Sanmina Corp (SANM) 2002 Q3 法說會逐字稿

Good afternoon. My name is Mitch and I will be your conference facilitator. At this time, I would like to welcome everyone to the Sanmina-SCI third-quarter 2002 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star, then the number 1, on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2, on your telephone keypad.

Thank you. I will now turn the call over to your host for the afternoon, Mr. Jure Sola, CEO and chairman of Sanmina-SCI. Mr. Sola, please begin

Thank you. Good afternoon, ladies and gentlemen. Welcome to Sanmina-SCI's conference call.

Here with me today on this conference call is Randy Furr, Sanmina-SCI's president and chief operating officer.

Good afternoon.

Rick Ackel, Sanmina-SCI's executive vice president and chief financial officer.

Good afternoon.

I would like to start out by thanking all of our listeners for their interest in Sanmina-SCI. Our agenda today is that Rick Ackel will review Sanmina-SCI's financial results for our third quarter fiscal year 2002. Then Randy fur will give you a review of Sanmina-SCI's operations and outlook. Then I will follow up with additional comments relative to Sanmina-SCI's results and future goals. And now, Rick.

Thank you, Jure.

Prior to reviewing our financials with you, I would like to take a moment to read the following safe harbor statement.

During this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operations may differ significantly, as a result of various factors, including economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, and technological change.

We refer you to the documents the company files from time to time with the Securities and Exchange Commission. Specifically, the company's most recent annual report on Form 10-K and 10-K(a) for the year ended September 29, 2001 and our more recent 10-Q filing in May, 2002. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

At this time, we hope everyone has seen the press release. Today, I will first discuss the results of operations, and then I will follow up with the balance sheet.

You'll note from the press release that we have, as is our custom, provided you with two profit and loss statements. One reports our results on a GAAP basis, to include merger restructuring costs and other infrequent or unusual charges, and includes the results of acquisitions after their closing dates. The other is presented on a pro forma basis and is presented without these charges.

We have provided a reconciliation from GAAP net income to results presented on a pro forma basis.

While I will provide more detail regarding charges later in the call, in general, for consistency, I will confine my comments to our results without these charges, and on a pro forma basis to facilitate comparability to prior periods.

Sales for the quarter, which represented our third quarter of fiscal 2002, were approximately 2.6 billion. Sales this quarter increased over last quarter by approximately 8.6%, and were within the range of guidance previously given and exceeded current consensus.

The primary area that we saw this revenue increase was in the area of our EMS business. However, all of our service offerings, which include EMS, enclosures, printed circuit boards, cables and memory modules, did see increases during the quarter.

Our top 10 customers made up roughly 68% of the total sales this quarter. The second 10 made up 11.3% of total sales in Q3. For the quarter, our top 20 made up about 79.3% of total sales.

We had two customers in the third quarter whose sales were greater than 10% of total sales, and those customers were IBM and Hewlett-Packard.

For the quarter, the mix of revenues as a percent of revenues breaks down as follows: Third-party merchant printed circuit board sales were approximately 3%, assembly and other EMS sales were approximately 97%. These percentages are basically the same as last quarter.

Gross profit for the quarter was 109.3 million. As a percentage of revenues, gross profit was pretty close, but slightly lower than what we forecasted, largely due to the mix in revenues.

Selling, general, and administrative expenses were just over 3% of sales and were approximately 79 million in absolute dollars.

Total operating expenses are selling, general and administrative expenses with the addition of 1.3 million in amortization, bringing total operating expenses to approximately 80 million.

We have decreased total operating expenses by 8.5 million in absolute dollars over last year's third-quarter number. We continue to focus on controllable costs and our ability to cost-effectively scale our manufacturing operations while maintaining our focus on our overall strategy.

Depreciation and amortization were 58 million and 1.3 million, respectively, for the quarter.

Capex spending this quarter was 35 million. Capex largely relates to IP enhancements, including implementation of our world-class Oracle platform throughout our organization.

Capex and resulting depreciation is a controllable cost that we pay attention to. Capex for the third-quarter year-to-date in '02 is approximately 56 million lower in absolute dollars than capex at this time last year.

Operating income was 29.4 million for the quarter, which equates to an operating margin of approximately 1.1%.

Other expense net was 24.8 million, and our tax rate was 36%.

Net income for the quarter was approximately 3 million. This is in line with our guidance given at the beginning of the quarter. Additionally, cash net income was approximately 9 million, which also is in line with guidance.

Basic shares for the quarter were 520 million. Diluted shares were 526 million. Cash diluted shares were also 526 million. Giving a cash EPS of 2 cents for the quarter.

We have previously outlined our plan that called for approximately 686 million in restructuring costs. Presently, we're pretty much on target with our restructuring and consolidation efforts from a time to accomplish perspective. When this restructuring effort is complete, we expect to be very close to the 686 million outlined back in December, say, plus or minus 5%.

During the June quarter, we incurred approximately 26 million of total restructuring costs of which approximately 22 million was cash and the balance was non-cash.

Of this 26 million, 12 million was charged to PL on a GAAP basis and the balance represents purchase price adjustments.

Now, turning to our balance sheet, our cash and short-term balance increased approximately 16% or 158 million this quarter, and cash and short-term investments are a very healthy 1.1 billion, with no new significant borrowings.

This cash increase was on top of cash outlays, including those for acquisitions. So as you can see, we added a significant amount of cash during the quarter.

Accounts receivable at the end of the quarter were 1.4 billion. This represents an absolute dollar decrease of 58 million from the previous quarter. The decrease in receivables allows DSOs to drop by almost one day over last quarter, and is at 50 days.

Since the merger, we have reduced DSO by approximately 5 days on an apples to apples basis and significantly improved the quality of our receivables despite a difficult economy.

Inventories decreased this quarter over last quarter in absolute dollars by approximately 30 million from 1,303,000,000 to 1,273,000,000. Excluding the effect of current-quarter acquisitions, inventory decreased this quarter over last quarter in absolute dollars by approximately 100 million.

Inventory turns excluding current-quarter acquisitions improved this quarter by over one full turn, from 7 to 8.3. Including current-quarter acquisitions, turns improved this quarter by almost one full turn to 7.9 turns.

