Sanmina Corp (SANM) 2006 Q1 法說會逐字稿

Good afternoon. My name is Derek and I will be your conference facilitator. At this time I would like to welcome everyone to the Sanmina-SCI first quarter fiscal year 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Sola, CEO and Chairman of Sanmina-SCI. Please go ahead, sir.

Thank you, Derek. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's first quarter 2006 conference call. And thank you for all, again, being here. Today with me I have David White, our Chief Financial Officer, and Hari Pillai, our President of Global Operations. Agenda for today's call is that David will review financial results for first quarter fiscal year 2006. Then I will follow with additional comments relative to Sanmina-SCI results and future goals. And now David.

Thank you, Jure, and good afternoon, everyone. Before we get started, please note that selected financial portions of this presentation are also available in the form of a slide presentation which can be accessed from the Investor Relations section of our web site at www.Sanmina-SCI.com. I'll be making reference to these slides during the course of my remarks. Prior to reviewing the financial results with you, however, I'd like to take a moment to review the following Safe Harbor statement.

Side 2. During this conference call, we will make projections or other forward-looking statements regarding future events of the future financial performance of the company. We caution that you such statements are just projections. The company's actual results of operations may differ significantly as a result of various factors, including economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, 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 ended October 1, 2005, filed on December 29, 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 will refer to certain non-GAAP financial informations. The corresponding GAAP financial information, and reconciliation from non-GAAP to GAAP is contained in our quarterly press release, which is also available on the Investor Relations section of our web site. You will note from the press release that we have provided you with a statement of operations for the three months ended December 31, 2005 on a GAAP basis, as well as a reconciliation between GAAP and the non-GAAP information that is either referred to in our press release or will be referred to throughout this conference call. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, other infrequent or unusual items, and noncash interest and amortization expense. In addition to the above items, first quarter 2006 non-GAAP results also excludes stock-based compensation expenses.

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 second quarter of fiscal year 2006. In general my comments will be directed at our non-GAAP financial results as we consider this information more meaningful in facilitating comparisons with prior periods. Accordingly unless otherwise stated in this conference call, when we refer to gross margin, gross profit, SG&A, and R&D, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information.

Finally, as many of you are aware, we have had a recent practice of providing separate financial information such as revenue and gross margins on our standard EMS, PC, and components businesses. As a result of customer sensitivities and due to competitive reasons, however, we will be discontinuing this practice effective with this conference call.

Slide 3. Sales for the first quarter of fiscal 2006 were $2.86 billion at the high end of our guidance versus $2.77 billion in the prior quarter. Our GAAP earnings for the quarter were $21.2 million which equated to $0.04 per share. Non-GAAP earnings for the quarter were $39.6 million which equated to $0.08 per share at the high end of our range.

Slide 4. Before I comment on our end market revenue, you will recall that during our annual investor and analyst day conference last November, we indicated that we would be making some changes in our end market classifications effective with the start of our new fiscal year. Accordingly our server class products, which we were -- which were previously classified under our personal and business computing end markets are now classified under our computing and storage end market. Secondly we will begin breaking out our medical and end market -- medical end market business separately. And thirdly, our multimedia sector will be expanded to include consumer electronics in recognition of the importance of this sector as we work to expand our presence it.

For the first quarter, our communications market sector represented 29% of net sales and, in absolute dollar terms, was down 2% over the last quarter. Computing and storage comprised approximately 31% of net sales during the quarter. Sequentially, and in absolute dollar terms, the business was up approximately 9% over the prior quarter. Our multimedia and consumer electronics sector accounted for 9.2% of net sales during the quarter which was up about 14% in absolute dollar terms over the prior quarter. Our medical sector accounted for 5.8% of net sales during the quarter which was down 5.8% in absolute dollar terms over the prior quarter. Our industrial, semiconductor, capital equipment, defense, aerospace and automotive sectors of our business accounted for 5.5% of our net sales and in absolute dollar terms were up approximately 5.2% over the last quarter. Finally, our personal and business computing systems sector, which accounted for approximately 19.6% of total sales, was essentially flat quarter-over-quarter in a percentage of total revenue basis, but up about 2.4% in absolute dollar terms.

Slide 5. Our top ten customers accounted for 64% of total sales this quarter. Sales to our top 20 customers amounted to 79% of total sales in the first quarter. We had 2 -- we had 2 customers in the first quarter whose sales were greater than 10% of total sales.

