Sanmina Corp (SANM) 2008 Q1 法說會逐字稿

Welcome, ladies and gentlemen. My name is Gerald, and I will be your conference operator. At this time, I would like to welcome everyone to Sanmina-SCI's first quarter fiscal 2008 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) Thank you.

It is now my pleasure to introduce your host, Mr. Jure Sola, CEO and Chairman of Sanmina-SCI Corporation. Sir, please go ahead.

Thanks, Gerald. Good afternoon, ladies and gentlemen. Welcome to Sanmina-SCI's first quarter 2008 conference call. Thank you all for being here. Joining me on today's conference call are Joe Bronson, President and Chief Operating Chief Operating Officer, and David White, our Chief Financial Officer.

Hello, everyone.

For today's agenda, we have David White to review our financial results for our first quarter fiscal year 2008, Joe Bronson will review operations, and then I will follow up with additional comments relative to Sanmina-SCI results and future goals. After that we will open for questions and answers. With that, David?

Thank you, Jure, and good afternoon, everyone. Before we get started, started, please note that selected portions of this presentation are available in the form of a slide presentation on the Internet, which can be accessed from the Investor Relations section of our website at www.sanmina.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 two. 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 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 to you the documents the Company files from time to time with the Securities & Exchange Commission, specifically the Company's most recent Annual Report on Form 10-K for the year ended September 29, 2007, filed on November 28, 2007. These documents contain and identify important factors that could cause actual results to differ materially from our projections of forward-looking statements.

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 29, 2007, on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and the 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, noncash stock-based compensation expense, amortization expenses, and other infrequent or unusual items to the extent material. Any comments we make in 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 our non-GAAP information.

As you are aware we have made it publicly known of our intention to separate our personal business computing division from our core EMS business. While this process has taken longer than originally anticipated, we are currently in negotiations with a prospective buyer. However, because we do not have a definitive agreement at this point, we concluded that as of the end of our first quarter, that we had not met of all of the accounting requirements under U.S. GAAP, for reporting this unit as a discontinued operation as was previously anticipated.

As such, the financial results that will be presented in today's conference call will address the total company consistent with our past practices. 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 2008 ending March 29, 2008.

Slide three. Revenue for the first quarter of fiscal 2008 as announced in our press release dated January 14th was $2.53 billion, which is just above the low end of our guidance of 2.5 to $2.65 billion, versus $2.51 billion in the prior quarter, and $2.78 billion in the same period a year ago. Non-GAAP earnings for the quarter were $21 million, which equated to $0.04 per share. This was at the high-end of our guidance of $0.02 to $0.04. By comparison our non-GAAP EPS was $0.02 in the prior quarter, and $0.07 in the corresponding period a year ago.

Slide four. For the first quarter our revenue by end market was as follows:. The Communications end market represented 29.4% of our net sales, which in absolute dollar terms of the up approximately 6% from last quarter. High-end Computing/Storage represented 13.1% of net sales during the quarter. Sequentially and in absolute collar terms this end market was up approximately 13% quarter-over-quarter.

The Multimedia end market accounted for 11.5% of net sales during the quarter, which was down 14% in absolute dollar terms versus the prior quarter. The Medical end market accounted for 6.9% of net sales during the quarter, which was down approximately 2% in absolute dollar terms from the prior quarter. The Industrial, Semiconductor, Capital Equipment, Defense and Aerospace, and Automotive end markets of our business, collectively accounted for 9.3% of our net sales, and in absolute dollar terms were basically flat with last quarter.

Our Defense and Aerospace sector along with our Automotive sector were up from the prior quarter, whereas our Industrial and Semiconductor sector was down from the prior quarter. Finally, Personal Computing systems accounted for 29.8% of total revenue, which was basically flat with the prior quarter.

Slide five. Our Top ten customers accounted for 60% of total sales this quarter. Sales to our Top 20 customers accounted to about 72% of total sales in the first quarter. We had two customers in the first quarter whose sales were greater than 10% of total sales.

