Sanmina Corp (SANM) 2012 Q2 法說會逐字稿

Good afternoon. My name is Brittany and I will be your conference operator today. At this time I would like to welcome everyone to the Sanmina SCI second quarter fiscal year 2012 earnings conference call. (Operator Instructions). I would now like to turn the conference over to your host, Ms. Paige Bombino. Ma'am, you may begin.

Thank you, Brittany. Good afternoon, ladies and gentlemen, and welcome to the Sanmina-SCI's second quarter fiscal 2012 earnings call. A copy of today's release is available on our website in the Investor Relations section.

You can follow along with our prepared remark in the slides posted on our website. Please turn to page two, the Safe Harbor statement.

During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution you that such statements are just projections. The Company's actual results of operations may differ significantly as a result of various factors, including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volumes, competition, and technological change.

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

You will note in our press release and slides issued today that we have provided you with statements of operations for the three months and six months ended March 31st, 2012, on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense and other infrequent or unusual items to the extent material.

Any comments we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in the conference call, when we refer to the gross profit, gross margin, operating income, operating margin, net income, and earnings per share, we are referring to our non-GAAP information.

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

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome to our conference call. Here with me today is Bob Eulau, our CFO.

Good afternoon, everyone.

For agenda we have today is that Bob will review our financial results for the second quarter fiscal year 2012. I will follow up with the comments relative to Sanmina-SCI results and future goals. Then Bob and I will open for question and answers. And now I'd like to turn the call over to Bob.

Okay. Thanks, Jure, and please turn to slide three.

Overall, the second quarter was challenging, but not significantly different from what we had expected. Revenue of $1.46 billion was down 2.6% on a sequential basis and down 6.8% from the second quarter last year. This was at the low end of our guidance of $1.45 billion to $1.55 billion.

Our gross margin came in at 7.4%, which was up 10 basis points from the first quarter. Operating margin declined 20 basis points from the first quarter to 3.1%.

Non-GAAP EPS was $0.27, which was at the midpoint of our guidance for the quarter. This was based on 84.1 million shares outstanding on a fully diluted basis.

Finally, cash generation was strong this quarter, with cash flow from operations at $60 million and free cash flow at $46 million. I'll discuss cash in more detail in a few minutes.

Please turn to slide four. Revenue was down 2.6% or $39 million from Q1 to $1.46 billion.

From a GAAP perspective, we reported a net loss of approximately $1 million, which results in earnings per share of negative $0.02. This was down relative to last quarter by $0.12.

The GAAP loss included a $6.5 million charge for the call premium and unamortized issuance costs associated with the redemption of $150 million of debt during the quarter. There was also a $2.8 million reserve that was taken for a customer that declared bankruptcy during the quarter.

Restructuring costs totaled $5.5 million for Q2. The costs primarily reflect what we've been recognizing as expenses or incurred related to real estate.

Looking forward, we will continue to see some ongoing restructuring charges on our GAAP P&L of approximately $4 million to $5 million per quarter that primarily relate to real estate which is being held for sale.

My remaining comments will focus on the non-GAAP financials for the second quarter. At $108 million, gross profit was down $2 million from the prior quarter. Gross margin came in at 7.4%, which was 10 basis points higher than the previous quarter. Gross margin was towards the high end of the range that we had anticipated for the quarter.

Operating expenses were up $2.7 million for the quarter at $62.8 million. $1.8 million of the increase was due to research and development spending, which was primarily related to increased investment in the storage business. At $44.8 million, operating income decreased by 10% from the prior quarter. Operating margin was 3.1%, which was a 20 basis point sequential decline.

The tax rate for the quarter was 15% of pretax income, which was in the range we had expected.

On a non-GAAP basis, we earned $22.5 million in net income or $0.27 per share. Net income was down 1.2% from Q1, while earnings per share was 2.8% from Q1.

On slide five, we are showing you some of our key non-GAAP P&L metrics. Let's start with revenue, which was the key driver of our financial results this quarter.

Revenue was down $39 million from last quarter. We had relatively flat demand across most segments, with the exception of Multimedia, which was down $33 million, or 14.5%. Compared to Q2 last year, total revenue was down 7%. We saw a slight improvement in the components businesses with revenue up 1% on a sequential basis.

Moving on to gross profit, we saw a 2% decline in gross profit in Q2, while gross margin recovered to 7.4%, which was up 10 basis points from last quarter.