Slide 6. Gross profit for the first quarter was $171 million, as a percentage of sales, gross profit was 6.0%, which was up approximately 40 basis points over the results reported in the prior quarter, but essentially flat with last quarter's normalized margin, and was up approximately 60 basis points over the same quarter a year ago. These quarter-over-quarter and year-over-year improvements reflect the results of our efforts to penetrate new emerging end markets, so shift our revenue mix towards lower volume, higher mix, and more complex EMS products and finally to reduce costs and improve operating efficiencies by continued focus on operational excellence and execution. I'll speak a little bit more about this in a minute in my comments regarding restructuring.

Selling, general administrative expenses, excluding stock compensation expenses of $1.5 million for the first quarter, were $86.1 million, up approximately $2.2 million from the prior quarter, but down approximately $1.5 million on a year-over-year basis. SG&A expenses as a percentage of sales were 3.0% for the quarter. Research and development costs, excluding stock compensation expenses of $100,000, amounted to $8.8 million during the quarter, bringing our total R&D and SG&A expenses to $94.9 million, again excluding stock compensation expense, or 3.3% of sales.

Operating income for the quarter was $76.1 million, up approximately 22% over the prior quarter. Our operating margin for the first quarter improved to 2.7%, up approximately 40 basis points over the prior quarter, and up approximately 20 basis points over of the same quarter a year ago. Depreciation was $32.9 million for the first quarter, down approximately $6.5 million quarter-over-quarter. Our EBITDA for the quarter was $109.1 million. Other expense net, which consists primarily of interest expense and income as well as gains and losses from foreign currency translation, was $27.3 million. Our tax rate for the quarter was 19.0%.

As indicated in our press release, our GAAP financial results for the first quarter included a one-time favorable income tax benefit adjustment of $64 million, relating to previously accrued income taxes that were reversed as a result of a settlement reached with the US Internal Revenue Service. The settlement was in relation to certain US tax laws that were concluded during the quarter. Notification of approval of the settlement by the congressional joint committee on taxation was received following the filing of the company's Annual Report on form 10-K for fiscal 2005. Of the $64 million adjustment, $27.9 million was recorded as a income tax benefit to earnings. The remaining $36.1 million was recorded as an adjustment to good will for pre-merger tax items associated with SCI systems. Our non-GAAP results exclude this one-time benefit.

Slide 7. Turning to the balance sheet. Cash and short-term investments at the end of the quarter were approximately $1.04 billion which was down approximately $86 million over the prior quarter. Accounts receivable at the end of the quarter were $1.6 billion, resulting in DSO of 51. The aging of our receivables continue to be strong and was consistent with prior quarters' experience with approximately 90% of our total balance being current and with 97% being current or less than 30 days past due.

Inventories at the end of the quarter were approximately $1.1 billion. Inventory turns during -- during the quarter an annualized rate of 9.6 times versus 10.3 times in the prior quarter. On an absolute dollar basis inventory increased $108 million quarter-over-quarter. As indicated last quarter, this inventory increase resulted from conscious decisions we made to provide better mix and upside flexibility for some of our long-term strategic customers.

Capital expenditure in the quarter amounted to approximately $23 million, the majority of which related to facility expansion activities and related equipment purchases in Mexico and Asia, where we continue to expand our capabilities. Accounts payable at the end of the quarter were $1.6 billion resulting in AP days of 55, a one-day improvement over the prior quarter. Our cash cycle days for the quarter was 33. Our working capital was $1.8 billion at the end of the quarter and approximately $113 million improvement over the prior quarter.

Slide 8. Cash flow from operations was a use of $64 million during the quarter. Free cash flow, which deducts CapEx from our cash flow from operations, was a use of approximately $86 million for the quarter. Substantially all of this use of cash was related to inventory programs I referred to previously.

Let me now comment on restructuring. During the quarter, we incurred approximately $35.6 million in restructuring cost, $20 million of which was cash. During the quarter, we started the consultation process relating to the closure of an EMS facility in Toledo, Spain. We announced the closure of an -- the closure of an enclosure facility in Clinton, North Carolina. And we downsized an EMS facility in Gunzenhausen, Germany where we repurchased the operations at that facility for new product introduction and as a gateway to our low cost operations.

