Sanmina Corp (SANM) 2005 Q2 法說會逐字稿

Good afternoon, my name is Miles, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Sanmina-SCI Second 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 call over to Mr. Jure Sola, Chairman and CEO. Mr. Sola, you may begin your conference. Thanks, Miles.

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

Good afternoon.

And also David White, our Chief Financial Officer.

Good afternoon.

I would like to start by thanking all of you for being here today. An agenda is that David White will review financial results for the second quarter of fiscal year 2005, Randy Furr will review operations and our future outlook, then I will follow with additional comments related 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 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 viewing 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'll make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution that you such statements are just projections. The Company's actual results of operations may differ significantly as a result of various factors including economic conditions in the electronics industry, changes in customer requirement and sales volume, competition, and technological change. We're 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 2nd, 2004 filed on December 29, 2004 as well as our most recent report on Form 10-Q, filed on February 10, 2005. 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'll refer to certain non-GAAP financial information. The corresponding GAAP financial information and a reconciliation from non-GAAP to GAAP of such information, are contain in our quarterly press releases which are also available on the Investor Relations section of our website.

You'll note from the press release that we have provided you with a statement of operations for the three and six months ended April 2, 2005 on a GAAP basis. As well as a reconciliation between GAAP and the non-GAAP information that is 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 the 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 third-quarter of fiscal 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 comparisons with prior periods. Accordingly unless otherwise stated in this conference when we refer to operating income, operating margin, net income and earnings-per-share, we're referring to our non-GAAP information.

Slide 3. Sales for the second quarter of fiscal 2005 were $2.9 billion. This is essentially flat with sales reported in the same quarter last year and is a decrease of 11.3% versus our prior quarter.

Slide 4. Our top 10 customers accounted for 66% of total sales this quarters versus 69% the same quarter a year ago and 69% for the prior year. Sales to our top 20 customers accounted to about 81% of total sales. We had one customer in the second quarter whose sales were greater than 10% of total sales. Third-party sales by our component operations which includes PCV fabrication, enclosures, memory solutions, back plains, machining and cables, amounted to $379 million, or approximately 13% of total net sales. Third-party sales from our personal business computing sector amounted to $962 million or approximately one third of our total net sales. Assembly and other EMS sales amounted to about $1.5 billion or 54%.

Slide 5. Gross profit for the quarter was $150.2 million reflecting roughly a 3.5% improvement over the same quarter a year ago and a decrease of 15.1% over the prior quarter. As a percentage of sales for the second quarter, gross profit was 5.2%. This was up 14 basis points from 5.1% reported in the same period a year ago and represents a decrease over the prior quarter's 5.4%.

While gross margins decreased quarter-over-quarter, gross margins for our components business improved to 3.1% from 1.1% reported from the prior quarter.

Selling, general and administrative expenses for the second quarter were $87.1 million ,which on an absolute dollar basis was essentially flat with the prior quarter. SG&A expenses as a percentage of sales were 3.0% for the quarter, which was an increase over the prior quarter due to the lower revenues experienced this quarter. Research & Development costs amounted to $7.3 million bringing our total R&D and SG&A expenses to $94.4 million or 3.3% of sales.

Depreciation was $45.4 million for the second quarter. Capital expenditures spending in the quarter was approximately $16.4 million. The capital spending was primarily related to equipment purchases for new programs and the continuation of our expansion in low cost regions, primarily in China where we are fitting up an enclosure facility, and enhancing the manufacturing equipment capabilities of our Pentax-Schweizer PCB facility, and in Hungary where we're expanding our enclosure, personal business computing, and general EMS capabilities. We expect CapEx for the total year to be in the range of 60 to $70 million.

Operating income was $55.8 million for the quarter. Operating margins for the second quarter was 1.9% versus 2.5% in the prior quarter and 2.0% in the same period of the prior fiscal year.

EBITDA was $101.2 million for the quarter. Other expense net, which consists primarily of interest expense and income as well as gains and losses from foreign currency translation was $26.2 million. Of this amount $2.2 million related to the recent $400 million high yielding offering that we completed in February.

Our tax provision for the quarter was only 1% primarily as a result of a recent reorganization of one of our international operations, coupled with further transitions of our manufacturing from high cost high tax jurisdictions to low cost low tax jurisdictions. This reorganization resulted in two benefits. First of all, we trued up our year-to-date tax provision based on our anticipated consolidated tax rate for the year, which resulted in a $5.9 million benefit. More importantly, however, the second benefit of the change is is that we expect our tax rate to be in the range of 19% respectively.

As all of you're ware over the last three years we've engaged in significant restructuring activities associated in large part with our operations in the United States and some the other high cost countries in which we operate. As a result of these restructuring we have incurred losses in the U.S. and continue to incur losses in the U.S. In accordance with FAS 109, accounting for income taxes, we are required to perform analysis of the likelihood of the realization of our net deferred tax assets, considering both positive and negative evidence. We have regularly performed a FAS 109 analysis on a quarterly basis, taking into consideration both our historical financial results as well as our financial projections.

As a result of some of the recent repeat structuring decisions we announce inside our December quarter conference call, we've concluded at this time at that time more likely than not that we'll realize our U.S. tax deferred tax assets, and have, as such, recorded a non-cash valuation allowance against those assets in the current periods of 379s million. This charge is consistent with the requirements of FAS 109 and, as a result, of this action our net deferred tax assets as of the end of the quarter were $37 million. I'd like to point out that a number of companies in the electronics industry, including many of our competitors have recorded similar valuation allowances against their U.S. deferred taxes in the last few years.