Our operating profit declined 10% from last quarter to $44.8 million. This led to operating margin of 3.1%.

EBITDA declined from last quarter to $69.1 million, which was 4.7% of revenue.

For modeling purposes, I want to mention that depreciation and amortization were $25 million for the quarter.

Now I'd like to turn your attention to the balance sheet on slide six. Our cash and cash equivalents were $464 million. Cash was down $140 million from the previous quarter. The decline in cash was driven by $186 million in cash used to redeem short and long-term debt, which was partially offset by free cash flow of $46 million.

Accounts receivable decreased by $2 million, while accounts payable decreased by $25 million. Cash benefited from a $41 million reduction in inventory during the quarter. Property, plant, and equipment was down $11 million for the quarter due to low capital expenditures.

We are very pleased with the ongoing strength of our cash position. Based on this strength and our cash generated from operations, we've made significant progress on improving our balance sheet and capital structure during the quarter.

We completed the previously announced call for $150 million of our long-term debt, which is due in 2016. We also reduced our short-term borrowings by $29.1 million during the quarter.

Late in the quarter, we announced that we had renewed and increased the size of our asset-backed lending facility. Highlights of the new facility include a larger size of $300 million, with the ability to grow the facility up to $500 million during the five-year term. This was accomplished while improving the rate we pay for borrowing.

With this facility in place, we announced the redemption of another $100 million of our standing 2016 debt. The $100 million redemption was completed on April 9th without using the new asset-backed lending facility. We expect that we will use the facility from time to time due its attractive interest rate.

The combination of these actions completed in March and April allows us to reduce our interest expense by over $20 million on an annual basis. As we move forward, we'll continue to look for opportunities to enter into accretive financing transactions while maintaining strong liquidity.

Let's turn to slide seven. As you can see from this slide, our debt maturity profile is very healthy and we continue to have no financial maintenance covenants. Our next debt is not due until June of 2014. By the end of June, we will have reduced our long-term debt by $250 million this year.

As of today, our long-term debt is approximately $933 million. With all of the progress that we've made in the last year, we still have room to improve the capital structure going forward and we will look for those opportunities.

Please turn to slide eight where we'll review our balance sheet metrics. Cash was down $140 million from Q1 for the right reasons that I just mentioned.

Cash flow from operations for the quarter was $60 million and capital expenditures for the quarter were low at $14 million. This led to $46 million in free cash flow.

Inventory reduction and cash generation are an ongoing priority for our team. Inventory decreased from $904 million last quarter to $862 million this quarter. However, the inventory turns declined from 6.2 to 6.1. We can liberate over $100 million in cash by getting our inventory turns back over 7.

In the lower left quadrant, we're showing the cash cycle days, which combine our cycle time for inventory, accounts receivable, and accounts payable. Inventory days were up 0.7 days when compared to last quarter at 58.8. We saw a decrease in accounts receivables days sales outstanding from 58.3 days to 57.2 days. Accounts payable was unfavorable as days payable outstanding decreased from 60.4 days to 57.0 days. This was primarily a result of purchases declining faster than cost of sales. Overall, cash cycle time increased from 56.7 days last quarter to 59.6 days.

Finally, ROIC was at 10.8% for the quarter, which was impacted by our lower profitability in the last two quarters.

Please turn to slide nine. I would now like to share with you our guidance for the third fiscal quarter of FY '12. Our view is that revenue will be in the range of $1.475 billion to $1.525 billion. We expect that gross margin will be in the range of 7.1% to 7.5%.

Operating expense should be in the range of $63 million to $64 million. This leads to an operating margin in the range of 3% to 3.2%.

Assuming no large foreign exchange surprises, we expect that other income and expense will be in the range of $16 million to $18 million.

We expect the tax rate to remain in the range of 14% to 16% and we expect our fully diluted share count to be around 84 million shares, plus or minus 0.5 million shares. When you consider all of this guidance, we believe that you will end up with earnings per share in the range of $0.26 to $0.32.

Finally, for your cash flow modeling, we expect that capital expenditures will be around $30 million while depreciation and amortization will be around $25 million. Capital expenditures are expected to be unusually high as we anticipate completing two buildings this quarter. One building is to increase our circuit board capability in China, while the other building is to increase our manufacturing capacity in India.

