Sanmina Corp (SANM) 2008 Q3 法說會逐字稿

Good afternoon. My name is Gamaria, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI third quarter 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. I would now like to turn the conference over to Mr. Jure Sola, Chairman and CEO of Sanmina-SCI. Please go ahead, sir.

Thank you, Gamaria. Good afternoon, ladies and gentlemen. Welcome to Sanmina's third quarter 2008 conference call. Thank you all for being here. Joining me on our conference call today here with me are Joe Bronson, our President and Chief Operating Officer, and David White, our Chief Financial Officer. On today's agenda, I will have David White review our financial results for our third quarter for fiscal year 2008. Joe Bronson will review operations and then, I will follow up with comments relative to Sanmina-SCI's results and future goals. David, Joe and I will then open for Q&A. And now, here is David.

Thank you, Jure. Before I get 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-SCI.com. I'll be making references to the slides during the course of my remarks.

As part of 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 of financial performance of the Company. We caution you that such statements are just projections.

The Company's actual results of operations may differ significantly as a result of various factors including economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, and technological change. We refer you to the documents the Company files from time to time with the Securities & 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, as well as our most recent report on Form 10-Q filed on May 6, 2008. 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 issued today, we have provided you with a statement of operations for the three months and nine months, ending June 28, 2008, on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also included 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 on this call as they relate to income statement measures, will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, SG&A and R&D expenses, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information. As part of describing our financial results, I would like to remind you that effective last quarter, our personal computing business and related logistics services have been accounted for as discontinued operations.

My comments today, which will focus almost entirely on the results of our continuing operations will include a review of the results of operations, a discussion of selected balance sheet accounts and corresponding metrics, an update with respect to our restructuring activities. And finally, I will conclude with guidance for our fourth quarter of fiscal 2008, ending September 27, 2008.

Slide 3. Revenue from continuing operations for the third quarter of fiscal 2008 was $1.9 billion which was above the high end of our guidance of $1.775 billion to $1.875 billion, up 4.7% versus $1.82 billion in the prior quarter, and up 13.7% versus the $1.67 billion reported in the same period a year ago. This increase was largely driven by strength in the telecommunications, and enterprise computing and storage businesses.

For the third quarter, we reported GAAP earnings from continuing operations of $12 million which equated to $0.02 a share. Our total Company GAAP earnings were $15 million which equated to $0.03 per share. Non-GAAP earnings from continuing operations for the quarter were $26 million or $0.05 a share. This compares with $0.03 per share in the prior quarter and a loss of $0.07 per share in the same period a year ago. Our total Company non-GAAP earnings were $38.2 million which equated to $0.07 per share. Our profitability in the third quarter marked the fourth consecutive quarter of improvement in overall profitability.

Slide 4. For the third quarter, our revenue by end market was as follows. The communications end market represented 44% of our net sales which in absolute dollar terms was up approximately 15.5% from last quarter. Enterprise computing and storage represented 18% of net sales during the quarter. Sequentially this end market was up 7.7% in absolute dollar terms quarter-over-quarter.

The multi media end market accounted for 15% of net sale during the quarter and was down 9.5% in absolute dollar terms versus the prior quarter. The medical end market accounted for 10% of net sales during the quarter which was down approximately 3.5% in absolute dollar terms from the prior quarter. And finally, our industrial semiconductor capital equipment defense, aerospace and automotive end markets of our business, collectively, accounted for 13% of our net sales. And in absolute dollar terms were down 5.1% relative to last quarter. All three sectors were down from the prior quarter.

Slide 5. Our top ten customers accounted for 48% of total sales in this quarter. Sales to our top 20 customers accounted to about 63% of total sales in the third quarter. We had no customers in the third quarter whose sales were greater than 10% of total sales.

Slide 6 and 7. Gross profit for the third quarter was $141.4 million. As a percentage of sales, gross profit was 7.4% which was up approximately 50 basis points from the prior quarter as a result of improved operating efficiencies in our EMS business as well as profitability improvement in our technology performance business. Specifically, our printed circuit boards and enclosure divisions which were both up quarter-over-quarter. I would also mention that our enclosures division posted its third consecutive quarter of improvement recording positive gross profit for the first time since the second quarter of fiscal 2007. When compared to the same period a year ago, our gross margins were up approximately 160 basis points.

Selling, general administrative expenses for the third quarter excluding stock compensation expenses were $75.3 million, down approximately $1.7 million quarter-over-quarter and down approximately $5 million versus the same period a year ago. Research and development costs excluding stock compensation expenses for the third quarter amounted to $5.8 million which was up $1.6 million quarter-over-quarter and down approximately $0.2 million versus the same quarter a year ago. Our combined R&D and SG&A expenses for the third quarter, excluding stock compensation expenses, amounted to $81.1 million or 4.3% of sales.

These expenses have continued to trend downward over the last year as we focused on reducing infrastructure costs in preparation for our exit in the personal computing business. We expect to further reduce our operating expenses by approximately another $15 million on an annualized basis by the end of this calendar year as we achieve additional efficiencies. Operating income for the quarter was $60.4 million. Our operating margin was 3.2%, up approximately 70 basis points quarter-over-quarter and up 260 basis points on a year-over-year basis.

Net interest and other expense which consists primarily of interest income and expense as well gains and losses from foreign currency translation was $23.1 million, versus $22.1 million in the prior quarter and $31.5 million in the same period a year ago. Depreciation was $20.7 million in the third quarter, down approximately $1.5 million from the prior quarter. And our EBITDA for the quarter was $81 million.

