Sanmina Corp (SANM) 2004 Q4 法說會逐字稿

Good afternoon, my name is Ramona and I will be your conference facilitator. At this time, I would like to welcome everyone to the Sanmina-SCI's Q4 fiscal year-end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. I would now like to turn the call over to Mr. Jure Sola, Chief Executive Officer of Sanmina-SCI Corporation.

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

Hello, everyone.

David White, our Executive Vice President of Finance and Chief Financial Officer.

Hello.

I would like to start by thanking all of you for being here. Again, for our agenda is that David White will review financial results for the fourth quarter of fiscal-year 2004. Randy Furr will review our operations and future outlook, and then I will follow with additional comments relative to Sanmina-SCI results and future goals. And now David?

Thank you, Jure, and good afternoon, everyone. Before we get started, please note that selected financial portions of this presentation are also available in the form of a slide presentation, which can be accessed on the Investor Relations section of our website at www.sanmina-sci.com. I'll be making references to these slides during the course of my discussions. Prior to reviewing our financial results with you, however, 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 technological change. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's most-recent annual report on Form 10-K, 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 August 9th, 2004. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

In addition, during today's call we will refer to certain non-GAAP financial information. The corresponding GAAP financial information and a reconciliation from non-GAAP to GAAP for such information are contained in our quarterly press releases of results of operations, which are also available on the Investor Relations section of our website at www.sanmina-sci.com.

You'll note from the press release that we have provided you with statements of operations for the 3 and 12 months ended October 2nd, 2004 on both the GAAP and a non-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. Our non-GAAP results are presented without these charges.

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 our restructuring activities, and finally, I will conclude with guidance for our first quarter of fiscal-year 2005. In general, I will confine my comments to our non-GAAP results, which excludes charges for restructuring and integration costs, impairment, other infrequent or unusual charges, and non-cash interest and amortization expense to facilitate comparability with our prior periods.

Slide 3. Sales for the fourth quarter of fiscal 2004 were $3.3 billion. This reflects an increase of 21% over sales from our fourth quarter of last fiscal year, and a 7.5% increase in sales over last quarter. The quarter-over-quarter increase in sales was primarily driven by strength in our communications and personal computing end markets, which Randy will provide more details on in his comments. Sales for the full year were 12.2 billion versus $10.4 billion in the prior year. This represented an increase of 17.8% year-over-year, primarily driven by strength in our communications, computing, and multimedia end markets.

Slide 4. Our top-10 customers accounted for 69% of total sales this quarter. Sales to our top 20 customers amounted to about 81% of total sales. We had 2 customers in the fourth quarter whose sales were greater than 10% of total sales. Third-party revenue for our components business, which includes PCB, fabrication, enclosures, memory solutions, backplanes, machining and cables amounted to approximately 13% of total net sales, with assembly and other EMS sales amounting to about 87%.

Slide 5. Gross profit for the quarter was $175 million, reflecting roughly a 35% increase over last year's fourth quarter of $129 million, and a 10% increase over last quarter's gross profit of $159 million. As a percentage of revenues for the fourth quarter, gross profit was 5.3%. This is up from 4.7% reported in our fourth quarter of 2003, and represents a slight increase over last quarter's 5.2%. While gross margins continue to improve quarter-over-quarter, our improvements in the fourth quarter were somewhat negatively impacted by our enclosures business. Randy will address this more fully in his comments as well.

Selling, general and administrative expenses for the fourth quarter were $88.9 million, up approximately $6.5 million over the prior quarter. This increase was attributable to a number of factors including additional IT expenses, professional fees for tax audit and socks work, as well as the inclusion of the SG&A expenses associated with the recently acquired PCB business, which I'll further comment on later. Notwithstanding this increase, SG&A expenses as a percentage of sales were 2.7% for the quarter, which was flat as a percent -- on a percentage basis with the prior quarter.

Research and development costs amounted to $8.2 million, bringing our total operating expenses to $97.1 million or 2.9% of sales. Depreciation was $45 million for the fourth quarter. CapEx spending this quarter was approximately $27 million. The capital spending was split between updating technology and equipment for new programs and a continuation of our move to lowest cost regions primarily in China. Operating income was $77.6 million for the quarter, and operating margin for the fourth quarter was 2.4% versus 2.2% in the prior quarter, and 1.8% in the same period of the prior fiscal year.

Our EBITDA was $123 million for the fourth quarter of '04. Other expense net which consists primarily of interest expense and income, as well as gains and losses from foreign currency translation was approximately $20.4 million. Our tax rate for the quarter was 27%, resulting in an annual average rate for the year of 27%. Net income for the quarter was $41.8 million and $128.9 million for the year. Basic and diluted shares for the quarter were 518 million shares and 522 million shares respectively. Diluted EPS for the quarter was 8 cents and 24 cents for the full year.

Slide 6. Turning to the balance sheet, cash and short-term investments were approximately $1.1 billion, up $112 million quarter-over-quarter principally driven by improved working capital management. Accounts receivable at the end of the quarter were $1.7 billion resulting in DSO of 45. Our best-performance in over 2 years. This improvement was a result of several factors including continued strong collection performance, increased revenues on a quarter-over-quarter basis, and a slight improvement in linearity throughout the quarter. Approximately 93% of our total accounts receivable balance was current, and 98% was less than 30 days past due. As a reminder, we do not have any off-balance sheet financings or factorings that affect the computations of these metrics.

Inventories at the end of the quarter were $1.1 billion with our inventory turns improving from 10.4 turns in the prior quarter to 11.5. Notwithstanding a quarter-over-quarter increase in sales of $232 million, our inventory decreased $32 million as a result of these improvements in our turns. Substantially all of the decrease was in raw materials, while work in process and finished goods inventory were essentially unchanged. Accounts payable at the end of the quarter were $1.7 billion resulting in AP days of 48. This metric was impacted by several factors including continuous improvements in our materials management, as reflected in our inventory turns.

Our cash cycle days for the quarter improved to 29 days, an improvement of 2 days over the prior quarter. This improvement contributed approximately $153 million of free cash flow in the quarter. On an annual basis, our cash cycle days averaged 30 days, an improvement of 9 days over fiscal-year 2003 average, which for the year contributed approximately $417 million of free cash flow. Our working capital was $1.7 billion for the quarter.

