Fabrinet (FN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Fabrinet earnings conference call. My name is Stacy, and I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference.

(Operator instructions)

As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, to Mr. Paul Kalivas, General Counsel. Please proceed.

Thank you, Stacy. And good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the first quarter fiscal 2012, which ended September 30, 2011.

With us on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet. And Mark Schwartz, our Chief Financial Officer and Executive Vice President. This call is being webcast and a replay will be available at the investors' section of our website located at investor.fabrinet.com. Please refer to our website for important information, including our earnings press release.

Before we begin, I would like to remind you that today's discussion may contain forward-looking statements. Forward-looking statements are not guarantees, and actual results could differ materially due to a number of risks and uncertainties.

Such forward-looking statements include our expectations regarding the timing for when we will resume production and when we will complete construction of Building six, our goals of expanding our global footprint and controlling our expenses, our expectations that we will recover significant amounts under our insurance policies, and that our balance sheet and insurance will be sufficient for our recovery efforts.

Our plans for moving future production at Chokchai to Buildings three, four, five and six. Our statements regarding the flood waters, their levels and damage to our facilities and assets, including their declining levels at Pinehurst. Our statements regarding the extent of the impact of continued flooding on our operations at all facilities in Thailand, and our statements regarding our future operating results and tax rate.

These forward-looking statements involve risks and uncertainties. Actual results could vary materially from these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the flooding situation in Thailand could continue for an extended period of time and could even worsen.

We may be required to suspend operations at our Chokchai facilities beyond our second fiscal quarter and, despite resuming limited production at our Pinehurst facilities, we may again have to suspend all operations at our Pinehurst facilities, which could be for an extended period of time.

Customers could scale back or cancel their orders in light of perceived or real production constraints. Even if the flooding subsides, the extent of damage to Thai roads, infrastructure and general public safety and health concerns could continue to have a material impact on our logistics, supply chain and employees.

If the flooding continues for an extended period of time, the Thai government could order a state of emergency or take other emergency measures which could constrain our operations in Thailand. These statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise them in light of new information or future events, except as required by law.

For a further description of the risk factors that may affect our results, please refer to our SEC filings; in particular, the section captioned Risk Factors, and our Form 10K filed on August 31, 2011. We will commence the call with brief remarks by Tom and Mark, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO and chairman, Tom Mitchell.

Thank you, Paul. Good afternoon, everyone. I'd like to begin with a discussion of the recent flooding in Thailand and our recovery from these events. Mark will then give you further details on the impact of the flooding, as well as review the results of the September quarter.

The 2011 monsoon season resulted in a natural disaster for Thailand. The annual monsoon flood waters overwhelmed the region from central Thailand through Bangkok and to the Gulf of Thailand. Millions of Thai citizens have been displaced and thousands of businesses have been flooded, including the factories at our Chokchai campus located 25 miles north of central Bangkok.

Operations at our larger campus in Thailand, known as Pinehurst, have been suspended for over two weeks. However, through the tireless efforts and resourcefulness of our employees, and in the midst of a natural disaster, we are preparing to resume production at Pinehurst. Today, in fact, we begin production at Pinehurst on a limited scale.

I'd like to personally thank our customers for the kind words of assistance and continual support of Fabrinet. Throughout this crisis, we've been working in close corroboration with our customers to assist how best we can support their needs and most quickly get back into production.

They've told us that our value to them is enduring and that our capabilities, execution and extraordinary efforts of our employees are greatly appreciated. Nevertheless, we understand that given the unique events of this crisis, there may be customer preference to assess options of geographic diversification. And looking forward, we've determined to create a global diversification manufacturing and engineering footprint which will offer our customers the ongoing business of our existing partnership.

We are also pleased to announce that Dr. Ta-lin Hsu, the Chairman of H&Q Asia Pacific, our largest shareholder, has decided to remain a member of our Board to assist us in the strategy for aggressive recovery and growth plans. Dr. Hsu withdrew his resignation letter prior to the November 3rd regular meeting of the Board. We are honored and excited by Dr. Hsu's continued commitment to our company.

In summary, we intend to remain critical partners in the optical component supply chain and intend to use our strong balance sheet as necessary to invest in our recovery today and a global manufacturing footprint tomorrow. Our collaboration with our customers has never been greater. I will now turn the call over to Mark Schwartz, our CFO, for a further perspective of the recovery and a report of our business and financial results. Mark?

