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Sanmina-SCI Corporation (NASDAQ:SANM)

F4Q2011 Earnings Conference Call

November 1, 2011 5:00 PM ET

Executives

Paige Bombino – Director, IR

Jure Sola – Chairman and CEO

Bob Eulau - EVP and CFO

Analysts

Sean Hannan - Needham & Company

Jim Suva – Citi

Wamsi Mohan - Bank of America

Craig Hettenbach - Goldman Sachs

Lou Miscioscia – Collins Stewart

Sean Harrison – Longbow Research

Operator

Good afternoon, my name is Michel and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI Fourth Quarter and Fiscal yearend Earnings Conference Call. (Operator Instructions) Thank you, Ms. Paige Bombino, Director of Investor Relations; you may begin your conference.

Paige Bombino

Thank you, Michel. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI’s Fourth Quarter and Fiscal Year end 2011 Earnings Call. A copy of today's release is available on our website in the Investor Relations section. You can follow along with our prepared remarks and the slides posted on our website. Please turn to page two, the Safe Harbor Statement.

During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections.

The company's actual results of operations may differ significantly as a result of various factors, including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change.

We refer you to our quarterly and annual reports filed with the Securities & Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You'll note in our press release and slides issued today, that we have provided you with a statement of operations for three months and 12 months ended October 1, 2011 on a GAAP basis, as well as certain non-GAAP financial information. Reconciliation between the GAAP and non-GAAP financial information is also available in the press release and slides posted on our website.

In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense and other infrequent or unusual items to the extent material.

Any comments we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results.

Accordingly, unless otherwise stated in this conference call, when we refer to our gross profit, gross margin, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information.

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

Jure Sola

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. Thank you again for being here with us today. Joining me on this conference call is Bob Eulau, our Executive Vice President and CFO.

Bob Eulau

Hi, everyone.

Jure Sola

For today’s agenda we have Bob Eulau will review our financial results for the fourth quarter of fiscal year 2011. Then I will follow with additional comments relative to Sanmina-SCI’s results and future goals. Then Bob and I will open for question and answers.

And now, I would like to turn it over to Bob. Bob?

Bob Eulau

Thanks, Jure. Please turn to slide three. Overall the fourth quarter results were better than we had expected. Revenue of $1.7 billion was up 1.3% on a sequential basis and up 0.6% over the fourth quarter last year. This was at the high end of our guidance of $1.65 billion to $1.7 billion. Our gross margin came in at 7.8% which is down 20 basis points from the third quarter. P

Operating margin improved by 20 basis points from last quarter to 4.1%. Non-GAAP EPS was $0.47 per share. This was based on 82.7 million shares outstanding on a fully diluted basis. Non-GAAP EPS was above the range of our guidance which we set last quarter.

Finally, cash generation was strong in this quarter with cash flow from operations was $79; I’ll discuss cash in more detail in a few minutes.

Please turn to slide four. Revenue was up 1.3% or $23 million from Q3 to $1.7 billion. From a GAAP perspective, we reported net income of approximately $18 million which resulted in earnings per share of $0.22. This was up relative to last quarter primarily because of a debt extinguishment cost which was incurred last quarter. For the year, revenue was $6.6 billion up to about 4.5% from $6.3 billion last year.

EPS for the year was $0.83 versus $1.48 last year. The major difference is on an annual basis was a favorable litigation settlement in FY ’10 and the debt extinguishment cost in FY ’11 that I just mentioned. Restructuring cost totaled $14 million for Q4. Restructuring was higher than normal for reasons. First, we incurred about $4 million in catch depreciation for real estate that we are planning to sell.

It is a technical accounting issue, but since we did not sell the assets within a year, we were required to recategorize these assets as normal operating assets and continue to appreciate them. We have no intention of using these properties and we will continue to look for an appropriate opportunity to sell these assets. The second discrete item during the quarter was further restructuring in Canada related to the BreconRidge Optical acquisition we completed last year.

