Sanmina Corporation
Q2 2008 Earnings Call Transcript

Published: 27 Apr 2008

[Operator:]

Welcome everyone to Sanmina-SCI second quarter fiscal 2008 earnings conference call. (Operator Instructions) It’s now my pleasure to introduce to your host, Jure Sola, Sanmina-SCI’s CEO and Chairman.

[Jure Sola:]

Welcome to Sanmina’s second quarter 2008 conference call. Thank you all for being here. Joining me today in this conference call are Joe Bronson, our President and Chief Operating Officer; and David White, our Chief Financial Officer. On today’s agenda David White will review our financial results for the second quarter. Joe Bronson will talk to you about our operations. Then, I will follow with additional comments relative to our results, talk about our discontinued personal computing business, Sanmina-SCI strategy for the future. Then, David, Joe and I will open the lines for Q&A. And now, here is David.

[David White:]

Before I get started, please note that selected portions of this presentation are available in the form of a slide presentation on the internet, which can be accessed from the Investor Relations section of our website at www.sanmina-sci.com. I’ll be making references to these slides during the course of my remarks. Prior to discussing the state of our business and financial information with you, I would like to take a moment to review the following Safe Harbor statement, Slide 2. 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 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 29, 2007, filed on November 28, 2007, as well as our most recent report on Form 10-Q filed on January 31, 2008. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. You’ll note in our press release issued today that we have provided you with a statement of operations for the three and six months ended March 29, 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 at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to the 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. Prior to describing our financial results, I’d like to reiterate a point made in our press release that our personal computing business and the related logistics activities have been accounted for as discontinued operations effective this quarter. However, given that our historical financial results and our guidance for the second quarter were each prepared on the basis of the total company, I’ll present a brief summary of our total company results. For purposes of this call today, our personal computing business means our personal computing business and the related logistics services together, and total company means continued and discontinued operations together. We provided this information to assist you in better understanding the results of our second quarter relative to our recent historical performance as well our guidance. In my remarks today, I will review the results of operations, discuss selected balance sheet accounts and corresponding metrics, provide an update with respect to our restructuring activities and finally, I will conclude with guidance for our third quarter of fiscal 2008 ended June 28, 2008. Slide 3, on a total company basis, revenue for the second quarter of fiscal 2008 was $2.4 billion, which was just above the low end of our guidance of $2.4 to $2.5 billion versus $2.53 billion in the prior quarter, and $2.61 billion in the same period a year ago. Revenue in our personal computing business was down $168 million over the prior quarter. This decrease was largely the result of the transition of some of this business to a new third party contract manufacturing service provider, in connection with our decision to exit this business as well as seasonal and market weakness. For the second quarter, we reported a total company GAAP loss of $24.4 million, which equated to a loss of $0.05 per share. The loss was entirely attributable to restructuring charges incurred by the company, the most substantive of which related to a previously announced plant closure. I’ll comment more about this later. Total company non-GAAP earnings for the quarter were $28.2 million, which equated to $0.05 per share. This was at the high end of our guidance of $0.03 to $0.05. By comparison, our non-GAAP EPS was $0.04 in the prior quarter and $0.00 in the corresponding period a year ago. With those comments about the total company now concluded, all of my comments regarding income and working capital metrics, which follow this slide, will focus on our continuing operations. Slide 4, revenue from continuing operations for the second quarter of fiscal 2008 was $1.82 billion versus $1.78 billion in the prior quarter and $1.79 billion in the same period a year ago. For the second quarter, we reported a GAAP loss from continuing operations of $39.9 million. This equated to an $0.08 loss per share. As previously stated, this loss was entirely attributable to restructuring charges recorded in the quarter. Non-GAAP earnings from continuing operations for the quarter were $14.5 million or $0.03 per share. This compares to $0.01 per share in the prior quarter, and a loss of $0.04 per share in the same period a year ago. Slide 5, for the second quarter, our revenue by end market was as follows. The communications end market represented 40% of our net sales, which in absolute dollar terms was down approximately 3.4% from last quarter. Enterprise, computing and storage represented 18% of net sales during the quarter. Sequentially, in absolute dollar terms, this end market was down 3.1% quarter-over-quarter. The multimedia end market accounted for 17% of net sales during the quarter and was up 8.8% in absolute dollar terms versus the prior quarter. The medical end market accounted for 11% of net sales during the quarter, which was up approximately 15.7% in absolute dollar terms from the prior quarter. And finally, our industrial, semiconductor, capital equipment, defense, aerospace and automotive end markets of our business collectively accounted for 14% of our net sales and in absolute dollar terms, were up 9.2% relative to last quarter. Our defense and aerospace and industrial sectors were up from the prior quarter, whereas our semiconductor sector was down from the prior quarter. Slide 6, our top ten customers accounted for 50% of total sales this quarter. Sales to our top 20 customers amounted to about 64% of total sales in the second quarter. We had one customer in the second quarter whose sales were greater than 10% of total sales. Slide 7 and 8, gross profit for the second quarter was $126.1 million. As a percentage of sales, gross profit was 6.9%, which was down approximately 50 basis points from the prior quarter, as a result of changes in our mix of revenue, as well as certain startup costs. Gross margins were up approximately 50 basis points from the results for the same period a year ago. Selling, general, and administrative expenses for the second quarter, excluding stock compensation expenses, were $77 million, down approximately $8.4 million quarter-over-quarter and down approximately $8.7 million versus the same period a year ago. Research and development costs, excluding stock compensation expenses for the second quarter, amounted to $4.2 million, which was modestly down from the prior quarter and down approximately $4.7 million versus the same quarter a year ago. Our combined R&D and SG&A expenses for the second quarter, excluding stock compensation expenses, amounted to $81.2 million or 4.5% of sales. These expenses have continued to trend downward over the last year as we have focused on reducing infrastructure costs in preparation for our exit from the personal computing business. You’ll recall that a little over five quarters ago, we stated an objective of reducing our annual operating expense run rate by $60 million by the end of fiscal 2007. Relative to