Sanmina Corp (SANM) 2009 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI third quarter fiscal 2009 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.

Ms. Bombino, you may begin your conference.

Thank you, Kara. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's third quarter earnings call. Today's call is being recorded, and is posted along with a copy of the earnings release and a slide presentation on the quarter at www.sanmina-SCI.com in the investor relations section. You can follow along with our prepared remarks in the slide posted on our website.

Please turn to page two, the Safe Harbor statement. 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 operation may differ significantly as a result of various factors, including the state of the economy, economic conditions in the electronics industry, changes in our customer requirements and sales volume, competition and technological change.

We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's most recent report on form 10-Q for the quarter ended March 28, 2009, and its most recent annual report filed on form 10-K for the year ended September 27, 2008. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You'll note in the press release issued today that we have provided you with a statement of operations for the three and nine months ended June 27, 2009, 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 and is posted on our website.

In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, gains or losses of 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 the 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.

I would now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Thanks, Paige. Good afternoon, ladies and gentlemen, again, welcome. Thank you for being here today. Joining me in this conference call is Todd Schull, our Senior Vice President, Corporate Controller and our acting CFO. Also typically I have our President joining us but he had to do a jury duty today, so unfortunately he won't be able to be here with us.

On the agenda today, Todd Schull will review our financial results for the third quarter of fiscal year 2009, then I will follow additional comments relative to Sanmina-SCI's results and future goals. Then Todd and I will open for questions and answers.

And now I would like to turn the call over to Todd.

Thank you, Jure, and good afternoon, everyone. Please turn to slide three. At our last earnings call, we stated that we were beginning to see some stability in the demand for our services. This improvement was reflected in the financial outlook we provided, which called for stable to modest increases on the top line and improvements in all our financial metrics. As you can see, we successfully accomplished those objectives.

Please turn to slide four. Revenue for the third quarter of fiscal 2009 was $1.21 billion, an increase of $14 million versus revenue reported in the second quarter, and essentially at the midpoint of our outlook. Jure will discuss our revenue in more details during his comments later.

For the third quarter, we reported a GAAP loss of approximately $41.1 million, which equated to a loss of $0.09 per share. We reported a non-GAAP loss for the quarter of $10.9 million or $0.02 per share. This compares to the loss in the prior quarter of $0.06 cents per share.

Gross profit for the third quarter was $77.1 million. Gross margin was 6.4%, which represents an improvement of approximately 50 basis points from the second quarter, reflecting our continued cost reduction efforts.

Operating expenses excluding stock compensation expenses were $59.9 million, a slight increase from the prior quarter, as we incurred some significant tax planning related costs. Generally our operating expenses have continued to trend downward over the last year, as we have focused on reducing infrastructure costs, and on a normalized basis we expect this to continue.

Operating income was $17.1 million. Our operating margin was 1.4%, an improvement of 40 basis points from the second quarter. Net interest and other expense, which consists primarily of interest income and expense as well as gains and losses from foreign currency exposures, was $23.2 million, an improvement of $10.6 million from the second quarter. This improvement was due primarily to modest foreign exchange gains in the current quarter versus significant foreign exchange losses in the prior quarter.

Tax expense for the quarter was $4.8 million. Notwithstanding our negative earnings before tax, we still report a tax expense as losses in certain countries under US GAAP do not generate tax benefits to offset the tax expense generated in our profit making countries. To mitigate this inefficiency, we continue to pursue our long-term global realignment program.

Depreciation was $21.2 million. EBITDA for the quarter was $38.3 million.

Now turning to the balance sheet, if you'd turn to slides five and six. Cash and short-term investments at the end of the quarter were approximately $878 million, an increase of $26 million from the prior quarter end. Cash flow from operations was $65 million. Free cash flow, which consists of cash flow from operations less net capital expenditures, was $57 million, and net capital expenditures reflect asset additions of about $10.8 million, less asset sales of $3 million.

Accounts receivable at the end of the quarter were $699 million, and our DSO for the quarter was improved by 1.5 days to approximately 52 days. Inventories at the end of the quarter were approximately $696 million, a reduction of $10 million quarter over quarter. This decrease represents reductions from existing operations offset partially by inventory acquired as part of our acquisition completed early in the third quarter. Overall, net inventory turns improved slightly to 6.5 turns.

