Sanmina Corp (SANM) 2007 Q1 法說會逐字稿

Good afternoon, my name is Jeremy and I will be your conference operator today.

At this time I would like to welcome everyone to the Sanmina-SCI first quarter fiscal 2007 earnings call.

[OPERATOR INSTRUCTIONS]

I would like to turn the call over to Jure Sola, Chairman and CEO of Sanmina-SCI Corporation. Thank you, sir, you may begin.

Thanks, Jeremy. Good afternoon, ladies and gentlemen and welcome to Sanmina-SCI's first quarter 2007 conference call. Thank you all for being here. Joining me today on this conference call from management is David White, our Chief Financial Officer.

Hello, everyone.

And Hari Pillai our President of Global Operations.

Hello.

The agenda for today call is for David White to give us--review our financial results for the first quarter, fiscal year 2007 and forecast for Q2. And I will then follow with additional comments relative to Sanmina-SCI results and future goals.

Now, David?

Thank you, Jure and good afternoon, everyone.

Before we get started please note that selected financial portions of this presentation are 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 reference to these slides during the course of my remarks.

Prior to discussing the state of our business and financial information with you I would like to take a moment to review the following Safe Harbor statement, slide 2. During this conference call we make--we may make projections and 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 September 30, 2006, filed on January 3, 2007.

These documents contain and identify important factors that could cause actual results to differ materially from our projections of forward-looking statement. Before commenting on our business and financial results for the first quarter, as most of you are aware, we recently completed an investigation into our historical stock option administration practice which resulted in the need for us to restate our historical financial results. Our restatement was filed with the SEC as a part of our annual report on Form 10-K on January 3, 2007.

Accordingly, the historical financial results disclosed in our press release and discussed here today have been restated. I would further add that as a result of that filing that we are now fully in compliance with all debt covenants and the Nasdaq's listing requirement for the Company's publicly traded securities.

You will note in our press release issued today that we have provided you with a statement of operations for the three months ended December 30, 2006 on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between GAAP and the non-GAAP information is also provided in the press release.

As a result of the restatement we have expanded this reconciliation to include all of the quarters of fiscal year 2006. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, loss on extinguishment of debt, non-cash stock based compensation expense, amortization expenses and other infrequent or unusual items, such the expenses incurred relating to the Company's recently conducted stock option investigation.

Any comments we make on this call as they relate to income statement measures will be directed at our non-GAAP financial results. Accordingly unless otherwise stated in this conference call when we refer to gross profit, gross margin, SG&A and R&D expenses, operating income, operating margin, net income, and earnings per share we are referring to the non-GAAP information. On today's call I will review the results of our operations, discuss selected balance sheet accounts, and corresponding metrics, provide an update with respect to our restructuring activities and finally I will conclude with guidance for our second quarter of fiscal year 2000 ended March 31, 2007.

Slide 3, revenue for the first quarter of fiscal 2007 amounted to $2.78 billion at the mid-point of our guidance of $2.7 to $2.85 billion versus $2.72 billion in the prior quarter and $2.86 billion in the same period a year ago. Non-GAAP earnings for the quarter were $34.7 million, which equated to $0.07 per share, also in the middle of our guidance range of $0.06 to $0.08 versus $0.00 in the prior quarter and $0.08 in the corresponding period a year ago.

Slide 4, for the first quarter our revenue by end market was as follows. The communications end market represented 28.2% of our net sales and in absolute dollar terms was down approximately 4% from last quarter. High end computing and storage comprised approximately 15% of net sales during the quarter.

Sequentially and in absolute dollar terms the business was down approximately 7.5% quarter-over-quarter. The multimedia and consumer electronics end markets accounted for 11% of net sales during the quarter, which was up about 23% in absolute dollar terms over the prior quarter.

The medical end market accounted for 6.6% of net sales during the quarter, which was up approximately 4% in absolute dollar terms over the prior quarter. The industrial, semiconductor capital equipment, defense aerospace and automotive end markets of our business collectively accounted for 8.2% of our net sales, and in absolute dollar terms were up approximately 2.5% over last quarter.

Our defense and aerospace and automotive sectors were up from the prior quarter, where as our industrial and semiconductor sector was down from the prior quarter. Finally personal computing systems accounted for approximately 31% of our total revenue, up 7% quarter-over-quarter in absolute dollar terms.

Slide 5. Our top ten customers accounted for 61% of total sales this quarter. Sales to our top 20 customers amounted to about 75% of total sales in the first quarter. Although customer concentrations increased modestly quarter-over-quarter due to seasonality in the PCM market we have been successful over the last year in diversifying our customer base as evidenced in the year-over-year comparisons in this chart. We had three customers in the first quarter whose sales were greater than 10% of total sales.

Slide 6. Gross profit for the first quarter was $169.9 million. As a percentage of sales gross profit was 6.1%, up approximately 130 basis points over the prior quarter's results and up approximately 10 basis points over the same period a year ago.

Selling, general and administrative expenses for the first quarter excluding stock compensation expenses were $90.4 million, up approximately $1.3 million over the prior quarter and up approximately $4.3 million over the same period a year ago. SG&A expenses as a percentage of sales were 3.3% for the quarter.

