Sanmina Corp (SANM) 2005 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Sanmina-SCI first-quarter 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. (OPERATOR INSTRUCTIONS).

Thank you. I would now like to turn the conference over to Mr. Jure Sola, CEO and Chairman of Sanmina-SCI Corporation. Please go ahead, sir.

Good afternoon, ladies and gentlemen. Welcome to Sanmina-SCI's first-quarter conference call. Here with me on this conference call are Randy Furr, our President and Chief Operating Officer; David White, our Executive Vice President of Finance and Chief Financial Officer.

I would like to start by thanking you all for being here with us today. Our agenda is that David White will review our financial results for the first quarter of calendar year 2005. Randy Furr will review operations and future outlook. Then I will follow with additional comments relative to Sanmina-SCI's results and future goals, and questions and answers. And now, David.

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 from 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 remarks. Prior to reviewing our financial results with you, however, I'd like to take a moment to review the following Safe Harbor statement. Slide two.

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 October 2, 2004, filed on December 29, 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 information and a reconciliation from non-GAAP to GAAP for such information are contained in our quarterly press releases, which are also available on the investor relations section of our website.

You will note from the press release that we have provided you with a statement of operations for the three months ended January 1, 2005 on a GAAP basis, as well as a reconciliation between GAAP and the non-GAAP information that are either referred to in our press release or will be referred to throughout this conference call. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, other infrequent or unusual items and non-cash interest and amortization expense.

On today's call, I will review results of our operations, discuss the balance sheet and corresponding metrics, provide an update with respect to our restructuring activities, and finally I'll conclude with guidance for our second quarter of fiscal year 2005. In general, my comments will be directed at our GAAP financial results, except where we consider our non-GAAP information more meaningful in facilitating comparison to prior periods. Accordingly, unless otherwise stated in this conference call, when we refer to operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information.

Slide three. Sales for the first quarter of fiscal 2005 were $3.3 billion. This represented an increase of 9.5 percent over sales reported in the same quarter last year, and is essentially flat with our prior quarter.

Slide four. Our top 10 customers accounted for 69.3 percent of total sales this quarter, versus 71.6 percent in the same quarter a year ago, and was essentially flat with the prior quarter. Sales to our top 20 customers amounted to about 82 percent of total sales. We had two customers in the first quarter whose sales were greater than 10 percent of total sales. Third-party sales by our component business, which includes PCB fabrication, enclosures, memory solutions, backplanes, machining and cables, amounted to $383 million or approximately 12 percent of net sales. Assembly and other EMS sales amounted to about 88 percent.

Slide five. Gross profit for the quarter was 177 million, reflecting roughly a 25 percent improvement over the same quarter a year ago, and was essentially flat with the prior quarter. As a percentage of sales for the first quarter, gross profit was 5.4 percent. This is up 69 basis points from 4.8 percent reported in our first quarter of 2004, and represents a slight improvement over the prior quarter's 5.3 percent on slightly less sales. While gross margins modestly improved quarter over quarter, our improvements in the first quarter were somewhat impacted by our components business.

Selling, general and administrative expenses for the first quarter were 87.3 million, down approximately $2 million from the prior quarter. This decrease was attributable to a number of smaller factors, none of which individually was significant. The Company continues to focus on cost reduction and operational efficiencies in its support departments, and SG&A expenses as a percentage of sales were 2.7 percent for the quarter, which was essentially flat on a percentage basis with the prior quarter. Research and development costs amounted to $7.5 million, bringing our total R&D and SG&A expenses to $94.8 million or 2.9 percent of sales.

Depreciation was $45.7 million for the first quarter, and CapEx spending in the quarter was approximately $14.7 million. The capital spending was primarily related to equipment purchases for new programs and the continuation of our expansion in low-cost regions, primarily to China and Hungary, where we continue to fit up (ph) new facilities in each of these countries. We expect CapEx for the total year to be in the range of $70 million.

Operating income was $82.2 million for the quarter. Operating margin for the first quarter was 2.5 percent versus 2.4 percent in the prior quarter and 1.9 percent in the same quarter of the prior fiscal year. EBITDA was $127.8 million for Q1 '05. Other expense net, which consists primarily of interest expense and income, as well as gains and losses from foreign currency translation, was $19.6 million. Our tax rate for the quarter was 27 percent. Net income for the quarter was $45.7 million.

Basic and diluted shares for the quarter were 519 million and 525 million shares, respectively, and our diluted EPS for the quarter was 9 cents.

Slide six. Turning to the balance sheet, cash and short-term investments were approximately $1.1 billion, consistent with our prior quarter. Accounts receivable at the end of the quarter were $1.8 billion, resulting in DSO of 48. The aging of our receivables continues to be strong, with approximately 90 percent of the total balance being current, and with 97 percent being current or less than 30 days past due. As a reminder, we do not have any off-balance sheet financings or factorings that affect the computation of these metrics.

Inventories at the end of the quarter were approximately $1 billion, with our inventories improving from 11.7 turns in the prior quarter to 12.3 turns. Inventory decreased $61 million as a result of this improvement, and our inventory turns represented record performance for the Company.

Accounts payable at the end of the quarter was $1.6 billion, resulting in AP days of 48, and improving this metric will be one of the areas of focus for this fiscal year.

Our cash cycle days for the quarter was 30, slightly up from the prior quarter's 29 days.

Our working capital was 1.5 billion at the end of the quarter.

Slide seven. Cash flow from operations was the source of $52.1 million for the quarter. Free cash flow for the quarter, which deducts CapEx from the our cash flow from operations, was also a source of approximately $37.4 million.

Let me now to turn to restructuring. During the December quarter, we incurred approximately $20.4 million in restructuring costs, $18.4 million of which was cash. Costs incurred under our Phase II restructuring plan accounted for $4.1 million of the total, while costs incurred under Phase III restructuring plan announced in July 2004 accounted for $16.3 million of the total cost. We completed substantially all of the restructuring actions at all of the facilities contemplated under the Phase II plan as of the end of our fiscal year 2004.

