Sanmina Corp (SANM) 2004 Q3 法說會逐字稿

Good afternoon, my name is Myles (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to the Sanmina-SCI third quarter fiscal 2004 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. I would now like to turn the call over to Mr. Jure Sola, Chairman and Chief Executive Officer of Sanmina-SCI. Mr. Sola, you may begin your conference.

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

Good afternoon.

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

Good afternoon.

At this time what we would like to do is thank you for attending this conference call. On agenda, we have Mark Lustig, who will review financial results for the third quarter of fiscal year 2004. Randy Furr will review operations and future outlook. Then I will follow with additional comments relative to our results and future goals. And now Mark.

Thank you. Good afternoon everyone. Before we get started, please note that selected financial portions of this presentation are also in the form of a slide presentation and available by logging on to Sanmina-SCI website at www.sanmina-sci.com. I'll be making references to these slides during the course of my discussions. Prior to review of our financials with you, I'd 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 technical change.

We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's most recent annual report on form 10-K, for the year ended September 27th, 2003, filed on December 9th, 2003, as well as our most recent report on form 10-Q, filed on May 11th, 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'll note from the press release that we have provided you with statements of operations for three and nine months ended June 26th, 2004, on both a pro forma and on a GAAP basis. Our results on a GAAP basis include restructuring and integration costs, impairment, other infrequent or unusual items and non-cash interest and amortization expense. Pro forma results are presented without these charges. The statements of operations also contain reconciliations from our pro forma operating 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 our operations, discuss the balance sheet and corresponding metrics, provide an update with respect to restructuring and finally I will conclude with guidance for our fourth 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 interest and amortization expense, to facilitate comparability to prior periods.

Slide 3. Sales for the quarter, which represented our third quarter fiscal 2004 were 3.1 billion. This reflects an increase of 16% over the sales from our third quarter of the last fiscal year and 7% increase in sales over last quarter.

Slide 4. Our top 10 customers made up 70% of total sales this quarter. The second ten made up 11% of total sales, thus our top 20 customers made up about 81% of total sales. We had two customers in the third quarter whose sales were greater than 10% of total sales. For the quarter, the mix of revenue and percentage terms breaks down as follows: Third party merchant printed circuit board sales were approximately 2% and assembly and other EMS sales were about 98%.

Slide 5. Gross profit for the quarter was 158.5 million, reflecting roughly a 33% increase over last year's third quarter of 119.6 million and a 9% increase over the last quarter of 145.1 million. As a percentage of revenues for the third quarter, gross profit was 5.2%. This is up from 4.5% in our Q3 of fiscal 2003, and a slight increase over last quarter's 5.1%.

Selling general and administrative expenses for the third quarter were 2.7% of sales, or 82.4 million in absolute dollars. Total operating expenses are composed of selling, general and administrative expenses and 7.3 million in research and development, which brings the total third quarter operating expenses to 89.8 million, or 2.9% of sales. Depreciation was $44 million for the quarter. Capital expenditures, this quarter was approximately 27.3 million, much of this was used for expanding into low cost regions.

Operating income or EBIT was 68.8 million for the quarter. Operating margin for the third quarter was 2.2%. Our EBITDA was 112.9 million for Q3 '04. Other expense net was approximately 21.7 million. Our tax rate for the quarter was 27%, and we believe the 27% rate should be maintained for fiscal '04 absent changes in the tax law or our profit mix.

Net income for the quarter was 34.4 million. Basic and diluted shares for the quarter were 517 million and 528 million respectively. Diluted EPS for the quarter was 7 cents.

Slide 6. Turning to the balance sheet, cash and short-term investments were approximately 1 billion. Accounts receivable at the end of the quarter were 1.7 billion, resulting in a DSO of 47 days. The improvement in this metric was driven by continued strong performance from our collections function and a solid quarter over quarter increase in revenue. The quality of our receivables aging remained very strong.

Inventories at the end of the quarter were 1.1 billion, reflecting a decrease of about $45 million as inventory turns increased to 10.4. Taking a look at our cash cycles day, we ended the quarter at 31 days. Cash cycle days were determined by inventory turns of 10.4, DSO of 47, and AP days of 51. 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 2.2 billion for the quarter. Cash flow from operations with the use of 103 million during the quarter, and pre-cash flow for the quarter was a use of approximately 130 million when deducting Capex from our cash flow from operations.

Let me now turn to restructuring. During the June quarter, we incurred approximately 18.3 million in restructuring costs, 17.7 million of which was cash. Further, one million of these charges were recorded as purchase price adjustments and the remaining 17.3 million were recorded on the P&L for GAAP purposes, and thus were excluded on a pro forma perspective.

As of the end of the June quarter, we have either completed or commenced restructuring actions at all of the facilities contemplated under the $250 million plan. However, certain charges cannot be recorded until future quarters in accordance with GAAP. In addition, we will be undertaking further restructuring actions on a smaller scale beginning in Q4. Randy will discuss the details of this new restructuring plan during his presentation.

Slide 7. Now let me turn to guidance for the fourth quarter of our fiscal 2004. The information I provide will generally be before restructuring and integration costs, impairment, other infrequent or unusual charges, as well as before non-cash interest and amortization expense.

We are targeting sales to be between 3.1 and 3.3 billion. We expect gross margins to be between 5.6 and 5.8%. We are targeting our operating margin to be around 2.5 to 2.8%. Net other expense is expected to be approximately 23 to 25 million. Basic shares for Q4 '04 are expected to be in the 518 million range, and diluted shares are targeted around 525 million. This equates to a diluted EPS range of 8 to 10 cents per share.

We are forecasting a neutral to slightly negative use of cash from operations for this quarter, as anticipated demand improves. We estimate that depreciation for Q4 2004 will be approximately $44 to $48 million, and quarterly Capex spending will be in the 20 to $30 million range.

So, in conclusion,, we continue 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'll now turn the discussion over to Randy.

Thanks, Mark, great job, by the way. As you can see from our Q3 '04 earnings release and just as Mark mentioned in his comments, June quarter come in at the top end of our guidance of -- and our pro forma net income of 34.4 million, which give us a pro forma EPS of 7 cents.

As usual, I'd like to start with a few minutes on our top line, as you can see again we achieved the 3.07 billion, placed us near the top end that we provided during last quarter's conference call, which was 2.9 to 3.1 billion. In general, I'd characterize the mix as once again favorable as both our communications, infrastructure and medical, defense and industrial businesses all showed increase.

Now for a little bit more granularity on the numbers. In this illustrated and slide 8, the communications infrastructure market sector again representing both voice and data was up 1% to 26% for the June quarter, which meant that this business grew in absolute dollars certainly as well. In this sector, our more heavily weighted telecommunications focused companies, the ones who primarily rely on carrier spending, were up about 9% for the quarter. We believe this reflects the overall end market trends we're seeing throughout the industry.