Our tax provision for the third quarter was an expense of $11.2 million, on pretax non-GAAP earnings of $37.2 million. And our tax rate was approximately 30%. Our lower tax rate reflects the favorable impact of the first phase of a number of business model changes we are pursuing to dramatically reduce our effective tax rate over the next year.

Slide 8 and 9. As we turn to the balance sheet, I need to comment on the basis of the presentation used here and in our press release. As reflected in our press release financial statements, US GAAP requires that the net book value of those balance sheet items that are sold or transferred as a part of discontinued operation, be collapsed into two reported line items on the balance sheet; assets held for sale and liabilities of discontinued operations. The sale of our personal computing business to Foxconn, as well as our sale of Lenovo business only involve the sale of inventories, certain plant and equipment assets and small amount of liabilities which are primarily payroll related. Sanmina retained all trade, accounts receivable, and trade accounts payable balances. These balances will be collected by Sanmina in the case of the receivables, and paid out in the case of the payables as they become due.

Since these balances will not be transferred to the acquirer, under US GAAP, they must remain classified as trade receivables and payables. This, despite the fact, they will not be reoccurring after the sale of the business. As these balances really aren't part of our ongoing business, our working capital metrics would be highly distorted if one were to use these balances in conjunction with an income statement that completely excluded this business. Accordingly, the cash cycle day metrics that I'll refer to, as well as those shown on these slides, have been calculated to exclude these personal computing AR, AP-related balances.

With that explanation, accounts receivable at the end of the quarter was $1.18 billion. Excluding our personal computing business receivables, excluding any factoring of receivables, our gross DSOs for the core business were 51.3 days, which was relatively flat with the prior quarter. Similar to my comments last quarter while these DSO figures have been calculated without the benefit of any factoring, historically we have sold accounts receivable as part of working capital management. For administrative convenience however, the receivables we sold in prior quarters went exclusively to our personal computing business. With the sale now of our personal computing business we have completed, we expect to transition our factoring program over to other customers during the fourth quarter. Upon full transition, we would expect our net DSO figures to improve by approximately 7 to 10 days. On an absolute dollar base, however, this will mean a reduction of approximately $75 million in back receivables when compared to the amount historically factored with our personal computing business.

Inventories at the ends of the quarter were approximately $901 million, down approximately 48 -- $49 million quarter-over-quarter. Inventory days at quarter end, were 47 an improvement of four days versus the prior quarter. Our third quarter inventory performance for continuing operations resulted in our lowest inventory levels in 11 quarters, and highest inventory turns in 12 quarters. Net capital expenditures in the quarter amounted to approximately $25 million. Accounts payable at the end of the quarter were $1.36 billion. Again, excluding payables related to go our personal computing and logistics service business, our AP days for the quarter were 49.

Our operating cash cycle which we define as unfactored or gross cash cycle days for the third quarter was 49. Again, we expect the full transition of our AR factoring program, DMS customers, to improve our net cash cycle by 7 to 10 days. During the third quarter, cash flow from operations was a positive $121.9 million. Free cash flow, which is cash flow from operating and investing activities, was a positive $118.7 million for the quarter.

Our debt at the end of the third quarter was $1.48 billion, which was relatively flat with the prior quarter. Our earliest debt maturity is $180 million which is comfortably two years away from maturing. Despite slower debt repayments than we originally planned at the beginning of the year, we still look to expect to this maturity -- to retire this maturity long before it matures. Our next debt maturity isn't then until 2013. Cash and short-term investments at the end of the quarter were approximately $982 million.

Let me now comment on restructuring. During the third quarter, we incurred approximately $13 million in restructuring expenses of which $8 million was cash paid out during the quarter. This expense primarily related to reductions and force associated with various corporate functions, as well as plant closures in (inaudible) Sweden, Phoenix, Arizona, Sherbrooke, France. We expect to incur additional restructuring charges of approximately $10 million to $18 million over approximately the next six months or so. At this point, we have announced, implemented and are nearing the completion of all of our currently planned restructuring actions.

Slide 10. Now, let me turn to guidance for the fourth quarter, 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 extinguishment of debt, amortization expense or other infrequent or unusual items.

Our fourth quarter guidance for continuing operations is as follows. We are targeting fourth quarter revenues of between $1.80 billion and $1.90 billion. We expect gross margins to be in the range of 7.6% or 7.8%. We are targeting our operating margin between 3.3% and 3.6%. We expect our tax rate to be approximately 25%.

Basic and diluted shares for the fourth quarter are expected to be about 531 million. This equates to a non-GAAP diluted EPS of approximately $0.05 to $0.07 per share. We estimate the depreciation for the fourth quarter will be approximately $21 million consistent with last quarter. And fourth quarter capital expenditures to be in the range of $25 million to $35 million, driven primarily by our expansion activities in India. Finally, we expect our fourth quarter cash flow from operations to be positive.

As a final comment, you'll note in our press release that we announced today our intentions of seeking shareholder approval of a reverse stock split. While we recognize that our market cap, just like everyone else's, is predicated on our performance, we also believe that a reverse split would be advantageous for a number of reasons. First of all, it would allow a broader range of institutions to invest in our stock, namely funds that are prohibited from buying stocks whose price is below a certain threshold, increasing trading volume and liquidity.

It would help increase analysis and broker interest in our stock as their policies oftentimes discourage them from following the recommended companies with lower stock prices. It would reduce the number of our outstanding shares, currently $531 million(Sic -- see press release), to a level more appropriate for a company with our market capitalization. And, finally, by increasing our stock price proportionately to the reduction in the number of outstanding shares, our reverse split would decrease price volatility as small price movements now cause relatively large percentage changes in our stock price.

