Sanmina Corp (SANM) 2009 Q1 法說會逐字稿

Good evening. I'll be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI first quarter fiscal 2009 earnings 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 call over to Jure Sola, CEO and Chairman of Sanmina-SCI Corporation. Sir, you may begin your conference.

Thanks. Good afternoon, ladies and gentlemen. This is Jure Sola. Welcome to Sanmina-SCI's first quarter 2009 conference call and again, thank you for being here. Joining me today on this conference call is Hari Pillai, President and Chief Operating Officer.

Good afternoon.

And David White, our Chief Financial Officer.

Good afternoon.

On today's agenda, we have first David White will review our financial results for the first quarter and also rest of the fiscal year 2009. I will follow with comments relative to Sanmina-SCI's results and future goals. Then Hari, David and I will open up for questions and answers and now here is David.

Thank you, Jure. Before I get started please note that selected portions of my remarks today are available in the form of a slide presentation accessible on the Internet through our Investor Relations section of our website at www.Sanmina-SCI.com. I'll be making references to these slides during the course of my remarks. Prior to discussing the state of our business and financial information with you, I'd 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 that such statements are just projections. The Company's actual results of operations may differ significantly as a result of various factors including the state of the economy, the economic conditions in the electronics industry, changes in customer requirements and sales volume, competition, technological change. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's most recent annual report on Form 10-K for the year-ended September 27, 2008, filed on November 24, 2008. This document contains and identifies important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You'll note in our press release issued today that we have provided you with a statement of operations for the three months ended December 27, 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 provided in the press release. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, loss on extinguishment of debt, non-cash stock based compensation expense, amortization expenses, and other infrequent or unusual items to the extent material. Any comments we make on this call as they relate to income statement measures will be directed to 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.

When comparing our first quarter fiscal 2009 results with prior periods our prior period results are based on the results of our continuing operations which excludes our personal computing business which we sold in fiscal 2008. My comments today will focus on 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 an overview of our Nortel exposure and finally I will conclude with comments regarding our plans for the second quarter of fiscal 2009 ending March 28, 2009.

Slide three. Revenue for the first quarter of fiscal 2009 was $1.42 billion which was approximately at the low end of our guidance, down 16.4% versus $1.7 billion in the prior quarter and down 19.9% versus $1.78 billion in the same period a year ago. As you'll see in my comments shortly, our quarter-over-quarter decrease in revenue was across all seven of our end markets. A fact that we largely attribute to a weakening global economy.

For the first quarter we reported a GAAP loss of approximately $25.3 million which equated to $0.05 per share. We reported a non-GAAP loss for the quarter of $0.8 million or $0.00 per share. This compares with $0.05 earnings per share in the prior quarter and $0.01 earnings per share in the same period a year ago.

Slide four. For the first quarter, our revenue by end market was as follows--The communications end market represented 43.0% of our net sales which in absolute dollar terms was down approximately 12.5% from last quarter. Enterprise computing and storage represented 16.1% of net sales during the quarter, sequentially this end market was down 26.6% in absolute dollar terms. The multimedia end market accounted for 14.7% of net sales during the quarter and was down 20.9% in absolute dollar terms versus the prior quarter. The medical end market which has historically been one of our stronger end markets accounted for 12.3% of net sales during the quarter and was also down approximately 7.1% in absolute dollar terms from the prior quarter. And finally, our industrial, semiconductor capital equipment, defense and aerospace and automotive end markets of our business collectively accounted for 13.9% of our net sales and in absolute dollar terms were down 16.8% relative to last quarter. The industrial, automotive, defense and aerospace segments were each down sequentially.

Slide five. Our top 10 customers accounted for 47% of total sales this quarter. Sales to our top 20 customers amounted to about 60% of total sales in the first quarter. We had no customers in the first quarter whose sales were greater than 10% of total sales.

Slide six and seven. Gross profit for the first quarter was $95.9 million, as a percentage of sales gross profit was 6.7% which was down approximately 110 basis points from the prior quarter largely as a result of the quarter-over-quarter decline we experienced in revenue. When compared to the same period a year ago, our gross margin was down approximately 70 basis points.

Operating expenses for the first quarter excluding stock compensation expenses were $64.7 million, down approximately $8.8 million quarter-over-quarter and down approximately $25.1 million versus the same period a year ago. These expenses have continued to trend downward over the last year as we have focused on reducing infrastructure costs. Operating income for the quarter was $31.2 million. Our operating margin was 2.2%, down approximately 130 basis points quarter-over-quarter and down 10 basis points on a year-over-year basis.

I think it's worth mentioning that while our revenue is down approximately 20% year-over-year, we have managed to largely hold our operating margins. As a result of concerted actions we have taken over the last year and our global operations and administration functions to reduce waste, to take further advantage of our low cost footprint, and to improve our operating efficiencies and effectiveness. We expect to realize additional improvements as we take further actions over the balance of this year. As such time as when the global economy stabilizes, improves, we expect to emerge as a much stronger, leaner, and more profitable business.

