Sanmina Corp (SANM) 2005 Q4 法說會逐字稿

Good afternoon. My name is Katina and I will be your conference facilitator today. At this time I would like to welcome everyone to the Sanmina-SCI fourth quarter fiscal year ends earnings conference call. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] I would now like to turn the conference call over to Mr. Jure Sola, Sanmina-SCIs Chairman and Chief Executive Officer.

Thank you, call Katina. Good afternoon, ladies and gentlemen. And welcome to Sanmina-SCI Corporation fourth quarter conference call. Joining me today on this call are David White, our Executive Vice President of Finance and Chief Financial Officer, and also here with us today we have Hari Pillai, President and Global Operations. Just want to introduce Hari to some of you that don't know Hari. Hari joined Sanmina-SCI in 1994. the same year we decided to get involved in a fully [inaudible] services. Hari was also very instrumental and successfully integrating Sanmina and SCI in the two , three years. Hari has been a very major factor in driving this business for the last 11 years and he's responsible today for all global operations.

Now I would like to begin by thanking all of you for being here today. But before I go to the agenda, I would like to take opportunity for those of you that read our press releases in last few days, you know that Randy Furr left the Company due to his personal and family reasons. I would like to take this opportunity and thank him for many contributions that he made to this Company in the last 12 years. And I personally want to wish him well.

Now on a business, for the agenda today, David White will report on our financial results for our fourth quarter of Fiscal Year 2005 and then I will follow with additional comments [about] Sanmina-SCI results and future goals and then after that we'll open questions for me, David and Hari. And now David?

Thank you, Jure. And good afternoon, everyone. Now before we get started please note that selected financial portions of this presentation are also available in the form of the slide presentation which can be accessed from the Investor Relations section of our website at www.sanmina-sci.com. I'll be making references to these slides during the course of my remarks.

Prior to reviewing our financial results with you, however, I'd like to take a moment to review the following Safe Harbor Statement. Slide two. During this conference call we'll 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 & Exchange Commission specifically the Company's most recent annual report on form 10K for the year ended October 2, 2004 filed on December 29, 2004 as well as our most recent report on form 10Q filed on August 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 -- refer to certain nonGAAP financial information. The corresponding GAAP financial information and reconciliation from nonGAAP to GAAP is contained in our quarterly press release which is 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 12 months ended October 1, 2005 on a GAAP basis as well as a reconciliation from GAAP and the nonGAAP information that is either referred to in our press release or also will be referred to throughout this conference call. In general our nonGAAP information excludes restructuring and integration costs, impairment charges, other infrequent or unusual items and noncash interest and amortization expense.

On today's call I will review the results of our operations, discuss the balance sheet and corresponding metrics, provide a update with respect to our restructuring activities and finally I will conclude with guidance for our first quarter of fiscal 2006. In general my comments will be directed our GAAP financial results except where we consider our nonGAAP information more meaning if you 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 nonGAAP information. In addition to the above you'll note from our press release that we make reference to certain accounting adjustments that recorded in the fourth quarter as a result of our remediation efforts to last years identified material weakness. I'll make comments as to the impact of those adjustments in my remark -- remarks regarding gross profits.

Slide three. Sales for the fourth quarter of fiscal 2005 were $2.77 billion at the high-end of our guidance versus 2.83 billion in the prior quarter. Sales for the full year amounted to 11.73 billion versus 12.20 billion for the prior year. Our GAAP earnings for the quarter were $15.1 million which equated to $0.03 per share, NonGAAP earnings for the quarter were $31.3 million by equated to $0.06 per share at the high-end of our range. For the full year, our nonGAAP earnings were $130.7 million or $0.25 per share.

Slide four. For the fourth quarter our communications infrastructure market sector represented 30% of our net sales and in absolute terms was down slightly less than 5% over the third quarter. Enterprise computing and storage comprised ap -- approximately 16% of net sales during the quarter. Sequentially and in absolute terms the business was down about 7% over the prior quarter. Our multimedia sector accounted for 8.3% of total sales during the quarter which was flat with the prior quarter on a percentage basis and down about 2% in absolute terms. Our industrial semiconductor capital equipment, medical instrumentation, defense, aerospace, and automotive sectors of our business played an greater role in our total mix, up sequentially 3.5% quarter-over-quarter. This absolute and relative growth was driven primarily by record sales in our medical, dental and aerospace sectors which were partially offset by continued weakness in the semiconductor capital equipment sector. Finally our personal and business computing system sector was essentially flat quarter-over-quarter on an absolute dollar basis.

