Sanmina Corp (SANM) 2006 Q2 法說會逐字稿

Good afternoon. My name is Ashley and I will be your conference operator. At this time, I'd like to welcome everyone to the Sanmina-SCI second-quarter fiscal 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 will now turn the call over to Mr. Jure Sola, CEO and Chairman of Sanmina-SCI. Sir, you may begin.

Thank you, Ashley. Good afternoon ladies and gentlemen and welcome to Sanmina-SCI's second quarter fiscal 2006 earnings conference call. Here with me today is David White, our CFO; and also Hari Pillai, our President of Global Operations. Today, we will start with David. He will provide a financial overview for the quarter, and then I will follow up with additional comments relative to the Q2 results and also focus on the next quarter and look out for the rest of 2006. And now, David.

Thank you, Jure, and good afternoon everyone. I would like to start by first apologizing for our press release being issued about 20 minutes late. 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 will be making references to these slides during the course of my remarks.

Prior to reviewing our financial results with you, however, I would lead to take a moment to review the following Safe Harbor statement, slide 2. During this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution you that such statements are only 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 volumes, competition and technological change. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's most recent annual report on Form 10-K for the year ended October 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 information, the corresponding GAAP financial information, and the 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've provided you with a statement of operations for the three and six months ended April 1, 2006 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, the impairment charges or other infrequent or unusual items and non-cash interest and amortization expense.

In addition to the above items, fiscal 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 third quarter of fiscal 2006, ending July 1, 2006. In general, my comments will be directed to 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 profit, gross margin, SG&A and R&D, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information.

Slide 3. Sales for the second quarter of fiscal 2006 were $2.67 billion, at the middle of our guidance of 2.6 to $2.7 billion versus $2.86 billion in the prior quarter. As indicated in our press release, our GAAP financial statements for the second quarter included a onetime charge of $112 million relating to the refinancing of our 750 million 10-3/8% high-yield notes. These notes, which had previously been swapped to floating, were currently approaching an 11% interest rate and costing the Company approximately $80 million in annual interest expense. In the process of evaluating our capital structure and other alternatives, such as refinancing, our 3% converts first, we're delaying the refinancing of the $750 million notes one, two or three years later, we concluded on a net present value basis that our best economic strategy was to tender for the $750 million notes now. In the process of doing so, we were also able to partially deliver the balance sheet by $150 million, extend our debt maturities in a rising interest rate environment and gain some financial flexibility by freeing up previously pledged U.S. collateral. The refinancing will also be accretive to future earnings by about $0.05 per share annually.

Our non-GAAP results exclude this onetime charge.

As a result of these charges, our GAAP results were a loss for the quarter of $103.4 million, which equated to a loss of $0.20 per share. Non-GAAP earnings for the quarter were $30.5 million, which equated to $0.06 per share, in the middle of our guidance range of $0.05 to $0.07 and consistent with consensus.

Slide 4. For the second quarter, our Communications market sector represented 30% of our net sales, and in absolute turns, was down 4% over last quarter. Although this sector was down quarter-over-quarter, we benefited from improved product mix. High-end computing and storage comprised approximately 28% of net sales during the quarter. Sequentially and in absolute dollar terms, the business was also down approximately 16% over the prior quarter. The quarter-over-quarter decrease is primarily attributable to weakness in high-volume server products.

Our Multimedia and Consumer Electronics sector accounted for 11% of net sales during the quarter, which was up about 10% in absolute dollar terms over the prior quarter.

Our Medical sector accounted for 6.6% of net sales during the quarter, which was up 6.4% in absolute dollar terms over the prior quarter.

Our Industrial, Semiconductor, Capital Equipment, Defense, Aerospace and Automotive sectors of our business accounted for 7.4% of net sales, and in absolute dollar terms, were up 22% over last quarter. Each of these end markets saw solid growth over the prior quarter with our Defense and Aerospace sector continuing to achieve record revenues.

Finally, our Personal Computing Systems sector accounted for approximately 17.4% of our total revenue and was down quarter-over-quarter about 16% in absolute dollar terms. This increase was in line with our expectations.

Slide 5. Our top 10 customers accounted for 61% of total sales this quarter. Sales to our top 20 customers accounted for about 76% of total sales in the second quarter. The diversification of our customer base over the last year has contributed to the lower customer concentrations as evidenced in these charts. We had two customers in the second quarter whose sales were greater than 10% of total sales.

