Flex Ltd (FLEX) 2004 Q4 法說會逐字稿

Good afternoon and thank you are for holding.

I would like to remind all participants that your lines have been placed in a listen-only mode until the question-and-answer session of today's conference call.

At this time, I would like to turn the call over to your speaker today, Mr. Michael Marks, Chief Executive Officer of Flextronics.

Sir, you may begin.

Thank you.

Ladies and gentlemen, thank you for joining the conference call to discuss the results of Flextronics' fourth quarter and fiscal year ended March 31, 2004.

On the call with me today are Bob Dykes and Thomas Mab.

To help communicate the data in this call you can also review a presentation on the Internet go.

To the investor section of our website and select earnings presentation.

You will need to click through the slides and I will give you the slide number I'm referring to.

Slide two, please note this conference call contains forward-looking statements within the meaning of the Federal Securities laws including statements relating to trends in our industry and end marks changing in customer demand, utilization rate, existing and new customer activities the affect of our conversion of our zero percent convertible notes.

Conditions, disease , ODM activity, industry capacity, and anticipated revenues, earnings leverage, operating results, cash flow, profitability level of future restructuring activity and charges and the expected impact of our potential new programs on our anticipated revenues and earnings.

These statements are subject to attendant are yours that can materially.

Information about these risks is noted in the earnings press release and in our SEC filings.

The term pro forma used throughout today's discussion excluding amortization, restructuring and other charges.

As forth in the accompanying slides.

Reconciliation of pro forma results to GAAP results included in the schedules attached to the earnings release, and in the investor section of our Web site.

Slide three.

Revenue in the fiscal year reached a record $14.5 billion, which represents an increase in $1.2 billion or 9% over last fiscal year.

Revenue in the March quarter amounted to $3.77 billion, which represents an increase of $709 million, or 23% over the year ago quarter.

Pro forma net income for the quarter was $73 million, or 13 cents per diluted share, which represents an increase of $47 million, or 187% over the year ago quarter.

Including after-tax amortization expense of $9 million and previously announced restructuring costs of $48 million, GAAP net income for the March quarter was $16 million, or a 3 cents per diluted share.

As compared to $19.5 million, or 4 cents per diluted share in the year ago quarter.

Slide four.

For the quarter gross margin increased 9 basis points to 6.3%.

SG&A decreased 10 basis points to to 3.7% of sales.

And operating margin increased 100 basis points to 2.6% compared to the pro forma results in the year ago quarter.

Return on invested tangible capital improved to 18.5%, from the year ago figure of 7.9%.

Both operating margin and revenues were stronger than expected in the March quarter.

Which ended up being less seasonal than expected.

I want to emphasize the earnings leverage we experienced in the quarter, with revenues growing 23% on a year over year basis.

While pro forma profits grew 187%.

This earnings leverage resulted from restructuring and cost reduction efforts, combined with better demand, which improved factory utilization, and increases overhead absorption.

Additionally, we have been successful in passing along some price increases and we expect these trends to continue.

I will have some comments later on these trends later in this discussion.

Slide five.

Because of the seasonal sequential decline in sales, I our working capital metrics deteriorated slightly as expected compared to the December quarter, but were improved year over year.

Inventory turns were 12 times versus 10 times a year ago.

And DSO was 44 days compared to 45 days a year ago.

We ended the quarter with $15 million in cash and our leverage ratio watt 28% with liquidity of approximately $1.5 billion, which is one of the strongest in our sector, after adjusting for near-term maturities.

Slide.

We continued to deliver an leading cash conversion cycle which came in at 16 days for the quarter versus 14 days last quarter.

Slide 7.

We also announced today our intention to convert all the outstanding zero convertible notes issued at Silver Lake Partners in March, 2003 into approximately 19 million shares of common stock.

We plan to file a registration statement on form F 3 tomorrow to register the shares.

And the conversion will be completed after the SEC declares the form S 3 effective.

The conversion will not affect Flextronics's diluted earnings per share as the stock equivalents have always been included in the diluted EPS calculation.

This conversion will strengthen our balance sheet and improve our leverage ratio which we consider to be highly desirable.

Our relationship with Silver Lake partners has been great and we work closely with their partners on a number of initiatives.

Over the past year, they have been helpful in improving our existing operations, as well as exploring new business opportunities.

We fully expect them to continue as our partner and hope they will become a long-term equity investor.

Slide 8.

The trend that we saw during the downturn which was a significant move by customers to production in lower cost countries, is reversing slight limit as you can see from this slide, the Americas increased a bit to 15% of global production, Europe and Asia decreased slightly to 41% and 44% respectively.

As the economy and the industry pick up, and because freight rates are increasing we believe that the emphasis on proximity is becoming more important.

