Paige Bombino - VP of Investor Relations Jure Sola - Chairman and CEO Bob Eulau - EVP, CFO.

Mark Delaney - Goldman Sachs Brian Alexander - Raymond James Sean Hannan - Needham & Co. Joe Wittine - Longbow Research Jim Suva - Citi Osten Bernardez - Cross Research Amit Daryanani - RBC Capital Markets.

Good afternoon. My name is John [ph] and I will be your conference operator today. At this time I would like to welcome everyone to the Sanmina's Corporation Second Quarter Fiscal Year 2015 Earnings Conference Call. [Operator Instructions] Thank you. Paige Bombino, Vice President of Investor Relations, you may begin your conference..

Thank you, John [ph]. Good afternoon, ladies and gentlemen, and welcome to Sanmina’s second quarter fiscal 2015 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 remarks and the slides posted on the website. Please turn to 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 global economy, economic conditions in the electronic 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 risk factors that could cause the actual results to differ materially from our projections or forward-looking statements.

You will note in our press release and the slides issued today that we have provided you with the statements of operations for the three and six months ending March 28, 2015 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 integration costs, noncash stock-based compensation expense, amortization expense and other infrequent or unusual items to be material.

Any comments we make on this call as they relate to the income statement measures will be directed on our non-GAAP financial results, accordingly unless otherwise stated in this conference call we will be referring to our gross profit, gross margin, operating income, operating margin, taxes, net income and earnings per share we're 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. Thank you all for being here today. With me on today's conference call is Bob Eulau, our CFO..

Hello, everyone..

For the agenda we have that Bob will review our financial results for the second quarter and I will follow up with additional comments relative to Sanmina's results and future goals. Then Bob and I will open for question and answers. And now I'll turn this call over to Bob.

Bob?.

Okay. Thanks, Jure. Please turn to Slide 3. Overall, the second quarter was below our expectations. Non-GAAP revenue of $1.53 billion was down 8.6% on a sequential basis, but up 3.4% from the second quarter last year. Non-GAAP earnings per share was $0.50 which was at the low end of our guidance for the quarter.

This was based on 86.9 million shares outstanding on a fully diluted basis. One bright spot for the quarter was our cash flow from operations which was $70 million; this is up $76 million from the first quarter. During the quarter we used $21.6 million to repurchase approximately 1 million shares of common stocks.

We have $103 million in remaining authorizations to repurchase common stocks. I'll discuss cash in more detail in a few minutes. Please turn to Slide 4. From a GAAP perspective, revenue was down 8.6% or $143 million from Q1 to $1.528 billion.

We reported net income of $14.7 million, which resulted in diluted earnings per share of $0.17 for the second quarter. This was down relative to last quarter by $0.09.

During the quarter we resolved several foreign tax issues, which resulted in a net charge of approximately $10 million including adjustments to related interest expense and foreign exchange. The largest and most unfavorable of these items relates to 2006. We do not currently anticipate other material discrete tax events in the near future.

The restructuring costs for Q2 were $1.7 million. These costs were associated with the real estate that we have on the market to be sold. We expect these costs to be in the range of $2 million to $2 million next quarter. Currently we have about $55 million in real estate on the market at list price.

During the quarter we sold one building with net proceeds of $5.8 million. My remaining comments will focus on the non-GAAP financials for the second quarter of fiscal year 2015. At $117.2 million, gross profit was down $15 million from the prior quarter. Gross margin came in at 7.7%, which was down 20 basis points from Q1.

Both gross profit and gross margin were negatively impacted by the lower revenue in Q2. Operating expenses were down $3.5 million for the quarter at $60.6 million. This represents a 20 basis point increase in operating expenses as a percent of revenue compared to Q1.

Spending was down this quarter primarily due to lower accruals for incentive compensation. At $56.6 million, operating income decreased by 17.2% from the prior quarter but increased 6.4% from Q2 last year. Operating margin was 3.7%, which was a 40 basis point sequential decrease.

