Sanmina Corp (SANM) 2004 Q1 法說會逐字稿

Good afternoon. My name is Michael and I will be your conference facilitator. At this time I would like to welcome everyone to the Sanmina-SCI first quarter fiscal 2004 earnings conference call. (OPERATOR INSTRUCTIONS) Now I would like to turn the call over to Mr. Jure Sola, Sanmina-SCI's Chairman and Chief Executive Officer. Thank you, sir, you may begin.

Thank you, Mike. Good afternoon, ladies and gentlemen. Welcome to Sanmina-SCI's first quarter conference call. Here with me today in this conference call is Randy Furr, our President and Chief Operating Officer, and Rick Ackel, our Executive Vice President and Chief Financial Officer.

At this time I would like to start by thanking all of you for your support. And our agenda today is that Rick Ackel will review financial results for the first quarter of fiscal year 2004. Randy Furr will review operations and future outlook. Then I will follow with additional comments relative to Sanmina-SCI's results and future goals. And now, Rick.

Thank you, Jure. Good afternoon everyone. Before we get started please note that selected financial portions of this presentation which I will speak to verbally are also in the form of a slide presentation and available by logging onto the Sanmina-SCI website at www.samina-sci.com. I will be making references to these slides during the course of my discussion.

Prior to the review of our financials, I would like to take a moment to review the following Safe Harbor statement, slide 2. 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. The Company's actual results of operations may differ significantly from those contemplated by such forward-looking statements as a result of these and other factors. 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 for the year ended September 27, 2003 filed on December 9, 2003. 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.

In addition during today's call where we refer to certain pro forma financial information. The corresponding GAAP financial information and a reconciliation for pro forma to GAAP of such information are contained in our quarterly releases of results of operation which are available on the Investor Relations Section of our website at www.sanmina-sci.com.

You'll note from the press release that we have, as is our custom, provided you with two statements of operation. One reports our results on a GAAP basis to include restructuring and integration costs, impairment and other infrequent or unusual items. The other is presented on a pro forma basis and is presented without these charges. We have provided a reconciliation from our GAAP operating results to operating results presented on a pro forma basis, actually on slide 14.

On today's call I will review the results of our operations, discuss the balance sheet and corresponding metrics, provide an update with respect to restructuring. And finally, I will conclude with guidance for second-quarter fiscal 2004. In general, for consistency I will confine my comments to our results without charges for restructuring and integration costs, impairment and other infrequent or unusual charges and on a pro forma basis to facilitate comparability of the prior period.

Slide 3. Sales for the quarter, which represented our first quarter fiscal 2004, were 2.97 billion. This reflects an increase of 17 percent over the sales from our first quarter of last fiscal year, and a 9 percent increase in sales over last quarter.

Slide 4. Our top 10 customers made up roughly 72 percent of the total sales this quarter. The second ten made up approximately 10 percent of total sales. Thus, our top 20 customers made up about 82 percent of total sales. We had two customers in the first quarter with sales of greater than 10 percent of total sales, IBM and HP.

For the quarter the mix of revenue in percentage terms breaks down as follows. Third-party merchant printed circuit boards sales were approximately 2 percent; assembly and other EMS sales were about 98 percent. These percentages are basically the same as last quarter.

Slide 5. Gross profit for the quarter was 141.2 million, reflecting roughly a 30 percent increase over last year's first quarter of 109 million, and a 9 percent increase over last quarter of 129.2 million. As a percentage of revenues for the first quarter, gross profit was 4.8 percent. This is up from 4.3 percent in our Q1 '03, and up from 4.7 percent from last quarter.

Selling, general and administrative expenses for the quarter were 2.6 percent of sales, or 77 million in absolute dollars. Total operating expenses are composed of selling, general and administrative expenses with the addition of 2.1 million in amortization and 6.9 million in research and development, which brings the total first quarter operating expenses to 86.1 million, or 2.9 percent of sales.

Depreciation was 48 million for the first quarter. Capex spending this quarter was approximately 12 million. This was a bit lower than anticipated, but as I will explain later, this is largely timing. Operating income, or EBIT, was 55.1 million for the quarter, which reflects an increase of 129 percent over last year's first quarter, and a 16 percent increase over last quarter. Operating margins for the first quarter was 1.9 percent.

Our EBITDA was 105 million for Q1 of '04. This reflects about a 22 percent increase from Q1 of last year, and roughly a 10 percent increase over Q4 of '03. Other expense net was approximately 27.4 million. The difference here over what was forecasted at the beginning of the quarter relates primarily to better FX results than initially anticipated.

Our tax rate for the quarter was 27 percent. The reduction in rate is a result of changes in the mix of profit in various tax jurisdictions from prior years. We're starting to see the tax benefit of a shift in business from low tax regions, particularly Asia. This drop did not have a significant impact on EPS over the previous estimated tax of 33 percent. We believe the 27 percent rate should be maintained for FY '04, absent changes in the tax law for our profit mix.

Net income for the quarter was 20.2 million, representing an increase over last quarter of 11.4 million, and an increase over Q1 '03 of 18.9 million. Additionally, adjusted pro forma net income for the first quarter was 26.2 million. Basic and diluted shares for the quarter were 513 million and 526 million, respectively. Adjusted pro forma diluted shares were also 526 million giving an adjusted pro forma EPS of 5 cents per quarter.

Slide 6. Turning to the balance sheet. Cash and short-term investments were approximately 1.2 billion. Accounts Receivable at the end of the quarter were 1.7 billion, and DSO ended up at 50, both reflecting our increase in sales.

Slide 7. Inventories at the end of the quarter were 1.1 billion, reflecting growth in sales and business activities as inventory turns remained at 10.6. Taking a look at our cash cycle days, we ended the quarter with 26 days. Cash cycle days were determined by inventory turns of 10.6, DSO at 50, and AP days of 58. Also as a reminder, we do not have any off balance sheet financing or factorings that affect the computations of these metrics. I would like to take this opportunity to thank all the team members for maintaining a focus on these key metrics. Our working capital was 2.1 billion for the quarter.