Slide 6. Gross profit for the second quarter was $164.8 million. As a percentage of sales, gross profit was 6.2%, up approximately 100 basis points over the same period a year ago, up approximately 20 basis points over the prior quarter's results and was at the high end of our guidance. Our gross margin in the second quarter also represented the highest reported in 19 quarters.

Selling, general and administrative expenses for the second quarter, excluding stock compensation expenses, were $88.2 million, up approximately $1.1 million over the same period a year ago up $2 million over the prior quarter. SG&A expenses as a percentage of sales were 3.3% for the quarter.

Research and development costs for the second quarter, [excluding] compensation expenses, amounted to $10.4 million, up $3.1 million over the same quarter a year ago and up $1.6 million over the prior quarter. This increase reflects our continued investment in ODM product development and R&D expenses for the quarter also include development expenses associated with our acquisition of Eurologic. Our combined R&D and SG&A expenses for the second quarter amounted to $98.6 million, or 3.7% of sales. Operating income for the quarter was $66.3 million. Our operating margin for the second quarter was 2.5%, down approximately 20 basis points over the prior quarter and up approximately 60 basis points over the same quarter a year ago. Depreciation $34.4 million for the second quarter, up approximately $1.5 million quarter-over-quarter, and our EBITDA for the quarter was $101 million.

Other expense net, which consists primarily of interest expense and income, as well as gains and losses from foreign currency translation, was $29.3 million versus $27.3 million in the prior quarter. Most of this increase was related to higher than anticipated foreign exchange losses which we expect to be nonrecurring.

In connection with the refinancing we completed in the second quarter, we will realize interest expense savings of approximately $36 million a year, which net of the forgone interest income, should equate to about $26 million a year in savings. Our tax rate for the quarter was 17.6%

Slide 7. Turning to the balance sheet, accounts receivable at the end of the quarter were $1.4 billion, resulting in DSO of 48. Our aging of receivables continued to be strong and improved over the prior quarter with approximately 91% of our total balance being credit and with 97% being current or less than 30 days past due.

Inventories at the end of the quarter were approximately 1.16 billion. Inventory turns during the quarter at an annualized rate of 8.6 times versus 9.6 in the prior quarter. On an absolute dollar basis, inventory increased $37 million quarter-over-quarter. Of this increase, $23 million relates to the purchase of inventory in connection with the contract manufacturing relationship we formalized with Adaptec earlier in the quarter. The balance of the increase was mainly attributable to raw materials under a few programs we are ramping in the third quarter and conscious inventory investments we have made to provide better mix and upside flexibility at some of our long-term strategic customers.

The balance of our inventory was in line with expectations we set at the beginning of the quarter.

Capital expenditures in the quarter amounted to approximately $48 million. The majority of the spending related to the purchase of our facilities previously released in Hungary and facility expansion activities and related equipment purchases in the low-cost regions of Mexico and Asia where we continue to expand our capabilities.

Accounts payable at the end of the quarter were $1.4 billion, resulting in AP days of 51 versus 55 in the prior quarter. Our cash cycle days for the quarter were 40.

Slide 8. Cash flow from operations was a use of $189 million during the quarter. Free cash flow, which deducts CapEx from our cash flow from operations, was a use of approximately $237 million for the quarter. Cash and short-term investments at the end of the quarter were approximately $625 million, down approximately $414 million over the prior quarter. This usage of cash is broken out as follows -- $264 million relates to the refinancing I just of, broken out as follows -- $154 million to pay down debt; $71 million in tender premium; $30 million in interest rate swap online costs and the balance in fees; $78 million in net accounts receivable, inventory and accounts payable, which I just addressed; $50 million for the purchase of new facilities in Hungary and Singapore and the remaining assets purchased in connection with the Adaptec and Eurologic transactions; and $22 million in other capital expenditures and other items.

We expect to generate positive cash flow for the balance of the fiscal year.

Let me now comment on restructuring. During the March quarter, we incurred approximately $20.6 million in restructuring costs, $15 million of which was cash. You may recall from our last conference call that we had just started the consultation process relating to the closure of our PC manufacturing facility in [Greenwich], Scotland and an EMS facility in Toledo, Spain. Our Greenwich facility closure is expected to be completed by before the end of this month with the work successfully transitioned to Hungary where it is being integrated with other similar high-volume CTO/BTO business.