Net interest and other expense, which consists primarily of interest income and expense as well as gains and losses from foreign currency translation was $30.2 million versus $29.8 million in the prior quarter. Net interest and other expense in the same period a year ago was $31.5 million. Depreciation was $20.5 million for the first quarter and was relatively consistent with the prior quarter. Our EBITDA for the quarter was $52 million. Our tax provision for the first quarter was an expense of $1.8 million on pre-tax non-GAAP earnings of $1 million. At this level of pre-tax earnings, tax inefficiencies across all of our operating jurisdictions render a tax calculation irrelevant. As I have indicated in previous calls we continue to pursue our global realignment program which has already produced substantial savings to the Company and is expected to further reduce our effective taxes paid over the course of the next year.

Slide eight and nine. Turning to the balance sheet. Accounts receivable at the end of the quarter were $892 million. While we have a $250 million facility for factoring trade receivables there were no amounts drawn against that facility quarter end. Our DSOs for the quarter were approximately 56 days which was up approximately 3.8 days from the prior quarter. DSOs were unfavorably impacted during the quarter as a result of the early timing of our quarter end cut-off which fell in the week of Christmas compounded by the fact that many of our customers were shut down during this period and wound up paying us in the following week. We view these late in the quarter miss collections as timing related issues that are self-correcting and not anticipated to repeat in the second quarter.

Inventories at the end of the quarter were approximately $784 million, down $29 million quarter-over-quarter. Inventory days at quarter end were 54 days or 6.8 turns versus 47 days or 7.7 turns in the prior quarter. While on an absolute dollar basis our inventory was down quarter-over-quarter we would normally have expected a much more substantial quarter-over-quarter reduction as a result of our reduced revenue. Two factors contributed to this--First of all we were unable to cancel or reschedule planned raw material receipts in time to match the rate and magnitude of which our customers were revising and pushing out their demand and secondly, we also experienced a number of customer directed end of quarter push outs. We expect this issue to be self-correcting as well, and are accordingly targeting significant inventory reductions in the second quarter.

Net capital expenditures in the quarter amounted to approximately $28 million. Accounts payable at the end of the quarter were $782 million, which equated to AP days of approximately 54, an improvement of 1.1 days versus the prior quarter. Overall, our operating cash cycle for the first quarter which we define as unfactored or gross cash cycle days was approximately 57 days compared to 47 days in the prior quarter. As a result of the receivables and inventory challenges we faced in the quarter our free cash flow which we define as GAAP cash flow from operations which was a use of $11 million in the quarter, less cash flow from investing activities which was also a use of $28 million, and excluding the impact of any receivables factoring which at fiscal 2000 year-end was $16 million was a negative $23 million.

In addition to these free cash flow figures, we had additional items that negatively affected our total cash flow for the quarter which collectively amounted to approximately $50 million associated with our stock repurchase activity, the collateralization of certain hedging instruments and the impact of not carrying over the factoring we had outstanding at the end of the fourth quarter.

Cash and short-term investments at the end of the quarter were approximately $797 million. Our debt at the end of the first quarter was $1.49 billion which was relatively flat with the prior quarter. Our earliest debt maturity is $180 million which is due in June 2010. Our next debt maturity thereafter isn't until 2013. During the first quarter, we closed a new five year, $135 million credit facility. There were no borrowings against that facility at quarter end.

In concluding my remarks about the balance sheet let me make a few comments about our exposure to Nortel as a result of their recent petitions for reorganization under bankruptcy law. As many of you know we have had a longstanding relationship with Nortel covering many years. We're supportive of their efforts to restructure their Company and are working with them to ensure their success while at the same time minimizing our economic exposure. We have concluded a preliminary analysis of our global balance sheet position with Nortel as of their filing date and currently believe that much of our exposure will either receive administrative or reclamation claim priority in the US or with Nortel entities that are not planned for bankruptcy reorganization. As such our current gross exposure is estimated at approximately $20 million. Notwithstanding the fact that there's a great deal of uncertainty as to how this bankruptcy will progress and ultimately conclude, we recorded $10 million of charges in the quarter as a reserve against this exposure. This charge was excluded from our non-GAAP results due to the magnitude and extraordinary nature of this item. Obviously we will be doing everything we can to reduce this exposure but should circumstances surrounding Nortel's bankruptcy reorganization proceedings come to light and materially change these estimates we may record additional charges or credits.

Let me now comment on restructuring. During the first quarter, we incurred $9.2 million in restructuring expenses. This expense primarily related to reductions in force associated with the announced closure of facilities in North America as well as restructuring of various corporate functions. Actual cash payments relating to previously accrued restructuring actions amounted to approximately $17 million in the quarter.

Slide 10. Now let me address our plans for the second quarter of fiscal 2009. Given the current uncertainty in the global economy and the specific end markets we serve, it is particularly difficult during these economic times to place meaningful ranges around some of our financial targets with any high degree of confidence. Consequently we are temporarily suspending our historical practice of providing guidance. Instead we'll provide you with point estimates as to our internal targets that we are operating the Company towards. As typical, this information is presented on a non-GAAP basis consistent with our past practices.

