Sanmina Corp (SANM) 2008 Q2 法說會逐字稿

Welcome, ladies and gentlemen my name is Darrell and I will be your conference operator. At this time I would like to welcome everyone to Sanmina-SCI second quarter fiscal 2008 earnings conference call. All lines are 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. It is now my pleasure to introduce your host, Mr. Jure Sola. Sanmina-SCI CEO and Chairman. Mr.. Sola you may begin your conference.

Good afternoon, ladies and gentlemen. 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, a David White will review our financial results for the second quarter. Joe Bronson will talk about 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.

Thank you, Jure. 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 will be making references to the 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 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 of forward-looking statements. You will note in our press release issued today that we have provided you with a statement of operations for three months and six months ended March 29, 2008, on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the gap 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 base compensation expense, amortization expenses and other infrequent or unusual items to the extent material. Any comments we make on this call as they relate to income statement measures will be directed in our non-GAAP financial results. Accordingly unless otherwise stated in this conference call when we refer to gross profit, gross margin, SG&A and R&D expenses, operating income, operating margin, net income and earnings per share we are referring to our non-GAAP information. Part of describing our financial results I would like to re-iterate a point made in our press release that our personal computing business and the related logistics activities are 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 in the basis of the total company I will 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 as 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 Three. 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 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 attributable by the company, the most substantive of which related to a previously announced plant closure, I will 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 zero cents 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 Four. 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 lost of $0.04 per share in the same period a year ago.

Slide Five. 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 an 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 in the prior quarter where as semiconductor sector was down the prior quarter.

Slide Six. 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 Seven and Eight. 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%, 50 basis points from the results for the same period a year ago. Selling, general, 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 cost 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 annual 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 Nine and Ten. As we turn to the balance sheet, I need 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 computer business to FoxCon, as well as our anticipated sale of the Nova business will only involve the sale of inventories, certain plant and equipment assets and 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 amounts receivables and payables. This is In spite of the fact that they will not be recur once the sale of the business closes. As these balances really aren't a part of our ongoing business, our working capital metrics will be highly distorted if one were to use these balances in conjunction with an income statement that completley excludes the personal computing business. Accordingly, the cash cycle day metrics that I'll refer to as well as those shown on these 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 are 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 receivable as 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 $69 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 logistics 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 shut down which increased our Q1 ending AP balance and resulted in more favorable AP days than otherwise would have occurred. Our unfactored or gross cash cycle days for the second quarter was 51.2, again, the transition of our AR factoring program DMS customers, will improve this figure by seven to ten days.

During the second quarter, cash flow from operations was a use of $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. And 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 of 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 raise 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-term investments at the end of the quarter were $861 million.

Let me now turn 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 a plant closure in Sarrebourg, France. In connection with our remaining closures and other plan 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 costs. 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 were targeting our operating margin to be between 2.8 and 3.1%. We expect our tax rate to be approximately 30%. Basic and diluted shares for the third quarter are expected to be in 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 zero 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.

Thanks, David. Good afternoon. 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 operated income 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 expectations. Revenue was higher than the first quarter as improvement in core EMS activities offset revenue decreases in the technology and components group. Core EMS revenue was higher in the first quarter primarily due to strength in the medical, defense, aerospace, industrial and multimedia markets as well as revenue from new program wins. The decline in revenue in the technology components group from 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 grew 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. The 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 on roughly equivalent revenue to the first quarter. Enclosures has made significant operational improvements and has reduced overhead costs 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 reduce costs in the Company's factories. Add factory capacity without adding personnel or assets and leverage the fix investment base.

Printed circuit board fabrication business achieved similar results in revenue and profitability compared to first quarter levels. Board revenue grew slightly over first quarter as strengthen demand from enterprise and computing customers offset expected reduction 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 imprinted circuit boards is improving and we will continue to pursue efforts to increase market share with our global footprint. Profitability in the back plane and cable operations grew nicely quarter-over-quarter. Memory modules activity achieved improvements and profitability with proprietary custom memory products and customer applications. Operating expenses were 81.2 million in the second quarter compared to 89.8 in the first quarter. Operating expenses have been 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 are evident in corporate administrative functions and plant operation 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 at working capital management are in place as focus continues on cash generation activities through improved profitable performance coupled with working capital management.

