Sanmina Corp (SANM) 2007 Q4 法說會逐字稿

Good afternoon, My name is Laney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI fourth quarter and fiscal year end 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

I will now turn the call over to Mr. Jure Sola, Chairman and CEO. Sir, you may begin your conference.

Thank you, Laney. Good afternoon, ladies and gentlemen. Welcome to Sanmina's fourth quarter 2007 conference call. Again thank you all for being here. Joining me today on this conference call is Joe Bronson, our President, Chief Operating Officer, and David White, Chief Financial Officer. Good afternoon everyone.

Our agenda, David White will review our financial results for the fourth quarter fiscal year 2007, then I will follow with additional comments on Sanmina's results and future goals. Then David, Joe, and I will open up for question and answers.

With that, I would like to turn it over to David.

Thank you, Jure, 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 will be making references 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 may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution you that such statements are just projections. The Company's actual results of operations may differ significantly as a result of various factors including economic conditions in the electronics industry, changes in customer requirements, and sales volume, competition, and technological change. We refer you to the documents that 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 3rd, 2007. As well as our most recent report on Form 10-Q filed on August 6th, 2007. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You will note in our press release today, that we have provided you with a statement of operations for the 3 and 12 months ended September 29, 2007. On a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release. 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 to the extent material. Any comments that we make on this call as they relate to income statement measures, will be directed in our nonGAAP financial results.

Accordingly, unless otherwise stated in this conference call, when we refer to the gross profit, gross margin, SG&A, and R&D expenses, operating income, operating margin, net income, and earnings per share, we are generally referring to our nonGAAP 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 first quarter of fiscal 2008 ending December 29, 2007.

Slide 3. Revenue for the fourth quarter of fiscal 2006 amounted to $2.51 billion, which is just above the low end of our guidance of 2.5 to $2.6 billion, versus $2.49 billion in the prior quarter, and $2.72 billion in the same period a year ago. NonGAAP earnings for the quarter were $10.2 million, which equated to $0.02 per share. This is above our guidance of breakeven, nonGAAP EPS was a loss of $0.04 for the prior quarter, and $0.00 for the corresponding period a year ago. As noted in our press release, our fourth quarter GAAP statement of operations includes a $1.1 billion charge, relating to the impairment of the carrying value of goodwill.

Pursuant to FAS 142, the Company is required to test the fair value of their non amortizing intangible assets of their reporting units at least annually to determine whether or not an impairment of those assets has occurred. We normally conduct this test in the fourth quarter, utilizing the services of an independent evaluation firm. As a result of the recent declines we have seen in the market capitalization of the Company we determined a write-down of the carrying value of our goodwill was required. This noncash charge caused us to report a GAAP loss per share of $2.10. I would like to make mention of the fact this write-down which was of a noncash nature, did not have any impact on our debt covenant compliance. We have been and continue to be in compliance with all debt covenants as of the end of the fiscal year.

Slide 4, for the fourth quarter, our revenue by end market was as follows. The Communications end market represented 28.0% of our net sales, which in absolute dollar terms was up approximately 4% from last quarter. High end Computing and storage represented 11.8% of net sales during the quarter, sequentially in absolute dollar terms, this end market was down approximately 10% quarter-over-quarter.

The Multimedia end market accounted for 13.4% of net sales during the quarter, which was up about 53% in absolute dollar terms versus the prior quarter. You will recall however, that the third quarter revenues in this end market were down $44 million, due to a one-time revenue recognition deferral. Excluding this item revenue would have been up 27% in absolute dollar terms quarter-over-quarter.

The Medical end market accounted for 7.1% of net sales during the quarter, which was down approximately 16% in absolute dollar terms from the prior quarter. The Industrial Semiconductor, Capital equipment, Defense, Aerospace and Automotive end markets of our business collectively accounted for 9.5% of our net sales. And in absolute dollar terms were down approximately 1% from last quarter. Our Defense and Aerospace sector was up from the prior quarter, whereas our Automotive, Industrial, Semiconductor segments were down from the prior quarter. Finally, Personal computing systems accounted for 30.2% of our total revenue, which was down 7% from the prior quarter.

Slide 5. Our Top 10 customers accounted for 62% of total sales this quarter. Sales to our Top 20 customers amounted to about 73% of total sales for the fourth quarter. We had three customers in the fourth quarter whose sales were greater than 10% of total sales.

Slide 6. Gross profit for the fourth quarter was $134.1 million, as a percentage of sales gross profit was 5.4%, up approximately 60 basis points from both the prior year's results, and from the results of the same period a year ago. Selling, general, administrative expenses for the fourth quarter excluding stock compensation expenses were $85.6 million, modestly up by approximately $400,000 quarter-over-quarter, but down approximately $3.5 million versus the same period a year ago.

SG&A expenses as a percentage of sales were 3.4% for the quarter. Revenue and development costs excluding stock compensation expenses for the fourth quarter amounted to $5.7 million, which is down approximately $370,000 from the prior quarter, and down $4.1 million versus the same quarter a year ago. Our combined R&D and SG&A expenses for the fourth quarter, again excluding stock compensation expenses, amounted to $91.3 million, or 3.6% of sales.

Operating income for the quarter was $42.8 million. Our operating margin for the fourth quarter was 1.7%, up approximately 50 basis points on both the quarter-over-quarter and year-over-year basis. Other expense net, which consists primarily of interest expense and income, as well as gains and losses from foreign currency translation was $35.8 million, versus $31.5 million in the prior quarter.

Depreciation was $26.1 million for the fourth quarter, down $1.4 million from the prior quarter. EBITDA for the quarter was $68.9 million. Our tax provision for the quarter amounted to a benefit of $3.2 million on a pretax non-GAAP earnings of $7 million. Our tax benefit resulted substantially from a change in our actual mix of earnings across jurisdictions, versus our anticipated mix of earnings previously. Our year end tax rate of 54% was unfavorably impacted as a result of our lower earnings.