Research and development cost excluding stock compensation expenses for the first quarter amounted to $9 million, down approximately $900,000 over the prior quarter and relatively flat versus the same quarter a year ago. Our combined R&D and SG&A expenses for the first quarter, excluding stock compensation expenses amounted to $99.3 million or 3.6% of sales. Operating income for the quarter was $70.6 million.

Our operating margin for the first quarter was 2.5%, up approximately 130 basis points over the prior quarter and down approximately 20 basis points over the same quarter a year ago. Other expense which consists primarily of interest expense and income as well as gains and losses from currency translation was $28.3 million versus $27.2 million in the prior quarter. Depreciation was $28.6 million for the first quarter, down approximately $3.2 million quarter-over-quarter, and our EBITDA for the quarter was $99.2 million.

Slide 7. To provide investors a little more transparency into the business we report two business segments in our public documents filed with the SEC. The first segment is our personal computing segment which includes business PC's and industry standard servers. The second segment is our core EMS segment which includes the rest of our businesses including our component businesses.

First quarter revenue for our personal computing segment amounted to $837.5 million, up $54 million over the $783.5 million reported in the prior quarter and down $112.9 million from the $950.4 million reported in the same period a year ago. Gross margin in this sector amounted to 2.0% versus 1.4% in the prior quarter, and 2.1% in the same quarter a year ago. Margins in this segment were consistent with our expectations.

First quarter revenue for our core EMS segment amounted to $1.94 billion versus $1.93 billion in the prior quarter and $1.91 billion in the same period a year ago. Gross margins in this sector amounted to 7.9% versus 6.2% in the prior quarter and 7.9% in the same quarter a year ago. Jure will talk more about these results in his comments.

Slide 8. Turning to the balance sheet, accounts receivable at the end of the quarter were $1.6 billion resulting in DSO of 50.5 days, essentially flat with the prior quarter. Inventories at the end of the quarter were approximately $1.3 billion. Inventory turned during the quarter an annualized rate of 7.9 times versus 7.8 in the prior quarter. On an absolute dollar basis, inventory increased modestly by $9.7 million quarter-over-quarter.

Capital expenditures in the quarter amounted to approximately $19.1 million. Account payable at the end of the quarter $1.5 billion resulting in AP days of 51.8 versus 52.7 in the prior quarter. Our cash cycle days for the quarter was 45.

Before I comment on our cash position and cash flow for the quarter I would like to point out that during the quarter we issued certain senior unsecured term loans. The proceeds from these loans were largely deposited into an irrevocable trust to [defees] our $525 million 3% convertible notes due March 15, 2007.

Notwithstanding the fact that these deposited funds are irrevocable and the convertible notes have been [defeesed] pursuant to the terms of the indenture, the accounting treatment for this transaction requires that we show these deposits as restricted cash on the balance sheet and continue to report the 3% converts as debt obligations of the Company until such time as the converts are actually retired. This event will occur this quarter, and as such we will not report these funds and debt obligations in our March results.

On a full quarter basis, interest expense on the term loans which is based on a variable rate, presently at approximately 8% will amount to about $12 million versus $3.9 million under the Company's 3% converts. Notwithstanding the fact that our cash interest expenses have been increasing as a result of refinancing inexpensive debt, we have reduced our overall debt by about $300 million over the last year plus.

It is our expectation as we continue to sell restructured facilities, close transactions either partially or completely, divest ourselves of certain non-strategic business and generally work on reducing our working capital needs that we will continue to reduce our outstanding debt and interest expense over the next year. Cash flow from operations was a use of $18 million during the quarter.

Free cash flow which deducts CapEx from our cash flow from operations was a use of approximately $38 million for the quarter. Cash and short-term investments at the end of the quarter were approximately $539 million, up approximately $47 million over the prior quarter.

Let me now comment on restructuring. During the first quarter we incurred approximately $3.2 million in restructuring expenses. As indicated in our last earnings call we announced three restructuring actions being taken by the Company.

We are proceeding aggressively in each of these three areas, and while we are making good progress, we are not in a position today to talk more definitively on the status of these actions. We hope to be able to do so, however, in the very near future.

Slide 9. Now let me turn to the guidance for the second quarter of fiscal 2007. Consistent with the prior quarters of fiscal 2006 the information I provide will generally exclude stock based compensation expenses, restructuring, integration costs, impairment charges, loss on extinguishment of debt, amortization of expense and other infrequent, or unusual items.

We are targeting second quarter revenue to be seasonally down, consistent with our history to between $2.65 and $2.75 billion. We expect gross margins to be in the range of 6.2% to 6.4%. We are targeting our operating margin to be around 2.6% to 2.8%. We expect our tax rate to be around 18%.

Basic shares for the second quarter are expected to be in the $527 million range, and diluted shares are projected to be around $528 million. This equates to a diluted non-GAAP EPS range of $0.05 to $0.07 per share. We estimate that depreciation for the second quarter will be around $29 million and second quarter capital expenditures to be in the range of $20 to $25 million.

