Flex Ltd (FLEX) 2011 Q1 法說會逐字稿

Good afternoon and welcome to the Flextronics International first quarter fiscal year 2011 earnings conference call.

Today's call is being recorded.

And all lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr.

Warren Ligan, Flextronics' Senior Vice President, Investor Relations and Treasury.

Sir, you may begin.

Thank you, operator.

And good afternoon, everyone, and welcome to Flextronics' conference call to discuss the results of our fiscal 2011 first quarter ended July 2nd, 2010.

With us on the call today is our Chief Executive Officer, Mike McNamara, and our Chief Financial Officer, Paul Read.

The presentation that corresponds to our comments today is posted on the investor section of our website and you conference calls and presentations.

Also, please note that we have recently upgraded the investor section of our website to include additional information we believe investors will find helpful.

During the call today, Paul will first review our financial results, and Mike will comment on the business environment and demand trends for our Company.

Mike will also give guidance for the second quarter of fiscal 2011, ending on October 1st, 2010, and conclude with quarterly highlights and following that, we will take your questions.

Please turn to slide two.

This presentation contains forward-looking statements within the meaning of the US securities law including statements related to revenue and earnings guidance, our expectation about future operating margins and return on invested capital, expected revenue and our market segments, expected improvement in profitability of our component business units, our expectations about the availability of components for our products, the expected changes and savings associated with our restructuring activity and our expectations regarding end market demand for our products and our business in the current economic environment.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements, are based on our current expectation and we assume no obligation to update them.

Information about these risks is noted in the earnings press release on slide 12 of this presentation, And in the risk factors and MD&A sections of our latest annual and quarterly reports filed with the SEC, as well as in our other SEC filings.

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

Throughout this conference call, we will reference both GAAP and non-GAAP financial measures.

Please refer to the schedules to the earnings press release and the GAAP versus non-GAAP reconciliation in the investor section of our website, which contain the reconciliation to the most directly comparable GAAP results.

I will now turn the call over to Paul.

Thank you, Warren.

Welcome everyone.

Today I will summarize the highlights of our financial performance for the first quarter of fiscal 2011 and Mike will provide additional insights on our current business trends including our guidance for the second quarter of fiscal 2011.

Please turn to slide three.

First quarter revenue came in at $6.6 billion, which was at the high end of our guidance range of $6.1 billion to $6.6 billion, and represented a healthy 11% sequential increase in sales.

We saw solid sequential growth across our entire portfolio of businesses, driven principally by now outsourcing programs with both new and existing customers, plus more favorable seasonal trends from our mobile, consumer and computing businesses.

This strong growth performance was achieved in the face of continued component supply constraints across various component types, which we estimate impacted our revenue for the June quarter at the high end of the range of $150 million to $200 million, which was in line with what we had initially anticipated and fairly consistent with the impact last quarter.

Mike will cover the impact of component shortages and our view of the supply chain in more detail later.

Adjusted operating income was $190 million, up $20 million or 12% sequentially, and more than double the $90 million of a year ago.

GAAP operating income, which includes stock option expense, was $175 million, up $40 million or 30% versus the prior quarter, and substantially above the year-ago level of $10 million.

Adjusted net income for the first quarter was $154 million, increasing 18% sequentially from our fourth quarter and more than doubling from $63 million a year ago.

GAAP net income, which includes the impact of intangible amortization was $118 million.

Nearly twice the $60 million of last quarter, and significantly above the GAAP loss of $154 million a year ago.

This all translates to adjusted earnings per diluted share for the June quarter of $0.19, which was at the high end of our EPS guidance of $0.16 to $0.19.

And was above $0.16 or 19% above last quarter, and well above the $0.08 of a year ago.

GAAP EPS was $0.14, double the $0.07 last quarter, and well above the GAAP EPS loss of $0.19 from a year ago.

Please turn to slide four.

Adjusted SG&A expense totaled $184 million in the quarter, up $12 million sequentially and $14 million year-over-year on revenue increases of $626 million, and $783 million respectively.

Despite the SG&A dollars being slightly above our expected range, we recognize economies of scale within our SG&A, as we leveraged our adjusted SG&A percent of revenue down slightly from 2.8% from 2.9% last quarter and a year ago.

While we would expect SG&A dollars to increase as we rapidly grow our top line sales, we remain confident that we continue to drive further leverage in our SG&A as a percentage of sales.

Our adjusted operating margin was 2.9%, and showed a significant 130 basis points improvement from 1.6% last year, driven by cost reductions and revenue expansion.

Our components businesses remained below normalized operating profit performance levels during the June quarter ,as both camera modules and power continue to work through high volume product ramp challenges.

We experienced improvement in Multek, our printed circuit board business, during the quarter, and see significant year-over-year growth in this business for the remainder of the year.

We expect increased contribution from our components businesses as a whole, as revenue continues to be strong and as we work through the current program ramp challenges we are facing.

Our EBITDA rose $289 million in the June quarter, up 9.5% from $264 million in the prior quarter.

Our EBITDA grew to roughly $1.1 billion on an LTM basis.

Year-over-year, our EBITDA rose more than $100 million from $184 million in the year-ago quarter.

Our adjusted EPS rose to $0.19 from $0.16 in the prior quarter, an increase of 19%.

And was more than twice the $0.08 we earned a year ago.

Please turn to slide five.

Looking at the income statement items below the operating line, adjusted interest and other expense net was $23.5 million, down from $33.1 million last quarter, and $28.8 million a year ago.

The Company has seen the benefits of deleveraging as we have realized the full quarter benefit of retiring our 6.5% senior supported notes back on March 23rd, 2010.

The adjusted tax expense for the quarter was $12.7 million, reflecting an adjusted tax rate of approximately 7.6%, which was below our guidance range due to some one time credits received as a result of settling some outstanding tax audit matters.

Going forward, we believe the 10 to 15% range remains a good range to use for modeling our results.

Our weighted average diluted shares outstanding came down slightly from 827 million to 824 million.

However, our previously announced stock buyback program is expected to have a more meaningful impact on our weighted average diluted share calculation next quarter, when shares are expected to approach 800 million.

Finally, turning to the reconciliation items between our GAAP and adjusted EPS.

Stock-based compensation was $14.6 million in the quarter, and represented approximately a $0.02 EPS impact.

Non-cash interest expense was $4 million, but will cease this current quarter as the convertible bonds will be redeemed.