At this point we’ve moved all high volume optical production from Canada to one of our factories in Guadalajara Mexico. This was $4.4 million of restructuring during the quarter. The remaining $5.6 million in restructuring charges include $4 million for the typical restructuring that we’ve been recognizing as incurred and $1.6 million related to litigation matters.

Looking forward, we will continue to see some ongoing restructuring charges on our GAAP P&L of approximately $4 million to $5 million per quarter that primarily to the real estate which is being held for sale. This real estate is listed on the market over $100 million and over the last two years we have successfully sold over $50 million in real estate.

My remaining comments will focus on the non-GAAP financials for the fourth quarter. At a $133 million, gross profit was down very slightly from the prior quarter. Gross margin came in at 7.8% which was 20 basis points below the previous quarter. Gross margin was in the range we had anticipated for the quarter. Component gross margin was above the corporate average and the highest level it has been in several years.

Operating expenses were down $6.3 million for the quarter at $62.2 million. The biggest decrease in spending was related to a lower accrual for incentive compensations than in the prior quarter. At $70.4 million operating income increased by 9% from the prior quarter. Operating margin was 4.1% which was a 20 basis point improvement over the previous quarter.

The tax rate for the quarter came in at 15.4% of pretax income which is also in line with what we had expected. On non-GAAP basis, we earned $38.7 million in net income or $0.47 per share. Net income was up 10% and earnings per share were up about 11% from Q3. On slide five, we are showing you some of our key non-GAAP P&L metrics. As you can see, Q4 was good following the strong rebound we saw in Q3 compared to Q4 last year, revenue was up 0.6% we also saw solid gross profit in Q4 following the record gross margin in Q3.

It is reassuring that we accomplished this result while revenue in our high margin defense business was down from last year. Our operating profit improved 8% to $70 million from last year; this led to operating margin of 4.1%. EBITDA also improved from last quarter at $94.5 million which was 5.6% of revenue. For modeling purposes, I want to mention that depreciation and amortization was $25 million for the quarter.

Please turn to slide six. On an annual basis all the key financial measures improved. Revenue was up 4.5% while gross profit was up 4.1%. Operating income was up 8.4% for FY ’11 after the dramatic improvement in FY ’10.

Finally, we made more progress in EBITDA which was up 9.3% from last year and finished at 5.4% of revenue. Now I’d like to turn your attention to the balance sheet on Slide seven. Our cash and cash equivalents were $640 million. Cash was up $57 million from the previous quarter.

Lower accounts receivable and higher accounts payable contributed to the increase in cash. Accounts receivable decreased by $28 million while accounts payable increased by $26 million. Inventory increased by $6 million which I will discuss more in a moment. The increase in property plant and equipment is due to the adjustment I previously discussed for the real estate that we continue to hold for sale that is reclassified as held for use.

Let’s turn to slide eight. Our cash position remains strong given our potential cash needs. Cash was up $47 million from Q4 of FY ’10 which was achieved by using around $100 million to refinance and repurchase outstanding debt. As I mentioned earlier, cash was also up about $57 million from last year from last quarter excuse me.

Cash flow from operations for the quarter was $79 million and capital expenditures for the quarter were $24 million. This led to $55 million in free cash flow. Inventory remains a key focus. Inventory increased from $886 million last quarter to $891 million this quarter while the inventory turns declined slightly from 7.2 to 7.

In the lower left quadrant, we are showing cash cycle days which combined our cycle time for inventory, accounts receivable, and accounts payable. Inventory days were up 1.3 days when compared to last quarter at 50.5. We saw an increase in accounts receivable days sales outstanding from 54 days to 54.5 days as a result of customer mix.

Accounts payable was favorable as days saleable outstanding increase from 53.7 days to 56.7 days; this was primarily result of higher inventory purchases. Overall cash cycle times decreased from 50.8 days last quarter to 49.7 days.

Finally, we turn on invested capital recovered nicely to 17.2% for the quarter. Please turn to slide nine. I would now like to share with your our guidance for the first fiscal quarter of FY ’12. Our view is that revenue will be in the range of $1.5 billion to $1.6 billion.