Thank you, Tom. Before I start, please note that all numbers are US GAAP, unless stated otherwise. I'd like to further discuss the Thailand flooding and our recovery initiatives. Monsoon rains are a seasonal occurrence in southeast Asia. Over the years, we have implemented multiple protections to address scenarios when the annual rains cause floods. This natural disaster was unique, however, in that the scale of the flooding overcame all efforts by the government to manage the water flow, as well as all of our efforts to protect our Chokchai campus.

Our Thailand production has historically represented greater than 90% of our total revenues. Within Thailand, approximately 60% of our revenues have historically been generated through our Pinehurst campus, and the remaining 40% generated through production at Chokchai.

Let's spend a moment to review the impact of flooding at Chokchai, located approximately 25 miles north of central Bangkok. Water breached our defenses and flooded the Chokchai campus on Saturday evening, October 22nd.

The water originally flooded the Chokchai factories to a level of approximately three and a half feet. But in later days, the water level within the facilities rose to as high as five feet and has subsided nominally from its peak.

In the days leading up to the flooding of the Chokchai campus, we undertook carefully planned protective measures to resist the flood waters. The measures included the use of sandbags, water pumps, shrink wrapping and moving equipment to second story areas or off the ground on first floors.

We also cut power and took other precautions for safety. When the flood waters breached our retainer walls, many of those protective measures were ineffective against the peak water levels. Equipment and inventories were damaged, the extent of which is still unknown.

Now that the flood waters appear to have stabilized, we have begun the difficult job of assessing the damage and recovering the assets. We have retrieved a certain number of finished goods from Chokchai, which we intend to inspect and ship this week, pending customer approval.

Production will not recommence at Chokchai for the rest of the current quarter, and likely for significantly longer. There is a possibility that we may never again manufacture at the Chokchai campus, but instead divert manufacturing to the existing buildings 3, 4 and 5 at our Pinehurst campus and the new building 6 at Pinehurst upon completion.

Mindful of the potential for flooding, we constructed buildings at our Pinehurst campus to resist water to a height of greater than five feet above ground level. Our Pinehurst campus is located approximately seven miles north of Chokchai, and the manufacturing facilities have remained dry.

Water has entered two of our parking lots at Pinehurst, up to a level of approximately three feet at its peak. But all floor space, including office, engineering, warehouse and production floor space, remain protected by their elevation and entry barriers. Indications are that the water levels near Pinehurst appear to be subsiding.

We have initiated aggressive efforts to recommence production at Pinehurst. Power is on. Our I.T. systems are in use. Our MRP system is running, and equipment is being calibrated and commissioned for production. As Tom stated earlier, on Monday, we began production at Pinehurst on a very limited scale. We are collaborating with our customers to prioritize production per their demands, and this week we will ramp to higher volumes of production across many of the customers and product lines at Pinehurst.

We are hopeful to be back in full volume production at Pinehurst by the middle of November. With the restarting of production, the next phase of our recovery has begun. We employ over 5,000 people in Thailand. Many of our employees are now displaced, their homes destroyed, and their families may be living with relatives or in shelters.

We have been in contact with over 90% of our employees, and we are determined to assist them. We have established on-site, temporary housing for our employees and are presently sheltering approximately 700 people, for whom we have arranged food service, bathroom and laundry facilities.

While transportation continues to be challenging, each day a greater number of our work force are commuting around flood zones and difficult traffic conditions to arrive for work. We are also looking forward to completing our Building 6, located at our Pinehurst campus. Construction of Building 6 was suspended approximately three weeks ago as a result of the rising flood waters, which created extreme logistical difficulties for the construction staff.

At the time construction efforts halted, the factory was over 70% completed. Our contractor has committed to restart construction the week of November 14th and to completing the first three manufacturing days in the building by January 15th. This will result in approximately 30,000 square feet of new manufacturing space becoming available to our customers in mid-January.

We cannot yet provide a revised completion date for the entire 300,000 square foot building, which includes engineering and office space, but we will provide further updates as that information becomes available.

We also plan to update our website from time to time on the flooding conditions and the impact to our operations in Thailand. These updates will be located under a Thailand flooding updates tab on our website.

When completed, the capacity of Building 6 will be more than sufficient to house all customer products previously assembled at the Chokchai campus and provide room for additional new projects from new and existing customers.

Our plans for the future of Fabrinet are straightforward. We will assist our employees during the recovery, and we will provide on-site shelter until it is safe for them to go home. We will actively explore global diversification of our engineering and manufacturing footprint. We will strive to satisfy our customers with the most rapid, yet prudent, steps to resume volume production.