On a somewhat related subject we have would reporting unions under which we report our financial results. A U.S. reporting unit and a foreign reporting unit. Pursuant to FAS 142, companies are required to test the fair value of the non-amortizing intangible assets of their reporting units, at least annually to determine whether or not an impairment of those assets has occurred. We normally conduct this test in our fourth quarter. In connection with the evaluation of our U.S. deferred tax assets and recognizing the recent declines we've seen in the market capitalization of the Company we also determined that a review of the fair value of these reporting units should be conducted simultaneously. This analysis, which was conducted by an independence valuation firm, concluded that a write-down in the carrying value of certain long-lived assets and our goodwill was warranted. Accordingly, we recorded a non-cash write-down of $600 million in the quarter.

I'd like to make mention of the fact that the write-downs just discussed, the deferred tax assets, the goodwill and other long lived assets will not have any bearing on our debt covenant compliance. We have been at all times and continue to be in compliance all debt covenants as of the end of March quarter.

Net income for the quarter was $29.3 million. Basic and diluted shares for the quarter were 520 million shares and 523 million shares respectively. Diluted EPS for the quarter was $0.06.

Slide 6. Turning to the balance sheet, cash and short-term investments were approximately $1.2 billion which is up approximately $120 million over the prior quarter. Of this amount, $100 million resulted from the sale of certain customer receivables to a third party financial institution. We expect this to be an ongoing source of liquidity of the Company.

Accounts receivable at the end of the quarter were $1.6 billion resulting in DSO of 53. The increase in this metrics in the drop of revenues quarter-over-quarter, as this metric is calculated on the average of the quarter's opening and closing accounts receivable balances. The aging of our receivables continue to be strong with approximately 90% of our total balance being current and with 97% being current or less than 30 days past due.

Inventories at the end of the quarter were $962 million with our inventory turning at an annual rate of 11.4 times, which is a decrease of the prior quarter's 12.3 turns. This decrease was entirely the result of lower quarter-over-quarter revenues. On an absolute dollar basis, inventory decreased $41 million quarter-over-quarter. Inventory decreased -- this $41 million decrease was the result of continue focus on our inventory attempt and substantially all of the decrease was in raw materials.

Accounts payable at end of the quarter were $1.5 billion resulting in AP days of 50. This is an increase of two days over the prior quarter, and as we previously indicated, improving this metrics continues to be one of our focus areas this fiscal year. Our cash cycle days for the quarter was 35, which was up from the prior quarter's 30 days. Our working capital is $1.7 billion at end of the quarter.

Slide 7. Cash flow from operations was a source of $122 million during the quarter. Free cash flow for the quarter which deducts CapEx from our cash flow from operations, was also a source of approximately $105 million.

Let me now turn to restructuring. During the March quarter, we incurred approximately $57.6 million in restructuring costs, 52.6 million of which cash. Costs incurred under our Phase 2 restructuring were $1.8 million, and cost incurred under our Phase 3 restructuring plan initially announced in July of 2004, accounted for $55.8 million of costs. We completed substantially all of the restructuring actions at all of the facilities contemplated in the Phase 2 plan as of the end of our fiscal 2004.

The Phase 2 costs incurred in our second fiscal quarter consisted only of revisions, and the estimated selling prices for those Phase 2 properties still held for sale as a result of newly market data. During the March quarter we incurred $55.8 million of restructuring cost related primarily to the closure of three plants as well as headcount reductions at a number of facilities pursuant to our Phase 3 restructuring plan.

We are firm in our belief that the total benefits from Phase 3 to the to be range of 35 to $40 million per quarter. This represents a one year pay back. We expect to complete 50 to 75% of our Phase 3 restructuring activities during fiscal 2005, with the balance to be completed in the first half of 2006.

Slide 8. Now let me turn to guidance for the third quarter of fiscal 2005. Consistent with our practice in the past, the information I provide will generally exclude repeat structuring and integration costs, impairment charges other infrequent or unusual items as well as non-cash interest and amortization expense. We are targeting sales to be between 2.8 and $3 billion, an approximately 3% reduction from the prior quarter at the low end and about a 4% increase at the high end. Notwithstanding reduced sales, we expect gross margins to be up quarter after quarter as a result in improvements in our components businesses and our targeting between 5.6 and 5.8%. We are targeting our operating margin to be around 2.1 to 2.5%.

Net other expense is expected to be approximately $30 million. This is up $4 million quarter-over-quarter as a result of the recent $400 million high yield offering we completed in the second quarter.

While our tax rate is heavily influenced by the profitability of each jurisdiction which we operate we would expect our tax rate to be in the range of 19%, consistent with the second quarter. Basic shares for Q3 '05 are expected to be in the $522 million range and diluted shares are targeted around 523 million. This equates to a diluted, non-[ECAP] EPS range of $0.05 to $0.07 per share. We are forecasting positive cash flow from operations at both the low and high ends of our guidance for this quarter. We estimate the depreciation for Q3 '05 will be approximately flat to Q2 '05 and quarter to CapEx spending to be in the range of 15 to $20 million.

In conclusion, we continue to focus on a substantial of our efforts on improving profitability and working capital management. We've 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'll turn the time over to Randy.

Thanks, David. So as you can see from our Q2' 05 earnings release and as David mentioned in his comments, the March quarter came in with a top line of $2.89 billion and non-GAAP net income of $29.3 million. This gave us a non-GAAP EPS of $0.06. Both our top and bottom line were within our guidance. As David did mention, this includes a one-time income tax benefit as a catch-up effect of having lower tax rate for the full year.

As usual I'd like to start with a few minutes on our top line, and again as you can see, the $2.89 billion. This equates to just under a 1% year-over-year growth and a sequential decline of 11.3%. This placed us toward the bottom end of our guidance provided during last year's earnings conference call, which was a $2.85 billion guidance number. As such, on the surface this does not look like a particularly strong top line quarter, however, you will see as I drill down on the numbers that there were several positive aspects coming out of the results and I'd characterize the mix as favorable, given that our personal and business computing sector posted a significantly softer quarter.