We expect that we will generate positive free cash flow this quarter as we continue to adjust our working capital levels.

Overall, we're navigating through a challenging period with our business mix. We will continue to focus on controlling costs while we expect revenues to begin to recover. We will focus on improving our performance in fiscal Q3, while positioning ourselves for better results in the second half of calendar year 2012.

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

Thanks, Bob. Well, ladies and gentlemen, I will review our business environment in March quarter. I'll talk about short-term business environment for third quarter and then I'll talk to you about visibility that we're seeing today and really talk about our outlook for the rest of the calendar year 2012.

Just to add to what Bob said to recap second quarter, as we expected the second quarter continued to be challenged by relatively flat demand in most of our key markets and demand decline in our Multimedia segment during the quarter.

When we provided our outlook for second quarter we had forecast that we'll see a slight improvement in our Communication Network segment, but that did not transpire. More specifically, we did not see growth in our wireless access products and also in some of the networking products as our customer forecasted.

Defense and aerospace market we saw some good stability in our products that we build, but we also continued inventory correction in the component side of the business such as printed circuit boards, plastic, and metal and so on.

Regarding the material supply during the quarter, we did not experience any major supply constraints. We had some challenges but there was no significant impact on the revenue.

And we continued to see more inventory correction in all other markets than what we anticipated at beginning of the second quarter.

Now, please turn to slide 10.

So, as you can tell, Communication Network continues to be our major market, which is 45% of our revenue. Defense, Industrial, and Medical is 25%. Enterprise Computing and Storage 17%, and Multimedia about 13%.

Our top 10 customers consisted of 47.4% of our revenue and we also had one customer about 10%-plus in revenue.

Please turn to slide 11. Now I would like to talk to you about third quarter, our June quarter, and make a comment about our end markets.

Communication Networks, we expect that market to continue to improve in June quarter. It's mainly driven by some of the new programs that we have such as LTE programs.

Enterprise Computing and Storage, we're also at this time forecasting continue to improvement. We have a fair amount of new projects there that should continue to help us drive the growth.

Defense, Industrial, and Medical I would forecast at stable to slightly up. As I mentioned, Defense continues to be stable and improving. On the Industrial side of our business, we have a strong pipeline of the new projects. We expect those to start shipping at higher levels. Medical, in short term we are forecasting that market to be flat.

As we go to the last segment, which is our Multimedia, we are forecasting that flat down and I'll break it down in a couple groups here. Set-top boxes we're forecasting that to continue to be down in the quarter. The rest of the markets -- automotive, gaming, and other products that are involved in the group we are forecasting to be slightly up.

So, to continue with the rest of the calendar year 2012, our visibility and outlook for second half, as Bob mentioned, September to December quarter, are more promising. At this time, most of our current customers still have better outlook for the second half of calendar year 2012.

New projects for us are starting to ship at a higher rate now and should continue in the second half of the calendar year 2012.

Inventories are at the lowest level that I've seen for a long time with our customers and also end customers. So, in the second half of calendar year 2012, we would expect that our customers are going to start refilling this pipeline.

Also, we're starting to notice that the forecast for second half for our component business is starting to improve.

Operationally, Sanmina is well positioned for an upside, as the market demand for our customers improves.

So, overall, future as we look at our market opportunities still remains attractive for our Company. Book-to-bill for second quarter was positive. Book-to-bill for third quarter at this time we expect to continue to improve.

We've been also investing and working very hard to drive the growth and we have some good new opportunities in pipeline. We are also expanding our Sanmina Global Services, which includes repair and reverse logistics. It's a focus market that we've been driving. Now I can tell you that we have a large global structure in place and we're ready to -- we have the infrastructure to really compete globally and grow this thing. We won some key partnerships for Sanmina Global Services and we expect to have strong growth in this segment the next 12 months and beyond.

Overall, we are continuing to invest in our higher margin business as part of our strategy, investing in new technologies and processes, continuing to invest in new research and development in the products and the IP area.

Also, I just want to let you know, these are focused investments. We expect that these type of investments will drive sustainable growth for the future.

So, in summary, short term, as expected first two quarters of our fiscal 2012, our business environment was challenging with demand in our key markets that we serve and also unfavorable business mix in the products and components area. So, as we are now entering the third quarter, revenue outlook is slightly below our early expectations, as Bob mentioned, $1.475 billion to $1.525 billion, but on the positive side we are starting to see a lot more new good activities in the pipeline.