Slide six. Gross profit for the first quarter was $155.1 million, as a percentage of sales gross profit was 6.1%, up approximately 70 basis points from the prior quarter's results, and flat from the results for the same period a year ago. Selling, general, administrative expenses for the first quarter excluding stock compensation expenses were $89.4 million, up approximately $3.8 million quarter-over-quarter, and down approximately $1 million versus the same period a year ago. SG&A expenses as a percentage of sales were 3.5% for the quarter. Expenses in the quarter were up as a result of one-time charges and items which we don't expect to be recurring.

Research and development costs again excluding stock compensation expenses for the first quarter amounted to $4.5 million, which is down approximately $1.2 million from the prior quarter, and down $4.4 million versus the same quarter a year ago. Our combined R&D and SG&A expenses for the first quarter excluding stock compensation expense amounted to $94 million, or 3.7% of sales.

Operating income for the quarter was $61.2 million. Our operating margin was 2.4%, up approximately 70 basis points quarter-over-quarter, and down 10 basis points on a year-over-year basis. Our expenses, Other expenses net which consists primarily of interest income and expense, as well as gains and losses from foreign currency translation was $31.5 million, versus $35.8 million in the prior quarter, and $28.3 million from the same period a year ago.

Depreciation was $25.8 million for the first quarter, essentially unchanged from the prior quarter. Our EBITDA for the quarter was $87 million. Our tax provision for the quarter was an expense of $8.6 million on pre-tax non-GAAP earnings of $29.6 million, and our tax rate was 29%.

Slide seven. 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. First quarter revenue for our Personal Computing segment amounted to $740 million, up $4 million from the $736 million reported in the prior quarter, and down $97 million from the $838 million reported in the same period a year ago. While revenues in this segment fell short of our expectations, gross margins were 2.3%, and exceeded expectations, versus 2% for both the prior quarter and the same quarter a year ago.

First quarter revenue for our core EMS segment amounted to $1.79 billion, which was up a modest 1% in absolute terms, versus $1.77 billion in the prior quarter, and down when compared to the 1.94 billion reported in the same period a year ago. Gross margin in our core EMS segment amounted to 7.7%, versus 6.8% in the prior quarter, and 7.9% in the same quarter a year ago. Our quarter-over-quarter margin expansion of 90 basis points was largely the result of improved financial performance in our components group, which Joe will comment on more fully momentarily.

Turning to slide eight. As for the balance sheet, Accounts Receivable at the end of the quarter were $1.25 billion, resulting in DSO of 44.5 days, up approximately 1 day from the prior quarter. Inventories at the end of the quarter were approximately $1.1 billion, up approximately $18 million quarter-over-quarter. Inventory turned during the quarter at an annualized rate of 8.8 times, versus 8.9 in the prior quarter.

Capital expenditures in the quarter amounted to approximately $38 million. Net of asset sales, this figure, however, was approximately $11 million. Accounts Payable at the end of the quarter were $1.59 billion, resulting in AP days of 60.9, up approximately 5 days from the prior quarter. Cash cycle days for the quarter improved to 24.9, an improvement of 3.8 days over the prior quarter, and an improvement of approximately 20 days over the same period a year ago.

Slide nine. During the first quarter we generated cash flow from operations of $132.9 million. Free cash flow, which is cash flow from operating and investing activities, was a source of approximately $121.9 million for the quarter. This quarter marked the fourth consecutive quarter of positive free cash flow in excess of $100 million. We expect to continue to generate positive cash flow, as we continue to focus on reducing our inventories and improving other working capital metrics, selling certain assets, and completing our targeted divestitures.

During the quarter we redeemed $120 million of our senior floating rate notes due 2010. Including this redemption we have now reduced our effective debt by over $400 million in the last nine months, and expect to continue retired debt out in the short-term out of our free cash flow. Notwithstanding our $120 million of debt reduction during the quarter, cash and short-term investments at the end of the quarter were up approximately $8 million over the prior quarter, with a closing balance of approximately $941 million.