In general, the strength once again comes from wireless programs in North America, Europe and China, access programs, DSL, primarily for residence, and IP for businesses. This sector also consists of our more heavily weighted networking focused companies. This group, much smaller than above, also showed a nice increase growing about 8% for the quarter.

So in summary, a nice quarter for the communications infrastructure sector, growing on an average of 9% sequentially, and slightly exceeding the top end of our guidance, which was 2.5 to 7.5% growth that we provided to you during last quarter's call. Personal and business computing systems was flat for the quarter at 37%, however given our strong top line growth this meant that this sector grew 5% for the quarter. This is in line or maybe slightly ahead of the normal seasonality trends for the business, and was at the top end of the guidance that we provided during last quarter's earnings call.

Enterprise computing and storage was 14% for Q3 '04, this was down approximately 2% from the March quarter. However in absolute dollars this sector was essentially flat from Q2 to Q3. We are ahead for our plan for new ISIS servers here. I will talk more in a few minutes and for those not familiar with the new ISIS servers, this is one of our key ODM initiatives. The softness in this sector came almost entirely from the storage base.

Industrial, medical instrumentation and defense aerospace was strong again this quarter. This sector includes three broad business sub-sectors, again semiconductor capital medical instrumentation and in our defense and aerospace business. This sector represented 12% of our total revenue for the quarter, although this compares to 12% last quarter, this sector actually grew over 10% for the quarter in terms of dollars. The strength was even a bit better than 5 to 10% guidance provided during last quarter's earnings call.

Our final market segment is multimedia this sector was up again nicely this quarter. In fact it too exceeded our guidance and come in at 11%, which was up 1% over March's 10% figure. This translated to some very nice sequential growth in absolute dollars of over $55 million or 20% sequential growth. So in summary, a nice quarter, with respect to our top line, with strength coming from our communications infrastructure, medical defense industrial, personal business computing, and multimedia sectors. So, now what I'd like to do is turn my comments to what we're really seeing in our primary markets and I'll start again with communications infrastructure.

We're definitely encouraged by what we're seeing in this sector. We believe our customers are more healthy today than at any time in the last three years. We're seeing new programs announced and an interest in investing into new networks and new technology. Our customers today are also speaking much differently, they're no longer talking in terms of survival. They're talking about how we can partner to win this project or that project. In general, a much more positive market environment.

We believe this momentum experienced during the last couple of quarters will continue and built into our present planning for which our communications infrastructure is included is in the up 2.5% to 5% range for our Q4 '04. We expect to see strength in various GSM Wireless programs, especially in Europe, ADSL, and IP access for Metro-optical network in (inaudible).

Both our enterprise computing and storage, and our personal and business computing sectors are tied to enterprise or business spending. As I've said the last several quarter, we still believe we'll see a nice recovery in this enterprise computing and storage space, upon a recovery capital markets. So clearly culling the recovery is a bit difficult.

With that said, we do believe we have some momentum going in. The enterprise computing and storage sector with our new ISIS technology. For Q4, we expect our enterprise computing and storage business to be in the up 10% to 15% range. As I mentioned during last quarter's call, we started shipping new ISIS servers in volume, and in fact revenue from new ISIS servers exceeded 30 million in the June quarter and for September we expect it to be up over 150% from this number. So as you can see great momentum in this area.

Last year at our analyst conference in New York we communicated to you that our goals relating to our ODM efforts in and one of these goals was to exit the calendar year with ODM revenues of 200 million. As you can see, we're very much on track and the new ISIS servers alone should account for three quarters of this goal.

For Q4, we expect our personal and business computing sector business to be in the flat to up 5% range. Once again as a reminder, almost 100% of our personal business computers are commercial, and are for the business sector. And I'm saying this as opposed to consumer or channel type PCs. So, again what we do is direct in the commercial. As such we expect this business to trend and track more in line with enterprise spending and as opposed to consumer spending and we believe this guidance tracks with the trend we're seeing in the industry.

For our industrial and medical instrumentation and defense aerospace sector, we expect this business once again to be strong. For the September quarter we expect to see this sector in the up 5% to 10% range. The strength should be across all three important elements of this sector, again semi conduct or capital equipment, medical and defense aerospace. Once again the strengths in this sector comes from programs we won and I mention during the second half of calendar 2003, more specifically the semiconductor capital equipment and the medical programs.

Finally, our multimedia sector, as I said last quarter, what can I say? We're doing very well here. The bottom line is we have great customer relationships here, and the set top box market is very strong today. Based on the excellent strength we saw here in March, and June quarters with March being up 32%, June being up 20%, we want to be a bit more conservative in September. As such we expect this business to basically be in the flat range, possibly even down 5%, but given the strength of the last two quarters, this is still very good.

I'd like to make some comments now on our components businesses, this being our PCB fabrication, back plane assembly, enclosure systems and memory solutions divisions. Bear with me a few minutes, as I want to convey adequately what I believe we're seeing in these businesses.

During the March quarter, if you look across our industry, as well as across most of our customers, quite simply, inventory has increased. Most of the increases in inventories were components, which essentially meant that component suppliers shipped at a rate that was in excess of actual demand. Again, this was for the March quarter. We believe our components' businesses reflected this and as you might recall during last quarter's call, about our board business was up in the quarter at a higher rate than the rest of our businesses.

During the June quarter we believe that overall inventories for our industry and for our customers should show a decline, at least in terms of turns improvements and as a result will be that some shipments made in March will be used to satisfy this June demand. Thus, in the June quarter just the opposite should have happened for the components suppliers. That is June shipments should be somewhat less than the overall market or in market demand.

We believe that this is just what happened, and here at Sanmina-SCI is evidence by the fact that our inventory actually declined despite a healthy increase in our top line. The good news is that we believe that this issue is more or less resolved itself in the June quarter, and component sales will track closer to actual demand in the September quarter.

Our PCB fabrication business saw a revenue decrease of approximately 10%. Profit was down in line with this top line decline. The business remained profitable during the quarter. I know many of you are interested in pricing trends. During the June quarter pricing trends on new programs was essentially in the flat range with the prior quarter.

For those of you who are keeping track of utilization in this business, no real changes here either. We believe that today's pricing we're running about a 57% or 58% capacity utilization in terms of facility and equipment, and about 90% based on headcount.

This is probably a good time for me to make a few comments about the Pentex-Schweizer acquisition that we announced late last month. As many of you know, adding printed circuit board fabrication capabilities in China has been part of our strategy for several years. This in part, due to our Chinese customer base requirements, and in part due to the need for the ability to effectively compete and the load to middle end space for PCBs.

We found that finding the right opportunity; that is, an operation with the right capabilities and cost structure at the right valuation was for more difficult than we thought. And quite honestly, it took us several years to find this right opportunity. We do believe that Pentex-Schweizer does just that and gives us just what we're looking for.

The acquisition gives us two qualities PCB fabrication operations, one in Singapore and one in China. Both are ISO-9001-2000 certified. We've had tremendous success recently in Singapore, now that we have a low cost operation and the Batam Indonesia Island just off of Singapore and the PCB fabrication operation in Singapore will complement our EMS operations there very nicely.