During the December quarter, we incurred $16.3 million of restructuring costs, related primarily to the closure of six plants, as well as headcount reductions in a number of other facilities pursuant to our Phase III restructuring plan announced in July 2004. Six months ago, when we announced our Phase III plan, we indicated that the contemplated actions would result in charges of approximately $100 million. As a part of our press release today, we announced our intentions to transition additional capacity out of high-cost regions, and anticipate incurring an additional $75 million in charges, raising the total cost of Phase III to approximately $175 million. Accordingly, we now estimate the total benefit from Phase III to be in the range of $35 to $40 million per quarter. This represents a one-year payback. We expect to complete 50 to 75 percent of our Phase III restructuring activities during fiscal 2005, with the balance to be completed in the first half of fiscal 2006.

Slide eight. Now let me turn to the guidance for the second quarter of fiscal 2005. Consistent with our practice in the past, the information I provide will generally exclude restructuring and integration costs, impairment charges, other infrequent or unusual items, as well as non-cash interest and amortization expense. Consistent with the history of the Company and our industry, our fiscal second quarter has traditionally represented a seasonal low period; and as such, we are targeting sales to be between $2.85 and $3.15 billion, an approximately 12 percent reduction from the prior quarter at the low end, at about a 3 percent reduction at the high end of the range.

Notwithstanding the reduced sales, we expect gross margins to be only modestly impacted, and are targeting between 5.3 and 5.4 percent. We're targeting our operating margin to be around 1.8 to 2.3 percent. Net other expense is expected to be approximately 23 to 25 million. And we expect our tax rate to be in the range of 27 percent, consistent with the first quarter.

Basic shares for Q2 '05 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 4 to 7 cents per share. We're forecasting positive cash flow from operations at both the low and high end of our guidance for this quarter. We estimate the depreciation for Q2 '05 will be approximately flat with Q1 '05, and quarterly CapEx spending will be in the range of $20 million.

In conclusion, we continue to focus a substantial amount of our efforts on improving profitability and working capital management. We have made great progress on a year-over-year basis, and our goal is to make consistent sequential improvements on a quarter-over-quarter basis. We appreciate your time, and I will now turn the time over to you, Randy.

Thanks, David. As you can see from the Q1 '05 earnings release, and as David mentioned, the December quarter came in at the top line of 3.25 billion non-GAAP net income of 45.5 million and a non-GAAP EPS of 9 cents, which was within our guidance. As usual, I would like to start with a few minutes on the top line. As you can see, we again achieved 3.25 billion, and this equates to a 9.5 percent year-over-year growth and a sequential decline of 1.5 percent. This placed us under the bottom end of our guidance that we provided during last quarter's conference call, which was 3.3 billion. In general, I would characterize the mix as unfavorable, as our personal and business computing sector was seasonably strong and the growth in this business surpassed all of our other businesses.

This is the point on each call where I generally get into a little more granularity for each of our businesses. However, when I really dug into the numbers this quarter, what I found was that there was really no one area of specific weakness, and only our PC -- our personal and business computing business -- saw real strength during the quarter. When we entered the quarter, we had customer forecasts supporting from the mid to higher end of our guidance. As the quarter progressed, and pretty much steadily throughout the quarter we saw a slow deterioration in demand. As I said, it was not one customer, nor was it any one sector. And when you look at each sector of our business, each one was off just a bit from our guidance.

As illustrated in slide nine, communications infrastructure market segment was flat, at 28 percent of total sales for the December quarter. Enterprise computing and storage was down 1 percent to 15 percent of total sales in Q1. Industrial, automotive, medical instrumentation and defense aerospace was flat, at 10 percent of total sales. Multimedia was down about 2 percent to 7 percent of total sales this quarter. And, as you might recall, we have guided this business to be down during the quarter. However, like all other sectors and again, with the exception of personal and business computing, this sector was off just a bit more than we had expected. Finally, our personal and business computing systems came in strong this quarter, and again within guidance. The sector represented about 40 percent this quarter, up 2 percent over the prior quarter, and again, this is in line with normal seasonality trends for the business, and reflects the strength our customers are experiencing in the market, especially with respect to the industry standard server space.

So, in summary, this was a quarter that became increasingly challenged as the quarter progressed. However, despite the challenge, we managed to achieve our bottom-line results within guidance. And as usual, I would like to turn the discussion to some comments of what we're seeing in each of these markets now.

So first, I'll start with communications infrastructure. We remained encouraged with what we're seeing in this sector from a long-term perspective. However, as I previously mentioned, the forecast started off well this quarter, and as the quarter progressed we did see some softening in this sector. So we want to be a bit conservative. In Q2, we expect this sector to reflect normal seasonal trends, and be down in the 5 to 10 percent range. As I have mentioned several quarters in a row now, both our enterprise computing and storage and personal and business computing sectors are tied to enterprise or business spending. And again, as I've said, we believe that we will see a recovery in these two sectors when we see a recovery in the capital markets.

For Q2, we expect our enterprise computing and storage sector business to be in the flat to down 5 percent range; again, this is somewhat reflecting normal seasonality trends for the sector. We expect personal and business computing sector business to be in the down 10 percent to 20 percent range. Once again, as a reminder, almost 100 percent of this sector -- and I'm also including our volume servers in this category, our industry standard servers. This is commercial and for businesses, as opposed to consumer PCs. Now, we expect this business to trend and track more in line with enterprise spending, as opposed to consumer spending, and again, we believe this guidance tracks with normal seasonality trends seen for this business.

For our industrial, medical instrumentation, automotive and defense aerospace sector, we anticipate the business to be a bit mixed in Q2. We expect to see the medical and automotive sectors up, reflecting some strength and some recent wins. The defense subsector is likely to be flat, and we believe the industrial, which is primarily semiconductor capital equipment, to be down a bit going forward here, and that's a large part of this business. So in summary, we expect the March quarter for this sector to be in the flat to down 5 percent range.

Finally, our multimedia sector -- again, this is a good news story. As I mentioned last quarter, this business has been challenged with the surplus channel inventory issue. That's been for a couple of quarters now. We believe that has certainly been resolved, and this business is back to growth. We expect to see the multimedia sector for us to be in the up 15 to 20 percent range for Q2.

