Sanmina Corp (SANM) 2004 Q2 法說會逐字稿

Good afternoon. I would like to welcome everyone to the Sanmina-SCI Corporation second quarter fiscal 2004 earnings conference call.[Operator Instruction] I will now turn the call over to Jure Sola, CEO and Chairman. Mr. Sola, you may begin your conference.

Thanks, Dawn. Good afternoon, ladies and gentlemen. Welcome to Sanmina-SCI's second quarter conference call. Here with me today on this call is Randy Furr, President and Chief Operating Officer.

Good afternoon.

And Mark Lustig, Senior Vice-President of Finance, Corporate Controller and acting Chief Financial Officer.

Good afternoon.

I would like to start by thanking all of you for being here today. Agenda is that Mark Lustig will review financial results for the second quarter of fiscal year 2004. Randy Furr will review operations and future outlook and then I will follow with additional comments relative to Sanmina SCI results and future goals and now Mark.

Thank you. Good afternoon. Before we get started please note that selective financial this portions of this presentation are also in the form of a slide presentation and available by logging on to the Sanmina SCI Web site at www.sanmina-sci.com. I will be making reference to these slides during the course of my discussions. Prior to review of our financial with you, I would like to review the safe harbor statement. Slide two. During this conference call we will make projections or forward-looking statements regarding future events or the future financial performance of the company. We caution that you such statements are just projections.

The company's actual results of operations may differ significantly as a result of various factors including economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change. We refer to you the documents in the company files from time to time with the securities and exchange commission, specifically the most recent annual report on form 10-K for the year ending December 27, 2003 and filed on December 9, 2003, as well as our most recent report on form 10-Q filed on February 9, 2004. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

In addition, during today's call, we will refer to certain pro forma financial information. The corresponding GAAP financial information and reconciliation from pro forma to GAAP for such information are contained in our quarterly releases of results of operations which are available on the investor relations section of our web site at www.sanmina-sci.com. You will note from the press release that we have provided you with statements of operations for the three and six months periods ended March 27, 2004 on both a pro forma and GAAP basis. Our results on a GAAP basis include restructuring and integration costs, impairment, other infrequent and unusual items, non-cash interests and amortization expenses. Pro forma results are presented without these charges. The statements of operations also contain reconciliations from our pro forma operation results to GAAP operating results and are posted in the investor relations section of our web site.

On today's call, I will review the results of operations, discuss the balance sheet in corresponding metrics, and provide an update with respect to restructuring and, finally, I will conclude with guidance for our third quarter of fiscal year 2004. In general, I will confine my comments to our pro forma results without charges for restructuring integration costs, impairment, other infrequent or unusual charges and non-cash interests and amortization expense to facilitate comparability to prior periods. Please note, we've eliminated non-cash interests and amortization expense within our pro forma P&L in order to enhance our comparability with other companies within the EMS industry. Slide 3. Sales for the quarter, which represented our second quarter fiscal 2004, were $2.86 billion. Slide four. Our top 10 customers made up 68.7% of total sales for the quarter.

The second 10, made up 11.7% of total sales. Thus our top 20 customers made up about 80.4 percent of total sales. In addition we had two customers in the second quarter whose sales were greater than 10% of total sales. For the quarter, the mix of revenue in percentage terms breaks down as follows. Third-party merchant circuit board were approximately 3% and assembly and other EMS sales about 97%. Slide five. Gross profit for the quarter was a $145.1 million, reflecting roughly a 39% increase over last year's second quarter of $104.7 million and a 3% increase over last quarter of $141.2 million. As a percentage of revenue for the second quarter, gross profit was 5.1%. This is up from 4.3% in our Q2 of '03 and a 4.8% from last quarter. Selling general and administrative expenses for the second quarter were 2.8% of sales or $81.3 million in absolute dollars.

Total operating expenses are composed of selling, general and administrative expenses and $7 million in research and development, which brings the total second quarter operating expenses to $88.3 million or 3.1% of sales. Depreciation was $45 million for the second quarter. CAPEX spending this quarter was approximately 21 million. Operating income or EBIT was $56.8 million for the quarter and operating margin for the second quarter was 2%. Our EBIDTA was $101 million for Q2, '04. Other expense net was approximately $20.3 million. Better than anticipated collections and cash management resulted in improved interest and expense over that which was forecasted three months ago. Our tax rate for the quarter was 27%. We believe the 27% rate should be maintained for FY '04, absent changes in the tax law or our profit mix. Net income for the quarter was $26.6 million. Basic and diluted shares for the quarter were $515 million and $533 million respectively. Diluted EPS for the quarter was 5 cents. Slide six. Turning to the balance sheet, cash and short-term investments were approximately $1.1 billion.

Accounts receivable at the end of the quarter were $1.54 billion, resulting in DSO of 52. The increase in this metric was primarily driven by the decline in current quarter revenues as compared to Q1. The quality of our agings remains very good. Inventories at the end of the quarter were $1.2 billion, reflecting an increase of 95 million as inventory turns decreased to 9.3. Taking a look at our cash cycle days we ended the quarter at 33 days. Cash cycle days were determined by inventory terms of 9.3 DSO of 52 and AP days of 58. As a reminder, we do not have any off-balance sheet financings or factorings that affect the computations of these metrics. Our working capital was $2.1 billion for the quarter. Slide seven. Cash flow from operations was approximately $46 million during the quarter and pre-cash flow was positive at $25 million when deducting CAPEX from our cash flows from operations. Now let me turn to restructuring. With respect to our restructuring plan during the March quarter, we incurred $91 million in restructuring costs, $70 million of which was cash. Further $7 million of these charges were recorded as purchase price adjustments and the remaining $84 million were recorded on the P&L for GAAP purposes and excluded on a pro forma perspective. As of the end of the March quarter, we have either completed or commenced restructuring actions at all the facilities contemplated under the $250 million plan. However, certain charges cannot be recorded until future quarters in accordance with generally accepted accounting principles. As result, we expect to incur up to approximately $40 million in future quarters pursuant to this plan. Approximately 30 million of which we expect to be cash. Slide 8. Now let me turn the guidance for the third quarter fiscal 2004.

