Flex Ltd (FLEX) 2003 Q4 法說會逐字稿

Good afternoon. Thank you for holding. All parts your line will be in a listen only mode until the question and answer portion. This call is being record. If you have any objections please disconnect at this time.

I would now like turn the call over to Mr. Michael Marks, CEO. Thank you so much, sir. You may begin.

Ladies and gentlemen, thank you for joining the conference call to discuss results for Flextronics fourth quarter and fiscal year ended March 31, 2003. On the call with me today are Bob Dykes (inaudible). To help communicate the data in this call you can also view a presentation on the internet. Going to the investor relations section of our web site and select earnings announcement presentation. You'll need to click through the slides so I'll give you the slide number I'm referring to slide 2.

Please note this conference call contains forward-looking statements within the meanings of the federal securities laws including statements related to our future growth, trends in our industry, expansion of and changes in our client base, market demand, ODM initiative, the future impact of SARS on operations in Asia. anticipate operating results, financial position and profitability. These subjects are to attendant risks. Information about these risks is noted in the press release presentation and our SEC filings.

Since I highlighted SARS as a potential future risk to our operations, I would like to take a moment and expand on that before I proceed. SARS has had no discernible impact to our operations to date. To our knowledge, we have not had any employees contract the disease and we're take all reasonable precautions to prevent such occurrence

We are obviously unable to quantify (inaudible) SARS had or will have on the demand for our customer's products nor will we be able assess what the impact would be in our financial results. Absent such future disclosure, you can remain comfortable that there has been no impact, so don't get nervous when we don't respond to the daily rumors an inquiries.

In the meantime, our management team remains confident we're taking prudent measures to prevent an outbreak at our operations. I'll separately address the benefits of being a global supply chain company as it relates to mitigating risks with regional supply disruptions.

The term pro forma excludes amortization and restructuring charges as applicable and set forth in the accompanying slides. Reconciliations of pro forma results to GAAP results are included in schedule one to the earnings release and in the investor section of our web site.

Slide three. As announced in the press release, revenue in the quarter was $1.3 billion and for the year was $13.4 an annual increase of 2 percent. Pro forma net incomes $25 million or 5 cents per share for the March quarter and $162 million or 31 cents for the fiscal year.

For the March quarter we did have any restructuring charges net amortization expense was $5.8 million and GAAP net income was $19.5 million or 4 cents per share.

Slide 4. On a sequential basis gross margin declined 10 basis points to 5.4 in the March quarter. As expected we were able to hold gross margins relatively flat in spite of large sequential decline in sales due to previous restructurings and a richer product mix this quarter as compared to last quarter.

While SG&A dollars remain relatively flat on a sequential basis as expected it increased to 3.8 percent of sales in the March quarter as a result of the sequential sales decline. It was actually a decline in SG&A dollars on a sequential basis that is being offset by an increase in ODM expenses as we expand activities in this area.

Slide five. At the end of the quarter, we have 424 million in cash. Total debt was reduced by $6 million during the quarter and our leverage ratio was 20 percent at quarter end. Liquidity increased to more than $1.3 billion. During the quarter, we renewed and increase our revolving line of credit from $8 hundred million to $880 million dollars.

Of the total revolved 347 million dollars expires in March 2004 and 533 million dollars expires in March of 2005.

As previously announced during the quarter, we issued a $240 million convertible note in a private placement transaction with (inaudible) Partners, a premier private equity investment firm focused on large scale investments in technology companies.

In the private placement transaction Silver Lake Partners (ph) purchased a zero coupon zero yield convertible junior subordinated note maturing in 2008. The (inaudible) is callable by Flextronics after three years and does not provide Silver Lake with any put option prior to maturity. It is convertible at a price of $10.50 per share and is payable in cash or stock at maturity at the option of Flextronics.

There were no fees paid by Flextronics as part of this private placement transaction. We used the proceeds from this note to pay down our revolving line of credit an we had no borrowings outstanding under our revolver at quarter end.

Slide six. Depreciation appreciation and amortization was $92 million and net capital expenditures were $52 million in the quarter. During the fiscal year, pro forma cash flow from operation generated in excess of $859 million and in GAAP cash flow from operation generated $608 million, the difference between cash payments on prior restructuring charges.

Slide seven. We continue to deliver an industry leading cash conversion cycle which game in at 26 days for the quarter. Inventory turns were 9.9 times in the current quarter, DSO is 45 days while accounts payable were 56 days.

Slide 8, customers continue to move their production to lower cost locations as a result Asia and Central Europe have been growing rapidly.

Slide nine. The March quarter represents Flextronics seasonally weakest quarter due to post holiday consumer spending and weaker capital spending.

Communication infrastructure was 15 percent of fourth quarter revenues. Customers in this segment include Ericsson, Motorola, Nokia, Siemens and Telia (ph). IT infrastructure was 10% of fourth quarter revenues. Customers in this segment include Alcatel (ph), Dell (ph), EMC (ph) and (inaudible) Siemens and HP.

IT infrastructure includes network switch, hubs, router, servers, tape and disk drives, storage systems and main frames.

Computer and office automation (inaudible) 46 percent of fourth quarter revenues. Customers include 3Com (ph), Dell, Hewlett-Packard, Infocus, Microsoft, and Xerox. We continue to build market programs through these customers.

Consumer devices were 13 percent of fourth quarter revenues significant customers include Casio, and Microsoft. Handheld devices were 29 percent of fourth quarter revenues. Customers include Alcatel, Motorola, Nokia, Palm, Siemens and Sony Ericsson.

