Sanmina Corp (SANM) 2006 Q3 法說會逐字稿

Good afternoon, my name is [Trenisha], and I will be your conference operator. At this time I would like to welcome everyone to the Sanmina-SCI third quarter earning conference call. [OPERATOR INSTRUCTIONS]

Thank you, Mr. Sola, you may begin your conference.

Thank you, Trenisha. Good afternoon, ladies and gentlemen. Welcome to Sanmina-SCI third quarter fiscal 2006 earnings conference call. Here with me today are David White, our Chief Financial Officer.

Hello.

And Hari Pillai our President of Global Operations.

Good afternoon.

What I'd like to do is have David give an opening statement, then I will come back with traditional comments related to Sanmina-SCI's results and future goals. And then we'll open for questions and answers. David?

Thank you, Jure, and welcome, everyone. As we indicated in our press release, the Company's board of directors formed an independent special committee of the board to review certain matters concerning the Company's stock option administration policies and practices, dating back to January 1, 1997. The committee's investigation is currently in process. At the present time, however, the Company cannot predict the outcome of the result of their investigation, and any potential impact on the Company's financial statements.

As a result, we've concluded that we are unable to issue GAAP and non-GAAP financial statements at this time, until their findings become more definitive. Further, as a result of this investigation, the Company may not be able to file its 10-Q within the deadlines prescribed by the SEC. In the event there's a delay in filing of our 10-Q, the Company will notify its shareholders in a press release. The Company is cooperating fully with the board's special committee and the SEC, and hope to have this matter closed and resolved soon.

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 assessed -- accessed from the Investor Relations section of our website at www.sanmina-sci.com. I'll be making references to these slides during the course of my remarks. Prior to discussing what limited financial results we can with you, I'd like to take a moment to review the following Safe Harbor statement. Slide 2. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company.

We caution you that such statements are just projections. The Company's actual results of operations may differ significantly as a result of various factors, including economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, and technological change. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's most recent annual report on Form 10-K for the year ended October 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 of forward-looking statements.

On today's call, I will review revenue for the quarter, discuss certain balance sheet items and their corresponding metrics, provide an update with respect to our restructuring activities, and finally, I will conclude with revenue guidance for our fourth quarter of fiscal 2006 ending September 30, 2006. Slide 3. As mentioned in our July 18 conference call last week, sales for the third quarter of fiscal 2006 were $2.71 billion, at the low end of our guidance of $2.7 to $2.8 billion versus $2.6 billion in the prior quarter.

As mentioned in the previous call, revenues are at the lower end of guidance due to an approximate $50 million revenue shortfall related to our defense and aerospace business, as a result of temporary delays in government program spending, and in our computing business, businesses where certain products were built, invoiced, but for which we had to defer revenue until the fourth quarter. Slide 4.

For the third quarter, our communications market sector represented 30% of our net sales, and in absolute dollars was up 2% over last quarter. High-end computing and storage comprised approximately 28% of net sales during the quarter. Sequentially, and in absolute dollar term, the business was up approximately 1% quarter over quarter. Our multimedia and consumer electronic sector accounted for 11% of net sales during the quarter, which was up about 3% in absolute dollar terms over the prior quarter. Our medical sector accounted for 6% of net sales during the quarter, which was down approximately 6% in absolute dollar terms over the prior quarter. The quarter-over-quarter decrease is primarily attributable to a timing issue with one customer and should improve in the fourth quarter.

Our industrial semiconductor capital equipment, defense, aerospace and automotive sectors of the business accounted for 8% of our net sales, and in absolute dollar terms were up approximately 10% over last quarter. Both industrial semiconductor capital equipment and automotive saw solid growth over the prior quarter; whereas defense and aerospace was down from the prior quarter, as a result of a delay in government spending on one program. Finally, our personal computing system sector accounted for approximately 17% of our total revenue and was basically flat quarter over quarter in absolute dollar terms.

Slide 5. Our top ten customers accounted for 60% of total sales this quarter. Sales to our top 20 customers amounted to about 75% of total sales in the third quarter. The diversification of our customer base over the last year has contributed to the lower customer concentration, as evidenced in these charts. We had one customer in the -- in the third quarter whose sales were greater than 10% of total sales.