Jure will discuss this in more detail, but we are seeing the lower demand from several customers. We expect that gross margin will be in the range of 7.2% to 7.6%. Operating expense should be around $63 million, this leads to an operating margin in the range of 3.2% to 3.6%.

Assuming no large foreign exchange surprises, we expect that other income and expense to be in the range of $21 million to $23 million. We expect the tax rate to remain in the range of 15% to 17% and we expect our fully diluted share count to be around 83 million share s plus or minus half a million shares. When you consider all this guidance, we believe that you will end up with earnings per share in the range of $0.26 to $0.34.

Finally, for your cash flow modeling, we expect that capital expense will be around $20 million while depreciation and amortization will be around $25 million. Overall, we are very pleased with the good profitability and excellent cash generation that we achieved in the fourth quarter.

Looking forward to FY ’12, it would be a challenging start with the revenue that we are forecasting. We are planning for the works from an economic standpoint and we hope that we are being too cautious. The management team has already been taking actions to reduce our cost structure but what we can achieve in one quarter is limited.

WE will focus on improving our performance in Q1 while position ourselves for success in FY’12.

At this point, I’ll turn the discussion back over to Jure for more comments on our target markets and our business strategies.

Jure Sola

Thanks Bob. Ladies and gentlemen despite a lot of headwinds in our global economy Sanmina SCI delivered a strong fourth quarter. Our fiscal year 2011 is a second year of good results and continuous improvements. So we are pleased with our accomplishments that we made in the fiscal year 2011 especially the future new opportunities that we created as we go on.

Sanmina SCI is in a great position. Our new strategy is working. I believe we are well aligned with our key customers. These are the leaders in the market where we have a strong leadership position with each of them and continue to be more involved in their future growth.

So in summary just to add to what Bob said, fiscal year 2011, EPS, non-GAAP EPS was $1.64, it grew 26%. EBITDA grew 9.3% and this is mainly driven by our focused strategy what we are focusing the quality of the customer, quality of the revenues, better margin businesses and focusing on the businesses that will return to us a fair sustainable returns on our investment.

We have a nice continuous improvement that’s why we have a nice continuous improvement in last two years. Our EBITDA grew 98% in last two years. We’ continue to lower our debt and improved balance sheet. So things are definitely moving in the right direction.

Now pleased turn to slide 10, I’d like to talk to you about our end markets. As you look at this slide, 10 you can see right away that revenues for the year grew 4.5%. We forecast that fourth quarter to be basically flat; it grew approximately 1.3% on a quarterly basis. We also in the quarter have in terms of customers at 53% of revenues and we also for a year we had a one customer over 10%.

Name of that customer is Nokia Siemens. Now let me talk to you little bit more in details about each market segments that we are involved in. Communication networks which includes networking, wire line, wireless infrastructure. For the fourth quarter we forecast supply slightly up, that’s a strongest market that we have a 47% of our revenue represents that in the four quarters. That market was down fourth quarter by 1.5%.

Basically driven by slower demand we had some push outs and I also believe there are some inventory corrections going on with some customers. If you look at the year, communication networks grew lot, it grew 26.2%. It was a great year for that market segments for us. As we look at the first quarter of 2012, as Bob mentioned it’s kind of to forecast but in the short term, we see some push outs Sanmina corrections. But the long-term fundamentals of this market segment and the key customers that we are involved with we believe are very strong and this market should continue to be strong for us in the calendar year 2012.

Next segment for us is enterprise computing and storage which is basically a high end enterprise service and storage. We forecast that that will be slightly up actually revenue was 14% in the quarter and it was up 2.8%. So overall it was a stable demand driven mainly by existing and a new project that we are involved.

For a year that market for us was down approximately 14.9% and basically we had a couple old programs that we’re exiting it was the end of the life. As we look at calendar 2012 especially first quarter, at this time we are forecasting flat. We see stable demand in the short term again driven by some inventory corrections. But as we look slighter than we continue to win some new programs in this segment and we expect to grow existing and new customers.

