Sanmina Corp (SANM) 2005 Q3 法說會逐字稿

Good afternoon, my name is Derrick, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Sanmina-SCI third quarter fiscal year 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question and answer period. [Operator's Instructions] Thank you. I would now like to turn the conference over to Mr. Jure Sola, Chairman and Chief Executive Officer of Sanmina-SCI Corporation. Please go ahead, sir.

Thanks, Derrick. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI’s third quarter conference call. With me here today are Randy Furr, our President and Chief Operating Officer.

Good afternoon.

And David White, our Executive Vice President and financial -- Chief Financial Officer.

Good afternoon.

I would like to start by thanking you all for being here today. On agenda we have that David White will review our third quarter 2005 financial results. Randy Furr will review operations and our future outlook, and then I will follow with additional comments relative to Sanmina-SCI’s 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 reviewing our financial results with you, however, I would 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 2nd, 2004, filed on December 29, 2004, as well as our most recent report on Form 10-Q filed on May 12, 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 are contained 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 nine months ended July 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 includes restructuring and integrations costs -- 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 will conclude with guidance for our fourth 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 comparisons with prior periods. Accordingly, unless otherwise stated in this conference call, when we refer to operating income, operating margin, net income, or earnings per share, we're referring to our non-GAAP information.

Slide three. Sales for the third quarter of fiscal 2005 were $2.83 billion, a decrease of 1.9% versus our prior quarter. Our GAAP earnings which included $20 million of charges for restructuring were essentially break even. Non-GAAP earnings for the quarter were $24.4 million which equated to $0.05 per share. Slide four. Our top ten customers accounted for 65% of total sales this quarter, versus 66% for the prior quarter, and 70% in the same quarter a year ago. Sales to our top 20 customers amounted to about 80% of total sales. We had one customer in the third quarter whose sales were greater than 10% of total sales. Third party sales by our components operations which includes PCB fabrication, enclosures, memory solutions, backplanes, machining and cables, amounted to $353 million, or approximately 12% of total net sales. Third party sales from our personal business computing sector amounted to $903 million, or approximately one third of our total net sales. Assembly and other EMS sales amounted to about $1.6 billion, or 56%.

Slide five. Gross profit for the quarter was $160.8 million and as a percentage of sales for the third quarter gross profit was 5.7%. This represents our highest gross margin in 16 quarters. Selling, general, and administrative expenses for the third quarter were $92.1 million, up approximately $5 million over the prior period. A large component of this increase related to SOX compliance and mediation activities, which in recent periods our external costs alone have amounted to approximately $2 to $4 million per quarter. We would expect this trend to abate commencing in fiscal 2006. SG&A expenses as a percentage of sales were 3.3% for the quarter. Research and Development costs amounted to $7.4 million during the quarter bringing our total R&D and SG&A expenses to 99.5 million, or 3.5% of sales.

Operating income was $61.4 million for the quarter, and operating margin for the third quarter was 2.2%, an improvement of 30 basis points over the prior period. Depreciation was 38.2 million for the third quarter, down approximately $7 million quarter-over-quarter as a result of certain assets reaching retirement. And our EBITDA for the quarter was 99.6 million. Other expense net which consists primarily of interest expense and income as well as gains and losses from foreign currency translation was $31 million. Of this amount, $5.7 million related to the recent $400 million high yield offering that we completed in February. Our tax rate for the quarter was 19.8% reflecting some modest true ups of our year-to-date accruals. We would expect our tax rate for the year in the fourth quarter to trend downwards to around 19%.

Slide six. Turning to the balance sheet. Cash and short term investments were approximately $1.3 billion, which is up approximately $60 million over the prior quarter. Accounts receivable at the end of the quarter were $1.6 billion, resulting in DSO of 51, an increase of one day over the prior quarter. The aging of our receivables continued to be strong with approximately 90% of our total balance being current, and with 96% being current or less than 30 days past due. Inventories at the end of the quarter were $949 million. And inventory turns were essentially flat with the prior quarter, turning at an annualized rate 11.3 times versus 11.4 in the second quarter. On an absolute dollar basis inventory decreased $14 million quarter-over-quarter with substantially all of the decrease coming from lower work in process inventories.

Capital expenditures in the quarter amounted to approximately $17 million, capital spending related primarily to equipment purchases for new programs and the continuation of our expansion in low cost regions primarily in Mexico where we are fitting up a personal business computing facility and enhancing the facilities and manufacturing processing capabilities at our enclosure plant there. Accounts payable at the end of the quarter were $1.5 billion, resulting in AP days of 51. This is an improvement of one day over the prior quarter. Our cash cycle days for the quarter was 32, which was up one day from the prior quarter's 31 days due to the increase in DSO that was only partially offset by the improvement in AP days. Our working capital was $1.6 billion at the end of the quarter.

Slide seven. Cash flow from operations was a positive $65 million during the quarter. Free cash flow for the quarter which deducts cap ex from our cash flow from operations was also positive at approximately $48.2 million. Let me now turn to restructuring. During the June quarter we incurred approximately $20 million in restructuring costs, 19.7 million of which was cash. Costs incurred under our phase two restructuring were $.7 million, and costs incurred under our phase three restructuring plan initially announced in July of 2004 accounted for the balance of $19.3 million of cost. We completed substantially all of the restructuring actions at all of the facilities contemplated under the phase two plan as of the end of our fiscal 2004. The phase two costs included in our third quarter results consisted only of revisions in the estimated selling prices for those phase two properties still held for sale as a result of new market data.

Slide eight. Now let me turn to the guidance for the fourth quarter of fiscal 2005. Consistent with our practices 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. We are targeting sales to be between 2.65 and $2.8 billion, an approximately 6% reduction from the prior quarter’s actual results at the low end of the range, and about a 1% reduction at the high end of the range. Notwithstanding the reduced sales, we expect gross margins to be up quarter over quarter as a result of improvements in our standard EMS and components businesses, and are targeting between 5.8 and 6%. We are targeting our operating margin to be around 2 to 2.4%. Net other expense is approximately $31 million.