Slide 7. Cash flow from operations was a source of $160 million during the quarter. Free cash flow for the quarter was also a source of approximately $134 million, when deducting CapEx from our cash flow from operations. 2 other points I'd like to make in regards to our balance sheet and liquidity. First of all, you'll notice that effective with our fiscal 2004 year-end, our $608 million of zero coupon convertible subordinated notes were reclassified from long-term to short-term. The holders of these notes have the right to put them to the Company on or after September 12th, 2005. Accordingly we plan to address these notes on or prior to that date. Secondly, as mentioned in our press release, and as more fully described in our 8 K, we closed a new 3-year $500 million revolving credit facility with a group of banks earlier this week. The credit facilities intended primarily to provide liquidity for short-term working capital needs, no amounts are currently drawn against the facility.

Let me now turn to restructuring. During the September quarter, we incurred approximately $27.8 million in restructuring costs. 20.9 million of which was cash. Costs incurred under our Phase II restructuring plan accounted for 20.6 million of the total, while costs incurred under our Phase III restructuring plan announced in July 2004, accounted for 7.2 million of the total cost. As of the end of the September quarter, we have completed restructuring actions at all of the facilities contemplated under the Phase II plan. However, certain charges cannot be recorded until future quarters in accordance with GAAP. During the September quarter, we incurred $7.2 million of restructuring costs related primarily to the closure of 2 facilities pursuant to our Phase III restructuring plan, again announced in July of 2004. We expect to complete substantially all the remainder of the Phase III restructuring activities during fiscal 2005.

During the fourth quarter, we completed the transaction of a PCB business pursuant to a purchase agreement that required the seller to make a net cash payment to us. Accordingly, we recorded a $3.6 million of negative goodwill resulting from the acquisition as an extraordinary gain in accordance with U.S. GAAP. This gain is not included in our non-GAAP financial statements.

Slide 8. Now let me turn to the guidance for the first quarter of fiscal 2005. Consistent with our practices in the past, the information I provide will generally exclude 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 $3.3 billion and $3.5 billion. We expect gross margins to be between 5.6 and 5.8%. We are targeting our operating margin to be around 2.6 to 2.9%. Net other expense is expected to be approximately $22 to $24 million. Basic shares for Q1, 2005 are expected to be in the 520 million range and diluted shares are targeted around 526 million. This equates to a diluted non-GAAP EPS range of 9 to 11 cents per share.

We are forecasting neutral cash from operations at the low end of our guidance for this quarter, and a modest use of cash at the high end for working capital, which would be needed to support the revenue growth. We estimate the depreciation for Q1 '05 will be approximately $46 to $48 million, and quarterly CapEx spend will be in the range of $30 million.

In conclusion, we continue to focus our efforts on profitability and working capital management, we have made great progress on a year-over-year basis, and we continue to make consistent sequential improvements on a quarter-over-quarter basis. Our goal is to continue this trend into the next quarter. We appreciate your time and I now turn the discussion over to Randy.

Thanks, David. As you can again see from our Q4, '04 earnings release and as David mentioned, the September quarter came in at the top line at 3.3 billion, non-GAAP net income of 41.8 million, and that equated to a non-GAAP EPS of 8 cents. As usual, I'd like to start with a few minutes on our top line. As you can see we achieved 3.3 billion, and again, as David mentioned, that represented a 21% year-over-year growth and a 7.5% sequential growth. This placed us at the top end of our guidance that we provided during last quarter's conference call, which was 3.1 to 3.3 billion and above Street consensus of 3.2. In general, I'd characterize the mix as slightly favorable as our communications infrastructure business again showed an increase.

Now for a little more granularity. As illustrated on slide 9, communications infrastructure market sector, which represents both voice and data, was up 1% to 27% for the September quarter, which meant that given our strong top-line growth, this business grew fairly significantly in absolute dollars as well. In this sector, our more heavily weighted telecommunications focused companies, the one who primarily rely on carrier spending, were up about 14% for the quarter in dollar terms. We believe this reflects the overall end-market trends being seen throughout the industry, in general, the strength once again come from wireless programs in North America, Europe and China, as well as access programs, again DSL for residents and IP for business in Europe and Asia.

This sector also consists of our more heavily weighted networking focused companies. This group, again a much smaller group than above, also showed a nice dollar increase growing about 16% for the quarter. So in summary, a nice quarter for the communications infrastructure sector growing about 14.5% sequentially and easily exceeding the top end of our guidance, which was 2.5 to 5% growth. And this was provided to you during last quarter's conference call.

Q4 was the fifth straight quarter of sequential growth for our communications business. That represents its 38% growth for this sector versus the overall growth of our business of about 25% during this period of 5 quarters. Personal and business commuting systems came in strong again this quarter, actually the sector came in ahead of our guidance. This sector represented 38% of our quarter up 1% over the prior quarter. This is in line or slightly ahead of normal seasonality trends for the business and reflects the strength of our customers as they are experiencing in their markets.

Enterprise computing and storage was flat at 14% for Q4, '04, in absolute dollars this sector was up about 4% or 20 million for the quarter. We were on or slightly ahead of plan for our Newisys servers here. We were at our goal of exiting the year at a $200 million run rate for ODM products, and most of that is accounted for here in the enterprise computing and storage sector. For those of you that may not be familiar with our Newisys group. This is one of our key ODM initiatives for our enterprise computing and storage sector.

Industrial, medical instrumentation and defense/aerospace was flat for the quarter. This sector includes 3 broad business sectors, semiconductor capital equipment, medical instrumentation, and our defense and aerospace business. This sector represented 12% of the total revenue for the quarter, although this compares to the same number the prior quarter, the sector actually grew by about 3% or 12 million during the quarter given our overall strong top-line growth.

Our final market sector is multimedia. For the first time in 6 quarters, this business was down. For the quarter this sector represented about 9% of our total revenues. This was down from 11% and our third physical quarter. As you know, this business has been strong for a long time. In fact, you would have to go back to the March quarter of fiscal 2003, since we experienced a down quarter in this business sector, and during this time this business has grown from approximately 115 million a quarter to over 300 million a quarter. The principal reason for the September being down is a channel inventory adjustment. So, in summary, this was a nice quarter with respect to our top line with strength principally coming from communications infrastructure, personal and business computing sectors. There was also support for the quarter by absolute growth in our enterprise computing and storage and our medical defense and industrial sector.