The financial metrics for the operating outlook were provided by David and his guidance commentary. We anticipate continuous margin improvement throughout the Company's operations. 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 transformation 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 costs, 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 companywide.

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 were 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 in 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 will turn the call back over to Jure.

Thank you, Joe. Good afternoon, ladies and gentlemen. As you just heard from David and Joe, we were pleased with progress we made during the second quarter, in our core business. Especially when you factor in the challenging economical environment we are in. Definitely positive steps in the right direction. Again, we were long way from being happy with these results. I want you to know that. 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% in the last six months. Definitely below our expectations, but still going the right direction.

Now what I would like to do is talk to you more about our strategy for 2008 and beyond. I will touch on two things here. Our personal computing business that we are exiting and calling today discontinued operations. And talk more about the core business. What is this new Sanmina, how we will compete going forward and with a we bring to the table. Okay, back to the personal computing business. I'm sure you are tired of listening to me. When we are going to exit this business. We finally there, almost there. This business includes what we call personal computing and PC logistics. I promise you this is the last time we will talk about it. But let me give you a background about this business. How we got involved and why we are exciting it now, for now for those that are not familiar.

SCI got involved in personal computing business since 1980. Actually, they are the one who built the first personal computer for IBM. For many years this was a great business for SCI. As we all know, industry change in this business. This became highly competitive. It's almost commodity type of product. We analyzed this business few years ago. Spent a lot of time with a are we going to do with it. As we realized it will take a significant amount of investment but when you compare what is the future of this business, the decision was very easy. It's to exit this business and that decision was made in early of 2007. We felt it's the best way for us to focus on our traditional markets and our new markets such as medical, industrial, defense and aerospace and new emerging markets.

Let me kind of summarize here what we are today in the personal computing business. We already started to transfer this business to a new suppliers. In the second quarter we transferred one customer. In 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? Couple things. Number one the most critical is the antitrust filings and some of this business. And also we had a request from one of our major customer to not to do a transfer during the quarter because of critical deliveries that are coming up and they ask us if we could do this over the holidays first week of July. So we agreed with that. 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 going to free or already free [180] and $200 million of capital. We are already realize about 80 to $90 million and we should realize additional $100 plus million out of this operations. We also exiting 1.7 million square feet of manufacturing space and we were transferring approximately 5000 to 6000 people. So that's about PC.

Let me talk about our core business, Sanmina-SCI new strategy. We are really back to Sanmina's what we call back to basic focusing on our traditional strengths. We are really focusing to compete in a high end markets with high mix products driven by leading technology. That was our -- always was our specialty and I believe we are well positioned here. Our new global infrastructure gave us a clear advantage. Strong global presence in 18 countries. Approximately 45,000 people left. And about 20% of those people are temporary. Gives us a lot of flexibility to adjust to schedules as they go up and down, especially in this type of environment. But 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 [EMIS] operation which shot most of the last quarter but definitely final stage this quarter and we have enclosure operation in Sweden which we are exiting this quarter. I hate to say never again restructuring, but I would like to say the major restructuring is done and we will do everything humanly possible to say it's almost done is done.

So what's going on from here? I can tell you we did turn a corner. We know this is a still challenging business. We are very confident about our future. We do have a great infrastructure in place, plenty of capacity, and most important just capacity is located in a low cost region.

Let me talk 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 the emerging market. These are the markets we were focused on. We do have competitive advantage and I will talk more about it. Our capabilities could provide many benefit to this customer in these markets.

Also back to restructuring, during this restructuring I want to bring you up to date on these things because sometimes we all forget how much work this took us. Again, this was a 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 have to rehire a 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 into long-term strategy. How will we compete in the future and what markets are we going to go in. Today I can tell you there are manufacturing model is second no none. It's lean, fast, flexible. And most importantly we still have new systems in place to focus and continue improvements to make this operation even better.