While our tax rate is heavily influenced by the profitability of each jurisdiction in which we operate, as previously indicated, we would expect our tax rate to be around 19%. Basic shares for Q4 '05 are expected to be in the 522 million range, and diluted shares are targeted to be around 526 million. This equates to a diluted non GAAP EPS range of $0.04 to $0.06 per share. We are forecasting positive cash flow from operations at both the low and high end of our guidance for this quarter. We estimate the depreciation for Q4 will be around $40 million and quarterly cap ex to be in the range of $15 to 20 million. As we previously indicated to you, and as Randy will elaborate on more fully, our efforts remain focused on improving our overall profitability through leveraging vertical integration opportunities. We appreciate your time, and I'll now turn the discussion over to you, Randy.

Thanks, David. As you can see from our Q3 '05 earnings release, and as David mentioned in his comments the June quarter came in at 2.83 billion and non GAAP net income of 24.4 million, this gave us an EPS again of $0.05 non GAAP EPS. Both our top and bottom line were within -- at the bottom end of the guidance we provided to you in April. As usual, I would like to start with a few comments on our top line and our end market conditions. The 2.83 billion equates to 2% sequential decline from our March quarter. A little more granularity on the top line, and I would like to get into this down by market sector.

As illustrated on slide nine, the communications infrastructure market sector, as a percentage of total sales, was up one point for the June quarter to 31%. In dollar terms, this sector was up as well. This sector was at the mid-point of our guidance provided in April, and I might add that on a year-over-year basis, the communications infrastructure sector continued its positive trend being up 7%. Enterprise computing and storage was essentially flat with last quarter's 16% of total sales. Sequentially the business was down less than 1%, in absolute dollars, and this was at the favorable end of our flat to down 5% guidance provided last quarter.

New Isis (ph) revenue in June topped $100 million, which exceeded our up over 20% for the quarter guidance provided in April. The industrial, semiconductor capital equipment, medical instrumentation, defense aerospace and automotive sector was up one point, coming in at 12% of total sales for the quarter. The strength here was primarily from our medical systems and defense and aerospace groups. The net was this sector was up nicely for the quarter. It grew in both percentage and absolute dollar terms and exceeded our guidance provided to you three months ago. As expected, multimedia was down significantly for the quarter, going from 10% of total sales to 8% of total sales. However, the decline was in accordance with our guidance and actually came in at the favorable end of the down 15 to 25% guidance provided during last quarter's conference call.

Our final sector is our personal and business computing systems sector. This is the only sector that fell short of guidance. This business, while still comprising approximately 33% of total sales, sequentially declined about 4% on a dollar basis. However, as you might recall from last quarter's call, we were expecting a modest growth in the 5% range. There are two significant events affecting this business. One is the transition from IBM to Lenovo. We are very happy to say that this transition went smoothly, and was completed on schedule, and without any significant disruption in service levels. Second significant event is we announced the closure of our French personal and business computing manufacturing operations at the end of the June quarter, and this work is being transitioned to our Hungarian operations.

So in summary, there were no big surprises affecting our top line, some positive did come out of the quarter. This included new Isis shipments topping 100 million, and absolute dollar growth in key market sectors of communications infrastructure, medical, and defense and aerospace, and this also contributed to an overall improvement in mix. This allowed us to achieve an overall gross margin of 5.7%, which was the highest gross margin since June of 2001. Moreover, we chalked up multiple new customer and new program wins, which Jure will touch on later.

Now I'd like to turn the discussion to some comments of what we're seeing in the short term in our primary markets, and we'll start again with communications infrastructure. We remain encouraged what we're seeing here, again both in the short and long term. As I mentioned earlier, this business was up last quarter, and it was up 7% year over year. Strength continues to be driven by multi-service edge routing platforms, some SONET management gear and various wireless programs both in the U.S. and Europe. For our upcoming Q4, we expect this sector to be flat to up 5% range. For the September quarter, we expect our enterprise computing and storage sector to continue to go through bit of a transition. While we still have a relatively small amount of legacy low-end storage business being manufactured in Asia that is transitioning out, as previously expected we do expect to gain additional traction in our new Isis division or, in another way our ODM initiatives. The net is we expect this business to be down in the 5% range. However, we do expect mix and corresponding margins to improve in this business.

For our industrial, semiconductor capital equipment, medical instrumentation, defense aerospace and automotive sector, we anticipate this business to be a bit mixed in Q4. We expect to see continued strength in defense and aerospace. We expect to see the medical subsystems sector relatively flat, and the industrial, again, primarily semiconductor capital equipment to be down. In summary, we expect this sector be in the flat to down 10% range for the September quarter. For the last few quarters, our multimedia sector business has certainly proven to be on a rollercoaster. The December quarter saw this business down 25%. However, in March, it jumped back up almost 30%, followed by last quarter’s down 16%. The bottom line is this business is a bit difficult for us to predict, so to be conservative, we expect this business to be in the flat to down 10% range for Q4.

Finally, our personal business computing sector. You might recall last quarter we said for Q3 we expect this business to be a bit of a question mark. Really not much has changed for Q4. As I stated earlier, we were a bit surprised at just how soft this business was in our June quarter. Also as mentioned there are certain dynamics affecting this sector. One of our customers again who is completing a major transition, and others transitioning work from legacy higher cost to lower cost locations. For forecasting purposes, we're planning to see this sector being anywhere within a range from up 5% to down 5%. Once again, and as a reminder, almost 100% of our personal and business computers, and I'm including our volume industry standard servers in this category are commercial and are for the business sector as opposed to any consumer type products there.