Let me now comment on restructuring. During the first quarter we incurred approximately $7.3 million in restructuring expenses, of which 6.1 million was cash. This expense primarily related to reductions in force associated with plant closures. In connection with our remaining closures, and other planned restructuring activities, we expect to incur additional restructuring charges of approximately 65 to $75 million, over approximately the next six months or so. With only a few closures remaining, we believe our restructuring is nearing completion.

Slide ten. Now let me turn to the guidance for the second 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 on any extinguishment of debt, amortization expense, or other infrequent or unusual items to the extent material.

Our second quarter guidance is as follows. We are targeting second quarter revenue of between 2.4 and $2.5 billion. We expect gross margins to be in the range of 6.0 to 6.1%. We are targeting our operating margin to be around 2.4 to 2.6%. We expect our tax rate to be approximately 25%.

Basic and diluted shares for the second quarter are expected to be in the $530 million range. This equates to a non-GAAP diluted EPS of approximately $0.03 to $0.05 per share. We estimate that depreciation for the second quarter will be approximately $26 million, and second quarter capital expenditures to be in the range of $30 million. Finally, we estimate second quarter cash flow from operations to be in the range of 75 to $100 million.

I want to thank you for your time at this point, and I would like to turn it back over to you, Joe.

Thanks, David. Good afternoon, ladies and gentlemen. I would like to take a few minutes to discuss the operational performance of the Company.

Gross margin improvement was achieved in the first quarter, as significant operational improvements were executed in the technology components group. EMS continued to perform well at previous levels. EMS operations achieved both revenue and gross margin targets, and grew sequentially over the prior quarter. Gross margins continued to track well above the corporate average, with a continued focus on business mix. We were particularly pleased with the performance in the EMS organization, as certain customer deliveries were pushed out in the quarter, and our Huntsville, Alabama, operation was somewhat impacted by a power disruption during the quarter.

Due to the customer pushout, inventories in this segment were higher than anticipated, resulting in lower than anticipated turns. We continue to execute well in this group, evident by quality metrics and customer satisfaction. Inventory levels are anticipated to decline, with higher turns forecasted in the second quarter.

The technology components group improved their gross margin significantly in the first quarter, compared to the fourth quarter of fiscal 2007. Printed circuit boards, backplanes, cables, precision machining, and industrial systems, were all at or above corporate average profitability in the first quarter. The loss in the enclosures division was substantially reduced, as the unit approached gross profit breakeven. Performance in enclosures is a key ingredient to our turnaround, and is a major focus for the Company.

The enclosures division made significant improvements in performance levels at all factories, including factory efficiencies, reduction control, supplier management, inventory control, and capacity planning. Significant improvements in on-time delivery performance to customers were achieved, confirming that the changes implemented are producing real results for our customers. The enclosures division is now poised to grow revenue through its global footprint and technology offerings.

The Printed Circuit Board division achieved their performance objectives with solid profitability, and have potential for additional business. Factory capacity utilization was higher than the fourth quarter, as the unit continued to win high-end technology business. Revenue declined in the Industrial, equipment, precision and machining group, as the unit has been impacted by lower demand from the semiconductor industry, as that industry is currently experiencing a cyclical downturn.

Inventory performance continues to be good in all the component divisions, and improved from the fourth quarter levels. The operational improvements that were necessary in the enclosures division is largely complete. Continuous improvement programs are under way, to deliver the next set of financial milestones for profitability. The success of the components group is critical to delivering our customers a vertical integration solution for their outsourcing requirements.

Our technical capability combined with operational execution in our global footprint, enables customers to move more quickly with lower cost results for their product. We expect the EMS operations and the components group to make further operational and financial improvements in the second quarter. We believe that the enclosures division is positioned to turn profitable, and that we will continue to improve our position in printed circuit boards, backplanes, cables, precision machining, and industrial equipment operations. Operational execution plans and strategy are defined and being implemented, to ensure continuous improvement and profitability.

So now I would like to turn the call over to Jure. Jure.

Thank you, Joe. Ladies and gentlemen, let me add a few things. As you heard from David and Joe, this was reasonably a good quarter. I am pleased at the progress we made during the first quarter, and most importantly, that we are in a good position for a second quarter. As David mentioned, the revenue came in at $2.53 billion, but if you go down deeper, our core business is the key to this thing came in at $1.79 billion, with the margins of 7.7%.