In this environment, we focus on things that we control, so we're going to continue -- we continue to lower our debt. In the last 60 days, we've paid down approximately $250 million and, as Bob mentioned, we'll continue to drive the debt reduction in the future.

We're focused, again, on a lot of positive things. We are building a strong company for the future. We remain well disciplined, continue to build strong relationships with our key customers, focus on our financial metrics, and continue to diversify to a better business mix.

So, during the quarter, we accomplished a lot. I'm very happy what we accomplished with our existing and new customers. The pipelines of new opportunities are continuing to expand and it's getting better.

So, with that, ladies and gentlemen, now I would like to say thank you for -- thank you all for your time and support and, operator, we are now ready to open this line for questions and answers. Thank you again. Operator?

Thank you. (Operator Instructions). Your first question comes from Sean Hannan.

Yes. Good evening.

Hello, Sean.

Hi, Sean.

So, if I could follow up on some of the comments you'd made, Jure, around some of the demand that had materialized in the quarter, specifically Communications, you indicated that some of the wireless access, as well as, perhaps, some networking didn't come through as what was previously forecasted or hoped for. Can you remind us whether this was predominantly new programs that you were expecting to materialize?

And then, when you think about -- secondarily, when you think about next quarter and kind of the back half of the year, how much of that is really weighted toward the new programs versus some of the existing programs pulling through?

Well, first of all, we had a substantial slowdown on a wireless access product, which is basically cellular radios last couple of quarters. We felt that maybe we'll have a little bit higher shipment during the quarter on that part of the business and that did not materialize. As we look in the future, we think that business bottomed out and we expect it to move in the right direction.

Some of the LTE programs especially those were a little bit delayed, at least at the customers we're involved in. We saw nice upside in the quarter, not as high as we expected originally. But on a positive side, that continues to improve.

As you know, Communication Networks for us is a big part of the market, almost half of our market and we think for that market segment we think we've bottomed out, because we're starting to see, again, some inventory filling up, especially on the components side, and that's what I said earlier is we expect that to continue in the second half of the year. And, overall, we expect that part to move in the right direction.

Okay, that's helpful. And then there was a lot of detail, I think, that you folks had provided in your efforts to build out your components group, as well as some and proprietary products, new ISIS, Viking, et cetera. Could you provide us a little bit of an update around the progress you're making there versus what your -- some of your goals are within those sub-segments, what you had previously laid out? And what do you expect at this point, when you think about either bookings in the second half of the year may take longer to realize than, perhaps, what you were thinking back in November.

Well, first of all, both of these markets what we call Viking technology and new ISIS systems, Viking technology is really focusing on memory modules, solid-state drives. That business for us continued to deliver good results. Financially, we had some delays in some of the programs, so we didn't see as much growth, but profitability actually, for that business, improved since November. We expect to see, hopefully, more growth in the second half in that business.

On new ISIS, which is an Enterprise Storage product, actually in that business improved a lot since November. A lot of opportunities that we are working on. Growth did not come as fast as we anticipated, but we believe that the customer base that is looking into this product and also the way we are positioned is probably a lot stronger than what I thought in November.

That's very helpful, Jure. Thank you.

Yes, thanks, Sean.

Your next question comes from Craig Hettenbach.

Yes, just a question on the Multimedia business. Anything you guys need to do there in terms of -- from an OpEx perspective, or, maybe said another way, can you talk about how you expect that business to kind of normalize a bit, particularly in set-tops?

Yes, Craig, let me give you that one. You know, set-top business, we have two key customers in that business. One customer has been with us for many, many years. If we look at that business, a lot of things changing in that market.

But I just want to tell you, if you look at the Multimedia area, we're really expanding to other areas, such as gaming equipment, a lot of high-end what I would call photography type of cameras, really expensive cameras. I'm talking the cameras that are well in the thousands and thousands of dollars. Point of sale systems, automotive electronics. So, we kind of expect other businesses to kind of fill in what we are losing on set-top box.

Again, these two customers that we have are very critical to us. We'll continue to do the relationship but, really, in that group, we have to expand to other focus markets that we've been driving for a long, long time.

Okay. And if I can follow up on the comment on positive book-to-bill, can you just discuss, as you went through the quarter, how business trended kind of month to month and then how things look in the first month of the current quarter?