Due to the ongoing investigation of our stock option activity, we are unable to provide any further information concerning our results of operations, and as such, turning to the balance sheet, slide 5. Accounts receivable at the end of the quarter were $1.6 billion, resulting in DSO of 52.7 days, which is an increase of 4.3 days from the prior quarter. The revenue deferral I previously spoke of, as well as increased shipments out of our options business for which we don't record revenue on materials shipped, together accounted for almost -- accounted for most of the quarter-over-quarter increase.

Inventories at the end of the quarter were approximately $1.25 billion. The inventory turned during the quarter at an annualized rate of 8.1 times versus 8.6 in the prior quarter. On an absolute dollar basis, inventory increased $92.5 million quarter over quarter. Of this increase, most of it was attributable to conscious investments we have made to drive materials loading to customer request dates to provide better mix and up-side flexibility for some of our long-term, strategic customers. Capital expenditures in the quarter amounted to approximately $29.7 million, the majority of spending related to facility expansion activities and related equipment purchases in the low-cost regions of Hungary, Mexico, and Asia, where we continue to expand our capabilities.

Accounts payable at the end of the quarter were at $1.55 billion, representing an AP days of 56 versus 51 in the prior quarter. Our cash cycle days for the quarter was 42. Cash and short-term investments at the end of the quarter were approximately $563 million, down approximately $62 million over the prior quarter. The majority of this usage of cash is broken down as follows: $52 million in net accounts receivable, inventory, and accounts payable and other working capital accounts; $29.7million in capital expenditures; and these capital expenditure were offset by $25.5 million of proceeds from the sale of restructured facilities in Canada and France.

Let me now comment on restructuring. During the quarter, June quarter, we incurred approximately $69.3 million in restructuring cost, $66.2 million of which represent future cash outlays. During the quarter we completed the closure of our Glenox, Scotland, facility, successfully transitioning the work to Hungary, where it was integrated into our high-volume BTO-CTO business. Secondly, we also successfully the negotiated cessation of our operating activities in Toledo, Spain. Substantially all of the restructuring charges during the quarter were related to the closure of this facility. We expect our remaining activities in Spain to wrap up by the end of the quarter -- this quarter. Let me close by providing revenue guidelines for the fourth quarter of fiscal 2006. We are targeting our fourth quarter sales be between $2.7 and $2.8 billion. And with that I'd like to thank you for your time., And I'll turn the time back over to you, Jure.

Thank you, David. Ladies and gentlemen, I am personally very disappointed that we could not issue financial numbers to you today. But as David mentioned, by advice of our attorney and special committee, you know, we were told basically to -- to delay the release. Bottom line, I just want to assure you that, overall, there is no other changes in our strategy, our business model or anything else that is going on in the Company. I feel very confident we will put this behind us and hopefully very soon. Our Company is on solid footing. We have strong customer and very loyal partnerships with many of our customers, and also assure you that the management that is here is committed to this Company and also to our people.

Now let me make -- add a few comments to David's comments regarding the quarter itself. As we previously talked to you during Q3, we did experience a shortfall in -- in three major factors that affected that, which is basically our enclosure business and profitability in our computing business. Those were the two main factors and some less favorable mix. In our enclosure business, I want to also make a comment that we did make a nice improvement in Q3. And good thing about it is it did make some money, not much, but they made it, and we expect nice improvement in September quarter, and we expect that to continue.

Now in the markets, overall I can see the market's pretty stable. And we see improvements based on our forecast that we are getting from our customers, not just for -- for this quarter, but also for the rest of the calendar year 2006. We are also continued to win new programs and expanding our customer base. Last quarter, I mentioned to you how we won approximately $500 million in new business. I can also give you some more good news, that this quarter we won additional $600 million, so we are going in a right track.

And all this business will be scheduled for production, you know, sometimes rest of this year and following 2007. We are making some good progress in our business strategy, and these are the following really key points to our strategies: To focus in a high-end technology and more complex products; the right customer base, where Sanmina-SCI provides competitive advantage. The bottom line is that our strategy is to focus on markets and products that will enable us to deliver a higher margins, focusing our core businesses.

Now let me also make some -- a few comments on overall component business. If you look at our overall component business,which three key ingredients there are printer circuit boards, backplanes and enclosure. Overall that business made improvements in Q3, both on top and a bottom line, and we expect that business to continue to make improvements in our September quarter and in December quarter. Overall markets are -- are improving, and in especially our core markets.

Our core markets basically includes everything but PC and high-volume servers. Definitely is moving in the right direction. The margin opportunities are there, and that's really what we're driving. We're driving that business that can improve us the margin. And I think the key to that is really proof that the business that we won in last couple of quarters, so it's very, very positive.