Again, continuing our strategy, vertical integration model is the key to our competitive advantage. We are focused here on advanced products and technologies. We do have very strong custom design engineering support end to end. High-end printer circuit boards, now in the low cost region. Back plants, cables, enclosures, now in the low cost regions including plastics, machining optical module and of course custom memory module. I know a lot of you are questioning this business for us for many years. Too many I should say. We believe in this business. This is really part of our end to end solution. I think as Joe mentioned I think we are going the right direction. Restructuring behind us. As you can see, a lot of the energy was spent shutting down the factories instead of building the business. Now we are focusing on building the business.

Also during the restructuring we did right size our global management. I believe it would pride ourselves developing to manage internally all level. Now we can tell you that we have a strong and appropriate management team in place. With emphasize on continuous improvement, because this is a key ingredient to be successful in this business. The bottom line is that our key customers who support our focus 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 were going after. And also the key for us in each of these markets to be a leader so we can compete with anybody in this market. 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 , in summarizing some of these points it's very simple. We were not going to be chasing revenue for revenue sake any more. And we made that decision months ago. We will focus on profitable growth only with focus on strategic long-term customers in each of the marks 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 consciously encouraged in what we are seeing from a key Sanmina markets from both short-term and 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 the business to be actually flat or up in a quarter. It did perform actually overall better than typical because this is a seasonally weak quarter for communication infrastructure. But we did well, especially net working and wireless side of the business. On the high end enterprise computers similar thing slowest quarter but the storage side of the business did well. The medical as we all know did really nicely, up 16%. Fair amount of opportunities. Some of our existing customer took on more. 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. Fair amount to new customers, 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. We do have a lot of opportunities, actually more opportunities pipeline now than any time in the history some of these cycles are long. We definitely high in this market. Multimedia usual this quarter performed well. About I should say multimedia and automotive about 8% up. But this multimedia business especially we saw customer base is hard to measure on at quarterly business. We expect this business to continue to grow year-over-year. We do have few number of very focused customer base and I believe we will do well with those going forward.

So as I look at the bookings for a second quarter, book-to-bill was positive. And what was driven really by we won some new projects with existing customers which these were very critical to us because the potential 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 little bit this quarter, next quarter and most importantly I think look out three or four quarters out p. Overall from the bookings point of view it was a reasonably good quarter. Let me make a comment on guidance that David talked to you about it already. Predicting the future in this economy as we all said earlier it's very, very difficult. But we were cautiously optimistic. I would like to spend maybe a few minutes talk about leverage that we have in our business model. Again, the leverage is coming from having restructuring all done. I think we should have a fair amount of EMS but the fair amount will come from component business because of restructuring and the improvement we put in operations and that we made especially in our low cost regions. Especially we should see a nice upside from our printed circuit board fabrication, enclosures and back blades.

And now also the management is a lot more focused on our core business. The PC business especially when we decided to sell to (inaudible - highly accented) energy, no excuses, but the key that we can now focus on our core business. Again, growth of the market is hard to predict. Even the flat market as we were forecasting for Q3, we are guiding margins to be up as David mentioned on gross margins improving to 7 to 7.5% and operating Marge also improving to 2.8% to 3.1%. It's a nice step in the right direction. But the most important is that we 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. If we have any improvement in economy, I believe we should have a nice growth from this customer base. So in summary, we will remain 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 great customer, 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 our industry and our company continue to offer significant long-term growth perspective. Would recognize that we still have a lot of work to do. We are starting to have fun again. And believing a 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 positive news. Now, thank you for your time. Before I go I would like that our employees for their hard work and dedication to this company. Operator now we are ready for

(OPERATOR INSTRUCTIONS) Your first question comes from Steven Fox of Merrill Lynch.

Hello, Steven.

