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Executives

Jure Sola – CEO

David White - CFO

Analysts

Steven Fox – Banc of America

Brian White - Collins Stewart

Jim Suva - Citigroup

William Stein - Credit Suisse

Joe Wittine – Longbow Research

Jimmy Kim – RBC Capital Market

Alex Blanton -Ingalls & Snyder

Sean Hannan – Needham & Company

Samina-SCI Corporation (SANM) Q1 2009 Earnings Call January 21, 1969 7:00 PM ET

Operator

Good evening. At this time, I would like to welcome everyone to the Sanmina-SCI first quarter fiscal 2009 earnings call. (Operator Instructions) I will now turn the conference over to Jure Sola, Chairman, and Chief Executive Officer of Sanmina-SCI.

Jure Sola

Good afternoon, ladies and gentlemen. This is Jure Sola. Welcome to Samina-SCI first quarter 2009 conference call. And again thank you for being here. Joining me today on this conference call is Hari Pillai, our President and Chief Operating Officer, and David White, our Chief Financial Officer.

On today’s agenda we have first David White will review our financial results for the first quarter and also the rest of the fiscal year 2009. I will follow with a comment relative to Samina-SCI results and future goals. Then Hari, David and I will open up for question and answers.

David White

Thank you, Jure. Before I get started please note that selected portions of my remarks today are available in the form of a slide presentation accessible on the Internet, through our Investor Relations section of our website at www.sanmina-sci.com.

I'll be making references to these slides during the course of my remarks. Prior to discussing the state of our business and financial information with you, I'd like to take a moment to review the following Safe Harbor statement, slide two.

During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operations may differ significantly as a result of various factors, including the state of the economy, 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 10-K for the year ended September 27, 2008 filed on November 24, 2008.

These documents contain and identifies important factors that could cause actual results to differ materially from our projections or forward-looking statements. You'll note in our press release issued today that we have provided you with a statement of operations for the three months December 27, 2008 on a GAAP basis, as well as certain non-GAAP financial information.

A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release. In general, our non-GAAP information excludes restructuring and integration costs, impairment charges, loss on extinguishment of debt, non-cash stock-based compensation expense, amortization expenses, and other infrequent or unusual items to the extent material.

Any comments we make on this call as they relate to income statement measures will be directed in 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 are referring to our non-GAAP information.

When comparing our first quarter fiscal 2009 results with prior periods our prior period results are based on the results of our continuing operations which excludes our personal computing business which we sold in fiscal 2008. My comments today will focus on a review of the results of operations, a discussion of selected balance sheet accounts and corresponding metrics, an update with respect to our restructuring activities, an overview of our Nortel exposure, and finally I will conclude with comments regarding our plans for the second quarter of fiscal 2009 ending March 28, 2009.

Slide three, revenue for the first quarter of fiscal 2009 was $1.42 billion which was approximately at the low end of our guidance, down 16.4% versus $1.7 billion in the prior quarter and down 19.9% versus $1.78 billion in the same period a year ago.

As you’ll see in my comments shortly, our quarter over quarter decrease in revenue was across all seven our of end markets, a fact that we largely attribute to a weakening global economy. For the first quarter we reported a GAAP loss of approximately $25.3 million which equated to $0.05 per share.

We reported a non-GAAP loss for the quarter of $0.8 million or zero cents per share. This compares with $0.05 earnings per share in the prior quarter and $0.01 earnings per share in the same period a year ago.

Slide four, for the first quarter our revenue by end market was as follows. The communications end market represent 43.0% of our net sales which in absolute dollar terms was down approximately 12.5% from last quarter. Enterprise computing and storage represented 16.1% of net sales during the quarter. Sequentially this end market was down 26.6% in absolute dollar terms.

The multimedia end market accounted for 14.7% of net sales during the quarter and was down 20.9% in absolute dollar terms versus the prior quarter. The medical end market which has historically been one of our stronger end markets accounted for 12.3% of net sales during the quarter and was also down approximately 7.1% in absolute dollar terms from the prior quarter.

And finally our industrial semiconductor capital equipment, defense and aerospace and automotive end markets of our business collectively accounted for 13.9% of our net sales and in absolute dollar terms were down 16.8% relative to last quarter.

