Sanmina Corporation (SANM) Q3 2008 Earnings Report, Transcript and Summary

Welcome to the Sanmina-SCI third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Jure Sola, Chairman and CEO of Sanmina-SCI.

Joining me on this conference call today here with me are Joe Bronson, our President and Chief Operating Officer and David White, our Chief Financial Officer. On today’s agenda is that I’ll have David White review our financial results for our third quarter for fiscal year 2008, Joe Bronson will review operations, then I will follow up with comments relative to Sanmina-SCI results and future goals. David, Joe and I will then open up for Q&A. And now here is David.

Before I get started please note that selected portions of this presentation are available in the form of a slide presentation on the internet which can be accessed from the investor relations section of our website at www.sanmina-sci.com. I’ll be making references to these slides during the course of my remarks. Part of discussing the state of our business and financial information with you, I’d like to take a moment to review the following safe harbor statement. Slide one. 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 economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company’s most recent annual report on Form 10K for the year ended September 29, 2007 filed on November 28, 2007 as well as our most recent report on Form 10Q filed on May 6, 2008. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. You’ll note in our press release issued today that we have provided you with a statement of operations for the three months and nine months ended June 28, 2008 on a GAAP basis as well as certain non-GAAP financial information. Our reconciliation between the GAAP and non-GAAP financial information is also included in the press release. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, loss on extinguishment of debt, non-cash stock based compensation expense, amortization expenses and other infrequent or unusual items to the extent material. Any comments we make on this call as they relate to income statement measures will be directed at our non-GAAP financials 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’re referring to our non-GAAP information. Prior to describing our financial results I’d like to remind you that effective last quarter our personal computing business and the related logistics services have been accounted for as a discontinued operations. My comments today, which will focus almost entirely on the results of our continuing operations, will include a review of the results of operations, a discussion of selected balance sheet accounts and corresponding metrics, an update with respect to our restructuring activities and finally I will conclude with guidance for our fourth quarter of fiscal 2008 ending September 27, 2008. Slide three. Revenue from continuing operations for the third quarter of fiscal 2008 was $1.9 billion which was above the high end of our guidance of $1.775 billion to $1.875 billion, up 4.7% versus $1.82 billion in the prior quarter and up 13.7% versus the $1.67 billion reported in the same period a year ago. This increase was largely driven by the strength in the telecommunications and enterprise computing and storage businesses. For the third quarter, reported GAAP earnings from continuing operations of $12 million which equated to $0.02 a share. Our total company GAAP earnings were $15 million which equated to $0.03 per share. Non-GAAP earnings from continuing operations for the quarter were $26 million or $0.05 a share. This compares with $0.03 per share in the prior quarter and a loss of $0.07 per share in the same period a year ago. Our total company non-GAAP earnings were $38.2 million which equated to $0.07 per share. Our profitability in the third quarter marked the fourth consecutive quarter of improvement in overall profitability. Slide four. For the third quarter our revenue by end market was as follows. The communications end market represented 44% of our net sales which in absolute dollar terms was up approximately 15.5% from last quarter. Enterprise computing and storage represented 18% of net sales during the quarter. Sequentially, this end market was up 7.7% in absolute dollar terms quarter-over-quarter. The multimedia end market accounted for 15% of net sales during the quarter and was down 9.5% in absolute dollar terms versus the prior quarter. The medical end market accounted for 10% of net sales during the quarter which was down approximately 3.5% in absolute dollar terms from the prior quarter. And finally, our industrial semi conductor, capital equipment, defense aerospace and automotive end markets of our business collectively accounted for 13% of our net sales and in absolute dollar terms were down 5.1% relative to last quarter. All three sectors were down from the prior quarter. Slide five. Our top 10 customers accounted for 48% of total sales in this quarter. Sales to our top 20 customers accounted to about 63% of total sales in the third quarter. We had no customers in the third quarter whose sales were greater than 10% of total sales. Slide six and seven. Gross profit for the third quarter was $141.4 million. As a percentage of sales gross profit was 7.4% which was up approximately 50 basis points from the prior quarter as a result of improved operating efficiencies in our EMS business as well as profitability and improvement in our technology components business; specifically, our printed circuit boards and enclosure divisions which were both up quarter-over-quarter. I would also mention that our enclosures division posted its third consecutive quarter of improvement earning positive gross profits for the first time since the second quarter of fiscal 2007. When compared to the same period a year ago our gross margins were up approximately 160 basis points. Selling, general and administrative expenses for the third quarter, excluding stock compensation expenses, were $75.3 million down approximately $1.7 million quarter-over-quarter and down approximately $5 million versus the same period a year ago. Research and development costs, excluding stock compensation expenses, for the third quarter amounted to $5.8 million which was up $1.6 million quarter-over-quarter and down approximately $0.2 million versus the same quarter a year ago. Our combined R&D and SG&A expenses for the third quarter, excluding stock compensation expenses, amounted to $81.1 million or 4.3% of sales. These expenses have continued to trend downward over the last year as we have focused on reducing infrastructure costs in preparation for our exit in the personal computing business. We expect to further reduce our operating expenses by approximately another $15 million on an annualized basis by the end of this calendar year as we achieve additional efficiencies. Operating income for the quarter was $60.4 million. Our operating margin was 3.2%, up approximately 70 basis points quarter-over-quarter and up 260 basis points on a year-over-year basis. Net interest and other expense which consists primarily of interest income and expense as well as gains and losses from foreign currency translation was $23.1 million versus $22.1 million in the prior quarter and $31.5 million in the same period a year ago. Depreciation was $20.7 million in the third quarter, down approximately $1.5 million from the prior quarter and our EBITDA for the quarter was $81 million. Our tax provision for the third quarter was an expense of $11.2 million on pre tax non-GAAP earnings of $37.2 million and