Flex Ltd (FLEX) 2008 Q4 法說會逐字稿

Good afternoon, and welcome to the Flextronics fourth quarter results conference call.

All lines will be on listen only until the Q&A session of today's conference.

(OPERATOR INSTRUCTIONS).

Today's call is being recorded.

If you have any objections, please disconnect at this time.

I would now like to turn the call over to Mr.

Warren Ligan, Senior Vice President of investor relations.

Sir, you may begin.

Thank you, operator.

Ladies and gentlemen, thank you for joining the conference call to discuss the results of Flextronics' fourth quarter and fiscal year ended March 31, 2008.

To help communicate the data in this call you can also view a presentation on the internet.

Please go to the investor section of our website and select calls and presentations.

You will need to click through the slides so we will give you the slide number we are referring to.

Slide number two.

Please note that this conference call contains forward-looking statements within the meanings of the U.S.

Securities laws, including: Statements related to revenue and earnings guidance; future revenue and earnings growth; expected improvements in operating margin; future cash flows; ROIC and SG&A expense levels; our expection of -- expectation of continued growth in the current economic environment; the expected result -- benefits resulting from our geographically-diversified business and our broad-based product, services and component technologies offerings; the expected benefits from our acquisition and long-term investment strategy; and our expectations of the benefits, cost savings and revenues to be obtained from the Solectron acquisition.

These forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these statements.

Information about the risk is noted in the earnings press release on Slide 16 of this presentation, and in the risk factors and MD&A sections of our latest annual report filed with the SEC, as well as in our other SEC filings.

These forward-looking statements are based on our current expectations and we assume no obligation to update these statements.

Investors are cautioned not to place undue reliance on these forward-looking statements.

In addition, throughout this conference call we will use non-GAAP financial measures.

Please refer to the schedules to the earnings press release, Slide seven and eight of the presentation, and the GAAP and non-GAAP reconciliation in the investors' section of our website, which contain the reconciliation to the most directly comparable GAAP measures.

On the call with me today is Mike McNamara, our Chief Executive Officer, and Tom Smach, our Chief Financial Officer.

I will turn the first part of the call over to Tom to go through the financial portion of our prepared remarks, and then Mike will provide commentary, along with guidance, and then open the call to questions.

Go ahead, Tom.

Thanks, Warren, and good afternoon, ladies and gentlemen.

We're on Slide three.

Quarterly revenue increased $3.1 billion, or 66% from the year-ago quarter to a fourth quarter record high, $7.8 billion, which was toward the higher end of our expectation of $7.5 billion to $7.9 billion.

Our quarterly operating results reflect good earnings leverage.

While year-over-year quarterly sales grew 66%, adjusted gross profit increased 75% and adjusted operating profit increased 86%.

Adjusted net income amounted to a fourth quarter record high $215 million, which is a 76% increase over the year-ago quarter.

This resulted in a fourth quarter record high adjusted earnings per share of $0.26, which is a 30% increase from $0.20 in the year-ago quarter.

Slide four.

Adjusted gross margin improved 30 basis points from 5.9% in the March 2007 quarter, to 6.2% in the March 2008 quarter, while adjusted operating margin improved 40 basis points to 3.4% in the March 2008 quarter from 3.0% in the year-ago quarter.

Slide five.

Fiscal year revenue increased $8.7 billion, or 46% from the prior fiscal year to a record high $27.6 billion.

Our fiscal year operating results also reflect good earnings leverage.

While year-over-year sales grew 46%, adjusted gross profit increased 50%, and adjusted operating profit and net income both grew 56%.

Adjusted net income amounted to a fiscal year record high $745 million, which is a 56% increase over the prior fiscal year.

This resulted in a fiscal year record high adjusted earnings per share of $1.02, which is a 28% increase over $0.80 in the prior fiscal year.

Slide six.

Adjusted gross margin improved 20 basis points from 5.7% in fiscal 2007 to 5.9% in fiscal 2008, while adjusted operating margin improved 20 basis points from 3.0% in fiscal 2007, to 3.2% in fiscal 2008.

Slide seven.

During the March 2008 quarter the Company recognized pretax restructuring and other charges of approximately $233 million, primarily related to the restructuring and integration activities associated with the Solectron acquisition.

These previously-announced restructuring activities, which include closing, consolidation and relocating certain manufacturing and administrative operations, reducing excess workforce and capacity, and the elimination of redundant assets will optimize the Company's future operational efficiency.

Pretax intangible amortization and stock-based compensation amounted to $61 million and $15 million respectively in the March 2008 quarter, compared to $15 million and $8 million respectively in the year-ago quarter.

GAAP net income amounted to $121 million, or $0.20 per diluted share in the March 2007 quarter, compared to a net loss of $93 million, or a loss of $0.11 per share in the March 2008 quarter.

Slide eight.