As I move along to our industrial, defense and medical segments, we forecasted that segments to be flat slightly down actually it came about 0.5% down represented a 24% of our revenues. Medical was up, industrial was down mainly driven by semiconductor equipment. Defense was up in the quarter itself. As we look at 2011 as a whole year, this segment was basically flat down 0.3% mainly down because of defense and aerospace we had a weakness there all year long. Medical industrial performed pretty well.

As we look at the forecast for our first quarter 2012 again we are forecasting flat for this segment slightly down. We continue to see weakness in semiconductor capital equipment defense and aerospace. For medical industrial we expect to see continued stable growth but for long term again all these segments we expect to be moving in the right directions and I think we are well positioned here.

Multimedia represented 16% of our revenues, we did forecast that to be slightly up for the fourth quarter, actually that came in pretty strong it was up 12.6% mainly our existing customer demand was pretty strong. For a whole fiscal year 2011, that market was down about 17.7%, We did exit some profitable customers there we had one or two customers that they demand for existing products was not very strong.

As we look at the forecast for the first quarter of 2012, we are forecasting flat slightly down. We expect to continue to see a stable demand here. I think the customer base is pretty strong so the longer term as long as economy cooperates we expect a nice upside. Now let me talk to you more about our current business environment especially what we see in the first quarter, our December quarter of fiscal year 2012.

Current business environment continues to be the way I call it uncertain in the short terms. Three months ago when we talk to you, we are really at that time our forecast for first quarter fiscal year 2012 looked lot stronger. But especially in last few weeks, we’ve seen lot more push outs in the demand. We also saw some inventory correction across many of our markets. Also we are concerned about the potential supply chain constrains that we might had related to the Thailand floods.

We do have a factory in Thailand ourselves which represents about 3% to 4% of our revenues. Good news is that our factory is not flooded and operations continue to operate. So for a year, we are cautious as Bob mentioned but at the same time we are confident that we will continue to deliver improvements in the fiscal year 2012.

Now let met talk to you about our longer term environment in our key focus markets.

Longer term when you look at forecast and so on, that looks good. I believe that we are well positioned in these markets with strong customer base, but I think our customers are very cautious in the near term. But I can tell you they are still bullish about the long term potential.

We do have a strong and diversified customer base in each of these key markets and on the positive side if you look at the forecast of our key customers they are forecasting growth in calendar year 2012. So again fiscal year 2011 I think we are very successful getting new programs with existing customers and also we continue to expand our customer base in some critical programs that we are going to be working on for many months in some cases years.

These opportunities will have a positive impact for our fiscal year 2012 and beyond. Now I like to ask you to turn to slide 11. I like to talk to you about just little bit about our strategy and also products and services.

In 2011, we made some changes really focusing how we are going to differentiate ourselves when comes to our technology products and services from our competition. So we really focus on the growth that could drive our growth in the margin as you look at this slide here, we went from a one large organization that we basically control all these business to what we call today more focused business groups.

Of course our EMS in the middle is still core, but it’s important with other components products and services what we expanded management and focus on these component products and services to be more independent so they can focus on the individual go to market strategies so they can provide better technology to their competitive world also we made them leaner I think they are lot more competitive today and also I believe this strategy today we are servicing our customers a lot better.

We definitely believe this strategy will continue to drive the growth and the margin expansion in each of these businesses. So when I look at the way we structure today each of this group as a strong global structuring place.

So we do expect this model to produce a superior execution continuous improvements and industry leadership in each of this business groups all the way from our printer boards to mechanical to optical defense and aerospace where we have real focus on mission critical products new license which is storage joint development and OEM products on a really high end. Viking technology which is memory modules and solid state solution then Sanmina Global Services again supported with our design services around the world. So I think this is a best structure that we have today. I believe the structure that will allow us to compete globally.

So in summary, overall this was a good quarter, especially in this environment. Again, we have lots of leverage in our business model in any economical environment as Bob said, we are adjusting to this environment today and we are operating in an environment that is also very difficult to predict.

On a good side, demand for our products and services is expected to grow in 2012 I believe we are positioned today better than we ever been positioned in the last 10 years. But at the same time we have to be cautiously optimistic that the 2012 is going to continue to deliver better results.