Other income and expense at $6.3 million was up 25% when compared with the last quarter and down 9% from the second quarter last year. The tax rate for the quarter was 13.7% of pretax income, which was lower than we had expected. This decrease was driven by a shift in the mix of profitability to lower tax rate jurisdictions.

On a non-GAAP basis we earned $43.4 million in net income or $0.50 per share. Earnings per share were down $0.11 from Q1 and up $0.06 from Q2 last year. On Slide 5 we're showing you some of our key non-GAAP P&L metrics. Revenue was down $143 million or 8.6% from last quarter. Compared to Q2 last year, total revenue was up $51 million or 3.4%.

Revenue was down sequentially across all market segments. On a year-over-year basis, there was a substantial increase in our industrial medical and defense segments which continues to be a very good segment for us and is helping us diversify our revenue base. This segment became our largest segment at 39.5% of revenue for the quarter.

Moving on to gross profit. Gross margin was lower in Q2 primarily due to the lost contribution on lower revenue in Q1. Gross profit was down $15 million from Q1 and down $3.7 million when compared to Q2 last year. Our operating income decreased 17.2% when compared to a strong first quarter.

This led to $56.6 million in operating income, an operating margin of 3.7%. Net interest expense was down $200 thousand to $5.9 million for Q2 when compared to Q1 and down $1.4 million when compared to Q2 last year. Over the last few years, our net interest expense declined considerably as we reduced our debt.

At this point we expect that the interest expense continuing at roughly the level of Q2. Please turn to Slide 6. We are providing more information on the segments that we report. As you can see from the graph on the left, the Integrated Manufacturing Solutions segment was down $148 million or 10.8% from last quarter.

The decline in revenue led to a 60 basis point decrease in IMS gross margin from Q1. The second segment press is Components, Products and Services. In aggregate, the revenue for this segment was down $11 million or 3.2%, with gross margin up 1.4 percentage points to 10.4%.

This gross margin improvement reflects flat profitability in the components area and improved profitability in the Product and Services businesses. Now I'd like to turn your attention to the balance sheet on Slide 7. Our cash and cash equivalents were $408 million. Cash was up $17 million from the previous quarter.

Accounts receivable were down $51 million and inventory was down $50 million. These declines were primarily driven by the lower revenue level we had in Q2. Property, plant and equipment was down $12 million for the quarter. From a liability standpoint, the major change was the $65 million reduction in accounts payable.

This change is also primarily caused by the lower revenue for the quarter. From a debt perspective, as of the end of the quarter we have $427 million in long-term debt. At the end of the quarter our gross leverage on total debt was approximately 1.4. Overall, our capital structure continues to be excellent and the best it has been in 13 years.

Please turn to Slide 8 where we will review our balance sheet metrics. Cash is up $17 million from Q1. We're very comfortable with our cash at $408 million. The cash levels were higher than normal in Q3 and Q4 of last year as we were completing the debt refinancing.

Cash flow from operations for the quarter were $70 million and net capital expenditures for the quarter were $17 million. This led to $53 million in free cash flow for the quarter. We expect to have positive free cash flow during the remainder of the fiscal year. Inventory levels were a disappointment in the second quarter.

Inventory dollars were down $50 million from last quarter at $858 million, while the inventory turns were down to 6.4. It is clear that we did not reduce material purchases quickly enough to reflect the lower revenue levels.

Compared to Q2 last year, inventory turns were also down 0.4 turns, but inventory dollars were up $58 million as a result of higher revenue. In the lower left quadrant we're showing cash cycle base which combines our cycle time for inventory, accounts receivable and accounts payable.

Overall, cash cycle time increased from 40.1 days last quarter to 45.2 days. This change was driven by the 3.7 day increase in inventory and the 3.2 day increase in days sales outstanding. This increase was partially offset by a two-day increase in accounts payable days outstanding. Overall, cash cycle time continues to be respectable.

In conclusion, return on invested capital decreased to 14.1% for the quarter, which was okay but not we want it to be or where it was over the last three quarters. Please turn to Slide 9. I would now like to share with you our guidance for the third quarter of fiscal year 2015.