Hi, good afternoon. Now that the PC business is nearly off the books I was wondering if we could step back a bit and look at 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 update us on your view, I think in terms of getting better margins. Seems like there are puts and takes during the quarter but you made progress.

Definitely we made progress. But let me -- as I mentioned why -- earlier in this economy, I throw the number out there. But let me put it to you this way. If you look at our customer base and really what's exciting for us and some of our key customers we want some new programs are replacing old programs and that gives us ability longer-term. A lot more focus on this core business. We should be able to definitely -- our goal is to grow double-digits. We call this internally second starter. It's a base of 7 to $8 billion base today and our capacity is well over $10 billion today. We are running into the low 60 to 5% capacity. We have -- space. We are expanding. Capacity in India because customers are pushing us to manufacturing in India for the local market. And adding to some factories in southeast Asia. But otherwise plenty of capacity. So growth is a key us to. 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. I think our circuit board business today is well set up in North America. We have basically new product introduction that is going to focus on defense in aerospace business and new product. We transition a lot of technology into Asia where today we are building a specialty product in Singapore, high end board in Malaysia. Product over 30, 40 layers. Fine lines in China. We reproducing a product that is 15 and 16 and 20 layers. Where a few years ago we were doing a double-sided product in there. There is still few challenges in Asia. We are improving the management there. But we were encouraged. Enclosures, as Joe mentioned, there is a lot of positive things. The key for us right now in the component business is margin improvement, before I would focus on growth. We will take the growth. But really in this economy we were focusing on margins and if the demand there is, that will be a plus.

Can you be a little bit -- I guess what I was hoping was to get more specifics around some new program wins that maybe you will help over the next year to get you over that double-digit growth.

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

Okay. Thank you.

Thanks, Steve.

Next question comes from Kevin Kessel of Bear Stearns.

Great. Hi, there, guys. Can you just help us understand with the PC business out of the picture soon. The components business. I know Joe you were mentioning I think overall components were done down. You said enclosures were actually down while PCBs were up slightly. Can you help us get a better sense in terms of what the sizes of this business today, the relative business of the two different parts of the division. I know there are others but those are the main ones. At the same time I'm curious on the PCB side, it sounds like the trend was a little bit reversed. You were saying that there is actually strength in enterprise come and storage on the PCB side. Yet on the actual from a assembly point of view those were the weaker segments and yet also with aerospace. I was curious about that.

Let me make a comment and I will toss it over to Joe. First of all on the marketing, it's overall the numbers I'm giving you is overall. Joe was talking specifically on a circuit board and enclosures. And you can have one program in a defense that will affect the circuit board. For example, it doesn't affect overall or a program in a enclosure because you got a schedule and the customer didn't get the product but all in all it was not an impact.

I will have Joe make more comments. Let me go back to your first question. If you look at our business today, the run rate is $7.3 billion business based on the last quarter. Our capacity we are running at 60 to 65. So capacity $10-plus billion in the place. We don't like to break the numbers. If you look at our component business with a we shipping today if that was an independent company it would be approximately 1.3, $1.4 billion company. We can double the as the capacity well over 2 to $2.5 billion. And capacity today is designed but in old days all the capacity was in a high cost region. As we shut the factories in North America and Europe, a lot of the equipment all the brand-new equipment that we had was positioned in the low cost regions. That's why now you have this extra capacity because of all of this extra equipment that we used to have in North America and Europe. And good ' days we bought a lot of equipment. And it wasn't used for many years. Now companies in a good position to grow. I will transfer over to Joe and Joe if you will make a comment.

I have a few comments. First of all I think the components business can grow very rapidly. What has occurred in the past was all the operational difficulties through the restructuring is that some customers were lost because of execution issues. Now the unit had 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. The situation then becomes a real potential growth if you can continue to make the kind of improvements you need to make. And we were focused on doing that. The other key to the business is that you have design activities 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. That's all the things we are trying to do to grow this business. I think we can grow that number. In my comments I said eventually these units will surpass the corporate average for profitability. Just the question of time and momentum and continued execution. I think we have the programs in place to make that happen.