Intangible amortization, net of tax was $16.7 million in the quarter, down from $20.2 million last quarter and also represented a $0.02 impact.

Please turn to slide six.

Flextronics' working capital management remained at industry leading levels, despite the cash conversion cycle moving up three days to 14 days, which is five days less than a year ago level.

Of the three day increase, one day was a direct result of a change in accounting for an AR sales program.

We are confident we can maintain our cash conversion cycle in a 10 to 15 day range going forward, which is a distinct competitive advantage that will allow us to continue to grow our business efficiently with significant positive free cash flow.

We believe that at these cash cycle levels, our net working capital as a percentage of sales will remain in the 3% to 5% range.

This quarter we will toward the higher end of that range at 4.9% mainly due to inventory build supporting higher revenue growth.

Inventory rose $445 million or $0.15 sequentially, but inventory turns improved slightly to 8 turns from 7.9 and marked the best inventory turnover for a June quarter since June 2006.

Nevertheless, this inventory performance has room for additional improvement, as it has been accomplished amidst the headwind of continued challenging component supply environment.

DSOs remained consistent at 37 days, and still remain within our targeted range.

DPOs decreased three days sequentially to 69 days.

Our asset management remains very strong and stable which has driven substantial improvements and consistency in our return on invested capital.

For the quarter, return on invested capital came in at 28.8%, more than double the 14.2% of a year ago and is flat with last quarter.

Please turn to slide seven.

Flextronics generated $89 million in cash flow from operations during the quarter, marking the eighth consecutive quarter the Company has generated positive operating cash flow.

Our cash flow for the quarter included $18.5 million in cash used in previously announced and recorded restructuring activity.

Net capital expenditures for the quarter were $98 million versus a depreciation expense of $93 million.

Free cash flow for the quarter was slightly negative at $10 million.

During the June quarter, we repurchased 21.9 million shares, for $135 million, with an average price of $6.19.

Under our existing repurchase plan, under which we have the authorization to purchase up to 200 million worth of our ordinary shares.

Cash payments for repurchases were $105 million.

Please turn to slide eight.

We ended the quarter with $1.7 billion in cash, down $197 million versus the prior quarter, principally reflecting the $105 million in cash payments to repurchase common stock and the inventory buildups, that were with the working capital improvement.

Total debt rose $137 million sequentially as a result of our $150 million European and Asian ABS program having to be recognized as debt on our balance sheet pursuant to the new accounting rules.

As a reminder, since our deleveraging efforts began in 2008, we have reduced the consolidated debt level of the Company by 34% or $1.3 billion.

Also during the quarter, our corporate debt received a positive endorsement from Fitch, which upgraded the rating to BBB minus, which is investment grade.

As a result of the accounting for our ABS program and the reduction in cash driven by stock buyback activity, net debt which is defined as total debt less total cash rose to $663 million from $329 million.

Net debt still remains close to the lowest levels in the Company history, and has declined by over $1.2 billion or 65% from our June 2008 level.

We closed the period with no borrowings under our $2 billion revolving credit facility, providing ample liquidity.

Our debt to EBITDA level continued to decline and ended the quarter at 2.2 times, down from 2.3 last quarter and 2.8 last year.

The graph at the bottom of the slide shows our significant debt maturities by calendar year.

Nothing has changed about this maturity schedule in the past quarter.

Our $240 million, 1% convertible notes matured in August 2010.

Outside of that, no additional debt is due until calendar year 2012.

With that, I will turn the call over to our CEO, Mike McNamara.

Thank you, Paul.

Our business environment remains healthy.

Despite what appears to be an uncertain macro environment, our orders and forecast continue to improve each quarter.

In the upcoming quarter, we are again forecasting sequential growth across all the markets we serve.

I will expand on this further when I discuss each business in more detail.

Before I turn to our businesses, I'd like to address the topic of component shortages, because it remained a high priority challenge for us throughout the quarter.

We entered the quarter expecting component shortages to be fairly similar to Q4 levels, which reduced revenue in $150 million to $200 million range.

During Q1, demand continued to outpace supply and in general, semiconductor and component capacity is still inadequate, which drove the impact of component shortages on our revenue to the higher end of the $150 million to $200 million range.

We are becoming more optimistic that the component shortages will begin to abate in our upcoming September quarter, due to the incremental capacity coming online.

For example, during the month of June our escalations fell 20% relative to the prior four months.

We see the issue of component shortages becoming less significant as we exit this calendar year.

Please turn to slide nine.

Our high mix, low volume businesses again grew nicely during the quarter.

Infrastructure sales were $1.8 billion for the quarter, and represented 28% of total sales.

This segment expanded 2.5% sequentially and would have had even stronger results had it not been for the majority of our component shortages impacting it.

Our September quarter outlook for infrastructure remains encouraging, and we see solid sequential revenue growth.

Our growth continues to be supported by demand across multiple customer accounts as our top 20 customers in this segment generate approximately 80% of our sales.

We expect the growth in infrastructure to continue over the next several quarters, and we remain confident in our double-digit growth forecast for this fiscal year.

Our capability in the segment continues to develop and our market position is strong.

Industrial automotive, medical and other comprised 22% of total sales, up from 21% last quarter.

This marks the second quarter in a row where this combined group has been the second largest behind only infrastructure.

This group has a high value add content and consistently contributes to the financial success of the Company.

Our industrial segment displayed strong sequential growth in the low double digits.

We had another very successful quarter of new program wins with the total of approximately $300 million, up from $250 million to $300 million last quarter.

Our wins remain spread out across a diversified base of customers and markets.

Areas of strength within industrial continues to be a resurging capital equipment market, Clean Tech such as smart meters, solar modules and inverters, office equipment, and kiosk.

In fact, we also mentioned in a story by our customer, Carbona, in relation to help them support the oil spill containment efforts in the Gulf by stepping up our production of their solar LED Marine lanterns.

We continue to feel confident about our competitive positioning within the Clean Tech supply chain and the capabilities we can bring to the table.

This quarter brought additional new Clean Tech customers such as Pythagoras and PetroSolar in addition to Sun Power which we added at very beginning of the quarter.

Overall, our outlook remains positive and with expected stable production from our industrial offering this next quarter.

Our medical segment performed well in the quarter, growing sequentially in the low double-digit range.

Above our earlier expectations.

Medical upside was driven primarily in our medical equipment and consumer health divisions, which experienced strong demand as well as new product brands.