Slide 8. Cash flow from operations was approximately 110 million during the quarter, and reflects our cash cycle day improvement which offset the growth in business. Free cash flow for the quarter was positive at approximately 98 million when deducting Capex from our cash flow from operations.

Let me now turn to restructuring. With respect to our restructuring plans during the December quarter we incurred approximately 16 million in restructuring costs, all of which was cash. Further, 9 million of these charges were recorded purchase price adjustments. And the remaining 7 million were recorded on the P&L for GAAP purposes, thus, were excluded from a pro forma perspective. This leaves us with an approximate balance of 90 to 115 million to be incurred over the next quarter with respect to our 250 million restructuring plan, plus or minus up to 10 percent that we had previously outlined. We expect cash charges on this balance to be approximately 80 million. In addition to restructuring charges we incurred approximately 2 million of integration costs. We expect to have all previously announced restructuring related to this 250 plan completed by our March '04 quarter.

Let me now turn to forward-looking guidance, slide 9. The information I will provide will be before merger, integration, restructure, impairment and unusual or infrequent charges. We're targeting sales to be between the 2.75 and 2.9 billion. Gross margins will be between 4.7 and 5 percent.

SG&A is expected to be around 2.9 to 2.8 percent of sales. And operating expenses are expected to be about 3.2 and 3.1 percent of sales. We're targeting our operating margin to be around 1.5 to 1.9 percent. Net other expense is expected to be approximately 29 to 30 million. Basic shares for Q2 '04 are expected to be 515 million. And diluted and adjusted pro forma shares are targeted 536 million. This equates to an adjusted pro forma EPS range of 3 to 5 cents per share.

We're anticipating positive cash flow from operations this quarter, and for the entire year, depending on the level of growth obtained. We estimate that quarterly depreciation for Q2 '04 will be approximately 48 to 53 million. Quarterly Capex spending will be in the 30 million range, reflecting the timing that I mentioned earlier. And quarterly amortization to be around 2.1 million.

We're anticipating Capex to be in the realm of 100 million, give or take 10 percent to the entire year as outlined at the beginning of Q1 '04. Obviously this could change as our economy improves and/or with new acquisitions.

In conclusion, we continued our focus on controlling costs, and believe we have managed our resources and cash responsibly. Our goal is to continue this trend next quarter. We will continue to focus on earnings growth and shareholder value.

Before I turn this over to Randy, you may have seen in the press release, I will be leaving the Company. I have had a terrific experience at Sanmina-SCI, and now plan to leverage this with some new opportunity. The Company have a terrific management team and Board of Directors and has a history of success. And I believe the strategy is a sound one that will continue to make Sanmina the IE leader in the MS industry.

I would like to thank the analysts and investors for all the courtesies you have extended to me. I have enjoyed the opportunity to get to know and work with you. And my finance team, I would like to send a very special thanks. Without a doubt you're the best of the best. I appreciate your time, and now I will turn the discussion over to Randy.

Thanks, Rick. As you can see from our Q1 '04 earnings release, and as Rick mentioned in his comments, the December quarter came in with a top line of 2.97 billion, and adjusted pro forma net income of 26 million, which gave us an adjusted pro forma EPS of 5 cents.

As usual, I would like to start with a few minutes on our top line. As you can see, we achieved the 2.97 billion. This placed us about 70 million over the top end of our guidance that we provided you during last quarter's earnings conference call, which was 2.8 to 2.9 billion. The 2.97 billion represented a topline sequential growth of 238 million, or 8.7 percent. This was almost all organic growth; we believe a reflection that our primary markets are recovering nicely.

In general I would characterize the mix as less than favorable. Both our high-volume personal and business computing sectors, which includes our Wintel-based servers and our multimedia sector again showed considerable strength during the December quarter.

Now for a little more granularity. For the quarter, the communications infrastructure market sector, representing both voice and data, was again 24 percent, a number consistent with last quarter. Given our overall strong topline and a consistent percentage, this meant that this business grew about 50 million in absolute dollars for the quarter. In this sector our more heavily weighted telecommunications focused companies, the ones we primarily rely upon carrier spending, were up about 6 percent for the quarter. We believe this reflects the overall end market trends we are seeing throughout the industry. In general, the stream comes from wireless programs such as UMPS in Europe, DSM and CDMA in North America, CDMA in China. Also we are seeing strength in access, DSL for residents, and IP for the business.

This sector also consists of our more heavily weighted networking focused companies. This group also showed very nice strength and was up about 15 percent this quarter. Clearly this group is smaller than the telecommunications focused group, but both groups showed a nice increase for the quarter.

Personal and business computing systems was 42 percent this quarter. This compares to 40 percent in Q4 '03. As many of you know, we have two customers that make up the vast majority of this sector. I want to emphasize both experienced strength broadly across the entire portfolio -- the programs we're involved in. We believe much of this strength was due to the traditionally seasonally strong December quarter seen almost every year for this business.

Enterprise computing and storage was 18 percent for Q1 '04. This was down by 2 percent from the September quarter. This was due to one program for a Tier one OEM that was a lower end server, which we chose to transition out due to long-term profitability concerns. The impact this quarter was approximately 50 million from this program. Without this transition, this business would have been up about 40 million for the quarter.

Industrial and medical instrumentation was down this quarter. This sector includes three broad business sectors, semiconductor capital equipment, medical instrumentation, and our defense and aerospace business. This sector represented 9 percent of our total revenue for the quarter and it compared to 10 percent last quarter. However, in absolute dollars the business was essentially flat with our Q4 '03.

The final market segment is multimedia. This segment was up this quarter reflecting our guidance from last quarter. For the fiscal first quarter this sector came in at 7 percent, which is up 1 percent over September's 6 percent figure. This translated to a nice sequential growth in absolute dollars of almost 60 million. And this, again, is reflective of the normal seasonality trends for this business.

