Sanmina Corp (SANM) 2012 Q4 法說會逐字稿

Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI fourth-quarter fiscal year-end 2012 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. Ms. Bombino, you may begin your conference.

Thank you, Brent. Good morning ladies and gentlemen and welcome to Sanmina-SCI's fourth-quarter and fiscal year end 2012 earnings call. A copy of today's release is available on our website in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on our website. Please turn to slide 2, the Safe Harbor statement.

During this conference call, we may make projections or other forward-looking statements regarding the 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, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change. We refer you to our quarterly and annual reports filed with the Securities and Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You will note in our press release and slides that we have provided you with the statements of operation for the 3 months and 12 months ending September 29, 2012 on a GAAP basis, well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in our press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense 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, 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 morning to everybody and welcome. First of all, l I want to thank everybody for letting us change this conference call. I know that there has been a lot of bad weather on the East Coast, so hopefully everybody got through it okay. But with that, again I want to thank you all for being here today, on our conference call today or this morning, I should say. I have Bob Eulau, our CFO.

Good morning, everyone.

For our agenda, Bob will review our financial results for our fourth quarter, then I will follow up with comments relative to Sanmina-SCI's health and future goals. Then Bob and I will open for questions and answers. So now I would like to turn this call over to Bob. Bob.

Okay. Thanks Jure. Please turn to slide 3. Overall, the fourth quarter was solid from a margin standpoint and very strong from a cash generation perspective. Revenue of $1.58 billion was up 1.9% on a sequential basis and down 7% from the fourth quarter last year. Our gross margin came in at 7.4%, which was up 60 basis points from the third quarter. Operating margin increased 70 basis points from last quarter to 3.5%. Non-GAAP EPS was $0.46, which was well above the high end of our guidance for the quarter. This was based on 83.6 million shares outstanding on a fully diluted basis. Finally, cash generation was outstanding this quarter with cash flow from operations at $121 million and free cash flow at $99 million. I will discuss cash in more detail in a few minutes.

Please turn to slide 4. Revenue was up 1.9% or $30 million from Q3 to $1.58 billion. From a GAAP perspective we reported net income of approximately $164 million, which results in earnings per share of $1.96. This was up relative to last quarter by $1.85. The GAAP results included a benefit for income taxes due to a partial release of our valuation allowance against US deferred tax assets. Given all available evidence, we now believe it is more likely than not, that we will be able to utilize a significant portion of our US tax attributes in the future. The tax benefit totaled $159 million or $1.90 per share. Offsetting this benefit is a restructuring charge of $17.5 million which we recorded this quarter.

You may recall that we made a decision a couple of years ago to expand our Printed Circuit Board manufacturing capability in Wuxi, China. And that facility is now beginning to come online. We feel that we can compete on a global basis from this location. The supply chain infrastructure is outstanding and we have an experienced a team in place in Wuxi. We have been critically accessing the footprint of our Printed Circuit Board business. While we had sequential growth in the components business this quarter, after a thorough review we have decided to close one of our Printed Circuit Board facilities, which is in Malaysia. This was a difficult decision, but one that we believe positions us for better financial results in both the short and long-term.

With this closure, we are able to transfer a significant portion of the equipment in that factory to our new building in China. Our estimate is that we are saving approximately $20 million to $22 million which we would have otherwise had to spend on capital equipment within our other Printed Circuit Board facilities. We also believe that once we complete this transition we will have eliminated approximately $3 million to $5 million in costs that we would have continued to incur on a quarterly basis. The payback period for this closure should be about six to nine months. We have initiated restructuring in another facility in addition to the PCB factory that I just discussed. The restructuring costs for the two impacted facilities totals $11.9 million. Most of the remaining restructuring costs related to previously announced restructuring activities.

In the first quarter of fiscal year 2013, we expect a GAAP P&L charge of approximately $5 million to $7 million for the ongoing expenses that have to be recognized as incurred associated with our announced restructuring activities. For the year, revenue was down about $500 million, while net income increased $111 million to $180 million primarily due to the tax benefit I just mentioned. Earnings per share for the year were $2.16 versus $0.83 last year. My remaining comments will focus on the non-GAAP financials for the fourth quarter.

At $117 million, gross profit was up $11 million from the prior quarter. Gross margin came in at 7.4% which was 60 basis points better than the previous quarter. Operating expenses were down $700,000 for the quarter at $61.1 million. This represents a 10 basis point improvement in the operating expenses as a percent of revenue. At $56 million, operating income increased by 26.8% from the prior quarter. Operating margin was 3.5%, which was a 70 basis point sequential increase. Other income and expense was at $10.8 million, which reflects a significant reduction in interest expense over the last year and a one-time benefit from a government incentive program in a foreign country.

The tax rate for the quarter was 15.7% of pretax income, which was in the range we had expected. On a non-GAAP basis we earned $38 million in net income, or $0.46 per share. Net income and earnings per share were up 74% from Q3. Historically, we reported our results as one segment with occasional comments about certain parts of our business. Going forward, we will report our business in two newly defined segments. We believe this will provide you with greater insight into how we manage our business. The first segment is Integrated Manufacturing Solutions, which comprises our high mix, high value-added electronic manufacturing services including -- Printed Circuit Board Assembly and Test, Optical and RF Module assembly, Final System Assembly and Test, and Direct Order Fulfillment. This represents about 80% of our total revenue.