Slide 7. To provide investors with a little more transparency into our 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 PCs and Industry standard servers. The second segment is our core EMS segment, which includes the rest of our businesses including our various component businesses.

Fourth quarter revenue for our personal business computing segment amounted to $736 million, down $64 million from the $800 million we reported in the prior quarter, and down $48 million from the $784 million we reported in the same period a year ago. Gross margins in the sector amounted to 2.0%, versus 1.9% in the prior quarter, and 1.4% in the same quarter a year ago. Fourth quarter revenue for our core EMS segment amounted to $1.77 billion, which was up 4.7% in absolute terms, versus $1.69 billion in the prior quarter, and $1.93 billion in the same period a year ago. Gross margins in our core EMS segment amounted to 6.8%, versus 6.2% for both the prior quarter and same quarter a year ago.

Slide 8. Turning to the balance sheet, accounts receivable at the end of the quarter were $1.22 billion, resulting in DSO of 43.8 days, down approximately 3.6 days from the prior quarter. Inventories at the end of the quarter were approximately $1.1 billion. On an absolute dollar basis inventory decreased by $72.7 million quarter-over-quarter. For the fiscal year inventory was down approximately $258.5 million, and at its lowest level in eight quarters. Inventory turn during the quarter at an annualized rate of 8.9 times, versus 8.4 times in the prior quarter.

Capital expenditures in the quarter amounted to approximately $34 million. Accounts payable at the end of the quarter were $1.45 billion, resulting in AP days of 55.8, essentially flat with the prior quarter. Cash cycle days for the quarter improved to 28.7 days, an improvement of 6.8 days over the prior quarter. While we recognize that we still after lot more improvement to make in this area, our cash cycle days are the lowest since September 2004.

Slide 9. During the fourth quarter, we generated cash flow from operations of $144.9 million. Free cash flow, which is cash flow from operating and investing activities, was a source of approximately $149.6 million for the quarter. We expect to continue to generate positive cash flow throughout the foreseeable future as we continue to focus on reducing our inventories, improving our working capital metrics, selling certain surplus real estate, and completing our targeted divestitures. These actions have collectively generated $494 million of cash flow in fiscal 2007.

As a result of our positive free cash flow in the quarter, we reaffirm our intentions of reducing our debt in the short term out of our free cash flow. Cash and short-term investments at the end of the quarter were approximately $933 million, up $153 million over the prior quarter.

Let me now comment on restructuring. During the fourth quarter we incurred approximately $15.7 million in restructuring expenses, essential all of which was cash. This expenditure primarily relates to plant closures. During the fourth quarter we completed the previously announced closure of our PCB operations in Phoenix, Arizona. In connection with our remaining closures and other planned restructuring activities, we expect to incur restructuring charges of approximately 75 to $85 million over approximately the next six months or so. With only a few remaining closures we believe our restructuring is nearing completion.

As we have discussed previously we are actively engaged in the divestiture or restructuring of certain business units and operations of the Company. During the fourth quarter we completed one of these divestitures, with the sale of our manufacturing operations in Australia. Proceeds from the sale of this operation amounted to $22 million.

In regards to the disposition of our Personal Computing business, we have indicated previously that our expectations were to complete the this activity by the end of the fiscal year. As of year end this action, however, was still pending. While we are not in position to comment on any specifics as it relates to this or any other pending divestiture activities or negotiations, we do expect to sell or otherwise dispose of this business during the next 12 months. Accordingly we expect to account for this business unit as a discontinued operation according with FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective with our reporting of the results of the first fiscal quarter of 2008.

Finally, in regards to our stated objective of reducing our annual operating expense run rate by $60 million by the end of this fiscal year as of the fourth quarter, we achieved approximately $32 million of our targeted operating expense reductions, based on the fourth quarter annualized rate of $365 million, versus a $375 million annualized run rate as of the first quarter fiscal 2007. We are continuing to pursue and implement cost reduction actions that will further reduce our operating expenses, and expect that those incremental reductions along with the reductions resulting from our planned divestitures will exceed this target. These additional savings should be realized over fiscal 2008.

Slide 10. Let me now turn to guidance of the first quarter of fiscal 2008. Consistent with prior quarters the information I provide will generally exclude stock-based compensation expenses, restructuring and integration costs, impairment charges, loss and extinguishment of debt, amortization expense, and other infrequent or unusual items to the extent material.

Our first quarter guidance is as follows. We are targeting first quarter revenue of between 2.5 and $2.65 billion. We expect gross margins to be in the range of 5.7 to 5.9%. We are targeting our operating margin to be around 2.2 to 2.4%. We expect our tax rate to be approximately 25%. Basic shares for the first quarter are expected to be in the 527 million range, and diluted shares are projected to be around 530 million. This equates to non-GAAP diluted EPS of approximately $0.02 to $0.04 per share.

We estimate the depreciation for first quarter will be approximately $25 million, and first quarter capital expenditures will be in the range of 20 to $30 million. Finally, we estimate first quarter cash flow from operations to be on the order of $100 million or more.

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

Thank you, David. Again, good afternoon ladies and gentlemen. I just want to add a couple of comments for the fourth quarter. I can say we met the financial targets and plans basically that we put in place internally.

We did have a nice growth in our core business, approximately 5% quarter to quarter. Only disappointing side was that our PC business was down approximately 6%, otherwise we could have hit the high end of our guidance. We did generate $127 million of free cash flow as David mentioned. And also for a year, $494 million, I think that was a good year from that point of view.