Our view is that revenue will be in the range of $1.5 billion to $1.55 billion. We expect that gross margin will be in the range of 7.6% to 8.0%. Operating expense should be $61 million to $63 million. This leads to an operating margin in the range of 3.5% to 3.9%. We expect that other income and expense will be in the range of $6 million to $7 million.

And we expect the tax rate to be around 15%. And we expect our fully diluted share count to be around 86 million shares plus or minus half a million shares. When you consider all this guidance, we believe that you will end up with earnings per share in the range of $0.48 to $0.52.

For your cash flow modeling we expect capital expenditures to be unusually large for Q3 at around $50 million. This is caused by an anticipated purchase of a building in June. The purchase of this building allows us to vacate leased space and reduce operating expenses going forward.

Finally, depreciation and amortization will be around $25 million for the quarter. Overall, while our Q2 was a disappointment, particularly from a revenue standpoint, our profitability and cash generation were respectable. We will continue to diversify our revenue base to position ourselves solidly for the future.

Growth continues to be our number one objective, but it is imperative that we grow with the right kind of profitable business. At this point I'll turn the discussion back over to Jure for more comments on our target markets and our business strategy..

Thanks, Bob. Ladies and gentlemen, again welcome. What I'd like to do is review our business environment for the second quarter and also outlook for the rest of the calendar year 2015. So let me recap second fiscal quarter of fiscal year 2015 and also make a few comments for calendar year 2015.

For the second quarter we expect the demand to be seasonally slower, but revenue in the quarter was a lot softer than forecasted, driven by weakness in our communications networks and softer demand across all other market segments with a lot of movements in forecast and order push-outs during the quarter.

Let me also give you year-to-year -- year-to-date comparison. Revenue grew approximately 9% for the six months of fiscal year 2015 and EPS grew by 31%. But overall, softer demand in the first half of calendar year 2015 and we believe that is a short-term scenario and we see better demand in the second half of calendar year 2015.

Now please turn to Slide 11. Second quarter revenue by end-markets, we continue to diversify revenue by end-markets and customers. We also continued to add new customers in the quarter. Top 10 customers represented 49.6% of our revenue. For Communications Networks that was 39% of our revenue.

We did forecast that segment to be down but it was more down than our forecast, down 13.2%. We believe we have an inventory correction in the market segment. We have some push out and end customers basically a softer demand during the quarter, driven mainly by wireless segment.

Industrial, Medical, and Defense we did forecast that to be flat for a quarter but again that came down 5.9%. Industrial, Medical, and Defense were basically at an overall softer demand. For a year that segment grew actually 20% up to year-to-date. Embedded Computing & Storage was down 4.4%. Automotive was strong and other segments were a lot softer.

Now please turn to Slide 12. Let me talk to you about the revenue outlook by market segment for the third quarter. For the third quarter we see continued headwind in our Communications Networks segment. We're forecasting Communications Networks to be down.

Basically forecasting is still challenging but we believe it's a short-term scenario as we expect markets to stabilize in the second half of the calendar year 2015 and we also expect revenue growth in this segment in second half of the year. In this market we are well positioned and we are expanding into new projects.

Industrial, Medical, and Defense we're forecasting to be up for a quarter. For Industrial most of our segment is stable except oil and gas segment. For this segment we see continuous weakness. For Medical we expect nice growth during the quarter. For Defense we're forecasting to be flat or gradually improving.

But in total opportunities in pipeline still continues to be good in this segment. For Embedded Computing & Storage for the quarter we're forecasting to be flat. We expect to see gradual improvements in the quarter and we are continued to diversify in this segment. And we also have a nice expanding customer base, overall a good pipeline.

Now let me make a few more comments about business environment and revenue growth for the second half of calendar year 2015. Short-term business environment has been more challenging, weakness in demand and forecasts are difficult. Again we believe this is a short-term scenario.

More customers are working down inventory and we see some push outs in orders to the second half of calendar year 2015. More so our customers are still optimistic about the rest of the calendar year 2015.

Book-to-bill for the second quarter was flat and we are expecting a stronger bookings in our third quarter and continued improvement in the second half of calendar year 2015. I believe this is very important and very positive for us.