So we were pretty encouraged and jazzed up and are starting to see some impacts competitively. I just like to give one small example. We won't name any customers but we had a situation where the customers didn't give us more business because they had some execution issues maybe a year ago or 12 or 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 the lean lines that we are putting in place, we are seeing expansion of the demand. So we just need to go out and pursue more revenue capability while we were implementing these types of improvements throughout all the factories, throughout the global system. So I'm pretty excited about the opportunity here. It's every day getting these things in place and executing them.

Okay. Then also can you I think last quarter you guys quantified what the losses were in the components division.

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

You mean enclosures.

Yes, enclosures. The group is profitable as a group already.

The group is?

The group is. The five units within the group are all -- cumulatively profitable.

The enclosures that are getting close to break even at this point?

Right.

And then when you said book-to-bill and PCBs is well above one. Can you help us quantify what did you mean by well above one?

It was overall as a company it was almost one to one in personal computers -- PC business was one over one. -- circuit boards.

One to one you said?

Yes.

Thank you.

Thanks, Kevin. Next question comes comes from Louis Miscioscia with Cowen and Company.

Hey. Hello?

Sorry about that. Hope you hear me now. Great. Can you go and maybe help us out with some possible operating for now you are getting down to core EMS and realize it might be a long term thing and realize you might give it in an meeting you may give it longer term and other meetings is you give it near-term or long-term. Any help would be helpful.

As I give you a lot of in the -- in the short-term. If you look at the model business model the core business that we go after I believe as we continue to fix our component business, that we believe that gross margin in our EMS business type of bill should be in the range of 7 to 8-plus percent. And our components should be over 15.

Gross.

Okay. And would you say you might hit that in this calendar year or more like 2009?

All depend on the demand. I would not say we will hit that in this calendar year. But definitely as I said earlier we feel confident we will see a nice improvement on a quarterly basis as we were forecasting right now for you into Q3.

Realize you have 90 days worth of visibility. Any sense on the macro? I know you commented on a couple of areas where we can expected. A lot of softening around the edge? Or is it a little worse than that?

Well, you know, like I say, depends on the customer. I'm not an economist and I don't know if anybody in this room is, you to look at what customers here and I personally spend a lot of time with our customers. Some customers especially in certain niche markets like medical or industrial or some the defense in aerospace. Some businesses seem there is no impact at all. Infrastructure product we aren't seeing that. We aren't in consumer products. I think the economy is affecting the consumer side of the business. Definitely our customers are worried. And when our customers are worried, I'm worried, too. As you can seat business today is we only grew 4% in six month. We did expect higher numbers than that. I think that the business will continue to be stable. Yes, we are right now forecasting one quarter at a time. Running the Company based on tough times and if the good times are there, we will take advantage of it.

Okay. Last question, I think you said that you look for 80% of your growth to come from existing customers. I was trying to understand, is that with new programs that look to outsource or more with organic growth.

If I look at that, these are the new programs that are replacing old programs and some the programs that they are -- they are taking it from inside outside. But we call M&A deals that we are picking up the customer business and positioning it to our factory. That's what I would call 80%. Then 20% will come from a new customer we are working on.

Thank you.

In the short-term.

Thanks.

Your next question comes from William Stein of Credit Suisse.

Hi, thanks, guys. Jure, I thought there wasn't going to be a 10% customer following the split off of the PC business but I think you stated there was one. Can you tell house it was, if not at least the end market and whether it's --

We don't release the customer who are 10% customer. I think there is almost hitting that number. We will release that number at the end of the year if they are at the end of the year. We will see how the business grows. If our business grows as much as we think it will, it might not be 10%.

Tell us which end market?

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

Okay. 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. I'm wondering if you can comment on that?

First of all, I think we turned a corner. In other words, I think we got hands around our business. Restructuring is basically almost done. And so that point we were right now -- we were in the driver seat. That's number one. Number two when it comes to what we will do at the stock right now is we were more focused on delivering the numbers so that the numbers itself can take care of the stock. Longer term if we will do the reverse split, really, 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.