Our internal targets for the second quarter are approximately revenue of $1.3 billion, gross margins of 6.9%, operating expenses of approximately $60 million, and net income to be breakeven and our free cash flow to be positive. Basic and diluted shares for the second quarter are expected to be about 510 million, excluding the repurchase of any outstanding stock. We estimate the depreciation for the second quarter will be approximately $20 million relatively consistent with last quarter and second quarter capital expenditures to be in the range of $20 million driven primarily by our expansion activities in India. This concludes my remarks. I want to thank you for your time and with that I'll turn the time back over to you, Jure.

Thank you, David. Again, good afternoon, ladies and gentlemen. As you can see from our earnings release and financial overview from David, we are still operating a very difficult economic or global environment. We are continuing to experience weak demand and limited visibility across all our markets and also global regions; however, as David said, revenue was $1.42 billion and basically non-GAAP breakeven. Make a few comments there.

This quarter, our work and coordination across our global operations. During the quarter we had to reset our cost base down to lower demand. Sanmina-SCI has sufficient cost structure in place but we have to do a lot more, take some additional steps and most importantly, we have to move quickly. Unfortunately, we have to implement additional layoffs worldwide, which was approximately 10%. We did reorganize our operations under one global management, introduced working sharing program. What that means, we reduced hours worked to our employees, asked our employees to take vacations, have shut down during the holidays. I can tell you the Company did a great job adjusting this operational and OpEx cost for the quarter, especially in this difficult environment plus the holidays.

Now let's talk about our outlook for the March quarter, just to add a few things to what David said. Basically, it's our second quarter fiscal year 2009. At this time as David said, we cannot give you guidance as we did in the past for the second quarter. Again demand reason today, just very limited visibility and forecasting the future is difficult. But we want to share some of our internal goals with you. Based on what we see today, our internal targets are approximately $1.3 billion breakeven and hopefully make a buck. The key here is to generate cash. We are driving it higher but we definitely believe we should generate at least $70 million plus for this quarter and we'll continue to drive our cost down.

Some of the steps that we are taking now, let me share that with you for the second quarter. We reduced salaries for the CEO, that's me, and the President, Chief Operating Officer, by 20%. Other corporate executives we ask them to reduce to 10% which they agreed. We also are forcing time off for all our employees around the world with no pay for minimum of two weeks per quarter. Vacation can be used against this also. Some additional staffing reductions will continue around the world as we tune up to present demand. Again, these actions continue to be reviewed weekly because in this environment, you just can't wait for next month. You got to do it on a daily basis. The key here is continue to reset our OpEx cost. I think we did a reasonable good job last quarter, we brought it down to about $65 million, if you compare that to a year ago that was about $90 million and down from the fourth quarter of the $74 million. We're going to continue to drive OpEx costs down. We do expect to drive that cost down at least additional 5 to 10% in this coming quarter.

Now, these actions will be very difficult for many of our employees and we understand that and believe me, we are very sensitive to our employees needs out there but I can tell you that our employees understand these challenging times. They are very focused doing their part to help the present situation and we are getting the great support from our employees and I'm going to take this opportunity to thank them for their sacrifice, help, and support.

Again, as we implemented these measures, the key is to balance between our interest of shareholders, customers, employees, and I think we did a good job reviewing all three of those.

Now let's talk about our future and market opportunities. As you'll probably know, most of our customers around the world experiencing tough times and of course, this affects our Company and our industry but we believe that Sanmina-SCI has a foundation to weather these difficult times. We have seen this before. We have experience and the Company is prepared to face this type of difficult economic environment. Sanmina-SCI is a financially strong Company with a strong cash position approximately $800 million, adequate liquidity approximately $1.2 billion and we are in a good position with the debt maturity profile as David mentioned a few minutes ago. And also Sanmina-SCI's fundamental business strategy remains intact. We have dedicated a seasoned management team that is committed for a long term success of our Company. Operationally, execution is excellent. There's no major issues and most importantly, our customers satisfaction is high and this is very important in this environment.

So what else are we doing in this environment? More than ever before, we are focused to drive our operating efficiencies and continue to provide superior service to our customers, because we are manufacturing Company, that's the value that we have, but we also focus on our long term opportunities. We are focused on the future and if you look at our fundamentals, they still look positive. We continue to invest to improve our technical leadership and help us renew programs, new markets and customers. During this time we're very focused on business development and building a stronger relationship with our key customers. New outsourcing opportunities still remains strong as our customers are looking to reduce expenses. Believe it or not, we're still getting new projects and new customers. Actually, Q1, we won approximately $210 million of new jobs. These opportunities are all shippable in the next 9 to 12 months and also the good thing about this is that half of the customers were new customers.

So the question that we kind of ask around ourselves here is this the bottom of the cycle? When is this going to end? It's still hard to predict. The global financial crisis had a major impact of the global economy and it's a lot worse than what we previously thought, but on a positive side, inventories are very low at our customer site and I believe in their customers, so again, is the March quarter going to be at bottom? At this time, we don't know, but we are taking conservative approach to this but also I can tell you there's some positive signs out there from some of our customers that maybe the bottom is nearing.

