Sanmina Corp (SANM) 2003 Q1 法說會逐字稿

Good afternoon. My name is Anthony and I will be your conference facilitator today. At this time I would like to welcome everyone to the Sanmina-SCI first quarter fiscal 2003 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 this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two on your telephone keypad. As a reminder, today's conference call is being recorded for a 48-hour replay. It will be available two hours after the completion of today's call.

I will now turn the call over to Mr. Jure Sola, chairman and chief executive officer of Sanmina-SCI. Mr. Sola, you may begin your conference.

Thank you, Anthony. Good afternoon, ladies and gentlemen. Welcome to Sanmina-SCI's first quarter 2003 conference call. Here with me today on this conference call is Randy Furr, Sanmina-SCI's president and chief operating officer.

Good afternoon.

And Rick Ackel, our executive vice president and chief financial officer.

Good afternoon.

First, I would like to start out by thanking you all for your support. The agenda for today is that Rick Ackel will review Sanmina-SCI's financial results for the first quarter fiscal year 2003, then Randy Furr will follow with Sanmina's operation and future outlook review, and then I will give you additional comments relative to Sanmina-SCI 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 electronic industry, changes in customer requirements and sales volume, competition, and other technological changes. The company's actual results of operations may differ significantly from those contemplated by such forward-looking statements as a result of these and the other factors, and we refer you to the documents the company files from time to time with the Securities & Exchange Commission, specifically the company's most recent annual report on Form 10-K for the year ended September 28, 2002 filed on December 4, 2002. This document contains and identifies 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. You'll note from the press release that we have, as is our custom, provided you with two income statements. One reports our results on a gap basis to include merger, restructuring costs, impairment and other infrequent or unusual charge, 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 gap net income to results presented on a pro forma basis.

On today's call we will review the results of our operations, discuss what we have done to improve the balance sheet and finally, I will follow up with guidance for our second quarter of fiscal 2003. During last quarter's conference call we outlined our game plan to restructure our balance sheet by extending the average maturity of our debt generally and reducing the outstanding amounts of our convertible bonds. I think we have made significant strides towards accomplishing these goals. As you know, in December we completed a very successful financing in which we issued $750 million of notes due in 2010 and entered into a $275 million term loan facility with a final maturity date in 2007. In addition we were able to repurchase additional amounts of convertible debt.

So let's start by discussing what debt has been paid to date. And to reduce confusion in connection with the amounts of the repurchases of our zero-couponed ventures with a print date in 2005, I am only going to give those numbers on the basis of the accreted amount that would be due in September 2005 on that put date. If you want to convert the amount of zeroes that I give to current book value just discount the amount that I give to present value at December 28, 2002 from December 12, 2005 at a rate of 4 percent compounded semiannually.

During our first quarter of 2003 we repurchased $27.5 million in face amount of the 2004 bonds. This means that in the last two quarters we have eliminated approximately $86 million of the 2004 bonds and there are now approximately $264 million of the 2004 bonds outstanding. We also repurchased approximately $82 million of our zeroes last quarter based upon the 2005 put date. This amount together with our repurchases in Q4 '02 means that we've eliminated approximately $251 million of the zeroes and there are now approximately $665 million of the zeroes outstanding at the 2005 put date.

We also took the opportunity last quarter to repurchase approximately $50 million of our 2007 bonds. The balance for the 2007 bonds is now $518 million. So to summarize, putting these repurchases together, we have reduced our shorter term bond debt coming due in 2004 and 2005 by a total of approximately $337 million or approximately 27 percent. All of the bonds have been repurchased at a discount and as a result of the debt retirement last quarter, we recognized an approximate $23 million pre-tax net gain on this retirement of debt. This gain is considered an unusual or infrequent item that is not reported on a pro forma basis. On a gap basis, this gain is reported as other income. With respect to our goal of extending maturity dates, our new financing plan allowed us to make great strides. One of our goals was to extend the maturity dates of the previously existing securitization and revolver, which was due in July '03 and December '04, to a time period beyond 2005. With the closing of our financing transaction, we have successfully accomplished this. The debt maturity profile on these amounts are now final maturity date due in December 2007 and January 2010.

Our new term loan interest rate is presently 5.5 % and our newly issued bonds have a rate of 10 3/8 %. Although these rates are attractive in today's environment, we were able to reduce the interest rate on the bonds in the short-term by converting the majority of the fixed rate debt to a floating rate debt. Our overall rate on our new bond debt is approximately 8.6. percent and will not adjust for another six months. The quarterly interest costs for both the new bank debt and the new bond debt is expected to be approximately $20 million, which is an increase of approximately $14 million over the prior quarter if the receivable securitization and revolver were still outstanding. Which means the after tax interest costs associated with the financing transactions is approximately $10 million per quarter and equates to less than 2 cents cash in gap EPS per quarter and it is anticipated to be approximately five cents for fiscal '03.

So in summary, during the quarter, we accomplished a significant amount related to our finance strategy. To date, we have reduced debt coming due through 2005 by 27 percent, or $337 million, on a put date maturity basis and have successfully pushed out the maturity dates associated with the revolver and asset securitization to 2007 and 2010, thereby significantly strengthening the balance sheet. We expect to continue moving forward with our game plan to reduce and/or extend the maturities of our near-term debt.

Let me now turn to an update on our restructuring plans. We have previously outlined for you our phase one restructuring costs related specifically to the SCI merger during prior calls. During the December quarter, we incurred restructuring costs of approximately $14 million pursuant to this plan of which approximately $13-$13.3 million was cash. As previously discussed, we expect the majority of the remaining balance of approximately $23 million to be incurred over the next quarter of which we estimate the cash portion to be approximately $7 million. Hence, we continue to be on target with our original estimate of $686 million plus or minus 6 percent.

In the previous quarter's call we described a new plan to increase capacity of utilization and to realign our operating costs to increase profitability. As you will recall this new plan calls for up to an additional $250 million of restructuring costs. We anticipate that the restructuring activities and savings under this plan will be spread over the remainder of fiscal '03 and into the first quarter of fiscal 2004. Of the total plan costs, approximately $136 million will be cash and $114 million will be non-cash.

In our December quarter, approximately $20 million of costs were recorded related to this new plan of which approximately $10 million were cash. Total costs continue to track to our estimate given and we anticipate Q2 restructuring costs related to our new plan to be approximately $50-$60 million of which approximately one half will be cash.

Now I would like to turn this discussion over to the results of our first quarter of 2003. I will begin with presenting the results of operations, then I'll follow up with the balance sheet and I will conclude by providing guidance for our second quarter. In general, for consistency I'll confine my comments to our results without charges and on a pro forma basis to facilitate comparabilities to prior periods. Sales for the quarter, which represented our first quarter of fiscal 2003, we're $2.5 billion which is in line with guidance. Our top ten customers made up roughly 67% of the total sales this quarter. The second ten made up approximately 10 percent of total sales and therefore our top 20 made up approximately 77 percent of total sales. We had two customers in the first quarter whose sales were greater than ten percent of total sales and those customers were IBM and HP.

For the quarter, the mix of revenues as a percent of revenues breaks down as follows -- third party merchant circuit board sales were 3%, assembly and other EMS was approximately 97 percent. The profit for the quarter was $109 million and as a percentage of revenues gross profit was 4.3%. Billing, general administrative expenses for the quarter were approximately 3.3% of sales and were approximately $83 million in absolute dollars. Total operating expenses, our selling and general administrative expenses with the addition of approximately $1.6 million in amortization bringing total first quarter operating expenses to approximately $85 million.