We will control our expenses during this period of lost production. We will aggressively resume the efforts to complete Building 6, and we will aggressively and creatively recover from the impact of flooding at Chokchai, which includes assessing damage to our and our customers' equipment and inventories, identifying the actions and timelines to relocate production to Pinehurst, and documenting the insurance claims and pursuing loss recovery for our customers and ourselves.

A word about our insurance coverage. We maintain approximately $120 million in coverage for equipment across our manufacturing campuses and another approximately $120 million in coverage for inventory. These amounts include coverage for customer-owned assets that are under our care, custody and control. We also maintain an additional approximately $45 million in coverage against building damage and approximately $47 million in business interruption loss.

We are confident that the combination of our strong balance sheet and insurance coverages are sufficient to support our recovery efforts and our customers' future production demands. In summary, we are fully mobilized to resume production at the earliest opportunities.

Now to review results for the first quarter of fiscal 2012. We achieved revenues of $186.3 million in our first quarter of fiscal 2012. The quarter ended September 30, 2011. Our revenues grew 7.3% from the same quarter last year but declined 2.1% sequentially.

Our share-based compensation expenses for the quarter were $1 million, of which $543,000 were included in SG&A. Our effective tax rate for the first quarter was 3.8%, compared to 1.7% the prior quarter. We continue to anticipate our global tax rate to remain at historical levels for the full fiscal year.

On a non-GAAP basis, net income totaled $16.6 million, or $0.48 per share, calculated from a share base of 34.7 million fully diluted shares. Including share-based compensation and other note the SG&A items, US GAAP income was $15.7 million, or $0.45 per share, which represents an annual increase of 3% and a quarter-over-quarter decrease of 6%.

On an end market basis, revenue from optical communications was $137.5 million, or 73.8% of total revenues for the quarter. While lasers, sensors and other revenue was $48.9 million, the remaining 26.2% of our revenues.

On a year-over-year basis, revenue from optical communications grew 0.6%, and revenue from lasers and sensors grew 31.6%. Quarter-over-quarter, this represents a decline of 6.8% in optical communications and 13.9% growth in our laser and sensors markets.

Moving on to the balance sheet, we ended the quarter with cash and cash equivalents of $132.3 million, an increase of $5.1 million from the previous quarter. During the quarter, we used $2 million of our cash toward the purchase of capital equipment and $3.8 million of our cash toward the construction of Building six. Our inventory days were 59 days, up modestly from 58 days in the previous quarter.

Now I would like to provide you with our limited guidance for the second quarter of fiscal 2012. As a baseline, if Pinehurst generates no further revenue during the quarter, we would expect our total revenues for the quarter to be approximately $28 million, representing primarily revenues generated before production shut down at our Thailand facilities, together with the revenues from our Casix and Vitrocom businesses throughout the quarter.

Obviously, our customers are counting on us to get back into production, and we do expect our revenues to be in excess of that minimum. But at this time, we are unable to determine to what level. As well, we cannot currently anticipate our net operating results for the quarter, although we anticipate a net loss, due to the significant decline in revenue and the timing and result of our insurance claims.

In conclusion, we intend to expand our global footprint, and we are gratified that our employees are safe and our customers have confidence in our efforts to restore their production. Thank you. At this point, I would like to turn the call over for questions. Operator?

(Operator instructions)

Subu Subrahmanyan with Sanders Morris. Please proceed.

Thank you. The first question, just trying to put some numbers around the production facility itself. From your K, I can see that Pinehurst represents a little over 70% of the production facility or the square footage for the campuses. You'd mentioned a 60/40 split in terms of revenues.

If we assume for five weeks or five to six weeks of the quarter you can get production at Pinehurst, full capacity, is that a logical way to apply that 70% square footage, and see how much revenue you can get from there?

Also, just trying to understand how many shifts that you are running and if you could run more shifts, if that would be a variable.

I'll take the first part of that, Subu; and Tom, you can add some color.

Yeah, sure.

So Subu, I think the right way to look at it is 60/40. The square footage in terms of the footprinting includes canteens and engineering and office space and warehousing, et cetera. So think about the manufacturing and the revenue generation as a 60/40 split.

In terms of how much of a period of time you ought to consider for full production if you're modeling it, that's much more difficult. We know what we have as our baseline, which we've mentioned, $28 million, including the production in Casix and Vitrocom for the rest of this quarter.

We've started production at Pinehurst as of Monday Bangkok time. We've also been able to salvage finished goods from Chokchai that are being inspected and, upon approval from the customers, we expect to be able to ship at least a portion of which this week.