The industrial, automotive, defense, and aerospace segments were each down sequentially.

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

Slide six and seven, gross profit for the first quarter was $95.9 million. As a percentage of sales, gross profit was 6.7% which was down approximately 110 basis points from the prior quarter largely as a result of the quarter over quarter decline we experienced in revenue.

When compared to the same period a year ago, our gross margin was down approximately 70 basis points. Operating expenses for the first quarter excluding stock compensation expenses were $64.7 million, down approximately $8.8 million quarter over quarter and down approximately $25.1 million versus the same period a year ago.

These expenses have continued to trend downward over the last year as we have focused on reducing infrastructure costs. Operating income for the quarter was $31.2 million. Our operating margin was 2.2%, down approximately 130 basis points quarter over quarter and down 10 basis points on a year-over-year basis.

I think its worth mentioning that while our revenue is down approximately 20% year-over-year we have managed to largely hold our operating margins. This is the result of concerted actions we have taken over the last year in our global operations, and administration functions to reduce waste, to take further advantage of our low cost footprint, and to improve our operating efficiencies and effectiveness.

We expect to realize additional improvements as we take further actions over the balance of this year. As such time as when the global economy stabilizes and improves, we expect to emerge as a much stronger, leaner, and more profitable business.

Net interest and other expense, which consists primarily of interest income and expense as well as gains and losses from foreign currency translation was $30.2 million versus $29.8 million in the prior quarter. Net interest and other expense in the same period a year ago was $31.5 million.

Depreciation was $20.5 million for the first quarter and was relatively consistent with the prior quarter. Our EBITDA for the quarter was $52 million. Our tax provision for the first quarter was an expense of $1.8 million on pre-tax non-GAAP earnings of $1 million. At this level of pre-tax earnings, tax inefficiencies across all of our operating jurisdictions render a tax calculation irrelevant.

As I have indicated in previous calls, we continue to pursue our global realignment program which has already produced substantial savings to the company and is expected to further reduce our effective taxes paid over the course of the next year.

Slide eight and nine, turning to the balance sheet, accounts receivable at the end of the quarter were $892 million. While we have a $250 million facility for factoring trade receivables, there were no amounts drawn against that facility quarter-end. Our DSOs for the quarter were approximately 56 days which was up approximately 3.8 days from the prior quarter.

DSOs were unfavorably impacted during the quarter as a result of the early timing of our quarter end cut off which fell in the week of Christmas compounded by the fact that many of our customers were shut down during this period and wound up paying us in the following week.

We view these late in the quarter miscollections as timing related issues that are self-correcting and not anticipated to repeat in the second quarter. Inventories at the end of the quarter were approximately $784 million, down $29 million quarter over quarter. Inventory days at quarter end were 54 days or 6.8 turns, versus 47 days or 7.7 turns in the prior quarter.

While on an absolute dollar basis our inventory was down quarter over quarter we would normally have expected a much more substantial quarter over quarter reduction as a result of our reduced revenue. Two factors contributed to this.

First of all we were unable to cancel or reschedule planned raw material receipts in time to match the rate and magnitude of which our customers were revising and pushing out their demand and secondly, we also experienced a number of customer directed end of quarter push outs.

We expect this issue to be self-correcting as well and are accordingly targeting significant inventory reductions in the second quarter. Net capital expenditures in the quarter amounted to approximately $28 million. Accounts payable at the end of the quarter were $782 million which equated to AP days of approximately 54, an improvement of 1.1 days versus the prior quarter.

Overall our operating cash cycle for the first quarter which we define as unfactored or gross cash cycle days, was approximately 57 days compared to 47 days in the prior quarter. As a result of the receivables and inventory challenges we faced in the quarter our free cash flow which we define as GAAP cash flow from operations which was a use of $11 million in the quarter less cash flow from investing activities, which was also a use of $28 million and excluding the impact of any receivables factoring which at fiscal 2008 year end was $16 million, was a negative $23 million.

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

Cash and short-term investments at the end of the quarter were approximately $797 million. Our debt at the end of the first quarter was $1.49 billion which was relatively flat with the prior quarter. Our earliest debt maturity is $180 million which is due in June, 2010. Our next debt maturity thereafter isn’t until 2013.