Finally we estimate second quarter cash flow from operation 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.

Again good afternoon, ladies and gentlemen. David mentioned our first quarter came in $2.78 billion in revenue, which is approximately 2.3% improvement over September quarter. And non-GAAP EPS results of $0.07. Gross margins improved from 4.8 in prior quarter to 6.1 in December quarter.

I can tell you that I am pleased with our first quarter results. Not as strong as we have seen historically, but we saw nice growth from number of our core markets. Last quarter we talked to you on how we're going to divide our business the way we report in two buckets.

Number one is core EMS and number two is our personal computing business. Now, let me talk to you now about our core EMS business.

Core EMS business includes custom design engineering, printed circuit board assembly, system assembly and logistics, printed circuit boards, backplanes cables, enclosures, plastics, machining, precision assembly, and memory module. The core EMS business delivered $1.9 billion in revenue in a Q1 and gross margin of 7.9%, up from 6.2% in the prior quarter.

This business continues to meet our expectations and we anticipate this business to continue to improve on its strong foundation and is well positioned for growth. Now what I would like to do is talk to you a little bit more about our strategy for 2007 and beyond.

We are focused on our key markets where our technology and global infrastructure gives us a clear advantage over our competitors. Our key markets are communication infrastructure, high end enterprise computing, defense and aerospace, industrial, semiconductor capital equipment, medical systems, multimedia, mainly high end entertainment, and automotive. So back to the strategy, we are well positioned to compete in our high ends markets.

A market that demand high end technology and have a high mix products. We believe that Sanmina is strategically located globally to compete. After major restructuring, which most of it is done up to date, we have a right infrastructure in place. We will provide a full service to our customer end to end from custom design and vertical manufacturing model to a full system assembly and logistics.

Now, how are we set up? First of all we do have Gateway factories very close to our customers and we do production in low cost regions. The bottom line, we're set up for high technology, low cost, high quality producer. Most of our Gateway NRP factories are located in high cost region, mainly North America and Europe.

I can tell you they are the most profitable today and these type of factories are needed to service high end products that we focus on. Let me tell you more, a few examples. Our defense and aerospace business is located in North America. We offer full design and all precision assembly on this product. We have two PCB factories that support the military printed circuit boards in North America.

We also have two high tech quick turn circuit boards in North America. But we do all the production in China and Malaysia. When it comes to enclosure it's basically a similar type of strategy, two quick turn factory North America, production is done in Hungary, Mexico and China.

Our several EMS assembly have also quick turns operate on the same model. These operations are needed to win new business and be able to transition the products quickly around the world. Basically seamless to our customer.

Our low cost factories are all state of art factories and are set up for high end technology products. We have a lot of capacity in the low cost region today because most of the capacity from high cost region was transferred to the low cost. What I would like to do is now spend a few minutes talking about our end markets during the first quarter.

[Inaudible-heavy accent] came in per plan except we had one customer in communication market which was down approximately $50 million in a quarter. We do expect this customer to take this product in Q2. We believe this was a one quarter scenario. We also saw nice trend in our multimedia, defense, aerospace, medical and automotive end markets.

Now I would like to spend a few minutes to talk about component business, what happened in Q1. I'm pleased with the progress we have made in our enclosure business. We had a nice revenue growth, over 10% quarter-over-quarter. Made improvements in operational facilities and driving the gross margin close to the corporate office margins.

I believe that management changes we have made and offerings and commitments to this business are starting to pay off. We should continue to see improvements going forward and we do expect to exit the year 2007 in our closure business with a gross margin of over 10%.

Now, let me tell you a little bit about our printed circuit board business. Our PCB fabrication saw softness demand mainly from our communication business. Overall this business was down 5%.

We made a lot of improvements in this area, we made management changes, we actually brought in two new management and two new managers to run this business. One individual to run our Asia operation and one individual to run our North America operation. Printed circuit board fabrication also will made nice improvements.

Our North American plants today focus strictly on leading edge technology, quick turn and military products. Our Asia factories have been transformed to focus and manufacture strictly high end technology boards. As you know we did have a fair amount operational challenges as we moved this high technology product into Asia. But we believe a lot of these issues are behind us and we're starting to see nice improvements.

We also as I mentioned increased the level of technology and quality and again strong Asia presence. Margin for this business in Q1 are below our company average. We do expect margins and growth to improve in Q1 and beyond.

We do expect to exit printed circuit board fabrication business a gross margin greater than 10% this year, and the longer term we expect to drive this business to be over 20%. We definitely believe this is possible based on what we see in the market today. Most of these improvements need to come from our Asia factories. The rest of our component business did well in this quarter.

Now let me talk to you about some other management changes that we made. We brought in VP of Sales for component businesses, VP of Sales and Marketing I should say. This individual is responsible for selling printed circuit boards, enclosure, backplanes, and so on.

This individual used to work for us five, six years ago, was a major contributor, it is good to have him back. We also bringing a Senior VP to run our component businesses, and that individual should be aboard the next 30 days.