We've seen continued interest on the part of large healthcare OEMs to embrace and accelerate outsourcing.

After booking roughly $450 million in new medical programs over the past year, we booked nearly $70 million during Q1.

We achieved our first $100 million revenue month in June, and we are extremely pleased with the progress in this segment.

The momentum in our automotive segment continued as it recorded its third straight quarter of sequential growth.

June quarter sales were up in the low double digits versus the March quarter.

The demand environment has remained strong, especially for our premium European car customers, who are seeing strong growth in the Asia-Pacific region.

We've also been winning additional in car connectivity programs where we have strong confidence.

As a reminder, more than half of our automotive revenue today is considered ODM and by the end of fiscal year 2012 is forecast to be almost two-thirds.

Mobile sales expanded almost 15% sequentially to $1.3 billion or 20% of sales, which was slightly ahead of our expectations, and improved seasonality and new program ramps drove the majority of the segment growth.

We experienced renewed interest from our customers in exploring global supply chain solutions due to the shifting cost structure dynamics in China.

We welcome this interest because we believe it plays to our strength of having a powerful global manufacturing logistics and services network.

In computing, we posted $1.3 billion in sales, which accounted for 19% of our total sales.

This segment was up 7% sequentially, in line with our prior expectations, and was minimally impacted by component shortages.

During the quarter, we launched three new notebook models, two new desktops and one new netbook.

We also had a very strong quarter in our storage business and some of our key storage customers recorded their highest growth quarters ever.

For the September quarter, we are forecasting low double-digit sequential growth, and we expect to achieve our long-term growth targets.

Overall, we continue to be selective as we grow this business.

Consumer digital rose 15% sequentially in the June quarter.

A nice bounceback from its 30% seasonal sequential decline in the March quarter, and in line with our expectations at the start of the quarter.

The segment ended at $716 million or 11% of total sales.

For the September quarter, we are currently forecasting significant double-digit revenue growth driven by new program ramps for new products, and increasing demand for existing products as we enter the holiday season.

Our components business are comprised primarily of Multek, VistaPoint and FlexPower, and all three have been underperforming.

Our components businesses are in the midst of significant revenue expansion, and we anticipate their revenues growing in excess of 30% from fiscal 2010 levels.

This steep growth is proving challenging, due to the complexity of the products and processes involved.

We are very pleased with the revenue expansion and capabilities.

And we remain highly focused on continually expanding margins throughout the fiscal year.

Our global services business focused on logistics, repair services and service product logistics.

Global service once again finished the quarter strongly, exceeding its targets on a number of key operational metrics.

It also booked numerous new programs with both existing and new customers, and overall our activity remains strong.

Our retail technical services groups or RTS business provides field services for customers' operations such as Verizon, Microsoft and AT&T.

During the quarter, RTS launched our new Firedog business which is focused on business to business and business to consumer field tech technical services.

Firedog provides in-store, in-home, phone, and web-based installation, maintenance and support service for electronic products.

For more information on this new business, please go to www.Firedog.com.

Now turning to our guidance on slide 10.

We are expecting another strong growth quarter for the Company with our revenue in the range of $6.8 billion to $7.2 billion, which corresponds to a sequential growth range of 4 to 10% and is up 7% at the midpoint.

We expect our adjusted earnings per share to be in the range of $0.19 to $0.21 versus the $0.19 just reported.

Quarterly GAAP earnings per diluted share expected to be lower than the guidance provided herein by approximately $0.04 for intangible amortization expense, stock-based compensation expense, and non-cash interest expense.

Please turn to slide 11.

Our first quarter was one in which we achieved impressive growth on a number of different fronts.

While we continued to experience challenging supply constraints, we are once again able to deliver improving returns to shareholders.

For the quarter ahead, we see continued growth in revenue, operating income, and earnings per share.

Our key take-aways are as follows.

We delivered strong sequential revenue and adjusted operating profit growth, which came in at 11% and 12% respectively.

This also translated into our net profit, where we grew adjusted earnings per share 19% quarter-over-quarter.

Every market segment and business unit grew sequentially.

Our year-over-year growth was even more robust with revenue, adjusted operating profit and earnings per share rising 14%, 111%, and 118% respectively.

Our long-term market EBITDA, last 12 months EBITDA, totaled $1.1 billion which is up 11% over the prior quarter and 10% over the prior year.

Our debt to EBITDA ended the June quarter at 2.2, down from 2.3 in the prior quarter and 2.8 a year ago.

ROIC ended the quarter at 28.8%, near Company highs.

And we initiated $200 million stock buyback program with $135 million repurchased during the quarter.

Now I'd like to open it up for questions.

Operator?

Thank you.

(Operator Instructions).

Our first question today will be from Brian Alexander from Raymond James.

Your line is open.

Thanks.

I think you previously said that you could achieve 3.5% operating margins at around a $7.5 billion quarterly revenue run rate, and I think in the September quarter, you're guiding to midpoint of revenue to $7 billion, yet operating margins implied in the guidance are closer to 3%.

So for the 3.5% margin target to hold, you would need to generate a contribution margin of more than 10% on that incremental $500 million in revenue.

And for the last three quarters, I think your contribution margins have been closer to 3 to 5%.

So I guess the question is do you still think you can deliver 3.5% margins on $7.5 billion in revenue, and if so, how much of that comes from the component segment versus the core business, because it sounds like your components business isn't recovering as you expected.

Thanks.

Thanks, Brian.

This is Paul.

You're right.

Going back to our Investor Day and the slides that we put up then, we said we would need around $7.5 billion of revenue but we would also need the mix to be in line with what we would expect September quarter, the mix isn't quite that.

We would also need the components business performance to be roughly around 4% in operating margin, and it didn't there either.

So there's a number of things that will bring that.

But revenue is just one part of that puzzle.

Maybe just drill a little bit more into the components business.

Sounds like it was below breakeven this quarter.

I think you expected it to be profitable in September.

So maybe just give us an update on whether you do expect it to be profitable in September and how quickly you think the aggregate components business can get to that mid single digit operating margin target.

Yes.

So I'll take that, Brian.

The components business, we are behind in terms of our operating profit expectations.

While we're having very good results for the customer and delivering technologies that make a lot of sense and having very good success in the marketplace, we're struggling with bringing them to yield and bringing them to our target operating profits as fast as we would like.