Let me turn to a discussion as to what we're really seeing relative to our primary markets out there today. First, the communications infrastructure. We continue to be encouraged by what we're seeing in this sector. As I mentioned above, this is the fifth quarter in a row of absolute growth in this sector. I communicated to you last quarter our belief on substantially what we've -- what are -- I've communicated to you the sustainability of what we've experienced, and as such, I don't really see a need to restate all of that. However, in addition to the overall market trends, I do believe we have some momentum in this sector as well. For Q1, we expect this sector to be in the up 5% range.

We expect to see strength in various wireless programs, especially Europe and ADSL and IPX were the metric optical networking gear. Both our enterprise computing and storage and our personal and business computing sectors are tied to enterprise or business spending, and as I've said for several quarters, we still believe that we will see a nice recovery in enterprise computing and storage, a point of recovery in the capital markets, so clearly today, given the capital markets, a bit difficult to call. With that said, we do believe we have some momentum in the enterprise computing and storage sector with our Newisys technology.

For Q1, we expect our enterprise computing and storage sector business to be in the flat to up 5% range. The strength here is again a momentum from Newisys ODM initiatives, partially offset by some expected weakness in storage. For Q1, we expect our personal and business computing sector to be in the up 2% to 7% range. Once again, as a reminder, almost 100% of our personal and business computers, and I am including our volume servers in this category, our commercial and for the business sector, and I say that as opposed to consumer PCs. As such, expect this business to trend and track more in line with enterprise spending as opposed to consumer spending, and we believe our guidance tracks these trends that are being seen within the industry.

For our industrial medical instrumentation and defense/aerospace sector, we expect this business to once again be strong. For the December quarter we expect this sector to be in the up 2% to 5% range. This strength should be across all 3 important elements of this sector, which are semiconductor, capital equipment and some industrial products, medical instrumentation, and defense/aerospace. Once again, the strength in this sector comes from programs that we won that I have previously mentioned on prior quarterly calls. More specifically, those programs in the semiconductor capital equipment and the medical instrumentation area.

Finally, our multimedia sector. As I mentioned earlier, this business has a channel associated with it. As many of you know, having good visibility into the channel, does not necessarily always happen. We did see some slowing in this business in the September quarter. And to be safe, I feel it prudent to be conservative in our forecasting of this business in December. As such, we are once again going to be conservative and we expect this business to be in the down 10% to 20% range for Q1.

I would now like to make some comments on our component businesses. That being our PCB fabrication, backplane assembly, enclosure systems, precision machining, cable assembly and memory solution divisions. As you may recall from last quarter's call, I mentioned that I no longer am going to provide specific details on our PCB fabrication and enclosure business, but in stead provide some detailed information on our consolidated or our entire components businesses. For Q4, total components revenue, which includes the inner-company portion of the revenue, was 505 million. This was essentially flat or just slightly up over the Q3 figures. Gross profit for this business was down from 3.8% in Q3 to 2.5% in Q4. Given the restructuring and our continued achievement in efficiencies, this was clearly disappointing. I do not want to get into the individual results of these businesses, and in general, there were no real significant changes in any of these with the exception of our enclosure systems division.

During Q4, our enclosure operation began to experience several problems. These problems included difficulties encountered in transferring some programs to low-cost regions, operational performance issues, and some issues related to customer contracts. In general, we fairly quickly boiled these issues down to management issues. We made multiple changes in our enclosure management structure, changing 3 out of the top 4 managers in this group. We believe the negative impact in Q4 was approximately 7 million pre-tax related to these issues or about 1 cent of EPS.

Although we were quick to implement changes, we want to abide by the commitments made to our customers by some of these previous managers. As such, in addition to the negative impact experienced in Q4, we think our Q1 '05 will see a negative impact of about 1 cent in earnings as well. This expectation was included in the Q1, '05 guidance figures that David shared with you a few moments ago. Capacity utilization is between 55 and 60% across our components businesses.

Also I might add, Pentex-Schweizer PCB fabrication acquisition closed earlier this week on October 26th. The impact on Q1 will be revenues of approximately 10 million and it will have an essentially neutral impact on earnings. We do expect accretion starting as soon as Q2, if we start to ramp up more of the internal sourcing of our low to mid-level technology boards that we have historically procured outside.

Now that I have the negative stuff out of the way, let's spend a few moments on some positive things that come out of the quarter and I'd certainly like to start with inventory. At the beginning of the year, we communicated our goal of 11 turns. As you can see, we ended up over our goal coming in at 11.5 turns. Very, very proud of our team, and I do believe this represents some of the best inventory management in the industry.

Also we made some nice improvements in our DSO and the overall result is our cash cycle days improved from 31 to 29 days this quarter. This equates -- or equated to $160 million of cash generated by operations. And all of this added up to some nice improvements in our return on equity from 6% in Q3 to 6.8% this -- in Q4. Our return on invested capital moved from 4.6% in Q3 to 5.2% in Q4. And our return on intangible invested capital moved from 9.6% in Q3 to 11.3% in Q4. These are still a long ways from achieving our goals, but they're still nice improvements anyway.

As I mentioned last quarter, we're at the tail end of our restructuring under what we refer to as our October 2002 plan or our Phase II plan. During Q4 we incurred approximately 20 million in charges to this plan. We have approximately 10 million left, all of which should be incurred in fiscal Q1 or Q2. With respect to the plan we announced last quarter or Phase III, we incurred approximately 7 million in expenses. During the quarter we announced 2 facility closures, 1 was our PCB fabrication site in Massachusetts, and the other was an enclosure operation in Scotland. Both of these sites will be fully closed before January 1st.

I want to give a quick update on what we're seeing in the supply chain. Generally speaking, we are seeing flat lead times in pricing, equating to a few issues, just -- again I want to emphasize we're seeing flat lead times and flat pricing equating to few issues, and we don't expect to see any short-term issues with respect to supply in passives, logic, printed circuit boards, fans, magnetics, power, batteries, filters, and mechanical fabrication.