Going forward, as we said, we intend to ramp to full production by mid-November. But what we've learned through this crisis is that events change hourly, and even quicker in some cases. So it's difficult for us to say how you or the other research analysts or investor base ought to be modeling what our revenue potential looks like for the quarter. We're hopeful that we ought to be back in full production at Pinehurst by middle of November, and that would leave us approximately five weeks, as you suggested, of revenue at Pinehurst.

However, it's difficult for us to say if that is actually going to occur. There's still a significant amount of flood water up north, and we don't know if the government's efforts or initiatives are going to route that away from us or toward us.

Mark, if I could follow up on the number of shifts you have run traditionally, versus an ability to run more shifts, does that provide a variable in terms of more production capacity?

I'll leave that one for Tom.

Yeah, we expect, like Mark said, we expect by the 15th of November, we'll be back to two shifts a day. And that's two 12-hour shifts. So that's working 24 hours and six days a week. So we believe we'll be back to that. And every indication we have today supports that.

Understood. And final question, since the near term is harder to model, going into the March quarter and the June quarter, you'd indicated you expect some capacity from Building six to come on in March. And then by June, Mark, do you think we're back to kind of all the capacity from Chokchai is also absorbed in and you will not have production constraints?

It is difficult to say, Subu. We are working as aggressively as we possibly can with our customers and our building contractor to get our customers up and running at Fabrinet as soon as possible. How long that will take, given qualification, cycle times, the construction, the space, and capacity utilization, is difficult for us to say as we sit here today.

Final question. If you look at just the demand, from end market demand perspective, and it might be hard to parse out, but can you talk about the underlying trend in the optical communications industry as well as the lasers and sensors industry?

That also, Subu, as you and others know, we leave that to our customers who know the market and their customers better than we do. But indications are that demand is solid.

Got it. Thank you, gentlemen. Good luck.

Steve O'Brien with JPMorgan. Please proceed.

Hi, Tom and Mark. Can you tell us a little bit more about the requalification process? I mean, what needs to -- production's starting this week, but what was the timing of requalifying that production and, you know, are those products sort of going to be qualified for the customers as you produce some more within the quarter? And then secondly, just on what you are able to ship this week, I mean, is infrastructure in the country allowing transportation, shipping to get these products out?

So the answer to the last part of your question, the infrastructure in the country, even though it's a bit challenging for the traffic, but the infrastructure in the airports and all of the logistics are entirely open. So that's not a constraint.

And Steve, in terms of the first part of your question, again, Tom can add any color to this. But for production at Pinehurst, for products that were previously, before the suspension of production, manufactured at Pinehurst already, our understanding in working with our customers and some of their customers is that those lines, as they are recalibrated and running pilot production, et cetera, do not require full-scale requalification because they haven't moved.

Okay, great. And then maybe secondly, if I could, on the losses, I know it's very hard to quantify, but can you help me understand what are some of the elements that will be driving the potential earnings loss in the December quarter? So I guess, you know, what are you including that makes your judgment say today that there will for sure be a loss in December?

Well, simply put, moving from revenues of $186-point million in the September quarter to revenues that will be significantly less than that this quarter, and you know what our guidance is right now, would suggest that the fixed costs that we incur on a regular basis cannot be controlled quickly enough to rationalize that into a profit.

So that is the first thing. The second issue is there's enormous recovery effort under way, and we're spending capital every day to assist our customers in recovering from this natural disaster, as well as our own equipment and assets. And the timing for recovery of those dollars spent is, at this point, unknown.

Okay. If I could just clarify, do you have a level of revenue you consider sort of the break-even level, with sort of $6 million of operating expense normally? I know it won't be normal, but all things aside from the recovery effort being equal, do you have a sense or a thought around what that break-even revenue level might be?

We've done some analysis on it, but it's not something, Steve, that we're prepared to share today, only because there are so many factors that influence that number, and I don't think it would be fair to have you thinking about modeling a number that may end up being materially different.

Okay. And if I could, just one more. On the customers who have discussed moving production in-house or to other contract manufacturers, I mean, have they given any indication about their sort of longer term interest or willingness to continue working with Fabrinet?

Tom, maybe you want to take that part.

We've had total support from our customer base. I mean, our customers obviously understand this crisis, and they understand how quickly that we're responding to go back into manufacturing for them. And we've had to -- and our relationship with our customers has been so strong. Going forward, I firmly believe that our relationship will continue. Our relationships will continue with our customers, and it will strengthen because they can see how strong that we are for coming back in the midst of a national disaster.

Thank you.