On Q4 forecast, as David mentioned, we're forecasting September 2.7, 2.8, and we expect to overall to improve the margins over our last quarter. We also -- as we look out in Q4 December quarter, we expect to continue to drive the mix our core business. And we expect -- not expect, but we're also driving internally the gross margin to exit the year, December, hopefully 6.5% to 7%, which allows us to start making operating margin of 3%-plus. That's really what we are driving for. So the bottom line, there's no changes. We believe in our strategy, our customer satisfactions are high, and we'll continue to drive -- to drive our strategy, and we believe we're on the right track. And yes, improvements are not as fast as we like it to be, but we definitely making a nice improvement in a right direction.

So with that, I would like to now thank you for all being here today. And operator, now we would like to open this conference for questions and answers. Thank you.

[OPERATOR INSTRUCTIONS] Your first question is from the line of Brian White.

Hello, Brian.

Hey, Jure. Can you talk a little bit about where the new wins are coming from. You said $600 million in new business this quarter. Can you maybe parse it out by new markets?

The market s-- first, all these wins came from all other markets except BC's. A fair amount came from computing -- high-end computing side, telecom side, industrial, military, and communications.

Okay. And just looking at the PCB fab business, Jure, what do you think you really need to do to really turn that around? It sound like most companies are doing fairly well in that business. The environment, [inaudible], pricing --

Brian, we're doing pretty well in North America in that business, in a high-end technology side for products in our military division. Where we struggle in last year and a half, two years, really, has been in Asia. As you know, we acquired a company there. We transferred lot of equipment -- a lot of high-end technology and management there stumbled. And about six weeks ago, we did add the new leadership in -- in Asia. The good thing is at least today, they're not losing money. We expect them to make slight improvement this quarter, and -- and even bigger improvement in the December quarter.

Beginning of the year, we had a target for them to get the gross market, as you know on our conference call, to at least 8% to10%. I don't know exactly, but I think it was probably 10% there. And, you know, we still have a chance to get there, but it's going to be tight. But good thing is that they are going in the right direction, and also a good side, that we have plenty of business. And you know, there's a lot of bright, bright things there, so I'm a lot more optimistic today than maybe a few months ago there.

How about enclosures, Jure? How can we fix the enclosure business?

Enclosures, we had a similar situation when we moved this to a low-cost region. We -- we suffered and main reason really again not having experienced people running these operations, mainly in eastern Europe and in Asia. In about four months ago we added a very strong management to that division. We updated a fair amount of middle management in there. We also refocused a lot more on the fabrication side, more on the higher end of that business. [inaudible] of the business that was not profitable, and as I said earlier, we expect them to make improvements this quarter and continue. We believe in this business. If we didn't believe this business can deliver 15% gross margin in the next 12 months, I would get rid of it tomorrow. But we as a management believe that business can be turned around to get the margin, you know, well over 10% and hopefully to our target of [15%].

Okay. Thank you.

Thanks, Brian.

Your next question is from the line of Yuri Krapivin.

Good afternoon, everyone. Just to follow up on the previous question regarding your component business. I guess as you look at, you know, the component business as a whole group, is the group's profitability is still below your corporate average, as you look at component's gross margins?

Well, we didn't make an improvement from last quarter by over one point, but they're a little bit -- they're almost at the corporate average right now if you look at it, just slightly below that. But our components business should be well over 10%. And as I told earlier caller, if I didn't believe that business we could be well over double-digit margin, we'll get rid of it. But both -- you know, all our businesses -- our backplanes business is there already, our PC business in North America is there already. We just need Asia to get there and then really -- and enclosure is really fixing our European operations. And I think once we do that, we have plenty of business to deliver those numbers.

Right. And then my other question has to do with your inventories. Do you expect to continue to build inventories in the September quarter, or should inventories stabilize?

Yes, our inventories turn -- I don't know, David, if you give me inventory turns were around 8.1 turns. We expect inventory turns for us to improve. The reason we built inventory up the last quarter, really, you know -- really three major customer of ours created -- you know, needs a lot of flexibility for last quarter and this quarter. We believe that we should be able to drive inventory down and improve our turn. You know, at least the goal here right now is to get the turns at least between 8.5 and nine turns in Q4. Our longer-term goal for inventory turns is to be between nine and ten turns.

Okay. Thank you.