this objective as of the second quarter, we have reduced our annualized operating expenses by $72 million. In addition, we expect to further reduce our annualized operating expenses by another $15 to $20 million per year by the end of this calendar year as we achieve additional efficiencies. Operating income for the quarter was $44.9 million. Our operating margin was 2.5%, up approximately 20 basis points quarter-over-quarter and up 140 basis points on a year-over-year basis. Net interest and other expenses, which consists primarily of interest expense and income as well as gains and losses from foreign currency translation was $22.1 million versus $31.5 million in the prior quarter and $37.7 million in the same period a year ago. Depreciation was $22.2 million for the second quarter, down approximately $2.6 million from the prior quarter. Our EBITDA for the quarter was $67 million. Our tax provision for the quarter was an expense of $8.3 million on pre-tax non-GAAP earnings of $22.8 million and our tax rate was 36.5%. Our tax rate is adversely impacted by losses in the U.S. and has been unfavorably impacted this fiscal year as a result of statutory rate increases in various countries. We are presently pursuing a number of changes to our business model, which are expected to dramatically reduce this figure over the balance of this calendar year. Slides 9 and 10, as we turn to the balance sheet, I need to comment on the basis of presentation used here and in our press release. As reflected in our press release financial statements, U.S. GAAP requires that the net book value of those balance sheet items that are anticipated to be sold or transferred as a part of a discontinued operation be collapsed into two reported line items on the balance sheet, assets held for sale and liabilities held for sale. The pending sale of our personal computing business to Foxconn, as well as our anticipated sale of Lenovo business, will only involve the sale of inventories, certain plant and equipment assets and a small amount of liabilities, which are primarily payroll related. Sanmina will retain the trade accounts receivable and trade accounts payable balances. These balances will be collected by Sanmina in the case of receivables and paid out in the case of payables as they become due. Since these balances however, are not transferred to the acquirer, under U.S. GAAP, they must remain classified as trade accounts receivables and payables. This is in spite of the fact that they will not be recurring once the sale of the business closes. As these balances really aren’t a part of our ongoing business, our working capital metrics would be highly distorted if one were to use these balances in conjunction with an income statement that completely excludes the personal computing business. Accordingly, the cash cycle day metrics that I’ll refer to, as well as those shown on theses slides have been calculated to exclude these personal computing AR and AP related balances. Accounts receivable at the end of the quarter were $1.23 billion. Excluding our personal computing business receivables and excluding any factoring of receivables, our gross DSOs for the core business were 51.5 days, an improvement of one day from the same comparable number of the prior quarter. While these DSO figures have been calculated without the benefit of any factoring, historically we have factored and sold accounts receivables as a part of our management of working capital. For administrative convenience, however, the receivables we sold related exclusively to our personal computing business. Upon the closing of the sale of our personal computing business, we anticipate transitioning our factoring program over to other customers. Upon doing so, we would expect our DSO figures to improve by seven to ten days. Inventories at the end of the quarter were approximately $949 million, down approximately $59 million quarter-over-quarter. Inventory days at quarter end were 51.1 days, an improvement of 3.6 days versus the prior quarter. Net capital expenditures in the quarter amounted to approximately $35 million. Accounts payable at the end of the quarter were $1.41 billion, and again, excluding our personal computing and logistic service payables, our AP days for the quarter were 51.4 days, down approximately six days from the prior quarter. This decline was due primarily to lower payments to suppliers in December due to our holiday shutdown, which increased our Q1 ending AP balance and resulted in more favorable AP days than otherwise would have occurred. Our un-factored or gross cash cycle days for the second quarter was 51.2, again the transition of our AR factoring program to EMS customers will improve this figure by seven to ten days. During the second quarter, cash flow from operations was reduced to $58.3 million. Free cash flow, which is cash flow from operating and investing activities, was a use of approximately $87 million for the quarter, again primarily due to the change in accounts payable mentioned earlier. As many of you are aware, one of the components of our cash flow results and plans over the last two years have included the sale of surplus real estate. In fiscal 2006 and 2007, we generated combined cash proceeds of approximately $98.4 million from real estate sales. While our real estate sales have thus far been zero this fiscal year, we are expecting certain real estate transactions to close in the second half for the year, which will further add to our free cash flow and also improve our return on invested capital. Looking out over the next one to two years, we believe we can rise upwards of $150 million from real estate sales. We expect to return to positive cash flow position in Q3 as we focus on reducing our inventories, improving other working capital metrics, selling certain surplus assets, primarily real estate, and completing our divestiture of the personal computing business. Cash and short terms investments at the end of the quarter were $861 million. Let me now comment on restructuring. During the second quarter, we incurred approximately $48 million in restructuring expenses, of which $11 million was cash paid out during the quarter. This expense, primarily related to reductions in force associated with the plant closure in Cherbourg, France. In connection with our remaining closures, and other plant restructuring activities, we expect to incur additional restructuring charges of approximately $20 to $25 million over the next six months or so. Slide 11, now let me turn to the guidance for the third quarter of fiscal 2008. Consistent with prior quarters, the information I provide will generally exclude stock base compensation expenses, restructuring and integration cost, impairment charges, loss on any extinguishment of debt, amortization expense and other infrequent or unusual items to extent material. Our third quarter guidance for continuing operations is as follows. We are targeting third quarter revenue to be between $1.775 and $1.875 billion. We expect gross margins to be in the range of 7.2% to 7.5%. We are targeting our operating margin to be between 2.8% in 3.1%. We expect our tax rate to be approximately 30%. Basic and diluted shares for the third quarter are expected to be in the $531 million range. This equates to a non-GAAP diluted EPS of approximately $0.03 to $0.05 per share. We also expect to generate another $0.00 to $0.01 of earnings per share from discontinued operations. We estimate that total depreciation for the third quarter will be approximately $22 million consistent with last quarter and third quarter capital expenditures to be in the range of $25 to $30 million. Finally, we expect third quarter cash flow from operations to be positive. I want to thank you for your time and with that I would like to turn the time back to you, Joe.