We do expect stronger revenue growth from existing customer in second half of calendar year 2015 and also growth from new projects, new customers that we won and expect to win in the near future. Now let me make a few more comments about operations and how we are positioned in our industry. Operationally the company is executing really well.

Efficiencies are up and improving. Our quality results continue to be leading in our industries and customer satisfaction is high. We are continuing to be build strong Sanmina and we are well-positioned for the future.

Continue to build solid partnerships with our customer base and we are investing in technologies and providing industry-leading solutions for our customers to drive better profitable future. As I mentioned we continue add new customers. This looks exciting as we are diversifying our customer base.

We are focused on driving quality of growth, quality of the growth, which remains our number one priority. Now please turn to Slide 13. In summary, second quarter again we operated in a challenging environment, broad-based weakness across our end markets.

For third quarter we're forecasting, as Bob mentioned, revenue flat to be -- flat sequentially but with continued headwind in the Communications Networks. But we do expect growth in Industrial, Medical, and Defense and we'll continue to diversify our end markets. And we expect also to continue to generate positive cash flow.

For second half of calendar year 2015 we expect overall better demand in our focus market segments than the first half. And as always we continue to invest in talent, technologies, and providing a value to our customers to drive the growth. Ladies and gentlemen, now I would like to thank you all for your time and support.

And operator, we are now ready to open the line for question and answers. Thank you again.

Operator?.

Certainly. [Operator Instructions] And our first question comes from the line of Mark Delaney from Goldman Sachs..

Hello, Mark..

Hi, Mark..

Hi. Good afternoon and thanks for taking the questions. The first question is on the Industrial, Defense, Medical segment. I understand that guidance for the June quarter is for that business to be up.

Maybe you could just help us understand what's giving you guys the confidence to guide that segment up and then to what extent you're factoring in some potential softness in just the industrial macro data points just given some Unc and some core industrial companies have missed their revenue forecast recently?.

Well, Mark, first of all, we really grew this business nicely, if you look at just year-over-year, this is up 20% year-to-date. We're well-diversified in Industrial, Medical and Defense and we have some pretty good pipeline in that segment that we've been qualified.

It's really more now just driving the growth and getting these new programs to start shipping. So we feel positive. Only major weakness that we have, and we were very excited about this industry two, three quarters ago, is oil and gas. Oil and gas section for us will continue to be weak. We don't know how long but definitely more than few quarters.

In the meantime we still believe in that business long term. We're going to continue to work on expanding the customer base there. But we have a major impact in the short term. But overall, again, our Industrial, Medical and Defense, we feel comfortable. Actually on the defense side of the business, as I say, we're gradually improving.

We've got some good new programs that we won. So we should see a nice growth. And again, even in that business we want to expand that revenue in that business long term. I think it's a good time as we still believe that defense longer term will be a good business for us. So, overall it's a good, good segment for us, Mark..

Okay. That's helpful.

And then on the communications business, could you just elaborate a little bit more about what caused the weakness, either in terms of geographies or types of applications, and then if any of that was related to your market share loss?.

Well, I think for us, first of all, we believe the biggest impact that we have in the Communications Networks is some inventory correction, that's basically what we're hearing from our customer, some push-outs from the second quarter -- even from a third quarter, customers are still optimistic about demand, they will think they have it for a year, especially as we enter the September and December quarter.

Overall we are very stable in that business. We have a lot of new programs. As I mentioned earlier, Mark, the biggest impact was there for us in the wireless. And I would say that's probably globally. We supply that product in all regions of the world. So it's really hard for me to tell you exactly what it is, but I would say it's more globally..

Okay. I appreciate that. And just one last question from me and I'll turn it over.

Could you give us a sense for how much exposure Sanmina has to, excuse me, Alcatel and Nokia and just how this proposed deal could potentially impact the Company? And maybe if you could just provide us -- remind us about how the Company was impacted in the past when Nokia and Siemens and Alcatel-Lucent had merged, what sort of effect that had on Sanmina?.

Well, first of all, we have a long relationship with both of these companies, well over 20 years with each. We have a very strong relationship at every level in each of these companies. We are executing well. Most of the products that we do for both of these because companies, there's not a lot of overlap.