The revenue growth between Q4 and Q1 was like 18% sequentially.

And then the expectation for Q1 to Q2 is to have it grow again at 35% sequentially.

So over these last two quarters, we're experiencing well over a 50% growth, and we are experiencing significant challenges in terms of start-up costs and getting to operating levels that we're able to achieve our target margins.

So I think what we're going to have, Brian, and like Paul said, to get to the 3.5%, there's actually several different conditions, one of which is we needed the components business to turn around.

We expect continuous improvements in that components business.

I would say we're one to two quarters behind where we thought we would be.

We're certainly having super success in the top line and in terms of booking real good customers, but we're probably a little bit behind expectations as to where we were six months ago as to how fast we can bring those to the profit levels that we need to go hit our 3.5 points.

I guess final follow-up, anything specific you could point to that's causing you to be one to two quarters behind?

I guess what are the key bottlenecks in getting the profitability up there?

Thanks.

Well, it's kind of everything.

We're bringing on a substantial increase in capacity in the power business.

If I break down the power business, one of the challenges we have there is not only that we're bringing down more and more servers, which is kind of new product categories for us, but also we're a little bit challenged with the wage rate increases in China.

A lot of the power business runs about 10% of labor and for direct labor as a percentage of sales.

We're rapidly moving into a facility in Guangzhou, which is several hundred miles away, which will give us a reduction in labor costs of about 40%.

That facility will be producing products within days.

On the camera module side, it's a very complex electrical mechanical assembly which we're probably tripling the overall business year on year.

So we're kind of drinking out of the fire hose there in terms of trying to ramp that business.

These are very state-of-the-art, complex, optical, electrical, mechanical assemblies and the ability to bring them to yield is a challenge because of each of those three different technologies being embedded in one.

So in that particular case, we're working hard on the yields.

And Multek is just getting to volume.

All we need to do with Multek is drive the volume more.

They've been well over 1.2 book-to-bill for the last several quarters even.

And we anticipate a nice steady recovery with Multek over the next few quarters which have a lot less variability in it if you will because been there, done that, know how to run that business.

Each one has different challenges so you can't just group it into one bundle but suffice it to say that our operating margins -- we're not going to hit our real target operating margin targets until we get that business to turn around.

Thanks for the detail.

Next question will be from Matt Sheerin, Stifel Nicholas.

Your line is open.

Yes, thanks.

Just a question regarding your comments about labor costs, Mike.

Are you having discussions with customers about passing along those costs and how successful have you been there?

And then just also about shifting programs to other regions, where it makes sense for either you or for your customer in terms of looking at other geographic regions like eastern Europe for instance and Mexico.

Both good questions.

On the cost increases, we are in the process of doing everything we can to recover the pricing from our customers.

Some of the businesses have almost no impact, to tell you the truth.

If you think about a personal computer, the direct labor is less than 1% of sales so it's not a big impact.

I mentioned you can have a power product where it goes all the way up to 10% of sales is the direct labor component.

Each one's affected a little bit differently, but we are actively working to recover those costs.

So we kind of view it as kind of the normal part of the business.

We don't view it as something we didn't anticipate.

We're probably going to have the same increase next year, we would expect.

Probably have some currency impact next year and we'll probably have another 15 to 20% price increase next year.

To us it's just part of the business we need to go manage and I think we're having relatively good success considering the mood of the supply base over there is to raise prices.

The prices are substantial and I think it's -- I think the OEMs on average understand that.

As far as moving to other places, we're just getting a lot more interest in Mexico and eastern Europe and other locations.

So I would say over the last four or five years, the labor rate in Mexico as an example has been extremely stable and really hasn't changed at all where as the cost in China as a good example has continued to go up.

We also have a real balanced portfolio even within Asia, and we probably have 20,000 people in the south area, which includes Indonesia and Malaysia, which arguably in many products has a lower cost than does China today.

So we're having quite a bit of increased interest in those regions.

We're talking more about bringing on more customers into that area.

I think customers are looking to diversify out of China a little bit more.

If that happens, we're pretty thrilled about it just because we have such a strong base in southeast Asia and such strong operations in Eastern Europe and Mexico.

We do expect to see that although we don't expect to see much movement until probably next year because people are working hard to create a stable supply base for the rest of this year.

Okay.

That's helpful.

Thanks a lot.

Our next question is from Brian White, Ticonderoga.

Your line is open.

Mike, on the notebook business, do you still feel like you can get to $2 billion in fiscal '11 and $4 billion in fiscal '12?

Yes.

Okay.

And it seems like in the September quarter low double-digit growth in computing seems a little softer than I would expect because you also have servers that should do well in the September quarter and I thought there was a big notebook ramp.

Has something changed in the September quarter?

It kind of ramps mostly during the September quarter.

It's not at full run rate during that period.

So I would say it's just pretty back end loaded.

I think I made that comment before, that we get pretty flat for the first half of this year, in terms of any kind of computing growth and then we'll see it accelerate towards the latter half.

I think it does still have some quarter to quarter kind of seasonality, not really seasonality but it has some unevenness for us, just because we continue to work to diversify that business, so that we have more programs so we don't kind of have that lumpiness.

But I think a key point is your first question.

We did roughly $1 billion last year.

We fully expect to do $2 billion this year, do not think that's in risk in any way and also think -- and are pretty comfortable that we'll hit $4 billion or better next year.

And just the tablet market, a lot of excitement there, will eat a little bit into notebooks.

Do you have any tablet programs right now in the pipeline?

In terms of booked programs in the pipeline?

No.

But in terms of -- just kind of end up being just like desktops and netbooks, we start with notebooks, and within a year and-a-half we had booked desktops and netbooks.

We're assuming this is just going to be a natural follow-on to the laptop business, to the notebook business.

We fully expect to do that but I would say we have not booked them at this time.

Okay.

Thank you.

Wamsi Mohan, Merrill Lynch, your line is open.

Yes, thank you.

Inventories are up 15%.

Your guidance is indicating much lower quarter-over-quarter growth.

Can you address the mix between raw material and work in process inventory and I guess some of your comments were about escalations were actually lower this quarter so should we expect inventory to normalize next quarter?

I believe it will.

The inventory turns were still okay.

If you do the calculation of course, inventory days did increase a little bit, and of course there was an absolute increase that was reasonably significant.

Part of it is as we're still planning on -- we're still planning on -- when you don't know if you're going to get parts in or not, you start to buy the other parts.