The key to that margin is that we did improve from 6.8 to 7.7 quarter-to-quarter, driven by margin improvements in the Defense and Aerospace, the Medical division, and our Components division that Joe talked about, which includes printed circuit boards, enclosures, backplanes, cables, plastic, and custom memory.

Personal Computing business, or PC the way we call internally, revenue came in at 740. That was basically 10% down below our expectation, but the gross margins improved in that operation from 2% to 2.3%. As we are planning to transfer this division to a potential buyer, this division is being run completely separately from our core business.

Now let me bring you up to date on the sale of this PC business. This process took longer than we expected when we started this process a year ago. We have to resolve a couple major things. Number one, work with our customers and eliminate their concerns, and also put a transitional plan in place, how this business is going to be correctly transferred to a future buyer. As David indicated in his opening comments, we do not have a definitive agreement at this time, but we are optimistic we can close the deal in the near future, although there can be no guarantees at this time.

Now let me talk to you more about our core business. As we exit the Personal Computing business, the business going forward is what at the company we call core business, has run rates based on our Q1 results approximately $7.2 billion in revenue, with gross margins of 7.7%. This is a base to build our Company. This is our future going forward. I can tell you that we are confident about our future when it comes to our core business.

We are positioned to compete at the high-end markets and high-end technology high mix products. Our customer base is also what is supportive about our new focused business strategy, as we talk about this new strategy with our customers, especially in the last six months, so very positive from that point of view.

This strategy also has a main focus building on high-end infrastructure product, and this is a key market, Communications infrastructure, High-end Enterprise Computing and Storage, Defense and Aerospace, Industrial, Semiconductor Capital Equipment, Medical Systems, Multimedia, Automotive, and also the new markets that we are starting to develop, such as what we call the new Emerging Energy Markets. For those markets we provide full end-to-end manufacturing capabilities, and the Company is really well-positioned to compete around the world with anybody in these markets, so basically we provide custom design and a vertical manufacturing model, to full system assembly including repair and logistics.

Let me add a little bit more flavor to our goals that we have here for fiscal year 2008. Number one, we are going to continue to generate free cash flow from operations and asset sales. We expect to generate over $650 million in the fiscal year 2008. We are going to continue to right-size the Company. When the decision was made to exit PC business a year ago, our SG&A costs were approximately $100 million per quarter basically, if you look at the Q1 '07 was about $100 million. At that time, we put plan in place to downsize our SG&A.

I can tell you that is going the right direction, and we expect to exit third quarter fiscal year '08 with SG&A at the run rate of less than $80 million per quarter, so a substantial amount of savings going forward. We are going to continue to improve the balance sheet, as David mentioned earlier, this year we plan to take minimum $500 million worth of debt. This quarter we already paid down $120 million of that, and we expect to pay down an additional $380 million during the remainder of the year, and the bottom line this year is the whole focus about the margin and customer satisfaction.

Let me spend a few minutes on the market conditions. The second quarter for us, but really it is the March quarter, has historically been seasonally a down quarter. But market demand for second quarter at this time look fine. We do have a pipeline of new projects, and overall at this time as we look in the calendar year 2008, it is very hard to predict, but I can tell you cautiously, we are optimistic about the outlook for calendar year 2008, based on our customer forecast that we are getting basically on a daily basis.

Let me give you some of the reasons why we are confident about the second quarter. First of all, we do serve a global customer base. We are more dependent on the global economy. We are focused on key niche opportunities here. Also 70% of our revenue comes today from a low cost region, for Sanmina this is a huge change, even comparing to a year ago.

Our relationships with our key customers are good and improving. Operationally as Joe said earlier, there are no major issues. Operational issues we had in the enclosure division are more or less fixed, and we continue to put the right programs going forward. During the quarter also we won some new programs from existing and new customers, and these new programs should start contributing in the June quarter, which for us is the third quarter of fiscal year 2008. So overall hard to predict, but we feel comfortable about the second quarter.