So in this economy we are going to continue to monitor these macro environments and we are going adjust accordingly. So in summary and I would like to say thank you for your support and taking your time with us today. But before I go to the operator, I would also like to remind all our investors and analysts that Sanmina SCI with its management will have Analyst Day on November 17 in Boston. So all of you are invited and we are hoping to see as many as possible and we are looking to really share our strategy and give you lot more details not what we did yesterday, but most importantly where we are going from here. Lot of exciting things looking forward to seeing you there. Lot of information is already in our press release but if you need more information please call us and again looking forward to seeing you there.

Operator, we are now ready open these lines for question and answers. Thanks again.

Question-and-Answer-Session

Operator

Okay. (Operator instructions) We have a question from the line of Sean Hannan from Needham & Company.

Sean Hannan - Needham & Company

Yes good afternoon.

Jure Sola

Hello Sean.

Bob Eulau

Hi, Sean.

Sean Hannan - Needham & Company

I had a quick question around your guidance Jure I wasn’t sure if I heard specifically what you are looking for the next quarter but I think from your broader guidance it seems to imply that communications will probably be down double digits next quarter and just looking to see if we can get a little bit more color behind whether within networking wire line wireless infrastructure where exactly we are seeing the inventory corrections to push outs in anymore information be appreciated?

Jure Sola

Well first of all, we believe and let's specifically talk about communication as far as the short term definitely there is some push outs and something into recorrection. I don’t think I can talk too specific about one market segment or in the group but I can tell you it’s really more across multiple customers I think it’s across the whole industry now and on the parties are Sean we are not seeing cancellation what we are really seeing there is more push outs. So we think that’s just a temporary adjustment and we still believe that our communication network infrastructure business will grow in 2012.

Sean Hannan - Needham & Company

Okay and to clarify, we are expecting growth in the aggregate for fiscal ’12 we still are optimistic around that based on this December guidance. That would imply a pretty significant growth in the back half of the year.

Jure Sola

Well let me tell you why we are confident, we have, we are involved in a really new programs. Most of our revenue in that’s coming from the new programs that we won in last 12 months or 18 months. These are all new programs. We are well positioned with all the key players and there are a lot of other opportunities that we are working on. So yeah this is the area that I believe that we can win as long as these customers grow and if you watch, if you listen to them and watch their forecast they are expecting to grow in a calendar year 2012.

Sean Hannan - Needham & Company

Okay and then last question now that you’ve completed fiscal ’11 when you look at those wins that you just referenced Jure, through the year versus a fiscal and realizing you don’t specify a dollar number. First can you share with us whether you actually won a higher level of business it sounds like perhaps you had and then second can you provide color on the segments that perhaps may drive that mix of wins to contribute more meaningfully in fiscal ’12?

Sean Hannan - Needham & Company

From utilization standpoint, is there a way if you can provide a little bit of color around that?

Jure Sola

It didn't change much from the last quarter. If you strictly look at the – based on the factory – based on people about 85% to 90% utilization, based on equipment about 75%.

Sean Hannan - Needham & Company

You've certainly talked for a while around de-leveraging your business. As we're now entering the new fiscal year and you've talked a little bit around some of the thoughts you have on cash flow, and of course, your CapEx expectations, is there a way if you can provide a little bit more around how you see taking out a little bit more of your debt and a degree, you can bring down some of the substantial interest payments?

Jure Sola

Yes, well, first of all definitely our larger segment the communication infrastructure will continue to grow for us. As I mentioned in my prepared statements enterprise computing we got lot activities going on including our own ODM products that has a lot of potential. I think our defense aerospace industrial medical segments will continue to be stable.

Defense was a tough business for us in 2011. We don’t expect defense business to recover fast in 2012. But we believe the other businesses will have growth in their segments. I think multimedia for us that group of customers also put a solid overall I think it will be a more all our customers – unless this whole economy goes down but we are lot better positioned today. We won more new programs in 2011 than let’s sway in 2010. So I think the future is brighter. The question is just when does this demand is going to be there?