During fiscal 2008 the Company recognized pretax restructuring and other charges of approximately $514 million, primarily related to the restructuring and integration activities associated with the Solectron acquisition.

The Company also wrote down its U.S.

deferred tax assets by $661 million during fiscal 2008 as a result of the Solectron acquisition.

The Company also recognized other pretax charges of approximately $61 million, primarily related to the impairment sale of certain non-core investments.

We received approximately $57 million in cash proceeds from the sale of these investments.

Pretax intangible amortization and stock-based compensation amounted to $117 million, and $51 million respectively in fiscal 2008, compared to $50 million and $32 million respectively in the prior fiscal year.

GAAP net income amounted to $509 million, or 85% -- $0.85 per diluted share in fiscal 2007, compared to a net loss of $639 million, or $0.89 per share in fiscal 2008.

Slide nine.

The Computing segment comprised 18% of March quarter revenue, which represents an increase of $959 million, or 204% over the prior-year quarter.

The Consumer Digital segment comprised 12% of revenue, which represents a decrease of $16 million, or 2% from the year-ago quarter.

The Infrastructure segment comprised 36% of revenue, which represents an increase of $1.5 billion, or 114% over the year-ago quarter.

The Mobile segment comprised 18% of revenue, which represents a decrease of $32 million, or 2% from the year-ago quarter.

And the Industrial, Automotive, Medical and Other segment comprised 16% of revenue, which represents an increase of $698 million, or 132% over the year-ago quarter.

Our top ten customers accounted for approximately 54% of revenue in the March 2008 quarter, with only Sony Ericsson exceeded 10%.

Our top ten customer percentages decreased from 63% in the year-ago quarter, reflecting further customer diversification.

Slide ten.

Return on invested capital improved 40 basis points to 10.8% in fiscal 2008 from 10.4% in the previous fiscal year..

This is the highest annual level of ROIC attained by the Company in the last seven fiscal years.

Slide 11.

We ended the fiscal year with $1.7 billion in cash, which is $1 billion more than the cash balance as of the end of last fiscal year.

Net debt, which is total debt less total cash, was $1.7 billion at March 31, 2008.

Including our availability under our revolving credit facility, total liquidity was approximately $3.6 billion and our debt-to-capital ratio was 30%.

Slide 12.

Cash conversion cycle came in at 25 days.

Inventory decreased $153 million sequentially, as turns fell to 7.0 times on seasonally lower sales.

Receivables decreased $91 million sequentially, while day sales outstanding increased six days to 42 days, and accounts payable decreased $525 million, while day payable outstanding increased eight days to 70 days.

Slide 13.

During the fiscal year, we generated over $1 billion in cash flow from operations.

Depreciation and amortization amounted to $451 million in the fiscal year.

CapEx amounted to $328 million and acquisition payments totaled $629 million during the year.

I'd like to thank you, ladies and gentlemen, very much.

As you turn to Slide 14 I will now turn the call over to Mike McNamara.

Thanks, Tom.

I'm very proud of the hard work and contribution of our employees and management across the globe in making fiscal 2008 a transformational year for not only Flextronics but perhaps the entire EMS industry.

We are extremely pleased with the operational execution of the Company, as we met or exceeded our financial commitments and established many financial records while integrating the biggest and most complex acquisition in the Company's history.

While investors can't really see it, we are also operating at record customer service levels, as our performance to customer expectations increased to probably our highest level ever.

The Solectron acquisition was the defining event for our Company, as it created the most diversified and premier global supplier of advanced design and vertically integrated electronic manufacturing services.

The scale, diversification and expanded breadth of capabilities gained through this acquisition have further enhanced our competitive position.

We have now become the market leader in most EMS product market segments and our increased scale and capabilities will enable us to further extend our market segment reach and realize significant cost savings to increase shareholder value through greater generation of cash flows and earnings.

During this past fiscal year we've added new vertical capabilities, including machining and touch screens ,while simultaneously expanding capabilities in virtually every one of our existing vertical segments.

We have substantially expanded our power supply capability and expect to be one of the top power supply companies within 18 months.

In addition to expanding our vertical capabilities, we have also made our Company more diversified across more markets and have expanded the available market to us.

We have now expanded into the desktop, notebook, disposable medical devices and medical plastics markets.

We added over 1,000 design engineers across a variety of segments and have expanded our ODM/CDM portfolio.

Through the revenue and scale that we have added, along with the continued geographic expansion and relentless drive to reduce operating expenses, we have increased our competitive advantage by offering our customers lower-cost solutions with enhanced capabilities.

We have spent the last ten years building sustainable, competitive advantage that have created an incredibly diversified company that we believe allows us to perform well even in a down economic environment.

While the growth rates of many companies in our space have slowed, we are continuing to capture market share, which we believe is confirmation that our customers have confidence in our Company to improve their competitiveness and meet their market demands through our broad array of market-focused capabilities.

We have continued to separate ourselves from our North American competition.