Slide five. Our top 10 customers accounted for 64% of total sales this quarter versus 65% for the prior quarter and 69% in the same quarter a year ago. Sales to our top 20 customers amounted to about 78% of total sales in the fourth quarter. We had two customers in the fourth quarter whose sales were great be greater than 10% of total sales. We had one customer for the full year, IBM, who's sales were greater than 10% of total sales.

Slide six. Gross profit for the fourth quarter was $153 million. As a percentage of sales gross profit was 5.5%. However as I mentioned earlier and as we stated in our press release our GAAP and non GAAP financial results each exclude adjustments recorded in the fourth period for out of period items. These adjustments in the fourth quarter effected several items but most substantively impacted our reported gross profit. Excluding these adjustments the Company's reported gross profit for the quarter of approximately 5.5% would have been 6.5%. On the other hand, we also recorded to cost of goods sold some favorable in quarter benefits. When you exclude these two items from our reported gross margins our normalized gross margins are more in the line of 6% range. This represents the Company's highest gross margin since Q3 2001, 17 quarters ago. Throughout the year we have been working very aggressively to fully remeditate crate the material weakness we discovered and reported on last year. And while the completion of our soft internal control assessment by management and inter -- and our audit firm is still underway, we feel very positive about the progress we've made and confident that the out of period clean -- cleanup we have seen in the last few quarters is substantially remediated and behind us.

Our standard E.M.S. gross margins for the fourth quarter across all end markets amounted to 8.0%, normalized for the out of period adjustments and one time benefits on total sales of $1.7 billion. This represented a 41 basis point improvement over the prior quarter and an 81 basis point improvement over the same quarter one year ago. These improvements have largely been the result of our consistent focus on operational excellen -- excellence, continuous improvements, improved product mix as well as cost savings we've realized from our restructuring activities. Our personal and business computing gross margins for the fourth quarter amounted to 1.7%, again on an normalized basis, which fell short of our financial model for this business which is targeted to be in the low 2% range as a result of startup inefficiencies associated with the transition of production from our Isle-d'Abeau France facility which we closed in June to our P.C. facility in Hungry. We expect these margins to reach more normal levels in the first quarter of 2006. Giving a little more granularity to our components business, total revenue for the fourth quarter including intercompany revenue amounted to $400 million. This consisted of $308 million, third party, and $92 million intercompany . This compares to total revenue of $441 million in our June quarter which consisted of $353 million of third party revenue and $88 million intercompany. This 5% quarter-over-quarter increase in intercompany revenue demonstrates continued progress towards our long term strategy of increased vertical integration. Gross margins for the quarter amounted to 4.5%, again on an normalized basis which was down from the prior quarter's 5.8%. Most of this margin decline is a result of lower revenues in our enclosures business some of which related to the sale of our automotive plants in Sweden which we discussed last quarter.

Selling general and administrative expenses for the fourth quarter were $84 million down approximately $8.1million from the prior quarter. This decrease was the result of lower employee related benefit costs, lower bad debt expenses and other cost savings offset by higher quarter-over-quarter SOX compliance remediation costs. SG&A expenses as a percentage of sales were 3.0% for the quarter. Research and development costs amounted to $7.6 million bringing our total R&D and SG&A expenses to $91.6 million or 3.3% of sales. Operating income was $62.4 million for the quarter and operating margin for the fourth quarter was 2.3%. An improvement of nine basis points over the prior quarter. Depreciation was $39.4 million for the fourth quarter up approximately $1.2 million quarter-over-quarter. Our EBITDA fort quarter was $101.9 million and for the full year was $430.5 million. Other expense net which consists primarily of interest expense and income as well as gains and losses from foreign currency translation was $25.3 million. Our tax rate for the quarter was 15.6% reflecting year end true ups of our total year financial results by legal entity. Our tax rate for the total year was 18.1% and we would expect our tax rate for the first fiscal quarter of 2006 to be around 18%.

