Sanmina-SCI's Management Presents at Bank of America Merrill Lynch 2012 Technology Conference (Transcript)

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Sanmina-SCI Corp. (NASDAQ:SANM)

Bank of America Merrill Lynch 2012 Technology Conference Transcript

May 08, 2012 6:30 PM ET


Bob Eulau – Chief Financial Officer

Paige Bombino – Investor Relations


Wamsi Mohan – Bank of America Merrill Lynch

Wamsi Mohan – Bank of America Merrill Lynch

Joining us here, it is the end of a long day for many of us. So appreciate you all being here today. For those of you who have not met, I’m Wamsi Mohan. I’m the Technology Supply Chain Analyst here at Bank of America Merrill Lynch and welcome again to our Technology Conference this year.

We are delighted to have Sanmina-SCI with us today. As you all know they have been around for a long time in the EMS business and have had seen many, many cycles both ups and downs over the years, and we have from Sanmina Bob Eulau, CFO, representing Sanmina here today. Also we have Paige Bombino from IR sitting here if you want to reach out at the end of the day.

Bob is going start off with some introductory slides and then we will jump into Q&A. Okay. Bob?

Bob Eulau

Okay. Thanks, Wamsi. It is a pleasure to be here today and thanks everybody for attending, we appreciate it. What I’ll do is quickly go through an overview of the company and we’ll save plenty of time for questions-and-answers.

Of course, I have to start with the obligatory Safe Harbor. I would encourage you to read all of our SEC filings about the risks, et cetera in them and with that, we’ll move right along.

So, as Wamsi mentioned, Sanmina-SCI has been around for 32 years. We’ve been, in fact some of our predecessors companies even been around longer than that. So we operate in 18 countries around the world and at this point, we have about 42,000 employees in those 18 countries.

Our focus is really on providing leading edge technology, engineering and manufacturing solutions to our customers. And I’ll go through that in more detail. Oops! Wrong direction.

So our strategy is to make sure that we are providing differentiated capability. We want to make sure we invest in technologies, and products and services, where we can add value for our customers.

We made a bold decision about five years ago to exit that personal computer manufacturing and we don’t do any high velocity manufacturing. We really focused primarily on infrastructure related product area, where again, we can bring more engineering content, we can add more value and hopefully, make a bigger difference for our customers.

Our goal is to maximize value in each and everyone of the businesses that we operate in and we’ll come back to that in few minute.

We do invest in leading edge design, engineering and technology. We are unique in that respect. As a EMS company, we have a higher percentage of our revenue that is vertically integrated then anybody else in the industry and we also make specific product investments that are unique within the industry.

And we spend a lot of time over the last few years really diversifying our customer base to continue to drive growth in the infrastructure product areas, which is where we think our capabilities are uniquely well-positioned.

The other thing that we’ve had as a strategy for quite awhile, it’s very much in evidence over the last 90 days, whereas our goal to deleverage the balance sheet and we’ve made a lot of progress on that, and I will share that with you as we move forward here as well.

So the key is, executing on this strategy to have long-term sustainable growth and profitability to create shareholder value.

When we look it as a company, it’s still dominated by the manufacturing and services area, which was showing in the center of this slide. But we are focused on unique businesses that help compliment the traditional manufacturing services.

One of the areas is interconnect systems, which we been in and involved in for many years, in fact Sanmina started out as the printed circuit board company and when we say interconnect systems we are really referring to printed circuit board, fabrication, backplane and cable, that’s a good business for us and one other areas in which we vertical integrate.

The second one is mechanical systems and here we invest in areas like precision machining, plastic injection molding, sheet meta, bending, stamping, et cetera. So we again have a unique business, we run each of these a separate business, we have separate leadership and President for those organization and their goal is to independently generate profitability for the company.

Third area for us is optical components and RF and microelectronic capability, and this is an area in which we have very large footprint that very tightly integrated with our manufacturing services. I would say our footprint is probably second only to Fabrinet in terms of optical, optical capability and the largest footprint among the Tier 1 manufacturing services company.

Another unique area for our company is on the defense side, we’ve been investing in defense and aerospace for a number of years, in fact, our name Sanmina-SCI, the SCI stands for Space Craft Incorporated and we began -- that part of the company began as really a defense contractor working for NASA.

So there is, and I believe that was in the ’60, we go over 50 years of selling into defense market. This is a still a very profitable business for us, somewhat smaller than it was a year ago, but still very good profitability.