The information I provided will generally be before restructuring and integration costs, impairment or other infrequent or unusual charges as well as before non-cash interests and amortization expense. We are targeting sales between $2.9 and $3.1 billion. Gross margins will be between 5.1 and 5.3%. SG&A is expected to be in the range of 2.65 to 2.8% of sales. And operating expenses are expected to be between 2.9 and 3.1% of sales. We are targeting our operating margin to be around 2.1 to 2.4%. Net other expense is expected to be approximately 23 to 26 million. And basic shares for the Q3 '04 calculations are expected to be in the $518 million range and diluted shares are targeted around $535 million. This equates to a diluted EPS range of five to seven cents per share.

For this quarter, we are forecasting a generation of cash from operations at the low end of our guidance to a slight usage of cash from operations at the high end. For the fiscal year, we continue to anticipate positive cash from operations, however this does depend on the overall level of growth realized. We estimate that quarterly depreciation for Q3 '04 will be approximately 47 to $52 million and quarterly CAPEX spending will be in the $30 million range. We are anticipating CAPEX to be the $90 millions give or take 10% range for the fiscal year. So in conclusion, we continued our focus on profitability 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. We appreciate your time and I will turn the discussion over to Randy.

Thanks, Mark. Nice job. As you can see from our Q2 '04 earnings release, and as Mark mentioned from the comments, March quarter come in with the top line of 2.86 billion in a pro form and net income of 26.6 million, given as a pro forma EPS of five cents. As usual I would like to start with a few minutes on the top line. The 2.86 billion placed us near the top end of the guidance provided during last quarter's earnings conference call, which was 2.75 to 2.9 billion. In general, I'd characterize the mix as favorable, as both our communications infrastructure and medical defense and industrial businesses showed increases again as illustrated in slide 9. Now for a little bit more granularity on the numbers. For the quarter, the communications infrastructure market sector representing again both voice and data was up 1% to 25% for the March quarter. Which meant this business group in absolute dollars as well. Given that December is historically a seasonably strong quarter and given that March showed absolute dollar growth over December, we consider the March results here very much a positive.

In this sector our more heavily weighted telecommunications focus companies the one again who primarily rely on carrier spending were up about 2% for the quarter. We believe this reflects the overall in-market trends being seen throughout the industry. In general, the stream come from wireless programs in North America, Europe and China, access programs, again DSL for residence and IP for businesses, and for the first time in several quarters, it was a very nice strength in the multiple optical metro network programs or some of our optical programs that we're doing. This sector also consists of our more heavily weighted networking focus companies. Again this group is a much smaller group and they showed a very slight decline of a little less than 1% for the quarter. Personal and business computing systems was 37%. This compares to 42% in Q1 '04, this was in-line with both seasonably trends for the business and our guidance given during last quarter earnings call. Enterprise competing storage was 16% for Q2 '04 this was down 2% from the December quarter. The softness in this sector comes almost entirely from the storage systems group. Industrial and medical instrumentation, which also includes our defense group, was strong this quarter. The sector includes three broad business sub sectors, again semi conductor, capital equipment, medical instrumentization and our defense and aerospace business. This sector represented 12% of total revenue for the quarter. This compares to 9% last quarter. The strength was even a bit better than we had anticipated. And that was-- is mentioned last quarter up 15 to 20% guidance, so overall, a very good quarter for that group.

The final market segment is multimedia. This segment was up nicely this quarter, reflecting our guidance from last quarter. In fact, it too exceeded our guidance and come in at 10%, which is up 3% over December 7% figures. So, again, translated to some nice seasonal growth in absolute dollars of over $65 million. So in summary, a nice quarter with respect to the top line with strength coming from our communications infrastructure, medical, defense, industrial and multimedia sectors. And again, we believe we've turned a quarter with respect to seeing a general recovery. So now would I like to turn the discussion to some comments relative to overall what we are seeing in each of these primary markets. And first, the communications infrastructure market. As I mentioned last quarter, some of the component areas related to this sector were seeing increased lead times and positive movements relative to pricing. Last quarter we told you that we felt historically the March quarter is seasonably sequentially down in the 10% range. However, we felt that we're seeing strength and momentum in this sector. And as result, we felt that March would be more like a flat quarter when compared to December. We believe the momentum will continue and built into our present planning is for our communications infrastructure sector to be up in the 2.5 to 7.5% range for Q3 '04.

We expect to see strength in various -- SM wireless programs, especially in Europe and also the metro optical networking gear. Both our enterprise computing storage and our personal business computing sectors are tied to enterprise the business spending. And as I have said for several quarters, we believe we will see a nice recovery of the enterprise computing and storage sector upon our recovery in the capital markets. Now given what's happening in the capital markets, it seems to be up some months and down others. For Q3, we expect our enterprise computing and storage business to be in the up 2.5 to up 7.5% range. As mentioned during last quarter's call, we expect to see the initial shipping of volume production for our new Isis (ph) business group, which is an ODM programs that we had last quarter. That did occur and we expect to see the sector benefit from revenue growth of these ODM products in the June quarter as well. And I should probably say increased -- certainly increased revenue growth in the June quarter.