Slide seven. Turning to the balance sheet, cash and short-term investments at the end of the year were approximately $1.2 billion which was down approximately $91 million over the prior quarter. During the quarter, however, we paid off the remaining $225 million of outstanding zero coupon high yield debt due 2020. In the absence of this payoff cash and short term investments would other -- otherwise have been up $133million. Accounts receivable at the end of the quarter were 1.5 million -- billion dollars resulting in DSO of 48 days, a three-day improvement over the prior quarter. 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 daze past due. The inventories at the end of the quarter were $1.0 billion, inventory turned during the quarter at an annualized rate of 10.3 times versus 11.3 in the third quarter. On an absolute dollar basis inventory increased $66 million quarter-over-quarter. This inventory increase resulted from conscious decisions we made to provide better upside capacity for some of our long-term strategic customers. Capital Expenditures in the quarter amounted to approximately $26 million, the majority of which related to facility expansion activities and related equipment purchases in Mexico and China where we continue to expand our capabilities. Accounts Payable at the end of the quarter were $1.6 billion resulting in AP days of 54, a three day improvement over the prior quarter. Our cash cycle days for the quarter was 29, down three days from the prior quarter's 32 days. The improvement -- the improvement, the result of improved DSO and AP days partially offset by lower inventory turns. Our working capital is $1.7 billion at the end of the quarter an approximately $86 million improvement over the prior quarter.

Slide eight. Cash flow from operations was a positive $174 million during the quarter, and $415 million for the year. Free cash flow which deducts CapEx from our cash flow of from operations was approximately $148 million for the quarter and $340 million for the year. Let me now comment on restructuring. During the September quarter we incurred approximately $18 million in restructuring costs, 17 million of which was cash. Subsequent to the end of the quarter we also announced the intended closure of our manufacturing facilities in Toledo, Spain and the down sizing of our operations in Gunzenhauser, Germany. Our Toledo business will largely be transferred to some of our low-cost regions. We expect the restructuring charges for these actions to be taken through the June quarter.

Slide nine. Now let me turn to the guidance for the first quarter of fiscal 2006. Consistent with our practice in the past the information I provide will generally exclude restructuring and integration costs, impairment charges, other infrequent, unusual items as well as none cash interest and amortization expense. Starting in Q1 fiscal 2006 we will also exclude stock compensation charges which will at that time become a component of our GAAP numbers. We are targeting sales to be between 12.8 and $2.9 billion or approximately flat over the fourth quarters actual results at the low end of the range and about a 5% increase at the high-end of the range. We expect gross margins to be in the range of 5.9 to 6.1%. We are targeting our operating margin to be around 2.4 to 2.8%. Net other in -- net other expense is expected to be approximately $31 million. As previously indicated, we would expect our tax rate to be around 18%. Basic shares for the first quarter are expected to be in the $523 million range and diluted shares are targeted around 526 million. This equates to an diluted nonGAAP EPS range of $0.06 to $0.08 per share. We estimate the depreciation of Q1 '06 will be around $40 million and quarterly CapEx to be in the 20 to $25 million range. For your information we estimate that our GAAP stock compensation expense for Q1 to be in the range of five to $6 million. In summary we feel good about our progress, the improvements we've made in the quarter and we thank you for your time. And with that I'll turn the time back over to you, Jure.

Thank you, David. Ladies and gentlemen, make a few comments on -- on the quarter. We -- we believe we made a good progress during the quarter. As David mentioned, revenue were in the high-end of our guidance. Excluding out of period adjustments our gross margins were above our high-end guidance and the highest in four years or 14 quarters. Definitely a step in the right direction. Also our standard E.M.S. business ga -- ge -- gross margins were strong over 8%. Our operating expenses were down quarter-to-quarter in spite of our increase SOX expenses. On the balance sheet we paid down 224 million of debt during the quarter. We generated 100 -- 174 million of capital from operations. And now as I look forward in the December quarter, as David mentioned, revenue of 2.8, 2.9 and EPS of six to eight. We are confident about the December quarter as demand is stable and we estimate that enterprise computing, storage and medical, defense and aerospace, personal computing and multimedia markets are going to be up in the quarter. Communication and semiconductor capital equipment markets will be slightly down to flat in this quarter.

Looking at the longer term, our goal is to stay in track with the positive news quarter after quarter. In 2006 I believe Sanmina-SCI will grow top line at the rate equal to of the overall industry, or E.M.S. industry, I should say. We expect double-digit growth in our [inaudible] business and back land business. This business has been fully restructured in the last year and today in North America and Europe -- in Europe we're manufacturing new product and high-end technology including military boards. With most of the production being transition to our [A.G.M.] factories. And this should help us improve the margin in 2006. So overall we expect margins to continue to improve in the Fiscal Year 2006 and we estimate at this time that our nonGAAP EPS should grow in excess of 30%. In 2006 we'll continue to expand also our technology through our O.D.M. projects that we have. In 2005 we shipped approximately $500 million in O.D.M. and we have a fair amount of new technology coming out in an short-term and we expect that O.D.M. projects to continue to grow for us at the higher rate than E.M.S. part of our business.