So in summary, a nice quarter with respect to our topline, with seasonal strength being seen in our personal and business computing and multimedia sectors, as well as a nice showing of strength in our communications sector. Again, we believe we have turned the corner with respect to seeing a general recovery.

Let me now turn the discussion to some comments relative to what we are seeing going forward in these primary markets. Again first, the communications infrastructure. As I mentioned last quarter, in some of the component areas related to this sector we are seeing an increase in lead times, some positive movements on pricing.

In our June quarter earnings announcement I mentioned that our customers were forecasting an increase in demand for the second half of the calendar year 2003, with a nice sequential increase in the December quarter. And as I said in our September quarter earnings call, I was happy to see that they pulled in accordance with their forecast for the September quarter. Now I'm happy to say that they once again pulled in accordance with, or slightly ahead, of their forecast for the December quarter.

Now the question is really, what does March look like? Traditionally March is down in the neighborhood of 10 percent. However, we are seeing strength primarily driven by wireless. As I mentioned earlier, we have seen strength in this area. In addition to the comments that I mentioned earlier, we believe the addition of 3G in the U.S. will add to that list of wireless programs -- are seeing strength. Therefore, built into our present planning for our communications infrastructure is to be in the flat range for Q2 '04 as compared to the December quarter. Again, we believe that given a traditionally seasonally strong December quarter, experiencing a flat March is, again, a very positive thing.

Both our enterprise computing and storage and our personal and business computing sectors are tied to enterprise and business spending. Again, as I have said for the last several quarters, we believe that we will see a nice recovery in enterprise computing and storage, a recovery in the capital markets. As you clearly know, we are seeing some recovery in the capital markets, so that is why we would expect some strength in this area.

Offsetting this will be the traditionally seasonally slowdown often seen in the March quarter. For Q2 we expect our enterprise computing and storage sector to be in the flat to down 5 percent range as a result of this. We believe this generally tracked overall spending trends for the industry, plus reflects some market share gain.

Our Newisys business group within this sector has been gaining a lot of traction, scoring two major OEM design and manufacturing wins. We expect to see a small amount of revenue from these in the March quarter, followed by more significant shipments in the June and September quarters. I certainly would like to congratulate this team for doing a terrific job at execution.

For our personal and business computing sector, we said in October that we believe this business was going to be in the flat range. Many of you questioned that, believing that we were too conservative. You were right. It was actually up 13 percent in terms of revenue. So we were -- we were definitely too conservative. This business is, again, a bit difficult to project. As I mentioned above, the December quarter is seasonably the strongest of the year. And we do expect this business to be off significantly in the March quarter as a result, down in the range of 15 to 20 percent.

For our industrial, medical instrumentation and defense aerospace sector we expect this business to be in the up 15 to 20 percent range range for the March quarter. This strength should come across all three important elements of this sector, again, semiconductor capital equipment, medical and defense aerospace. I'm confident that we will experience further growth of this important strategic sector throughout fiscal 2004.

During the second half of calendar 2003, we won a number of new programs, specifically both in the semiconductor capital equipment and medical subsectors of this. And they are both going to benefit this sector going forward. And, again, our strategy is to grow all three of these businesses.

Finally, our multimedia sector. Historically this business has been down seasonably in March. However, as a result of some new program wins, we actually expect this business to be flat to up 5 percent for March.

I would now like to make some comments on our components business. Again, that being our printed circuit boards fabrication enclosure and memory solutions divisions. Let me start with the PCBs fabrication business. In December we did experience an increase in PCB fabrication shipments in the neighborhood of 82 million fourth quarter to around 100 million this quarter. Profit did increase accordingly to be in the 7 to 8 million range this quarter. The trends for this business were positive throughout the quarter. We expect to see trends continue positive into the March quarter. And we expect March to be up in the 15 percent range in terms of revenue. Also, we believe pricing improved a bit in Q1, with pricing being up in the 3 to 4 percent range.

For those of you that are keeping track of utilization of this business, we believe that at today's pricing we're running at between 50 and 55 percent capacity utilization in terms of facility and equipment, and in the range of 90 percent to slightly plus that based on headcount. Both our enclosure and memory solutions businesses were, again, solidly profitable at the operating profit level for Q1. And capacity utilization in each of these businesses remains between 50 and 55 percent.

Let me make a couple of comments relative to restructuring. I know Rick did. I'm going to add to that. As many of you know back in September 2002, we announced a phase II restructuring effort, which was to affect approximately twenty sites, and in total be about $250 million. Today we have taken a little over 150 million. We still believe the 250 plus or 10 percent is a good number. The issues with respect has to do with timing and with the accounting rules as to when the restructuring charge is eligible for an actual charge or expensing.

We're still confident that all of our restructuring activities will be finished during this, our March quarter. However, the only significant variable here will be the timing, again, of these charges.

I would like to make a few comments relative to the future. Even though predicting the future is always challenging, I think we have done a great job of providing you with guidance despite the challenging environment. Also, despite seasonal challenges inherent the March quarter, our desire is to make the bottom-line financial results for March as close as possible to December as we could possibly do.

As such, we are going to provide essentially the same guidance with a little lower top end -- or topline, and basically the same bottom-line as we provided you last quarter. For our fiscal Q2 '04 for the March quarter, and again as Rick previously mentioned, we expect to see our topline of 2.75 to 2.9 billion range, and our bottom-line in the range of 3 to 5 cents adjusted pro forma EPS. Again, very close guidance that we did back in the October.

On a positive note, our December quarter was the second in a row for which our top and bottom-line both grew organically. With that said, once again, we're not happy with the operating performance. However, we do believe there are a lot of bright spots in the December numbers.

Again, we organically grew the topline by over 8 percent. We won our first significant orders for our ODM initiatives, again, Newisys. We saw a meaningful increase in our communications infrastructure business for the first time in almost three years. We exited the quarter with much larger backlogs in our key components businesses. We improved our asset management, achieving cash cycle days of 26. And that is a seven-day improvement; again, with a pretty substantial topline growth there. And that was without, again, any help from factoring receivables, assets, securitization or similar products. And we generated 110 million of cash from operations and increased our cash and short-term investment position by 81 million for the quarter.