The Wuxi operation in China clearly is strategically located very close to our Chiashew (ph) DMS enclosure operation not far outside of Shanghai. As many of you know, since the SCI merger two and a half years ago, we only source today about one-third of our total PCB requirements internally. We believe that within a year, that number will move closer to two-thirds internally sourced instead of just that one-third.

So in summary, the operations are strategically located, they provide the right capabilities, they have the right cost structure, they are profitable today and in fact we think it's about half cent accretive in 2005 and we believe again there's upside that we can effectively increase the through-put by directing more of our internal requirements to the operations.

Our back plane assembly, enclosure systems and memory solutions businesses were again all solidly profitable and pro forma operating income level for Q3. Past utilization across all those businesses remained essentially consistent, with last quarter in the range from 55 to 65%.

Let me turn my comments to restructuring, as many of you know back in October 2002, we announced the Phase II restructuring effort, which was to effect approximately 20 sites in total and be about $250 million in total charges plus or minus 10%. Today we've incurred about 260 million in charges relative to this restructuring and we've announced we completed all activity with respect to this restructuring.

With that said, over the past few months, it has become clear to us that a lot has happened since October 2002, and we should rethink the scope of our overall restructuring effort. This includes two important facts. One, demand for low to medium volume, high mix products has not recovered quite to the levels we had hoped when we set the October 2002 plan, and two, our operations in Hungary, Mexico and Asia are more efficient than we actually expected at that time.

Given these two issues, and events that have occurred subsequent to October 2002, we believe it to be prudent to do another phase of restructuring. This phase much smaller and one to fine tune our overall cost structure and take cost out of our higher cost locations. This phase is to be approximately 100 million in charges, to be incurred over the next four or five quarters. The charges will be approximately 70% cash, and 30% non-cash. And once all the charges have incurred, we expect to save approximately $22 to $24 million a quarter. Because the timing of these charges is difficult to predict, I do not want to provide guidance respect to the timing of the savings. However, I can assure you that the payback criteria will average in the four to six quarters range for each of these charges.

Let me make a few comments on inventories. As you may remember from my comments last quarter, I did say that we would improve the 10.0 or better in the June quarter and we exceeded that with the 10.4 number. I want to give you a quick update what we're seeing in the supply chain. Generally speaking we're seeing flat lead times in pricing and very little issues with respect to supply and passives, interconnect, switches, fans, magnetics, power, batteries, filters, storage, printed circuit boards and mechanical fabrication.

We're generally seeing slight increases in lead times for pricing in linear, logic, ASIX, and crystals. However, we have managed lead times correctly, we're not seeing many issues with respect to supply availability with these components. With that said, we are generally seeing issues with respect to lead times of pricing, and some supply availability related issues with respect to discrete and memory. So, in summary no real significant trends, however, a couple components are definitely presenting some challenges.

On a positive note, our June quarter did see some, as I say positives here. Very nice strength in three key market segments - communications, infrastructure, multimedia, industrial-medical instrumentation, defense aerospace in fact with the exception of high end computing, every sector grew in absolute dollars for the June quarter, and again high end computing was flat.

Our new ISIS servers are doing a wonderful job in the market with June volume is being meaningful and the forecast going forward is strong keeping thus keeping us on track with respect to our ODM initiatives. We've rounded out our PCB fabrication strategies with the announcement to acquire of Pentex-Schweizer thus providing us with a substantial footprint in Asia for the records. Sanmina-SCI with that acquisition we will have approximately 2.5 million square feet in Asia.

We've improved margins at both the gross and operating margins level showing leverage as our business grows, with operating margin being up 26 basis points. And we ended with a positive book-to-bill and strong backlog to support future growth for which Jure will comment on here in a few minutes.

Again, we're a long ways from being happy. However, when you factor in the challenges from this environment we're making some good progress, and most importantly we're doing what we said we would do. As I mentioned to you last quarter, we still believe our industry and our company continue to offer significant long-term growth prospects. We recognize that we still have a lot of work to do and I want to assure you that this team is up to the challenge, and our goal hasn't changed to stay on track quarter after quarter with positive news. So thank you for your time, and now I'd like to turn it back to Jure.

Thank you, Randy. Before I make any comments in the quarter I would like to update you on our CFO search. We have just completed a very intensive CFO search and we were fortunate to have opportunity to interview many qualified candidates. I'm happy to announce that we have selected the individual, however, we are not ready to disclose the name today. We will do so on a day he joins us, and we expect a start date to be next month or so. I believe this person is an extremely capable individual that will help us take our company to the next level.

Now, ladies and gentlemen, let me talk to you about our market conditions. You heard a little bit from Randy but let me add to that. Today I'm more encouraged about the rest of the calendar year of 2004 and beyond about improving market conditions. We are continuing to see positive trends across all of our end markets we serve, and I believe that the second half of calendar year 2004 will show stronger growth.

Bookings in third quarter continued to be positive. Book-to-bill ratio for the whole business was over 1.1. Pricing has continued to stabilize and I believe will gradually improve the rest of the year. Sanmina-SCI will continue to focus on business development and profitable growth only. The pipeline of new organic opportunity looks good, and promising. We are positioned for growth and our customer relationships are strong and involving. At this time I expect bookings will continue to improve for the second half of calendar year 2004, and should continue to steadily expand in calendar year 2004.

On technology front, Sanmina-SCI has a strong engineering design service that operates globally. This engineering group has been very successful in the last few months helping us win new business through engineering services and developing ODM products. As Randy mentioned, our ODM shipments for a year are per schedule and we expect to exceed well over our goal.

We have some exciting new ODM initiatives being worked today that will benefit us in fiscal year '05 and beyond. Our engineering services mainly focus on high-end products and we provide end-to-end design capabilities for printer circuit board design, back plane design, enclosure designs, full system designs and final system designs. Our customers continue to outsource more of their engineering needs at a faster rate than ever before and Sanmina-SCI should benefit from this trend.

Now let me talk to you about our financial goals. You heard from both Randy and Mark, but let me add to that. Our visibility continues to improve even though predicting the future is always challenging. I think we have done a great job at providing you with the guidance despite this challenging environment. I'm happy that we have been able to deliver towards the top end of our guidance for the last several quarters. As previously mentioned, we expect to see our top line in the fourth quarter September to be in the range of 3.1 billion to 3.3 billion, and bottom line range of 8 cents to 10 cents pro forma EPS.

At this time, the outlook for December quarter looks good. And we expect to see continued improvement on our top and bottom line. In beginning of 2004, we gave you some financial goals. Revenue growth of 15%, short-term operating margin goal of 3 to 4%, and long-term operating margin goal of 6 to 8%. At this time we still feel comfortable about these goals. First of all, revenue growth should be over 15% in fiscal year 2004 and short-term operating margin goal of 3% and higher still looks attainable in December quarter 2004. And longer term operating margin goal of 6 to 8% and here we believe this is reachable in the longer term and to us this is the most important goal for our corporation.