During the first quarter we closed a new five-year $135 million credit facility. There were no borrowings against that facility at quarter end. In concluding my remarks about the balance sheet let me make a few comments about our exposure to Nortel as a result of their recent petitions for reorganization under bankruptcy law.

As many of you know we have had a long-standing relationship with Nortel covering many years. We are supportive of their efforts to restructure their company and am working with them to ensure their success while at the same time minimizing our economic exposure. We have concluded a preliminary analysis of our global balance sheet position with Nortel as of their filing date and currently believe that much of our exposure will either receive administrative or reclamation claim priority in the US or are with Nortel entities that are not planned for bankruptcy reorganization.

As such our current gross exposure is estimated at approximately $20 million. Notwithstanding the fact that there is a great deal of uncertainty as to how this bankruptcy will progress and ultimately conclude we recorded $10 million of charges in the quarter as a reserve against this exposure. This charge was excluded from our non-GAAP results due to the magnitude and extraordinary nature of this item.

Obviously we’ll be doing everything we can to reduce this exposure but should circumstances surrounding Nortel’s bankruptcy reorganization proceedings come to light and materially change these estimates, we may record additional charges or credits.

Let me now comment on restructuring, during the first quarter we incurred $9.2 million in restructuring expenses. This expense primarily related to reductions in force associated with the announced closure of facilities in North America as well as restructuring of various corporate functions.

Actual cash payments relating to previously accrued restructuring actions amounted to approximately $17 million in the quarter.

Slide 10, now let me address our plans for the second quarter of fiscal 2009. Given the current uncertainty in the global economy and the specific end markets we serve, it is particularly difficult during these economic times to place meaningful ranges around some of our financial targets with any high degree of confidence.

Consequently we are temporarily suspending our historical practice of providing guidance, instead we will provide you with point estimates as to our internal targets that we are operating the company towards.

As typical this information is presented on a non-GAAP basis consistent with our past practices. Our internal targets for the second quarter are approximately revenue of $1.3 billion, gross margins of 6.9%, operating expenses of approximately $60 million, and net income to be break-even and our free cash flow to be positive.

Basic and diluted shares for the second quarter are expected to be about $510 million excluding the repurchase of any outstanding stock. We estimate that depreciation for the second quarter will be approximately $20 million relatively consistent with last quarter and second quarter capital expenditures to be in the range of $20 million driven primarily by our expansion activities in India.

This concludes my remarks. I want to thank you for your time and with that I’ll turn the time back over to you Jure.

Jure Sola

Thank you David, again good afternoon ladies and gentlemen. As you can see from our earnings release and actual overview from David we are still operating a very difficult economic global environment.

We are continuing to experience weak demand and limited visibility across all our markets and also global regions. However as David said, revenue was $1.42 billion and basically and non-GAAP break-even. Make a few comments there, this quarter took a lot of hard work and coordination across our global operations.

During the quarter we had to reset our cost base down to a lower demand. Samina-SCI has efficient cost structure in place but we have to do a lot more, take some additional steps and most importantly we have to move quickly.

Unfortunately we have to implement additional layoffs worldwide of approximately 10%. We did reorganize our operations under one global management, introduced working sharing programs, what that means we reduced hours worked to our employees, asked our employees to take vacations, had shutdown during the holidays.

I can tell you the company did a great job adjusting to this operational and OpEx cost for the quarter especially in this difficult environment plus the holidays. Now let’s talk about our outlook for March quarter, just to add a few things to what David said.

Basically its our second quarter fiscal year 2009, at this time as David said we cannot give you guidance as we did in past for the second quarter. Again the main reason today just we have very limited visibility and forecasting the future is difficult but we want to share some of our internal goals with you.

Based on what we see today our internal target is approximately $1.3 billion break-even and hopefully make a buck. The key here is to generate cash. We’re driving it higher but we definitely believe we should generate at least $70 million plus for this quarter and we’ll continue to drive our cost down.

Some of the steps that we are taking now, let me share that with you for a second quarter. We reduced salaries for the CEO, that’s me, and the President and Chief Operating Officer by 20%. Other corporate executives we ask them to reduce to 10% which they agreed. We also forcing time off for all our employees around the world with no pay for a minimum of two weeks per quarter.

