Flex Ltd (FLEX) 2009 Q1 法說會逐字稿

Good afternoon, and welcome to the Flextronics first quarter fiscal year 2009 earnings conference call.

Today's call is being recorded and is the copyrighted property of Flextronics International.

Any rebroadcast of this information in whole or in part without the prior written permission of Flextronics International is prohibited.

We will be conducting a question-and-answer session at the end of the company's prepared remarks.

(OPERATOR INSTRUCTIONS) At this time, I would like to turn the call over to Mr.

Warren Ligan.

Mr.

Ligan, please go ahead, sir.

Thank you, operator.

Good afternoon, ladies and gentlemen.

Thank you for joining us today for our quarterly conference call to discuss the results of Flextronics' first quarter ended June 27th, 2008.

To help communicate the data on this call, you 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 then click through the slides.

We will give you the slide number we're referring to.

On the call today is our Chief Executive Officer, Mike McNamara; and our Chief Financial Officer, Paul Read.

Mr.

Read was appointed Chief Financial Officer effective July 1st, 2008, upon Tom Smach's departure as announced in our press release dated May 16, 2008.

Paul most recently served as Executive Vice President of Finance for Flextronics' worldwide operations.

I will turn the first part of the call over to Paul to go through the financial portion of our prepared remarks.

Mike will then give his view on the quarter and provide guidance for the upcoming quarter.

After Mike's comments are concluded, we will open the call for your questions.

Please turn to slide 2.

Please note that this conference call contains forward-looking statements within the meaning of US security law, 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 expectation of continued growth in the current economic environment, the expected benefits resulting from our geographically diversified business and our broad based product, services, and component technologies, offerings, the expected benefit from our acquisition and long-term investment strategy, and our expectation of the benefits, cost savings, and revenues to be obtained from the Solectron acquisition.

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

Information about these risks is noted in the earnings press release on slide 14 of this presentation and in the Risk Factors and MD&A section 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 7, of the presentation and the GAAP versus non-GAAP reconciliation in the Investor section of our website which contains the reconciliation to the most directly comparable results.

At this time I would like to turn the call over to Paul for his comments.

Thanks, Warren and good afternoon, everyone.

Please turn to slide 3 in the presentation.

Our first quarter revenue increased 62% from the year ago quarter to a record first quarter high of $8.35 billion, while quarterly adjusted operating profit increased 83% from the year ago quarter to a first quarter record high of $280 million.

Please turn to slide 4.

We grew our quarterly revenue for each of our segments on a year-over-year basis.

Revenue from the infrastructure segment comprised 35% of total revenue and at $2.9 billion represents an increase of 100% over the year ago quarter.

Revenue from the Computing segment comprised 17% of total June quarterly revenue and increased 195% from the year ago quarter.

The Consumer Digital and mobile segments comprised 14% and 19% of revenue for the quarter respectively.

While both segments were flat to slightly up in revenue for the year ago quarter, their combined total quarterly revenue is is approximately one-third of our total revenue, which is down from one half of our total quarterly revenues a year ago, reflecting a more balanced end market diversification.

Finally, the Industrial Automotive Medical and other segments comprised 15% of total revenue and increased 119% over the year ago quarter.

These segments now represent approximately $1.3 billion in quarterly revenues.

The strength and growth of this segment is significant, and will continue to be a growth driver for us in the coming years.

Our top 10 customers accounted for approximately 55% of revenues in the June quarter and Sony-Ericsson was the only customer that exceeded 10% of the June quarter revenue.

We realize these numbers are difficult to analyze on a year-over-year comparison.

In general, we expect our organic revenue growth to be in the range of $2 billion to $3 billion this year after we exclude the contributions of the various acquisitions.

Please turn to slide 5.

Adjusted gross profit of $507 million and adjusted operating profit of $280 million established record first quarter highs increasing 74% and 83% respectively from the year ago quarter.

On a margin basis, both adjusted gross margin and adjusted operating margin improved year-over-year by 40 basis points with adjusted gross margin amounting to 6.1% and adjusted operating margin amounting to 3.4%.

Please turn to slide 6.

Adjusted net income amounted to $227 million, which represents a 69% increase over the year ago quarter and is a new first quarter all-time high.

This resulted in a first quarter adjusted earnings per diluted share of $0.27, which is a 23% increase over the year ago quarter.

Please turn to slide 7 for our quarterly GAAP reconciliation.

Slide 7.

During the June 2008 quarter, the company recognized after tax intangible amortization and stock-based compensation of approximately $23 million and $15 million respectively, compared to $17 million and $9 million respectively in the year ago quarter.

Also during the June 2008 quarter, the company recognized after tax restructuring integration and other charges of approximately $58 million, primarily related to restructuring and integration activities associated with the Solectron acquisition.