Which is a significant benefit to Flextronics because of the global nature of our manufacturing and logistics footprint.

Slide 9.

The current quarter, Sony Ericsson represented approximately 11% of revenues, and Siemens represented approximately 10% of revenues.

Our top 10 customers accounted for approximately 64% of revenues in the quarter.

Slide 10.

Now let me make some comments on the quarter.

Obviously, the quarter turned out better than expected from a revenue, operating margin, and profitability perspective.

As noted earlier, earnings leverage was significant on a year over year basis, as March quarter revenues grew 23% while pro forma profits nearly tripled.

This earnings leverage is a result of many things.

Such as less than normal seasonality for hand-helds and other consumer-related products.

Accelerating demand for communications infrastructure.

Better utilization rates and overhead absorption from the higher-than-expected demand.

Cost reduction and restructuring benefits.

And price increases.

Each of these items enhanced operating performance across each of our business units and regions.

In addition to this our ODM business was just began to ship product in the December quarter was profitable once again in the March quarter.

Slide 11.

As previously announced we are in continuing discussions with Nortel networks to take on a substantial amount of their manufacturing.

These are complex discussions and are not yet concluded.

I am happy to say that our business with Nortel continues to grow, while we are negotiating a larger transaction.

The transaction is not included, it is therefore not assumed in the guidance in our press release, and at the end of my prepared remarks.

If and a definitive agreement is signed we will provide a more detailed update including revised guidance at that time.

Slide 12.

Our pipeline continues to be very robust.

As I said in the last earnings call, we are winning new business in the hand-held category, both from existing, and new customers.

This is clearly an area of strength for the company and with the design activities under way.

We should remain competitive in this category for years to come.

While discussing the hand-held business, let me comment on the recently announced joint venture that Alcatel has announced with TCL.

As a number of analysts reports have pointed out, we have an excellent relationship with Alcatel, and believe that this new joint venture affords us the opportunity to increase our business with TCL, which is a current customer.

In the Sony Ericsson joint venture, where Sony brought considerable manufacturing capacity and expertise to the partnership, the combination of the strengths of the two parties led to an increase in market share, and increased business for Flextronics.

We expect that the same will be true here.

Once again, our global footprint and considerable design expertise will make Flextronics an essential supplier this new arrangement.

We're also winning new business from existing customers and from new customers in the telecom data com infrastructure category.

Our industrial part dedicated these type was products have also extremely busy.

These parts are in Poland, Shanghai, Guadalajara and Brazil.

We are expanding our capabilities and enclosure and are under construction what should be one of the world's tooling operations in China.

These capabilities are enabling us to grow business in this important segment an initiative we have been driving for several years.

Finally, we continue to find opportunities in industrial, medical, and automotive companies which also typically have higher margins.

Overall, the pipeline is quite robust.

Now let me address margins.

Clearly the industry is improving.

Virtually every competitor is beating expectations there continue to be new restructuring announced and overall business is improving.

These things all work together to create a much better balance between supply and demand in the industry which inevitably leads to better margins.

Customers understand that profitability in the industry has been very low for the past few year, and as our businesses are improving, they are in a better position to allow pricing to increase.

We take very little in additional margins to make the industry very healthy again and that trend is under way.

With respect to restructuring, I am pleased to stay that we enter our new fiscal year in quite good shape.

Obviously, for Flextronics to be considered a world class company, our earnings must not be accompanied by the testimony restructurings of the past three years.

We believe that we have been aggressive in our approach and a leader in building the footprint of facilities that our customers need for the future.

We do not expect restructuring charges going forward of any significance.

Most of the activities we foresee of this nature are small enough to be absorbed through our P&L without a separate one-time charge.

I should remind investors of course that a significant event that we do not currently foresee could result in a charge in the future.

Slide 13.

Let me talk about future expectations.

As I've discussed orders are strong.

And our pipeline is robust.

So we believe it is appropriate to increase guidance at this time.

We are comfortable that we should exceed current First Call consensus estimates by approximately $150 million in revenue, and 2 cents per share of earnings in the June quarter, and by $100 million in dollar and one penny in earnings per share for each of the remaining three quarters in fiscal 2005.

This represents an annual increase in expectations of $450 million in sales, and 5 cents in EPS for the company's fiscal year ending on March 31, 2005.

This guidance is exclusive of any potential transaction with Nortel, or any other ongoing discussions that could add materially to our outlook.

As those programs are concluded, we will update you on the impact they could have to revenues and earnings.

While we manage the business for returns I know most of you are also very interested in margins.

We believe better utilization rates and pricing will obviously continue to improve margins.

Additionally, our ODM business should further strength Which will also help margins.

In addition, as we grow revenues and continue our relentless pursuit of cost reductions we think our SG&A percentage will decrease accordingly.