Now for more granularity on the top line. As illustrated on Slide 9 the communications infrastructure market sector was up 2 points on a percentage of total Company sales basis for the March quarter to 30%. In dollar terms this sector was sequentially lower. Nothing unusual here as hard is traditionally a seasonally slow quarter for this business and this sector was within guidance provided during last quarter's earnings announcement. I would like to point out, however, that even though our total sales were relatively flat year-over-year, our communications infrastructure business was up almost 14% on a year-over-year basis.

Enterprise computing and storage was up 1 point to 16% of total sales for Q2 '05. [INAUDIBLE] revenue in March was essentially flat with December, however, we do expect the Odium part of this sector's sales to be up over 20% for the June quarter. Also I might add that this sector was within the guidance provided to you during last quarter's call.

Industrial medical instrumentation and defense/aerospace was up 1 point as well coming in at 11% of total sales for the quarter. Again, this sector includes four broad based subsectors, automotive, medical instrumentation, defense and aerospace, and our industrial, or semi-conductor capital equipment group. The strength here was primarily from had your medical systems and automotive groups. I would add that our defense and aerospace business was up as well. The net of this sector was slightly over the top end of the guidance provided to you during last quarter's call.

Multimedia was up significantly and easily exceeded our up 20% guidance. This sector was up 29% quarter over quarter, up 3 points to 10% for the March quarter. Strength here came from both the strong demand from our largest customer as well as some nice new wins for the multimedia space.

Our final sector is our personal and business computing sector. As mentioned earlier this business was up more than the guidance, this quarter ending up a sequential decline of about 27%. The decline was spread across both of our two major customers and this sector represented about 33% for the quarter down about 7 points over the prior quarter.

So in summary, we view the quarter overall as positive. When you carve out both the components and the personal and business computing business, you're left with what we call core EMS. Normally, and due to seasonality you would expect this business to be down anywhere from 5% to 10%. However, this quarter, its total revenue was relatively flat a trend we view as very positive. Secondly, the same was also true for our components operations into March as the revenues were within 1% of the December sales figures.

I'll talk more on the components in a couple of minutes. Now I'd like to turn the discussion to some comments relative what we're seeing in the short term in our primaries markets, and I'd like to start again with communications infrastructure. We remain encouraged with what we're seeing in this sector, again, both in the short term and from a longer term perspective. This is driven by multiservice edge routing platforms and various wireless platforms both in the U.S. and Europe.

For upcoming third quarter we expect this sector to be north up approximately 5% range. For Q3 we expect our enterprise computing and storage sector to be in a bit of a transition. We still have a relatively small amount of legacy lower end storage business being manufactured in Asia that we are transitioning out. However, as stated, above we do expect to increase traction in our ODM division, where our ODM effort, [INAUDIBLE] expect this business to be in the flat to down 5% range, however, expect the mix and corresponding margins to improve here.

For industrial, medical instrumentation, defense/aerospace sector, we anticipate that this business will be mixed in Q3. We expect to see our defense and aerospace and the automotive part of this up. The medical systems subsector relatively flat, and the industrial again primarily semi-conductor capital equipment to be down. This, of course, reflects the overall industry trends we're seeing for semi cap equipment. In summary driven by the weakness in this Industrial group we expect this sector to be in the flat to down 10% range for the June quarter.

For the last few quarters our multimedia sector business has certainly proven to be on a roller coaster. The December quarter saw this business down 25%. However, in March it jumped back to almost 30%. Now we expect this business to be down a bit as the systems we shipped in the March quarter get fully deployed by our customers. Although it's a bit difficult to predict, to be conservative, we expect this business to be in the down 15 to 25% range. With that said we believe this business will again bounce back nicely in the September quarter.

Finally, our personal and business computing sector for Q3, we expect this business again to be a bit of a question mark. As I stated earlier we were a bit surprised at just how soft of the business was in the March quarter. As all of you know, one of our customers is going through a transition at this time and as previously mentioned we did view March as a traditionally seasonably slow quarter and our view of June as it will be up. How much though is still a question but we certainly believe it'll be up. For forecasting purposes we're planning on the business to be in the up approximately 5% range, once again as reminder almost a 100% of our personal and business computers and again I'm including our volume industry standard servers in this category are commercial and for the business sector as opposed to a consumer.

I would like to make some comments now on our component operations. Again components, that being PCB fabrication, back plane assembly, enclosure systems, plastic injection molding, precision machining, cable assembly and our memory solutions divisions. To start off with, I do want to say that I want to carve out certain interdivision transactions from our components operations to provide you with what I think as better overall picture of component sales. As such I want to restate the Q1 components total sales figure I provided in January to make it more of an apples-to-apples comparison. Now, again, third-party sales did not change. Only what I want to classify certain inter-Company and that really only changed a couple of points, a couple percent here.

For Q2 components revenue included our intercompany revenue and this is total including intercompany was $450 million. This consists of 379 million third-party and $71 million intercompany. Now this compares to a total revenue figure of $453 million at our December quarter, which is broken down by $383 million third-party and $70 million intercompany. So the good news is that even though our components revenue was relatively flat, the gross margin for the components was up from 1.1% in Q1 to 3.1% in Q2. Our goal for Q3 will be in excess of 5%. Capacity utilization remains between 55 and 60% across our component operations.

Now I'd like to shift the discussion to margins. First off, I provided you with a component margins and that was 3.1% as I just earlier indicated there for Q2. As discussed in prior calls, our components business is volume sensitive and the business does carry significant leverage. Let me also add that our personal and business commuting business margins fell for the first time below 2% coming in at 1.8%. When you do the math, you'll see that our core EMS business posted a gross-profit margin of 7.5%. The message here is you can see we why we place emphasis of growing our core EMS and components businesses.

Now I'd like to expenses a few minutes on some of the positive things that I view coming out of the quarter. As stated earlier, both our revenue from our core EMS operations as well as our component operations, or put another way our total business less our personal and computing business sector, was essentially flat in what traditionally has been a down quarter. Moreover we saw margins improve within our components division.