So overall revenue was stable in our core EMS business. We delivered a nice margin improvement in this business and I believe we will continue to see improvements. The leverage should continue to come from our component businesses especially enclosures and printed circuit boards.

Now let me talk to you about PC personal computing business. Last November 16, 2006, we communicated to you that our personal business is not in our long-term strategy. We are planning to separate personal computing business and all the business connected to this market.

Personal business computing includes high volume, low end Intel and AMD servers, low end storage, desk top, laptops, computers. This move will provide us a potential for strategic partners to work with-- to maximize what we have, because I believe we have a very good setup when it comes to BTO and CTO. Mr. Mike Meseo who has been with the Company for 15 years plus is leading this unit.

Revenue in Q1 came approximately $838 million and gross margin around 2%. This is approximately 30% of our total revenue which was in this quarter approximately 7% up. Revenue mainly was generated from three large customers.

Few comments on our inventory. Inventory turns were up from 7.8 last quarter to 7.9 this quarter, these are still best industry turns, but we are not happy with these turns, we believe we can do better. We did expect, as I mentioned last quarter that our inventory turns would come down as much as a hundred million quarter-over-quarter.

Well, this didn't happen, mainly caused by two of our customers. We are working very close with these customers and we believe we will be able to improve inventory in the second quarter between $50 and $100 million.

Now I would like to talk to you about our market and market outlook. As always predicting the future market demands is very challenging. Bookings for the last quarter, book to bill was lightly below 1 and 0.98. Impacted mainly from personal computing, bookings and telecom.

Booking forecast for Q2. At this time our forecast shows that book to bill should be about 1. We see stable demand for existing customers and programs, and we should see nice demand from new wins in our core EMS business.

Personal computing business bookings, we're forecasting to be down between 8% and 10%. So in summary, our hard work is starting to pay off. Our core EMS business is improving and we should see a gross margin improvement in Q2. If you look at our core EMS last quarter as I just mentioned came in at 7.9%.

We believe this margin will continue to get better. Longer term goal for us is to drive the gross margin for combined core EMS business at 10% plus. As we look at what's going on in Q2 coming up, typically this is seasonally the weakest quarter a year.

Revenue forecast as David mentioned earlier is 2.65 to 2.75, we are forecasting total business gross margin to be between 6.2 and 6.4 and non-GAAP EPS $0.05 to $0.07. Revenue in this quarter is mainly affected by our PC business.

As we are fine tuning the Company to be a leaner and more agile, and by separating our personal computing business our goal is also to take the cost all the way through the Company. As we look at our SG&A looking forward we believe we should be able to take out some cost out of there and approximately 15 plus million per quarter or 60 plus million per year.

Most of these cuts should be coming in second half of this fiscal year 2007. We are focused in driving hard our core EMS business because this is the future of our company, and again, predicting the future is very difficult, but I believe we are well positioned to compete in our core business. We are making steady progress and our core business is heading in the right direction.

Bottom line, I am personally more optimistic about our future. And at this time operator I would like to again say thanks to everybody and I'm ready to answer any questions that anybody might have. Thanks.

[OPERATOR INSTRUCTIONS]

Your first question comes from Matt Sheerin.

Hello, Matt.

Hello, Jure. So let's start with the--your utilization rate. What's your overall capacity utilization right now and what is it in Asia, because you're talking about having capacity there.

Overall capacity utilization for us is in middle 60s, but we have most of the extra capacities in Asia, specifically in China.

Okay, and you talked about some opportunities on the new project front, new customers, could you tell us where you're seeing that and when should we expect to see that roll in?

Well, we have been pretty fortunate I think during 2006 that we brought in fair amount of new customers to the table. We expect these things to start to--contributing fair amount to the revenue.

I would say overall our core business should continue to move in the right direction. We saw nice optic demand in our medical multimedia, defense and aerospace business. I think communication as I mentioned earlier was affected by one customer, otherwise that business overall should have been up a few percentages.

We think the telecom business will continue to be stable, we don't see a huge growth in 2007, but definitely what we see today is going the right direction.

I guess the concern that investors have, Jure, is that you have been stuck in the 26 to 28 billion range for almost eight quarters now and you talk about growth opportunities, new business opportunities and then we see kind of the same guidance the same operating margin guidance. I guess the question is what should we be--what can you do to convince us that we're going to see margin expansion, we're going to see growth better than what you have been seeing the last few quarters?

Well, I don't think I'm going to convince you til we do the--we have to deliver results. I think we are focused really today on the margin improvements. I believe that quality of the revenue is the most important thing to us. We're not going to chase just revenue for revenue sake.

We're going to drive as I mentioned if you look at our core EMS last quarter delivered 7.49% gross margin, I believe those margins will improve a lot of the leverage should come through our component businesses. We see a nice improvement in our enclosure business for now, second quarter in a row, and we expect to even have an even higher improvement this quarter.

Printed circuit board business that's an issue that we have in Asia got fixed. We just need now demand to pick up on that side of the business, as I said was a little bit soft. So the biggest leverage for me to convince you, Matt, is really number one results, but I think the leverage has got to start coming from our component business.