I would like to now make some comments on our components businesses -- and by components, I mean our PCB fabrication, our backplane assembly and closure systems, precision machining, cable assembly and memory solutions divisions. For Q1, our components businesses acted very much like our overall business, starting off pretty well but ended up being anemic. For the quarter, our total components revenue is a little bit different than the number Dave gave you, in that I am including our intercompany revenue in this figure for total revenue, this 461 million. This was down in the 8 to 9 percent range from Q4's figure. Gross profit for this business, reflecting the top line, was down a bit, too, from 2.5 percent in Q4 to 1.1 percent in Q1.

As you might recall, during the December call or the Q4 call, I discussed some specific problems related to our enclosure operations business. These problems included difficulties encountered in transferring some programs to low-cost regions, some operational performance issues and some issues related to customer contracts. I mentioned that these issues cost us about 1 cent in each our September and December quarters, and that we expected we would have these problems resolved in the December quarter. I'm very happy to say that we did resolve those problems in December, and they are behind us now. Capacity utilization in our components business remains between 55 and 65 percent.

Now, I would like to spend a few minutes on certainly some positive things that I think came out of the quarter, and I want to start with our operating results. As I mentioned earlier, despite a very challenged top line, the December quarter represented our eighth quarter of sequential operating margin increases. And really, it was the best operating margin that we have had since the third quarter of fiscal 2001. During Q1, we again made substantial improvement in our inventory management. For the quarter, we achieved 12.3 turns. This helped push positive cash flow of operations to over 50 million for the quarter. We are very, very proud of our team, and believe this represents some of the best inventory management in our industry.

Also, we continue to make progress on our ODM initiatives, with revenues hitting an annualized run rate of approximately 275 million in the December quarter, and we expect that this will continue to increase, pushing or maybe even exceeding 300 million run rate in the March quarter.

So now, just for a few additional comments in addition to what David said on restructuring -- and I know David did give you some specifics -- I wanted to add that with the continued softness we experienced throughout our business, we do see did the need for an adjustment in our overall restructuring program. Essentially, we need to take some additional capacity out. The net effect will be to increase the expected charge of our Phase III program from approximately 100 million to approximately 175 million. To date, with respect to this restructuring, we have announced -- and I'm talking about this Phase III restructuring -- we have announced actions at nine sites, with approximately eight of these sites being complete closures and six of these eight sites were in our components businesses.

I wanted to give a quick update of what we're seeing in our supply chain. Generally speaking, we're seeing flat leadtimes in pricing, equating to very few issues, and we don't expect to see any short-term issues with respect to supply in interconnect, PCBs, fuses, fans, storage, power, batteries, filters and PCB base materials. In the next group of commodities, we are actually seeing pricing trends trending downward; and that is passives, discrete, linear, logic, memory, ASICs, switches, crystals, magnetics, RF devices and optics. And the final group, we are viewing as somewhat cautiously, and we're seeing some price increases in this group, and that includes medical fabrication, metals, chemicals, plastic resin.

Our Q1 operating results were the best we have seen in 13 quarters, but we are still a long ways from being happy. However, when you factor in the challenges of the environment, I do think we're making progress. And more importantly, we're doing what we told you we would do.

So, I'd like to thank you for your time and now turn it back to Jure.

Thank you, Randy. Now, let me talk to you a little bit more about market conditions. As we all said, demand in December quarter came in softer than we expected, especially the last month of the quarter. What we're seeing today is some positive trends, with the recent activity in the pipeline of some new organic opportunities for us. And so the pipeline looks good in tracks (ph) of all markets -- computing, medical, industrial, defense, aerospace, automotive and communication.

Our customer relationships continue to be very strong, and have been stable and expanding, with one exception -- Nortel. However, we have known about Nortel for one year, and we have plans, and we are already replacing this business, and have plans to replace the rest of it going forward. But we do believe that our relationship with Nortel will continue in some capacity for many years to come.

During the quarter, we have had many questions regarding IBM-Lenovo deals. I can assure you that our relationships is very solid, and we have communicated a great deal during the quarter with both companies. The services we offer, built to order and configured to order globally, are very critical to this new IBM-Lenovo relationship. I believe this new relationship will be successful for us going forward.

In the EMS industry, the forecast is to grow the whole industry between 5 and 10 percent in calendar year 2005. I believe that Sanmina-SCI will grow at the rate equal to that or better than EMS industry. We have a strong relationship with our key customers, and I can say that during the last six months, our relationships are even stronger, and our performance has been best ever, as we are continuing to offer our customers cutting-edge technology. And I believe this is our competitive advantage, and we will remain competitive in this area.

Now, let me tell you about some of our financial goals in the future. We have experienced softness demand from our key markets, with the programs that we are involved in. But we still delivered the record financial results, having the best quarter in the last three years. We're entering historically a seasonally slow quarter, which is always the toughest quarter to forecast for us. And predicting the future is always challenging, yet we have estimated in the March quarter to be slightly down, but after that, we expect nice improvements quarter after quarter for the rest of the calendar year 2005. So going forward, we will continue to run this company for our long-term success and our long-term goals are in our (ph) place.

Our goal is to stay on track with the positive improvements quarter after quarter. We're going to ship some more capacity out of the high-cost regions. We're continuing to restructure our component businesses by moving into the lower-cost regions, such as our printed circuit boards, backplanes and enclosures business.

So, basically new product introductions and quick churn (ph) will be manufactured in North America and Europe, and most of our high-volume production will be done in lower-cost regions such as Mexico, Asia and Eastern Europe. We're starting to see component-level inventories run low for printed circuit boards, backplanes, cables and enclosures. So, based on this data and to do a -- once we have a lean inventory with our customers, I believe the demand for these products should see a quick uptick in the rest of the year.

In summary, Sanmina-SCI will continue to diversify its customer base in the markets we serve. I believe the opportunities are still good. The outlook for our customer base for calendar year 2005 shows continued gradual improvement, and we basically see 2005 a better year than 2004. So for calendar year 2005, we're continuing to focus on our organic growth and our number-one financial goal is to continue to improve our operating margin and other financial metrics.

Now, I would like to extend a special thanks to all our investors and analysts who are participating in this conference call. At this time, Randy, David and I would like to answer any questions that you might have. Thank you.

(OPERATOR INSTRUCTIONS). Thomas Hopkins, Bear Stearns.

I think what everyone really wanted to know about the reduced revenue guidance is that -- do you really have a grip on the lost revenue from Nortel? And are you really going to keep this Lenovo business for the next few quarters?