Vacation can be used against this also. Some additional staffing reduction will continue around the world as we tune up to present demand. Again these actions continue to be reviewed weekly because in this environment you just can’t wait for next month, you’ve got to do it on a daily basis.

The key here is continue to reset our OpEx costs. I think we did a reasonably good job last quarter, we brought it down to about $65 million. If you compare that to a year ago, that was about $90 million and down from the fourth quarter of $74 million.

We’re going to continue to drive OpEx costs down. We do expect to drive that cost down at least an additional 5% to 10% in this coming quarter. Now these actions will be very difficult for many of our employees and we understand that and believe me we are very sensitive to our employees’ needs out there. But I can tell you that our employees understand these challenging times. They are very focused doing their part to help the present situation and we are getting great support from our employees.

I’m going to take this opportunity to thank them for their sacrifice, help and support. Again as we implemented these measures the key is to balance between our interest of our shareholders, customers, and employees and I think we did a good job reviewing all three of those.

Now let’s talk about our future and market opportunities. As you all probably know most of our customers around the world experiencing tough times and of course this effects our company and our industry but we believe that Samina-SCI has a foundation to weather this difficult time. We have seen this before. We have experience and the company is prepared to face this type of difficult economic environment.

Samina-SCI is a financially strong company with a strong cash position approximately $800 million, adequate liquidity approximately $1.2 billion and we are in a good position with the debt maturity profile as David mentioned a few minutes ago.

And also Samina-SCI’s fundamental business strategy remains in tact. We have dedicated and seasoned management team that is committed for a long-term success of our company. Operationally execution is excellent. There is no major issues and most importantly our customer satisfaction is high and this is very important in this environment.

So what else are we doing in this environment? More then ever before we are focused to drive our operating efficiencies and continue to provide superior service to our customers because we are a manufacturing company. That’s the value that we have but we are also focused on our long-term opportunities. We are focused on the future and if you look at our fundamentals they still look positive.

We continue to invest to improve our technical leaderships and help us with new programs, new markets, and our customers. During this time we are very focused on business development and building that stronger relationship with our key customers.

New [inaudible] opportunities still remain strong as our customers are looking to reduce expenses. Believe it or not we are still getting new projects and new customers. Actually Q1 we won approximately $210 million of new jobs. These opportunities are all shippable in the next nine to 12 months and also good thing about this is that half of these customers were new customers.

So the question that we kind of ask around ourselves here, is this the bottom of the cycle, when is this going to end? Its still hard to predict. The global financial crisis had a major impact on the global and it’s a lot worse then what we previously thought. But on the positive side inventories are very low at our customer sites and I believe in their customers.

So again is the March quarter going to be at the bottom? At this time we don’t know but we are taking conservative approach to this but also I can tell you there’s some positive signs out there from some of our customers that maybe the bottom is nearing.

So in summary, we are setting the cost to meet the present demand. That is the main focus right now in the short-term. Stay profitable, focus on customer satisfaction, generate positive cash flow. For fiscal year 2009 we still expect to generate approximately $200 million plus of cash. We are ready to navigate through this difficult global economy crisis and again we’ll continue to right size the company to present business conditions but keep a strong, capable and ready for growth when demand returns.

And if you look at our long-term fundamentals they still remain positive. So with that I would like to say thank you to our investors and analysts for participating in this conference call today. I would also like to express my special thanks to our employees for their hard work and dedication to this company.

Now we are ready to open the line for questions and answers. Thank you again.

Question-and-Answer Session

Operator

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

Steven Fox – Banc of America

Just looking at what you’re talking about the potential for gross margins next quarter, just understand better on roughly a slight decline in sales, you’re talking about roughly a 20 basis point improvement in gross margins, can you just explain how that’s going to happen and then I’m a little concerned about what’s happening under [print] circuit board side in terms of pricing pressures, can you put your thoughts around what’s going to happen in pricing especially in the March quarter.

Jure Sola

First of all, this started with us as we all know sometime in the last couple of weeks of September and it got really bad and then things were starting to kind of level off early November and then things just didn’t get better. What we did in early October is said, hey this thing is going to get pretty bad and let’s, we have to take some costs out and that’s really one of the main reasons that our margins, we are actually taking costs out to really bring the company down to present demand cost wise.