So in summary, we are resetting the cost to meet the present demand. That is the main focus right now in the short-term. Stay profitable, focus on customer satisfaction, generate positive cash flow, for fiscal year 2009 we still expect to generate approximately $200 million plus of cash. We are ready to navigate through this difficult global economic crisis and again, we'll continue to right size the Company to present business conditions but keep it strong, capable and ready for growth when demand returns. And if you look at our long term fundamentals, they still remain positive. So with that, I would like to say thank you to our investors and analysts for participating in 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? Now we are ready to open these lines for questions and answers. Thank you, again.

(Operator Instructions). Your first question comes from the line of Steven Fox with Banc of America.

Hi, good afternoon, Jure. A couple of questions. First of all just looking at what you're talking about the potential for gross margins next quarter. Just understand better on roughly a slight decline in sales you're talking about roughly a 20 basis point improvement in gross margins. Can you just explain how that's going to happen and then as part of that, I guess I'm a little concerned about what's happening on the printed circuit board side in terms of pricing pressure, so can you put your thoughts around what's going to happen in pricing and especially in the March quarter?

Okay. Well, first of all, as we all know, sometimes the last couple weeks of September and it got really bad and then things were starting to kind of level off early November time and then just things didn't get better. What we did in early October is said, hey, this thing is going to get pretty bad unless we have so take some cost out and that's really one of the main reasons that our margins will improve. We are actually taking cost out to really bring the Company down to present demand cost wise, and when it comes to the pricing, actually what we seen from pricing so far that's holding. At the same time there's certain components we're able to get a little bit cheaper today than maybe what we paid six months ago, so that's helping out.

Question on printed circuit board, Steve, similar thing. I think our circuit board, it's similarly down to the rest of the business, as you know, to do assembly unit repair board but I would say that our circuit board operations are holding their own. They had to adjust their cost. They are staying profitable and we're really focusing there and expanding new technology and on a positive side there, they are doing a lot of R&D, a lot of new programs except the volume is not there. Pricing on printed circuit boards I would say so far what we've seen is stable.

Okay, and then just on the OpEx side, it looks like you reacted during the quarter with some expense actions. Are there other things you could do beyond what you mentioned if say demand continues to be weaker than you're thinking?

Well, yes. I mean, we are preparing our OpEx down to make sure we look at the worst case situation here. I mean as you know, we've been bringing our OpEx down, resizing this Company to what we call internally lean and mean and the key here is as we do this, make sure that we don't cut into the muscle of the Company and I think we can still bring some of that down. As David mentioned, OpEx should be under $60 million but I think if the things don't get better, then we should be able to move them down at least additional, maybe 5% plus a quarter or so minimum.

Okay, thank you.

Thanks.

Your next question comes from the line of Brian White with Collins Stewart.

Hello, Brian.

When we look at the computing market in the December quarter, it was down about 27% sequentially. I'm just curious, was there any lost market share or is that really just driven by the weakness in the market?

Best as I know, Brian, this is Jure, and I pay a lot of attention to the details of every customer we have. This is strictly driven by the demand.

Okay, and when we look into the March quarter, what markets do you expect to be the weakest?

Well, I mean, let's talk about which one is the strongest. If I just look at the medical, medical last quarter we only had one customer that was down so they did some movement so I would say the medical market is probably holding decent and our defense market is also holding decent and some industrial. I think the rest of the markets continue to be weak.

Okay, but what do you think will be worse, the telecom side or the computing side in the March quarter?

To be honest with you, right now, it's hard for me to predict because this situation has been going on the last few months. It's a new territory for us to be able to really predict something that means to you or anybody else listening.

Okay and Jure, how big is Nortel as a percentage of revenue?

Well, Nortel for us is not a huge customer. We are in the midst of rebuilding that relationship with Nortel and we are growing the business back on some of the newer programs, and unfortunately, this is going on right now. We are going to work with them to help them out. They've been very open and honest with us. This is not something that I'm sure they don't like to do but it's a necessary part of the business that for them to get stronger in the future and I assure them that Sanmina-SCI will do everything we can to help them to pull out of the Chapter 11 and get back to the normal. So we have a lot of respect for those people. We have good relationship and that's all I can tell. It's a tough time for them and we'll help them out and I hope and I know they are dedicated. They will find a way to pull out.

Right, but how big are they, Jure?

Well, it's a couple hundred million dollars a year for us because they knew we were planning this year.

Okay, thank you.

Yes.

Your next question comes from the line of Jim Suva with Citigroup.

Thanks very much. Jure, can you talk a little bit about have you seen any of your customers start to in source as they try to take care of their employees and their factory utilization? And also, if they did, would you even be able to see that as opposed to distinguishing that from a lack of follow-on orders?