Subsequent to the end of the quarter we also commenced the consultation process for the intended closure of a PC manufacturing facility in Greenock, Scotland. Our Greenock business will largely be transferred to some of our low cost regions. Upon the completion of these restructuring actions, the restructuring activities we embarked upon approximately three years ago are expected to be completed. We expect the restructuring charges for these actions to be taken through June 2006.

Slide 9. Now let me turn to the guidance for the second quarter of fiscal 2006. Consistent with our first quarter of 2006, the information I provide will generally exclude stocks-based compensation expenses, restructuring and integration costs, impairment charges, and other infrequent, unusual items as well as amortization expense. We are targeting second quarter sales to be between $2.6 and $2.7 billion, consistent with the seasonality we have traditionally experienced in the March quarter. We expect gross margins to be in the range of 6.0 to 6.2%. We are targeting our operating margin to be around 2.4 to 2.6%. Net other expense is expected to be approximately $28 million. We would expect our tax rate to be around 19% which is in line with the first quarter actual results.

Basic shares for the second quarter expected to be in the $526 million range and diluted shares are targeted to be around 528 million. This equates to a diluted non-GAAP EPS range of $0.05 to $0.07 per share. We estimate the depreciation for Q2 '06 will be around $37 million, and quarterly CapEx for our normal recurring requirements to be in the $30 to $35 million range. In addition to this figure, however, we are also acquiring a new facility in Singapore, which we recently purchased from Adaptec. Our current Singapore facility will be sold, and we expect to purchase a facility in Hungary that we currently lease. Finally we estimate second quarter cash flow from operation to be positive. As we've mentioned previously, we expect to use our available cash resources and positive cash flow from operations to reduce the amount of our outstanding debt over the next year.

In summary, we are pleased with our progress and the improvements we have 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, again, the first quarter 2006 was a good quarter, a quarter for our expectation. If I just look at this quarter and just kind of look at what we benefit from, number one was restructuring efforts that we've been working on for a few years here, stable improved IC markets and a better product mix. Also in our first quarter, to provide increased flexibility for new programs that we want and to meet our customers expectation requirements for January shipment, we brought in extra inventory in December. As David mentioned these inventory turns have been 9.6 turn, but we do, again, expect for these turns to come back, and we are forecasting these turns to improve in the Q2 to 10 turns or better.

Now looking at the longer term. As David mentioned earlier, the second quarter historically has been a seasonally slower quarter. What we're seeing today is a similar situation here, but we do expect a better product mix, and we see a potential for product margin improvements, and as David mentioned we are forecasting 6 to 6.2%. And again, expecting EPS of $0.05 to $0.07, but that's in a line with our Q2 expectation that we planned almost the beginning of the year. But the good thing about this quarter the visibility for the quarter itself is good.

Now let me talk to you about our bookings and backlog forecast. Our book-to-bill in the first quarter was over 1. And, also, if we look at the second quarter now at this time, it looks like we're also are going to be over 1. These are all positive news as we look at out there in the next quarter or rest of the year. But as we always say, predicting the future is always a challenge. Today we are pleased at all the opportunities that we have in front of us, and we believe that -- that there is an improvement for potential in 2006. As we diversify and improve of this product mix, as I mentioned, what we saw in Q1, I think we're going continue to see a better mix in Q2. And also any of the new programs that we have and some of the new nice opportunities, that should help us in a second quarter.

In the second quarter, we expect to continue to improve our component businesses. As you know, we experienced some difficulties in our enclosure division as we transitioned these businesses to Eastern Europe and China. Although we still face some challenges, we are beginning to see some nice improvements. We also are seeing nice improvements in our printed circuit boards, and we expect considerable improvements in our Asian operation in printed circuit board factories. There is still a lot of work in our component businesses, such as enclosures and printed circuit boards, but overall we anticipate margins to continue to improve in the second quarter. We also continue to make nice improvements in our personal computing business, as most of this manufacturing now is being moved to our -- from our western operation to in Eastern Europe.

So in summary, we are making good progress, and business is heading in the right direction. Customers' demand is stable and improving. We are well positioned to compete globally and are focusing on providing our customers with a total technology and manufacturing solution. Again, our bookings and forecast are improving. We have a good pipeline of new opportunities, and as a company, we are very focused on those opportunities where our technology and infrastructure gives us a clear advantage over our competitors. The key here, what we are saying is that we are not just going to acquire a bunch of factories here, but really acquire the businesses that will help us grow in the future.