I think when it comes to a pure EMS business I believe that business again is going to improve and that's really what we're going to focus on. We are separating our PC business away from our core business and, we'd rather be a smaller company but producing higher margin, higher EPS, so time will tell.

Okay, fair enough, thanks a lot.

Your next question comes from Louis Miscioscia.

Thank you. The question I had I guess, David, if you could just maybe take us through the income statement. On your press release, I know that you do try to get us from GAAP to non-GAAP. You had SG&A that obviously was higher than the non-GAAP version. I think also when you look at the other income line there was a couple things in there, and I'm just trying to understand what those things are, if you could walk us through that.

Well, I think real briefly, Lou, is if you look at the operating expense delta between GAAP and non-GAAP it is substantially stock compensation expenses this quarter, a small amount in there of restructuring expenses, about $3.2 million if I'm not mistaken. That's primarily the difference quarter-over-quarter for the operating expense side.

On the other income and expense side of the equation there's a couple things kind of going on there. One is that as I indicated in the quarter we swapped some 3% convert debt with--with 8% term loans. So there is incremental interest expense in the quarter associated with that in the first quarter.

There's also you will recall that as part of the stock option--stock investigation we had a bond holder consent, there's about $500,000 worth of cost in the March quarter, excuse me, in the December quarter for that that was not in the fourth quarter. Then there's a little bit of FX benefit relative--a little bit of FX loss in Q4 and a little bit of FX gain in Q1 that kind of bridges the two as well. So those are the primary components, bridging quarter-over-quarter.

And then on the GAAP to non-GAAP on other income and expense, one other item that's probably notable in there is the fact that we sold one of our--our facility in Toledo, Spain that had been restructured about four or five months ago. And the gain on the sale of that building is included in the GAAP results for the first quarter, but is excluded from the non-GAAP results. So I hope that--I hope that helped.

Okay. Great. And then one follow up, when you're separating obviously the PC business, could you give us some idea, is this something that you're thinking of spinning it off to shareholders, are you looking for an outright sale? If you run some of the margin numbers through on the--if you take out the PC business you still don't get to--you only get to about $0.20 in EPS which obviously because you're losing some income from the PC operation, just wondering what you expect--

I don't know how you figure that out. If we first of all we believe that PC business today is not really bringing a lot of money to the table and the savings that we can get just measure to our SG&A savings are at least $60 plus million a year that we are working on, which we feel we can take out. And then really focusing, you have only 724, we want to change the way this company looks. We want to focus on to be a really high technology, high mix low volume producer, really going back to old Sanmina roots.

Spin-off the shareholders or --

Well, we are looking--we are talking to our customers, we're looking what is best best value we can find. Most important is really to protect our customers.

Okay, thank you.

Your next question comes from Thomas Dinges.

Hello Thomas.

Good evening, Jure and David. Jure, can you talk just a little bit more about the PCB business? Was it it a similar quarter this quarter to last quarter where when you talk about those long-term margin targets the Americas was maybe there this quarter and Asia was significantly below that, and did you actually make, even get to break even in the Asian region--?

Yes, we had a nice--it was nice, but we actually made a little bit of money in Asia and we had a little bit soft demand which really mainly was in North America, and a quick turn mainly from a telecom side of the business. So overall I feel comfortable the road Asia is on, I think the management improvements there really helped lots. So I feel comfortable.

I mean we're building products right now in our China factory that is over 16 layers. We're building our products in Malaysia factory that are well over 30 layers, large boards. So we really ready to--to take on and compete. So I feel that we're in a lot better position to leverage overall component businesses than what we were let's say 90 days ago.

Okay. Then just a real quick one on the cash flow side, as you had said you thought you would be positive free cash flow this quarter but a couple of customers didn't pull product, and now you're talking about maybe $50 to a $100 million. I guess the question is, if you thought you would get a $100 million out of the inventory last quarter, now you're going into a bit of a seasonably softer quarter, why the hesitation to not get a little more out of the cash flow here, is there just still some question as to maybe what the last month of the quarter will look like from a pull standpoint?

No, we are driving our inventory down. We do expect our overall inventory to definitely improve. Just like I said last time we thought we were going to drive it down and we didn't and we are trying to stay a little bit more on the conservative side, but our confidence level is very high that we will generate positive cash flow and we will continue, we will drive inventory down.

Thank you.

Thanks Thomas.

Your next question comes from Jim Suva .

Great, thank you.

Hello Jim.

Jure, or Dave, could you talk a little bit about addressing some of the concerns that investors may have when you talk about separating the PC business. Some of the great synergies that potentially you could be having with the enclosures, the components, the printed circuit boards, as well as the general allocation of SG&A such as corporate management costs and such, which now is when you spin it out you have a 30% smaller size business, can you discuss that--address that concern?

Yes, Jim, let me do this, and David I'd like you to add. First of all, the way you looked at it let me clear that up for you.

First of all, this business,as we separate this business the overhead will be separated with it. We're just not going to separate this business and keep the overhead, okay? So we believe this business has a lot more overhead than really even ourselves thought, okay?