And lastly, we are working hard to improve the product mix by growing the non-consumer segment of the business.

Slide 13.

There are real risks of operating in this business and q-and-a.

Please limit yourself to one question and one follow up.

Yes, at this time, if you would like to ask a question, press star one on your touch-tone phone.

You will be announced prior to asking your question.

Once again, to ask a question, press star one.

One moment, please .

Our first question comes from Lou Masska.

Lease state your company name.

Lehman Brothers.

Michael, could I just ask a question about demand?

It might seem obvious from your results and everybody else's but there is a pretty big debate going on I guess in the market that we're really not seeing as much growth as I guess some investors had expected.

You know, some companies are building up inventories to a certain degree.

You know, what -- you know, just if you could reiterate what you're seeing out there.

Obviously the up guidance and everything else indicates that things are going very well but any signs for either the June quarter, second half that would deviate I guess from these good results?

You know, I don't really think so, Lou.

I mean as I always say in these calls, you know, we have only so much data in the marketplace.

I mean if you look at the cell phone market for example, it has obviously been very strong, but not for everybody.

So you know, Nokia's results were a little bit weaker than they expected and some other companies took market share and in our particular case, you know, we're not making cell phones but Nokia but making them for a number of the companies that are taking market share so if you're sitting in our seat, it looks like everything is going perfectly well, but in fact that's not uniform.

So that hasn't been said.

You know, we have mostly upsides here, as we have for a couple of quarters.

And it is more or less across the board.

Now, you know, upsides can take place because companies are very conservative in their forecasts to us, you know, waiting until they are really sure before they increase their orders and so that is an upside to us.

But that may not be an upside to what analysts think about our customers' business.

And that's really hard for us to know.

In fact, we don't know.

And so you shouldn't rely on our expectations for our own business as, you know, how that compares to what our customers are saying to analysts and all that kind of stuff.

But again, more or less across the board, things have been firming up for a couple of quarters.

You know, does that mean that, you know, at the end of the June quarter, things are going to die again?

That could always happen.

I don't think that we have any particular insight.

But in discussions with customers, in looking at our business, our business opportunities, we see continuing strengthening.

Okay.

And then one follow-up.

Your return on invested capital was 18.5% I guess many probably thought you would never see that again.

You know, pretty strong number.

Where do you think it could go?

And what are your hopes an expectations there?

Sure.

Well, it was down from last quarter.

You know, which was our seasonally strongest quarter of course and I think it was 20% or so.

I mean our target has long been 15% return but I would say that we -- you know, if you look at what has happened with our cash cycle days, I would say that we have made that figure much better than we ever expected.

Now, if we can maintain that number, I mean if we can continue to have, you know, more or less 15 cash cycle days, then our returns ought to be north of 25% return on capital.

And that's what we're going to try to get to.

You know, we're comfortable we're earning a reasonable return.

But we're not comfortable that our profits are high enough.

I mean you all know that the long-term model is for, you know, much higher operating profits and if we're able to double operating profits, then you know, we're going to double the return on capital which would be just awesome.

We're not really predicting that but it is in our model and we have a mod until the longer term that we're going to get to, you know, a 6% operating profit and if we can get there, which we expect over some period of time we can, and if we can maintain cash cycle days in the region where they are, we are going to have, you know, stunning returns on capital, even, you know, at 30%.

So we will just see how much we can drive that.

Okay.

Great.

Thanks.

And congratulations, good quarter.

You bet.

Thank you.

Our next question comes from Steve Stebbins of Goldman Sachs.

Thank you.

You may ask your question.

Sure.

Thanks.

I guess Michael maybe on the ODM side of the business, are you giving kind of any indication, I know you said it was profitable for the quarter, any indication of kind of where revenues and/or volume on hand sets might be and then any progress on some next gen products that you've been thinking about like networking or some place else?

Yeah, sure.

So we're profitable but not highly so.

And so there should be an upside for margins as that business grows.

We said last conference call that we expected to do around a billion dollars in business this year.

And we continue to believe that.

That is primarily in the hand-held space.

Which is -- but not entirely so.

We have some stuff in the printing and imaging space as well.

But we are extremely -- I mean we are very pleased about these activities.

We are -- the business is bigger and profitable sooner than we expected.

And as a consequence, we're expanding our activities in this area.

We believe that -- I mean to a certain extent, ODM is a misnomer in the sense that you know, ODM kind of refers to a pure product that we do, and most of the products that we're engaged in are more of a joint development.

What we call CDM in our company which is for co- developed manufacturing.

And in that arena, we are operating right now in a very brought set of categories, although nothing with the kind of depth and bred we have in hand-helds, but it is our stated mission that within the next three or four years that we will expand into virtually every category that we're currently manufacturing in.