So I would say, it's hard to predict the future, but the way I see things today, neutral to positive. I believe as these two companies merge together, they will create a stronger company. I believe there is a positive opportunity for Sanmina. If you look at the historical, and goes back all the way to Alcatel-Lucent merged together.

We had a positive result, and of course when Nokia and Siemens put these two companies together we had a positive result. So I feel comfortable, but really that's all I can make a comment on right now, Mark..

Thank you very much..

And our next question comes from the line of Brian Alexander from Raymond James..

Yeah. Jure, just -- hey, Jure; hi, Bob. Just any insights into what you think is driving the inventory correction at some of your communications customers and how broad-based that is? I mean their demand hasn't really been that strong, and if anything, maybe it will get better from here.

I'm just wondering why is there an inventory correction now and do you think any of that relates to the merger that was just talked about, perhaps preparing for some integration activities? And then I just have a follow-up..

Yeah. Well, first of all on the merger, I can't make a comment on that because I don't know much about it, that impacted inventory or not, Brian.

But overall what we really saw as we're digging into that, there were -- you know, a few quarters ago there were some shortages for some of the critical components in this industry, and I think there was a little bit more build-up to catch up. And I think we kind of -- and customer -- I should say our customers are working that out a little bit.

So we see that being cleaned up hopefully this quarter. And -- but at the same time I think we had a softer demand across the board on some of the key programs that we're involved in, and we are in -- good thing is we are involved in the new technology in all of these programs.

So we think it's a short-term scenario in this segment and we are, at least what we're hearing from the customer, we think the second half of the calendar year will be -- will get better for us in this segment..

Okay.

And then just maybe big picture question with the Alcatel-Nokia merger and some consolidation occurring amongst some of your suppliers on the component side, how does that change your thinking about the need for the EMS sector to consolidate, if at all? I mean as the world around you is consolidating, does that change your view on whether you need to be more acquisitive? Or perhaps you need to be consolidated? Thanks..

Well, I think for us, I think our strategies are right and I think we need to continue to be more focused and focus on the things that we're good at. Sanmina for example in this segment is well-positioned. I think we have one of the best solutions in our industry to service these customers.

As you know, this customer base is becoming smaller, so I think our customers are looking for specialists. We've proven ourselves with the long-term relationship we had with all these key customers for 20-plus years.

I think we're in a, from an execution point of view and type of supply chain which includes technology, quality, flexibility that we provide today is very, very high. So from that point of view I think we'll get -- we feel fine, as I said earlier.

I think this latest merger to us will be worst case neutral, but we feel it's positive because it creates a stronger customer going forward. And I think Sanmina is well positioned to really compete whatever happens..

Okay. Thank you very much..

Thanks, Brian..

And our next question comes from the line of Sean Hannan from Needham & Company..

Hello, Sean..

Hi, Sean..

Hey, folks.

Can you hear me?.

Yes, we can, Sean..

Okay, great. So just wanted to see if I could dig into the EMS side a little bit. So I understand some of the dynamics in terms of the quarter-to-quarter and how that kind of flowed through there in terms of margins. But if we look at the business, you were up revenues year-over-year, the margins though were down.

Can you provide us with a little bit more detail or color on what's really moved around there from a mix standpoint? Because I think intuitively as I consider a higher piece or contribution coming from these non-traditional segments such as Industrial, Medical, et cetera, that should I think typically be a little bit more helpful on the margin front.

So any color would be great. Thanks..

Well, let me just shout out a few comments and I'll turn it over to Bob. Number one, you're right as our Industrial, Medical and Defense business and some of the services that go around it, including the products, are more profitable, we overall -- I mean, yeah, our revenue was down substantially if you look at it quarter-over-quarter.

And I will say operationally we were able to adjust and still deliver a respectable result. Not that we're happy with, but a respectable result in environment when we had a weak demand. The most important what it showed me is that Sanmina has a lot of flexibility to adjust up and down.