Accounts payable at the end of the quarter were $711 million, which equated to AP days of approximately 57.3, an improvement of 2.2 days. Overall, our cash operating cycle for the third quarter was approximately 50.8 days, an improvement of 4.8 days from the prior quarter.

During the quarter, the Company repurchased 17 million shares of our stock for $10.1 million. Since the inception of this stock buyback program, we have repurchased a total of 61 million shares at an average price of $0.48 per share.

You will note on our balance sheet that our 2010 debt has been reclassified from long term to short term, as it is now within 12 months of coming due in June of 2010. We have previously earmarked part of our cash on hand to repay this debt, and therefore the repayment will not impact our strong cash position or our ability to manage our cash flow.

Our overall liquidity position remains very strong with cash on hand of $878 million, available accounts receivable and bank borrowing facilities, and a debt maturity profile that is very favorable. All of this plus our continued focus on improving our working capital metrics positions the Company well to weather these economically challenging times.

Now let me comment on restructuring. Although we completed our major restructuring initiatives prior to this economic downturn, we continue to fine-tune our structure. During the third quarter, we incurred $13.9 million in restructuring expense. This expense primarily relates to reductions and forces associated with previously announced plant closures, as well as the restructuring of various corporate functions.

Actual cash payments related to these reductions and previously accrued restructuring actions amounted to approximately $16 million during the quarter. We expect further restructuring related expenses for the fourth quarter of between $8 million and $10 million.

Sanmina-SCI operates on a fiscal calendar that ends on the Saturday closest to September 30. As a result of this, our fiscal 2009 will have 53 weeks rather than the usual 52 weeks. This extra week will be added to our fiscal fourth quarter.

In summary, we continue to operate in challenging economic times. In such times we must be focused on cost and asset management. Our results reflect that focus, and we will continue to do so.

I'll now turn the call over to Jure to provide his comments and our outlook for the fourth quarter. Jure?

Thank you, Todd. Good afternoon, again, and please turn it to slide seven. What I'd like to do is talk to you now about our end market demand for our third quarter.

As Todd mentioned, the revenue of $1.21 billion in June was slightly up 1.2% from our March quarter. While during our third quarter we saw signs of stabilization in demand, and improved business confidence from our customers, we are still operating in this challenging economy. The June quarter was more stable and predictable compared to the March quarter.

If you look at revenue breakdown by the market, communication, which consists of about 44% of our revenue in June, was basically flat. Medical represents about 14% of our revenue and that was slightly down about 4%.

Enterprise computing represents about 15% of revenue, that was slightly up about 4%. Industrial, automotive, defense and aerospace represented about 13%, and that was slightly up about 11%, and multimedia represented about 14% and that was basically flat.

The third quarter Sanmina-SCI had no customer over 10% of revenue. Also, our top 10 customers represented 48% of revenue, and our top 20 customers represented about 62% of our revenue.

Please turn now to slide eight. Now let me talk to you about our fourth quarter outlook. On a positive short-term visibility has improved, and we continue to see positive signs from our customer base.

Our outlook for the fourth quarter is that revenue should be between $1.2 billion and $1.3 billion, slightly upside, gross margin should continue to improve between 6.4% and 6.8%, operating expenses we expect to go up as Todd mentioned because the 14 week in this quarter, and this happens to us every five to six years because of the leap year. Again, operating expense is $59 million to $61 million.

Interest expense, also slightly up because of 14 weeks, will be $29 million to $31 million, depreciation should be around $21 million, CapEx should be between $10 million and $15 million. This is all based on diluted shares, approximately 472 million shares, and we expect a non-GAAP loss per share to be between $0.03 and loss of $0.01. We also do expect to generate positive cash flow in the fourth quarter.

Now let me talk to you now where we go from here. During the recession, we finalized our restructuring. We took aggressive action to right size the Company to meet present demand, and brought cost structure in line.

As Todd mentioned, I can tell you today, and this is very exciting and important news for us, is that restructuring at Sanmina is done. We do have a charge that is coming up this quarter as Todd mentioned, $8 million to $10 million of basically restructuring physically is done, and there is no new restructuring that is anticipated at this time.

