Sanmina Corp (SANM) 2007 Q2 法說會逐字稿

Good afternoon. My name is Anthony, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI Corporation second quarter fiscal 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Jure Sola, CEO and Chairman of Sanmina-SCI. Please go ahead, sir

Thank you, Anthony. Good afternoon, ladies and gentlemen, my name is Jure Sola, and again welcome to Sanmina-SCI second quarter 2007 conference call. I would like to again thank you for -- for being here today. Joining me on this call today is David White, our Chief Financial Officer.

Hello.

And Hari Pillai, our President of Global Operations. Good afternoon.

On today's agenda I'd like to ask David to give financial results, review for second quarter fiscal year 2007. Then I will follow with additional comments relative to Sanmina-SCI results and our future goals. And then we will open for all of us for question and answer. And now, David.

Thank you, Jure, and good afternoon, everyone. Before we get started please note that selected financial portions of this presentation are available in the form of a slide presentation, 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 two. During this conference call we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operations may differ significantly as a result of various factors including: 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 annual report on Form 10K for the year ended September 30, 2006, filed on January 3rd, 2007, as well as our most recent report on Form 10Q filed on February 5th, 2007. These documents contain identifying important factors that could cause actual results to differ materially from our projections of forward-looking statements.

You will note in our press release issued today that we have provided you with a statement of operation for three months ended March 21st, 2007, on a GAAP basis, as well as other than nonGAAP financial information. A reconciliation between the GAAP and nonGAAP information is also provided in the press release. In general, our nonGAAP information excludes: restructuring and integration cost, impairment charges, loss on extinguishment of debt, noncash stock based compensation expense, amortization expenses and other infrequent or unusual items such as expenses incurred related to the company's concluded stock option investigation. Any comments we make on this call as they relate to income statement measures will be direct at our nonGAAP financial results. Accordingly unless otherwise stated in this conference call, when we refer to gross margin, gross profit, SG&A and R&D expenses, operating income, operating margin, net income and earnings per share we are referring to our nonGAAP information. On today's call I will review the results of our 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 year 2007 ended June 30, 2007.

Slide three. Revenue for the second quarter of fiscal 2007 amounted to $2.61 billion, which is in line with our revised guidance provided on April 9th versus $2.78 billion in the prior quarter and $2.67 billion in the same period a year ago. NonGAAP earnings for the quarter were $0.8 million, which equated to [$0.00] per share. As we noted in our April 9th conference call this is the low end of our guidance range of $0.05 to $0.07. NonGAAP EPS was $0.07 in the prior quarter and $0.06 in the corresponding period a year ago.

Slide four. For the second quarter our revenue by the end -- by end marked was as follows. Communications end market represented 26.6% of our net sales. Which in absolute dollar terms was down approximately 12% from the prior quarter. High-end computing and storage comprised 14.3% of net sales during the quarter. Sequentially in absolute dollar terms this end market was down approximately 11% quarter over quarter. As noted in the April 9th call the declines in our communications and high-end computing end markets are the major reasons for the softness in our revenue this quarter. The multimedia and consumer end markets accounted for 11.3% of net sales in the quarter, which was down about 3% in absolute dollar terms over the prior quarter.

The medical end market accounted for 8% of net sales during the quarter, which was up approximately 9% in absolute dollar terms over the prior quarter. The industrial, semiconductor capital equipment, defense, aerospace and automotive end markets of our business collectively accounted for 8.7% of net sales. In absolute dollar terms were up approximately 2.6% over last quarter. Our defense and aerospace and automotive sectors were up from the prior quarter whereas our industrial semiconductor sector was basically flat with the prior quarter. Finally, personal computing systems accounted for 31.1% per revenue, down approximately 5% quarter over quarter in absolute dollar terms.

Slide five. Our top ten customers accounted for 63% of total sales this quarter. Sales to our top 20 customers amounted to about 74% of total sales in the second quarter. Although the top 10 customer concentration increased modestly quarter over quarter, the decrease in the percentage of revenue accounted for by our top 20 customers quarter over quarter and year over year continue to show the successful efforts in diversifying our customer base. We had three customers in the second quarter whose sales were greater than 10% of total sales.

Slide six. Gross profit for the second quarter was $139.2 million, as a percentage of sales gross profit was 5.3%, down approximately 80 basis points over the prior quarter's results and down approximately 80 basis points over the same period a year ago. Selling, general and administrative expenses for the second quarter excluding stock compensation expenses were $90.1 million, down approximately $.3 million over the prior quarter and up approximately $1.9 million over the same period a year ago. SG&A expenses as a percentage of sales were 3.45% for the quarter. Research and development cost, excluding stock compensation expense for the second quarter amounted to $8.9 million, which is flat with the prior quarter and down $1.5 million versus the same quarter a year ago. Our combined R&D and SG&A expenses for the second quarter again excluding stock compensation expenses amounted to $99 million or 3.8% of sales.