The second segment for us is Components, Products and Services. Components include Printed Circuit Board Fabrication, Backplane Assemblies, Cable Assemblies, Enclosures, Precision Machining, and Plastic Injection Molding. Products include Computing and Storage Products, Defense and Aerospace Products, as well as Memory, and SSD Modules. Services include Design and Engineering, Logistics and Repair services. The current and potential financial results of these two segments are somewhat different.

Please turn to slide 5. Here we are showing you the revenue for these two segments relative to last quarter and the fourth quarter last year. The Integrated Manufacturing Solutions business grew 1% sequentially while Components, Products and Services grew 5% sequentially. As you would expect, given that much higher revenue, the gross profit is higher in the Integrated Manufacturing Solution segment, while gross margin is significantly higher in the Components, Products and Services segment. We will plan to share more detail with you on segment profitability in our Analyst Meeting on November 15 in New York.

On slide 6, we're showing you some of our key non-GAAP P&L metrics. Revenue was up $30 million from last quarter. Demand was particularly strong in the Communications and the Enterprise Computing and Storage market segments which more than offset continued weakness in the Multimedia segment. Compared to Q4 last year, total revenue was down 7% and again, most of the decline was attributable to the Multimedia business.

Moving on to gross profit. We achieved a 10.5% increase in gross profit in Q4. Our gross margin improved to 7.4%, which was up 60 basis points from last quarter. Our operating profit increased 26.8% from last quarter to $56 million. This led to operating margin of 3.5%. Net interest expense declined by $2.7 million this quarter, as we continue to see the benefits of the deleveraging of our balance sheet.

Now I'd like to turn your attention to the balance sheet on slide 7. Our cash and cash equivalents were $410 million. Cash was up $15 million from the previous quarter. This increase in cash was achieved while we were simultaneously paying off the final $150 million remaining of the 2016 notes which had a coupon of 8.125%. The $150 million was paid off by using cash generated during the quarter, along with a new mortgage on our San Jose campus of $40 million in short-term borrowings of $30 million. While inventory was flat from Q3 to Q4, we benefited from a $15 million decrease in accounts receivable and a $42 million increase in accounts payable. Property, Plant and Equipment was up $3 million for the quarter. The large increase in other assets reflects the reduction of a valuation allowance against our deferred tax assets discussed earlier.

Please turn to slide 8. Solid cash generation, combined with some well-timed capital markets transactions has allowed us to make great strides in improving our capital structure. Over the last three years we have reduced our long term debt by $600 million and over the last year we have reduced our long term debt by $345 million. As I mentioned, during the quarter we redeemed the remaining 2016 notes with cash and significantly lower cost debt. These collective actions have lowered our annual interest expense on a run rate basis to just under $55 million. Combining this with the fact that our next major debt maturity is in 2014, we feel very good about our capital structure. With all the progress that we have made in the last year, we still have room to improve the capital structure and balance sheet going forward. And we will continue to look for those opportunities.

Please turn to slide 9, where we will review our balance sheet metrics. Cash was up $15 million from Q3. Cash flow from operations for the quarter was very strong at $121 million and net capital expenditures for the quarter were $22 million. This led to $99 million in free cash flow. Inventory reduction and cash generation are an ongoing priority for our team. The inventory dollars were flat with last quarter at $127 million, while the inventory turns improved from 6.8 to 7.1. Compared to Q4 last year, inventory is down $64 million. We are showing cash cycle days which combines our cycle time for inventory, accounts receivable and accounts payable.

Overall, cash cycle time decreased from 55.2 days last quarter to 51.9 days. The biggest driver was our accounts payable days outstanding which improved by 2.5 days. We also benefited from a decrease in inventory days of 1.8. These improvements were partially offset by an increase in accounts receivable, day sales outstanding of 1.1 days. We are pleased to see progress in our overall cash cycle time. Finally, our return on invested capital was 13.4% for the quarter, which was helped by our better profitability, while asset utilization also improved.

Please turn to slide 10. I would now like to share with you our guidance for the first quarter of fiscal year 2013. Our view is that revenue will be in the range of the $1.5 billion to $1.55 billion. We expect that gross margin will be in the range of 7% to 7.4%. Operating expense should be $62 million to $63 million. This leads to an operating margin in the range of 2.9% to 3.3%. We expect that other income and expense will be in the range of $13 million to $15 million. We expect the tax rate to remain in the range of 14% to 16%. And we expect our fully diluted share count to be around 84 million shares plus or minus 0.5 million shares.

When you consider all this guidance, we believe that we will end up with earnings per share in the range of $0.31 to $0.37. Finally, for your cash flow modeling, we expect that capital expenditures will be around $30 million while depreciation and amortization will be around $25 million. We also anticipate real estate sales of $25 million to $30 million this quarter. Overall, we're navigating through a challenging macro-economic environment. Growth is the biggest challenge, as we see very growth prospects across our customer and business base.