During this tough time, we also kept our experienced team together, and we improved our operational execution and customer satisfaction, we lowered our cost, and improved asset efficiency by making structural changes in how we do business for long term. We continue to invest in a new technology, not just for today but for the future.

The bottom line is that today we have the right global infrastructure in place. 80 plus percent of our manufacturing capacity is now in a low cost region such as Mexico, China, south Asia, India and eastern Europe. North America and Europe mainly focuses on new product introduction, defense business and some logistics.

With the new strategy in place now at this time, Company has a minimal down side and lots of upside. We have plenty of right capacity for growth as economy normalizes. At this time our customer base in a normal economical environment can support the business well over $9 billion run rate a year, again very strong customer base with the long-term relationships.

Now I'd like to talk to you about opportunities in this environment and also talk about bookings. If you look at our overall business, book to bill was positive, also exciting new, this is the second quarter in a row that the bookings were positive. Also, our component business, which includes printer circuit boards, back planes, mechanical systems, enclosure, is starting to see very positive book to bill. In Q3 was 1.2 to 1.

Also, new business wins in the quarter were strong. New business wins at Sanmina are defined as following. New customers and new projects with existing customers.

In the last quarterly earnings call, second quarter, I told you that new business bookings were approximately for first quarter about $200 million, in the second quarter about 150 million. I can tell you that this quarter new business was well over $350 million shippable in next two to four quarters. Also, I can tell you that the forecast for the new business wins for the fourth quarter looks promising at this time. Again, these are positive signs that the markets are starting to stabilize, as we look to a better future.

Overall, the second half of the calendar year 2009 we are more positive about, so as we look at this quarter, again we call it to be more stability with some upside by July and August and September. We are probably going to see some slowdown from Europe during the summer, that's typical. But however, October, November, December we should see continued improvements.

Now, this is all what I'm hearing from our customers, and so basically we are sharing it with you today.

Now I would like to make a comment regarding our reverse stock split. In September 2008, we asked and received from our shareholders approval to reverse the stock at the ratio range of one for three to 10. At that time the economy had turned negative and was very unpredictable, therefore management and the Board did not believe to be in the right time to implement this reverse split, but today we believe it's a good time to reverse our stock at this time because the fundamentals of the business are improving, and end markets are starting to stabilize.

So today we announced that the Board of Directors has approved the ratio of one for six effective August 14, and stock will trade on a split adjusted basis beginning August 17, 2009.

While we recognize that our market (inaudible) just like everybody else's, it is all going to be based on our performance. We also believe that this reverse split has some benefits for a number of reasons. Some are that the large institutions that typically don't invest in the stock at the low price will have a chance to look at ours again. It's going to increase the trading volume, should reduce the trading expenses, and also should decrease stock price volatility that we have been having, having the price under $1. And I'm sure there are some other benefits.

So in summary, we are coming out of this recession fundamentally a stronger Company. We transformed the Company to adapt to present market environment, and positioned the Company for a better future as market demand improves. In this environment, we will continue to focus on basics, focus on developing new business opportunities, continue to generate positive cash flow and improve working capital metrics, as Todd talked about. Again, we believe we are well positioned for an upside.

Now I would like to thank all of you for joining us on this call. I would also like to thank our employees for their hard work, their dedication to this Company.

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

(Operator Instructions). Your first question comes from the line of Jim Suva with Citi.

Hello, Jim.

Good afternoon, Jure. Can you update us since post your restructuring is now all the way behind us, can you let me know as far as breakeven if my math is correct, are we at about a 3.5 quarterly run rate for break even or closer to 4.0? I know back in December you broke even at about 1.4 but you've done a lot of restructuring since then. Can you kind of update us on the --

I think it depends on the mix but we think our breakeven today on a normal 13-week quarter, probably about 1.3 billion or less.

Okay. And then also can you let us know, the tax number has been moving around a little bit, kind of -- it was 7.6 -- or 7.5 a quarter before, and about 2.1 this quarter. Should we expect it to be more normalized around the 2 million level?

Let me turn it over to Todd on that question. As Todd mentioned, we are working a lot on our taxes, and the goal is to really improve that in 2010, but I will turn it over to Todd to maybe answer that directly.

Jim, I'm a little confused by your question, only that I don't recognize the number. You said 2 million tax expense?

I thought you had about a 2 million that you took this quarter.