Let me also make a few comments on the guidance that David talked about. We do expect to operate our Personal Business, or PC business through March quarter. If I look at the demand for this forecast, only business that we have today that we are forecasting down in the second quarter is really our Personal Computing business. We are forecasting Personal Computing business to be down 5 to 10%.

Our core business is basically flat if you compare it to last quarter, if anything perhaps some upside. We continue to generate free cash flow as David mentioned. We are going to reduce inventory at least 50 plus million dollars in the quarter or more, so overall I think it should be a good quarter.

So in summary, I think we are making steady progress, and our goal is to continue to make improvements in every quarter as we look out in the calendar year 2008. After this major restructuring that Sanmina is basically finishing, we are well-positioned globally to compete by providing the superior technology that we possess across all our product lines, and services to our customers. We are focused to drive shareholder's volume, and that is the main focus, is to deliver return on investment capital above our rate of cost of capital.

If we looked at economy today, it is really hard to predict. It is kind of crazy out there, oh, you know better than I do. but even in a tough environment, even if we position the company, if we a tough economical year, I think we are positioned to do well. As I said earlier, I think the core business that we are focused on, I believe that our market where we are focused, will bear the tough economy better. No matter what, the Company is positioned to generate free cash flow, and improved margins, and I can tell you that the Company is being well tuned up, and positioned for long-term success even during the tough times.

Now I would like to extend basically special thanks to our investors and analysts for participating on this conference call. Also, I would like to say thank you to our employees for their hard work and dedication to this Company. And operator, we are now ready to open the line for questions and answers. Thank you, again, all.

(OPERATOR INSTRUCTIONS) Your first question is from Lou Miscioscia.

Lou Miscioscia with Cowen & Co.

Hello, Lou.

Let me ask you a question about the vertical portions of your business, and I was glad to hear like things sound like they are moving in the right direction. I think years ago you used to be able to give out how much business you were actually selling in-house.

Is there any measurement that you have for that we could sort of track either on this quarter, or just on a quarterly basis, to see how much of this business you are actually cross-selling, and that would obviously show that customers really want to buy it, as opposed to selling it externally?

If you look at total inter-company, including vertical and other stuff, it is a little bit over $100 million a quarter.

Okay. What would be the direction, or how high do you think you would want to try to get it to?

Ideally to get 100%, but realistically, if you look at it, we would expect to as our growth comes in to increase that, by at least by approximately another $50 million a quarter.

Okay. On the last earnings call you had talked about reducing your operating expense by $360 million, $60 million on a quarterly basis, and I think that you had said that in the fourth quarter of September, you already got about halfway there, you got to 32 million. How much of your OpEx cuts do you really need to make by selling the PC business, and how much is just the other restructuring you are doing?

First of all, we talked about that, Lou, basically about a year ago, that is what I just mentioned. At that time, we felt that we could reduce about $60 million from that point of view. As you can see, that number is going to be more than 60, as much as could be 90 plus million dollars, from on a yearly basis, once we get done with this. David, maybe you can make a comment on this. We are really not ready to break that down yet, and hopefully once that we sell the PC business we are able to do that for you, but the key here before I pass it onto David, the purpose or the whole strategy was, that we have to reduce the SG&A down as we sell this piece.

There is a contribution from the PC business, and as we right-size the Company, we are really sizing the Company for our core business only, and I think it is the right step in the right direction, and we are looking forward at our going forward business will be generating more profits than what we are generating today. That is goal number one. David.

Lou, I will just add a couple pieces. If you look like I mentioned in my comments, the fourth quarter versus first quarter comparison, our first quarter did include some bad debt expense. It was above and beyond our normal recurring provision rate, and that was primarily what drove up our SG&A you might say in the fourth quarter, so we would expect that to come back down.

We actually have a number of reorganization plans in the Company, as it relates to our SG&A activities, and so we would expect the impact to be if you actually did some reverse engineering I think on the guidance we gave you, you would see the operating expenses are going to be coming down fairly substantially over the next quarter.