So in summary, visibility continues to improve with our customers. Our standard EMS business is growing nicely and we are starting to see leverage in EMS business going forward. Additionally, we expect to see improvements and growth in our component business in the second half of calendar year 2004, such as printer circuit boards, back planes, enclosures, cables, both optical and RF and memory modules. With combination of these sectors, we expect improvement across the whole company.

During the last nine months, we diversified our customer base and will continue to do so going forward. And again, I believe we will continue to see nice, steady growth across all our markets we serve in 2005. 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 I would like to answer any questions that you might have. Thank you.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Thomas Hopkins with Bear Stearns.

Good afternoon, Jure, Randy.

Hi Tom.

How are you? I wonder if you could comment on just communicating your story to the investment community. You seem to have had a good quarter. You seem to sound pretty confident, yet your stock in the last two months has gone from 10.50 to 6.50 and there was some management inside selling as well. But everything from what you're saying here, seems to be, you know, pretty much on track. So what is it that you think the Street is missing in the story that you're communicating, and what can you do to better communicate the story, and could you also comment on the insider selling?

Yeah, Tom this is Randy Furr. So first off, I want to clear up this insider selling and I think we've looked at the process to change it. About a year ago, at the recommendation of outside counsel, and you know we think it's a good idea, too, several of us at the company and primarily Jure and I, put a 10-B-5-1 plan in place. And what the process involved in that 10-B-5-1 was at the beginning of every quarter to put the maximum amount of stock that could possibly be sold that was in that plan.

You know, I can't comment on Jure's plan, but I can certainly tell that you for that to happen, the stock would have to be about 25 bucks today, and to the best of my knowledge none of that stock that was mentioned that was there was sold by anybody, because the strike price, even the floor of those plans, was well under the double digits, if not closer to $20.

So as such, I think it was just a procedure that is involved with the 10-B-5-1 plan, and I don't think any stock was sold by certainly Jure, or I, and to the best of my knowledge any others, didn't need anybody else's either, but I can certainly comment on us two.

As far as the story goes, I don't know. You know I mean we don't control, clearly control the pricing, I mean it's upsetting to us. We don't focus on it every single day, although we certainly want to meet the needs of our shareholders here going forward, but we're keeping our nose to the grindstone so to speak, and we're continuing to do exactly what we say we're going to do. And I certainly feel better today than I did a quarter ago about the future.

I think our story has been communicated, I feel, pretty well, out there, I mean you know, we're a company that is vertically integrated EMS company and by being vertically integrated we're focused on a few key components. We want to build systems and we want to do that for a few specific industries out there and we want to be experts at that. And we think there's a need for that.

Some of those particular industries - enterprise computing and storage, PC, to a lesser extent medical and communications infrastructure, need some ODM solutions and we're in the process of providing those solutions to meet the market needs as well, and I think we're on track for that. So, I think we're doing the things that our customers are expecting, I think we're getting the results.

I know that everyone would like to see the curve be a little steeper up into the right including us, but we have to deal with what we're dealt with out there, and we're certainly not losing market share. I'd like to think internally we're winning market share here, but certainly I think we're keeping up with the industry and we're continuing to improve margins and take cost out, you know, as I tell everyone here we're focused on volume in terms of growth, we're focused on mix, we are focused on price improvements and we're focused on taking cost out of the organization. So I don't know what else I can say, Tom.

Let me add something to that, Tom. First of all, I think it's an excellent question. I think what you asked, I'm going to be a little direct to analyst, I think some people still don't understand, not just Sanmina, don't understand the industry. I mean, they try to mix every company in the same bucket.

A good example, comparing Marix, to Sanmina-SCI, even if all my printed circuit board business was shut down tomorrow it wouldn't affect this company. It's only 2% of our revenue and then here is a company that is basically running run rates approximately $100 million, in effect you know what Sanmina does. So I think that you can't put all the companies in one bucket. I think you have to look at the companies that deliver. I think what we're going to do about it is as Randy mentioned earlier, our goal is to deliver the numbers and do what we said and we feel very comfortable what we told you a year ago and what we telling you today and I think the economy is improving enough that we're going to have a nice improvement going forward.

Okay, great. Just one quick follow-up. I believe it's for Mark. Is that your finance.

Yes.

There's about a I guess a 15 million pro forma reconciliation to the other income line?

Yeah, that relates to non-cash interest expense, and also a -- we performed a FAS-144 review on the 49.9% interest we had in investment in board and we impaired the assets related to that investment.

Okay.

That was roughly 9 million.

Okay, great. Thanks a lot, guys.

Thanks, Tom.

Your next question comes from the line of Steven Fox with Merrill Lynch.

HI. Good afternoon.

Hi, Steve.

Could you just I know you probably haven't notified any employees, but could you put a little more color around the facilities that could close, at least maybe is it more component-related or EMS-related, more North America, Europe, anything any color you can add there. And then I have a follow-up.

Look Steve, let me have Randy give you a comment on that, Randy.

Steve, unfortunately I can't give you any comments on that, and so I apologize. I mean, what other I said there, you know, we quite simply, we have done a great job at moving a fair amount of production from some of our high cost areas to our low cost areas, some of our customers wanted that. We're doing very well in low cost areas. We're running much higher capacity utilization rates. I can share with you that we're running around 65% capacity utilization in high cost areas, and we're running around 42, 44%, and I'm sorry in the high cost areas we're running around 40, 42% and low cost areas we're running around 65.

And it's just, you know, we've set back, we were hoping the markets would come back a little stronger. They clearly haven't. Clearly, we have too much capacity in these areas, and we need to take some out. Certainly not going to talk on this call about any sites that may be affected by this, and you know, this will just have to get sorted out over time, and I'm sure you can appreciate though why I would not do that.

No, I understand. And then, in terms of savings, I just want to make sure I'm clear. You're saying the $22 to $24 million a quarter, so you could have annualized savings, six quarters out at the most, of approaching $100 million from this -- these actions?

That's correct. That's correct.

And then one last question on Pentex. When do you expect that to close and I'm assuming it's not included in any of the commentary for top line. Is that also correct?

That is -- yeah. So we don't expect it to close this quarter. It could, but everything would have to align itself just perfectly. So we expect that to close in our Q1 of '05, and therefore the only guidance that we provided was Q4, so therefore it's excluded.

And then last question. Any comments on longer term synergies what it could mean for earnings once it does close if you looked out a year from closing date?

Well, I mean I'm sure you've done your homework. This company today is shipping at a rate of about 65 million annually, it's profitable, as you can see, but we paid -- you know, there was a premium paid over the assets, so when you factor in all of this, you know, we expect it to be accretive, but it's not overly huge in material to Sanmina-SCI. So I think I provided the guidance there. It's about, you know, we expect it to be about half cent accretive for FY '05.