Thanks, Yuri.

Your next question is from the line of Kevin Kessel.

Hello, Kevin.

Hi, there, Jure. I just wanted to clarify what you said just a moment ago. So you were saying your components business in aggregate, the target is to get them to a 10% gross margin?

Well, they;re hanging right now around 6%. Okay, they did make improvement from last quarter by over a point.

They were up one point over a quarter ago?

Right.

And so you're saying they're fixing it --

In the longer term -- you know, we believe the longer term our printer circuit board business between 18% and 20% gross margin. That's what we call internal minimum number.

Right.

Then enclosure should be well over double-digit margin. Which, you know, we drive at least 10%, but we really dri -- you know, if you look at the market and what the market price ceiling, you should be able to deliver in a high end at least 15%-plus gross margin.

Right. Now how were your component margins up versus a quarter ago when you had your problems in enclosures this quarter? That was one of the reasons you cited for the shortfall.

First of all, we did have an improvement in enclosure from the quarter before. A quarter before our enclosure business lost about $4 million, approximately -- or $5 million, where this quarter they basically made a few bucks. So right there, you know, there -- there was a pickup of $5 million of profit compared to quarter before. Okay.

I think, Kevin, though we had maybe expectations or hopes that we would do a little bit better, as well.

Yes. Right. And -- and just remind me in terms of the restructuring, your restructuring is coming to an end essentially in terms of what you've announced?

Right.

And at this point some of your peers have announced that they're showing restructuring, at the need to do additional restructuring. What's the feeling there? I mean, it sounds like you still have a lot of desire to fix these businesses. Do you think it's going to require additional restructuring or you don't think so?

At this time, we are right in the midst of reviewing our strategy for the next three years. We do it once a year, look three years out. We definitely are looking at everything. At this time. we don't really have information to really say -- tell you yes or no.

Okay. Thank you very much.

But -- but just so I can add for everybody else, we will drive every one of our business to be profitable. If it's not profitable at -- at better than a corporate margins, it's a business that we'll get out.

Your next question is from the line of Alex Blanton.

Hello, Alex.

Hi, good afternoon. I guess what I -- I just want to ask this. You probably can't answer it, but since most of the option acts that have been of concern took place before 2002, why would that cause you to delay the current quarter's report? You wouldn't have any impact it.

Alex, just to give an example, we don't have all the facts yet to be able to make a final decision one way or another. But we also did -- the Company did summary pricing, okay, for everybody else but the executives, so if there's any issues there, you know, it could be effect. But we really don't have enough of all the data, you know, to really -- you know, to see if there was any errors made or not.

Let me just -- if I could just add to that.

Go ahead.

One other point to your question is, you know, stock expense is amortized over the vesting period, so if there was something back in that time period, it wouldn't necessarily mean that it -- that 2005 or '06 wouldn't necessarily be impacted by it. So we don't know the answer to any of that at this point in time. And one other -- one other point I just want to mention is the fact that, you know, our non-GAAP information excludes the -- you know, stock-compensation expense.

Yes.

But we're unable to even provide that information because we can't provide non-GAAP information without providing a reconciliation to GAAP information.

Right.

So that's kind of the -- the difficulty we have in term of the -- the situation we're in right now. And the only thing we can really do is work aggressively to help the committee and so forth reach their conclusions and get it behind us.

Yes.

But Alex, the numbers for the quarter are done. I mean, we have internal numbers, we just can't share them. And -- but again, we're -- you know, as I said earlier, we're going to, you know, continue to drive with our strategies. It's really frustrating, but it's a -- you know, it's a process that we have to go through and put it behind us as soon as possible.

Okay. So -- so it's the -- the stock option expense item that really is in question.

Right.

Now, second question is this, earlier you were having problems with the PCB business in China because customers that had been buying the boards from your North American plants, U.S. plants, hadn't qualified the Chinese plant. So they couldn't buy those boards from you as they had been. They wanted to buy them in China, but they couldn't buy them from you because they hadn't qualified the plant yet. And so, that also included some of your own plants. You had to buy boards from competitors because you couldn't get them from yourself.

Right.

Now how is that going, and what progress has been made in qualifying those -- those customers so that you can build up the volume in China?

Yes. Alex, first of all, you're right. At the beginning when we acquired these companies, they were not approved for our high-end customers to do business in China or Singapore. A lot has been done since then. That's one area that we've invested a lot of time and money. I would say as much as probably 80%, 90% of our top customers approved all our factories in Asia. Or we already supply the samples and those -- either we're starting to do business with them right now, or they're in the process of testing them. So we accomplished a lot.