Finally the industrial, medical and other segment was about 7 percent of revenues.

Slide ten. In the current quarter Sony Ericsson represented approximately 12% revenues and HP represented approximately 10 percent of revenues. Our top ten customers accounted for approximately 62 percent of revenues in the quarter.

Slide 11. The March quarter operating results were what we expected and had forecasted in the past two calls. End market demand slowed somewhat during March but in the range of our previous forecast.

I would like to make some comments about our outlook for the new fiscal year beginning April 1st and beginning the new trends and issues we see for Flextronics and for the industry.

We're now situation where the three of the largest DMS companies are forecasting break even or losses in the June quarter. Margins continue to be under pressure. It would not be unreasonable to project continuing difficult times for our industry indefinitely. Yet, we have another view to suggest. As we indicated in our last conference call our business is pretty stable. What that means is that we continue to book new customers and new programs which offset weakness in some sectors.

We are profitable, we are generating cash and we're making excellent progress in a number of very important initiatives which I would like to spend some time discussing here. Our company is in fine financial shape and is well respected in the industry and by our customer base. Yet, we have some problems that have to be solved for us to be a longer term success and to reward our shareholders as we expect. Fundamentally those problems are that we have now become too seasonal because of our great success in book consumer business during the downturn and our margins are simply too low. During the past quarters we have been aggressively attacking these issues and make good progress.

In terms of our seasonality it is clear we need to book new business in the areas of telecom, datacom, semiconductor equipment and automotive and medical sectors which are all market segments that can balance seasonality. We're make very good progress in their is regard. We have four or five programs nearing realization, in the telecom, datacom arena. We are starting a new relationship in the semiconductor equipment arena and smaller opportunities in both the medical and automotive markets.

We like to outline these in more detail, but the nature customer negotiations keeps us from doing so on this call. We do, expect, however to provide more information on these programs in the next couple of quarters.

On the margin front, I would like to discuss two major issues. One under our control and one that may be controversial but is important to our view of the future. Let me first talk our ODM activity which is our major initiative to permanently change the margin structure of our company.

We cannot overstate the importance of our future to the company design arena which carry much higher margins than standard EMS margins. We're making excellent progress in this area. We've signed a number of customers for both cell phones and related products and we're extremely busy with opportunities in other areas. Many of these programs carry operating profit margins in excess of 10 percent and some are even in excess of 15%. As our ODM initiatives take route we are increasing our efforts in this area even though that means short-term decreases in profits. We hope to make significant announcements in this area before year end, but we expect this portion of our business to offer the opportunity to begin to permanently increase the company's gross and operating margins later this year or next year.

We are being conservative in our estimates for this business in the near term but we are obviously pretty optimistic.

The next area for margin improvement is a somewhat more controversial view but it is our view nonetheless, and that is our view that pricing which has been under serious pressure for some time now is about to show some improvement. I base this on extensive conversations with customers in the past few weeks and some of the announcements coming from our industry just recently.

With the trend towards outsourcing clearly intact and with major suppliers in our industry now losing money, customers clearly understand that further pricing pressure on the industry leaders could result in instability in their absolutely essential suppliers. For the first time in years, I hear customers concerned that their suppliers can no longer afford to vest on their behalf.

At the same time, we increasingly CMS suppliers announce intentions to raise prices, to offer business arrangements that have no profit opportunities and to reduce their emphasis on revenue growth if, We are also one of those companies. We are saying no to opportunities without profit or where the terms and conditions are inappropriate to the risk and reward characteristics of our industry. We, like other major players in the industry are not concerned about our size relative to other players. We are concerned about increasing profitability and reducing risks.

I recently heard about competitors refusing to bid for certain contracts and we're doing the same. The point is this development is bullish for the relatively near term future for our industry. We continue to book new customers and new programs (inaudible) in some sectors. We are profitable, we are generating cash and we are making excellent progress in a number of initiatives which I would like to spend sometime discussing here.

It might take two or more quarters for this to work its way through, but I think we'll see price increases and more rationality appear in the industry and all of us are poised for profitability with relatively modest improvements in margins. While we are not forecasting this in our guidance and expectations we do believe it will happen.

Another area of increasing opportunity for Flextronics is arising both in the struggles of some competitors and the risk of Asian supply chain (inaudible) and SARS. As security is tightened around the world and oil prices have risen, transportation costs are also rising. As this happens, the cost of transporting goods to local markets from the Asian supply base goes up, making end region manufacturing more attractive. As all these supply chain eruptions occur like dock strikes, fear of SARS epidemics and others there is added pressure to consider global supply chains.

Now some of our competitors are primarily Asian base and others are reducing manufacturing in North America and Europe. These developments are providing Flextronics with customer opportunities that have previously been difficult to access. Again, this bodes quite well for us in the future although this is a longer term trend rather than an immediate opportunity.

On the negative side for Flextronics is the fact that our printed circuit board business continues to be under pressure. We hope to be break even in the June quarter but now expect to lose approximately 2 cents per share in the n June and foreseeable future.

There is some good news here also though. In the June quarter, we will finish paying for some capital expenses in our PCB business that have been committed for a long period of time. Beginning in the September quarter cap-ex will be reduced to maintenance levels around 2 to 3 million dollars per quarter with depreciation of approximately $15 million we will begin generating cash from this business with losses of 2 cents per share. This give us substantial protection in a business that is losing money on a global basis.

