Sanmina Corp (SANM) 2006 Q4 法說會逐字稿

Good afternoon. At this time I would like to welcome everyone to the Sanmina-SCI fourth quarter fiscal 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you, Mr. Jure Sola , CEO of Sanmina-SCI, you may begin your conference.

Thank you Good afternoon, ladies and gentlemen and welcome to Sanmina-SCI's fourth quarter 2006 conference call. Thank you all for being here today. Joined here with me today on this conference call will be David White our Chief Financial Officer.

Good afternoon.

The agenda today we have for you is David White will review our financial results for the third and fourth quarter fiscal year 2006. And then I will follow with additional comments relative to our results and future goals.

And now David.

Thank you Jure and good afternoon, everyone.

As indicated in our press release issued today, our financial statements are not available at this time because they are currently undergoing restatement subject to the completion our annual audit. As a result we have provided non-GAAP financial guidance for fiscal year 2006 and the frist quarter fiscal 2007.

We have done so because we feel that investors, analysts and other followers of the results would be better served with this information than without it. The non-GAAP financial guidance published in our press release excludes stock compensation charges, restructuring expenses and other items consistent with the Company's historical definition of non-GAAP financial measures.

We expect to complete the restatement of our financial statements on or before December 13, 2006, at which time we will also provide a detailed reconciliation between our GAAP financial results and the non-GAAP guidance disclosed in our press release and discussed in this conference call. For more information regarding this matter, I would refer you to the important disclosures in our press release under the headings "Results subject to significant adjustment" and Safe Harbor.

Before we get started, please note that selected financial portions of this presentation are also available in the form of a slide presentation, which can be accessed from the investor relations section of our website at www.sanmina-SCI.com. I'll be making references to these slides during the course of my remarks. Apart of discussing the state of our business, and financial information, we can with you, I'd like to take a moment to review the following Safe Harbor statement.

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 the outcome of the restatement of the Company's financial statements or results, the risk that the Company would be unable to file certain reports required to be filed with the SEC by December 14, 2006, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change.

We refer you to the document's the company files from time to time with the Securities & Exchange Commission. Specifically the Company's most recent annual report on Form 10K for the year ended October 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 and forward-looking statements.

You'll know from the press release that we have provided you with selected non-GAAP guidance for fiscal 2006 including our third quarter and our fourth quarter. In general, our non-GAAP information excludes restructuring and integration costs,impairment charges, other infrequent or unusual items and amortization expense.

In addition to the above items, fiscal 2006 non-GAAP guidance also excludes stock-based compensation expenses. And fourth quarter guidance also excludes $10.9 million of costs associated with the Company stock option investigation as we consider this expense an unusual and infrequent item related to the operations of the Company.

On today's call, I will discuss financial guidance for our operations, discuss select balance sheet accounts and corresponding metrics, provide an update with respect to our restructuring activities and finally I will conclude with guidance for our first quarter fiscal 2007 ending December 30, 2006.

Any comments we make on this call as relate to income statement measures will be directed at our non-GAAP financial guidance. Accordingly unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, earnings per share, we are referring to our non-GAAP information.

Slide 3, revenue for the fourth quarter of fiscal 2006 amounted to $2.72 billion at the low end of our guidance of $2.7 to $2.8 billion, versus $2.71 billion in the prior quarter. Revenue for the full year of 2006 amounted to $10.96 billion versus $11.73 billion in fiscal 2005, down approximately 6.6% in absolute terms. Most of the decrease was attributal to decreases in our personal and business computing segment. Jure will provide further color on our year-over-year revenue in his comments.

Non-GAAP loss or earnings per share guidance for the fourth quarter is a negative $0.01 to a positive $0.01 per share versus $0.06 in the corresponding period a year ago. Non-GAAP earnings per share guidance for the full year of 2006 would be in the range of $0.18 to $0.20 per share versus $0.25 in fiscal year 2005. I'll comment on these results in a moment. Slide four.

Before I comment on our end market revenue, in our press release we announced our intentions to make certain changes in our personal and business computing business unit. In order to be consistent with that intent, our industry standard server class products,which were previously classified under our high-end computing and storage end market will now be classified under our personal and business computing end market. Jure and I will each comment more fully on this matter momentarily.

For the fourth quarter, our communications market sector represented 30% of our net sales, and in absolute dollar terms was up approximately 1% over last quarter. High-end computing and storage comprised approximately 16.6% of net sales during the quarter. Sequentially and in absolute dollar terms the business was up approximately 3% quarter-over-quarter.

Our multimedia and consumer electronics sector accounted for 9.9% of net sales during the quarter which was down about 17% in absolute dollar terms over the prior quarter. Our medical sector accounted for 6.5% of net sales during the quarter, which was up approximately 6% in absolute dollar terms over the prior quarter. Our industrial semiconductor capital equipment, defense, aerospace, and automotive sectors of our business accounted for 8.2% of our net sales and in absolute dollar terms were up approximately 4% over last quarter.