our tax rate was approximately 30%. Our lower tax rate reflects the favorable impact of the first phase of a number of business model changes we are pursuing to dramatically reduce our effective tax rate over the next year. Slide eight and nine. As we turn to the balance sheet I need to comment on the basis of presentation used here and in our press release. As reflected in our press release financial statements, U.S. GAAP requires that the net book value of those balance sheet items that are sold or transferred as a part of a discontinued operation be collapsed into two reported line items on the balance sheet. Assets held for sale and liabilities have discontinued operations. The sale of our personal computing business to Foxconn as well as our sale of the Lenovo business only involved the sale of inventories, certain plant and equipment assets and a small amount of liabilities which were primarily payroll related. Sanmina retained all trade, accounts receivable and trade accounts payable balances. These balances will be collected by Sanmina in the case of the receivables and paid out in the case of the payables as they become due. Since these balances will not be transferred to the acquirer, under U.S. GAAP they must remain classified as trade receivables and payables; this in spite of the fact they will not be recurring after the sale of the business. As these balances really aren’t part of our ongoing business our working capital metrics would be highly distorted if one were to use these balances in conjunction with an income statement to completely excluded this business. Accordingly, the cash cycle day metrics that I’ll refer to as well as those shown on these slides have been calculated to exclude these personal computing AR/AP related balances. So with that explanation accounts receivable at the end of the quarter was $1.18 billion. Excluding our personal computing business receivables, excluding any factoring of receivables, our gross DSOs for the core business were 51.3 days which is relatively flat with the prior quarter. Same notes on my comments last quarter, while these DSO figures have been calculated without the benefit of any factoring, historically we have sold accounts receivables part of our working capital management. For administrative convenience, however, the receivables we sold in prior quarters waded exclusively to our personal computing business. With the sale now of our personal computing business completed we expect to transition our factoring program over to other customers during the fourth quarter. Upon full transition we would expect our net DSO figures to improve by approximately 7 to 10 days. On an absolutely dollar basis, however, this will mean a reduction of approximately $75 million in factored receivables when compared to the amounts historically factored with our personal computing business. Inventories at the end of the quarter were approximately $901 million, down approximately $49 million quarter-over-quarter. Inventory days at quarter end were 47, an improvement of four days versus the prior quarter. Our third quarter inventory performance for continuing operations resulted in our lowest inventory levels in 11 quarters and highest inventory turns in 12 quarters. Net capital expenditures in the quarter amounted to approximately $25 million. Accounts payable at the end of the quarter were $1.36 billion again excluding payables relating to our personal computing and logistics service business; our AP days for the quarter were 49. Our operating cash cycle which we define as unfactored or gross cash cycle days for the third quarter was 49. Again, we expect the full transition of our AR factoring program DMS customers to improve our net cash cycle by 7 to 10 days. During the third quarter cash flow from operations was a positive $121.9 million. Pre cash flow which is cash flow from operating and investing activities was a positive $118.7 million for the quarter. Our debt at the end of the third quarter was $1.48 billion which was relatively flat with the prior quarter. Our earliest debt maturity is $180 million which is comfortably two years away from maturing. Despite slower debt repayments than we originally planned at the beginning of the year we still look to retire this maturity long before it matures. Our next debt maturity isn’t then until 2013. Cash and short tem investments at the end of the quarter were approximately $982 million. Let me now comment on restructuring. During the third quarter we incurred approximately $13 million in restructuring expenses of which $8 million was cash paid out during the quarter. This expense primarily related to reductions in force associated with various corporate functions as well as plant closures in Jönköping, Sweden, Phoenix, Arizona, and Cherbourg, France. We expect to incur additional restructuring charges of approximately $10 million to $18 million over approximately the next six months or so. At this point we have announced, implemented and are nearing the completion of all of our currently planned restructuring actions. Slide 10. Now let me turn to guidance for the fourth quarter fiscal 2008. Consistent with prior quarters the information I provide will generally exclude stock based compensation expenses, restructuring and integration costs, impairment charges, loss on extinguishing of debt, amortization expense or other infrequent or unusual items. Our fourth quarter guidance for continuing operations is as follows. We’re targeting fourth quarter revenues of between $1.80 billion and $1.90 billion. We expect gross margins to be in the range of 7.6% to 7.8%. We are targeting our operating margin to be between 3.3% and 3.6%. We expect our tax rate to be approximately 25%. Basic and diluted shares for the fourth quarter are expected to be about $531 million. This equates to a non-GAAP diluted EPS of approximately $0.05 to $0.07 per share. We estimate the depreciation for the fourth quarter will be approximately $21 million consistent with last quarter and fourth quarter capital expenditures to be in the range of $25 million to $35 million driven primarily by our expansion activities in India. Finally, we expect our fourth quarter cash flow from operations to be positive. As a final comment you’ll note in our press release that we announced today our intentions of seeking shareholder approval of a reverse stock split. While we recognize that our market cap, just like everyone else’s, is predicated on our performance we also believe that a reverse split would be advantageous for a number of reasons. First of all it would allow a broader range of institutions to invest in our stock, namely funds that are prohibited from buying stock whose price is below a certain threshold, increasing trading volume and liquidity. It would help increase analysts’ and broker interest in our stock as their policies oftentimes discourage them from following a recommended companies with lower stock prices. It would reduce the number of our outstanding shares, currently $531 million, to a level more appropriate for a company with our market capitalization. And finally, by increasing our stock price proportionately to the reduction in the number of outstanding shares our reverse split would decrease price volatility as small price movements now cause relatively large percentage changes in our stock price. This action if approved by shareholders is not expected to take effect until after the end of our fiscal year. This concludes my remarks and I think you for your time and with that I’ll turn the time over to you, Joe.