As I said before, if demand doesn't increase, supply will decrease. That continues to happen to happen and eventually profits will return to this segment of our business.

By the way, I have read a number of analysts reports that said that vertical integration is a failed strategy in our business. For Flextronics this is absolutely not true. The further development of our industrial parks are key factors in the business we are winning. We have a very good pipeline of new prospects, almost all based on these offerings. During the downturn of the past couple of year, our plastics, metals and lodgists businesses have grown quite well. In fact, in the next couple of conference calls we expect to be able to outline some exciting new opportunities in the logistics arena. We are competent enough in our vertical integration strategy that today we separately announced the licensing arrangement in the power supply arena which will allow us for the first time to add power supply capabilities to our industrial parks. We believe this is another higher margin initiative for the company.

One final thing before I get to discussing our outlook for the year. Because of the financial struggles of some of our competitors we have seen interest from customers we have been unable to access. It is too early to predict this inquiries will result in substantial business opportunities, but this is what we would expect from a prolonged business downturn which is a flight to safety in the supply base. We're optimistic this will result in business in the coming years.

To summarize regarding our prospects. Flextronics continues to take market share in a difficult business environment. Our market objective is to improve EMS margins from the traditional three to four percent range to five percent or more. Investors should note we have the financial strength to be make investments necessary to accomplish this. We can expect to see results as the economy recovers.

Now let me address what we expect for this quarter in the coming year. With continuing weakness in the end markets but with stability that I previously discussed we expect the June quarter to be about the same as the March quarter with revenue in the range of 3 to 3.3 billion dollars and pro forma earnings per share in the range of 5 cents to 8 cents. Those of you who are optimistic about high end demands should expect high end of the pessimistic should expect results at the lower end. We will not be able to influence these numbers through our ODM activities or new business in this early time frame, but we expect to seat impact in later quarters.

For the year, here's what we are targeted. Last fiscal year earned 31 cents per share on a pro forma base and generated cash from operations of $608 million. This year, we are targeting EPS growth year over year over of approximately 20 percent on a revenue base around 14 billion dollars. This is neither a forecast nor specific guidance rather that it is what our internal target is. There is obviously a range around these expectation and again those of you who are pessimistic should assume modest growth in EPS and those who are optimistic should assume 20 percent or more. From a quarterly cash flow perspective absent cash acquisitions we expect to generate on average approximately $100 million of cash flow from operations.

So overall, we are pleased with our situation. While we don't expect big increases in revenue or profits in the June quarter, we do see a number of trends developing that should set the framework for a return to historic profitability in the longer term. We have quite a good pipeline of opportunities in most of the segments of our business and we hope to win enough of this business to generate solid EPS growth in the current fiscal year. favor the industry participants with the best financial structure and with the ability to best serve their customers. In our case, this means worldclass capabilities in manufacturing, a stable global footprint and a broad service offering which includes design services, manufacturing and logistics management. With these tributes in place we believe the Flextronics can continue to be an industry leader.

One final note before I turn the call over to the operator for questions. In March 2003 Goldman Sachs and Reed Business Information published outsource (inaudible). The survey included one thousand respondents representing 200 OEMs of all sizes. Respondents were geographically diverse through Asia and North America with various job functions related to product development and manufacturing. The results of the survey ranked Flextronics the number one EMS company in customer satisfaction. We are extremely proud of this but it is also extremely important. Customer satisfaction is the life blood of any outsourcing industry.

Notwithstanding the recent industry dynamics, we are extremely proud that Flextronics employees continue to provide customers with the highest quality of service in the EMS industry.

Slide 12. As part of the previous private placement announcement with Silver Lake partner, Jim Davidson a founding member has recently joined the Flextronics board of directors. In addition, on April 3 rd, Tommy Go (ph) who joined our board as part of our acquisition of JIT Holdings (ph) resigned in good standing and we appointed to the board (inaudible) Boutan, the founder and Chairman of Walden International a $1.8 billion venture capital fund. We think both Jim and (inaudible) have significantly added to the strength of our board.

Slide 13. There are real risks of operating business that investors should appreciate and we have laid out some examples here. Please pay particular attention of this slide in list market conditions

With that I'll turn the call over to the operator to please poll for questions. Please limit yourself to one question and one follow-up. Thank you.

+++q-and-a.

At this time if you have a question, please press star one on your touch tone phone. The first question comes from Lou Miscioscia from Lehman Brothers. You may ask your question.

Okay. Great. Mike, if I could I guess touch on SARS for a little bit. I was talking to one of your big customers today and I guess the view I had was that supply chain seems like it has and is handling the problem pretty well and that the main issue is really Asian GDPs in the sense that nobody is going out spending money or traveling. He point out to me that a new product ramps are being affect because it's a little bit more difficult because engineers can't go out to the sites where products were eventually ramp. Could you just go into detail about how you are handling that issue?

Sure. Our general view and I started out with this just to be able to clear the air. I mean our general view is that more is being made of this than is maybe should be at the current time. Of course, we don't know what will happen over time. But there is an issue in that there are lot of people who don't want to travel to Asia and that does, that just makes it more difficult to start product ramps and so on.

For us, we're taking, as I said, the proper precautions. We have you know, you know, we have education in place at each of our sites in Asia in terms of what they should do if there's any suspected cases so we can respond immediately. But so far, so good we're really not having any impact to speak of.