In regards to our Toledo, Spain facility, we have yet to reach a conclusive agreement with the union regarding the closure. However, we do anticipate an agreement by the end of June. Based on the anticipated outcome of these negotiations, we expect the costs associated with all of our remaining Phase III restructuring to cost approximately 65 to $75 million. Of this amount, greater than 90% will be in cash over the next three quarters.

In connection with the closure of these facilities and others that have previously taken place, we believe we can generate upwards of $100 million in cash flow from the sale of these excess properties and facilities over the balance of the year. Of this amount, $39 million is already in escrow and should close within the next three months. As indicated in our last call, on the completion of these restructuring actions, restructuring activities we embarked upon approximately three years ago will be completed. We expect the majority of these restructuring charges to be taken in the June quarter.

Slide 9. Now let me turn to the guidance for the third quarter of fiscal 2006. Consistent with prior quarters of fiscal 2006, the information I've provided will generally exclude the stock compensation, expenses, restructuring and integration costs, impairment charges, other infrequent and unusual items, such as -- as well as amortization expense.

We are targeting third quarter sales to be between $2.7 and $2.8 billion. We expect gross margins to be in the range of 6.5 to 6.7%. We are targeting our operating margin to be around 2.8 to 3.2%. Net other expense is expected to be approximately $26 million. We would expect our tax rate to be around 17.5%. Basic shares for the third quarter are expected to be in the 527 million range and diluted shares are targeted around 529 million. This equates to a diluted non-GAAP EPS range of $0.08 to $0.10 per share.

We estimate that depreciation for the third quarter will be around $34 million and third quarter CapEx to be in the range of 25 to 30 million. We also estimate third quarter stock compensation charges to be in the range of $2 to $4 million. Finally, we estimate third quarter cash flow operations to be positive.

In summary, we are pleased with our progress and the improvements we made in the quarter and we thank you for your time. With that, I will turn the time back over to you, Jure.

Thank you, David. Ladies and gentlemen, as I mentioned before, I will also comment on our second quarter and also talk a little bit about our Q3 and the outlook behind that.

As David mentioned, we as the management are pleased with the quarter itself. As you know, this is a seasonally weak quarter; typically, a quarter that has always been challenging no matter what (indiscernible) in the industry. But I can see that we have some good things here. We did improve the margins from 6% to 6.2% on a quarterly basis. And also, if you compare it to a year ago, it was only a 5.2%. So a nice improvement, especially when you look at it on a yearly basis.

The main reason for that is that our product mix is improving as we have been focused on diversifying our markets and our customer base in the last three years. I can tell you that definitely this is starting to pay off. Our Defense and Aerospace, Medical, Multimedia, Consumer, Industrial, Semiconductor markets are improving nicely -- improved nicely in this quarter, and we expect it to continue to improve through calendar year 2006.

In absolute dollars, if you look at our communication, high-end computing business was down for the quarter. But we had some good things happening this quarter, that the product mix was very good and that really drove our margins up. Most of the weaknesses in the quarter really came from our high-volume computing and servers -- in computing and [mainly] in servers business, and also in the PC segment. And our high-volume server and PC server business was down, but we expected it to happen in this quarter. This was not a surprise to us as we forecasted this during the quarter.

On the PC business itself, growth for this business is expected to be flat. Yes, we see improvement in the second half of the year, but if I look to what's going to happen in the next three months, we look at things on the soft side. Our customer relations in the PC business are continuing to be strong. We're not losing any market share here and this type of relationship will continue for many years to come.

Let me make a couple of comments on our component business. Demand for our printed circuit boards and backplanes has been very strong during the quarter and the good thing about this business is this continues to be good for coming quarter and we really expect this business to continue to be strong for the rest of the calendar year 2006. Also, I can mention to you that our printed circuit board business delivered the highest revenue in 19 quarters, and most importantly, that in the third quarter, we were able to increase that forecast.

And also, we're starting to see nice margin improvements in both of these businesses. And also, as I mentioned, last quarter, we had some issues with our Asian printed circuit board factories, but I can tell you that they are starting to now contribute -- they contributed positive margins in Q2, and they should continue a nice improvement in the third quarter.