As David mentioned in his guidance for the third quarter, we expect to see quarter-over-quarter improvements in gross margins in Q3 up from 5.2% in Q1 to window of 5.6 to 5.8% in Q3. This is a very meaningful improvement for us considering that revenue will be basically flat quarters over quarter and the mix will not change significantly.

Cash flow from operations was $122 million which was up $70 million over Q1. And we believe we still have some tunes to squeeze more cash out of the operations as a result of working capital asset management. We continue to make progress on the ODM, front earlier this month we announced our new NAS or network attached storage solution. This system simplifies storage management for small business homes and certain media centers. This was collaborative with Intel and Bell Microproducts. This program should provide us with some nice growth starting in the September quarter and further demonstrates our commitment to providing our customers with cost-effective ODM solutions. In addition we expect to make additional ODM announcements through the 2005.

I'd like to give you a quick update on what you're seeing in our supply chain. Generally speaking, we're seeing flat lead times in pricing, according to very few issues, we don't expect to see any short term issues with respect to supply and Interconnect, Discreet, Basics, PCB's and RF devices. In this next next group of commodities we're seeing price trending downward, and that group being passives, memory, crystals, fans, magnetics, power, filters, storage, optics and steel. In the final group we're viewing somewhat cautiously as we're seeing some price creases that group being linear logic switches fuses, battery, wire and cable. Some medical fabrication, base materials copper aluminum, chemicals and some plastic resins. So with that I'd like to say thank you. And I'd like to turn it back to Jure.

Thank you, Randy. Now ladies and gentlemen let me tell you a little bit about market conditions. As we review our second quarter operating results, we have met our guidance as you can see, but as we analyzed these numbers for a second quarter we grouped the business in a three groups as Randy talk about. Core EMS, component business, and personal computing. What we saw here, some positive development during the quarter, is that our core EMS and component business actually are trending in the right direction.

Our market conditions also are still challenging but are predictable. As we look back on our first half of fiscal year 2005, we grew approximately 5%, compared to the first half of 2004. And as we look at the rest of the fiscal year and calendar year 2005, our data shows we should continue to experience a single digit growth and all this growth is organic.

Based on our input from had your customers, our business mix should continue to advance to more traditional higher end products. We will continue to enhance this mix which will help us improve our margins. We continue to see some positive trends in a pipeline for new organic opportunities, especially in following key markets: communication, high end computing, automotive, medical, industrial, defense and aerospace.

During the quarter we earned new businesses and expanded programs with existing customers. We definitely believe we are getting our share of new business where we are continuing to invest in a business development and offering technology solutions for our customers. Our leading technologies, ODM projects and vertical model will continue to help us renew programs. We also currently predicting bookings for the rest of the calendar year 2005 will continue to improve.

Now let me share with you some of our financial goals. We expect our operating margin to continue improve as we optimize manufacturing operations and improve our mix of business. As previously mentioned, we expect our top line in June quarter to be in the range of 280 and $3 billion and the bottom line $0.05 to$0.07 non-GAAP EPS, but as we said predicting, the future is always challenging, and the goal for June quarter is to improve margins up to half a percent. And our objective here is to stay on a track with positive margin improvements quarter after quarter.

In beginning of the year, 2005, we will outline our financial goals for you. Short-term operating margin goal was 4% or better. With short-term defined as a four to six quarters out. And long term operating margin goal was greater than 6%. Long term defined as two, three years out. We did anticipate that the economy would be stronger. And these margins were projected and we had a potential to exit this December 2005 quarter around 4% operating margin. In a view of our recent market conditions and forecasts, more realistic goal is to exit this December quarter with operating margin of 3-plus percent. We still remain committed to reaching our long-term goal of operating margin goal of 6-plus percent.

In summary, we will continue to diversify our customer base and market we serve. The outlook for our customer base in calendar year 2005 shows continued and gradual improvements. We do expect a mix of business to continue to improve. And we do anticipate significant margin improvements in our component business for the rest of the calendar year 2005.

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 I would like to answer any questions that you might have. Thank you for your time.

[OPERATOR INSTRUCTIONS] And your first comes from the line of Scott Craig.

Good afternoon, guys.

Hi, Scott.

Hi, just a couple quick questions here. First of all, Randy in the PC business, can you discuss the differing trends between, say the desktop PCs and the industry standard servers. And secondly, with regards to capacity utilization, can you give us an update there on how you see that playing out with the restructuring happening both for the quarter that we just completed and for the June quarter also? Thanks.

Yes, Scott. The industry standard server for us was clearly stronger both -- well, it was clearly stronger both as a result of internal ODM initiatives and as well as the industry standard servers that we do for -- is well-known for our biggest customer here, so that particular part of the business was stronger than the PC business. We don't break that down in terms of how much -- you know, personal business computing we break it down, you know, that's as far as we're going to break it down. I certainly can tell you that the ISS group was stronger than the PC. As far as capacity utilization, and your question was overall and not just the components? Or Q2 compared to --

For starters just what it was this quarter maybe you can break it down in, you know, a couple of different ways, components, geographical, something like to give us a better flavor of what's going on and how you think that plays out in the next quarter.

From a geography point of view, clearly places like Asia, China, Mexico, and Hungary utilizing much higher, the capacity utilization is much higher than it is in western Europe and North America. And, you know, it varies from probably a low of 60% to a high of 85% in those geographies I give you depending upon whether it's a closure or bare board or, you know, a personal business computing or something like that. So the net of that is we kind of view capacity utilization in the low cost regions to be in a range of about 70% on an average overall.

In terms of North America and Western Europe that number would be a number closer to 40% capacity utilization in those regions to get you maybe 42. It's north of 40 but less than 45 to get you into an overall capacity utilization figure of about 55%.