If you take a look at inventory turns over the two quarters from the date of merger, we've improved by approximately 27%.

Achieving these strong financial metrics took a lot of hard work, and I'd like to thank our entire organization for doing an excellent job.

Cash flow from operations was approximately 365 million during the quarter, which has again allowed us to be able to self-fund current-quarter acquisitions with no substantial impact on our cash balances, and without incurring any significant additional debt.

Our working capital was approximately 2.3 billion for the quarter.

Taking a look at our cash cycle days, we have made significant improvements since the date of our merger. Our cash cycle days have decreased over 21 days, and it's now at 50 days in the current quarter, due to our continued focus on asset management.

We're pleased with this trend, and expect it to continually improve. Our overall goal is to get this number below 40.

We are in good position from a debt perspective to weather any continued economic instabilities. To this end, we felt it would be helpful to share with you our significant debt commitments. When you take a look at the maturity profile of our debt instruments, we do not have any significant payments coming due in the near term. I'd like to take a moment to outline, from a liquidity standpoint, our significant debt commitments.

We have 250 million due in December of 2002 relating to the short-term portion of our revolver, again, which we expect to roll into another 364-day term.

The next date any significant amounts are due is mid-to late 2004. May 2004 is a 350 million convertible bond and December 2004 is the remainder of the revolver of 350 million.

The next significant date would be September 2005, and approximately 920 million would be due on our convertible bond issued in September 2000.

The final significant date would be March 2007 and consists of our 565 million convertible bond.

Please note that we have the ability to call and cash out or potentially convert into equity all of the convertible bonds. There are no put rights on the convertible bonds except the convertible we did in September of 2000. The earliest put feature is not until September 2005.

We have a good debt profile, and we will continue to manage the terming and cost of our debt.

Our debt - I think we have a very conservative capital structure. Our debt-to-cap ratio at the end of this quarter is 29% and our debt carries a low average interest rate of about 3.7%.

Shareholders' equity is approximately 6 billion.

So in conclusion, we have been focusing on key balance sheet metrics, and we continue to make progress in reducing DSO and increasing inventory turns as well as generating strong cash flow from operations.

As a result of our focus on the balance sheet, as you can see, absent acquisitions, no significant amounts of cash are expected to be expended for debt in the near term. And if you layer on top of this the fact that we have the ability to draw down an additional 150 million on the revolver and we will finalize our ability to pull down approximately 200 million on the asset securitization shortly, this means we have access today to an additional approximate 350 million.

Couple this with the fact that we have the 2 billion shelf registration available to us, we believe our balance sheet and liquidity position is in good shape, including the current 1.1 billion of cash and short-term investments presently on the balance sheet.

Now, let me turn to forward-looking guidance.

Many leading companies in key sectors which Sanmina-SCI serves continue to report softness which certainly impacts the timing of when we believe we will return to higher levels of profitability. This fact should not be a surprise to anyone.

If the economy picks up, we believe we have positioned ourselves to take advantage of the leverage in our business and are poised to achieve higher levels of profitability. Randy will outline this in more detail in a few minutes.

In today's environment looking out beyond one quarter remains difficult. Hence, we are outlining guidance today with the continued assumption that the economy will not recover as quickly as we expected. As to our guidance for our Q4 2002, the following information will be before merger, restructure and unusual or infrequent charges.

We are targeting Q4 sales to be between 2.6 and 2.7 billion, which is approximately flat to 3% growth. Gross margins are expected to be between 4.2 and 4.5%, and we are also targeting operating margins of approximately 1.1 to 1.4%, which is flat to up over last quarter.

Net interest expense is expected to be approximately 26 million.

I'm pleased to announce that our expected tax rate for the full 2002 year has dropped to 33%. We've achieved - we have achieved this rate drop primarily through the benefit of changes in the tax law relating to foreign sales as well as increased earnings in low-tax jurisdictions. While this rate drop and the corresponding catchup adjustment will not impact Q4 EPS, quite frankly it equates to less than one-tenth of one penny, we believe the rate reduction is sustainable at the changes in the tax law, and therefore is significant, because it will certainly provide benefit in the future when the economy picks back up.

We will continue to focus on lowering our tax rate as growth and the mix of our business continues.

Basic shares for Q4 are expected to be 515 million, and diluted and cash shares are targeted at 520 million.

This equates to cash net income of 9 to 14 million, and cash EPS of approximately 2 to 3 cents.

We are targeting continued improvement in inventory turns before any acquisitions, and are targeting a decrease in DSO by one to two days.

We estimate that quarterly depreciation will be approximately 60 million, and quarterly capex spending will be between 30 to 40 million, of which a large portion will be for IT infrastructure, including Oracle implementation.

We estimate that our Q4 amortization will be 1.3 million. For our entire 2002 year, we are expecting our annual depreciation to be approximately 265 million, and our annual amortization will be approximately 6.3 million. These amounts are significantly lower than the amounts I have previously given and outlined to you.

Obviously, this could change as our economy recovers or with new acquisitions.

So in conclusion, we continued to show profitability and growth in the business, generated significant cash from operations, improved DSO, inventory turns, and cash cycle days, as well as increased our cash and short-term investments without any additional debt. This positive trend continues from the date of merger. We believe we've managed our resources and cash responsibly. Our goal is to continue this trend next quarter and beyond. Our strong balance sheet coupled with available liquidity and a debt profile that is favorable allows us to be committed to taking the necessary steps to adjust our business to the current environment, and that are consistent with our strategic goals. We will continue to focus on quality earnings growth and shareholder value.

I appreciate your time, and now I'll turn the call over to Randy.

Thanks, Rick. As you can see from our Q3 '02 earnings release, the June quarter was in line with expectations. For the quarter, our top line, as Rick pointed out, came in just over 2.6 billion and our pro forma net income was 3 million. This gave us a pro forma cash EPS of 2 cents. And again, we believe that given the challenges for the quarter we're seeing, and the markets, these are very respectable numbers here.

Let me start with a few minutes on our top line.