In Q1, we will focus on completing the transformation of the Printed Circuit Board business to improve profitability while revenue is that this level. With the actions we have taken this quarter on the structuring of the business, we believe we are positioned for better earnings even with sluggish revenue growth. I look forward to seeing you in New York on November 15. We will update you on our progress in executing the strategy we laid out last year. At this point I will turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob. Again, ladies and gentlemen, what I would like to do is to give you a little bit more insight in our business environment for our September quarter -- I mean, for the quarter that we just finished, and also talk about short term business environment first quarter, or December quarter of our fiscal year 2013. And then what I would like to do is give you some outlook, what we're looking from bookings as we go enter the calendar year 2013.

Just to add few things, as Bob talked about the fourth quarter, this was a modest growth in a quarter. Definitely was below our internal expectations, mainly driven by forecast going up and down. We did deliver a nice margin improvement per our expectations, driven by operating efficiencies and better product mix during the quarter. So overall we are pleased with the fourth quarter results and accomplishments in our fiscal year 2012, despite a challenging economical environment. We had just basically a lot of headwinds during our fiscal year 2012.

One comment that I would like to make is that in 2012, we made a significant improvements in our strategy that we [related] for you a year ago. We continue to diversify our customer base with a lot better opportunities. Really position each of our business unit to be aligned with the customer needs and ability to compete independently. So our long-term opportunities are still very promising and also on a positive side, there are -- customers are still cautiously optimistic about the future as we look at the calendar year 2013.

So please turn to slide 11. As you can tell, our top 10 customers were 51.4% of our revenue. We also had a one customer around 10% of our revenue, and that was Noctilucent. Our largest segment of the market is Communication Network, which for us includes networking, wire line and wireless infrastructure. That was sequentially up 4.1%. Enterprise Computing and Storage for us continued to move in the right direction and that was up 7.8%.

Defense/Industrial/Medical was slightly up, approximately 1%. Defense and Aerospace for us continue to be moving in the right direction, especially our products. Industrial also was pretty strong. Medical was slightly down and semiconductor equipment continued to be weak for us, and I think will continue to be weak for the rest of the -- at least for the next couple of quarters. As Bob mentioned, Multimedia came down approximately 14%, mainly driven by our set-top box business.

Please turn to slide 12. As I look in our first quarter here, let me make a couple comments on our markets and demands. Communication Networks were forecasting to be down in our first quarter, mainly driven by a weak demand from our wireless access products for infrastructure. The rest of the Communication Networks are stable and some are up. Enterprise Computing and Storage will continue to move in the right direction, slightly up in the first quarter.

Defense/Industrial/Medical, overall that group I would say is stable, flat. But I make a comment on individual -- Defense, we also think is going to move in the right direction. Industrial, we have a strong pipeline of new projects, that we expect it to continue to move up. Medical, flat, some off-site potential and again, semi-conductor equipment continued to be weak during the quarter. Multimedia we also forecasting in December quarter to be up, so that seems like now is stabilized and it should move in the right direction.

Let me make some more comments, what we are planning to do for calendar year 2013, as Bob mentioned, it's kind of tough to forecast, but we got some positive news there. Book to bill in the fourth quarter was positive, and we also forecasting book to bill for fiscal year 2013 to continue to improve. This is mainly driven by strong programs in place and forecasting stronger than [NIM] from these programs in fiscal year 2013. Also, some of our new programs that we won in 2012 should start shipping also in our fiscal year 2013. Also, we have a strong pipeline of a new opportunities and we have a high confidence that a good portion of these programs we are going to win and make some shipments in our fiscal year 2013.

Overall, as I look at the fiscal year 2013, and really the rest of the calendar year 2013, we expect to see improvements in revenue growth to margin. Again, that is based on the projects that we are involved, and some of the new programs that we are working on today. In short term, this macro-environment will remain challenging from a demand point of view, and be able to forecast good. How long this is going to go on again is very hard to forecast at this time and this could impact our future demand.

As we look at the long term growth, we are optimistic and let me give you a couple of points why. We continue to build a strong balance sheet, as Bob talked about. This gives us a lot more flexibility to take advantage of market opportunities, to drive the growth and margin expansions in the future. Also, our business model still has a lot of leverage as the economy improves. And I think our focal strategy is gaining a lot of traction in each of our business units. What I would like to do is give you some more insight on that.

Please turn to slide 13. As you know, about a year ago we talked to you about how we are going to run our business going forward. We broke it down into two segments, groups. Traditional, what we call Integrated Manufacturing Solution, here we focus on higher technology products, high mix. We believe that business has been stable for us. I think it is more driven by what's the demand out there in the key markets.

The rest of the business is such as Printed Circuit Boards, Mechanical Systems, Defense and Aerospace Mission Critical Products, Newisys which is a storage product, Viking Technology, Solid State Drives, advanced memory packaging and the Sanmina Global Services Repair and Logistics. Those businesses, I think our strategy is working. The key here is to maximize the volume in each of these business units. The same time the we believe separating these units, running them independently, allows them to really provide leading-edge technology for our customers and really allows us to focus on our core strength in a key markets. We have been investing and a lot more in a higher margin business during this, what I call flat market in the last 12 months.