Next area for us is Newisys which is a ODM storage capability. We have a product family of storage hardware that we sell into the two traditional enterprise storage companies, as well as cloud providers.

And then we have Viking Technology, which is a memory module business and we’ve investing R&D in solid state drives as well to diversify other offering that also is a very nice profitable business for us.

And then we have a services offering which really refers to our reverse logistics and our overall repair capability. This is an area where we are making great strides. We expect to have significant growth in this area over the next year or so, as we mentioned in our recent earnings call, we’ve just signed a new deal with the major customer there, so we are optimistic about that business as well.

And then finally, one other ways, we really try and differentiate our manufacturing services is through offering engineering capability and services to our customers, since they are going through their new product introduction cycle and that’s an area where we think we can really offer best-in-class capability.

So, again, we are still primarily a manufacturing services company, but we have a lot of unique vertical component and integration opportunities, and product capabilities.

If you look at our key markets, our company is very much correlated with the communications industry. We’ve been involved in communication networks for a number of years and the piece -- the size of the pieces of the pie varied somewhat quarter-to-quarter, but we are very correlated with communications in general.

One of the strategic segment for us is defense, medical and industrial, and this is an area where we think we have unique capability where we have the opportunity to provide engineering services and to provide capability that is unparalleled in the industry. This is also segment that we think overtime has unique profitability opportunities.

From an enterprise computing and storage perspective, it’s about 16% of our business in the first half of the year and at this point, it’s probably more storage then computing. We are continuing to do some computing products, but we see storage as a bigger and bigger opportunity for us in that segment.

And then, finally, we have multimedia, which probably the business that’s most consumer oriented. We have digital set-top boxes in that segment. But we’ve been diversifying it over several years.

We have casino gaming consoles that we do there. We have high-end cameras for cinematography and we have automotive in that segment which is being growing quite nicely over the last couple of years. So we’ve got a fairly diverse set of markets. Again, we focus really on infrastructure opportunities.

This is a look at some of our customers, I think, you’ll recognized probably every one of the names on here. I would say, we do business with almost every one of the major communications companies and we do business with the number of infrastructure companies across the other segments as well.

So shift gears, here I’ll give you a little bit about financial overview. This has been challenging first half. We talked about that in our call a couple weeks ago. We primarily have been slowdown down through demand declines on the communication side. We think that’s the transitory factor. but we are -- and we are anticipating the second half will be stronger than the first half of the calendar year.

We’re disappointed and what had happen in the first half. The other that was a bit slow in the second quarter was the set-top boxes business that I mentioned earlier. And as a result of the revenue being lower then what it was in the second half of last fiscal year. We saw the margins in the gross profit drop off quite bit and we believe this is primarily related to the revenue drop. We think the company is pretty well-positioned for growth as we see the revenue, for growth and profitability as we see the revenue come back.

From operating income standpoint a pretty much parallels what was transpired on the gross profit side and the EBITDA also drop off a bit as a result of the margin.

From a balance sheet standpoint, we continue to have a very healthy balance sheet, we’ve done a lot of changes to the balance sheet over the last 90 days or so. We used significant amount of cash to pay down some of our long-term debt and that’s why the cash balance is down relative to the December quarter.

Account receivable relatively flat and we were able to bring inventory down by about $42 million. However, our inventory turns really didn’t improve. So we got an opportunity in the next quarter or two to really improve our inventory turns and generate some cash as a result of that.

You can see, the long-term debt down to $1.33 billion as of 31st of March and that’s down about $150 million from December, and then this quarter, we’ve also repurchased more debt, which I’ll come to in a moment.

We are in very good situation from a debt maturity profile. We don’t have any debt due until 2014, that’s $257 million and we in the last 90 days or so retired about $250 million of our 2016 debt, which is fantastic.

The net effect of that is saving us about $20 million a year in terms of interest expense. You combined that with some of capital structure changes we made a year ago when we repurchased debt and refinanced debt. We're saving in total about $40 million a year relative to where we were previously. So we’re making very good progress in terms of our overall capital structure and deleveraging continues to be a top priority for us as we generate cash going forward.

From a balance sheet standpoint, I already talked about cash and why it came down during the quarter. Inventory turns are a bit of a disappointment for us. We averaged 7 to 7.2 turns in each of the quarters last fiscal year.

We have 6.2 turns in the first quarter. I didn't think turns could get worse and actually did. It’s 6.1. As I said, we brought down the total amount of inventory, the turns actually declined a bit. So I was disappointing, although it does mean that we’ve got an opportunity here over the next quarter or two to generate a fair amount of cash.