Well, first of all, let me make a comment to the last quarter. It was a little bit back-end-loaded. We -- during the quarter we have a -- we worked on a lot of new opportunities that we've been working on, actually, for many, many months. Some of those opportunities, like I said, the revenue is not as high as what we anticipated, let's say, three, four months ago. But on the positive side, a lot of these programs are real and should continue to help us book in the future.

Book-to-bill was slightly positive. We expect that book-to-bill to improve in the third quarter and I would expect that, based on what we see today, that to continue in a positive direction.

Bob, I don't know, during this quarter so far, it is really --

Yes, a typical quarter for us is very back-end-loaded and last quarter was that way. We can't draw a lot of conclusions at this point, just starting a new quarter, but early indications are pretty positive.

Okay. Thanks for that.

Thanks, Craig.

Your next question comes from Wamsi Mohan.

Yes, thank you.

Hi, Wamsi.

Hey, Bob. Hey, Jure.

Hi.

Can you talk a little bit about your expectations of the components business? So, you mentioned it was up 1% quarter over quarter, but how do you think it progresses through the course of this year?

And in the context of your guidance of 2% revenue growth quarter over quarter at the midpoint, it doesn't sound like you're expecting any sort of snap back in the near term, because your margin guidance is sort of in line with this quarter. Is that the right way to think about it?

You want me to?

Yes, go ahead.

So, yes, I think the growth, the slight growth we saw this quarter, we believe, is an indication that we've probably bottomed out on the components business and we continue to believe that that business will be the one where we see signs of recovery first. That's what we've seen in the past as we've come through soft periods. So, we're hopeful that we'll begin to see some momentum there.

We're not as -- we're not forecasting, as you described, a snap-back. I mean, we think that we'll see some gradual progress there. The contribution margins are great on the components side, so we're anxious to see some revenue growth there, but I think we're -- you're probably looking towards the second half of the calendar year.

Okay. Thanks, Bob.

Thanks, Wamsi.

Your next question comes from Shawn Harrison.

Hello, Shawn.

Hi. I wanted, I guess, just to touch on the margins. At the low end of the guidance, the margins would be down this quarter on relatively stable sales. Is there a mix factor occurring this quarter that could pressure margins downward? I'm just trying to get an idea of how you could see a margin decline on a gross margin basis.

Yes. Well, I would say that mix is always a factor every quarter and we never can predict it with incredible precision. We think it's -- if we see the components business gain momentum, then we probably can move towards the high end of the range. If we don't see that, if we continue to stay flat and we see some of the other businesses increase, then we'll be towards the low end of the range.

But it's -- as we said earlier, it's very early to be predicting what's going to happen this quarter. I think the midpoint is something we're pretty confident in.

Okay. There's no incremental -- it's solely mix? There's no incremental cost or anything involved?

No. There's nothing -- no significant change. It's more how does the business unfold here this quarter.

Okay.

Yes and just to add to that, Shawn, it's really, in addition to the mix, just what revenue comes in. And the more we load these factories up, the faster it falls to the bottom line.

That's fair. And then the follow-up question was, when looking at the top 10 customer base, it looks like that drove the majority of the sales decline sequentially for the March quarter. As we look into that June quarter guidance, would we expect the top 10 customer base to provide most of the uplift, or is it a little bit more diversified?

Well, first of all, our top 10 is usually a higher percentage of the revenue. So, if I just kind of look at the list, we had a few bigger customers that were down more last quarter. We expect those customers to be recovering a little bit at a faster rate.

So, your comment is right. So, a lot of upside will come from our top 10.

Okay. Thanks so much.

Sure.

Your next question comes from Brian Alexander.

Thanks, guys.

Hi, Brian.

Brian.

Hi, Jure and Bob. It looks like for the June quarter you narrowed the range of revenue guidance for the quarter back to a $50 million range from $100 million the last couple of quarters. Does that, I guess, suggest improved visibility based on some of the comments you made earlier about customer optimism in the second half? I'm just curious what drove that kind of narrowed range for June.

Well, I think we had less visibility last quarter. It could have went either way. If things fall in as what we thought beginning of the quarter, we could have had it on the top end.

I think today we feel a lot more comfortable what's in front of us and I would hate to use the word "precise," but I think we can guide it a little bit better and -- but, at the same time, we'll see how things shape up. There's a lot of good things during the quarter and, hopefully, there's a way to improve it.