And, you know, we have more capacity because it's more difficult to take out an add today. We have somewhat higher capacity available or under utilized capacity in our components business than we do in our EMS business. It's much easier to throttle that capacity there.

Thanks.

Thanks, Scott.

Your next question comes from the line of Matt Sheerin and your line is open.

Yes, thank you.

Hello, Matt.

I'd just like to ask Jure about your trends in the quarter. back in early March at your Guadalajara facility management talked about the quarter trending pretty well, in fact, better than previous expectations and then you come in at the low end of your revenue guidance and without the tax break at los ends of EPS so trying to figure out what happened. It looked like the computer business really fell off and so if you can talk about that. And also just talk about your relationship with IBM in La Nova, what's happening in terms of contracts because you're now characterizing that business as a non-core business. But it's still 30% of your overall revenues, so I'm trying to figure out what your long-term plans are for that PC business.

Great question. First of all, on our core EMS and components, make sure you understand what we mean by core is really traditional EMS stuff that Sanmina always focused on a high end, higher mix of very difficult products, and our components business when we started the quarter things didn't look as bright. As we got into that quarter that business started to improve.

One area that was disappointing as Randy mentioned, our PC business came in at a low lower percentage than we expected it. So a lot of shipments really, if you understand our PC business, really happens in the last five, 10 days of the quarter. That's really what happened in the quarter.

But overall I want to say that our core EMS business continued to improve and that really helped us deliver the $0.05 we're talking about. And most importantly the nice improvements in margins in our component business and, as I mentioned, we expect that to improve.

The second question regarding La Nova and IBM. That relationship is solid, we did meet La Nova multiple times at all levels of the management. We believe that will deal is going to happen and really expect no changes.

And are you doing anything just at the lower revenue level here in that business just to improve margins whether it be additional restructuring maybe walking away from certain types of business there?

Well, we kind -- let me turn this a different way. We expect our PC business to hold percentage-wise, or let's say flat in absolute dollars but we actually want to grow our other businesses at a higher percentage which I think that's going to happen. But the key here to the PC, you know, to improve the margin here, we have to vertically integrate this business more, and we're look at different options how do we vertically integrate. Maybe we partner with other companies out there that can add some value and so on to make it more valuable to us.

Okay. I want to add, Matt, I think this is important. When we use the term core EMS business we didn't mean to indicate our components business and/or our PC -- our personal and business computing sector was not an important business to us. We just found that as a way to define, to provide you with a little bit better information out there to understand what's happening with our various businesses. So we broke them apart because as you can see, you know, we got some improvement to make there, but other than the percentage business computing other and other than it's components business we've 7 1/2 point gross margin there on everything else and that's big chunk of business for us. In fact, it's singally the biggest chunk. We think there's some improvement there. We still think we can get some improvement on the personal business computing. Although it has very high asset velocity, it's still turning a return on invested capital between 17 1/2 and 23% with the assets we have deployed there, and we think there's a lot of leverage in our components businesses as we continue drive up. I think if we can hit 5 points gross margin here in the June quarter I think we're on track to get that to close of a double-digit by the time we exit the year.

Definitely.

Thanks very much.

Thanks, Matt.

Your next comes from the line of Lou Miscioscia.

Hello, Lou.

Hi, guys. I was wondering if you could sheds some light, I know that when you talked about core and the PC business and the PC business hurt you, but it definitely seems like there's a lot less programs flowing into EMS, and obviously it's not just early in your numbers, Selestia from a revenue standpoint, Selectron from a revenue standpoint, both had, you know, similar times of to top lines. Is there a big pipeline coming or is it just a big slow-down in some of the new growth areas like medical, auto, aerospace, industrial just need to really hit higher levels and that he is not happening yet?

First of all, Lou, from a business point of view, as we go out there and look at our customer base and I personally spend a lot of time over there including Randy, with our customers and what we've seen out there as I said earlier, that the business, the traditional EMS and our component business we believe that you know we're winning the market share and I think that part of the business is coming back. It's coming at the slower rate than we like it to be but definitely we expect a nice growth to continue. As I said it's more predictable.

I think if you look at our numbers for us to throw some big numbers immediately in the top line, it's really been an affected more by the PC than with our other business. But going forward, we believe that there's a programs that we are working on that will help us continue to grow that business the next 12 months.

Okay. And then I think, did you give the gross margins for the PC area at 1.8% this past quarter.

That's correct.

Can you give us the prior quarter?

It was about 2.1.

And then when you defined core, was it basically everything other than the PC business?

Everything other than the PC and the components.

And components.

That's correct.

So again, I just want to emphasize, it's just a way of providing you with a understanding of how we kind of view the business. We have a components business that we're trying to drive and has a lot of leverage, we have a personal business computing sector that gives us a lot of asset velocity and low margin, but return on invested capital is respectable there, and then that gives you everything else, and we're trying to help understand how we break our business down a little bit better. And Lou, just to add to that really the purpose is so you understand what our focus is. Our focus is to improve the margins, because we believe even with the slight growth in some of our key businesses we can have a nice margin improvement and I think that's the name of the game that at least for us for next two, three-quarters.

Final question is that getting a little bit more to vertical orientation with the PC business, obviously you had it for a while now have. Any big stumbling blocks? Do you think you're going to overcome them soon?

Think if you look at our server business, I think we're on the right track there. We've got great offering, we have ODM model there, and we're well positioned on that business because we come in with additional products and I think ODM part of the business will help us grow that side. And on a pure PC business itself, as I mentioned earlier, I think we're looking with some companies out there to partner, to get more involved in our ODM side of the business so we can vertically integrate that and make that business, more valuable, you know, in other words that we can be more profitable and offer more technology to our customers than what we offer today. Only way you can drive the margins up is offer more value to your customers and that he is really with a what we're working on with a couple quarters in.

Thank you.

We're not ready to talk about it at this time.

Okay. Thank you.

Your next question comes from the line of Michael Walker.