I’d like to provide an overview of our third quarter operating performance and outlook for the fourth quarter. These comments relate to the continuing operations of the company. Third quarter performance resulted in another sequential improvement in revenue and gross margin. Revenue is 5% higher than the second quarter and exceeded the top end of our guidance with strength throughout the EMS grew. Strong markets for the company this quarter were telecomm and high end computing and storage. The company’s operating profit for the third quarter was 3.2% compared to 2.6% in the second quarter. The third quarter execution of objectives were as follows. One, improve underperforming operations in the EMS group that were operating below the corporate average. Second, we will improve the components business profitability. Third was to improve supply chain management and fourth was to generate free cash flow. Most of our EMS operations are now at profitability levels that either meet or exceed the corporate gross margin average. These improvements represent the execution of a number of initiatives including cost reduction, operational realignment and revenue improvement that resulted in increased gross margins. Revenue and gross margins in the components business were slightly higher than the prior quarter. The company turned to gross profit in the enclosures division for the first time in five quarters. Enclosures unit continue to implement lean manufacturing throughout its global plant structure which has significantly improved on time delivery and quality performance. Profitability in printed circuit boards was slightly higher in the third quarter than the second quarter. Improvements were evident in certain Asian operations with continued good performance from operations in North America. Precision machine components business unit suffered a gross margin loss in the quarter due to the steep drop in revenue due to the continued decline of demand from the semiconductor capital equipment industry. Additional highlights for the quarter included improvement in our memory modules component business and sustained profitability in back planes and cables. Our focus on customer delivery and quality metrics for our production and design services has demonstrated a components operation capability to differentiate its performance in the industry. Global supply chain management and operations executed well across the company to manage and leverage the pricing of commodities and components in the wake of market disruption from oil price hikes and global demand hikes in the prices of commodities. As we work closely with our customers we’ve been able to cope with significant increases in the prices of commodities and components through global sourcing activities and inventory control prophecies and procedures. In the third quarter we generated approximately $120 million in free cash flow due to improvement and profitability, inventory management and receivables collections. Inventory turns increased to approximately 7.9 compared to the second quarter performance of 7.2. We expect this trend to continue as many of our operational initiatives are designed to reduce the assets employed in the business. With respect to the outlook the completion of the restructuring of our manufacturing capacity and the sale of our PC business enables us to address opportunities for new and existing customers who are increasingly turning to an outsourced manufacturing model. This level of outsourcing is highly dependent on design engineering capabilities for high mix low volume programs. Extensive design resources and local capability in proximity to customers is presenting increased opportunities for Sanmina in the markets we serve. Geographically, customers are becoming increasingly concerned about freight and logistics cost created by the significant rise in global energy prices. Our global footprint now provides our customers with significant flexibility in addressing their needs for their regional customer base. Our NPI plants provide design and prototype manufacturing capabilities that enable the customer to transition production from an internal to an outsourced model. Customers can then choose the appropriate low cost regional facility for low cost volume production. Our large scale production facilities in Mexico, China, Southeast Asia, Eastern Europe and now India provide customers with viable low cost opportunities when they ship to their markets in these regions. Despite the economic downturn the company feels that business opportunities exist to allow sales and earnings growth. Requirements for success continue to differentiate our performance of service offerings and leverage the improvements we have made and continue to make in capturing increased share of the outsourced manufacturing market for high mix low volume applications. After achieving greater than the 3% operating income objective the next goal is to improve operating profit that exceeds 4%. The company is making continuous progress towards these goals which we expect to be achieved through sequential improvement in revenue and operating efficiency in the near term and in future quarters. We expect to be able to achieve our operating goals provided our customers’ business is not significantly impact by potentially poor global economic conditions. These goals can be accomplished by a continued focus on operational initiatives and productivity improvement programs while providing excellent service and cost reduction for our customers. We believe that the components business will grow and achieve increasing levels of profitability as we’ve been gradually improving the capabilities of these operations. We are building a new management operating system for these components business units which will position the operations profitability to exceed corporate margins and lead the company to an improved margin structure with continuous improvement over the next several quarters. Our core EMS business is achieving good results and positive growth. These operations position the company for further stable growth particularly with the completion of our restructuring and global footprint. We are in the process of ramping our India operations in the fourth quarter and the first quarter of 2009. We are pleased at the current level of progress to date through fiscal 2008 but we recognize that the job is far from complete so we will continue to drive the company to improve performance, differentiated customer satisfaction and improved returns to shareholders. So that concludes my comments.