As you know, March was seasonably down for our personal and business computing sector. We expect this business to track to normal seasonal trends. And for the June quarter, we expect this business to be flat to up 5%. For our industrial, medical instrumentation and defense aerospace sector, we expect this business once again to be strong. For the June quarter, we expect to see this sector to be in the up 5% to 10% range. The strength should be across all three important elements of this sector, again, semi conductor, capital equipment, medical and the defense aerospace. Once again, the strength in this sector comes from programs we won and I mentioned during the second half of last year or calendar 2003 more specifically the semiconductor capital equipment and the medical programs that we have are starting to ramp up for the first half of this year. We've added high-end machining capabilities in this sector, which has drawn significant interest from our semiconductor capital equipment and medical customers as well. And again, our strategy is to grow all three of these important businesses. Finally, our multimedia sector. What can I say? We're just doing very well here. The bottom line is we have some great relationships here and we have one customer who is really doing well. This is not to take away from the other seven or so set-top box customers we have. It is to say though, that this one customer is very strong for us here. Based on the excellent strength that we saw in March, we want to play a bit more conservative for June. As such, we expect this business to be in the flat range for our Q3. I now would know like to make comments on our component businesses again that being our PCB fabrication, enclosures, back planes and memory solutions divisions. Let me start with a few comments on our printed circuit board fab business. The March quarter represented another quarter of continued improvement. The top line was a bit over $110 million; we're up about 10%. Operating profit increased accordingly to be in the 10 million to 11 million range for the quarter. We expect to see positive trends continue in June. As I know many of you are interested in pricing trends, we did see a continued improvement in pricing during the March quarter with pricing trends on new programs being in the up 3 to 5% range. For those of you that are keeping track of utilization in this business, we believe at today's pricing we're running about 57, 58% capacity utilization in terms of equipment, in facilities and then again in the range of about 90% based on head count.

Both are enclosures and memory solutions businesses were again solidly profitable with operating profit level being positive in Q2. Capacity utilization in each of the businesses inched up a bit to between 55 and 60%. And just to give you capacity information overall in the company, our EMS capacity utilization is running in the 60 to 65% range. Let me make a couple of comments relative to restructuring. As you may know back in October of 2002, we announced a phase two restructuring effort, which is to affect approximately 20 sites and in total be approximately be $250 million. Again that was about 18 months ago. To date we've spent about 215 million or taken about 215 million and P&L charges relative to this restructuring. We have announced or completed all activities with respect to this restructuring effort. However, as I mentioned during last quarter's call and certainly as Mark just mentioned, we do have some issues with respect to timing, as to when the restructuring charge is eligible for expensing. And as such, we will continue to see some charges come through in the June quarter and maybe some in the September quarter as well. As Mark mentioned, we have about 40 million more to go. We think 80 to 90% of that will certainly flow through in June. And, again, these only have to do with timing related to the accounting.

Before I talk about the future, I'd like to make a few comments on inventories. I see that this is an area that clearly has received a lot of press lately. Inventories did increase about 95 million in absolute dollars; most of this increase was due to buy heads for a few large customers. Over the past several months and generally across the board, we have seen lead times for key components move out. Areas that were lead times were up significantly include opto electronics, connectors, LCD displays, logic linear and discrete integrated circuits, custom A-6 resistors and capacitors, crystals, power supplies, R.F. devices filters, S-RAM as well as flash memory and E-PROM and EE-PROM. Again, because lead times have moved out, we've experienced the relatively slight increase in inventories as a result of just dealing with those longer lead times. We believe about 35% or so of the 95 million is a result of these increased lead times. The good news is that we believe that even with these longer lead times, once they stabilize a bit, which we believe they're starting to do, we'll be able to continue to make progress towards achieving our 12 turns, which is our goal by the end of the calendar year.

Not all components have -- that which have experienced lead times increases have also experienced the same trend in pricing. However, most that are associated with circuit fab production have increased some pricing as well. Examples here include custom A-6, S-RAM, flash and E-PROMS. Several of these pricing increases were to take effect April 1 and a few of our customers have asked us it do some buy ahead of these components for the month of -- for their production for the month of April, which we bought ahead at the end of March. This resulted in additional inventory of 50 to 60 million at quarter end. All of this inventory will cycle through the current quarter or June quarter, most of it actually in April. The bottom line is inventories were up due to component lead times and pricing. In the end we do believe this is likely to be a positive thing for our industry, the fact that lead times and pricings moving up a bit. We do believe that we will continue to improve inventory turns and our goal is to break back into the mid 10s with respect to turns in our June quarter.

So now I'd like to make a few comments relative to the future. Even though predicting the future is always challenging, I think we've done a great job providing you with guidance, despite clearly a challenging environment. I'm happy that we've been able to deliver toward the top end of our guidance for last few quarters. For the June quarter, again as Mark previously mentioned, we expect to see the top line in 2.9 to 3.1 billion range and the bottom line in the range of five to seven cents per forma EPS. On a positive trend our March quarter did see some positives there despite being a seasonably weak quarter. Our calm infrastructure, medical, defense and industrial businesses as well as the multimedia business all saw sequential growth in absolute dollars. Again as mentioned, we started shipping some new Isis servers in volume this quarter, thus validating our ODM initiatives. We improved margins despite an over $100 million reduction, our top line showing leverage from improvement in both mix and our component's businesses and is also positive, our book to bill was well north of 1.1 for the quarter, positioning us for growth for the balance of the year. So again we are a long ways from being happy with the results. Howerver, when you factor in the challenging -- challenges we're seeing from the environment, we're making good progress and most importantly we're doing what we said we would do. As I mentioned to you last quarter, 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 and, again, I assure you we as a team are up to the challenge. And our goal hasn't changed. It's to stay on track with quarter-after-quarter of positive news. So again thank you for your time and now I'd like to turn it over to Jure.

Thank you, Randy. Ladies and gentlemen, before I make any comments on the quarter, I would like to update you on our CFO search. We did hire an executive search firms to facilitate this process. I can tell you that the search is progressing well and we expect to make an announcement in the next three months. Now let me make a few comments on our quarter performance. Second quarter operating performance as you heard met our expectations. During the quarter, our customers remained optimistic about their future and the economy. We expect our operating margins to continue to improve as a result of our optimization of our manufacturing operations and expanding customer relationships. Now let me talk to you about our market conditions, what we see out there.

Today I'm personally lot more encouraged about the rest of the calendar year 2004 and beyond. We are continuing to see positive trends across all of our end markets we serve. Looking in second quarter for positive. Actually, book to bill ratio was over 1.1. Pricing has stabilized and I believe it will continue to improve the rest of the year. We want to launch new programs without existing customre base and we also want some multiple new customers. As a company, we will continue to focus on business development and most important profitable growth. Sanmina-SCI has leading technologies and our vertical model will continue to help win new programs and improve our financial results. The pipeline of new organic opportunities looks promising.