I would like to make a few comments on our component operations, again that being PCB fabrication, backplane assembly, enclosure systems, plastic injection molding, precision machining, cable assembly, and our memory solutions divisions. For Q3, total component revenue, including our intercompany revenue was 441 million. This consisted of 353 million third party, and 88 million intercompany. This compares to total revenue of 450 million in our March quarter, which was broken down by 379 million third party, and 71 million intercompany. So the good news is that despite a sequential decline in revenue, we were able to grow our intercompany well over 20% for the quarter. As you might recall, this was in line with our overall plans to increase the portion of internal sourcing for our total spend on components. Even though our component revenue climbed a bit, gross margins for components was up from 3.1% in the second quarter to 5.8% in Q3. This met the goal provided to you last quarter, which was to be in excess of 5%. I might add that the top line took a very small hit last quarter, and will take a 5 to $10 million a quarter hit going forward as a result of our selling, of our automotive metal stamping components business. This business was small and part of a larger acquisition that we did four years ago. This business consistently generated losses. We sold the business last quarter for a small $200,000 gain. The sale, again, may give us a small hit on the top line, but with respect to the overall components business margins -- it will help margins improve going forward. Capacity utilization remained between 55 and 60% across our component operations.

Finally, let me summarize our business by three major groups: components, personal and business computing and finally everything else, or what we refer to as standard EMS. This information is based on our business unit view, and the total sales figures may vary slightly, I emphasize slightly from the market sector breakdown provided to you on slide nine because that data's based on a customer view, and, again, what I'm going to read you here is data that's based on specific plant point of view. As just mentioned, our components total revenue was $441 million, with intercompany being 88 million, and gross margins for this group was 5.8%. Personal and business computing was 938 million in total sales, for which intercompany was 35 million. If you exclude certain one-time items which impacted this business during the quarter, gross margin for the sector would have been 1.7%. We do expect to see gross margins for this sector back up to approximately 2% in the September quarter.

Finally, our standard EMS or the total EMS revenue, which again is everything else, was 1.676 billion, with intercompany 101 million, gross margins for this group was 7.6%. Again, I might add, this is a very nice gain from the 7.3% posted in March, and this was done on essentially flat revenues. I think it may prove useful to make a few comments related to our SG&A cost. As you can observe, our SG&A cost has increased approximately 10% year-over-year, or up approximately $10 million. As David mentioned, we're incurring up to four million a quarter in external costs related to Sox compliance. When you add our internal costs related to this important and required activity, we attribute approximately one half of our SG&A cost increase as a result of Sox compliance. The other one half is almost all related to investments we are making in our sales operations. We've added several sales professionals to our sales organization within the past six to nine months. These are seasoned professionals, primarily in Europe and in the U.S. to cover both our multinational accounts, as well as to attract new local accounts. About 50% of these professionals are directed towards our components sales efforts. We believe this investment is starting to pay off, and I know Jure will talk a little bit -- in a little bit on some recent wins.

Now just a few comments on some of the positive things, again that came out of the quarter. As I mentioned earlier we saw growth in key market sectors, comm infrastructure, medical, defense and aerospace. Margins for both our standard EMS operations, as well as our components operations, were up nicely during the quarter. Cash flow from operations was 65 million, and we still believe we have some opportunities to squeeze cash out of operations as a result of working capital asset management. We continue to make progress on the ODM front with ODM revenues exceeding a 450 million annual run rate, and finally, as mentioned earlier our gross margin was the highest since June 2001.

Now for a few additional comments on the restructuring. I know Dave gave you some specific on charges during the quarter. During the quarter, we announced or closed our Hunt Valley, Maryland MPI site, our Plaisir, France design and engineering site, our personal computer manufacturing site in Isle d’Abeau, France. We also consolidated certain activities located in separate locations in the Silicon Valley to our San Jose campus site. Per previous comments we have incurred approximately $100 million of costs to date, and the rest or the balance will be incurred over the next two -- or let's say three to four quarters.

I want to give a quick update of what we're seeing in the supply chain. Generally speaking we're seeing flat lead times in pricing equating to very few issues. We don't expect to see any short term issues with respect to supply in interconnect, ASICS, PCBs, switches, fuses, fans, power devices, mechanical fabrication, base materials, chemicals, and rosin. In this next group of commodities, we're seeing pricing trending actually downward and that's PASIs (ph), memories, crystals, magnetics, filters, storage, RF devices, optics, and steel. In the final group we're kind of viewing it somewhat cautiously, as we're seeing some slight price increases. And this group includes discretes, linear, logic, batteries, wire and cable copper, and aluminum. So I'd like to thank you for your time and I'd like to turn it back to Jure.

Thank you, Randy. Now I would like to talk to you a little bit more about market conditions. As we mentioned already, demand in our third quarter was softer than we expected it, but as we look past September quarter, December quarter is usually our strongest quarter in good and bad times. So trying to gauge is not as easy, however, based on our historical demand, our current customer activity, we see an upside in December quarter. In the June quarter we won approximately 16 new programs from existing and new customers in excess of 400 million plus. Six of these programs came from communication industry, two from high-end computing, three from multimedia, and five from industrial defense and aerospace industries. For confidential reasons, we cannot go into too many of these details, but following are some of the major customers from which we gained new programs in 2005. Alcatel, Cisco, Nokia, Sun Microsystems, Valeo, Kodak, Phillips Medical, GE, IBM, Lucent (ph), and HP.

As Randy mentioned, we added several technical sales people to the street, especially in the key component segments such as printed circuit boards, backplanes, and enclosures. These actions are beginning to pay off and we see a road map to continually improving these segments. Two out of three of the segments should exit a year with a double digit margins, and third should deliver double digit margins in a longer term because of this effort. Additionally, we have increased our manufacturing staff to promote our -- sorry, marketing staff to promote our ODM products, which is also paying off.