Okay, an excellent question. First of all, back to Nortel, we have known about Nortel for a long time, and we know that we're going to lose some of this business. We already have that in the plans for the last 12 months. We believe that we have a plan to replace this business. We are already replacing it, and so I think we have got a way how to do that. When it comes to IBM-Lenovo, I think our visibility today of their project is a lot better than it was when this thing was announced. We spent a lot of time talking to both of these companies. I don't want to talk about contracts, because whenever you talk about the contracts -- but let me just put it this way. Our relationship is strong. A lot of this stuff is behind us, and we are looking forward to working with Lenovo, assuming that this deal is going to get done.

Just to follow up, then, it looks like, again, the March quarter revenue, given the guidance you have, is missing maybe 300, 400 million in revenue. Are you saying that, of that difference, none of this is due to Nortel and Lenovo, or that some of it is due to Nortel or Lenovo?

First of all, I think that zero due to Lenovo and IBM. As you know, some of the Nortel business we already lost. So I can't say there was -- you know, Nortel business -- it did make some difference, but it's not a major difference. And it's something that we planned for months before. So this is not a surprise to us.

And then, lastly, given that with Nortel and Lenovo, do you feel like you can continue to get operating margin improvements, even if you cannot get gross margin improvements?

Well, first of all, our job as a company right now is to really focus on operating margins. We believe, from a manufacturing point of view, I think we're in good shape. We have to take more costs, more capacity out. I think that will definitely help us. I think the key to us is a product mix and recovering an infrastructure product that is our niche market. So, as I said earlier, if you look at our customer relationship today, we are not losing business. If anything, we're gaining. We're able to gain new programs. It's just the nature of the market, what's going on today, but in a short term. I think, longer term, we expect that 2005, as I mentioned a few seconds ago, to be a better year than 2004.

In terms of dollars, Jure or Randy or David -- SG&A dollars, though -- is there anything else you can do, SG&A dollars? You have done a good job. Is there anything else you can do at this point, or maybe this is as good as you can do?

Well, let me turn it over to Randy and David on that question.

First of all, before I get to that, Tom, I want to comment a little bit on your other question. And one thing I can absolutely do is I can take IBM-Lenovo discussion in terms of impacting revenue is -- potentially, some of this may be lost. I can take that off the table certainly throughout 2005, and probably beyond then. But, given we're just entering, it is not going to be an issue in 2005, and we don't think it's going to be an issue beyond then. But I just want to give you some comfort that if you're looking at a downward revision in revenue, I want to quantify this a little bit -- absolutely none of it has got to do with IBM-Lenovo. And it will not have, through 2005 and, we think, beyond.

And secondly, when you are talking about quantifying the Nortel deal, it is in tens of millions a quarter, not hundreds of millions a quarter -- I mean, is the kind of impact that it's going to have here. Ultimately maybe getting to a maximum from the peak to what it has lost is in the 100 million a quarter range, but not -- you know, you threw out a number of 300 million. So the point of that is, we don't think we're losing market share here, other than the Nortel transaction, and we think that it's a reflection of the mix of business we have. We are dependent -- as you know, highly dependent on enterprise and consumer spending. And the one piece of business we had that was related to consumer spending was multimedia, which had a little bit of a channel inventory issue which was resolved. Had it not been for that, I think we would have seen some increases there.

So what we're reflecting to you, we think, is not a marketshare shift, other than Nortel. What we think we're reflecting to you is the actual end-market conditions that we're seeing from the particular mix of customers that we have that's out there. I want to make that clear.

With that said, in my opinion, in SG&A, you can always continually improve that. I think the improvements that we're going to get in SG&A are marginal, and it's going to have to come because, from a leveraging of SG&A as we continue to grow our top line, not from a substantial opportunity to reduce SG&A today. In fact, as the guidance that Dave gave you, it's likely to see some increases going into next quarter, some of those increases reflecting some of the additional requirements that we have as an organization, on things like the SOX 404 and other things. Dave, do you want to add anything there?

Yes. Some of that will be nonrecurring past the year once the big investment in SOX has passed. The other thing I guess I would add is that, as we undertake some of the restructuring activities, in terms of taking out capacity, some SG&A costs will naturally go with that, as well. So that represents an opportunity for us. Clearly, topline growth -- we don't add dollar for dollar or even a fraction of that. So that represents another opportunity for that to come down, as well, as just a couple of examples.

Michael Walker, First Boston.

A couple questions on the end market front. You talked a lot about seasonality kicking in the March quarter, overall down 8 percent. You've got PCs going down 10 percent. But it's not really a mirror image of what happened in the December quarter, where PCs were up 4 percent; they were up 14 percent, for instance, a year ago sequentially, and communications up only 1 percent after being up 9 percent a year ago.

And then I also want to ask on the industrial side, where you had a sharp reversal on revenues, it looks like down 15 or so percent. So I'm seeing kind of a change here, in terms of traction on the end markets that we had not seen in '04, and you are still looking for seasonality in March. So I'm trying to understand why things, if they deteriorated that much in December, would be off that much more in March across these three end markets.

So let me ask a question here, because I think the numbers you're looking at might be a little bit skewed here, Michael. We sit down periodically, and we did this during the quarter, and we re-looked at our customer base, in terms of the programs that we're doing for those customers, to try to make sure the customers were put into the right buckets there. And what we found is, because some customers have done mergers and acquisitions over the past couple of years, and because some of the programs we're doing are different, we reclassified some of those customers. And, to be fair, we adjusted the classifications back so we would have and apples-and-apples comparison. Are you looking at that adjusted classification? Because the numbers you come up with are a bit different than mine.

Yes. I may not be. Can you just tell me what the PC bucket was up sequentially, then?

It was up 2 points.

Okay. So it was up 2 points, but you still expect it to be down 10 to 20 points in March?

That's correct.

So I guess that kind of captures the essence of my question, because it wasn't really up much in December, but you are looking for a lot of seasonality in March the other way?

Well, in my opinion -- yes, so let's pull this up. I mentioned that earlier, I think. The PC business, I felt, Mike, was up -- let's see. Let me just look at the numbers here. I just don't have them here. I'm going to have to look at it -- could you help me?