Sean Hannan - Needham & Company

Okay, thank you very much. I’ll jump back in the queue.

Jure Sola

Thanks Sean.

Operator

And your next question comes from the line of Jim Suva from Citi.

Jim Suva – Citi

Thank you. Hey Jure, it’s Jim Suva, how are you?

Jure Sola

Hey, great. Jim, how are you?

Jim Suva – Citi

Great. Quick question, and maybe you can help kind of cross the gap here a little bit about your guidance on the gross margins compared to say a year ago in the same quarter. It looks like year-over-year gross margins are going down and you what kind of that you are out what that’s the case is, we kind of hope for gross margins post restructuring to be going higher?

Jure Sola

Okay, well let me give you a couple of points and I’ll turn it over to Bob our CFO. First of all, it’s mainly driven by the revenue today. We do expect as the revenues come up to margins continue to improve. I think our model drives that even in the quarter that we just finished, the business was challenging especially at the component level we delivered higher margin at our component level than overall company but still demand for component level is down. We do expect that component level of demand to come back in hopefully in the second quarter. So that will help us out, but it’s really more revenue driven, Bob?

Bob Eulau

Yeah I think, I mean Jure hit the highlight and our margin is going to be very dependent on revenue and on mix and as you know the components business is very high contribution margin and so when revenues goes the wrong direction it has a disproportional impact on margins. So while we’ve enjoyed three quarters in a row of components being higher than the company average gross margin, we are planning for the December quarter that component gross margins are actually going to decline. So that’s probably the biggest issue in addition to just the pure fact Jure mentioned as revenues declining overall puts a lot of pressure across the board.

Jim Suva – Citi

Great. And then my follow-up is, Jure on your prepared comments you had mentioned the last few weeks you saw some more volatility or lack of visibility or order cancellations, can you maybe help us isolate or figure out which end markets you saw the biggest change that kind of was a little bit under rings?

Jure Sola

Okay, well first of all in the last, I’d say few weeks is really the last three weeks we’ve been seeing more push outs than what we expected. Of course with our communication infrastructure being almost 50% of our revenue percentage wise that was more push out there than other markets but we deal some push outs especially in the semi conductor side of the business, as I mentioned in my prepared statements our defense and aerospace business is not growing at this time/. But we are investing lot of money in that side of the business that’s why if you look at my model what we are doing we actually separate that business to make an independent as possible so that they can focus on new opportunities and that’s becoming a more a product company than just an EMS company. So overall, I would say the big impact we’ve seen in the communication infrastructure but we’ve seen across the other markets also.

Jim Suva – Citi

I want to make sure they were clear that the problems aren’t just in communications.

Jure Sola

Well we wish it weren’t the case and we are seeing declining revenues from September to December and nine out of our top 10 customers. So it’s pretty diverse it’s not any one area. Communications got a lot of attention because it’s almost half of the business but softens to pretty much across the board.

Jim Suva – Citi

Great, thank you for your details. It’s always very useful gentlemen thank you.

Jure Sola

Thank you.

Operator

And your next question comes from Wamsi Mohan from Bank of America.

Wamsi Mohan - Bank of America

Hi, yes good afternoon.

Jure Sola

Hey, Wamsi.

Wamsi Mohan - Bank of America

Hey, bob, hey Jure. Can you help separate the impact of the component constraints from the Thailand flooding from the weaker demand environment and the push outs you noted and what components are you most worried about?

Jure Sola

Well, definitely there is a couple key components, it’s some of the stuff that we have in our optical business we are worried about that and also some of the business that we have and there is some other some few semiconductor components. We are working around it, but right now we know there is going to be an impact it’s really hard to figure exactly what impact because often the customers are looking very close to finer ways to minimize the impact. And it's mainly from other suppliers as I mentioned, factories find some minor interruptions just for employees coming to work but we are – I think I got a report this morning 85% of our employees are there and so from that point of view I would say it’s our optical business.

Wamsi Mohan - Bank of America

And anyway this size that Jure for next quarter or like the $25 million, $50 million implied within your guidance that your thinking would be the4 hit from this.