Sherri Scribner with Deutsche Bank. Please proceed.

Thank you, Mark and Tom. I just wanted to dig a little bit deeper into the costs that you're expecting for the December quarter. Clearly, revenue will be down significantly. But when I think about SG&A, should we think about that cost being roughly flat sequentially? And thinking about COGS, should those numbers be flat? I assume there's some variable component to your COGS, of course, but it sounds like you have some significant additional expenses, including housing employees and feeding employees. So just wanted to try to understand how we should think about those cost line items in helping us build our models out.

Sherri, I think we've said this before in discussions related to foreign exchange exposure. That we incur roughly $9 million to $10 million a month in [BOT] costs. And that's labor and that's facilities and maintenance, and that is power.

And outside of power, perhaps, most of those costs are still with us today. So that is the significant driver of what we believe to be a loss in the quarter.

In terms of the fixed costs in our company generally, we've talked about this as well in the past. That roughly 75% of our costs are materials, and the other 25% are facilities and employee costs and gross profit dollars.

Okay. So that helps frame that, and I would assume -- maybe this is a question, but I would assume that you're helping your employees by paying them despite the fact that they're not able to work. Or, you know, how is that variable cost working, and what are your expectations for additional costs related to housing employees and feeding them?

Well, we'll do what we need to do to help our employees first and foremost. And yes, we are continuing to pay in some cases a portion of salary. But in many cases, more than that. And we expect to do that throughout the quarter.

The Company is considering all options relative to rationalizing our expenses today. No decisions have been made in that regard, however.

Okay. That's very helpful. And then thinking about the equipment, I know that your customers typically provide the equipment that's in each of their own bays. When we think about the lead times for that equipment, to order new capital equipment to replace what was potentially destroyed in the Chokchai site, what is the lead time typically for that type of precision equipment?

I think it varies considerably, dependent on the complexity of the equipment, how customized it is, and where it would be manufactured. So it's difficult to give you any type of real number, Sherri.

Is it safe to assume it's a couple months to a quarter or two?

I don't know if it would go out that long. But in some cases, it may.

Okay. And then my final question relates to the custom optics business. You've given us your base case, which includes custom optics. My question is, are you assuming that custom optics is running at full capacity, or will custom optics be impacted by the flooding in Thailand? Thank you.

About 30% of our production in custom optics is consumed internally. So it would be impacted some level relative to that 30%.

Okay. Great. Thank you.

You're welcome.

William Stein with Credit Suisse. Please proceed.

I'm wondering if, when you take a step back and look at the structure of your capacity today, whether you are anticipating opening or at least exploring the idea of opening new capacity in other regions of the world. And in that case, how the competitive dynamics of the industry could change.

Tom, do you want to get this?

Yeah, sure. The answer to that is that we're actively involved in globally diversifying our manufacturing and engineering footprint. And we expect that within a fairly short period of time, and I haven't been able to define that, the length of time, but that we'll have a manufacturing diversification plan in place and be acting on that.

Okay. So that's part of the plan.

Right.

Now, looking at it from the other perspective, if you're able to get all of the Chokchai capacity up and running in Pinehurst, or maybe the question is, what is the shortest amount of time you think that could happen in? And if it happens relatively quickly, do you think that perhaps you won't wind up diversifying geographically and that you and customers kind of look through this as more or less a one-time event, and maybe the risk was small to begin with and becomes smaller of a flood going forward, given the location of Pinehurst?

Well, I would tell you that given the magnitude of this event on Fabrinet, but perhaps more so the impact to certain of our customers, it is imperative of Fabrinet to find manufacturing in a different location, whether that be up north somewhere in Thailand, whether it be elsewhere in Asia or southeast Asia, or anywhere else in the world. We need to diversify our manufacturing.

And how long do you think you might be able to get full capacity; in other words, all of the Chokchai capacity up and running in the Pinehurst facility?

Difficult to say. I think that was asked perhaps a little bit of a different way in an earlier question. We're doing everything we can to help our customers that were impacted at the Chokchai facility. But it is -- I don't think we can give today a timeline that would encompass all of the production there and how long that would take to move.

Great. Thanks for taking my questions.

Sure.

Lou Miscioscia with Collins Stewart. Please proceed.

Thanks for taking all the questions. I guess the first one would be, you know, running 24 hours a day is great. Was that the way you were normally running there, or does it sound a little bit like some makeup production possibly that you've scheduled in?

We've always run two 12-hour shifts, six days a week.