If I can add. I think if you look at our overall printed circuit board business, Steve, this move should make our longer-term business more profitable and more stable.

Thank you very much.

Your next question comes from the line of Lou Mishosha (ph) with Lehman Brothers.

Hello Lou.

This is Reid (ph). Great. Maybe I could go back to I guess the way that the markets have perceived you. Obviously, it seems every time printed circuit board fab that doesn't get increasing pricing, maybe decreasing pricing, your shares take a swoon, and I know you gave the numbers. Maybe you could talk a little about how this contributes to the operating margin line because people are going to maybe realize that's the Sanmina-SCI, and not the old Sanmina days when you were a $3 or $4 billion revenue company, that could move off the huge trading aspect with the components and the leverage therein.

Well, let me make be a comment, Lou, and then Randy you can help me on this one. First of all, Lou, I think you got to look at the Sanmina strategy today, what we want to sell is the system. That's really what we're selling. And that's really how we have the volume.

Selling the system, you want to utilize memory -- you selling the system and want to utilize mainly key technologies as you can, advance circuit boards, advanced back line, then complicated cables, machine, enclosures, the whole package. And then deliver that whole package to our customer. That's when we make the most money. Because-- and we save the customer most money because we eliminate a lot of wste for our customer and so on.

That is the strategy. So, just to take one part of our business today, new Sanmina strictly dependent on the board, that's not the key. Now, beginning of the year, we knew, at least in our forecast, we didn't expect the board business to go through the roof. We expected this board to improve from 2003 -- and we're going to have improvement in 2004. And we're going to be profitable for a year in 2004, where we were not profitable in 2003. Okay? And so that's really what the part of the plan.

We had ups and downs and Randy explained it pretty good in the June quarter, I mean in the March quarter, I think some of our customer bought a little extra, so the June suffered a little bit. But as I said in my statement, we expect our component business, boards, back planes, and so on and enclosures to improve in the second half of the year. Now, as those component businesses improve, definitely it will help our bottom line. You know, --

I can add to that. Saying kind of what Jure said in a different way is that our component businesses today are making a little bit of money today, they're not losing money. And we don't expect them to lose money. And so we need to view the components business as upside to Sanmina-SCI.

I think in the -- and the second thing, I think there's been a lot of emphasis on components and that's probably been my mistake. I pointed out, you know, how much money we made in the board business, and FY -- one quarter in 2000, and it was substantial. Also, you know, Sanmina -- the old Sanmina used to make 15 to 17% operating margins too and we're not providing that as long-term guidance today. We're providing numbers in the 6 to 8%.

So there's probably been too much emphasis on boards, both as we've communicated and by the Street, and it's probably partly our fault, and I think the way to view Sanmina-SCI today is we're an EMS company and doing pretty well in the EMS sector and we are growing - we are getting positive. We have components, we think that's important to our EMS business and will provide us some upside in the future. If those components business do not come back for a while, we're still going to generate the results that we say we're going to do here in the short and long-term. And I think that would be the way to look at it.

And you delivered through this quarter and next quarter without really much help from the components, correct?

That's correct.

Okay. Switching horses a little bit. I think you just signed a lease on a big facility out in Hungary. Maybe if you could share some of the thoughts of what you're doing out there?

Yeah, certainly. We have -- the former SCI established an operation in Hungary about ten years ago. It's an EMS operation, it had grown very nicely. About three years ago, we started building computers and our personal business-computing segment there for both HP, IBM, and that business has grown nicely. It expanded about a year and a half, close to two years ago, and took over a site across the street, and quickly filled it up.

And we've been challenged for space both in terms -- because we still have some high volume business over in the first facility that's -- that was historically a period EMS facility and we completely filled up the building across the street, and we have more opportunities to grow there, so there was a site that's located about 50 minutes away. It's located on another major artery out of Budapest. And it's a very nice site and we can consolidate 100% of our personal business computing to that site and we can take on additional business from both our existing customers and new customers that we have slated. So that's what the process we're doing.

The site was primarily a clean room site used to build disk drives in the past, so it took literally about six or seven months to get the site converted. It wasn't on our dime. It was on the landlord's dime. But that site today, we are expanding and we're actually going to move there at the beginning of August. So it's about two weeks away, and that will free up more space in the old EMS site there in Tatabanya. The new site is in Chechasavara (ph) and the old site is Tatabanya. It's a nice site and will free up some space there that will allow us to do some work. So we do work for companies like Nokia and Ericsson and others and it will free up some space there, which we need as well.

Okay great. That's all I have. Good luck for the next quarter.

Thank you.

Your next question, sir, comes from the line of Steven Savage and he is with Goldman Sachs.

Thanks, good evening.

Hey, Stephen.

I guess, first question on your gross margin ramp and guidance for next quarter is about 50 basis point increase at the midpoint and sequentially and just wondering kind of what your thought is on the key drivers there. Or is it a bunch of factors, like ODM business improvement now with that growing nicely, PCBs cost cuts, utilization, what's the mix of things kinds of driving that?

Yeah, it is a good question Steve. So look again, I kind of blew over this pretty quick but I want to emphasize we've initiatives in Sanmina-SCI that centers around all four of these important elements and all four contribute to it. And that is volume, and as you can see from the top line, we forecasted growth there, certainly at the midpoint, and we do expect to do more volume next quarter.

One is mix. Again, we're excited about what we're seeing in the comm infrastructure space. You can see I provided some nice guidance growth and high-end computing or enterprise computing and storage. So the second one is mix. The third one is pricing. You know, and I don't want to underemphasize this, you know, in pricing is down significantly. We clearly, the industry clearly took a hit in terms of volume, but it also took an equally big hit in terms of pricing from the late '90s and 2000.

It's to a point that it needs to be fixed, and if I look at my customers' customers today, they're pretty healthy. And if I start to look at many of our customers, we think they're doing better than some of us are doing, and you know, we need to share the wealth a little bit here and we need to fix some of that pricing. So that's part of it.

And then finally, and certainly as mentioned here in the initiative that we have with restructuring, we have to continue to take costs out of this organization aggressively, and to get it right sized for today's market. And all four of those key components are going to contribute to enable us to hit our margin targets here both in the short-term and the longer term.

That's great. And then I just wanted to follow up quickly on the acquisition of the PCB facilities in Asia. Wondering kind of what your plans are - a time frame to kind of Sanmina-ize the plants and what your thoughts are in terms of a shift for higher end boards going from maybe North America to China, and does that create an opportunity for you to leverage it into higher ends PCB A shifting from North America to China?

Yeah, well, we talked about our printer circuit board strategy now for last couple of years, and you know, we looked, a lot of other opportunities, green field, other factories, and we believe that we find a good fit, good management in a place, they've got an expansion going on. Here at Sanmina we have a lot of equipment and a lot of technology and a lot of talent.