So again, we are long ways from being happy. However, when you factor in the challenges from the environment, we are making some very good progress. Most importantly, we're doing what we said we would do. 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. We certainly have the capacity. We just need demand to improve.

We will continue to focus on fundamentals to include improvement in our asset management, cash flow, our technology, and overall solid business practices and financial controls. The signs we're seeing in the marketplace today are definitely positive and we believe we're in the early stages of a recovering market for our key primary markets, again, the ones that use low to medium volume high-technology products.

We believe that our industry and our Company continue to offer significant long-term growth prospects. Again, we recognize we still have a lot of work to do. I assure you this team is up to our challenge. Our goal hasn't changed; it is to stay on track for quarter after quarter of positive news. So with that, thank you. And now I would like to turn back to Jure.

Thank you, Randy. Ladies and gentlemen, I would just like to talk to you a little bit about the market conditions. Definitely things are turning in the right direction. We are starting to see positive new orders trends across all our end markets that we serve. Our bookings in our first quarter were up positive, especially in our printed circuit boards business, backplanes and enclosure. And most of our customers are a lot more optimistic about the real recovery in 2004. And everything I can see today, their forecasts are up. So we expect the bookings in this March quarter to be also strong. Sanmina-SCI is in an excellent position to leverage this outsourcing opportunity as the economy and demand for our key product continues to improve.

During 2004 we will focus on the fundamentals of our business. And two key things that we are really focusing right now are revenue growth and improving margins. On the revenue growth last quarter we told you that growth is going to be -- for fiscal year 2004, approximately 15 percent. At this time I can tell you that that 15 percent growth number is very conservative. We are focusing on a business development and growth, and we have the largest sales and customer service organization in our industry. And so far we scored some good win this year.

The pipeline also for new organic opportunity looks promising for the rest of year. We're continuing to win new programs in the following areas, high-end computing, medical, semiconductor, industrial, automotive and communications side of the business. So as I look ahead I remain optimistic about the growth opportunities in 2004 and beyond.

Sanmina-SCI will continue to focus on our high-end technology and services that are helping us win new and future businesses. Our technology advantages there, especially some of the key components such as the boards, backplanes and enclosures. Here we have a tremendous leverage as demand is starting to improve now.

Our ODM projects are on schedule. Randy talked about our high-end enterprise server marketplace where we won two major customers. And we're working on some other customers in that area now. And also in some other areas that we can't talk about today. But the key on our enterprise server business, we're going to start shipping this quarter and significant shipments for the rest of the calendar year in 2004.

So in summary, Sanmina-SCI will continue to diversify its customer base and the markets that we serve. We expect significant growth in our component business for calendar year 2004. Our backlog is starting to grow today which is a very good sign, and pricing is starting to improve. Definitely visibility is starting to improve. At least we can forecast a little bit better. But our number one goal today is really to continue to improve our bottom-line.

So now what I would like to do is to extend a special thanks to our investors and analysts for participating in this conference call. And Randy, Rick and I would like to answer any questions that you might have. Thank you very much.

(OPERATOR INSTRUCTIONS) Matt Sherrin of Thomas Weisel Partners.

Regarding your guidance in the communications infrastructure market, which was kind of flattish, how much of that has to do with new business ramping? I know there is one specific customer that you are still going to be ramping in the quarter. But how much about is new wins and how much of it is true end market demand?

I think, Matt, first of all, we definitely have seen a corner turning around in our communications side of the industry. I believe that everything that I have seen so far -- we focus on about 20 major customers in the communications side the business. And I can tell you that most of those customers today are forecasting a better 2004.

We have been very successful positioning ourselves in the last two years. As you know, we used to always be very strong in this market, and I believe we're very strong today. So we've got some new wins. And also there is some nice demand from the key programs that we have had for a long time.

You talked about some pretty good deal flow in general. Can you give us an idea of when we should expect to see those new wins go into the volume stage? And then also if you could comment on the pricing environment for your core EMS business now?

Are you talking about the volume on the storage business that we talked about?

Yes, storage, but you talked about new deals in the pipeline for high-end computing, medical, etc.

We definitely -- as we said earlier, our guidance for this quarter in the top line is down a little bit. We expected that. But that is kind of normal for our business. But as June, September quarter, as we look that far out at this time, as Randy mentioned, it is hard to forecast. But looking at what we have in the pipeline -- how well we are positioned -- we expect some nice pickup the second part of our fiscal year.

Steve Savage with Goldman Sachs

I guess first congratulations, Rick, on moving on. I think lots of people will miss you. So I might as well start off first with a quick question for you. Can you talk about FX impact? You had mentioned something, I think, related to interest and other income, but can you clarify the FX impact in different places?

Sure, Steve. And thank you for that comment. FX impact was again relatively small. It has been minor for all quarters. It is probably -- it is less than $5 million a quarter. And what I was talking to is that obviously at the beginning of the quarter we try to gauge what that was, and it came in under what we thought it was going to be. So it has a relatively small impact, because we do try to hedge. And we get natural hedges as well because we are dealing in functional currency.

Then maybe, Randy, on the operating side. You mentioned two significant wins in the ODM area. I'm sure you're not going to name the customer, but anything directionally in terms of size? Is this consistent with things that you guys were thinking -- at your Analyst Day you had talked about either exiting fiscal '04 or calendar '04 kind of with 200 million in revenues or more, or 200 million run rate. Can you give us some sense of size?

Yes. I think this is very consistent with what we said on Analyst Day. These two wins right here alone should put us very close to those numbers for the run rate. In fact, it should put us at those numbers for the run rate exiting this year. So we're comfortable with that, with just these two wins.

And that was for this fiscal year or calendar year?

For this fiscal year we should be very close to a run rate -- I'm going to say between 150 and $200 million by the time we exit September.

Was that one or two different customers with the two design wins?

It was two different customers.

Jim Savage from Wells Fargo.