I would like to make a couple of comments here in our enclosure business. Business for our enclosures is also very strong. As we mentioned previously, we did have some operational issues in the last two, three quarters, but I can give you some good news, that we made some changes there. We added additional management and we saw a nice improvement this quarter based on performance. And I am personally optimistic that these type of improvements will continue going forward in Q3 and beyond.

Now I'd like to talk a little bit more about our market condition, just to bring you up to date on what is going on. Market is definitely more favorable and will continue to improve. Again, this is based on the input that we're getting from our customers and the forecasts that we're seeing. Lead times are going to -- going out across all of our businesses, which is good because pricing is getting more stable and we think pricing should be able to improve as long as the demand goes up. Also, our book-to-bill for the quarter was positive for all of our major businesses, except for our PC business.

Let me talk to you about program wins. First of all, we've been very successful winning new programs with our existing and new customers, and I've been talking to you in the last couple of quarters that we are investing fair amounts of money in our technical sales force, and it's starting to pay off. If we just analyze our last six months, we brought in approximately $500-plus-million of the new business that will be shippable in rest of the year in, I would say, next 12 months. And I believe these type of wins will continue in the rest of this fiscal year and the calendar year based on the programs that we are involved in the midst of negotiation.

Also, we believe we are making good progress in our business strategy, which is really, again, focused on diversifying our markets and a customer base. Today, we have really focused on the growth of our core business and margin improvements. Demand for our traditional business is definitely coming back. The telecom business, for the quarter itself it was down, but there was a lot of positive things happening with our customer base. And as you know, Sanmina-SCI has a very strong customer base in that business. As I mentioned, our other businesses as we diversify into that are also starting to improve.

We are positioned I think to deliver a nice growth in our core business for the quarter itself, and also most important for the rest of the calendar year 2006. Only businesses that is hard to forecast at this time for us is our PC segment, which is basically high-volume server business and the desktop PC.

So let me also add a few comments on our guidance. At the beginning of the year, we told you that we're going to grow our non-GAAP EPS at least by 30%. I can tell you today that we are very confident about that, and our goal is to continue to work very hard to make sure we meet or exceed those goals. We should see continued improvement to our top line and the bottom line, as I mention, the rest of the year.

Again, we are forecasting, as David mentioned, 2.7, 2.8; EPS range of $0.08 to $0.10. It's a nice step in the right direction. And also, I think the reason we're more confident is that our mix of our business continues to be more favorable, our core business has continued to grow. Along with our increased efficiency and with the restructuring mainly being now behind us, we can focus on things that we're good at. So improving the margins for the quarter, 6.5 to [6.7], is attainable.

As again I'm just going to add, the only business that we have a hard time to forecast at this time will be the PC segment itself. But any business that we believe we're going to see in the PC in this coming quarter, we think we can offset that by positive growth in our core business.

So in summary, our hard work is starting to pay off, our core customer base is strong and growing. Combined with our new customer wins and restructuring basically behind us, as I mentioned, now we can focus on things that will give us the growth, and most important, improve our margins.

At the beginning of the year, we also told you that our operating margin should be [between] -- we're actually in the fiscal year 2006 -- should be between 3 to 4%. As I can tell you today, that we're more comfortable about those numbers this time, and I believe we are very close to meet those numbers and hopefully, go from there at the higher numbers.

The bottom line is we're more optimistic about the future of our business and I believe the pipeline of the new opportunities is healthy, and that is really what is more exciting now.

So at this time, I would like to say thank you for all of your support, and we will now have some time to answer any questions that you may have. Operator, we're ready for questions.

Lou Miscioscia, Cowen.

I guess if you could give us a little bit of an update on the full-year revenue guidance. I think at the analyst meeting, you had thought you might be able to hit I guess zero to a positive kind of growth this year. Does it look like, I guess if we look at the high end for June and maybe something sort of flattish for September, that you will probably be down mid-single digits for the full fiscal year?

Well, right now, we would like to take one quarter at a time. I think it all is going to depend how PC business comes in the last quarter of our fiscal year. I can tell you that the core business is starting to grow, and we expect a nice growth across all of our core businesses, except the PC, in this quarter, but it's really hard to forecast at this time. It really all sort of depends what type of strength we get in the PC and the server business.