And even given this third quarter we're continue going to tune up and hopefully improve the bottom line and most importantly position us as hopefully as we think it will happen that in September, December will be a strong quarter and will allow us to execute better. So we've been tuning up our global operations.

We operate in an environment where market changes fast and I think what we went through in last two or three years, I think we prepared the company to adjust to the environment that we face today.

So I would give my operational team a lot of, how do I say, a lot of credit to be able to create that flexibility and be able to execute pretty well in this environment.

So, Bob?.

Yeah. I don't know that I have a lot to add. We haven't done a lot of analysis versus a year ago. I mean most of our focus has been on the sequential change and really the drop in gross profit is directly correlated with the revenue decline that we saw. We just lost the contribution margin on that revenue.

So I don't have a quick answer on how that compares in terms of mix from a year ago, but the classic answer is it's some difference in mix..

Okay. All right. And I'll probably follow up with a little bit of that offline. Let me see if I can shift then, in terms of the expectations for the back end of the fiscal year, I think you've already provided a little bit of color around that for where the confidence is.

Could I perhaps get a little bit more detail or some of us get a little bit more detail around what helps to drive that? Are we thinking top line? And to the extent that we see mix having a margin impact beyond the benefit of just revenue leverage? Or what are some of the puts and takes as we think about the optimistic points as you consider the back end of this calendar year? Thanks..

Well, Sean, first of all, again let me take the first part. Number one, I personally believe that as we continue to improve the mix that we can even at this revenue I think there's a potential to improve the margin, some of the things that we are doing.

We do also have a fair amount of new opportunities, customers that we want, the projects that we want that will help us as these go out.

And number three, I think we have a very good pipeline of opportunities that we've been working on, on the last year that I believe is going to benefit us in the second half, especially second half of the calendar year.

At the same time, as I mentioned earlier, we think overall we do expect a better demand, especially from Communication Networks side in the second half of the calendar year. So, adding all those two together should give us a better opportunity to improve the financial results..

Yeah. I don't have much to add. I mean we get forecasts in from our customers and they're never exactly right. But I think directionally they're typically pretty good and it looks like the second half will be better..

Okay. And I just want to make sure I understand this correctly, because I earlier, I heard stabilization for the back end of the calendar year within comm, and I think what I just heard from you is it sounds like there would be relative second half growth versus first half.

Did I hear that correctly? And then it sounds like the majority of where the remaining optimism would be is that there is a strong backlog of new program ramps.

Is that -- have I heard this correctly?.

Yes. You heard it on the new programs opportunities that we have, that's correct. And let me make sure that I say it correctly when it comes to Communications Networks. Based on our customer forecasts we expect that market to stabilize and improve in the second half of the calendar year. That is true. But again it's a customer-driven scenario.

Just want to make sure that too. But with all the other stuff, we still think we can make some improvements and we're making improvements to help us deliver a better result. So if you put all these things in a bucket, I think opportunity is there..

All right. Thanks very much for taking my questions..

Thanks, Sean..

Thanks, Sean..

And our next question comes from the line of Joe Wittine from Longbow Research..

Hello, Joe..

Hey, guys. Going back to comms, so if we assume a 2% sequential downtick in the fiscal third coming up here, I know you said down sequentially, you'll be down on a year-over-year basis kind of mid-teens. So I understand it obviously is a down year for global wireless deployments, but you're lagging the industry on the customers certainly.

So, can you go into any further -- as far as what's driving that, especially when you say you are winning a lot of business I think in comms too, so just some further details of why you're trailing the customers would be helpful?.

Well, I think in the short term we think it's, as I talk to some of my customers they say, Jure, we're not losing our market share, it's just it's a more normal environment and we have some inventory to work out. So I believe it's inventory driven and some of the slower, how do I say, softer demand from some of our customers.

When I talk about the new programs I think it's our existing customers and the new customers, we are participating in new programs that will help to drive the future demand, and expanding the customers into telecom industry that we didn't have before..

I guess it will be the fourth year the comms is down on a year-over-year basis, so has there anything changed as far as the amount of business that you're winning being enough to offset the typical program end-of-life? Or are we kind of still at the similar win rates that Sanmina has generated in the last few years?.