Operating income for the quarter was $40.2 million, our operating margin for the second quarter was 1.5%, down approximately 100 basis points over both the prior quarter and the same quarter a year ago. Other expense net which consists primarily of interest income and expense, as well as gains and losses from foreign currency translation was $37.7 million versus $28.3 million in the prior -- prior quarter. While this amount was within our January 25th guidance the increase quarter over quarter was primarily attributable to FX gains in the first quarter and higher interest expense in the second quarter. Depreciation was $27.4 million for the second quarter, down approximately $1.2 million quarter over quarter. Our EBITDA for the quarter was $67.6 million. Our tax rate for the quarter was approximately 68%, up approximately $1.3 million over our expected rate of 18%, primarily as a result of lower income in the quarter and a true up of our year-to-date tax rate to 21%, which resulted from lower projected fiscal 2007 financial results in certain jurisdictions.

Slide seven. To provide investors with a little more transparency into our business we report two business segments in our public documents filed with the SEC. The first segment is our personal computing segment which includes business PC's and industry standard servers. Second segment is core EMS segment which includes the rest of our businesses including our various component businesses. Second quarter revenue for our personal computing segment amounted to $806.6 million, down $31 million from the $837.5 million reported in the prior quarter and up $62 million from the $745 million reported in the same period a year ago. Gross margins in this sector amounted to 1.9%, versus 2.0% in the prior quarter and 1.8% in the same quarter year ago. Margins in this segment met our expectations. Second quarter revenue for our core EMS segment amounted to $1.81 billion versus $1.94 billion in the prior quarter and $1.92 billion in the same period a year ago. Gross margins in this sector amounted to 6.8% versus 7.9% in the prior quarter and 7.9% in the same quarter a year ago.

As indicated in our conference call on April 9th and again in our press release issued today, profitability was impacted by unfavorable revenue mix as a result of weak demand in our communications and high-end computing end markets, which significantly impacted revenues also in our PCB and enclosure operations. Revenue in our PCB and enclosures business were each down approximately 20% quarter over quarter. As these end markets and businesses operated higher variable contribution margins in the rest of our business. lower demand in these segments had had a larger than proportional impact on our profitability. Jure will talk more about these results in his comments.

Slide eight. Turning to the balance sheet. Accounts receivable at the end of the quarter were $1.4 billion resulting in DSO of 48.5 days, down approximately 2 days from the prior quarter. 91% of our receivable balance was current with 97% current or less than 30 days past due. Inventories at the end of the quarter were approximately $1.8 billion on an absolute dollar base -- basis, inventory decreased by $111 million quarter-over-quarter, which is in line with guidance we provided on our April 9th call. Inventory turn during the quarter on an annualized rate of 8.1 times versus 7.9 in the prior quarter. Capital expenditures in the quarter amounted to approximately $21.3 million.

Accounts payable at the end of the quarter were $1.4 billion resulting in AP days of 50.8 versus 50. -- 51.8 in the prior quarter. And our cash cycle days for the quarter was 43. Outstanding debt decreased $525 million during the quarter as we successfully retired our 3% convertible debt due March 15th, 2007. Similar reduction appears in our restricted cash as these funds had been previously escrowed for this purpose. While this reduction reduces our interest-bearing debt, it will slightly increase our net interest expense perspectively as we earned more income on our invested funds than the 3% coupon on this debt.

Slide nine. Cash flow from operations was a source of $134.3 million during the quarter. Free cash flow which deducts net capital expenditures from our cash flow from operations was a source of approximately $119 million for the quarter. Cash and short-term investments at the end of the quarter were approximately $664 million, up $125 million over the prior quarter, which is in line with the guidance we provided on our April 9th call. We expect to continue to generate positive cash flow throughout the balance of the calendar year, as we focus on reducing our inventories, improving cash cycle days, selling certain surplus real estate, and completing our targeted divestitures. These action should collectively generate positive cash flow in the range of $400 million to $600 million this calendar year. We would expect to use this free cash flow to retire debt and fund our restructuring activities.

Let me now comment on restructuring. During the second quarter we incurred approximately $18.9 million in restructuring expenses, most of which was cash. As indicated in our fourth quarter of fiscal 2006 earnings call we announced three restructuring actions being taken by the company. One the realignment of our ODM activities to JDM, two, the separation of our PC business and, three, our consolidation and our facility closure actions. We are still proceeding aggressively with this plan. While we are not in the position to comment on any specifics as it relates to our divestiture activities or state of negotiations, we continue to make progress on these fronts and continue to believe we can complete them by the end of the fiscal year.

Furthermore, as it relates to plant closures we expect to complete these actions over the balance of the calendar year. In the second quarter we an announced the closure of enclosure operations in Lisbon, Ireland, and our PCB operation in Karlsruhe, Germany. These two operations together lost $7 million in the second quarter. We also announced the closure of one U.S. facility and the consolidation of two EMS facilities in Israel into one. We expect these actions to be fully completed by the commencement of our fourth quarter. Finally, while we targeted operating expense reductions are somewhat influenced by the timing of our divestiture actions, we believe we are on track to reducing our operating expenses by $60 million annually by the end of this fiscal year. In connection with the closures just commented on and our remaining closures and other planned restructuring activities, we expect to incur restructuring charges as previously announced of approximately $100 million over the balance of the calendar year.