Again, you heard from David and Joe that we are pleased with our third quarter results especially the new factoring, the challenging market conditions. Again, as Joe mentioned we’re a long way away from being happy with these results. Anyway, it was a good quarter for many reasons. I think nice growth quarter-to-quarter, financial metrics went in the right direction and as of July 7, we’re completely done with the PC business. Restructuring is basically now behind us so basically what does that mean is that all the hard work that we’ve been working on for many years is now behind us and now we are in a building mode. It’s a lot more fun focusing on that and focusing on possible growth. I’m very confident about the company’s foundation that we built on today. I think we have a right global infrastructure in place and Sanmina-SCI is strong compared to the position. We do have to focus strategy today, focusing on our key markets where we do have a competitive position or competitive advantage. We do focus on our key global customers that have been with us in some cases for many many years. We are able to expand that base and with a truly end-to-end manufacturing solution company with technology and services again that are competitive advantage. Now what I’d like to do is to give you a market condition update. As David shared the guidance with you, our guidance for this quarter is basically flat quarter-over-quarter but on a positive side we do feel confident that we can improve our gross margins from 20 to 40 basis point from over the third quarter and operating margin improvements 3.3% to 3.6%, which is approximately 10 to 30 basis points. So what’s going on with the market demand? As we all know our market conditions are challenging but it was also challenging last quarter. I don’t see major changes for us at least last time we talked. The entire economical environment is hard to predict at this time but again, as we all mentioned here, we remain cautiously optimistic about the markets that we play in. Now what I’d like to do is talk to you about maybe more based on our segments and what we think is going to happen in short term. If I look at the communication infrastructure, which is in our group networking and wireless business, last quarter with a nice growth so if we look at that in Q4 we’re forecasting flat. High end enterprise computing and storage was also nicely a plus quarter. For this quarter we’re forecasting flat down. Medical was slightly down last quarter. For this quarter we’re forecasting flat up. And then we have a group called industrial semiconductor, defense aerospace, and automotive. In last quarter that group was down approximately 5%. For this Q4 we’re forecasting flat down. That’s mainly driven by semiconductor business. Multimedia was down last quarter; for Q4 we are forecasting up quarter for multimedia. Now I’d like to talk a little bit more about market condition but longer term. Even with all the market challenges that we are faced today we still see growth opportunities ahead of us. So why is that? Today our company has a reasonable good pipeline of new opportunities that we are working on. Our customers have a low inventories. New Sanmina-SCI offers our customers clear and differentiated competitive solution model today. We do have an excellent customer base that is diversified and that is global. And again we’re involved in a right market where we are focused on these segments and where we provide our customer with competitive advantage. So in summary, with the major restructuring now behind us we are excited about our future so we can focus on our core business. We’re well positioned to compete. In short term we’re focused 1) to continue to generate free cash flow 2) margin improvements and growth; again we do expect nice margin improvements in Q4 as I just talked about 3) customer solution; providing our customers with competitive advantage every time and 4) driving our shareholders’ volume. The bottom line, we will continue to take actions to improve the company no matter what it is and goal for us is to be a leading performer in the EMS industry, nothing less than that. And I think that Q3 was a step in a right direction. Now I would like to extend my thank you to our investors and analysts for participating on this conference call today. I would also like to express my special thanks to our employees for their hard work and dedication to this company. Operator, we are now ready to open the lines for question and answers. Thank you again.

(Operator Instructions) Your first question comes from Steven Fox – Merrill Lynch. Steven Fox – Merrill Lynch: Can you just review the expansion plans for India? What is going to be focused on and the risk that there’s some extra short term costs that could hit the numbers?

Actually, we going to India based on our customer demand, Steve. Actually, we’re starting to produce in India. We don’t, if you look at the last quarter, they made a shipment. We’re going to build a new building down there. That’s really already calculated in our plan but we really believe that India will be successful very fast, just based on the demand that we have in India and we are, our first step in India is not major. We put in one building and I can tell you today it’s almost booked. Steven Fox – Merrill Lynch: And it’s for what type of customers, Jure?

Right now it’s a telecommunications infrastructure and medical and industrial. Steven Fox – Merrill Lynch: And then my second question on the components business. You mentioned slight improvements in profitability but can you be more specific on where the components margins are and how long do you think it’s going to take from here to get to acceptable levels?

Well, first of all, they build on corporate average. We don’t like to break it down; acceptable levels. As I always said I think our circuit board business should be generating over 20% margins and the rest of the businesses should be well over 10% margins. And we expect to get, as Joe mentioned there, to get to double digits margins sometimes in 2009. We have more than half of those businesses have delivering higher than double digits margins today but the biggest improvement that we need to go up will be enclosure but as Joe mentioned they turn the profit, slight profit this quarter and I think today it’s all about the demand. Our operational issue that we have there are fixed and I’ll turn it over to Joe. Maybe Joe even makes a few comments on operational issues that we had.

Well, I think we’ve made a lot of progress in the components side of the business, particular enclosures. Last year had some pretty serious issues in deliveries and also inventory control. The implementation and retransformation of a number of plants and facilities have really streamlined those operations to lean models and it starts with customer satisfaction and getting your deliveries in on time and we’ve been able to do that with a high level of quality. And that essentially leverages the whole fixed cost structure of these operations and so profitability this quarter well positioned to improve profitability particularly as revenue grows right now, so we’re pretty pleased. We also had pretty good performance in our modules group and in the boards group and we just have a situation where the demand is low for the semi cap equipment and we’re looking to diversify that customer base by some new business in the industrial sector, the non-semi basis and that’s also coming along. Steven Fox – Merrill Lynch: Just a last question. It’s a little difficult to answer, I’m going to say that up front, but you guys have made steady progress over the last few quarters. You have a market cap right now of about $800 million for business with about $8 billion in sales which in my mind makes you, and it’s a fairly attractive book of business, in my mind it would make you susceptible to a potential takeover. Can you talk about what else you could do to either improve the business on your own and your willingness to be part of another organization?