Well, we did forecast year-over-year growth at the beginning of the year on this segment and we work very close with our customers on this. Unfortunately right now we see more softness than what we saw let's say 90 days ago, and we'll see how things shake out in next 30 days to 90 days. I think we'll have a lot better picture, Joe, at that time.

But again, we are well-positioned in this market. I think we are in -- we're providing the right value and we are involved in a new program. So based on that we are still optimistic in this segment..

Yeah. And maybe finally here, why not be a little more sober on the tone, Jure? You know, the last few quarters you've come on and you've kind of recorded -- reported a book-to-bill that's flat, I think, that's the tone every quarter; but here we are with sales kind of off 9% sequentially.

So the implication there is customers aren't ultimately ordering what they're initially booking with you.

So again we're kind of faced with an optimistic back-half scenario, why come out and say we're really confident in the back half uptick and we're confident in these customer forecasts again?.

Well, first of all, I think you really kind of need to see, Joe, what I just said. I said based on the customer forecast, based on what they're telling us, the second half of the calendar year is, you know, they're more optimistic on their demand. And that's all we can tell you. That's basically what we share.

And we don't control what they're going to take, but I can tell that we are well-positioned in these key customers. And of course in this type of business you've got to execute every day and we've been executing well. I think it's all demand-driven..

Okay. Thanks for taking the questions..

Just to put it in some context, on a year-to-date basis comm is only down 2%. So it's disappointing, we're disappointed that it's down, but, again, the indication is that things will get better..

Thanks, Joe.

Next question?.

And our next question comes from the line of Jim Suva from Citi. Your line is open..

Thank you so much to you and your team there at Sanmina. A quick question. You gave a lot of commentary around Communications improving in the second half of the year. I assume you're referring about sequentially quarter-over-quarter, like the second half of the year compared to the first half.

So maybe we could shift comparison a little bit more to year-over-year, or maybe that's not relevant, because typically I think that in the winter months and spring people aren't digging and putting in as much infrastructure, say, as summer and fall and budget flushes and getting things installed before the yearend.

Is that the way you think of it? And if so, can you help us more with year-over-year versus, say, first half versus second half?.

Okay, first of all, Jim, you know, December -- as you say, January, March and February was definitely slower in Communications Networks than what we anticipated, let's say, what it was going to be 90 days ago when we reported it for this number. That softness continued into the April, May and June.

So we expect based on what we're hearing from our customers that we're going to have a better second calendar year which will be a September and December quarter.

But if you strictly compare to, how do I say, fiscal year year-over-year, as Bob mentioned, if you look at the first six months we're down a little bit and we'll see how things shake up this quarter and next quarter.

But overall what we're hearing from our customers, hey, we're not losing, how do I say, orders, it's basically some inventory correction, and we're going back to the normalized demand. And I'm talking mainly on the wireless side of the business, Jim..

Great.

And do you expect the second of the year to pick up from the second half of last year or more stable?.

It's hard to predict, I mean, you know, what is -- how things going to shake out. I mean we're going to take one quarter at a time. But I would say today if I compared second half of the calendar year now going forward, I think we'll be a little bit better than the first half..

Great. And then my last question is on a different topic. In this environment of kind of slower growth, do you look at M&A a little bit more? I know you did some acquisitions in the past on the industrial and the oil side of things.

Do you look at acquisitions a little bit more than maybe you would have, say, in a growth environment?.

Yeah, Jim, we've been really focused on growth. Let me just - you know, our biggest issue today, if you really look at Sanmina, we fixed a lot of things in the last couple of years, now it's all about getting more growth. And we have been talking about quality of the growth.

It's easy to get the growth, but what type of quality of growth were you going to get? We believe that you have some good opportunities that will help us this year. We added -- we've been investing a lot in driving the new technology, the business development people, we added a fair amount there. We got some good opportunities in our pipeline.

So, organically I think we're well-positioned. At the same, strategically we're looking at the different deals that would make business sense for us to do this. But definitely our main focus right now is profitable growth..

Right. Thank you so much to you and your team there at Sanmina..

Thanks, Jim..