And then, if you look on the lower left-hand quadrant, you can see the cash cycle days and as I mentioned, the inventory picked up a little bit. We also had our AP go down about 3.4 days. The net effect of that was the overall cash cycle time going to about 59.6 days. And we’re very focused on this measure. I think we’ve got multiple actions we can take to make improvements.

And then from a return on invested capital perspective, the primary challenge for us in the first half has been the margin erosion that we talked about previously. And we’re confident as we get the revenue back, generate the margin, the return on invested capital will improve accordingly.

So the key for us going forward is margin expansion. And we have, I think phenomenal opportunity to expand our margins going forward. There are multiple levers that we can pull of.

The first one is continuing to improve our operational efficiency and we've been tuning up our factories. We do this every quarter. We’re very vigorous about that -- that going through the factories that are performing most poorly.

And there are some quarter, when this made a really meaningful impact last year and the bar just keeps getting raised quarter-after-quarter. We expect everybody to continue to improve and this could have a big impact for us.

The second opportunity for us is to continue to drive a favorable business mix. We -- I think, as I said, it made a bold move to really focus on infrastructure products and to the extent that we can continue to drive on areas where there is more engineering content. We can generate better margins and create more shareholder value that way. And it’s markets like medical, defense, industrial within communications, or it’s like optical where there is more manufacturing challenge.

The other thing that we focus on is our components business. And we have the ability to more vertical integration than anybody in the industry as a percentage of our revenue. And there is a phenomenal margin opportunity as a result of that.

We've been through several quarters last year where our components area had a higher than average corporate gross margin. And then most recently as our revenue decelerated we had it go below the company average. But we believe this area should have twice the company average gross margin and this alone can impact overall margins by 1 to points.

And then we have the product opportunity, I mentioned before. So we're unique in fact we have products in the defense business, we also have products in the storage area and we’re developing products in the solid state drive area as well. So we’re inventing products where we thing we can get better margin and generate more value.

As the business rose again, we expect our operating expenses to be relatively flat. If you look at the last 10 quarters, our operating expenses have been in the $60 million to $64 million range, with the exception of one quarter. And so as we drive revenue again, we will get operating expense leverage, which will help us 30, 40, 50 basis points in terms of margin expansion.

And then, finally, a big opportunity for us is to better utilize the factories that we have and obviously we've been hurt by this in the first half of the year as we drive volume into some of these underutilized factories in the second half of the year. That'll really help expand our margins as we can leverage those fixed costs.

So, overall, we think our margin has the potential to lever sustainable industry-leading gross margin and operating margin. And that it’s not a big mystery in terms of how we’re going to do this. It’s a matter of focusing on each of these levers.

So in summary, we believe over the longer timeframe, the strategy is working. We’re really focused on maximizing the potential of each of the businesses in which we are operating within the manufacturing services. It’s a matter of getting right business mix and focusing on infrastructure products. And then as I outlined in each of the other business areas, it’s a matter of making sure that we’re competitive in each of those offerings.

We’re unique technology company. We have differentiated capabilities. We are focused on executing in a consistent way and making sure that we’re delivering value to our shareholders. And the key for us is to continue to focus on what we’re good at, invest in the higher-margin opportunities and make sure that we focus on growth and sustainable market.

So, again, we believe there is a lot of leverage in this business model and we are looking forward to the second half of the year. We can hopefully get revenue growth that really demonstrates the capability of the company.

So, with that, I think, I’ll turn over for questions.

Question-and-Answer Session

Wamsi Mohan – Bank of America Merrill Lynch

Okay. Great. Thanks for that introduction, Bob. Maybe I’ll kick it off over here first. So when I look at the mix of your business, 25% industrial, defense, medical. Do you see that mix materially changing over the next few years. What sort of profit trajectory, margin trajectory do you expect on that over the next few years?

Bob Eulau

Yeah. We’re really excited about that segment and I would say, particular the industrial areas, probably the most unpenetrated area that we focus on. And so there is a lot of opportunity there, depending on how you define industrial and that’s a trillion dollar industry and very little outsourcing to date. We -- there are a lot of segments, niche segments in there where we think we can build a very good business.

We are well-positioned for industrial with our mechanical capability, coupled with our traditional EMS capability from PCBA assembly standpoint. So industrials market we’re very enthusiastic about. We’ve been participating on medical side for a number of years. We expect that over time we’ll have slow steady growth there.