Our defense and aerospace and industrial semiconductor sectors were both up from the prior quarter whereas our automotive sector was down from the prior quarter. Finally our personal computing system sector accounted for approximately 29.6% of our total revenue, up approximately 3% quarter-over-quarter in absolute dollar terms.

Slide 5, our top 10 customers accounted for 59% of total sales this quarter. Sales to our top 20 customers amounted to about 73% of total sales in the fourth quarter. The diversification of our customer base over the last year has contributed to the lower customer concentrations evidenced in these charts. We had three customers in the fourth quarter and for the full year whose sales were greater than 10% of total sales.

Slide 6, gross margin guidance for the fourth quarter is approximately 4.8%, down from the prior quarter's guidance of 6.1% and down from the 5.6% reported in the same quarter a year ago. Fourth quarter guidance is below our expectations for the following reasons. First of all, during the quarter we made a decision to exit certain ODM product lines and realign our ODM business to focus on joint development manufacturing opportunities. This decision resulted in charges of approximately $15 million primarily associated with obsoleted inventories.

Secondly, our PCB fabrication business fell short of expectations primarily as a result of lower quarter-over-quarter revenues. And finally, we recorded charges associated with certain one-time warranty claims and doubtful collectibility of certain customer receivables. All told these items resulted in approximately $32 million of reduced gross profit in the quarter.

Excluding these items, fourth quarter gross margin guidance would have been approximately 6.0%. Operating margin guidance for the fourth quarter is approximately 1.2% down from the 2.6% guidance for the prior quarter and down from the 2.3% reported in the same period a year ago.

Depreciation is expected to be $31.8 million for the fourth quarter up approximately $2.5 million quarter-over-quarter. Other expense net, which consists primarily of interest expense and income as well as gains and losses from foreign currency translation is expected to be $27.2 million versus $26.7 million in the prior quarter.

Slide 7, turning to the balance sheet. Accounts receivable at the end of the quarter were $1.5 billion resulting in DSO of 50.6 days, which is an improvement of 2.1 days from the prior quarter. Inventories at the end of the quarter were approximately $1.32 billion.

Inventory turned during the quarter on an analyzed rate of 7.8 times versus 8.1 in the prior quarter. On an absolute dollar basis, inventory increase $67 million quarter-over-quarter. This increase was mostly attributal to material support for new program ramps, a revenue shortfall for one customer in our server business and the inventory associated with our win of the allied Telesyn business.

Capital expenditures in the quarter amounted to approximately $35.5 million, the majority of the spending related to equipment purchases in the low cost regions of Hungary, Mexico, and Asia. Accounts payable at the end of the quarter were $1.49 billion resulting in AP days of 52.7 versus 55.6 in the prior quarter. Our cash cycle days for the quarter were 44.3.

Slide 8, cash and short-term investments at the end of the quarter were approximately $492 million, down approximately $71 million over the prior quarter. The majority of this usage of cash is broken out as follows. $67 million in increased inventory, $35.5 million in capital expenditures, $62 million in cash restructuring costs primarily relating to the closure of our Toledo Spain operations.

Approximately $20 million in cash flows from matters directly or incidentally related to the stock option investigation. I'll comment more on this momentarily. These items were offset by $100 million of borrowings under our revolver and $5.6 million of proceeds from the sale of restructured facility in the U.S.

Cash flow from operations was a use of $104 million during the quarter. As a side note, since our last earnings call in April, we have closed the sale of 5 facilities and have another 4 facilities in escrow with expected proceeds of approximately $70 million.

Let me now comment on restructuring. During the fourth quarter, we incurred approximately $7 million of restructuring expenses. Separately, however, we have made two important strategic decisions, which will influence the nature of our business going forward. They have to do with our ODM business and our personal computing business. Let me address each of them separately.

The ODM business, unlike the EMS business subjects the Company to certain market risks. These risks are generally--have not been risks, our customers have been willing to assume. Particularly when the product was offered to multiple customers.

Our inability to price this risk into our ODM products has led to a decision to realign all of our ODM activities to joint development manufacturing or JDM activities over the next year. While we complete this realignment, we anticipate that there will be some related charges. As I mentioned earlier, our fourth quarter non-GAAP guidance for gross profit included approximately $15 million in such charges.

Secondly, we assumed that it was our--we announced it was our intention of creating a more separable personal and business computing business unit that will enhance our ability and flexibility in pursuing other strategic alliances that can accelerate the pursuit of component vertical integration, product design and growth opportunities. Finally, we also announced the potential that we may take additional restructuring charges for further consolidation and closures of facilities in some of our high-cost regions.

We expect our realignment from ODM to JDM services, the separation of the PC business, and other consolidation and/or facility closure actions to cost somewhere in the range of $125 to $150 million over the next 12 months. We believe these actions will save us over $15 million a year.

Before I close my remarks with guidance for the first quarter of 2007, let me update you on all of the activities that have resulted from our stock option investigation which recently concluded. As you're aware, our inability to file on a timely basis, our third quarter 10Q with the SEC resulted in a default under certain covenants relating to debt previously issued by the Company.