Now let me address market conditions. And this is mainly based on our input from our customers. We're seeing a stable trends for December and calendar year 2006 at this time. The good thing and while we see today that the pipeline of the new inorganic opportunities for us looks good at this time. We've been spending fair amounts of money and time on a business development around the world, and these things are starting to pay off. I would like to also make a comment regarding our personal computing business, mainly what we call P.C. business. We have three major customers in this market segments which is IBM, Hewlett Packard and [Lenoble]. I can assure you that our relationship with these customers is solid and will continue to be successful for us. We do not expect any major changes in 2006.

So in summary, we are making some positive improvements for the future. I would I like to -- where we are going and I believe we'll continue to win new business. We expect improved margins with each new quarter. I believe that our industry in Sanmina-SCI particular continue to offer significant long-term growth prospects and opportunities. We still have much work to do, but we are ready and willing and we are going to have more fun doing it. Now I would like to extend special thanks to our investors and analysts for participating in this conference call. Before I go to Q&A, I would like to remind you that Sanmina-SCI will host a Annual Investor and Analyst Day on November 17th in New York. And for those of you who are not register would like to attend this presentation, please give a call to our Investor Relationship -- Relations Department at 408-964-3610. And we look forward to seeing you in New York. At this time, Hari and I and David would like to answer any questions that you might have. But before I go there I would really like to ask to limit to two questions because we like to get as many people as possible on this call. Again, thank you very much. Go ahead, operator.

[OPERATOR INSTRUCTIONS] Bernie Mahon Morgan Stanley

Hi. Good Evening.

Hello, Bernie.

Question for you on the components business. Just total components was down I think $40 million sequentially. Could you talk about what's going on there? Is that largely Nortel business that's moving away or is it just weakened demand? What are kind of the expectations there as we go into the December quarter?

Good question, Bernie. This is your Jure. Most of that business that was down actually came from our enclosure business. And as David mentioned we sold our enclosure automotive business which I think was at least 30% of that business and the rest of it was really weak demand from an few customers of ours. The rest of the component business such as the back plains and P.C.B. actually grew in the quarter. Now, going forward in the December quarter we expect this busi -- enclosure business to be stable and we expect the growth in our printer circuit board and the back wind business.

But then for the overall components do you think it won't grow? Do you think it will be less than 400 million?

No. We expect the overall components to grow in the December quarter. And most importantly Bernie, we expect the margins to improve in that.

That was my next question. In terms of the gross margins there, you had a target before of I think 10 or 12%. What are we looking at now over the next couple of quarters?

Well, first of all we think that -- not think, we know we'll have the margins over double digits on a [inaudible] the printer circuits boards in the December quarter and we expect the longer term for those two parts of the businesses actually doing over 15%. But overall component business our next step is to get that to 10%. And it's going to take a few quarters to get there but I really believe we have a road map to get there.

All right. Thanks a lot.

Thanks, Bernie.

Thomas Hopkins Bear, Stearns & Co.

Yes. Good afternoon.

Hello.

Yes. Just talking about some of your computer customers, more specifically just trying to nail down how you see the first half of 2006 for the [Lanova] relationship?

Specifically to that relationship we feel very stable, as I mentioned earlier we don't expect any changes not just first six months but also in the second six months of 2006 and beyond.

Now, is that, Jure, is that -- I know there was an agreement I thought you had out until April. Is there some -- is there a change to that agreement? Are there new terms? What -- what are they saying to you about your participation in the business?

Well, first of all we can't specifically talk about the customer but I'm sticking to what I said earlier, Tom . We don't -- we don't see any major changes for -- in 2006. If you really look at none of our business is ever guaranteed. But based on our experience and the contracts we have I think we are in an good place. Most importantly we have a good relationship and I think we need each other for many years to come.

Okay. And just looking at your December top line, it's up a little bit. But there have been bit bigger moves between September and December in the past. Can you talk about what you're seeing from your telecom equipment customers which seem to be kind of the key part of the story in terms of getting also the components business to go higher?