So really for us is to come with a new global strategy for printer circuit boards which basically North America will become an R&D center, quick turn, and Asia specifically for us will become our production. We definitely not going to China just to focus and compete on a low-end boards. We will -- you know, of course there's some low end boards in there now, but eventually to really improve and transfer the technology, and we will be competing on the high end boards in Asia in a very near future.

Great, thank you.

Thanks.

Your next question comes from the line of Patrick Parr with UBS.

Good afternoon, guys.

Hey, Patrick. A couple questions. The fact that you're closing some North American capacity, let me to look at my notes, and you've got, I think, about two-thirds of your capacity still in North America and Western Europe. That's correct. What's the eventual goal? What are you driving towards in terms of a mix, say two years down the road?

Well, first of all, I think our goal is to transfer all the labor-intensive product in Mexico, Eastern Europe and Asia. You really can't judge particularly by square footage, Patrick

Okay.

Sanmina-SCI will still continue to do fair amount of business in North America and Europe but it's going to be a really a niche market which will be NPI, R&D, and some you know military type of business, you know, and really what I would call high end quality stuff that probably will never be built in far-away country.

Patrick Parr Okay.

So, but the key here, Patrick is really, we're -- we have no choice. I mean, it's driven by our customers. It's not what Sanmina-SCI wants. We're working with our customers and becoming partners in this global supply chain , and trying to come one the best possible position so we can be competitive and we have to as Randy mentioned earlier, we have to make a little bit more money.

Okay. But do you think you can get the same kind of return on business that's done in the more the higher cost geographies that you can get and the lower con geographies in.

Well, depends on the product mix. I mean there's certain products -- we believe the military, most of the military and defense type of businesses will stay in this country. Some of the medical products that we are building I think will stay here, because it's a lower volume, high mix. Some of the industrial semiconductor type of products we believe fair amount will stay here. And those are the types of things that I'm talking about. And I think on those leading edge, high-end stuff, new product, we believe yes, we can deliver the good turnaround investment just as good as in low cost try country. .

Okay. I was happy to see you worked inventory down a bit this quarter. You mentioned you're going to be neutral and maybe slightly negative on cash flow from operations this September. How would one think about the December quarter? Would we be able to generate positive cash flow from operations at that point or is that something we would expect this calendar 05?

Randy, go ahead.

Yeah, I'm thinking of how to -- you know, we so look, we were generally pleased with the three key components of cash cycle days this quarter with one exception, or that's our AP days. We think going into September, we think there is some room continued improvement in inventory returns, and we think if we can improve our AP days to get them back to where they were, which we're optimistic we think we can do. We think there's some nice leverage we can have.

With that said, you know we're expecting to throw some pretty decent growth on the top line for September, which clearly is going to be a demand for working capital and that's where the neutral kind of number, kind of range comes from. I think if we achieve that improvements in that we get in September, then there's probably lower hanging fruit for December, and if we throw a fair amount of growth, you know, quite honestly we might use some cash there to fund that growth.

So it's a function of our growth and it's a function of how good a job we do in September, to what's going to be there for December. So if we do a great job in September and we push each of these metrics, you know, to the limit, then there's a chance that we might not use as much in September or we might even generate some. There's a chance then in the following quarter that there could be some demand for use of cash, for which we think we have -- we have that today.

May be it's unanswerable Randy, but is there a sales growth rate and profit margin level at which you can be cash flow positive? I mean, I know there is, but what -- could you tell us what it is?

I'm probably not prepared to do that right now. I'm assuming that that question is asked with the inventory returns, DSO, and AP days staying constant. Is that correct?

That's one way to do it, yeah, sure.

So, we have to work that. We model that stuff, treasury does that for us and I just didn't bring that in the room I'm in.

Okay. That's fair. And one quick final question. I guess maybe a year or two ago, some of your competitors wrote off big chunks of goodwill, intangibles. You guys still have over 2 billion on your balance sheet. I know the auditors test this from time to time. Any comment on whether you would expect to be carrying that moving forward?

So look, part of the process, maybe Mark you might want to add some color. Part of the process is that we do that periodically, and that period is coming up here at the end of our fiscal year, which is the September quarter. You know, there's a specific test that's run. I don't want to speculate on the outcome of that test. We're not necessarily forecasting or projecting there's going to be an impairment to the goodwill today. Now, the test is going to be performed in Q4. We ran through a mock test at the end of Q2, and found no impairment.

Okay.

Alright, thanks, Patrick

Patrick Parr Okay, thank you.

Your next question comes from the line of Scott Craig, with Morgan Stanley.

Hi, good afternoon, guys.

Hi, Scott.

Hey, Jure, can you take us through the ODM business model. You're starting to ramp up revenues there. Can you take us through some - you know somewhat of an outlook on the profitability ramp there, going up to your long-term goals. And then a question just on the multimedia segment, clearly way above your expectation this is quarter, which was great. Is that more a function of new program wins, or is that more referring to that one customer that's been very strong over the last couple of quarters gaining market share? That's it. Thanks.

Thanks, Scott. On ODM, as you hear both from Randy and I, we are very excited that we are able to meet all the projects that we set at the beginning of the year. Definitely our server, ODM projects is -- or I would call ahead of schedule. At the same time, we got some new products that are going to be coming out in the near term. So, we're very -- feel comfortable about it we have other programs in different fields, in the telecom side coming out. So, the bottom line, it's definitely going the right direction. I think our investment is paying off. And most importantly, customer wants us to do this, and so there's some unique demand from our customers that I believe we'll be able to fill.

When it comes to profitability, Scott, here, definitely you know, we're starting to make some money on this thing. Our long-term goal we believe based on our analysis, we analyze today on this high end ODM project we are involved in, that we can definitely get operating margin around 10%-plus. We're not there yet, but definitely you know, our product today is make some money and it's going the right direction. On the multimedia question there, regarding demand, definitely as Randy mentioned, the demand from our customer is strong, as you mention we have a one major customer and then we have other multiple, I think it's a combination, definitely our major customer is doing well, and continuing to take the product.

But we also expanding the customer base and that's helping us out. So it's really combination of both things. And we're a lot more focused on that business and really want to grow that area.

Okay, thanks.

Your next question comes from the line of Alex Blanton with Ingalls & Snyder.

Hello, Alex.

Hello, good morning.

Good afternoon.

I have to get off speaker here, sorry. Hello?

Yes, Alex, we hear you.

Okay. On the question of the PCB business, did you mention whether it was profitable by itself in the quarter?

Go ahead, Randy.

Yeah, our PCB business was profitable, and you know, I want to kind of get away from talking a lot about this. And I made a statement in there that the profit, I think last quarter we kind of communicated to you is we're around $110 million of revenue and profit was around $10 million of business and this quarter it's down, top line is down about 10%, and profit is down in accordance with that. And you know about what the contribution margin is in that industry and you can take that off and it still gets you somewhere you know between zero and 5 million, closer to 5 million there. And that's, you know, that's where the business is. I don't want to lead you to think it's 5 to 10, but it's in the $5 million profitability, 0 to $5 million profitability range, closer to the high end of that, and the rest of our components business was similar profitable in that kind of arena. So yes, each of those businesses are profitable on a stand-alone business, and are clearly profitable on a consolidated basis.