Thanks. Good evening.

Hello, Michael.

Hi, I wonder if you can dive a little bit into the component margins expanding from 1.1 to 3.1, how much of that is restructuring recommended, ie. cost savings, and how much is that improvement in the pricing environment. I'm particularly interested in the printed circuit board side of the business. Did you see any improvements in the business itself over the course of the quarter?

Go ahead, Randy.

Yeah, so Michael, I'd say I don't have the figures right in front of me but I'd say a substantial part of the improvement probably, north of 50% here, was just a result of costs continuing to come out of our components. We've announced, you know, some operations that are being closed as parts of our components business. And we're in the process of going through that, those closures now, and we're getting some benefits as a result of that.

The pricing in my opinion, and the bare board business was flat with the quarter before. We didn't see a lot of pricing improvement nor did we see it go the other way there. And -- but we did believe that we've got additional efficiencies out of out of of this business as well.

I also want to points out that I highlighted two quarters ago that we had a problem in our enclosure operation that was going to carry over to the December quarter, and I indicated in last conference call that that was behind us, so that's one of the things that also helped the improvement here going forward in that business. We still have similar kind of activities planned for improvement in this business here going forward, and also we're now gaining traction on our vertical innovation initiatives. And we're starting to see that show up toward the end of the March quarter and into this quarter and when I cite figures next quarter for how much of our revenue is third party and how much is intercompany, you're going to see the intercompany is going to jump significantly higher.

So part of the reason that's behind the comfort that we have here that we'll be -- have a goal of a 5% margin we think it's attainable because we think especially in the printed circuit board fabrication business that the intercompany revenues are going to be up as well as total revenues for that business.

Okay. Thanks. And my second question's on the SG&A line. You touched on this a little bit toward the beginning of the call, and I might have missed everything you said, but you did see SG&A plus R&D pick up the highest percentage of revenues that it's been in, looks like in four years. Has there been a new investment that's taken place and how do you expect the leverage that's apparent in that business to work out over the next, two to four quarters let's say. Do you expect that percentage to come down dramatically.

Just a couple commence it was relates to that. There's two kind of things at least in the second quarter that impacted it, On was obviously, revenues were down so a percentage basis, that drives that up.

But on an absolute dollar amount nothing really fundamental, other other than I think something that is common to every public reporting company in the United States just an added cost of can complying with SOX Rule 404, so our costs are going up. We incurred cost in that in the second quarter. Those costs are going to creep up a little bit on us throughout the balance of the year. I think there's a lot of question as it relates to that particular area as to how much benefit or how much reduction you'll get in your second year of compliance, so I think at this point it's a little bit hard to read how much of this will be recurring in the second year or not. So those are really the principal pieces driving behind it.

Other than that we continue to focus on reduces those SG&A costs and trying to leverage the infrastructure that we have to sell to our customers and develop new products, you know, as best as we can. And enhance, if you look at our SG&A expenses as a percentage of revenues even though they took an uptick I'd think you'd fine themselves lower than the competitors in the industry.

Just to add a little more on the R&D we're really investing the right programs there the investment that we made in the current programs, that is paying off. We have a tremendous growth on that server side of the business. We got a couple programs already in the pipeline. So it is something that is necessary for our business because our customers are looking for more than just putting a bunch of components on a board and what Sanmina-SCI in the future wants to be is a company that really provides a total solution from engineering to a system assembly.

Great, thank you.

Thanks, Michael.

And your next question comes from the line of Bernie Mahon.

Hi, good evening.

Hey Ernie.

Question for you on the PCs, specifically on the desktops, could you just walk through that? That was a bit of a disappointment. Could you just talk maybe by geography or just how it kinds of played out in the quarter? I think Randy might have said the last couple weeks were probably considerably worse than what your expectations were and then also what gives you confidence that this is going to come back at all in the June quarter?

Go ahead, Randy.

So good question. I'm not sure I'm going to have all the answers for you here. So let me of start with how things played out in the quarter. As hopefully all of you know out there, the bulk of our business is done on a forecast and pull system. So it could be communications infrastructure, it could be PCs, it could be medical systems, and our customers give us a forecast and that's a rolling forecast, and in this business is updated generally weekly and we understand the dynamics of the forecast. And as a result, I think our, we don't disclose much more data on this than we do, because unfortunately we only have two customers here, and our customers want to do their own talking in their business, so I can'y break it down much more than we do because we'd just as soon let them do the talking.

I think if you look at some of the statements that's been made out there, you'll see it was perceived that January and February were a stronger month or stronger months than was March. Clearly there's a bit of a hockey stick to this business. It's traditionally been that way. And the forecast I think supported a higher revenue figure. It supported that at the beginning of the corner quarter. That's why we give the guidance of it being down but not down that much, and that's why we were probably a bit more optimistic we were in the middle than we were at end of the quarter when we reported.

With that said, the overall slowness, if you want to call it, the softness there in the market was not attributed to any one particular geography. It was both in Europe as well as in North America which is the vast majority for what we do for our two customers there.

All right. So it sounds like, you know, more recently than maybe April was a little bit better than the March softness?

Well, you know, as far as going forward, we do think the business will be up. But we, you know, the guidance was flat to up 5%. We don't think it's going to go down many we don't think it's going to go up a lot. We don't really know, you know. Let's face it, one of the customers is going through a transition and selling their business, and, you know, we work well with IBM. We well with la Nova we work well with HP, there's not new wins that's going to come out of this in this quarter, there's not business that's going to go away in this quarter and what we're going to end up doing is going to reflect the overall end markets of what our customers end up with, and that's pretty hard for us to predict from this point of view other than based on all the input we get we think it'll be up.

And just on restructuring, can you just say what the benefits you received in the March quarter were and then also what your expectations for the June quarter as far as dollar amounts?