What can I say about 2007? It was a challenging year. We are finishing our restructuring here. The good thing is we are almost done. And it was also a transition year for us, going to a new strategy. I can tell you that a lot of good things were accomplished, and I believe that our Company today is in a lot better position than a year ago to compete going forward.

Let me talk to you a little bit about restructuring. As I mentioned, it is almost complete. We do anticipate all of these final restructuring initiatives to be completed by end of the calendar year 2007. I think that there is possibly one client that might slip into the January/February timeframe.

Now I would like to also give you an update on our PC business. As we previously made an announcement concerning our Company's PC business unit, although we remain focused to sell this business in the near future, but no matter what decision we are, we just always have to consider our customers and employees and shareholders. Because we have to look at their interests here. We believe this business is going to continue to be profitable, and so there is no panic here. We simply are not going to give it away. We expect to give you more information soon. I can tell you that we are working with two different parties right now, but at this time I would really like to keep it at that level.

Let me talk to you about operations. I think, can tell you that overall, our operations are executing really well, except our enclosure systems. As I mentioned to you last quarter, we have some efficiencies issues, and unfortunately this quarter, this operation lost money. But I can tell you during this quarter with the new management in place, this organization continues to make pleasant surprises, and I believe these results will be evident in the Company's overall operating performance in the near future. So we are looking for a better day, and I am confident that this team will get the job done.

Let me now make a few comments on our strategy, basically give you some highlights from our strategy for 2008 and beyond. Again we are exiting the PC business, so as we look to the rest of the business for 2008 and beyond, we are really focused on these key markets, where I believe the technology that we have, provides us with the global infrastructure in place, it gives us a clear advantage over our competitors.

These are some of the key markets, such as Communication Infrastructure, High end Enterprise computing, Defense and Aerospace, Industrial, Semiconductor Capital Equipment, Medical Systems, Multimedia, high end, basically high end Entertainment, that side of the business, and the Automotive side.

I can tell you as I mentioned earlier, that most of the hard work has been done. We did right size our business, and today we are focused on growing the strategic end markets and the key customers. I believe we now have the appropriate management team in place, that is ready to take on the next growth, what I call internally, a second starter. I think we have a right global group in place, and we offer our customers a leading technology product and services, that are basically second to none today globally.

Again, I firmly believe that this vertical integration model that we offer to our customers is the key to our success, because we do provide end to end solutions that our customers are looking for, basically from our customer design and engineering services, to high end printer circuit boards, and high end backplanes, high end enclosures, focusing on Plastics, Machine, Optical module, Memory modules, all the way to the full system build and logistics. I think the key to this vertical model that we have is that each of these products that we offer has a global leadership and has a great global footprint to compete. So I am excited about what Sanmina has to offer to our customers, our employees, shareholders, in 2008 and beyond.

I know David just gave you guidance, but I would like to add a few things to that. On the revenue again, 2.5 to 2.65 billion. Let me break it down by core and PC. For core business in the first quarter, we expect to see a growth potential up to 5%. And for PC for first quarter, we expect the growth potential up to 10%. As David mentioned, non-GAAP EPS of $0.02 to $0.04, and most importantly, we will continue to generate positive cash, at least we expect to generate a minimum of 100 million plus in the first quarter.

As we look at the year out from a precash flow point of view, from operations, asset sales, and this will also include selling our PC division, we expect to generate between 650 and $750 million in the fiscal year 2008. As we look at our budget, and what we see in front of us from our customer's point of view, we do expect that we can deliver the full margin quarter after quarter in fiscal 2008 for our core business. We are also committed to drive our Auto IC above our weighted cost of capital as we exit fiscal year 2008, and longer term goal, auto IC greater than 20%, and what I mean by longer term, 12 months out.

Let me talk to you now a little bit about the market conditions. Overall, I can tell you that our market is stable. We do have some markets that are up a little bit down or sideways, but overall, I would call it stable. We view our Communication infrastructure market as we mentioned, quarter to quarter that was up 4%, but for the year, that was down 28. Some of the main reasons there, is that as you know, Nortel business, we lost in the beginning of 2007, and two other customers have a lower demand. As we look in 2008, we believe that this business is churning for us, and I think has the potential to grow up to 10% in 2008.

Some of the main reasons are, some of the new programs that we are winning with existing, or that we won with existing customers, and we are also getting some old programs that we lost in the last 12 months. So we are getting a substantial amount of those back. Plus the new customer wins that we will be working on in 2007. So I feel a lot more comfortable about the Communication infrastructure for 2008.

The Medical market for us was down last quarter, but it is really because we had some transitions, product transition, mainly delays on the customer side. These are the programs they that should start picking up next quarter and the following quarter, but overall if you look at the Medical business for 2007, it was up 15% for the year. And again, as we look out in to 2008, we do expect to see Medical business to grow up, has the potential for growth of 15 plus percent.

As we look at the Defense, Industrial, and Automotive group for the last quarter, that group was flat. But if you look at it for the last year, it was up 17%. Let me talk to you a little bit about our Defense and Aerospace. As I talked to you last time, I told you that we have been getting a fair amount of business on that side of our market.

Defense and Aerospace business just on a quarterly basis was up 24%, and the year-over-year was up 37%. We definitely expect the Defense and Aerospace to continue to grow over 35% in 2008, but if we look at it as a group, the Defense, Industrial, and Automotive, we look at the growth, potential growth in fiscal '08 of 20%.

Right now, our Semiconductor and Industrial side, I will say Semiconductor is probably the slowest one, but the rest of the business is doing fine. On the High end computing side of our market, that business quarter to quarter was down approximately 9%, and if you look at for a year, that was down 22%.

Let me give you some of the reasons. We did exit the ODM business and that was really the majority of our downturn in that business, and we also had one major customer that went through a merger, and there was a delay on that demand. As we look at it in 2008, we believe this business has the potential for growth up to 5%. So at least, we stopped the bleeding here and we expect it to move in the right direction.