And this next group I'm going to mention, this next group of commodities, we're not experiencing any issues today, but we're viewing these commodities very cautiously and this group includes discrete, linear, memory, ASIX [ph], switches, crystals and fuses. And, finally, we are seeing some slight increases in lead times or pricing in interconnect and storage. However, if we manage lead times correctly, we're not really seeing many issues with respect to supply availability with these components. So, in summary, no real significant issues with respect to supply-chain components.

So on a positive note, on the September quarter we did, again, have some positives. Again, continued strength in 4 of our 5 market sectors, communications infrastructure, industrial medical defense, enterprise computing, and personal and business computing. Our Newisys servers are doing a wonderful job in the market with September volumes being very, very close to the 200 million annualized goal established for exiting 2004, thus keeping us on track with respect to our ODM initiatives. We improved both gross and operating margins by over 10 basis points. Great improvement in asset management, especially with respect to inventories resulting in 160 million in cash generated by operations.

We executed well on the details necessary to complete the Pentex-Schweizer transaction resulting in an early close, and we're well on the road and we are hitting the ground running with respect to this very important strategic acquisition. And, finally, we had a positive book to bill and strong backlog to support future growth. So again we're a long ways from being happy. In fact, we're clearly disappointed with certain aspects of our Q4. However, when you factor in the challenges of this environment, we are making progress. Most importantly, we continue to do what we said we would do.

And now I'd like a few comments relative to the future. And again, even though predicting the future's always challenging, I think we've done a pretty good job of providing you with guidance despite this challenging environment. For the December quarter, we expect to increase our top line, over the last 2 quarters we've added 439 million to our top line or an average of 220 million a quarter. Again, this is a sequential growth, an average sequential growth is 7.5%. We're seeing nothing in the market that indicates that there's anything going on that's gonna cause a slowing of this growth. However, we want to be cautious. And we believe it is best to be a bit conservative in our forecasting.

Also, we do expect to see some continued improvements in our bottom line resulting from restructuring activities. However, this will be partially offset by the enclosure issues that I previously discussed. The net of this is we expect to see a top line in the 3.3 to 3.5 billion range and our bottom line in the range of 9 to 11 cents non-GAAP EPS. 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. However, I want to assure you this team has continued to be up to the challenge and still is today. Our goal hasn't changed, it's to stay on track, with quarter after quarter of positive news.

One other thing I'd like to mention, Sanmina-SCI will host its annual investor and analyst day on Tuesday, November 9, 2004 at the Marriott Hotel in San Jose, California. This is an excellent opportunity to hear from the Company's senior management team and meet many of our key managers from several of our different business units. The day is designed to provide you with useful information about the Company, its business model, and future outlook.

The day also provides an opportunity to see several of our operations first hand with local facility tours scheduled in the afternoon. These guided tours will enable you to see for yourself how these facilities operate, as well as some of the specialized processes that are unique to the industries we serve. Again, if you're interested in attending the event or you have any questions whatsoever, please contact our Investor Relations department at 408-964-3610. So again thank you for your time, and now back to Jure.

Thank you, Randy. Ladies and gentlemen, fiscal-year 2004 was a good year. 2004 was also a building year for a majority of our customers. During which most of our customers saw their financial results improve. In this environment, we are also able to improve our results in fiscal-year 2004. So as you can see, our revenue grew approximately 18% and our non-GAAP operating margins grew around 50%. So in summary, a year was a good year. We achieved positive improvements in all major markets and developed key customers.

Now let me talk to you about market conditions. Book-to-bill ratio for fiscal-year 2004 was over 1.2 and book-to-bill ratio for last quarter was well over 1. So what does this mean for our fiscal-year 2005? From the bookings point of view, we are gaining momentum and this should continue in December quarter and calendar-year 2005. Our confidence is based on organic growth of existing programs, new programs wins and existing customers, new markets and of course new customer wins. The overall customer forecast of fiscal-year 2005 is coming reasonably positive.

So we are forecasting for EMS industry that will grow -- that will continue to grow in calendar-year 2005 over 10%. Some of the reasons are following: Overall growth of our customers, more outsourcing, our portfolio of value-added services, and our ODM products. Addition to that Sanmina-SCI has a very strong engineering and design capabilities, material supply chain, time to market, and global low-cost manufacturing, and these are the keys to our overall growth and financial success in the future. Sanmina-SCI will continue to serve higher mix, high-technology and more complex markets. Our goal is to continue to gain market share as we accomplished in 2004.

Now, let me talk to you about some of the financial goals that you already heard from David and Randy, so forecast for fiscal-year 2005, for first quarter, as you can see it's 3.3, 3.5. A year ago, we informed you that our operating margin goal for Q1 fiscal-year 2005 in the December quarter was to meet or exceed our 3% operating margin goal. At this time, it looks challenging to meet that goal of 3%. We do expect our operating margin to improve in December quarter in the range of 2.6 to 2.9%. However, we are not giving up on our 3% goal. The main reasons are enclosure business issues that Randy talked about, component pricing did not improve at the rate we expected it, and the product mix.

So going forward and looking at the calendar-year 2005,we expect revenue growth go up 10% or greater. Bottom line is the goal is to stay on the track with the positive news quarter-after-quarter. Main focus will be on operating margin growth and our goal for calendar-year 2005 is to exit the year with operating margins of equal or greater than 4%. Goal is to continue to improve EMS margins. Component business margins should improve at the faster rate than the rest of the EMS business. We will continue to improve our inventory turns, and over the short term we believe that we can get 4 turns or better. We will continue to generate positive cash for operations in fiscal-year 2005, and the longer-term operating margin goal will remain unchanged at greater than 6%.

Our management believes in these goals, we believe this is attainable, as long as the economy improves and demand for our products continues to grow. Our vertical model should have a leverage in a growth market which should continue to improve the next couple of years. So in summary, we will continue to diversify our customer and markets we serve. The outlook for fiscal-year 2004 shows continued, but steady improvement. We will focus on organic growth and our number 1 financial goal, again, is to continue to improve our operating margin and stay on the track with the positive news each quarter.