Can we first again -- I'm going to go ask Rick a question. The significant increase in payables, are we going to be expecting that payables will be higher than receivables going forward? They have been below receivables for about the last two years.

Jim, recently the payables have been equal to or actually a little bit better than receivables, the last couple of quarters. I would expect on a go forward basis it should continue that trend.

We should be looking at relatively similar working capital performance going forward?

Yes, certainly we want to going -- coming off the last fiscal year we wanted to improve. And we talked about this before. We want to end the year coming up at September quarter at really the low 30's, if you will.

Obviously, the increase in sales helped this particular quarter. But if you go looking at it over the course of 12 months, I do expect to see payables to be a little bit higher than receivables from that perspective to be able to gain some working capital metrics.

Now regarding margins. As we go forward, and you have talked in the past about your goals for margins, with the Ben Wyish (ph) business, once that becomes more mature, what kind of margins structure do you think you can get on that in terms of EBIT margins?

You're talking about the (indiscernible) business?

The ODM business.

ODM. We expect the ODM business to generate operating margins of over 10 percent.

And the printed circuit boards fab went from 82 million to 100 million in the last quarter. You anticipate that it is up this quarter. Did you exit with a positive book to bill in PCB?

Yes, we were very positive. We were over 1.1.

Over 1.1. And there is a little bit of pricing still going on, do you think?

Well, I think the pricing -- what we see so far, as Randy mentioned, we definitely saw some price improvement. And we believe the price improvement will continue this quarter. And it needs to continue, let's put it that way.

It sounds like you are expecting that business will be north of a 10 percent EBIT business in the next quarter?

It could be.

I'm just trying to go out a couple -- as we go through the year and the richness of the mix, and the impact of the margins -- if your mix will continue -- will shift toward a toward margin mix during the course of the next two to three quarters?

That is our goal, Jim. I think the key to our success to improve the bottom-line results is a product mix. As Randy mentioned, our product mix was not all that favorable last quarter. So we expect it to really improve in the third and fourth quarter this year.

In the third and fourth quarter? Okay.

I think we're going to have some improvements here in the second quarter, but really I think as we go out, we should do better.

Scott Craig of Morgan Stanley.

Just two quick questions. First with regards to the enterprise computing business, on the program transition that occurred there, is that pretty much finish, i.e., are we going to see any incremental impact next quarter?

And then secondly, with regards to the margins, it looks like the printed circuit board fabrication business added the vast majority of the incremental operating profit this quarter. Can you describe how the leverage in the rest of the business outside of the PCB fab is going to work over the next few quarters? Because it doesn't look like we got much leverage there this quarter?

Good question there. Let me take the second one first. We did improve our PCB profitability, which was probably a $7.5 million operating improvement. It was probably around 55 percent of that improved. We took some one time things through our printed circuit board business this quarter. Not overly significant. That could have been a little bit better, but we just wanted to -- we were comfortable with doing up this quarter.

So in the neighborhood of half of that operating income improvement did come from the printed circuit board fabrication improvement business that we had there. We expect that leverage in that business continue to be a minimum of 30. And we are really hoping it is going to be closer to 40 cents, as we grow that business going forward that every dollar is going to come through the there.

I think with respect to to the rest of the business, and clearly we understand this business very well, we have dissected it. And it is just a combination of the mix of businesses that we have in terms of the products that we ship. And as I read off the call, I said overall the mix was unfavorable those quarter. It not only had to do with the mix of the incremental of growth, but it just had to do with the mix of business in general that we have with the products that we ship.

We clearly have to continue to focus on cost reductions going forward, and we have to continue to improve profitability. And the leverage that we got off of the incremental revenue this quarter was not as much as we would like to see. And we're going to continue to focus on that going forward to improve that. But it really just had to do with the specific mix of shipments that we had through our businesses this quarter that we didn't get quite the leverage that we had hoped that we would get. But we did more or less get it on the printed circuit board business, and we continue to expect it there going forward.

And the enterprise business result?

Yes, the business had moved out. It is essentially all done. There is somewhere less than $5 million of revenue that will be left in this quarter, and then there will be no more of that.

Michael Walker, First Boston.

Just a couple of questions. On the PC business, I'm little confused. You were defending your zero percent expectations of sequential growth last quarter by saying -- by reminding us that most of that business is commercial desktops, which tends not to see a lot of seasonality. I'm wondering why there was so much seasonality this quarter, and then why you expect again the seasonality to work in the opposite direction next quarter? Has there been a mix shift the I'm not aware of?

There has not been a mix shift. The vast majority of all the PCs we do are commercial desktops that are used in enterprises. When I laid out the expectations for the December quarter, you might recall, I expected that to be flat. It was actually up significantly. I cannot -- I don't want -- I shouldn't say I don't want to comment on it, because we only have two customers there. And you can probably drill down to who those are. I can't comment, nor do I want to comment too much on very specific selling strategies with respect to their quarters.

I can tell you that we were upsided from respect to what was expected in that business. And we were able to, fortunately, deliver on that upside. We're very pleased with that. And again, I'm looking at the numbers that are projected for this quarter, and that is what is reflected there.

So everything I have said hasn't changed. It is still true, so to speak. But what I am saying is that both of those customers -- one of the customers, the quarter hasn't ended. It ends in January. The other one it ends in December. Had a robust December above plan, and we were able to deliver on that. And the forecast that we're getting going forward doesn't reflect that same level of production. So just as any of our customers that deal in the commercial arena, which could be Lucent, Nortel, Alcatel, Siemens, any of these have sometimes very strong quarters and it is followed by another quarter that is not strong. I would really communicate that that is what happened here in this particular business.

Michael, just to add to it. If you look at the rest of the year, the rest of the calendar year 2004 on this PC-type of business that we have, overall we're looking at nice growth.

I have a pretty similar question in the communications business. You had mentioned that normally seasonality would have you down sequentially pretty good. The March quarter with the wireless segments is allowing you to guide flat. Does that mean that either on the networking or the wireline side that you are looking for some heavy negative seasonality?