Multimedia business for us, as I said earlier, that for us is mainly home entertainment was up quarter to quarter 52%, and up for a year about 5%. This business is hard to forecast quarter to quarter as you always seen in Sanmina, but if you look at on a yearly basis, and as we look at 2008, I believe this market has a potential for growth for us up to 10%.

So let me summarize for you here. As a company, we will continue to be very focused on these key opportunities where our high end technology and infrastructure gives us a clear advantage over our competitors, and also provides the services that our customers are looking for. We are better positioned to compete than ever before in high end markets today, as we are focused strictly on the high end markets.

The bottom line, we are committed to providing superior service and technology to our customer. Number two, we are focused on margin improvements as I mentioned in 2008. And we are focused driving the shareholders wallet. As I said earlier, driving Auto IC back to 20% in four months from now in fiscal year, but exiting fiscal year at least cost of capital.

Now I would like to extend a special thank you to all of you for participating in this conference call. And I would also like to take a, really express my special thanks to our employees for their hard work and dedication to this Company, especially what we went through in the last couple of years. So I think that better days are ahead of us.

Now operator, we are now ready to open the lines for questions and answers. Thank you, again.

As a reminder, (OPERATOR INSTRUCTIONS) Your first question comes from the line of Steven Fox.

Hi Steven.

Hi, good afternoon. Couple of questions. First of all, on the divestiture. Do you have any guesstimate on what the balance sheet impact would be from putting the PC business as discontinued?

I will turn it over to David.

Hi, Steve. You say the balance sheet impact?

What would be the further write-down of book value?

We wouldn't expect any further write-down of book value, number one. As it relates to how we would report it, the assets and liabilities would both be consolidated to, and reported as one line item under current assets, one line item under long term assets, and one line item under current liabilities.

Okay. And then are you suggesting then that we should start excluding it now in our estimates, even though you gave guidance including it?

I would say do that in the Q1 call.

Okay. And then when you look at the components business here, you mention that the enclosures business is still a drag. Can you give us more color on the overall components business, where are the margins now, and what what happened specifically in PCBs during the quarter?

Overall, component business for us is profitable, but it is below the corporate average. As you can see, our core business came in at 6.8%. We do expect to see a nice improvement in the enclosure business in this quarter. And if you look at our printer circuit board business, up operationally, they executed really well. The main of that business is starting to come back, so I expect them to move their margins in the right direction.

Our backplanes are doing well, and cable, and I will say machining and precision machining of that group is doing well. Memory modules, demand has been soft for the last few quarters. But we have a couple of new programs that are out. We expect that business to move in the right direction.

I think, Steven, if I can make a comment, I think if I look at our Component business, this is a year for us to take this business to the next level. Restructuring our printer circuit boards to-date is 100% complete. What we have today is that we have, in North America, we are focused on the military work and new product introduction, and some really advanced boards, such as Flex and Ridges, and so on. All of the production has been now been moved to Asia so from that point of view.

Enclosures also, all the restructuring is basically done. With the new management, we do expect to see some immediate improvements, and drive that business to double digit margins, and of course, our goal to drive our circuit board margin to 20% plus. So that is an internal goal. I think we are going to make some right steps in the right direction, hopefully a quarter at a time.

But Jure, can we get more specifics around where the margins are today?

The margins are in and about 3% or so.

Okay. As a combined components entity?

Right. But like I say, it is the enclosures that was the last money contributor [inaudible-background noise] in the last quarter.

I am sorry. I lost you there. Can you repeat that?

Enclosure cost us last quarter, this quarter, I say last, in Q4 a couple of cents.

Okay. And just one last question on that. So when you improved your core EMS business from 6.2 to 6.8%, that did not have anything to do with the enclosures improving, or did that also help?

There was a slight improvement but not much. Most of that improvement came from other components and EMS.

Great. Thank you very much.

Bye-bye.

Your next question comes from the line of Jim Suva.

Can you talk a little bit about the standard [EMS] business with the guidance you have given us now, and as we start to model it, it still will be down year over year. When can we start to see the bleeding, so to speak, to use your words that you did during the conference call, kind of stop as far as losing share?

You mean over year in 2008 or 2007?

As we look forward --

As we look forward, we do expect our core business to be better than what we had in 2007. As you can see, last quarter, the quarter went up approximately 5%. Our core business last quarter in Q4 was $1.769 billion. As I mentioned earlier, we expect the business to improve up to 5% in first quarter.

Right. So, you are starting out the first quarter to negative year-over-year, and you are saying the second half the year will be better than the first?

When you compare it to the first quarter of last year.

Yes.

Yes, I am not even looking at that. I am really looking at where we are going from here, Jim. I look at where we are going from here, we do expect to see a growth on a quarterly basis definitely year-over-year.

Okay. And then as a quick follow-up, can you give us the operating profits of the standard EMS business?

Not at this time.

We don't normally break that out, Jim. But if you were to look at our business, you know, as we have indicated publicly before, our PC business typically has about a half a percentage point of revenue of operating expense attached to it, so you can actually get pretty close doing the arithmetic yourself.

Okay, great. Thank you very much.

Thanks, Jim.

Your next question comes from the line of Kevin Kessel.

Hello, Kevin.

Hi, guys. Can you help us understand a little bit better what needs to happen to not only fix enclosures, but actually make it a profitable business again?

Well, Kevin, the enclosure business for us is the key part of our strategy for providing our customer end to end, okay. We believe that business will be profitable, nicely profitable in 2008 and we expect that, to make it profitable soon, okay. That is the #1 goal.

#2 really is if you look at what is our total solution, what we offer to our customers is the high end infrastructure product that is going to require a lot of complicated backplanes, a lot of complicated enclosures. And one of the reasons we are getting out of the PC business is because we believe that will allow us to focus on growing our core business.

