Paige Bombino - Vice President-Investor Relations Jure Sola - Chairman & Chief Executive Officer Robert K. Eulau - Chief Financial Officer & Executive Vice President.

James Dickey Suva - Citigroup Global Markets, Inc. (Broker) Mitch Steves - RBC Capital Markets LLC Steven Fox - Cross Research LLC Herve Daniel Francois - B. Riley & Co. LLC Christian David Schwab - Craig-Hallum Capital Group LLC.

Good day. My name is Sequoia and I will be your conference operator. At this time, I would like to welcome everyone to the Sanmina Corporation Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the call over to Paige Bombino, Vice President, Investor Relations. Ma'am, you may begin..

Thank you, Sequoia. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Second Quarter Fiscal 2016 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 in the slides posted on our website. Please turn to slide 2, 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 operation may differ significantly as a result of various factors including the state of the global economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, 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 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've provided you with statements of operations for the three and six months ended April 2, 2016 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, noncash stock-based compensation expense, amortization expense, and other infrequent or unusual items to the extent material.

Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial results.

Accordingly, unless otherwise stated in this conference call, when we refer to our gross profit, gross margin, operating income, operating margin, taxes, 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. Welcome. Thank you all for being here with us today. With me on today's conference call is Bob Eulau, our CFO..

Hello, everyone..

For agenda, Bob and I will review our financial results for the second quarter of fiscal year 2016. I will follow up with additional comments about Sanmina results and future goals. Then Bob and I will open for question and answers. And now, I would like to turn this call over to Bob.

Bob?.

Thanks, Jure. Please turn to slide 3. Overall, the second quarter was very good. Revenue of $1.61 billion was up 5.0% on a sequential basis and up 5.5% from the second quarter last year. Non-GAAP earnings per share was $0.63, which was above the high end of our guidance for the quarter.

This was based on 78.5 million shares outstanding on a fully diluted basis. $0.63 is the best quarterly EPS we've had since 2001. During the quarter, we used $75 million to repurchase a total of 4 million common shares. Cash flow from operations was excellent at $143 million for the quarter and free cash flow was $114 million.

I'll discuss cash in more detail in a few minutes. Please turn to slide 4. From a GAAP perspective, revenue was up 5.0% or $76 million from Q1 to $1.611 billion. Reported net income of $30.4 million, which resulted in earnings per share of $0.39 for the second quarter. This was up relative to last quarter by $0.06.

My remaining comments will focus on the non-GAAP financials for the second quarter of fiscal year 2016. At $132.3 million, gross profit was up $6.6 million from the prior quarter. Gross margin came in at 8.2%, which was the same as we reported in Q1. Operating expenses were up $2.2 million for the quarter at $66.9 million.

Expenses were up primarily due to higher accruals for incentive compensation. Operating expenses as a percent of revenue were the same as last quarter. At $65.4 million, operating income increased by 7.1% from the prior quarter and increased 15.5% from Q2 last year. Operating margin was 4.1% which was a 10 basis point sequential increase.

Other income and expense at $7.3 million was up $1.4 million when compared with last quarter. This was primarily driven by higher deferred compensation expenses. The tax rate for the quarter was 15% of pre-tax income, which was in the range we had expected. On a non-GAAP basis we earned $49.3 million in net income or $0.63 per share.

Earnings per share were up 8.9% when compared to Q1 and up 25.8% from Q2 last year. On slide 5, we're showing you our key non-GAAP profit metric. Gross margin was 8.2% for Q2 while we had a $6.6 million increase in gross profit from Q1. We've been very consistent with our gross margin ranging between 7.7% and 8.2% over the last 12 quarters.

Our operating income increased 7.1% when compared to Q1. This led to $65.4 million in operating income and operating margin of 4.1%. Please turn to slide 6, where we're providing more information on the segments that we report.

As you can see from the graph on the left, the Integrated Manufacturing Solutions segment revenue was up $76 million or 6.1% from last quarter. Gross margin was down 30 basis points primarily based on the mix of revenue. This is a good outcome for this segment. The second segment for us is Components, Products & Services.