At this time, we can predict our bookings will continue to improve and exceed our expectations in calendar year 2004, which will allow us to achieve the short-term goals we have set for ourselves. Now let me talk to you about our financial goals. Visibility continues to improve. And for the first time in a long time, we can give you an outlook for more than a one-quarter at a time. As I previously mentioned between Randy and Mark, we expect to see our top line at Q3 June quarter to be in the range of 2.9 billion to 3.1 billion and bottom line in the range of five cents to seven cents on pro forma basis. But the outlook for Q4 continues to improve and we look at the fourth quarter, which is our September quarter, fiscal year 2004, we expect to see our top line to been in a range of 3.1 billion to 3.3 billion and the bottom lines to be in a range of eight cents to 10 cents pro forma EPS.

Also beginning of the fiscal year 2004, we will give you some financial goals. Let me go through three of them: revenue growth to be exceeding 15%, short-term operating margin goal exiting calendar year 2004 to be 3 to 4%, and long-term operating margin goal 6 to 8%. At this time, we feel comfortable about these goals. Revenue growth greater than 15% in fiscal year 2004 is attainable. Short-term operating margin goal of 3 to 4% should be attainable in the December quarter of calendar year 2004. And the long-term operating margin goal of 6 to 8%, we believe, this is still attainable as the company improves and demands for our products improve. Our vertical model should have a nice leverage in a growth market. So in summary, as I said earlier, visibility continues to improve. It's a good thing.

We expect significant growth in our component business in second half of the calendar year 2004. Sanmina-SCI will continue to diversify customers and markets we serve. I think we did a good job there. And margins will continue to improve. Now I would like to extend special thanks to our investors and analysts for participating in this conference call. At this time, Randy, Mark and myself would like to answer any questions that you might have. Thanks for listening.

[Operator Instructions] Your first question is from Steven Fox.

Hi, Good afternoon. Could you just talk a little bit more about the print circuit board business? When you look at the outlook in terms of volumes for this quarter, can you be more specific? And how does the mix look from an average layer count? What was it in the last quarter and do you see the mix improving in this quarter into the next quarter after that?

Let me focus in on the mix there first, because I looked at some data -- a few days ago. The mix is improving. As the market is moving in the right direction, the high end is picking up and that's our sweet spot. So we're really optimistic about that. It's -- we would like it to grow a little faster than it's doing it, but definitely, it's improving, pricing is improving, and I believe the average layer on the high end for us has been well over 20 layers.

Steven, this is Randy. I will take the first part of your question there. And, you know, I'm not providing specific guidance for the fab business or any of the other components business because I just -- I'm not good enough to predict everything. I'm pretty good at getting the overall and we're just providing top-level corporate guidance here, but trying to be responsive to give you the information. I'd say we expect the positive trends that we've seen to continue. We've been fortunate to be able to see some price increases in that business as I mentioned. We've been fortunate enough to grow the business on top of that.

Our goal is to continue to do that very thing. It's to continue to improve pricing in the business and to grow the business. Our goal isn't to go fill our shop up with a bunch of low-margin business. Our goal is to continue to see pricing move and to continue to have the flexibility that we need to give our customers, the flexibility that we think we're looking for. We think because of that, we're continuing to win market share. I'm just am not good enough right now to be able to predict exactly what that business is other -- to going forward other than to say we expect these positive trends to continue.

One quick PCB follow-up. Is there any update on your plans to go into China from a print circuit board standpoint?

Yeah. We're looking at Asia specifically, right now specifically China. We are, as you know, we do have a major operation in Malaysia right now. And we are looking to expand in other parts of Asia.

Thank you.

Your next question comes from Steve Savage.

Thanks. Good evening, guys.

Hi.

I guess one question just on depreciation just 'cause I am trying to make sure I understand the numbers. This quarter I think depreciation was 44 million and then last quarter it was 47 and I think going forward it's 47 to 50, I think is what was indicated. Is that kind of ordinary variability or what's in that?

Well, if I understand your question, it is ordinary variability. We've got some additions this quarter were greater than in prior quarters. So the depreciation will kick in on those. So it's nothing out of the ordinary.

So put it another way is I think, we kind of view the 44 as the low point. We've taken most of the restructuring that we have to -- from an asset impairment point of view and going forward it will likely increase as a result of capital that we expect to spend. I think Mark pointed out that forecasted it's 30. You know quite honestly we've given you what we think is the high end of the range. We've been given that number and it's been coming in lower than that and if capital does come in lower than that in the June quarter, then depreciation will likely be lower than that as well. What we are doing is, giving you high end of the guidance here, just so others know. No negative surprises. Does that help Steve?

Yes, that does very much. Thank you. I'll keep to one question.

Thanks, Steve.

Your next question comes from Alex Lantin.

Hello Alex.

Good afternoon. I would like to ask about the, the enterprise computing and storage business, which was one weak spot that you mentioned. It was down about 14% sequentially in dollars, but also down 18.5% year-over-year in dollars. So it seems like there is a trend going on here. Could you elaborate on that? Randy, what is causing that and what might be done about it?

You know, it's a very good question, a very good point. And it is an area that we are focused on. We're probably not the only company out there that's focused on it. We are certainly focused on it. If you recall for several quarters, saying that that industry has been seeing a fair amount of strength from our storage customers there and we have quite a few customers in that area in terms of storage. And quite honestly, you know from -- and because we separate industry standard servers and PC's, what we are referring to is very high end computing gear, UNIX and proprietary system computing gear, as well as the storage customers there.

And for whatever reason, from what we saw in the March quarter with storage, really represented a significant decline. Not any one particular customer, but in general that was soft across that particular industry. Now, because our new Isis programs fall in that industry and if you do, you kind of market research, where we believe the growth is going to come in enterprise computing and storage, it is in industry standard servers and it is in storage in the future and our focus today in terms of winning new programs and our focus today in terms of our ODM programs are in those, those growth areas.