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 $60 million and $1.6 million respectively for the quarter. Cap-ex spending this quarter was approximately $20 million. Operating income, or EBIT, was approximately $24 million for the quarter, which equates to an operating margin of approximately 1 percent. Our EBITDA was approximately $86 million. Other expense net was approximately $22 million and our tax rate for the quarter was 33 percent and should remain at 33 percent going forward.

Net income for the quarter was approximately $1.4 billion -- excuse me -- million. This is in line with our guidance given at the beginning of the quarter. Additionally, cash net income for the quarter was approximately $6.8 million. Basic shares for the quarter were $509.6 million. Diluted shares were $510.7 million and cash diluted shares were also $510.7 million, giving a cash EPS of 1 cent for the quarter.

Turning to our balance sheet, cash and short-term investments are approximately $1.6 billion. Our cash balance excluding our recent net financing edition and excluding our debt paydown increased from the beginning of the quarter by approximately $112 million, giving us the ability to continue to pay down our debt during the quarter. Accounts receivable at the end of the quarter were $1.4 billion. Inventories decreased this quarter over last quarter in absolute dollars by approximately $39 million, or 4 percent, to $1.1 billion. Inventory turns improved this quarter to 9.

Taking a look at our cash cycle days, we have improved over last quarter by approximately 6 percent and cash cycle days are at 41. This is represented by DSL of 50 days, AP days of 50 and inventory turns of nine. The continued improvement in cash cycle days is due to our continued focus on asset management. Achieving these strong financial metrics takes a total focus on asset management and I would like to thank our team for doing an excellent job. Cash flow from operations was approximately $123 million during the quarter which is, again, allowed us to be able to self-fund debt repayments and cap-ex.

Free cash flow is positive at approximately $80 million. Our working capital was approximately $2.6 billion for the quarter. So in conclusion, we have been focusing on key balance sheet metrics and we continued during our first quarter of 2003 to make progress in reducing cash cycle days as well as generating strong cash flow from operations. Although we ran into an difficult economic environment, we are committed to achieving our financial goals.

Now let me turn to guidance for the second quarter of fiscal 2003. The information I will provide is before merger restructure and unusual or infrequent charges. We are targeting sales to be between $2.3-$2.5 billion. Gross margins will be approximately 4.3 and 4.6 percent of sales, or in dollar terms, approximately $100-$115 million. We are targeting our operating margin to be approximately 1 and 1.4 percent. Net interest expense is expected to be approximately $39 million. Basic shares for Q2 are expected to be $510 million, and diluted and cash shares are targeted at $514 million. This equates to a cash EPS range of approximately a 1 cent per share loss to a positive earnings per share of approximately 1 cent, including the revised financial costs between 1 and 2 cents per share.

We are targeting continued improvement in asset management and would anticipate positive cash flow from operations in Q2. We estimate that quarterly depreciation for Q2 will be approximately $60 million, quarterly cap-ex spending will be between $20-$30 million and quarterly amortization will be approximately $1.7 million. I would anticipate depreciation, cap-ex and amortization would be about the same amount per quarter for the balance of the year. Obviously this could change as our economy improves and/or with new acquisition.

So in conclusion, we continue our focus on controlling costs, generating significant cash from operations, paying down significant debt while improving cash cycle days. We believe we have managed our resources and cash responsibly. Our goal is to continue this trend next quarter. We will continue to focus on quality earnings growth and shareholder value.

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

Thanks, Rick.

As you can see from our Q '03 earnings release, the September quarter came in at the top line, a little over $2.5 billion in pro forma net income of $1 million. This gave us pro forma cash EPS of one penny. Let me start with a few minutes on our top line, and again, as you can see, we achieved $2.537 billion. This placed us solidly within the guidance we set in October during our last quarter's earnings call.

For the quarter, the communications infrastructure market representing, again, both voice and data was 30%. This compares to 32% posted at our fourth quarter of fiscal '02. In this sector, our more heavily telecommunications focused companies, the ones who primarily rely on carrier spending were down around 7.5% for the quarter. This was a bit more than our guidance of flat to down 5 percent, however, it was in line with overall in-market trends for the industry. Personal and business computing systems, or volume computing business, was 34 % for the quarter. This compares to 36% in the September quarter. High end computing was 20% for Q1 '03. This was up from Q4's 17%. Strength here comes from several of our storage customers. Industrial and medical instrumentation was up 10% this quarter, we're over $35 million in absolute dollars. This compares to 9% in the -- in our September quarter. This is consistent with our strategy to grow our medical semiconductor capital equipment defense and aerospace and automotive businesses as you might see from the specific vertical market focus, and if you really look at our 2002 annual report you'll note this in our foldout section there near the end of the annual report. If you have not had an opportunity to review this pictorial, I would encourage you to do so. I think it's a very good illustration of our overall strategy.

Our final market segments, multimedia was down a bit in absolute dollars, however in percentage terms it remained flat with last quarter at 6%. Now I would like to turn the discussion to some comments on what we're seeing in our primary markets. First, again, communications infrastructure. Clearly we do not have good visibility here and there are a number of different directions the overall market could take. Some of these could be pretty positive. Right now, given the lack of visibility though, we're going to take a more cautious view of the overall end market. Built into our present planning for wireline equipment is for this sub-sector to remain weak throughout calendar 2002. We believe it will bottom in either the March or June quarters and will go to a flat to slightly up scenario for the balance of the calendar year. We expect this business to be in the down 5% to 10% range for Q2, and again, March is traditionally a seasonally weak quarter for most of our segments here.

In the wireless sub-sector, the business environment is best characterized as soft, we continue to see some activity here, however it is mixed. Built into our present planning is for wireless is for a bottoming during the first half of the calendar year and for a mild recovery during the second half of this calendar year. We expect this sub-sector again to be down 5% to 10% for Q2. The enterprise sub-sector of our communications infrastructure is also soft. We believe this particular sub-sector could see a nice rebound with an improvement in the capital markets. It is difficult for us to call when this could occur and actually many of you may have a better feel for this than us, but we certainly believe it could happen during the second half of the year, and our present thinking is for a down first half of the year followed by modest gains during the second half. For Q2 we expect this sub-sector also to be in the down 5% to 10% range.

Like the enterprise part of our communications infrastructure, both our high-end computing and our volume computing are tied to enterprise or business spending. As such, a near-term outlook for these two sub-sectors are very similar. We believe we'll see a nice recovery of the end markets, (inaudible) recovery in the capital markets, and this could be again as soon as the second half of this year. We expect our high-end computing business to be in the down 5% range for the next couple of quarters and our volume computing business probably down a little bit more for that initially, because of the seasonality it will be down more than 10% to 20% range for Q2. And again, this is due to the seasonality. However, this will be partially offset by the incremental growth coming from the IBM E-server X Series Award, and I'll talk more on that award in a couple of minutes.

Our industrial and medical instrumentation segment was up approximately 5% Q1. We expect further growth of this important strategic sector throughout fiscal 2003 and again in Q2 we expect this sector to be up in the 5% to 10% range. Finally, our multimedia sector -- we expect this sector to be in the down 5% range for Q2. Again, this is mostly due to the downward adjustment in average selling prices resulting from model changes and the fact that capabilities of many of today's lower-end models are catching up to the features of the higher-end boxes.