In September, we successfully negotiated waivers for this default from holders of both of our outstanding high yield notes. These waivers cost the Company $12.5 million. In addition to this debt, however, we also arranged to take out for takeout financing to retire our $25.5 million 3% convertible notes due 2007.

The total incremental interest cost of the Company over and above what we would have paid under the otherwise remaining 5 months of the 3% converts will amount to approximately $11 million. The total cost of conducting the investigation thus far has amounted to $10.9 million. When the direct and related incidental costs of the investigation are combined the total economic cost of the Company is approximately $34 million.

As a separate matter, the listing qualifications panel of NASDAQ recently determined to continue the listing of the Company's share in the NASDAQ stock market subject to the Company filing its third quarter Form 10Q along with all required statements on or before December 14, 2006. We are currently in process of completing our restatement and year-end audit.

We have corrected measurement dates for all the [inaudible] grants and are completing the application of the appropriate accounting to each. We currently anticipate that we will complete our restatement on all required filings by this deadline.

Now let me turn to the guidance for the first quarter of fiscal 2007, slide 9. Consistent with the prior quarters of fiscal 2006, the information I provide will generally exclude stock-based compensation expenses, restructuring, and integrations costs, impairment charges, other infrequent or unusual items as well as amortization expense. We are targeting first quarter revenue of between $2.7 and $2.85 billion. We expect gross margins to be in the range of 6.0 to 6.4%. We are targeting our operating margin to be around 2.6 to 2.8%.

Net other expense is expected to be approximately $34 million. This cost will be up approximately $7 million quarter-over-quarter primarily as a result of the higher interest rate on the takeout financing, which I spoke of earlier and higher interest rates in general. We would expect our tax rate to be around 18%.

Basic shares for the first quarter are expected to be in the $528 million range and diluted shares are targeted around $530 million. This equates to a non-GAAP diluted EPS range of $0.06 to $0.08 per share. We estimate the depreciation for the first quarter will be around $32 million and first quarter capital expenditures to be in the range of $25 to $30 million. Finally we estimate first quarter cash flows from operations to be positive.

I thank you for your time and with that I'll turn the time back over to you Jure.

Thank you, David.

I would just like to add a few things. I'm going to focus on four major items here. Talk a little bit more about the stock option investigation. Our review of fiscal year 2006 both Q3 and Q4. Talk about our new strategy and outlook for 2007 and beyond.

We already talked about this for many months, but stock option investigation started for us in June. The loss was approximately four months. We did issue a press release regarding the findings on October 12th. We definitely had the misuse and as David mentioned we're planning to file our Q by our deadline of December 14th.

I can tell you this investigation was very intense. Definitely did affect productivity over the last 6 months in our operations. It took a lot of management time. On a positive side, good things came out of it. We fixed our weaknesses in the Company's internal controls over our stock compensation practices. And now, after all this we can focus on running our business.

So now let me talk to you about 2006. Revenue as David mentioned was down approximately 6.6%. Mainly caused by personal computing. Our personal computing was down 21%. I'm going to break out business in a two groups. A PC group itself was approximately 3.2 billion in 2006, and d what we call core EMS was approximately 7.7.

If you look at our overall growth was mainly affected by our PC low demand in fiscal year 2006. Few more things as David mentioned issues we had in Q4 were really around OEM products, and I'll talk more about it. PC low demand, also defense and aerospace forecasts were lower than what we expected it. It's really a timing issue for us, actually happened both quarters Q3 and Q4.

Some of the government projects being delayed, but we do expect this to--demand for these products to be up in 2007. As David mentioned, we did have some issues in our [inaudible] business, mainly in our China operations. For other businesses, overall revenue was stable, and for the year, I can say that the gross margin did improve from approximately 5.5% to about 6% before a one-time charge for this continued ODM products that we took in 2006.

Our non-GAAP EPS for the year should be--should come out approximately $0.20 versus our internal goal of $0.32 to $0.35. Now, let me tell you where the miss is. If you look at our under performance operations, personal computing caused us $0.03, enclosures $0.05.

Mainly in our Hungarian and Chinese factories, these are both two new factories. [Inaudible] mainly in Asia and Europe about $0.02, and one-time charge for certain discontinued ODM products for Q3 and Q4 that we took approximately $0.05. If you take all of this together, it's approximately 5 --$0.15 that we underperformed.

On a good news from the new business point of view, we won approximately $1.5 billion of new business in fiscal year 2006. Both from new and existing customers. This helps us really to replace the lost business that we had from Nortel. Mainly was a demand was low and the Nortel business is a business that was sold and went over to Flex.

So in summary for 2006, back to again investigation was distraction to the management, took a lot of time and delays. Overall, a challenging year, but very good year from a customer relationship point of view. Our customer base increased and I think we're a lot better positioned for growth because of that both on a top and our margin improvements.

Now let me talk to you about our strategy and outlook for 2007. Over the past 6 months, we concluded comprehensive review each of our businesses, basically we take a full review our strategy, we basically do this once a year and look three years out. We look at our capabilities, we look at our global competition, customer needs, and trends, and some of the internal issues that we have.