So to answer the second kind of part of your question, what are we doing to position ourselves to reverse that, is we're trying to position ourselves for what we think will be hot opportunities for growth in that industry in the future. And we think we are doing a fairly good job there today. I know that the statistics does not show that over the last six months, but we really believe that you will see that industry grow from here on out. In fact I am willing to sign up to that. That next quarter you will certainly see growth in this business knowing what I know today.

Yeah. I, just to add to that, if I look at the customer forecast in the new programs that we are working on and opportunities in that high-end computing, it's really looked promising and I agree with what Randy said really I think the future is brighter. Thank you.

Thanks, Alex.

Your next question is from Matt Sherrin.

Hello, Matt.

Yes. Hi. Good afternoon. I just have a question regarding the inventories. You said that you did build some buffer for certain customers, but that would be worked off in the next quarter or so. Is that correct?

That's correct.

So I guess the question is, if end-market demand is getting better and lead times are still extending, we are not seeing a lot of capacity come online, and at least in the next three quarters or so, from semis and component suppliers, why wouldn't customers expect you to continue to build in some buffer here?

Ok, so very good question. Again, let me try to explain this. About a third of the inventory bill that we had, I attribute to the longer lead times. And really, it just had to do with being able to get - you know I don't want to get too technical here, but getting all the data in our systems, in our business planning, our MRP systems correct with the lead times. Because right now, because lead times have moved out fairly rapidly over a fairly short period of time, you know, we might have had something in there at six weeks that had moved to eight weeks, and when we placed the order it was six, but it moved to eight weeks during that period of time. So what we are finding is that until we get all of that stabilized, and we are very close to that today, what we found is that some inventory was coming in a little bit ahead of time because of what we placed orders, where some of the other inventory was coming later. As a result, we had extra inventory here that we will not have, when we get all this balanced out. That was about a third of the pickup and we are confident that over the next quarter, we understand this and we'll get that fixed. That represented a 30, $35 million worth of kind of inventory. The bigger chunk there, really had to do with pricing. It really had to do with the number of price increases by large IC related companies that were going to kick in on the first of April and we had a few large customers to ask us to take some inventory on their contracts on the last day of the month of March, or right at the end of March. As a result of that, to take advantage of the pricing, pre-price increase. And that was the tune of between 50 and $60 million.

That stuff will flow through in the month of April. So because of that, we don't necessarily think we'll have that to deal with, that 50 to 60 to deal at the end of our June quarter, because it will flow through and we don't think they will be asking us to do that again unless there's more price increases and then we're still going to have to have some discussions here, because I wasn't overly happy that we even -- that we were even in that situation. But, you know we're flexible and responsive to our customers needs and we accommodated them there and we did that and I do think we'll be able to fine tune these systems back to work off this other 30 million or so inventory that we had, hence, that's why I think we'll be back in the mid 10s at the end of the June quarter.

Ok. Great. Good explanation. I appreciate that. And just a follow-up on, just regarding your expenses, it was up sequentially, which was a little bit surprising given that sequential revenue decline on the restructuring is done. You guys basically flattish Apex, should we expect to see additional costs coming out or you pretty much done at this point?

Are you talking about SG&A?

Yes, SG&A.

So, we did experience, an increase in SG&A and as our top line did decrease about a $100 million. However, when you do the math on the revenue, all the decline can be attributed to the seasonality in our volume computing business and as you can see, it declined by about $170 million. That means that without the seasonal decline in the volume computing business, our top line would have actually increased about 50 million to 60 million. Also as we mentioned earlier, we did see a very nice quarter with respect to our bookings. So given this and the necessity to provide sales and customer service support for the business, we did invest and I want to use the word invest, in additional sales and customer service professionals during the March quarter. Generally, our higher mix-lower volume business carries higher margins and also it carries a somewhat higher support cost as well. So about a third of the increase, and again I am talking SG&A here, about a third of that increase come from that, that investing in the salespeople. We do believe that with the pick up in volume in the computing business that will come during the second half of the calendar year, you will see back to a lot of leverage in SG&A with the percent of sales getting back in that 2.6 or so range.

Another third of the increase comes from IT-related activities. If you know, during 2002 and 2003, we converted all of our EMS operations over to Oracle with two exceptions, that being our volume computing business, and our defense and aerospace business. And again the reason for those two being later is just the differences in the business processes related to our volume computing business when compared to our EMS businesses in general and as well the unique elements related to the government contract reporting.

The Oracle conversion has provided us with a consistent platform across our market-focused segments allowing significant operational synergies that we have. Our focus in the next year is continuing overall consolidation into a single ERP for government and volume computing and any acquisitions we do. The continued Oracle conversion effort, the integration and some significant acquisitions such as IBM, as a result, have meant that we had to continue to make investments in strategic supply chain and other technologies and again, that's driven up some additional investment. However, we believe that by providing us with strategic capabilities important to these overall efficiencies and the ability to meet our customer's view on new and more complex requirements for manufacturing and fulfillment services, we believe these investments are clearly going to pay. So, again another third of that has been come from IT-related activities, which we do think will go down in the future as we come off of those legacy systems. The final third really comes from, once a year we have an annual merit increase that's implemented around -- that is implemented on January 1.

So that -- those three things basically make up the increase that we've seen and we certainly think that you will see as a percentage of sales that SG&A decline in the upcoming quarters, back down to hopefully, that 2.6% range here by September, certainly no later than December.

Ok. Great. Thank you.

Thanks, Matt.

Your next question comes from Chris Whitmore.

Hello Chris.

Good afternoon guys. A couple of quick ones. First on the interest expense line, that line came in about 7 or $8 million less than I expected. What was the impact there? And then secondly, coming back to the circuit board business, I wanted to see if you are seeing any impact at all from recent capacity expansions or announced capacity expansion programs and plans from some of the competitors there such as a AMEREX (ph) or TTMI? Thanks.

This is Mark. I'll take the interest expense question. Chris, are you considering the non-cash interest expense in your calculation of $7 million below your expectation? Because that's 6 million and that's excluded from the 20.3 million of other income and expense. So that might be the majority of the delta that you are looking at.

Ok. Great. Thanks.