In terms of broader economic impacts, you know, we're not economists over here and I don't know what to suggest about that. It's obvious that the news, you know, you see pictures of empty airports and all that kind of stuff and that obviously impacts the travel and tourist industries and long-term impact for manufacturing. We don't see it at this point. Other than the other point that I made which I think is very important to our investors which is we've been talking to our customers for some period of time about this sort of rush to move everything to Asia being driven by the need to take costs out all the time and even before SARS epidemic hit and before the dock strike, we've been saying that you really want to balance your global supply chain to the best of your ability. And with these kinds of disruptions in place, that, you know, that pitch is fallen on --is getting a good reception, I would say. This is good for us. I mean it's what the companies really should do is that putting too much of anybody's business in one location or with one customer, or one supplier is not a good thing to do when you're running in a big global economy. And to me, that's one of the values of the information being gleaned out of this, this SARS issue is that obviously we take appropriate precautions for this and other diseases which I think are pretty well known. But in fact, we all have to be careful not to get overload with any one particular capability. We think this is valuable for Flextronics though we're watching it carefully. Not really affecting us at the moment and we'll just see what happens as we go forward.

Great. Can you go into a little bit about... It looks like with a $14 billion estimate for the next fiscal year, but it looks like about a 4 percent top line growth but it looks like you're suggesting that earnings at the bottom line can grow 20 percent. So can you talk about the disparity where that is coming in.

Yes, I can. I think it's important for me to add a little bit of color beyond my prepared remarks about this. And I think it's true of Flextronics and you know while I'm not here to promote the competitors, I suggest that it's true, really throughout the well positioned competitors in our business and that is that there's just a lot of operating leverage it turns out to be $15 billion instead of $14 billion we're going to grow earnings 40 percent or some number like that. What's happened here is everybody has gone and cut costs down, but clearly you can see we're not earning what we ought to be able to earn on this revenue base and that's because we are carrying you know we're carrying capacity that's not fully utilized which we're doing on purpose. We've taken a lot of capacity out and the capacity we've have is the capacity we want. That carries, you know, that can drag on earnings, there's no' around that. What that means is you've got very high operating lever And so you know if we do 12 1/2 billion dollars we break even and 13 million we make 30 cents or whatever it is. And $14 billion it goes up and ramp on earnings is high relative to growth and revenue. That's the first piece.

The second is that we continue to take costs out of our business. You know, I mean all the time we're continuing to whittle down some of the activities and investments we have in portions of our business we don't think will have a return in the long ever term. So as this year progresses we're going to continue to reduce our costs. So all this creates operating lever A and you know, these other trends that I talked about in pipelines that I have in place, these are all potential upsides for us. You know, the earnings expectation, 20 percent growth is relatively modest. 20 percent EPS growth is a relatively modest improvement in profits on what we're projecting is a relatively modest improvement in revenue but there is a lot of operating revenue at Flextronics and our industry. (inaudible) things have improved later in the year which we haven't put in our numbers, we're going to see very good improvement. You can see it in our December quarter. December quarter revenue came in higher that expected. Earnings came in strongly higher than expected and that will be true as the year goes through. You know, we have the business in place today, you know, barring any major move in either direction to do between 13 and 14 billion dollars of revenue and do earnings per share of what we did last year to as much as 30 percent improvement. It's very early in the year so we're giving some general outlook for the year and our visibility doesn't go out that far as you know. But the key point here is there's plenty of operating leverage at Flextronics and the rest of the industry and with relatively modest increase in revenue you're going to see better earnings. .

The next question comes from Thomas Hopkins from Bear Stearns. You may ask your question.

Good afternoon, Michael. First question I just want to come back and touch on this question a little more, you talked about possibly a better tone in pricing and then you're giving guidance, which is, slightly up sequentially at the mid point for the June quarter and then you're (inaudible) but you're talking about targets that are up year over year, I just want to reconcile that with you saying the end market slowed a little bit in March and obviously being somewhat conservative relative to SARS?

Sure. First of all, we are, we continue to be in a seasonal business as you know. So we're going to get with no real changes in the end market, you know, no real changes in the customer base, we're going to get an increase in revenue and earnings later in the year. June, you know, from a seasonal standpoint, June quarter isn't much better than March. I mean the company that have seasonal business, the entertainment industry, you know products that are kind of Christmas oriented, they really start to ramp in July, so I think that's why we're saying you know not much change in the March quarter. So seasonal improvement if nothing else happens the kind of numbers we talked about are reasonable opportunities for us. We do have a very good pipeline. I mean we do. We have, talking with all kinds of companies. You know, the one advantage Flextronics and the EMS industry has over some of the other technology companies is that with no increase in end markets at all, even with the decrease in end markets, we can still grow our business, not necessarily by taking market shares, Flextronics as we did particularly well in the last year. But we are actively engaged with customers who still do a lot of manufacturing analysis. There's still a lot of manufacturing, it's hundreds of billions of dollars of business still inside the OEMs and more time that goes on, the more pressure they're under, the more willing they are, you know, to consider moving some of this stuff out of house, we're actively engaged in those conversations, so we dough do see the opportunity to link this business and get up side from the kinds of numbers we talk about here. These businesses are, you know, 30 million, 50 million, 100 million but some of them are much for substantial. I think as we indicated that we took on a bunch of handset business that we won clearly from inside the OEM to outside that we announced last quarter. So there's still a lot of opportunity for us to improve and increase the business just based on those things. So we're not really in any of these numbers talking about end market improvement. We're not forecasting any end market improvement. I guess asked all the time when are markets going to turn up. The truth is woe don't have a clue. We're not seers, we're not economists and we're running our business on the assumption it won't get better. So we're taking cost out of the business where we can and driving the sales activities as hard as we can. I think there can be some up sides in those activities.