The bottom line, we are committed to providing our customers the superior customer service, technology and solutions. We believe that we can continue to improve our margins, in short-term and also long-term, and the bottom line, a return to a growth again. And now I would like to send special thanks to all our investors and analysts this quarter for listening to us today. And at this time, we would like to answer any questions that you might have. Again, thank you.

[Operator Instructions] Your first question comes from Scott Craig with Banc of America.

Hi, thanks, good afternoon. Jure, can you describe the progress that you made in the quarter on the vertical integration side of things? Normally, you would give us components revenues and the percent that you're using internally. And then, second, can you discuss the inventory side of things a little bit better, because I'm confused there. Your sales over the last couple of quarters are actually down if I look back to early in 2005, and yet inventories increased around 16% over that same period, but I don't think component lead times have really stretched all that much. So, why is it necessary to build inventory when -- when the top line really hasn't seen much growth. Thanks.

Okay. Thanks, Scott. First of all, on the vertical integration, it's been basically flat compared to last quarter, about $90 million. But the most important, I think, for us, when it comes to our component businesses, as I mentioned, we had some challenges as we transferred this operation from North America and Europe into the Asia and the Eastern European. We made some internal changes here in both enclosure in our printed circuit board, some of the improvements that we are making, so we think that we turn the corner there, and we are going to see some better results. Most importantly, we are starting to see our margins improve in those businesses. As I mentioned earlier, the market itself is more stable, so there's a lot of positive news, but we just need to execute better. And, as I said, I think the worse is behind us there. So opportunity is up. As we start to be able to execute better, we should be able to do more internally. But, again, I think, potential for our component businesses really looks good now, especially as we restructure this thing and we got a good footprint.

Scott, on inventory, as I mentioned, we brought in about 100-plus million dollars of inventory. We want some new programs. Most of these things were due in January, and due to some flexibility that our customers were looking for, not just during -- not just January itself but during the quarter we brought some inventory a little bit earlier. As you know our inventory turns are still leading in industry, about 9.6, but we definitely believe we can keep those over 10 turns. If you really look at our sales comparing to the year ago, yes, our sales are down, but the mix of our revenue is different. Most-- the reason our sales are down is really mainly because of our PC business, year-to-year basis, but all our other businesses are going in the right direction. I hope that answers your question.

Your next question comes from Steven Fox with Lynch.

Hi, good afternoon. Jure, I'm just not clear on the vertical integration comment. Are you saying that your margins in components were -- held steady during the quarter?

They slightly improved, Steve. But not at the level where they need to be. I think we have a potential, maybe this quarter, to even hopefully bring them at the level of our overall corporate average, but we do expect our component businesses to get back to over 10%, and they are right now under 6%. And they did improve from the last quarter, slightly.

Just two financial questions for David. Rough estimate on how much charges and dollars remain, and also what type of cash outflow do you expect for Singapore and Hungary facilities.

So on the restructuring side, we are currently in consultation in two facilities, one in Scotland and one in Hungary, and those consultations involve the unions there and other representatives, and to some extent we have a little bit of uncertainty here. We announced that our expectation for phase 3 is about $175 million in charges, and we don't at this point see any reason to change that conclusion at this point. We incurred about $145 million to date, so that leaves us with, at least again that plan anyway, somewhere around $35, $40 million.

Thanks a lot.

Your next question comes from Thomas Dinges with JPMorgan.

Hi. A quick one for David here. David, you gave us the quarter-on-quarter growth rates for the realigned segments. Can you give us flavor following on what Jure's comment was there on what the two new segments, the server segment and the PC segment, look like on a year-on-year basis, and then I have a quick follow-up.

On a year-over-year?

Which segment you talking?

Which -- you talking about -- which segments again?

Well, you moved the server from PCs out of there, so just trying to get a sense of what the two segment are year-on-year.

Yes, you have that. Yes, we do. So, if you at -- if you look at on a year-on-year, it's up about -- well, actually it's down from where we were previously because some of that includes business that's transitioned.

Okay.

o the tune of, maybe -- I'm sitting here looking at it -- I don't have a calculator so I'm doing it in my head.

Okay.

Something in the order of about 15%.