Chris, on the board capacity, really if you look at the type of a product that we manufacture comparing to those two companies you mentioned, it's a little bit different, I think we have a little bit different customer base and going little bit after different business. All our factories really today are refocused more on a leading edge type of product. And I believe so far we really don't see impact at all. Actually, it's an opposite. Our customers are very concerned today about not having enough capacity in the industry if we're going to have any pick up. So we have customers today that are basically coming to us and are really doing a fair amount of planning for future, which is a really pleasant surprise for me today, but definitely when you look at the potential demand with major customers out there and when it comes to high-end technology, quick turns and so on, there is still not enough capacity out there.

A couple of follow-ups to that. Do you have a good sense of where your customer's inventories are in circuit board? You mentioned you are building inventory in some components where there's some shortages. Are you seeing that at all in your PCB business? Secondly, in terms of raw material costs in PCB, have you seen raw material price increases come through here in North America? Thanks a lot.

Ok, first question, again, regarding inventory with the printer circuit boards. What we've seen with our customers, a very little of that, I think may be one customer that I am aware of, that built up a little bit of extra inventory, which we'll use up sometime this quarter. But most of our customers really have almost zero inventory on printer circuit boards. They're buying what they need. When it comes to the raw material, we are starting to see some increases here in North America and we are passing those on to our customers.

Great, thanks a lot.

Your next question comes from John McManus.

Good afternoon.

Hey, John.

Could you give us some idea of what your capacity is in North America, Europe, Mexico and Asia now and will be when the restructuring is fully implemented?

You are talking about the total company, John?

Yeah.

I mean, we fully implemented, more or less we moved most of the, correct me here, Randy, far as I know -- we moved all the, what I would call labor-intensive products, already in Mexico and Asia and Eastern Europe. So if I look at our footprint today, I really believe we're in a very good position when it comes to the low-cost manufacturing. Now we are doing some expansion in the low-cost regions, you know, adding some more processes, but more or less, our North American factories are really focused on a NPI and a final system built for really a large systems. And Europe, very similar Europe -- especially Western Europe, a small footprint but it's mainly NPI and some high-end systems.

I think, John, you know, we don't have the data right here in front of us. But I can tell you that our Eastern Europe, our Mexican operations, and our Asian operations are operating at really a fairly high capacity utilization rate when compared to Western Europe and North America.

Could you give us an idea of when the savings there from the restructuring, what they may be in the fiscal third quarter and what they will ultimately be when the whole -- when it's fully implemented.

That we can do. We're looking that up right now. You have that all scheduled out?

You have that all scheduled out?

So for next quarter we're looking at about $56 million in savings and then about $286 million for the total plan on an annulized (inaudible).

Are you looking for incremental savings?

Right.

What was it the quarter before? How much more?

17 million.

What's the difference between that and 56? So incrementally we're looking at about $16 million total savings more on the $40 million that's remaining here for which we think most of that will be taken next quarter. So you probably won't see all of that in the June quarter, but between June and September, we will realize an additional $16 million a quarter in savings.

Ok. Thank you very much.

Thanks, John.

Your next question comes from Joseph Wolf.

Thank you. I wanted to go to the inventory turns you guys mentioned that you think it will go back up to the 10 level next quarter. Wanted to know how much you would relate to mix and how we should be thinking about inventory turns on a seasonal basis for your business or whether you think inventories across the board independent of mix mean that your inventory turns could not start trending back up and then as a quick follow-on, in terms of the inventory and the price increases on the raw materials that pass through starting in, I guess, as you buy components in April, how much of that shows up in your revenue and how quickly do you pass that through to your customers?

That's on increase in material cost you're saying?

Yes.

Ok. Let me take with the first one there. There is a considerable difference in mix in terms of inventory turns that we have. Our higher volume business tends to be much lower margin, as you know our volume computing, for example, even our multimedia is a much lower margin business. However, you turn your inventories significantly more. So as that business increases in terms of the percentage, it does clearly help the overall inventory turns that you have. With that said, we have programs in place, we're not satisfied with the inventory turns that we're getting and really I should say all of our businesses. There's some minor exceptions to that, but certainly in the high-volume business we have, we're not happy with the amount of turns we get there, those turns are north of 30 turns or in that neighborhood today, and we're not overly happy with that, nor are we happy with the turns we're getting in the rest of our business. So we have programs in place to continue to make improvements in turns in both the high volume and therefore we do believe that regardless of mix going forward, you will continue to see. So absent any change, you will continue to see. So that's why I'm comfortable at making the statement that we expect to be back in the 10 turns range by next quarter. With respect to the pricing increases on materials, let's separate that out between our traditional EMS business and our components businesses.

With respect to traditional EMS, which is by far the bulk of the business we have, all of that pricing changes is passed on to the customers. There might be some minor exceptions, but generally speaking if material goes up, that's passed, if material goes down, that's passed on as well. And with respect to things like our printed circuit board fabrication business, our enclosure business, our memory, some of our -- not the memory itself, but some of the other parts of our memory business, that business is a little different. It's treated more as commodity kind of pricing out there. And when you book new business you book -- when you book business, you book it at a particular price and that price is firm through delivery of that particular order. And then on the next order, you're quoting that order separately. So, therefore if during the time you're delivering that order there are price increases, generally you don't have an easy mechanism for passing them on. You can go to the customer and you can say, I gotta change prices, but that doesn't usually set real well, so generally you live through that.

Now, before I really drop this subject, I really want to say generally speaking in terms of materials, generally speaking as you ramp a program from its infancy through the life of the program, generally as the program matures and you get to volume production, generally you see reductions in material pricing. In an environment where there are some increases in materials, generally what you will see is less of a reduction in overall pricing as opposed to an increase. Because, again, as you ramp from very few to a large amount as your efficiencies get better in terms of yields, as they get better in terms of manufacturing efficiencies, your cost is continuing to come down. In an environment where the component pricing is trending up, what that generally means is that reduction in your material costs going forward is less than it would be in any other environment.

Ok. Great. Thank you.

Thanks, Joseph.

Your next question comes from Jim Savage.