As Randy mentioned earlier, we're on track to deliver over $500 million of ODM products in calendar year 2005. With multiple new ODM products coming out, we expect to continue to grow revenue and profits in this important new business in 2006. These major products are currently in our customer testing labs, and products are in communication, service, and storage area. We will continue to invest in a business development in offering new technical solutions to our customers, because these things are starting to pay off. Demand for traditional high-end products is improving, and we believe this mix will help us to increase our margins in future.

In March, we told you that our goal was to exit December 2005 with operating margins of three-plus percent. Predicting the future is always a challenge, but as we look at our potential opportunities, and if we can get some help with improvements in demand, there's still a chance we can accomplish this goal. As we move through summer months and we expect to have benefits of demand which will help us provide you a more solid forecast. But I want to assure you that every business decision Sanmina-SCI has made with the focus on fundamentals that drive efficiencies. We are committed to providing superior service, building strong relationships with our customers, delivering on our promise, and giving our customers the quality technology they deserve. We will continue to remain competitive as in the stock market, and I believe we have a staying power, what it takes for long term success. So, in summary, we will concentrate on diversifying our customer mix in the markets we serve by presenting leading technologies and services. We believe we are well positioned here to gain the market share. Our long term business outlook shows continued and steady improvements in this area. Our number one priorities continue to be new business and improve our margins with each new quarter.

And now I would like to extend special thank you to our investors and analysts for your participation today on this call. At this time, Randy, David, and I will answer any questions you might have. Thank you again.

[Operator’s Instructions]. Your first question comes from Lou Miscioscia with Lehman Brothers.

Okay, thank you.

Hi, Lou.

Hi, how are you all today? Are you all breaking out IBM and Lenovo as two separate customers? So I guess in the quarter when you put down that there was one customer with 10%, would that then be IBM or Lenovo?

That would be strictly IBM.

So they are two separate customers to answer your question.

Okay. And Lenovo was not over 10%?

No. Just the one customer.

Okay, great. You mentioned $400 million in new wins. Could you maybe give us an idea -- was that just new wins that you had for the quarter? Is that going to ramp up in fiscal '06, and then maybe in comparison, what would be your new wins year-to-date?

Yes, Lou, this would –- these are the programs that we won during the quarter. These programs will be shipped to the customers the next six to twelve months.

Okay. Do you have the same statistics for, let's say, year-to-date?

Year-to-date I don't have a statistic on, but if you look at our business, as much as forty percent-plus of our business comes from our new programs, so continuously winning the new programs to us is very, very critical, because that's the future, with both with existing customers, and of course with the new customers.

Okay. One quick final question. When you look at the next quarter, obviously, with the down guidance, would you -- is there any program trenches going on there, or is it really just end markets?

I would say for us it's just an end market. We are experiencing softness in the products that we're involved in. It was a little bit of a surprise to us, but as we talk to our customers, we hope this is a short term scenario. Randy, you want to add to that?

Well, no, I don't think so, Lou. I think clearly if you go back to the December quarter our third party personal business computing business was just under 1.3 billion, and it was just about 900 million here, so clearly that's affecting the overall top line. I think if you look at some of the traction we're getting in quality of business, in terms of the lower volume, higher mix kind of business, I think we're tracking reasonably good into that sector. We've grown it over the year, and we expect to continue to grow it here in [TECHNICAL DIFFICULTY].

And if I can add to give just a final statement. I think that's what's really helping us improve the margin in some of our standard and EMS components.

Okay. Thank you.

Thanks.

Your next question comes from Bernie Mahon with Morgan Stanley.

Hi, Bernie.

Hi. A question on the components. You guys did a pretty good job selling the components internally, went from 70 to 88 million. Is there not specifically guidance, but how should we think about that over the next couple of quarters? Do you think you're going to be able to continually grow that on a sequential basis?

Well, Bernie, that's definitely the strategy we have. As you know, we have a pretty large TAM, or total available market internally for which the amount we source internally is broadly speaking one third of that total, and we'd like to see that continue to grow. We think that's fairly low-hanging fruit in our organization and we're going to continue to go after growing that business. About three months ago, when we set out, we set a goal for 85 million for this quarter, and we accomplished that goal and at the same time we set that 85 million goal, we set a 100 million goal for the September quarter, and that's still our goal going forward.

Okay. And then how should we think about gross margins in that business, also? Do you think you're going to be able to improve them, and could you just kind of quantify that?

Yes, so the total components that I give you is a mixture of six different -- roughly six different businesses here. If you thought of a contribution margin in that business, somewhere in the neighborhood of a blended contribution margin of 20% if you were just modeling, you can probably figure that as we grow the top line, it's pretty margin dependent, and we continue to get some improvements there. We restructured a fair amount in that business, as you know historically, and we have some -- a little bit more to go in that business, which will continue to improve the cost structure in that business and improve margins going forward, as well.

And as we mentioned earlier, we have a fair amount more technical sales people to really market our components, especially high-end printed circuit boards, enclosures and backplanes, and Bernie, that seems to be paying off, and hopefully that will help us out.

All right. That's great. Thanks a lot.

Thanks, Bernie.

Your next question comes from Brian White with Kaufman.

Hi, Brian.

Hi. Hi, Jure. Could you talk a little bit more about end market demand trends? Obviously one of your competitors indicated that demand slowed pretty meaningfully in the month of July. Did you see that or an overall slowing that began in the June quarter?