Slide ten. Now, let me turn to the guidance for the third quarter of fiscal 2007. Consistent with the prior quarters of fiscal 2006 and fiscal 2007, the information will generally exclude: stock-based compensation expenses, restructuring and integration costs, impairment charges, loss on extinguishment of debt, amortization expense and other infrequent unusual items. We are targeting third quarter revenue of between $2.55 billion and $2.65 billion. We expect gross margins to be within the range of 5.6% to 5.7%. We are targeting our operating margin to be around 1.9% to 2.1%. We expect our tax rate to be around 21%. Basic shares for the third quarter expected to be in the $527 million range. And diluted shares are projected to be around $529 million. This equates to a diluted nonGAAP EPS range of $0.01 to $0.03 per share. We estimate the depreciation for the third quarter will be around $29 million and third quarter capital expenditures to be in the range of $25 million to $30 million.

Finally, we estimate third quarter cash flow from operations to be positive. I thank you for your time, with that I would like to turn the time back over to you, Jure.

Thank you, David. Again, ladies and gentlemen, as we mentioned previously, the second quarter is a seasonally a very soft quarter typically for -- for Sanmina-SCI. However, we did experience a greater than expected weakness in demand from our customers with the greatest impact, again as David mentioned, coming from communication and high-end computing, communication down 12% and high-end computing approximately 11%. Again, this softness was really at attributed to end market demand because there was a fair amount of excess inventory in our -- with our customers. The rest of the markets performed as we expected, in some cases better than we expected. And let me just kind of spend a few minutes there.

Industrial, semiconductor, automotive, defense and aerospace, it is the new markets for us, that we will spend, they were nicely actually, they were flat. Multimedia consumer was down only 3% and medical was nicely up, as David mentioned, 9%. Back to personal business computing, what we call PC here. Delivered better than expected results. This was down only 5%. We did internally expect PC down to be as much as 10% in the quarter. Component business was down 20% quarter over quarter with majority of decline from a high-end printer circuit boards backplanes and enclosures.

So, in summary, I am personally very disappointed with the results. But let me just give you some more details. The business mix was unfavorable, the core business, which includes everything but PC was down from our internal expectation by $150 million for the quarter. Gross margin for core business were 6.8%. Margins were impacted by the component business as previous -- previously stated. Because as much as 50% of that core business of $150 million really came from a component, which is mainly printer circuit boards, enclosures and the backplanes. Personal business was up approximately $40 million compared to our regional forecast, and also will delivered gross margin of 2%, basically in a line with our expectations. As David mentioned we did experience some positive few things in quarter. We were able to bring down our inventory by $111 million. We did generate cash flow from operations during the quarter of $134 million and most importantly customer satisfaction was up for the quarter.

So what's going on here? Operationally, there's no major issues. Actually if you look at our manufacturing yields have continued to improve to all -- all time high. We continue to take the cost out of the business. And we are in process as David mentioned to combine and also shut down few major operations. Let me make a comment on two major ones. First of all on printer circuit board operations in Germany, decision was really made to shut that down a few months ago and we expect this factory to be shut down sometimes here early May and all the work from this factory will be transferred to our Asia operations. An enclosure operation, a large operation that we had in Ireland, a town called Lisbon, this operation also in shut down mode today. We expect to complete the complete shut down sometime in July timeframe and all this business at this time is being transferred to our factories in Hungary and also Asia operations.

As David mentioned, these two operations were losing approximately for us about $7 millions range actually second quarter. And if you look at some historically they were losing more in some quarters in past. But bottom line is we will continue to tune up our operation. This is the only way we can remain competitive, so we're going to do everything what it takes to do that. And also we are focused on meeting our customer needs as we communicate with our customers on daily basis. We are also continuing with our strategy as we talked about in the last couple quarters regarding our PC business. We believe this business will be sold in next few months and hopefully this transactions will be done by end of our September timeframe.

Back to our strategy, we are focused and committed to our long-term strategy that we set up beginning of this year. Basically, number one, we are aligning Sanmina-SCI Corporation technology and all other capabilities to end market that offer the greatest opportunities for us. Number two, we're going to continue to diversify end markets and our customer base, and of course, number three, provide the greatest volume to our customers going forward. I believe that our strategy is going in the right direction, and a lot of work to be done, but we like some of the accomplishments.

So let me talk to you about -- a little bit about looking forward. As David mentioned our guidance is revenue of $2.55 billion to $2.65 billion and EPS of $0.01 to $0.03. Although our revenue guidance is flat at the mid point of our guidance, we're cautiously optimistic about the third quarter as we are getting positive feedback from our customers. The second half of the calendar year, basically September, December quarters, our key customer at this time is a lot more optimistic about those two quarters. So based on all the forecast and all the data that we look at we believe the weakness in demand is in the short term and we should see nice improvements in -- in second half of this calendar year. Bookings for second quarter basically came to flat, about book to bill was about one, and bookings for the third quarter at this time were forecast to be slightly greater than one.