The changes that you're seeing in the PC business, is that anything to do with just the customers' end demand, or is there possibly some businesses shifting around there?

Definitely, there's no shifting in the business there at all. Just want to make that very clear.

Okay. Can you give us an update, when we were at the analyst meeting, you talked about Newisys and that this year was a little bit of a transition year. Has the two-way winding down, the two-way [Operton] servers and the four-way still doing well, but just a couple of your customers going through some transitions and ramping of their own product lines there. Just how are you seeing Newisys I guess as you look over the next -- or I guess the rest of this calendar year?

As we said at the beginning of the year, we knew that we were going to be losing some of that business at the beginning of the year and we have a few new products coming out. So first half of this calendar year, we expect the slowness, which as you describe it, [2P] we're still shifting some of that, but it's not at the volume like we used to be. [4P] is doing okay. We have a couple of products coming out, a new version of 2P. We do have a nice project with one of our key customers that hopefully will start shipping by the end of the year. So we are optimistic. As the end of the year, we're going to start shifting more from Newisys.

So same I guess guidance you had before, just it's a little bit more of a transition here, or do you actually have a large customer signed up for volume?

I would say, it's a transition year, but we definitely have a customer now that we did not have six months ago. And we also are working on a couple of opportunities that I cannot talk about it, but could be substantial, you know, if those prove successful. So it's definitely a business that's in a transition year and we have forecast that for 2006. We expect more growth in 2007 on that side of the business.

Okay, thank you.

Kevin Kessel, Bear Stearns.

Can you guys give a little bit more detail about your components? You had mention that printed circuit boards had hit their highest revenue level I think you said in 19 quarters. In the past, you had actually given us a breakout. I think last quarter, you said total components were roughly flat with Q4, which implies around $400 million in aggregate, and the gross margins were I think you said about 5.1%, or at least above 5, you had said. So, can you give us an update on where that stands today?

The printed circuit board business, definitely as I said, is the highest revenue. This coming quarter, our revenue in printed circuit boards will grow again and the run rate for our printed circuit board business today is almost a $600 million run rate. Comparing to a year ago, it was only a $400 million run rate. So it's really a nice improvement, but most importantly, also the backplane is starting to improve. We're getting some nice programs as the demand for high-end backplane product is there, and also combining that with some of the high-end enclosure stuff that we're having. Overall when you look at the growth, the component businesses in Q2 was basically flat, some growth, like I said, in the key markets. But, we had some slow demand in our memory module business that offset some of the growth that we had in our component business. But looking at Q3, we expect a nice growth, especially in our printed circuit boards, backplanes and nice growth in our enclosure business.

Okay.

And the margins for -- we don't like to break it down, but our printed circuit board margins for North America are running in the high-double-digits. In Asia, it's a single-digit. But overall, it's basically the low-double-digits we feel now, but we're really pushing to get to high-double-digits in that business. And we have the potential to get there and we think we can get there in a few quarters.

Are enclosures above breakeven at the operating line yet?

Basically, enclosures, we lost some money last quarter, but we expect to make money this coming quarter.

Okay. And in terms of restructuring, I heard what David said, that Phase III is winding down; then, you will be complete with restructuring. Are you comfortable today with your footprint in components where it stands, or do you think there might need to be more readjusting to actually maximize the value?

At this time, we feel very comfortable because as our components in a so-called high-cost region really are focused here on a quick-turn leading technology military type of product and we're very busy in those areas. And if anything, I would need more capacity today in those regions. But the growth of our components is going to come in the low-cost region as we feel a lot more comfortable with that foundation that we build on. As we transition that business, we struggled it, we had some problems in Hungary, we had some problems in Asia. We believe it is behind us, we added some management and I think it's starting to help us. So I'm a lot more optimistic. And the most important is the backlog is very strong in our component businesses right now.

Last question on the components is, it's well-documented that there is one more site for Flextronics to transfer over from Nortel and Calgary, and it seems as if once that has occurred, they might go ahead and try to transfer in the remaining components they currently don't manufacture that they're able to manufacture. So that would mean most things you do with the exception of backplanes. Would you agree with that? Do you still think there's more to happen?