First of all when it comes to vertical integration we are not set up to vertically integrate this type of product. A lot of the product that go in a PC are low end, low end enclosure systems that this company was never set up for it to do. And for us really vertically integrated stuff it's really major investment that I really don't believe we should go continue to compete in a PC business. I think this is the business that makes more sense for us to exit and I think you will see when that happens that we're going to be generating a lot higher income than what we are generating today with a lot lower SG&A cost.

David, anything else?

Yes, I would add one thing, when you look past just one year or so, and you look a little bit longer term, growth in the PC business and the opportunities we have to address the PC business are somewhat limited, and so for us to grow that business aggressively I think would be a pretty significant challenge for us on our own.

So our objective as we have talked about is to bring a party to the table that can realize growth beyond the PC markets and then free up for us the ability to focus on our core business and not be diluted in those efforts.

And, Jim, really to compete in this business you really have to have a strong end to end, and we talked to our customers, really we're not able to provide the really competitive solution. The margins that we have in this business, there's just really not future.

Then my follow up on the same topic, then I'll drop off, is what about, you talk about returning to your home and core business. What about the thought or concern, not to sound funny, but the neighborhood is changed compared to several years ago, meaning the competition across the street or high on the other side of the ocean, that they are now having a lot more robust skill set than they did several years ago and therefore there's some concerns about you're returning home but the neighbors have become more competitive?

I think we never really left our home. I think that we can compete on that side of the business, we compete with them today. I believe that the technology, flexibility, agility that we provide is the best in the industry. To be honest with you, we have no issues competing with them.

And then would you think it would be a couple quarter event that you see this happening or how much effort and time do you see happening?

First of all we are moving in that direction. And in a couple quarters we should see some big results.

Great, thank you very much.

Thanks Jim.

Your next question comes from Kevin Kessel.

Hello, Kevin.

Thank you guys. Just kind of a follow up on that question. You guys have outlined why this PC business makes no sense to keep and why you're eager to get rid of it or do something in terms of a synergy, what I'm trying to understand is what David said, he said you might try to look for a partner where they can grow this beyond just a PC business, so maybe you can just explain that because my confusion is based on the way the business sounds, I couldn't imagine anybody would actually want to own it outright and certainly would never be spun off because I couldn't imagine investors would want to own it as an independent entity, so maybe you can just explain what you mean by growth--?

I think this business, at least from my point of view will be partnering on this business with a partner that add a lot of value to this business. If you look at the value that we add is really the back end. What we are really looking for somebody who can add front end and combine those two solutions, and deliver our customer a better solution. But for us really right now, Kevin is really, we think we have a way to resolve this issue. But really the whole energy right now is being focused on our core business.

But Jure can you define what you mean by the front end value just so I'm clear?

If you have a full design on ODM, you're designing everything that goes in a PC from a plastic, from enclosure, from a mother board, to all this stuff that goes in there. If you see the companies that compete in that business successfully, they build everything from wire to screwdriver that goes in the box.

In other words, you would partner with somebody who has a lot of design expertise and then they can leverage your manufacturing and assembly expertise?

That's correct.

Okay, I got that, so then just a follow up to that then, when you look at your specific end markets this quarter, I'm curious what happened in enterprise computing, I didn't catch that why it was down 7%?

Enterprise computing down, we pulled some of the ODM, as we were pulling some of the ODM business out of that, we are disconnecting from that area and we had a few rescheduled product that we couldn't get certain components to ship it.

Okay, and then if ODM business was pulled which make sense, why did your R&D basically not go down at all.

It went down approximately $800,000, but again it's the part of the business that we are working on and fair amount of R&D should go away soon.

Okay. So you would expect it it to drop maybe a couple million. Is there a way for us to think about a run rate for R&D?

I would say most of these issues Kevin will be resolved next three months to five months.

Okay. And then David just to clarify this interest income when you look at the proforma number going forward I think you guys did something like $21.5 million proforma other income net, where do you see that going, because I know it's been very up and down?

So inherent in the guidance that we gave for the second quarter would be net interest expense of somewhere around $35 to $37 million.

You're saying it would be up like $15 million?

Yes, that's right.

Okay, and that's due to what then, FX going the other way?

Well, FX going the other way for example. The biggest component of it though, Kevin is the term loans. And 3% debt being swapped out for 8% and the full quarter impact of that.

Okay, so you're seeing the full quarter. And you saw how much in December?

About two thirds of it. There's another third of that that's coming. And then as I indicated in my comments when I talked to Lou is we had a couple--the FX and a couple of other non-recurring small items in there, in the first quarter. So the recurring rates would be somewhere in the neighborhood I just indicated, somewhere in the $35 to $37 million range.

I got it it. Then just the last thing is can you guys just address what that customer did in telecom, you said it was down 4% because someone didn't want to take $50 million of product, they didn't pull it, what is the reason that they gave you?

First of all I don't think we can go in details what our customer tells us, but this is one of our customers, long-term partnership with these people and these things happen.

I think if we gave the reason you would figure out who it is.

Oh, really.

Kevin, it's not a fair question.

Okay, no, no, I understand, thank you.