We would now like to make some comments on our PCB fabrication and closure divisions. The PCB fabrication business continues to navigate through a period of excess or surplus capacity and the result is again continued pressure on pricing. For the quarter, our board business experienced a top line decrease in revenue of approximately 5%. This entirely due to pricing. Our losses were in the $5-$10 million range, or about a penny a share net of taxes.

Based on the restructuring discussed during last quarter's conference call, we announced and we are in the process of closing two additional PCB fabrication plants -- Watsonville (ph) and Ward Hill (ph). Also, we decided to permanently close the Derry (ph) facility. This meant that we took out an additional $100-$200 million in capacity at today's pricing and mix. The three plants were a total of approximately 265,000 square feet. After the closure of the three plants are completed, which should happen by the end of the June quarter, we will have approximately $750-$850 million in total annual capacity remaining, and at our present run rate of approximately $90 million a quarter that would put us at a capacity utilization rate of approximately 45 percent.

As I stated last quarter, our strategy with respect to our fabrication business is to come very close to break even from a profitability viewpoint and to generate positive cash flow. Once this is accomplished we want to maintain as much capacity as we can to capitalize on future growth opportunities, which will certainly come as our endmarkets improve. Again, we are very close to this objective. We did achieve positive cash flow with cash from operations in our fabrication business being about $10 million positive, however we're still experiencing the operating gap loss. We are still optimistic that we will get this to break even or better by the June quarter. Again, this should come after realization of the bulk of the benefits of our restructuring efforts that we talked about and announced last quarter. These programs, again, take several months to implement. Our enclosure business for Q1 was again profitable and cash flow positive.

Now I would like to turn the discussion to the SCI and Sanmina merger integration. As I mentioned during last quarter -- actually during the last couple of quarters with the exception of the IT system integration, the Sanmina-SCI integration is behind us. We have an excellent management team and they're working well together. The IT integration is again going extremely well and is still right on the original schedule. As I mentioned last quarter, we're in the final phase of the IT integration. This is the actual site implementation. In Q1, we crossed eight more sites off the list and we're scheduled to complete an additional 11 this quarter. By the end of the March quarter, we will have all of our EMS operations on Oracle with the exception of our world class BTO/CTO volume computing division, our government division and our relatively small Brazilian operation. All three of these have unique issues which equate to implementation to occur during the September or the December quarters later this year.

Once again, I would like to compliment all that have been involved in this effort, the implementation effort is one of the largest of its kind in the world and not one facility has failed to make the transition. This is a tremendous effort by both our IT and operational management teams. Once this is completed, 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. Minimizing supply chain risk and supply chain management are critical areas of focus by our customers in today's environment. Our new IT platform and our supply chain management business practices continue to offer substantially improved and innovative supply chain management techniques.

I would now like to make a few comments relative to the future. I believe it is clear that predicting the future has become increasingly difficult, especially to do in today's environment. With this said, I know we need to provide some guidance with what to expect the upcoming March quarter. Again, this is difficult given the uncertainty of our endmarkets and given this uncertainty we believe it is prudent to be somewhat conservative for fiscal Q2 '03. And again, as Rick mentioned, we expect to see our top line in the $2.3-$2.5 billion range and our bottom line in the range of a 1 cent loss to a 1 cent earnings for cash EPS, and this is taking both the financing cost and revenue increase from the IBM E-server X-Series Award into consideration. As Rick mentioned, the financing negatively impacts earning about a penny a share. And the $50-$75 million in the provided guidance is incremental to revenue from the IBM award.

So again, to clarify here, included in the $2.3-$2.5 billion revenue guidance is between $50-$75 million of incremental revenues from the recently announced IBM award. Per our conference call of January 7th, we would like to provide some additional information with respect to the new IBM award. Jure covered the scope of the supply agreement very well during the January 7th call, as such I'll focus on some of the financial metrics. The business will be at an initial run rate of between $275-$350 million per quarter.

Operating margins are slightly better than traditional PC margins and asset turns are very close. This would place inventory turns in the 25-30 turn window and total asset turns in the 15-20 turn range. We will initially take some inventory in excess of the amount which equates to this 25-30 turn inventory number, however we expect to get within the 25-30 turn range within 120 days. This will equate to an ROIC a bit north of 20%, and with what we believe is good execution we believe we can see an ROIC of close to 25% within an 18-month time frame. We expect to close in March and it will not be until the June quarter before we'll see any real benefit from the transaction. Strategically, the transaction offers us a lot.

Wintell (ph) based servers offer a very attractive and growing market opportunity -- we expect to leverage this relationship to offer similar solutions for other key customers in this and other closely related products. You will see other announcements by Sanmina-SCI in this space to include enhanced design capabilities. We will leverage these resources across our existing PC business to create an enhanced personal and business computing division which will focus on worldwide build-to-order and can figure to order volume computing solutions for our customers. The performance of this division has been impeccable. This division can build and ship computers and lots from one to thousands in 48-72 hours and do so in key markets to include North and Latin America, Western and Eastern Europe, Southeast Asia, China and Australia.

SCI, or Sanmina-SCI is the world leader in this key service and we expect to leverage this capability across other markets to include communications and medical products. We have in-source opportunities to include PCB fabrication, PCB assembly and closure or casings, cable, memory and design. These potential benefits are not factored into our financial metrics. Also, we add mobile computing to our desktop line with the addition of the Thinkpad. We also believe we can leverage this up the food chain and increase market share in the higher end server platforms and finally, we get some very good people and world class operations from this transactions.

So in summary, we're very excited about the new IBM award. Our challenge continues to be to manage this difficult time and balance our needs of our investors, our customers and our employees. This balance includes positioning the company for a bright future, we're certainly not happy with our operating performance. Although we've achieved consistent improvements in key areas of asset management, customer satisfaction, we really want improvements in our bottom line. The biggest hurdle in making substantial improvements to our bottom line is still the overall demand for low to medium volume high technology products. We have the technology, we have the culture to get the job done, we have the capacity, we just need demand and we know it will come. It may be the second half of this year, it may not be until 2004, however an improvement will come and we will leverage this improvement into solid bottom line gains.

In the interim we'll continue to focus on fundamentals to include improvement in asset management, cash flow, leading technology and solid business practices and financial controls. We still believe that our industry and our company offer significant long-term growth prospects. We recognize we still have a lot of work to do, however I assure you that the team is up to the challenge. Our goal hasn't changed, it's to stay on track with quarter after quarter positive news. I would certainly like to thank you for your time.

And I'll turn it back to Jure.

Thank you, Randy.

Ladies and gentlemen, let me just add a couple of more points here. As we already said, as you can see we are still continuing to operate under challenging market conditions. But we're starting to see some positive signs that the calendar year 2003 will be a better year. It is still hard to forecast future, as Randy said, but especially when I personally try to do that last year and I missed it many, many times. But I can tell you at this time, it's a little bit different. I believe that our customers are a lot more optimistic about the recovery in calendar 2003. So what does that mean for Sanmina-SCI? I personally believe that Sanmina-SCI will see improvements in demand in the second half of this calendar year across all of our service offerings and product line. As I look ahead, I remain very optimistic about the growth opportunities for our company. Our customer (inaudible) is to continue to outsource all, if not most of their products to the EMS industry at the faster rate in the next couple of years. Sanmina-SCI is in a very good position to leverage outsourcing opportunities that are going to be in front us and as the economy demands for the products improve.