As you can see, we achieved 2.62 billion. This represents a sequential increase of 206 million or 8.6%. The three larger new program wins that we announced since the beginning of the year, all of which have now closed, were IBM, HP, and Alcatel. These wins contributed, in aggregate, approximately 200 million in revenue in our March quarter, and approximately 300 million in incremental revenue to the June quarter, or in other words, a total of about 500 million in aggregate revenue from our first quarter to our third quarter.

This meant that in Q3, our base business or all the other business other than these new wins, declined about a hundred million dollars or about 4%, which is in line with our guidance and expectations.

For the quarter, the communications infrastructure market segment, representing both voice and data, was 31%. This compares to 32% posted in the prior quarter.

However, even with the 1% drop, this sector grew approximately $40 million in absolute dollars.

In this sector, our more heavily communications focused companies, the ones who primarily rely on carrier spending, were essentially flat with last quarter. The strength in this sector comes from our more heavily networking focused customers, the ones who rely more on enterprise spending.

This sub-sector was up in absolute dollars about 35%, and this increase was primarily driven by new program wins.

Personal computing sector come in at 39% this quarter, and this compares with 34% in the second quarter or the March quarter. This gain came from having the IBM net vista for a full quarter, as well as the benefit from completion of the HP European transaction during the quarter.

High-end computing was 16% for the June quarter. This was down about 1% from Q2. Our industrial and medical instrumentation sector was 8% for the quarter. This compares to 10% for the March quarter. And our final market segment was our multimedia, and it come in at about 6%. This is down about 1% from the prior quarter. It was mostly rounding. In absolute dollars, this sector was actually up $8 million, or about 5% for the quarter.

The net result is the mix in the June quarter was heavily slanted towards PCs. We attribute this, in part, to the overall strength in consumer and enterprise spending as contrasted to a basic weakness in carrier spending, which negatively impacted our communications infrastructure segment.

Long-term, we expect to see significant growth in communications infrastructure, shifting the mix somewhat back towards higher-end products and services. Let me turn the discussion to some comments relative to what we're seeing in our primary markets.

First, communications infrastructure.

The wireline long-haul transport segment we often refer to as optical switching continues to remain weak. And I know this is no surprise. As many of you know, carrier and service provider capital spending forecasts have been steadily shifting down. Consistent with our comments last quarter, this business actually came in down about 2%, or basically in this essentially flat range that we outlined for an expectation. We expect that this business will remain in the essentially flat range for Q4 as well.

In the wireless sub-sector, the business environment is also characterized as a bit soft. However, we are seeing increased activity here. Q3 revenues were in line with our communications - or our expectations that we communicated to you during last quarter's conference call, actually coming in about 3% up range, which is basically in our previously communicated flat range here. But, again, we still did see some - some increase here of about 3%, when compared to Q2.

We expect this sector to be in the up 5% range for Q4.

The enterprise sub-sectors held up relatively well for Sanmina-SCI. Q3 revenue was up significantly. As I mentioned earlier, about 35%. We expect this business to be in the flat to up 10% range for Q4. Once again, the increase was primarily driven by new program wins.

In our high-end computing sector, Q3 revenues were in line with our in-the-flat-range expectations, and we expect this business to continue to be flat for the next couple of quarters.

Our industrial and medical instrumentation segment was actually down about 30 million, or 12% in Q3. This business includes our semiconductor capital equipment, our medical and industrial instrumentation, and our defense aerospace sub-sectors. There is a flurry of activity in this area as the semiconductor capital equipment and the medical OEMs realize the benefits towards outsourcing. We've also seen a decent pickup in activity in our defense and aerospace markets as well.

As such, we expect this business to be in the flat to up 5% sequential range for each of the next two quarters.

In our and P and C computing sector, Q3 represented another strong quarter. Clearly, this sector got a boost from the IBM and HP new business wins.

Overall, this sector was up approximately $200 million or about 24%.

Approximately 250 in incremental revenue was attributed to the IBM and HP wins. That equated to an overall decline of approximately 5% in our base and P and C business, and given this pretty nice strength that we saw in the March quarter - I pointed out last quarter's call - we're really pleased with this contribution.

We expect this business to again be in the up 10% range benefitting from a full quarter of the HP European business.

Finally, in our multimedia sector, Q3 revenue was in the flat to up 5% range that we outlined earlier. We once again expect this business to be up, though, and probably more like up 10% range for Q4. We're seeing some nice activity in this area.

I'd like to make some comments in our PC fabrication and enclosure business divisions.

The PCB fabrication business is clearly navigating through a period of excess or surplus capacity. Given the commodity characteristics of this business, we've seen some pressure on pricing. In addition, we've seen a significant reduction in overall profitability due to underutilization of our facilities. I know none of this is news to you, especially if you follow the industry. However, we've received several questions regarding trends relative to pricing, as well as whether or not the business is migrating from locations in North America to locations in Asia, and as such, I'd like to make a few brief comments in this area.

First, I want to point out that pricing is a function of several things, to include available capacity, future growth opportunities for the particular business, and certainly the level of technology needed for the manufacturing of the board. What we are seeing is a reduction of pricing somewhere around 3% average on a quarterly basis. Again, this is not necessarily an indication of the average panel pricing that we have in our operations because this is a function of the level of technology, and, you know, it very well may be increasing. However, for the purposes of addressing this issue, we're seeing some reductions in pricing, again, around this 3% on an average quarterly kind of basis.

We are seeing greater pricing pressure on the lower layer count boards as opposed to higher-end boards.

With respect to business leaving North America for Asia, we firmly believe there is no significant trend in this direction. We do believe that the overall PC fabrication business in Asia is enjoying higher capacity utilization rates. However, we believe this is primarily driven by the fact that consumer spending is stronger than spending for high-end communications infrastructure and computing equipment, and clearly, the Asian PCB fabrication market caters to this currently stronger trend in consumer spending, which again is more closely connected with the lower technology. We recently had a team doing some survey work for us in Asia. It was our own team. And our thoughts were confirmed, based upon this work. There were very few high-end programs being done in Asia. And by "high-end," I mean above 16 layer count boards. There is no clear trend that the high end is moving offshore. We've won several new high-end programs and we believe we are solidly positioned to grow our PC fabrication business once we see a recovery in our primary higher technology markets.