Okay. Then maybe, Mark or Tom, if you could talk a little bit about the insurance. It definitely sounds like you have ample insurance. Probably more the business interruption. I've not run into that before with any of my companies. Just wondering how that could offset losses or any additional points you could add for us.

Yeah, we're learning a bit about it as we go through this ourselves, Lou, as you can imagine. This week, we'll be retaining the services of a forensic accountant to assist us and a claims representative advocate for Fabrinet to work through the best way to position our claims for ourselves and our customers.

So you mentioned business interruption, and I can spend just a minute talking about that. When we negotiated our business interruption policy, ultimately, the coverage that we were granted is not very different from what is traditionally known as business interruption, which is based off of changes in your gross profit plus certain standing charges, fixed charges that you have to incur as a result of the event.

And so there's always the risk versus the reward versus the payback when you determine the level of insurance, something like business interruption, to claim and to attempt to administer within the company. And we felt that the level that we insured ourselves against was the right number. And I think today, we still feel that way.

Okay. And then if we look out to March, assuming that things go as hopefully expected in the sense of water continues to subside, you know, what a would March be? Would March be almost back to a close to a normalized kind of quarter?

It honestly is very difficult to say. That would depend on how quickly we are able to transition production from Chokchai to Buildings three, four and five, where we are creating space for products even as we speak.

And Building six, we have a commitment from our Building six contractor, who by the way is the same contractor we used for the construction of Buildings four and five. They have committed to us to have three manufacturing bays, approximately 30,000 square feet of clean room space, ready for customers by mid-January. That will help us out significantly, in addition to the space that we are creating at Buildings three, four and five.

But how much production is at that point up and running, even in that space, is difficult to say at this time.

Maybe last question for me, appreciate it, is how much space do you think you can open up or how much capacity of Chokchai could you fit in hopefully this space that you do open up before Building six opens?

I think, Tom, maybe there's two ways to look at this. One is existing space that we are creating at Pinehurst, and then with the addition of the new space. Maybe you can speak to that a little bit.

Yeah. In Pinehurst today, we have approximately 20,000 square feet that's vacant. And then with this additional 30,000 square feet that will be made available to us by the middle of January, we'll begin to really make some real aggressive -- to aggressively be able to move the capacities that we had in Chokchai into Pinehurst.

And I think it's also fair to say, Lou, that additionally, our operations teams, led by our COO, are looking for creative ways with our customer to compact what we're doing in other areas in Pinehurst to free up some additional space. And if that is successful, then there would be additional space available for what we were previously doing at Chokchai.

Okay, guys, thank you. Good luck on getting it all back up and running.

Thank you.

Thank you, Lou.

Ehud Gelblum with Morgan Stanley. Please proceed.

Hey, guys. How you doing, Tom and Mark? Couple quick questions. Really, really tough situation. Feel for you guys. Could you give us a sense on the laser sensors and other? Was that equally distributed between the two facilities, or were lasers sensors and others more in Pinehurst or more in Chokchai?

I think, Ehud, to protect our customers, we're not going to be prepared to answer any questions about which customers were where or what was distributed where. I think to the extent that certain of our customers have already talked about that, that's great, and we're supportive of it. But otherwise, we'll leave it to our customers to decide what and when they'll disseminate.

Okay. Looking at some of your filings, looks like the Chokchai facility was around 227,000 square feet?

That's right.

So how are we, with 20,000 square feet available at the existing Pinehurst facility and 30,000 coming on January 15, Building 6, it doesn't look like we're getting too much into that -- call it 230,000 from before. Is it possible that it's not all of equal profitability or yield, let's say, and some square feet are more equal than others so that 50,000 square feet can maybe make up 70% or 80% of the revenues? Or is it equally distributed? In which case, it looks like we're still missing an awful lot, if all we're getting is 50,000 out of 230.

Yeah, I think you're right on both sides of that, and again I'll let Tom add color to it. You can imagine, as a free-standing campus, that Chokchai has a canteen, and it's got other spaces that are not pure manufacturing spaces.

So the actual amount of square footage required to move everything from Chokchai into Pinehurst is significantly less than that number. And I don't have that information available as we sit here. Perhaps Tom does.

The other side of it is, as we said, when we're thinking about ways to creatively compact some of the operations in Pinehurst, including office space and others that could be converted in certain areas to assembly space, then our operations team is off to do that, and we think that this 50,000 square feet of space, the existing [20] at Pinehurst, the new [30] in Building six, and any additional ways we're creatively able to acquire more space today will give us an opportunity to move a substantial amount of what was at Chokchai into Pinehurst.