Basically, as Randy is looking for that, Michael, I think what we have seen in the December quarter is that things really started to -- beginning of the quarter, I think forecasts were actually positive for higher, and then things in the last four weeks really pulled back. Based on our customer input, we basically -- what we're seeing, when you look at it year over year, is a gradual. A lot of our customers are little bit more cautious, I think, in this quarter were being optimistic. So that's what I said earlier. It's a very tough quarter to forecast. But I believe that if -- Sanmina is going to be not more down than the rest of the industry.

So, Michael, I got to -- your point is that our PC business was up 6 percent in the December quarter, and we're saying down 10 to 20 percent going forward. And we agree with that. What I can tell you is that -- it is well-known we have two broad-based customers that are there. We are not losing -- in my opinion, there is not a marketshare shift there. It is reflecting the end-market demands, and we're trying to be conservative there, because we don't want to get there. So we were up 6 percent, and what we're saying is we expect that business to be down 10 to 20 percent going forward.

Okay. And my second question was on the component business. I had really thought that the 2.5 percent gross margin in September would be the bottom. I had understood there was a fair amount of restructuring going on that would help save costs. And clearly, things kept getting worse in December. So I'm wondering if you have the conviction to be able to say that the gross margin of 1.1 percent in components is the bottom, and it will definitely go up from here, because it looks like you are guiding to a pretty substantial drop-off in EBIT margin sequentially, 2.5 to 2.0 in the midpoint. So it doesn't sound like components are really going to help out with the margin front in March. I'm wondering if you could kind of give some more color there.

Well, one thing I can tell you is that we think the 1.1 percent is absolutely the low point. In fact, we really think that number will be up substantially, and I think there is a very good chance it will be up more than it was -- higher than the 2.5 percent number that we had there in March. And we expect to make good sequential improvements in that business throughout the year, to a number that is between 6 and 7 percent by the September quarter here.

Bernie Mahon, Morgan Stanley.

Could you walk through the restructuring benefits, and when you'd expect them to be at kind of full ramp -- the, what was it, 25 to 35, or 35 to 40 million in benefits you expect to receive?

Bernie, as I think I mentioned in my comments, I think at this point in time, and as Randy iterated, I think we have announced eight closures at this point -- or nine closures, of which eight have been completed. And we're anticipating that that $35 to $40 million is going to begin materializing, certainly with those plants. We're seeing benefits if you look at our -- if you look at the first quarter, those restructuring activities from just those plants alone were in excess of 1 cent a share. And we're expecting that number to ratably increase over the next six quarters. So this latest restructuring will probably be about 50, 75 percent done this calendar year, and we would not expect to see the full benefit from all of that until probably about a year from now.

And then, the high-end computing business -- that was down, I believe, sequentially in December. Could you just explain, is there -- I know previously you were working off some old programs that maybe were not priced as well. Or is that more of an end-demand issue? Could you just talk about it? I mean, seasonally it is typically up in the December quarter.

I'll have Randy take this one. Randy?

Yes. So I just want to, again, kind of comment here. The high-end computing business was on the adjusted numbers there that we had has moved from about 16 percent down to 15 percent, for about a point. So it's down; it's clearly down. And there was a program that we have had for some time. It was a program that has been on a long phaseout, disengagement with a customer in this space. And that program is still somewhat negatively impacting us as it winds down. And it used to be a program that pushed $1 billion a year, kind of, annually, and it's a program that is much less than that today. And it is a program that we feel has impacted our top line, hasn't necessarily significantly impacted our bottom line as a result of the profitability that is inherent in there.

And I think your question was, were we impacted somewhat with that program in the December quarter? And the answer is yes.

Could you quantify that at all? And when do you think that this program will be completely kind of off the books?

It's in the range of being down 20 to 30 million a quarter from quarter-over-quarter kind of numbers -- 20 million, let's say. And we think it's about two quarters away from being completely wound down.

Brian White, Kaufman.

I'm wondering if you could talk a little bit deeper into your components business, and some of the trends that you saw. The gross margin drop-off was pretty significant. You already knew the enclosure business had an issue. So how do we really drop from 2.5 to, I think you said, 1.1 percent gross margin in that business?

Well, I can answer that. And that is that we dropped down because our top line dropped there, in my opinion, a fairly significant manner. As I mentioned, we dropped between 8 and 9 percent of revenue. This business is somewhat volume-dependent, and the corresponding bottom line kind of reflected that drop, along with the issues that I mentioned that cost us about 1 cent in our enclosure business that are going to go away.

Now, that probably leads to the second question, why did the top line drop? And an easy answer to that is it dropped as a result of reflecting the trend in our overall business. With that said, I do think we can, we should and we will be doing a better job in the future to grow that (technical difficulty). It's a combination of all these businesses, and for us to be successful in this business, one of two things has got to happen. One is we've got to take a bunch of capacity out so we can make money at the current run rate, or we're going to have to grow the business. And clearly, our goal here is to grow the business forward, and we think we can do that. We think we have some fairly low-hanging fruit internally to grow the business through vertical integration. That vertical integration activities, and my opinion, have been somewhat behind schedule. I'm not happy about it. I don't think management is happy, and we're taking some actions to make some changes. We're taking some actions to accelerate that vertical integration, to grow the top line. And that is why we -- and we feel that the roadmap is there to do it. It's just a question of execution. And we didn't execute as well as we should have last quarter, and we're going to do that better here going forward. That's going to enable us to improve our bottom line here going forward.

I think, with the cost reduction activities we have in mind, even if we don't grow the top line, I think there's some opportunities to -- we will improve the bottom line. I mean, simply, we are costing ourselves once in a quarter from the enclosure issue I mentioned earlier, and that has gone away, and we're taking costs out of the organization. So we are attacking this from both ways, taking costs out and trying to grow the top line there.

And, Brian, just to add to that, I think we're starting to also see, I think, a slow, but the demand is starting to pick up a little bit, both in our boards and enclosure business.

Was the board business profitable in the quarter?

Basically, it lost a few bucks.

At one point, I think you mentioned component business -- hopefully you could grow it 30 percent in 2005.

Right.

-- as you used more internally. That was, I think, the key to it. Do you still think that is achievable?