What we concluded is the best way is to position the Company to basically realign the Company, I should say. Eliminate certain products that were not adding a lot of value, some of the certain ODM projects that we were involved in the last three years. Separate our PC business from our core EMS, and consolidate certain operations in a high-cost geographies. And as David mentioned, because of those restructuring or realignment that we're working on, Company will take approximately $125 to $150 million charge during the 2007.

We do expect a pay back on this to be approximately $50 million a year and we should start seeing this benefit in Q3 of fiscal year 2007. As we separate our personal business computing business as a separate unit, this will improve our customer focus and explore other options to provide increased value to our customer and investors. It'll provide our customer base added volume from design and logistics. It'll provide a greater transparency to our investors, and it will have to find a better way to improve the margins.

So as we are realigning our ODM business-- we're going to realign all our ODM businesses across all the product lines. We're going to strictly focus our design engineering capabilities with customer--what we call joint development in the future. These are mainly customer specific projects where customer guarantees us some kind of a revenue in the future.

So as we review a lot of these ODM projects that we were involved in the last three years, we find out a lot of these didn't have a lot of future, we spent a lot of money in the last three years and the best thing really for the Company was to cancel this--this projects and really focus what we call on joint development in future.

Now let me talk to you more about personal business and computing. This personal business will include high volume, low end Intel and AMD servers, low-end storage, desktop, and laptop computers. This will provide us with the potential for strategic opportunities to work with technology partners to maximize value for our PC business. The gentleman that's going to lead this project is Mr. Mike Misseus, he has been with the Company over 15 years.

As I mentioned earlier, revenue for PC for year 2006 was approximately 3.2 and the gross margin on that business was approximately 2%. As we look out for 2007, we do expect this business to grow slightly 3 to 5%.

Now let me talk to you about our core EMS. This business has a strong fundamentals and is well positioned to compete and grow. The core EMS business includes PCB assembly, system assembly and logistics, costumes design and engineering, circuit boards, backlamps, cables, enclosures, plastics, machining, and assembly and memory modules.

The core EMS will focus on following markets, communication infrastructure, high-end enterprise computing, defense and aerospace, industrial, semiconductor equipment, medical systems, multimedia mainly focusing on the high-end home entertainment and automotive. As I mentioned earlier, core EMS business had revenue approximately $7.7 billion and had a net gross margin of approximately 8% in fiscal year 2006.

As I look at--in the future, let me now break this business in two groups components and asunder EMS. And our components business includes printed circuit boards, backlamp cables,enclosures, plastics, machining, and memory modules. We expect this business to grow approximately 10 to 15% this year--in 2007. If you look at the margin for this business in 2006 was approximately 5%, we expect gross margin for 2007 to double to a 10%-plus, and these are the following reasons.

We had enclosure issues in 2006, which I believe are mainly fixed today. Definitely going the right direction. Our operation in Hungary is improving and also our operations in Asia are going the right direction. We also add the new management here 6 months ago. So based on the results in Q4, these things are going the right direction.

We believe that our printed circuit board issues that we had in Asia are fixed. Again, we've added and threatened the management there. And all the signs are telling us that is going the right direction. I believe that our components business overall is a lot better positioned for a growth now than it was for long time.

On a standard EMS which basically includes typical PCB assembly and a system assembly, which is a high mix and highly complex infrastructure product. This business itself, if you look at it last year, it grew approximately 5% we expect to this business this year will grow over 10%-plus.

Most importantly, the margin of this business are reasonable for fiscal year '06, at about 8.1%. We do expect these margins to continue to improve rest of the year, and should reach between 8.5 and 9% by the end of the calendar year 2007.

Why we are confident about this? We do have some--what we call underperforming operation in this--in this group in 2006 so just this factory's being fixed and we see a positive improvement there. We also see improvements in growth in our defense, medical, communication, industrial area in 2007. So and because of this growth of 10%-plus growth definitely should help us improve the margins.

Most importantly, I think we are well positioned here to compete both in technology and the cost. In summary, overall gross margins should be as David mentioned for Q1 '07 between 6 and 6.4%. We also expect to exit fiscal year 2007 with the gross margin of 7 to 7.5% for overall business, that includes, when you combine PC plus our core EMS.

Now let me talk to you about the market conditions. Market conditions continue to be stable. We had some nice new progress in fiscal year '06, as I mentioned over $1.5 billion. And also what we've seen is that our non-traditional markets are doing well and they showing some positive signs for fiscal year 2007.

Medical, industrial, our defense group, especially, we just won a major contract with USA Department of Homeland Security. It's basically a 3-year contract. It's the first sign that we've been involved directly with the government itself. So it's really a great sign for this division.

We grew this business approximately 30% in fiscal year '06. And we expect to grow this business 35 to 40% in fiscal year '07. We're going to continue to focus on mainly on organic growth and continue to diversify the markets and our customer base.

Now what I would like to do is share some of the numbers we are forecasting how each of these markets should grow for us in 2007 and beyond. Communication we expect to grow for our business that we are involved in 5 to 10%, high-end enterprise computing, 5 to 10%, defense and aerospace 30 to 40%, industrial 20 to 25%, semiconductor about 10 to 15%. Medical systems 20 to 25% and we grew medical also last year over 20%. And automotive 15 to 20% and multimedia mainly home entertainment for us 5 to 10%.