Okay. Okay. And then -- a quick one just to ask the inventory question just one more time, Jure. It sounds as if a lot of this is going to get consumed in January, and I guess the broader question for a lot of folks is, we've now seen a couple of companies in the sector now that have had some spikes in inventory higher, I shouldn't say spikes, but a little bit stronger inventory growth than revenue growth, with the characterization that a lot of it is for new programs. The question is, are you getting paid the carry cost on that, and if so, a question for David, where is that reflected? Is it just baked into the gross profit number there or does some of that offset against, maybe, some of your own capital cost.

Well, first of all, the inventory that we carry is definitely for new programs. We've been fortunate that we've got fair amounts in our pipeline, and we are able to win some new programs, and we are pretty optimistic, some of the programs that we, the new programs that we have right now, we are working on. So we -- if you look at our inventory turns last year, we are running them about 11 turns or better, and we are still not giving up to be the leader there and I think we'll continue to be a leader in inventory turns, and I think we'll keep it over 10.

But I think, as we win these new programs, how do you get paid for them? It's really-- you look at the program by program. Some programs it's a part of the cost where customers say, listen, I need to have finished goods, I've got to have this raw material up front, and that's really part of the -- part of the cost. Or in some cases where customers are not forecasting really well and we end up getting inventory turns. Typically we go back to them, end of the month or end of the quarter, and submit them a bill for that. But I would say most cases it is really part of the cost which we share with our customer.

Okay, thank you.

Your next question comes from Thomas Hopkins with Bear, Stearns.

Hello, Tom.

Hey. Could you update us on how you see the high-end computing market, and the mid-range and low-end as well, it seems that there are a lot of different things going on. For example, on your ODM server business, it looks like Sun is looking at other potential ways to do Opteron servers. There's obviously the Lenovo business, which is pretty much been understood and digested, so that's a little bit of a change, and then there could be things going on with IBM as well. So, it just looks like the supply chain is a little in flux. It you could just update us on that.

Yes. First of all, under -- we break our computing business into two groups. One group is mainly PC which is a PC -- mainly desktop and laptop, we have two major customers there, which is Lenovo and then Hewlett-Packard. The relationship with both of these customers is strong, and we don't expect any changes there. As their business grows, we believe we are going to participate in that business nicely.

On the rest of the computing business, which is mainly servers and storage, we feel very comfortable of that. I mean, yes, we have a major -- we had one major project with Sun a year ago, and that project is basically almost end of the life. We are still shipping a few units on that one. We have other opportunities with Sun, and we are expanding that ODM with service to other customers. But overall as you look at that business, servers and storage, over 95% of that revenue will still count from mainly our ODM designs. We think we're well-positioned there. We've got a fair amount of opportunities in our hands right now, and we expect that business to grow.

Okay. And how do you see the opportunities for your vertical components business as it relates to telecom infrastructure.

Well, telecom is always a sweet spot for us. I mean, back to comments on telecom, we are more optimistic about the telecom infrastructure this year than last year. There's a lot of positive things that are happening, especially some of the new program development and, fortunately for us, we're involved, and the more we're involved in those new programs, there's more vertical opportunities for us.

But back to what I said earlier, Tom. We had some challenges when we moved our component businesses to Asia and China, and that kind of hurt us taking on more revenue, because we have some process issues there which that are behind us now. I should say management issues. We are upgrading that. And that was just a challenge, a challenge that we underestimated. We moved a lot of surface mount lines all around the world and we are very successful in it, but as we moved some of these technology products, it took a little bit longer than we thought it would. But we learned a lot from it, and going forward, we should see some positive result, and we should be able to take on more revenue, and as I said earlier, I am pretty confident that we are going to see some better margins from both those business, enclosure and printed circuit boards in Asia.

Okay, great, thank you.

Your next question comes from Bernie Mahon with Morgan Stanley.

Hello, Bernie.

Hi. A couple questions for you. One on the SG&A. It seems like that, well, it was up, say, 10 basis points as a percentage of sales, but I thought that you had some cost rolling off that inflated it a little bit, I guess, in the second half of fiscal 2005. So, can you just talk a little bit about what's going on there? Is there more R&D, and what the additional costs there are?

Well, Bernie, I think the only costs kind of rolling off is SOX. We had a lot of push on that in the latter part of last year, and so that's the cost that's kind of rolling off.

Yes, but I guess the question was, is that it's inflated some, but you're also doing some restructuring so I would think there would be some costs coming out of that?