Right. Well, as I said earlier, forecast -- we're forecasting communications to be down and flat for next quarter. We actually have one major customer that's down, but the rest of the customers are stable enough. Longer term, as we gather the forecast for the rest of the year in 2006, I would say that most of my customers in telecom are pretty optimistic about 2006 and opportunities for growth. But it's still an challenging market and we're going to take one quarter at a time. But I think we're well positioned there.

Okay. Thank you, Jure.

Thanks.

[Ameet Airemanni], RBC Capital markets.

Hello, Ameet. How are you?

Good. How you doing?

Good. Good.

Just a question on your components side of the business again. It looks, in total lose, [inaudible] was out 5% of like $4 million sequentially. In the past I know the goal had been to improve it by 15 million quarter-over-quarter. Could you talk about sort of what drove the shop versus expectation and are you still targeting the incremental 15 million?

Our goal was to really start building everything we can internally where it makes sense. You have to do a lot more with getting some of these approvals -- approvals from some of our customers that's taking a little bit longer than what we anticipated. But I think we have a better systems in the place today to make sure that every new order that comes in here if we want 100% vertically integrated we have a process to start immediately. So I'm more optimistic about the future how we're going to integrate than what we did in the last couple of years.

All right. And then a question, you spoke about Sanmina being able to grow revenues on par with the EMS growth -- I'm just wondering what do you anticipate the industry to do in 2006f? Because if you look at consensus street estimate your looking at mid single digit growth in aggregate and then if you look at sort of industry consultants, they pay you to earn 10 to 12%. So I'm wondering, where do you fall into that -- in those two ranges?

I think if I look at, as I said earlier, the customer demand and so far what we've seen, I believe that industry will grow at least in the single digits. And I think we're going to see maybe maybe more once we get to December quarter. But I think that probably we're going to see some growth.

All right. Thanks a lot.

Thanks.

Matt Sheerin, Thomas Weisel Partners

Hello, Matt

Yes. Hello, Jure. Just a question again on the -- on the revenue outlook. You talked about seeing some growth but if you look at the mid point for you guys in December you're basically going to be down 12% year-over-year starting off. So I would like to get a sense of what kind of business pipeline that you have. And also if you could tell us how much of Nortel is factored in there, how much is left to come off transfer over to Flextronics?

Well, first of all the first question there regarding growth. I mean, it's a little different market today than the last year. So I can only talk about this quarter right now. As I said, we think we're going to grow this quarter. What we see today is that 2.8, 2.9, that could be upside there if everything comes in that our customers are forecasting. But you know how that goes, Matt.

Sure.

So the key for us is not just the top line. I think key for us is improving these margins. And we had a really good quarter this quarter, especially if you take some of these other periods issues that we had. So I'm pretty optimistic that we are an lot more efficient today and I think we're getting a better -- better product mix today than we have in an few quarters ago. So I feel confident about the December quarter and we're going to take one quarter at a time. But if the demand is there, this Company definitely can ship more. Regarding the question to Nortel, I really hate to talk about specifically about customers but I can make a comment that our relationship with Nortel is good and also good with our friendly competitor, Flex. I mean, we are going to continue to support both companies as long as they need us. Our relationship with Nortel has been long-term and we expect to continue to win some business from Nortel. So it's not the end of the world when it comes to our relationship. We are performing pretty well and we're going to work pretty hard to earn more of that business.

Great. Just a quick question on the higher inventory level. Could you just drill down a little bit on what kind of inventory you're holding for customers? Is that through your system already? And do you expect to see improved terms on the higher revenue in December quarter?

Let me pass on that question over to Hari. Hari.

Hi, Matt. Good afternoon. This is Hari Pillai. We would -- we would expect that in the next quarter we would see turns in the range of 10 to 11. So not a big increase in inventory going forward.

Okay. And is that inventory that you held, was that sort of to accommodate sales that were done at the end of the quarter and shipped in the beginning of this quarter? Is it -- was it raw material? Was it finished goods? Could you just give us some more info there ?

Yes. We have seen some of the effect of that inventory has already been reflected in the numbers that David talked about. But going forward, especially given how dynamic some of the marketplace we operate in and some of our customers are working with us to position for as Jure mentioned maybe if things go right for them and us we can see some -- some benefit there.

Okay. Great. Thank you.

Thanks, Matt.

Michael Walker, First Boston.

Hello, Michael.

Hi. Good afternoon.

Good afternoon.