In aggregate, the revenue for this segment was down $3 million or 0.9% with gross margin up 1.6 percentage points to 10.3%. This gross margin increase is driven primarily by better profitability in the components area. Now, I'd like to turn your attention to the balance sheet on slide 7. Our cash and cash equivalents were $407 million.

Cash was up $9 million from the previous quarter. We used $75 million of cash generated to repurchase 4 million common shares at an average price of $18.90. In addition, we used a total of $59 million in cash to complete two acquisitions we mentioned last quarter.

The first acquisition was for the MSI factory in Malaysia and the second was for a small storage software company. Both acquisitions are off to a good start. In fact, we booked almost $20 million of deferred revenue this quarter associated with our new storage software offering. The $20 million is reflected in our cash flow from operations.

Accounts receivable were up $69 million and inventory was up $27 million. Plant, property and equipment was up $26 million for the quarter and accounts payable were up $90 million. The Malaysia acquisition was a driver in all of these increases but was almost neutral from a working capital perspective. Short-term debt was up $47 million.

Our liquidity continues to be very strong in spite of the significant investments that we made this quarter. Please turn to slide 8, where we will review our balance sheet metrics for the second quarter. Cash was up $9 million from Q1. The cash levels have been very consistent over the last year.

Cash flow from operations for the quarter was very good at $143 million, and net capital expenditures for the quarter were $29 million. This led to $114 million in free cash flow for the quarter. We expect to have positive free cash flow the remainder of fiscal year 2016.

While inventory dollars were up $27 million from last quarter, most of this was attributable to the acquisition of the MSI plant. Inventory turns improved 6.2 to 6.5, which is the level of turns a year ago.

In the lower left quadrant, we are showing cash cycle days, which combines our cycle time for inventory, accounts receivable, and accounts payable. Overall, cash cycle time decreased from 47.2 days last quarter to 44.6 days. This change was primarily driven by a 2.7-day decrease in inventory days outstanding.

A decrease in days payable outstanding was mostly offset by a decrease in accounts receivable days sales outstanding. Starting this year, we moved to a pre-tax ROIC measure. We made this change because of a large deferred tax asset on our balance sheet.

This eliminates the complications of determining the appropriate treatment of taxes from both a profit and an asset standpoint. The pre-tax ROIC was up 1.1 percentage points at 22.3%. Please turn to slide 9. I'd now like to share with you our guidance for the second quarter of fiscal year 2016, actually the third quarter of 2016.

Our view is that revenue will be in the range of $1.625 billion to $1.675 billion. We expect that gross margin will be in the range of 7.8% to 8.2%. Operating expense should be $67 million to $69 million. This leads to operating margin in the range of 3.7% to 4.1%.

We expect that other income and expense will be in the range of $6.5 million to $7.5 million. We expect the tax rate to be around 15% and we expect our fully diluted share count to be around 77 million shares plus or minus 0.5 million shares.

When you consider all this guidance, we believe that we will end up with earnings per share in the range of $0.61 to $0.65. Finally, for your cash flow modeling, we expect net capital expenditures of approximately $30 million, while depreciation and amortization will be around $27 million.

Overall, we have executed consistently well in the last 12 quarters and have positioned 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 business. I think the growth this quarter is very beneficial as we continue to execute our strategy.

One final comment, I want to remind you that we're hosting a Analyst Day in New York on May 26. We hope to see all of you there. This is an excellent opportunity to meet our management team and hear the latest on our strategy as we move forward.

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. Ladies and gentlemen, I would like to add few comments about business environment for the second quarter and talk about our outlook for the third quarter and the rest of the fiscal year and calendar year. So let me recap second quarter, just to add few more comments to Bob's.