This action, if approved by shareholders, is not expected to take effect until after the end of our fiscal year. This concludes my remarks and I thank you for your time, and with that, I'll turn the time over to you, Joe.

Thanks, David. Good afternoon. I would like to provide an overview of our third quarter operating performance and outlook for the fourth quarter. These comments relate to the continuing operations of the Company.

Third quarter performance resulted in another sequential improvement in revenue and gross margin. Revenue is 5% higher than the second quarter, and exceeded the top end of our guidance with strength throughout the MS group. Strong markets for the Company this quarter were telecom, and high-end computing and storage. The Company's operating profit for the third quarter was 3.2%, compared to 2.6% in the second quarter.

Our third quarter execution objectives were as follows. One, improve underperforming operations in the EMS group that were operating below the corporate average. Second, was improve the components business profitability. Third, was to improve supply chain management. And fourth, was to generate free cash flow.

Most of our EMS operations are now at profitability levels that either meet or exceed the corporate gross margin average. These improvements represent the execution of a number of initiatives, including cost reduction, operational realignment and revenue improvement that resulted in increased gross margins. Revenue and gross margins in the components business were slightly higher than the prior quarter.

The Company returned a gross profit in the enclosures division for the first time in five quarters. Enclosures unit continued to implement lean manufacturing throughout its global plant structure, which has significantly improved on-time delivery and quality performance. Profitability and printed circuit boards were slightly higher in the third quarter than the second quarter. Improvements were evident in certain Asian operations with continued good performance from operations in North America.

Precision machine components business units suffered a gross margin loss in the quarter, due to the steep drop in revenue due to the continued decline in demand from the semiconductor capital equipment industry. Additional highlights for the quarter included an improvement in our memory modules component business and sustained profitability and back plains and cable. Our focus on customer delivery and quality metrics for our production and design services has demonstrated a components operations capability to differentiate its performance in the industry.

Global supply chain management operations executed well across the Company to manage and leverage the pricing of commodities and components in the wake of market disruption from oil price hikes and global demand hikes in the prices of commodities. As we work closely with our customers, we have been able to cope with significant increases in the prices of commodities and components through global sourcing activities and inventory control processes and procedures.

In the third quarter, we generated approximately $120 million in free cash flow due to improvement in profitability, inventory management and receivables collections. Inventory turns increased to approximately eight--actually 7.9, compared to the second quarter performance of 7.2. We expect this trend to continue as many of our operational initiatives are designed to reduce the assets employed in the business.

With respect to the outlook, the completion of the restructuring of our manufacturing capacity and the sale of our PC business, enables us to address opportunities for new and existing customers who are increasingly turning to an outsourced manufacturing model. This level of outsourcing is highly dependent on design engineering capabilities for high-mix, low-volume programs. Extensive design resources and local capability in proximity to customers is presenting increased opportunities for Sanmina and the markets we serve. Geographically, customers are becoming increasingly concerned about freight and logistics costs created by the significant rise in global energy prices.

Our global footprint now provides our customers with significant flexibility in addressing their needs for their regional customer base. Our MPI plants provide design and prototype manufacturing capabilities that enable the customer to transition production from an internal to an outsourced model. Customers can then choose the appropriate low-cost regional facility for low-cost volume production.

Our large-scale production facilities in Mexico, China, Southeast Asia, Eastern Europe, and now India, provide customers with viable low-cost opportunities when they ship to their markets in these regions. Despite the economic downturn, the company feels that business opportunities exist to allow sales and earnings growth. Requirements for success continue to differentiate our performance of service offerings and leverage the improvements we have made, and continue to make and capture an increased share of the outsourced manufacturing market for high-mix low volume applications.

After achieving greater than the 3% operating income objective, the next goal is to improve operating profit that exceeds 4%. The Company is making continuous progress towards these goals, which we expect to be achieved through sequential improvement, and revenue and operating efficiency in the near-term and in future quarters. We expect to be able to achieve our operating goals, provided our customers' businesses is not significantly impacted by potentially poor global economic conditions. These goals can be accomplished by a continued focus on operational initiatives and productivity improvement programs, while providing excellent service and cost reduction for our customers.

We believe that the components business will grow and achieve increasing levels of profitability, as we have been gradually improving the capabilities of these operations. We are building a new management operating system for these component business units, which will position the operations profitability to exceed corporate margins and lead the Company to an improved margin structure with continuous improvement over the next several quarters. Our core EMS business is achieving good results and positive growth. These operations position the Company for further stable growth, particularly with the completion of our restructuring and global footprint.

We are in the process of ramping our India operations in the fourth quarter and the first quarter of 2009. We are pleased at the current level of progress to date through fiscal 2008, but we recognize that the job is far from complete, so we will continue to drive the Company to improved performance, differentiated customer satisfaction and improved returns to shareholders. That concludes my comments. Jure?

Thanks, Joe. Again, ladies and gentlemen, you heard from David and Joe that we are pleased with our third quarter results, especially when you factor in the challenging market conditions. Again as Joe mentioned, we're a long way away from being happy with these results. Anyway, it was a good quarter for many reasons.

I think nice growth quarter-to-quarter. Financial metrics I think went in the right direction. As of July 7, we're completely done with the PC business, restructuring is basically now behind us. Basically what does that mean? Is that all of the hard work that we've been working on for many years is now behind us, and now we are in a building mode. It's a lot more fun focusing on that and focusing on profitable growth.