We really again tried to focus on areas where we can do more vertical integration where we can add more value to customers. So we tend to do the bigger products, the MRI machine, CAT scan machine, X-ray machine, et cetera. So we think medical is a good area for us to be participating in.

And then from a defense standpoint, we had challenge last year as the troop withdrawal began. We got that business right sized. It’s a very profitable business today. There are new leadership in place and we’re pretty comfortable that we got a team there that will search out and find the right opportunities with our core competencies.

So, of all the segments there is probably the one that we’re very bullish on and over multiyear timeframe, I expect there’ll be a bigger percentage of the company.

Wamsi Mohan – Bank of America Merrill Lynch

When you look at, Jabil was here earlier today, they spoke about lot sizes, particularly in that business being fairly small. Is that something you track that can you quantify that for us, what sort of lot sizes, you guys as a company as a whole and perhaps within than higher mix segment?

Bob Eulau

Well, high mix its, in the lot sizes this can be quite small depending on which industry -- which segment of the industry we’re talking about. So, I don’t know, I can put a particular number on it, but we do. We’ll do a lot sizes one and some cases with a very complex piece of precision machinery and then we’ll do 100s is very common. We’re very much focused on high mix business. I mean, that's really where we've tried to tune our factories to address.

Wamsi Mohan – Bank of America Merrill Lynch

Any questions here in the audience? Why don’t you talk a little bit on the com network side, some of the LTE programs, elaborate on some of the products you’re building in, what kind of ramp you’re seeing in that segment?

Bob Eulau

Yeah. So on communications, as I mentioned, its about -- for first half about 45% of our business. We had a pretty significant decline relative to the second half of last fiscal year. And a lot of that was driven by the cellular base station market, the wireless market that you are alluding to.

We believe that the real cause and a lot of that probably the potential merger between AT&T and T-Mobile. The team does seem to slow down carrier spending and of course our customers are the equipment providers to those carriers.

And what we believe happened was they got caught with too much inventory. So we got hit in two ways. One was through the reduction of their inventories, as well as the underlying demands slowing down.

The forecast we’re getting from our customers today indicates second half will be clearly better than the first half. And let’s say, our customer forecast are always precise, but I think directionally they've been fairly accurate and we’re pretty confident second half will be stronger.

Wamsi Mohan – Bank of America Merrill Lynch

I have follow-up to that. You know there is some weakness relative to the wireless access business. There has been continuing weakness in that and I think you always spoke about several areas being a primary driver for that weakness. Are you saying that business starting to turn around now?

Bob Eulau

Yeah. When I talk about communication, that’s a big driver within the communications segment. And we are seeing some early indications that things are starting to get better there. And as we said, we said in the last two conference call, we really expect the second half of the calendar year to be stronger, much stronger than the first half. So, I think the indicators are looking fairly good there.

Wamsi Mohan – Bank of America Merrill Lynch

Okay. I just wanted to touch on the component margins. So where are the margins today with respect to the overall company average and you talked about a long-term target of twice the company average? Is it a matter of just growing the topline to get to that or do you need any restructure and if you can also like segment the margins by PCBs and other components like which area has the bigger margin within components?

Bob Eulau

Yeah. I’ll do the best I can with that. As you know, we don’t do that level of reporting, but in terms of components overall, they are little below the company average today. We had, as I mentioned, a few quarter last year, when they were above the company average. We really think longer-term the components area can deliver margins, it should be delivering operating margins that are than 10% or so, 8% to 10%.

We believe when we benchmark and that’s where we can and should be with that business. That implies gross margins. As I said, probably twice what the company average is.

So we continue to believe that that’s a very good business for us. We’ve done a lot of transition with the components business. We believe the primary issue today is revenue. And we believe as we get a little bit of tailwind will be able demonstrate very strong profitability on the component side and help us on the traditional EMS side as well. But revenue is really critical on components.

And you may recall, when we, in the December quarter, I commented on the fact, revenue was down in the December quarter by 17% on the component side. And when revenue was down 17%, the gross profit was down almost by 50%. So it gives you a sense of much leverage there is, if we can get the components growing it really drives the gross profit of the company.

Wamsi Mohan – Bank of America Merrill Lynch

How much is your revenue growth within component is tied to the rest of your business growing versus what you would could sell sort of separately, because adventures like what you’re doing with liking Newisys I mean those seem like standalone products and solutions that you can sell as oppose to supporting other areas of the business?