I would say what we saw, really, end of the June quarter we expected, as I said earlier, to do a little bit more in June than we did, and a few things -- just demand wasn't there. That continues to be a -- starting to a little bit in July. If I see what we forecast here, I think we have a pretty good idea of what we have on our plate. If there's an upside, who knows, but as we give the guidance of 2.65, 2.8, we feel comfortable in that window, and I -- but I -- as I look at the customers, as we talk to them and we've been spending a lot of time with them, they're more optimistic about the future, but it's been a challenging market so it's hard to get excited. Seems every time we get excited about tomorrow something pushes us back, so we're really focusing on fundamentals, improving internal efficiencies, working very, very hard to position ourselves to win the new programs with the customers.

Yes, and I might also add we have little of our overall top line revenues are really consumer driven. I think consumer driven products clearly are going to start picking up strength here as we pick up for that season back to school and the holiday season. We're a little bit concerned, I think that's why the mid-point of our guidance is down a little bit. We do a substantial amount of infrastructure related kind of equipment and traditionally, especially in Europe, the July, August are generally slower kind of months because of the holiday season they are any other time, so we're taking a bit of a cautious outlook because of that traditional summer kind of slowdown that we've seen in this kind of a year.

Randy, any color on wireless infrastructure, specifically 3G, some of the trends there?

You know, it's a very good question. We are -- we are shipping more 3G products every quarter, but it -- it is -- I need to be careful how I word this, but it can be kind of feast or famine from one customer to the next. It's a -- it's like one quarter, one customer might win some new programs, and you see upside and demand there, and the next quarter that falls off, but another customer, it picks up in another customer there. So we've seen, on a consolidated point of view, a continued increase in 3G shipments across our customer base but it will vary from quarter to quarter, from customer to customer.

And if I can add to that, Brian, is that I think the good thing about us is that we are an infrastructure company. We are well positioned with all of the major press for a 3G product.

Okay. Great. Thank you.

Your next question comes from Matt Sheerin with Thomas Weisel Partners.

Yes, thank you.

Hello, Matt.

Hello, Jure. Just a question on Nortel and the relationship there. Are you starting to see some projects shift to Flex, and if so, how is that transitioning, what your expectations are for the next couple quarters, and then just discuss your long-term relationship with Nortel. Thanks.

Well, Matt, that's a good question. As you know, Nortel was one of our first customers, so we have a long, long term relationship with this customer. We're aware of this project between Nortel and Flex, and we do experience -- we did experience transition of the products to Flex, and that continues. That's been in our forecast and going forward we -- that's part of the forecast going forward. But I think the longer term, knowing this company as I do, we expect to continue to have valuable relationship with Nortel for many years to come.

Okay. Thank you. And then just another question on components and PCDs. Could you talk about your new acquisition there, the Asian operations? Are you starting to see any transfer in business from North America, and then in line with that, are you expecting to take any significant capacity offline in North America?

Well, first of all, on component businesses we're very encouraged with the margin improvements that we have there. We also are encouraged with some demand. We believe demand is improving. As it comes to (ph) specifically to our Asian factories that we acquired six, seven months ago, we -- we're busy in those factories. We are transferring a fair amount of equipment and we are upgrading these factories right now. We're running a lot of qualifications through there for new customers and so we expect nice growth in that -- in that area for many years to come. When it comes to the factories in North America, what we have today is really mainly new product development and military type of products in North America. So at this time, we have no plans to shut down any factories of our printed circuit boards factories in North America, because these factories strictly today are going to be used for new product introduction and military.

Are there some -- is there volume work now that will eventually shift over to Asia?

Yes, basically what -- the way we're going to use these factories is really the front end. In other words, they will do preproduction, demo (ph) product introduction, preproduction, and transition the product into the Asia. What we are keeping here is some of the really advanced stuff that Asia is not capable to do, and military products.

Okay. Thank you.

Your next question comes from Amit Daryanani from RBC Capital Markets.

Thank you.

Hello, Amit.

You know just looking at the near-term weakness in the top line, could you maybe talk from where you stand and what you're seeing in the end market, if you foresee a phase four restructuring going forward?

Amit, good question, and the answer is really, no, we -- these -- I was listening to David talk about these phases. We're not -- as a management team, we're not happy that there was one phase, let alone multiple phases, but clearly this industry, and we're not immune to that, has been saddled with excess capacity and we'd all hoped, and there's got to be more of a balance between supply and demand, and until there is we're going to continue to struggle with getting decent pricing in the market place there and we're -- we're going to be continually forced to look at that -- that equation, both on the demand and supply side. And today, because we have low capacity utilization, and because demand hasn't really picked up the way we'd all hoped we're forced to continue to look at paring out some capacity. With that said, last quarter I mentioned that this phase three is greater in scope than we'd originally set out for that, and I don't think we'll come up with something we call phase four in this company, and I think the amount we've outlined today, although I do expect to use all of it, will be -- will be in the neighborhood of what we ultimately expect it's going to take to right-size this company going forward, but there's still a substantial amount of money left out there, and to move forward with, that we're going to have to do to get capacity closer aligned to what demand is.

Thanks. And just a quick question on the component side. Glad to see you guys had the 15 million incremental in total sourcing over there. Margin improved 130 basis points. How much of that do you think was attributed to restructuring, and then should we sort of try to factor in 15 million of incremental insourcing going forward through the next few quarters, as well?

So I -- that is a very good question. I do not have the breakdown, because restructuring is a very hard thing to quantify. We can quantify how much cost we take out, but invariably, when we restructure a facility and the business is moved some down the street to other, shall I say higher cost locations, and some of the lower cost locations, that that is moved to lower cost locations generally gets a price reduction and therefore you've passed on some of your restructuring costs, or in some cases all your restructuring costs onto your customer. So to rightfully answer the question I think the bulk of that increase there is as a result of efficiencies and incremental revenue. There is some that is attributed to cost reductions going forward, but it is not the biggest piece, and I don't have that quantified for you although it is a good question, I just don't have it here with me. As far as 15 million incrementally, I don't want to fine tune things here to too much extent but we exceeded it about three million, I think we said a hundred million last quarter. I think that I wouldn't want to go over that as a goal to see for September, but that's still our goal for September so let's fine tune it to at least an incremental 12 here.