Yeah, Ernie, just one comment in relation to that. I think I mentioned in my comments that we had three site closures. We also have indicated that we expect the benefit from our Phase 3 to be somewhere on the or of 35 to $40 million. The timing of when we achieve those benefits is really predicated a couple of very complex items to work orchestrate, one of which is to transitioning the business in that facility to another facility and doing so in a manner that does not impair our customers' ability to conduct their own business.

Secondly, going through that transition period, and doing so with a work force that potentially has been notified of a pending closure. And, you know, that all just winds up taking time so the guidance I think we've given everybody is that we would expect 50 to 70 plus percent of it to be completed by the end of this fiscal year and the balance of it falling over into fiscal '06. And what I guess I could quantify, I don't know that I can quantify for it except I can tell you that what benefits we've been able to realize at this point in time have been reflected in the guidance we've given for the third quarter.

All right, thanks.

Thanks, Ernie. Operator.

Yes, sir.

Next question.

Yes, sir your next question comes from Ahmed [Dahri], your line is open.

Thanks. In the past you've talked about bringing some the currently outsource PC boards in-house and you have. You also outsource 300 million worth of boards right now. What's the forecast in the next six to 12 months. How much of that would be would you be able to bring in-house?

Right now we going through a qualifications. We've made some improvements this quarter. We expect to make more improvements this quarter. But I would say the longer term, in the next 12 months we should be in-sourcing as much as 70, 80% of that.

If you can take a little bit about your ODM business, what was the run rate on an annual basis for this quarter and if also you had any insights on the X-86 servers that you do with Sun?

First of all, we can't give you too much what's going on. You really have to talk to A&M and Sun Micro, but Randy, did we release the numbers on how much we ship or we don't release that?

It was essentially flat with last quarter.

275 million run rate.

Right, right.

Thanks a lot.

Thank you.

And your next question comes from the line of Steven Fox.

Hi, good afternoon.

Hey Steve.

Two questions for you. First of all, you mentioned a new receivables program. Are you carrying any receivables off balance sheet at the end of the quarter, and if so, could you quantify that?

So let me see if I can characterize it. We're not doing an asset securitization program. We've implemented as a sale of receivables so those receivables are off balance sheet. You know, so they're -- they've effectively been sold and title to them has been transferred, and that amount during the quarter was about $100 million.

Okay. And then secondly, Randy or Jure, can you talk a little bit about target you talk about getting to 3% plus margins by the end of December. How would that break you down in your mind, by the segments you just talked about, PCs versus components versus the core EMS?

First of all, most of that improvement will come from the traditional core EMS, as we've said, and the component businesses. As Randy mentioned we expect the component businesses, you know, a few quarters to be double digits. And, you know, that definitely that helps. So I think it's a combination of both of those. I don't think we have data here to spread it out but as we do modeling, it's the mix of the product is really helping us out. We are taking the projects that are more higher end, and in those type projects we are generating higher margins and, of course, we're being more successful in transitioning some of the traditional EMS from a high cost region to lower cost region that's helping us out, but all the improvements will come from core EMS and components.

I think if you just run the math there you'll see if we can just get our components business to 10 points that would get you to 3 points without hardly any improvements in anything else.

Yeah.

But I want to agree with Jure here that the bulk of the improvement would be from getting that 3 points and components to close to 10 points or better and the components still, there's some improvements that are going to be made from restructuring and other things and volume and what we refer to as core EMS, and that's where almost all of that will be. We don't see whole lot of potential for improvements in the personal business computing sector.

Thank you very much.

Thanks, Steve.

Your next question comes from the line of Jim Savage.

Hello, Jim.

I have a couple questions, gentlemen. With the SG&A I want to go back to it, because I go back a year a little over a year and there's really a substantial increase if we go back to December 2003 where your revenues were actually a little bit better than they were here. It's pretty much a $10 million swing in SG&A expense. I can't believe that that all has to do with SOX compliance. I mean just is there anything else that is at work here that's causing your SG&A expense to go up?

Go ahead.

Jim, certainly not all of its SOX. That's for sure. But I think if you're going back that far in time, I think you'd also have to look at, you know, the fact that wages have gone up since then and other costs of operating business have gone up since then. Revenues at that point in time were not too dissimilar from where we were this quarter. But we've built you know an organization somewhat that is able to leverage, you know, more sales than what we've reported in the last quarter and certainly the December quarter, you know, is an indicator of that.

If I can add here that about a third of that is, Jim is related to IT systems. We've got a little bit of a challenge or a dilemma or an issue here. We have converted almost all of our businesses from a legacy system that has a price tag on it of between 12 and $15 million a year to maintain, and we've converted that to an Oracle-based system that is more as a pay-as-you-go. So we add more license periodically as a result of conversions to Oracle, we pay more money for that. There is a date out there in the future. I can tell you that that date is beyond this fiscal year, into next fiscal year, but not beyond that, that we think we can turn off that Legacy system. And when that happens, you will see about a minimum of $12 million a year go away on that, most of that on the SG&A line.

And then will you also be getting as part of your benefits from restructuring going forward and if you could quantify what you think is left in restructuring will there be a SG&A benefit from that also. I assume as you close plants there is a SG&A expense that goes along with that.

That's right, Jim. I think we announced a 3 closures, a complete closure obviously results in SG&A benefits. As far as how to quantify that or not, I think -- I don't think we have it a breakout of it here other than to say in the 35 to $40 million that we've guided that that includes the full benefit of what we expect to realize including.

Okay. If we look at overall what your restructuring costs are going to be over the next say four quarters, where do you think that's going to fall off at this point? Because you did have a somewhat higher restructuring this quarter than people had anticipated, which I guess means that you're moving faster than people had thought you would move.

I'm sorry.

Go ahead.

No, we had about $55 million of restructuring costs that related to our Phase 3, we announced the 175 was basically the total end of that program so it leaves a balance of about 125 to be recognized over the next year or so.