So in summary, as a company will continue to do--to be very focussed on those opportunities where our technology and the infrastructure that we have that give us a clear advantage over our competitors. This is the areas that we're going to focus on. In our core EMS business, we are better positioned to compete than we were a year ago and I think we do have, as I mentioned earlier a strong infrastructure in place.

The bottom line, we're--we're committed to providing a superior customer service and technology because that is the key to the growth in this business. We're going to continue to improve the margins.

I think we made a small step in 2006 with all of these interruptions that we have in new factories. Those issues are behind us, I'm a lot more confident in 2007, and as I said earlier, if you look at our gross margin today is approximately 6% we expect to improve that margin in 2007 or exiting 2007 between gross margin of 7 to 7.5%.

And now, what I'd like to do is again extend a special thank you to all of you for participating in this conference call today. I would also like to thank all our employees for their hard work and dedication to this company, especially in the last 6 months going through this interruption that we went through through this investigation. But I do appreciate all the hard work.

So operator, now we are ready to open all the lines for the questions and answers, thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from [Thomas Lingent].

Hello, Thomas.

Hi, guys. David, maybe just a clarification here in talking about the activities you're doing to drive costs and do some restructuring. Along the three buckets that you talked about exiting the ODM, consolidating some facilities and then the separation costs that you've got. What's kind of the split between all of those, and then I have a quick follow-up for Jure?

Well, we don't have a specific split for that right now. What I can tell you is that in the fourth quarter as I mentioned, we had $15 million of charges for obsolete inventories as a result of product lines that is we are going to be discontinuing.

The--and that--those costs have already been incurred, and going forward, we're still really putting in place plans that we'll be executing on over the next year. I don't really have any more of a break down I can give you at this point.

Okay. That's fair. And Jure, just in regards to the consolidation of the PC assets that you've got there, are you currently engaged in any discussions around the strategic alternatives there including potentially like the sale of the business, or is this just consolidating the assets and management and resources right now and those types of discussions will go on through the rest of the year?

Well, the main goal right now is really to consolidate this group as a one solid unit focussed on the--to really focus on how do we add more value, but we are definitely looking into a partnership that can add value to our customers long-term. Because this division itself, I believe needs to provide a more services instead of just built to order or configure to order long-term.

Okay. Thank you.

Your next question--I'm sorry Michael Walker.

Hello, Mike. Mike, are you on? Operator, nobody's on.

Mr. Walker, your line is open, you may speak.

Is that Mike Walker you said?

Yes.

I didn't know that was me, thanks. My question is about the PC business, the language is a little bit vague about it being more separable. It sounds to me frankly like you're looking to sell it and I guess I'm wondering if that's your intention and what your strategy is along finding a buyer?

Well, Mike, as I mentioned earlier here, we are--first of all the margin that we are being delivered for this business for us and the growth is not acceptable. So that's why we wanted to show it to you as as an analyst and our investors to see both sets of the business we have. I think we have a very healthy core business of $7.7 billion that has a momentum for growth and then we have a business that is not been really growing as I mentioned last year went down 21%, and mainly on--there was no demand from one of our major customers.

Then I look at the some of the ODM projects that we were involved in last few years, would not be very successful on our own on some of those ODM products. And that's why we're saying let's create this new division that can really focus on this unique business. We will look at for other partners that will, maybe we can create. If that means that we can bring in a financial partner into that group to create the stronger company, all the options are open.

Okay. And just a question on the multimedia, it was down about 17%. Just seasonally, that gets to be pretty strong these days, so could you just kind of give us an idea of what happened there?

I think with us is mainly a timing issue. We have a customers, they are basically we build ahead a little bit, but it's really a timing issue with us, Mike.

Okay, and then just two quick questions for Dave. Interest expense you said it goes up on a couple different moving parts, I think one of them has to do with the one-time payment to the bondholders related to the filings, does that amount go away--I'm trying to figure out what kind of a steady state number is to use for interest expense.

So the primary difference quarter-over-quarter is not so much the waiver cost because those costs by GAAP are amortized over the life of the debt. That being, we're waiving the default on. The bigger issue is that we've replaced 3% convertible notes with 7.5% notes. So that delta of roughly 4.5% is what creates that difference quarter-over-quarter.

Okay, and then just my last question is can you give us roughly the idea as to what book value per share is?

Well, divide --

I don't think we have all of the components.

I don't have it off the top of my head. But I'll tell you what, if you give me a call, I can give that number to you.

Okay. Great. Thanks a lot.

I don't have the math in front of me.

Thanks, Mike.

Your next question comes from Jim Suva.

Great, thank you very much. Can you talk a little bit about your inventory management? I know you wrote off about $15 million of obsolete inventory and you were very clear about that. But if you were to even include that, even including it or excluding it, it looks like inventory has grown greater than your sales outlook for several quarters in a row to the magnitude of almost about 5 quarters in a row. I understand about business ramps and such, but it doesn't seem like there's very many goods out there that take more than 3 months to buy their product and assemble it. Can you talk about inventory management and kind of where we sit today and what we should expect going forward?