Sanmina-SCI has some of the technology leadership that can leverage as the economy improves, so let me kind of talk about followings. Engineering and design, very strong from (inaudible) to a product design. Advanced printer circuit boards, complex (inaudible), high-end enclosure systems, custom memory modules, complete systems built, final system test, distribution including built to order and configured to order. Again, Sanmina-SCI is well positioned to provide a true end to end solution to our customers anywhere in the world, and our customers realize the capabilities that we have and that's the reason they do business with us. Sanmina-SCI will continue to diversify customers in the market segments. Our market segments include networking, wireless, fixed wire, medical, industrial, semiconductor, aerospace and defense, high-end computing, personal computing, automotive and multimedia. So our goal is to really focus on these things and I really believe this will continue to benefit us.

During this March quarter, we'll focus on fundamentals of our business such as continues to reduce costs, and Rick and Randy talked about it, focus on technology development because there's a lot of new activities in new product development going on, all the products that we do. Improved quality and performance. Customer relationships are good, there's always room to grow and continue to improve our financial matrix.

With traditional financing that Rick talked about, a billion dollars in December, our balance sheet is very strong. Our liquidity is solid. That gives our company a bright future so we can take advantage of the market as it comes back. But as a management will continue to generate positive cash from operation even in this tough economical times and will continue to improve our financial metrics, as Randy and Rick talked about. So in summary, and although visibility continues to be tough, as I have said, we have very strong management team and I like our position in this industry. We have developed technology leadership, global manufacturing capabilities, and positioned Sanmina-SCI with tremendous leverage.

Our number one goal now is to improve the bottom line and position this company to deliver us industry leading financial results in the future.

And now I would like to extend special thanks to all our investors and analysts for participating in this conference call. At this time, Randy, Rick and I would like to answer any questions that you might have. Thank you again.

At this time I would like to remind everyone if you would like to ask a question simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two on your telephone keypad.

Our first question comes from Thomas Hopkins (ph) from Bear Stearns.

Randy, Rick, Jure, I wanted to talk about the SG&A a little bit, up 30 basis points from 3% last quarter to 3.3% and the sales were down $70 million. Can you give us a little bit of detail on that?

Yes, Tom, I can. When we gave guidance last quarter, I indicated SG&A was going to be up a little bit and it's pretty much in line with what we said it was going to be. I think what it's doing is reflecting the fact that we're still going through some IT integration and some other small infrastructure items, as well as reflects just the continued timing, if you will of our overall restructuring plan. So as you can see it's kind of a temporary thing, but we certainly did give that number or pretty close to that number at the beginning of the quarter.

Okay. And, March, obviously, you know, the top line is down a little bit. So the trend in terms of dollars, should it be down in SG&A?

Yes, it will be down SG&A. If you take a look at kind of the math that we're talking about, we're looking at SG&A in the 3.2%-3.3% range, probably 3.3% in the low end, 3.2% in the upper end.

Okay. Now, how will that track once IBM comes online, the new IBM business, the server business?

I have it kind of built in, but clearly as revenue continues to increase, you'll see SG&A and the percentage of sales continue to decrease.

Okay. But I mean there's nothing different about Wintell servers in terms of the SG&A line structurally that should cause for higher SG&A dollars?

No, it should not.

If I can add to that, Tom. I think our long-term goal is really to get our SG&A down under 3%, but we just have to get the revenue up.

Okay.

Specifically, the volume computing business traditionally has a lower SGA element cost than does traditional business. So if anything, that should help us achieve that goal sooner.

Exactly. That's what I was getting at, I think, when I think about the old SCI. The couple of PCB closures, Derry, New Hampshire, the one in the Netherlands and then the one you announced in Scotland and then the one in Finland, and you gave good numbers -- how will that impact gross margin and what quarter should we start to see some of that trickle in?

Okay. Just to clarify here, the PCB fabrication plant, there were only three of them. The other plants that you mentioned were EMS plants, just to clarify. And the actual benefits -- how can I word this? -- really have to do with the timing of when the plants are actually closed, and that's defined more or less by the SEC as to when shipments stop. So in other words, you have this huge plant or this plant and you cannot take a write-off of the plant, for example, the equipment and all that until you finish shipping all your shipments out of there, and sometimes that takes months to completely get wound down.

So, Rick, you have a schedule there, do you want to share with what we're forecasting here?

Sure. Tom, if you take a look at the -- in essence, the savings we hope to generate which affects the majority that is above the line and is in cost of sales, we expect to hit our true ramp rate of about $200 million annually. Really, it's in the beginning of the Q1 '04 period, that will be a little over $50 million at that point in time on a quarterly basis. This Q1 '03 we saw a little bit, but obviously, since Randy had mentioned, there's always a timing mechanism. We're going to see probably a little bit of increase and that's why you're seeing probably margins somewhat stabilized a little bit better even though the sales are going down a little bit. And probably beginning in Q3 and really Q4 you're going to see a stronger portion of those savings take place, because it takes typically, you know, two quarters, two-and-a-half quarters to really get through this from a pure accounting perspective. So, you know, you're going to see a slow ramp, you saw it last quarter, you'll see a little bit this quarter, but you'll see much more beginning in Q3, and ramping up end of Q3, Q4 and into Q1 '04.

Okay, great. And finally, I just want to be clear, I think it was you, Rick, maybe it was Randy, but I think you said after you finish all your bare board closures that you would get capacity down to 45% -- excuse me - you would get it up to 45%. Is that -- I mean that can't be the end goal, I would think you would want it a little bit higher.

Well, clearly, the goal is that it would be higher. But what our goal is -- let me make this clear. We were operating in -- with today's pricing, we were operating in the mid 30% capacity utilization before we took these three plants offline that I talked about. The amount of revenue we're shipping today did not substantially change. So the part that increased it from, say, 35%-45% was the fact that we took this additional capacity out to lower our total capacity utilization rates.

Now, our goal is to not lose money in this business, to be cash flow positive, and to maintain capacity for the future we are still -- we know that we are building many, many, many programs for our customers that the demand is just extremely low. These are programs that include high-technology wireless products, optical products, that there's a lot of technology involved in these products. They're not moving offshore. They can't move offshore. And we know it is strictly an element of demand. And what we do not want to do, it would be easy for us to do -- but what we do not want to do is go take so much capacity offline that our capacity utilization rate jumps from 45%-70% and then see these markets come back and not be able to capitalize on any kind of improvements in the markets.

If you look at what's happened to the company's top line, when you back out the, you know, the outsourcing opportunities that we've won, if you've looked at that there's been a steady deterioration of the top line there reflecting the endmarkets there that we serve. Again, we think these endmarkets are going to bottom out here in the March/June timeframe and start some small recovery in the second half of this year, and we think that there will be a demand for some of this. So what we do expect to happen is not additional capacity coming out, but we expect that capacity utilization rate to move up north of 50% as our revenues move north of $100 million to, you know, hopefully closer to $125 million as we exit the fiscal year.

Okay. Great. Okay. Thanks a lot, guys.

Thanks, Tom.

Your next question comes from Jerry Labowitz (ph) from Merrill Lynch.