I think over the next week, we are actively considering, I would say, our investigating the business returns around some categories, in the PC space, and in the networking space, and even to a certain extent in the telecom space.

Tho we have not launched a major initiative yet beyond what we're currently engaged in because we are very, very busy.

I mean our design groups are all, you know, running full out, and so we have to be careful that we don't pick up an area that will require a lot of resources that we don't currently have and we obviously don't want to disappoint the customers we're signing up, you know, in the hand-held and the printing and imaging arenas, so we will be -- we will be -- we will have a combination of being somewhat cautious but also relatively aggressive about expanding the approval so by the end of fiscal 2005 we will have a couple of other major initiatives five under way.

A quick follow-up on the handset front, Qualcomm has been a partner you have been successful with.

Today they announced and investment in a small handset design ner China.

Anything changing in your relationship or is it kind of status quo for you.

Definitely.

That announcement doesn't have any impact on us.

I mean there are many, many -- I mean you know if you're in the Qualcomm, the chip set guys, you want to get your products engaged in as many design companies as you, can that's the business that they are in so I wouldn't read anything into that.

On the other hand, we -- we really want all the business we can run in terms of how much handset stuff we can design.

A lot of the products we are working on today, even later this year or even the beginning of '05, so no, I think that our relationship with the chip set guys is very good.

Our relationship with the OEMs is very good.

And I just don't think it could be going much better than this at this point.

Thank you.

You bet.

Our next question comes from David Pashran of Smith Barney.

Thank you.

You may ask your question.

David Pashran your line is open.

Sorry about that.

Michael, can you just talk generally about what you're seeing and hearing from customers recently in terms of their desire to more fully embrace the else EMS model to have both full system integration and supply chain management.

And do you see or do you get a sense that a significant number of your existing customers might be moving in that direction in the next 12-18 month or is it more of a long term horizon.

Yeah, sure.

I mean one of the nice things about talking about the business today now that we're clearly out of the depths and you know, the business is returning to much more than normal, the normal type of activities, is you can sit back and you can ask the question which have you in fact, you know, is are the trends intact in the business, I mean do we see, you know, outsource in continuing to development, do we see the OEMs embracing a broader, you know, a broader array of services from the EMS companies and the answer is no change.

I mean this is exactly -- you know, we went through three very tough years here, but our customers are outsourcing their manufacturing more, you know, as is in -- you know, as is indicated by what we did with Ericsson and xerox and you know, now discussions with Nortel and others, so that is, you know, it continues to be intact.

The embracing of -- I mean, you know, the EMS companies are pretty big companies now and pretty sophisticated companies in supply chain management and we are much more seen as a consultant to our customer, much more seen as the company that actually helps to make the decisions about where things get made and how they get made, you know, we're doing logistics we're doing design services and our customers are embracing these activities.

We are ourselves, as I indicated, you know, expanding in the enclosures area, we're adding capabilities around plastics and sheet metal, you know, we're growing the capabilities arn the printed circuit board business and so on and this is because customers want more and more out of it.

It is clearly working the way it has been, I who say, over the last 10 years, and we are just now in a position where customers are feeling better about their businesses, they have a little bit more margins, they are in more upbeat modes in terms of how they work with it, so I see the trends exceptionally intact tact.

Great and then make just as a follow up, can you give us a sense of what percentage of your customers today are utilizing either the full suite of services or a large number of services that you offer today?

And maybe what is a realistic goal longer-term for migrating customers into more of the vertical services?

Yeah, sure.

It is not really a number that we track but I would say it is more than -- just off the top, more than half, you know, have engaged us in multiple -- in multiple activities, you know, particularly in the vertical integration area.

I mean most of our customers who have enclosures which is most of the customers use us in some form in sheet metal, plastic, tooling and so on.

In the longer term this is a 100 percenter.

We have built built -- I means in terms of an objective.

We have built a complicated company to manage because we operate all around the world with these big complexes, we're vertically integrated, and the payoff from creating that kind of an enterprise has to be that we work with customers who want to use that set of activities.

And increasingly that's the case.

If they don't want all the things that we offer, this are smaller companies that are, you know, focused in a subset of the areas we're focused on and they they ill be perfectly good supplier force the customers.

But I think if you look at our results and see the fact that, you know, the biggest guy in the industry that we continue to grow well and earn well, I think you can see that our customers, at least our customer base are embracing the activities we're engaged in and it is working quite well.

If I could just one more follow-up.

If we got close to the 100% of customers using a fair number of your services, would the operating margins then look in excess of a-6% or does that just get you to the top of that range?

That really gets us to the top of that range.

I mean that is our business model.

Our business model is customers use your for multiple service, some of which are lower margin some of which are higher margin and that's how we get into that, you know, what would be, you know, really strong margins.

I don't think we can aspire to higher than that with this product offering we have.