Well, Michael, I think if you look at the history of the communications side of the business, typically the March quarter is really the slowest quarter. So as you know, we're coming out of a recovery on that side of industry, and I think for right now we would rather be a little bit on the conservative side. But as I said at the beginning, I think all the signs in the communications side of the business are pointing in the right direction. And there could be some upside there. But I think to be on the conservative side, I think we're going to stay with our flat now.

Finally, and my last question really quickly is on the PCB business. You mentioned you had seen up 3 to 4 percent or so sequentially, despite having utilization around 50 to 55 percent. What that tells me is that the rest of the industry probably has utilization quite a bit higher than that. I'm wondering if you see pricing being sustained in that rate or do you see more capacity coming online that could cause pricing to revert maybe back toward zero or negative?

I believe the opposite. I think the pricing in printed circuit board business got so low in the last or three years that it would have the opposite effect. Because people in this business are not going to be able to make money in the whole pricing. As you get into the high-end boards, some of these guys that were buying the business, they finally realized that they just can't continue like this. They have to raise the prices. So I expect these prices to be normalized. They're not at the normal level yet, so we expect to see it continue to go up in the right direction, I think, in the next three quarters.

Lou Miscioscia of Lehman Brothers.

Rick, if I could pry a little bit -- obviously I always wish you the best of luck. But now things are starting to turn up a little bit. Any particular reason for leaving now when it looks like obviously things are starting to get a little better?

I appreciate the comment. It is not tied to market conditions at all. I have gained a lot of experience here. And a couple of opportunities have surfaced where I can use that experience and leverage it. And that is what I'm going to look to do. It is really no indication, no reaction to where the market is one way or the other. These things just pop up from time to time.

Good luck. If you could transfer us back over to the low-end server business that is transitioning out. I mean, $200 million of revenue isn't a bad business obviously -- or it is not nice to walk away from. Was it pricing? Was there anything in particular? Was it someone now picking this business up out in China? Or was it someone else designing a product and it went over to the ODMs? If you could just give us maybe a little bit more information on it?

It is a product that was the leading Tier 1 OEM in the computing space. And it is a product much more suitable to be done by an ODM than an EMS company. It moved to Taiwan.

Okay, that's helpful. And then my final question is just on operating margins. As we look through the year, obviously you've got some businesses that you have some nice leverage. Would you predict it is going to be a slow moderate increase in operating margins from either a basis point or a percent perspective? Or do you think as we get to the June and September and then December quarters, it will be a lot more of an acceleration?

I think it is always going to depend on the mix. I think if our component business is continuing to pick up then at the higher rate and the pricing continues to improve, then I think we should be able to accelerate. But we're still going to go with the model that we told you at the last Analyst meeting that are short-term goal is to generate operating margin 3 to 4 percent. And we would like to exit our calendar year 2004 in that range. And then our long-term goal for our operating margin is 6 to 8 percent. And that is really the goal that we're pushing for.

And you are right, we have a tremendous leverage and we're going to focus right now on the leverage that we have. And that is really higher end type of products where we can make more money. We're not interested just in the revenue. And that is what (technical difficulty) into margins that we used to make on it.

So we're looking everywhere that we have today. And we are going to analyze it, and if we're not making good enough money on it, we're not going to take it anymore. And I think the market is turning that we can now focus on performance. And we going to sell performance and technology, and that is really, at the end of the day, I think that is what our investments want is to deliver a better bottom line. That is what we want to do now.

Okay, thank you. Good luck on the year.

Joseph Wolf of Banc of America Securities.

I have got a question about the timing for the leverage, or the progression of the leverage with the mix of business.

Will you come closer to the phone, we can't hear you real well?

I'm sorry, is that better?

Yes.

Is that better?

It is excellent now.

Okay. If you look at the progression or the leverage that is expected going forward, could you talk about in that 15 percent topline growth, how much of a variance are you looking at as you look for a pretty good back end of the year in terms of a mix shift in your end markets? Or how much visibility do you have into that right now?

And then just one drill down. If you look at that industry, medical and military, can you describe whether what you're seeing in that military and aerospace is on the defense side of the business or whether you have contracts in the commercial aviation?

Okay. First of all in the end markets, looking forward as we do analysis of our customer base, we think that our customer base is pretty stable. And the key there is to diversify the programs for the key customers, so we have a better forecast and so on.

Basically everything that we see today we believe that as the demand for high-end product comes back, that we will be able to have a better product mix. And based on that better product mix, combining with a growth of 15 percent plus in this fiscal year, we believe that we will be able to deliver -- continue to improve our margins going forward. And that is really the goal we're talking about.

Also, as we diversify in the market, as you mentioned, industrial, medical and military, we believe that area is going to grow for us. As Randy mentioned, this coming quarter we expect at least 5 percent, and also continue to grow. That should help our bottom line results. But if I look at where most of business on a military side is coming, it is really more from a defense side. We are looking at commercial aerospace. As you know, that industry is a little bit slow, but there's a new programs that are coming up. In that industry you have to be involved for many years.

Stuff that we're working on right now, it is not going to come to life for probably another couple of years, so three years. There's a lot of work going on into this, what I call niche market, such as industrial, military, medical side. But the potential for us, for our industry, I think it is a lot higher. And that will give us a more stability, especially when it comes to margins going forward.

Steven Fox of Merrill Lynch.

First of all, can you looking forward at the March quarter, is it fair to say that some of the incremental margin in just the EMS business is sort of stalled as you transitioned out some new programs and bring some older programs, and bring some new ones in? And if so, when would we start to see the incremental margins just in the EMS business again?

So you preface that question by saying, looking at the March quarter. I think the March quarter will be a quarter that in broad terms revenue will be down significantly as a result of the seasonal slowness that March has. We will continue to generate cost reductions in that business. And the profitability -- as I said our goal is to try to be as close as possible to December. The profitability would probably be in rough terms down or flat, down 10 percent in that business overall. Our goal is to keep it flat. It is going to depend on a combination of mix and cost reductions, because again we will have a pretty significant top line reduction there.