Excluding acquisitions, Flextronics grew its organic revenue by over $3 billion in fiscal 2008, or more than a 15% organic growth rate, compared to no total revenue growth in the comparable period for the combined revenues of the next top five North American EMS competitors.

Based on the most recent quarterly combined revenues for the next top five North American EMS companies, Flextronics individually is the same size as the entire group and our adjusted net profit is 1.7 times larger than the group.

We continue to increase our scale across all of the market segments we serve and enjoy the cost advantages that are achieved with scale.

Two years ago, we had virtually no medical, capital equipment, self service, automotive, and connected home business.

We believe we are currently the largest EMS supplier of each of these products in the world today.

Our market position in datacom and telecom is even more impressive, as we believe we are 2.5 times bigger in this segment than any of our competitors in the world today with a strong offering of vertical services and design engineering in this segment.

Our customers' solutions increasingly require cost structures and capabilities that can only be achieved through size and our scale is a significant competitive advantage.

We have decreased SG&A as a percent of sales each year in the last four years, lowering it from 3.5% in the March 2005 quarter to [2008] in the March 2008 quarter.

We will expect this to improve again next year.

Our SG&A leverage ratio, which we believe is one of the lowest in the EMS industry -- excuse me -- is just one example of the competitive advantage we gain through our size and scale.

With over 200,000 employees working around the world on various diverse product categories and verticals, we believe we are very well positioned to compete into the future.

We believe the effective management of this complex worldwide system is, in itself, a competitive advantage with significant barriers to entry.

As the world continues to evolve and emerging markets continue to command more importance in he capital markets we are extremely pleased with our positioning.

The pipeline of new business opportunities is as large and promising as I can ever recall and our bookings have accelerated in the last several months..

With regard to demand, overall was towards the high end of our March quarter expectations, whereas earnings exceeded the high end of our guidance.

Actual revenue in the March quarter was $7.8 billion versus our expectation of $7.5 billion to $7.9 billion, and adjusted EPS was $0.26 a share, versus our guidance of $0.22 to $0.24.

We were able to meet our revenue guidance primarily as a result of operating a large, diversified Company, which is not overly dependent on a particular geographic region, market segment, customer or product.

In addition, our healthy ramp of new business wins, backed by an all-time high pipeline of new business opportunities, should provide an offset against future macroeconomic, organic-demand driven softness.

Our better-than-expected operating performance is attributable in part to our successful integration of the Solectron acquisition, which I believe is one of the most successful large scale acquisitions ever completed in any industry.

We significantly exceeded our original 2008 fiscal year guidance, as revenues increased to $8.7 billion, or 46%.

Fiscal year adjusted earnings per share increased 28% in 2008 compared to our original guidance of 15% to 20%.

Adjusted operating margin improved throughout the year, ending with a fourth quarter year-over-year increase of 40 basis points, or 3.4%, which also exceeded our original target of 3.3%.

This is the fourth quarter in a row that adjusted operating margins increased sequentially and we ended with a six-year high watermark for the fourth quarter.

Perhaps even more importantly, return on invested capital increased by 40 basis points to 10.8% in fiscal '08, which is the highest level in seven years.

This is further confirmation that our revenue growth is generating higher incremental ROIC.

We expect this trend to continue into the foreseeable future.

Our balance sheet is in very good shape with over $1.7 billion in cash, with no short-term debt maturities, and a debt-to-capital leverage ratio of only 30%.

Operations generated positive cash flow of over $1 billion for the year, and free cash flow was $715 million.

We continue to expect to generate positive free cash flow of $800 million in fiscal '09, which is after estimated CapEx of approximately $450 million, which is also our depreciation estimate for fiscal '09.

While I am pleased with these results and believe they are a testament to our strong operational execution, I can assure you we are not resting on our past accomplishments.

Slide 15.

June quarter revenues should be approximately $8 billion to $8.5 billion and adjusted EPS should be approximately $0.27 to $0.29 per share.

GAAP earnings per share are expected to be lower than the guidance provided herein by approximately $0.07 as a result of quarterly intangible amortization and stock-based compensation expense, and by approximately $0.03 to $0.04 as a result of previously-announced remaining restructuring and other charges, primarily related to the Solectron acquisition, in the range of $30 million to $40 million.

Before we move into the Q&A segment of our call, I want to remind everybody that I told you on our last earnings call in January that part of our stock-based compensation includes restricted stock grants to executive officers that began to vest in the April 2008.

As a result, I stated this would result in some insider selling under 10b5-1 plans and it should not be interpreted as any indication of insider views on valuation or outlook.

It is the insiders monetizing the shares primarily to pay the related income taxes resulting from the investing of restricted shares.

You should expect to see some additional selling in May, as additional shares are vesting.

None of this selling is material to the option and shareholding of these insiders and you should expect the same next year on these same dates.

Slide 16.

There are real risks of operating in this business, which include a macroeconomic or technology slowdown among other things.