Well, most of our, Jim, most of our customers that I have are really don't have internal manufacturing, so we really have not seen that. If anything, we've seen opposites, that a lot of our customers that were doing some stuff internally especially in a final system, assembly and logistics, that they are, they are going out to do some of that. I mean, there was a rumor that one of our customers was moving internally but I don't know where that rumor is coming from. The projects that we are involved in, that's not the case. I know they have manufacturing in China but so far if anything as I said earlier, we see more opportunities where customers are looking for us to do more.

And as a follow-up maybe can you talk about your customers looking for a little bit more favorable terms seeing how everyone has to experience this down cycle?

Well, in this industry, Jim, I mean we've been given really good terms to our customers for a long time, and not just as Sanmina-SCI, but a whole industry. I think some customers of course are asking more but most of the relationship that we have really nothing changed. It's really more now in both sides, we both understand that we got to help each other. I think our customers have been very loyal. They understand that they have these forecasts and we go out there and buy this material and they not take it and they know this is a big impact on us, so if anything, we are doing right now a lot more favors to our customer than our customers are doing it to us, but I got to be fair that our customers have been very sensitive. I personally talk to a lot of the key ones and the relationships have been pretty strong.

Okay and a follow-up question for Dave. Is there anything on the balance sheet that maybe may not hold sufficient water for book value whether it's some deferred tax assets, inventories, accounts receivable, PP& E are aging of receivables stretching out or something like that? Because I know you wrote off basically almost all your goodwill if I interpret the SEC filings correctly but are there some inventories at risk, are the receivables starting to be elongated, surely Nortel is not the only Company in financial duress at this time?

Well, if you kind of go up and down our balance sheet as you correctly stated our goodwill has completely been written off so there's really nothing from that standpoint. From an inventory standpoint we monitor our inventory very very regularly as to what customer demand we have against the inventory and what is our excess position against those demand windows that they've given us and right now, we don't see anything really changing there substantially in one direction or another. In fact actually, if you look at the trends as we've been reducing inventory over the last year or so, we've actually been reducing the amount of our excess position and actually improving our position and we don't see that reversing right now.

On the receivable side with customers, Nortel is the one that certainly stands out because of their recent filing, but we are continuing to monitor that as well. We've had a very good history in the past of not having bad debt write-offs. We've been very fortunate but we think we've also tried planning a lot of these fairly carefully so as to avoid those kinds of exposures. So I think at the end of the day I don't think I would say that we're under any kind of balance sheet exposure today that has changed materially from what we've seen over the last year or two.

Great. Thank you very much, gentlemen.

Thanks, Jim.

Your next question comes from the line of William Stein with Credit Suisse.

Hello, Will.

Hi, Jure. First, wondering if you can talk about the pushes that you discussed, you said at the end of the quarter some customers pushed orders. Can you talk about maybe the sizing and whether any of those customers took that product now that we're a bit into the first month here?

Yes, well, we had approximately, if you just let me just go a little bit more specific, basically a few weeks before the quarter, two weeks before, actually, what? The 27th of September, so we kind of ended before the most of our customers so that also kind of hurt us a little bit this year so a couple weeks before the quarter as we review these things on a basically daily/weekly basis, I remember Hari and I talked about it and we were really expecting to ship additional minimal at that time additional $75 million plus and we were hoping to almost last day and then things got pushed out. As David mentioned, most of that stuff had already been shipped to our customer in January.

Most of that $75 million has already been shipped?

That's correct.

Okay. Can, maybe David for you, can you talk a bit about any maintenance covenants that are on now and how you feel you're performing versus those?

Well, we really don't have any maintenance covenants to speak of, particularly financial maintenance covenants. We have, previously had a revolver that revolving line of credit which we renewed or replaced I guess in the quarter but we don't have any maintenance financial covenants like leverage ratios and so fourth. We do have certain negative covenants that we can't pay dividends and things of that nature but those aren't real problems for us. We also have incurrence covenants which means if we want to go out and incur new debt, we would have to pass certain requirements but from a maintenance standpoint we really don't have any outstanding.

And just quickly also, the cash on the balance sheet, is that mostly outside the US or any problem getting that here, or is that in the US? Any comments on that would be helpful.

Probably most of it is outside the US today but if you also look at our Company and the way we're structured today, most of our cash requirements for financing our business are outside the United States. We are, as I indicated in my comments, we are going through a global realignment right now which is going to change some of that but we have probably the healthiest US cash balances that we've had in at least the four years I've been with the Company.

But so the operations mostly outside of the US but the debt is all--?

The debt is all here.

Okay. Just one more quick one. On the 2009 goals, is that essentially a roll up of your customer forecast? Is there a big hair cut to that? How can we think about that goal relative to maybe what your customers are telling you what you see in the forecast?

Well, really right now the only thing that we are targeting this next quarter, that's really based on the forecast that we have from our customers and then based on experience and we kind of reduced by certain percentages and go back and fourth, so at this time it's really hard to forecast. I think as I said earlier, I think the key for us right now is what we are focused internally is making sure we bring the cost down to meet present demand, so we really are resizing the Company to death and I think we are doing a good job there and as we said earlier, you're going to see our margins kind of going up.