Then as Jure commented, as we break out the PC business and hopefully get that behind us, we will be able to provide a little bit more transparency in terms of not just only the SG&A expenses, but the entire business model.

Operator, next question.

Your next question comes from Jim Suva.

It is Kim Duncan in for Jim Suva. Just wondering, can you comment on a sending a scale term being competitive in relation to Flextronics, Hon Hai, that seem to be moving more and more to higher end markets?

We founded this company in this what we call niche high-end markets. A year ago as we look to the competitive global there, the decision was reviewed and basically we made a decision what markets that we can compete, and how well, first of all, it was the best market competing going forward based the way that we set up, and the markets that we are exiting is the Personal Computing business and Consumer business. We never did a lot of Consumer. We did a fair amount, but we kind of exited that business in the last four or five years, and a year ago we decided to exit the PC business.

I believe in those markets Consumer and Personal Computing business, I believe that the companies that you mentioned are probably set up and a lot more focused to compete in that business, but I think when it comes to this niche market, such as Medical, Defense and Aerospace, Industrial, Semiconductor, High-end Storage, computing types of products, and Telecommunications infrastructure, I believe we are set up to compete to anybody in our customer base fixed for that, and as I mentioned earlier, we did a lot of analysis in the last six months talking to our customer regarding our new strategy, and I can tell you that basically everyone likes our focus, and they believe this is the right thing for us to do.

And I guess lastly, can you give an update to your end market growth outlook for fiscal '08, have they changed since last quarter?

Well, I wouldn't say they changed much from the last quarter at all. I mean, as I just talked about, we are right now mainly focused on the second quarter, and as you know, this is a seasonally weak quarter, so the second quarter is a little bit stronger than maybe what we thought is going to happen three months ago, so comfortable about second quarter.

What is going to happen about 2008, you know, third and fourth quarter is hard to predict today, but based on my customer forecast, you know, it is no major changes from let's say 60 days ago.

Great. Thanks.

Your next question comes from Kevin Kessel.

Hello, Kevin.

Hi, guys. Can you just expand a little bit in terms of the divestitures, so outside of the PCs, what right now is left to sell in your mind, and maybe you can remind us, in terms of the overall proceeds that you expect from them, as well as the PC division, I guess?

Well, first of all, the biggest one here to sell is the Personal Computing business, which as I mentioned we are working on it right now with a potential buyer. That is number one.

The rest of the assets are really, a lot of it is really safe assets that we have around the world as we restructure the Companies, a big part of that is the real estate, and then of course, when you look at the total amount that we expect including the selling of these assets, and the free cash flow that we generate from operations, we expect to generate 650 million plus.

That is free cash flow for this year, so the 122 that you did in the quarter, plus the next three quarters, plus the proceeds from the divestitures of real estate and PC?

That is correct.

That is right, Kevin.

It is mainly PC, real estate, and operations.

Right.

PC, real estate, and operations. When you say operations, you're --?

I mean free cash flow from operations.

Free cash flow, right. What about at one point there was something like five different sites. Is that what you are referring to as real estate now, the five different, like the one in Australia that you sold?

That was a small business. There was a couple other small businesses that we had on the market, but we pulled it off the market for the main reason, and we are just as timing is good, and at the same time these businesses turn profitable, it makes so sense for us to unload them right now, especially when you look at their outlook going forward.

Like you are referring to memory modules and those other things you were talking about?

Memory modules would be a good example of that.

And then you mentioned in your prepared remarks about the forecast, how you have the forecast for PCs down 5 to 10, but for the other end markets I assume they are up, because that is what you said. Is there a way to give us more specific granularity around that? Terms of --

It is really, you know, Kevin, right now we really tried to, it is hard to section those, but overall our core business which includes everything but the PC business, you know, we are forecasting for second quarter to be flat. We have a few markets up, a few down, but it is a really small percentage in a 2 or 3 percentage, one way or another.

So core flat, PCs down 5 to 10?

Right.

Within the core that is flat, you are saying some are up, some are down, but there is none you can single out for example like--?

Nothing major. If you look, really nothing major that will be predictable. We have a one market section. We have some product delay, but we already knew about that three months ago. That is about it.