So the issue right now, Alex, for us is really driving the right now execution, and that's really what we are focused on. You know, we send a fair amount of people from North America. We sent a lot of equipment over there, and we did not go in China to focus on low-technology circuit boards. We are staying on the board that are high-end infrastructure product.

So we're not into the cell board or camera boards. You know, not saying that you cannot make money there, but we're staying in our traditional what we call big and ugly boards, you know, with lot of layers. And that's what is taking time to train these people. It's not just, you know, of course -- you know, we want to get the local management because the management we had from here was a good management. It's just that, you know, they want to come home. So we were able to get the management there locally that I believe will be able to -- to build a long term the total management that it's going to require us. We wanted to rebuild our circuit board business to a leadership role again.

That business grew nicely this year, and we want to, you know, drive that thing at least 20%-plus growth a year. If I look at the -- I don't have the final numbers in front of me, but would at least grow 20% this year in our bare board business. And I expect to improve that 20%-plus growth. So when it get back to the billion-plus run rate, you know, with the 20%-plus margins. So that is -- you know, that's what we believe in. We know this business. It's just taking us a little bit long, but it's the marketing stuff. The market for high-end products, demand wasn't there. But the good thing, it's starting to come back. So we in management have to be patient and because it's a technology product, you have to commit long term.

Now, what -- one more thing. How -- how many layers can you go now in China, up to what level?

We've been [inaudible], but I think we're building some about 20 layers -- 20 layers in production, 12 plus. But we would like to see our China factory really be between, you know, 12 and I would say 30 layers.

That's your goal?

That's the goal.

12 to to 30 layers.

Right.

Okay. Thank you.

Thanks, Alex.

Your next question is from the line of Lou Miscioscia.

Hello, Lou.

Hi, how are you guys today?

Good, good.

Okay. I guess the ques -- the first question I have --

Been a tough day, but it we'll get through it.

I guess I can imagine. Unfortunately going down that path a little bit, could you help me with just the timing of understanding things in the sense that you obviously have until the middle of August to file the Q. You get then, I believe, a two-week extension after that. What would happen theoretically in September if the audit isn't done, or do you have a high degree of confidence that things will be actually put out by then?

Well, we are -- I'll turn it over to David, but let me give you -- we worked with this outside committee, and basically what it is, it's an independent law firm. Let me put this t this way. We told them to -- you know, we -- whatever it takes to get it done now, And they are working around the clock to get this stuff done. But when you do a full, independent review as we are going through, so that once they get done, you know, it's good, it's not polluted, it takes time. So they have to check all the e-mails, all the -- when the decisions were made, and all that stuff.

So everything has to match, so that takes time. And so we are pushing. You know, we don't want to be late. But -- and we just -- not knowing where we are today, we're just basically raising a flag that, hey, it could happen. But we're going to drive as humanly as possible to get done this as soon as possible. David?

Yes. I can't really add a lot to that other than, Lou, you know, we've got tens of thousands of employees. And, you know, the committee is -- is purposely being thorough and looking at everything, so that when the investigation is concluded and so forth we can say with a high degree of certainty that everything has been looked at and there isn't anything unresolved. As it relates to our 10-Q filing, our filing date is August 10, I believe, what it's scheduled for. And if we wound up having to file an extension, you normally file for a ten day -- ten business day extension.

We don't want to file the extension, but that's kind of the window we're working with and within. As Jure indicated, we're trying to do everything we can. One of the other difficulties here is when you go back to 1997, documentation is tough to come if it goes back that far. The committee gets into situations where what do they do at that point in time, when the documentation's not there? So, it raises a lot of difficulties I think, given our size and the period they're going through and so forth.

Okay. Do you think that the odds are greater than 50/50 you actually get it back or get some information back and out to us before the extension period?

I think the chances are 100% that we will keep you informed before the next filing period is concerned. As to what the outcome is going to be, I don't -- I don't what the outcome will be. I have really no right way of predicting it.

We even asked the same question today to committee, to when you going to give us this. Basically, when these guys doing independent report, they don't want to be pressured, and we, as a management, or the board can't pressure them. We tell them to go out and spend whatever you need to do to get it done, you know. But that is the goal. We want to get done as soon as possible, Lou, because we need to put this behind us. I feel very confident this will go behind us, but if -- hopefully faster than I think, and so we -- we can just focus in on a business, what we get paid for. But I feel very comfortable we'll get this done clean.