Your next question comes from Todd Coupland.

Hello, Todd.

Good evening, everyone.

Thanks.

I was just wondering if you could just flush out what you think the demand might look like post the seasonally lower quarter? We have seen pretty mixed results from the EMS group and a number of the OEM's, I was wondering if ex-PCs what type of outlook and forecast are--? If you could just highlight the pluses and minuses.

Right now if I take the PCs out, from bookings we are forecasting positive book to bill. If you take the PC's out. On shipments we're looking at basically a flat quarter. Comparing to Q1, so it's not as big drop as we saw in past, but what we see today was basically flat if you take the PC's out.

Okay, and when you think about the visibility that you have right now versus three months ago or six months ago how would you compare it?

I don't think it's changed much with our customers. But if I talk to my customers what they're trying to accomplish in 2007 they're still have an upside forecast. But there is a lot of moving parts. I mean it seems like--I would consider this more as a stable business. You see a good visibility on a quarterly basis, but if you try to look out past couple quarters it's kind of hard to see.

Okay, and just finally when you think about your operating margin targets for 2007 can you get to those with a stable environment or what kind of growth do you need in order to achieve those?

I would say as long as this environment stays our goal is to--for total, for a total business including even with PC's we think we can drive those gross margins to 7 plus percent. But without a PC, those margins 7.9%, all depends what leverage we get from components. If we do well in components and demand improves the chance of exiting our core business over 10% is pretty high.

And to exit at 10% what type of demand environment do you need?

I would say I think stable environment.

Okay. So if this holds up or maybe improves a little bit then you can exit at 10%?

That's correct.

Okay.

Whole focus for our start is really the quality of the revenue, quality of customers that we're going after and the programs and then really internal execution, because we still have internally operations that can do better than what we are doing. As I mentioned earlier we are working on taking substantial amount of SG&A out.

And do you feel you have the programs under your belt now or is there programs you need to win?

Well, I think we have--if you look at our customer base I think as long as we hold to what we have I think customer is strong enough to support what we're trying to do here. If the demand goes up I feel more comfortable, but I think we have a strong enough customer base that we should be able to grow this business.

Okay, that's great, thanks a lot.

Thanks, Todd.

Your next question comes from Shawn Harrison.

Hello, Shawn.

Hi, this is Tom Graelis speaking on behalf of Shawn Harrison. I was just trying to get a little more color on the PCB and enclosure demand coming into the March quarter, could you talk a little bit about where are some areas of strength and weaknesses lie?

PCB or PCs?

PCB.

Okay, well as I mentioned earlier I think weakness on PCB fabrication with some mainly from telecom side of the business, mainly in a quick turn, North America side, enclosure actually we had growth that was well over 10% quarter to quarter. So our enclosure demand is very, very strong.

Okay, that's pretty much what you are expecting going forward, some weakness in telecom?

No, that's not what I said. I think we see telecom for us based on customers we see stabilizing. We don't see a huge growth today, but we see a positive improvement.

Okay. And kind of in that same line of questioning, the raw materials benefits are you expecting to see anything with the cost of copper rolling off and if so what kind of timeframe are we looking at?

Definitely some of the commodities have been coming down and we are hopefully going to start seeing some of that. We're not seeing as much as we like to, but at least it's going the right direction.

And you can't really quantify what timetable?

No.

All right, thank you.

Thanks.

Your next question comes from Amit Daryanani.

Hello, Amit.

Hi, how are you doing? Just a question on the SG&A you spoke about seeing $16 million in reduction annualized on the back half of the year, does that reflect restructuring charges or are we just building on the fact the PC business may get divested by then?

Well, first of all there's certain SG&A that we're taking out even without PC, even if PC were staying here we still have to take certain SG&A. We believe that we can take substantial amount. But when you include, as we separate out PC, personal computing business away we feel that we can save as much $60 plus million a year. That is defined, we know exactly what it needs to be, we're working on that already.

All right, and then could you just maybe describe the progress you've made in the last quarter in vertical integration essentially. Normally, you give us the component revenues and the percentage you're using internally.

Well, we are making nice progress especially with the new programs that we are winning, we are really more focused right now going after more infrastructure, high end products and as we get more into the medical growth there and defense and aerospace we are going to continue to see more and more vertical integration. I think today this number is probably around $400 million a year and we would hope that we can improve that rest of the year.

This is a longer term question, but a lot of the other vertical EMS companies at least tend to be involved in more higher volume business, and if you divest the PC side of your business the rest of the business is fairly higher mix and relatively lower volume. I'm wondering if it actually makes sense to remain--maintain a vertical strategy at that point?

Actually, Amit, that is 100% opposite. The vertical model really works in this--on a high tech type of products, when you're building 30, 40 layer circuit boards as a backplane then you put into high enclosure system, that's where you really have an advantage.

All right. Thanks.

Okay.

Your next question comes from Yuri Krapavin.

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

Yes, I know that, you too, Jure. Well you talked about profitability and growth rates in the PCB and the enclosure businesses, and then I believe you mentioned that the rest of the component group did well in the quarter. Can you comment on what type of margins are you generating in the rest of the component group and what kind of growth rates have you seen there?