Bob Eulau

Yeah. So it’s -- when you look at the component and product areas, first of all, I’d say, just from a component standpoint, about a third of the demand is driven by our EMS business. So we get pull-through on that and as revenue separates there, it does affect our component business. And then across the board strength on a component side tends still be in this same market segment.

So we obviously sell, we -- our focus particularly in the printed circuit board side is on complex boards, so get into very high layer accounts and backplanes, and selling those primarily, again in the communications and enterprise, computing, storage solutions. So those are same markets.

From a -- if you look mechanical systems, as I mentioned, probably, we certainly do chassis and racks and those kind of products for communications and enterprise, computing and storage. But also have a lot of capability for the industrial market there as well. So it’s the same general markets and I think that we got potential to grow both with our customers on the EMS side, as well as in third-party opportunities.

Wamsi Mohan – Bank of America Merrill Lynch

Thank you. One question back there please.

Unidentified Analyst

Can you discuss a little bit about your capital spending plans over the next two, three years? Where you envisioning putting more money to work, is it going to in this same communications space or you going to go furthermore towards the industrial machinery side? Where do you see the biggest opportunities over the next two, three years and where you’re going to put your money to work?

Bob Eulau

Yeah. It’s a good question. I think our capital -- our capital spending is up a little bit this years as we are completing two buildings this quarter and next quarter. I would say, our spending over next two to three years will be relatively modest, our investments will be dictated on where the business opportunities are, we as I mentioned, do you see quite a bit of opportunity on the industrial side, which implies investments in terms mechanical systems, capability.

We’ll continue to invest on the EMS side as appropriate as custom demand dictate. But I don't see a particularly big change in terms of capital spending. We don’t have any other buildings on horizon, so it’s tend to be big outlays. So I don’t see that happening. So I think capital budget will be pretty, pretty consistent with what has been running as a percent of revenue over last two or three years.

Wamsi Mohan – Bank of America Merrill Lynch

Bob, can you talk about what metrics you look at when you are looking at your factories across the globe to understand which ones the ones that are performing the best versus the ones that need improvement? What are the ones that you are -- what are the metrics you guys truly look at the ton, but if you -- it is still down sort of, where you see the largest opportunities where actions that you're taking apart from revenue growth could make a difference, so that margin profile of those underperforming factories?

Bob Eulau

Yeah. As you know Wamsi, we have lot of operational measures we look at, we do monthly reviews sort of P&L with all our divisions around the world and the factories we put into the divisions.

So we’ve got a pretty good grip on what’s going on plant-by-plant every month and we look at full P&L. If I have pick one measure that we really focus the team on more than any other measures it’s what we call controllable free cash flow.

So, we actually measure that plant-by-plant, make sure that they are managing not just the operating margin, but also what they're doing in terms of working capital and success. So and I think we've got folks very tuned up on that measure. But it’s hard to just focus on one.

Wamsi Mohan – Bank of America Merrill Lynch

If you were to look at the operating margin delta between sort of the best performance factories in the lowest formula, what sort of magnitude of differences there, which could give us some sense of where the opportunity lies?

Bob Eulau

Well, the top performing factories generate solid -- very solid double-digit operating margins, and the poorest performing factories, I would say – I would say probably loose operating margin.

Wamsi Mohan – Bank of America Merrill Lynch

And is there geographic distribution to that where just given structurally some countries, obviously China are much more lower cost in terms of from a labor perspective, is there a geographic element to that or is that sort of totally accounted formally look at that?

Bob Eulau

Yeah. I don’t know the geography is the driver. As I mentioned earlier, I think more nailing office revenue right now. So even the factories that aren’t performing as well, the bottom performance, I think little bit of revenue would help them a lot. So, we have some underutilized factories with that certain fixed costs and so we get a little more revenue in there, I think that will -- that is the biggest thing we can do to help them.

Unidentified Analyst

Just ask a follow-up. In line with what Wamsi was just asking, Japan is suffering mainly with this strong Yen, they are producing too much on-shore, you think that’s a huge market for you, are you looking at spend help out these guys to outsource their products their manufacturing?

Bob Eulau

We do business with some Japanese global companies and I actually, I think we won some new business there recently.

Wamsi Mohan – Bank of America Merrill Lynch

Yeah. Please.

Unidentified Analyst

Bob, recently you’ve take out a lot of debt, are you happy with the capital structure right now? How do you see that changing going forward and if you can just prioritize the usage of cash?