Our next question comes from the line of Osten Bernardez from Cross Research..

Hello, Osten..

Hey, good afternoon. Thanks for taking my questions.

Just to begin, I want to know if - just to dig a little bit deeper on the guidance, can you -- when you're looking at your H2 outlook, how dependent are you on new programs versus -- excuse me, for the calendar second half -- how dependent are you on these programs versus better market demand? And are you counting on any programs that you have yet to win for the optimistic view that you have for the second?.

No, we -- you don't -- first of all, you don't plan on the order that you didn't win. I think we, first of all, we have some good programs, as I mentioned earlier, Industrial, Medical and Defense that we are able to diversify the customer base in the last 12 months. So, some of those programs should help us.

Same thing in embedded computing and storage, we got some new customers that we got qualified and win. And that's really what we are planning on. Now at the same time we are positioned to win some programs, but we are not putting those at the forecast at this time..

Got it. And then with respect to your IDM programs, do you -- that is offsetting the comm weakness in the third quarter, what type of programs specifically are you --.

Could you -- Osten, could you repeat the last question?.

Yes. What type of IDM programs do you expect to -- Industrial, Defense and Medical --.

Oh. Okay, okay..

Excuse me. Sorry.

To offset the communications weakness that you still see for the third quarter?.

Well, we grew that business nicely last year, as you know. And even if you compare year-over-year or you should day year-to-date, nicely, we have a strong customer base in both -- in all these three programs especially in the Industrial.

Only the area that we are, industrial side, that we are experiencing that we had high hopes was the oil and gas, and oil and gas contributed to us fair amount in last 12 months. It's the area that's not going to be contributing a lot at least for next few quarters, just the nature of the business. But we still believe in that customer base.

We still believe in the industry long-term, so we're not giving up on it. We continue to find a way to expand the customer base. But in the short term, forecasts on that are very low. But rest of the customers, we expect that to grow because of our expansion in that side of the customer base.

As you can see, that percentage is going to grow up, grow to 39%, and we expect the percentage to continue to move in the right direction..

Got it. Thank you very much..

Thanks. Operator, we have time for one more question..

Certainly. And our last question comes from the line of Amit Daryanani from RBC Capital Markets..

Hello, Amit..

Hi, Amit..

Hi. How are you guys doing? Glad I sneaked in. Couple of questions, I guess, Jure, you've seen this comm cycle happen several times before.

In your assessment, I mean, do you think two quarters is a reasonable time frame for a recovery to happen? Or could it be two quarters of downtick, then flatness, and then you see an uptick in growth?.

Yeah. Amit, I think, you know how this goes, for us to be able to predict market 100% is impossible. We gather the data from our customers, which is very detailed data, and they share a lot of information with us that we can't talk about. But we see it.

So assuming that those forecasts are correct, we believe the second half of the calendar year 2015 will be better than what we saw or what we're seeing right now in the first half of this calendar year. So that's really what we base on. At the same time we're looking at what programs we are involved, what's the future of these new programs.

So I'm more optimistic. First of all, our customer base today in the comm is smaller but it's healthier than let's say in the lifecycle. So I feel the more -- and the market is completely different. So I think the market is stable. Yeah, there are some ups and downs, but overall I think this market will be fine..

Got it. And then I know a few questions asked on the Alcatel and Nokia transaction, I'm curious, I mean one -- there's been talk one of your peers potentially buying manufacturing sites as part of that transaction.

Is that something you guys would ever consider to look at, doing OEM asset acquisitions, or is that more likely off the table for you guys..

Well, no, we did some acquisitions like that in the last couple of years. I think it all depends on the opportunity, does that opportunity fit to us and does it make business sense. We still have a few customers that are doing some internal manufacturing, yeah, and some of those we are interested in..

Fair enough. Thank you..

Thanks, Amit..

Thanks, Amit..

Well, ladies and gentlemen, that's all we have for today. If there's any more questions, please give us a call. Otherwise, thank you very much, and we'll be talking in the next 90 days..

Yeah. Thanks, everyone..

Bye-bye..

This concludes today's conference call. You may now disconnect..