Our strategy with respect to our PCB fabrication business is to come very close to break-even from a profitability viewpoint, generate positive cash flow, and maintain as much capacity as we can, meeting these financial metrics, so we can capitalize on these future opportunities.

For the quarter, in our board business, we grew the top line approximately 2%, and we came in a bit short of our break-even target. Our losses were in the break-even $5 million loss range, a number consistent with last quarter. Our capacity utilization is in the 32 to 34% range, and we continue to maintain about 1.2 to $1.3 billion in annual capacity.

Based on what we're seeing today, we do not expect to take out any additional capacity, and that we're coming very close to hitting our short-term targets for the business for which I just pointed out to you above - or just pointed out here.

For the quarter, we expect to see a continued increase on the top line. And by "the quarter," I mean here coming up for the September quarter, we expect to see a continued increase on the top line. Probably in the 5% range. And operating results, again, very close to our break-even goals.

The last week of June and the first two weeks of July did indicate positive trends for this particular business, and is certainly helping us move in this direction.

Once again, I broke down our fabrication business for you because I believe it is helpful for you to see the leverage on our profitability that a recovery in the high-end bare board business would bring to Sanmina-SCI.

Our enclosure business revenues for Q3 were in the up 5% sequential range, and given the leverage in this business, profit was up substantially for the second straight quarter. We expect this business to steadily continue, with positive trends for the next several quarters.

Let me turn the discussion to the Sanmina-SCI merger integration.

With the exception of the IT system integration, the integration is behind us. We have an excellent management team, and they're working very well together. The issues that arose in December have, with one exception, all been resolved, and in the June quarter we were profitable in every region. The IT integration is going well, and is on schedule. In May, we successfully completed our dual former SCI beta site initial transitions. In July, we began our planned monthly multiple new IT site system integrations. To date, we've successfully completely transitioned four former SCI sites. We're on schedule, and we will continue to believe that by the end of December, we'll have over 85% of our revenue on Oracle, and by March 2003, a hundred percent of everything that is part of Sanmina-SCI today should be transitioned.

Once this is completed, we'll be - we will be one of the very few large companies in the world with such a large international presence on one common IT platform. This will clearly be a long-term strategic advantage, especially in the area of managing the supply chain, and after the huge amount of supply chain issues which surfaced over the last year, minimizing supply chain risk and supply chain management is a critical area of focus that we're increasingly seeing by our customer base.

Our new IT platform and our supply chain management business practices will combine to offer substantially improved and innovative supply chain management techniques.

So in summary, the integration is going well, and in fact, has gone better than we could have hoped for and we're pleased with our progress, and I can honestly say, in my mind, our management team is doing an excellent job.

Another area we receive a lot of questions on is HP. As such, I'd like to update you on the Sanmina-SCI/HP relationship.

On January 17th, we announced that HP would outsource its [inaudible] France operations to Sanmina-SCI. This announcement stated that Sanmina-SCI would manufacture personal computers and other products for HP at the site. This is, of course, prior to HP completing its merger with Compaq.

Subsequent to completion of its merger with Compaq, HP announced its outsourcing plans for its European operations, and we are very pleased to be one of those partners selected. As part of its new product plans, HP also announced that some of the products that were historically produced in the [inaudible] France operations would be phased out.

However, to offset the negative impact of these phased-out programs, certain equivalent programs would be transitioned in. Based on this commitment, we moved forward with the announced transaction and it was completed in June. I might point out that there is a potential - and I want to stress the word "potential" here, because it may not happen or it may happen - for a short-term negative impact on production rates at the site as production is transitioned to some of the new programs over the next three to nine months.

The impact of this transition has been included in our overall guidance that we provided to you today.

I know you have other questions relative to our relationship with HP as it relates to North America. Unfortunately, at this time, we are not able to discuss any specifics with you. Clearly, the reason relates to the fact that HP has not publicly announced its outsourcing plans here in North America. When this information is announced, we will update you as to any material impact, if any, on Sanmina-SCI. This decision was coordinated with HP, and this is all the information that we are authorized to disclose at this point.

One final comment on HP. We have enjoyed a long, successful partnership with HP. We believe our relationship has been mutually beneficial, and based on the success of this past relationship, we firmly believe the new HPQ will offer significant growth opportunities to Sanmina-SCI and we are very excited about these opportunities that are ahead of us.

Finally, I'd like to make some comments relative to the future.

I believe it is clear that predicting the future has become increasingly difficult to do. It's not unusual to find individual customers off by as much as 25% with respect to their forecasts. Fortunately, we have the laws of numbers working to our advantage, and when some are down, others are up. With that said, I know we need to provide some guidance as to what to expect for the upcoming September quarter.

Again, this is difficult, given the uncertainty in our end markets and given this uncertainty, we believe it is prudent to be somewhat conservative.

We expect to see our top line in the 2.6 to 2.7 billion range. This reflects the additional incremental revenue from the full quarter of the HP Europe and the late quarter expectation of closing Siemens, a total of which approximately 150 to 200 million in total will contribute and are factored in our numbers to this is the offset by the expectation of a decline of up to - and I want to say up to - 5% of our base business or business excluding this - these new wins that I just mentioned.

For the bottom line, we expect to see the September quarter in the range of cash EPS of 2 cents to 3 cents. This gets benefit from the incremental growth that I mentioned above, and the continued benefits of the cost reductions, offset by the negative impact of a small decline in our base business and the increased costs from the newly-acquired HP European operations.

Our challenge is to manage through this difficult time. We balance the needs of our investors, our customers, our employees, and our suppliers. This balance includes positioning the company for a bright future. We believe we've done an excellent job at striking this balance. Even with the significant hit to our top line, we've managed to stay in the break-even range, and we've generated a significant amount of cash while maintaining our technology leadership position and sufficient capacity for meeting tomorrow's demands.

We believe that our industry and our company offers significant long-term prospects. We recognize that we still have an awful lot of work to do. However, I assure you that this team is up to the challenge. Our goal hasn't changed. It's to stay on track with quarter after quarter of positive news.

So again, I'd like to thank you for your time and turn it back to Jure.

Thank you, Randy.

Ladies and gentlemen, in this tough economical times, you always have to focus on control and you already heard a lot of that and I just want to add a few more things.