And then just to clarify here on the SG&A comments that you made about reducing them to 80 million a quarter on the run rate, do you get there? This does not imply, or is this with the PC division divested or --?

That includes not having PC division with us.

Okay. So that division is gone, because right now you are at 94, right? So we are talking about 14 million that you want to eliminate a quarter in SG&A?

At least, at least.

At least, and in terms of the PCs, have you ever broken out what that is from an SG&A perspective?

We haven't, Kevin, but we have typically said it is in the range of a percent, give or take.

Okay.

So looking at 8 million, give or take.

Got it. All right. Appreciate it.

Thanks, Kevin.

Your next question is from Shawn Harrison.

This is [Joe Whiteen] filling in for Shawn. I want to go back to the previous caller I think talked about some of the differences in the markets between yourself and some of the big guys, Flex and Hon Hai. I was curious more on the market opportunities that may have been created from the merger, I guess. You mentioned some wins earlier. Were some of those wins potentially coming from fall-offs on the merger?

No. I mean, the reason that we won, I don't think it had anything to do with the merger, really more to doing the customers that we are involved. We would have got those with or without a merger. I think the merger with Flex and Solectron is good for the industry. The industry has a little bit of extra capacity, I think taking that out is not bad for us. It is good.

We fight every day, or compete every day for same customer base, on this high-end stuff, so we competed with Solectron, and now we compete with Flex/Solectron, so there is really no major changes for us. It is all about who can do a better job in these unique projects. That is all it is about.

And then just one more point of clarification. You mentioned a statistic about the percentage of your manufacturing at a low cost, I think around 70%. Is that right?

That is correct.

I was wondering if you could just provide prior figures, maybe just give an idea of where we have been over the last three quarters? I didn't see that number reported in the past.

We didn't, but if you really compare it to a few years ago it was best case 50/50.

So maybe a year ago closer it was closer to 50/50?

David, I don't know if you have the numbers there, but it is probably --

A year ago it would have been about 60/40, but if you go back about five years ago, it would have been just the reverse of what we have today. It would have been about 70% in high cost and 30% in low cost, and so it has completely flipped itself around, and I think if you look at the trend, you know, we consistently are continue to be pushing that number up, and towards the low cost countries.

With the additional restructuring that is expected over the next six months or so, that should go up further?

Yes. For that, and for other reasons as well.

Okay. Thank you very much.

Thanks Joe.

Your next question comes from Sundar Varadarajan.

Hi, guys. How are you?

Good.

Just some questions with respect to your plans to reduce debt. Is the timing of that in any way contingent upon your getting the PC sale behind you, or I understand it doesn't really have anything to do with that, when you realize the asset proceeds, the reason I am asking that question is seems like you are already having a pretty good cushion from a cash perspective, based on what you said that you need to operate the business.

Well, let me transfer that question to our CFO.

Hi, Sundar. You look at last quarter we retired $120 million, and we didn't have a PC sale at that point in time, so our plans you know, the amount of debt that we retire will certainly be influenced by the timing of PC sale, and the proceeds from that, but our free cash flow plans and so forth, are still going to divert a lot of our free cash flow to paying down debt, irrespective of the timing on that.

And in terms of seems like given where LIBOR is going, is there any preference you have between which traunch of debt you would want to take out?

We do, and it has to do with a number of different characteristics of the debt, not only just the rates of the debt, but also the seniority of the debts, and the remaining term of the debt, so interest would just be one factor in the consideration.

All right. Thank you.

Thanks Sundar.

Your next question comes from [Alex Banton].

Hello, Alex.

Hi. Good afternoon.

Good afternoon.

I would like to address the question of the end markets for a moment, and just if you could talk about the strength and weaknesses that you see developing in your order rates by different types of product that you make, and have you seen any effects that you can identify from economic weakness in the U.S. and/or Europe, or Asia, so sort of break it down graphically?

Alex, if I can break it down geographically, because we do have an international customer base, so as we mentioned earlier, over 70% of our business today we manufacture in a low cost region.

Oh, that is location of the production. I am talking about where the demand is coming from.