I'm very confident about the Company's foundation that we build on today. I think we have a right global infrastructure in place, and Sanmina-SCI is in a strong competitive position. We do have the focus strategy today, focusing on our key markets where we do have a competitive position, or competitive advantage. We do focus on our key global customers that have been with us in some cases for many, many years. We are able to expand their base, and with a truly end-to-end manufacturing solution company with technology and services again, that are competitive advantage.

Now, what I'd like to do is give you a market condition update. As David shared the guidance with you, our guidance for this quarter is basically flat quarter-over-quarter. But on a positive side, we do feel confident that we can improve our gross margins from 20 to 40 basis points from over the third quarter. And operating margin improvements 3.3 to 3.6% which is approximately 10 to 30 basis points.

What is going on with the market demand? As we all know, our market conditions are challenging, but it was also challenging last quarter. I don't see major changes for us, at least last time we talked. The entire economical environment is hard to predict at this time. But, again, as we all mention here, we remain cautiously optimistic about the markets that we play in.

Now what I'd like to do is talk to you about maybe more based on our segments and what we think is going to happen in the short-term. If I look at the communication infrastructure which is in our group networking and wireless business, last quarter we had nice growth. If we look at Q4, we forecasting flat. High end enterprising -- I'm sorry, high-end enterprise computing and storage was also nicely up last quarter. For this quarter, we're forecasting flat-down. Medical was slightly down last quarter. For this quarter, we forecasting flat-up.

And then we have a group called industrial semiconductor defense, aerospace and automotive. Last quarter that group was down approximately 5%. For this Q4, we're forecasting flat-down. That's mainly driven by semiconductor business. Multi-media was down last quarter. For Q4, we are forecasting up quarter for multi media.

Now, I'd like to talk a little bit more about market condition, but longer term. Even with all of the market challenges that we are faced today, we still see growth opportunities ahead of us. Why is that? Today our Company has a reasonable good pipeline of new opportunities that we are working on. Our customers have a low inventories.

New Sanmina-SCI offers our customer, I think, clear and differentiated comparative solution model today. We do have excellent customer base that is diversified and there is global. And again, we're involved in a right market where we are focused on these segments and where we provide our customer with comparative advantage.

In summary, with the major restructuring now behind us, we're excited about our future so we can focus on our core business. We are well-positioned to compete. In short-term, we're focused; number one, to continue to generate free cash flow. Number two, margin improvements and growth. Again, we do expect nice margin improvements in Q4 as I just talked about. Number three; customer solution, providing our customers with comparative advantage every time. And number four, driving the shareholders' value.

The bottom line, we will continue to take actions to improve the Company, no matter what it is. And goal for us is to be a leading market procurement in the EMS industry, and nothing less than that. I think Q3 was a step in the right direction.

Now, I would like to extend my thank you to our investors and analysts for participating on this conference call today. I would also like to express my special thanks to our employees for their hard work and dedication to this company. Operator, we're now ready to open the lines for questions and answers. Again, ladies and gentlemen, thank you again.

(OPERATOR INSTRUCTIONS.) We'll pause for just a moment to compile the Q&A roster. Your first question will come from the line of Steven Fox.

Hello, Mr. Fox.

Hi, good afternoon. Couple of questions. First of all, can you just review the expansion plans for India? What it's going to be focused on and the risks that there is some extra short-term costs that could hit the numbers.

Actually, we are going to India based on our customer demand, Steve. Actually we are starting to produce, in India, we don't -- if you look at the last quarter, they made a shipment. We're going to build a new building down there. That's really already caught within our plan.

But we really believe that India will be successful very fast, just based on the demand that we have in India. And we are--our first step in India is not major. We put in one building. I can tell you today it is almost booked.

And it's for what type of customer, Jure?

Right now, it is telecommunication infrastructure, and medical and industrial.

And then my second question on the components business, you mentioned slight improvements in profitability. Can you be more specific on where the components margins are. And how long you think it's going to take from here to get to acceptable levels?

Well, first of all, they bill a corporate average. We don't like to break it down. Acceptable levels, as I always said, our circuit board business should be generating over 20% margins. And the rest of the businesses should be well over 10% margins. We expect to get, as Joe mentioned there, to get to double-digit margins sometime in the 2009. We have more than half of those businesses that are delivering higher than double-digit margins today.

Okay.

But the biggest improvement that we need to go up will be enclosure. But as Joe mentioned, they turned a profit, slight profit this quarter. I think today, it's all about the demand. Our operational issues that we had there are fixed. I'll turn it over to Joe. Maybe Joe, you want to make a few comments on the operational issues that we had.

I think we made a lot of progress in the components side of the business, particularly enclosures. Last year, had some pretty serious issues in deliveries and also inventory control. The implementation and retransformation of a number of plants and facilities, have really streamlined those operations to lean models. It starts with customer satisfaction, and getting your deliveries in on time and we've been able to do that with a high level of quality. And that essentially leverages the whole fixed-cost structure of these operations.

Profitability this quarter, well-positioned to improve profitability, particularly as revenue grows right now. It's--we're pretty pleased. We also had pretty good performance in our modules group and in the boards group. We just have a situation where the demand is low for the semi-cap equipment and we're looking to diversify that customer base by some new business in the industrial sector, the non-semi basis, and that's also coming along.

Thank you. And then just a last question. It is a little difficult to answer. I am going to say that up front. But you guys have made some steady progress over the last few quarters. You have a market cap right now of about $800 million for a business with about $8 billion in sales. Which in my mind makes you -- and it is a fairly attractive book of business. In my mind, it would make you susceptible to potential take-over. Can you talk about what else you could to either improve the business on your own and your willingness to be part of another organization?