As you look at the core business today as we just mentioned earlier it has a margin of 6.8%, and with components not performing at the level they need to be. As we go into 2008, longer term, we believe that we should, in our core business should be a double digit margin business. So enclosure will play a major, major part of that.

Right. But I guess what I am asking is it sounds like there are quality issues within the enclosures operation. So --

It is not a quality issue. It is really more of an execution, efficiency issues.

Execution efficiency issues. So those get fixed how essentially? Because you say soon, but I am just trying to understand because I think we were at this point last quarter as well. Maybe the loss got smaller.

Okay, Kevin. As I mentioned earlier, I think that the basic improvement with the new management took over 90 days. We made a nice improvement. We expect to see a tremendous improvement by, you know, during this quarter. And you know, I don't want to forecast any, what the profitability is going to be, but we expect to make the operations profitable very soon.

Okay. Then just a question.

Kevin, if I could just add one thing. We do have a management team in there and so forth. One of the things they have done is they have built a road map to improving the profitability of that business, so we do have a detailed plan of execution, to correct some of those issues. It will take some time. But you know, as Jure said earlier, we are driving toward a plan that would have us exiting '08 returning our greater than our cost of capital. That would include the enclosures business.

And is this localized, or is this throughout the operations where these issues need to be addressed?

It is global.

It is global. Okay. Then just a question for Joe if I may. You have been there for two months or so. What are your top priorities as you see it going forward here?

I think, first, you have to excuse me. I have a terrible throat today. Excuse me. The enclosures business has to be fixed. And to provide a little color on this is that first of all, it needs, a lot of personnel have been changed, more of a experienced personnel redeployment in the areas of Lean manufacturing, in the areas of supply chain management and design.

These are occurring simultaneously in a bunch of plants particularly we are focusing on improving one or two plants very significantly, so we can increase the revenue. Because we have a lot more capacity once we introduce these techniques. And then the system will have a lot more need for revenue. And revenue is going to be the big driver of this thing.

Thank you.

Thanks, Kevin.

So, there is one other thing I would like to talk about is customer customer focus is going to be very important, and the ability to reduce cycle time will be extremely important from our quotation time to getting paid. So these types of really measuring our ability to deliver our products to the customers is going to be extremely important to gain differentiation.

Your next question comes from the line of Thomas Dinges.

Hi, good afternoon, guys. Hi, Thomas.

Hi, Jure.

Wanted to just ask you a quick question about the Defense and Aerospace business. I think last quarter you said it was running somewhere around $300 million run rate. And was expected to grow about 30 to 40%. Did you have just a little bit better growth this quarter than you had expected, and that is why you said sort of better than 20 over this next year, or is that just kind of shaving that estimate?

Actually, I said better than 35 next year.

Got it. Okay.

The whole group, you know, we put industrial defense and automotive in one group. We might change some of that next quarter. But that is how it is. If you look at the difference, we expect to have the run rate in fiscal year 2008 hopefully at the run rate of 400 plus million.

It is really good business for us. It is definitely a business that we think the longer term can be a billion dollar business. As you know, we do have some of our own products down there that we develop. So it is just an exciting piece of the business, and definitely delivers a lot better margins than EMS.

Okay. Then one other point of clarification on some of the comments you made about end markets. In the communications business, you mentioned getting some programs back.

Can you provide us a bit more detail as to exactly what that was? Were these prior disengagements, or were these things where you guys had to fix one or two issues that you guys were having, and once you fixed those, you got the revenue back? Just a little bit of clarification there would help.

Actually when we lost some of the business in the communications side of the business as I said, most of the losses came from Nortel, and a couple other customers that did not have a demand. As you know, we lost business from Nortel. It had nothing to do with performance. Actually it was the opposite. We performed really great, and our reputation with Nortel today is very, very high. We expect some of that business is coming back to us, and we know we already won some of the business. So that is just the nature of this business. Orders moves back and forth.

Okay, thank you.

Thanks, Thomas.

Your next question comes from the line of Will Stein.

Hello, Will.

Hello, Jure, how are you?

Good.

Good. David, actually a question for you. I think it has been touched on in the past. But if the PC business is going to be put in discontinued ops next quarter, why exactly are we guiding for full company revenue and earnings results? I don't understand. It sounds like you are going to report numbers that are on a different basis than the guidance you are providing.

So primarily two things. One is we are in the process of trying to carve that out, number one. And so we want to have figures that will align themselves with GAAP, because GAAP has very specific parameters as to how a discontinued operation is recorded. And actually, that is really the primary reason right there.

Can you give us a sense as to what the non-GAAP EPS number, what the equivalent guidance would be outside of, you know, if we just look at the core business?

Well, here is what we have stated before about the PC business. You know, it is roughly an $800 million a quarter business of revenue. We have already publicly disclosed a gross profit of about 2%.

Our operating expenses on that business are roughly about a 0.5 to 0.75 of a percent, and there you go. And PC business operates primarily in low tax jurisdictions. So that roughly there would be your number right there.

Okay, great. Then one other thing. I was under the impression in the quarter that just closed, that you guys were going to be buying back debt. And I don't think you did. Is that a priority for cash use in the coming quarter? Any other comments you can give us on uses of cash would be very helpful.

It is certainly not generating cash off the balance sheet to hoard it. Our intentions are to pay down debt. As we have seen in the debt markets here recently in terms of a lot of the credit tightening and so forth, we are really just trying to proceed with some caution before we go and take that up permanently, and make sure that we really have a sustainable cash level of the Company that we are comfortable with. So we are just trying to proceed with a little bit of caution. As I indicated in my comments, clearly our intention with the cash flow is to take out debt, and we will be doing so over the next year.