I have some questions. I'm confused on the margin situation. I think, David, I heard you say that when you back out both the out of period items which you actually don't really list, I don't think, in the press release and also some one time benefits you came one a normalized margin of 6.0% but your EP -- your nonGAAP EPS was $0.06 I think predicated on a 6.5% gross margin. So I guess I see three different margins flying around. I'm trying to understand exactly what -- what the differences are.

So I was waiting for someone to ask the question. We're trying to make it as straightforward as we could, Michael. But basically our GAAP and our nonGAAP financial results have been calculated the way we've been doing it for at least the last year since I've been here in that we deduct inch tack tangible items and restructuring, et cetera. But in this quarter we had these out of period adjustments as the press release referred to and my comments did. And we concluded as a Company and at least preliminarily with our auditors, I say preliminary only because they haven't officially given us their form audit opinion yet, that it's inappropriate to restate any of the prior periods. So fe we're not going to restate any of the prior periods we didn't think it was appropriate to restate either our GAAP or nonGAAP numbers. So our GAAP and our nonGAAP numbers include all those items in it. And so in my commentary I was trying to provide a little bit of color as to what were -- what was the real margin generating ability of the business last quarter. And that's where those comments kind of came into. So if you if you look at the nonGAAP EPS of $0.06, that's based on the 5.5% gross margins, just to be clear about that. And my comments as it relates to the normalized margins, those -- those represent you might say more what the inherent earnings power was of the business during the quarter.

Okay. And I guess my follow up is kind of on the same lines. Could you just explain? It looks like on both the GAAP and nonGAAP basis you had a tax refund in the quarter but you were saying you had a [50%] tax right. Just help us clear that up as well.

Well, when you do your tax provision each quarter you make estimates as to what you think your ultimate profitability for the year is going to be for every country in which you conduct business. And so at the end of Q1 you have actual results for one quarter and you have a forecast for three quarters and you make your tax provision based on that estimated earnings for the year. And each quarter you true that up as you get one more quarter of actual and one less quarter of forecast. And so this quarter as we trued up the full year right, to where we had a full four quarters of actuals in there, we brought down the rate for the full year from -- I think we're previously reporting about 19% tax rate, and we closed out at actually 18.3%. So as a result, in order for the total year to be at eighteen point -- excuse me 18.0. In order for it to be 18.0, there's a little bit of a pickup in the tax rate for the fourth quarter to -- to true up the whole year.

Okay. Thanks.

Thanks, Michael.

Thomas Dinges, JPMorgan Chase

Hi. A couple of quick ones here. I wanted to , David, if you could walk through an bit also on the OPEX line. You ex- mentioned that was lower because of some lower benefit costs. Are you expecting those to continue? Are these again like the tax explanation you just gave? Were three one time true ups at the end of the year? Bonus accruals, those keeps of things? Then I have an follow up for you.

Some some of it was honest to goodness cost reduction on our part where we went back and re- negocaited some contracts. In other cases our bad debt experience was not such that we didn't need to actually increase our reserves any during the quarter. So things of that nature. So there certainly was some aspect of true up and if you actually did the -- did the numbers you'd see our operating expense outlook for Q1 would actually be going back up a little bit. So, yes, there is -- so the net of it all is, yes, there is some you might say some inquarter, you might say, benefits from cost reductions.

Okay. And then I want to go back to the inventory question just in one other -- in one other way here. Obviously with where you guys are pointing revenue and where you've seen kind of lead times and those things around the -- around the industry go, I'm just questioning whether -- and specifically for Hari -- if you guys are looking into go doing a lot more on the vendor managed side so you guys don't have to expend a lot of your capital to continue to build these kind of inventories quarter off. Even though a one quarter off kind of event here. Because obviously as people look at inventories around inventories around the industry we've seen them get elevated a little bit. We're not quite seeing the revenue growth. And I do understand that this stuff is going to come down in the next quarter but maybe can you talk about a little bit more about the longer term strategy here to kind of push a little bit of this else where to help returns?

Sure, Thomas. Yes. We will continue to try and selectively implement various supply management agility type programs around the world. But we are governed by an level of conservatism in the way we handle those. So we don't want to do anything that would represent the liabilities outside. We prefer to see that on our books. And so we're conservative in that regard. But in general, we will do the kind of programs that you're talking about. I do want to tell you that the inventory performance that we've achieved has been the result of really a lot of hard work by a lot of people doing lots of things repeatedly well around -- around the world. It hasn't been the result of one time or of special deals cut to V.M.I. type deals.

Okay. Thank you.