Please pay particular attention to this slide in light of the current market conditions.

I will now turn the conference call over to operator for questions.

Please limit yourself to one question and one follow up.

Thank you.

(OPERATOR INSTRUCTIONS) First question comes from Jim Suva, CitiGroup.

Your line's open.

Great.

Thank you very much.and congratulations, gentlemen.

Quick question, on your June outlook, could you give us a little bit of breakdown about the organic and then I know you recently closed some acquisitions and what's layered on there for acquisitions?

Jim, we -- I don't think we have that number off the top of our head as to what is acquisition related and what is organic, so I think we're going to have to get back to you and break that out.

I'm sorry for that.

Great, I'll follow up with a second question then.

After investor day you gave a full-year outlook for both sales and EPS, EPS of -- I believe it was $1.20 to a $1.30 and revenues of $34.5 billion to $36.5 billion, what's the update to that?

Yes, so, as you know, every November we give an outlook of what we think it might look like the following year and then we limit our guidance to quarterly guidance, so while not -- given a full-year guidance at this point, we continue to look at those numbers and those targets that were established, we continue to be comfortable with those targets and -- but we're only giving one quarter guidance at this time.

Okay.

And then as my follow up I believe you said CapEx of $450 million.

It looks like that that's a fair amount of increase over this past 12 months.

Can you maybe explain to us about where that capacity, where are those dollars going into building.

Is it like in Vietnam or what are you doing with that and what should we look forward to, because it seems like this is in addition to the acquisitions you're making?

Well, it's -- it's in addition, but again, we're coming off a much higher revenue base because now we have the whole Solectron piece in there and we expect to earn and grow on that Solectron piece, as well.

So having it be roughly equivalent to our CapEx is -- was our target last year.

We exceeded that target for a number of different reasons, but once again, we're actually hoping to drive the business organically and at the same time hold CapEx to be equal to depreciation, which is where we came up with the $450 million number.

And I would say it's a real broad range of investments.

In some cases it's to grow our vertical business, in some cases it's to grow our more traditional EMS business -- electronic EMS business.

There are a few buildings in there but probably less than there were last year.

And in terms of geographic expansion, the only thing we're really contemplating at this point is to head into Russia.

So it's not really as much new locations but it is a pretty broad-based expansion across verticals and more traditional EMS market segments.

Great.

Thank you and congratulations.

Thanks.

Jim, I have the answer to that acquisition revenue question.

So incrementally in the June quarter acquisitions would contribute less than $150 million of incremental revenue in the June quarter compared to March.

Thank you very much, Tom.

Our next question comes from Alex Blanton, Ingalls & Snyder.

Your line's open.

Good afternoon.

Good afternoon.

At the construction equipment show in Las Vegas in March it was disclosed that the -- that Flextronics is the manufacturer of a new small vertical manlift for JLG Industries and I believe that's a new market for you, Michael, the industrial market.

And you're making the whole thing for them.

It's a small unit, the retail price is about $2,000, but it is kind of a new thing for you to be making industrial products instead of electronic products.

So could you discuss that and say what your plans are and are you going to move further into that market?

And then I have a follow up to that.

Yes.

So that's correct, we are building that device and we view the industrial market -- if I think about that broadly we think about a lot of different things in there.

We think about solar.

We think about controls.

We thinks about security products.

We think about even what you just mentioned in terms of lifts, small mechanical lifts.

There's a whole range of industrial products that we have traditionally not tapped and we have been aggressively pursuing that market for a couple years now.

I think in FY '06 our business in that business -- in that category, the sum of all those industrial products was about $600 million and this go-forward year we expect to do well over $3 billion in it.

So this is an area that's probably growing faster than -- maybe as fast or faster than any other product category and we actually anticipate that continuing over the next couple years.

We view it's a market that continues to diversify us, away from the more traditional electronic manufacturing services product categories, and that diversification is something that's very, very important to us.

And I think it's one of the reasons, in particular, that it -- that will -- it'll enable Flextronics to work through this -- the current macroeconomic challenges, with continuing to have good growth rate by diversifying into these different regions.

So we're pretty excited about it and it lays -- it plays a lot into some of the additional verticals we have in terms of machining and some of the heavy-duty plastics that we do as well as sheet metal and such, so it plays on the existing verticals we have, so we're very active in that market.

This $3 billion is non-electrical -- non-electronic, it's more regular --

It's still very electrical but it tends to have less and less electrical content.

It certainly has a tremendous amount -- a tremendous reduction electrical content compared to the telecom industry.

Because the one I'm talking about is mainly just steel and plastics and --

Yes, exactly.

-- a lift.

And you know we have -- we're one of the biggest metal manufacturers around the world.

We're rapidly expanding our machining operations, we've expanded machining into Mexico and China over the last year.

And our plastics business continues to be very robust.