[Joe Bronson:]

I will restrict my comments to a discussion of the company’s continuing operations performance and outlook for the second quarter and third quarter of fiscal 2008. My comments will discuss revenue and operating income and trend performance from the second fiscal quarter and some qualitative comments on our overall performance. Continuing operations revenue was $1.817 billion compared to $1.778 billion, an increase of approximately 2.2%. Continuing operations’ operating margin was 2.5% in Q2 compared to 2.3% in Q1. We did not provide specific second quarter guidance on continuing operations from our first quarter earnings conference call. The company’s operating performance for the second quarter met our internal expectation. Revenue was higher than the first quarter as improvement in core EMS activities offset revenue decreases in the Technology Components Group. Core EMS revenue was higher than the first quarter, primarily due to strength in the medical, defense and aerospace, industrial, and multimedia markets as well as revenue from new program win. The decline in revenue in the Technology Components Group in the first quarter was anticipated due to lower revenue in semiconductor capital equipment systems and machining operations, which are being impacted by a steep cyclical decline in the related semiconductor capital equipment business. In addition, revenue was lower than the first quarter in the enclosures division. Margins throughout the company’s operations were stable through the quarter and reflected some improvement due to the increases in operational efficiency. Although the Technology Components Group second quarter revenue was lower than the first quarter, the group achieved higher margins than the previous quarter as operational improvement plans are beginning to become effective. We expect that the Components Group margins will continue to improve and eventually surpass the corporate average. Revenue declined in the enclosures division, as a result of weaker demand in the telecom infrastructure market, where customers stretched out certain deliveries. Enclosure business had a small loss for the quarter as the unit is approaching positive gross margin performance. The loss was less than the first quarter. We had anticipated profitable results in the quarter and roughly equivalent revenue to the first quarter. Enclosures have made significant operational improvements and have reduced overhead cost and increased plant efficiencies due to plant rearrangements throughout its global footprint. These operational improvements are not complete. We also made the decision to close an enclosure plant in Sweden and consolidate production into our Hungary plant. The implementation of true lean manufacturing techniques will further reduced cost in the company’s factories, add factory capacity without adding personnel or assets and leverage the fixed investment base. Printed circuit board fabrication business achieved similar result in revenue and profitability compared to first quarter levels. Board revenue grew slightly over first quarter as strength in demand from enterprise and computing customers offset expected reductions in aerospace and defense as a major government program ended, as expected. The book-to-bill ratio for the printed circuit board business was at the highest level in three quarters. We believe that the market opportunity in printed circuit boards is improving and we will continue to pursue efforts to increase market share with our global footprint. Profitability in the backplane and cable operations grew nicely quarter-over-quarter. The memory modules activity achieved improvements in profitability with proprietary custom memory products and customer application. Operating expenses were $81.2 million in the second quarter, compared to $89.8 in the first quarter. Operating expenses were reduced to reflect disposition of the PC business and to size the company appropriately for a $7 to $8 billion current level of business. Reductions were evident in corporate administrative functions and plant operating expenses. Inventories for continuing operations were $947.8 million in the second quarter, down $41 million from $988.3 in the first quarter. Inventory turns were 7.1 in the second quarter compared to 6.7 in the first quarter. Implementation plans to increase velocity and improve inventory turns of working capital management are in place as focus continues on cash generation activities to improve profitable performance coupled with working capital management. The financial metrics for the operating outlook were provided by David in his guidance commentary. We anticipate continuous margin improvement throughout the company’s operation. Improvements are anticipated with stable revenue and productivity improvement programs. Technology Components Group will continue to improve modestly in the third quarter. It is anticipated that all units will perform marginally better on flat revenue as we continue to implement lean manufacturing throughout enclosures and improve certain aspects of our PC business. Current customers are encouraged by the progress made in enclosures as evidenced by on-time delivery and quality metrics and the unit is committed to improve performance in the next and subsequent quarters. Plant transformations to lean manufacturing models will continue throughout the global footprint. Generally speaking, operational improvement programs will continue to be implemented throughout the company with further focus on supply chain cost, lead-time improvement and responsiveness. These programs include IT enhancements of our unique enterprise-wide computing systems, transitions of customer programs to the company’s low cost footprint activities and continued implementation of lean manufacturing activities company wide. Our supply chain organization is a key leverage point for cost reduction and efficiency for the customer, and we are currently focusing on continued improvements across the board, to improve working capital management, reduce cost and provide differentiated customer support. We believe that a continued focus on our customer performance is imperative to our ability to grow and gain market share in the markets we are engaging. The combination of providing engineering design services, value engineering capability to design for cost, followed up by factory execution and offer customers differentiated manufacturing solutions that will reduce their cost. The economic environment poses a demand risk that cannot be ignored, so we will continue to assess potential demand impacts, but we believe near-term revenue will be stable. We believe that the combination of operational improvement programs and customer satisfaction metrics and execution provides the company with a firm foundation to grow its revenue base as well as to improve its profitability in asset management. With that, I’m going to turn the call back over to Jure.