All right. Thanks a lot, guys.

Thanks, Amit.

Your next question comes from Jim Savage with Wells Fargo Securities.

Hello, Jim.

Hi, how are you?

Good, Jim.

I guess with your guidance, the mid-range of your guidance is down in revenues year-over-year by about 17, 17.5%, and I guess that brings up the question of what's happening in terms of market share, because the overall end markets are not down so much. Is there something -- I mean, we know that you've lost some Nortel business. Is there something else going on that we should be aware of in terms of market share issues?

So, Jim, I think that's a very fair question, and I will give you -- I ask that question internally, and I look at a lot of data and I try to determine that, as well. And certainly if you look at the rest of the industry and what's happened out there, I don't think we're the worst. We're certainly a long ways from the best. We'd like to be the best. There is a shift at Nortel as a result of their transaction with Flextronics. I'll let Flex and Nortel talk about that transaction. As Jure mentioned, we have a great relationship there. And we're still doing a fair amount of business with Nortel and we're going to continue do a fair amount of business with Nortel after that but there's clearly some shift on that business. There is some customer that we -- there is a customer, we did not mention the name, it was a transaction that was done about the time we merged with SCI. The annual revenue at that point was in the neighborhood of 7 to 800 million annually. That business has been -- I'm going to use the word -- bleeding off for about three years from now, slowly coming out quarter-over-quarter. That is going to another Asian competitor, not one that we would normally refer to as a tier one kind of competitor, and it is a business that I've been up-front and said it just impacts our top line. It hasn't impacted our margin significantly, but clearly that business represents a market share shift as a result of Sanmina-SCI.

And there was also an announcement regarding Lucent. Is that going to impact you going forward that Lucent was consolidating a portion of their business to Solectron?

Yes. We do have some Lucent business. My understanding is that that business that’s going from one EMS company to Solectron is -- or is primarily going from one to Solectron is not business that we are doing. I don't want to rule out some potential there, but in my opinion, the amount of that business would be very, very small that’s impacting us and it's primarily impacting another EMS competitor, as I understand it.

Yes. I mean, just to add to that, I'm a little bit more familiar with that, Jim. Most of the business that we do with Lucent today in component business, boards, backplanes, enclosure, cables, some memory modules, so I would say more than 90% of our business like that. We expect that relationship in that component level to continue to improve, and our relationship is very strong. So --

So to be up front, there is a small portion of that business that may end up going to Solectron, but we expect to offset that with additional wins within Lucent as we have going forward in our component business. Short of that, there could be programs out there that I'm not familiar with, like replacement programs, but I don't know of anything that comes to my mind that would represent a loss of market share in terms of our business there. Again, I think if you look across our business, the bulk of the top line hits that we've taken has been associated with our personal business computing business.

Right. And you've taken top line hits, and your -- and your gross margins have been at a historic low recently. Are there potentially strategic ways that you're going to deal with this? Say if you --

The answer is yes. We are constantly evaluating strategically how we can improve, and we're exploring strategic opportunities on that. But we're just doing what any good, what I think management team would do, is to not rule anything out, to improve margins and our overall growth and the bottom line, EPS going forward.

Okay. And I guess the other thing that -- I mean, these are all issues having to do with demand issues. Probably about a year ago, you were talking very, very optimistically about the ability to grow the defense business, the medical business, the automotive business. And at this point, while there has been some growth over the course of the last year, it has not been -- I guess the question is, that as you go into calendar 2006, is there an anticipation that that will become a significantly greater portion of your business, those emerging EMS sectors?

So the answer is yes. And -- we have done -- we have grown those businesses. Unfortunately, we've been offset by another business. So our medical business year-over-year is up pretty significantly. Our defense business is up fairly significantly in percentage terms year-over-year. Unfortunately, a big part of that business was the semiconductor capital equipment. That industry was running much stronger at this time last year than it is today, and that business has offset the strengths that we've seen in some of these other businesses. So it is still an initiative of the company. We don't think we've lost market share in the semiconductor capital equipment industry. We just think they're in more of a down cycle now, and -- than they were a year ago, and that business will come back, but it is -- it is still very much an initiative of Sanmina-SCI to grow medical, industrial, which is primarily semiconductor capital equipment, defense aerospace, and automotive going forward.

And so that's really a cyclical issue with a semi-cap.

Yes. If I can add to that, Jim, on the semiconductor, actually, our customer base in that industry today is stronger than ever, we've widened that -- instead of having just the one customer in that area now we have as much as six or seven major customers in that. We expect when that industry comes back that we'll have just as much upside as the industry does itself.

Okay. Great. And I guess the one last question is on the SG&A line. This is all the addition of sales, because you've -- with the declines in revenues, you've had about a 60 basis point increase in SG&A expense and an actual increase in dollar expense. Is there any sign that that's going to either turn around or flatten out over the next couple of quarters?

David?

Yes, Jim, a couple of things. You're right from a percentage standpoint it's gone up because we've seen some degradation of revenues in our PC business, right? Which traditionally has had a very small portion of the SG&A really allocated to it. So it tends to aggravate it on a percentage basis. When you look at it on dollar basis, really on a year-over-year basis and even almost quarter-over-quarter, it's up really, for two factors, primarily. One is just the costs associated with the Sox 404 activities that we’re engaged in and secondly as Randy had indicated just some basic investments we've been making in trying to building our sales capability, particularly in some of our components businesses.

