Ladies and gentlemen, thank you for standing by. And welcome to the Sanmina Corporation's Second Quarter Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker for today, the Senior Vice President of Marketing and Investor Communications, Paige Melching. Ma'am, please go ahead.

Thank you, Ian. Good afternoon, ladies and gentlemen, and welcome to Sanmina's second quarter fiscal 2020 earnings call. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Let me remind everyone that today's call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. 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 could differ materially from those projected in the statements as a result of a number of factors. Most notably, the ongoing impact of the COVID-19 pandemic, which have and are expected to continue to reduce demand from our customers, interrupt the flow of our components needed for our customers' products, restrict the type of products we can build for our customers, and create health risk to our employees. Other factors that could cause our results to differ from our outlook include adverse changes to the key markets we target, significant uncertainties that can cause our future sales and net income to be variable, reliance on a small number of customers for a substantial portion of our sales, risks arising from our international operations, any other factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission. The company is under no obligation to and expressly disclaims any such obligation to update or alter any of its forward-looking statements made in the earnings release on this conference call and on our Investor Relations section of our website, whether as a result of new information, future events or otherwise, unless otherwise required by law. You'll note in our press release and slides issued today that we have provided you with a statement of operations for the quarter ended March 28, 2020 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 unusual or infrequent items. 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 this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, net income and earnings per share, we are referring to our non-GAAP information. I now like to turn the call over to Hartmut Liebel, Chief Executive Officer.

Thank you, Paige. And also from me a warm welcome to our second quarter earnings call. In addition to Paige here today, with me is also Kurt, our CFO. The last weeks have been some of the most challenging in my, perhaps in all of our careers. I am in particular pleased with our exceptional management team. They have stepped up to the plate, managed wave after wave of operational adjustments, taking care of our customers who on average have been with us for 15 years, serving mission critical high complex end markets. So let me take this opportunity to thank our leadership team and of course, thank you to all of our customers and key suppliers, who collaborated with us extremely well in the last few weeks. With that, let me pass on to Kurt, who will take us through the quarter.

Thanks Hartmut. We started off the quarter strong and on track to meet our original outlook. However, as the quarter progressed, we started to be impacted by COVID-19. We first saw this as our employees in China were delayed in returning from Chinese New Year. Secondly, there were delays in our Chinese supply chain, which have been shutdown as well and we supply to our operations worldwide as well as the operations of our customers. Thirdly, we saw the impact to the timing and cost associated with the logistics of the supply chain, especially freight. Finally, in March, we saw the impact of the shelter-in-place and similar restrictions, on both our operations as well as the operations of our customers. The fact that many of Sanmina's products are considered essential and as such are subject to certain exemptions from shelter-in-place or similar restrictions helped mitigate the impact, but we were still impacted. As a management team, we focused on what we could control, namely optimization of our cost structure, limitation in new capital expenditures to only the most essential items, and cash generation. With that, I'd like to walk you through the details of the quarter. If you could please turn to Slide 3. Second quarter revenue of $1.6 billion, was down 13.6% sequentially and 9.1% lower than the midpoint of our original outlook provided in January. Again this was primarily due to the impact of COVID-19 as we previously discussed. As you know we withdrew our original outlook back in March. Q2 non-GAAP gross margin was 6.9%, down relative to the prior quarter. This was primarily the result of under absorption due to lower revenue levels, manufacturing inefficiencies, and additional costs caused by COVID-19. There were certain limitations based on government mandates in certain geographies, which prevented Sanmina from…

Thanks, Kurt. So let me add my comments to what Kurt outlined for that please refer to slide number 11. To set the stage., I think the firm ex-Sanmina is very much at the center of the COVID-19 crisis. Guess why? To get through these challenges we need three things to work for us to run our business. Number one, we need logistics channels to bring part into our centers and to ship to end customers. Number two, we need a functioning supply base. We may have 99 parts, but without number 100 which might be a golden screw you cannot fulfill the order. And number three and probably most important, we need employees to be in the factory recognizing that some work can be done from remote offices. So we have to manage all three, so we can produce and ship to our end customers. Seeing how our company work through these issues under pressure and uncertainty tells me a lot about the Sanmina team and our company. Just like other multinationals for Sanmina COVID-19 also started in China. There we have a relatively small presence in two key cities. The local teams and our other retail teams rapidly rolled out waves of operational adjustments through our network by the time the challenge has arrived in Europe and the Americas we had learnt a lot and were relatively well prepared. The primary responsibility is to keep our employees safe while building products that our customers need right now. For example, inside of one week we moved 7,000 associates to set up and work from home. Today we have ample protective equipment suppliers on hand, new protocols how employees enter facilities, social distancing, and we know how to isolate possible infection cases ahead of time in the future. I hear…

[Operator Instructions] And our first question is from line of Ruplu Bhattacharya from Bank of America. Your line is open.