I think that's reflected and obviously that's offset by increases elsewhere in the business. Certainly on a percentage basis, it's going to be impacted by -- well, on a percent of revenue, but --

Okay. And then just a follow-up. On the depreciation, what's going on with the depreciation expense. It seems like it fell about 6 million from last quarter, but then do you expect it to jump right up to 37 million next quarter. I just wouldn't think it would be that volatile.

So, some of it's retirements, assets coming off or assets that we have sold or dispositioned, and then that gets offset by new assets that we purchased during the quarter. So that -- that's the fundamental difference.

All right, thanks a lot.

Thank you, Bernie.

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

Hello, Matt.

Hi, Jure. Could you be a little bit more specific in talking about some of the pipeline out there, some of the new projects that are rolling on, perhaps if not by customer but by end market segment? And then also, can you give us an idea of what your expectations are for business that 's transitioning out to competitors.

Okay. Well, first of all, opportunities that we have. As you know, we spent a lot of time last nine months putting more people in our sales area, and then our whole customer development. So, our medical side of the business, industrial, defense and aerospace, I think has a tremendous amount of opportunities that I think are coming to us right now. I think communication side of the business we are involved in a fair amount of new programs there. Some more customers there are -- at least what we see with our demand is -- it looks like we're going to have a nice upside this year. And, of course, I talked about computing. I think storage and servers, we're well-positioned there. Multimedia, and as David mentioned, we're going to be also pushing a little bit more in consumer side the market. We think there's a tremendous opportunity there for us too.

So those are some of the opportunities we have. On a personal computing side, as I said earlier, those are the two major customers there, and that business, we think it's going to grow this year, but it is hard for me to predetect at this time. So a lot of our focus right now is to diversify in the rest the businesses and really grow that business, including our component businesses. I think the demand for product at the component level is pretty strong right now, and as we fix some of our issues in Asia and Eastern Europe, I think we should see some positive benefits there. Losing the business, I can tell you right now, you know we stopped that leakage. I mean, we don't really see any major things going away from us. There's always small amounts of businesses moves back and forth, but I can tell you right now that the business we have today is pretty secure

Okay. And I know you don't like to comment about specific customers but certainly Nortel has been an issue given what they are doing with Flex. Any comment there about that customer?

Well we don't like to comment about customers; both Nortel and Flex are our customers. I mean, with Flex -- we are customers to each other. We partner and we deal. So there -- we can't make a comment. It's not my place to make a comment. We do business with both, and hopefully we will continue to do business in the future.

Okay. Thank you.

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

Thanks a lot. Jure, you just spoke about some of the new wins and I'm trying to understand, when you look at these new programs, like the Adaptec one. Are these new programs enabling you to leverage your [witagel] integration? And I guess, maybe if you could about what percent of new ones involve some level of [witagel] integration.

Adaptec is a perfect type of things that we look for. It is a nice piece of business, over 100 million potential, 150 or maybe even more. Depends on the demand. We have right to 100% vertically integrate that. And we'll do that -- whatever makes business sense.

And then just in general, in terms of the wins that you have, in a broader basket, what percentage of the wins might have some level of [witagel] integration.

Well, on a high-end stuff, really that's where we believe we can add a lot of value, on a high-end product, where they have a very difficult printed circuit board, difficult metal work, and things like that, that back plane, we've been always very successful. Where we've not been very successful in on the lower end, because some of our factories were not set up for that type of product today, but as we move the factories to Asia, we're going to be picking up some of that work where we can make a little bit of money and offer our customers total solution.

All right. And then if you can just talk on the component side, specifically the Pentex acquisition you guys did. Can you talk about how that is coming along, and also how many of your top 10 customers have qualified that side so far.

Well, first of all, that was a challenge -- but it's been really mainly a challenge because of the management there and we, as you know, we moved a lot of equipment into those factories. We transitioned a lot of new customers in there. So there was a lot of interaction, comparing what they were used to. But I would say that -- I would say at least 80% of our top ten been approved in those factories. So we did a lot of approvals in the last 90 days.

All right, and just finally, regarding the closure on your PC facility now in Europe. Just to be clear. All this work should move to your facilities in Hungary, I believe, right? And [inaudible] reflection of program transitions away from Sanmina?

No, that's-- that is true, we're just from moving it from one factory to another factory.