If I can add to that, Thomas, if you look at our inventory turns all the way through the last four quarters we have been leading in our industry. And we believe that we can improve those. I think you're going to see that they'll be either on top of the best inventory turns in the industry. That's our goal.

Thanks. Thank you.

Todd Coupland, CIBC World Markets

Hello, Todd.

Good evening, everyone.

Good evening.

Could you just then after that discussion on the tax point in the fourth quarter remind us of the effective tax rate in the quarter?

15-point -- hold on one second. I think it's 15.6.

15.6 on the $0.06

On the nonGAAP $0.06. That's correct.

Okay. Secondly if I if we could just go back to this P.C. relationship question, there were some comments out there from [Lenogo] saying they are looking for Taiwan ease based V.M.S. suppliers. So in listening to your commentary, I guess we should view that as -- as -- as Lenogo looking for relationships to build parts of the P.C. and maybe printed circuit board assembly and Sanmina will continue to do final -- final assembly and fulfillment in the jurisdictions where these products are ending up? Is that the right way to look at this?

Yes, Todd, I don't want to tonight whether our customers are doing out there. But I can tell you what we could for them is build to order, configure to order. Of course, Lenogo always is looking for other opportunities when it comes to their components as you mention. But I think our part of the business, what we do for them, as I said, there's really no changes today that I'm aware of and we have to communicate with these people every day. And we believe that we have very, very good relationship. And most importantly we think we can grow this relationship. So that's all I can tell you.

Okay. And then the last question I wanted to ask you about is, with less seasonality pretty much across the board in the E.M.S. group in the December quarter, is there enough visibility, stability out there to say that then you will see less seasonality in the March quarter as well so things won't be going down as much? Could you just give us your thoughts on that? Thank you.

Todd, it's too early to tell. But if I I have -- if I look at today I would say it would be a less, maybe downturn in the March quarter. At least that's what I would estimate today. But I really believe I need more time to be more specific. But we expect it to be less than normal.

Okay. Great. Thanks a lot.

Thanks, Todd.

Brian White, Kaufman Brothers, L.P. .

Hello.

Hi, Bryan.

High, Jure. You just update us on the restructuring program? Are we finished? How much do we have to go?

I'll turn it over to Hari and Dave, but let me just make a comment. We definitely are almost there and I'm going to be very happy when that is over so we can strictly focus on what we do best is to grow book the business and bidding. Hari?

Hi, Brian. I think we have got some important and fairly complex restructuring actions in progress today and we're in delicate negotiations. So I probably want to stay away from discussing much more about the ones that David referred to already. As Jure said, we are nearly there but not 100% done in terms of what we [envisioned] at this stage. And from an operational perspective, I'm really happy that the message that I'm giving to my management team is that we're going to be focused on growing the business and looking forward. So we're kind of largely behind it in terms of announcements. We still have some way to go in terms offer completing the announced actions, even the ones we've already announced -- even the ones we already announced will take some more time to complete. We have some other actions that have not yet been announced but may not be that material.

Okay. I would just be curious, maybe, what kind of charges we should model on an GAAP basis for next quarter. David, do you know what we should approximate for next quarter?

So, you know, Brian, one of the things we did back in January is talked about $175 million program. And we continually look at the estimated costs associated with that. I think as Hari indicated we've got some fairly sow negotiations going on right now which make it difficult to give a better estimate than what we've already given you. So I think the best thing you could do is forecast what is remaining out of that 175 over the next principally three quarters.

Okay. And when do you expect to see 100% of the benefit from this new prog -- this new restructuring program starting in mid '06, '07? How should we think about that?

I think that's fine. But you say new, I want to clarify your or correct maybe your adjectives there. We're not viewing this as a new program. This is part of the phase III restructuring we announced back in January. We're just getting to some of the final pieces of this point.

Right. I mean new to 2005. So when do you think you'll see all the benefits to that? Sometime in calendar 2006 calendar, 2007?

Yes. Yes.

Okay. Thanks. Thanks, Brian.

Jesse Pichel, Piper Jaffray & Co.

Hello, Jesse.

Yes. Good afternoon. Have you sold the lower margin enclosure business why are component margins not higher than they were last quarter at 5.8%?