So, in summary, we are optimistic about our future. Our gross -- gross margin should continue to improve in our core business. The goal for the component business as we mentioned to you in last six months, the margins should improve. I -- I know that today it doesn't look like it, but we still believe the margin still have a chance to exit the year with the gross margin of 8%, which is if you compare to our historical average has been running between 4% and 5%. And then we expect it to improve from there.

As David mentioned we will continue to reduce our OpEx, especially as we exit certain businesses here as we talk to you about by end of this fiscal and calendar year. We're going to continue to reduce our inventory approximately $50 million to $100 million per quarter for next two quarters. And also will we feel confident that we're going to continue to generate positive cash and we expect for a year to generate free cash from operation of $250 million plus. And again the goal as we have been talking about it, as we generate positive cash flow and sell some of these nonstrategic operations to pay down the debt at least from this by $500 million before end of the calendar year.

So goal by end of the year for us is to continue to work on our organization, to make it leaner, we're going to continue to remain focused on our key market where we do have competitive advantage and market leadership. At this time, I would like to say, again, thanks to all of you for participating in this conference call, and now we're ready to answer any questions that you might have. Operator, we're ready.

Yes, sir. (OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster. Your first question comes from Bernie Mahon from Morgan Stanley.

Hello, Bernie.

Question for you on -- you have kind of revenue guidance and kind of overall demand, so it sounds like things I guess softened the second half of the March quarter, particularly in the servers and the communications. And then your guiding flat sequentially. Could you kind of go through the different end markets, maybe what end markets you think may be up sequentially in the June quarter versus what could deteriorate a little bit further? Do you expect communications and computers to be up sequentially in the June quarter?

Well, let me -- let me give you Bernie a little more details what we have seen today. As I mentioned in our preannouncement that really the second half of the March, two, three weeks before the quarter was over few, not few, more than few I should say, our customers, especially on the communications side and the defense side, postponed, taking orders. If I look at the Q3 data we have today, as I mentioned earlier, we're cautiously optimistic. We're starting to see some pick up, or nice pick up I should say in board business, that's high-end board business, that's usually a good sign, because eventually those things got to be assembled and shipped.

I would say if I look at communication customers today that I would at this time forecast flat or some upside in communications side. We feel more comfortable to see more outsides in our defense and aerospace area. I mean, industrial and semiconductor and the medical side of the business, multimedia at this time probably that one will be flat, down. And then high-end computing again worst case flat, but could be up. PC business itself, we expect it to be up for Q3.

Okay. And so then the gross margin improvement in the June quarter, that's going to come from just the mix shift --

The better mix shift and we do expect the mix shift especially to improve in our component business, to help us improve the margins there. And really hopefully across -- across the board.

Alright, thanks a lot.

Thanks, Bernie.

Your next question comes from Thomas Dinges from JPMorgan.

Hi. Good evening, Jure and David.

Hi, Thomas.

What's the expectation for the loss still from the operations that are going to get shut down for the quarter? Is that still going to cost you a couple million bucks next quarter? And then I have a quick follow up.

Go -- go ahead, David.

Yes, like we said, I think I mentioned in my comments, the two at least were mentioned they're about a $7 million loss. The enclosure facility will not be fully -- fully closed until roughly the end of this quarter. The PCB operation will be closed roughly halfway through the quarter. So we'll get some -- some of that benefit is included in the current guidance, but this should be wrapped up completely, at least those two by the end of June.

It should be at least a few millions of dollars in savings.

Few million. Okay. Alright. It also looks like back of the envelope that OpEx you guys are going to be able to get some of the savings that you had talked about last quarter into this next quarter, roughly speaking it looks like to me about -- maybe about $25 million annualized. If you could just tell me if my math is roughly about right there. And then how long do you guys think that it takes before you start to get the full benefit from what you guys talked about over the last few quarters of trying to work that down by I think you were talking about say $50 million to $60 million, and that's it.

So, you're right on your math, it's in the low 20%. So you're really right about that. As it relates to getting the rest of the reductions we talked about, there's -- there's certain items that we're certainly in the control of, the timing of, and the (inaudible) and so forth and certainly proceeding to take action on those, some of that's embedded as you figured out in your calculations there. But a piece of it also in getting the $60 million or more also has to do with our divestitures. And so the timing of that as we indicated is we're working to have those completed by the end of the fiscal year. At which point we would expect to exit at the $60 million rate we talked about.

Yes. Okay, thank you.

Thanks, Thomas.

Your next question comes from Kevin Kessel from Bear, Stearns.

Hello.

Thank you very much. Hi, guys. Yes, my question is if you could just talk a little bit about the -- the components business again. You said it was down 20% sequentially.