Back to the Component Product and Services, think our circuit board operations are well-positioned today. We did expand in China with the High Technology Printed Circuit Boards. We are bringing the technology up here so we believe it will be one of the highest technology in Asia. We continue to invest in Precision Machining and Enclosure and Plastic Casting and that group is moving in the right direction. Defense and Aerospace, when I'm talking Defense and Aerospace here, I'm really talking about the Mission Critical products. We have been investing in this product for many years and we continue to spend fair amount of R&D for this business and I believe that this market, in the short term, it is not a huge growth but definitely is moving in the right direction.

Our Storage product which is basically a joined development of all the end product that we supply on our high end of storage product for our customers, that product is really doing well. Some great opportunities in front of us. Viking Technology, which is basically Advanced Custom Modules and Solid State Drive product that we provide to our customer, the business has been stable and we have been developing a lot of new products there. And I expect that to be also improving as we go into 2013. I want to make more comments on our Sanmina Global Services, which is basically Repairs and Global Logistics. We really expanded the footprint of that operation.

We expect that business to be growing 20% to 30% a year. Most importantly it is a business that has the foundation to be $1 billion business in a few years, so we are really excited about that and the acquisitions that we made in 2012. Of course our Design Engineering Services goes together with all these businesses so we will talk more about some of these unique capabilities at our Analyst Meeting, but in the meantime, I think our strategy is coming together and most importantly I think our customers are excited about the technology that we are providing in each of the segments.

Now please turn to slide 14. In summary, revenue grew approximately 5% sequentially in the second half of fiscal year 2012. We also did generate a strong cash flow from operations, approximately $215 million. And as Bob mentioned, we reduced our debt approximately $345 million in fiscal year 2012. Our goal there is to continue work on that debt to minimize our expenses there. We expect to continue to generate positive cash flow from operations in fiscal year 2013. And as I mentioned earlier, I really believe that we have a strong pipeline of the new projects that should help us drive the growth in 2013.

So again, in summary, it is very hard to forecast for long term, but I can tell you that we are in better shape, a lot better position today for any economical environment that this Company has been in a long time. With that, ladies and gentlemen, what I would like to do is basically, again, thank you for your time and support. And now, operator, we are ready to open the lines for questions and answers. Thank you again.

Thank you.

( Operator Instructions )

Brian Alexander, Raymond James.

Hello, Brian.

Hi, Jure. Bob, maybe talk a little bit more about the source of gross margin upside in the quarter. Revenue was at the low end of the range, but gross margin was up 60 basis points and almost a 40% incremental margin. Looks like the components revenue was only up about 5% sequentially. So just talk about how much of the gross margin expansion came from components, improving profitability versus the core business, and maybe some mix factors that drove it.

Yes, okay. Thanks, Brian. First of all, I go back to Q3 and say that was the biggest anomaly. If you look at it this year, overall gross margin's been in the 7.3% to 7.4% range other than Q3. And you recall in Q3 we got hit by some FX issues as was a particularly bad mix of business in the third quarter, so part of your question is comparing to a fairly weak base period. Now, with respect your question on components, the way we have historically defined components, the gross profit was definitely up and was pretty good. Not as good as it was in the second half of last year, but it is starting to recover. Revenue, again in the historical definition, was up as well. And in our new definition as well, with the Components, Products and Services. I think, as Jure I think mentioned, mix was positive and we are comparing, particularly with Q3, to a weak base period.

And just to clarify, was the Component's gross margin about the corporate average this quarter?

So, in our new segment, Components, Products and Services, the gross margin is higher than it is in the Integrated Manufacturing Solutions. And the components in the old definition was, I believe, still below.

Got it. And then just a follow-up for me, I know last quarter you alluded to more of a deep dive into some of the components operations to identify some opportunities for improving efficiencies. Sounds like you've been able to do that in the PCB area with cost savings of, I think you said, $3 million to $5 million a quarter that are going to be coming. What is the timing of the cost savings? Will all of that be realized in December? And then what about some of the other areas within components? Have you dug deeper into those operations? Or is that still an opportunity going forward? Thanks.

So yes, thanks for that question as well, Brian. First I'd like to credit the team for really doing an extremely thorough analysis of all the alternatives that were available to us. And I think we have landed on a solution that makes a lot of sense for our shareholders. We think we will get the $3 million to $5 million in savings showing. It will begin -- some of it will begin soon, but I think to fully realize that it's probably in the June quarter. So we'll work our way through this transition.

And then just other areas within the components business, are you --

Yes --

Go ahead

Yes, so we scrubbed everything, as we had told you we would, and at this point we are pretty pleased with the footprint we have got in the other components areas. We are also, as I mentioned, defining the business with Components, Products and Services and we will continue to invest in the product areas which are showing some pretty momentum as well.

Okay. Thank you very much.

Thanks, Brian.

Wamsi Mohan, Bank of America, Merrill Lynch.