Let me finish up.

Okay.

Most of this stuff like I said shifted to an international/global customer base. As you know we have European customer base, a North America customer base, a Japanese customer base, and the rest of Asia, so we don't have a really good way of measuring of what exactly this product gets sold.

Okay? But we know we have enough information in general terms that our customers, every one of our major competitors, especially when you look at companies like Cisco, Alcatel, Siemens, Nokia, just to name a few, these are all global companies. IBM, HP of course, so that is a really kind of what I can tell you, but on the economical side of the business, industry as a customer are nervous a little bit about it, just what is going on around the world, you world, but the skies are not falling down. At least not as of today.

I think from Sanmina's point of view, we would take it one quarter at a time. This quarter we are well-positioned actually in a better position at the beginning of this quarter and the last quarter. That is number one.

Secondly I think the Company has been going through a major restructuring. We are in the final stage of that restructuring, so we are well-positioned to weather the tough times, and we are ready. If the economy becomes a lot more difficult than what is today, I still believe we will get through it okay.

Okay. Let me try it one more way here. Looking at your guidance for this quarter, can you separate out what is coming from new wins that you might have had, and what is coming from the ongoing business, and what is really happening to the ongoing business, even if your sales were to be flat quarter-over-quarter, you might have a downturn in the existing business replaced by some new business, so it wouldn't show up. You see what I am saying? How would you characterize it?

Alex, I mean we have been very fortunate that in the last couple of quarters, we have a fair amount of new business or new projects, in our business you have got old projects that basically get replaced by new programs, and fortunately for us, we had a fair amount of old programs turning to the new programs, and these new programs have a bigger upside, and so we are optimistic about that. We don't really break it down at that detail that you are really asked me for, but in general terms, I can tell you the new program is what is helping us in the short-term, and I think it will help us in the longer term.

Our core business I would say is very healthy from a stability point of view. It is a hard to, you have got to understand, we have a wide customer base, that global customer base, so it is very difficult at this time to predict, but we are cautiously optimistic about the future, based on the programs that we are involved in, and who are the customers. We got the basically if you look at our customer base, it is basically who is who in our core business.

At the same time we are being very aggressive developing some of these emerging markets, and also in the areas that we did not have a lot of business in the past, such as Industrial side, and the Defense and Aerospace area. I mean, our Defense and Aerospace business almost doubled in the last twelve months, and this area, Defense and Aerospace, is a market that delivers you 3X margins than typically what you get in the typical EMS industry, so we are going after these emerging markets a lot more aggressively today, or this was a part of this new future for Sanmina in the last twelve months than ever before.

Okay. Thank you.

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

Your final question is a follow-up from the line of Jim Suva.

Hello, Jim.

Great. Thank you very much. Joe, you have been a little quiet here, except for the prepared remarks. Can you give us a little overview as far as the opportunities, challenges, and maybe some milestones we can look for, and what you have seen now that you have been there a little bit?

I think the key issue is revenue growth that will dovetail the efficiencies that are being executed in the plants. You put a level of financial discipline and accountability on top of all of those things, and we can really make pretty good margin improvements down the road. That is going to be important. The enclosures thing is very encouraging. That is going to be a very good business for us as we go forward, and that kind of situation that I think exists in pretty much all of our operations, whereas we continue to make these kinds of improvements, we will be better than the competition. We have to be, in order to improve.

Joe, what type of timeline or milestones are we looking at, to see some measurement from your specific efforts?

I would like to see sequential market improvement quarter after quarter, and certainly the upside for us is certainly still in the components area, even though we have a number of the operations at the corporate average, we want to get enclosures to the corporate average, that would probably the first thing, and then we want to bring the others up 50 to 100 basis points over time, and that will really increase our profitability rating.

Thank you very much.

Thank you, Jim. Ladies and gentlemen, that is all for today. Again, we appreciate your support, and if you guys have any questions, please give us a call. Otherwise we will be talking to you in the next 90 days. Bye bye.l

Ladies and gentlemen, this does conclude today's Sanmina-SCI teleconference. You may now disconnect.