Yes, okay, Jim. Excellent question, Jim.

I think what we had about two quarters ago really started for us, we had a--some demand, some shortage in stocking components with a couple of our major customers. And we, based on our customer inputs, we went out there and really brought in a little bit more than maybe what we needed and demand for our customer really went down. We started to work that down, and then we have another customer that just again timing, a lot of working process, and demand wasn't there and combining those two really added up about $100 million.

And then we did acquire--the last three months really, the four months two major deals, which between those two deals potential revenues of over $300 million is the latest one is this Telesyn, we picked up some inventory there and the one before that was the--[inaudible]. So that's, that's really some of the issues came in. Now, we believe that if you look at what's in front of us, our inventory turns should go up and we expect it to really reduce our inventory at least by $100 million in the Q4.

Okay. And as a quick follow-up, that 15 million written off, my understanding was most of the EMS companies tend to generally procure inventory based upon orders and have commitments from customers. Was there more in your memory module business? Or were you holding a little bit of extra inventory for potential upside? How did you actually get left --?

This is mainly ODM products.

Okay. Got you.

This is a product that we build then we try to sell it and we take full responsibility of inventory. That's what both David and I said earlier. Our goal here is that we getting out of that business, we strictly going to focus on a joint design where we have a guaranteed inventory and guaranteed revenue.

Great, thank you very much. Thanks, Jim.

Our next question comes from Kevin Kessel.

Hi, guys.

Hey, Kevin.

In terms of your ODM business that you're discussing. If we go back to last year when you did your Analyst Day, Jure, you were talking about, your optimism around this business.

You thought you'd grow overall sales of ODM to 20% of the total. At the time your largest customer was switching things up, but you mentioned you won a couple other large deals with some Tier 1 server vendors and you were talking about the storage and then you bought Adapt Tech. I guess my question is, why did it take--even if this business has been as performing as poorly as it has, why did it take so long do you think for you guys to to really abandon it?

Well, we had -- let me give you more details than that. Kevin, first of all some business for us at one time was running well over $350 million run rate in that business. You're right we won actually two other projects on this business. And one of those projects still going on and will continue to go on and that's weel.

Actually the project that I'm talking about and I say we want--that one is really more like a joint development. We designed a server for specific customers that will be sold to a specific customer. That type of--that project is going to continue to go.

We--Kevin we tried to do two things. We also tried to develop a channel business in this stuff. And the--just the competition is fierce in this area. I think it's something that what we find out, we're just not good at it. We're a manufacturing company, we're not a product company, and we just decided that this is not for us.

Okay. And then in terms of the new wins that you were talking about earlier, I think you said 1.5 billion plus new wins this year that should help growth in '07, is that correct?

That's correct.

And can you just give us a sense of where these wins are? Is this--how many customers this maybe incorporates or what end markets you're targeting?

It's really cross all our markets. As you know, with PC being down the last year, 21% and then some of the Nortel business went away, we really have to replace the business, and I think we did a good job. Most importantly a lot of these are new programs they will continue to grow in 2007, hopefully beyond. It's really across all the product lines. But I would say the biggest it will be, the telecom, the second will be the medical, industrial, and defense and aerospace.

Okay. And then just a follow-up on the last thing with the PCBs that you mentioned they were--they performed poorly, I guess quarter to quarter, that hurt your margins. But on the flip side, you're sounding optimistic about how the component business will perform next year and I understand that's partly due to restructuring and realignment and then closures and boards. What is it telling you right now that the printed circuit board business which is sometimes an indicator for your overall business is starting to weaken? Is that a -- does that concern you?

Yes, overall business. If I look at overall printed circuit board business today, demand is a little bit softer than what it was 6 months ago, but still demand is strong enough to fill the factories.

My issue is really not being--filling the factories, my issue has been execution issues that we had in Asia, specifically for printed circuit boards and then execution issues in our enclosure business that we had in our new factories. We believe that all the major problems are behind us now.

That these businesses now are stable, and we expect this the group of--components which includes backlamps, enclosures, plastics, and so on, is to grow this year nicely 10 to 15% and double its margin because the margin in that business should be a lot higher than 10%. So taking it from 5 to 10 we feel pretty confident now in longer term that group should be 15-plus, 15 to 20% margin.

Could that group also be separated out and potentially sold or spun off or some --?

Under the new realignment, we are running that group as a separate division. But it's really connected through all our core businesses. We still believe this business that our technology component group is, it's one of the competitive advantages we have. In a high-end very complex products.

Thank you.

Thanks, Kevin.

Your next question comes from [Kevin Orum].

Hey, guys.

Hey.

The difference--can you go into a little more detail in the fiscal Q4, the differential between the 4.8% gross margin and the 6% if you exclude those items? What are all the items that are in there?

Dave, why don't you take that one.

Kevin, really three pieces, as I indicated about $15 million was associated with their--the ODM decision that we talked about here. That was all primarily obsolete inventories.