On our published statements here, if you refer to slide four, our number that we are disclosing is $4.8 million for our tax expense for this quarter, approximately $15 million year to date. Our expectations for the full year on our normal pro forma basis is approximately $20 million. So I would be anticipating our fourth quarter to be in the same range of around $4 million plus or minus in terms of tax expense for the fourth quarter.

Okay. I have it. And then a quick question for Jure. Jure, when you talk about stability, can you talk about maybe some of the end markets that are maybe a little bit more positive, and maybe some of the end markets that may be lagging a little bit for the recovery?

Yes, for us this quarter if I look at, I think, communication infrastructure reasonably, especially with the new wins that we won, that that was pretty strong, also enterprise computing, and then industrial was driven mainly with a lot of new wins that we got through our alternative energy projects.

Great. Thank you very much.

Thanks, Jim.

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

Thank you.

Hi, William.

Hi. I'm wondering if you can clarify something. I thought I heard some discussion of an acquisition in the quarter. Did I hear that right, or am I --

Yes, we acquired the assets of optical of JDSU in China.

Okay, right, I remember. Can you talk a bit about the status of the CFO search. Do we have the final selection at this point or is it still in process?

Well, the final decision is not made yet. We are in the final stages of finishing that project, and we are hoping to get that done before end of this fiscal year, but we are not in a hurry. I mean, we are looking for the right player, right teammate. I think we have a strong Controller here, two Controllers here, we feel very comfortable with our financial control, so we are really looking for the right partner for the long-term success of this Company.

And two other very brief ones, if I can. First, what drove the gross margin upside in the quarter? Was it mix or restructuring cost savings or something else?

And then the final one is, Jure, whether in this downturn you think you've seen any structural changes in the industry whatsoever. I think a lot of investors anticipated that there would be one, and I don't think we are seeing signs of any real structural changes. Any comments there would be helpful.

Okay. First of all, our margin improvements, I think definitely the steps that we took to lower the costs are helping out. I mean, as I mentioned, we didn't just look at the restructuring as we did, especially in this final stage, as for a short term. We looked at changing the Company's structure for long-term success, and I think we did a pretty good job there. There is a few things we need to tune up. I feel very comfortable there. So I think it's a cost and also improved mix.

Regarding your following question, regarding structure in the industry, I believe that the industry learned a lot in last three, four years. I think this industry has a lot of better days ahead of itself. I think we all learned a lesson.

If you look at our customers, our customers are making a lot of money in past, and this industry did not make a lot of money. What I mean to learn the lesson that we have to focus on profitability and financial metrics long term, so I believe there's a lot more discipline here. If you look at the top layers in this industry, I think that they will get through this stuff, I should say not just survive.

When it comes to Sanmina, I'm more excited about Sanmina today than I was in last ten years. I mean, it's been tough for us since acquisition of SCI. We did a major restructuring, we made it, we changed the strategy two years ago, we had to implement it, we are done with restructuring, we have been doing a lot of restructuring, we are done with it, so from my point of view, we like where we are at.

I kind of internally, we call this second start up. We are excited. Now we just need the economy to cooperate, but even if the economy does not cooperate in short term, we will improve our margins, we will make a little bit of money, we will continue to generate cash, and the most important being position to take out of the gate when economy improves.

Thank you.

Thanks.

Your next question comes from the line of Amit Daryanani with RBC.

Hello, Amit.

Hi, Jure. How are you doing?

Great. Yourself?

Good. You guys obviously talking about the stability at this point. The guidance looks like it's flattish for the most part. Is the sense from what you can see, is this a precursor that we start seeing at least normal but muted seasonality in Q4 and start seeing some revenue growth?

Let me go back, kind of why we think it's stabilizing for us. Again, I'm not an economist, so I am not here to tell you the recession is over. I don't even know when it started, when it's going to end. I'm going to -- when somebody tells me it's over -- I know it's over when we start getting more business. Let me put it that way.

If I look at our bookings and the new wins and what customers are telling us, we definitely, more demand, more stable, more predictable demand. I personally believe that recovery is going to be slow. I think for us a lot of the things starting to pay off or a lot of investment that we made in the business development role in the last 18 months, and focusing on new customers and alternative markets that we believe have a lot bigger and better future for us, so that's starting to pay off.