Okay. Just one other quick one on that. Similar topic. Debt repurchase. I think this was the focus on the last call and I'm wondering if there is an update there. Repurchase on any detonate and what's the near-term plans?

I will turn it over to my CFO.

Chicken. Will, as you know in 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 have plans to continue moving forward on that in the second half of the year.

Any quantification you can help us with to think about how much or which tranch you will take out?

I probably wouldn't indicate that on the call because to the extent we wanted to purchase in the open market I wouldn't want to necessarily influence the pricing. In term of amounts and so forth I think -- the numbers will be in the $100 million or so in the next couple of quarters.

Thanks, guys.

Thanks.

Your next question comes from Ryder Campbell of Barkley Capital.

Hello, Ryder.

Hi, thanks. It can you give us an idea of what kind of CapEx although we should anticipate going forward off the PC business?

It's all going to depend on growth. If you look at today, just to maintain what we have, if you look at let's say 2008, we will spend about $80 million in existing plants. These are just adding the new test equipment or some advance stuff that we need and replacement of some the old equipment. And about maybe 20 to $30 million will go for our expansion mainly in India and in other few factories in the southeast Asia. If I look at the longer term, especially when I say longer term, let's say 2009, I will say probably we will stay between -- and I'm going give you a wider number, between 100 and $150 million in a year. We have plenty of capacity. So all depends what type of mix that we forget the right mix we don't need to spend anything. But knowing the historically I think about like I said about 100, 120.

Okay. So that kind of roughly seems in line with the prior business model. Is that a way to think about it?

Well, yes. If you look at all Sanmina's business model, where are we going to focus on right now is again is more high mix. More lucrative type of a market that I think if you look at top infrastructure that we have in place is well set up for that. And we spend a lot of money in cash on restructuring. If you look in the last five years we spent over $1.2 billion of structure 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 a two P&L and in October of 2009 we will be to one P&L.

Just to add to your question. And the response, our PC business has not been capital intensive. So the if you look at our total Cap Ex historically the PC business is relatively minor portion of the total.

Okay. I just wanted to confirm that. It seems like going forward then we should expect slightly greater cash burn out of the business then?

Well, I wouldn't say from the core business from a CapEx it will be pretty similar. But this new business should be generating more cash going forward.

So I would add this to it. If you look at cash flow generation that we had prior to the March quarter, we generated 500 plus million dollars of 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. Our objective as a company is to continue generating cash flow out of our core business which will be the components business and EMS.

Okay. Just one last thing. Can you tell us what total depreciation amortization was for the quarter for on a consolidated basis?

Was $22 million for the -- $22 million for the continuing operation and for -- PC was a $1 million. Pretty small amount.

Thank you.

Thanks. Next call, please.

The line is open. Please go ahead, sir. And there is no response from -- we will our next question. Your next question comes from the line of Yuri Krapivin with Lehman Brothers.

Good afternoon.

Good afternoon.

Question regarding your enterprise, computer and storage segment is a look at the year-over-year trends in that particular segment. Basically trends have been negative for awhile now and it appears that you are on the performing end in that particular seg. Maybe you can provide some more color on your performance in that segment and I'm wondering if it is this ongoing shift in this standard products that is going there? Or is it more intense competition or what do you think about the performance of that segment.

Both of those are not true. Let me tell you why, we exited a lot of business and lost a year and a half in this business. We exited our server business. We used to have our own -- new service product. We exited that business that business was over a 5 to $600 million run rate. We exited a couple other customers at low-end stuff. When you look at all the low-end stuff we exit the stuff. What we have today is all high-end enterprise computing and storage. We believe the business is stabilized for us and the last six months and we expect to grow this business for from this point of view and we expect this business to be in a range of around 20-plus percent of our revenue going forward.

With respect to your gross margin you attributed to sequential decline to gross margin to mix as well as start up costs? Anyway you can quantify those startup costs in the quarter?