First of all, let me make it very straight, Sanmina will be independent company unless somebody comes here with a huge checkbook. So I think 1) we’re really focused on running this business and I’m confident, first of all, our company, if you look at our competition where we focus today let’s compare our $2 billion run rate to some of our competition. We’re in a good position here. We have a strong balance sheet. Most importantly I think we’ve got the talent that is one of the better in the industry. I have no doubt that this company will get back again where it needs to be and I think you’re going to see that in nice improvements every quarter. Unfortunately, we have a challenging market out there but I think we’re in a good position to go through this tough time. We went through major restructuring, we lowered our cost, we’re going to continue to run the tight ship here but I’m excited growing this company again.

If I could just jump in, Steven, and add one further piece of color there. When you look at the market cap of the company you’re only looking at one piece, right? You have to look at the enterprise value which will also include the value of our debt so it’s both those components; it’s not just the market cap. Steven Fox – Merrill Lynch: Yes, I’m even on those metrics; it’s pretty compelling for a strategic buyer but I appreciate the feedback. I know that’s not an easy question to answer.

Your next question comes from Jim Suva - Citigroup. Jim Suva – Citigroup: Back on the India topic a little bit, can you maybe tell us about, that business is going there. Is it coming away from some of your other operations? How much of the new building being booked are being opened up in Q4/Q1 of 09 is booked? Because it just doesn’t seem like your top line sales is growing a huge amount to open up a facility and maybe you can just let us know the square footage and what you have in…

Jim, again this factory is not being opened strictly because we got a huge demand that we don’t have extra capacity somewhere else. This is a strategic move for us, for India, based on our customer requirements for Indian market. We see India today as a really focusing on India markets for our existing customer base. We have a small operation in there today that is 100% booked. I wish a new factory will be about a 200,000 square foot factory so it’s not a huge factory. We expect this division to be profitable after few quarters and we expect it to be fully booked in first six to nine months of operation. Jim Suva – Citigroup: Does business come away from some of your China factories or in start a restructuring program?

No, it’s not coming from China at all. There’s no restructure involved. This is the market that if we don’t have Indian presence we’ll go somewhere else. Jim Suva – Citigroup: On the restructuring topic, you’d mentioned that you’re getting close to the end of it. At the end of this, do you think that you’ll be clean and out of it or do you see something else that maybe you’re keeping an eye on?

Jim, first of all, let me clear. We are as far as I’m concerned, we’re done with shutting the factories. All that as David said, we are now and sold the shutdowns. For all the practical purposes everything is done. Now from accounting purposes there’s a few lingering things that got to be on but then you look at the people in the factories that we shut down, basically 98% of those people are gone. So going forward you never know but based on today I feel very confident that at least in my career I’m done with restructuring. Jim Suva – Citigroup: Dave, those lingering things. Do they start to really wind down here as we exit December or when should we see those go away?

They should go away within the next six months.

Your next question comes from Kevin Kessel - JPMorgan. Kevin Kessel – J.P. Morgan: David, I guess this question maybe is for you. On the explanation you were giving regarding the sale of the PCs and the impact on working capital, I just wanted to get a sense for the actual impact on the inventory dollars and then how that might have affected the cash flow from operations because I know that the way two transactions were done is that they straddled the court of right one happened before and one happened after?

Yes, the Foxconn deal closed in the first week of July so it’s not in the Q3 numbers at all. Kevin Kessel – J.P. Morgan: You got an inventory reduction of what, $46 million? I’m just curious what portion of that was related to the PC part that was sold?

Well, that $46 million was entirely from continuing operations. Kevin Kessel – J.P. Morgan: When we look at the September quarter, there is a portion of inventory that you ended the quarter with that essentially transitioned over to Foxconn in July.

That’s correct but since the inventory is one of the assets being sold it’s not part of the inventory report; it’s part of the assets that are being dispositioned. Kevin Kessel – J.P. Morgan: So it’s already been reclassified?

Yes, so when we talk about our inventory today we are talking entirely just about continuing operations. Kevin Kessel – J.P. Morgan: So no effect on cash or from operations or from a working capital perspective?

No. Kevin Kessel – J.P. Morgan: Just to understand the accounts payable aspect of it, you’re holding all accounts payable for the entire operations and when I look at it, just the way it’s at least reported, that might explain why there’s the increase there was but not on a continuing basis it almost looks like payables are up 20 days sequentially.

That’s why in my comments, Kevin, that you can look at the numbers right off the balance sheet because the payables and the receivables attributable to the PC business are not carved out. They are part of our reported AR and AP and so that’s why I did the calculation for you in my comments. Kevin Kessel – J.P. Morgan: Would you expect that for, any reason that the payables that were part of the PCs would be able to be extended past your normal payment period?

They’ll be wound down by the end of the fourth quarter. Kevin Kessel – J.P. Morgan: So they’ll be normalized again?

They’ll all be normalized by the end of the fiscal year. Kevin Kessel – J.P. Morgan: But in terms of breaking those amounts out in dollars, is it possible to do that?

You’ll see it in our queue. I can tell you in rough numbers they’re on the order of $400 million each. Kevin Kessel – J.P. Morgan: Just in terms of looking at the components business, so I understand what Joe had said in your area about these improvements that we’re seeing there. At the gross profit level if we looked at components overall right now, as a total unit, would they be operating profit positive or are they operating profit negative?

Positive. Kevin Kessel – J.P. Morgan: And is there any way to give just a sense of the size of the overall components division in terms of run rate right now or maybe the run rate of the PCs? I know PCBs used to be around $100 million.