Hi. It's Brian White for Jerry Labowitz. I was wondering if you could talk a little bit about some of the opportunities you're seeing in the alternative markets such as defense. You completed an acquisition in the medical area, and one area that we haven't heard you talk that much about is the automotive sector. Can you talk about some of the trends you're seeing there and some of the opportunities, and how big these businesses could grow in the next two to three years? Thanks.

All right. This Jure. Let me, first of all, talk about medical business. As you know, our industrial, medical and defense right now is approximately 10 -- running at about 10%. So it's about a billion dollar business. We would like to find a way to really double that business the next 18 months, and I think we can do that. We have a great foundation on our medical business, we have -- I think our medical business right now total is running right almost $400 million per year. This newer (inaudible) really advanced medical products. They got a great engineering and really give us an opening to focus in a really advanced type of products such as an MRI, an X-ray and so on, and so on. So we're 100 percent focused. As you know, we created a medical division and we hired a president of that division that reports to Hari Pillai, so a lot of activities going on.

On the defense, as SCI started in the defense market, so we have a business that's about a couple hundred million dollars a year right now, so we're going to really build on that. We have a great design team there, it's a very profitable business. There's a lot of activities going on. We are really expanding the capabilities. This -- we never really focused on this business until maybe a few quarters ago, but now we have a whole focus on the defense and we expect those businesses to go. So let me just go back to defense medical and then other one that we didn't talk about -- industrial and semiconductor business, also, however, niche market there that we believe we can grow it with the companies like Applied Materials just to mention a customer there and a few others. So we're well positioned in defense market, medical market and industrial semiconductor.

I would say each of these businesses for us - our goal is to build them to be at least a billion dollar business, that's our strategy. Now how long it's going to take, well, hopefully, we'll accomplish that in the next few years. On automotive, that's a new business for us, we're just starting to do some of that and right now it's in an infant stage, but we're definitely paying attention to what's going on and we've been winning some awards there.

Okay. Great. Thanks a lot.

Thanks.

Your next question comes from Michael Morris (ph) from Salomon Smith Barney.

Yes. Thanks. Good afternoon, everybody.

Hi, Michael.

I have a question about the phrase that I've heard a couple of times on the call and that's leverage, and I know that at least we would tend to agree that demand for the medium and lower volume products is below par and we're all waiting for that to recover. But as time has worn on, industries are changing, protocols and applications and platforms are changing, as you pointed out, by the Intel IBM - IBM Intel-based server program. So I guess my question really is, have you refreshed at all your analysis of the leverage within Sanmina's model as the medium and lower volume products do come back assuming some recovery on the PCB side? You had some goals a year or so ago about what the combined company could achieve in the way of operating margins and so on. And if you could just refresh us on that, that would be very helpful.

Yes, Michael, I think it's a very good question. So look, the reason that, that term is thrown around quite a bit is to really understand Sanmina-SCI, you really got to kind of dissect and break the businesses down into the various businesses we have. If we go back at the peak times, and I know that's not what you're asking, but bear with me here a second -- if we go back to the peak times of the fabrication business, which was let's say the December quarter right before the downturn, that business was about $455 million in revenues for us and about $152 million or so in profits, which is -- one quarter is a $600 million run rate and I only picked that quarter because that's the one right before the downfall, it was similar quarters up to that. And if you look at that from a profitability point of view and you look at the contribution margin there, it was well north of 50 cents at that point, well north of that. And today we put that contribution more in a range of about 50 -- I'm sorry, about 40 cents per dollar as a result of deterioration in pricing. But it's still pretty large because that's a high fixed cost, low variable costs business.

So what that means is that if you relate that to, say, to some of this high volume business that might be a nickel, it might be four cents to a nickel in terms of contribution margin, you can see that for every $10 million of revenue in say the fabrication business could basically equate to $100 million in revenue or more in some of these other businesses, and that's why we say that if we see -- when we see, not if, but when we see a recovery in things like the fabrication business and the enclosure business, that we certainly think that there will be a disproportional amount of profits added to the bottom line in relation to revenue in those businesses.

Now the question that you've come forth with, do we think there's a substantial change in the fundamentals of this business or customers that would say that, that business is never coming back? And we clearly think there is a migration of products that tend to be able to run in higher volumes, that have lower risk of engineering changes or changes to the design, changes to the configuration, and that have critical or do not have critical time to market where they can certainly be put on a plane or container and shipped around the world, if logistics allows for that -- we certainly believe there's a migration of those products to low cost regions and we do some of that, and that's why our capacity utilization rates in Latin America, Eastern Europe, and Southeast Asia and China are higher than our capacity utilization rights here. It's because some of that is migration, some of it is just the products themselves tend to have endmarkets that are stronger.

But we do know a great number of programs, some we've been involved with several years, some are relatively new programs that have technology and have requirements to be built in very low volumes and to be built - and again, I'm going to use a simple example - but an outdoor wireless space station is a good example, we built those products for Nortel in Calgary, and Ericsson in Lynchburg, Virginia, and I can go on and on. So what we're having is those products -- some of the components used in those products, granted, are candidates to move to lower cost regions, but the assembly of those systems themselves are not something that our customers want moved. What they want there is those products built in the markets they serve and the issue is that we used to build -- and I'm just using an example here, don't hold me to these numbers - but 1000 a quarter and now we build 100 to 150 a quarter.

So the problem is that we have these facilities and this infrastructure and this capability, and we're having to downsize that because demand is low today. What we do believe is that maybe demand will never come back to, in this example, a thousand, but we think certainly demand when it improves will come back to two, three, or four hundred units, which will clearly provide this leverage that we're talking about there. So again, we don't think that in these really high-end complex products that the market has gone away, or we don't have the service capabilities to handle them, what we really think is just demand has been depressed and there will be demand for these products at some point in the future. When that demand comes back, we'll have the technology and the capabilities to handle the demand.

And, Mike, this is Jure. If I can add to that, I think what's exciting, when we just talked about leverage, if you look at some of the advanced boards that we're building today, even a couple of years ago, you know, end of the market, we couldn't even build. So there's a lot of new technology that's coming out, they're large, they're advanced. We know that, you know, as they go into production, we're going to have a tremendous opportunity to build some of that, then goes to the back way and assembly, and combining that with our high-end enclosures if you look at the boards back with the high-end enclosures, really tremendous amount of new programs. We know there are new programs that are coming, because we're doing them right now. It's just now the question is when all of this stuff is going to go to production and that's everybody's guess. Now as I said earlier, I think this is a rebuilding year and I think we're going to see some improvements in the second part. And if that happens, I think you're going to see Sanmina is back to what it used to be.

Okay. I'll just ask one follow up on the demand question. When you look at demand, you think about demand, obviously you're talking to your customers all of the time -- do you have a sense of the inventories that are out there and whether inventories in any way, shape or form are depressing demand at this point? Or do you think the inventories are pretty clean, you're getting a pretty true demand statement at this point?

Well, Mike, I spent actually a fair amount of time last quarter mainly in the November, December timeframe with the customers and starting tomorrow I'm going to go see the rest of North America. But what I'm seeing is that inventories today are very, very low at the customer's side. So what we see, it's a real demand and as my customers - you know, everybody is cautious, as you know, 2002 we second guess that every quarter and so everybody is a little bit gun shy to what they're going to do tomorrow. Nobody wants to stick their foot out there. But as our customers open it up and they start showing us data and some of the things they're working on, just the first time I seen that the real world is coming back again and that 2003 will be a better year.