[Jure Sola:]

As you just heard from David and Joe, we are pleased with the progress we made during the second quarter in our core business, especially when you factor in the challenging economical environment that we are in; definitely a positive step in the right direction. Again, we are a long way from being happy with these results; I just want you to know that. But we are making progress and most importantly, we continue to do what we said we would do. Most markets performed, as you heard, according to the plan and slightly ahead of our expectations. As Joe mentioned, the core business grew approximately 2% quarter-over-quarter and about 4% and if you look at it in last six months. So, definitely a little bit below our expectations but we are still going in the right direction. Now, what I would like to do is talk to you a little bit more about our strategy for 2008 and beyond, so I’ll will touch on two things here, our personal computing business that we are exiting and we calling today discontinued operations, and talk a little bit more about core business. What is this new Sanmina and how we are going to compete going forward and what we bring to the table. Okay, back to the personal computing business, I am sure you are tired of this listening to me when we are going to exit this business. Well, we finally are there, almost there. This business includes, what we call, personal computing and PC logistics, and I promise you this is the last time we are going to talk about it. But let me give you a little bit background about this business, how we got involved and why we are exiting it now, for those of you that are not familiar. SCI got involved in personal computing business since 1980. Actually, they are the one who build the first personal computer for IBM. For many years this was a great business for SCI, but as we all know the industry change in this business. This became a highly competitive. It’s almost commodity type of product. We analyzed this business a few years ago, spend a lot of time what we are going to do with it, as we realize it is going to take a significant amount of investments, but when you compare what is the future of this business, decision was very easy, is to exit this business and that decision was made in early of 2007. We felt that it’s the best way for us to focus on our traditional markets and our new markets such as the medical, industrial, defense and aerospace and the new emerging markets. So, let me summarize here where we are today in the personal computing business. We already started to transfer this business to our new suppliers. In second quarter, we transferred one customer; I think that happened late February, first week of March. Right now the plan is to transfer additional business, another customer, and the final part of this business will be transferred to a new supplier first week of July. And some of you might ask why it’s taking so long? Well, it is a couple of things. Number one, really and most critical is, anti-trust filings in some of this business and also we had a request from one of our major customers not to do a transfer during the quarter, because of there is some critical deliveries that are coming up and they asked us if we can do this over the holidays, that first week of July, so we agreed to that. So, but more or less we are exiting this business and I think that will be the first week of July, 100% out. All together, this business is going to free or already freed somewhere between $180 and $200 million of capital, we already realized about $80 to $90 million and we should realize additional $100+ million out of this operations. We’re also exiting 1.7 million square feet of manufacturing space and we are transferring approximately 5,000 to 6,000 people. So that’s about PC. Now, let me talk about our core business Sanmina-SCI new strategy. We’re really back to Sanmina’s what we call back to basics focusing on our traditional strengths, which are really focusing to compete in our high end markets with high mix products driven by leading technology. That was always was our specialty and I believe we are well positioned here. Our new global infrastructure gives us a clear advantage. Strong global presence in 18 countries, approximately 45,000 people left and about 20% of those people are temporary, that gives a lot of flexibility to adjust to schedules as they go up and down especially in this type of environment. Back to restructuring, as David mentioned, we are in the final stages from a physical shutting down the factories, personal computing business again first week of July, this operation in France which is a EMS operation, we shut most of it last quarter but definitely final stage this quarter and we have enclosure operation in Sweden, which we are exiting this quarter. So, I hate to say never again restructuring, but I would like to say the major restructuring is done and we’ll do everything humanly possible to say that what’s done is done. So, what’s going on from here? I can tell you that we did turn to a corner. We know this is a still challenging business, but we are very confident about our future. We do have a great infrastructure in place, plenty of capacity and most important, this capacity is located in a low cost region. We talked to you about our traditional markets especially communication infrastructure, high-end enterprise computing and storage, defense and aerospace, industrial, medical, multimedia, automotive and some of these new merging markets. These are the markets that we are focused on, that we do have competitive advantage; I’ll talk more about it. Our capabilities do provide many benefits to our customers in these markets. Also back to restructuring, during this restructuring, I just want to bring you up-to-date on some of these things because sometimes we all forget how much work this took us. Again, this was a very difficult process, we have to do it, market changed on us. We did spend a lot of time and money, we shut down over 70 factories around the world, we laid off 25,000 people, mainly North America and Europe and then we had to re-hire lot of these numbers again in Mexico, China and other parts of South Asia. So it was a difficult job, so a lot of thought was put in a long-term strategy, how we are going to compete in the future, and what markets that we want to go in. So, today I can tell you that our manufacturing model is second to none, it’s lean, it’s fast, and it’s flexible. And most importantly, we still have new systems in our place to focus and continue improvements to make this operation even better. Again, continuing our strategy, our vertical integration model is a key to our competitive advantage. We are focused here on advanced products and technologies, we do have very strong custom designed engineering support end-to-end, high-end printed circuit boards now in a low cost region, backplanes, cables, enclosures, now in low cost regions including plastics, machining, optical module and of course custom memory module. I know a lot of you’ve been questioning this business for us for many years; too many I should say, we believe in this business, this is only part of our end-to-end solution. I think as Joe mentioned, I think we are going the right direction, with this restructuring behind us, and as you can see lot of the energy was spent shutting down the factories instead of building the business. Now, we’re focusing on building the business. Also during the restructuring, we did right size our global management; I believe we pride our self developing the management internally at all levels. Now, we can tell you that we do have a strong and appropriate management team in place, with emphasis on continuous improvement, because this is a key ingredient to be successful in this business. The bottom line is that our key customers support our focused strategy as I personally go and talk to them; they believe this is the right thing for us, especially in this niche market that we are going after. And also the key for us in each of these markets is to be a leader so that we can compete with anybody in any of these markets. So, it’s all about the technology and speed to the market. Again, our customers are very positive about this strategy. So the strategy for us, again in summarizing some of these points is very simple, we are not going to be chasing revenue for revenue’s sake anymore, and we made that decision months ago. We’re going to focus on profitable growth only, with focus on strategic long-term customers in each of the markets that we can create the win-win for both ourselves and our customer. Now, let me make a few comments on our market conditions. Again, we remain cautiously encouraged in what we are seeing from a key Sanmina’s markets from both short-term and a long-term perspective. As David and Joe mentioned about communication infrastructure was slightly down, there was a few orders that moved out. We did expect that business to be actually flat or up in the quarter. It did perform actually overall better than typical because this is a seasonally weak quarter for communication infrastructure, but it did well, especially networking and wireless side of the business. On high-end enterprise computing similar things, the slowest quarter for it, but the storage side of the business did well. The medical as we all know did really nicely up 16%. A fair amount of new opportunities, some of our existing customers took on more, but we do expect to continue to attract new customers in that business. Industrial did also nicely, went up over 9%, but as Joe mentioned, we had a major weakness in our semiconductor capital equipment market that otherwise that percentage would have been higher. A fair amount of new customers, a fair amount of new opportunities, I think it’s really a good fit for Sanmina. Defense and aerospace was up again, defense market is always challenging but we do have a lot of opportunities, actually more opportunities in pipeline now than anytime in the history. Some of these cycles are long, but we’re definitely high on this market. Multimedia as usual this quarter performed well. I should say multimedia and automotive about 8% up. But then this multimedia businesses especially to our customer base is hard to measure on a quarterly business. We do expect this business to continue to grow year-over-year. We do have a few number of very focused customer base and I believe we’ll do well with those going forward. So as I look at the bookings for the second quarter, book-to-bill was positive. We won some new projects with existing customers, which these were very critical to us because that potentially could replace major old programs, so we won those. So, that was good, and also some of the new customers that are helping us out a little bit this quarter, next quarter and most importantly I think if you look out, three, four quarters out. So, overall from the bookings point of view, it was a reasonably good quarter. Let me make comments on guidance, as David talked to you about it already. While predicting the future in this economy as we all said earlier is very, very difficult, but we are cautiously optimistic. I would like to, though, spend maybe a few minutes to talk about the leverage that we have in our business model. Again, the leverage is coming from having restructuring now done, I think we should have a fair amount of EMS, but also some special amount leverage will come from our component business because of restructuring and all the improvements that we put from operations and that we made, especially in the low cost regions. So, especially we should see a nice upside from our printing circuit board fabrication, enclosures, and backplanes. And now, also the management is a lot more focused on our core business. The PC business, especially when we decided to sell took a lot of energy out of us. No excuses, but the key is that we can now focus on our core business. Again, the growth of the market is hard to predict but even the flat market as we are forecasting for Q3, we are guiding our margins to be up. As David mentioned, our gross margins are improving to 7.2% to 7.5% and operating margin also improving to 2.8%, 3.1%. So, it’s a nice step in the right direction, but the most important is that we do expect these margins to continue to improve for the rest of the calendar year 2008. And as we look at the customer base, I really believe we do have a customer base to get through the tough times and if we have any improvements in economy, I believe we should have a nice growth from this customer base. So, in summary, we remained focused and committed to our long-term strategy. We are confident that we are taking the right steps for our customers, number one; number two, for our employees and long-term investors. I always say, if you got a great customers, great employees, our investors should hopefully make a lot of money long-term and I believe in that. As I mentioned to you last quarter, I believe that our industry and our company continue to offer significant long-term growth perspectives. We recognize that we still have a lot of work to do but we are starting to have fun again and believe me, lot more fun. This team is up to challenge. Our goal again is to keep it simple, go back to basics, focus on Sanmina traditional markets and strengths and going forward, our goal is to stay on a track with a quarter-after-quarter of positive news. Now, thank you for your time. But before I go, I would like to thank our employees for their hard work and dedication to this company. We are ready for our Q&A.