Now I would like to extend special thanks to our investors and analysts for participating in this conference call. And at this time Randy, David and myself would like to answer any questions that you might have. Thank you again.

At this time, I would like to remind everyone, if you wish to ask a question, please press star 1 on your telephone keypad now. Your first question is from Lou Miscioscia of Lehman Brothers.

Hello, Lou.

Hi, Randy, and guys. Thank you. I guess the first question I have is given the industry growth, I was actually modeling slightly below a 10% top-line growth, but I guess EPS of 47 cents, it sounds like with the guidance that you would think that my top line might be a little bit on the conservative side and that the 47 cents looks reasonably doable?

Well, Lou, this is Jure. First of all, we believe based on all the forecasts that we are getting, from our key customers today and some of the, you know, programs that we're working on that we should be able to grow the revenue in 2005 around 10% plus. And based on all the data that we see, I think as the whole industry should be in that range. I see the forecast, you know, that range from 8% to 12% out there. But the way we forecast is based on really what we see from our customers. We would like to stick with 1 quarter at a time right now. But we do expect to exit the calendar year with operating margins equal or greater than 4% and assuming that all these things happen, you know, we should be somewhere in that 40-plus percent range.

Okay. How much growth are you looking for for some of your, I guess your end-customers, the end-market. Many of the CIO surveys that we do sort of puts the customers at increasing IT budgets, let's say about 3 to 5%, pretty similar to '04.

Right. If you look at the -- you know, again what we've seen there, yeah, if people are -- as I say, reasonably optimistic about 2005, if I look at the data that customer confidential we share with us, you know, we see nice -- nice continued improvement, and I think as long as we see that, I believe that we as a Company, based on the programs that we are working on, we should be able to deliver those numbers.

What are you expecting half from your customers and half from just additional EMS outsourcing?

Well, we definitely -- I think we're going to focus on organic growth, Lou, this year. I mean we believe that we have plenty on our plate, but we do have some, you know, key projects we're working on with additional outsourcing conditions come our way.

Okay. One last quick question. What does it look like for the tax rate for the year, you think with some of the low-cost geographies ramping up it might be able to get dropped somewhat?

I leave that to David.

Hi, Lou. We're working on a number of tax strategies right now. I think it would be a little bit too early for me to guide you, that it would be anything less than the guidance we've given, which would be 27%.

Okay. Great. Good luck on the year.

Thanks, Lou.

Your next question is from Thomas Hopkins of Bear Stearns.

Yes, good afternoon.

Hi, Tom.

Nice inventory work on the quarter. I want to talk to you about the telecom numbers you are seeing and kind of some of the optimism you're talking about. It's a little counter to what we've been seeing lately. And if you put it in the context of the Cingular, AT&T Wireless acquisition, which seems like it's going to put a little bit of a freeze on things for maybe a quarter or so. Just could you give us a little more confidence as to why you would still be feeling good about telecom equipment at this point?

Well, Tom, I think I'm basing this -- everything based on the customer based, the programs we're involved. As you know we are well positioned with all the key players in telecommunication industry. And I believe that we have a fair amount in new programs that we won, you know, and position ourselves in 2004 that I really believe going to start paying off in 2005. But overall, most of our customers in that industry are forecasting some growth in 2005. And as long as that happens, I really believe that, you know, that we'll be able to expand our business there. Randy, you want to add to that or?

No, I think you worded it -- worded it well. I think the basis behind what we're guiding is the forecast we're receiving from our customers and we're pretty -- you know, we're pretty diverse with all the industry leaders there in the forecasts we are seeing, especially in the areas that I mentioned earlier. You know, wireless is one area, is supporting that guidance that we give for just this upcoming quarter.

Okay. Great. Just a follow-up. Solestica talked about maybe scaling back its ODM server programs. Any impact for you guys? How do you think about that? Is there something you think you might be missing in terms of the opportunity relative to them, kind of rolling that program back?

Well, Tom, it's not fair for me to comment because I don't know, you know, why they made that decision. I can tell you what we are doing is that we believe we have a, you know, very professional team that is involved in this project. We've been very successful at delivering the high-quality technology product. I mean, what we deliver is not just a so-called ODM platform. We deliver a really total solution for our customer. You know, and basically we do order fulfillment on the products that we manufacture. So I would say that our team has been very successful, you know, for our first year. I give them, you know, a high grade for that. And I believe that we'll be able to expand this growth and win new programs in 2005 based on our technology.

Okay. And if you're kind of close to $200 million run rate there, where would you expect it to be at the end of 2005?

Well, you know, it's tough to forecast, but we would like to grow that at least, you know, 30% to 50% plus this year.

Off the small base?

Right.

Okay. Great. Thanks.

Your next question is from Brian White of Kaufman Brothers.

Okay. Good afternoon. Could you talk a little bit about, you know, the plans for Pentex, particularly in China, what layer count are those boards at today in China and what's your goal 1 year from now?

Brian, this is Jure. First of all, great question for me, I just came from Asia a few weeks ago and I visited these factories and spent a few days talking to the people. First of all, they're a great management team in Singapore and then I went to China and saw again great management there, mainly the management from Singapore. So they were a great infrastructure. Both factories are really state of the art factories. They got capabilities to do -- you know, to high layer. The sales and marketing focus was never really to develop and go after the high-layer account, so most of the business that we're doing is between, you know, 2 and 8 layers. We are already running some tests through those factories and we find out the capability's a lot higher. At the same time, we are in the midst of transferring a lot of high-end equipment to those 2 factories. So I would expect that,you know, our long-term goal there is really to focus in on higher technology. But they are ready. We sold -- we send the team already over there. In Malaysia, which is old Sanmina factory, we are doing the layers, there are over 30 layers today, and so combining technology that we have in Malaysia, which is only an hour flight from Singapore and technology that we transferred, we expect for them to be doing the products up to 30 layers a year from now.

Okay. That's great. Do you anticipate closing down another PCB fab in the United States and shifting that production over to Asia?

Well, as Randy mentioned, we just closed 1, you know, we are reviewing everything but at this time really can't make comment on that.

Okay. And just finally, if we think about the enclosure business having about a penny impact in the December quarter, are we gonna gain that back in the March quarter?

Randy?