As I just said earlier, our new wins with the customers and new projects were nicely up in the third quarter, and so far fourth quarter looks good. So we do expect stability.

As I mentioned, Europe I think is always slow in the summertime, and I just came from Europe two, three weeks ago talking to my customers, I think Europe will be a little slower in this quarter, but definitely as we look through October, November, December, as we analyze some of the forecasts and what we are hearing from our customers, we see some upside. I don't know how much at this time, but we definitely think it's going to be higher than what we are shipping today.

That's helpful. And then just on the OpEx line, did you guys quantify how much incremental expenses we had for tax lining purposes?

Well, if you look at the trend quarter to quarter, we are actually in the process and have been for some time of adjusting our infrastructure on the SG&A line in the OpEx area, trying to right size ourselves and preparing ourselves for the future. And we have been on a continued path for several quarters now, of changing that structure and reducing our costs, both from third-party type costs, as well as our own internal headcounts, staffing-related costs, and we continue to do that and we will continue to do that as we go forward here.

In terms of the blip this past quarter, we did have probably about a $1 million to $2 million blip in our expenses this quarter, as we incurred some costs associated with some long-term planning projects that we were doing on the tax side. That is not likely to repeat itself, and so when you look at the fourth quarter and the projections or the outlook that Jure provided earlier of $59 million to $61 million, that actually reflects on a normalized basis a reduction in our OpEx, but then you have the 14-week effect that bumps it up a little bit. So you'll continue to see our OpEx come down.

Got it. And the extra week probably adds about $4 million, $4.5 million in expenses, I figure. Just a quick -- just a final question. How much did the JDSU, the assets to be bought, how much contribution did you get on the revenue side from that acquisition for the June quarter.

We don't like to make a comment, that's confidential information between us and the customer. We are not allowed to comment on it. This acquisition is a long-term partnership with a great company, most importantly this is a right technology for us. Sanmina itself has been investing in the optical manufacturing for long, long time, and this gives us a competitive advantage that we are looking for, so --

Fair enough. Thanks.

Thanks, Amit.

Your next question comes from the line of Shawn Harrison with Longbow Research.

Hello, Shawn.

First question has to just get back to the new business wins you're seeing. If you look at, say the past 90 days, do you think the outsourcing pipeline has gotten bigger or you're just seeing some of the benefits of the initiatives you've put in place over the past 18 plus months?

For us, the wins that I'm talking about has been mainly through organic wins. Now, we are working on also an outsourcing deals that we believe will be benefiting the next couple of quarters, we feel very comfortable with that, but right now the things that I'm talking about is all organic wins.

Okay. It seems like, if I'm looking at the revenue mix with the top 10 and top 20 customers, it's more with customers outside of that mix, given the top 10 were down sequentially this quarter.

Well, that -- how do I say? Sometimes the top 10 moves back and forth, so it's hard to predict looking from outside.

Okay. Just moving on to a few other points, if you could maybe provide us with what capacity utilization is for the core EMS business, and then also within the components business right now.

Well first of all, let me give you an example. The way we are set up today, if you look at the capacity utilization based on people, we are running at around 85%, so it's a pretty tight ship. We as a Company, as we did the restructuring, as we shot the plans in high cost region, we transitioned a lot of our equipment to a low cost region, so our Company today has a lot of capacity for upside with this equipment and these plans are all paid off. So it's a very low cost, so based on equipment, we are running the basically at 60%, 65% capacity utilization.

Okay. And that's on a total companywide basis?

Yes, that's on total Company, yes. On component side of the business, definitely, that business has been hit the hardest but that's why, as I mentioned, the component business now is coming back fastest because as the demand goes up and inventories go down, the first thing the customers need to be start buying is components.

So if you look at in a whole industry today, demand for components has been going up, and that's basically what we saw in our component business. That's why the book to bill ratio and component business was 1.2 to 1. But we don't break it down because the way we run the Company today is always as one unit.

Okay. And then just one maybe final commentary, if you could maybe look at the medical market, and you've been doing well at least in picking up some new business wins there, but if you can try and talk about what you're seeing in kind of the higher end aspect of the medical market versus kind of the mid and lower end, where you're seeing the growth opportunities over the next six to 12 months.