So we should anticipate then that will flatten out at this point because you've got the Sox expenses in there, and you've brought in the people already on the sales side, or is there --

So on the sales side, I think we tend so see that flatten. On the, SOX side, I think we'll see a -- probably another increase in that that's already in the guidance we gave you for our fourth quarter. But I would expect to see it start -- the SOX piece of it start abating in 2006, so from that standpoint it would start coming down.

Okay, great. Thank you very much.

Thanks, Jim.

And, Jim, I just want to follow up on one thing here. Our medical business is up 22% year-over-year. Our defense aerospace is up 25% year-over-year. Unfortunately, our industrial sector is down about 20% year-over-year. A year ago, our industrial sector was a lot bigger than our medical, but today our medical business is about 45% busier than our industrial, and again, I want to emphasize it's a cyclical nature of that business, it's not a market share issue.

Okay, great. Thank you.

Your next question comes from Steven Fox with Merrill Lynch.

Two quick questions. One if you look at the improvement in the components gross margin, how much was that due to the asset sales during the quarter?

Zero.

That didn't have any impact? And then --

It wasn't something we put up in the gross margin for that business.

Got it. And then secondly, when you talk about achieving a 3% margin by the December quarter, I know you don't want to provide guidance, but is there a range of revenues that you would need in order to get there, and how much -- what type of component margin would you envision in order to get the 3% margins?

Steven, we traditionally, as you know for the whole industry, December quarter is typically the strongest quarter, like I said in the good time and the bad time. Based on what we’re hearing from our customers today, the way the backlog is kind of coming together we definitely feel that the December quarter is going to be a stronger than a September quarter. We are right now continuing to focus on really improving each segment of our business, as Randy mentioned earlier. We believe we are going to improve -- continuously improve our components business, both boards, backplanes, and enclosures, which is the three major segments of that. I think we're going to make some improvements in our personal computing business, and all of these things will go in the right direction. But you're right, it's -- the top line is going to be a big factor here. I hate to stick my neck out and say the number, but it's all driven by the mix. I mean, we don't have to have a huge jump. If the -- if demand comes in our component businesses and in standard EMS.

Fair enough. But you do need a further improvement in component margins to get there?

That's correct. And then what I said earlier, we think that two -- the three major segments, boards, high-end boards, backplanes, and enclosure, that two of those segments hopefully we believe -- pretty confident that we'll get the gross margins over 10% in December.

Thank you very much.

Thanks.

Your next question comes from Michael Walker with First Boston.

Hello, Michael.

Hi, thank you. Just off that last question. So you had endorsed a gross margin target for the component business for the September quarter. Do you have a margin we should think about modeling for the -- for the June, rather. Do you have a margin we should think about for the September quarter? For components.

I think what we said on the call we expect it to improve. I hate to put the numbers, as I put one out there longer term, when I say longer term exiting the year in the double digits, but right now, -- I mean, when I say double digits for our core components which is the boards, enclosures, and the backplane, which is majority of this group anyway, we’ll definitely -- you're going to see a nice improvement in our component businesses in September quarter.

Okay. And then just on the printed circuit boards, specifically, can you tell us what the rough capacity split is between North America and China, and if that's changing at all, if it's headed differently?

Well, yes, we're moving in all the -- Mike, the capacity is based on really the people and equipment. We have three major factories right now in Asia. One in Malaysia, one in Singapore and one in China. The one in China, we have a lot of room for expansion. We’re actually expanding that factory right now. What I mean by expanding, we're adding a lot of equipment that we transferred there from North America to China, so we'll have plenty of capacity there. At the same time as we use that existing capacity, we can triple the size of that existing business there. So all of the production is being transferred to Asia. As I said earlier, the goal in North America and Europe strictly to do MPI, and I can tell you that our MPI factories right now in North America are very, very profitable.

Okay. Thanks.

Your next question comes from Thomas Hopkins with Bear Stearns.

Yes, good afternoon, everyone.

Hi, Thomas.

Just going back to the question about Lucent, and it's more of a general question on competition and the supply chain. If I'm Solectron and I win a new piece of business from Lucent, initially Sanmina might be on the approved vendor list for components like boards and enclosures, but over time why wouldn’t I try to buy those components from someone else who wasn't one of my competitors?

Well I mean if you put it that way, it's almost like you say, well, that might make sense. If you really look at our relationship, we do a fair amount of business, so called, with our competitors. I mean, we're kind of partners. The way that our customers want us to do business, I think we are all smart enough to know none of us are going to be a sole source with most of these customers, so we have to partner with each other to provide the best solution to that customer. It sometimes means even buy -- assemble a product from each other to give that solution. So that's been going on in industry. I mean we buy stuff from Solectron, Solectron buys stuff from us, Solectron to Flex, and back and forth, including Jabil. We believe that the technologies that we offer in this case specifically Lucent, that we will continue to be their major partner in their component business, and what I mean by component business is enclosures, high-end printed circuit boards, and the backplane, and we have some additional markets there, including some ODM potential. So we expect to actually grow our relationship with Lucent, but not in our EMS side, but mainly in the components and some ODM products.

Okay. And then on the flip side, if you guys book a new EMS program, I would hope and I would think given what's been going on, the very first thing you try to do is get them to buy your components rather than someone else's?

Well, definitely. I mean we would like to offer the customer a total solution, and that's our strategy. But even in some cases when we do an assembly because of the way the customer today likes to have a double sourcing, even if it's the, let’s say, advanced printed circuit boards, we still believe we have the leading edge technology the customer would want another supplier that we have to buy boards from sometimes because that's just the way the systems are set up.

Okay. Okay. Thanks.

Thanks, Thomas.

Your next question comes from Jesse Pichel with Piper Jaffray.

Good afternoon.

Good afternoon.

Where was the increase of insourced components most pronounced? Was it Pentax or ODM?