Okay. And then back to components, I don't know if you touched on this earlier, but how were the margins overall for components in the quarter? I know you said sales were up 1%. You sound optimistic about bookings patterns going forward, but are we still below the corporate average and well below peak levels? Maybe put that in perspective?

Yes, so what I said earlier is we're hopeful that we've bottomed out at this point because components were up slightly sequentially. They were this quarter, unfortunately, below the corporate average, although they did improve a little bit sequentially.

So, I think what we've got to do is see some revenue growth and, as Jure said, once we get the revenue growth, we can really generate some good contribution margin, really, in any of the factories, but particularly in the components factories.

Okay. Okay and then just on the PCB expansion in China. How significant of a capacity addition is that?

It's a major one. We have a capacity, if you look at about 250,000 square foot factory in China, we're doubling that size of that factory. Most importantly, we've been building up higher technology in there and really the whole focus of the new expansion of this factory is to be able to build a high layer count in really advanced printed circuit boards. So, for us, it's a major and it's a big expansion.

I guess, how should we think about utilization in that context and how much line of sight do you have on the revenue stream?

Well, I think this factory we're just finishing the building. This factory will not come to what I would call, say, full -- to full production 'til some time end of this calendar year.

So, is that something that will pressure margins, I guess?

No, it will not pressure. I think it will help improve the margins.

Okay. Thanks.

Your next question comes from Jim Suva.

Thank you, Jure and Bob, and thanks for letting me ask a question. When we think about --

Hi, Jim.

Hi, Jim.

Hi. When we think about your sales rate year over year and your operating margins year over year and that just lets us not worry about the seasonality impact, it appears that your operating margins and EPS are dipping year over year. Is that a function solely due to your top-line sales declining year over year? Or is there something more going on to the story there?

And then the second question is, with year-over-year sales declining, is your Company right sized the way you want it or do you think you need to do some business realignment?

Yes, so you touched on the most significant factor is revenue down year over year. And if you look at both the first and the second quarters, revenue was down more than $100 million when you compare it to the prior -- the prior year's quarter.

So, that puts a lot of pressure on us. We also, as we've noted, have seen the revenue hit us on the components side. We got hit there first and that affected margins. They came down pretty significantly in the components areas during the first and second quarter. As I said, they came up a little bit relative to Q1 in the second quarter, but if you compare the first two quarters components this year versus last year, margins were down a fair amount.

So, I think it's revenue and then it's mix. From a -- is there restructuring that needs to be done? We don't see that at this point. We're continuing to get, as we said, pretty good signals from our customer. We think we've got the right global footprint.

We need to keep pushing on the actions we've been working on for quite a while to improve our margins, which includes getting the right business mix, loading up the factories, improving our operating performance in each and every factory.

So, I think it's a tough period from a revenue and demand standpoint, but structurally we feel like we're in fairly good shape for the future.

And, Jim, if I can add to it, I think the market that we are focused on is more high-end infrastructure as we know. Half of our market comes from the Telecommunication Network side. As we know, that side has been a little bit slower first six months. As we said earlier, we expect that to improve the second half of the calendar year.

But to add on the structure itself, with our new structure that we shared with all of you six months ago, we really -- our restructuring is basically done. We separated our businesses to focus on efficiencies. The good thing about structure, we are very lean when it comes to the people and overhead.

Company -- if you just look at the -- we have a lot of upside to build on. Most of our factories are paid off. So [leave] structure in place.

So, just to add to what Bob said, it's all about right now, loading this up and as the most important thing is that customers are there. I think it's all about demand and as demand comes in, there's a lot of leverage in our model.

And then, maybe a follow-up question for Jure. If we were to contrast Sanmina versus, say, a low-volume producer, like Plexus, or a higher volume producer, like Jabil or Han Hai, can you help us bridge the gap about why they're seeing year-over-year growth and Sanmina is not?

Okay, let me just kind of -- we don't compete with Foxconn, but if you look at our competition that is focusing on enterprise type of product, I don't -- at least the data that I'm looking, I don't think there was a lot of growth in the last six months where in a lot of the -- what they call high-velocity product, more consumer stuff, there was a lot more growth there and other manufacturing services that we offer.

For us, again, if you look at the businesses that they're really not growing is the Enterprise, old traditional, even the Defense and the Medical businesses. We're well positioned in both of those businesses, it's just that the demand for those products has a lot slower expansion in the last six months.