Yes, thank you. Good morning and thanks for rescheduling this call.

Good morning, Wamsi.

Morning had a question around this PCB transition you are talking about from your Malaysia facility. The Malaysian footprint was about 5% of your revenues. Are you completely closing the Malaysian facility or is it a subset of that facility?

Well, we are, we're going to be leaving some technology engineering group there that will be working on some research and development. So basically, for all the practical purposes we're not going to be manufacturing printed circuit board at that factory in the future. Really the whole focus here, Wamsi, is to -- this new expansion that we created in China. It is a really high technology product and based on a present demand in a future demand we believe we can provide a better solution from China and in other parts of the Company. Think it is also important that we continue to invest in this business substantially. So our capabilities today, even with the transitioning Malaysia operation into China and other parts of the factories around the world, are a lot stronger. And we believe that areas that we focus on, that this was the right solution for us going forward.

Okay, just to clarify your Malaysia question, we continue to have an integrated manufacturing facility or EMS type facility in Penang, Malaysia. And what we are in the process of transitioning is our printed circuit board facility which is in Kuching, Malaysia.

Okay, thanks. Thanks, Jure. Thanks, Bob. Also, if I understood that right, Bob, then we shouldn't be expecting any change to your tax rate here because of this change?

No, I don't anticipate this affecting the tax rate. Tax rate, as you know, is always a function of where do the profits end up being. I don't think this will change.

Okay, thanks. As a follow-up, Jure, last quarter you commented that you think that the inventory correction on the component side was more or less complete. This quarter you saw some sequential growth in the overall new segment basis. Do you think that, that's pretty much worked out of the way now from an inventory correction standpoint? And within components, could you just perhaps elaborate a little bit within the new segment where you are seeing faster versus slower growth? Thank you.

Wamsi, definitely as I look at the pipeline of inventories with our customers, are pretty low. With most, there a few customers that have more, but overall I still believe that the pipeline in industry today is operating with a very low industry -- I mean very low inventory. We do expect, as we mentioned, we saw some upside in our September quarter, we see some positive trends right now on some of these components in December quarter. And hopefully that will continue through the calendar year 2013.

Again as I mentioned earlier, I think as I talk to our customers, they are pretty optimistic and I've been spending a lot of time there. They are cautious about the global economy and what is going on in Europe, and then the election year in the United States. Hopefully with all this behind us, that things will move in the right direction as we enter the January time frame. So we are pretty optimistic.

But again, back to these components. We do expect this portfolio to grow at a faster rate than traditional EMS business. Especially how we are repositioned these businesses, as independent as humanly possible, and also I think we strengthen them both from a capabilities point of view so they can compete in the future. If we did not believe that these businesses are not going to add a lot the volume in the future, we would not be investing in these businesses. So we are very excited because this is the side that should be loud because they're more rich today, has a lot of potential and as the economy turns around we are pretty optimistic about this diversified portfolio of Components, Products and Services that we have.

As I mentioned on a call earlier, we are really expanding our global services, which includes repairs, which is a major partner in the mission-critical type of products. Most importantly, we built the foundation in that side of the business that can be a $1 billion-plus business. The margin in those type of businesses, as we all know, are better than traditional EMS. So we're really investing in the businesses that can deliver the better results going forward. So yes, growth is very critical to us. Right now, and there is a lot of focus, but growing with the right customers, the right project, and also invest in a business that is going to be sustainable for many years in the future.

Thanks, Jure.

Sean Hannan, Needham.

Hello, Sean.

Yes, thank you. Good morning. Can you hear me?

Yes

Okay. Jure, just to clarify, if I understood your comments correctly, you're explicitly looking for growth in fiscal '13. I want to confirm that. And then, did you mean that you are looking for the improvements year over year? Or are you also looking for improvements on your top and bottom line, your business sequentially, through the year? How do we think about that?

Based on the -- if you look at the projects that we have with existing customers, they have been a long time. We are very fortunate that we are involved in a lot of new technology products, so that customer base is pretty strong with most of them. Some of the new programs that we won also have a fair amount of potential, and the new projects that we are presently involved. When you look at that, assuming all these things move in the right direction, I would expect us to deliver a better year than what we did in 2012. At the same time, if the economy falls off the cliff, the it's going to be a different world. But we do not expect that. We expect to see some improvements across most of our businesses, based on opportunities that we have in front of us today. That is really what I'm talking about. But, overall, yes, we do expect to have a better 2013 on the top line and on the bottom line.

Okay. Well, just to follow on that, can you perhaps elaborate when you think about that business providing the relative strength, as you look into December and into '13. To what degree is there perhaps, A, the project orientation where it is the momentum with the customers that is underway; versus B, better relative demand for some of your customer products in their general marketplace; versus C, explicitly the magnitude of the new programs and perhaps why the environment has not disrupted those ramps?