Great.

Thank you.

Okay.

Our next question comes from Steven Fox of Merrill Lynch.

Thank you, sir.

You may ask your question.

Hi, good afternoon.

There were a couple of comments on some of the news wires about your expanding in China.

Could you just update us on expansion plans for say the next couple of quarters, relative to where were you say ending the calendar year?

And where specifically -- what type of capabilities you are expanding into?

Yeah, sure.

So as I think people know, who have been listening to these calls for a while, we seem to always be expanding in chine China.

I mean today we have an enormous footprint there.

We have around 50,000 employees.

We have three major sites.

One in Shanghai and one in the check shang and one in the domen area, which is in southern China, down near Jewhigh (ph), near Hong Kong.

And we are under construction of additional facilities at all three sites.

The biggest addition we're doing in the sheng shang area is an addition we're building a world class tooling center which is -- which will be state of the art, and I think the most dramatic one that exists around in the business.

Shanghai is where we're doing infrastructure work and we're extremely busy there, adding people, moving into a new complex of buildings.

And in in southern county in jewhigh, we have, you know, something like ten or 11 buildings now, a couple more under construction, there sort of always are, we are just kind of continually expanding in these locations.

Would very some work in -- and a couple of other locations.

So I'm not going to be more specific about revenues or anything, other than this is a, you know, a major activity for us.

We are absolutely world class in China and demand just continues to be very strong.

So as long as demand continues to be strong, we will continue to build.

We also, just so everybody knows, I mean we're adding capabilities and expanding in malacia, which is a very big manufacturing location for us in Asia, and continuing to expand in Eastern Europe as well, so overall we're just doing fine.

Thanks.

And just clarifying your comments on pricing; it pricing on fabrication ration and EMS or one particular area in general?

Specifically, print circuit board prices have been going up.

I think everybody knows that.

That business is now back to reasonably healthy.

Certainly solidly profitable.

But even on the EMS side, you know, when -- what goes on here, and I've talked about this a lot, you know, during the downturn, whenever I was out visiting, most people are saying are the margins ever going to come back?

And I said absolutely as soon as demand comes back.

And I think that is what your finding out.

Most of what drives prices up is the marginal program goes out.

What customer does when they're filled up is they go to the marginal programs and they go to the customer sand say we need a price increase or you need to move the business.

And the last few years they moved the business.

And the next few years, there will be nobody to move it.

To nobody wants marginal business.

Every is filling up.

They are closing fact Is once supply and demand is in balance and once supply and demand is in balance there is no reason to have losing pieces of business in in their factories.

Would very been in this mode for a while.

It lass about a year really since we got to a position where we didn't have a lot of excess equipment and that's when we had started to raise prices and that's why I said there is some influence of price increases.

I think there is much more to come.

I think you know, our competitors who are still not as busy as we are, for the most part, are getting busier, you can see it in their numbers, they're continuing to close factories, that will also stabilize things, and when people are filled, they expect to make a fair profit.

So I'm actually bullish that we are in the part of the cycle here where we are going to see more increases.

And the other thing I said going in, it is important for everybody to realize that, the one 1% increase in price is not that big a deal to the OEM, but it is huge to the EMS companies, because of the, you know, leverage on the relatively low margin.

I mean you have a 30% increase in profit.

You know or 25% increase in profit, 1% increase in the price.

So there is plenty of opportunity here to get these numbers back where they belong.

Thank you very much.

Okay.

Our next question comes from Alex Planton of Ingalls & Snyder.

Thank you.

You may ask your question.

Hi, Mike.

Hi, Alex.

Can we put some numbers on the expansion that you talked about earlier?

The reports from the China -- Chinese journalists there that interviewed your person over there said that you were adding about 1.6 million square feet in manufacturing space, and another 500,000 square feet in logistics which doesn't count as manufacturing.

Right.

You have about 12 1/2 million in total throughout the world.

What are you adding elsewhere outside of China?

Because the 1.6 million is about a 12.8% increase by itself.

Well, so I mean the issue about the -- I moan this isn't a -- this isn't a number that you know, we focus on or manage to, from a customer -- I mean from a company standpoint.

I mean I'm not -- to be perfectly honest with you, I'm not sure over what period of time that 1.6 million was.

That's not a number that I track or that we -- or that we manage to.

They said it was over the next 12 months.

Yeah, so, I mean you know, we have -- I think what everybody would like to know is how much we expect to grow our business.

We have got to keep capacity in front of us to be able to grow into the kind of demand that we would expect.

And so, you know, we expect our business is going to grow 15-20%.

I mean we have to have that much in facilities.

But I would remind everybody that facilities are not what particularly expensive for us.

It is what you fill them with.

And I would caution people from doing, you know, deriving too much from how many square feet we're putting under roof.