Thanks a lot.

You're welcome.

Your next question comes from Alex Blanton from Ingalls & Snyder.

Good afternoon.

How are you?

Just -- first, could you clarify something. At the very beginning, you said you were discontinuing something -- giving out certain kinds of information. What was that again? I missed--

Well, first of all, we don't -- we -- we are not going to forecast any more -- tell you what markets are going to be up, what markets going to be down next quarter because if I look at -- analyze the last 2, 3 years, it was very hard for us to forecast. So we are going to give you one number and that number we feel very confident, confident as we can be, and try to push the number so we are going to get away from trying to tell you what's going to happen with telecom, what's going to happen with PCs. We just, we're not good at it, and I want to stay away from it. So that's really the major -- and we can't tell you more, we can't give you data on our customers anymore. I think we were -- some of our customers talked to us about it, and also some of the information that were giving regarding our internal businesses, I think for competitive reasons, we stopped giving that away.

What kind of information on customers?

Oh, just as much, how much business we do with customer A, B, and C and so on.

Okay. Second question is this. Recently one of your competitors, Solectron, announced that it would take its lean manufacturing efforts, which have -- which are in the third year now, under Marc Onetto, and they would migrate that to their suppliers in order to get additional benefits from it, to get their supplier up to speed. What has Sanmina done in this regard.

Well I can't comment what Solectron did--

No, I'm not asking you for that. I am asking what Sanmina's done.

Well, Sanmina, we've been involved in lean manufacturing for many years, for last 10 years. And, of course, we always try -- utilize our suppliers to help us. It is really a customer, supplier and us that work very close together to eliminate the waste and find the processes that are the most efficient way to get the job done. So it's a practice that we all do every day. It is nothing new to all of us. Some of us do better than others, and some of my factories do it better than others. For they say it's a constant thing, Alex, that you have to do. I grew up in this manufacturing myself, and it is something, no matter how good you are today, you have to continuously tune things up.

Well, I guess what I am asking, though, is -- in terms of helping your suppliers get lean. In other words, going into their operations and changing those operations. For example, in 1997, General Electric, which was a big customer of Plexus, and was doing their lean manufacturing, and at that time under Marc Onetto at GE, took their program and put it into Plexus, so Plexus's lean manufacturing program originated because of what their customer did. And, what I'm asking you is, can you give me examples of some of your suppliers where you have taken your lean manufacturing procedures and installed them in your suppliers.

Alex, first of all, we can't tell you what we do with our suppliers. That's really between us and the suppliers, but what I told you, that's a normal process that we all do every day, and what you are talking about is an old story. There's nothing new in this industry.

Yes, I know. So -- you have -- you've got your lean program migrated backwards into your suppliers, and so that you can get products more efficiently from them?

Of course. I mean, the works of not every supplier is out there is perfect just like we are not, but the bottom line is you have to cooperate with our suppliers. So, that's the best I can answer it to you.

Okay. Thank you.

Your next question comes from Brian White with Kaufman Brothers.

Hi, Jure.

Hey, how are you?

Good. I wondering if there's any market that surprised you either on the upside or the downside in the December quarter.

We had -- we had opportunities in communication market probably to ship more and because -- just trying to get some of components, it was difficult to get it out. We also had pretty good opportunities in our defense and aerospace area that some of our customers wanted to take more. So those are some of the, maybe, positive things that we got in kind of late in December. Really, there was never -- I wouldn't say anything that surprised us. We forecasted at 2.8 and 2.7 to 2.9 is what it was. As you can see we came very close to top end, and really we're really focused on improving our processes and trying to maximize the profits.

Okay. Is there anything thus far in January that surprised you, either positively or negatively?

On the positive side, I wouldn't say I'm surprised but encouraged with some of the opportunities that we have, with some of the new accounts we have been working on for many months. So they seem like they are starting to come in right now with some demand, and hopefully we'll see some benefit the next few quarters there. So those are positive news. But I wouldn't say anything surprised. This whole business for us, I think things are moving the right direction, but I don't think it's still there that we can go out and grow this business 20% a quarter. But definitely, things are moving the right direction and those are positive signs. So I would say there's a lot more positive than negatives.

Okay. And just Jure, I know you've spoken at the Analyst Day, EPS could grow about 30% in '06, sales can grow with the market somewhere in the single digit range. Are you still comfortable with those?