And then two other issues, one was in our PCB fabrication business, which is primarily lower revenue quarter-over-quarter. And then thirdly, some one-time warranty claims and uncollectible receivables. And those three items added up to about $32 million.

Okay. So the--in the PCB fabrication, the specific problems in that quarter are what?

Revenue, primarily revenue down quarter-over-quarter.

And when you talked, and when Jure was just saying that a lot of it is kind of company specific misexecution, is that what you're referring to is that revenue was actually affected by this?

No, there were also some execution issues, as well.

Well, in China.

In China, he was talking to China.

Okay.

We had some issues, if I can add to that one, we had issues in China that basically affected the shipments of the potential revenue. But that problem is being fixed.

Okay. And the--can you go into a little more detail on the--what you're referring to the warranties and on collectible receivables?

We ship a lot of products, and sometimes we have warranty obligations, to service returns and sometimes those are done in the field by a customer and we had some costs associated with those that we as a company decided to bear in the interest of customer satisfaction.

Well, what's the uncollectibles?

Just receivables that were uncollectible at the end of the year, and just as a result of our position of trying to be very conservative on our receivables to the extent they get past a certain age. We take a reserve against them.

Yes, but something--something had to happen there to get you to take this route that you didn't think you were going to have to take, right? Is there anything--how many customers is this?

It's a handful.

What's going on there? Who's not paying you?

Well, well--maybe we need to explain our policy. Our policy is very simple. And that is when a receivable has become 120 days old, there's 90 days we have to collect it at that point in time. If at the end of that 90 day period it's still not been collected, we take a reserve for it.

So that's in effect what happened. Now at the beginning of the quarter, these receivables were on the alert list. They were expected to be collected at the end of the period. And because they were not collected at the end of the period, we took a reserve for them.

But, Kevin, the process for collecting will continue.

We'll still continue to work and collect on them. But sometimes you have disputes and disputes, may be that the customer thinks it's a different price than what you think it's at or maybe different quantity or there may be an issue with the customers receive the goods against the wrong purchase order.

So sometimes there are mechanical things that go in place and we work to get those things corrected. Sometimes, there are differences that wind up being sorted out for other reasons. And wind up having to take--require a negotiated settlement at the end of the day.

Okay. And the 17 million is broken out how between those two buckets?

We didn't provide any break out of that.

Can you tell me if one is bigger than the other?

I think we've disclosed as much as we're going to disclose.

Let me ask you this, on the enclosure business you said you kind of you think the problems are behind you but it seems like you continue to have problems. In the past you had said that the second quarter you had originally thought it was going to make money. I think it was maybe $5 to $6 million in the second quarter and ended up being break even in the second quarter.

Actually in the third quarter.

I'm sorry, third quarter, I'm thinking calendar. So third quarter. So can you tell us what happened there in the the fourth quarter and what you think it could be?

Yes, the fourth quarter they actually made money. There were --

They actually improved quarter-over-quarter.

Quarter-over-quarter over $5 to $6 million. And we expect these things to really to go over 5% this quarter and really the goal for them is to exit--exit a year over 10%. North America is over 10% already.

When you say exit, you mean exit the calendar year?

Calendar year, right.

At 10% gross margins?

Right, right.

At a 10% gross margin are you making money on an operating basis?

Yes.

Okay.

SG&A for this business will be about 2.5 to 3%.

Okay. And then from there, from the -- if it exits the year at 10%, where should it go after that? What's the level you need to believe you can hit--?

This business, Kevin, if we didn't believe this we could get to this business about 15% gross margin, we'll get out of it tomorrow.

Okay and so when do you think you can hit the 15?

It all depends on the demand. I'd say that North American is already doing over 10% now. And they're definitely North America will move over 15% in couple of quarters and I would hope that we can get the whole operation not too long after the fiscal year.

Okay. I'm thinking--I think Kevin Kessel was alluding to your ability and your willingness to sell, businesses and break up some of these businesses. Some of the parts would be worth significantly more than your market price.

And you kind of have one quarter, it's one business having a problem another quarter it's a different business. Some of the--sometimes you're turning it around a bit in the case of PCB fabrication, and then it kind of turns down again.

How are you thinking about this in terms of--in terms of which businesses? Like you just said with the enclosure business that you would sell it if you can't get to certain margins? How are you thinking?

Kevin, we can discuss this offline all you want, but--I just rule of thumb for everybody. You have a--you have an assortment of businesses that you really have--that you provide the best possible solution to our customers. If you really look at what we're doing today, our business is really two different businesses.

You got a core EMS and you got a PC business. PC business today is what we service is really BTO-CTO. A great support there if you talk to our customers, but what we don't really have thrown in but we're building the mother boards, we're designing it.

So we need to find a partnership there to really provide a total solution. That's really why we are breaking the business and looking for that better solution. I think when it comes to the rest of the businesses, I think we really have one of the best setups in our industry when it comes to the high-end, high-mix, high complexity type of products.

You look at the capabilities that we have. Yes, we struggle during the--during this restructuring, but it was our customer base that really struggled. I think the worst is behind us.