Well, it was -- so -- it was across the board. It -- so Tom just asked a question, I started to add it's a double-edged sword. Our -- our customers still control the AVL in almost every case with respect to components. And the challenge that we're having in transitioning this business is getting approved on the AVL without having to give up all your margin, because the customers, if you're not on that AVL today, the customers are saying I'll put you on there, you guys are world class, I'm sure you can do this, but you've got to give me an incentive, and we don't want to go mess up the pricing in the marketplace or the industry or cut our potential margins by having to bribe the customer to put us on the AVL, so that's the game, if you want to call it that. That's the challenge that we have going out there today. And as a result when -- as Tom mentioned earlier, when -- when Solectron or Flex or somebody else gets a deal and we're a component supplier, it also makes it more difficult for them to change it for the same reason it makes us more difficult to be able to get on this AVL. Generally what we saw there with respect to that increase in demand was -- was us getting on the AVL on products that are more of our traditional kind of programs that we do which would be medical, or defense, or semiconductor capital equipment, or high-end computing. It would be stuff that tends to fall under the more low to medium volume high mix high complexity work. When we get on the AVL, and we start sourcing some of the much-higher volume kind of stuff that we have out there, you'll see a bigger jump in revenues probably a bit less in terms of the margins in that business. But what you saw there in that roughly 16 million, $17 million increase there really just had to do with the traditional stuff that's our strength and bull's eye of what we do in our components business.

So how many programs now, new programs are now sourcing from Pentax, which was your latest vertical acquisition there?

Well, I'm not so sure that's a piece of data that I have here in front of me. Generally speaking, what's going on at Pentax today is legacy stuff that was there when we acquired them, but we're starting to make some progress and transfer in programs that we have over here, but I would say if you had to estimate the total percentage of their business today, it's probably 80% legacy, 20% new stuff.

And what was operating margins for the components business in the third quarter?

So, again, a very good question, Jesse. The -- but I want to explain one thing. We -- the reason I give gross margin on this business is because we do not allocate all SG&A to these businesses. We don't have an allocation schema where we can say so much of the finance organization is attributed to this, and so much of the HR, and so much of the IT. We allocate out some costs, but it's not huge. So as a result, I don't have SG&A all detailed out by business unit, so if you wanted -- if you wanted to really look at this, I'd use a broad number of 1% to 1.25 as SG&A associated with our PC business. We've certainly done many more than back of the envelope kind of calculations, but I'm -- but I don't have enough to be able to publicly disclose this each time. That's why I'm just giving it to you as rough figures, and you can figure roughly around 4% to 4.5% is related to the components, and the balance would be somewhere slightly under the average that we have, would be related to the rest of the standard EMS business.

So roughly 4% margin for components versus roughly break even a quarter ago?

So what I'm saying is that if we made 5.8% in the component business, you wanted to use the outside edge of that 4.5%, you can say we made an operating margin of roughly 1.3% worse case, in our components business.

Okay. Now, do you have more plant shutdowns to go with components looking at September and December?

So I don't want to get too granular on this, but, yes, clearly there are some additional restructuring activities to happen.

Okay. And lastly, just for clarification, you're saying that the Lucent business is mostly components, and you'd hoped to hold on to it, but, I mean, wasn't that the case with Nortel, as well? I mean, I was under the impression that a lot of that Nortel business was enclosures. Was I mistaken in that, or –

So you're not -- you're not necessarily mistaken. The difference is with respect to the Lucent announcement that's out there it's going to an EMS company that's not a vertically integrated company, and that transaction was not done to my knowledge, based on vertical integration, where the Nortel-Flex transaction was a transaction that had -- part of it was based upon being able to insource the components, if you see where I'm headed there.

Right, right, right. All right. Well, fair enough.

Operator, thank you -- Operator, we do have time for one more question.

Your final question comes from Todd Coupland with CIBC World Markets.

Good evening, everyone. Are you able to talk about the printed circuit board pricing in the quarter and what you expect in the September quarter.

Well, I think the pricing was stable on our high-end boards I would say was up, and for September quarter, we expect the pricing to continue to be stable.

Secondly, with respect to the Lenovo transition and the headache that that's giving you, what's your feeling on how long that's going to take?

Randy?

Okay. So somehow I miscommunicated here. I didn't mean to indicate that in any way Lenova is giving us headaches. In fact, I think the transition that we've done from IBM to Lenova, my team, or our team here, deserves a lot of credit, because this was a flip the switch, and as you know there has been a lot of scrutiny in the U.S. on this transaction, and it meant, a new set of IT systems, and we were able to accomplish that with no disruption. In fact, I've received a number of complimentary notes from both the IBM and the new Lenova side, both Lenova International and Lenova China on the results we've done. So, Todd, I don't want to in any way indicate that that's a headache for us in terms of that. So --

So then basically the PC softness is just an end market issue?

Yes. I mean, from our perspective, it's not -- there is -- Lenova's not going out and buying their PCs from somebody else. In fact, I'd know that, and that's not happening.

Okay. And just to be clear, I know the question was asked earlier, and I didn't hear an answer, perhaps you're not comfortable in giving it, what revenue level would you need in Q4 to hit 3% operating margin, or are you just not comfortable in providing that at this point?

Well, Todd, it's hard to -- in this challenging environment, I hate to throw the number out there, but I think the key here is the mix of the product, and, as I said earlier it's the boards, enclosures, backplanes, and standard EMS will drive it up, but I would say if we go over $3.1 billion run rate in December, I think our chance of meeting that number is put very, very high.

Okay. Great. Thank you very much.

Thank you. First of all, ladies and gentlemen, again, thanks for your time, and as we mentioned earlier we still are having a lot of fun here. It's not the results that we enjoy, but we believe that we have a road map continuously to improve the margins and get there. So thanks for your support. Bye-bye.

That concludes today's Sanmina-SCI third quarter fiscal year 2005 earnings conference call. You may now disconnect.