Kevin, if they were independent company then we’d be running around $1.4 billion run but it is a lot of stuff gets shipped internally. That’s why these things are so hard to break it down. We’re selling, when we go to our customers we don’t sell them just a bare board, we want to sell them a full system. I mean idea but our recommend here is to give our customer better competitive advantage and hopefully if we do it right we make little bit of money. That’s really the purpose of the vertical model and today we, as I said in my prepared statement, if you look at our business today, the way we structure I think we got the right footprint. I think, as Joe mentioned, operationally job is now finished with the restructuring. This was the biggest, think back when you move high tech technology product around the world as we did, especially when the capabilities that we have internally I think my personal excitement is that this is now behind us; we can focus on growing. And I think that’s one of the reasons you’re seeing and if you look at this quarter this is a very clean quarter. Discontinued operation, every one of our methods went in the right direction and it’s a challenging market as you know better than I do, and the goal here is to focus things that we control. We don’t control the market but we’ll focus on things that we control and we believe that we still can even in the tough environment, have an opportunity to improve the margin. I’ll answer all the mangos away.

We had to improve the components operations to take advantage of the vertical model because if a couple of the pieces aren’t working well, the customers aren’t going to buy the vertical model. So now that we’ve basically have all the operational issues down behind us, you’ll always be able to make things better but in terms of being able to sell we’re seeing a lot of these new opportunities have really good potential for verticalization possibilities whereas before we would be hard pressed if we saw one of these units unable to perform well. So this gives us where we wanted to be with respect to pursuing this as Jure says. Kevin Kessel – J.P. Morgan: I guess the last is maybe more of a housekeeping question but obviously given all the changes recently with the divestitures and the change in overall business mix going forward, is it possible to give investors the sense now for what the makeup is of the new, you guys give the top 10 customer and top 20 customer, if you could us just in alphabetical order who the top 10 customers are on a go forward basis so we could have a better understanding?

First of all, we don’t give you that. I think you know who our customers are, Kevin. Only three customers that were over 10% or close to 10% were Lenovo, IBM PC business, not the PC but the low end server business and Hewlett Packard PC. So we still have IBM as a customer today; of course they’re not 10% customer. We still have HP as a major customer but they’re not 10%. Lenovo is a very small customer so everybody else is basically on the same list so we have a great customer base. We just exited what we call non-core PC business but when it comes to a lot of key customers that’s the core focus right now. Kevin Kessel – J.P. Morgan: I understand that. I was trying to get a sense for who would replace those other three but it sounds like two of the three might still remain as core top 10 customers.

Oh yes. IBM and HP is our core business. Except PC.

Your next question will come from Brian White – Collins Stewart LLC. Brian White – Collins Stewart LLC: When you talk about the pipeline, can you quantify how big this pipeline is and really where the opportunities are in terms of markets?

The pipeline is pretty good. This is combination of opportunities, new outsourcing deals and the deals that we don’t have. We believe that these deals will happen even if the economy continues to be challenging because some of our customers are want to outsource more because things are challenging out for them and the internal costs are too high, so there’s some benefit there. The second thing, I think some of the hard work with some of the new programs that we working are starting to pay off. I hate to predict what percentage there is but it’s substantial amount. It’s more than a billion dollar opportunities. Brian White – Collins Stewart LLC: In terms of the markets, if you had to say the top two markets in terms of opportunities, where are they?

I would say it’s really for us it’s in networking side. It is in medical side and industrial side. Brian White – Collins Stewart LLC: And then when we look at, what did you get paid for the sale of the PC business to Foxlink and Lenovo?

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

Brian, I guess you can break it up into a couple pieces. In terms of what we have actually received for the business, roughly $220 million, the customers that we sold it to per sec of EMS companies. But also over that time period the other thing to note is that we, the price that we negotiated for the business was pretty much fixed a long time ago and so since the date we’ve announced the deal, in addition to $220 or so million that we collected on the sale of the business, we’ve also earned about $120 million over the last almost two years now. So that’s generally what we’ve gotten for the business since we announced getting rid of it. Brian White – Collins Stewart LLC: On the balance sheet, am I seeing that $220 million as of the June quarter or a piece of it?

There’s still about $30 million, $40 million that’ll come in in fourth quarter.

Your next question will come from Louis Miscioscia – Cowen and Company. Louis Miscioscia – Cowen and Company: Just a couple of simple questions first. The R&D line seemed a little bit high this quarter. Maybe if you could just mention why and if we could get, David, to get some guidance on interest expense for the rest of the year?

Lou, you didn’t come in clear. Could you repeat that first question? Louis Miscioscia – Cowen and Company: The R&D line seemed a little high in the quarter. Just was wondering why and what you would expect for the R&D line for the year and the same thing on interest expense?

Yes, R&D came over higher there because we do have a fair amount of investments in our defense and aerospace group and a storage area came. That number’s going to go up and down but you probably is going to hang around $5 million per quarter. Louis Miscioscia – Cowen and Company: Interest expense is going to be about this level for let’s say the next three or four quarters going forward?

It would be somewhere in the $24 million, $27 million range, probably. $23 million to $27 million. Louis Miscioscia – Cowen and Company: My last question goes back to one earlier. When you look at the component business, because it seems that the EMS operation is doing quite well. It looks like it’s running about 3.8% operating margins so the main expansion of upper margins will probably come as the component business turns around. Do you look for that to be a linear improvement or do you expect there to be a hockey stick that maybe when we get to the September quarter or December quarter or earlier of 2009, the margins and the business really starts to take off.