And when it comes to the pricing, actually what we’ve seen from pricing so far that’s holding at the same time there are certain components we’re able to get a little bit cheaper today then maybe what we paid six months ago so that’s helping out.

The question on printed circuit board similar thing, I think our circuit board its similarly down to the rest of the business. As you know to do an assembly you need a bare board, but I would say that our circuit board operations are holding their own. They had to adjust their costs, they’re [inaudible] profitable and we’re really focusing there, expanding new technology and on the positive side they’re doing a lot of R&D, a lot of new programs out except the volume is not there.

Pricing on printed circuit boards I would say so far what we’ve seen is stable.

Steven Fox – Banc of America

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

Jure Sola

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

Operator

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

Brian White - Collins Stewart

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

Jure Sola

I follow, pay a lot of attention to the details of every customer that we have, this is strictly driven by the demand.

Brian White - Collins Stewart

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

Jure Sola

Let’s talk about which one will be the strongest, if I just look at the medical, medical last quarter actually we only had one customer that was down so they did some movement so I would say the medical market is probably holding decent and our defense market is also holding decent and some industrial, I think the rest of the markets have continued to be weak.

Brian White - Collins Stewart

But what do you think will be worse, the telecom side of it or the computing side of the March quarter.

Jure Sola

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

Brian White - Collins Stewart

How big is Nortel as a percentage of revenues?

Jure Sola

Nortel for us is not a huge customer. We are in the midst of rebuilding that relationship with Nortel and we were growing that business back on some of the newer programs. And unfortunately this is going on right now. We’re going to work with them to help them out, they’ve been very open and honest with us. This is not something that I’m sure they don’t like to do but it’s a necessary part of the business for them to get stronger in the future and I assured them that Samina-SCI will do everything we can to help them to pull out of the Chapter 11 and get back to normal.

So we have a lot of respect for those people. We have good relationship and that’s all I can tell. It’s a tough time for them and we’ll help them out and I hope, I know they are dedicated, they’ll find a way to pull out.

Brian White - Collins Stewart

But how big are they?

Jure Sola

Well it’s a couple hundred million dollars a year for us of the [inaudible] we were planning this year.

Operator

Your next question comes from the line of Jim Suva - Citigroup

Jim Suva - Citigroup

Can you talk a bit about, have you seen any of your customers start to insource as they try to take care of their employees and their factory utilization and also if they did, would you even be able to see that as opposed to distinguishing that from a lack of follow on orders.

Jure Sola

Most of our customers that I have really don’t have any trouble manufacturing so we’re really not seeing that. If anything we’ve seen the opposite that a lot of our customers that were doing some stuff internally especially in a final system assembly and logistics, that they are going out to do some of that. There was a rumor that one of our customers was moving internally, but I don’t know where that rumor is coming from. The project that we are involved in, that’s not the case. I know they have manufacturing in China but so far if anything as I said earlier we’ve seen more opportunities where customers are looking for us to do more.

Jim Suva - Citigroup

Can you talk about are your customers looking for a little bit more favorable terms seeing as how everyone has to experience this down cycle.

Jure Sola

In this industry we’ve been giving really good terms to our customers for a long time not just as Samina-SCI but our whole industry. I think some customers of course are asking more but most of the relationships that we have really nothing changed. Its really more now on both sides, we both understand that we have to help each other. I think out customers have been very loyal. They understand that they have these forecasts and we go out there and buy this material and they’re not taking it. They know this is a big impact on us. So if anything we are doing right now, a lot more favors to our customers then our customers are doing to us.

But I gotta be fair, our customers have been very sensitive. I personally talk to a lot of the key ones and the relationships have been pretty strong.

Jim Suva - Citigroup

Is there anything on the balance sheet that may be may not hold sufficient water for book value whether its some deferred tax assets, inventories, accounts receivable, PP&E or aging of receivables stretching out or something like that because I know you wrote off basically almost all your goodwill if I interpret the SEC filings correctly, but are there some inventories at risk, some receivables starting to be elongated, surely Nortel is not the only company in financial duress at this time.