These represent the final restructuring costs associated with the acquisition and the company expect to be able to absorb any future restructuring charges in its quarterly operating results or offset them with one-time gains in the period.

After reflecting these items, GAAP net income increased by 22% to $130 million compared to $107 million in the year ago quarter.

GAAP earnings per diluted share were $0.16.

Please turn to slide 8.

Slide 8.

We have been consistently building on our operational success and that has been reflected in our steady improvement in return on invested capital.

This quarter, return on invested capital improved 30 basis points to 10.7% from 10.4% in the year ago quarter.

Please turn to slide 9.

Slide 9.

We ended the quarter with $1.8 billion in cash, which is a sequential increase of $42 million from the last quarter.

Total debt was $3.7 billion at quarter end.

Net debt, which is total debt less total cash, amounted to $2 billion at quarter end.

Included in the availability under our revolving facility, total liquidity was approximately $3.3 billion and our debt-to-capital ratio was 31%.

Please turn to slide 10.

Slide 10.

Our cash conversion cycle increased slightly to 26 days from 25 days last quarter.

Our inventory turns improved to 7.3 turns in the June quarter from seven turns in the March quarter.

Our inventory balance increased by $337 million, which reflects the impact of acquisitions made during the quarter and the position in those inventory to support new business ramps.

Days sales outstanding improved one day sequentially to 41 days, while days payable outstanding decreased five days sequentially to 65 days.

We continue to focus efforts on our working capital management and expect to generate additional cash flow while improving our working capital metrics.

Please turn to slide 11.

Our cash flow from operating activities reflected the use of $8 million during the quarter which included approximately $150 million of spend associated with our restructuring and integration related activities.

CapEx amounted to $155 million while depreciation and amortization totaled $117 million from the quarter.

As a result, free cash flow was negative $163 million.

Thank you, ladies and gentlemen.

As you turn to slide 12, I will now turn the call over to Mike McNamara.

Thanks, Paul.

I would like to begin by highlighting that I'm very pleased with with our execution this past quarter, especially in light of the challenging economic environment.

Our June quarter revenues of $8.35 billion and our adjusted EPS of $0.27 were both within the range of our quarterly guidance.

Our revenues continue to be solid.

Currently, any softness in revenue is being overcome through new customer wins or new product categories adding additional business.

Clearly we are operating in a very challenging marketplace and several trends are emerging simultaneously which makes it difficult to assess the market and to conclude on the strength of the overall demand environment.

While there are areas of softness in certain markets and geographic regions, there are also various product categories where demand is strong and certain regions where most segments have strong revenue growth.

Additionally, some segments have customers doing well and other not so well.

So the answer to the question of how is demand is -- it just depends.

It depends on the segment.

It depends on the region.

And it depends on the customer.

However, being an EMS company and not an OEM, we still see the EMS business expanding during this time of economic uncertainty.

The cost side is also becoming more challenging.

We are seeing an escalation of costs that are more significant than we have seen in many years.

In particular, we are seeing cost pressures in many commodities, foreign exchange rates, labor rates, energy costs and freight costs.

We are working hard to mitigate these costs.

We have increased our efforts to drive down SG&A.

We have accelerated efficiency improvements and we are educating our customers on the changing cost environment.

While we have very strong year on year margin improvement, these conditions are impacting our ability to improve our margins as quickly as we would have hoped.

These are exceptionally challenging time that will cause our customers to rethink their worldwide supply chain strategies and we believe Flextronics will be a prime beneficiary of these new strategies due to our global scale and breadth of service offering in so many different geographies.

We are also very well prepared for this macroeconomic environment as the expansion of our segments have created a much more diversified company and one that can weather the macro economic disruptions much more successfully.

An example of this expansion is seen in our Computing segment.

During the past quarter we completed the final phase of the previously announced acquisition.

We are extremely pleased with the level of interest and business opportunities we are seeing from tier one OEMs that seek to leverage our design and manufacturing capabilities in this rapidly growing market.

This is evidenced through our recent announcement of a design in manufacturing win for a new high volume notebook computer for HP.

This market continues to grow very rapidly, and at over $100 billion, it is the largest outsourced market in the world today.

As a result, we are significantly increasing our design capability to develop new platforms.

While this adds to our cost pressure in the near term, it positions this product category to be a significant contributor of revenue growth over the next several years.

We have also enhanced our capabilities in our Consumer Digital business through the addition of significant capacity to design and produce flat panel LCD televisions.

Our Mobile segment grew its revenues 11% sequentially.

While certain customers experienced softness in demand, we were still able to show good growth through our continually more diversified customer base.

Our Medical business is shaping up to be a superb growth engine with a very broad customer base and a very broad product offering.

We recently completed the acquisition of Avail that added non electronic disposable medical device products to our portfolio and we are on track once again to achieve our cost synergies.