Well, component overall came in less than a corporate average. We expect the total component group for our year to exit over 10%, so hopefully we will pass not just the corporate average but it will really improve the overall core EMS up.

So we forecasting core EMS including components to be over 10%, but components itself we're expecting to be over 10% exiting in this calendar year, and we're confident as we said at the beginning of the year and longer term as I mentioned earlier our good circuit board companies out there with the high technology products are delivering high teens, low 20% margins and enclosure business, good enclosure companies. If you look at the market you should be able to deliver well over 10%.

So we feel comfortable that we can get there. I think a lot of issues that we had when it came to moving the products around the world and all the interruption that we had in the last couple years, I think that is stabilized. I think we got some better management in place in this components area.

I also added as I mentioned earlier VP of Sales and Marketing, which we didn't have that position for many years, so we're bringing it back. And as we are focused on that business we also bringing a Senior VP to run that business. So we feel comfortable that the worst is behind us and we will be able to really leverage our component businesses.

Okay. And then on the previous earnings call, I believe you talked about taking restructuring charges of potentially between $125 and $150 million to complete your current restructuring moves, is this still your expectations in terms of the restructuring charges?

Well, yes, as David mentioned we really can't be specific on this call, but hopefully we can communicate with you more in the next call. But there are certain non-strategic factories around the world that we need to either downsize or do something about and these are the factories today that are hurting our margins. So as we starting to restructure that it should have immediate impact on our gross margin and overall bottom line.

And you could not be more specific right now because you have not yet announced those restructuring internally?

That's correct.

Okay. Thank you.

Thanks, Yuri.

Operator, I have time for two more calls.

Your next question comes from Long Jiang.

Okay.

Yes, hi Jure and David, good evening. My question here is last November you mentioned your $1.5 billion in new programs.

Right.

Can you talk about how much of that has been reflected in current quarter run rate and also can you talk about new program in December quarter?

Okay. If I looked at the last year I believe that $1.5 billion that we talked about, most of that will be really come to shipments in 2007, I think I mentioned that 12 to 15 months, that is already in the process.

I don't know exactly today what percentage of those new programs ship but definitely we are shipping a lot of those programs, okay? If I look at the new wins for this quarter we had--I would say at least another hundred million potential business that we picked up that I believe should be shippable next 12 months.

What end market did you get that--?

It's really across our core market from telecom, defense, aerospace, medical, industrial, semiconductor, those were the markets.

One second question, you mentioned components are currently running below [inaudible-heavy accent] average and gross margin, you also talk about you want to exit the year at least 10%.

Right.

I mean if you look at component gross margin I mean obviously you can drive that by volume by better operation or execution or by higher vertical integration, so to try more than 10% gross margin which of these three factors do you think has the best leverage for the rest of the year?

Okay, the best leverage, perfect year, if you go back two quarters ago we were losing $5, $6 million in our enclosure business. I mean today that business is almost at the corporate average gross margin and we believe that will continue and be at hopefully at the 10 plus % before year-end. So I think the two biggest leverage is going to come from our enclosure business, our printed circuit board business, and the backplane. We also have industrial business that is really our machining, precision assembly area that I believe also has potential to help.

I thought for enclosure business you already fixed the operational issues as of the end of September?

Right.

So the benefit is already in your December numbers?

The benefits are not all--we don't have all the benefits yet. We still have factories that are not there yet. So there's still a fair amount of benefits left in this side.

Okay, okay, thanks a lot.

Thanks, Long.

Operator, we have time for one more call.

Your final question comes from Scott Craig.

Hello Scott.

Good afternoon guys.

We saved the best for last.

Just a quick question on return on invested capital, can you describe the differences in return on capital in the PC business versus the core business as well as, kind of the free cash flow or cash flow from operation trends we have been seeing in the individual businesses, thanks?

Scott, I don't know that I've got all that broken out here for you. What I can talk about a little as it relates to the PC business is if you look at the business I think we have talked about this previously, its margins are--the gross margin line as we reported this last quarter about 2%. When you carry that all the way down to after tax it's somewhere in the order of about half to three quarters of a percent.

When you look at the invested capital that's in that business you have got inventory that's turning 30 times a year and then you have got AR and AP, which essentially offset one another. For a total investment including PP & E on the facilities and so forth of somewhere in the $150'ish million range. And that works out to be somewhere at the end of the day on $3.5 billion worth of revenue, anywhere from 16%to 18%, 19% return on invested capital.

So that's that business. And given that today and I think the comments we made earlier about the future of that business and our ability to leverage it are probably limited which is why we're looking for other alternatives . Certainly the rest of the businesses return on capital is less than those numbers as a result of principally higher assets invested in them.

Okay, thanks.

All right, thanks Scott. Well, ladies and gentlemen this is end of our call. Again, thank you for your support and thanks for taking your time to be with us today.

If you have any more questions please give us a call. Thanks a lot.

That concludes today's Sanmina-SCI first quarter fiscal 2007 earnings call. You may now disconnect.