Overall, I believe we delivered solid results, also solid revenue growth quarter-over-quarter driven by new customers. Operations also executed well. We continued to drive efficiencies and we also improved our operating margin to 4.1%. We delivered a strong cash flow of $143 million as Bob mentioned, but most importantly free cash flow of $114 million.

This is a key metric and we focus lot on these numbers here at Sanmina. Also during the quarter, we continue to expand our customer base. Again, overall, we delivered a solid quarter. Now, please turn to slide 11. Now, I'd like to give you some highlights of second quarter revenue by end markets. Top 10 customers were 53.9% of our revenue.

We continue to diversify revenue by end markets and customers. A lot of focus here and it's a key to our strategy. Book-to-bill for our first quarter was positive 1.02 to 1. Industrial, Medical and Defense was 42% of our revenue, and that was nicely up for the quarter of 11.7% driven by strong demand from Industrial, Defense and Medical.

Communication Networks was 36% of our revenue, down 3.5%. This is slightly down primarily due to seasonality; no major movements in this segment. For Embedded Computing and Storage – were 22% of our revenue. Also, that was nicely up 8.1%. Overall, good demand during the quarter in all our market segments in this group. Now, please turn to slide 12.

Revenue outlook by market segment for the third quarter will continue to see good and stable demand from our customers. For Industrial, Medical and Defense, we are forecasting that to be up for the third quarter. For Industrial, we expect to see good growth driven by new projects. Medical, Defense, we're forecasting to be stable, slightly up.

For these segments, Industrial, Medical and Defense, we are focused on mission-critical products, and I can tell you we have a strong customer base here and it's growing. For Communication Networks, we're forecasting this segment to be up. At this time, we see nice improvements in demand driven by networking and optical products.

For mobile broadband, we see stable slightly up. Again, for this segment most of the revenue comes from our latest technology products, and we are well positioned in this segment. Embedded Computing and Storage for the quarter, we are forecasting to be flat.

We have some good opportunity in cloud computing projects that could help us and also overall good pipeline, our new business opportunity looks good. Let me talk to you about what we expect for rest of the fiscal year 2016 and calendar year 2016, at least what we see today. Overall, global economy is still challenging.

We expect to see some choppy forecast here and there but overall stable and growing. We expect to see modest growth with our existing and new customer base to continue for the rest of the calendar year 2016. We also have a good pipeline of new opportunity across all market segments that also could be an upside.

As Bob mentioned, we did close our transaction with Motorola Solution in February. Proud to announce this is a very important partnership to Sanmina. We expect to grow this partnership, and for Motorola Solution today, we are providing government public safety products.

We made lot of positive steps in last 12 months that will help us continue to make financial improvements and that's why as Bob mentioned, we are optimistic about Sanmina's future that we still have a lot of leverage in our business model. Also, let me make a few comments about our strategy. Our strategy is working.

Sanmina has a strong management in place focused on our customer success and building technologies around our customer's most important needs. By providing superior execution and capabilities, this is our competitive advantage and it's working.

We are continuing to be expanding and growing new businesses as we continue to diversify into more profitable segments of our strategy. Again, our strategy is focused on quality of results driven by strong customer base. The bottom line is to maximize the shareholder's value whatever we do. Please turn to slide 13.

So in summary, second quarter was a solid quarter. We delivered the growth and margin expansion. For third quarter, we see stable demand and growth will be driven by new wins. For rest of the fiscal year 2016, we remain confident and this confidence is based on our customer forecast that we see today.

We also have a strong foundation and opportunity to continue to build a strong company. There's a lot on our plate but everything looks promising. Ladies and gentlemen, now we'd like to thank you all for your time and support. Operator, we are now ready to open the lines for question and answers. Thanks again.

Operator?.

Your first question comes from the line of Jim Suva with Citi..

Hello Jim..

Thank you very much and congratulations to your team at Sanmina..

Thank you, Jim..

One detailed thing probably for Jure and then a follow-up for Bob, and I'll ask them at the same time. So, Jure, I believe when you kind of gave your outlook this time about three months ago, you expected, I think, Communications to be flattish and it ended up being down 3.5%, if I read the slides correctly, or maybe my numbers are wrong.