Let me just give you little bit more -- if I look at our communication infrastructure product, overall we expect today a slight growth, in that bucket. But if we look at the industrial side of the business, defense, the medical side, we expect more growth in that one. Also our storage, what we call Enterprise Computing and Storage, we expect that, based on the projects that we have, to move in the right direction. On the Multimedia, with that business being down for us, and actually there is two reasons there. Demand, and we also decided to end the relationship with one of our customers there. It was a relationship that was not profitable for us and we made a decision to exit that. We believe overall, that business now is stabilized. I think we have the right customers. So quality of the customer, I would say for us, is a lot stronger in 2012.

We do have a fair amount of good opportunities in front of us. Some new opportunities that we have a high confidence that will benefit in 2013. So, Sean, we'll be expanding in a unique market. So the key there is to focus on areas where it will allow us to deliver, not just a growth, but more sustainable growth, and go invest in this unique technologies that will allow us to make a little bit higher margin. If I can go back, I know this is a long answer to your question, if I just look at our circuit boards, backplanes, overall we expect that to do better in 2013 than what we accomplished in 2012. Same thing in Mechanical. We will deliver better numbers.

I think Defense and Aerospace products, which are mission-critical products, I believe that will also move in the right direction in 2013. We got some new capabilities we've have been investing a fair amount. I think our storage product that Sanmina, all the end products, JDM products, I believe we are positioned to really win some good projects there. I Think we have got some unique technology that is competing the high end of that gain. We continue to invest in that business more. I think our Viking technology modules, 2012 was a kind of a flat year for us there. We have been developing a lot of new technology in the solid state drives. Qualification orders on those type of products are taking a little bit longer than maybe what we anticipated in 2012.

We also expect that demand to move in the right direction in 2013. As I mentioned earlier, Sanmina Global Services, we partner with a couple key players during 2012. We expanded footprint of that, those capabilities and I think we're going to grow at least 20%, 30% a year in those areas. We improved our Design and Engineering Services that works across all of these businesses. So we did a lot the work in 2012 to position the Company to be able to win new programs and execute better in any economy. We prepared for both ways but to today overall, I would expect that, I don't know how much but, 2013 overall for us should be a little bit better year.

Thanks very much, Jure.

Thanks, Sean.

Craig Hettenbach, Goldman Sachs.

Thank you. Jure, you talked about a book to bill that was above one and some benefit from some new programs yet and demand environment has weakened. Could you just walk us through what you saw from customers as you progressed through last quarter into the beginning of this quarter in terms of that up-and-down in forecast you mentioned?

The biggest impact, as you know 50% of our business is communication networks. Our wireless access product demand from some of our customers is kind of weak this quarter. That affected our forecast for this quarter. If you look at the demand for that product longer term, this is mainly 4G LTE type of projects. We believe there is a lot of momentum there and we expect that business to be fine. Again, as I said earlier, I think communication networks for us. We do expect it to be slightly up, it is probably more difficult to forecast that at this time.

On the positive side, we are involved in advanced new programs in that group. Enterprise Computing and Storage I think will continue to move there in the right direction. That is really mainly driven by demand for a storage area and I believe that we have been investing some good solutions there. That other group that we talked about, is Medical/Defense/Industrial, I think all those will be okay. Semiconductor, a capital equipment still weak for us. We are involved in that business we've really focus on a new products. We believe in new technology coming out that we will have some positive momentum in 2013.

The energy area that we are really working on, an this is both from, it really crosses all energy area. It's a new area for us. We have got some positive things there. I think from a pure positioning, I believe that we are well positioned. But again, from a demand itself, I would say the hardest one for me to forecast right now for our customer base, would be the wireless access product, especially in the short term.

Okay. And then any color or commentary in terms of how those customer forecasts and patterns change as you went through the quarter?

At the beginning of the quarter they were a lot more positive than the end of the quarter. We had a lot more change in the schedule there. I believe that is going to continue through this quarter. It's a little bit more difficult to forecast. But at the same time, I want to also give ourselves the credit, this year was really hard to forecast the whole year, but I was just looking at my notes internally, when we had, in June time we had a detailed review, we had a sales meeting. We looked at what we're going to ship in the next two quarters and we were in the $5 million. We were able to -- there was a lot of changes in the product demand, but overall we were $5 million off. From that point of view, we were really micro-managing that today. And I think we need to continue to micro-manage that at least for next 90 days and we will see how things shake up as we enter the January time frame.

Okay. And then if I could just ask a follow-up, a couple of the companies in the EMS base have talked about some pressure in margins in the com space and one of them reset their targets in terms of profit. Any commentary there from your end in terms of, in addition to weak demand. Do you see any changes to the pricing environment?

Well, the nature of this business, Craig, here, we always have price, it's a tough pricing environment, drives all of our businesses. I don't think there's anything, at least the projects that I am involved, anything different now than is not there all the time. There is a lot of pressure on all our customers right now in this environment to, they have to deliver the better numbers, their customer are asking for a better deals. So we have to be creative. We have to, on our part, we invested a lot of money in our supply chain. Material is the biggest cost here. We're working very close with our customers, try to offer a better solutions when it comes to options and materials, so that we can go and give them a savings there. Those are the areas that we do, but, Craig, in this business, there is always price pressure.

Thanks. Thank you.

Christian Schwab, Craig-Hallum Capital Group.

Hello, Christian.