What we did during this quarter is that we made great progress in furthering our strategic plan. Sanmina-SCI merger integration is nearly completion, as Randy said. Basically it's done. We are continuing to expand and strengthen the key partnership with leading OEMs. We are advancing our leading technologies in design of the key products, printed circuit boards, enclosures, back (inaudible), RF and optical cable assembly, memory modules, and complete system integration and final system test, as well as global order fulfillment. Our new company, Sanmina-SCI today has increased ability to provide a total end-to-end solution in all of the major technology centers worldwide.

Sanmina-SCI's management is not only committed to building the premier [inaudible] company we talked about, but we're also maintaining our focus on the value of our customer service, our people, and importance of trust and value of our shareholders.

Now, let me tell you what I'm hearing from our customers, specifically about the market demands.

Clearly, there are challenges in predicting the future. Some of our customers see a strong second half of 2002, while others are more cautious.

What we do believe will happen is a continued trend towards outsourcing, and given this trend, our industry will see a reasonable growth during the second half of 2002, and more growth in 2003.

So what does this mean for Sanmina-SCI? I personally believe that Sanmina-SCI will continue to see some improvements during the second half of this calendar year, but at this time, I still am very - it's very hard to forecast how strong the demand is going to be.

Sanmina-SCI has been successful winning some new programs, and our pipeline is full with new program opportunities. As I look ahead, I remain very optimistic about the growth opportunities for the EMS industry, which is expected to show high growth in coming years. The outsourcing trends continue to be ever more positive in this environment. I believe that Sanmina-SCI is in the best position in the EMS industry to leverage outsourcing opportunities as the economy turns.

Internally, we are continuing to focus to deliver leading financial metrics in our industry. And I believe that we have the technology, operational excellence, and management team to deliver these leading metrics.

During this challenging economical environment we are well entrenched in some major pieces of the business and are more focused than ever before on our long-term strategy and improvement of our operations.

These are some of the areas that include focusing on the leading technologies in EMS industry, enhancing our customer relationships, improving manufacturing processes, enhancing our supply chain management capabilities, and of course reducing the costs.

Sanmina-SCI's long-term strategies continue to strengthen our ability to provide our global customer base with a total global manufacturing solution. We have developed technology leadership where we have positioned ourselves with tremendous leverage when demand picks up. These leadership areas include, again, engineering and design, complex printed circuit boards, back [inaudible] assembly where we're also number one and we are producing products over 50 layers, high-end enclosure systems. We are also number one in technology and global presence. And we're also develop the leadership role in RF and optical cable assembly sector as we have recently strengthened our memory product offering.

On the EMS side itself, I believe that we are positioning company to be number one here. We are definitely a global - in a global leadership role where we can supply our customers with design services, a complete system build, final system and test, and full global order fulfillment.

So when you look at our company today, we truly have an offering of services that is really true end-to-end solution.

In addition, we are constantly working to diversify our market segments. Long-term, we view the likely breakdown of our end market as following: Communication infrastructure, mainly networking, optical and wireless, 35 to 40%; high-end computing, a range of 15 to 20%; medical, industrial and aerospace, 10 to 15%; personal computing 25 to 35%; and multimedia, 5 to 10.

So in summary, yes, we are operating in these challenging times, but Sanmina-SCI has the strong fundamentals and experienced management team who has seen challenges like this before. We will get through this challenge, the challenging economical environment, which will result in a healthier and stronger business, long-term.

Sanmina-SCI has positioned itself as the premier EMS company in this industry. We will stay customer focused. We are a disciplined organization where integrity and excellent are the most important.

And now, what I would like to do is to extend a special thanks to our investors and analysts who are participating in this conference call. At this time, Randy, Rick, and I will be able to answer any questions that you might have. Thank you again.

Ladies and gentlemen, at this time if you would like to ask a question, please press star, then the number 1, on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Jerry Labowitz of Merrill Lynch.

Since you started the restructuring program, how many facilities have you downsized? How many have you closed and can you give us an idea of where your head count is today compared to where it was at the peak?

Randy, you want to take that one?

I'll take that. Altogether, Jerry, there was - it was around 37 or 38 facilities that were one way or another affected with the overall restructuring effort. That doesn't mean they were all closed, but they were downsized or impacted one way or the other.

At the peak, our head count - or I don't - I don't know exactly what it was at the peak. I have it here in front of me. At January 1 of 2001, we had about 66,000 people, and clearly we've added some people through some of the new wins that we've had.

The head count today stands at about 44,700.

Okay. Thank you.

Thanks, Jerry.

Your next question comes from Lou [Misoshaw] with Lehman Brothers.

Sure. On that same thought, I guess, could you give us the squire footage, I guess, where you were on January 1 and then where you are now and also, the blend, I guess of the footprint, where it went from, from high-cost, low-cost percentage. I guess the data point again being back January 1 and now.

I do not have that. Unfortunately, I don't have that data in front of me and I don't know that I got it compiled on a consolidated basis because we break it down by - between our fabrication, our enclosure, and our EMS business.

I will try to get that by the end of the call, and I'll just - I'll just bring this off.

I do want to point out that - that the activity that we've had has primarily been focused in North America and in Europe. There has been very little restructuring activity that has happened in Asia. What that is - what that is clearly - has meant is that there has been a shift of capacity - available capacity slightly in the area of Asia.

Our current strategy and goal, though, is not to, in essence, close capacity over here and move capacity over there. We have - we've been reacting to the market demands that clearly, as I've pointed out here on the call and as clearly you know, is with primarily carrier spending being down, enterprise spending being off a bit, a lot of the stuff that we've historically done in North America and in Europe has been higher-end products for that particular business. We've had to downsize that capacity, and we've had, you know, some - some duplicate capacity as a result of the merger that we've had to take out there to meet that demand.

So I certainly want to point out there is not an ongoing plan in place to take and move business from North America to Asia. I just want to point that out. And by the end of this call, I'll certainly try to have what the impact has been overall on our square foot.

Okay. Do you think you're done with everything now, or do we still have another quarter to just actually go through the implementation of closing whichever facilities or, you know, laying off more workers, if that's the case?