Because I just don't think that is the best indicator of you know where we're heading.

Obviously if we're not adding anything, that would be a bad sign and we're clearly adding a lot.

In addition to what we're doing in Asia, we are expanding in Eastern Europe.

And we are growing into our facilities in Guadalajara.

So we're not expanding facilities in North America, we are expanding our business, but not our facilities.

And we're not expanding facilities in Brazil.

We are expanding a little bit in Europe and a fair amount in Asia.

What is your capacity utilization now, would you guess?

You know, I just don't know how to answer that.

It is a -- I mean we get asked this a lot and I'm really not trying to be obtuse, it is just not a number we measure because it is just so different by -- if you talk about how full the buildings are or how many hours a day we run the average equipment and that T-is not a number we track.

I will remind you certain metrics we do think about which is for us, you know, 80% full is 100% full.

So from our perspective.

And what I mean by that is, you know, if we are running our buildings and equipment 80% of their available time in a week, then for all intents and purposes, we need to go at capacity, -- add capacity because the rest is burst capacity we need to keep available for our customers and so then these utilization measures just become difficult, you know, what percentage of total or what percentage before we think we need to add stuff and that's why we don't track it that well.

I will say, again, I'm trying to give you data here without being mechanical in the numbers because we don't actually will have the numbers.

In most of our Asian facilities, we are at the place that we are full enough and anticipating growth as in our guidance numbers, that we need to add facilities.

That is equally true in Eastern Europe.

Not in Western Europe and not in the Americas.

So we will build facilities in advance of expected demand, so that it is pretty easy to, you know, put equipment in and go from there.

So I would say, I don't know, if that means we're reasonably full in the low cost countries an not quite as full in the higher cost countries.

Follow-up question.

This is on a comment made by one of your competitors last week on their call.

That customers are increasingly asking for greater flexibility in the part of the -- their suppliers, because they don't want to carry inventory but they want their suppliers to be able to respond quickly to large changes in demand either way, which means that you have to be more flexible, you have to use pull-flew systems so that you can immediately respond, and without building a lot of inventory.

How long -- I know you've been using those systems.

How long have you been using them, Michael?

And do to what degree has your success so far been due to that fact?

That you have been using the pull-through process slow or whatever you want to call it, manufacturing system?

Sure, I mean I think a lot of our success is related to that.

Look, the -- I mean it is an important question.

First of all, the reason customers want more flexibility from us is because their business is getting better and they don't know whether they are going to have upside, they're still worried about down side and they want the EMS companies who are the supply chain experts to manage that for them.

So that is a natural thing for them to request.

And we like it.

It means that they -- that they depend on us, you know, more and more.

If you go back to where we were in 2000, when the downturn hit, you know, everybody was taking inventory write-offs and going through all this stuff and we made the determination at that point that downside will inevitably happen as will upsides, we had years and years of managing upsides and all of a sudden we got reminded I would had to manage downsides and we didn't want to argue with customers about inventory so we took the position years ago that we would change our systems in the company so we would be able to manage to an increasing volatility -- to an increasing volatile requests from our customer base without our just having to sit on piles of inventory and argue about who was going to have it.

So if you look at the inventory turn, remember in the December quarter, maybe they are still at our Web site, I don't know, but we showed trend over four years and our inventory turns went from you know, six time or 6 1/2 times going into the downturn to 13 times last quarter to 12 times this quarter and that was the kind of a steady pro he greg and it was as we kept putting in more and more elements of the systems you referred to in your last and you asked questions about.

And the benefits are huge here bought we can accommodate greater flexibility requests from the customers while not having to carry more inventory on our side and at the same time we get this fabulous benefit of having, you know, lower cash cycle days and therefore a higher return on capital.

And so you asked the question where are we in this.

We are never as good today as we expect to be tomorrow.

We have, you know, 100 activities under way to make this better and better.

I mean we obviously use supplier managed inventory a lot.

You know, we track what percentage we have.

We -- every quarter, we drive to add more supplier managed inventory.

And better I.T. capabilities to understand what is happening in the chain and so on.

So that will get better and better.

In the meantime, you know, the reason why we win a lot of the business we win is because our customers are sophist about this.

They can see.

It is not that hard to tell how everybody manages inventory and who has got the best inventory turns and what it means, and we obviously sell that all the time, which is we have better inventory turns, not because, you know, -- not just because we probably buy the stuff but because we have systems in place that allow us to have a much more flexible supply chain and it is clearly working, Alex and I can tell that you this is one of the real things that separates Flextronics from a lot of the other companies out there, and it definitely wins us business and it is going to continue to win us business as customers more and more understand the value to them that this isn't a writ to them, it is actually an advantage to them.

Well you have been doing a so-called -- and this is my last comment.