Bob Eulau

Yeah. So, great questions. We are really pleased with the progress we made on the capital structure. And as I noted in the presentation, so I won’t go back through that again. In terms of usage of cash it’s very consistent when we said the last two or three years. Number one is to make sure we have the cash to grow the business and we unfortunately haven’t been growing in the last six months and so that’s why we used the cash we generated to pay down debt.

Second use is to delever the company. And the third will be small strategic acquisitions and we are doing a lot of acquisitions, we look at a lot of opportunities, but we don’t do many, they really have to fit well with our overall strategy. But, in terms of like capital structures it’s -- the company is capital structure in best shape, it’s been in a decade and I think we’ll be able to continue to tune it from here.

Unidentified Analyst

As a follow-up to that, Bob, do you expect to generate significant amount of cash from the real estate assets that you’ve got, help us, what’s the timeframe as you look at market, real estate market it doesn’t seem like it quite anyway right, but do you think that -- there is a certain price level that you looking for which is likely to come about in the next couple of years, if you are looking to your significant amount of cash inflow?

Bob Eulau

Yeah. It’s great question. Actually, someone spent time on last week. We have been really patient on the real estate and if you look at the last couple years I think we generate in the neighborhood of $30 million in a year in terms of real estate sales, that piece is dropped out quite a bit in the last six months.

And we reevaluating what we were doing there, because we would like to see more of it moving, but we don’t want to get it away either. So it’s always the balancing act and we had offer on a piece of property last week, we countered on it, we will see what happens. I mean, there is activity and we could sell everything really fast, but I don’t think anyone of us to be very happy of the price.

Wamsi Mohan – Bank of America Merrill Lynch

Okay. One more here.

Unidentified Analyst

The question I have is on overall strategy, so when we look at the North American EMS players, looks like everybody is now focused on the higher mix, higher margin areas, if Flextronics has existed the ODM business, they focus more on high mix now?

So are you seeing more competition, are you seeing more pricing pressure and in this environment like what advantages and what can you do to keep -- to give the advantage to Sanmina like, what advantages do you see Sanmina having against bigger players?

Bob Eulau

Yeah. It’s a great question. It’s interesting for me. I have been in the industry almost three years now, so it’s about three years ago, I was really looking at the industry. And I really thought at that time Sanmina-SCI had a unique strategy. Now when I listen to others it sounds more like our strategy. So, I guess that’s a little bit of flattery.

What we have to do is focus on what we are good at and obviously, we need to service our existing customers extremely well. We need to continue to win the follow-on business there. We need to look from more vertical integration opportunities, more opportunities to add value through engineering, making sure that we continue to build on a strong partnership with relationships that we have.

And then as I noted, we are building out our capability in some of this product areas. So again, we have differentiated offerings from a storage standpoint. We’re very excited about what’s going on there, we had I think POs from 40 different customers last quarter. There is a lot of evaluation going on there. So I think there is a lot of potential. They have a unique capability within the storage area relative to our competition.

And defenses and other area, where we have unique capability where we have products that we have been doing for number of years. So, again, it goes back to making sure we are really focused on what we are good at, having differentiated offerings and driving the right business mix and making sure that mixes areas where we can add value.

Wamsi Mohan – Bank of America Merrill Lynch

I think there is time for just couple more questions. But when you look at the acquisition front, do you anticipate anything of the size of Breckenridge to down here in the -- with the next couple of years or are you anticipating something different?

Bob Eulau

Well, again, as I noted, we’re always looking at opportunities and we’re pretty clear on our strategy in terms of what we’re trying to accomplish. We just, one, as we noted in the earnings call, ones in material business recently, which is allowing us to build out that footprint a bit more. We’re going to continue to look for areas, where we might make synergistic investments offset with the kind of strategy I articulated today. But I don’t see as doing any kind of acquisition they would take us different direction.

Wamsi Mohan – Bank of America Merrill Lynch

And on free cash flow, obviously you have a pickup in CapEx because of the buildings you did with that in China and India, inventory turns little bit of drag here in the near-term. Do you anticipate you will be free cash flow positive to the course of the rest of the year?

Bob Eulau

I would expect that we would be. I mean, I think, as I noted our margins should improve. We should be able to improve our inventory turns. One turn in inventory is about $100 million in cash. So we’ve got to challenge the team, but I think they will be able to generate free cash flow.

Wamsi Mohan – Bank of America Merrill Lynch

Okay. I think that’s all the time we have today. So, thank you all very much for joining us here and thank you Bob.

Bob Eulau

Yeah. Thank you, Wamsi. It’s pleasure.

Wamsi Mohan – Bank of America Merrill Lynch

Thank you.

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