I think, Louis, it’s not that very simple just to say let me divider this cake in a two pieces. Your assumption there close but you’re not 100% there. Definitely all the EMS part of the business is doing well and we expect that business to continue to perform well and we believe they’ll continue to improve. As we just mentioned earlier I think components biggest issue that we had components during the restructuring in some of these new factories not performing to what Sanmina as a company is used to. Now I believe that all those headaches are now behind us. Right now it’s all about the growth and if the growth comes faster I think you’re going to see the Sanmina’s gross margin as a company go. We’re still targeting over double digit for whole company so that’s our goal but we’re going to take, as Joe said earlier, we went over 3%. Took us a long time to get there; hopefully we’ll get up to 4% up pretty much a lot faster and go from there.

Your next question will come from Amit Daryanani – RBC Capital Markets. Amit Daryanani – RBC Capital Markets: Just a question just on the components side again. For us to get to carpet like operating margins, call it, do we need revenues to float for the model or are there still too these internal initiatives that we had implemented several quarters ago that still need to possibly impact the margins?

Well, I think we expect to improve the margins. I think we can do better than what we are doing today across all our businesses. Definitely as the demand goes up we expect our margins to improve. I think companies today is running lean and mean for their revenue but believe me we can ship a lot more revenue than $1.9 billion. Amit Daryanani – RBC Capital Markets: It has to be a revenue driven function to expand margins from here on the component side right?

Well, no. We have opportunity to expand it the way it is today. Let’s just say there’s, we don’t book any extra dollar today in our component business we can improve the margin. The same thing in our EMS. If we don’t book an extra dollar but it stays the same we can improve the margins so there’s some improvement that you’re going to see with no major growth and that’s basically what we saying for this quarter. Even if we stay flat revenue in a Q4, we are forecasting margin expansion. Amit Daryanani – RBC Capital Markets: How much of the components business, or the components manufacturer that you sold internally to Sanmina?

We vary but we sell as much as probably around 30% of their shipments. Amit Daryanani – RBC Capital Markets: That number hasn’t changed for the last four or five years that I can see. Is that, why has that been the case because initially the whole interior was, there’s more insourcing and that’s going to drive margins higher and that hasn’t quite worked out for several years now.

It’s really more program driven. What programs that, there’s a competitive advantage with programs are not. I expect that because of the movements that we’re moving a lot of our operations around the world that impact of some of the vertical integration is now the movement is stopped. In other words no more moving the plant, shutting the plants around. We can focus on improving the number and we expect it to improve the number. Amit Daryanani – RBC Capital Markets: Finally, if I look at the communications and computing side you had really good growth this quarter. It seems to be a little bit more robust than what the end demand is obviously in the market place. Could you just talk about what growth that, was it new ramps or incremental market share or…?

Well, I think for us it was a really across the board with, we have a very wide customer base in our communication infrastructure. I don’t think it’s just the one customer specific. It was combination of some new programs and some of older programs did a little better than what we expected it.

Your next question will come from Shawn Harrison – Longbow Research. Shawn Harrison – Longbow Research: Just a few quick questions. I was wondering, I think you touched about this earlier on the call but just what you’re seeing in terms of higher raw material costs within the components business and just the ability to pass those through to customers in a rather quick fashion.

Hey I’ll pass that over to Joe.

Yes, it doesn’t necessarily manifest itself in that kind of a situation. I think what you try to do first is through global sourcing activities not have to pay those prices and sometimes you work with the customers on alternative solutions and you’re able to get the right cost for the customer. Certain cases cost can be passed through if they make sense and that’s what we’ve been able, the combination of both of those things plus the inventory velocity really is an advantage of being able to manage this situation so it’s worked out so far pretty good. Shawn Harrison – Longbow Research: My second question: just with the multimedia business being down 10% sequentially in the third quarter, what exactly happened there and…?

I think if you look at historically, Shawn, that business it’s really hard to predict that business on a quarterly basis. If you look at it at a yearly basis that business is going to be out for a year but just if you look at the last three years, one quarter is up one quarter is down so just the nature of our customer base. I think it’s a more nature of the business but we do expect that business to be up in a Q4, Shawn. Shawn Harrison – Longbow Research: And the final question: just looking at the sequential gross margin improvement forecasted for the fourth quarter, how much of that is mixed improvement with revenues holding stable versus restructuring savings versus just better returns from the components business?

I would say it’s really better improvements, definitely the traction is continuing to help us but I think it’s just this efficiencies that we’re implementing. I think that those are things that we are counting right now and then we are assuming that based everything we tell that revenue will be in that range and as long as in that range I think we can improve the margins. If revenue exceeds our forecast then I expect our margins to improve at the higher rate.

Your next question will come from William Stein – Credit Suisse. William Stein – Credit Suisse: First question is a followup from someone else’s on the growth in the communications and enterprise computing and storage; we saw some good growth there. Is any of that related to anything new that’s ramping? Any new customers or new programs or do we think that…?

Well, yes definitely we had a couple new programs in that group that helped us out, yes. But we know about them; we knew they were coming. But it’s tough to predict exactly what, especially in a new program what customer is going to take one quarter to another but yes that was an upside there. William Stein – Credit Suisse: And it’s across several customers in both?

It’s more than one customer. That’s correct. William Stein – Credit Suisse: The next question maybe, David, you can help me out. Depreciation I think came down what $5 million in the quarter thereabouts. I think that adds about 30 bips to operating margin.

I think it’s $1.5 million, Will. That’s what I indicated in my comments. William Stein – Credit Suisse: I thought it was 20.7 is that right? I thought last quarter was 24.3.