Yeah, Brian, I -- you know, the answer is most of it will come back. As I said in my prepared comments, it's about a penny in September, about a penny in December. We think that it'll all be behind us by the end of December. What's left will -- there might be some, but it'll more or less be noise that we have. So the answer is the question, yeah, we probably lost a penny in 2 quarters and we should gain it back in the March quarter.

Okay. Thank you.

Thank you, Brian.

Your next question is from Scott Craig of Banc of America.

Good afternoon.

Hi, Scott.

Jure, on the margin goals exiting fiscal 2005, you guys have talked in the past about the volume mix, price and restructuring impacting your margin goals. Can you help us understand, you know, how much each of those would contribute to improving margins from where they are now to that -- exiting the 2005 at 4% goal?

Well, definitely this -- the last restructuring, Scott, that we announced is part of it will help us, as I mentioned, we definitely believe that we'll be able to improve our component business this March and at the higher rate the rest of the businesses in this fiscal year and come out strong, you know, at the end of the year. We expected a lot more from components in 2004. We started doing really well at the beginning of the year and then things kind of, you know, slowed down. But we feel that we are in a better position today with restructuring, with getting our China factory now on board. I think we'll be able to improve the margins definitely in our board business. At the same time, our enclosure business, a lot of these issues that we talking about really mainly was caused by moving the, you know, product from a high-cost to low-cost regions, and so that should help us improve the margin going forward. So that is the key.

Definitely mix in this business, Scott, as you know it's always the key. We expect that our key core business will grow. And, you know, we are -- you know, we are well positioned for infrastructure product and we been very successful winning some industrial semiconductor medical type of product. So those type of products should help us improve our margin. As I mentioned earlier, the key for us and the whole focus for for this management right now is a bottom-line improvement, of course, do a good job for our customers is always number 1, but once we do that we got to make some money, we've got to some better money than what we've been doing, and that's a commitment.

I want to add, you know, love to answer the question, Scott, here, but -- in the analyst day we have coming up here in a little over a week. We spent a fair amount of time and we just didn't have enough time to do this on this call. We spent a fair amount of time and that's why I'm encouraging everyone to come. We're going to walk you through a road map to get -- to get to this 4% goal Jure mentioned exiting next year and how much is more or less contributed by volume, how much is contributed by mix, vertical integration, cost reductions and of course the restructuring you just mentioned. So we do plan on answering this question and answering it in a pretty precise way, but that's going to be here in about 10 days.

Okay. Thanks a lot, guys.

Thanks, Scott.

Your next question is from David Pescherine of Smith Barney.

Thank you. Randy, maybe you could just clarify for me, you're talking about enclosures costing you about a penny for the quarter, but is it right to say that it's the entire component business that's costing you a penny? Because it looks like the components business about a break even.

S the answer is no, the entire components business is not the problem. We, for the first time in a long time, had a loss in our enclosure business, and the problems that I mentioned are very specific to enclosures and do not spill over in the other components business. As I said, I really don't want to get into a lot of details. We did not see an improvement in the other elements of that components business from Q3 to Q4, but they were very, very close to what they were. A couple was maybe a -- half a point to a point over, a couple half a point to a point down, but they were all pretty much in line with Q3. What really impacted us negatively in Q4 was these specific problems relative to enclosures, and I'd be misleading you if I told you anything different. It was unique to enclosures.

And I do understand it, but the gross profit that you gave for the entire components business was 2.5%. So is the SG&A, if you were just looking at the components business, less than 2.5%, Randy?

No, no. No. So maybe I misunderstood your question. What I was doing was relating Q3 to Q4. Do your question again, Dave. Maybe I misunderstood.

I'm just trying to understand, you're giving us all the components business on a blended basis, 505 million and you said gross profit was 2.5%, so if I'm looking at all of your components businesses in aggregate, it looks like in aggregate they were at break even, and I'm just asking you that one -- that one penny -- enclosures are actually costing you more than a penny. It sounds like it's the entire components business is costing you a penny in profitability.

Yeah. They're different -- I understand where you're headed now, and they're different issues. So what I'm saying is that the problems we had in the enclosures this quarter we didn't have the prior quarter. And that took a penny off of earnings, both in that component sector as well as the companies overall. If we didn't have that, then the Company would have earned a penny more and the enclosure -- the components business would have earned a penny more. That doesn't mean that the components in general even earned a penny. It just meant it would have done a penny more than what they earned. You were right, if you allocate SG&A at something between a 3% and a 4% figure to the components business, you're gonna get a loss overall for the component business, but my statement didn't relate to the overall performance of the components as much as it did to the impact of the problems in the enclosure group.

Right. Okay. So overall the business is at something of a loss. So then my real question, Randy, is: Help us understand how big the components business -- or you think you'd like the components business to be, let's say 12 to 24 months out? And what types of margins -- operating margins we can expect for that blended business long term?

Yeah. So to answer the question -- and I'm not going to specifically -- I mean I'll come back to that. But, you know, we get into a lot of detail here, which I was really kind of hoping to avoid, but the answer to this is that earlier in the year, that components business instead of being 3.8 or 2.5 was a number that was -- that was close to 7%. And we had hoped to grow that business at that point up. And if we would have been able to grow that, just theoretically to 10% gross profit, that would have equated to clearly a $500 million base at this point, you know, a $50 million figure instead of a figure closer to 10 million. So as a result of all this, you can see that we have a fair amount of leverage there that we can do in our components business.

Our goal is to get -- is to do 2 things in the components business, it's clearly to grow it, some of that growth will come from increased vertical integration. If you do a little math here, you can see there's a lot of opportunities for vertical integration because David will give you a figure of what third-party revenue was in a components business and I told you what the total revenue was. So you can see we have a lot of opportunity for vertical integration of our components at Sanmina-SCI going forward. So our goal is to grow that components business next year at a number in the 30% kind of figure. And I think we should be able to do that fairly easy given Pentex-Schweizer and some of the other initiatives that we have on.