Hi, Christian.

I missed -- I'm sorry, can you just repeat your guidance for gross margin in OpEx for the upcoming quarter? I missed that.

Yes, so the gross margin guidance is 7% to 7.4% and operating expense is $62 million to $63 million.

When we look at the cost reduction in the printed circuit board restructuring, what of the $3 million to $5 million, what is mix between CoGS and OpEx?

Is going to be mostly cost of sales.

Perfect. And then lastly, congratulations on finally selling some of the real estate this quarter. After this $25 million to $30 million sale, how much real estate do you have left for sale?

Yes, there is probably another, somewhere between $50 million and $100 million that's still available for sale. You are right, '12 was a tough year on real estate sales, but the prior two years we'd actually sold $25 million, $30 million as well.

Great. No other questions. Thank you.

Thank you, Christian.

Jim Suva, Citi

Hello, Jim.

Thank you and congratulations to you and your team there at Sanmina.

Thank you, Jim.

A question and a follow-up question the same topic. The main question is, can you give us a little bit more details on, it looks like the gross margins came in quite a bit more healthier or stronger than projected. Can you give us some details on that? And then on the forward a guidance, should we expect gross margins to be relatively stable as we progress through the year? Or is there some volatility or changes seasonally through your gross margins as we look at potentially coming into a better environment, Jure, that you had mentioned?

I think it is difficult to say what would happen with gross margins on a seasonal basis. We're obviously working hard to improve and as we see the benefits of some of the actions we're are taking now, I would hope that by the second half of the year the margins would be a bit better. That is certainly is our goal. And then with respect to this quarter's gross margin and the guidance, we thought we had several one-time events last quarter that were negative and so we were a bit cautious in terms of setting the guidance this quarter. Just to make sure that we clearly understood what was going on there. Fortunately now with the benefit of hindsight it is clear that the anomaly was really much more Q3 than it was current quarter.

But, Jim, if I can add to that, for us right now, it is just loading these plans with better product mix and expanding these businesses that allowed us to make a little the better margin and I think as we grow those businesses, should help us to improve the margin. That is the focus.

Great. And then a quick question follow-up, probably for Bob, on the other income expense line, I believe you guided that could be approximately $13 million to $15 million. Is that kind of a good run rate? Or is there some timing to where that is going to keep going down lower in the future? Thank you, gentlemen.

Yes, so at this point I think that is a reasonable run rate to assume. As you know that particular line item just inherently has volatility, because we have miscellaneous things that show up there. I think the $13 million to $15 million range is a good way to think about it throughout FY '13.

Thank you and congratulations to you and your team at Sanmina.

Thank you, Jim.

Richard Todaro, Kennedy Capital.

Hi, guys.

Hi, Rich.

I just was going through a scorecard of what you guys have accomplished in the last three years, where your book value's increased from like 7.25 to 11.50. You've paid down debt and you've done a really nice job in prior years. It looks like when you have had losses they have mainly been below the line items intangibles or acquisitions or shutting down divisions. So, as I look forward and I'm just projecting this out, with lower interest expense going forward, now that your debt is lower, it appears that the company could throw off $600 million in net income in five years and you have a $600 million market cap today. I realize you have about $400 million in debt, net debt, so guess my question is, is if the company continues to generate this sort of earnings in a flat environment, one, what level of debt would you like to get the company down to? And then, two, what do you start to do with the free cash flow? And I'm not necessarily asking you to back the free cash flow numbers or the net income numbers I'm giving. But at some point, the amount of cash you are generating relative to your market cap starts to become ridiculous, and I don't think analysts are assuming any sort of assumptions with those cash flows in their forward models when they give four and five earnings multiples to your stock.

Yes, thanks, Rich, appreciate the observations and comments. With respect to your question on target debt and our plans over the next longer period, I'd say five years or so, we haven't put a specific target out there. Obviously the last, probably even the last decade, one of the key goals of the company has been to deleverage. And we have made a lot of progress on that over the last three years. If you go back to the recession, the gross leverage peaked something over eight and I think if you do the calculation now, you will see it is around three.

I believe that we are in a new equilibrium at this stage. We certainly have some appetite for continuing to deleverage, but we can make opportunistic decisions in terms of what we choose to do going forward. And by that, what I mean is, we will make a good capital allocation decisions. There may be times when it makes sense to repurchase more debt, and there may be times when it makes sense to repurchase shares. There may be times when there are small strategic acquisitions that make sense and are synergistic with our strategy. I really do believe we are in a new equilibrium now. I again, can't say what our plan is over the next five years, but if you look at the last five years, as you noted, we have generated a lot of cash and we think we'll be able to continue to generate cash going forward. And I think we can make some good decisions here over the next few years that will really benefit shareholders.

I guess for the final comment I would make is on your observation. I agree with you, I find it remarkable that our Company trades below book value with our ability to generate cash, And I think at some point in time, the market will catch up with that.