Well, the stuff that we sold really has nothing to do with the lower margin, actually, wat was not strategic to us to be in that automotive business. And ever since we acquired that division in Sweden the goal was to sell that. What happened there is that in the enclosure business with the less revenue, a few customers that we expected to ship didn't take the product. And then also we did a lot of restructuring in that business this year, mainly moving the product from Sweden to Hungary and the product moving from North America to Mexico. So there have been some costs during that move. We believe that most of that or the majority of that are now behind us. So we expect our enclosure business to tin and now improve and eventually get to an double digits.

Hello?

We're here. Can you hear us?

Yes. So I don't know if you heard me, but basically we think that is behind us now and we expect that to improve -- go to double digits again. I the restructuring within the components division complete?

I would say majority is yes.

And could you recap for me, what are the largest programs that you have ramping? You've announced some programs over the last few quarters.

Right.

What are you really looking at for next year in terms of the biggest drivers there to offset some of the end of life?

Well, I think the biggest drive, we've been very successful at growing our medical business this year. Defense and aerospace business also have been going in the right direction. The computing side, especially the storage side and server side of the business is going in the right direction. And we like to see what we have in the telecom. We want a fair amount of new programs to existing customer base, they're going to be wrapping up in this year. So we see -- we seem pretty comfortable there. Of course in this business you never can feel comfortable. But I think a lot of positive things are in the pipeline.

Will you able to share any of these programs with us at your Analyst Day?

I don't know how much detail we're going to go for competitive reasons. But we're going to give you a lot more details on an whole strategy plan for 2006 and beyond.

Well, thanks very much, Jure.

Thanks a lot. Jesse. Operator, we have time for one more question.

Okay. Carter Shoop, Deutsche Bank.

Great, thanks. A couple of questions. The first one I wanted to better understand your comments with regards to growing with the E.M.I. industry. I know the previous caller tried to fiscal figure that out. While L look at the U.S. based [EMS]3 vendors I'm looking for roughly 5% to 6% growth, then if you add in the Asian based vendors close to 8% to 9% growth in '06. Were you referring to U.S. based growth at 5% or 6 % or the global industry at closer to 8% to 9%?

We think the potential for this whole industry, what we think based on our data, this industry will grow in the high single digits plus. There is an he a potential that it could go over 10%. And that's kind of what we are thinking right now at. It's based on an program that we've seen. It's all really going to depend how things -- what demand comes in.

As a follow up there, what is your underlying assuming in regards to end market demand on a weighted basis for the business that you are servicing?

Well, first of all, if I look at right now December quarter, demand that we have today is pretty good. I mean, if you look at the customer by customer especially some of the new technology that we're involved in, I'm really excited about that. As I mentioned earlier, our medical business has really grown a lot. We are the largest medical electronic manufacturing company now in the world that I'm aware of. Our military and aerospace business also is growing. We invested a lot of time and money in the last couple of years. We think we are well positioned in industrial and semiconductor business. So we really diversified the Company a lot in the last couple of years and I believe we're going to have some benefit in 2006 no matter what happens to our major markets.

Okay.

All right?

And then the second question here, on your footprint, when you talk about that you guys are almost down with the restructuring and then if you look at your 10K and your facilities by geography, I know this is not a an absolutely best way to measure your capacity and such. But if you look at the amount of capacity you have by square footage, you have more square footage capacity in the United States than all of your low cast geographies combined. I just don't understand how week keep that kind of capacity online over the next several of years particularly when we're continuing to see business migrate from the use and higher cost geographies to Asia.

I think you need to see us to get to know what the Company a little bit better to really understand what Sarimina does. I don't think you can put us all in one bucket and think we're the same. Sarimina offers a lot more services that will never move from North America. We will spend fair amounts of time in New York, so hopefully if you can't come here we can see you in New York. Because Hari will go through details of that. At the same time we're going to show you how we progressed and in the low-cost region. What we're really doing right now in North America and Europe is really new product introduction, some unique stuff that is not going to move to Asia. But all the traditional product that requires a lot of labor we already moved either to Mexico or Asia or eastern Europe. But we can give you more details on that when we are in New York.

Maybe just to better understand. Maybe if we look at all your facilities in the U.S., what percentage of those facilities do you think are making money right now?

Everyone offer them.

Really? Great. Thank you.

Yes. Ladies and gentlemen, that concludes our conference today. I appreciate your time. If there's any more questions please give us a call anytime. And again, I encourage all of you to really come and listen to us in New York because we'll be able to give you more details about our strategy and hopefully you can ask us more questions. So with that we just want to say thank you again.

Thank you. 'Bye.

This concludes today's conference call. You may now disconnect.