A substantial amount. So you think well over 50%?

Well, it's difficult to say right now, honestly. But it will depend on equipment and how quickly we can get equipment into those factories. Tom, is there anything you would add to that?

I would just say that the commitment that we have from our contractor to make available 30,000 square feet by the middle of January, you can imagine that all that construction continues as we build out the rest of that 300,000 square foot plant.

Okay. Well, I hope your contractor is better than the ones that I've dealt with in the past. But there was a period of time when I think you said that construction had halted because you couldn't get the construction vehicles in there. That, I guess, is over, or should be over within the next week or two, you said?

Talking to them today, I don't believe they'll have a problem with moving in material to complete the construction.

Okay. Where is the Chokchai equipment, manufacturing equipment right now? Is it still on the second floor of Chokchai? And I wasn't sure if all of Chokchai --

For the most part, it's in a warehouse that we've put about a hundred kilometers from here, and we're going through and doing the rehabilitation of that equipment. Our engineers and technicians are doing that.

So Chokchai is completely empty? You've taken all the equipment out?

Not quite, not quite. We have about another two weeks of salvage.

Okay. And has everything pretty much, was it pretty much taken to the second floor before the floods got high?

The second floor of Chokchai is very small so it couldn't accommodate very much equipment.

I'm trying to get a sense as to how much of the equipment can be, for the most part, within a week or two of retooling, be put back into use versus how much has to be ordered?

I think we'll have a much better picture of that in about a week.

Okay. Helpful. Talk about insurance for a moment. It's great that you had all this insurance. Was that in your COGS or in your SG&A? Because your SG&A is a very small number each quarter. I'm wondering was that actually in there, or was that stuck into COGS?

No, it's in our SG&A, but the cost of this policy for our property is roughly a couple hundred thousand dollars a year, Ehud. It's not perhaps as much as you might consider.

Wow. That's a great deal. Have they given any indication what happens to premiums? My guess that is they're paying out [45] plus [47]. I mean, if they're paying out, you know, well over $100 million and possibly even more --

I can tell you this. We haven't had those discussions with the insurance syndicate yet, but you can imagine, as we understand, that it will become more increasingly difficult to obtain flood insurance in Thailand. And that's something that, frankly, we haven't started working on yet because we've been focused on so many work streams related to assisting our customers and salvaging equipment and restarting production. But it is something that we will very quickly begin investigating and determine how we're going to insure ourselves going forward.

Sure. Do you have any land at Casix in China?

No, but we have access to additional lands and manufacturing space through our relationship with the government.

Okay, but it wouldn't necessarily be contiguous, but it's fine, which would be another campus?

Right, potentially. But we don't do any assembly. Very, very limited assembly in Casix today, as you're probably aware. So that would be a new business model for our operations in China.

Okay. And then finally, are there other parts of the supply chain? It appears to me when you read about everything going on in China, whether it's auto parts, hard disk drives, all the different pieces in optical components, I always got the impression that there aren't that many other pieces of the supply chain in Thailand so that you could, perhaps, move the facilities to Singapore or Indonesia or somewhere else and not suffer a loss of supply chain continuity by not being geographically next to other pieces of the supply chain. Is that true, or would the whole supply chain have to move together?

Not, I think that's true. No, I don't think it's true. It is true.

Okay.

That the supply chain would stay intact.

Appreciate it. Thanks, guys.

Thanks, Ehud.

Cobb Sadler with Catamount Advisors. Please proceed.

Thanks a lot, guys. I know you want to refrain from talking about which customers are in which facilities, but could you run through what types of products are primarily manufactured at Chokchai? Is it, you know, is it kind of the next generation products like the ROADMS [950] tunables or traditional products, or is it too tough to break out?

Well, we could break that out, Cobb, but we can't because I think if we did, it would give some clear indications about the customer base there. So I don't think we're comfortable going into that level of detail, although there is a mix, for sure.

Okay. Sounds good. Then just another question on insurance. I'm assuming the Chokchai facility is worth less now than it was before the flood. Would insurance cover the decrease in value of your Chokchai facility, given that it's lower than what you paid for it?

Well, the Chokchai facility itself, Tom can tell you much more about the history of it, because he was a part of the conversion of that facility into a manufacturing facility back in his Seagate days in the mid 1980s, but that factory footprint has been around since the Vietnam War, as I understand it.

And we don't own that property. We lease it. So we will have some discussions with our landlord and determine what our landlord would intend to do to shore up that space. And if we can't get ourselves satisfied that this type of occurrence to this degree couldn't happen again in Chokchai, or would be a minimal risk at Chokchai again, then as we said in our prepared remarks, we may never manufacture there again. So that is still under consideration.