David White

If you go up and down our balance sheet as you said, correctly stated our goodwill is completely been written off so there’s really nothing from that standpoint. From an inventory standpoint we monitor our inventory very regularly as to what customer demand we have against the inventory and what is our excess position against those demand windows that they’ve given us and right now we don’t see anything really changing there substantially in one direction or another.

In fact actually if you look at the trends as we’ve been reducing inventory over the last year or so we’ve actually been reducing the amount of our excess position and actually improving our position and we don’t see that reversing right now.

On the receivables side with customers Nortel is the one that certainly stands out because of their recent filing but we are continuing to monitor that as well. We’ve had a very good history in the past of not having bad debt write-offs. We’ve been very fortunate but we think we’ve also tried planning a lot of these fairly carefully so as to avoid those kinds of exposures.

So I think at the end of the day I don’t think I would say that we’re under any kind of balance sheet exposure today that has changed materially from what we’ve seen over the last year or two.

Operator

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

William Stein - Credit Suisse

I’m wondering if you could talk about the pushes that you discussed, you said at the end of the quarter some customers pushed order, can you talk about the sizing and whether any of those customers took that product now that we’re a bit into the first month here.

Jure Sola

We had approximately, let me just go a little bit more specific, basically a few weeks before the quarter, actually the 27th of September we kind of ended before most of our customers so that also kind of hurt us this year. So a couple of weeks before the quarter as we reviewed these things on a basically daily, weekly basis, I remember Harry and I talked about it and we were really expecting to ship additional minimum at that time, additional $75 million plus and we were hoping to almost the last day and then things got pushed out.

As David mentioned most of that stuff has already been shipped to our customers in January.

William Stein - Credit Suisse

Can you talk a bit about any maintenance covenants that are on now and how you feel you’re performing versus those.

David White

We really don’t have any maintenance covenants to speak of particularly financial maintenance covenants. Previously we had a revolver, revolving line of credit which we renewed or replaced I guess in, but we don’t have any maintenance financial covenants like leverage ratios and so forth. We do have certain negative covenants that we can’t pay dividends and things of that nature but those aren’t real problems for us.

We also have [incurrence] covenants which means that if we wanted to go out and incur new debt we’d have to pass certain requirements but from a maintenance standpoint we really don’t have any outstanding.

William Stein - Credit Suisse

Also the cash on the balance sheet is that mostly outside the US or any problems getting that here or is that in the US?

David White

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

William Stein - Credit Suisse

So the operations mostly outside of the US but the debt is all—

David White

The debt is all here.

William Stein - Credit Suisse

On the 2009 goals is that essentially a rollup of your customer forecast, is there a big haircut to that, how can we think about that goal relative to maybe what your customers are telling you, what you see from the forecast.

Jure Sola

Only thing that we are really targeting is the next quarter. That’s really based on the forecast that we have from our customers and then based on experience and we would kind of reduce by certain percentages and go back and forward. So at this time its really hard to forecast. I think as I said earlier, I think the key for us right now is what we have focused internally is making sure we bring the costs down to meet present demand. So we’re really resizing the company to that and I think we’re doing a good job there and as we said earlier you’re going to see our margins going up.

So we just, at the same time we’re investing in the right technology especially some of our components technology, some of our, we are today among global IT systems, we focus most on giving our customers the better solution when it comes to the global logistic, delivering the product as they need it because some of our customers are now starting to plan to give us more in the final system assembly so that’s the area that we’re really kind of investing.

And the key for us, we’ve seen this before, the key is to be well positioned and lean so when the market comes around that we’re going to have a big leverage in the future.

Operator

Your next question comes from the line of Joe Wittine – Longbow Research

Joe Wittine – Longbow Research

I was hoping you could talk about utilization right now, as far as what happened to utilization during the quarter. I think last time around you mentioned components, was it 75% and the [MS] business was about 70%--

Jure Sola

Let me answer just to give you some numbers after bringing the cost down and we had a major layoff last three months as I mentioned earlier, we’re down about 10% of our people and we are continuing to tune things up. Right now we are at the level we’re just tuning up and that’s why we’re asking people to take some time off so we can preserve the experience and strength so that when things come back we’re okay.

So if you look at the, based on people, today our capacity utilization is about 85% to 90% in other words strictly based on people but if you base it on equipment its about 65% total company and based on space about 60%. We are designed to always have a little bit extra space so that when market comes back you only have equipment and people.