We completed the acquisition of Friwo, which primarily focused on chargers, and have already booked major contracts with multiple new tier one OEMs.

A very important achievement this quarter is that it is the final period in which our results will be negatively impacted by the associated restructuring and integration related charges of the Solectron acquisition.

I'm extremely proud of the entire organization for their diligent efforts in completing the integration and achieving this financial milestone in nine months.

There are no more charges expected from this acquisition.

Lastly, at our Analyst Day last November, we shared with you our expectations of the improving cash flow of our company.

We continue to believe the company will generate significant cash flow in the current and future years.

We believe it was important to fully integrate the recent acquisitions before committing to a course of action to utilize a portion of this excess cash.

We presently have Board and shareholder approval to buy up to 10% of our ordinary shares.

Shares repurchased under this plan may be made through a variety of methods and the timing and actual number of shares we purchase will depend on a variety of factors including share price, corporate and regulatory requirements, and other markets and economic conditions.

With this authorization, we will continue to allocate our capital in a manner that we believe is best for the business.

We will continue to invest back in the business, pay down debt, and/or buy back stock.

I would next like to share our guidance for the September quarter.

Please turn to slide 13.

We expect September quarter revenue to be between $8.5 billion and $9 billion and adjusted EPS in the range of $0.28 to $0.31 a share.

We would like to reiterate that our September quarter visibility is always limited, as the quarter is traditionally back end loaded due to summer holidays in July and August.

Our guidance also reflects some consideration of the challenging macroeconomic environment.

This guidance reflects an EPS increase over last year of between 17% and 29%.

Quarterly GAAP earnings per diluted share are expected to be lower than the guidance provided herein by approximately $0.05 per quarter for intangible amortization expense and stock-based compensation expense.

I want to remind everybody that during our January earnings call, we cautioned that there would be insider selling [through] the first half of this calendar year.

Part of our stock-based compensation includes restricted stock ramps to executive officers that began to vest in April and May of 2008.

This would result in some insider selling under 10b5-1 plans and it should be not interpreted as an indication of insider views on valuation or outlook.

It is insiders monitoring the shares to pay the related income tax resulting from the vesting of restricted shares.

You should expect the same activity to occur in April and May of 2009.

Finally, on behalf of the management team, the entire management team, I would like to thank our employees around the world for their continued hard work and dedication in a very rapidly changing market environment.

We are very confident that Flextronics' strong position and look forward to the exciting opportunities in front of us.

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

Please limit yourself to one question and one follow-up.

(OPERATOR INSTRUCTIONS) One moment, please.

Your first question comes from the line of Lou Miscioscia from Cowen.

Your line is open.

Okay.

Great.

Mike, maybe you could just help us out with the share buyback.

How did you all come to that conclusion and would you expect to be reasonably aggressive at these levels here?

So the conclusion was to get us into position where we had maximum flexibility to allocate our capital in the best way that we saw fit.

And when I say that, I mean it could be anything from reducing our debt to buying back shares or obviously continuing to invest in the business.

When we look forward, we see that we have most of the pieces that we need in our company to compete long-term.

We continue to invest in the company very aggressively in terms of new capabilities, in terms of expanding our footprint, in terms of expanding some of our product categories, diversifying into product categories that we didn't participate in the past.

And most of those activities are really kind of done.

So we've kind of put ourselves in a position where we believe we've made the major investments necessary to maintain a very, very broad based portfolio that compete over time and really sustain for a long period of time.

If we look at that and we also look at the fact we're starting to move margins up, our profitability has been pretty solid.

We're predictably earning.

We actually expect to generate a lot of excess cash.

When we look around at what we're going to do with that, we think buying back stock is one option that we have as a result of the price we have today, but also as well as a good governance program to possibly continually reduce the amount of total shares outstanding over a long period of time.

So we just wanted to put ourselves into having the right flexibility and really the opportunity to take advantage of anything that we need to.

As far as how aggressive we're going to go at it and how soon, it really depends.

We have to look at the market.

It's a tough one to judge right now.

We do view our stock as being attractive at these levels and again, it depends on how much cash we really have available.

So we'll just put it all together and then make that decision as time goes on.

Okay.

When we look towards your earnings guidance that you had given back in November of $1.20 to $1.30, the way it looks like the September quarter might be a couple pennies light, a little bit of a hangover into December.

Do you think it's around $1.20 is the thought now or do you think there's a whole new range here?

Yes, certainly a lot has happened since November.

That November was guidance for a year that started in April.

I would like to reiterate -- call that -- those are our targets of what we thought we could achieve at that time.

And -- but our real guidance is only a quarter in advance.

I wanted to restate that position.

But as we look at that, a lot has changed since then.