First of all, we don't -- I will make it very straight, Sanmina will be an independent company unless somebody comes here with a huge checkbook. Okay? I think number one, we are really focused on running this business. I'm confident -- first of all, our company -- if you look at our competition, where we focus today. Let's compare our -- let's say, $2 billion run rate to some of our competition. We're in a good position here. We have strong balance sheet.

Most importantly, I think we got the talent that is one of the better in the industry. I have no doubt that this company will get back again, where it needs to be. I think you're going to see that on a nice improvements every quarter. Unfortunately, we have a challenging market out there, but I think we're in a good position to go through this tough time. We went through major restructuring. We lowered our cost. We are going to continue to run the tight ship here. But I'm excited growing this company again.

Thank you.

If I can just jump in, Steve, and add one further piece of color there. When you look at the market cap of the Company, you are only looking at one piece. Right? You have to look at the enterprise value which will also include the value of our debt. So it's both those components. Not just the market cap.

Yes. Even on those metrics, it's pretty compelling for a strategic buyer. But I appreciate the feedback. I know that is not an easy question to answer. Thank you.

Thanks.

Your next question will come from the line of Jim Suva.

Great. Thank you and congratulations.

Hi, Jim.

Back on the India topic a little bit. Can you maybe tell us about -- that business that's going there, is it coming away from some of your other operations? How much of the new building being booked are being opened up in Q4, Q1 of '09 is booked? Because it just doesn't seem like your top-line sales is growing a huge amount to open up a facility. Maybe you can just let us know the square footage and what you have.

Jim, again, this factory is not being opened strictly because we got a huge demand and we don't have extra capacity somewhere else. This is a strategic move for us. For India, based on our customer requirements for Indian market. We see India today as a really focusing on India markets for our existing customer base.

We are--we have a small operation in there today that is 100% booked. I wish new factories will be about a couple hundred thousand square foot factory. It is not a huge factory. We expect these things -- this division to be profitable after a few quarters. We expect it to be fully booked in the first six to nine months of operation.

And does business come away from some of your China factories? Or in the start of restructuring -- ?

No, it is not coming from China at all. There is no restructuring involved. This is a market that if we don't have Indian presence, we'll go somewhere else.

Okay. Great. On the restructuring topic, you had mentioned that you're getting close to the end of it. At the end of this, do you think that you'll be clean and out of it or do you see something else that maybe you're keeping an eye on?

Jim, first of all, let me be clear. As far as I'm concerned, we're done with our shutting the factories. All that had really said, we announce all the shutdowns. For all of the practical purposes, everything is done. For accounting purposes, there is a few lingering things they got to do. When you look at the people in the factories that were shut down, basically 98% of those people are gone. Okay? Going forward, you never know. But based on today, I feel very confident that at least in my career, I'm done with restructuring.

Okay. And Dave, those lingering things, do they start to really wind down here as we exit December or when should we start to see those go away?

They should go away in the next six months.

Thank you, and congratulations.

Thanks, Jim.

Your next question will come from the line of Kevin Kessel.

Hi, guys.

Hi.

David, this question maybe is for you. On the explanation you were giving regarding the sale of the PCs and the impact on working capital, I just wanted to get a sense for the actual impact on the inventory dollars. And then, how that might have affected the cash flow from operations. Because I know that the way -- the two transactions were done is that they straddled the quarter. Right? One happened before and one happened after?

The Foxconn deal closed in the first week of July, so it is not in the Q3 numbers at all.

Right. You had an inventory reduction of what, $46 million? I'm just curious, what portion of that was related to the PC part that was sold?

That $46 million was entirely from continuing operations.

That was entirely.

Yes.

And then, when we look at the September quarter, there is a portion of inventory that you ended the quarter with that essentially transitioned over to Foxconn in July.

That's correct. But since the inventory is one of the assets being sold, it is not part of the inventory report. It's part of the assets that are being dispositioned.

Okay. It is already been reclassified?

Yes. When we talk about our inventory today, we are talking entirely just about continuing operations.

No effect on cash flow from operations? From a working capital perspective?

No.

To understand the accounts payable aspect of it, you're holding all accounts payable for the entire operation. When I look at it, just the way at least it's reported, that might explain why there's the increase there was. But on a -- not on a continuing basis, it almost looks like payables are up 20 days sequentially.

That is why in my comments, Kevin, that you can't look at the numbers right off the balance sheet, because the payables and receivables attributable to the PC business are not carved out. They are part of our reported AR and AP. That why I did the calculation for you in my comments.

I got it. But would you expect that for any reason that the payables that were part of the PCs would be able to be extended past your normal payment periods?

They will be wound down by the end of the fourth quarter.

It will be normalized.

They will be normalized by the end of the fiscal year.

But in terms of breaking those amounts out in dollars, is it possible to do that?

You'll see it in our Q. But I can tell you in rough numbers, they're on the order of $400 million each.

On each. Got that. In terms of looking at the components business, so I understand what Joe had said and Jure about these improvements that were seen there. That is gross profit level. If we looked at components overall, would you right now, as a total unit, would they be operating profit positive or are they operating profit -- still running operating profit negative?

Positive.

They're positive.

Yes.