I guess one observation is, is that in the past some of the shareholder value write-downs, which it looks like most of your acquisition write-downs are behind you, hopefully, given the way your goodwill is at, etc., is that in the past some of the shareholder destruction has been having to write down something you've purchased and it seems like you have a decent business today. So whether it is in prior years paying 8% for leverage to somebody else to get a return, or doing an acquisition or rewarding somebody else. It seems like you stay on the same path, maybe do small acquisitions where you have to, that you're shareholders today, including management, will be rewarded one way or another down the road, based on these cash flow estimates. I just wish you guys the best and I give you an A plus for the last three year track record. Good job.

Thanks, Rich.

Thanks, Rich. Actually there's one thing I wanted to add, and in terms of the book value, obviously the big increase this quarter is on the deferred tax asset and the valuation allowance we released. That was a partial release, so in addition to the cash generation capability that you mentioned, there still remains a valuation allowance on probably close to $0.5 billion of deferred tax assets that, if we are profitable over the next five years, we'll be able to recognize more and more of that as well.

Rich, let me just add one more thing, I think we had a very difficult time to operate. We had a lot of debt after acquisition of SCI. Today, especially if you look at the last three years, we've brought it down to what I call reasonable. Personally, I don't like any debt and will continue to drive that down. But we have a lot more flexibility to do what is right today and how we are going to grow each of these business. So we're not going to do anything crazy. I think in a flat market, we're going to continue to generate cash, try to improve the margin in each of these businesses. And in a growth area, I really believe we're going to be throwing a lot of cash to the bottom line, because each of these businesses are now poised to do better. And I would like to leave it with that. So I appreciate your positive comments, but we are really excited what we can accomplish in the next couple of years.

Thanks a lot, guys.

Yes, thanks, Rich.

Amit Daryanani, RBC Capital Markets.

Hello, Amit.

Hi, Amit.

How you guys doing? Just a couple of questions from me. One, sequentially obviously we've got gross margins in decline by about 40 basis points is on the op line. Is there anything beyond the fact revenues were declining 3% or so sequentially that's driving that op margin declines?

Well, the biggest issue, you're talking about the Q1 guidance?

Yes.

Yes. The biggest issue, of course, is the revenue was down from Q4 to Q1. And that impacts all line items. If we had obviously similar revenue, I think we would be able to continue to see some progress on margins.

Got it. And then I think you guys, Bob, and maybe I didn't hear this earlier, but you mentioned you had a one-time benefit from a government incentive program in a foreign country. Was that on the interest income line and could you quantify that number for us?

Yes, it was in the other, we call it other income and expense line, which includes interest expense. And yes, that item was around $2 million.

Got it. And then just finally, you guys obviously indicated communications network segment to be down sequentially in the December quarter, that is again seasonal trends. Is this something specific you are seeing within wireline or wireless infrastructure that is driving that? Or is it really just broad-based demand softness across all of the different sub-sectors there?

As I mentioned, Amit, that is really mainly driven for us on that wireless access product. The rest of the networking, what we call, communication net force, are actually pretty good shape.

Perfect. Thanks a lot.

Thank you, Amit.

Operator, I think we have time for one more question.

Yes, sir. Osten Bernardez, Cross Research.

Hello, Osten.

Hey there. Good morning. Thanks for taking the question. When I look at the mix of your component business, aside from the activity that is taking place with respect to PCB, where do see the greatest margin improvement opportunity going forward into 2013?

As I said earlier, Amit (sic), I am very excited about our Global Services which is a [payable logistics] both forward and reverse, lot of engineering services there that we sell, so that's basically in the bag. I think that business is moving in the right direction. I think our products groups, both our storage products, defense, mission-critical products and also our solid state drive solutions what we call Viking technology, I think all three of those have a fair amount of opportunity. And then I see, as I mentioned earlier, unless the whole economy falls off the cliff, I would expect a better results, I should say improvements from our high technology printed circuit boards and backplanes and our mechanical systems group.

And how should we be thinking about the, obviously the internal studies to make the decisions you needed to make with respect to the upcoming restructuring? But how susceptible are the other sub-segments of your business or the components business to future restructuring?

Well, first of all, as Bob mentioned earlier, we did a lot of reviews in all of our businesses on a quarterly basis. We believe that what we have today, after this transformation, and really this transformation has been planned for a long time, we always review it, we've made a major commitment with investments in China. We got a basically, a huge new factory there. It just did not make sense for us to have a two similar type of factories, one in Malaysia and one in China. We feel the one can provide the solution. Also I think it is important to understand, the type of product that we build, these are really, we are driving to advance printed circuit boards, that we can compete in some of these things even from North America. So we have been investing heavily in our North American operations, that provide for a unique technology. So we feel comfortable what we have today, we have been tuning this thing up. Most important for us right now is, really the growth of these and I believe we need some demand to improve. But that demand comes, I think, operationally we are ready to execute.

Thank you very much.

Well, ladies and gentlemen, that is all we have for today. Again, appreciate your time and appreciate you letting us reschedule. It's unfortunate thing that we had to do it, but I appreciate you guys being on our call today. If you guys have any more questions, we will be ready to answer these at any time so give us a call.

Yes, thanks everyone, and we'll see many of you in New York in a couple of weeks.

All right. Goodbye.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.