Bear with me. It was 22.2 last quarter; it was 20.7 this quarter. William Stein – Credit Suisse: So maybe I’ll go onto a different question then. Can you comment on the competitive situation now between Sanmina and the other global, maybe North American based EMS providers versus the Taiwanese or China focused providers. You have the Renminbi, Chinese labor law changes, oil obviously affecting transportation costs. Any of that having any meaningful impact on competition today?

Well, I think let me make a comments and think Joe made a prepared comments and you said, “No, pass it over to Joe,” but I think today we complete globally. We change our strategy two years ago and just finalize that now a few weeks ago that now we can certainly focus on core business. Our strategies is very simple it’s to focus on our key markets where we have a competitive advantage. In worst case equal but the goal here is competitive advantage in the areas that we can compete with anybody in the world. I think today our global infrastructure allows up to compete in China, Southeast Asia, Eastern Europe, Western Europe, North America so I think our footprint is in a good shape to focus on a, like I said, on a key markets, key projects, in that area we’re going to be 100% focused. We’re not going to try to be everything for everybody. We’re going to be really laser focused on stuff that we’re good at and maybe I can turn it over Joe.

Yes, what I would say is that customers are getting very concerned about freight and logistics cost and so they’re looking at Mexico particularly if their markets are Europe and North America. They’re looking very hard at that cost differential between say China and those areas and the cost differential is starting to melt. Of course, the closer you get to home the easier it is and so a lot of the customers are seriously evaluating the situation. I think we’re going to see our competitors expanding in Mexico. We have a huge presence in Mexico and we’ve seen some of our competitors expanding already so it’s going to be, I think Mexico’s going to be very important for us and I think we’re very very well positioned there with an infrastructure that has been there for a long time. I think likewise you can say the same thing about the footprint. The footprint allows, depending on where your markets are, it allows for lower transportation and logistics cost and particularly when you’re doing some of these new product introductions. When a company first outsources its products and does it at one of our NPI plants they love to be very close and then of course being able to do it Mexico really tightens the chain pretty sell. So I can’t say we’ve seen a huge push at the current time but I do think the customers are really looking at this very carefully.

But if I can add to that again really that, for example, in India as we talked about earlier we’re really not going India today to manufacture and export. Really we’re going to India to supply the local markets so our customers wants us to be local. When in India, we’re an Indian company, we can service locally and give our customers the competitive advantage. Same thing in China. It’s really being there for Chinese market. Of course high percentage of that business today has been exported from China but I think in the future it will be more focused on the local markets. William Stein – Credit Suisse: Just a very quick followup. Joe, you mentioned 4% operating margin target. Can you comment on the timing?

Well, it’s hard to comment on the timing because of the, the margin improvements are going to come from the factors that the last questionnaire talked about. It’s going to come from component improvements with existing revenue. It’s going to come from growth in revenue in the entire business. It’s going to come from the benefit of some of the restructuring that’s completed so a lot of it is going to be those three factors. I think what we have factored in the guidance is what you’re seeing from a flattish outlook with improvements. Certainly improvements in revenue would enable us to drive margins higher.

Your final question will come from Sherri Scribner Deutsche Bank Securities. Sherri Scribner – Deutsche Bank Securities: I just wanted to get a little more clarity on the strength in the enterprise and compute and storage segment. Was that primarily, I know you talked about new deal wins and just generally, new program wins and then just generally doing better in that segment. Would you say that’s more heavily focused to the high end compute side or to the storage side?

I don’t know if I have a real numbers of exactly from which but let me just comment on that part of the business. We been kind of a restructuring that type of business for a long time, getting out of the low end type of our product. Of course, we got out of the PC business so some of the customers there that we are growing on are a lot more focused type of a customer that we’re looking at the long term. It just that last quarter it seem like majority enterprise computing customers were going in the right direction. We had a few that were not but most of them were in right direction so it’s really hard to predict is that a trend or what? As I said earlier I think it’s going to be a flat down in Q4. Sherri Scribner – Deutsche Bank Securities: In terms of the medical it was a little bit weaker than I would have thought and I know that you guys have called that out at least a quarter before as being pretty strong. Was that more of a timing issue in terms of projects ramping because it sounds like that’s going to improve this quarter or is there something else going?

Yes, to us it’s a mainly there in a medical, I think it’s a timing issue with some of the projects and a major customer that we have but no, we are pretty bullish in a medical longer term. Sherri Scribner – Deutsche Bank Securities: Just one quick question for David on repurchasing the debt. I think last quarter you said you had plans to repurchase about another $100 million of debt. It looks like you did a little bit this quarter but I was wondering if you still have plans to repurchase that additional debt.

Well, actually we didn’t repurchase any debt this last quarter. We did at the beginning of the fiscal year talk about plans to retire debt. Our intentions haven’t changed. I think what, there’s two things that, there’s really one thing that’s changed and that’s just totally the general economy that we’re all functioning in today and uncertainties in terms of accessibility to capital markets if you needed them so we are being a little bit more cautious. I would say that we have, we could take out debt today. We’ve got plenty of cash to continue to do so. We could execute the plans we really talked about the beginning of the year but we’re just being a little bit more cautious before we do that. Sherri Scribner – Deutsche Bank Securities: So you’re holding onto the cash until maybe things look a little bit better.

We are.

If you guys again have any more questions I apologize that we couldn’t answer everything on this call. Give us a call. At the same time I’d like to say thanks again and thanks for your support.