Oil was probably at $90 a barrel back at that time.

The Dow was probably 15% or 20% higher.

The macroeconomics didn't look as bad.

So there's a lot that's happened between then.

Alternatively, when we set those targets, we thought they were achievable.

We knew the economy was a little bit rocky even at that point.

So we still hold those targets, as how we're driving our management team and our group.

Certainly we expect to be -- as we think about that range, we expect to be a little bit on the low end of that range as opposed to the high end of the range, of course.

So I think the only new data here is the economy has changed a lot, as I mentioned.

The cost increases are continually more challenging for us.

The macroeconomic has certainly deteriorated since last November.

So certainly we would -- while we're still looking to hit those targets and not reset, we certainly would expect to be at the low end.

Final quick question, on the HP notebook win, congratulations on that.

Can you give us any help on the size and the timing of that?

Thank you.

Not really.

Sorry about that.

The timing, if we already have the win, certainly it's probably going to be -- if you just think about, I'm talking about just generically as opposed to this particular one.

If you just think about that win in amongst itself, most of the launches after a win will hit about nine months.

I'm using generic numbers as opposed to specifically the HP one.

I would call it sizable.

But we're not at liberty to disclose the actual amounts.

Except to say the important part here is to get the nod from HP is very important, sign of confidence.

And secondarily, not to get a niche notebook but a mainstream notebook is also a very significant sign of confidence.

I think the take-away here is that we've been able to put together a portfolio of capability and be able to convince at least HP that we're -- they can go risk some of their high volume products with us.

And I think that's going to -- that realization that HP had is going to extend across all the tier one OEMs.

Okay.

Thank you.

Our next question comes from Jim Suva, CitiGroup.

Your line is open.

Thank you, Mike.

When we look at the stock buyback, those of us who have been following this company for a while have heard this before.

I know you weren't calling the shots back then, but back about two, 2.5 years ago you guys announced a $250 million stock buyback.

I guess the question now is kind of how credible is this 10% you're putting out there for us?

Also more importantly, when we look at you making a decision about that, say, versus acquisitions, I mean the entire group has been under tremendous pressures.

One can't help but think some more acquisitions, because hats off to you, Solectron integration was much better than expected.

Why not put that at a higher priority versus a buyback?

Well, again, our key position here is to put ourselves into position to be able to do the buyback, invest in the business, whatever makes sense.

When we look at our business and we look at where the acquisition investments have gone, we've obviously had a lot of success in some of these acquisitions.

But we look at the pieces we have in place, the completeness of the product portfolio, the amount of verticals we've invested in, the need for acquisition has deteriorated significantly.

You look at the fact we're continuing to grow organically very nicely, the range I think Lou mentioned a minute ago was -- well, maybe he didn't mention it but it was like $34.5 billion to $36.5 billion.

We certainly have adequate size and scale to last.

So the real thinking on the -- being able to introduce the stock buyback was we just don't need a lot of acquisitions, I think, to have a complete portfolio.

I think 2.5 years ago, I don't even remember -- to tell you the truth, it wasn't my call to decide to go after that or I don't know exactly all the dynamics of what went into that decision.

But we were sure were not at a position where our footprint was exactly correct and we for sure were underinvested in many of the vertical technologies and in fact even our company size was pretty much at par with Solectron and Sanmina at that time.

I think there was a lot more work to be done to develop a position that was very sustainable over time and very competitive in the marketplace.

So I don't think we were ready back then for that, but as we look now, we have higher profitability, which is going to generate more cash.

We have the footprint we want.

We don't have to do those acquisitions.

So I actually think we're more in a position to do it today.

I don't think we were 2.5 years ago.

And but again, I don't know all the decisions that went into the criteria to either do it or not do it that last period.

But certainly as we look at our portfolio capability and our cash flow now, we think it's absolutely a very possible solution for us.

So if I look at the acquisition need has deteriorated because Solectron has done so well and where your stock is today, would it be fair to say that where we sit from today, what we know now, that buyback looks more attractive than acquisitions?

Or is it just played as cash comes in the door and opportunities?

I don't think you should just think about the acquisition being Solectron.

If you think over the last couple years, we've added LCD displays, we added machining technologies which we never had before.

We think our power system group could go up as high as $1 billion in the next two years.

We've added disposable medical products.

We've added plastics factories for medical.

We've expanded into the whole computing space.

I mean, all of those things, all those pieces are outside of the Solectron acquisition.

So I think Solectron helped in the high end.

It helped going after the high end computing and telecom space.

It helped with the services business and it helped diversify our portfolio away from consumer electronics.

We mentioned went from 50% to close to 33% year on year.

I think that's going to help us as we go through the consumer slowdown that's inevitable, going to gain some speed here over the coming quarters.

So I think it's more than just Solectron and putting that behind us.