We're probably looking to grow that probably at least 30% this year and we already have a base of about 1,500 plastics machines worldwide.

So it leverages along a lot of those plastics lines as we -- and again, this is an attempt to diversify our products -- our product categories some more and -- but as well, leverage off of the vertical strategy that we've put in place that -- so it's just a new business and there tends to be a little bit less competition out there for it, so hopefully we'll be able to drive a little bit better margin.

Okay, now I have a follow up -- and by the way that product is called a lift pod.

Could you update us on the -- what it looks like in the notebook area -- and actually you mentioned desktops as well in your opening remarks -- the notebook area with Arima as a base, what are you planning there?

You could get business from Dell and Hewlett-Packard because they're not happy with their dependence upon Taiwanese companies necessarily.

And also on the Russian LCD plant that you're going to open, I think you said somewhere that that could be at least $500 million in the not too distant future.

Yes, so I'll tackle the laptop, desktop one first.

Our prime initiative is to go after laptops and we think the timing is right for a number of different reasons.

One is, as you mentioned, the branding of the Taiwanese creates an opportunity for us and also the laptop market is growing and expanding in size, but also with the emerging markets it's creating -- and some of the companies, the OEMs needs to go into different kinds of retail markets which are different.

It creates a need for a lot more notebook design and a lot more geographic reach.

So when we think about the ability to geographically reach the rest of the world in emerging markets and at the same time have the scale to compete in notebooks and at the same time, with the threat of the branding of the Taiwanese, it lends itself to just a super opportunity for us to go grow that business.

So we would expect that to be one of a real fast-growing category for us.

We're still in process of closing the second part to that acquisition, which will be done in moment -- you know, real soon, within weeks.

But we're already having a tremendous amount of interest and success in terms of companies wanting to place business with us, so I'm actually quite bullish about the whole laptop market and really, really pleased with it.

Desktops is just kind of -- it's just -- sometimes when you service the laptop customer, they also want desktops, and so it's something that we're going to be a little bit more careful about, how we get into it, but it has a lot of the same product characteristics and a lot of overlap and capability.

So we'll probably most likely be pulled a little bit into desktops, except we'll once again be very, very careful in terms of the pricing and the investment that we'll make there, so -- and we've already ended up winning a couple of different desktop deals as a result of going into notebooks.

So we're going to head that way, but still our prime objective is to really go penetrate the notebook market.

And the last question is on Russia.

This is a deal that's not yet done.

This is a deal that has the potential to be closed.

We still have some contingencies out there that need to be finished off as part of the contract, but we -- and some of those contingencies have to do with the government in terms of duty relief and I think if we get that duty relief we believe that it has substantial opportunity to be a very, very attractive place for both Consumer and Computing customers.

So with Consumer computing customers, for them to reach $500 million is not at all a stretch over the next, say, two years.

Okay, thanks.

You're welcome.

Our next question comes from Matt Sheerin, Thomas Weisel Partners.

Your line's open.

It looked like both Infrastructure and Consumer was a little bit lighter than expected and more than seasonal.

I know you talked about in your guidance how Consumer might have been a little more than seasonal, but could you talk about exactly what's happening with your customers in those markets?

Was it demand related, any specific projects and what are your outlooks for those businesses going forward?

Yes, I think -- we actually missed the first part of your question, but I think the comment is are we seeing softness in the Consumer markets and Enterprise markets -- or in the Telecom markets, sorry.

Infrastructure and Consumer.

Yes, Infrastructure.

Yes.

Yes.

So maybe we're seeing a little bit, but again, we're not really in those Consumer markets and we're not in the Enterprise market.

We service those markets and at the same time we're trying to do our best to -- even if our customers are seeing some softness in the market, that doesn't mean we'll necessarily in the end see softness in those markets, so we're focused pretty hard at going and booking and winning new projects, both in Consumer and Enterprise.

that would offset any potential weakness.

So I think those markets we'll end up -- I don't believe they'll decrease at all for us in the year.

I don't know if that's what you're getting at.

How our customers do is really dependent on the customers, but at the same time we'll spend our time booking other business within those markets and actually have a pretty good pipeline in both those markets of being able to add additional business, even in light of any softness.

So once again, from our customer standpoint, maybe they're seeing some softness, but from a Flex standpoint in those market segments we still expect to have a growth business this year.

Okay, thanks.

And then just on the inventories, I know the inventory days is way up because of the revenue, but are you comfortable with that number?

Were you staging some inventory for June shipments?

Well, our business goes up every June, so there is a little bit of that in there, but we're pretty much in a pretty -- the number gets distorted a little bit because of the pretty significant revenue downturn that we always see in the March quarter.

So I think the additional inventory coming in from the Solectron acquisition tends to run a little bit lighter or runs a little bit slower, just because of the nature of that Enterprise kind of business.

so we'll work pretty hard this year.