Second, follow-up question, if we look at revenues around 14 billion or your target of 14 billion and looking at where the hand-held, where the consumer and the computer segments are, if you really want to penetrate some of this telecom and networking and some of these other segments in a meaningful way, is going to take, it's going to take a pretty big number. So with that, would you consider acquisitions whether they be other EMS companies or whether they be you know telecom or network, OEM divestitures to get a kind of sizeable number to get that seasonal exposure down?

Yeah, I think we would. We don't have any of those discussions under way, but I think that you know the seasonality, look, we are very successful as I think all of our investors know, the telecom data com markets took a huge hit and we managed to hold up, you know, December quarter was a record revenue quarter and earnings were pretty decent because we were able to book a lot of consumer business, but we have always been a portfolio play and we expect to be a portfolio play. Now we're overweight in the consumer, I know it, you know T we're working pretty hard on this. You know, telecom, we believe the telecom industry is not improving. You see the, you see the announcements just like we do from, I think the latest high profile announcement was Nokia, you know, doing a lot of lay offs and announcing the overall infrastructure was going to decline against this year and I guess we believed that because that's what our customers tell us.

We expect that's going to continue to go down and data com sector has also been very flat. So if we're going to change our mix of business, which we are dedicated to doing, we have to looks at all avenues. Our primary avenue for that right now to be honest is not by acquisition, I mean, you know, if there are OEM divestiture activities that makes sense, we will certainly consider those. You know, the whole industry has gotten religion around us including as you and we're happy about that which is we just don't have much appetite for OEM divestitures unless they come really with solid profitability and a and the kind of long-term contract with the kind of protection we need to avoid the issues the whole industry has had a h in the last couple of years. These are all our customers more or less. And so we don't have to go out of our way to look at it and they'll show them to us.

In terms of acquiring other EMS player, we believe there will be more consolidation in the industry. I mean, you have a lot of capacity. You have a number of companies both large and small that are some n some financial distress. And over time, if it stays this way, there's going to be some consolidation and I would guess if we get into that position, Flextronics would be at least a participant in the conversations but these are not active, these are not things we're working on at the moment. The primary way we intend to grow our business in data com and telecom is to get more vertical integration activities which we're being successful with. We are winning some expansion of business from the current customers who may be outsourced, closures to us or boards to us or back planes or something and are now under more pressure and looking for the next wave, the next generation of cost savings and are looking at us to provide a more integrated solution. So that's work. This is back to the use of industrial products in the vertical integration being a good competitive edge for our company. And we're definitely make progress here. So we think we can get further penetration, existing players and we'll also frankly think we can sign of new ones where we have not participated. We think we have the opportunity to penetrate some companies in the data com telecom space that have historically not been customers of ours. So that's the primary initiative we've got in place.

Your next question comes from Alexander Blanton from Ingalls and Snyder. You may ask your question.

Alexander Blanton Hi, Michael.

Hi, Alex.

I would like to ask you about the -- about the guidance you're giving for both the on sales for the June quarter and for the full year. Guidance for the full year on sales is up about 5 percent. And flat sequentially in June. That's about in line with or slightly above overall economic growth and given the fact you do expect to get some new contracts during the year, I would hope, how much new business have you factored into that? Have you basically just assumed you won't get much to keep the guidance at very conservative?

Yes. We have, we have assumed not much. I think I can elaborate on this a little bit. You know, I mean we are an aggressive company over here. We work hard. We don't think 14 billion dollars of revenue up from 13.4 and you know, 33 or 35 or 39 cents a share is great performance. I mean, you know, we are continue to be in a difficult market, there's no question about that. Margins have clearly been under pressure, everybody knows that. But so we're being conservative here. So when we assume $14 billion of revenue, that's basically take the current base of business, including customers we won, everybody needs to understand that in the $13.4 billion of revenue we just did in the full fiscal year was up 2 percent but that had a lot of new business in it. Because within that $13.4 billion was some pretty significant deterioration in capital spending around the data com and telecom sector. So we did add a bunch of new customers some in the December quarter, some in the March quarter.

Those new customers and new customer programs some of which are just beginning are factored in. We assume in the next year there's going to continue to be deterioration in the end market demand. And we expect customers we're we're doing buy business with will call (inaudible) say sorry cut to order we're expecting some of that. And we're also expecting to factor in some new business wins.

On the other hand, we have some level of optimism we can do better than this. We have a good (inaudible) taking their time placing orders and all that independent (inaudible)of stuff, but we're pretty pleased with the amount of activity we've got. It's still billions of dollars of annual business that we're negotiating. Some of that stuff in the next couple of weeks is going to have an impact on year yet. It will have a little bit of impact next year and some more next year, but yeah, we have not factored in a lot of these trends I've talked about, we think they're seeing renewed interest from competitors with financial trouble. We're seeing renewed interest that got all crazy about doing too much stuff in Asia and we're very well positioned in those two trends and that's not factored in, not at all.

I also have a question on the leverage side. Some people seem to have been surprised that you can get a 20 percent increase in on a 5 percent increase in sales, but I've bon following cyclical industries for over 30 years and that's nothing. Really. Off the bottom.

I agree with that.

