with cost cutting, do you expect that that alone could break even on flatish revenues?

Well, actually our projections are to increase a bit in the March quarter or December quarter. The revenues have been steadily increasing from our low of last March. It has been double digits up most of the quarters. March we expect to be up a bit. This is a market where there is plenty of weak players in every segment.

What you see that customers are placing more of their business with the companies they know will be around, and that is in our benefit in every category, and certainly in the circuit board category where the number of people are going bankrupt and so on. But what I think will happen in that business in the next couple of quarters is we will continue to grow revenue with pretty weak pricing, and so our overall results will improve and then, you know, one day when we least expect it, the orders will pick up and it will instantly become profitable. And I actually expect that will happen the next year, but not in the next quarter or two.

There is a lot of concern about pricing on the EMS side. Could you maybe describe what is going on there, if you are seeing the situation level off or that is still getting worse?

I don't think -- I have been asked this question for about five years, I guess, and I have said I don't actually see the pricing getting worse. It is always tough. That is something different. You know, when you have a lot of capacity. We are not commune to the law of supply and demand here. There is a lot of companies that are struggling.

We are doing pretty well. But some companies are doing less well -- less well and companies not doing particularly well will be more aggressive about pricing. You need to remember it has always been that way.

There is always a company or two struggling. And whoever is struggling tends to reduce prices. That is not that big of a problem. These are big -- for any of us, these are big relationships, relationships don't move around that much.

Clearly, when customers are losing money as most are, many of them are, they are intense about making sure you take every penny out. I that is healthy, a that is not a problem. The other underlying trend that is a problem for some companies, it is not a problem for electronics, there is a lot of pressure to do this lower cost locations for lower prices. When the the customer comes in and says we have lower prices, that doesn't mean we have to cut our prices, that means we have to go put the business in a lower cost location.

This is a strength of Flextronics, that is why we are busy in Asia, busy in Eastern Europe. We have been busy in Mexico. We are busy in the locations where we can offer the lower pricing. So when you talk to other companies that don't have nearly the footprint in these locations that we have, they are under a lot of pressure.

If the customer comes and says, you have to cut the price by 10% and then move to China. You say, I can't move you to China, I have to cut my prices. It is one of the reasons I put in my script we are making money in the toughest times in the toughest locations with the toughest price pressure and our EMS business is in quite good shape. We are not overly concerned about pricing.

The longer it stays like this, the more likely a few companies will get in trouble and go out of business. There have been quite a few of our competitors that have gone out of business in the last year or two. So I think pricing thing is very manageable.

Thanks a lot, Michael.

You bet.

Thank you, Michael Walker with First Boston, your line is open.

Thanks, hey, Michael. One of two questions. The first is, you had mentioned in the multi side that you had seen some firming of the pricing there. I'm wondering if you seeing any different trends?

No, in fact our high density interconnect, that portion of out business is the healthiest. We are basically filled out of capacity. Pricing is reasonable or profitable and so there is no -- we don't have more capacity there. That part of the business is in good shape. And the rest of it is no change. Just short of dodgy, but we are adding a little bit of business, but I don't see any real difference in the price trends and the other products.

Great. The follow-up is that you are at the 3% SG&A, but I'm wondering what the impact of that will be as the ODM starts to ramp-up. The RDM will have a greater impact. I'm wondering how you will balance that 3%? [INAUDIBLE]

That is a good question and I'm not sure I have a good answer for you other than to say that the really relevant number, I said 7% when I joined in 93 to 3%, but the relevant number is 7% to less than 2%, which is just awesome. And the fact that it is 3% now is really a function of these other businesses, network services, ODMs. Remember in the numbers that we just reported, you know, we are losing money in the ODM business.

I prefer to think about that as investment, because we don't have revenue and we are designing product. So that is in there. And I think if that part of our business or network services or logistic services as the services part of our business grows, SG&A will drift up from 3% almost certainly, because at under 2% at EMS there is not much room left there. But margins will drift up with it.

I'll be able to say now that we have the higher SG&A businesses growing, we will say target is 4% but instead of 5 1/2% gross margin we will have 7 1/2% gross margin and everybody will be happy. I think you are exactly right, SG&A will go up and so will the margins.

Thanks a lot.

I will take two more questions and then call it a night.

Chris Whitmore with Deutsch Banc, your line is open.

Hi, Michael. I wanted to go back to an earlier theme, which involves the transition of business and low cost regions. And understand a bit about your current utilization in China and incremental capacity that you adding there, the growth you expect to come out of that region if you could provide a little more meat on that topic, that would be great.

Okay, so in Asia, so that we are clear, I mean, we have three major locations in China and two minor locations. We have a booming location in Thailand, we have smaller operation in Japan, we have a couple of locations in Singapore and Malaysia. This is bigger event than China. We are busy and profitable in everyone of those countries that I mentioned.