[Operator:]

(Operator Instructions) Your first question comes from Steven Fox - Merrill Lynch.

[Steven Fox:]

Now that the PC business is nearly off the books, I was wondering if we could step back a little bit and look at what type of growth rate you think you can target for the remaining business. And then, if we were to look longer-term at the components business, if you could just update us on your view in terms of getting better margins, seemed like there were some puts and takes during quarter but you made progress.

[Jure Sola:]

Yes, definitely we made some progress, but as I mentioned earlier in this economy right now, I hate to throw the number out there, but let me put it to you this way. If you look at as our customer base and really what’s exciting for us and some of our key customers, we won some new programs that are replacing old programs. So, that gives us the stability longer-term. A lot more focus on this core business and our goal is to grow definitely double-digits. We call this internally second startup. It’s a base of $7 to $8 billion base today and our capacity is well over $10 billion today. We’re running at the low 60-65% capacity utilization, so we got plenty of space. We are expanding capacity in India, mainly because our customers are pushing us to manufacture in India for the local market. And we are adding to some factories in Southeast Asia, but otherwise plenty of capacity. So growth is a key to us. I think, the margins will improve because of the restructuring now is done but if I look at the component side of the business, Steve, I think that has more leverage and we expect to grow that business again. I think our circuit board business today is well setup. In North America, we have a basically a new product introduction that’s gong to focus on defense and aerospace business and new products, but we transition a lot of technology into Asia where today we are building specialty product in Singapore, high-end boards in Malaysia, product over 30, 40 layers. Five lines in China, we’re producing product between 16 and 20 layers, where only a few years ago, we were only doing a double-sided product in there. So there are still a few challenges in Asia. We are improving the management there but we are encouraged. Enclosures, as Joe mentioned, that those are lot of positive things. The key for us right now in the component business is margins improvement before I would focus on growth. We will take the growth but really in this economy, we are focusing on margins and if the demand is there, that’s going to be a plus.