You can get -- increases in earnings of several hundred percent off the bottom often. Just as an example, I want you to comment on this because you mentioned a 15 billion sales figure and 43 cents in earnings. You also mentioned a 4 percent operating margin, which you won't get to this year, but perhaps in the following calendar year. 4 percent on $15 million is 87 cents. So that's about double the number that you mentioned. So isn't there that kind of potential off the bottom in a cyclical business when you get everything going in the virtuous way, price is improving, volume improving, efficiency is improving, utilization improving, so on?

Absolutely. Let me make your point very graphically. Let me talk about the printed circuit board business, if we get $100 million dollar of additional business which you don't even notice in our top line, you know, that's going to add $60 million of operating profit to our business. 12 cents a share. That's 30 percent growth. We could have 30 percent growth in our operating profits with an almost not noticeable ruin crease. That would just be an example and I think you've got it exactly right, Alex.

One of the things know, I spend a lot of time crafting the prepared remarks today because there's a lot going on in the business we're trying to boil it down, digest it and put it out there in ways that's easy for investors to follow. But you're exactly right, we're going through a what is known as a classic business cycle. It's not very much fun when you're in it and it's hard to talk about the trends when we talk to you every sick weeks. But we're two-and-a-half years to a down cycle and everything you would expect to happen is happening now.

The weak players are getting weaker, the strong players are getting stronger. Serve cutting their costs, cutting out the marginal activities they used to think would have value and you know really honing the businesses down and in my belief we are really near the turn now in profit margins. That's the other thing we haven't talked about is I mentioned it, but in my prepared remarks. I mean, we're talking to customers and saying, no more, Guys, they got an industry here that's at break even or losing money or making a little bit of money and we're not going any lower, in fact, we're going higher. If you want to us continue to invest in your business, got to give us more. Where you get actual price increase, every dollar you get is a dollar at the bottom line. That has huge operating leverage. I think we're going to see that. Again, not in our numbers, but I think we're going to see that later this year. So I think you're exactly right. Nobody after two-and-a-half year of getting beat up around the ears the way we have been is going to go out there and say, gee, another $40 billion in revenue we're going to make 40 cents more. But you're right there is high operating lever A we're going to see it in there, I'm not sure when. We're saying two to four quarters.

The next question comes from Michael Morris from Salomon Smith Barney. You may ask your question.

Yes. Thank you. Good afternoon. Michael, I want to ask about your comment concerning let's say dislocations with existing customer relationships with some of our peers and I know you said you don't know if (inaudible) that will come to fruition. I recognize that. I want to ask about the asset purchase deals that took place in the '90s. (inaudible) a number of them in the late '90s, a number of them in the industries you're suggesting you're targeting to diversify your portfolio. Those had agreements that were three or four year agreements and those are now (inaudible) lapping, I'm wondering if you're seeing potential opportunities if those do expire if that is part of your opportunity set.

It is. That's a good question. One of the things that occurs to me about listening to these questions is that you know now that life is has sort of returned to normal we're getting better at this, all of this. You're getting better at figuring out how our business works and we're getting better at figure out how our business works. Very valuable questions for us. So that's exactly right. One of the things that we did at Flextronics is that we just never paid premiums for these deals, we didn't go -- I think I've talked about this on calls in previous quarters or previous years that with all these asset transfers that have taken place with very little exceptions we have not paid premiums to assets. And the reason that we didn't is because we always said to the customers this doesn't make any sense, you're trying to cut your costs and if we to pay a the lot of money to buy these asset premiums, we're going to have to charge you higher amounts of money back and that's exactly opposite to what you're trying to accomplish. For all the deals we did, virtually all the deals we did, they agreed with that.

Now a lot of deals, as you know, or as I'm sure many of you know, came with very big premiums and with those big premiums came higher pricing. And so now you have a double whammy when those things to finish up. Which is that the incumbent has a higher -- has higher costs of doing business because they paid higher prices for the assets than do the non-incumbents. So they are either in a position where they have to come their costs dramatically in order to stay competitive which drives their margins down and so on and I think you've seen that in some of the competitors, I don't have to tell you who it puts us in a very good situation to compete. For one thing, we don't have that higher cost base in place. A the lot of these factories were older, smaller facilities. We now to get quote that new business coming out, so we have much more to offer with a clean sheet of paper than do the companies who have these deals expiring. So you're absolutely right. Those are big opportunities for us and in some areas we're kind of click our cops about T some of them are coming up, some have already come up. It amazing me there are companies still doing that stuff. But we never did it, we're not doing it now. s question is look at asset divestiture, we're never going to get ourselves in this position and I we've been very successful about that. We think there are a number of opportunities in segments not only data com and telecom but where cracks are coming an (inaudible) we can bid our industrial parks.

Shift gears. Talking about the ODM offering. I think in part quarters you mentioned you could ship some initial product in the June quarter from your ODM division and I was wondering that's still likely to (inaudible) secondarily, when you talk about ten percent EBIT margin on ODM products what kind of SG&A should we assume with a 10 percent EBIT?

Again, good question. So yes, we will ship our first ODM product in the June quarter barring some unlikely incident which I don't think there will be. We have orders in place. We are losing money in the ODM business today for the obvious reasons we have a lot of investment in it and as we speak no revenue but the revenue starts this water and it will build every quarter after that. What's good about our ODM offering and I want to underscore something I said earlier, which is we're talking about permanently changing the margin structure in our company, I mean it's not done yet, so the proof is in the pudding. When we did our conference with analysts in New York in October, we modeled the ODM business on a longer term basis of 8 percent operating profit and everything we've seen to date suggests that we ought to be able to do that in cases more as I point out today. In a few cases less but not much less, we're not going to do it for much less because we have to take more risk.