So in terms of profitability, I would have to agree with you that March is "stalled". However, in terms of continued leveraged cost reductions, the ability to make as much profit on lower revenue, I would say we're still making progress in that area, and still have a couple of quarters to go before we achieve all the cost reductions that we expect to achieve in that business. So I do expect in terms of margins it continue to improve, but with margin revenue down, I don't expect profit in terms of absolute dollars to improve there.

Randy, do you expect it to start coming back in the June quarter, or is this something that is going to take a couple of quarters to get through?

I absolutely expect it to come back in June.

One last question on the printed circuit board business. Do you have average layer count? And are you saying prices should tick up the next couple of quarters in a row?

We definitely believe that margins are going to continue to improve. As we told you earlier, we thought 8 to 5 percent increase this -- if you look at where we make most of the money -- and the products that we build, Steve, is really in the high-end product, over 14 layers, 14 to about 30 layers. That is the majority of the high-end stuff that we do.

Any change in the layer count quarter to quarter?

I think it has been about flat.

Thomas Hopkins of Bear Stearns.

Congratulations again, Rick. Randy, or maybe Jure, I just want to be clear, the telecom business you're guiding to -- the communications infrastructure that you're guiding is basically flat for Q1, which I suspect, as you said, reflects some of the recovery and some of the strength in some of the wireless and other sectors. But the board business you're guiding up 15 percent. And a significant amount of your board business goes into comm infrastructure. So I'm just wondering about the disconnect first?

Well, first of all, the high-end boards, you're right, a fair amount comes from the telecommunication side. But if you look at the forecast for this quarter, it is really kind of -- there is also high-end computing -- we have got some military boards, some medical boards, and things like that. It is not all from telecom that it is coming out. But as I said earlier, if you look at the telecom industry and look at the history, typically this is the slowest quarter for that industry. I believe because of they are coming out of a very bad recession that this first quarter is percentagewise -- is not going to beam as bad as the history used to be.

I think we still see a lot of positive things in telecom side of business starting to happen. And I believe that our customers will start ordering more because their demand is a little bit more exciting in the future than it was for the last two or three quarters.

So overall we don't look at the disconnects. But we said it three months ago, that if we can keep the bottom line flat and be down 5 percent or so on a topline overall that we would look at that as a good result. And I still believe that way.

I think also, Tom, there is not a one-to-one correlation there. I think there is always inventory concerns. There is some ordering in anticipation for an improvement in June. We still buy a lot of boards outside that we're in the process of converting internally. So I think don't necessarily expect a one-to-one correlation there. Also, a greater and greater percentage of our board revenue today is in the high-end computing space as well. So it is not -- it is probably more like only about 55, 60 percent today is in the communications space.

And then as just a follow-up. Some of -- obviously some of the telecom equipment companies have been looking healthier lately. Many of them are your customers, as well as some of the enterprise networking companies. If I looked at all of your components business, the boards, the enclosures, the memory modules -- maybe more so the board and the enclosures -- where would you say you have the biggest leverage in telecom and networking? Is it wireless? Is it wireline? Is it more on the networking side? Where would you -- what would really move your board business with respect to the various sectors in telecom and networking?

Tom, if you really look at those three sectors that you just mentioned, the networking side of enterprise business, I think wires are very difficult boards. And if you look at the new designs that are coming out the layers are going up at least 15 to 30 percent. And the boards are getting bigger. The same thing what we call a fixed network, long haul. Those type of things, including wireless. So the demand for a leading-edge technology in the communication area is continuing to go higher.

At the same time -- so we have a big advantage in boards. We have a big advantage in backplanes. We've got also a large advantage in our enclosure business, because that is what we focus on, advanced large complicated enclosures. And the key for us there is to deliver that as a unit including enclosure, the backplane, the cables that go in there, some of the optical modules that go in optical systems. That is really the leverage in component business. And as you know, in component business for many years now, the last two or three years, we didn't make a lot of money. This is the first quarter that we starting to see some improvement, and we expect that improvement to continue in each quarter. But our leverage longer-term is tremendous here.

Great. Just this last question. Your Capex that you're currently forecasting of 100 million for the entire year looks very attractive in the sense that it is below 1 percent. If I take your topline now it is between 11 and 12 billion. And you're talking about $100 million, so it is slightly less than a percent or so. Is that conservative do you think, or is it just based on the fact that a lot of the Capex goes into your component businesses and you still have a lot of capacity available?

First of all we have a lot of equipment in our places. And we talked about our capacity utilization is still very low, especially in our component business. There are plenty of equipment. We spend a lot of money in 2000, 2001 on equipment. And some of the equipment is brand-new because it has not been used that much. So we really don't expect to be spending a lot of money on heavy equipment. A lot of the spending that we're going to do in Capex is going to be based on more improving the process and efficiencies, some of the unique stuff. But we got a lot of heavy equipment in place already.

And, Tom, thank you for those kind words.

Michael Morris of Smith Barney.

I just have a couple of questions about the ODM initiatives. And I'm really trying to get a sense of the swing factor in terms of your costs as you swing into a revenue position. Can you give us any sense of the magnitude of investments in Newisys, for example, in the December quarter? It sounds as though there are really no shipments to offset the costs. But just what would be the discrete costs attributed to that initiative in the December quarter, if you can give me anything?

I can give you some stuff. When we issued the press release here, you'll notice that we have broken out research and development in our earnings release. And about 70 percent of that cost there is related to the Newisys initiatives that we have in place. The revenue -- there is some revenue there. It is relatively small. It does it go to contribute to offset back. It is not anywhere near 50 percent of it, but it does go to offset some of that cost.

But I want to be right up front. Sanmina-SCI is investing in the neighborhood -- we did last quarter -- we want to invest in the neighborhood this quarter -- in the neighborhood of $4 million a quarter into developing and refining the technology in terms of Newisys. The rest of that -- the bulk of that goes for other ODM initiatives that we have there. So it is an investment in the future for which we do expect to get a return on that investment.