It's why the infrastructure division has had the most impact in terms of the component shortages, because they have the most complex product, so they might have 10,000 different components in their product to produce one product.

Unless you get them all, you can't ship it.

So you do have to plan.

You have to plan for success and when you don't get those parts in, sometimes it strands some.

So that's a good part of it.

Part of it is the fact that we'll increase inventory, we'll increase revenue again this next quarter.

We're still even at the midpoint of the guidance at 7%, and at the high end it's over 10%.

So there's still some expectation or some need to increase inventories just to prepare for that ramp.

And when we come to the September quarter, we actually do expect a little bit of normalization, getting back to your comment, because by the time September quarter hits, we actually are expecting a pretty nice increase in inventory turns.

So all in all, I don't find it alarming in any way.

I think it's a little bit of component shortage.

We expect the component shortages to start mitigating going forward.

We think there's going to be less on the dock so-to-speak, so I think all in all the inventory levels are not alarming.

It's just a view of some component shortages.

It's a view of preparing to build a higher revenue level this quarter and I think it will work its way out through the balance of the year.

And to follow-up on that, Mike, I mean, if you look at the infrastructure segment which you're pointing to which sort of saw the bulk of maybe the revenue sort of that you were unable to deliver in the quarter because of these component mismatches, is that something that now -- how broad based was that?

Was that sort of just a few programs where you just ended up with a lot of inventory across because a few parts were missing or is that much more broad based than that?

Well, I think that component types and the amounts of different programs in terms of number of customers, number of programs within customers were all pretty broad based.

So it's not just one or two or three different things.

It's not just one or two different customers.

It's a pretty significant industry wide problem still.

The escalation comment was an important one.

It's one of the ways that we measure what we anticipate going into the future because it's not revenue that's left on the dock but it's actually how many parts we're chasing for a future schedule which has not yet shipped and that's what we call escalations and those are starting to drop.

So we really do think this problem's going to mitigate over the next couple quarters.

That in turn's going to help our inventory turns improve, and it will help us get back to kind of normalized levels.

Although turns, if you go back historically, it's not really out of line with what's quite good performance.

Okay.

Thanks a lot for that color.

And if I could follow up with one last question here.

It's a follow-up on the China labor commentary.

How much do you expect realistically wages can increase for you, for your exposure in China, on an annual basis weighted by your exposure to the various regions within China and what is the catalyst that would cause you to actually move capacity is there a certain level of wage increase that sort of triggers that movement for you or program by program?

How are you going to measure that and how are you going to actually execute on that?

Thank you.

We kind of -- every region's a little bit different.

We're probably in 10 different locations in China.

On average, we're probably looking at 20 to 30% increase and doesn't make us move when you're running 0.5% of sales on a program for direct labor and it moves 20%, we have almost zero motivation to move.

But when you talk about on a power program like I mentioned at 10%, we're real motivated, and the Guangzhou operation that we're putting up we started working on probably six or seven months ago and we're actually doing prototypes and pilots through that operation now.

So it's well along on its way and we'll actively run it and manage it and we're motivated to go move that part as quickly as we can.

So it really just depends, and as far as moving it to other regions, like I said we'll see more interest in Indonesia and Malaysia over time, and I think every year that goes by, we're going to see Mexico becoming more and more attractive and eastern Europe, just more attractive as an alternative to China as those things narrow.

So I think it's not going to be a quick move.

I think it's going to be an evolution.

It's going to be real slow but we'll see it make some movements over the course of this next year.

Okay.

Great.

Thanks a lot.

Appreciate the color.

Amit Daryanani from RBC Capital Markets.

Your line is open.

Looking at the operating margin sequentially, despite the 10% uptick in sales, doesn't look like we got a ton of leverage, and mix actually looks to be fairly normal, sequentially.

Talk about impeded the leverage I guess sequentially for you guys this quarter?

Amit, it's Paul.

Clearly our expectations for improvement on the component side have been pushed out a quarter or two and so that's certainly cost us 10 or 20 basis points.

But it's just the ramp issues like Mike talked about, labor cost issues on the power supply side.

I think Mike's already gone through all of that.

So that certainly caught us.

We did have a more favorable mix seasonality with some of our businesses on the consumer side.

That always has a little bit of a dilution on that.

But overall, we're only 10 or 20 basis points away from where we hoped we would end up.

Sounds like it was a component centric issue more so in the rest of your business.

Is that fair.

Mostly it was, yes.

When you talk about being one to two quarters behind plan I'm curious about what sort of growth number or what sort of revenue or time line do you have to achieve to this 4 to 5% operating margin target that you've talked about as a medium term goal right now.

On the component side?

Yes.

Well, the revenue growth of 30% this year on the bundle we still feel very confident about.

It's actually the biggest challenge for us.

It's coming on very strong and supporting all these programs, so from a revenue perspective we're certainly very encouraged by that.

Is that the question?

I'm trying to understand what --

Maybe I could --

Go ahead.

Just before you go, we're in the middle of the ramp if you will.

I mentioned the 18% and the 35% growth going from Q1 to Q2.

So we're still right in the middle of the challenge, if you will.

If you look at the growth from Q2 to Q3 for that whole bundle, that entire bundle it's like 6%.

So what happens is we're going to continue to struggle, absorbing this significant growth in Q2.

It's going to push down margins still in Q2.

And then our expectation is that Q3 things start to get stable and it's when we get stable is when we think we can work out the profitability.

So we'll have the revenue by the time Q3 comes.

But and that's when the stability, the period of stability's going to come from manufacturing standpoint.

So to us, we still have one more quarter as we ramp this real hard which is the Q2 quarter we're in now.

And then hopefully we're going to get a little bit more stable.

So I guess Mike, you'll have enough revenues to not only break even but actually to get to 4 or 5% margins but Q3 you break even and hopefully a few quarters down you get back do the 5% margin in components?

Is that fair?

I think we're going to make continued progress towards the 5%.

I would expect to make significant margin improvement over the course of the remainder of fiscal year.

So that is for sure.

Whether it's 5%, I mean, I don't want to say now because we're delayed by a couple quarters.

But for sure we start hitting a more stable revenue flow in Q3 and then kind of drinking out of the fire hose kind of ends at which point we can really work on everything from yields and productivity, we'll be up and running in our operations in Guangzhou and there's a lot of change that we'll have gone through during this quarter.