Okay. And I guess the last question that I have has to do with cash flow from operations. Do you think that you can get any substantial improvement in your working capital performance or are we going to really need to see substantially higher profitability in order to see equivalent cash flow to what you had this quarter?

I think there's still some room in asset management improvement. We're going to try -- you know, we were hurt a bit by the inventory turns this quarter because of what happened on the, you know, the way the math works, but we think, you know, I can tell you as a goal next quarter we'd like to see our inventory turns get back to 12 turns or better. And I think we think there's a day or two improvement on DSO next quarter and our goal is to get back to where we were in the prior quarter which is 30 days. So I do think we can continue to get some continuous improvements out of inventories and still a little bit in DSO and certainly in AP. We seem to pay our suppliers about as fast as anybody in this industry, and we're still working on ways to improve our AP days out. So we think there's some improvements and we were we'll certainly be disappointed if we exit this year in the 20s there in terms of cash to cash cycle days. So yes, we can get more out that. But with that said we need to improve our profitability we need to improve or margins and that that'll help our cash as well.

Even without that hundred million a quarter for the rest of the fiscal quarter should not be -- is not a massive challenge in terms of cash flow from operations.

No.

Okay. Thank you.

Thanks, Jim, I'm just going back, are you inferring that the hundred million wouldn't be recurring.

I'm just saying it shouldn't be a big challenge for you to get there over the next couple quarters to have that hundred million. I'm assuming as profitability increases that it should be easier.

Yeah, that's right.

Okay.

Sorry.

And your next question comes from the line of Tom Dingus.

Hello, Tom.

A couple quick ones because we're running up on the end of time there. Randy, in the computing business you've been transitioning this legacy low end storage for some time now. It's been a bit of a drag. If you strip that out when you look at you you're expecting next quarter what the overall segment there, what's left of the computing and enterprise storage business look like?

I'm not sure I fully understand your question, Tom. What I did is I give some guidance going forward. What we said we think it'll be roughly flat. It could be down a little bit as we transition this out, but the mix will be better because I think we've been pretty up front that this is a top line issue is, not a bottom line.

No, understood. I was just curious if you took that out of what you're expecting that business to bleed off, what the trend is in the rest that have business that's left.

Probably, it would be up but it'd be up in the 5% to 10% range, not north of 10.

One last one, when you get done with the Phase 3, if you think about sort of a single digit growth rate for this year and maybe think about you know what you've got currently planned for next year, which you obviously haven't articulated yet, where does the utilization on a global basis what does that look like from your standpoint when you guys are done with all the restructuring in Phase 3, say 12 months from now?

Well, Tom, let me just put it this way. We are working very hard right now to grow the business and at the same time we are restructuring very aggressively. So definitely we need to improve utilization for what is today. I would hope it's going to be in, you know, high 60s, low 70s.

Okay. Thank you.

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

Very well, sir. Your final question of the evening comes from the line of Brian White. Brian, your line is open.

Hello, Brian, we always save best for the last.

Thanks a lot. Can you talk a little bit maybe about the wireless infrastructure business during to the quarter relative to the rest of your comm business. How did that trend?

Randy, do you want to comment on the wireless side?

Well, the wireless part is really some of the strongest part of our business today. We're probably seeing slightly more strength in Europe but we still are seeing growth in the U.S. in that part of the business as well.

And if I can add to that, Brian, I think we're able to really in the last nine months widen the projects that we're involved with in multiple customers.

And finally can you update us on Pentex, how is that coming along, are you transferring business over there? Are you starting to sell some of those boards into your existing programs?

Go ahead, Randy.

Well, you know, Jure set me a target of 80% to get that done in a year. I think I agree that that's a pretty good target, but I also want to say that today we only buy about a third of our boards internally. I think we fairly set fairly aggressive targets for ourselves communicated those, and we're in the process now of getting customer authorizations. In fact, we've got a very, very formal process we go through with the Company. We have identified the top 100 opportunities, that equates, believe or not, 11,000 parts. That alone will get that one-third purchase up to about 60%, not quite two-thirds. We are aggressively pursuing these. It does mean that we have to [INAUDIBLE] qualifications, we're in the process of doing that. That actually starred three or four months, it's starting to pay dividends, as I said earlier, the trends early in this quarter are looking good in terms of the internal amount of business we have. So, you know, not sure what else I can say.

How many plants do you have currently in the U.S. now for PCB fab?

We have three PCB plants. Let me explain. We technically have four. We have three PCB fabs. We have one in Owego, it is a very high-technology plant there. We have one in Phoenix, it too is high-technology, but it's increasingly doing quick turn and MPI work for our customers. And we have one in San Jose that is very heavily focused on back plane assembly and subassembly. If you go into those three plants, they look and feel, have the look and feel of the traditional high-tech print circuit board fabrication operation.

In addition to that, we have a small highly specialized facility in Costa Mesa. It doesn't look, take the look and feel of a traditional PCB plant. It has quite a few clean rooms in the operation. They do very high-technology board. They specialize in defense/aerospace type of work down there. So we have four, one very specialized.

And if I can add to that, Brian, really out of these four, two are becoming a technology center of the east coast. West coast here in San Jose and then Phoenix and one in Southern California become military factories. That's really the strategy and so we will really improving our military wins in our [INAUDIBLE].

Yeah. So it's some business that obviously is transitioning from North America offshore. We think we have a footprint now to be able to handle that but as Jure said, the defense and aerospace business we're doing -- has requirements that that stay here within the U.S.. Okay. Thanks a lot. Thanks.

Well ladies and gentlemen, thanks for your time. First of all, just one comment that, you know, Sanmina-SCI has strong fundamentals, and we're committed to building that. Our customer base is very strong and we think that better days are ahead of us. So thank you again.

Thanks.

Thank you, gentlemen, and ladies, we do appreciate your joining us today. This does conclude our Sanmina-SCI second quarter earnings conference call. You may now disconnect.