Okay, great. Just switching to one other topic. Question on you guys closed Greenwich, Scotland. Do you have a number for how much it cost to close that site?

I think the number was around $7 million or $8 million.

Okay. Reason I ask, and I guess it's just I would ask about maybe future deals. Obviously that was one of the ones with the big IBM one. Would you in the future, if you do do an acquisition of, let's say, an OEM facility, just run those numbers actually through the P&L? Or do you expect somehow to make up those -- that number and whatever else maybe you had to close from the big IBM deal, so it's actually more in the operating numbers than a one-time charge?

Well, we're not -- we're not intending to acquire any businesses. We're taking on a facility and everything else again, prospectively. So, if you look at most of the wins we're getting today, they don't involve the purchase of those assets.

We've been doing some nice deals. I mean, you know, the nice [adoptic] deal was, you know, a couple hundred million dollar project. We're working on another deal right now that is well over $100 million project, that basically we are -- we're in the midst of doing it this quarter, and we are strictly taking over the business.

We're transferring their business from their factory to our factory, and we'll only pick up the people that we need to run the business. So that's -- that's the model, Lou, that we are focused on. I mean, hopefully we learned. We went through tough -- I mean, you know, a period where we basically were buying everything and at that time it made a lot of sense. And I -- I think this management learned a lot. And I guarantee you that we will not make the same mistakes. We might make new ones, but not the same ones.

Okay. I'm going to be here watching over you.

Yes. please do, and remind me if we do something stupid.

Okay. Thank you.

Thanks. Operator, any more questions?

You have a question from the line of [Kevin Orum].

Hello, Kevin.

Hi, Jure. You know, when you talk about the businesses that you still need to turn around, the enclosure business and PCB and China, you're talking about kind of where you want to end the year in terms of margins there.

Right.

If you look out, can you -- I know you can't to be too specific on this, but what -- you know, you're going to sell businesses if they can't make money or they can't generate a return. As you look out over the next couple years, how do you see -- once you turn these businesses around, how do you see the earnings power of the Company? Is there any way you can kind of talk to it?

Yes, I can. You know, internally we're really -- you know, our goal internally is how do we make $1 a share. That's what what we're -- that's what I'm signed up for. That's what all my management is signed for is, you know, my -- my bonuses, my stock options, everything depends on that. And that's really the model that we implemented here about a year ago, almost a year ago. And that's the model that we're going to drive going forward.

Our focus right now is drive to improve the margins. And I think that you're going to see that, once we're able to reach the number, that our margins are going the right direction. And I'm a firm believer -- if you look at my core business today and use the core, except PC's, our margins in that business are basically, you know, almost 8%. And PC, you know, business that we have is generating, of course, less margin, but it's a good auto IT business. You know, if you look at our PC, even if I looked a few quarters back, it generates 18%, 20% auto IT.

So we are going to run that part of the business based on a ROIC, but all other core business is going to be looked at driving the margin and, of course, return [inaudible] after that, and that's really what I want to drive. I believe that, in order to -- to stay in this business, to be able to invest in the future, you have to drive the gross margin as a Company over 8%. That's what we think we should be able to get to in the next couple of years.

Okay. And -- and in order to hit that $1 a share, if you take the core business, do you need much improvement in the core EMS business or is it the EMS business has to stay where it is right now and then you'll get the swing factors with these --

I think the core EMS business we have to grow now. I mean this was a flat year, and now the growth -- you know, our model right now in, you know, 2007 is that we grow our component businesses, you know, 15% to 20% growth, and growth the rest of the core EMS business without a PC in that 10% to 20% growth. I'll leave that bigger window there, but if we can grow at least 10%, you start generating pretty good margin. Because the factories today are pretty efficient. We just need to load them up more.

Yes. Okay. All right. Good. Thanks, Jure.

Thank, Kevin.

Your next question is from the line of Jim Suva.

Hello, Jim.

Great. Thank you. Can you talk a little about where your utilization is today. It's a little bit confusing because I know you had lrestructuring and some closings and such. Were you like in the low 70%, upper 60%, where --

I would say it's upper 60, Kevin, if you look it based on a space and equipment. Now based on a people, we're running at high 80's, low 90s, you know. But we have a -- the Company bought fair amount of equipment four or five years ago, especially before the merger of Sanmina-SCI. Both companies were having a lot of equipment, and we still have a lot of equipment available. And that's why, if you look at our CapEx, we not been spending a lot of money in CapEx, because we have a fair amount of equipment.