Where we spent a lot of last year doing the integration and consolidating facilities and such, we'll spend a lot more time next year working on the balance sheet and trying to optimize those inventory levels.

So I'd say it is where it is today, but it's going to get a lot more attention than it got this year next year, so I think we'll be able to drive some improvements.

But without question we are positioning a little bit for the June quarter.

Okay, thank you.

Next question comes from Kevin Kessel, Bear, Stearns.

Your line's open.

Hi, guys.

Hi.

So Mike, you mentioned a couple times I think on the call the pipeline of business and the pipeline of new business and the focus, obviously, on generating new business, but could you help us, maybe conceptually at least, understand just roughly speaking what this pipeline is as we go into fiscal '09 here from a dollars perspective?

Yes, well, I can't give areal good indication from a customer standpoint and just because our customers don't like that and we actually went and talked to a few of them this time because we thought we'd give a little more color to it, but it's just kind of an uphill battle so we chose to stay away from it.

But the --

What about the general in dollars or end markets, like maybe general just by dollars?

Yes.

So in end markets, our business in servers is, I think, going to go up pretty strongly this year, despite the server market being down.

I think the amount of new wins that we're seeing and some of the success that we've brought on after we brought on our ODM server business is going to be really very strong.

I think we'll see continuing strength on the heels that I mentioned with the notebooks and -- or the laptops and the desktops.

I think we'll see -- we're starting to see new product categories that we've not participated in before, even in Consumer, that I think we're going to start hitting.

So maybe a good example of that that I can describe is, while the Consumer business might be a little down for the consumer companies we did about -- we did about $20 million worth of LCD TVs last year and next year we could easily end up with $500 million of that business, this FY '09.

So even in light of any kind of end-customer weakness, our customer's customer's weakness, certainly we can grow the business.

We're still looking to see probably -- I mentioned last call I think that we'd see a good five out of seven and we're going to go try to get it to seven out of seven, but we thought we'd end up seeing five out of seven with double-digit growth rates and we're continuing to see that.

Industrial's strong.

Medical's strong.

Automotive is actually very, very strong.

All these will for sure see double-digit growth rates.

So I think there's -- it's actually pretty broad based.

Even mobile phones, we ended up only growing about 3% last year in terms of revenue and this year we would expect to grow double digits just based on what we can already see and that's largely on the strength of some significant diversification that we were successful with this last year, as some of our customers went down in revenues.

So again, I think it's going to be reasonably broad based.

I also think our vertical categories, virtually every one of them is going to grow double digits.

I can't think of whether it's printed circuit boards or flex circuits or camera modules, displays or mechanicals, power, I think every one of those will be in the double-digit growth rate.

And this is just the --

I'd say it's pretty broad-based.

And that's all based, like you said, on just actual wins as opposed to potential forecasts or just new a additive in your forecast?

Yes, this -- the reality of it is this year's -- we have pretty good visibility over -- you have to already have won it in order to see the next six months for sure.

Maybe there's a March quarter upside that you haven't won yet, but pretty much these are things that we already see.

Got it.

And then just as a follow up to Tom, Tom, just two things that jumped out at me.

One is the depreciation and amortization was up significantly from what I can tell on a quarter-to-quarter basis, up almost 21%, and I was just curious, number one why that was?

And then secondly on interest expense, if I recall correctly I think last quarter you guys were expecting to come in mid-to low 40s-ish and it came in quite a bit below that, so I'm wondering how to think about that and what maybe the offsets might have been?

Maybe it's foreign exchange, I don't know.

Yes.

So amortization was a little higher this quarter because we finalized some valuations appraisals relating to the Solectron acquisition and as a result of that we had to adjust the amortization in this quarter.

So you had a one-time bump-up in this quarter that will get normalized back down next quarter.

With regard to interest and other expense, we're just trying to manage that really aggressively, Kevin.

I would expect going forward to have that line item run somewhere between $30 million and $40 million a quarter, so we're definitely doing better.

Maybe we were a little too conservative in the guidance that we previously gave and I think you'll see some improvement going forward at closer to the levels that it's at today.

So you can model in $30 million to $40 million a quarter.

And then what about FX?

Is there any -- where do we see those impacts?

I saw your cash flow showed it was a negative $39 I think in the quarter and a negative $64 million for the year, implying that it's accelerating in terms of the negative impact a little bit maybe, but where -- I know you guys run hedging programs, I believe, but --?

Right.

So the numbers you're talking about is the impact on cash flows, not the impact on profit?

Right.

So, you know, we run a very complex, multi-national Company.

We're in probably 35+ countries.

We probably transact in over 100 different currencies around the world.

So at any one time the dollar is strengthening or weakening against the various currencies that we operate in, so I would just say foreign currency management for us is day-to-day business.

It's something that we're very, very active in.

And knock on wood, so far we have never had to call out an impact specifically related to foreign currency.

Any one quarter the foreign currency impact might be a little bit positive or a little bit negative, but we try to keep that as close to zero as possible through the various hedging programs that we have.