For us, medical market is very important. We have been in that market as an EMS Company longer than anybody else. We believe our infrastructure is one of the leading in the EMS industry, and if you look at our pure revenue, what we are shipping and a customer base is one of the widest in the industry.

We are really set up to do high end, very complicated systems in the medical side, both including vertical integration from machining the big platform to fabrication and final testing of the stuff. So it's really more and more high end.

We do expect that business for us to grow. It's a business that takes a long time to develop, and we invested a lot of time and energy, so I would-- . But again, in this tough environment, all businesses got affected, but we believe the long-term medical for us, it's going to be a very, very healthy business, as is going to be industrial and also the defense and aerospace

Okay. Thank you very much.

Thanks, Shawn.

Your next question comes from the line of Sherri Scribner with Deutsche Bank.

Hello, Sherri.

Hi. How are you doing, Jure?

Great.

I guess I was hoping to get a little clarification on the revenue guidance. If I look at the midpoint and I normalize for the 14-week quarter, and I normalized that back down to a 13-week quarter, it looks like revenue guidance is down sequentially about 3%. How should I think about that down guidance considering the --

Yes. Don't look at it that way because see what happens, not all our customers have 14 weeks quarter.

Okay.

And we have a little bit extra costs here but it's really, most of our customers have a 13 week quarter, so the revenue is 13 weeks for them, okay? So if anything, I think our revenue is going to be slightly up.

Okay.

We do have a little bit extra cost because we have extra time here, we are not pooling extra business. If we can manufacture, we will be manufacturing more internally but we are not going to be able to ship it. In today's environment, most of our customers take the product as they need it.

Okay. So, it sounds like you're not going to have pure linearity throughout the quarter? And I mean obviously that's typical, right?

Actually, linearity for last quarter was really good. The problems we have in this quarter, this happens to us every fifth or sixth year, is that you get in this extra week.

Yes.

And so basically most of our customers plan on the 13-week quarter, and that's all they take.

Right.

But we are manufacturing more and, but we are not going to be able to ship it.

Okay. That's helpful. And then in terms of the comments you made about seeing stabilization, I guess I was hoping to get a little more color on the enterprise compute and the industrial segments. Those were very strong this quarter on a sequential basis. You commented on new deal wins in that business, but excluding new deal wins, do you see that -- was there growth in the rest of the business, and what is the commentary from those customers excluding new deal wins on the outlook for the third -- for the --

First of all, I mean, most of the shipments that we shipped in the third quarter is really for the wins that are up in six months ago plus in all customers.

Okay.

The new wins I'm talking about, really very little shipped in Q3.

Okay. So that is -- so maybe it's not fair to characterize that as new wins.

Yes, new wins will be for future, start shipping this coming quarter. Most of it is really in 90 days from now and after, but no, this is really -- I can almost say this is the stuff that we have booked in past first quarter and second quarter, and all customers that we had around.

I guess -- I guess I'm trying to understand how much of the business is coming from sort of the newer types of customers that you're looking at, like the solar customers versus your core business --

I mean, Sherri, we have been pretty successful at winning what we call alternative energy customers. Demand for a lot of those customers also impacted in this recession, and a lot of these customers have small projects so it's not a huge revenue. Today, the name of the game is do you get qualified as many new projects as you can with this new alternative, what we call alternative energy businesses, and we all do this, and that's how you kind of measure and what is the potential for the future but it's not a huge impact on the short term.

Now, in this quarter we had a little bit more shipped than we did in the past quarters, and we do expect higher shipment next quarter for industrial.

Okay. That's helpful. And then I guess just some clarification on the CapEx. I think in the past you've said CapEx guidance, annual guidance was somewhere around $100 million to $120 million, but it looks like you're at a run rate well below that. Just thinking about going forward into fiscal 2010 and 2011, can you give us some guidance--?

First of all, we had to cut it down because demand that we going to spend approximately $60 million this year, and fair amount of money went for our expansion in India and Thailand. I think 2010 all depends on the business.

As I said earlier, we got plenty of capacity, and that's one thing nice about, I don't think we are going to have to spend a lot of money in the next couple of years to grow. So right now it's hard for me to predict what we are going to spend in 2010. I'm just going to tell you, we will only spend what we need to.

Okay. Is it fair to say that maintenance CapEx is somewhere around $60 million?

I would say, if the way I see it today will be $60 million to $80 million per year.