Right.

You're doing some restructuring. What would you expect that component business to do this upcoming quarter here, do you expect it to be flat, do you expect it to be up? And then aside from this is two closures you've mentioned are there other plans in place, do there need to be other plants in place to turn that business around, or to turn those businesses around?

Yes, Kevin, first of all, we do expect components to be at this early stage of our quarter up. How much up at this time is really hard for me to forecast, but we expect it to be up. When it comes to the -- what we are doing to make our component business profitable, we still believe here internally that we will make this thing a profitable back to hopefully to its glory days. If you look at what we did the restructuring, we did a lot of restructuring, moving from North America and Europe to Asia the last couple years. Unfortunately, we did underestimate what it took to move some of these capabilities, especially when you're moving leading-edge technology as we were moving to Asia and Mexico. We are taking those two major factories off -- off the line right now. We are going to continue to do whatever it takes to make this business profitable.

As I already mentioned our printer circuit board business should be at least 20% margin. We're still hoping that as I mentioned earlier to exit this year, taking it from our historical of 4% to 5%. If you look at the last four quarters it's been running around are 4% to 5% really to at least 8% plus and hopefully exit the December quarter closer to the double digits. We still believe we have a chance and I'm assuming that the forecast we're getting from industry are correct and that demand will come up.

As that comes up I think we have taken enough cuts out and we will continue to do whatever it takes to make our component business a leadership again, Because we do have technology there and that -- I don't know how to say it any other different way, but it is a priority in this company to get that businesses in double digit margin. That is the minimum, then drive it up to its potential. Enclosure should be at least 15% gross margin and printer circuit board 20%.

Okay. And then, David, could you talk about other income -- other income net, what you're looking for that to be in the upcoming quarter or upcoming next two quarters?

Yes. As I mentioned in the call, when you look at it quarter over quarter there's some FX gain or loss in there, but there's also the fact that we are now paying the full 8% coupon on that other debt and not getting the spread on our cash versus the 3% converts. So we would expect over the third quarter, the interest -- the net interest expense to be somewhere in the range of $39 million until we are able to take out more of the term-loan debt. And which we are planning on doing between now and the end of the calendar year. So for the foreseeable future until that happens around $39 million.

Okay. So up about $1.5 million or so?

About $1.5 million.

Okay. And then -- then just lastly, on the divestitures you mentioned a little bit here in the call, can you just remind us there's the PC division, memory module division, I believe, then some nonstrategic EMS operations or plants you plan to sell. Is that correct, or are there others? And then, secondly, is it -- should it be our expectation that we will begin to see some of the sales kind of happening in a piecemeal fashion or do you expect to announce them all at the same time?

Well, first of all, I don't want to comment about this, but definitely PC and what we call nonstrategic assets, I think we will be announcing those as they happen. We have a few things that should be happening in weeks, right now in a plate, and we hope to start announcing some of those this quarter.

Okay, thank you.

Thanks.

Your next question comes from Jim Suva from Citigroup.

Hello, Jim.

Hello, gentlemen, thank you very much. Quickly, I want to try and triangulate on -- Jure you said cash flow number of around $250 million and Dave said $400 million to $600 million. Can you just help me triangulate, was that one excluding divestitures and one including?

Jure's number was cash flow from operations, the number I was talking about included sale of real estate and divestitures and so forth.

Including the PC business, Dave?

Yes.

So we can actually then back into what you expect to get from the PC sales.

Well, PC -- if you know what I was selling excess real estate for and knew what capital -- working capital improvements, yes. But that's what that balance would be accounting for.

You're not going to be so kind as to give us that. Okay. So let me -- let me switch gears then. Jure, on the demand outlook it's been several times in the past when your customers have given you positive indications. Were basically 33% of the way through the quarter now with April, can you kind of talk about how April came in, and why you think your customers just aren't getting you revved up and pumped up for another disappointment?

Well, I -- well, first of all I think if you look at our forecast for Q3 right now it's not a great forecast. We are basically flat -- forecasting flat Q3. As I said I'm cautiously optimistic because we do have a fair amount of programs that the customer should even -- last quarter. So we're hoping that based on what I tell them today they will be taking them this quarter and that's really where that optimism comes in. At the same time we've got some new programs coming up, we had talked about last year how we won approximately $1 billion of new programs. And one of the programs that was a program for our defense and aerospace industry. The program is over $300 million, we got the first releases on these things this quarter. And all the depends on government approval. We think the new approvals will start coming in sometimes early May time, middle May time, that could be releasing a chunk of that business. So we've got some nice programs in a place that can help us drive the revenue up, assuming let's just say the telecom demand doesn't come in as planned.

But the linearity, are we waiting on June being strong, or is it pretty linear each month?

I think that April itself, would you say, Hari --

I think it's roughly in line with the guidance, it's reasonable conservative. I would like to see some pick up towards -- towards the end of the quarter

But April, so far I wouldn't say it's not much different than a normal April. But based on our forecast -- let's make sure that we have forecast here approximate point is 26 so based on the forecast I would say it's pretty linear too.