So I still consider this quarter to be a high transition quarter, this quarter being Q2, and I'm looking for real results improvement in the Q3 time frame.

Whether it gets to 5% by the end here we'll have to see but there is definitely sufficient revenue to highly utilize all the assets in power, camera modules and Multek.

Thanks.

Sherri Scribner, Deutsche Bank, your line is open.

Hi, thank you.

I was curious to get your thoughts on the mix of business this quarter.

Some of the comments we heard from some of the other companies is that consumer has been a bit slower while the corporate side has been stronger.

You guys seem to be somewhat different than that.

Your consumer digital and mobile piece was very strong this quarter, and then some of the more enterprise focused segments like computing were weaker.

I know you mentioned storage was good for you guys.

Wanted to get your thoughts on sort of that discrepancy, what you're seeing on the consumer side and also on the corporate side.

Well, on the consumer side, we just think it's kind of business as usual, to tell you the truth.

We always start to have some movement up in June, September's usually a very significant increase, even over June.

So to us, it's kind of business as usual, and maybe we have some new program wins that are helping things out.

I don't know.

But we're not seeing real softness in that consumer business, at least in the programs that we're in.

And we always see a nice little jump in September and it starts -- it actually starts tailing off in December, just because a lot of that consumer product needs to be shipped out by Thanksgiving.

But to us it's just a normal seasonal trend that we're experiencing.

Okay.

And what about corporate side, any comments?

I think the corporate side will be fine.

You know, the --

Your computing was a bit slower an the infrastructure, maybe that was impacted by the components.

Infrastructure is probably a little bit more disappointing to us.

It's going to be up 2.5%.

Alternatively infrastructure for the year will still be double digits.

So we actually anticipate our infrastructure to have Q2, Q3 and Q4, all with continuing revenue increases.

We'll have to wait and see if we hit that, but we're actually seeing pretty nice strength even in the enterprise part.

It's just that we seem to be more challenged in getting the parts to get those completed, but if we look at our forecast, we see real strong growth.

If you look across the entire year, we're still looking at double digits there.

Okay.

Did you guys give an outlook for September for the mobile segment and the industrial segment?

I didn't get the details on that.

Did we?

I don't know.

Hold on, Sheri, we're checking on that.

Okay.

If you didn't, maybe you could give us some thoughts.

Well, Sheri, maybe I can just comment on it.

Each one of them.

Basically, we anticipate each one of them to be growing on a sequential basis, each one of the different categories.

Consumer digital by far will have the largest percentage growth.

Quarter on quarter, just because of the nature of the business.

But it's going to be another kind of strong across the board growth rate going into September.

Okay.

All right.

Thank you.

The next question is from Amitabh Passi, UBS.

Your line is open.

Thank you.

First question just had to do with OpEx, a little higher in the quarter than I would have anticipated.

Can you just give us some color in terms of what happened and how we should think about the OpEx line as we look forward to the September quarter?

Yes.

Well --

Sorry.

During the quarter, we're definitely having some ramping OpEx costs supporting these new programs, whether it's R&D or even general business development, sales and marketing costs.

So it was slightly above our range that we had given out.

I think we said 175 to 180, and I think we'll be probably more in the 185 to 190 on a go forward basis, continuing to support these product ramps but we should see some deleverage, some benefits from obviously increasing revenue and percentage of sales coming down but the dollars should trend up.

Okay.

Got you.

And then can you just remind us, normal seasonality for you in the December quarter is usually up double digits, low double digits sequentially?

Is that fair.

Any reason to think things might trend slightly differently this year?

Do you still expect a normal seasonal pattern going from September into December?

I think that with the new computing business ramping, it's changing the seasonality patterns slightly.

We're having a strong September here and that could result in less than typically seasonal strong December.

We expect growth, but whereas we would probably expect a double-digit growth in December, we'll probably be in the single digit growth in December.

That's kind of how we see it from year-to-date, driven by a higher September.

Got you.

Just one final question.

I'm still struggling with this wage pressure issue in China, the prospect of relocating to other markets like Mexico and eastern Europe.

Maybe you can help me understand.

I just assumed the wage differential between a market like Mexico and China is probably fairly significant.

So I'm just trying to understand what does that do to your overall cost base, relocating say from a China to Mexico and how do you sort of mitigate any incremental costs?

Maybe I didn't describe it well before.

There's going to be no mass relocation of anything, whether it's inland China or -- at least for our business and our customers.

Because it's still, whether you're staying $1.50 in China or $1.75 an hour in China it's still kind of the best deal around, because you have the entire supply base there.

You have outstanding logistics.

You have the developing end market.

It's still pretty good.

So the fact that you can move inland for $1.25 an hour is with a huge cost associated with that.

It's just not something that you need to rush into, and the difference of building in Mexico at $3 an hour compared to $1.75 or $1.50 is not a huge difference in the calculation.

We're not going to see any kind of mass relocation of any business.

We're going to see a tweak.

The tweak's going to happen over time and often with maybe the next product cycle.

But it's going to be slow.

No one's going to pick up and just move in a pretty aggressive way.

China still represents a very low cost place to do business with a very competent supply base, a very competent operator base and outstanding freight lanes and as you know a quickly developing consumer market.

So this is a tweak.

This is not going to be a dislocation of business.

That's helpful, Mike.

Thank you.

Shawn Harrison, Longbow Research, your line is open.

Hi, good afternoon.

Capital spending for the year looks like it was maybe running a little bit ahead of expectations for the June quarter.

Is it still 300 to $325 million for the year, given the growth you're seeing if you increased the capital spending plan?

Hi, Shawn.

We're seeing some real accelerated revenue growth and we'll probably be spending 350 to 400 this year now and maybe towards the higher end of the range, supporting these new program ramps that we have.

Okay and it would be within the categories components, and then on the computing side already discussed on the call or are there other categories that need capacity as well?

In the end, we're probably going to be growing double digits on all product categories and with components being a more significant growth, upwards of 30%.

So we're going to have to tweak each one of them a little bit.

Really depends on the revenues of where we end up with the revenues and then our expectations for revenues next year so it's hard to predict it.

The rule of thumb is if we grow 10 or 15% revenues for the year we could probably do that with $300 million against a CapEx spend against the depreciation of $400 million.

If we start turning into revenue growth of 15 to 20%, we're probably going to start seeing our CapEx move into the 350, 400 kind of range.