Well I can't make any comments on that. I think you need to talk to Flex and Nortel about that. I can tell you, we do business with both of those, they're customers of mine, so I'm not ready to make any comments on that.

Okay, thank you very much.

Jim Suva, Citigroup.

Great, thank you and congratulations. On the margin outlook, which I find especially encouraging, can you give us a little bit more color as far of as -- is that improvement coming from traction in your restructuring versus increased utilization versus products, or maybe break it down into a little bit of a quantifiable bucket, if possible?

We're definitely getting a benefit from our restructuring, and as I mentioned it's really nice to sit back and focus right now on servicing our customers, building that relation instead of worrying -- laying people off and shutting the factory. So hopefully, that part of our history is behind us. We're going to focus on growth.

Now definitely, what we have see, if you look at our core EMS, basically what we call core EMS is everything but the PC. We have been making nice progress there in last year and efficiencies are up. I think our operations are well loaded today, and those margins are really improving nicely. Now I think as we're starting to see, and we saw some nice improvements in our printed circuit boards this quarter and we expect a really nice improvement next quarter in our printed circuit boards, backplanes and enclosures. As I just mentioned, enclosures did not help us this quarter, in Q2. Actually, we lost money there. So that is really a combination of strength that we made in our core business and our component business is now I think now is coming the right track. The demand for high-end boards is really starting to fill up, especially the advanced backplanes and advanced military boards that we're building today. So that is really what's helping us, so that is why we are confident that we can -- made a nice improvement in a weak quarter. The third quarter for us is a little bit stronger and we're going to make a nice improvement there. And our goal is to continue to improve that on a quarterly basis.

Great. Can you give us a little bit of color on the utilization of where you're at right now and where you see that going?

First of all, if you look at or utilization in our big factories, like Mexico, Asia, those factors are running high utilization rates, in the 80-plus. Where we are seeing -- some capacity obviously in our -- what we call [NPI] factories. These are the quick-turn factories, they have a little bit of extra capacity there. So overall, probably running low 70s.

Great, thank you and congratulations.

Steven Fox, Merrill Lynch.

Just looking at your guidance, it's down anywhere from 30 to 130 million versus last year. It sounds like you have explained part of it from Newisys, part of it from PCs. And you also said you had had new wins versus a year ago. Is there anything else negative that is limiting the year-over-year comparisons from the outlook?

Well I think, first of all, let me take you back. First of all, I think as I mentioned earlier, this year we're really not chasing just the revenue. We did have some weaknesses we said at the beginning of the year in Newisys because the one major program we have with one of our customers was basically they decided to come with their own design, so -- (indiscernible) of our business. And of course, the weakness that we experienced in our PC side. But the rest of our business is starting to improve.

So I am really more focused right now at making improvements from now on to just looking what happened 12 months ago. I think that you're going to see a nice improvement for us in this fiscal year, especially when you look at the last six months of this fiscal year. And hopefully, we're going to come very strong exiting this calendar year. So that is really the goal. As I mentioned earlier when Lou asked the question, the first question he asked. I think if you look at the year, we still think we can have a flat year, but it really is going to all depend what demands we're going to have in the PC business.

Okay. Can you just talk about your ability to increase the use of your components in the EMS programs you have, what percentage?

We had the last quarter around the $90 to $100 million I think range. We expect that to now start improving there at least %10-plus a quarter.

Okay, thank you.

Amit Daryanani, RBC Capital Markets.

Thanks a lot. Just a longer-term question -- things really start to look like they're improving on the core EMS and component business, there still seem to be some issues on the PC side though. I'm just wondering, have you ever looked at exiting the whole PC business, which tends to have very minimal EPS accretion in (indiscernible) margins, and just concentrate on the core EMS side?

First of all, let me make a comment first of all at core. That is really, if you look at our company, the way we run the company is really it's almost like two businesses. You have our core business, there's traditional EMS plus our components business, and then we have a business on the PC side basically there's a build-to-order and configure-to-order. The future for us to improve our margins is really have to come from our core, because that is the majority of our business. On the PC side, it's not hurting the Company. It's generating margin. If you look at that margin, I mean, the return on investment capital is favorable. And we have a good relationship with all of the customers and we are hoping that we can add more value. And as we're talking to these customers, how we can add value? Our goal is to add more design capabilities there so we will see if we can improve the margin. But the goal for our company is to improve the margins, and I think we can show that on a quarterly basis.