Well, we - we think we're - from what we're seeing today, that we're pretty close to the things that we've announced or the plans we've had in place, or at least the things that we announced back in December.

There is a - there are some opportunities in our enclosure business. In December, when we laid out our - our overall plans here, we actually only had, of that total number, we only had about $5 million for restructuring efforts in our enclosure business. We - even though that business is profitable and continued to grow, we do view that business with a fair amount of surplus capacity today, and I think there's some opportunities there to improve that business by - by rationalizing some of that capacity that we have there today.

And I think as such, we - you know, there might be some more efforts there. However, from - for all practical purposes, we're not going to be significantly off the overall efforts that we discussed in December, and if - if we do exceed that number that's there, it will not exceed it more than five or six percent that we've outlined earlier. Hopefully that's where you're headed with that question.

Let me just add to that. I think I have some - just if you look at the demand - or just the revenue, where it comes from, with basically international about 50% and domestic about 50, it's kind of 50/50 spread. But as Randy said there, we're talking very close with our customers and looking at their strategy long-term and I believe our - you know, if you strictly define the low-cost, we really believe that what's going on right now with our expansion that we're doing in Asia and Mexico, really it's going to cover us, what we need going forward.

Okay. Great. Just switch over to some of the recent wins that you've announced. I'm not sure if you've actually given the actual dollar amounts of some of those. I think you just mentioned Siemens now but you also had Storage Tech, I think you had a Sienna announcement and a new other things. Can you give us an idea for the rest of this calendar year how much revenue we might end up seeing flowing into maybe the September quarter and then also, obviously, the December quarter, similar to the way you talked about HP and IBM?

I can. For December, at this point because of the uncertainty there, we're going to kind of limit what I'm going to say to just the September quarter that's there.

We have - when we pointed this stuff out, we - certainly the HP, the IBM, and the Alcatel was there. We pointed out that we expect about a hundred to a hundred and fifty million dollars of revenue from these transactions in Q2, and we were slightly over that. In Q3, they would contribute over Q1 about 400 to 500. We're at the top end of that range. And we said in Q4, 600 to 700 million from these transactions, and we're going to be at the high end of that range as well.

Therefore, to answer your question, that's about 700 million from these deals. Incrementally, it's going to be about 200 million over Q3 to Q4. And that's in line with the comments - my prepared comments that I had earlier.

So but that's - that's the HP, IBM, and Alcatel?

No. I grouped - I grouped Siemens in that as well. The other transactions that we mentioned were - were not as sufficient of size that I've added them in there. So let's just put it that they're not - you know, in the end, it would be somewhere in decimal points of how it would affect our overall revenue.

Okay. Great. Thank you.

Uh-huh.

Thanks, Lou.

Your next question comes from Tony [Bowes] with A. G. Edwards.

Thank you. Assuming no recovery in end markets over the next 12 months, which, granted, is, you know, worst-case scenario, what kind of production would you anticipate from PCB fabrication? Right now you're running at, you know, a little over 400 million. Do you think you'd get to 500 million simply from the completion of inventory - of the inventory correction?

Tony, this is Jure. Based on analysis that we are seeing every day, even if there's no recovery, I believe that business is going to grow a little bit and definitely should get over a run rate of 500 plus just based on - strictly on some inventory collections, yes.

And could we get some further details on the - on the Siemens transaction? Specifically, annual revenues and purchase price?

Well, let me put it this way: The 00:59:05 Siemens deal, as you know, we announced it. It 00:59:07 will be finalized any day now, and so I can't give 00:59:11 the details at this time. 00:59:12 00:59:12 But this is a very strategic deal for us because 00:59:16 of the long-term potential and the type of 00:59:19 partnership that we're working on. So it's a - 00:59:21 it's a very important deal for Sanmina-SCI, and 00:59:25 we'll give you more deals when this thing gets a 00:59:28 hundred percent finalized. 00:59:29 00:59:29 >> ANALYST: Lastly, I'm wondering about the 00:59:32 strategy behind your modular division. I'm just 00:59:37 curious. Why not just be a contract manufacturer 00:59:40 to Viking or interworks? Why go out and purchase 00:59:44 those companies and, in essence, become an OEM in 00:59:49 those areas? 00:59:51 00:59:51 >> JURE SOLA: Well, Tony, first of all, we 00:59:54 acquired the interworks a few years ago, and we 00:59:57 learned a lot about the business. This was a 00:59:59 small business, actually, that was making a little bit of money for us. And as we looked at our - what we can do with this business, it just made a lot of sense to really either get it just a little bigger or get out of the business.

We believe that we have tremendous potential to increase this business. As you know, we use a lot of memory ourselves, and it just - we feel at this time it just makes a lot of sense for us to expand this division.

Randy, you want to comment on that or help me out there?

No, I think you did pretty well. We've - we've been pleased with the performance of our memory module, which was a very small part of our business from the day we decided to get in this business.

Prior to the Viking transaction, we were - we were primarily a custom memory module company, and what we found in doing a little bit more work in this area is that if we could supplement the custom work with a little bit of the standard work, we could be much more efficient in the way we do our processes here. And also, the reason that we got in this business to start with was a little bit of a survey from some of our customers in areas where they would like to see us have a service offering because as Jure pointed out, in quite a bit of the work that we do, we do have memory in here, and our customers have perceived some of their memory solutions in the past as being some issues for them to get specifically what they were looking for from a service offering in this point of view, so we really felt that by combining Viking with our existing memory division, hiring an industry veteran like Ralph Kaplan to come on board and help guide that group, that we would multiply what little success we've had in there to a much bigger success going forward, and just in the 30, 40 days since we've announced that transaction, I'm pleased to say this group is ahead of forecast and has some pretty good momentum going forward.

So I don't - it's relatively small for Sanmina mean an overall. I mean this is a business that's in the neighborhood of 200 million annually today. It's not overly large. But it's a business that we see some above corporate average profitability coming from in the future and one that will enhance our overall ability to win systems business, because of the vertical integration aspect.

Just two housekeeping questions. One is, what was the long-term debt portion of long-term debt and other on the balance sheet, and what was capacity utilization in your EMS business?

I'll take the second one first and I'll let Rick thumb through his book here for the first one.