Great. Thanks very much.

Thanks, Mike.

Our next question comes from Steve Savass (ph) from Goldman Sachs.

Good afternoon.

Hey, Steve.

I'll ask a relatively simple question on just new business opportunities and kind of what you're seeing, maybe if you could split it out between organic opportunities and then the OEM divestments, and maybe on your organic side, what would be the mix of opportunities you're seeing out there either from current customers or new customers?

Okay. Well, let me take first of all, organic just so I can build on what I just say. On our high end computing like networking storage area, really focused on that markets, so we starting to be reading some nice projects there and I really believe that part of our business will grow. We talked about personal computing -- I think we are negotiating there. Winning this IBM program, as Randy said, I think there's other opportunities in a similar type of program. So that part of the pocket I think we're in good shape. A few minutes ago, I talked about industrial, semiconductor, medical military, aerospace, that's the business that we're really focusing on that. That's a business that is profitable right now and I think we'll make it more profitable as we develop it. We are now market focused. What that means is that we have people that strictly focus on the medical part of the business day after day, or defense day after day, industrial semiconductor day after day, that's been really helping us out and we've been seeing a lot of MPI, you know, and new customers in that area.

Communications, I know, you know, that used to be our best sector, but I believe that worse for communications side of the business is behind us. I don't think that the recovery is going to come overnight, but we're starting to see some positive signs of Sanmina positioning themselves very well in the networking side of the business. Wireless and wire line - you know, if you ask me who are the customers, I can tell you that every major customer in all of those markets we are involved with and I can tell you that from business point of view, we're in a good position. The biggest issue right now, how fast demand is going to come. Once the demand is here, I think we have a tremendous leverage. I know we have used the word, but that's - as Randy said, that's why we carry this infrastructure to take advantage of the market when it comes back. And you can't run this business just for today, you got to look at the, you know, what is going to happen six months from now, a year from now.

You know, we went through a difficult cycle that none of us experienced, but we learned a lot from it and I think we'll be able to take, be a better company going forward as the market turns around. So in summary, I think organic business is stable and I think as a demand comes in I think you're going to see our organic business grow. Now, opportunities - outsourcing opportunities, IBM is a good example. Sanmina is a well respected company out there. We look every deal out there. We're going to continue to look at the deals that make business sense for us, and that's all I can say about those right now.

Okay. And no question there's a lot of leverage once that turn happens and I think what is helpful is if you think that just on an organic basis until we get to that recovery, can you replenish some of the, you know, sequential downs -- we have seasonality for March. But if there's, you know, continued weakness for another quarter or two, do you think there's enough new organic business to keep your revenue base roughly flattish? In other words, compensating for communication and other deterioration?

I believe that's the case. I really believe that we have enough opportunities to keep it. You're talking about the worst case situation.

Yes.

Yes.

Okay. Thank you very much.

Your next question comes from Scott Craig (ph) from Morgan Stanley.

Hello, Scott.

Thanks. Hi. Jure, can you go over the high-end computing section in a little more detail with the upside surprise there almost entirely from new programs, or did we see some organic strength there?

Well, we've been, Scott, focusing on this high-end computing, as you know, for many quarters and you know, that industry was suffering, you know, a few quarters ago and we're starting to see some nice recovery, especially in the (inaudible) storage type of products. As you know, we have some good customers there like EMC, Mack Data (ph), you know, Storage Tech (ph), Sun Microsystems.

Compaq.

Compaq. You know, so we got some good products in there.

Okay. And then -

And we expect that business really to -- for us -- to slowly, you know, continues to get better, let's put it that way.

Okay.

In the near term.

Secondly, can you also go over, Jure, how you guys are progressing with getting some of your boards certified into some of some of SCI's programs for when the upturn comes in demand?

Yes. I think that job is really almost done on a high-end stock -- we went out to all the major customers that we would move the products in eventually. We got all the approvals that I believe that we wanted to insource. But the -- most importantly, I think that on the new programs that we went, we are building those boards ourselves and I'm personally excited about that business. I know it's been a tough -- you know, we've been losing money, but as Randy made, you know, the statement, if you look at the whole last year, if you take all the restructuring out, we lost $45 million, but in the good times we make that very easy in one quarter. So I think that pretty much the circuit board industry will come back this year. As you know, a lot of capacity has been taken out of this industry and if we have any recovery I think that the demand for that product is going to be pretty high. And again, the products that we are focusing strictly high end. We are buying a lot of low-end products outside and we will continue to do that, but on high-end boards, we are really continuing to do a lot of research and development so that all these new technologies that are coming in now that Sanmina-SCI has advantage.

Okay. Thanks.

Your next question comes from Michael Walker (ph) from Credit Suisse First Boston.

Hello, Michael.

Hey, thanks a lot, good afternoon, guys. Actually the flip side question I have on the previous question was in the personal computer area, it looks like that was down about eight or so percent sequentially. I know we saw some pretty good PC industry results and IBM posted some good PC results. I'm just wondering if you could comment at all on the weakness there?

I personally believe that overall PC industry, you know, everything, you read the same data as I do. I can't go into details that my customers are telling me, but we expect the PC, at least our portion that we're involved in, actually be, you know, with some growth in 2003.

Okay. And second question I have again on the PCBs, which is that I'm wondering if you have any comments on the strategic aspects of being involved in the third party PCB business, I'm wondering if that is something that you see as being a long-term core component of your PCB strategy, or possibly that gets downplayed a little bit in the future?

Well, our third party -- you're talking about printer circuit boards, right?

Yes.

Definitely, we will continue to sell third-party printer circuit boards, printer circuit board enclosures, and the back plate. We have market for it and as you know, some of my so-called competitors are great manufacturing partners when it comes to printer circuit boards and enclosures, we're going to continue to support them just as good as we support internal Sanmina's factories.

Okay. Great. Do you by any chance talk about an average layer count at your PCB division?

No, we don't get into the details. But most of the stuff that we focus on, it's, you know, a higher end, over 20, but 20 layer, but the stuff we typically buy outside is anything eight layers or less.

Okay. Great, thanks a lot.

Your next question comes from Jim Savidge (ph) from Thomas Weisel Partners.

I think everybody has been trying to focus on what's going to happen with the margins going forward and how you begin to get some margin leverage. Can you focus on a couple of things? First is, IBM is closing this quarter -- at what point do we begin to get normalized margins in the new IBM business?

Well, the way that, that program is structured, you will get very close to normalized margins in the June quarter.

Okay. So you begin to get accretion then in the September quarter, is that the expectation?

That is correct.

Okay. And in terms of the impact of restructuring, is there any way that you can give us an idea as to what the impact is going to be and where it's going to be? Is it going to be primarily in the gross margin line or are there going to be -- also because of the closure of the plants -- impact in the SG&A expenses? And at what point do we begin to see that really hit your income statement in a way that it makes a difference?

Jim, this is Rick. You're going to see a combination of benefit coming from both in the gross margin and SG&A, but the primary benefit of the savings, if you will, that we're going to generate for the restructuring will be quarterly through cost of sales and gross margin. The buildup of the savings per quarter ultimately getting to $50 million savings, you're going to see it come through, realistically, it's coming through a little bit now, but you won't see a real major impact probably until the middle to the end of Q3 and then on in Q4, because that's when the savings really start to ramp just because of the timing it takes to shut down and move operations, coordinate with customers, that type of thing.