Okay. And then longer-term looking at the component business, do you still feel comfortable in achieving 10%-plus operating margins by -- (indiscernible) talking about the end of '06? And you also had some management changes over there. Are you expecting some fundamental differences in the way the business is going to be run going forward?

Could you repeat that question -- is it operating margin in our printed circuit boards?

The target I think the last thing you guys had talked about was 10%-plus on the (MULTIPLE SPEAKERS) overall.

No, no, what we said in New York is that on our printed circuit boards that we will exit the year overall margins better than -- gross margin better than 10%. I believe we will do that sooner then the end of the fiscal year. But that is mainly in our printed circuit boards. What we said for our whole business is that we will have our operating margin actually in fiscal year 2006 3 to 4%. I believe they're very close there as we're forecasting right now as you can see in this quarter, we have a chance to go over 3%.

Alright, thanks a lot.

Michael Walker, Credit Suisse.

Hello. According to the operator, you're supposed to be asking us questions and we're supposed to give you responses. But I probably won't go there. I have one question, well a couple of questions. First is, I want to zero in a little on the enterprise computing side. People are talking about PCs, but that part's running down in the double-digits teens year-over-year as well. Is that predominantly Newisys, or is there something else going on?

Definitely on enterprise computing, the biggest drop we had in our Newisys business in last quarter. But the rest of the high-end enterprise computing did pretty well.

Okay. Can you give any more clarity on the inventories? You've told us for a couple of quarters now that you're consciously investing in inventories and the days of inventories are increasing, which means that you're billing more than you would need for your revenues, it seems. Are you having a couple of specific customers that are sort of generally requiring their EMS suppliers to carry more inventories going forward?

Let me start this and I will pass it over to Hari. First of all, as you know, we did acquire assets of one of our customers, and the top majority was inventory. End of the quarter, we basically purchased approximately $43 million of inventory, which most of it will ship this quarter. And then we also had another customer that we basically held -- the customer (indiscernible) we couldn't get certain components the last week of the quarter and we held additional 50 and $60 million. And so if you look at that, if you take those two things out, our inventory would have been flat. But let me turn it over to Hari.

I would just add in terms of comfort to our investors and analysts, that we -- I feel really good about looking at the inventory in terms of exposures, (indiscernible) and all of that. So I don't have any concerns in that regard. The inventory, the nature of the buildup that we have had, we have talked about it for two quarters, is something that you will see start to drop in the next two quarters as we start to pull that back. And it really revolves around us working in a partnership mode with customers that are launching or bringing out new products and being able to capture upside with components that are new to the market and at the high-end of technology, so not readily available type of components. So that is the background. Over the next couple quarters, you should start to see that come down and turns go back in the kind of range of guidance that we have given in the past.

Is there any connection between the inventories and the stretching lead times you talked about, Jure?

Definitely, there is some stretching lead times. And also, I think every time we have an upside with some of our customers, [at the beginning], their forecasts are not the best. So they want all these products, but their customer demand changes every quarter. So there is a lot of adjustment going on. As Hari said, we expect these things to smooth out. Next quarter, hopefully, you'll see a nice smoothing in the following quarter. But definitely, the lead times on a lot of these high-end components are out there.

Great. Thanks a lot.

Thanks Michael.

Carter Shoop, Deutsche Bank.

Thank you. Can we talk about the impact from acquisition on the top line in the quarter and what the expectations are for the June quarter?

Position of what?

Adaptec.

Well, definitely, there is some business that we won with that account, but the business with that account that we basically we took over a lot of their ODM products. We took over their storage and things like that, so we bought whole engineering area. And it could be $10, $15 million per quarter plus, but we don't really like to go into specific customer by customer.

Okay. And then I know you don't want to get into too much detail about customers, but could you give us who the top two customers were in the quarter, over 10%?

Basically, it's the biggest traditional customers. We don't like to give that on a quarterly basis, but --.

But it didn't change quarter-over-quarter?

There was no change quarter-over-quarter.

Last question on PC demand. If you look at your overall -- the PC market is down about 18% year-over-year. I know that (indiscernible) servers from IBM are one of the largest categories. That was up about 10% year-over-year. Lenovo and HP aren't struggling that dramatically, and you claim that you're not losing any of your share there. Is there something to do with the price tick-downs on a year-over-year basis, or is there something else there?