Jure Sola

I mean to me it’s really difficult because there are still lot of moving parts not in some of these cases both customers and us and I am not giving up on the revenues because they are our end-customer requirement. So that’s why we don’t like to put a number on it we still have two months to go and we are trying to find ways to satisfy all the customer needs.

Wamsi Mohan - Bank of America

Okay thanks, Jure.

Bob Eulau

Yeah, I’d just add. I think our team has done a great job in some cases we’ve shifted volumes to other factories in Asia and we’ve done I think a very good job of meeting demand thus far and so we just have to keep working through the issues day by day.

Wamsi Mohan - Bank of America

Okay, thanks, Bob. And can you perhaps provide some more details on the comments that you made at the end of your prepared remarks around the cost structure it seems like you are taking some steps to better preserves the margin structure going forward but can you be a little more specific about what those actions are and what the magnitude of cost savings we can expect from that?

Bob Eulau

Well, I can’t be real specific but I can tell you that we as a team have already been looking hard at every part of the business and we fortunately have flexible work force in many cases. So as we have lower demand we can react fairly quickly to that and we are going to take some time off around the holidays do the classic things you do when demand starts to decline a bit but in terms of specificities I really can’t offer much more than that and as I said also in my remarks there is only so much you can do in a short time horizon. So we are doing all the things we can do very quickly and then we do believe that the business will become back later in the year. So, we want to make sure we don’t do anything in the short term that jeopardizes the long term as well.

Wamsi Mohan - Bank of America

Okay, thanks a lot guys.

Jure Sola

Okay, thank you.

Operator

Your next question comes from the line of Craig Hettenbach from Goldman Sachs.

Craig Hettenbach - Goldman Sachs

Yes thank you. Just a follow-up on the end-market commentary, I know you said it was, you’ve seen a broad base decline, but any additional insight into inventory, because in looking at the guidance in the communications business down double-digits versus the other markets flat to slightly down, and looking back is that’s the bigger issue that those markets income got built up more and now they have to be worked on or can you shed any more light on that?

Jure Sola

Well, Craig, Jure here. I don’t know if I can give, that much details but definitely you have a couple scenarios. None of these things seem like a consolation most of these things getting pushed out and there is more in some cases driven more by end customer and some cases it’s driven by inventory correction. So I think it’s more customer driven than our whole industry. But we believe that’s a short lived and because if you really look at deeper the pipelines are not overfilled.

Craig Hettenbach - Goldman Sachs

Okay if I can follow up, then just as you look out to fiscal 2012 independent of the macro environment can you highlight any areas where you feel is the best in terms of the new program activity where you could drive some growth?

Jure Sola

As already mentioned that I think communication infrastructure is definitely one for us because that’s almost 50% of our revenues we are well positioned with all the leaders in that industry. So we expect to grow there and I think we are going to see some nice improvements in enterprise computing and then in medical, industrial, defense is the only that we are not forecasting growth. I mean we are forecasting some growth from 2011 but that has not to be excited. So I think as we move across most of our customers.

Craig Hettenbach - Goldman Sachs

Jure, you mentioned the uncertainty for some customer forecast. Can you just go by end market and talk about it between, industrial, the multimedia as well and just kind of see what you're seeing by end market?

Jure Sola

Well, first of all, as I mentioned in my prepared statements, first of all communication networks for us seems like it's in a good position. Well I think in a near-term we see some adjustments in our forecast with our customer but the long-term we feel very comfortable there.

On the industrial, medical and defense and aerospace again that industry similar I think we got a lot of new programs involved in that area. I think we've all positioned for the longer term, we expect to see the growth. In the short term, I think it's a similar thing, I think its adjustments some of our customers were driving inventories or demand pretty hard in last two, three quarters.

So, we believe there are some adjustments going on, and at the same time, I think some customers are worried about the economy, I mean they are just looking and making sure that the forecast is going to be there. It's hard for us to – again to forecast economy, but we really feel comfortable based on the pipeline that we have especially organic wins that we already won during the 2010, and the programs that we're working today. On the multimedia to us I think it's more – it's mainly timing.