Unclear whether there will be any repurchase of debt in the current quarter?

Well, since we haven't announced anything to that extent, it would probably be inappropriate for me to comment on that at this point.

Okay. That is it for me for now. Thank you.

Thanks, Will.

Next question comes from the line of Brian White.

Hi, Jure. On the enclosure business, it disappointed in this quarter, what specifically was disappointing about the enclosure business and caused you to lose money?

Well, it was just basically the execution part of the business not being able to ship what they needed to ship, and keeping the cost down. That is basically it.

Okay.

It is really, it is very simple, Brian, I mean these are some of the issues that we have, and you know, we have a few plans that are doing okay in this division, but there are a few that need some help. And we believe the new team is in a place right now to take care of that with confidence, taking care of a very simple business. Unfortunately, you know, it took a little bit longer to get the right team in there.

Okay. And Jure, how many enclosure plants do we have today?

Today we have six.

Six plants. And what do you think the utilization is at these plants?

Probably at high 50s.

High 50s. Okay.

I mean if you look at one thing about us right now, we still have a lot of capacity as David mentioned earlier, we are not spending a lot of money on additional equipment, so with this company can ship a fair amount more with existing capacity.

And Jure, what was the growth rate in this business in '07, fiscal '07 sales growth?

For enclosure?

Yes, for enclosures.

It was basically, I don't have it in front of me but from my memory it was, you know, flat or down. Flat or down.

Okay.

And mainly not because there was no opportunities there. It was really because we couldn't take orders on. We have to delay the orders. I mean or turn orders down.

Okay. You think this will --

This is the first quarter that we can start taking on more business.

Okay. And you think this business will grow in '08?

Yes. Definitely. Oh, yes, yes.

Jure, just on the end markets, what happened in Medical? Were there FDA delay issues? In the quarter?

We can't make a comment on that. But basically, you know, we had two customers, I would rather use the word transition.

Okay. And how about enterprise? Enterprise, Jure, what happened in enterprise that it was down 10%.

Enterprise was mainly demand from a few customers of ours.

Okay. And when we look into the December quarter, Jure, what looks really strong in terms of end markets and what looks weak?

Well, definitely Defense and Aerospace for us looks very strong. I wouldn't call anything that is weak, you know from this point of view. As I mentioned earlier, we do expect the core business to improve up to 5% or more. So you know, nothing is falling off the cliff. But you know, you can say maybe some of the demands could be a little soft.

Okay. Thank you.

Thanks.

Your next question comes from the line of Matt Sheerin.

Hi, Jure. Just to follow up on the questions regarding components, could you give us the revenue run rate for the entire component operation which would include enclosures?

Well, you know, we don't break it, but approximately that business is about $1.5 billion run rate including inter company. And you know, we expect it to grow from there. If you look at their capacity, they can probably do well over 2 to $2.5 billion.

Okay, and then you talked about growth rate in enclosures. Was the PCB business also flat to down on year-over-year basis for FY '07?

PC business was down year-over-year.

I know that you had some difficulty in transferring volume business and capacity to Asia. Now how is that going?

Well, as I said earlier, the good thing about our component business, what I am personally excited about #1, is the restructuring. That is transitioning high end printer circuit boards for North America and Europe into Asia was very difficult for us. I think we had a great teams here in North America where we are used to building 30, 40, 60 layer boards. As we move this product into Asia, and we went over there to compete on these high end boards, it took long time to train people.

If you come to our factories in Malaysia today, they are building a product that is over 40 layer boards, including large backplanes. If you go to China, I mean, we required those operations two, three years ago that were doing double sided products. Today they are doing some products that are over 18 layer boards.

You look at the Singapore, they are building some flex, just some really advanced stuff. So, we moved a lot of technology in there. So from the pure bare point of view, we are well-positioned right now.

Similarly with enclosures. Enclosure was a combination of shutting the factories down and opening the new factories in other regions. A new factory in Mexico, new factories in Hungary, and new factories in China.

Those were the challenges, especially when you are building some of the more advanced operating enclosures, there is a lot of engineering going on. Stuff that we build is not a really high volume. It is a high mix, of what I call big and ugly, but it requires a lot of engineering. That is the area where our strength is. That took a long time to get the capabilities up to the level that we used to do it when we were in Sweden, or here in North America, or in England.

Okay. And then your top, your 10% customers, could you remind us who they are, and when you break out the PC business in your core EMS business, do you have any 10% customers?

All of our 10% customers are in the PC business and nobody else.

Okay. So that is HP, Lenovo, and IBM.

Yes.

So you won't have any in the core business?

No.

Okay, alright, thank you.

Your next question comes from the line of Jeff Walkenhorst.

Hello, Jeff.

Hi, guys. Thank you. Jure, and I guess David and Joe, this is a question for all of you, you mentioned that you are committed to driving your ROIC above your weighted average cost of capital within the next 12 months. So, and Jure, you talked about a 20% number. It seems a bit aggressive, but I guess the right, the billing and write-down helps you to get your turns higher. It looks like you need to, where do you think your op margin needs to move to? It looks like basically if your turns are about 5 times, your op margin would have to be on an after tax basis about 4%. That would be the highest, actually, you have been running between 1% and 2% by our model.

Yes.

How do we have already talked about, you think there is some low hanging fruit on the PCB side and enclosure side. Is that really where you think that within the next couple of quarters we will see this change happen?

Let me tell you what we have and then I will turn it over to the experts, to both David and Joe and auto IC, David and Joe worked on it for a long time. First of all, if you look at our what I call [Santeremis] business, today that business I think is functioning really well. I would say one of the best in the industry. We are delivering gross margin on that business well over 8%, okay. And we believe that we have room for growth, both on the top line and the bottom line on that side of the business.