The nice thing about Flextronics ODM activities unlike the ODMs per se is that we created a new activity in the company which has it has design engineers, but from a sales and marketing standpoint we're leveraging off of our existing infrastructure. From a manufacturing standpoint we're leveraging off you are our existing infrastructure and even to in a lot of the design areas we're leveraging off of our existing design services activities. So as a consequence of that. That's actual lie why I think there's opportunities to get margins even higher than 8 percent because that leverage is working very well. So in the business, just using a 1 percent SG&A cost which is a variable cost of sales and marketing for those activities and that's why I think if this continues to hold true, this is still very early in the game. But this continues to hold true operating profits above 8 percent are going to be possible because the SG&A manufacturing overhead and to a certain extent design service will be lower than originally expected. So we're very optimistic. If we make this a 3 or 4 billion dollar portion of our business which we've targeted over the next few years we will permanently change the margin structure in this company and hopefully permanently change the valuation characteristics of our company.

The next question comes from Stephen Savas from Goldman Sachs. You may ask your question.

Thanks. I guess maybe I wanted to follow up on that notion a little bit. It sounds like near term you're making some investments on the engineering side of the ODM business at the expense of March improvement that you've gotten from your other restructurings, first is that a fair statement? Second you mentioned you're losing some money in ODM today. Can you give us a sense of how much roughly or when do you expect to reach break even in that business roughly?

Yeah, I can. We're spending between two and three cents a quarter right now is what it's costing us. Right now we're spending between 15 and 10 million per quarter and we've had no revenues. So we'll start to get revenue and some contribution back so that number and I think we've talked earlier, we were spending about $5 million a quarter. As we started to get products in front of the customers and began to prove out the model it looked like this really was an opportunity to permanently change our structure, we ramped it up. Which we've done. So you know, we're spending, you know, I think two to three cents is a fair number for you guys to factor in here. The other part of your question, the $64,000 question, when does that turn positive? I'm expecting that to improve some every quarter. To when it really gets to be positive, it could happen as early as the December quarter of this year. But I would be more conservative and say most likely first half of calendar year next year. And it depends on how well the products do that we land. We land stuff, it goes out to the marketplace and then you have to see how well these products do just like with any other OEM product that's launched. If the products that we're winning the OEM space do well, we could win it sooner than that but look at in the first half of next year, but sigh the second half of next year it begins to affect the company's margins.

As a follow-up ODM industry right now is certainly highly fragmented there's just a to be of Taiwan ease, Korean players certainly enhanced handsets and other areas, looks poised for consolidation, do you look to be a builder, consolidater, how do you view it?

We view we'll be a consolidater by winning a bunch of the business. We really have no plans at the moment to do any acquisition in the ODM space. In the Asian ODM space. I mean there may be opportunities to come along and add a capability to the company, know, which we continually look at. We're a big believer in the segment. We're continually looking at ways to expand, to actually speed up our movement in this area. Cell phone about one because it's a very big market that's place we're most likely to be active because there's so many different segments of the cell phone business. You have SM, GNA, 3 G products and you have all kinds of things going on. So it's very difficult to be a major player in that space without looking for ways to add the capabilities which we are actively doing. In the other areas in which we operate, you don't have the markets aren't as big. They are not as fragmented in terms of what the -- in terms of what the product niches are. So they are more likely to do it on a concentrated basis with our existing base and design engineers.

The neck question come from the Ellen Chae from Prudential Securities. You may ask your question.

Good afternoon, Michael. When you said that you expected $100 million or so in cash flow from operations did you mean for the quarter or the year?

The per quarter.

Could you talk about what the major categories of cash usage might be in the year ahead?

Cash (inaudible). From the cash flow side if I can do that real quickly. You've got earnings of you know whatever it is $25 to $50 million whatever numbers you put out there and you have the difference between capital expenditures and depreciation, we expect that to increase because we'll drop off some of the expenditures we're making in the printed circuit board arena and so on. So that's a $50 million quarter and pretty easily get to $100 million a quarter. Tax uses are pretty straight forward and the question is working capital fluctates in this but in a relatively modest growth year whatever increased working capital we need to fund bigger revenues we will get out of just improving the efficiencies in inventory turns and so on. So that's pretty straight forward. Terms of cash usages, outside of cap-ex it's running around $50 million and that may drop town to $40 million area. But it will be cash acquisitions or if there was an opportunity to greatly expand the ODM arena and we had to invest at a higher rate in engineering, that would be a possibility, that would then come out of earnings. So the main thing would be cash acquisitions, otherwise we will be a net generator of cash here.

The next question comes from Michael Walker from CSFB. You may ask your question.

Thanks a lot, hi, Michael.

Hi.

Just two questions. The first is on the mid-quarter update you kind of talked about having five new ODM programs new customers in hand sets. Can you incremental that at all or add any color to that?

No, I can't really. It was only six weeks ago. Signed the deals we talked about we are getting some EMS business in from customers we on an ODM basis so I think the customers I numbers I used $500 million of EMS and that's hang together. I don't think there's any changes to that. I would say that you know every month or six weeks that goes by when he get a chance to talk to you you know we're seeing more opportunities in this arena. We continue to be optimistic that those numbers will go up over time.