So we don't really break out the impact on foreign currency in any particular quarter because we just try to manage it as close to zero as possible.

Great.

Thank you very much.

Okay.

Our next question comes from Lou Miscioscia, Cowen and Co.

Your line's open.

Yes, can you give us any comments -- or I guess update just on China?

The first question would be -- I don't think you have many facilities up in and around the Beijing area, but if anything that's coming in from the Olympics, might have anything to do with either your facilities or maybe suppliers as the government there looks to maybe reduce air pollution and maybe shut down some sites.

Yes, we don't have that much of a presence up there, as you said.

We'll have one facility up there as a result of the [Freewheel] acquisition and then we have some -- a factory in Tianjin area and then we head on down to Shanghai.

As far as the suppliers, I'm not aware of any potential impact that we're going to go see, so I'm thinking it's not going to be significant.

As a matter of fact, I think it's not even going to be unsignif -- insignificant, so I think it's going to be not a problem.

Okay.

How about just the change in obviously the RMB and the increase in wage rates, is most of it just pretty easily -- maybe that's not the right word, but most of it passed along to your OEM customers?

Well, theoretically, we all have increasing wage rates and it's sometimes hard to get it immediately and lot of that pass-along has to come with the bidding of the next project cap -- with the next project or with the next available pricing discussion, so usually there's a little bit of a lag effect and that's a little bit of a problem for us but we do expect to recover it over time.

With us, I think it's a little bit less of a problem.

We only have about 52% of our total business in Asia, and of that a significant portion of it is in Indonesia, Singapore and Malaysia.

So when you boil it down relative to a lot of our -- at least our Taiwanese competition it actually puts us in a little bit of an advantage position.

I think it's one of the reasons that our Mexican operations are growing significantly faster than our Asian operations are this year.

So I think we'll catch it.

I think there's a little bit of a lag effect and I think it puts a little bit of pressure on us short term, but once again, it's not the majority of our numbers that are affected but a portion.

Okay, great.

Just --

And the products that we build in Asia, Lou, are obviously very short product life cycles, so the next generation product comes up quite rapidly, which is the longest it would be for pricing negotiations, sometimes even have pricing negotiations on existing products.

But fairly short product life cycles are built over in Asia.

Okay, good luck on the new year.

Thanks.

Next question comes from Steven Fox, Merrill Lynch.

Your line's open.

Hi, good afternoon.

Hi.

First question was the comment, Mike, you made on bookings accelerating as the quarter ended.

Are you talking about new program wins or organic business with existing customers?

Can you just expand on that a little bit?

Well, neither one.

I didn't want to separate it out.

There are new customers that we're adding.

There are new business that's coming into the marketplace I think as a result of the potential macroeconomic environment.

And I think there are new customer wins and market share gains from existing customers.

So I think it's a combination of all those things and we really didn't differentiate one from the other, except I think the entire pipeline's pretty robust and we're seeing our share of new customers, as well as seeing our share of more opportunities with existing customers.

With regard to market share gains, are you classify -- are you referring specifically to taking business from other EMS providers or just penetrating existing customers?

Well, it could.

That tends to be the smaller percentage of it.

But it normally when I think about that I think as a new program comes up, we're probably have more success winning that new program than anyone else.

So while it may not be an extraction of business from someone else, maybe the next revision coming up is an opportunity for us.

That's the more likely scenario, so -- and then those we're having pretty good success with, just because of the robustness of the offering now.

Understood.

Then last question, so since it looks like this year LCD TVs could be very sizable, at least in absolute terms, can you talk a little bit about -- it's growing very fast in terms of the market penetration overall for outsourcing, but it seems like it's becoming more competitive.

What type of margins do you expect to make, what kind of -- can you talk a little bit about also what kind of vertical integration opportunities you have there to maybe stack some margins, as well?

What kind of model is it, basically?

Yes, I actually don't think it's getting more competitive.

I think it's intensely competitive and it already has been and I don't think it's taken up a notch, so I actually think it's more of the same.

Okay.

The verticals on TVs, we have a number of different things.

These big LCD TVs, the model needs to be a regional final regional final assembly and then there needs to be a distribution repair activity associated with it and we're very well positioned from that standpoint.

We have plastics, whether it's in Mexico or Eastern Europe or in Asia we have large form factor plastics in all those different operations.

We have our own power solution for the TV marketplace.

We have a full team of ODM design engineers that we've put together, hundreds that we've put together over the last year.

And with the distribution and repair it ends up being a real strong play for us and this is one of the advantages that we have in terms of being head of the guy that can operate a worldwide system with the same process around the world.

It's a huge competitive advantage and when you drop in the verticals on top of it that are regionally located it also is a pretty good advantage, so we have a nice set of verticals.

And then of course, there's the boards.

There's a lot of basic electronic boards in these TVs.