Maintenance?

Well, some new, not all maintenance but maybe a third of the maintenance, some of it's new, I think it's all going to depend what happens to the demand, and the new programs that requires us to buy the new equipment.

Okay. Great. Thank you.

But we have the money for it, so the goal here I want you to understand, no need to spend the money today. The business comes in with it, then we can go over that.

That makes sense. Thank you.

Thanks, Sherri.

Your next question comes from the line of Steven Fox with CLSA.

Hello?

Hello, Mr. Fox, your line is open. He is unavailable for questions. We will move to the next questioner.

Okay.

Your next question comes from Alex Blanton with Ingalls and Snyder.

Hello, Alex.

Good afternoon, Jure.

Good afternoon, Alex.

Could you tell us if you've had any significant amount of in-sourcing. That's not really a big issue in the industry, but it does get raised. There's been a couple of examples of it. Have you experienced that at all?

We did not experience at all, nothing more than normal. We have a couple customers that do some manufacturing internally, but for us has been a very, very small percentage.

Well, you must have some customers that do have some internal capacity left, or do you?

Like I said, the ones that I -- like, I don't want to mention their name but there's really a couple that I can know that has some manufacturing internally.

But they are not taking back production at this point, are they?

No.

No. And nobody is thinking about setting up manufacturing -- or re-setting it up, I should say, who once did it but now is out of it, they are not thinking about doing it.

Let me make it very clear. I've been in this business long term, I talk to my customers all the time. Let me put it this way, 99% of my customers do not want to set up manufacturing, and the ones that have, I will be getting rid of them.

Now, there's a few companies that have some big runners that manufacture the cell phones and some consumer products as part of their strategy, they have a big manufacturing. That's a different story. But the type of product that we build, high mix, high technology, lower mix product, there's really no plans to in-source that. It would be a huge mistake for our customers.

Absolutely. I agree. Now on the component --

Alex, there's no trend out there but sometimes I'll listen to some of the analysts that are talking about it, I can tell you I don't think they know what they are talking about.

There's a big consulting firm in the industry that has been writing about it on evertick.com and I don't agree with it.

--these days.

What?

Paper takes anything these days.

Yes. Okay. Just some color, more color as they say on component book to bill.

Right.

1.2 to 1. Does that cover all your components?

Yes. That includes printed circuit boards, back planes, cables, machining, frames, plastics, memory modules, all the stuff that we do, yes.

Yes, okay. And to what extent might that represent the end of destocking rather than an increase in end market demand? Because if it's an end market demand that means that those components are going into circuit boards, which are going into, telecom products or whatever, but I don't think end market demand is picking up like that, so what explains that book-to-bill ratio?

Well, I think first of all, component businesses, if you look across the board, no matter what you build is being hit the hardest because when recession came, what we all do? We stop purchasing. We have to use inventory.

Right.

So number one, inventories are lowest that I've seen in industry for long, long time.

Okay.

That's number one. Number two, in this environment customers don't want to build more inventory. They don't want to carry it on. Everybody wants to have a lean, lean type of production line.

Yes.

Everybody wants to save money. So there's a lot more pressure right now just in time than ever before, so my personal belief, yes, you do have some restocking going on.

Not restocking, but just --

--is starting to improve.

The end market demand is starting to improve?

That's correct.

Okay. But there could also be the situation where, end market demands stays flat, but your orders go down for a while because they are reducing inventory and then they go back up.

But I think inventories being reduced. I don't think, Alex, we are going to see a lot of it. I'm sure -- I know some companies today have too much inventory, but if you look at the overall market, most of the customers today are pretty lean. And as I said, I think that we had a lot of inventory shift back and forth, maybe in last nine months. I think if you look at the next six months, I think there will be a lot less of that. I think today it's really more focused on a real demand. People do not bring inventory just because they like to see more inventory in their warehouse.

I know that, but if they ordered less than their shipping, they have got to increase their orders just to make shipments.

Yes.

Okay. Thank you.

Thanks, Alex.

Ladies and gentlemen, that's it for today. First of all, I want to again, thank everybody for participating on this conference call, and if you have any questions for any of us, please coordinate it and we will get back to you. Thank you very much. Bye-bye.

That concludes this evening's teleconference. You may now disconnect your line.