So it really depends on what we see for revenue and again a lot of that CapEx that we spent this year is really positioning for programs next year.

So there's probably more of a tendency right now for us to lean a little heavier on CapEx than it was in the beginning.

We're pleased with June.

We ended up having CapEx and depreciation equivalent.

As you know, it's a pretty uncertain macro environment out there and we could see some headwinds coming at us that we don't see today.

That could end up changing that.

I think in the end it's kind of a long answer but I think Paul's answer's right.

We're leaning more toward the 350 to 400 kind of number for this year but it really depends on what we book for next year and what the economy looks like for next year.

Two follow-ups.

The interest expense assumption for the September quarter, and then maybe Mike if you could comment on notebook PC pricing, I know at the Analyst Day you cited a few competitors getting a little bit more aggressive in that market.

What are you seeing 45 days post the Analyst Day?

The interest and other, we had some favorable events there in this quarter with some FX gains on the full benefit of the 6.5 for the quarter that we paid off last quarter.

Going forward, I'd say the range is probably around $28 million to $32 million for the quarter, I would probably peg it around there.

And on the PC, I think this year it has really represented a shift down in overall maybe operating profit or gross margin, however you want to describe it for the notebook ODM marketplace of about a full percentage and I think that's -- so there's been a deterioration to me in operating profit across the board of about 1%.

And that's a result of renewed competition.

Whether that renewed competition will carry on to next year I'm not sure because there's so much wage pressure and I think there's a lot of challenge in maintaining those lower numbers.

But certainly we're in the middle of experiencing I think a shift down of about 1%.

So it is more tight than it was -- had been in the past and that's negative so our objective is to be real thoughtful about which programs we go after.

We did $1 billion last year and we did $24 billion of total revenue so this is a small percentage of our revenue and we're not going to chase it unless we think we can make money on it.

So we're going to be selective.

We think we can be selective and not chase price down and still make our goals of $1 billion last year, $2 billion this year, and $4 billion next year.

There will be some profit headwinds on that as a result of a shift down of about 1%.

And we're hopeful that -- we're still hopeful that $4 billion to $5 billion that we bring on next we're we'll end up having some relief on that price pressure going down.

We'll have to wait and see how that looks next year.

Thank you very much.

The next question will be from Alex Blanton, Ingalls & Snyder.

Your line is open.

Good afternoon.

Good afternoon.

Wanted to start by asking -- going back to the components business and it's really a huge ramp you're talking about.

59% in six months, the two percentages you gave.

Where is that coming from?

I mean, is that from your own internal programs or is that merchant business you're getting from outside and what kind of business?

Well, for sure it's mostly outside business in our components business, we probably run, I don't know, 15 or 20% inside and 80 to 85% of regular merchant business and each one of those businesses are growing pretty rapidly.

Camera modules on a percentage basis is growing did most.

Multek will be up a good 25% year on year, that includes FlexCircuits and some of the materials businesses.

Camera modules are just kind of exploding for us.

Okay.

Technologies that we think are interesting that the customers think are interesting and they're in pretty high demand and we're in some really interesting programs so that one is growing very rapidly.

And power again, power will be an $800 million run rate this quarter.

Where last year we did maybe $600 million or $550 million, I don't remember the exact numbers last year.

The problem is they're all going up.

The challenges toward profitability are all different as I mentioned so I don't want to go through those again but really we're just -- I mentioned the book-to-bill in Multek continues to grow very rapidly.

So it's all of them.

Just trying to understand though why.

Because you've owned Multek or your predecessor Company has owned Multek since 1994.

And all of a sudden the business is exploding 25%.

I mean, why is that?

I don't think the markets are growing that fast.

And also the camera modules you've been in that a few years.

The power supplies are new so I can understand that's your start-up but these other ones, all of a sudden they're taking off.

Why is that?

I mean, the markets aren't growing that much.

Yes, so on the camera modules, it's a technology business.

And if you hit a certain technology, maybe you achieve an XYZ type benefit through your own technology initiatives that create a demand for your product.

So that's basically what we're experiencing with camera modules.

It's really a technology business.

Multek's coming from a low point.

While Multek will grow very significantly and will add over $200 million of business this year in mull tech, just year on year, it came from a hole alternatively, in the recession it went down quite a bit.

But alternatively in FY 2011 we actually expect higher revenues at Multek than we've ever achieved in the past so it's actually passing the 2008 and the 2009 levels.

We have a nice product offering.

I just want to get to a place where we can get some profit out of it.

Well, it's better to get the top line than the would toll bottom line right now I would think.

Second question is hasn't been talked about here but the Nokia Siemens Motorola deal, how is that going to affect you, if at all?

Are you doing business with both parties?

How much with each party?

What are the competitive aspects here?

Is there any chance that either one of these entities might start in-sourcing as a result of this and could you discuss all that?

Yes.

It's hard to say.

Between Nokia, Siemens and Motorola we're probably doing $200 million to $300 million of business, kind of a best guess.

I would say about, a significant portion of that is actually other things, they might be enclosures.

They might be raw printer circuit boards that we're doing out of Multek so it's different elements making that up.

In terms of down side risk, I view it as almost nothing and in terms of upside risk, upside opportunity, I would consider it to be not significant.

But I kind of think it's not going to be meaningful to us, to tell you the truth.

Okay.

And one final thing.

You mentioned double-digit growth on infrastructure for the year.

Yes.

Yes.

The slide that you presented May 25th I think it needs to be corrected because it still indicates on your website 5 to 10%.

I think that was an error.

We changed that when we did May.

You changed that but it wasn't changed on the presentation in the website because I just looked.

Okay.

We'll go fix that.

But it certainly is going to have to be a big increase for the next nine months because you're starting off with 3% decline.

Yes, we're actually kind of anticipating every quarter gets better in terms of dollars.

So we've been kind of stuck in that category.

Our profitabilities continue to improve and ROIC continue to improve so we actually haven't been stuck as Flextronics go.

But in terms of revenue it's been flat.

We think the flatness period is over.

Those infrastructure programs take long to incubate sometimes and very often these programs last three, four years, as you know.

And the product cycles that we anticipate on infrastructure are very positive.

So we're going to start entering into some new programs here.

Already are starting to build some new programs that are going to have multi-years of what we think is going do be pretty decent growth.

We actually anticipate that we're going to have accelerating growth throughout the year.