Are those good markets to be in? Answer is yes. And so I think the Company is set up to compete with the small guy. We have a lot of capabilities where we do really high mix, low volume, and then in a focused market such as telecommunication market infrastructure, we're basically set up to compete with anybody in the world.

Yes, great. Thank you for the details and great clarification in helping me understand that. Thank you, Jure.

Thanks, Jim.

Thanks, Jim.

Your next question comes from Sherri Scribner.

Hi, thank you. I wanted to get a little more detail on the Multimedia segment. I think you commented in the prepared remarks that the set-top box business was down. I would typically expect that business to be down sequentially, but was it down more than you expected?

And as it relates to set-top boxes, what are you seeing from customers? Are you losing share or was there some impact from the HDD shortages?

Well, Sherri, first of all, we don't -- we can't specifically talk about the customer. I think we did -- we knew that things were going to be down a little bit, but they were a little bit down more than what we anticipated.

We expect during the summer, if you look at kind of historical on this type of business usually the March quarter, it's typically the slowest and June quarter and then things start picking up September, December quarters. So, I think there's some seasonality going on with this big two customers.

Again, with one customer we had a relationship forever and we expect to continue that relationship forever. With the other customer, our relationship is in a niche area and we'll continue to service a niche area, but we're not going to chase every order in the set-top box business?

And were you impacted by HDDs in that segment?

There was no impact at all, significant impact. Our customers were able to procure the -- some of the product early, in some cases paid a premium to get it. As I mentioned earlier, we did not have a significant impact on the revenue in Multimedia at all.

Okay. That's helpful. And then in terms of the server, the Enterprise Computing and Storage business, that was up sequentially, which a bit of surprise. Is that related to new program wins? You're expecting that to continue to be strong as we move into the fiscal third quarter, but is that new program wins or what's going on there?

Well, Enterprise Computing and Storage for right now, these things just don't happen overnight, but in last couple quarters some of the programs that we have are newer programs. We see more upside and I think our own products, our new ISIS products is doing pretty well and that's starting to help us move in the right direction.

And, as I said earlier, we expect to continue to gain the revenue share in that side of the business.

Okay. Is the new -- what percentage is the ISIS business of that segment?

We don't break it down.

Okay, thank you.

Thanks, Sherri.

Your next question comes from Christian Schwab.

Hello, Christian.

Hey, Jure, how are you? So our component --

Good.

Good. Can you give us a utilization rate on the components business, what utilization rate you're currently at?

Well, it depends --

In the factories.

As I mentioned, I mean, if you look at it on average, our utilization rate, based on people, is probably an 80 to 90 percentile through most of the plants. We adjust those things. In this type of business, Christian, you adjust on a monthly basis.

But, as we mentioned earlier, of course, we can be shipping 10%, 15% extra with same labor force. So, you never in those type of businesses, you cut down so low that you can't pick up an upside. So, we think the market is now bottomed out, so it's all about having the right infrastructure in place and be able to service our customers as the demand improves.

But we do expect demand in the components side to go up, because we have pretty low inventories right now with most of our customers.

Right. You said the lowest inventory you remember in a while. Can you quantify how long that "while" has been?

Well, at least the last three years.

Last three years, lowest in three years?

Yes.

Perfect. And then, on the new factories that you're building in China and India, does any of that have to do with market share gains or is that just sheer capacity needed?

Well, I -- let's -- India, we have multiple customers in India that we are focused on growing in the Indian market. So, it's more regional focused in India. We have a lot of great opportunities and some great customers in that area. That area's pretty busy and we needed to add additional space there. So, you can say, yes, it's a market share win, but it's customers we worked on it for many years.

On the circuit board technology, we needed more expansion in China. At the same time, we are increasing the number of the layers and technology that we're going to build in China to stay -- to be able to compete globally. So, it's really more strategic. But we do expect to grow our printed circuit board business in the next 12 months.

Perfect. And then, on the optical side, with all the shakeouts and things like that, do you believe going into the second half you're positioned to gain market share there?

Well, I think we're well positioned. I mean, Communication Networks is half of our business. As you know, a lot of the advanced networks today are built on optical technology. I think we are playing -- we are involved with all the key players in that area and, most importantly, that we are producing some of the most advanced optical technology that our customers are using today.