And if so, was that due to maybe the timing of Motorola coming in later than expected, or why was it down? And then the follow-up question is, was MSI in for the full quarter or part of the quarter? And can you help us out with organic growth rate and what Motorola added in the first part of the quarter? I assume there's a additional add-on that helps out for the June outlook.

Thank you..

Yeah. First of all Motorola is not in that segment. Motorola business is all government safety, and that's in our industrial part of our business under Industrial, Medical, and Defense.

So, back to Communication, Jim, as I said earlier, really we did expect maybe little bit stronger communication in our second quarter beginning of the quarter, but really nothing major happened. There were some movements back and forth, but nothing major.

We expect that segment for us continue to move in the right direction and we expect some kind of growth for the rest of the year. So, as I mentioned, we're well positioned in that segment.

We're fortunate that most of the revenue that we have is in newer technology, especially in the networking and optical products of our business, so that looks promising. Back to MSI or Motorola Solutions, we have basically some revenue that we had in February and March.

So, back to the growth, the company – a lot of our growth and a lot of the positive stuff that we have today, Jim, has been really driven by new projects, new opportunities, new wins. Motorola's project for us is really extension of the relationship that we had with this company for the last 20 years.

They decided to outsource most of their manufacturing couple of years ago. Now, we are a major partner, actually majority partner for MSI. So we're looking to building – this, to me, it's no different than just winning a new win, and that's basically what happened.

It's a start-up stage, so from margins point of view, we need to do lot of work to get some margins up here but it's a very exciting project. Most important, it's a long-term project, and it's in a great industry that we really want to grow. Bob, any comments? Go ahead, Jim..

Go ahead, Bob..

Obviously, I don't have a lot to add. I think our view is we're extending the relationship..

Okay, so it sounds like you are not quantifying the amount of revenues that transaction's driving, is that right?.

Yeah, I mean, it's – we really don't go into specific customer situations..

Okay. And then Bob, you'd mentioned Communications. There was bit of softness, but nothing to worry about. But if I remember right that segment has three parts to it. Maybe my memory is old but I thought it was like networking, optical and wireless infrastructure.

If so, which of those three came in softer? Because the segment was down about 4% for the quarter. I thought you'd mentioned that it was probably going to be flattish.

So which of those did better, which did worse?.

So, Jim, let me. I would look at 3.5%; to me, I don't look at that as a big deal in the quarter itself. I think we had a lot of new programs that are coming aboard. So, some of these – as you know, seasonality – the March quarter is our slowest quarter in that segment if you look at historically.

So I believe that 3.5% coming down, more of it was a seasonal. Beginning at the quarter, because we had so many programs, I personally thought that we will be able to ship more of that. So, some of those, the new programs didn't get shipped out. But I would say that all our segments there, because these are all new technology, did well.

But lot of our revenue in that today has changed lot, Jim. Like – what you're talking about is years ago when you're talking – most of our stuff right now comes there is really an optical side of that networking part of the business, and lot of the new programs on that side of the business.

And if you look at the mobile, also pretty stable and strong going forward..

Thank you and congratulations to your team at Sanmina..

Okay, thanks, Jim..

Thank you..

Your next question comes from the line of Mitch Steves with RBC Capital Markets..

Hey, I've got a quick question. So it looks like your top 10 customers increased about 6% sequentially as a percent of revenue.

So, one, did you guys have a 10% customer in the quarter? And then secondly, what drove that material increase there?.

Okay, let me take – this is Jure, Mitch. First of all, we had two customers that become one. Alcatel and Nokia merged, so instead of having two customers, now we have one. So, really if you take that out there is really no change there.

Bob, any comments?.

Yeah, no, there are really two causes. I mean that was one, and the other was the increase on the Motorola business. But the combination of the two caused that increase..

Got it. And then secondly, if I look at the gross margins for the CPS business, looks like you're at the 10% range.