In addition to that top-line growth, our goal is to get the gross margins in that business by the end of next year into double digits. In other words, in excess of 10%. So I feel like both of those are very achievable goals going forward, which you can work the math and see where the leverage is going to come from. If you go back to -- you would have to go back a long time to before our -- well, not a long time. You have to go back about a year before you would see gross margins be below even last quarter's 3.8. So this business has been a positive, it's been profitable for us going forward in all of our components businesses up until this quarter, and clearly at 2.5 gross it's gonna be -- it's gonna be pulling it down. Another way to relate it is just look at the corporate gross margin and relate it to this gross margin, you can see it's pulling us down as a result.

And then maybe just 1 final question, Randy. Again along the same lines with the components businesses. Should we expect that the traditional end-markets that have driven business in those -- in that business continue to be there, meaning the communications and the enterprise, computing, or are you really starting to see a pretty major shift into the industrial and the medical towards the -- towards the components businesses?

No, again, I think it would be wrong to think that we're banking the future on a big shift in terms of the kind of business that's gonna be there. I do think there will be some shift from what used to basically just be telecom and a little computing to other sectors, like industrial, and the multimedia and some other things because of the Pentex-Schweizer capabilities. I mean, as you know, we're the leading outsource company that builds set-top box. There's some opportunities for vertical integration there, and, you know, we haven't done that in the past and we'll probably do it in the future. So there's some opportunities there. So it will diversify that a bit. But, you know, the key to our future still lies very much in communications, infrastructure, high-end computing, and then the industrial, medical sector.

Great. Thank you very much.

Thank you, David.

Your next question is from Steven Fox of Merrill Lynch.

Hello, Steven.

Hi, good afternoon. In regards to -- a quick question on SG&A first of all with Pentex included, can you give us a sense for -- in dollars what that could be in this quarter?

Randy mentioned there's really no impact in SG&A, David.

Are you talking about just SG&A, Steve?

Total SG&A, sort of give us a rough run rate where you should be in Q1.

You know, I don't have that number here with me. You know, it's a small -- it was a small acquisition compared to the total company.

I'm thinking in total, if you look at the total Company SG&A, what -- what type of number are we looking at for Q1?

I don't know the number for it.

You know, I -- let me go ahead and say, SG&A will increase. I mean, if you look at the operating margin, we're forecasting a top-line increase, and we're forecasting -- you know, first of all let me back up a second. As I've said many times, we really manage the Company on an operating margin level, so that's why we're not too focused on the difference to get there, the different elements. But with that said, I do think you'll see an increase and as we guide it in operating margin. I think that will be driven by an increase in gross margin. I think it will be an increase in SG&A that corresponds to our -- to our top-line increase. But I think we'll continue to leverage that a bit and it will grow at a slower rate than our top line will grow.

Okay. And then, looking at these serve markets -- 2 quick questions. On the industrial and medical side, you basically have doubled the revenues over the last couple years out of that segment. Is it fair to assume that 20% growth is still reasonable say over the next 12 months, given all the opportunities, or given the scale is it going to be less than that?

Yeah. Well, Steve, I think we have enough in a pipeline, you know, to accomplish, you know, that type of a growth. So we are pretty excited but, you know, industrial and medical side of business especially.

Okay. And then one final one. On the multimedia side, it looks kind of like you got really tough comparisons for this year, can that segment be up this year? Is there anything going on away from the markets or how bad do you think the channel inventories are?

Randy?

Well, to be honest with you, I don't have really good visibility on the channel and the inventories that's out there. And if you think through this business, they're down to -- you know, these boxes are sold in a lot of different distribution outlets. You know, in talking to the guys that run this business for us, they're still optimistic. There's a lot of new technology, the capability of everyone, you know, at first digitally recording these television shows and movies at home and now, you know, going forward the opportunity for them maybe to write some of that stuff to a disk in the units. We think is going to continue -- the technology's going to continue to drive strength in that business going forward. Will it be able to go from, you know, 5 quarters from roughly a little over 100 million to over 300 million? I don't think it's gonna -- you're gonna see that kind of growth going forward. But we certainly expect it to keep pace with the overall corporate growth we've kind of outlined here.

Thanks. Very helpful.

Thanks, Steve.

Your next question is from Steve Savas of Goldman Sachs.

Hello, Steve.

Good morning -- good afternoon.

Good afternoon.

How are you? I guess, Jure, I want to follow up. I think you had said -- did I hear you correctly, that either material or component cost increases also contributed a bit to a gross margin squeeze in the quarter; did you say that?

No, no. Basically what I said -- when I made a statement that our goal is to exit the next year, calendar-year 2005 at operating margin of 4% or greater, I think is gonna come from 2 components. I think our EMS margin should improve in our component businesses, which includes PCB enclosure, backplanes and so on, we believe that margins in that will improve at the faster rate than the rest of the EMS business.

Okay. Then follow up within the component business, I would take it part of the strategy or key part of the strategy to improve profitability there is with your acquisition in China and then your Malaysia PCB facility shifting volume production over there and kind of narrowing the scope of North American and European to really just be like NPI, low volume and design work. Can you give us a sense of time frame for that overall process to restructure the PCB business to the point where you're in what you would call your finished state of volume production in Asia, and the low-volume design NPI stuff in the higher-cost regions? Like when would you expect to be there by?

Well, basically what we have today in North America is basically is going to that point. We have a -- you will recall quick turn R&D, really advanced type of products, and we have 1 really advanced factory in upper state New York that will continue to focus on the really advanced stuff. And European factory, will come mainly NPI. So the goal is to move most of our -- what we call volume production in a low-cost region. We do have a lot of equipment, you know, we are in the midst of transferring millions of dollars worth of equipment to expand these factories that we have in Singapore and China and Malaysia. So that's really the -- most importantly, we believe that our Singapore [ph] business will continue to improve the margins starting today. Assuming that the markets will continue to improve, which, you know, we hope they are. So but overall, what we call component businesses in our group -- again, are the boards, enclosures, machining, backplanes and cables and memory modules, we expect those margins overall in 2000 to improve and that's really the focus of the, you know, the whole margin improvement.

And the big part of this shift of programs to Asia, et cetera, you think you'd largely be done, let's say in the next 2, maybe 3 quarters, with that be kind of set of transfers?

That's probably a plan, 3 to 4 quarters.

Thank you very much. Take care of your cold, Jure.

Thanks, Steve.

Your next question is from Jim Savage of Wells Fargo.

Hi.