So we just at the same time, we are investing in the right technology, especially some of our components technology, some that we are today and one global IT system we focus more on that giving our customer better solution when it comes to the global logistic delivering the product as they need it and because some of our customers now are starting to give us more in the final system assembly so that's the area that we are really kind of investing in. And the key for us, we've seen this before. The key is to be well positioned and lean so when the market comes around, that we're going to have a big leverage in the future.

Okay, great. Thank you.

Thanks.

Your next question comes from the line of [Joe Wheaton] with Longbow Research.

Hello, Joe.

Hi. Most of my questions have been answered. I was hoping you could maybe talk about utilization right now, as far as what happened to utilization during the quarter. I think last time around, you mentioned components was at about 75%.

Yes.

And the (inaudible) business was about 70%.

Okay, well let me after Joe, just to give you some numbers, after bringing the cost down and we had a major lay off the last three months, as I mentioned earlier, we're down about 10% of our people and we are continuing to tune things up. Right now we're at the level where we are just tuning up and that's why we are asking people to take some time off so we can preserve the experience and strength so when things come back, we're okay. So if you look at the base on people, today our capacity utilization is about 85 to 90%. In other words strictly based on people but if you base it on equipment it's about 65% total Company and based on space about 60. We are designed to always have a little bit extra space so that when the market comes back, you only have equipment and people.

Okay, and with that spare space, I'm assuming the industry is seeing some of the same things, kind of an industry related follow-up. Are you seeing consolidation out there in the industry and any particular geography?

We are really not focused on that. I think we are focused on what we think is the best thing for our Company and really we have the right customer base and our goal here is to, in short-term there's nothing you can do no matter how much consolidation you do, you're going to have issues, the business is not there so is it more work than benefit. I think the long term, we have to look at your Company, how well you position, what markets you're going to. We did change our strategy not to chase consumer type of product but to go into the more medical, defense and high end technology type of product where we believe we have a competitive advantage providing the total solution, so that's yes, we are a smaller Company today, but the goal for us is to make sure that we're going to focus more on technology and agility and I believe there's room for our type of Company to grow.

Now, we are also looking to other opportunities. How do we know in this environment there's a lot of opportunities to pick up some of the other companies that can help us be a better Company together, so this is a time to position yourself for growth. We've seen this before and if I look at our history in tough times, that's really where Sanmina-SCI actually did the best job preparing itself and then growing again when the market came around so that's basically what we are doing today. This is not the time to panic. We aren't panicking. We are just understanding what the real world is and focusing on the real world.

All right, and then lastly, I was just hoping to get an update from you on the share repurchase program, if shares were repurchased during the quarter like you thought and I think you mentioned last time there was $10 million covenant that was allowable under one of the--?

Let me turn it over to David and he can give you more details but we did spend, David will give you the number but we'll continue to purchase shares starting a couple days from now. David?

Yes, so, the $10 million you are correct on that covenant, that covenant got lifted though, however, or terminated when we replaced our previous bank facility, so today our limitation is $50 million, but if you look at what we did, we had a limited window to repurchase shares during the quarter because of a blackout period and so forth so we only effectively were in the market for a period of about four weeks and then we're also subject to limitations in terms of how much we can purchase at any given day unless it's done in a blocked rate. So during the quarter we purchased about 21 million shares, at a purchase cost of about $11.6 million. So at about an average of $0.54 a share.

David, just one more kind of housekeeping question. You'd mentioned a $60 million SG&A or fixed cost target rather for the March quarter. Does that include R&D costs?

Yes, that's the total operating expenses.

Okay, thanks a lot.

Thanks, Joe.

Your next question comes from the line of Jimmy Kim with RBC Capital Markets.

Hello, Jimmy.

Hi. A couple quick questions for you. In light of what happened with Nortel, what kind of measures are you taking to protect yourself, if more of your customers get into trouble?

I'll pass that over to my CFO.

So we have been doing a number of reviews in the Company. Certainly, customer risk is one thing that we look at. We also look at counterparty risk as it relates to foreign exchange hedges, our insurance programs, so we have been canvassing a lot of our third party relationships making sure that those third parties have the ability to fulfill their obligations to us. As it relates to our customers, we've done the same thing there. We have had reviews. We've had additional tightening you might say in terms of our past due escalation processes so that we are more expedient to raise the flag when we potentially have issues so we don't allow them to go beyond certain numbers of days and we are having executive reviews of what those exposures are and trying to stay in close contact with those customers as to what their financial strength and so forth is. So today it hasn't necessarily changed any of our terms and conditions for those customers per se as much as it's changed how responsive we're trying to be to perceive changes in their conditions and changes in kind of payment habits, those kinds of things and so far, we've really not seen, notwithstanding some of the issues we had during the shut down at the end of the quarter, we've really not seen any significant issues otherwise.

And I mean, is there any sort of industry or end market that you're more concerned with than others?

I don't think it's an end market exposure. I think there's strong and weak players in every end market we participate in and so I don't think that necessarily would define it.