I know this is sensitive stuff, and I don't want to step on your competitive information, but you have two design wins. Is there any detail at all that you could provide in terms of the type of architecture, number of processors, the operating system, just anything at all in terms of the type. And if not, could you tell us if comparing the two design wins, are they substantially similar designs or are they different architectures?

Look, I want to help you here as much I can. First of all, Newisys today has two products. You can go to the website. You can see what these are. It is a 2P and a 4P design. We do have some exciting things that are coming out in the future. And both these designs centers around the A&D alteronship (ph). You can find that out. So it is a fairly safe assumption to assume these two design wins are relative to those products.

There is a product introduction and rollout by both of these customers that will happen. And to the best of my knowledge, it is going to happen relatively soon, within the next -- let's just say a couple of months here, if not before. And as these come out, then we will be in a better position to talk about them. But clearly in any of these kind of programs you said an NDA. The reason that we're being a little bit evasive, if I could use that expression, is not because we want to be, it is because we have NDAs in place. We just can't mention the customers or talk any more specific than I have done here. So hopefully that helps, but I know it is not all the way there.

It is very helpful, Randy. And I don't think anyone who has followed you would ever call you evasive. You have always been very helpful in terms of providing information.

My last question on the subject is just, you talked about a 200 million kind of run rate. And I'm assuming that is a box level assembly. Could you just help me out there? Is that board level or box level or some combination thereof. Just if I could have a better understanding of what you're actually shipping?

That will be a complete box or system that is fully tested. And just as we do a lot of the programs, that is done on an EMS model in this space, we will put them in boxes with our customers names on them and ship them to our customers' customers.

So software loaded, ready to run ?

Exactly.

John McManus of Needham & Company.

Could you tell us how much of the incremental revenue in the printed circuit board area was on the quick-turn side?

John, we don't really break that down, but we had -- that part of the business is increasing for us because we are really involved going after the new programs and things like that. But we really don't have the number in front of -- By I know overall the data, as I looked at -- without (indiscernible) numbers, I put it that way, the overall was up.

Was all of the price there due to the quick-turn business?

No. The price increase really was at an average across the board.

And might you increase capacity in quick-turn?

We're planning capacity in quick-turn.

And could you increase capacity in the back panel and back panel assembly business?

John, the way we set up -- as you know our printed circuit board business is over $1 billion capacity, and our backplane business a similar types of situation. So we do have four NPIs set up. One in Mexico, one in China -- I'm sorry, five. Three in North America. So we have plenty of NPI capacity. A lot of flexibility in our component business, both in boards, backplanes, enclosures and so on.

Let me add an editorial comment here, John, on this business. When I read my prepared comments, I put two capacity utilization figures out there. We're running essentially the same capacity as we did last quarter. We're probably a point or two higher because of the revenue, but also because pricing increases, that helps capacity -- the amount of capacity we have as well. So we're probably slightly up, but not hugely up.

The other number I threw out was capacity based on headcount. And clearly, all of us in this industry, and certainly us at Sanmina-SCI, we absolutely cannot afford to have people standing around in any of our business waiting for business of the future. So even though we have a fair amount of capacity in terms of machines, equipment, rooftops, square feet, etc., we're running fairly high capacity utilization rates in terms of headcount. And I think if you were to poll the industry, you would find that that is a similar situation out there.

And in fact, many of our competitors, I've been told, and I read, that have much higher capacity utilization rates in terms of square foot and machines. So what we're seeing as a result of that is a push out in lead times, and both because of headcount capacity. We're seeing a push out in lead times. We're seeing greater challenges in terms of providing that flexibility, that upside. And what that is doing is that is offering some opportunities to see pricing increase.

And as I have always stressed and pointed out, it is kind of a linear kind of increase as we move forward. So I think we are in the early stages of not just bare boards, but components in general for the electronic industry. I think we are in the early stages of seeing increases in lead times and pricing. And in fact, if I look at many of the component we use, I see that today. I see the trend is pricing and lead times moving out.

One last question. You indicated there that you thought you could increase the contribution margin from roughly around 30 percent this quarter to close to 40 percent there for the March quarter. Could you tell us how it that may take place?

Yes, you know, I don't want to get too specific year, John, but the reason that might take place is I think the pricing today on the traditional mix we have is probably close to 40. We just had a couple of one time items that we didn't want to classify as unusual and put it in the number that we normally classify as unusual. We just put it through the P&L there. So what I'm saying is I think those one time items will go away. They're not overly significant. We're only talking 1 to $2 million total. But I certainly think they will go away. And when those go away, it is already there.

Operator, we have time for one more question.

Your last question for the evening comes from Brian White of Koffman (ph) Brothers.

I wonder if you could talk a little bit about pricing for printed circuit boards assembly? Printed circuit boards fabrication obviously saw price increase this quarter. But what are some of the discussions you're having with customers on the printed circuit boards assembly side, and how has that changed over the past quarter or two?

Will definitely, Brian, our printed circuit boards assembly pricing is starting to stabilize. I think our competitors are a lot more careful of what type of business they take in, so the environment is changing. It is a little bit longer cycle to improve the margins. It is not going to happen like in the component business -- that can happen in 30 days or so on. But definitely we are starting to see some positive signs there. And as Randy just mentioned, we expect really this pricing to slowly improve and really across the board.

When you sit down with customers, is pricing still the first thing they bring, or are there other items that they're more interested in right now?

Well, fortunately things are changing. Today it is really, can you deliver on time, and what is your capacity going to be? Our customers today are a lot more concerned about capacity than I have seen for many years. So they're going back to that true partnership talk. And so the pricing is still there. And we're still in a competitive environment, don't misunderstand me here, but it is more than just pricing.

Thank you.

Well, ladies and gentlemen, again I'm going to thank you for your support. Another quarter behind, three to go. So still having fun and we will be talking to you the next 90 days. Thanks again.

Thank you.

Thank you.

This concludes today Sanmina-SCI first-quarter fiscal 2004 earnings conference call. Thank you for participating. You may now disconnect.