Hi, Jim.

How are you doing?

Good, good.

A couple of things. In terms of the transfer of some of the PCBs that you're currently outsourcing, the lower technology stuff that you want to move to Pentext Schweizer. Where are you in terms of getting the customers to qualify the facility and to start to move that production? Is that just beginning or --

No, no, it's not beginning. Jim, we already start work -- as you know, we've been working on this project for last over 6 months, but really with this -- with this acquisition for 6 months, it's our company now. So we already started to work with our customers, we got -- you know, running the test boards through there, some of the boards already done. We already started to move some product in there. So this is a now working process. They just need more equipment and we just couldn't put equipment there -- in there because the deal just got signed yesterday. So, now we got equipment going over there and, you know, we just expect nice growth, most important this factory's are profitable today and I think that will -- that we will be able to improve the profits that just put in additional work.

And that's not going to add revenues to the Company, it's just gonna add margin to the Company because it's going to be an internal sale to -- from one of your groups to another, is that right?

Yeah. Well, the key for us, Jim, is not revenue, it's -- we'll get the revenue, I think it's the margins that we are focused right now, so only thing that is focused right now we care about is operating margin.

So that will have an impact on the margin?

But you're right, Jim.

Pentex also I know has -- had when you acquired it, significant sales into the automotive electronics business and we've been hearing a lot about automotive electronics in China as being a major potential growth area. Can you address what you're doing in terms of that? Is that business staying with you or is --

That definitely that business is a part of our strategy, we 2 years ago decided to go into automotive, we've grown that business from basically zero to couple hundred million dollars right now in assembly business, and definitely we will take advantage of their board capability they have. So Sanmina has a very focused plan right now for growing automotive.

Okay. And does that also entail adding capacity on the assembly side in China?

We already added that capacity there. We have plenty capacity right now for those -- that type of work.

Okay. One last thing in terms of customers and there had been a lot of talk last year at your analyst meeting about the military aerospace business.

Right.

And while at the time you talked about it taking a while to develop, if you could give an update as to how it's developing and whether you think that there will be any substantial growth there over the next 12 to -- you know, say the next 12 months.

Yeah. We'll talk to you more about it at the analyst meeting, but I can tell you we planted a lot of seeds out there, we're involved in a lot of opportunities and I think we're well positioned to grow it. Maybe for this year alone in 2004, probably did not grow as much as we expected it, because some of these government programs just don't move as fast. But I can tell you they we're in a lot better position today than year ago winning new programs.

Okay. And does that include on the PCB side?

That's correct.

Okay.

Basically there we are doing a -- the whole vertical integration, actually on the premier circuit board side we did a great job.

Okay.

Because that part of the business is easier to win and moves a little faster than when you're talking about the system. When you talking about the system, that takes a little bit longer approval to move the project from one place to another.

Okay. I want to go back also just for a minute to the margin structure in your component businesses. And while you probably with what's the problems in enclosure business that cost you 150 basis points or so, it still is really lagging margins. And so we're looking at getting from what is probably a 4, 4.5% gross margin assuming normalized no problems in the enclosure business, up to a 10% margin. That seems to be a very aggressive goal. Can you go through a couple of the ways that you intend to get from the low margins and drive margins that much higher that quickly?

Yeah. Well, I think that -- from an execution point of view, most of our operations, let's just say boards, backplanes, cables, memory modules, machining, is in a really great shape. As already mentioned enclosure we have some issues I think we -- it's a short-term fix, you know, which we are fixing and I think we'll fix it by end of December. So I think we are ready to execute. We just need to improve the revenue. I believe that some of the programs that are coming down the line through a customer base that we had, that we will be able to improve. Taking those margins and components business from 3 to 4% to 10% plus, it's not as difficult and, as long as we have improvements in economy, which we expect to continue -- you know, to improve in 2005.

I just want to point out, you know, like I mentioned, you know, 2 quarters ago we were well over halfway there, 3/4 of the way there almost, we were close to 7% there and it's very much volume dependent. I think -- you know, as you know it's a -- some of this business is fairly high-fixed costs, well variable costs and volume does make a difference. And, you know, if we can -- if we can increase the volume, probably even 10%, we can probably get very close to that. So I think -- I don't think -- you know, the view that we're trying to grow this 30%, I would think that we'll easily be able to get a 10% gross margin in that business easy at a 30% top-line gross, probably a lot more than that. Because -- just the leverage that's there.

Okay. Great. Thank you.

Okay. Operator, we do have time for one more question.

Thank you, sir. Your final question comes from Andrew Wong of American Technology Research.

Hi, Andrew.

Good afternoon. Just a quick question. I believe when you provided the guidance for this quarter you guided 5 gross margins to 5.6 to 5.8%. And if I do the math, even with the weakness on the component side, it looks like you fell a little bit short of that, did EMS come in a little bit lighter than you expected?

5.6 to 5.8?

Yeah, that was the guidance for the September quarter.

What did you -- what did you use for SG&A?

Oh, that was the gross margin guidance.

No. You know, we didn't -- we didn't really get into this on the call. I think had we not had the enclosure issue, you know, I think the Company would have probably earned another penny more. And, the operating margin, I'll get back to gross margin here in a sec, it would have probably been 150 basis points, probably been, you know, more like 2.5, 2.6 range. Still, given the top line -- the strength in the top-line growth. You probably would have expected a little bit more leverage from that. And as I pointed out earlier, we got some nice growth from the com business, but also our PC business, if you look at what really exceeded the guidance that we give last quarter, it really was the personal and business computing sector. I mean, it was the one that was the most over what the guidance I give and you can -- you can kind of -- kind of say from that aspect, you know, the mix wasn't that favorable. So I think, you know, if you -- if you get -- you want to get -- draw down below that, it would really -- the answer to that would really be more of a mix issue than anything else.

Okay. And just one quick follow-up. On the 4% operating margin for December of '05, is that basically a 7% gross and a 3% operating expense?

Well, yeah. Close to that, yes.

Okay. Thank you.

Thank you, thank you Andrew. Well, ladies and gentlemen, sorry we could not answer all your questions, but if you have any more questions please give us a call. Again thank you very much for your support and we'll talk to you 3 months from now. Bye bye.