So when you add it all up, the vertical opportunity on these things might be as high as 20% and we're well positioned from that standpoint and well positioned geographically.

What do you mean by 20%?

A lot of times the glass itself is a significant -- very significant portion, so when you add up the boards -- and every TVs is a little different, but you add in the large plastics, you add in the power system, if you add in the plastics, that end up being 20% of the total cost of the bomb -- of the bomb..

Okay, great.

Thank you very much.

Next question comes from Yuri Krapivin, Lehman Brothers.

Your line's open.

Good afternoon.

My first question is regarding your operating margins.

Do you have a specific goal in mind for fiscal '09, because I remember that at the time of your analyst meeting, I thought you talked about achieving operating margin of around 3.8% in fiscal '09?

Yes so operating margins are heavily dependent -- as I think we've gone through many times, they're heavily dependent on the type of business that you book.

If you book an extra amount of notebooks and laptops, things like that, they tend to run lower operating margins with with higher inventory turns.

If you book a lot more medical and higher-margin business, then you tend to drive up the margin.

So really we have targets for each one of those different businesses, but the percent of business that we end up with we never know for sure.

So we have -- but what we are seeing is, if you look across the last four quarters, we've been able to, for four straight quarters, drive up the operating margins every single quarter.

We continue to see opportunities to improve the operating margins going forward.

We think the amount of vertical integration that we can do is going to be enhanced as a result of being called a $36 billion Company.

We're continuing to get SG&A leverage that is not going away and we expect to gain some more of that SG&A leverage this year and we still expect some additional optimization from the overall acquisition.

So that, in and amongst itself, is providing us with a lot of opportunities, whether it's in procurement or whether it's Lean manufacturing implementation or just taking the best processes that we can find throughout the Company and then implementing then.

And if we can spend a lot of time focused on doing that, whereas the last year we spent a lot of time focused on the acquisition, we see continued possibilities to drive the margin up.

So while it depends, we're still shooting to continuously drive the margins up and continuing to drive the ROIC in a positive way.

Okay, great.

And then I guess for Tom, what should we be modeling for the tax rate in fiscal '09?

So our guidance continues to be 7% to 10% and I would encourage you probably just to be in the midpoint of that range for right now.

Okay, thank you.

Why don't we take one more question and then we'll wrap up the call today.

Our next question comes from Amit Daryanani, RBC Capital.

Your line's open.

Thanks.

Good afternoon, guys.

I guess just a question.

When I think back on the November analyst day and the EPS range that you guys outlined, you had a bunch of drivers that drove that, be that the Solectron savings or the revenue attrition or the end market expectations.

If you look at the drivers that led to that EPS range, have those drivers changed?

Could you just give us an update on those drivers and how those have trended so far versus the expectations?

Well, I think -- I think those are the EPS targets we're still driving to.

If I can think of one thing that's changed is the -- I think the macroec -- the economy makes us a little bit more nervous than it did in November.

That being said, we probably have a stronger pipeline than we did in November and continue to have some pretty good success at being able to diversify out of any kind of softness that we may have.

So I think all in all we're still heading for that same number.

We still worry a little bit about all the news we read and like I said the macroeconomic effects, but we also think that we're diversified enough and healthy enough that -- and we have enough opportunities to drive operating profit improvement, like I mentioned, with the VI and the SG&A leverage and the additional optimization that we can do within the Company that provides us still with a lot of levers to hit those EPS targets.

So I think we're still driving there.

That being said, as far as specific guidance, we're only going to do that one quarter at a time and, of course, in November we'll give you guys a new up -- a fresh update on what this FY '10 looks like.

But so far we're pretty much on track with a little bit of caution around the macroeconomics.

Fair enough.

And just as a follow up, when I look at the June quarter guidance, organically you're looking at about 4% sequential growth, call it.

Just looking at the end markets, could you just talk about the puts and takes, which one do you see having better seasonality versus softer?

So I don't know about your 4% number, so assuming that -- I'm not sure how you can do that, actually, because you don't have the Solectron numbers in there but --

Well, I'm looking at sequentially because I figured you had Solectron in December; right?

Oh, okay.

Okay, so your question's on the June quarter, what are the drivers for revenue growth?

Yes.

A little bit broad based.

I think we mentioned we have $150 million of acquisition growth that's in there.

I think we'll see just a general pick up of our general end markets.

They always start to trend up a little bit because we take a little bit of a March downside.

We have some new programs coming in that have been booked for some time that we'll continue to see.

So I don't actually know the breakdown between any one of those, except to say it's just a bundle of all those things.

I know that's not a very good answer, but I don't have the breakdown from one versus the other.

That's fine.

Thanks.

But we will see the Consumer and the Mobile space come back substantially relative to the March quarter.

Okay.

Well, thanks very much for everybody's attendance and we'll look forward to talking to everybody again next quarter.

Thank you.

This concludes today's conference.

You may now disconnect.