I actually think it's the breadth of all these different pieces that we've put together over the last two years.

Now I think we can really lock and load and make that work for us a little bit better with the focus on driving more margins.

Because our investment is going to need to be less.

As we drive more margins we're going to drive more cash flow, and I think it makes the share repurchase a real good choice.

Housekeeping item -- CapEx for fiscal '08 that we should plan on and cash flow from ops?

You mean in '09?

Yes, sorry, '09.

We're still hoping to do about $400 million to $450 million.

We think it's going to be roughly equivalent to our depreciation levels or maybe $50 million high.

We're kind of in a little bit of a heavy investment period right now which we kind of are going to see all the time, which is to prepare for the September to December kind of increase that we typically see, the seasonal increase.

So we're going to be pretty close to that depreciation level, although we're running a little bit hot right now because we have a lot of opportunities.

Alternatively, we -- but we still think it's going to come in either at depreciation levels or plus $50 million.

Thank you very much.

Our next question is from Will Stein, Credit Suisse, your line is open.

Don't mean to beat the stock buyback to death.

But I think the issue last time, at least as I recall it, it was less about the operating situation of the company, was more about some laws, where your legal domicile is.

Can you update us on that?

Is there any reason a quarter or two from now, assuming the stock doesn't suddenly jump on this news that we should see -- is there any reason why we wouldn't see a buyback actually happen as opposed to just the announcement?

It's Paul.

So, we've obviously gone through evaluating all the options here with regards to stock buyback.

We're certainly restricted under Singapore laws for certain purchase methods.

However, we're very clear on what we need to do and how we need to do it.

So we have everything lined up and obviously getting the Board of Directors' approval was important for us.

So it will be part of this fiscal '09 timing and quantity and price, et cetera, to be determined.

But all the -- there are no roadblocks to doing it.

So no legal roadblocks today and what's the expiration of the buyback, of the authorization?

We have authorization from the shareholders and the Board for 10% purchase of outstanding shares as of last year-end.

So we have an AGM on September 30th where we will ask for that to be reapproved, which would be at the higher level of shares, of course, and the Board has already given approval, should that be reapproved by the shareholders, which we would expect.

And therefore, this would last through to the following September, September '09.

So it's year by year?

Yes, you have to get shareholder approval year by year.

If I could turn to margins for a second, it seems as though the margin improvement, while very nice year-over-year, seemed to have stalled in the quarter a little bit.

And I'm hearing you talk about higher cost from materials and shipping expenses and oil and all that, energy I suppose.

Can you help us understand what portion of these costs are things that are kind of directly passed on to customers in a sense, in the bill of materials or in the bill that you hand to customers versus things that you take risk on yourselves?

I'm not going to tell you -- certainly the objective is to pass 100% of those costs onto the customers.

So when we do our pricing and when we work with our customer on what the right price is for a particular product, we talk about the bill of materials and we also talk about the drivers of all the costs, of all the value added pieces of the cost to produce the product.

So it's our objective to get all these costs in.

It is never our objective to absorb energy costs as they continue to increase, to absorb currency fluctuations.

It's not our objective or expectation or even our customers' expectation for freight or any of these.

The issue is the timing by which these costs go up how fast you can get them into the product price and whether or not there's a delay for the customer, and whether or not you have either contractual rights to change them, or you have negotiation possibilities to go change them, or whether you have to wait for the next product release to incorporate those costs into it.

But it's our intention to keep nothing.

Absorb nothing.

It's just you can't do it day one.

It's hard to tell the customer that you're going to raise prices next quarter because oil may go to $160 a barrel instead of $130.

It's just hard to have that conversation.

There's a little bit of a lag effect.

We're certainly feeling the effects of that lag effect.

At the same time we're aggressively trying to go figure out how to go mitigate those costs and we're aggressively trying to figure out -- for those costs that we can't mitigate, how to pass those on to the customer.

Along those lines, I think the prior -- I understand it's not guidance but I guess it's target -- would have suggested about 3.8% operating margin this year.

And I'm wondering if we assume that commodities don't continue to run, if we make that bold assumption, do you still think you can get close to that?

Or has something changed, at the current level, can that not be passed on fast enough to get to that level?

Well, it's certainly -- again, we -- 3.8% is one thing.

I think the way to think about it is our margins are always dependent on what kind of business we're bringing in.

As you know, we always try to say we drive to a certain return on capital target on that incremental new business.

So if a cell phone it coming in, it's coming in at a whole different price structure than a complex infrastructure product.

That being said, we have a pretty good idea of what our mix is.

I think the way to think about it is we expect to be able to run this business between 3.5% and 4%.

And that expectation is even in light of the current cost challenges that we're having.

I think it's slowing us down a little bit in terms of getting there.