The components business, we are going to call them low hanging fruit, Jeff, are there. We do believe that we can get there and David maybe can give you more information on that. But the goal from a pure business demand is that we believe that the worst is behind us. We believe that even with no growth, if we just fix our internal issues, we have a very good chance of hitting cost of capital exiting the fiscal year fourth quarter. But hopefully we are going to do more than that. We do expect to drive the growth, and you know, and fix our component business.

Our component business should be, on an average, should be delivering over 15% gross margin. [Both] should be over 20. Our enclosure should be between 13% and 15% and [backvent] and everything else. So, that is why we feel very confident that this new strategy will deliver to us a gross margins of 10% or plus, and for us to get Auto IC of the cost of capital, and David can make a comment on that.

Yes, I guess I would, Jeff, is just make two comments. One is as it relates to our EMS business, our challenge in the EMS side of our business really is bringing down our net assets. Bringing our inventory down, reducing our AR, and certainly stretching out our payables. So for the EMS side of our business, our challenge in terms of getting to our weighted average cost of capital is primarily a balance sheet challenge for us, and as you look at the free cash flow we have generated over the last year, most of that free cash flow has all come out of our EMS business.

On the Components side, the challenge is just the opposite. We certainly have room for improvement on the balance sheet side. I don't want to take any, relax any on any on that side of it, but it is primarily a profit turnaround as it relates to that side of the business. Those two components together is how we kind of get to achieving that objective by the end of the year.

Okay. A couple of follow-ups. On the balance sheet, if you are talking about stretching payables, where do you think the number could go? You are already in the mid-50s now. Does that push higher to the 60s?

Well, I mean if you look at all of our working capital metrics, our payable metrics are perhaps the most out-of-line with that of our competitors, and so if you look at the difference between us and the leaders, you might say in the industry, take on this particular metric, we are 15 days or so roughly behind them. And so we have a lot of work to do on that ,and you know, that is going to involve customers. Customer negotiations because a lot of the suppliers we deal with are on their AVL, approved by them. Just a lot of hard work on things to make that move. But given that our competitors have been able to demonstrate that, we just don't see any reason why with the right focus we can't do the same.

If I can add to Jeff, I would expect us to get over 60 days easy.

Okay. And then on the profit side for the components segment, is that down from where it was in the year ago period?

Excuse me, Jeff, could you repeat that?

The profit margin for the component side of the business.

Yes, if you compare it to year ago, yes. The margins in first quarter last year, margins were a lot better than they are today. The biggest impact today really is enclosures. The rest of the businesses are very close to the company average.

Okay. And how confident are we that we can see improving, I think you did say that you expect to see improving margins kind of on a sequential basis.

Yes. We were expecting most of that. Most of the margin that we have been planning for this coming quarter, all of the margin improvements are coming from our core business. And not coming from PCs, they are coming from our core business.

Okay. And then one last question. It sounds like from a macro standpoint, even if you said your growth is flat, you still think you can achieve the better margins in ROIC gain.

Even if the revenue is flat, as long as we fix what we said we are going to do in our Component business, we should deliver the auto IC higher than cost of capital.

Okay. Good luck, guys.

Okay, thanks, Jeff.

Your next question comes from the line of Amit Daryanani.

Thanks.

Hello, Amit.

Hi, how are you, Jure? Just a quick question on the AP stuff, historically AP has been depressed because of your PC relationships, so once that gets discontinued, or you guys sell that business eventually, how much of a benefit do you get on AP days from there?

The PC AP days are not vastly different than the EMS. We will pick up a few days.

All right.

Not a lot.

All right. And then the Multimedia segments, we had some pretty good strength, in the quarter from benefits. Was that seasonality, or was that new customer ramps?

For us, we have multiple customers in that business. For us, you know, that business is very hard for us to forecast on a quarterly basis. It is better to look at it on a yearly basis. Just because you had a jump one quarter, doesn't mean it is going to continue to jump every quarter. So really, Amit, to look at this business more on a yearly basis, and we expect that business to have a potential for growth about 10% plus next year.

All right. I may have missed this but enclosures in June quarter, had you about 10 million losses. Was it worse or better than that this quarter? I know you had a loss.

It is about the same.

All right. Then finally, I think someone asked you about how you guys hit your ROIC north of your cost of capital. If fiscal '08 ends up being much like the last three years where the revenues have gone down and ROIC has been in single digits, what is the Plan B for the company in that scenario?

We don't have that plan. We have a plan and we are going to fix stuff. We are not worried about that plan. We know where we are at today. We know where our issues are. What we fix and where we are going.

I think we make, you know, if you look at improvements that we made are very positive, and we are doing a great job for our customers, and we expect, this is the $7 billion start-up. And believe me, we are going to be a player there for many years to be there.

I would just add to reiterate a point that Jure made earlier, is our plan or intentions are that even if revenue is flat, we will improve ROIC. If you look at even last year, you know, we certainly generated a lot of cash flow off the balance sheet with, you know, in that kind of a scenario. So we certainly believe that we can achieve it if flat.

Fair enough. Thanks a lot, guys.

Bye-bye.

Your next question comes from the line of Louis Miscioscia.

Hello Lou.

How are you guys?

We are still having fun!

That is all that counts. David, I guess if we look at the PC business, can you share with us what the book value is of that?

Well, you know, it depends what our inventory is. It can be anywhere from, you know, 120 to --

175.

175.

Most of it is inventory, Lou. Plant and equipment is roughly 15 to $20 million. Of which most of that is building.

Okay. Because just running through some of the quick numbers you had given on the call, I guess I get to that the PC business contributes, because it has been consistently profitable. I have never been one to deselect it as part of your structure, about $0.085 on an annual basis. Is that about right?

That would be in the range.