Thank you, gentlemen.

Thanks, Jim.

Your next question comes from the line Amit Daryanani from RBC Capital Markets.

Glad to see is you guys are breaking out the PC business and the margins, could you just talk about what the total component revenues were in the quarter, and what the margin profile was for the component business, specifically in the March quarter?

We don't break those out. We break out business in two buckets, which is what we call core EMS and the -- and the PC's If you look at that historically, we -- I just talked about a 4% to 5%.

Alright. And I'm trying to understand, Jure, you made a comment earlier that operating efficiency yield at all time highs, but operating margins slid around 1.5%. Could you talk about why is there a big deviation between your operating margins and operating yields?

Yes. Because there was $150 million less shipment than what we had planned to ship internally of our core business that typically delivers around 8% plus gross margin. That is really what affected it.

What part of the business delivers 8% gross margins, is that the PCB stuff you're talking, or --

Well, our core -- if you look at all the data you have been releasing, if you look at our core EMS business, what we call core EMS which includes everything but PC's. I think the last quarter was 7.9%. I think if you look at the last 12 months it was averaging about 7.6%.

Alright. Fair enough. And then, just on the last question on the ODM business, would we expect R&D expenses to come in at a lower run rate as we exit 2007 essentially?

Oh, yes, sir. Yes.

And what's a run rate we should look at?

Well it's a part of our CapEx, but we will from -- from ODM alone, we're planning to take out at least $30 million a year.

Alright. Thanks.

Your next question comes from Matt Sheerin from Thomas Weisel Partners.

Hello, Matt.

Hello, Jure and David. Just another question if I can on the components business. It seems like it's been down a little bit more than some of the pure plate CPC guys, and I'm not sure if it's because the programs that you're in, or are there any difficulties that you're having in -- in transferring volume work from North America to Asia? And just as a follow up on that, as you're closing the facility in Germany, are you -- do you feel comfortable with transferring all that business, or could you lose some of that business and maybe take a step back in margins before that comes back up?

Okay. Yes, let me answer two questions here. First of all, based -- based on analysis that we have on our -- let's just take both printer circuit boards and then enclosure business. I think our printer circuit board business is based on big programs we have and these customers for many, many years that just the demand wasn't there. We don't believe we -- we lost any of those programs because of that, just a few of them in. On enclosure side, actually it was again definitely the customer just didn't pool. We had plenty of business in the backlog, but they were not pooled. When it comes to the transferring the -- these two projects that we just talked about from Germany, we belive that we will transfer probably better than 85% of these jobs into Sanmina's factory in Asia and Hungary. We were pushing for higher June, but at least 85% confidence right now on these programs.

Okay. And I know you've had some cuts in your U.S. facilities, specifically the big Owega plant, is there as much left to be done there?

Well, we continue to tune up (inaudible) operations as we always said our north factories will continue to be a gateway factory, a research and development factory. And these factories when it it comes to demand that go up and down and we're creating fair amount capacity in them. That's how they're going to be designed.

Okay. And just my last question Jure, has to do with your business pipeline you talked about some opportunities, defense, aerospace, what about in the core computing and communications area, what kind of pipeline do you see there?

Well, if I look at the -- just looking at last couple days, a lot of data, but on a customer basis and what we are winning, what's going on. I think we're winning our fair share on communications side. As I said we only had one major customer that we lost business a year ago, which was Nortel. Rest of those things -- and then we talked about some of the Ericsson business that was then sold internally. We think we are stake a relationship with Nortel on their new program, and we're hoping that we can rebuild that relationship in a few years from now. I think if I look at my other core customers, such as Alcatel or Nokia, Siemens, both of these customers are going through a major -- a merger, so we don't -- we expect to -- to continue our relationship with this customer, we expect to gain the business with both of these going forward. And if I look at other major customers it's just a pure, pure demand, and it's just not one customer it really cost a lot of these infrastructure customers that we have right now.

Okay, I got it, thanks a lot.

Okay.

Your next question comes from Andrew Wong from American Technology Research.

Hello, Andrew. Hello, hello, Andrew.

Mr. Wong, your line is open, sir.

Next question, then we can go to next person, please.

Okay, sir, your next question is from Steven Fox from Merrill Lynch.

Hello, Steve.

Hi, good afternoon. Jure, just getting back to the core business, the sales were down about $136 million in the quarter over quarter and your gross profits were down about $31 million. So does that imply that all of the missed sales or disappointing sequential sales the kind of which related to components, or how much of the $136 million was related to --

Basically -- approximately $150 million because from our plan, let me give you, when we planned the quarter we expected our PC to come in about $40 million less. Our PC business, our personal computing came up $40 million more than we had originally forecasted. And internally, so if you do the math it's approximately $150 million is the core business that didn't come in as we forecasted. If you look at the $150 million, about $70 million, about $75 million, $80 million of that came from what we call component businesses, mainly printer circuit boards, backplanes, and enclosures, and the rest of it came from our core EMS.