[Steven Fox:]

What I was hoping is to get a little bit more specifics around some new program wins that maybe are going to help over the next year get you to that double-digit growth?

[Jure Sola:]

I hate to talk about the customers. We do have a traditional customer base. If you look at it, our communication infrastructure is basically, we got all the big players in the game from Cisco, Nokia, Ericsson, just to name a few. I would say that 80% of our growth is really coming from the new programs and about 20 plus percent will be from new customers.

[Operator:]

Your next question comes from Kevin Kessel - Bear Stearns.

[Kevin Kessel:]

Now obviously again with the PC business out of the picture soon, the components business, I know Joe, you were mentioning that, I think overall components were down. You said, I think, enclosures were actually down, while PCBs were up slightly. Can you just help us a get a better sense in terms of what the size is of this business today, the relative size of those two different parts of the division? I know there are obviously others, but those are the main ones. And then at the same time I’m also curious about, on the PCB side, it sounds to me like the trend was a little bit reversed. You were saying that there is actually strength in enterprise comm and storage on the PCB side, yet from a assembly point of view, it seemed like those were the weaker segments, and yet and also, vice versa with aerospace.

[Jure Sola:]

First of all, on the marketing, the numbers that I’m giving is overall. Joe was talking specifically on our circuit boards and enclosures. You can have one program in a defense that affected the circuit board, for example, it doesn’t impact overall or a programming enclosure that affected the enclosure business because you got it scheduled, the customer didn’t need the product but the overall, it was not an impact. But I’ll have Joe make more comments on that, but let me go back to your first question. If you look at our business today, Kevin, run rate is about $7.3 billion business based on our last quarter. Our capacity, as I said, we’re running at a 60% to 65% capacity $10+ billion in a place. We don’t like to break the numbers, but if you look at our components, this is what we are shipping today if that was independent company, it will be approximately $1.3, $1.4 billion company. But if we can double the capacity, as the capacity is well over $2, $2.5 billion. And capacity today is designed, but in old days, all that capacity was in a high cost region. But as we shut the factories in North America and Europe, lot of the equipment, all the brand new equipment that we had was transitioned in a low-cost region, so that’s why now you have this extra capacity because of all this extra equipment that we used to have in North America and Europe. And in good old days, we bought a lot of equipment and it wasn’t used for many years. So now, the company is in a really in a good position to grow

[Joe Bronson:]

I think the components business can grow very rapidly. What has occurred in the past, with all the operational difficulties in the past through the restructuring, was that some customers were lost because of execution issues. Now that the unit has sustained customer execution for quite a decent period, it takes a long time, but customers begin to understand the changes that are being made are permanent. So the situation then becomes a real potential for growth if you can continue to make the improvements you need to make and we are focused on doing that. The other key to the business is that you have design activity, so the business model, because you have design and engineering, the business model lends itself to margin capability that I think is very attractive and also presents a lot of potential for internal vertical integration as well. So that’s all the things that we’re trying to do to grow this business and Jure mentioned the number, but I think we can grow that number. In my comments I said eventually these units will surpass the corporate average for profitability. It’s just a question of time and momentum and continued execution, but I think we have the programs in place to make that happen. So we’re pretty encouraged and jazzed up and we’re starting to see some impacts competitively. I’d just like to give one small example; we’re not going to name any customers. But we had a situation where customers didn’t give us more business because they had some execution issues, maybe a year ago, or 12, 15 months ago, and they had to rely on higher cost sources. When we started to deliver, not only on time but with spectacular quality as a result of these lean lines that we’re putting in place, we’re seeing expansion of the demand. And so we just need to go out and pursue more revenue capability while we’re implementing these types of improvements throughout all the factories, throughout the global system. So I am pretty excited about the opportunity here. But it’s, it’s every day, getting these things in place and executing them.

[Kevin Kessel:]

I think last quarter you quantified what the losses were in the components division.

[Joe Bronson:]

We didn’t quantify it, but we said the unit was approaching breakeven last quarter and it got very reasonably close to breakeven this quarter. And we expect and I think my comments that I just made said they would make money, prospectively.

[Kevin Kessel:]

Joe, you mean that in enclosures.

[Joe Bronson:]

Yes, enclosures, the group is profitable as a group already. The group is. All the units, the four units, the five units within the group are all cumulatively profitable.

[Kevin Kessel:]

It’s just the enclosures you are saying that are getting close to breakeven now at this point.

[Joe Bronson:]

Right.

[Kevin Kessel:]

When you said the book-to-bill in PCBs is well above one. Can you help us quantify that? What you mean by well above one?

[Jure Sola:]

Overall the company was almost 1 to 1 and in PC, personal computer, our PC business was over one, one over one.

[Kevin Kessel:]

PCB?

[Jure Sola:]

Personal printed circuit boards.

[Kevin Kessel:]

It was 1.1 to 1 you said?

[Jure Sola:]

Yes.

[Operator:]

Your next question comes from Louis Miscioscia - Cowen and Company.

[Louis Miscioscia:]

Can you go ahead and maybe help us out with some possible operating margins now that you are getting down to core EMS. And for that, realize these might be a long-term thing, it might be something that normally you would give it at a analyst meeting, but I am sure you have some in the back of your mind, even though you might give it long-term, and at other analyst meetings you have given near-term and long-term, or any help here would be helpful.

[Jure Sola:]

I just gave you a lot of in a short-term, but if you look at our business model, the core business that we go after, I believed as we continued to fix our component business, we believe that gross margin in our EMS business should the type of products that we build should be in the range 7% to 8% plus and our components on average should be over 15% gross.

[Louis Miscioscia:]

Would you say you might hit that in this calendar year or is that more likely in 2009?