I don't just claim it, that is 100% true. We did not lose share there. First of all, I can't make a comment about my customers' business. I can tell you that the margin is being 100% stable and there is no negative impact on the margins. But I just want to say to everybody, we did not lose any of this business to anybody else.

So when we add up your customers' markets in the PC space in the X Series servers, it doesn't really add up. Do you have any idea of what the expectation is?

Maybe then you should talk to my customers, and maybe they can help you add it up. I cannot go into details. I'm telling you what we're doing.

Fair enough. Thank you.

Matt Sheerin, Thomas Weisel Partners.

Good afternoon, it's Michael Ellis calling in for Matt. I just wanted to ask a little bit more on your orders which you described. If it serves me correct, I don't remember you actually quantifying the dollar amount among -- out there for new business for awhile. You've mentioned $5 million. I was just wondering if you could perhaps take a look at that and just give us a bit more detail. Is that coming from -- how much of it's coming from new customers versus existing customers, and how evenly is that distributed across your end markets?

First of all, we don't like to talk about the new wins until they are really in the bag and the products that we know it's going to continue to grow. You know, it's really spread out nicely across all our markets, from Military, Medical, Communication, Industrial, Semiconductors also picking up for us. So it's really well diversified. Most importantly, a lot of these really are some new customers that we've been working on for many, many years, and we think this is just the beginning with a potential for some of these customers is a lot bigger than what we're forecasting right now, assuming their markets really takes off what they keep telling us.

And just secondly, we seem to be -- conditions and communications overall seem to be improving. I'm just wondering your view there, as you look into the rest of your fiscal year in 2006, what areas are you thinking are going to the best growth areas for Sanmina?

As you know, before we did the merger, Sanmina, there was a quarter of Sanmina's business and SCI was getting a lot into the telecom side of the business. And we have all of the major telecommunications accounts today. We kept the relationship very strong during the downturn. We felt, we helped our customers during downturn and it's starting to pay off for us. Now, we have a lot of technology to support those type of customers, especially in the high-end boards, the backplanes and the high-end enclosure systems that is really helping us because our factories, especially the backplane factory and printed circuit board factories and enclosure factories, are really set up to support that type of market. Now in the last three years, we diversified the market and brought the new equipment to support other businesses, but we believe we can add a lot of volume for the telecom side of the business.

Any feeling for wireline versus wireless versus, say, optical or access?

Definitely, we have a nice pickup in the wireless side of the business, and also on the optical site, a lot of new technologies coming out there. Of course, the fixed wire is not growing as fast, but there's still demand, there's still, customers obviously (indiscernible) some of the old systems and I think those will be there for many years to come. Now a few years ago, they didn't buy anything, but now at least, they're starting to buy a few every quarter.

Thank you.

Jesse Pichel, Piper Jaffray. (OPERATOR INSTRUCTIONS). Alex Blanton, Ingalls & Snyder.

Just a question on the shape of the sales during the quarter. Was it relatively flat across the quarter, or was there a pickup at the end of the quarter in March? Could you clarify that?

I would say, it was a pretty typical quarter. I mean, our business has been coming up equally almost on a weekly basis. End of the quarter, you always have a pickup. So if I have to kind of rule of thumb say -- I don't have the data, Alex, in front of me -- but it's probably you know 30, 35, you know and the rest at the end of the quarter.

The reason I'm asking is Benchmark reported last Thursday, and they said they had a big surge in March, 50% of the quarter was in March. But what you're indicating is that was not the case?

In my customer base, we did not experienced that.

Okay. And how were the sales in the quarter relative to what you had expected at the beginning of the quarter? Where they in line or better?

They were in line. There were certain customers that I thought they're going to do better than others, and so we have some positive surprises and they offset some negatives, but it's difficult. Most importantly, I think we were positioned to have a growth that I'm thinking that we will have the rest of the year.

Okay, thank you.

Operator, at this time no more questions, right? At this time, I would just like to say, again, thank you for supporting us, and if you have any more questions, please give us a call. Thanks for your time.

Thank you for participating in today's Sanmina-SCI's second quarter fiscal 2006 earnings conference call. You may now disconnect.