Sounds good.

Yes.

Thank you.

You're welcome.

Our next question will be from Lou Miscioscia, Collins Stewart.

Just two quick ones.

When you look at the hey bore issues in China, from a sequential standpoint, have the wages come up and it's now all in your income statement and our models?

Or is it something that's going to have to happen over multiple quarters, thus obviously worried about a risk that your margins either might stagnate or go down because of labor issues in China.

And then one quick follow-up.

We know what the increases are.

What we don't know is how much we can recover from the customer necessarily but our best guess of that blend of the results of price increases, simultaneously with the known cost increases, we think is in our guidance.

So it's fully planned for and the variable we'll have is how well we'll be able to recover those costs out of the customer.

There's not an unknown variable in the cost structure.

We know what that is and a lot of those costs are -- we increased some wages in April, we're increasing some more wages in July.

But we know what those are.

We're anticipating what those are.

They're in our numbers and so as best we can, we're giving the best indication of what the result will be.

Good.

And then the last follow-up question, I know we're running long here is that on the supply chain obviously you made the comment that supply chain's starting to ease.

In general I heard that the supply chain issues were very sporadic sort of all over the place.

Are you getting pretty good visibility that it's really starting to come down and is there anything that's still out there that is still issues and is this going to, other than capturing the $150 million, $200 million in revenue, is there anything else that could benefit you, help your margin or just make business a bit easier?

Well, we just use the best data we can.

We talk to the semiconductor guys all the time.

We look at the amount of escalations we're getting.

As you know, we have large suppliers of capital equipment in the semiconductor industry so we can look at what those trends look like.

We get good indications from them.

What they think the demand looks like and how fast their customers are catching up on their -- how fast they're catching up on the customer demand.

So we just put all that into the best indication of what the future looks like that we can and our best guess is it just gets better over the next few quarters.

We don't know that it will.

It seems like the semiconductor industry might have some pretty reasonable growth next year.

Alternatively, there's been a lot of capacity going in to meet some of that growth.

So I think we just have to wait and see but our indications are it's getting a little bit better and the industry is catching up pretty nicely.

Okay.

Thank you.

We have time for one more call.

Our last question today will be from Jim Suva from Citi.

Your line is open.

Thank you and congratulations to you and your team.

I have a question for Mike and then a follow-up question for Paul.

Mike, on the inventory, there's been a lot of questions asked about it but when we look at the linearity of the September quarter, and maybe things have changed, I believe the September quarter is somewhat back end loaded and that makes the 15% increase in inventory even that much more puzzling.

Has there been any change in terms of OEMs asking you to hold more inventory or order more inventory or are you kind of taking some title of it and some risk?

Because it just seems like with the 15% increase in a nonlinear quarter that's back end loaded, we actually wouldn't expect to see such a big bump.

And then for Paul the question, Paul, on the cash, maybe you can talk to us about the use of cash as you deployed $135 million back to shareholders this quarter, which is over half of your stock buyback.

Do you foresee exhausting it or using it on stock buyback or more look forward to M&A ahead?

And then on the tax guidance, I just don't recall for years any type of tax greater than 10% or let alone 10 to 15%.

Seems like maybe you're guiding something or is there a mix shift going on or something with the tax guidance just doesn't seem to square with what history has shown.

Let me start, Jim, with the back end loading.

We are actually not very back end loaded.

It's hard when we have over 200,000 people to be back end loaded and all of a sudden turn the crank and we just don't have a business that has the characteristics of us being back end loaded.

So we just don't have that.

We don't anticipate that coming in.

We don't get nervous at the end of the quarter about whether or not revenue is going to come through.

It's actually reasonably linear.

September will be a little bit more than July of course.

It's actually a pretty linear business on average.

Maybe it's because of the amount of diversification we have, the amount of product categories we're involved in.

I'm not sure what the reason is.

But our business is historically reasonably linear through the month.

Through the quarter.

Any change on terms of inventory?

As far as, not really.

If anybody asks us to hold it, we ask for inventory carrying charges.

Maybe we're getting a little bit of that.

But not too much.

We are collecting some inventory carrying charges.

I could tell you in the March quarter we were carrying no inventory carrying charges.

As customers ask us to place inventory, we'll charge them for it so that has a return on it so we kind of view that as being good business.

There's a little bit of that going on, but not too much.

I just think we're mostly caught with, again, I think we're mostly caught with a little bit of revenue growth and a little bit of component shortages, maybe a little tiny bit of holding up some inventory, but almost insignificant and I think it's going to work its way out kind of nicely.

We did 7.9 turns in March.

We'll do eight inventory turns in June, and I would expect it to have a nice jump up in September on inventory turns.

So we're not actually not too worried about it.

We think it works its way out over the course of the next two quarters and once again we also think doing eight turns is probably fine.

Thanks.

And Paul?

Hi, Jim.

So the stock buyback you're right, we did about $135 million in the June quarter and we probably expect to finish up our $200 million this September quarter.

That's kind of what we're looking at.

We have the $240 million of debt, the 1% convert maturing in August.

So we're working on that.

We obviously intend to retire that with cash but being pretty comfortable with our leverage position where they're at and debt to EBITDA trailing very favorable for us.

We are looking at other alternatives replacing that debt that we're working on.

We night not get it done this quarter but certainly working on it.

We mentioned earlier the uptick in CapEx compared to our previous time when we talked to you back last quarter.

With a significant revenue ramp, we think the CapEx is going to trend up 350 to 400 from the 300 to 350 that we talked to you about before.

So a bit more investment there.

And we always have slowed for acquisitions every year so we still have that in mind and really it does fit the profile that back in the Investor Day I showed that slide of what a typical normalized period would look like and it's very much looking like that for us this year.

And the tax item?

The tax item.

Yes, you're right.

We keep saying this 10 to 15 and truly operationally is kind of where it does come out, but we have a number of tax audits around the world.

When you make acquisitions, you pick up some legacy issues, Selectron in particular, and we've had some fairly large credits come back through successful negotiations of some audit matters around the world and we still have a few, a lot less than we had before and we're working through them.

But an operational rate of 10 to 15 is actually -- is where it should be.

Thank you and congratulations to you and your team.

Thank you, Jim.

Thanks everybody.

We'll look forward to talking to you again on October 27th when we announce our second quarter results.

Thank you, good-bye.

This concludes today's conference.

You may disconnect at this time.

Thank you.