Can we go back to new Isis for a minute regarding what your expectations are in terms of revenues there for this year and whether there are new products other than the Opteron products that they are developing and may market during the course of the year?

Again we can go wherever you want to go. First of all, excellent question on the new Isis. We are still very excited what we have there. We have a lot of programs in a place. We got some few orders going there, we made the first shipments -- major shipments this quarter. We will continue to that. We are still scheduled, Jim as we said at the beginning of the year, to exit the calendar year from ODM products, about $50 million and new Isis is playing a big part of that.

Ok. And are there new products that are not Opteron-based products that are being developed at this point?

I can't make a comment on that, but we are looking at other programs.

Ok. Can you also break down a little bit the semi cap, medical and defense so that we can get a sense as to how each of thoses businesses are doing and what the expectations are and perhaps even if there are specific customers that are doing well and you're free to talk about them?

Well, Randy is looking for the data, but before I turn out we can't talk about specific customers. But let me give you an example. A lot of the new wins Jim that we won, came from a semiconductor industrial and medical and automotive side of our business. So that there is a whole group is doing really well. I think that the military side, it's very positive. We have got lot of opportunities in the pipeline, but it just at the business when it comes to the bookings, it takes a little bit longer, but we are very optimistic on that on the long-term.

And when you look at those wins both in the military aerospace and the remainder, do you anticipate that they will continue to outgrow as you go into fiscal '05 the rest of your business?

Yeah. As you look at the percentage wise, we expect those businesses to continue to grow very nicely.

Do you have goals, I know that in your analyst meeting you talked about certain goals regarding revenues for those businesses over the next two to three years.

Yeah, I think the percentage there is about 15 to 20% of our overall business.

And that would be by what? The end of fiscal '05 or further out?

Randy, what was it last quarter in Q2 total? Was it 12%?

It was 12% in Q2.

Right. So I think in line with what Jure said, I think you'll see a consistent improvement of that and our goal is to be certainly in 2005, Jim, in the fiscal year 2005 to see this portion of our business to be at least 15%. And all three of those segments were clearly solidly profitable. We're probably experiencing the most rapid growth of the three segments in the industrial group. Again, that's benefiting from both the strength of the semi conductor capital equipment industry today, in terms of the bookings that they're receiving, and the trend that industry has in moving towards out sourcing and it's contributing some very nice growth there. And again, these medical programs that I alluded to and the second half of 2003 are starting to ramp up. And as a result we saw a nice sequential growth in the medical part as well. So it would follow the industrial group as the second fastest growing area in that, in those three segments.

Ok. Great there is just one more little thing, both in terms of tax rate going forward and what their expectations would be for net interest in other? Can you give us an idea?

Yeah, the tax rate is expected on a pro forma basis to stay at 27% and other incoming expense, let me go back to my script, 23 to 26 million.

Ok. Great thank you very much.

Thanks Jim.

Your next question comes from Thomas Vingas.

Hi. Just a real quick one on the board business. I realize we are dealing with small numbers here when we talk about merchant sales versus internal consumption, but it does seem as if the amount of boards are consumed internally did fall quarter-to-quarter and I'm hoping you can just help me kind of triangualte back why that was, seeing as you did see better than seasonal in the com business and in some of the areas in the higher end areas other than in the storage and computing. And where I would have thought you would have been able to sell some more of the back plates and some more of the boards and that's the only question I have. Thanks.

Ok. Tom, its probably just rounding of the numbers here. We actually saw a growth in both third party and our inter company business here. Probably saw -- actually saw more growth in our company than we did third party. That isn't necessarily an indication of anything. I mean, we could have some business that maybe we were building the boards and somebody else was assembling them in the past and now we are assembling the boards and they've just been transferred. But we saw nice growth. And that business was in the range of about 68 in Q1, about 68%, third party 32% internal and it jumped to about 66% third party, 34%. So there was a 2% shift in the business in internal, plus it grew about $10 million.

And if I can add to that, Thomas, is that bookings were internally also improved. So that in the future, you know, that should continue to go up internally.

Ok. Thank you.

Thanks.

Your next question comes from Thomas Hopkins.

Thomas Hopkins Yes. Good afternoon.

All of these Thomas' in a row.

I had a similar question, I just want to make sure the numbers work out. I think when you kicked off your comments you said that PCB business was 3% of sales, which gets you to something like 85 million, which would be 30 million short of your goal for the quarter, which was 115 million. And maybe it's jsut rounding. Is that it because, the 110 comes up something like 3.9%.

Yeah. It's always a good question. And maybe we need to figure out a way to present this a little bit different. When the numbers we present, that included the 3% number, that is merchant or third-party revenues only.

Ok.

Numbers that we threw out as a goal of 115 million included the inner company.

Ok.

Ok. So we were about 100 million or so in Q1 and we were north of 110 million, 111, 112, somewhere in that range, don't want to get specific numbers here, but we were in that range this quarter. So we fell a little bit short of our overall top line goal that we had. So I think I threw out like 15% growth and we grew a little bit over 10%.

Ok. Just a follow-up. With Jure talking about a little more visibility here and going out on a limb and talking about -- basically raising Q4 expectations here to 3.2 and I think nine cents at the mid point. You know, where is the core of that coming from? Is it one end-market segment? Is it a just the telecom and communications stuff starting to get better and, therefore, you know, it's a better mix for you? Where is kind of the confidence in that coming from specifically?

Well, let me start with that one and Randy can help me here. First of all, as we go into this quarter and now we're starting to see a lot more visibility, Thomas, out there. And as we talk to our customers, we feel a lot more comfortable. Otherwise we wouldn't be talking about the Q4, our fiscal year which is September quarter. If I look at the cross out businesses, we're seeing a positive sign definitely. The mix is changing in our favor. It's more higher end, lower volume type of product, which is more profitable business. So, we definitely at this time feel comfortable to predict that the Q4 September quarter, will come in in that range and the bottom of 8 to 10 cents.