There's a lot of talk going about seasonality, I mean, that business typically you can't predict it one quarter to another, but if you look at over the year that business grew for us. We believe it's – for us it's a temporary slowdown, maybe a quarter to quarter and a half, but we see that business coming back to just the strong numbers that we had this year and maybe even the larger numbers.

Operator

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

Unidentified Analyst

Hi, this is actually Kevin (inaudible) in on behalf of Sherri. I may have missed this but did you say you saw sequential improvement this quarter in your components business? And then also just looking forward, are you able to improve margins there volume growth and volume or is volume really was dictating margin improvements there. Thank you.

Jure Sola

Well Kevin in this environment when there is a natural disaster like that what we are trying to do is, to help out and we are involved with multiple customers and trying to help them out during these tough times. So those are services that we offer lot of times. These are the same customers that we have and we’ll continue to work and see how can we help them out and so they can satisfy their customer requirements.

Unidentified Analyst

Excellent, thank you.

Operator

And your next question comes from the line of Lou Miscioscia from Collins Stewart.

Lou Miscioscia - Collins Stewart

Yes, thanks, Jure. I guess, I could ask about the computing sector, obviously you mentioned in your remarks that that was down and one program went end of life, if you could just give some more color about that and it does sound like you are going to be replacing that business pretty soon.

Jure Sola

Well, actually for a quarter that business was up 2.8% Lou. For the year, that was 14 plus percent. We talked about this in our previous quarterly calls that we have some programs that were end of the life and that’s going to come into the end. And lot of the new programs are picking up and I think that’s one of the reasons we see some growth in last quarter. We are forecasting kind of a stable flat stable growth. The good thing is that we are involved in multiple customers out there that could be a substantial amount of business especially in some of the high end enterprise storage products that we provide and also we are able to widen the customer base in the last six months.

Operator

And your final question comes from the line of Sean Harrison from Longbow Research.

Sean Harrison – Longbow Research

Hi, good evening. I’ll try to make it brief. Bob, just on the comment of cash generation in December quarter. What do you expect inventory dollars to do? Would you expect it to decline sequentially?

Bob Eulau

We are certainly going to try and make that happen. We are a bit disappointed in the inventory turns this past quarter as I mentioned they dropped down to 7 from 7.2. Our longer term goal is to get them up to at least eight and one third of inventory is about $100 million in cash. So there is a big opportunity there. We are working with the accounts right now to really make sure we understand demand and that with we manage our own inventories as effectively as we can.

Sean Harrison – Longbow Research

So, it sounds like I guess the shortfall this quarter was more volatility than anything else?

Bob Eulau

From an inventory standpoint you mean?

Sean Harrison – Longbow Research

Yes.

Bob Eulau

Yeah, certainly we had expected to do a little bit better and now we’ll be burning off that inventory.

Sean Harrison – Longbow Research

Okay and then the follow-up question. Just in the components business, given the weaker demand environment are you seeing any, I guess abnormal pricing dynamics within any of the components businesses or is it pretty normal versus what you’ve been saying over the past say 180 days?

Bob Eulau

So I think the pricing environment has been pretty stable. We are not seeing much of a change there. What we are seeing as I mentioned earlier is that business when you end up that with an economic headwind like this, the components business is the first to face pressure and that’s what we are seeing right now, is more pressure on the components side. We also believe that business will be the one that recovers the first as business picks up again. So, we haven’t seen much change in terms of the pricing environment but we definitely are facing some demand pressures there.

Sean Harrison – Longbow Research

All right. Thanks, so much.

Bob Eulau

Thanks, Sean.

Jure Sola

Well, first of all, I want to thank you to everybody on this call. Also want to again remind all you that we are going to have that Investor Analyst Day November 17. We are looking forward to seeing you there. We really like to hopefully see you all there. So we can go in details and talk a little bit more about the strategy. There is lot of exciting things here and we want to share that with you. Thank you very much.

Bob Eulau

Thank everyone. We look forward to seeing you in a couple of weeks.

Operator

And this does conclude today’s conference call. You may now disconnect.

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