Is there a way to think about how that's being sustainable over the next, call it, three or four quarters?.

Well, Mitch, we're not happy with those margins. We believe we need to do a lot better in our Component, Product and Services. So we're not happy with those margins. We believe there is a fair amount of upside in those margins as some of our new businesses come online, and we drive the revenue up in that segment.

So yeah, I would say hopefully, our margin, that will improve..

Perfect. Thank you very much..

Thanks, Mitch..

Your next question comes from the line of Steven Fox with Cross Research..

Hi, Steve..

Good afternoon, hi..

Hi, Steven..

Hi. So just couple questions on the gross margin also. I guess you noted mix was an issue in the gross margin on the IMS side, so I was hoping to get some specifics on that. And then secondly, on the CPS side, you said that Components was driving some improvement in the margins, but the volumes didn't change that much.

In fact the volumes slightly went down quarter-over-quarter.

So can you sort of dig into how you're able to achieve those gross margins quarter-over-quarter?.

Yeah. This is Bob. So I'll take the question. So on the IMS side, my belief is 7.4% is still a very good outcome. And there are always mix changes quarter-to-quarter. They're never completely predictable. But I think that's a good outcome, and we've been about 7% now for the last four quarters. So we feel pretty good about that.

Q1, as we've said at the time, was a very good mix and – I'm sure that that would be a sustainable mix. And having said all that, there's still room for operational improvement in the IMS businesses. On the Components side, as Jure said to the last question, we think there's still a lot of upside potential here.

The number one issue in Components, Products and Services is revenue growth, and that's definitely true on the Components side. As I've said before, it's characterized by high fixed cost but also very high contribution margins.

So as we can get some revenue growth there, we should see quite a bit of margin expansion on the Components, Products and Services. And specifically on the Components side we saw some nice operational improvements this quarter although as you saw overall, we actually didn't see revenue increase.

So, a lot of the improvement was operationally oriented..

Great, that was very helpful..

And Steve, if I can just add to that, it's important to understand that Sanmina is a different company now than years ago, and I just want to kind of remind analysts that we changed this company especially in the last couple of years. So, we are focused more about quality also of the earnings.

So getting the revenue for revenue's sake, that's the easiest thing for us to do. But we went away from that formula. We're really focusing more on what we call sustainable type of businesses that are repeatable for many, many years that will build a long-term partnership. And I think we are accomplishing that.

I think our customer base today is lot more solid than I've seen it ever. And I think we have a strong pipeline of new opportunities and some new businesses that we are being expanding into that will help us drive the margins.

So I think the message today, I think we have a solid quarter but we are basically saying that we can do better and there is room for growth both on the top and the bottom line..

Thanks for that, Jure. I appreciate that. And then just really quickly on the software business that you acquired, can talk about its impact over the next couple of quarters on CPS? Are we going to see revenues at fairly high margins flow through? Any help there would be appreciated. That's it..

So let me start with that from a marketing sales point of view a little bit, Steve, and then I'll turn it over for Bob for additional comments. First of all, we are building a product through our name called Newisys that's basically focusing in a cloud computing type of environment. I think we progressed a lot.

We added a fair amount of customers there. And we started looking about a year and half ago, how do we create more value and we had a lot of interest from some of our key customers adding more software to solution that we already have.

And we went out and acquired a small company with very unique capabilities – was that last quarter, Bob? Yeah, I think so..

Yes..

So, the last quarter. So we think this has a lot of upside. We don't want to talk too much about it today because of competitive reasons. But I personally believe that has upside. Maybe, Bob, you can add more on profitability..

Yeah. Now, we're really pleased with how this acquisition is going. It really helps our offering on the storage side and allows us to have an offer in terms of software defined storage, which is pretty compelling right now. And the good news is we have early customer engagement there.

While we were able to book $20 million in deferred revenue – that's revenue that will not be recognized immediately, it will be recognized over the next few quarters, so I wouldn't assume dramatic changes right away.