All right. Thanks a lot and good luck.

Thank you.

(Operator instructions)

Ajit Pai with Stifel Nicolaus. Please proceed.

A couple of quick questions. I think the first is just looking at the fact that you're fairly uncertain about Chokchai and production returning there. So is safe to assume for the December quarter, that at least for the majority of the quarter, that you'll no longer be depreciating the asset. And for the March quarter, that the depreciation should be zero for that asset?

Well, as I mentioned, the building is not owned by Fabrinet. So to the extent that we have fixed assets associated with tenant improvements, for example, that still have some depreciation in them, then we'll have to work internally in our accounting team and have some conversations with Price Waterhouse to determine the right next steps there.

In terms of the fixed assets that are damaged or lost at that factory, then we will have to impair them as required under US GAAP.

Got it. And then the second question is just looking at the tables relative to the equipment over there, is there a rough mix you can give us, how much is owned by customers and how much is owned by Fabrinet itself? I know that it's not 100% customer equipment that's in the bays, or I think most of the back end is owned by them. But some broad mix?

Difficult to say, and it would vary by customer, as you could imagine. I think it's probably safe to say that a majority, and I don't know how much greater than 50%, is titled in the name of the customers and under the care, custody and control of Fabrinet.

But we are treating all of the equipment in the salvage effort the same, because our customers need that equipment, whether it's ours or theirs, to get back into production.

Got it. And just in terms of the insurance and the impact of that in terms of the timing of the re-ramp of production and requisition of new equipment, is it fair to assume that even if the insurance and the claims are uncertain, that there shouldn't be any impact from a cash flow perspective or an investment perspective of the re-ramp of new equipment? That you're still going to go ahead with whatever's necessary, even if the claims are still outstanding?

Absolutely, absolutely. We're working with our -- there are five insurance carriers in our syndicate of coverage, and they've appointed their loss adjuster, who is having his first -- his initial assessment of the Chokchai site on Wednesday in Bangkok. It was supposed to have occurred late last week, and we wanted somebody from the Fabrinet team on the ground for that assessment. So our general counsel, Paul Kalivas, is there and will be accompanying the loss adjuster.

In addition, as I mentioned previously in this call, Ajit, we plan to retain the services of a forensic accountant and a claims representative that is an advocate for Fabrinet during this process, and we want their input as well before the loss adjuster's initial assessment, which, as I said, will happen on Wednesday in Bangkok.

Got it. But regardless of how much time it takes and how quickly it happens and how favorable it is, there should be no impact of the timing of that relative to your production coming online. Is that fair?

I think that is fair. Once we've discussed what needs to occur in order to get our customers back in production, then we'll, in collaboration with the customers, make all that happen.

Okay. And then the last question is, just looking at the difference in levels, I think you talked about where the water got to in Pinehurst, in the parking lot, but that it is five feet raised and no water penetrated the compound. But could you give us a ground level difference, if you have it, between where Pinehurst's ground level is relative to sea level and what it is relative to Chokchai?

No, I don't think we have that as we sit here. It may not be materially different, Ajit. It may very well be simply the rerouting of the waters and the height of the roads in the areas that are acting as boundaries to the water. You can imagine if you've got a series of roads that cross each other that you're creating a pool in some cases. And so the water levels inside those pools can be drastically higher than the water level in the surrounding area.

All right. But we don't know of any material difference in the actual ground level at Chokchai relative to Pinehurst?

Tom, are you aware of anything?

No. I think they're basically the same. But the Pinehurst facility, like Mark was saying, the ground floor is five feet above the ground level.

Got it. Well, thank you so much, and good luck with getting everything back and ramping.

Thanks, Ajit.

William Stein with Credit Suisse. Please proceed.

Quick follow-up on the capacity question I asked before. So contemplating a Fabrinet where you have significant, imaginably significant additional capacity in a very different location, would you still be able to achieve the same margin structure on a go-forward basis, or does some of this cost of operating in, you know, much disparate locations, could that significantly impact your cost structure? You've achieved very good margins historically for a contract manufacturer, you know, over 12% gross and 9% operating. Can that continue?

I think it's too early for us to make any assumptions on that, Will.

Okay.

And at this time, I'd like to turn the call back to Mr. Kalivas for closing remarks.

Thank you, Stacy. This concludes Fabrinet's earnings call. Thank you, everyone, for your participation.

Thank you.

Thank you all.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.