Okay. And I guess the other thing is what is your capacity utilization level? You talked about it in printer circuit boards, can you put a number on EMS enclosures at this point?

We can. Capacity utilization in the enclosure business is about 52% today and in the EMS business is very close to 50%.

And where would you anticipate normalized gross margins to be in EMS when you get utilization levels where you want them to be?

And I'm assuming obviously that the BTO/CTO business is a lower margin business than other parts of your business are.

Yes, I would say that if we can get an improvement - you know, a lot -- the reason I'm hesitant on some of this stuff, Jim, is because there's - there can be mixed issues here, right? So it depends upon where that demand comes from. So -- but assuming that based on the present mix that we have and the business gets up, I would say that we'll see the EMS business be in the 8% kind of range which we can -- which hopefully we can do a little bit better than that with the other businesses we have, but it's, by far, going to be the bulk of our business.

But that's the gross margins, Jim.

Right. And are you anticipating closing additional EMS and enclosure facilities over the next few quarters?

You know, I would rather not at this point get into too much detail on any restructuring plans other than what we've said.

Okay. One last question, sorry to ask so many, in terms of your printed circuit board pricing, I know that pricing has been under pressure, but there has recently been on a high-end consolidation of the printed circuit board industry -- are you seeing with that -- the sale of the Honeywell plant any stabilization in pricing recently?

You know, honestly, I think it's too soon to see anything as a result of some of the very recent activities, specifically the Honeywell plant out there. And you know, I don't want to tell you that we have seen stabilization in pricing, because, you know, last quarter we probably lost around 5% or 6% in terms of pricing overall and, you know, we keep hoping that with all the consolidation that's going on, that there will be an end to that, but at this point, you know, I don't want to tell you we've seen an end to it because I can't say that.

Okay. Great, thank you.

Thank you.

Your next question comes from Lou Misosa (ph) from Lehman Brothers.

Hello, Lou.

Okay, thank you. How are you? I was wondering if we could go through maybe some of the positives. Jure, I know you commented that you think that customers are starting to feel a little better about things and, you know, not particularly for, you know, your guidance, but do you think that it's - you know, after the seasonal drop-off in March that we go sort of flat or up into June? And then September usually is - for enterprises a seasonally weak quarter, so that means we have to give up a little bit or do you think things actually start to pick up so then - you know, for tech in general we'll start to see September also, I guess, up from June and then obviously December usually has a pretty good quarter hopefully no matter what. You know, so how are you sort of seeing things there?

Well, let me (inaudible). First of all, assuming there's no economical recovery at all, let's just say the economy just continues to be weak as it is right now -- I still believe that you will have just the way seasonality goes, you will have some improvement in June, it's going to get a little bit better in September and then, you know, depends on the PC demand in December quarter that's going to go up and down. So we still feel there will be some improvement comparing to the March quarter no matter what happens, okay, assuming things are the same. But what I'm talking about, what my customers are telling me based on their data, based on their customers, the demand out there and how much money their customers are going to be spending, they believe they're going to see a higher demand in 2003. Actually, I just talked to one customer yesterday that basically told me -- he says, hey, Jure, at least now I know what I'm going to build next quarter and all those following quarters, which, you know, I didn't hear that for almost two years.

So more stabilization?

More stabilization, definitely. We're hoping that if we get any meaningful economical recovery this year and you know with tax rate that is going on and then the economy itself should help us maybe get this thing rolling.

Okay. Can you give us an idea as to, you know, just the size of the pipeline? You know, a couple of years ago, it seems to be about, you know, $15 billion plus, now companies have sort of (inaudible) somewhere between five and ten. What would your number be, and I guess if you throw in both the deal that you just won from IBM where, you know, they might want to include a facility (inaudible) outsourcing a big chunk of business, and then also throwing in any organic opportunities that you might be seeing?

Well, I mean, I hate to put the measurements on. There's a lot of deals that are floating out there that, you know, we might not have no interest in it. But I can tell you, you know, the numbers are definitely in the billions, but the thing is I think we're more focused on the quality of the deals.

But one of the things you threw in there at the end was the organic opportunities. So we clearly want to separate that. I think what you're going to see at Sanmina-SCI and this is going to sound like we were not focused on it before and that absolutely is not the case, but you're going to see I'm going to say more focus on organic. You're going to see us -- we're actually taking some of our corporate development guys that are very good, we've actually refocused some of their efforts on pure organic kind of stuff, because, you know, today we think that -- I don't want to rule out the opportunity to do some more strategic related transactions, but our focus today isn't on growing through external growth, our focus is on the organic growth and the internal opportunities we're seeing from our customers and trying to increase market share that way as opposed to the external growth. So I just want to...

And the bottom line, please.

And there's a lot of opportunities out there in the organic growth area and that's where our focus is.

Okay. And you defined the external ones as sort of like an IBM deal where they're selling, I guess, facilities and moving people over?

Yes, I would - you know, my big differentiation factor there is if there's a supply agreement. If you give consideration, you get a supply agreement and then that to me is the big difference as opposed to just going out and, you know, quoting business and winning it the old-fashioned way, so to speak.

Okay, great. I was actually at one of your China sites and they're just starting to ramp up VMI, which obviously seems like a good idea and obviously your inventory turns in general seem to be ticking up. Can you give us, I guess, a regional or corporate-wide view as to where you're going with vendor managed inventory?

Well, yes. You know, we are working on that and we have a very good group of people, I think, in our supply chain management group. And you know, it's just -- it's one of the many different techniques or business practices that we're focused on to help improve our overall asset management. I mean, we have an internal goal here to get, you know, I'll just tell you this directly what it is, to get to 32 days, cash cycle days here by September and I honestly think we're going to achieve that. With that said, we're not happy with that 32 days. We want those days to be in the 20 days and we are going to make a pretty big effort to try to get it to there by the December quarter of this year, and we're just using quite a few different techniques to get us there.

Yes. And just to add, I think our new IT system will definitely help in that. As Randy described it earlier, I mean we're going to be only one EMS company with the latest IT infrastructure in the world under one system.

Okay. Great. And last question, going back and looking at your balance sheet over a number of years, you know, sort of doing a pro forma, you know, you've got the most cash you've had on the balance sheet in quite a while, just -- obviously still some debt out there, I mean, is it - you know, what's the plan with - I guess, just the cash moving forward?

That's a good question, Lou, you know, and I guess our game plan with the financing with the cash -- the game plan is going to be to continue to explore, you know, I'm going to say efficient means to continue our program that we did start in September and that was to pay down and extend debt maturities. We are looking at a lot of options right now and opportunities, and we need to balance this obviously with the needs of the company and the goal is to obtain the maximum rate of return all things considered, so we're going to continue that focus.

Okay. Great. Good luck on the year.

Thank you, Lou.

Your next question comes from Keith Dunn (ph) from RBC Capital.

Good afternoon, everyone. A couple of follow up questions. Can you give us any color - you know, IBM and HP were over 10%, but can you give as a little, you know, clearer picture? You know, does that mean that it was, you know, 15% or so? And was the IBM deal that you just announced - you know, is it conceivable that they, you know, get closer to 30% of your sales as we go forward in the early year without any incremental, you know, OEM outsourcing deals?