But we think there's a lot of potential and we obviously really like the software business because we can be differentiated there and over time deliver very good margins..

Great, thank so much..

Thanks, Steve..

Your next question comes from the line of Herve Francois with B. Riley..

Hi, Herve..

Hi. Good evening, everybody. Hey, how's it – good to hear from you, Jure.

I was just asking in regards, when you look out for the remainder of this year in regards to the drivers of operating margin improvement, where do you – do you see it being the majority continuing to come from your mix of business? Do you see any of that coming from efficiencies that you can get from some of your existing, either processes or manufacturing facilities?.

Well, both of those. I mean definitely mix is a big impact on our business and of course efficiency. Efficiency is what we drive every day, I believe we still can make improvements there. But I think also it's going to be growth we have – we've been working on a lot of good projects.

We've got to get those things in production as we start loading some of these plants that we have around the world, definitely will help us improve the margin and we talked about earlier on Components, Products and Services. Again, we're driving more revenue there.

And also, as we just talked about, some of these storage product that we're doing, hardware plus the software, I believe that will help us drive the margin. Bob, anything else? Did I miss....

No, I think you hit all the key items. I guess the one other area as we grow that we think we'll get leverage out of is our operating expenses because we think we can grow the company pretty significantly without increasing operating expenses very much..

Got it, got it, got it.

And then just lastly, as you guys are quoting business from new customers and even some of your existing customers, any differentiation in regards to where they would like to see some of their programs being ramped, let's say, from a geographic perspective?.

Well, I think that all depends on our customer. I would say today the type of product that we focus on, which is more higher technology products, higher mix, higher technology, it's really based on the region and where our end customer is going to be selling that product. And we offer them what we call global solution.

So if you look at the – here in Americas, we will offer North America and Mexico combination of these solutions; or we'll offer, let's say North America, and China, North America, Southeast Asia, Europe, Eastern Europe. So that you know I would say – I think businesses becoming for our top more regional than anything..

Great. Thank you very much, nice quarter again..

Thank you, again..

Thank you..

Operator, I think we have time for one more question..

Sure thing. Your last question comes from Christian Schwab with Craig-Hallum Capital Group..

Congratulations..

Hi, Christian..

We obviously leave the best for the last, you know..

You're always so nice to me. Congratulations on a good quarter, guys.

So Bob, can you remind us how much is left in the stock buyback?.

Yeah, we've about $100 million remaining in the share repurchase program..

Okay. Given the significant leverage not many companies do and $6.5 million in revenue with only 77 million shares outstanding, do you plan on being opportunistic in that? Or I know you spent a number of years reducing debt cost and re-profiling.

Can you give us an idea of what your plan is long-term on the stock buyback program?.

Yeah, I'm happy to do that and I'd say our strategy there really haven't changed. I mean in terms of use of cash, it's always where do we need to grow the business first in terms of either working capital or CapEx investment. And then, at this point, it's really a matter of either small strategic acquisitions or share repurchase.

And the good news is that the share repurchase program sets a pretty high bar for any of the acquisitions. So, we're very pleased with the repurchases we made last quarter and we'll continue to be opportunistic with the program..

Right, no other questions. Thanks, guys..

Thanks Christian..

Thanks Christian..

Well, ladies and gentlemen, I'm going to again thank you, and also remind you again, as Bob mentioned earlier, we're hoping to see in New York on Thursday, May 26. I think our meetings are between 9 and 1 PM. As Bob mentioned, I think it's a great opportunity to see at least both of us; that's plus right there.

And we're going to also bring other members of our management team who do most of the work. And we're looking forward to a very open discussion and for you to get to know new Sanmina and most important where is this Sanmina is going. We're very excited, it's entrepreneur type of a company, we got lot of exciting things that we love to share with you.

So, looking forward to seeing you in New York. Thank you, again..

Yeah, thanks, everybody. Bye, bye..

This concludes today's conference call. You may now disconnect. Thank you for joining..