Right. And on that same note, with utilization on the space in the upper 60%, do you have some longer term goals of operating margins, you know, greater than 3% eventually going to 4.5% to 5%, where does utilization really have to get to?

Okay. First of all, when I say long term, we really are driving internally, we think if everything goes in the right direction and demand continues to improve slowly -- not huge, but slowly -- that we have a chance to get to that 3%, gets our gross margin between 6.5% to 7% range, and that will give us around 3%. I think we need to, you know, grow at least overall revenue on a quarterly base the next couple of quarters about, you know, five -- by 8% a quarter, and I think that will allow us to get there.

Great. Thank you very much.

Especially, Jim, as long as that is done in the core business. If the growth only comes from PC, it will be difficult.

Absolutely. Great, thank you very much.

Thanks. Next question, please.

Your next question is from the line of Todd Coupland.

Hello, Todd.

Yes, good afternoon, everyone. With the visibility just going to this question of 5% to 8% quarter-on-quarter revenue growth, do you have the visibility to see that type of growth in -- into the December quarter at this point in time?

Based on a -- Todd, based on the forecast that we have today and the stuff that we've been getting from our customers and our sales forecasts, we think that that is there.

Okay. And --

In the December quarter because, typically, December quarter is our, you know, strongest -- strongest demand quarter, because we sell a fair amount of infrastructure. We don't have a lot of consumer -- consumer typically picks up, you know, July, August, September timeframe for Christmas sale. But for infrastructure product, usually, you know, it's September, October, November, is always Europe's three busiest months.

Okay. And I guess the Nortel business that's going to transfer is gone now, so you have a base where you can grow at that rate in the infrastructure business?

Yes. Todd -- to let me make a comment -- good question -- in that we still have a little bit of Nortel to be transferred on our old stuff, but we also believe that we won some new business at Nortel going forward that will be replacing some of the business that we lost. So we -- that we have some other opportunity in new programs. But in the meantime, we have a few more orders that we're going to be losing to our friendly competitors down the street. But we knew about that. And we've been replacing that with the new business that we've been winning. And that why -- you know, this year if you look at some of the numbers, we didn't grow as much in that side, but we've been replacing it -- we've been fortunate we able to replace it with the new wins.

Okay. And besides infrastructure, what other areas are you seeing a little bit better outlook for the December quarter in terms of the forecasts you're seeing?

Well, you know, we hope that our defense and aerospace industry will continue to grow. We have high hopes there. We have a very, very big forecast there. So as long as our customers take what they have forecast, that looks pretty good. Industrial, semiconductor areas looks promising. And, you know -- excuse me, somebody's giving me notes here. We expect our multi media slots from [Sumeroso] to do nicely in December.

Okay. Just one clarification. When you say 5% to 8% growth, you mean quarter to quarter, September to December rather than year over year?

That's right.

Okay. Great. Thanks a lot.

Thanks.

Your next question is from the line of Tom Dinges.

Hello, Tom.

Good afternoon. Jure, maybe just a little bit more about the $500 million of wins in Q2 and the $600 million that you talked about here. One of the strategies, obviously, to improve the margin in the component business on top of just the restructuring work and cost cutting that you're doing is to find a lot of programs out there that actually will take advantage of -- of all the capabilities you've got.

So amongst those program, I mean, how much of that is going to be using internally-developed components and how much of it is still stuff where maybe you won the EMS side it first and then you kind of hope to displace the incumbent suppliers of backplanes or boards or enclosures later on?

First of all let me make a comment. First of all, we didn't make a nice improvement in vertical integration this quarter. We actually improved it by about 10%. So it was like $10 million more, which, you know, was a nice pickup. On -- on the business that -- the $1 billion of the new products that we won, I would say good percentage of that we'll be able to vertically integrate at basically from the beginning.

There's a few programs in there that's going to take some go-through qualification, and we might have to compete on it. But I would say if I have to take a percentage -- Tom, I don't have the statistics on it, but I'm very familiar with this project. I would say as much as 60% to 70% of these jobs that we -- in this project we should be able to vertically integrate.