We're running at around 44 to 46% capacity utilization in our EMS business.

And Tony, the long-term debt portion was about 436 million.

Thanks very much.

Okay.

Thanks, Tony.

Your next question comes from Scott Craig with Morgan Stanley.

Hi. Good afternoon.

Hello, Scott.

Randy, if you look at, let's say, a flattish revenue type environment, can you describe what your margin profile will be, you know, given that you're still seeing a bit of a decline in your base business right now? If that was to shore up to zero, sort of how - what sort of improvement would you get from your restructuring?

Yeah. So let me - let me say that on the surface, it might appear that we should be doing a little bit better job in improving margins going forward or we're not taking enough cost out of this business. I want to try to kind of paint a profile here and try to answer the question this way:

You know, we in this business have some relatively tough choices to make from time to time, and that includes, with this trend towards outsourcing, how much of these opportunities do we take and how much additional cost or resources or facilities or people or all of the above do we take on as part of these outsourcing trends.

I mean, I think it's clear to everyone today, the ideal situation is for the OEM to outsource the business and not outsource the facilities and the people and all of that.

Unfortunately, that's not always a choice that we have, to be the most favorable. So we have to sit back and we have to run a lot of numbers and make - make a decision on, you know, if we do take on this additional cost by taking on these people and facilities, how are we going to get a reasonable return on that investment. And our decisions to go forward on each of these is to do that very thing, is to make an above-industry average return on these investments we're making for these opportunities.

On a - on - also, on a positive note is that as we move up from somewhere around 14% of all OEMs' cost of sales that was outsourced last year to something closer to 30% five years down the road, these opportunities are part of that growth in this market.

So if we take the position that we're not going to participate in this, we're probably not going to win market share over the long term.

So, you know, we have selectively, as well as the other companies in this industry, picked opportunities that we think make sense and give us the returns we're looking for.

The downside to that is that we are taking on additional costs. So for example, with the Alcatel transactions and the HP Europe transaction that closed last quarter, Sanmina-SCI now has a greater cost. We have a greater cost of sales because we have these manufacturing sites and we have some greater SG and A. So when you look at the guidance that we - that we give out on the top line, which was flat to up 3%, and you say our revenue - our earnings are flat to up a penny, that really means that given this additional cost that we've added to this organization, we're at least taking out as much cost that we've added. And when you sit down and you look at three or four or at least three sites that we've added over this period of time, and we're taking that cost out, clearly our team is doing a good job at reducing our costs going forward, and in fact, we've hit some of these cost reduction expectations that we have. But our challenge is to continue to do more.

So the bottom line here is that we do expect to take out as much, if not more, costs than we're taking on. We do think that we're doing the right thing for our shareholders over the long term by winning market share here and positioning the company for growth. A lot of the things that we have done here, especially in the area of Alcatel and Siemens, is calm infrastructure business. Today is clearly depressed but we think long-term this business will come back. And we do see a continued improvement in our earnings, both at the gross profit and at the operating earnings level as we go forward, and the more of this business that we unfortunately win through these outsourcing transactions that we do have at facilities that are associated with it, the more that's going to make that challenging or we have to grow our organic business to make up for that as well.

I will tell you that we have been successful - Storage Tech was a good example - and there will be some other ones that we're going to talk about in the future, of winning programs that there are not facilities, people, and equipment that goes with it.

There - there's probably a corresponding offset to let's just say margins that come with that as a result of that, but we don't have to take on that cost.

So I know that's a long-winded answer to your question, but I did want to at least make that statement that I do think we're making good strides at reducing cost and winning market share. It's just not quite showing up in the margin improvement as we'd like to see it, but I think over the long term, especially as some of this business comes back - and we're starting to see some life - some signs of life, especially in the wireless area - I think you'll see the margins have a lot of merge of leverage and can move up fairly quick once this business will pick up.

Okay. Thanks. And Rick, just quickly, can you go over the goodwill impairment tests issues for us? Please.

Well, the goodwill impairment test issues, we are monitoring that. When you look at the rules, the rule is quite complicated as to when you pick your date. We've effectively picked this coming quarter to implement the SCI transaction effectively and take a look at that, along with all other goodwill impairment.

At this point, from what we can tell when we do the test, there has not been an impairment, but we do monitor that very closely and will continue to monitor that.

Thank you.

Thanks, Scott.

Your next question comes from John McManus with Needham and Company.

Hello, John.

Could you discuss the Asian survey you did in the printed circuit board sector? Do you have to be in China? And can you afford there not to be in China for boards which are maybe 10 to 16 layers?

Well, John, we went to Asia to survey really to understand better, you know, what's going on there and what are the future opportunities, you know, as we're expanding heavily, as you know, from an assembly point of view and our enclosure point of view in Asia. We do have a facility in Asia right now, in Malaysia. Our Malaysian facilities is one of the leading-edge technology - printed circuit board facility in Asia right now, you know, and with advanced technology.

We feel that we will be in China. It's just a timing issue. We believe today, we don't need to be in China.

As the markets start coming back and we see a need for it, I think we'll be there. If I had to guess, probably in next 18 months, Sanmina will have some factories in China because we are buying a fair amount of boards, you know, at the lower level that we're not manufacturing ourselves today, and we believe there is a benefit, if we can manufacture some of these lower boards in China, especially as we are assembling in China.

I think that's true there, and wouldn't you want to do that as quickly as you possibly can?

Could you talk a little bit about how much you do source internally and how much you think you could source internally at the maximum?

Well, I don't have the number in front of me. First of all, I don't think - first, let me answer the direct question. I don't think we need to be there today because I think there's plenty of extra capacity and that we are getting, I think, you know, a fair pricing at this time. But we are having plans - we're putting plans in place to move to China when we feel the timing is right. We just feel today, with all this extra capacity that I have, including Malaysia extra capacity, there's really no need for us to have factory in China.

The difference in cost between China and Malaysia is minimum. It's strictly in the labor. It's anywhere from 75 cents to a dollar in labor, which is not a huge difference at this time.

How much we outsource, I don't have the number in front of me. We can get back to you on that, John.

Thank you very much.

Your next question comes from David Parrish with RBC.

Hello, David.