We had a mix issue and we had the startup in Mexico we opened up a new built to order configure order for a large systems. So some of the products in there were did not contribute a lot. Really haven't contributed more in the mix to make sure as you look at our forecast for Q3, that will go back in the right direction. And assuming that just revenue stays flat, rest of the year we don't know what will happen. But we expect the margins in both the EMS but more in our component side of the business.

Then once again on mix, was the mix unfavorable because of debt in the semiconductor equipment business?

Definitely, that was one of them. And really more across the mix on the projects that just like with the customers. Sometimes you have ten different programs and some programs are more profitable than others. That's the way the customer pooled.

Thanks.

Operator we have time for one more question.

Your next question is going to come from Jim Suva with Citigroup.

Hello, Jim.

Thanks very much.

Good to get you back. We thought we lost you.

You won't lose me. Hopefully you can help people understand this. I'm getting a lot of questions about your strategy. What I mean by that is talk about low volume, high mix. Yet you do set-top boxes. Earlier in your questions you don't do consumer business. But think most people consider set-top boxes as consumer. Talk to us about your strategy. You are going down the vertical road. You don't have the scale and the scope that say Flex and [Honhidoo]-- your tier two players Benchmark and Plexies don't do vertical. Help us out there about how you can accomplish this without doing the splits and being spread too then.

Excellent question and I like to clarify that and it's really to my heart. First of all, when we started the Company Sanmina was started on a vertical model. Supplying everything from design. Getting in early stage of product development. Very difficult but we used to call product that nobody wants to build. And also the product that customer requires 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 multimedia, we have some -- if you look at the set top boxes that we are focusing some of our key customers, it's a part of the business here. We will continue to have. We only focus on a handful of customers in the multimedia side of the business. And that's it. So we will continue to use because we have a factory that are set up to build those type of products. They are efficient. And I -- like I said, I would consider that and consider consumer but it's high end consumer product. The most importantly we will have a strong setup for that and it's profitable business for us.

Let me go focus on the rest of my businesses. How are we going to compete especially with the smaller guys and how do we compete with the big guys? The smaller guys, I believe just because they are small doesn't mean they are easy to compete again. This is a service business. I mean, I have been in this business now -- hate to admit how many years. But Sanmina alone for 28 years. What it takes is exactly what I said earlier. It's a close relationship, close engineering work and really flexibility in what can you do faster and better than the next guy. Not just the size. That's how you -- with sometimes with the competing against smaller guys a little more difficult in those type of relationships than the big guy. We have a very good capabilities to compete. Just the way we are set up. We have a gateway factories in North America and Europe. Very close to the customers. These gateway factories focus on small, high mix, high engineering. Something needs to be done in 24 hours and in hours they can do it. The whole vertical mother 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, we are -- if you look at my infrastructure business, when it comes to the communication infrastructure business, I am very -- better positioned in there or just as good position in there than any of my competitors over there. Definitely better positioned than say a company like FoxCon. What we can do in that they can't touch it. Same it thing in the industrial side of the business or medical side of the business. The reason we grow our medical side of the business because it requires a lot of nurturing, a lot of specification, a lot of attention and detail. Medium size company like cost or small company can give a lot more attention to it. Not a large company can't. We aren't a small company when you 45,000 people you aren't a small company. It's what are you focused on? What reason I'm excited and the reason I'm still here today is that this restructuring took a lot of time. Took a lot of energy out of us and a lot of money. 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, Jure says you should have done this five years ago.

So I don't have enough time to go through all of the details. But hopefully we can get together and go through the details and we are looking forward if you have to maybe -- how do I say simplify our strategy so that people can understand it better.

Great. Thank you very much.

Thanks, Jim.

Anyway, ladies and gentlemen, again, thanks for your time. Sorry we have to cut you short here. If you have any questions, please give us a call and again thank you for your support. Bye-bye.

Ladies and gentlemen, this does conclude the Sanmina-SCI second quarter fiscal 2008 earnings conference call. You may now all disconnect.