I see. How about terms with your suppliers? Are they getting tougher on you or is that kind of remaining the same?

Well, I think, this is Jure. I think when it comes to suppliers, these are suppliers we use all the time and we are the fastest in the industry so we take care of our suppliers, we pay them, and we have a good relationship so it's just like a customer. You build that relationship long term, you can't just think short-term. As David said, there's companies that are very healthy and they are a lot healthier in this type of environment than they were in last recession and there's also some players out there that you have to be very careful and watch but same thing with suppliers because we analyze our suppliers in details because to making sure they are going to be around for a long time and I can tell you the most of suppliers will be around. Again it's a similar thing. Certain suppliers are very financially strong and there's certain suppliers that are struggling a little bit in this environment.

I see. Thank you very much.

Thanks, Jimmy.

Your next question comes from the line of Alex Blanton with Ingalls & Snyder.

Hello, Alex.

Hi, good afternoon.

Good afternoon.

Well, back to Nortel, there have been questions on this call indicating a feeling among participants that you're getting squeezed between the OEMs and the suppliers. Are your customers getting tough on you? Or are your suppliers getting tough on you, but I'd like to refer to a Reuters. story that came out. You can find it under the Flex thread on Yahoo!, but it provides a different perspective because it quotes quite a well known telecom equipment analyst who follows Nortel for an independent research house now saying that Nortel, the title is, Nortel faces squeeze as key supplier pulls back. And it says that, referring to Flextronics that Nortel is almost totally dependent on Flextronics, they have got to keep Flextronics relatively happy or they don't have any product anymore. Nortels options appear restricted. They can't really shift, he's pointing out to another supplier easily very costly for the major part of their business. Some of that of course has already shifted because Flextronics and Nortel agreed to reduce their mutual exposure by shifting some business to others including yourself but the point here is that this analyst, whose not an EMS analyst but an equipment analyst, OEM analyst is saying that hey, these people now that they've outsourced everything and don't have any plants, they are totally dependent upon suppliers like Flextronics, so my question to you is how accurate is this perception? I mean it's totally different than what investors seem to be thinking widely that you and others in the EMS business are totally subject to whatever these OEMs want to do. It doesn't appear to me that that is the case so would you comment on that?

Well, Alex definitely that's not the case. First of all, any good customer needs a great supplier, okay? Once you have, once the customer has a great supplier, they are 100% dependent on them and it's very expensive to change, so it's really a mutual relationship. I can't comment too much about Nortel and Flex, but I'm just going to say just like any other supplier, of course, if Nortel needs the product or Flex or Sanmina delivers or somebody else, they are going to treat, they have to treat them right. Otherwise they can't get the product. It's a two way street, so definitely nobody puts a gun to our head so I think yes, some analysts are asking the questions but I don't think they understand the relationship that we have with our customer. This is a long term relationship and I can tell you my customers are very loyal. Yes, there's always challenges, the cost cost cost because of end market is tough but end of the day there's always a respect and everybody is looking at the long term success relationship. It's not a two way street here, where both players are successful, it usually doesn't work, Alex and yes, there's a few customers out there but usually you get either those customers as soon as you find out that's how they operate.

Now, thank you. Earlier, you mentioned that there was a rumor that one of the OEMs was pulling stuff back in house. I believe you were referring to Alcatel.

Well, there was an article written of that, yes.

Yes. Of course, they are in a little different situation. They are in France where labor unions are very strong and they would really have to pull back some stuff into their plants even though it's more costly; isn't that correct?

Yes, but let me put it this way. That article was not accurate. I don't even know who wrote that article so I'm not bias here at all but I heard about it. It's not accurate. Of course, some of our customers move the product in and out, but they did not effect all of the suppliers. I know it didn't affect us, so let's leave it at that. And again, guys, it's a tough environment out there. Good suppliers will have a long term relationship with their customers. If you talk to our top customers, or you talk to Cisco, talk to IBM, talk HP, talk to even Nortel, talk to Alcatel, talk to Nokia, they want the suppliers. They need us just as bad as we need them.

We save so much money to our customers that I'm telling you, in this environment a lot of our customers would be hurting a lot more if they didn't have outsourcing, so outsourcing is the right solution. We are starting to see it today. Some of the customers are doing internally, they are putting the plants and going to outsource more to us. I think we as an industry made some mistakes in past. We overexpanded it, we went out there and bought a lot of businesses but I think we learned a lesson as an industry and I can tell you, Sanmina learned a lesson and our whole focus here is having the right customer and the customer that we can have a profitable long term relationship.

Well, yes. It would seem that if they don't use your low cost services they won't have business in the long term anyway?

Right.

Okay. One final thing. Did you say $400 million is what you plan to do with Nortel this year?

No, no, that's not what I said. If you look at our run rate for next year in 2009 we're planning about $200 million in that number is not even there yet. I mean, we're starting to develop relationship and again, we known these guys for many years. We'll do everything humanly possible to help them out and it's a two way street, even in these type of circumstances you have to treat them right and help them out.