Good evening. Randy, are you saying that you're actually not seeing an outflow of business from the U.S. market into some of the lower-cost regions?

We have - we firmly believe that we're not seeing high - higher-end product that we do in any material fashion. I'm sure you can find some examples - in any material fashion moving from North America to Asia. For example, and I'm using this as a broad extreme but Nokia and Nortel today are not taking their base stations for the North American marketplace or for the European marketplace and moving that to Asia. The OC-192 and OC-768 optical transport switches that we're building for our customers today are not being - not being migrated to China. And I can - I can continue with this kind of examples here.

So the point is that, you know, there are some capabilities to do some of this stuff at some selected sites in Asia, and everybody said that and we're not - we're not totally disagreeing with that statement. We think it's selective but we're not disagreeing.

But in our survey work, nobody could show us any of this work that was over there. So - that's being done. And the reason is because it's depressed today. I mean, these marketplace for these higher-end products today is soft, and we know the codes and we know what we're shipping, and granted, we might have been shipping at the rates of hundreds a week, 18 months ago, and today we're shipping a few a week. We're still shipping those a week. We haven't lost that business. It's just the fact that these markets are soft. We firmly believe that when these markets come back, this work will still be being done, the high-end work here in North America, and that's the point we're trying to make here.

Do you think that we'll see an outflow from the U.S., though, into Mexico, as capabilities continue to increase in that region?

You could. I mean, the - the BTO/CTO work that we're doing for our PC customers today, I don't think there's any secret some of that work we're doing, we're managing the process, is migrating from North America - or from U.S.-based sites to Mexico-based sites because of the logistics related issues. I still think for some of this really higher-end, low-volume, a lot of ECOs, a lot of changes, pull-in, push-outs, you're not going to see a whole lot of that work migrate from North America. If you were to talk to our customers today, clearly cost is one of the top things, but also one of the top concerns they have is mitigating risk or reducing risk in the supply chain. And if you build a half a million-dollar telephone switch or, again, I can give you many examples of our high-end work. By moving that stuff to where it's not overly efficient to ship on a plane or it takes longer from a logistics point of view, it doesn't reduce some of the risks in the supply chain that our customers are looking for.

So I don't want to tell you that there's not some things - there's a lot of things, if they're more commodity, if they're higher volume, if there's less risk of obsolescence or and E and C and O changes or customization, that work is clearly moving to low-cost regions, and we're doing a lot of that work ourselves.

But the work that is highly configurable, has very short lead times, our customers really want to reduce the risk in the supply chain, the cost/benefit by moving some of that stuff to - you know, from this - from North America, say, to China is not enough to get our customers comfortable with moving it because of these other things that I've mentioned.

So would it be fair to say that utilization in the U.S. is probably unlikely to exceed, say, 50% until we actually see some sort of rebound on the telecom side of the market, assuming that, you know, the majority of this high-end business is - is kind of telecom related?

I think if - first of all, are - is that question phrased from just the bare board business or from a total business?

Total business.

I think we're not - we're not in a position to say that - let me see. I'm trying to figure out how to put this in words.

I think the demand that we're going to see is hard for us to predict, and we're not saying that demand is going to come back to be able to load these plants to where it's going to be north of 50%. I mean, we're not saying that today because we don't know.

I will tell you that there is a fair amount of consolidation going on in the industry, and certainly in the EMS industry and the board industry as well as the enclosure and other industries, that is on a pretty rapid, you know, program to take out capacity.

So I think the combination of some recovery in this business, maybe like the wireless, for example, combined with what's going on in terms of capacity beginning to be taken out of this business, I think you'll see this line move closer to 50%. Whether we'll get it over it or not in the next couple or three quarters, I don't know, but you're going to be seeing it move at least in a positive direction.

Okay. What portion of your footprint right now is in the U.S.?

I don't - I did get the information asked earlier. 70% of our footprint is in U.S., Europe, and a small amount in Brazil for which we're going to - we're going to refer to as maybe higher cost. Certainly not - not what you're looking at at lower cost.

And 30% of our footprint is in Asia and eastern Europe.

Okay. And you - did you say that - I think you said you were profitable in all regions?

That's correct.

That would include the U.S. as an individual region as opposed to North America?

Yeah. We don't - we don't normally disclose this, but our U.S. operations contributed - contributed north of 60% of our overall profitability for the quarter, so we're probably more profitable still in North America than we are there, even with the capacity. Because, again, the products and services that we do in North America tend to be higher-end programs that have higher-end margins in them.

Okay. Just one last question. If we do get a modest rebound in the end markets next year, what kind of improvement would you expect to see in your operating margin?

Well, that's a very good question, and again, it's hard for me to answer that because the variable is what kind of improvements do we expect to see.

You know, I think if you - if you look at the leverage that we have in our PCB fabrication, in our enclosure business, you look at - when we complete the restructuring efforts that we've had, we certainly think that our operating margins would - would rebound up into the four to six percent range, you know, by the end of next year, with - with any kind of decent rebound in the calm infrastructure and high-end computing space.

Okay. And the type of rebound, I mean would that be something on the order of, you know, maybe 15% top-line growth or would it have to be north of that to kind of achieve -

No, I think it - from an organic growth point of view, if we would see those kind of numbers, it's probably going to move us certainly into that low end of that window that I just gave you.

15%.

Right.

Okay. Great. Thank you.

Thank you.

Ladies and gentlemen, due to time constraints, this concludes our question and answer session. Mr. Sola, do you have any closing remarks?

Yeah. Yes, I do. First of all, I apologize for not being able to answer all your questions you might have but we'll be ready to answer and just give os call, leave us a message, whatever, we'll get back to you.

Again, as we all said today, it's a challenging market, but we're still excited what's in front of us. A lot of work, but it's the work that we enjoy doing it, and we definitely looking for, you know, some kind of improvements each quarter. So with that, again, thank you very much for attending this conference.

Yeah. And I do want to close with answering that question. The total square feet that is part of our restructuring square feet is just about an even 3.5 million square feet that we're taking out of Sanmina-SCI, so again, thank you.

Ladies and gentlemen, this concludes the Sanmina-SCI third-quarter 2002 earnings conference call. You may now disconnect.