[Jure Sola:]

It all is going to depend on the demand, so I would not say we are going to hit that in this calendar year but definitely as I said earlier we feel very confident that we are going to see a nice improvement on a quarterly basis, as we are forecasting right now for you in Q3.

[Louis Miscioscia:]

I realize you probably have just 90 days worth of visibility, but any sense on the macro. I know you commented it seems like obviously a couple areas were weaker than expected, is it just a lot of softening around the edge or is it a little bit worse than that?

[Jure Sola:]

Well, like I said, it depends on the customer. I am not an economist. I don’t know if anybody in this room is. But you really have to look at what customers here and I personally spend a lot of time with our customers, and some customers, especially in certain niche markets like medical or industrial or some of defense and aerospace side of our business, it seems like there is no impact at all. On infrastructure product, we’re just not seeing it. We are not in consumer products, so I believe this economy is affecting more consumer side of the business, but definitely, our customers are worried and when our customers are worried, I am worried too. So as you can see the business today we only grew 4% in six months. We did expect higher numbers than that. I think that the business is going to continue to be stable, but we are right now forecasting one quarter at a time. We are running the company based on tough times but if the good times are there, we’ll take advantage of them.

[Louis Miscioscia:]

I think you said that you look for 80% of your growth to come from existing customers, and, is that with new programs they’d look to outsource or more in with their organic growth?

[Jure Sola:]

If I look at that, these are the new programs that are replacing old programs and some of the programs that they are taking it from inside outside, or we call M&A deals that we are picking up customer business and transition it to our factory. That’s what I would call 80% and then 20% will come from a new customer that we are working on in a short term.

[Operator:]

Your next question comes from William Stein - Credit Suisse.

[William Stein:]

Jure I thought that there wasn’t going to be 10% customer following the split off of the PC business, but I think you stated that there was one, can you tell us who it was if not at least the end market.

[Jure Sola:]

No, we don’t release the customer order, 10% customer I think there is, slightly almost hitting that number. We will release that number end of the year if they are going to be end of the year. So it’s we will see how the business grows, if our business grows as much as we think it will, they might not be 10%.

[William Stein:]

Can you tell us which end market?

[Jure Sola:]

I hate to put it down which market. Our customer base is very small.

[William Stein:]

You talked about feeling like the business really turned the corner. It would seem to me to be a good time to consider a reverse split in the stock given the share count and the EPS level. Can you comment on that?

[Jure Sola:]

I think we turned the corner. In other words, I think we got the hands around our business, restructuring is basically almost done and so that’s for that point. I think we are right now we are in the driver seat, that’s number one. Number two, it comes to what we do with the stock right now is we’re really more focused on delivering the numbers so that the numbers itself can take care of the stock. Longer term if we’re ever going to do a reverse split, we are not really looking at that seriously right now. We look at all these things, but right now our whole focus is really building the bottom line and trying to book an extra order.

[William Stein:]

Debt repurchase, I think this was the focus on the last call and I’m wondering if there’s any update there, did you repurchase any debt in the quarter, and what’s the near term plans for that please?

[David White:]

I think on the December quarter, we retired $120 million of some of our debt. We had plans and have plans to continue retiring debt in the second quarter. We unfortunately did not retire any debt, but we do have plans to continue moving forward on the second half of the year.

[William Stein:]

Any quantification you can help us with to think about how much or which tranche you’d take out?

[David White:]

I probably wouldn’t indicate that on the call because to the extent we wanted to purchase it in the open market, I wouldn’t want to necessarily influence the pricing, but in terms of amount and so forth, I think the numbers are going to be it will be in the $100, greater than $100 million or so over the next couple of quarters.

[Operator:]

Your next question comes from Ryder Campbell – Barclays Capital.

[Ryder Campbell:]

Can you give us an idea of what CapEx level we should anticipate going forward off the PC business?

[Jure Sola:]

Ryder, it’s all going to depend on our growth, but if you look at today, just to maintain what we have, if you look at the let’s say 2008, we’re going to spend about $80 million in existing plants. These are just adding some new test equipment or some advanced stuff that we need and replacement of some old equipment. And about maybe $20 to $30 million will go for our expansion mainly in India and another few factories in the Southeast Asia. If I look at the longer-term, especially when I say longer-term, lets say 2009, I would say probably we’ll stay in between, and I am just going to give you a little wider number between $100 and $150 million in a year. We do have plenty of capacity, it all depends what type of mix that if we get the right mix, we don’t need to spend anything, but knowing historically I think about, as I said about $100, $120.

[Ryder Campbell:]

So that roughly seems in line with the prior business model, is that a way to think about it?

[Jure Sola:]

If you look at all the Sanmina’s business model, then the way we’re going to focus on Ryder, here right now is again is more on a high mix, more lucrative type of a markets that I think if you look at the top of infrastructure that we’ve in place is really well set up for that. And we’re not going to be spending, we spend a lot of money in cash on restructuring, if you look at it in last five years, we spent I think over $1.2 billion in restructuring and half of that was cash. Now that is done and unless some disaster happens, which I don’t see, but we don’t see major restructuring, I want to go to one P&L. I don’t want to have a two P&Ls, and hopefully starting October of 2009, we’re going to get to one P&L.

[David White:]

Ryder, just to add to your question and Jure’s response, as our PC business is generally not been capital intensive, and so, if you look at our total CapEx historically, the PC business has been a relatively minor portion out of the total.

[Ryder Campbell:]

It seems like going forward then we should expect slightly greater cash burn out of the business then?

[Jure Sola:]

No, I wouldn’t say higher but from a core business, from a CapEx, it’s going to be pretty similar, but this new business should be generating more cash going forward.

[David White:]

If you look at cash flow generation that we had prior to the March quarter, we’ve generated $500+ million of cash, free cash flow over the last year that principally all came from the EMS business. While certainly the PC business contributed some to that, the overwhelming majority of it really came from EMS and our objective as a company is to continue generating cash flow out of our core business, which will be the components business and EMS.