Well, we definitely believe that the overall component business is going to grow faster than the rest of our industry. At the beginning of the year, we did forecast 30 percent. We're still pushing for it. We started the year a little slower, but I still believe that we will see a nice achievement. I don't know if we're going to get 30, but definitely we're going to see a nice, nice growth -- and most importantly, flexibility. I think we're at the bottom, in taking some of this additional capacity out, mainly in the component side of the business, will help us be immediately a lot more profitable.

David Pescherine, Smith Barney.

Randy, can you talk a little bit about the wireless trends that you saw, or the wireless infrastructure trends that you saw in the December quarter, and just give us a sense as to what maybe you're expecting throughout this year? Might we see some more wireless infrastructure programs hitting in the second half with the 3G transitions?

Well, yes. So wireless is an important area for Sanmina-SCI, and we have many customers that are involved in this area. And we were -- how can I word this? We were a bit disappointed in the overall demand in our communications infrastructure space, but the wireless come closer to hitting what we thought it would be, even though it was a bit soft in the wireline. So I don't want to knock all wireline business, because it was some small pockets there, but generally speaking, wireless was stronger than wireline last quarter. And it's going to play a key part in our growth here going forward.

And a good thing about it, as Randy said, David, is that we really have a strong customer base in that. And so far, every forecast that we have, it's on the positive side for the rest of the year.

On the PC side of the business, I know that the question was asked earlier about IBM-Lenovo, what does that mean for Sanmina? I guess I would like to ask the question a different way, in that can you maybe talk about the potential for Sanmina to actually leverage its bill to order and configure to order capabilities that you have in North America and Western Europe, maybe into Asia, whether it be through Lenovo or other customers there? Is that a possibility?

Definitely, David, that's a possibility. And we can't talk to much details what is going on with our customer, but just assume this relationship is going to happen. I believe opportunity for Sanmina-SCI is to widen the business for what we have today because of Lenovo in Asia, and other parts of the world.

Jim Savage, Wells Fargo.

A couple of questions. First, on the balance sheet, with the convertible debt, you have got about $1 billion in cash. And you have a $600 million cash requirement, right, in a couple of quarters? Is that correct?

That's right.

Do you think that $400 million is enough to run your business, or can you just talk a little bit about the liquidity and where you might be?

Certainly, I think we can run the Company from a liquidity standpoint on less than $1 billion of cash, at least given where the economy is at today and so forth. Growth, obviously, of our business dictates a lot of our working capital requirements and cash requirements.

But if we look at our forecast today, in terms of that convertible note and so forth, we really kind of see three sources available to us to repurchase those or retire them. One is cash that we have on the balance sheet today. Two is cash flow from operations that we expect to generate between now and the end of September. And then, thirdly, the opportunity is always there, should we choose to do so, to go to the capital markets and refinance the debt. So we are really not overly concerned about it, because we feel we have a number of options available to us, and we're certainly looking at them all. We're not eager to jump into something that we don't think will be in the best interest of our shareholders and likewise.

And what do you have available in your working capital line at this point?

The revolving line of credit?

In your revolver, yes.

The revolving line of credit was not put in place, however, to put --

No; I understand that. I do understand that, but it is put in place to finance some of your other requirements.

So the line of credit -- today, there is no amounts outstanding against it. It was initially for $500 million, and it ratchets down to the extent that the Company does not take care of the zeroes.

Okay. And you are not financing any of your receivables at this point?

That's correct.

Is that something that you would also consider doing?

We are actually looking at that, yes.

A couple of other questions. First, you have talked in the past about hoping to bring some of the currently outsourced PCB fab into China, into your new operation there. What is the forecast on that at this point? How are you doing on it?

Jim, let me take that one. And maybe, Randy, you can help me. Basically, what we have been doing this quarter, doing a lot of qualifications. Those qualifications went a little bit slower than what we expected, so we're going to do a lot more this quarter. But as you know, we buy about $300 million worth of boards on a yearly basis right now outside, and we would hope that we can in-source that, at least 50 to 60 percent of it.

And there would be, what, within the next 12 to 18 months?

Yes, I would say next 12 months.

And one last question having to do with the impact of the downsizing on your North American and European component businesses. Is that primarily just a reduction of capacity? Or will you have additional capacity in low-cost geographies, as well, to offset that?

We have plenty of capacity right now in our low-cost regions on certain component business. We just moved it over, and these operations are becoming a lot more efficient. So we are tuning, really, and taking capacity out of North America and Europe. So, as I said earlier, for North America and Europe to become more NPI, quick churn (ph), military type of work. So our printed circuit boards basically in North America will become our technology centers. They will be doing the NPI, quick churn (ph), and really developing new technology. And then when we have one or two factories or full military business which never will move outside North America. And in Europe, a similar type of thing. We will have technology centers where all the production will be done in Eastern Europe and Asia.

And the same thing is true in enclosures?

That's correct. Both of these enclosures, backplane, boards and cables.

And will you be actually moving some of your equipment into your Asian and Eastern European facilities?

Well, definitely, we have a lot of equipment, as David mentioned earlier. We're not going to be spending a lot of money this year for new equipment, not for next couple of years. We have plenty of equipment, and this equipment will be moved as required to other parts of the world.

One last thing -- the cash expense in the restructuring expected?

Roughly 65 to 70 percent of the total.

Matt Sheerin, Thomas Weisel Partners.

If you could just talk about -- you talked about wanting to deemphasize the PC business, but you also have said that you really want to focus on infrastructure. But that's a pretty volatile market, and we're seeing pretty tough visibility there. Are you looking at the industrial side? You have done a lot on the medical side, but what are you doing to increase diversity in that area?

Really, what I am saying is that we really have two major businesses. You have a PC, which is 40 percent of our revenue today, and the rest of it is really the infrastructure product. What we have got to do is really -- three years ago, Sanmina was 85 percent telecommunication company. So basically, in last three years, we refocused the Company to focus on additional markets besides Telecom, which is, of course, medical, industrial, semiconductor, automotive multimedia and high-end computing. And I think we positioned ourselves really well in that area. I think, especially if you look at some of the new programs that we are winning, they have a tremendous potential for growth, as the demand for these products comes in. And the reason this infrastructure product is very important for us, because of our component capabilities -- boards, enclosures, backplanes and so on and so on. I think, on a PC business for us, there is really to focus on -- is to vertically integrate this stuff. We really need to bring in more ODM products on our PC side of the business, so we can improve the margins in that business. So that's really kind of our internal plan what we are working on.