Thanks. And the second question is again on mull tech, it kind of feels like your outlook for that business has gotten a little bit worse over the course of the quarter especially with the two mull tech facilities have been been closed it sounds like that restructuring will kick in or be offset by worsening business. I'm just wondering what changed if anything changed. It did get worse. Because when we did our last guidance or maybe a quarter ago, we thought we would be at break even by the June quarter now we're saying we're going to lose 2 cents a share so that's $2 million worse per quarter which is a drag. We don't like this much. But on the other hand, we, at the worst period here and worst quarter we lost $30 million ma quarter. That number has been getting steady better. It was 20 million. We closed two fact is now it's 10 million. We hoped to be zero but we didn't. Clearly closing those factories was hugely helpful. If we hadn't done that we would not be in a position to be generating cash from this business which is clearly terrible. I mean I would like to say something else, but the circuit board business globally is losing money.

And if we were not a part of the Flextronics you know, these guys would be broke. I'm sure that's true at other places. The good news is an awful lot of circuit board companies that are not part of a big company that is financially strong and they will go out of business and eventually supply and demand is going to come back around. But you're exactly right, the business expectation, both revenue deteriorated some and pricing has continued to deteriorate some. And in addition, we've got some material cost increases, know, at the site that we've not been able to pass on to customer. So it's not been a happy quarter there and not a happy year and we're all frustrated by it. You know, you know, we're tired of getting calls saying we keep losing money in this business, but we are. Right now, this is the state of the business. The good news for us is our plants are good, they're very G we have invested in them, we're not losing any customers, we're adding customers, we're just going to have to wait for it to improve. There's nothing much else we can. I want to get on a call and sigh good news we're making a little (inaudible) that's going to happen overnight when supply and demand comes into balance. We're looking forward to that. Don't know when it will be.

The next question comes from Chris Whitmore from Deutsche Bank. You may ask your question.

Good afternoon, Michael.

Good afternoon.

Quick question on the Shanghai industrial park. Hats environment, has SARS or anything that's going on impacted the expansion plans for that industrial park?

No, it really (inaudible) actually we're nearing completion of our buildings there, there's been quite a bit of demand for Shanghai and know, it's clearly a part of our's longer term. So no real changes from that. And I think that SARS is not -- Shanghai. So I don't -- I mean SARS, to be honest with you, is just not affecting our plants at this point at all.

Okay. Great. Secondly, can you talk a little bit about your utilization to the extent you can by geography or just a general number would be great. Thanks.

Yeah. I can only just editorialize because we don't, we never have really given out capacity utilization numbers the main reason is because we don't really know how to calculate them in terms of business and equipment and that kind of stuff. Europe as we said before continues to be (inaudible) Asia has been the best performer both in profits revenue growth and capacity utilization, it's pretty high in most of Asia I would say 80 percent. 70 to 80 percent. For us 85 percent is more or less full. Europe has also been pretty strong. Almost as good as Asia but less in capacity so if I were guessing I would say 60 percent. This is a number we can calculate so I would something like that and the Americas have been the weakest portion at 50 percent. Our pipeline is improving in north America, one of the things I should point out is we have Flextronics announcing cutting 12,000 people and 3 million (inaudible). That's good for everybody. That's good for our industry. Any announcement from any of the major (inaudible) an advantage for everybody. It helps the company doing the cuts to improve their own utilization. Some are leaving areas where we're strong and giving us an opportunity to pick up some business. So we clearly have access capacity but it is not a disaster, is t is not a disaster. I'm going to take one more question.

Final question comes from Shawn Severson from Raymond James. You may ask your question.

Thanks, good afternoon.

Good afternoon.

Michael, could you give a little more color, I know you've got one ODM project in the pipeline and revenue coming to fruition come in June. Is that just from one of those projects or is it a basket from the five, six you have in the pipeline? Just trying to figure out timing for the rest of the year?

Yeah, actually, the stuff we're doing in the June quarter is primarily telecom. That's the area we attacked first for the obvious reason it's the area we have the most expertise in and customer base in. So we do have some other areas we have not talked about quite so specifically, but those will come in later quarters. You know, we're doing both SDMA and GDS phones and we'll start (inaudible) of both in the June quarter and other product areas will come later.

I know this was touch on the earlier, but the incremental risk and the ODM model for you obviously people get margins because they take on incremental risk, but it seems like you've already got the infrastructure in place and sales force in place. So are you saying that really you know the only additional expense or risk is just you know some little bit on the engineering side or is there something else in the mix there?

No, I think you have that exactly right. I mean one of the reasons why we think we're going to be very successful in this part of the business is because we don't have to put as much risk in place as some other companies because we have this infrastructure in place so the additional risk is basically engineering design comforts. We have to put that money in up front of and that's two to three cents a share we're investing right now because R&D then if you look our P&L we don't have an R&D line and we are going to van R&D line. So the margins have to be higher offset the risk of that expense. But we think we're managing that very effectively. We think we'll be pretty large in this business pretty quickly with what's going to turn out to be a smaller overall investment to get there than we've made in a lot of activities we've done over the years and with the higher payoff.

So I have to be cautious about that but we like what we see a (inaudible) we think the fact that we're such a large player in the EMS business and have low cost and locations plays perfectly into the ODM business and customers are more interested in it than they used to be so we're pushing it hard and I think you'll see better numbers from us later on because of that. Thanks very much for joining us. We'll talk to you again in six weeks. Thanks very much. Bye now.