I think if these costs weren't as aggressively going up, I think we would be at a higher than a 3.4% number today.

Nonetheless, we have line of sight of how we can can drive our margins forward from the 3.4% and we think we can comfortably run in the range of 3.5% to 4% over the near term.

I think that's the way to think about it, 3.8% is in the middle of there.

Great.

Thank you very much.

Kevin Kessel, JPMorgan, your line is open.

Thank you very much.

I wanted to go back to the cash flow question earlier.

I think you said CapEx was expected at around $400 million to $450 million.

But it seems like it's clearly been somewhat front end loaded so far in the fiscal this year in this quarter at a little over $150 million.

From what I recall previously, I thought that you guys had outlined cash flow of $1.2 billion that would result in about free cash flow of $800 million assuming a $400 million CapEx.

Is that still something we should think about as kind of what the objective is for fiscal '09?

Kevin, I'll take that one.

So that $800 million was definitely -- had a range around it.

It's definitely our target still for the year.

We're not coming off that as our target.

And all the other pieces that lead up to that are pretty much within range.

CapEx, as you said, is a little bit over, compared to depreciation.

We've got acquisition costs, et cetera, et cetera.

One-time charge costs, restructuring.

But overall, we are still targeting that number.

But given that there is a small range around that number for us.

And what did you say about the quarter, how much were you negatively impacted from cash charges related to restructuring?

It was approximately $150 million.

In cash charges?

Yes, cash charges.

Going forward you expect no more charges from Solectron on either an accrual basis or cash?

On a cash basis, we still have approximately $200 million to $250 million to pay out over the next three quarters.

Okay.

That's from an accounting perspective, we're done.

I got it.

And then when I look at the mobile part part of your business, I think it came in quite a bit stronger than people might have thought, up 11%.

And I know, Mike, you mentioned that it kind of points to the diversification of that segment, aside from just the one 10% customer you have there.

Can you kind of help us understand maybe even in a broad sense, roughly how many customers make up that mobile segment today?

And is it just strictly phone customers and potentially smart phone customers that are in there or are there other type of applications that we might not be thinking about that you guys slot in mobile?

I'm thinking we're shipping about -- anywhere between nine and 11 different customers in that segment today, I believe.

It's obviously dominated by Sony-Ericsson as you do the numbers.

They're a 10% customer so it continues to be dominated pretty heavily with Sony-Ericsson.

So we do feel the impact of what their numbers are on a large scale basis.

We are doing smart phones, and I think going forward we'll do more and more smart phones as a percent of total, only because I think that marketplace is growing and certainly we hope to participate -- we will be participating in that growth.

So I think, I mean it's -- the best way I can describe it is while there's -- some customers are going to have some short-term problems, other customers.

Alternatively, we work hard to diversify our customer base and make sure that when one customer is down, hopefully we bring in another customer that's going up.

Like I said, we do hope to participate in the smart phone market pretty significantly.

Great.

Then just last, I guess almost as a housekeeping note, is there any way at all to quantify as a whole, what the rising cost, impact of the rising cost maybe in terms of basis points on margin, relative to -- I mean, I guess if we look at this quarter for example, relative to maybe what it was a quarter ago or something?

Yes, it's a little bit of a tough question, but I think I might take a shot at it.

Because a lot of it, we have rising costs anyways.

I mean the Euro has been rising against the dollar for years.

We have to figure out how to deal with it.

There are other costs that have been going up.

Costs in Asia have been going up for several years as well.

The question is how much is normal and how much you can mitigate as the normal course of your business in terms of driving efficiency and improvement and how much is excess that you probably can't get as a result of purely internal efficiencies and what we're losing in terms of the delay effect in terms of getting it into our product pricing.

And I expect this quarter we've probably been hit maybe 10 to 20 basis points, I would guess.

I mean, it's a guess because there's no real right answer.

But certainly relative to where we were last quarter to this quarter, I think we're taking about a 10 to 20 basis point hit.

This is probably the first quarter that you've -- that it's kind of jumped in a significant way, I'm assuming, as opposed to like you said normal course of action, rising cost that you deal with.

That's correct.

Thank you very much.

The next question is from Alex Blanton, Ingalls Snyder.

Your line is open.

Good afternoon.

I've got a couple of things.

The first one relates -- and I want to discuss just briefly the Solectron part of your business.

Even though I know you can't identify it now because it's been intermingled and so on, you can't tell us exactly how much it is.

It is there.

It's a lot of high end business there, high end -- the most difficult to make Cisco products, the high end computing at IBM, the NCR, ATMs, Trimble navigation products and so on.

Now, that's a pretty high end product mix and always has been.

Now Sanmina reported yesterday, and they have a high end product mix too, but it's not really as high as Solectron and they don't have the high margin service, the aftermarket support business either that Solectron does.