So, we're well positioned. I think that I would -- I'm not 100% expert these markets, but I would say that also the optical demand in the future should be improving.

Great. Thank you. No other questions.

Thanks, Christian.

Your next question comes from Osten Bernardez.

Hello, Osten.

Hey, there. Good afternoon.

My first question really pertains to sort of the confidence you have in your second half sort of expectations as -- coming off of a quarter where your com sales were not exactly where you had anticipated. What gives you the confidence that the second half of the year will be what you were expecting sort of earlier this year and if you could sort of provide any color on that, that would be helpful?

Well, number one, I think, Osten, personally I was surprised that the Communication Networks was going to be down, actually, in December quarter, then our first quarter we started down and then they continued to be down in the March quarter. When we were finishing the fiscal year 2011, our expectation was that the Communication Networks going to be up and the Multimedia we also expected to be up, which neither one of us those happened.

So, really, is our expectation was higher. I mean, we knew that around December timeframe and then, as we talked in our last call in January 18th, we said that things were challenging and at that time I think I said that we think the second half of calendar year will be a better year.

We see that today for two reasons. I think our customer forecasts are more real today. I think we understand them a little bit better. Number two, the pipeline, in other words, the inventories, are very low. And when you add those two things together and also the new programs, the new projects, that we've been working on for a long time that hopefully will have a higher demand, you add all those three things together, it shows us that we should have a better second half of calendar -- of 2012.

And I'm not sure whether you touched on this yet today, but were there any significant wins during the quarter, this particular quarter?

Well, I think one that I talked about earlier we expanded our Sanmina Global Services. As you know, the global services market for us is very profitable. We've been working on this since a long time and we won a long-term partnership with a very key player, customer of ours for many years to come. So, that was a significant win during the quarter.

And then we had nice, significant wins across other markets, but we usually don't talk into details of those things.

Thank you.

Thanks. We -- operator, we have time for one more call.

Yes, sir. Your next question comes from Amit Daryanani.

Hello, Amit.

Hi, good afternoon, guys. Just a couple of questions.

One, you've talked quite a bit about expecting better demand trends in the back half and it can be seen on your customers' side. Can you help us on this on what sort of recovery could you be looking at in the back half? Do you expect things to just be seasonal or do you even get back to at least being flat on a year-over-year basis on the back half?

Well, let -- it really all depends how some of these things shake out. I mean, one thing that we learned in last six months that you can't always go with 100% forecast, because some of the forecasts that we had earlier in the year did not materialize. I think today we understand the future better.

I believe our customers are, as I just mentioned two minutes ago, a lot more confident about the second half. The inventories are low and they're starting to talk about long-term components, some of the components that are hard to get and they're starting to put a better plans into place. Addition to that, we've got some new programs that should be able to kick up.

So, yes, I mean, we want to get back to that run rate that we had four quarters ago. Is that possible? Answer is yes.

Fair enough. And then just two quick questions on my side. One on capital allocation. Given the fact that you guys have actually moved out with financing your debt maturities to 2016 and beyond, how do you think about capital allocation from now going forward?

And then secondly, could you guys just touch on the bad debt expensing out in the quarter? Is there some vestigial headwinds we should thinking about in the out quarters or have you taken the entire hit in the March quarter numbers? Thank you.

Well, when you -- this is Bob. When you ask about capital allocation, I assume you're asking about uses of cash and really our priorities remain the same. I mean, the first priority is to make sure we have the cash we need to grow the business. The second is to do small, strategic acquisitions, of which we don't do very often, and then third, to continue to delever the Company.

So, I think you'll continue to see us delevering the Company over time. We've done quite a bit in the last three months, because the opportunity has been there and we'll continue to look for that, going forward.

And in terms of the bad debt situation, it was a customer who declared bankruptcy during the quarter and we believe that we've properly accrued for that. We don't anticipate further adjustments. I'm hoping we can have some recovery on what we've reserved for. But at this point, we think that's the right number.

Bob, are you still engaged with that customer or is that relationship finished?

We are still engaged with that customer.

Got. Thanks a lot.

Thanks. Well, ladies and gentlemen, again, thank you for participating in our conference call here today. Hopefully, we answered most of your questions. If not, please give us a call. Like I said, we're excited about what's in front of us and are looking forward to talking to you in three months from now. Thanks a lot.

Yes, thanks, everyone.

'Bye-bye.

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