And then, just speaking of outsourcing, the opportunities that you are looking at there -- is that going to be difficult, given that you have got this big restructuring that you are still undertaking?

Well, no. Truly, we are not interested in picking up more factories. We are strictly interested in picking up -- just like the projects that we would tell us (ph). We ran into global -- the business -- we helped them shut their operations. We transferred the business out of the factory, but so I can just assure you we have no appetite for picking up more OEMs, factories. We strictly are interested in organic growth. And we believe that there is plenty of those opportunities out there that Sanmina-SCI is already participating in and looking at right now.

Jesse Pichel, Piper Jaffray.

One bright spot there is your ODM products grew from it looks like about 200 to a $275 million run rate. I'm just wondering what is driving that. Perhaps you won a Newisys customer that you could talk about? And I have a follow-up question.

I think demand for the product in our Newisys project there is being good. I think the most important -- performance of our servers has been outstanding. We have been getting a lot of complements from our customers there. So I would say the quality of the designs is what is helping to drive this business. As you know, we are opening the market here. The market -- especially in Opteron servers -- is very new. So we're testing the market. We have got other products coming out, and to us, from our experience, if you have a good technology out there, people will buy it. And I think that's what's happening with our server product.

Have you picked up any share there, from some of Celestica's customers, since they closed down its initiatives there?

Well, I don't know. I don't have the details that I can say specifically we picked it up because of Celestica shut it down. But I can tell you that we have a very strong demand from our customer, couple -- one strong customer and multiple smaller ones. And we have interest from a couple other major players.

And then one more question, if I could. You mentioned the Nortel effect, the hit, as being 100 million per quarter. How much of that affects components?

Well, a lot of that components business has already been affected in last six months. Yes, so really it's not going to be a major effect going forward. We are still going to continue to do some of the critical stuff that we have always been doing for Nortel, and I believe as Flex buys them out, there are certain opportunities for us to build certain product here for many, many years. We never give up on a customer, and I believe what we offer this customer, specifically Nortel, at least what I see today, we need each other for many years.

So was that initial Nortel components hit covered under your Phase IIIA restructuring?

Could you repeat that question?

I'm just wondering -- the new restructuring charges under Phase III, is that to -- really, what is the delta there? What has really changed in components?

Well, it changed because we're taking out more capacity out from North America and Europe. Basically, we see a demand coming back slower than we expected it. We have got to improve the bottom line. At the same time, we are executing a lot better in our low-cost regions than we anticipated. So it's a combination of two things.

Patrick Parr, UBS.

I realize that the majority of your planned restructurings now are more on the component side, but could you give us a sense of where your utilization rates are now in the assembly business, and where they might be a year from now, after this restructuring and anything else that is going on is completed?

I'm going to break it down to help you out here a little bit. In the low-cost regions, our capacity utilization rates are pretty high. In fact, we're doing some expansion in places like China and places like Mexico here, and we have done some recent expansion in Hungary there. So we're still expanding there. It's not totally complete. And I would say the capacity utilization in those rates there are up in the 85 percent range; they are pretty high. And that's why we have driven that expansion.

You take that out, the rest of our printed circuit board assembly business throughout the world is relatively low. And that's what is driving some of the consolidations that we have had here, of recent, and that number is probably more in the 60 percent range. And you net all of that together, we're probably running a number around the high 60s to touching close to 70 percent in capacity utilization in the EMS space.

The EMS space is, I want to point out -- to an extent is far less of an issue than the components business, especially circuit fabrication and some enclosure business, because it is a lot easier to shift capacity around, and a lot easier to add it, take it down, than it is in the other businesses.

So, Randy, since you're giving out numbers on this, in the components businesses, you cited 55 to 65 percent currently. Again, post restructuring and assuming some incremental growth for the year, where might we be a year from today there?

Well, I think we'll be up, but we will be up in the 5 points range, because -- you know, for that reason. I don't think it's -- Jure mentioned we have a lot of capacity in China, but we're going to be moving some equipment and some machinery over there from some of the other operations we have had here that has been stored that has been closed in years past. And actually, that is going to have the effect of adding some throughput in those plants. So I think, once that movement of that equipment is done, it's actually going to increase our capacity, which will be offset some of the reductions in the increase we have in terms of volume. So that's why I'm saying, if it wasn't for that add, I think it would be up more like 10 percent utilization. But, given that we will probably bring some more capacity online as a result of these equipment moves, and we have the space over there -- so I think the net of it is going to be in the 5 points range, not 10 points.

The reason this is on my mind tonight is that your competitor there, Celestica, announced a pretty substantial additional restructuring to take out capacity and bring utilization rates up, particularly in the high-cost areas. You have been taking charges pretty regularly for a while. Is any thought given -- I'm sure there's plenty of thought given -- but to getting that utilization rate, once and for all, up to a higher level via a pretty substantial reduction in capacity?

I think that's an absolutely great question, and I'll take a second here and comment on this. So, look -- we have a lot of business in low- to medium-volume, high-mix, high-complexity businesses that historically a lot of that business has been done in high-cost regions. As I said before, you have historically built semiconductor capital equipment systems, wireless base stations, cat scans, MRI units and even a lot of the CTO/BTO stuff, that we have done historically that had 48-hour time to market and delivery to the customer, had to be located in regions where -- or was located in regions where this product was consumed.

And our industry and our business at Sanmina-SCI has evolved. It has evolved, and it's changed somewhat. It's changed a lot in the last three or four years. And one of the things that we're able to do -- for example, in Mexico -- is we're able to give the same time-to-market capabilities, in terms of BTO and CTO, that we used to be able to give right here in the US, or were able to give that same -- and we measure that in hours and minutes, not days -- that same kind of delivery from Hungary that we used to do, say, from other parts of Western Europe.