So we are expanding capacity in China because China is the flavor of the day at the moment for a lot of companies, just want to be there and that is great. China is a great place to manufacture. It is not necessarily better than Malaysia or Thailand or Japan or Eastern Europe for any of the other places that we operated in, just depends on what we do. What you see in China though, is that you have a lot of other companies going in there and the supply basis becoming very robust around it. Which is true in Malaysia.

There have been a lot of suppliers in Thai, Singapore and Malaysia areas, so that is a good supply chain. We are building up our campus in Shanghai.

We have just been in two stand alone businesses, we bought some land and are now starting to build out a major campus there, so that is probably a construction project that will be ongoing for the next few years. We just completed another building in [INAUDIBLE],which is near Hong Kong and we have one other building under construction there.

We have 28,000 employees in China and 45,000 in Asia altogether. So it is just a very good solid, robust area for us. And I think that is going to just continue to grow. We don't have lots of excess capacity there by any means. I'm sorry, did I get all of your questions?

Pretty much. I'm trying to understand the incremental square footage or capacity pass that is coming on with China. in the next 12 months.

Yeah, I think that -- you know, we build buildings in these places normally in three or four months, so these are long term projects. So we old land in Shanghai area, in Hungary, and Mexico, so we can add buildings in any of these places as the demand increases. Eastern Europe for the first time in a while is pretty filled also. So we will have to have a look at whether we will add capacity in eastern Europe as well.

You know, this is the future of our business, the lower cost locations, that is where the big volume will be. We continue to grow our business. I expect we will continue to add capacity in the locations but carefully. I'm also proud of the fact that we kept our CapEx down below 50 million, which is what we hope to do. We will be careful. And we will grow. We will have more places.

Should we expect CapEx to stay right around 50 million?

Yes, you should the -- I think for the next three or four quarters, you know, if we need additional equipment there is used equipment available on the market and so we are going to add a couple of buildings. I'm pretty comfortable that you know, around this range, give or take 10 million is where we will be for the next three or four quarters.

Thanks a lot.

You bet. One more question.

Thank you. Your final question comes from Todd Copeland with CIBC.

Hi, good evening, Michael. You had talked about the guidance range for March and had given a bias on the down side of that guidance range. Can you just update us on that in terms of your thinking within the range, and then secondly, could you just give us what you think are the upside or down side levers in the quarter, what are you watching closely? Thanks.

Yes, sure, we did have a bias on the low end of the range and said if Christmas is lackluster, you know, expect a low end of range. And you know, I don't know. It is a range. We talked about this and I expect we will be in the range. We can't really call it much closer than this. Clearly, the December quarter is better than we expected.

One, because Christmas wasn't that great, we could think maybe we get at the low end of range, but I don't think we can't fine tune it anymore than that. As I said in the December quarter, the strength as we went through it and that may very well happen at the March quarter. That's the high end of the range. But that is why we give you a range and talk again in the middle of quarter and give you more of a feeling for it. Right now I'm comfortable that we are talking about being in that range and will leave it at that.

In terms of the costs and the drivers, they are probably the same ones we always look at.

We do turn inventory quickly. Most customers are on relatively short order cycles, because there is plenty of capacity in the supply chain, which maybe will change during this year, so we don't have, you know, the quarter is not completely booked or anything like that. We do talk to customers all the time.

We are tracking where the potential upsides are and so we just look at the order cycle, given that we are only two and a half weeks into the quarter is just hard to know because we don't have that much visibility. But I think we will be pretty solid. And there is a chance people will come in with better orders.

As Bob has indicated, you know, the customers were very conservative in their expectations for the December quarter, and they tell us what their expectations are and they pass the expectations on to you. And it turns out they all did many of them did better than they expected and we all got a bit surprised, which is great. People are being very cautious.

So, I don't know whether that caution will be justified or they will say gee, things are going better than we thought. Hope it is. But I guess it is probably around where we suggested.

Thanks.

Hopefully we will have some of the new customer wins will come in and we will have a pretty good growth year in 2003. That is what we are hoping for. In the meantime, you know, almost no matter what we will be generating cash, we are pleased about that side of the business and I think we are in quite good shape here.

So thank you all for taking the time to listen in. It is very late where we are. I think we will call it a night here. I appreciate the congratulatory comments. It has been a while since anyone from the investor side was pleased with what we are doing.

I hope you talk to the rest of the management team and pass on your thoughts about that. This is an outstanding management team and our guys have been working hard at these metrics and at these results. We have gone through all the restructuring, which are no fun, and people write bad things about you and the press and all that stuff and you know, we expect we are very near the end if not completely at the end of that part of our business. Good cash generation we are running efficiently, people are highly motivated, we have customer opportunities.

So we are feeling good about our business and are optimistic we will get a turn in the end market some time next year. Thank you for the nice comments you have made and we will talk to you at mid quarter call. Thanks very much. Good night.