Okay, that helps a lot. And so then my next question is you gave guidance for the June quarter, as you play out into the typically slow summer, is there ways to approve profitability even -- how much of the profit -- you've mentioned a bunch of things, how much of the profit improvements will you see enough to stay above the break even line in the September quarter?

Well, we do expect -- based on everything we see today we do expect improvements both in our printer circuit board, backplanes and enclosures. And we do expect also, actually our EMS business based on our shipments did well, but we expect them to hopefully do -- do a little more in revenue.

Okay. And then lastly, just if you can -- getting back to the divestitures. Is there -- you keep saying that you should be able to complete it by fiscal year-end, can you provide any more color around whether how much progress has been made or are you at the same level as you were last quarter?

We have a lot of interest right now in this opportunity, at least in major, major deals. We have a lot of interest, okay. And so, we're hoping that we will know a lot this quarter.

Okay. Thank you.

Bye-bye.

Your next question is from Alex Blanton from Ingalls Snyder.

Hello, Alex.

Good afternoon.

Good afternoon.

I want to ask a question about your movement of boards to -- to Asia. You've had a problem in moving things to Asia of getting customers qualified in Asian plants. So could you comment on -- on the difficulties you might have or not have in moving the customers in Germany to the Asian plants? Are they going to be qualified initially when they go in there, into Asia.

Okay. First of all, the question regarding our printer circuit board factory in Germany. This German factory for us is a large factory, but we turn it into the gateway factory. We tried to work it it as a gateway factory and what we realized is just -- we couldn't make it profitable I think for two reasons. A lot of the European big players that we were focusing on, they were fine for us providing their new product introduction from Singapore. So, we just came in -- based on all the data, the business decision is made up that we will move these customers to Asia. Fair amount of these customers already being qualified by our existing factories in Asia and a few ones -- a few ones we are going to -- we have been going through qualification last couple months. So as I said earlier I think our expectation is pleased to have a success rate of 85% plus of transferring these existing accounts to our Asia operations.

I was going to say we just -- we started the qualifications before we actually announced the closure.

Yes. That's a good point, David.

Okay.

And, Alex, let me make a comment on our enclosure factory in northern Ireland, in Lisbon. Basically, in that factory, the reason we shot in that factory really an understanding between us and our customers, they wanted to move a lot of this work to low cost region and that was really why we made that decision to shut the factory down. So -- so, qualifications basically done, it just right now transitioning a few critical project and also some of the critical equipment that we have in northern Ireland to Hungary and Asia.

So, in Asia, then how -- where are you in getting all the customers qualified that you want to have qualified?

Well, no, first of all you're mainly talking about component businesses, right?

That's right.

I just want to make sure we understand that. Yes, you're right. The last couple years, two years ago when we first started doing restructuring we had a tough time getting transition some of these high-tech customers into the -- our Asian factories, because in some cases our Asian factories were not ready to take over some of these high-tech businesses. Now, that issue is behind us now. Our -- if you look at our capabilities, for example in Malaysia today, we are producing board and the backplanes that are well over 30-layer boards. And they also large size boards. So we believe we have a leading edge technology on large boards today, Malaysia, our Singapore is becoming our technology center producing, again, unique type of products, heavy copper, flex and rigid type of products, plus is really our research and developer center for Asia.

Our China operations, when we acquired our China factory whatever that was, 2.5, 3 years ago mainly was two and four-layer boards, today they are producing over 18 layers. We transition a lot of equipment. So our capabilities in Asia today are great and they continue to improve. We did change management in Asia about a year ago I think that made a big difference. We have been adding a lot of talent and we continue to invest in Asia. We are committed to this business. We grew up in this business and we believe we have some of -- one of the leading technologies and we did not go to Asia to just do low end. We are really into Asia to do large printer circuit boards with fine line technology, a lot of layers and so on and so on.

I understand that. So this was providing a major portion of your profits in the 1990s.

That's correct.

So what is -- what do you have to do to get it back to that point. I mean, you mentioned 20% as your goal in margins, and that's what the business used to do or even better. But what do you have to do now to get it back there? Can it get back there or has it become commoditized to such an extent --

Well, Alex -- Alex, we can talk about old days, old days we used to have a gross margin over 35% on those type products.

Right.

If you look at the good companies today around the world including Asia, on printer circuit board they are delivering 20% gross margin, and on enclosures around 12% to 16%, 17%. Those were leading companies out there. We believe that's the market that we are targeting for our -- for our printer circuit boards, for our enclosure business and backplane business is high end. Yes. It's a little bit more difficult to get qualified, it takes a little bit longer time. And now we also will expand in defense and aerospace industry and the board and flex and rigid and so on. We did a lot of work in there and I think we're close, but proof is in pudding. We've got to deliver it. As I said earlier I -- we have a confidence that we can improve the margin to at least to 8% gross margin. Historically in the last four six quarters if you look at it 4% to 5% basically nothing to brag about, but I think we can somehow exit the year this year hopefully around 8% plus and go from there.