So, because our business is involved, we have got more efficient, we have got more capabilities, we're able to do that better, we're able to do it for lower cost, including logistics, it has meant that this capacity and the fact that, if you go back to 1999 and 2000, and you look at the demand for these products, and we had -- our factories were bulging, our leadtimes were way out, we couldn't hardly produce any more, and the fact that our customer base really thought that, although it's not going to get to those levels -- don't take all this capacity out, they are telling us, because we're still going to need some of that in the future. The bottom line there is that this has been a bit of a moving target.

Now, Monday morning quarterback -- had we known what we know today in 2001, the answer would have been yes, we should have just -- clearly, we had a lot of issue, and we should have taken care of it sooner. And I accept that criticism. I think that's fair. But it's not like we didn't have a rationale for as slow as we have moved here, and that rationale was I don't want to take these kind of products offshore. I want them built here. They used to be built here. And I think because we have gotten better at what we have done in low-cost regions, and we can build the highest technology products that we build in this company today can be built in China, can be built in Singapore, can be built in Guadalajara or Tada Bana (ph) -- then I think as our customers have become more customer with that, and they see that capabilities, then it's clear now they are comfortable that you reduce some of this capacity in these regions. But we could not have done that two and three years ago, because they wasn't comfortable with that moves, but they are absolutely comfortable with those moves. So therefore, it has been a bit of a moving target, and that's why, when we had a Phase I and a Phase II, and we said, look, we're going to need a Phase III. And just today, we says, you know, we are probably going to need to increase this a bit, because we are getting better at doing this. And there's also -- it's part of the industry and part of the business. It's not just us. I didn't listen to Celestica today, but it's not something unique to Sanmina-SCI. It's what is going on. We're reacting to that, and we are dealing with some of those issues that's out there.

So I hope I answered your question there. It really has more to do with how the industry has evolved than anything us.

From where you sit today, do you think there will be a Phase IV?

You know, where I sit today, the answer would be no, or I would tell you, and I would have increased Phase III to take into consideration that. So the answer is no.

Operator, we have time for a couple more questions.

Dave Miller, Tradition.

Just going back to you were saying qualification is taking a little bit slower, and just weakness overall in that area. Are you finding customers a little more reticent to embracing your vertical offering? Or is it just the fact that you feel you are less price-competitive than you could be, and that is the reason why you are accelerating the moves to lower-cost locations?

Well, first of all, I think our vertical model is being accepted. This company was always based from day one, Dave, on a vertical model from ground zero. And I think in projects that we are involved from end to end, we deliver, overall, a lot better solution to our customer and a lot more flexibility. I think what is going on right now in Asia, as we are trying to move the product that we buy from outside suppliers to internal, it's taking a little bit more time because demand for some of these products is not there. At the same time, I think these qualification were a little bit more on our side, were not produced as fast as they needed to be. So it's really more our internal issue than is it from a customer side or the pricing side.

I want to put that kind of in my words here real quick, David, and saying the same thing. It's that, look, the process it goes through is pretty simple. We have to get the CAD file, we have to get it to our PCB fabrication plants. They have to build first articles or prototypes. We have to get those units. We have to get them to the customer so they can run through the qual process. And they are all agreed to do that. They are going to do it. And it's getting that particular process, and getting a green light after it goes through that process, what Jure is talking about, that that timeframe can range from as short as a few weeks to as long as a couple of months. And we have to be better, faster, at getting that stuff done. And that's where I think, what I mentioned execution, that's what I'm talking about. So it's not a pricing issue. It's not a question of having capabilities of doing it. It's strictly, we have to get that qualifications done internally and to our customers on a faster rate.

And then, Jure, just a qualification on a comment you made earlier in the Q&A session, about expanding ODM capabilities into your PC area. Are you just strictly talking about your servers, still, or are you talking about pushing down into the desktop and the laptop space, which is quite competitive today?

Well, what we're doing right now, definitely on a server side of the business, we are developing ODM strategy on a whole product line. On a pure PC side, we need to vertically integrate that more than what we are today. And it's not necessarily that we are looking, building just the motherboard, but there is vertical integration when it comes to enclosures, plastics, some of the (indiscernible) boards that are built for that, and so on and so on. So I'm not talking 100 percent, but we definitely need to vertically integrate that more than what we are today to improve the margins up.

A question, one more question.

Mike Coupland, CIBC.

It's Todd Coupland. I haven't changed my name that I know of.

A couple questions. Could you just tell us what your December expectations were for the components business versus the 461 that you reported, and then where do you think it's going to be in March?

Yes, I can answer that. So we expect that our components (inaudible) to grow in line with what we expected the rest of the business. So, if you look at the -- we were roughly 3.3 billion. We guided 3.3 to 3.5. It's the midpoint, 3.4. So we expected, you know, (inaudible) 3.3 is. And we expected it to grow at that kind or percentage rate here going forward. So it had been in the neighborhood of 515, kind of, 520 kind of million dollars instead of the number that we had, which was roughly $461 million.

In the March quarter, we expect the business will decline slightly in terms of topline but, because the enclosure issues that we mentioned earlier will go away, and because we expect some lower costs as a result of some of the activities that have taken place in December will be reflected in the month of -- in the quarter of March, we expect the operating margins in that business will be -- this is not guidance, per se, so I don't want you to take it that way. I'm just trying to answer your question here -- somewhere between 2.5, 3 points of gross margin.

And just from an end-market perspective, we saw a couple of the other EMS companies report pretty decent telecom sequential improvement. You were flat, you are guiding down. If you were to exclude the loss of the Nortel business, is the rest of the telecom business rising within Sanmina, and that's being masked by the Nortel transfer?

Yes. I would say, definitely, we are losing some Nortel business. So I would say rest of the business is very strong. We are not losing any of that business. It's just the nature of the programs that we are in, more than anything else, Todd. And I think we have got some great programs to grow in the rest of the year, especially in our wireless side of the business.

I think, though, that specifically, Todd, it would not have been a decline in the business, in absolute dollars.

Well, ladies and gentlemen, that's all we have for you today. First of all, I want to thank you for your support. I think one comment that I'll make, we are still excited what's in front of us. I think that last quarter, as I mentioned earlier, was less than what we expected it. But looking the long term at what our customers are forecasting, I believe that Sanmina will grow nicely in 2005, and that is our promise to you. So thanks for your support.

That concludes this evening's Sanmina-SCI first-quarter earnings conference call. You may now disconnect.