Well, Keith, this is Jure. We don't like to really give out percentages of our customers. We do that once a year. (inaudible) IBM definitely in the near term will increase, but we hope that we are going to, you know, balance that off with the other customers that come in the line.

Let's maybe shift to a longer term focus kind of - you know, in the past you said you had hoped that, you know, that the PC area would get to 25%-35% of your sales and com would be 30%-40% of your sales. With this recent acquisition, do you really see that PCs in the near term are going to go above that 35% goal and be closer to the 35%-40% area, you know, from a global macro looksie?

Well, from global macro, I think that personal computing and storage, you know, (inaudible) low end and medium storage area could jump to that number in a short-term.

And I assume that you're going to put the servers and things in the PC area?

That's correct. These servers will go in the same group as the personal computing, part of the same division.

Right. And do you see long-term, are you still going to stick to try and get into that 25%, 35% PC, 30%-40% com?

As this company grows, we would like to keep that bucket down around 30%.

Next question is more of a Rick question, I guess. Rick, you mentioned I think cash flow from operations was 123 less 20 cap-ex -- I get 103 free cash flow, you mentioned 80. What else are you pulling out there? Can you help with me that calculation?

Yes, I can, Keith. Give me a second and let me look at exactly the cash flow schedule. What you got in there, remember, too is that we had some restructuring costs, so when you layer in the restructuring costs that gives you definition of free cash flow. That's what you're missing as well as there was some minor other things going through, but that's what you got to add back in.

Okay. So the cash flow from operations didn't take out the restructuring, it was before that, that was the piece?

That's correct, the cash flow from offset comes out down below.

Okay. That's fine. That helps me there.

(inaudible) incoming to free cash flow.

Right, right.

You have to adjust for the restructuring for the nonrecurring charges.

I understand. The inventory in the quarter with this new acquisition that you're doing with the IBM, is it fair to say that total inventories are likely to go up in the quarter given this transaction when you get through the whole quarter's done?

You know, if the revenues were at the top end of that window -- you're pretty tricky, Keith, so I got to watch some of your questions. If the revenues were at the top end of that window, I would think our absolute dollars of inventories would go up. If they're at the bottom end of that window, I would expect our absolute dollars of inventories to go down. I think we will continue to bring down inventories on a --from this quarter in the neighborhood of the amount of inventory we're taking on from IBM. But it's -- a lot is going to depend upon what happens with our top line clearly. So if we're down in the 2-4, 2-3 range, then I would certainly expect inventories and absolute dollars to increase even with the IBM transaction.

And I think this is the last question I have right now. There has been a lot of question. The AR securitization program, roughly that -- has that all been paid back now, Rick? Is that gone?

That's correct.

Okay. Thanks very much, guys. Good job.

Your next question comes from John McManus (ph) from Needham (ph) & Company.

Yes, good afternoon.

Hi, John.

Hi, John.

You commented on the opportunities that the BTO and CTO function there could be translated there into other areas, into the medical sector, into the communications sector. Could you give a little color on where you see you can use that expertise there to build some of these other markets out?

Yes, the strength of that group, John, is probably too broad an area. One, its IT systems (inaudible) our customers get an order from their customer and as soon as they clear that order, a pick list is issued to our floor and the parts needed to build the system are delivered and issued to the floor within a few minutes. We can, again, build the system and deliver it within a very short period of time, somewhat limited to just physics, but it's within a period of 48 to 72 hours. On the other is the business practice we do and what we've been able to achieve in terms of the culture of each facility. That process, both the IT as well as the factories themselves can easily be converted into a number of different products out there -- and customers who have similar products built on a worldwide basis, and time to market is critical and the products are configured then they lend themselves to this --to these kinds of operations.

So, for example, if you're build building a router and you want the system built and tested for a particular company, then this kind of product would work out very well, where you could configure it specifically to say the company's CIO's requirement and that's the way these PCs are done today. The CIO of a company wants 30 PCs delivered to a site, he wants ten to this spec, ten to this spec and ten to that. He calls up and he knows if it will happen. He doesn't have to go down to the store and start shopping, take what's on the shelf. He can specifically deliver what he wants to where he wants it in a very short period of time. If you think through that, there are a number of different products and different industries that have similar kinds of opportunities and it's not just limited to the two I mentioned, communications and medical. But I think that works out very well. Also, we can custom load software into those systems. So if you're building terminals for Burger King and you don't want a McDonald's logo on there, it's easy to go off and do that kind of thing and make sure they don't have a specific stand or product, it can be configured for that specific requirement.

So without getting too detailed to give away some of the programs that we're working on and some of the markets and the sales process we're doing, I'll leave it at that. Hopefully that answers your question.

Just like for example in the medical area, could these be used for monitors like glucose monitors, just to give us some idea of your thinking about where this could lead to?

Yes, okay. So in the medical space, it would probably be about a little higher level products than the glucose monitors, because the glucose monitors are an example of a product that are all built to the same specifications and just built and distributed throughout the world. So we might build those products in places like China and Latin America to do that because you can put them on a container or ship and get them somewhere and they're not necessarily time critical. So what I would be talking about in the medical space might be a -- you know, a CT kind of a device or a higher end medical device that has software that's designed for a particular hospital chain or like, say Kaiser -- and they want to standardize on some of these products and they want their logo to come up and they want it in their colors or something. So what we would do is we could build those products and configure them for that particular doctor or hospital and that would be the kind of products we would look at as opposed to lower end higher volume products that could be built in specific low cost regions, if you see the difference, okay.

One last question, could you give us an idea of what the net interest expense would look like in the third and fourth quarter of this fiscal year?

I don't think it's going to be terribly different than what I described, John. It's going to be roughly the same.

That would be around $39 million?

Yes.

Okay. Thank you.

Okay.

Hey operator, we do have time for just one more question, so please go on.

Your next question comes from Joseph Wolf (ph) from UBS Warburg.

Thank you. I had a question about the taxes. Looks like in the 10-K you had a lot of --

Could you speak a little bit louder, Joseph.

I'm sorry. Can you hear me now?

That's better.

It looks like in the 10-K you had $300 million of losses, which carry forward for a while. I was wondering if you could go through how you're treating those in terms of the difference between the book taxes that you had this quarter and the cash taxes that you paid out in the actual quarter, and what the outlook on using those losses going forward is?

Well, obviously, with respect to the utilization losses, to the extent we can capture those current and back taxes, we are going to be doing so. The utilization of those going forward, how they're reflected in the financial statements depends upon if you believe -- you have I'm going to say metrics in place to be able to generate revenue, if you don't think you can realize this in a realistic timeframe, then there's a valuation allowance that gets placed upon it and it is carved out from the tax picture. If you think you can utilize it, it gets put in. Obviously, the details of taxes is probably going to go beyond what I can talk about in this phone call. But it is reflected in the overall balance sheet and the deferred tax area and you should be able to see that in the details of the footnotes of the 10 K. If you can't, call me separately because it takes a few minutes to walk through it and I can get you through it.

What were the cash taxes paid in this quarter?

Cash taxes paid this last quarter were nominal.

Okay.

Okay.

Ladies and gentlemen, thanks for your time, I know this took a bit longer -- a lot of questions asked. Thanks. As I said earlier, we're still excited about what's in front of us and we'll work very hard to deliver that. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's Sanmina-SCI first quarter 2003 earnings conference call. This concludes today's conference. You may now disconnect.