And is there any way to give just a sense of the size of the overall components division in terms of run rate? Like right now or maybe the run rate of the PCs? Used to be $100 million. (multiple speakers)

Kevin, if they were an independent company, they would be running about $1.4 billion run -- but it's a -- when a lot of stuff get shifted internally. That's why these things are so hard to break it down. When we go to our customers, we don't sell them just a bare -- we want to sell a full system. Idea about our vertical model here is to give our customer better competitive advantage. Hopefully if we do it right, we make little bit of money. That is really the purpose of the vertical model.

Today, as I said in my prepared statement, you look at our business today, the way we structure, I think we got the right footprint. I think, as Joe mentioned, operationally, job is now finished with the restructuring. This was the biggest impact when you move high tech technology products around the world as we did. Especially when the capabilities that we have internally, I think -- my personal excitement is that this is now behind us. We can focus on growing. That is one of the reasons, you've seen. If you look at this quarter, this is a very clean quarter.

This continues operations, everyone of our metrics went into the right direction. And that the goal -- it is a challenging market as you know better than I do. The goal here is to focus things that we control. We don't control the market, but we'll focus on things that we control. We believe that we still can, even in a tough environment, have an opportunity to improve the margin, unless the whole demand goes away.

We had to improve the components operations to take advantage of the vertical model, because if a couple of pieces aren't working well, the customers aren't going to buy the vertical model. Now that we basically have all of the operational issues behind us, there is -- you will always be able to make things better, but in terms of being able to sell, we're seeing a lot of these new opportunities have really good potential for vertical integration possibilities. Whereas before, we would be hard pressed if we saw one of these units unable to perform well. This gets us where we wanted to be with respect to pursuing this, as Jure said.

I got it. And then the last -- maybe more of a housekeeping question. Obviously given all the changes recently with the divestitures and the change in the overall business mix going forward, is it possible to give investors a sense now for what the makeup is of the new -- I guess that you guys give the top 10 customer and top 20 customer. If you can give us just in alphabetical order, who the top ten customers are on a go forward basis, so -- ?

We don't give you that. I think you know who our customers are, Kevin. Only three customers that were over 10% or two customers.

Three customers that were over 10 or close to 10 were Lenovo, IBM-PC business, and not PC, but low-end server business and Hewlett-Packard PC. We still have IBM as a customer today. Of course, they're not 10% customer. We still have HP as a customer, major customer, but they're not 10%. Lenovo is a very small customer. Everybody else is basically on the same list.

We have a great customer base. We just exited what we call non-core PC business, but when it comes to all other key customers -- that is the core focus right now.

I understand. I was trying to get a sense for who would replace those other three, but it sounds two of the three might still remain as core content customers.

Yes. IBM and HP is our core business.

Okay.

Except PC. Okay?

Thanks, Kevin.

Your next question will come from the line of Brian White.

Hello, Jure.

How are you?

Good. When you talk about the pipeline, can you quantify how big this pipeline is? And really where the opportunities are in terms of markets?

Pipeline is pretty good. This is combination of opportunities, new outsourcing deals, and the deals that we don't have. If we believe these deals were up, even if the economy continues to be challenging, because somewhere our customers are want to outsource more because things are challenging up with them and the internal costs are too high. There is some benefit there.

The second thing I think some of the hard work, some of the new programs that we're working on, are starting to pay off. I hate to predict what percentage is. There is quite substantial amount.

And, Jure, where are the opportunities?

Its' a more than a billion-dollar opportunities.

Okay. And in terms of the markets, if you had to say the top two markets, markets in terms of opportunities, where are they?

I would say, it's really for us -- it's in a networking side, it's for in a medical side, and industrial side.

Okay. And then when we look at -- what did you get paid for the sale of the PC business to FoxLink and Lenovo?

I don't know if we can give you direct what each of them paid, but maybe I'll turn it over to David to give you an overview on that.

Okay. Brian, I guess you can break it up into a couple of pieces. In terms of what we have actually received for the business, roughly $220 million crosses -- the customers that we sold it to. The respective US companies. But also over that time period the other thing to note is that the price that we negotiated for the business was pretty much fixed a long time ago. Since the date we announced the deal, in addition to the $220 or so million that we collected on the sale of the business, we've also earned about $120 million over the last almost two years now. That's generally what we've gotten for the business since we announced getting rid of it.

Okay. And on the balance sheet, am I seeing that $220 million as of the June quarter or piece of it or none?

There is still about $30 million, $40 million that will come in the fourth quarter.

Okay. Thank you.

Okay. Thanks, Brian.

Your next question will come from the line of Louis Miscioscia.

Hi, how are you this evening?

Good.

Just a couple simple questions first. The R&D line seems a little bit high this quarter. Maybe if you could mention why. And also, David, if we could get some guidance on interest expense for the rest of the year. (multiple speakers)

You didn't come in clear. Could you repeat the first question?

Sure. The R&D line seemed a little high in the quarter. Just was wondering why and what you would expect for the R&D line for the year, and the same thing on interest expense.

R&D came in a little bit higher there, because we do have a fair amount of investment there in our defense and aerospace group. And a storage area came. And that number is going to go up and down, but probably is going to hang around $5 million per quarter.

Okay. And interest expense is going to be about this level for let's say, the next three or four quarters going forward?

It would be somewhere in the $24 million or $27 million range probably. $23 million to $27 million.

Okay. And then my last question goes back to one earlier. When you look at the component business, because it seems that the EMS operation is doing quite well. It looks like it is running about 3.8% operating margin. The main expansion of operating margins will come as component business turns around. Do you look for that to be a linear improvement? Or do you expect there to be a hockey stick that maybe when we get to the September quarter or December quarter or earlier of 2009, the margins and the business really starts to take off?