And is there a possibility that given they're in bankruptcy that you could keep your inventory exposure low by doing the business on a consignment basis? Would you do that?

Well, that's the only way you're going to do it. No matter who does the business with the Company that is going through this stuff, any business in the future has to be guaranteed by cash somehow.

Actually if I could just interject a comment there. In US, at least as far as their US bankruptcy is concerned, according to the US law, bankruptcy law, any work that's done within post of filing date has administrative priority so it's going to get served or just paid, as the first obligation they've got in the priority list. So you're actually safer working with them after bankruptcy than you are before, and they've got $2 billion of cash so I don't think there's a problem with paying those administrative claims.

Yes, but what I'm saying is you could reduce your inventory exposure by doing it in consignment. Would you do that?

Of course, but that's the goal here as David said, you look at our total exposure, the goal is to, we are working with them and to cut it down and they need the products. On a positive side with us, everything that we have, Nortel needs it. And we'll work with them and create a win for them, a win for us. Nobody wants to hurt anybody here.

Thank you.

Thank you, Alex. Operator? We have time for one more question and for those of you that were not able to get to please give us a call so we can answer any questions you might have. So one more question. Go ahead, operator.

Your final question will come from the line of Sean Hannan with Needham & Company.

Yes, thank you.

Hi, Sean.

Hi, Jure.

How are you?

Hanging in there.

That's good.

So you had some comments around the new business, roughly about $210 million of your business to ramp over the next 9 to 12 months. Just wanted to see if I could get a sense of where the focus was from a customer standpoint, of that new business that was won? Was there a dominant theme whether it be medical or computing or what have you? Is there a way to provide a little bit of--?

Well, for us it was really across the industry, the medical, defense, communications, it was a majority of it and like I said half of those customers that we got there were all new customers. Medical we had three customers, new customers there, so some of these things are not just (inaudible) for this year. These are the programs that should gear up for multiple years and hopefully be better, so customers are still developing the products. It's not end of the world. If you look at the health of our customers today comparing to 2001, 2002, 2003, most of our customers are in better health, and they have a lot more cash today than they had at that time. So it's not end of the world. I think the most important for us is how well do we bring the cost down to the present level of the business, forget about what happened yesterday, start dreaming about all of the demand that we had a few years ago or a few months ago. You got to focus on today and I think the companies that do that will come out of this fine and I expect Sanmina-SCI to come out of this fine.

Now, the new customers though, being half of that group, is that equally represented in these different categories that you're providing services into?

At this time, I don't have--?

Don't have that detail. That's fine.

But I'll just give an example. I'm just looking at my notes here as I prepare for this call. Medical customer with three customers, new customers that we won last quarter, these are the customers we work a long time and in the medical industry it takes a long time to develop so these are the programs not just for today but for multiple years from now.

That's fine. If you had the color it would have been great but that's fine. For the medical customer that was down in the quarter. Was that Medtronic?

We never make any comments on a customer.

So is there a way to provide a little bit of color in terms of just the overall group for your components in closures, boards, etc. Where that stands today from a profitability standpoint?

Okay. Well, what we did because to reduce the costs and look at the efficiencies, we resize the Company and we put everything under the one management starting this quarter, okay? So the components are not run like they were run let's say last year. We spread them around, we combined them with other businesses in different regions of the world to bring the costs and efficiency up. We looked at what worked, what didn't work and what really went with the better system that we think is going to help us out but overall if you put them as a group, they were profitable, but the demand down, with that stuff is just as bad as the rest of the stuff.

Okay, and you took a lot of costs out in this December quarter. Of course assuming that there was a representative amount of costs that were pulled out of the components piece as well, is there a way to provide a little bit of color around what some of the actions were taken within that group and what we can maybe expect for the next quarter?

Well, let me just give you a couple things we mentioned last quarter we said we were going to be tuning some of the operations and we announced that we have enclosure operations in Toronto, we announced that we're going to move that business to Mexico, most of it will go to Mexico, some will come here in our new product introduction factory in California and then we have another factory assembly factory in Canada. We have two factories in Canada that we announced to, we're going to combine them as one factory, so we are doing some of the stuff like that across all our businesses to tune it up, bring the cost down and just to make sure that these operations don't lose money.

And so the plans, basically within I guess kind of the internal targets that you have for the March quarter, is this based on actions or announcements that have already been made or should we be expecting new announcements?

No, no, actions for all these things that we just talked about for this quarter are already made. Of course additional stuff as I said earlier, we are forcing some people to take a vacation or time off for two weeks per quarter. We reduce the executive salary this quarter that I just talked about, but we'll continue to tune things up. In this environment, we're going to, because we don't know what's going to happen tomorrow so you have to be ready for the worst case scenario, but everything that we did already, we believe will allow us to do what we said.

Okay, that's very helpful. Thank you.

Thanks, Sean. Well, ladies and gentlemen, thanks for spending time with us the last hour. I apologize if we didn't answer all of the questions but we are available any of us so give us a call and we'll definitely get back to you. Thanks for your support. Bye-bye.

That concludes this evenings teleconference. You may now disconnect.