You have been doing a so-called lean manufacturing for years.

I mean I went into one of your plants in 1995 and it was all that way.

All pull through systems on every product assembly line.

So this is nothing new.

You just keep refining it right.

That's exactly right.

It is something that we adhere to as a principal.

It is something we have become very good at it.

Is something ha is difficult to do.

But as you point out I got here in 1939 and my first act was to hand out world class manufacturing books to all of our guys and say we are going to be the best there is and now it is 11 years later and we are the best there is.

Not necessarily by that much but this is critical to the business.

If we are going to be in the supply chain management business we ought to be really really good at it.

And I think in the bubble times we were just all so busy managing the business that came in that we weren't as focused on making sure that we were getting better all the time at this.

And now, we are.

And I think customers really, really appreciate it.

Thank you.

Okay.

Our next question comes from Thomas Hopkins of Bear Stearns.

Thank you, you may ask your question.

Yes, good afternoon, though two questions on the gross margin.

First, just to go back to pricing again.

I mean it was three or four quarters ago you actually started talking about, you know, expecting to talk with your customers about price increases, everyone was skeptical, and sure enough, you know, it started to happen.

Is there anything unique in your negotiations, in the way you plan for this?

More recently, Selectron of course has talked about the same thing about renegotiating some of their weaker contracts for better price increases.

I mean is this something that you know we should generally see?

Or is this something that really comes down to relationship management?

Well, I think -- I mean it is a good question.

I think it -- I mean there is always some relationship management.

I think that you can't get away from that.

On the other hand, what you see here, and I will make the point again, what you see here is business cycles at work.

Just the way they write it up in the textbook, you know, you get into an overcapacity situation, business turns down, the strong companies get stronger during the downturn which is exactly what has happened here, the weaker companies, you know, become weaker during the downturn, which is exactly what's happened here and then you get some consolidation, then you get some restructuring, then supply and demand, you know, comes into balance, and then you know, the prices begin to go up.

And you know I've been doing the best I can to preach this all through the downturn because it sure -- I knew there was a down trend and I knew there was an upturn coming and here it is.

And you would see exactly what you would expect to see.

I don't control what our competitors are doing but I listen what they're doing and I know what they're doing.

Everybody hates losing money.

And we have a couple of new CEOs in our business and everybody is trying to get their business back in shape bought investors vote with your dollars and if companies don't make money once in a while people get tired of watching their stocks in the dumper and they go fix up their business, cut people, cut factory, you know, raise prices do all the things that takes to come into balance because you guys vote every day.

And when I was out on Wall Street a couple of -- whatever it was, six or eight weeks ago I was telling everybody I was telling everybody I think it is a great time to be invested in our industry.

More or less across the board.

It isn't that some companies are better than others.

Those are judgments for you guys to make.

But what I meant by that we are clearly in the part of the cycle where the weak guys, there has been some consolidation, there are new executives, there are activities under way, all across the industry, to improve pricing, improve utilization, and this is going to be a rising tide now, I believe.

Over the next couple of years for the industry as a whole.

And I think as you guys are as sophisticated analysts and investors, you know that in general, with a rising tide, the best companies do a little bit better than the weak companies.

And so that's -- you have to make your decisions about where you want -- your best plays, but overall, this is an improving industry, and in general, I think you're going to see companies increase -- you know, beating expectations, as opposed to the reverse, just in general.

And I'm, you know we're very bullish obviously we're raising our numbers and all that because we see this as an ongoing trend.

A follow-up on the gross margins.

One thing we haven't talked about is mix.

It looks like your telecom or network infrastructure business was up about 10%.

Which, you know, kind of follows a theme of a recovery and telecom and networking.

Can you talk about how, you know, those higher complexity programs might contribute to the margins on a mix basis?

Yeah, sure.

I mean that is right in terms of the mix, and everybody knows that, you know, we have become such a strong and dominant player in hand sets and that's what everybody likes to talk about a lot but we have been very aggressive about growing our -- not just the -- I mean the business within the customer base is more difficult to grow, because that -- that counts on end market demand improving but we're getting that.

We're getting end market demand improvement as you can see from the hardware at OEMs.

But we're also working very hard to add customers in this space.

It is higher margin business.

But it is not higher return business.

I need to remind everybody that all the business has more or less the same kinds of return on capital considerations, but we think it is a healthier mix anyway.

You know, it makes for a little bit higher margin, a little bit higher expend but it is a healthier thing tore us to have our business spread across a bunch of different sectors and a bunch of different customers, we are very close to not having a 10% customer any more which I view to be a very healthy activity.

So yeah, the margins are a little bit better.

Obviously what you get here, you also get better utilization.

So in our telecom related factories that have been struggling with demand.

We are getting better utilization and that is a double whammy.