Yes. I think, Louis, it is not that very simple just to say let me divide this cake into two pieces. Okay? Your assumptions there are close, but you're not 100% there. Definitely our EMS part of the business is going well.

We expect that business to continue to perform well. We believe that it will continue to improve. And I -- as we just mentioned earlier, I think components -- biggest issue that we have components, we're in the restructuring in some of these new factories not performing to what Sanmina, the Company, is used to. Now, I believe all those headaches are now behind us.

Right now it is all about the growth. And if the growth comes faster, I think you're going to see Sanmina's gross margin as a company grow. We're still targeting over double-digit for the whole Company, so that is our goal. But we're going to take -- as Joe said earlier, we went over 3%, took us long time to get here. Hopefully, we'll get to 4% operating margin a lot faster and go from there.

Okay. Thank you.

Something specific.

Okay. Thank you.

Thanks, Lou.

Your next question will come from the line of Amit Daryanani.

How are you doing, Jure?

Good.

Just a question on the component side again. For us to get to corporate-like operating margins call it, do we need revenues to pull for the model? Or are still some of these internal initiatives that we had implemented several quarters ago that still need to possibly impact the margin?

We expect to improve the margins. I think we can do better than what we are doing today across all our businesses. Definitely, as the main goes up, we expect our margins to improve. I think companies today are running lean and mean for the revenue. But believe me, we can ship lot more revenue than $1.9 billion.

It has to be a revenue-driven function to expand margins from the component side, right?

No, we have a rare opportunity to expand it the way it is today. Let's just say, we don't book any extra dollars today in our components business, we can improve the margin. Same thing in our EMS, if we don't book an extra dollar, but it stays the same, we can improve the margins. There's some improvement that you're going to see with no major growth. And basically what we are saying for this quarter, even if we stay flat revenue in a Q4, we are forecasting margin expansion.

All right. And then, how much of the components business or components and manufacturing are actually sold internally to Sanmina?

It varies, but we sell as much as probably around 30% of their shipments.

And that number hasn't changed for the last four or five years that I can see. Why has that been the case? Initially, the whole -- there is more insourcing and it's going to drive margins higher. But that hasn't quite worked out to seven years now?

It is more program-driven. What programs that -- there a competitive advantage which programs or not. I expect that because of the movements that we're moving a lot of our operations around the world that impacted of some of the vertical integration. As now, the movement has stopped. In other words, no more moving the plants, starting the plants around. We can focus on improving the number, and we expect to improve the number.

Fair enough. Finally if I look at the communication and computing side, you had really good growth this quarter. It seems to be a little bit more robust than what the end demand is in the marketplace. Can you talk about what grows it? Was it new ramps or incremental market share?

I think for us it was really across the board. We have a very wide customer base in our communication infrastructure. I don't think it's just a one customer specific. It was combination of some new programs. Some of all of the programs did a little bit better than what we expected it.

Fair enough. Thanks a lot.

Thanks a lot.

Your next question will come from the line of Shawn Harrison.

Hi, guys.

Hello, Shawn.

Just a few quick questions. I think you touched on this earlier on the call, but just what you're seeing in terms of higher raw materials cost within the components business, and just the ability to pass those through to customers in a rather quick fashion.

I'll pass it over to Joe.

It doesn't necessarily manifest itself in that kind of a situation. I think what you try to do, first, is through global sourcing activities, not have to pay those prices. Sometimes, you work with the customers on alternative solutions and you're able to get the right cost for the customer.

Certain cases, costs can be passed through if they make sense. That's what we've been able to -- the combination of both of those things. Plus the inventory velocity really is an advantage of being able to manage this situation. It's worked out so far pretty good.

Okay. My second question, just with the multi-media business being down 10% sequentially in the third quarter, what exactly happened there?

Well, I think if you look at historically, Shawn, that business is really hard to predict that business on a quarterly basis. If you look at it on a yearly basis that business going to be up for a year. But just if you look at the last three years, one quarter is up, one quarter is down. Just the nature, I guess, of our customer base.

I think it is more the nature of their business, but we do expect that business to be up in a Q4, Shawn.

And final question, just looking at the sequential gross margin improvement forecasted for the fourth quarter. How much of that is mix improvement with revenues holding stable versus restructuring savings? Versus just better returns from the components business?

I would say it's really better improvements. Definitely restructuring is continuing to help us, but I think it is just efficiencies that we implemented or implementing. I think those are things that we are counting right now. Then we are assuming that -- based everything we tell, revenue will be in that range. As long as it is in that range, I think we can improve the margins.

Okay. But you're not seeing -- ?

If revenue exceeds our forecast, then I expect our margins to improve at the higher rate.

Okay. Thank you.

Thanks, Sean.

Your next question will come from the line of William Stein.

Hey, Jure. First question is follow-up from someone else's on the growth of the communications and computing and storage. We saw some good growth there. Is any of that related to anything to anything new that is ramping in new customers or new programs?

Yes. Definitely. We had a couple of new programs in that group that helped us out. Yes. But we knew about them. We knew they were coming.

Okay. So -- (multiple speakers)

Its' hard to predict exactly what -- especially new program, what customers are going to take one quarter to another but, yes, there was an upside there.

And it's across several customers -- ?

It is more than one customer. That's correct.

Okay. And then the next question, maybe David can help me out. The depreciation I think came down $5 million in the quarter or thereabouts and I think that adds 30 [bps] to operating margin.

I think it was $1.5 million, Will.

Is that right?

Yes. That's what I indicated in my comments.

I thought it was $20.7 million. Is that right? I thought last quarter was $24.3 million.