Well, I'm just saying what do you have to do specifically to get there?

Specifically, I think we did a lot of work: transitioned into these new factories, we did a lot of qualification, most of our big customers are qualified today in our -- in our new factories in Asia, specifically Malaysia, Singapore and China. Same thing on enclosure areas, we -- we -- as you know we have three brand new factories in enclosure business, one in Mexico, one in Hungary and one in China. We believe that those -- these are state of art factories, it -- it takes time to get the new factories going, but we have been working on this the last couple years. So I don't think we are that far away from delivering some reasonable numbers. We just need market to cooperate. I think if market did not slow down for us, I think we would have made improvements in this quarter and continue with that. But demand was really what hurt us this quarter.

Okay, thank you.

Thanks, Alex.

Your next question comes from Brian White from Jefferies.

Hello, David, Jure. Could you talk a little bit about the PC business in North America compared to China and elsewhere in Asia, you said PCBs were down 20% sequentially, but how does that compare to China and Asia?

Well, I think the biggest impact we had on our high end boards actually was in North America, and some of these really advanced boards that we're building especially in MCI and so on. Asia, overall, wasn't too bad for us. Again, we did transfer a lot of work there.

Okay. And when you look at enclosure, you said potentially the PCB business can bounce back in the June quarter. Do you expect enclosure to actually grow sequentially also in the June quarter?

Yes. We expect that to go in the right direction, both of those in the June quarter.

Okay.

That's based on today. As I say, I'm cautiously optimistic, but I think the second half we're more optimistic.

And the company in whole, is there any capacity being added right now at Sanmina?

Yes, we are transitioning capacity, moving around, but purely adding capacity area --

In some of our EMS locations in Asia, we are adding in Mexico we are (inaudible). Okay. And David, do you have a CapEx number for the year? What you expect fiscal '07. Yes. We've been running around $25 million a quarter, so it will be somewhere in the $100 million range. Okay. How about depreciation? Last quarter I think was $29 million, so $100 -- $120 million a year. Okay. Thank you.

We have a fair amount of open capacity. We don't have to be spending a lot of on our CapEx to grow our revenue.

Right. What is utilization right now, Jure?

I would say, if you look at us as a company around 70 -- 70% plus, low 70%. EMS is operations probably, I would say our average about 75%, components about 60%, and our PCs are running probably 80%. So that's just kind of our average, about low 70%.

Great. Thank you. Okay. Thanks, Brian.

We have question from one more, Operator.

Your final question comes from Louis Miscioscia from Cowen.

Okay, thank you.

Louis, we always save the best for last.

I guess I better ask a really good one here. It's actually pretty quick -- a simple question and it's not necessarily what we've been talking about for most of the call, but just the question's on pricing. In the sense of, obviously, the EMS guys have been restructuring now for five plus years. Is there anything that can happen on that front, or is it just the situation that it's just a very competitive environment out there and that -- that you've got to continuously get your costs lower? And then, I guess the follow up to that would be, well, then, what happens when you do get your cost lower? Does it just go around in another round of competitive, that you just sort of never end up getting there?

Well, Lou, let me just speak for our industry for a second. I personally believe that industry itself has to make lot higher margins than it's making today. Not many of us are making cost of (inaudible) yet. So, I think it's embarrassing for whole industry. But I think we all as a leaders of this industry understand that and I personally believe that everyone of us today is taking all the necessary steps to make this industry a lot better than what is today. I mean, what we're doing here internally, we are taking the costs out, and we believe as we now restructure and really focus on the market that we feel we have a competitive advantage, we're going to be a lean and mean operation here. But I think as an industry and we're here internally, we will focus on a market that we can make money on. And that's it. The market that we believe we cannot make money on, we'll stay away. I think there's plenty markets out there to make money on.

Okay. And most of the benefits from the restructuring and everything else, will they be in the September quarter or more likely in the December quarter?

Well, it all depends on when will these things happens, but I'm hoping to see some of those benefits, David, what do you think, December quarter, but most of them will happen because in December.

Yes, I think if you're talking restructuring specifically, as it relates to like plant closures and so forth, certainly by the September quarter. If you're including other things in that, I think they'll be ratable over the rest of the calendar year.

Okay. Thank you.

Thanks. Well, ladies and gentlemen, that's the end of our call today. I do appreciate your time. As I mentioned earlier, we're disappointed about the quarter, but on a positive side, we are committed to this business. I think we understand what it takes to again make money in this industry. It's -- we have a -- it's a challenging time overall, but overall we sea a light at the end of the tunnel, we see demand and I think overall, as an industry, becoming a better industry than what we've been the last few years. So with that, we want to thank you for your support and a commitment to us. Thanks a lot.

Thank you. Bye-bye.

Ladies and gentlemen, thank you for participating in today's Sanmina-SCI second quarter fiscal 2007 earnings conference call. This concludes today's conference. You may now disconnect.