But they reported a 7.4% gross margin.

Now, this is without the PC business, which they have sold.

Now, they had a 4.2% SG&A figure, so that left them with operating margin of only 3.2%.

But I want you to tell us, is there any reason why you can't -- why the Solectron portion of your business, which is anywhere between $12 billion and $14 billion annually, can't get a gross margin ultimately comparable to at least what Sanmina is doing, and they promised a 7.6% to 7.8% next quarter.

And now, with your SG&A of, say, 2.5%, if you can get 7.5% to 8% out of the Solectron business, and you have a 2.5% operating cost to take away from that, that leaves 5% to 5.5% operating margin for that portion of the business.

Now, I don't think models really have that in there, but if you put that kind of metric into an earnings model for Flex and look at 2010, you'll come up with accretion from the Solectron acquisition of around $0.40.

So if you assume that Flex by itself without Solectron in the normal course of events would have earned say $1.30 in 2010, if you have $0.40 of accretion from Solectron, you've got $1.70.

Now, is there -- could you comment on that as a prospect?

I'm not saying it should even be a target, but as a prospect.

So as you know, we've had -- there's a lot of comments I guess, and maybe I'll try to hit them if I remember them all.

But first thing is we've had Solectron for nine months and part of getting that gross margin is to get the footprint in the right position and to get the contracts in the right place.

And I think we're taking steps to do that and I think that's moving along very effectively.

If you think about Solectron being 40% of the total business or so, think about Flex being at whatever it was $19 billion when we picked up Solectron, and Solectron being at $12 billion.

Flex is running at about 5.7% gross margins last year at this same time.

Now we're running at 6.1%.

A lot of that is because of the Solectron.

We should be able to get that Solectron piece running at a higher level.

That doesn't get it to 7.6% or 7.8%.

But I think --

Sanmina can do that.

And Solectron has a better manufacturing capability than Sanmina.

Solectron is really the best in the world at making high end products.

So why can't they make margins comparable to Sanmina?

So I'll kind of go through that.

I think some of those product categories are just not going to run that high.

You talk about kiosks and things like that.

Those don't really carry the complexity to carry such a premium.

The same thing with Trimble, I think you mentioned is the other one.

I don't think they have the complexity to run at that level.

ATM machines?

Even ATM machines.

I view though as -- anyway, I think some of those things are just not going to run as high as a 7.8% margin business.

I think the other thing that you have to think about is that we invest a lot.

And if we were to lock and load and just stop preparing ourselves for the future, we stop moving the organic growth -- you think about organic growth last year alone a good $3 billion.

We mentioned this time it's another $2 billion to $3 billion just in organic growth.

If we weren't continuing to invest and if we weren't continuing to grow organically and if all of a sudden we just stopped revenue growth and just decided to take what we have and make it work, I think you can get a little bit higher margins.

So part of what we're doing is trying to absorb continually higher margins and at the same time grow and prepare for the future so that we survive the long-term.

And I think Sanmina doesn't quite have that characteristic.

They're not growing, that's for sure.

I think that takes it -- some of the stress of margins down a little bit.

We talked about even the design wins, I mean, we're getting a lot of design wins in computing and we're probably spending an extra $10 million in R&D this quarter, this last quarter, to prepare for the future.

And $10 million is a lot of money to invest, but we think it's going to pay off in multiple billions of dollars in the very near future.

So as you get into those investment modes and you ensure your survival and you continue to invest, I think it takes a little bit of pressure on margins.

Fundamentally, I agree with your assessment that -- and the other thing is we actually expect, even though we're having a little bit of a hiccup here.

I wouldn't call it a hiccup.

We're still at 3.4% margin growth or 3.4% operating profit, up from 3.1% last year but we actually do expect going forward to go move up into the 3.5% and 4%.

And that is partly a result of getting the Solectron pieces -- the original Solectron pieces working a lot better.

So I think it's coming.

Maybe it's not coming -- I think some of the cost challenges are putting a little bit of a pressure on us.

I mentioned a 10 or 20 basis point hit in this last quarter.

I could add onto that the fact that we had $10 million more R&D than we -- as a result of being successful, believe it or not.

And I think those things put pressure on the business.

But nonetheless, we'll keep moving the ball forward.

And I think the most important point is I think you're fundamentally right, that business has an opportunity for higher gross margins.

We are not fully realizing it.

I think that's what's going to give us our future to drive to 3.5% to 4% margins.

Along the lines of what you mentioned about growth and its cost, there was a report I saw today that you were planning to open a new plant in east China.

And the total investment there was listed at $300 million to produce computers, navigation and medical equipment as well as plastics, metals and other parts.

Could you comment on that?

Is that the case?

This was not a company announcement.

It was a report from the Asian press.

Yes, I don't know, east China is a big place.