Bear with me. It was $22.2 million last quarter. It was $20.7 million this quarter.

Maybe I'll go on to a different question then. Can you comment on the competitive situation now among the -- between Sanmina and the other global, maybe North American-based EMS providers versus the Taiwanese or China-focused providers. You have (inauble) Chinese labor law changes, oil obviously affecting transportation costs. Any of that have any meaningful impact on competition today?

Well, let me make a comment and I think Joe made a prepared comment. You -- and I'll pass it over to Joe. But I think today we compete globally. We changed our strategy two years ago and just finalized it now a few weeks ago. And now, we can strictly focus on our core business.

Our strategies is very simple, is to focus on our key markets where we have a competitive advantage. In worst case, equal. But the goal here is competitive advantage in the areas that we can compete with anybody in the world. I think today, our global infrastructure allows us to compete in China, Southeast Asia, Eastern Europe, Western Europe, North America. I think our footprint is in a good shape to focus on, like I said, on a key markets, key projects. In that area, we are going to be 100% focused.

We're not going to try to be everything for everybody. We're going to really be laser-focused on stuff that we're good at. And maybe I can turn it over to Joe, do you want to make any additional -- ?

Yes. What I would say is that customers are getting very concerned about freight and logistics costs. They're looking at Mexico, particularly if their markets are Europe and North America, they're looking very hard at that cost differential between say China and those areas. And the cost differential is starting to melt. Of course, the closer you get to home, the easier it is. A lot of the customers are seriously evaluating the situation.

I think we're going to see our competitors expanding in Mexico. We have a huge presence in Mexico. We have seen some of our competitors expanding already. It's going to be--I think Mexico is going to be very important for us. I think we're very, very well-positioned there with an infrastructure that has been there for a long time. Likewise, you can say the same thing about the footprint.

The footprint allows, depending where your markets are, it allows for lower transportation and logistics costs, particularly when you're doing some of these new product introductions. When a company first outsources its products, and does it at one of our NPI plants, they love to be very close. And then of course being able to do it in Mexico, really tightens the chain pretty well. I can't say we've seen a huge push at the current time, but I do think the customers are really looking at this very carefully.

If I add to that, again, really that for example in India, as we talked about earlier, we're really not going India today to manufacture and export. Really we're going to India to supply the local markets to our customers. One has to be local. I'll go when we're in India, we're an India company. We can service locally and give our customers a competitive advantage. Same thing in China. It's really being there for Chinese market. Of course, 5% of that business today has been exported from China, but I think in the future it will be more focused on the local markets.

Just a very quick follow-up. Joe, you mentioned 4% operating margin target. Tell me about the timing.

It is hard to comment on the timing. Because of the -- the margin improvements are going to come from the factories that the last questioner talked about. It's going to come from component and improvements with existing revenue. It's going to come from growth and revenue in the entire business. It is going to come from the benefit of some of the restructuring that's completed. A lot of it is going to be those three factors. What we have factored into the guidance is what you're seeing from a flattish outlook with improvements. Certainly improvements in revenue would enable us to drive markets higher.

Okay. Thank you.

Thanks. Operator we have one more--enough time for one more call. Question, sorry.

Okay. Sir, your final question will come from the line of Sherri Scribner.

Hi, Sherri. Save the best for the last.

Thank you. I just wanted to get a little more clarity on the strength in the enterprise and compute and storage segment. Was that primarily -- I know you talked about new deal wins and then just generally, new program wins. And then just generally, doing better in that segment. Would you say that is more heavily focused to the high-end compute side or to the storage side?

I don't know if I have real numbers of exactly from which, but let me just comment on that part of the business. We've been restructuring that type of business for a long time, getting out of the low-end type of a product. Of course, we got out of the PC business. Some of the customers there, that we are growing on, are a lot more focused-type of a customer that we look at long-term.

We just last quarter it seemed like majority enterprise computing customers were going in the right direction. We had a few that were not, but most of them were in the right direction. It's really hard to predict. Is that trend or what. As I said earlier, I think it's going to be flat-down in Q4.

Okay. That's helpful. And then in terms of the medical, it was a little bit weaker than I would have thought. I know that you guys have called that out at least a quarter before as being pretty strong. Was that more of a timing issue in terms of projects ramping? It sounds like that's going to improve this quarter? Or is there something else going on there?

To us, it's a mainly there -- the medical thing is a timing issue with some of the projects and major customers that we have. But, no, we are pretty bullish in the medical longer-term.

Okay. And then just one quick question for David on repurchasing the debt. I think last quarter you said you had plans to repurchase about another $100 million of debt. It looks like you did a little bit this quarter. But I wonder if you have still have plans to repurchase the additional debt.

Actually, we didn't purchase any debt this last quarter. We did at the beginning of the fiscal year talk about plans to retire debt. Our intentions haven't changed. There is two things--there is really one thing that has changed and that is the general economy that we're all functioning in today and uncertainties in terms of accessibility to capital markets if we need them. We are being a little bit more cautious. I would say that we have -- we could take out debt today. We've got plenty of cash to continue to do so. We could execute the plans that we talked about in the beginning of the year, but we're just being a little bit more cautious before we do that.

You're holding on to the cash until things maybe look a little bit better?

We are.

Okay. Thank you.

Thanks, Sherri. Well, if you got, again, any more questions, I apologize we could not fit in everything on this call. Give us a call. At the same time, we would like to say thanks again and thanks for your support.

Ladies and gentlemen, thank you for participating in today's Sanmina-SCI third quarter earnings conference call. You may now disconnect.