[Ryder Campbell:]

Could you tell us what the total depreciation and amortization was for the quarter on a consolidated basis?

[David White:]

It was $22 million for the continuing operation and for and PC, I think was like $1 million or a pretty small amount.

[Operator:]

Your next question comes from Yuri Krapivin - Lehman Brothers.

[Yuri Krapivin:]

Question regarding your enterprise computing and storage segment. As I look at the year-over-year trends in that particular segment, basically trends have been negative for a while now and it appears that you are underperforming the end markets in that particular segment. So maybe you could just provide some more color on your performance in that segment and I’m wondering if it is this ongoing shift towards industry standard products that is shorting you there or is it more intense Asian competition, so what do you think overall about the performance of that segment?

[Jure Sola:]

Both of those are not true. Let me tell you why, we exited a lot of business in last year and a half in this business. We exited the standard server business that we used to have, our old OEM, Newisys, what we called Newisys server products, we exited that business. That business at one time was over $500, $600 million run rate. We exited a couple of other customers at the low-end stuff, so when you look at all the low-end stuff, we exited stuff. What we have today is all high-end enterprise computing and storage. We believe that business is stabilized for us in last six months and we expect to grow this business from this point of view and we expect this business to continue to be in a range of around 20 plus percent of our revenue going forward.

[Yuri Krapivin:]

With respect to your gross margin, you attributed sequential decline in gross margin to mix, as well as start-up costs, any way you can quantify those start-up costs in the quarter?

[Jure Sola:]

We had a definitely a mix issue, and we also had some start-up. In Mexico we opened up a new build-to-order, configure-to-order for large systems, so some of the products in there did not contribute a lot. So clearly I would attribute it more to the mix, which as you look at our forecast for Q3 that’s going back in the right direction. And assuming that, just our revenue stays flat for the rest of the year, let’s say we don’t have any idea what’s going to happen, but we do expect to improve the margins, both in the EMS, but a lot more in our component side of the business.

[Yuri Krapivin:]

Was the mix unfavorable because of the declines in the semiconductor equipment business?

[Jure Sola:]

Definitely that was one of them, and really it was more across the mix on the projects just like with the customers, sometimes you have ten different programs and some programs are more profitable than others. That’s all it is, just the way the customer pulled.

[Operator:]

Your next question comes from Jim Suva - Citi.

[Jim Suva:]

I am getting a lot of questions, Jure, about your strategy and what I mean by that is you talk about low volume, high mix, yet you do set-top boxes. And earlier in one of your questions you mentioned that you don’t do any consumer business, but I think most people consider set-top boxes as consumer. Talk to us about your strategy, you’re going down the vertical road; you don’t have the scale and the scope that say Flextronics and Hon Hai do. Tier 2 players Benchmark and Plexus don’t do vertical. Help us out there about how you can accomplish this without doing the splits and being spread to thin.

[Jure Sola:]

First of all, when we started the company, Sanmina was always started on a vertical model. In other words, supplying everything from design, getting involved at every stage of product development, and it’s been very difficult, what we used to call is products that nobody wants to build. And also the products that customer require a lot of technology and speed to the market. That’s what Sanmina was always built on and that’s really the key of our strategy going forward. Now just to comment on multimedia, if you look at the set-top boxes that we are focusing some of our key customers, it’s a certain part of the business here we’ll continue to have. We are only focused on a handful customers in the multimedia side of the business and that’s it. So we will continue to use because we have our factories that are set up to build those type of products. They are very efficient, and like I said, you can consider it consumer but it really is more high-end consumer product and then most importantly we have a strong set up for that and it’s a profitable business for us. But let me go focus on rest of my businesses, how are we going to compete, especially with the smaller guys and how do we compete with the big guys. With the smaller guys, I believe just because they are small doesn’t mean they are easy to compete against. This is a service business. I’ve been in this business now for; I hate to tell you how many years, but Sanmina alone for 28 years. What it takes is exactly what I said earlier. It’s the close relationship, close engineering work, and really flexibility and what can you do faster and better than the next guy. It’s not just a size. So that’s how you compete. Sometimes competing against smaller guys is little bit more difficult in those type of relationships than a big guy. So I think we have a very good capabilities to compete with both, just the way we’re set up. We have gateway factories in North America and Europe that are very close to the customers. These gateway factories focus on small run, high mix, high technology engineering. If something needs to be done in 24 hours, in hours they can do it. And the whole vertical model from bare boards, enclosures matches that. As we get into the production now and let’s just say now we have to compete against our larger friends. Again if you look at my infrastructure business, when it comes to the communication infrastructure business, I am better positioned in there or just as good positioned in there than any of my competitors over there. Definitely, better positioned than say a company like Foxconn and what we can do in that stuff, they can’t touch it, because that’s our business. Instead if you look at the same thing in industrial side of business or medical side of the business, the reason we’ve grown our medical side of the business is because it requires a lot of nurturing, lot of specification, lot of attention, lot of detail. A medium size company like us or even a small company can sometimes give a lot more attention to it. I’m not saying that the large company can’t. We are not a small company. When you have 45,000 people, you are not a small company. It is what are you focused on. So the reason I am excited and the reason I am still here today is that this restructuring took a lot of time. It took a lot of energy out of us, lot of money. Now, that’s behind us. We are now focused on this core business that I personally believe we can compete and the best, best people to tell you this is our customers. When I talk to my customers today, they say you should have done this five years ago. I’m looking forward simplify our strategy so the people can understand it better. Anyway, ladies and gentlemen again thanks for your time. Sorry we have to cut you short here, but if you have any questions, please give us a call. Again, thank you for your support. Bye, bye.