Definitely we're a lot more comfortable about our EPS growth today than I was three months ago, that we can grow 30-plus percent. On the growth, I think if I look at the growth there definitely potential is there, but I think that the higher growth for us is going to come more in the second part of the calendar year.

Okay.

There is a lot of opportunities that we are planning today, and a lot of new programs that should be picking up the second part of the year.

Okay. Finally, Jure, just the ODM business, do you have any color on that during the quarter and the sales level?

Yes, we -- it really didn't change much from the -- what we talked about in New York there.

Okay.

And we -- for a whole year, really, we are more right now in introducing some new programs and winning some new customers and just making a lot of shipments. So we knew this year was going to be a low year from ODM point of view, but we are still committed to that area and it is something that I think we need to be involved in.

And -- this is -- the ODM business should ramp in the second half of the year also?

That's correct.

Okay, thank you.

Your next question comes from Jim Suva with Citigroup.

Hi, can you briefly touch on what your utilization is now and on the same note, your production footprint and high-low costs now, say, versus a year ago, and when you -- where you think it will be exiting the restructuring, thank you.

Hari could you -- you want to [inaudible]

Sure. Jim, Hari Pillai here. We -- in November we talked at -- quite a bit about our footprint and the distribution of that post restructuring, and we're -- the good news is, we are on track to achieve what we said we would, and we view that as the most important from a -- from a quick recap, our North American and European facilities are primarily focussed on [MPI] activity and being gateways into our excellent facilities around the world and low-cost regions. So we are still really sticking to that strategy and marching to the plan that we shared in November in New York.

And on utilization?

We didn't break out utilization specifically, but I would say that we are looking in -- overall in the 65 to 75% range.

Thank you.

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

Hello, Todd.

Good evening, everyone. Going back to Nortel for a moment. Are you not in a position to comment on whether or not whatever transfers that we're going to go on to Flex are either done or still going on and will take another couple of quarters to work their way through your system?

Todd, it is just not fair for me to make a comment on that. I think that question is really more for Nortel and Flex. You know, as I said earlier, we do business with both, and I will leave it at that.

Okay. Secondly, you're seeing down 8% sequential seasonality taking place in the first quarter. You talked about your visibility being pretty good for this quarter in terms of bookings. Can you make any qualitative comments about a balance in the business in the June quarter and give us kind of orders of magnitude.

Well, first of all, let's talk about the Q2. Visibility is good because what -- the booking forecast, we basically have it in our hands. So we feel very confident about that. And usually that's a good sign that if we are already booked for this quarter that the June quarter should be hopefully a little bit better. But, I would like to talk to you about that three months from now. But we are optimistic, let's put it that way.

Okay. Great. Thanks a lot.

Thanks, Todd. Operator, we have time for one more question.

Your final question comes from Lou Miscioscia with Lehman Brothers.

Thanks, Lou.

Okay, great.

We left the best for last, how did I say that.

Oh, so now I have to be really nice. [ LAUGHTER ] My question has to do with cash flow. Obviously, the cash flow came off in the quarter. Obviously you pointed to inventory. Maybe, can you give us a range for what you expect for free cash flow from operations and free cash flow in the upcoming quarter?

Go ahead, Dave.

Yes, Lou, we are not giving guidance on cash flow other than the fact that we expect it to be positive and positive for a number of reasons and one is we believe we will generate positive cash flow from operations, number one. Number two, we -- as a part of that, we think our inventory will continue to come down, but we're really not giving any further guidance than it being positive and such.

Okay. Great. And it looked like accounts receivable ticked up but last year it looks like you were able to work that down pretty substantially. Last year moved it from $1.8 billion to basically $1.6 down 200, quarter to quarter. Would you expect a pretty substantial workdown in accounts receivable again?

I think we've got room for progress there. If you look at the strength of our aging and so forth, it is very good, but we do see lots of opportunities for it to be -- to be better at collecting, to be negotiating better terms. And so we would expect it to come down.

Okay. Thank you.

Okay, thanks, Lou. Well, ladies and gentlemen, again, thank you very much for listening to our conference call today. If you have any more questions, give us a call here, and we will make sure we answer all your questions you have. Otherwise, we'll talk to you three months from now. Thank you very much.

This concludes the Sanmina-SCI first quarter fiscal year 2006 earnings conference call.