And you know, I know that you are going to take some costs out but that is below, you know, obviously the gross margin and the SG&A and R&D line. So do you think you are going to be able to make most of that back up? Do you think you will just have to replace that $0.085 through restructuring and other things?

Well, we will use it to pay off debt, number one, which obviously reduces interest expense drain, so that somewhat mitigates that. The other thing is, as you know, we are planning further cost reductions as I mentioned. You know, that we will take out during the course of this year that will further mitigate it.

Okay. But probably the interest taking out, probably about a quarter to half of it, I guess?

Well, I am not going to guide you on how much money we are going to get for the PC business. Or how much we get on a disposition of it.

Okay. Fair enough. One last question. On the infrastructure side, I guess in high end enterprise. You gave great guidance, Jure, thank you for all of the different areas. On those two areas, do you actually see more outsourcing coming, or are they all obviously pretty mature? I mean you look at Cisco, Nortel, Lucent, and many other that are 100% virtual. Was most of it a share gain in margins, or actually getting new outsourcing?

I think as you mentioned, most of these big companies outsource, you know, most of it. I would say probably if I had to estimate some of the customers you mentioned probably about 70%. But they are still there to be outsourced with some other players around the world. So we believe that the outsourcing will continue, and a fair amount of the growth is coming because of outsourcing, and also the new programs that are coming out, and it just all goes what program somebody is on, and so on. So we do expect that part of the business for us to turn in the right direction.

Okay, great. Good luck on new year coming!

Thanks.

Thanks.

Your next question comes from the line of Yuri Krapivin.

Question on your PC business. I thought that one of your customers there decided to bring business in-house, has this process started yet?

That process did not start yet.

When do you expect it to start?

It is really hard to forecast at this time. We really can't really estimate it. We have some internal information, but we really can't share that with you.

Okay. Then my second question is on the tax rate. So you are guiding December quarter tax rate to 25% I guess that is including the PC business. If we exclude the PC business, what should be an appropriate tax rate for the core business?

We wouldn't expect it to change materially.

Okay. And you know, can you share with us your expectation for capital expenditure? I guess for your core business in the coming year?

I think the only guidance we have given is on a quarterly basis. That was 20 to $30 million this quarter, which is roughly the amount of CapEx to sustain the business. CapEx, 20 to $30 million a quarter.

Okay. Thank you.

Thanks, Yuri.

Your next question comes from the line of Alex Blanton.

Hello, Alex.

Good afternoon.

How are you?

Fine. You mention that you are getting business from Nortel that you had previously lost, and of course, with the merger of Flextronics and Solectron, they really have only one supplier now. So I would think that they would be looking to have some alternatives. Is that why the business is coming back to you? That they need to have more than just one supplier?

Well, let me answer it this way, Alex. We have had relationship at Nortel now for 27 years. And our relationship with Nortel was always perfect, except one year out of 27. That was about a year ago. I mean, you know, as Nortel grows, and they have new programs, and they need additional capacity here and there, that is kind of how we are winning. We really based on our performance and our relationship, it is not fair for me to make comments on what is going on with other relationships. I know that the other company that does a majority of the work does a great job. So we just got to make sure we do our job, and we think we have, you know, great opportunity there to win some of our business, well maybe it is not the same business, but at least get the dollars back to what we used to do with them.

So, it is communication and infrastructure. It is wireless or wireline?

Basically --

Excuse me?

Across all of the product lines.

Across the product lines you say.

Across all of the product lines.

Okay. That is useful. Second question is on the goodwill write-down, $1.1 billion, I notice, I think you have about $0.5 billion left. What was written down? The two biggest acquisitions that I remember were Hadco, which was the PCB business and SCI. So it was probably those two. But could you be more specific on what you wrote down? Because that implies that the earnings power of that particular part of the business is impaired.

Yes, Alex. Let me see if I can explain it to you.

Okay.

Under accounting rules, when do you an acquisition and you create goodwill as a result of that--

Right.

That goodwill gets merged into the goodwill of that reporting unit. So we have three set segments in our business. The PC, the Components, and the EMS business.

Okay.

All of the goodwill is allocated across those three segments. We don't have goodwill for let's say the Sanmina-SCI merger. We don't have goodwill for Hadco. We don't have goodwill for any of those things.

They all get kind of merged into a pot, you might say, for each of those reporting segments so that when we do an impairment of it, analysis of it and so forth, you are looking at the total amount of the goodwill in that business, relative to the income that that business can generate, relative to the valuation of that business unit. And to the extent that there is an impairment, you are simply writing out an amount that came out of that pool. It is not earmarked, you know, as to which acquisition.

Well, what you are doing is you're looking at the segments that generated the goodwill and you are deciding what the future earnings could be, right? As a total? Is that what you are saying?

Against each of those segments, right. Backstopped by what the current market valuation is. So we may have certain expectations as to what we believe we can do with the business when we turn it around, and approve it, et cetera.

Yes.

But given the market cap of the company and the enterprise value of our debt, et cetera, or the market value of our debt, those two together, you are somewhat capped from valuation standpoint as to how much, you know, your projections really weight into that analysis. So you know, it is all in one pot, and it gets looked at individually and written off individually.

Yes. Well, is it the case though that the earning power of these assets have really been impaired?

Well, I guess that is a matter of debate, right? You know, I can put together an analysis, or I can show you our plans, and so forth, and they might lead to one answer. But when the market has voted with the valuation they have prescribed to the company, that is voting for a different answer, right. So, we are really capped by how the market kind of views the value of the company right now, and that really is what kind of drives the back end of that analysis.

All right. Thank you.

You bet.

Thanks, Alex. Operator, that was the last question. So again, I want to say thank you to everybody for participating in this call. I appreciate it. If you have any more questions, please give us a call, and we will make sure that we get back to you. Thanks a lot. Bye-bye.