Okay. And then, real quickly, I just --

And -- just a second, Tom of the most of these are what I would call smaller projects with maybe some of the smaller type accounts, but you know, maybe $40, $50, $60, $100 million type of projects. Which is a more complex type of technology, where the customer truly wants us to integrate it, because we can give them, you know, a better delivery, more flexibility, and really more complex products if we do it ourselves.

Okay. And then a bit more of a longer term question here. We've seen a number of the other EMS companies, you know, talk the same as you did today about inventory and customers asking for a bit more, you know, flexibility, meaning that you guys would have a little more on hand.

And I guess when you think back, a number of years back there was a big push on the part of a lot of EMS companies including yourselves, to try and push a little bit more back on vendors. And I guess, has something just changed in the economics that all of a sudden now, you know, customers either aren't comfortable with those kind of programs? Or, you know, how is this impacting the overall finances for you guys, because it sure seems like the industry, as a whole, is tying up a lot more capital with the inventory on their books, and it's something that you look back a couple of years, and folks just didn't really seem like they were going that direction.

Tom, you're familiar with this so you understand it. It's a good question. Let me explain it to you, what's happening. In today's environment, you know, we were into a tough environment. There was basically no demand. And we're able to -- to tell the supplier whatever we wanted, and they did it. As the environment got busy, a lot of the component guys didn't go out there and build a lot of extra capacity. So the -- getting some of these components definitely is more difficult. Our customers today, you know, they really and truly want to outsource everything. And they don't want to worry about inventory, because most of our customers, if they have to manage inventory, they're not really good at it. So they're really pushing that responsible to us. At the same time, my customers' forecasts are not very good, you know, so they are driving higher forecasts and end of the quarter they take less.

So we're in the midst of really straightening some of these things out, working with our customers back and forth. I believe that we have to have a better inventory turn, because these are not a huge margin business, and we cannot be tied down to carry all this inventory. So talking to my customers, I think we just need to do a better job on both of us. I think forecasts need to improve from my customer side which, you know, a lot of times that's not going to happen. And internally, we've got to do a better job. I think we're taking steps internally to improve, as I said earlier, our inventory turns at about 8.1, nothing to brag about. But we think we'll improve in this quarter to at least 8.5 to nine turns. But our longer term goal, when I say longer term goal, to getting in 2007 fiscal year to get between nine and 10 turns. We definitely, Tom, going to get better.

Okay. Thank you.

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

Okay. [OPERATOR INSTRUCTIONS] We have a question from the line of Alex Blanton.

Okay. Alex, you're a lucky guy again.

On this last point that you just talked about, there are -- there are some people in the business that are saying that the answer to the inventory question in the supply chain is not to have better forecasts because -- because that's basically impossible. Forecasts are always going to be a problem if you're depending on forecasts to -- to plan your production.

And what you really need is to move the lean system back in the supply chain to your suppliers so that everybody is on a poll system and they don't make anything until there's an order from the OEM. So the OEM doesn't have any inventory, and they order stuff from you, and you produce it in a couple of days and ship it to them, but you don't have any inventory either because you can get your materials from your suppliers at the same time.

Right.

See what I'm saying?

Yeah. Alex --

This is working toward that, their system. And I think the industry needs to go that way, don't you agree?

No, no, I agree. I wish we all, you know, listened to your statement there and we all do it. Let me just make a correction there, what I said earlier. Really what I said, during the transition from no demand to a higher demand, the forecasts were not as good from a normal point of view. We understand that our customers will never have a perfect forecast, and I don't expect that. It's just that the better planning can be done.

At the same time, I think we were -- I'm just going to talk about our own Company, not doing as good a job during the time as we should have. So we -- we learned, we're working very close with our customers, and the key here is definitely is to push it down the supply chain, and we are building a lot of partnership. And maybe we need to do maybe more of that. In past maybe we didn't do as much and that's the goal. To create more partnership so that we can create the system that you talk about. We believe -- you know, our inventory turns today are best in industry, but they're still not good enough. I mean, we definitely should be -- we think, based on our business, we should be two turns better than what we are today.

Okay. Thank you.

Thank you, Alex. Again, ladies and gentlemen, thanks for your time. And again, I'm personally very disappointed we could not share with you our financial numbers today, but we're going to work very hard to get this behind us. In the meantime, I just don't want you to worry about the business. We are committed, and I guarantee that my management in this Company is committed to -- to do what's right for this Company, as we always did and always will. So with that, thanks for your support. If you have any questions, please give us a call. Thank you.

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