Better margin on the actual product type but also much better utilization of the factories and you're see some of that actually flow through the numbers and hopefully we will continue to do that over the next three or four four or eight quarters.

And just a quick clarification on the guidance, are you saying that you expect next quarter to be 150 million higher sequentially in revenue and two cents higher in EPS?

Or it looks like you have this revised outlook but it is a little unclear.

What we're suggesting is that there are ranges out there, for revenue.

And EPS.

There is a bunch of different -- a bunch of different, you know, people at different points in the estimates.

What we're saying is that the range next quarter should be about $150 million higher.

And there has to be a range, guys.

Everybody needs to understand we're not telling you the numbers because we don't know.

There is a range here.

But people who are on the low end of the range are raising by 1 million people on the high rained will raise it by 150 million.

On the high end of the range should raise it by two cents and what you will wind up is is a range of estimates that we're comfortable with, between the low end and the high end.

So that's for the next quarter and then for each of the following three quarters which is the remainder of our fiscal year we're suggesting the ranges be increased by 100 million and one cent per share, and so the same thing.

People on the low end should raise it by that amount and people by the high end should raise it by that amount and people in the middle should raise it by that amount and we have what we consider a fairly healthy manageable range of estimates in both revenue and profits for the rest of the year.

Okay.

There will be plenty of raising after that.

[ Laughter ] That's what we're telling people to do.

Okay.

So I will take one more question.

Okay, our last question comes from Joseph Wolf of Banc of America Securities.

Thank you, sir you may ask your questions.

Thanks, Michael I just want to ask one question.

You mentioned just as a outlook in terms of restructuring charges, seeing very few on the horizon, I know you don't want to comment directly honor tell because it is not closed but would that include the conviction or the type of acquisition that you intend to do with more tell; that something ha would be restructured out without a restructuring charge for Flextronics?

And then I got a quick follow-up.

Sure, so basically nothing in our -- assumes the transaction with Nortel.

I mean complex transactions, a lot of things being discussed.

I mean if we are able to complete a transaction, we will just let you know then what the impacts of that are.

So I think you should just assume that that is out of all this discussion.

And -- but it is true that we do not foresee anything major in the way of restructuring going forward.

We are very excited about -- you know, restructuring charges don't get that much attention in, you know, from analysts and investors, but it is real money.

It is real costs.

And it is real sort of negative activity that, you know, with layoffs and all that stuff, with the companies involved in, an you know, we are basically through with that, and we're very thrilled about that.

Just a quick follow-up and I know you don't like to get too customer specific but it looks like you have a new 10% customer I haven't seen in the past.

If you could just go into a little bit of the breadth of the relationship with Siemens with the programs or end market ex and what the acceleration has been with that customer that cracked 10% of sales this quarter.

Yeah, sure.

I think about a year ago, I can't remember now, but we announced that they had outsourced a bunch more of their cell phone work to us.

We do a wide variety of activities for Siemens like we do with many of our other customers in this space.

You know, which is handsets and infrastructure products of one sort or another.

And we have an excellent relationship with them.

And so they have continued to expand their relationship with us across product lines.

And it is that coupled with the fact that they've done quite well in the handset business this last period.

They've taken some market share.

And we're building a lot of that product.

So it -- you know, increased the numbers with them.

But you know, Siemens, like Motorola, like Ericsson, like Nokia, you know, like Xerox, you know, like Sony, Ericsson and all these companies, these are very big broad relationships, you know, it is not an accident ill Y-we're growing our business across the board because companies are satisfied with their performance and they continue to give us business, and that's why in my prepared remarks, I said we're adding new business with existing customers, as well as new customers.

And that's all that's a reflection of.

I mean we're delighted with our relationship with them.

Delighted that they have deemed to give us more business because they do have their own manufacturing facilities.

They do have other EMS companies this he use.

So as I said United Airlines, they have a choice and they have chosen to give us more of their work and we're thrilled about that.

Thank Michael.

Just a couple of comments at the end.

Thank you all for listening.

We're obviously feeling pretty good about our business.

We have a lot more work to do.

This is not -- you know, we don't consider that our profitability levels are where they belong.

We're delighted to be through the restructuring activities, and be focused on growing our business.

Lots of interesting customers in the pipeline.

Lots of interesting opportunities with the customers.

We are very focused on expanding the design business so we can continue to drive margins up.

And so we have more -- definitely more work to do here but we're clearly on the upswing and feeling pretty good.

So thank you very much, as always, you know, our guys will be available to talk to you, you know, after the call, and additional things, and I will try to be on the road a little bit more myself over the next couple of quarters, would he have a lot of new analysts in the business, and I'm committed to making sure that people understand not only Flextronics' business but the dynamics of our industry, as we come out of this period.

So thanks very much.

Talk to you all soon.

Bye now.