Joe Wittine – Longbow Research

With that spare space and assuming the industry is seeing some of the same things, are you seeing consolidation out there in the industry in any particular geography.

Jure Sola

We’re really not focused on that. I think we are focused on what we think is the best thing for our company and really we have the right customer base and goal here is to, in short-term there is nothing you can do no matter how much consolidation you do, your going to have issues, the business is not there so there’s more work then benefit.

I think the long-term, we have to look at new company, how well you position what markets you go in to. We did change our strategy as to not to chase consumer type of product but to go into the more medical, defense, and high end technology type of product where we believe we have a competitive advantage providing that the total solution. Yes, we are a smaller company today but the goal for us is to make sure that we’re going focus on technology and agility and I believe there is room for our type of company to grow.

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

Joe Wittine – Longbow Research

I was just hoping for an update on the share repurchase program and the shares were repurchased during the quarter like you thought and I think you mentioned last time there was a $10 million covenant that was allowable under one of the—

Jure Sola

We did spend, but we’ll continue to purchase shares starting in a couple of days from now.

David White

The $10 million you are correct on that covenant, that covenant got lifted though however or terminated when we replaced our previous bank facility so today our limitation is $50 million. But if you look at what we did, we had a limited window to repurchase shares during the quarter because of a blackout period and so forth so we only effectively were in the market for a period of about four weeks and then we’re also subject to limitations in terms of how much we can purchase any given day unless its done in a block trade.

So during the quarter we purchased about 21 million shares at a purchase cost of about $11.6 million. So at an average of about $0.54 a share.

Joe Wittine – Longbow Research

You had mentioned the $60 million SG&A or fixed cost target rather for the March quarter does that include R&D costs?

David White

Yes, that’s the total operating expenses.

Operator

Your next question comes from the line of Jimmy Kim – RBC Capital Market

Jimmy Kim – RBC Capital Market

In light of what happened with Nortel what kind of measures are you taking to protect yourself if more of your customers get into trouble?

David White

We’ve been doing a number of reviews in the company. Certainly customer risk is one thing that we look at, we also look at counterparty risk as it relates to foreign exchange hedges, our insurance programs so we have been canvassing a lot of our third party relationships making sure that those third parties have the ability to fulfill their obligations to us.

As it relates to our customers we’ve done the same thing there. We have had reviews, we’ve had additional tightening you might say in terms of our past due escalation processes so that we are more expedient to raise the flag when we potentially have issues so we don’t allow them to go beyond certain numbers of days. And we are having executive reviews of what those exposures are and trying to stay in close contact with those customers as to what their financial strength and so forth is.

So today it hasn’t necessarily changed any of our terms and conditions with those customers per se as much as its changed how responsive we’re trying to be to perceive changes in their conditions and changes in any kind of payment habits and those kinds of things. And so far we’ve really not seen, notwithstanding some of the issues we had during the shut down at the end of the quarter we’ve really not seen any significant issues otherwise.

Jimmy Kim – RBC Capital Market

Is there any sort of industry or end markets that you’re more concerned with then others?

David White

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

Jimmy Kim – RBC Capital Market

How about terms with your suppliers, are they getting tougher on you or is that remaining the same?

Jure Sola

I think when it comes to suppliers these are suppliers we use all the time and we’re the fastest paying in the industry so we take care of our suppliers, we pay them, we have a good relationship. So its just like a customer, you build that relationships, long-term, you can’t just think short-term. There are companies that are very healthy and they’re a lot healthier in this type of environment then they were in last recession and there’s also some players out there that you have to be very careful and watch.

But same thing with suppliers, we analyze our suppliers in details to make sure they’re going to be around for a long time and I can tell you that most of our suppliers will be around. Again it’s a similar thing, certain suppliers are very financially strong and there’s certain suppliers that are struggling a little bit in this environment.

Operator

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

Alex Blanton - Ingalls & Snyder

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

Jure Sola

Definitely that’s not the case, first of all, any good customer needs a great supplier. Once you have, once customer has a great supplier they are 100% dependent on them and its very expensive to change it so its really a mutual relationship. I can’t comment too much about Nortel and Flex but I’m just going to say just like any other supplier of course if Nortel needs the product or Flex or Samina-SCI delivers to somebody else, they have to treat them right otherwise they can’t get the product. It’s a two way street.