Suzhou City.

So it's probably not -- maybe my terminology at all.

It's most likely some investment.

I think $300 million, I don't want to comment on, but for sure we're seeing significant demand on the notebook side and we are going to have to significantly increase our capacity available to build notebook computers.

Once again, that's a good example I guess of how success actually breeds higher cost in the interim.

And what we're trying to do is to build a growth plan simultaneously with able to continually -- build a growth plan, invest in the future, and absorb those investments in the future, yet continually increase our return on capital and increase our margins.

And that's what we're doing, that's where we're headed and that's what we continue to see into the December and March quarter and -- but this is a good example of what kind of success gets you.

I mean, all of a sudden you book a lot of business and you have to get the plants ready to absorb it.

Thanks.

You're welcome.

Next question comes from Brian White, Collins Stewart, your line is open.

There's been a lot of stories about [Hunhai] raising prices and some of the Taiwanese ODMs recently having 5% to 10%.

If you could talk a little bit about how that would impact your business.

Is that something you're thinking about?

Are you seeing greater demand for the global footprint?

Most of these companies are primarily focused in China.

I think these companies are under a little bit greater pressure.

I think the 10 and 20 basis points might be light for a lot of those companies because they do have such a high percentage of business in China where the costs are going up even higher and their lack of geographic diversification is probably going to hurt them a little bit now.

We view it as being a wonderful thing because as those business models come under significant challenge and they're forced to raise price, it sets a competitive bar in the marketplace that we can then participate in.

So I think both near-term and long-term, those are positive events for us.

Additionally, as those costs go up, we are having the benefit as a result of the significant geographic diversification that we have and footprint that we have.

So right now this is going to be the first year in a long time where our Mexico operations and Latin American operations are going to grow faster than our operations in Asia.

Even Europe operations for the first time in many years are going to expand.

And that's largely because of the redistribution of the supply chain that's occurring as a result of the macroeconomic conditions and the significant price increases of labor in China.

So we view that as good and good.

Good in the sense that if those guys go raise price, it takes some competitive pressures off us from a pricing standpoint and two, it makes the worldwide geography a better place to -- a better opportunity for us to participate in because we have the broadest footprint worldwide.

Okay.

And just when we look at the September quarter, of your five markets, what markets do you think will grow?

Which markets will grow over which quarter?

Sequentially in the September quarter, versus the June, which markets do you think you're certain will grow in the September quarter?

We're actually going to look that up a little bit.

Typically, I think handsets go up, consumer starts to go up, your printer business goes up.

Believe it or not, we're just looking at the data now.

The biggest growth areas are going to be all the consumer businesses, so mobile will be a significant -- will have significant upside, consumer, digital will have significant upside.

But we actually expect pretty good growth out of the whole bundle.

The only thing I think that's not going to see sequential growth is probably infrastructure and -- but everything else will probably grow.

Well, I think will grow.

But I think the biggest growth drivers are probably going to be consumer digital.

We actually think consumer digital so far is going to be the strongest growth driver for next quarter.

I don't believe, I know.

Mobile is only going up because of the new programs you're ramping.

Yes, new programs and it just always goes up that quarter.

Always, always, goes up.

Even with the slowdown with your big customer, it would go up even without the programs?

It would go up, yes, even if the big customer is flat, it would still go up, that's correct.

Okay.

Thank you.

Take one more question.

Thank you.

Amit Daryanani from RBC Capital Markets, your line is open.

Thanks a lot.

Just a quick housekeeping question to start with.

Interest expense seemed a little bit higher than what I was thinking.

It was definitely up $8 million sequentially.

Could you just talk about that and how should we think about that going forward?

It's Paul.

You should just think about that as going forward, roughly in the range of $40 million to $45 million.

It has dropped sequentially.

We were into some short-term borrowings into the quarter, a little higher than the previous quarter.

But again, we're ramping and working capital requirements, et cetera.

You should just think $40 million to $45 million going forward.

Going back to the buyback question, I guess, I know the last analyst day (inaudible), you guys talked about how undervalued you perceived the stock to be and of course the S&P 500, EMS group.

I'm just curious, given the fact we should generate $800 million of free cash flow this year and your net debt to EBITDA is around 1.2 to 1.3, what prevents you from doing an accelerated repurchase or Dutch auction fairly soon, especially if you believe in the long-term fundamentals you have outlined to investors for last year?

We are restricted under Singapore law during the accelerated stock purchase program.

We have other methods available to us, but not that.

I guess maybe what prevents you from using the other methods fairly soon?

Nothing.

All right.

That's it.

Thank you.

Thanks very much for everybody's participation, and look forward to talking to you all again.

Ladies and gentlemen, thank you for joining the call.

This concludes today's conference call.

You may now disconnect.

Thank you.