The revenue decline, is any of that due to business that's going away to low cost regions, or would you attribute it all to the inventories you mentioned earlier?

Actually, I don't -- I'm going to add a third one here, and I'm not going to drill down on it. But it's a function of just the mix that we have of our customers, some quarters some of these projects products are stronger than other quarters, and some they are not and we haven't lost any business. We've added some new business there. But there's a few programs, and it's more than one or two. There's a few programs that we're involved in that, you know, you can look at as a product transition at this point, and that's what I attribute the business. If it wasn't for those, business probably would have been up the quarter because we've had a lot of new wins and the guys are doing a great job of managing the business. So I do think the businesses of these programs will come back, and I think the future will be there. But the important thing is that we were able to deliver the numbers, even without the strength that we have there.

And finally, you talked earlier about an increase in your -- was it an increase in your internal use of boards that you talked about?

Well, yeah, let us say what we're talking about, as we now expand into Asia, we buy 60, 70% of the boards that we use from outside because they're a little bit lower technology. As we go to Asia some of that product or most of that product we build internally and we believe we can make some money on that

That's a really big plus for the profitability, that board business, longer term, isn't it? I mean ...

It's longer term, but I think you have to look at Sanmina-SCI's total component business. If you look at our component business, you know its run rate is almost $1.8 billion annually, and our printed circuit boards are about 5, 6% of that, so it is other business. So I think people emphasize too much of that. Look at us, what we want to sell is not a bare board. What we want to sell is a full system utilizing all the critical components that we built.

But you've been missing out on the element of the full profitability somewhat because the board making skills have shifted to Asia and now what we're doing is catch-up in that so you can get back and capture more of that volume and profit. Isn't that the case as you go forward?

Yeah, I think that's the case, Alex, but bear in mind we already have relations with those customers and we do a fair amount of their product. So we don't think it's going to be difficult to as there's new products, that we will come back and you know, have an opportunity to participate in some of that business. Some of this stuff we've kind of refused to participate in the past. It's been our choice. And now we're going to say, hey, we want some of that stuff. You see what I'm saying.

Yes. Okay. Thank you.

Thank you, Alex

Your next question comes from the line of John McManus with Needham.

Good afternoon.

Good afternoon, John, how are you?

Could you talk a little bit more about how Pentex there can allow you to do more business in China and in Asia? I mean, just the strategy of adding capacity possibly a fair amount of capacity, how then does that dove tail with the rest of the EMS operation there and allow you to do business to really justify this acquisition?

John this is an excellent question. First of all this is a strategic move. We do have customers available between North America and Europe that today are utilizing companies in Asia to build their boards. So we have those connections, we personally buy ourselves over 200 to $300 million of bare board from outside. So this factory immediately gets the benefit being part of the Sanmina-SCI. That's number one.

Number two, I'm going to remind everybody again, what we sell is a full system. We've been selling a full system for last five years, and that's been our success of Sanmina company. You know we invented vertical integration is to you know start with the board, you add components on it, you take it to enclosure, take it to a system. So having this new acquisition, it really gives us some more capabilities in Asia so we can give total solution to our customer end-to-end. And our managers in Asia have been looking for this, and we believe it's something that's going to help us immediately book the business and will make our Asia an product Asian profitable and be more profitable in other parts of the world

So if you can provide everything there, as far as vertical components there to the customer, that would help you actually win business and of course lower your cost. ***

That's correct, I mean, number one you don't want to just be winning business on the price, you want to be winning business because you are adding lot more value, you are faster to the market and at the same time you lower the cost so you can be more competitive and we make a little bit more money, that is really as simple as we can put it.

And may I ask you, are you going to take actions there in the existing printed circuit board business there after looking at the June results, are you going to take actions there in that operation there over the next two quarters?

You're talking about in Asian operations?

No I'm talking about the U.S there.

Well we can't make a comment on that, John, because you know we have people they are very sensitive to this and we need to communicate to our people before we can make any public statements.

Thank you very much.

Thank you, John

Your next question comes from the line of Todd Copeland of CIBC.

Hello Todd.

Yeah good evening, everyone. Could you just tell us who your 10% customers were and what percentage of revenue it was?

We have two customers over 10%. It's really fortunately for us two same customers, IBM, and HP. We will give you that information end of the year.

No problem. And just going back to the ODM question, I am not sure if you are able to answer this but I am not sure if I heard the answer but I think the question was there. How many design wins are actually contributing to this revenue ramp and is this more than you had a couple of quarters ago? Can you just give us a little bit more color there?

Well, first of all, we have got some major customers and some smaller customers on this product, and we have other ODM product besides the server business. So I hate to just break it down project by project, but definitely we're a lot more involved with multiple projects today than we were for a few quarters ago.

Okay. And do you think you have gained share in the server business here or is the market expanding?

Well, you know, as you know, this is a new product that we bring to industry. I would say today you know, there's a lot of interest in this Optron chip out there, and I think, you know, if you look at our server, we're bringing a lot of technology and better solution, so it's really a combination of both.

Okay, great. Thanks a lot.

Your next question, sir, comes from the line of David Pescherin with Solomon Smith Barney.

Hello David.

Hi how are you? Randy, you talked about pricing as being one of the main drivers in margin improvement. Can you just give us a sense as to what percentage of the customer base is actually seeing price increases, and then maybe just give us a sense of how much impact is still remaining from price increases? You know is most of that behind us, or is most of that still ahead of us, and maybe an idea of what timing might look like for price increases to go through in the future?

Let me start with, that David, and then I'll pass it on to Randy because he's working on this a lot closer than I am. But first of all, I think that price increases can be interpreted a lot of different ways. What's happening in the market today is for the last three years our markets have been depressed, and you know, our customers I think pushed us, our customers were not making money, their customers were not making, and we were not making money. It was a survival period. I think that's behind us today.

I think our customers today are focused on the value. They're looking at us and saying okay, you know, today I need partner. We need to look at it, how can we deliver a better solution to end customers, together and based on that we're able to add more value, that we are making a little bit more money than we used to. And I really believe those type of processes will continue because there's no way in the world this industry can exist on the margins that we are delivering today. This industry has to deliver better margins, and I believe that our customers understand that. And I think what we want to do at Sanmina-SCI, we want top add more value so our customers can sell this volume for higher profits. That's really the model that we're talking about here.

Right, I mean so can you give us a sense of then you know, which customers maybe have seen the biggest price increases, because some of our competitors have talked about passing price increases on to the small and midsize players because they can, but you know a lot of the larger customers not really seeing similar types of price increases yet. So can you comment on that in maybe your experience?