I know we did not show all the necessary improvements that we planned to, but I really believe that our core business is well positioned to move in the right direction. And as you can see, even in a tough year as we had 2006, overall business improved gross margin. But our core business with our PCs running about 8%, which is if you compare that, that's a leading in industry.

Right.

And I think we can get our core businesses if you combine--assuming that we get the component business to about 10% and other EMS business to keep it now growing to about 8.5 to 9%, overall net net gross margin because as the inner company elimination there, you have a potential to get 10% and that's really what we're driving is to grow that core business 10 to 20% a year longer term and get the gross margin around 10%.

If we do that, it won't take us long to be producing $0.20 to $0.25 a share per quarter, and that's really our internal goal.

Right. Okay. Last question, so the gross margin exit '07 at 7 to 7.5%?

That's correct.

Ultimately get to 10%?

Right. And if you take the PC business out of it assuming once we hit that 7 plus, that means the rest of the business is 9 to 10% already. I think our core business, Kevin, is well positioned to do what it-- what it takes right now is to grow and make money.

Right. All right. All right guys, thank you very much.

Thanks for your support.

Thank you.

Your next question comes from Amit Daryanani.

Hey, Amit.

Hey, how you doing, Jure?

Good, good.

Just a question, you're speaking about some fairly robust margin expansion across pretty much all your segments, can you just talk about how the incentive compensation is structured for division heads and if they are typing all the metrics you're laying out in front of us?

Yes, we--our whole company, all of our bonuses are paid based on performance from basically any--any senior manager in this company including myself we all pay based on performance. So it's really driven by the growth, customer satisfaction, quality, flexibility, delivery and all those things that we measure.

All right. And --

For us to make money, we got to have a -- we got to have a margin and growth.

Right. And I guess, looking at just the component business that's probably going to be a big driver for you to hedge your margin expectation that you've laid out.

Oh, Yes. It is critical for us. We expect it-- I think that business being at 5% in last 12 months is just not acceptable. We've got to choose for it. We showed you where we missed it. But I think that we're in a better shape from enclosures point of view.

I think we do have issues with the new factories. I know I'm repeating myself. Some issues with the management in Asia and Hungary. We got--we're getting that behind us and it's a small steps in right direction. The most important I think the team is executing well with the customers. Our customers are happy and now is really, just making some money.

All right. And then how much of the component did you guys manufacture is getting insourced on a dollar basis quarterly--?

It's been running between $85 and $100 million if you look at the about last four quarters.

Right. And the expectation has been to improve that by 10 to 15% every quarter which I guess--

I would say--I would hope that we're going to do next year in a company at least $380 to $400 million plus.

Annually?

Yes.

So that would imply it would be at the same run rate that it's at right now, 90 million quarterly then, right?

Yes, 90-100 million, yes.

Isn't that going to be a big driver for you to improve your margins?

It will but I think most of the growth that we're going to come into and these company's going to come on these new programs. It all depends, Amit, is how well do we-- how fast these new programs expand. Because those are the ones that we're more vertically integrated.

All right. And just finally, I think you spoke of the Department of Homeland Security program, I believe you're talking about the portable nuclear detectors that you want.

That's correct.

Is that a Sanmina branded product now or how does that work?

We are the lead general contractor there. We using a one major partner. But we do 80% of work on that project.

And the technology that you guys are using, is that based on sodium iodide or germanium based?

I can't go into details on that.

Fair enough. A+.

Thanks, Amit. Operator, I've got time for one for question.

Okay.

[OPERATOR INSTRUCTIONS]

Your next question comes from Yuri Krapivin.

Good afternoon, everybody.

Hey, Yuri, at least you got a good name.

Yes.

Sorry go ahead.

Yes, a question about your PC business. You mentioned that the gross margin was about 2% in fiscal '06. If you are to allocate the SG&A expense to the PC business what would be the operating margin of that division?

We don't really break that down, but it's a very low, actually, if you look at that business and auto IC base, that's why we're breaking it away from our core business. That business on ROIC base is really delivers 18 to 20% ROIC today. So the business that you've got to measure completely. You can't measure that business strictly on a gross margin.

Basically you are suggesting that after allocation of the SG&A expense, that business is still making money.

That's correct.

That's correct.

Okay. And I'm trying to understand how easy it is to separate this business from the rest of the Company. Does the operation share manufacture facilities with other units, do they share IT systems, accounting systems, so on and so forth? How easy it is to separate and how long will it take?

Well, this business always ran a little bit different than the rest of our businesses, but it's being connected, to certain accounting controls and engineering and decision making. We are really, we're going to--they're going to--we still going to have one IT system, okay? Or they'll have their own, but they're going to all have their own separate controls, a lot of the decision making, a lot more focussed on their needs than other businesses. So we think we should be able to completely leave them on their own in about couple quarters.

Okay. Thank you.

Well, ladies and gentlemen thank you very much for participating in this call, if you have anymore questions, I'm sorry we couldn't answer them all right now. But we're available to take your call if not today, tomorrow. So again thank you for your support.

Thanks.

Bye bye.

This concludes this afternoon's conference call. You may disconnect.