Let me take that question, Tom, and give you a little bit more granularity of the leverage we hope to see. Today we're at about 2% of operating margin, which means we need to improve, you know, 1 to 2% and we basically got three quarters to do it, to hit these numbers. We believe that we will continue to achieve leverage in our components businesses. We believe that our PCB fabrication business will drop between 35 and 40 -- or does drop between 35 and 40 cents, to the pretax line for every incremental dollar of top-line increase. We believe that our enclosure and back plain businesses contributes around 15 to 20% contribution margin and the balance of our components businesses will average around 15% contribution margin. So if you assume a blended average contribution margin of about 20% and you assume that our components business top line will improve in the range of 100 million per quarter from March to December, and that's not 100 million per quarter, but 100 million from March to December, this in an improvement of about 20 million of operating income or 60 basis points of operating margin.

Secondly, we expect improvement in our overall cost structure from March to December by approximately about an additional 10 million and I think that's conservative. We pointed out earlier we hope to get more like 16, but for the debate here, let's say 10 million. And again, that's going to contribute another 30 basis points. And this reduction will come from the benefits of these -- finalization of the restructuring efforts.

Next, we expect to see a benefit from top line growth. As Jure mentioned, our goal for December will be in 3.2 to 3.4 billion range, or about 450 more than we're doing today. If you exclude the 100 million discussed -- that I discussed there in terms of our components business, that's still 350 million or so increase and even at a much lower contribution margin, you should easily get 20 to 30 million incremental operating profit at today's margins, which will -- and then also we expect to see an improvement in mix. By December, we expect our high-volume business to shift from about 53% of our business today to around 57% of our business by December. We hope to see a shift of around 40 basis points on this mix shift and finally we expect to see some improvement in pricing. Our goal is to see this yield between 25 and 100 basis points of improvement over the next six months.

So in summary, even at the low end of our pricing improvement goals, when you add up these five items, you get, you know, somewhere at least a 2% as much as a 2.5% improvement. So we do believe that we can exit this calendar year in the 3 to 4% operating margin window that we've outlined.

Ok. Great.

Thanks, Thomas.

Thanks.

Your next question comes from David Pescherin.

Thank you, gentlemen. Just some quick follow-ups on previous questions. You mentioned a $50 million -- exiting the year with a $50 million run rate in the ODM business. That was on quarterly basis, correct?

That's correct, quarterly basis there.

What kind of costs are you incurring on a quarterly basis right now from that business?

Randy, you got those numbers?

Yeah. We've outlined about $8 million of research and development or between 7 million and 8 million here of research and development expense, a quarter of which about 80% of that is in relation to the enterprise computing and storage for which these products will come out. Probably half of that research and development is related to this 50 million in revenue and the other half of that research and development is attributed to revenue we expect to see in 2005 and 2006.

Ok, so then on the $50 million revenue, let's call it, I guess, the September quarter, what kind of operating margin you would expect?

Well, we've steadily said that we expect to see 10% operating margin on our ODM programs, and that -- there's certainly no different there.

Ok and then Jure or maybe Randy has mentioned the expansion of the PCB business into Asia. Would you be running the same type of boards that you're running in North America or in Western Europe or would you be moving more towards the low end boards in those operations?

Any of us can probably take that, our goal to be in Asia is to meet demand that we have for our customers and I want to word it Asian customers but I don't want you to think of that just as -- companies that are Asian companies, so we have a lot of comp customers like Nortel and Lucent and Ericsson and Nokia and Alcatel that are in China, or in Asia today that really, really require us to supply them out of those regions and that's the principle reason we're going is because of the demand that we have for our customers in those regions.

I do think that when we're in those regions there will be -- we will have some opportunities on the technology curve to provide some lower technology wards and be profitable to meet our profit expectation in doing that that's not really low-end stuff but it's down from where we're at today. So, I guess we are going there primarily to meet our customers demands but we do think we will have somewhat larger markets as a result of being there with the capability of producing some of these let's say low to middle end boards that we have today. We still buy about two thirds of the boards that we are consume internally, externally. So we're still a very large procurer of boards for which again only about a third of that is supplied internally so with -- by being in these regions, we think we can increase that from about a third and may be as much two thirds.

Great and then Randy, you know, you're talking about the improvement in the components business in the incremental operating margins that you are expecting there, how much of the incremental revenues that you are generating or expect to generate in the component business is just due to higher production volumes of existing EMS business that you are selling into and how much is depending upon you actually the selling --cross selling those components into existing programs that maybe aren't using your components.

I would say about 80% is expected to come from incremental volumes we have from our customers and 20% is conversion from someone else to us.

Ok, and then one final question for Mark. Mark, the interest expense, somebody had asked, you know, going from 20 to 23 to 26. Should we read from that there is 3 to $6 million of positive impact in the other expense line this quarter that you are not expecting next quarter? Such as (inaudible) or something?

No, we had some very small one-time benefits in the other column but the reality is in the forecast we've got built in some increases in the (inaudible) rate in the next quarter.

Ok, great. Thank you.

Yes, operator, we have time for one more question.

Your last question comes from Todd Hopelin (ph).

Yeah, good evening everyone.

Hello Todd.

Couple of things. Could you remind who your 10% customers are and what the percentages are?

We can tell you who they are but at this time we are not going to tell what percentage they are. It's IBM and HP.

Ok. And could you also update us on where Sanmina expects to shake out of the Nortel flex negotiation? Seems like those are getting extended and drawn out here. Can you provide us any color on whether or not use think you can maintain your position there?

Yeah, I mean, I can't comment really too much on that project, it's really I got to leave that to Nortel to do that we have meetings, high level meetings in Nortel you know, very often we are in touch with them everyday, we feel that no matter what happens, that the deal will continue to be a player with Nortel going forward and some capacity and we don't believe they will be a major impact in our short term and I think in the long term, we believe there is enough on our table and the technologies that we offer to Nortel that will continue to be a player. That is all I can say at this time, Todd.

Ok, great, thanks a lot.

Yeah, thanks a lot. Well, ladies and gentlemen, thanks for participating in this conference call, and I will look forward talking to you next time, so thanks again.

Bye, bye.