David, I really can't specifically talk about what we do with each of our customers. I mean, we treat our customers, you know, fairly across the board. I have a small customers, big customers, and some of my small customers today will become big customers tomorrow. To us, it's very important that we have the credibility with our customers, and that's -- so it's something that we have to work with, with them. But I think, you know, of course pricing is based on a volume and stability of the business and of course there's going to be different pricing for different customers out there just because demand and value is different.

And maybe a different topic, then, you touched on inventories, inventory and management looked real nice this quarter. Again, a lot of your competitors are talking about inventories going up this quarter, and potentially into next quarter because your customers are asking to you hold more inventory. So again, can you kind of tell us what your experience has been with customers, and are your customers asking you to hold more inventory going forward and is it a short-term phenomena, is it kind of a one-time step-up in just the level of inventory in the supply chain? Can you comment on that?

Well, our customers are clearly asking for us to hold more inventory and do it for less money and do it faster and cheaper and all that sort of thing, and that's going to go on. And there could be, David there could be some negative, let's say, impact as a result of that. I am focusing, Sanmina-SCI, on fundamentals, and I shouldn't say I. It's the entire management team, is focusing on Sanmina-SCI on just improving the basic fundamentals, just transaction processing, with respect to inventories.

We have a very aggressive and well thought out program, it's done by the guy that runs our EMS division, Mr. Peli (ph) and it's called a M3K program and it's very, very rigid disciplines around executing upon inventory, confirming it, returning it if it is not needed, changing it, pushing it out if our schedules push out. And if we follow the guidelines in the program, there's still improvement opportunities and let me use the word substantial improvement opportunities in our inventory situation, and that's what we really focus on.

Clearly if a customer comes up and says we want you to hold inventory and we're going to pay you to do that and you can get a reasonable investment, a reasonable return on that investment, we're not going to say no. I mean, we're flexible, responsive, we want to meet the needs and demands of our customers, and we're not going to tell them no. And some of that is going on, but that's not where I'm really focusing the efforts today. It's focused on the fundamental improvements. And if we can fundamentally improve, I think we can do a better job there, then what we would add to it in terms of the short temperature of what our customers are asking. Of course you could put it other way, as we certainly said we will explain telephone to you.

Randy, let me just make sure I heard you correct. You said that you would not hold incremental inventories unless you were being paid to hold them? Meaning you're not going to commit your capital for essentially no incremental return on that capital commitment?

That's absolutely true.

Okay.

If our customers want to us push days from 30 to 60, we say fine but you're going to pay and if you want us to be a bank, we're going to make money like a bank, right? I mean, that's the way you got to look at it.

Exactly. Then one quick housekeeping question. Looking at the share count June over March, it looks like it was down about 5 million shares and it looks like you're looking for shares to be down another 3 million shares. Was there some share repurchase during the quarter or can you tell us what happened with the share count there?

It's not related to share repurchases. It's mostly related to the stock price and impact on outstanding options.

Right. Thanks a lot.

Thanks. We have time for one more question.

Very well sir. Your last question comes from the line of Jim Savage with Wells Fargo.

Just a couple of short things.

Hello Jim, how are you?

I'm fine. That was a terrific quarter, gentlemen.

Thank you.

Pentex-Schweizer, how much is that going to cost?

Go ahead, Randy.

Between 75 and 80 million.

Okay, so it's going to have a meaningful impact on your cash.

No.

In the last 18 months every quarter you've had between 10 and 30 basis points improvements in your operating margin. The next couple of quarters to get that 3% operating margin for the December quarter you need to be more in the 40 to 50 basis points a quarter range. And I just want to go through again what's different now, is it that you've completed this restructuring, is that having an impact or is it strength in the end markets? What is different now than over the last six quarters that gives you the confidence that you're going to get better operating margin improvements than you've had thus far?

Well, Jim, let me try to, first excellent question. As Randy answered before, it's really four things, it's the volume mix pricing and cutting down the cost. First of all, I believe that today the company, you know, we've been going through this bad environment for now many years and I really believe that we just, you know, turned the corner for better days. Now that corner could have been two, three quarters ago, but it takes time to get up there, but I really believe that this industry at all -- overall is going to get better, based on the input we get from our customers.

I think we as a company, we'll continue to do better job. So assuming that I'm correct the economy is going to continue to gradually, and I use the word gradually improve, I think we're doing a good enough job and I think we've been -- at least with our customer base, we see the demand going up. I think combination all those things give us the opportunity to meet that commitment that we made to acknowledge a year ago.

Are you seeing less of a pushback on pricing at this point? Are you able to pass through now or is that something you're just anticipating over the next --?

Well, it's always hard to push the prices up. I mean, to me, I've been in this business many years and in good times and in bad times, nobody wants to pay more for a product. But I think the market is changing today, because the type of margin that we're asking for is very, very small, and just to be fair for us continue to do good job for our customer, we just have to have a fair return on our investments, so I think the market environment, Jim is changing. There are customers see that today and they're starting to make more money. New customers are making more money, they're going to allow to you make a little bit.

And where does that leave you in terms of your expectations on where return on invested capital can go over the next few quarters?

Well, you know, I don't have the number in front of me, but our long-term goal is to get that thing to, you know, 20%. I know that being today around 4.5%, 5%, so we have a long way to go. But I expect this thing to improve each quarter.

And I guess the last part of that is that obviously you're looking at the over the long-term, the ODM business is having a meaningful impact on your margins.

Yes, Jim, I think the industry is changing, as I mentioned. Our customers want us to do more and more engineering work. Two type of engineering we do. We do work based on internal IP, where we protect the IP, and then we have ODM, where we own the IP. And in both of those cases we're doing more engineering. We win the jobs based on those capabilities, and our long-term goal is still to be 20% derived from our revenue from our ODM product.

Okay.

You know, to get there because -- the whole culture is changing out there, but I think Sanmina-SCI is ready to take that on.

Okay, the last question, I'm sorry to hit you with one after another. In terms of revenue growth going forward, are there major revenue opportunities that you feel that you can participate in the next six to 12 months that would make a meaningful difference in your revenues and not just be incremental?

Well, first of all, which were major. I can tell you we expect -- we expect to continue. We grew over 15% this year in 2005. I'm not ready to forecast that but I would hope 2005 is even better than 2004, so that, you know, I think the customer base that we have can support that. We working on some good programs out there, and if we win them, it can be very major. But any of those deals it's not done until it's done.

You've talked in the past Jure about your having initiative into the automotive industry. You haven't mentioned any of that today. Is there an expectation that you will? And Pentex-Schweizer has significant automotive.

We're going to that market. It's not a huge percentage of our revenue but I believe our automotive business for us today is over 150 million run rate.

Okay, thank you.

Thanks, Jim. Well, ladies and gentlemen, again we're going to thank you, as Randy mentioned earlier, you know, these are right steps in the right direction, but we're not satisfied yet. We're going continue to work hard, to improve both top line and bottom line, and we'll just go from there and talk to you next quarter. Thanks a lot.

Thank you.