So definitely nobody puts a gun to our head so I think, yes some analysts are asking the questions but I don’t think they understand the relationship that we have with our customers. This is a long-term relationship and I can tell you my customers are very loyal. Yes, there’s always challenges to cost, cost, cost because the end market is tough but end of the day there’s always a respect and everybody is looking at the long-term success relationship.

Without a two way street here, we’re both players are successful, it usually doesn’t work out. Yes, there’s a few customers out there but usually you get rid of those customers as soon as you find out that’s how they operate.

Alex Blanton - Ingalls & Snyder

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

Jure Sola

There was an article written about that, yes.

Alex Blanton - Ingalls & Snyder

Of course they’re in a little different situation, they are in France where labor unions are very strong and they would really have to pull back some stuff into their plants even though its more costly, isn’t that correct?

Jure Sola

Let me put it this way that article was not accurate. I don’t think that, I don’t even know who wrote that article so I can be not bias here at all. But I heard about it, its not accurate. Of course some of our customers moved the product in and out but they did not effect all the suppliers. I know it didn’t effect us so let’s leave it at that. It’s a tough environment out there. A good supplier will have a long-term relationship with their customers. If you talk to our top customers, or you talk to [Cisco], talk to IBM, talk to HP, talk to even Nortel, talk to Alcatel, talk to Nokia, they want new suppliers, they need us just as bad as we need them.

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

Alex Blanton - Ingalls & Snyder

It would seem that if they don’t use your low cost services they won’t have business in the long-term anyway. Did you say $400 million is what you plan to do with Nortel this year?

Jure Sola

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

Alex Blanton - Ingalls & Snyder

Is there a possibility that given they’re in bankruptcy that you could keep your inventory exposure low by doing the business on a consignment basis, would you do that?

Jure Sola

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

David White

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

Alex Blanton - Ingalls & Snyder

But what I’m saying is you could reduce your inventory exposure by doing it on consignment, would you do that?

Jure Sola

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

Operator

Your final question comes from the line of Sean Hannan – Needham & Company

Sean Hannan – Needham & Company

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

Jure Sola

For us it was really across the industry, the medical, defense, communication was the majority of it and like I said half of those customers that we got there were all new customers. In medical we had three new customers so some of these things are not just for this year, these are the programs that should gear up for multiple years and hopefully we’ll be better so customers are still developing the products. Its not end of the world. If you look at the health of our customers today comparing to 2001, 2002, 2003, most of our customers are in better health.

And they have a lot more cash today then they had at that time, so its not the end of the world. I think the most important for us is how well do we bring the costs down to the present level of the business. Forget about what happened yesterday. Start dreaming about all the demand that we had a few years ago, a few months ago. You’ve got to focus on today and I think the companies that do that will come out of this fine and I expect Samina-SCI to come out of this fine.

Sean Hannan – Needham & Company

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

Jure Sola

I don’t have details on this but I’ll just give you an example, a medical customer, we had three new customers that we won last quarter, these are some of the customers that we worked with for a long time and you know in the medical industry it takes a long time to develop it so these are the programs not just for today but for multiple years from now.

Sean Hannan – Needham & Company

For the medical customer that was down in the quarter was that [Medtronic]?

Jure Sola

We never make any comments on a customer.

Sean Hannan – Needham & Company

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

Jure Sola

What we did to reduce the cost and look at the efficiencies we resized the company and we put everything under the one management starting this quarter. So the components are not run like they were run let’s say last year, we spread them around, we combined them with other businesses in different regions of the world to bring the cost and efficiency up. We looked at what worked, what didn’t work and really went with the better system that we think is going to help us out.

But overall if you put them as a group they were profitable but with demand down, that stuff is just as bad as the rest of the stuff.

Sean Hannan – Needham & Company

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

Jure Sola

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

Sean Hannan – Needham & Company

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

Jure Sola

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

Ladies and gentlemen thanks for spending time with us last hour. We are available any of us to give us a call and we’ll definitely get back to you. Thanks for your support.

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Source: Samina-SCI Corporation F1Q09 (Qtr End 12/27/08) Earnings Call Transcript
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