Hi, thank you for taking my questions. You know you’re giving guidance for the next quarter and I think that’s great. I’m just a little surprised because -- there is a lot of uncertainty and a lot of your competitors have also not given guidance so maybe if you can just touch on it, at higher level what are some of the things that are giving you confidence to give the guidance and it looks like a fairly tight guidance on revenues of -- the range of about $100 million so what are some of the things that are giving you confidence enough so that you can guide them at the -- the June quarter?

Sure, thanks, thank Ruplu good, good question. You know I think it's somewhat reflective of the nature of the customer relations we have. We are -- we always are in close contact with our customers and probably even more toward different levels of organization even more these days with our customers. And so that's very much the -- the feedback we are hearing from them that combined with a pretty robust -- bottoms up forecast. You know we thought that -- based on that we feel, it would be appropriate to give our estimate for of what Q3 would look like at this point based on the available information to us?

Yeah, I know it certainly -- we appreciate that and it’s at least a good guidance framework for us. Maybe for my second question if I can ask I think you're guiding flat from an end market demand standpoint except for automotive for the next quarter so I was wondering if you can just drill a little bit deeper into the communications network. What did you see in that market in fiscal 2Q in networking, optical or wireless and are the same trends continuing so when you say flat are all of these end markets more or less trending the same as you saw in the last quarter?

Yeah. I think in the -- on the communications side, I think there are some puts and takes of what I think what the end market of our customers are kind of thinking through. And on the one side obviously they're dealing with very similar supply chain and employee and readiness challenges that I described to us in our call, and that you’ve heard from them directly. At the same time you know they see actually market opportunities to grow their space, so you know in terms of increased communication demand, increased bandwidth demand, increased storage demand and so on. And so I think that's why imbalance, I think our end customers in the communications space they are -- they are reasonably optimistic about the outlook for this space, and that's why those puts and takes that kind of balance each other out, that's why would -- that's why we would call this space right now stable and supporting kind of our guidance right now.

Okay. Thank you for that. And for my last question I'll focus on margins. I think you reported the gross margin of 6.9%. You mentioned additional costs associated with COVID-19. How much was that in the quarter, and how should we think about additional costs associated with COVID-19 in fiscal 3Q? And it looks like from the guidance you're guiding our gross margin down somewhat because it's the guidance if I heard correctly, the 6.4% to 6.9%. So what are some of the puts and takes that are impacting gross margin in fiscal 3Q? Thank you.

Kurt, you maybe want to take that call. That…

Sure. So, again I mean I think there are a lot of variables that are interrelated as it relates to margins. I mean obviously it starts with volume, and you know volumes last quarter were down relative to the prior quarter and down relative to the expectations. You know I think as it relates to margin. I mean obviously it starts with volume, and you know, volumes last quarter were down relative to the prior quarter and down relative to expectations. I think Sanmina has a history of adjusting pretty quickly to those things, but I think given a lot of the uncertainty and the speed of how the coronavirus or COVID rolled out, I think that was problematic. And I also think, you know again -- as I mentioned in my earlier remarks, there are some restrictions in certain geographies, in terms of what we're able to do to reduce costs, but certainly under absorption is the key thing -- inefficiencies, again if you think about it -- you know inefficiencies associated with not having everybody in the factory or inefficiencies associated with having everybody in the factory, but not necessarily having all the parts you need, and then when the parts show up, you've got to work overtime to pick things up, and then add additional costs, I think Hartmut talked a little bit about freight and some other things. So they're all intertwined. I think the way, I would think about it, is you know we have guided gross margins in kind of the mid-7s range for the outlook, and I think without COVID-19, I think we would have been in that range based on our strong start to the quarter. So we're probably looking at a 50 bps to 60 EPS impact as a result of all those factors and COVID-19 as far as Q3 goes, we're going to see a lot of those. Some of them are going to be different right because we won't have -- let's say the shutdown that we had at -- after the Chinese New Year in China, but at the same time you know we've got a fuller impact in -- let's say the automotive business with some of the shelter-in-place stuff that thing come into effect towards the end of Q3 -- or excuse me the end of Q2 that may be in effect for longer in Q3. So I think you're going to see a lot of the same factors and I think that's why roughly margins are flat to slightly down on relatively flat revenue.

Okay. Thank you for -- thank you for all the details. Appreciate it.

No problem.

Ian, next question please.

Apologies. I was on mute. Our next question is from the line of Christian Schwab from Craig-Hallum Capital. Christian, your line is open.

Great. Thanks for taking my question. On the supply side dynamic issues can you quantify the difference between or call out any parts that have caused disruption or is it really just kind of travel logistics to get them?

Yeah. You know Christian question -- good question. It's really so widespread that it's very much you know the profile that we described of how we had to walk through here at Sanmina filters -- filters very much down to all of our supply base and so it's I think everybody across the board that raised levels of success to get ready again. Again depends by location, depends by the region and we've worked very closely with that supply base to make sure that when we -- when we have the authority to that -- we could receive from our customers to be up and running under local government regulations we made sure that our suppliers had those too. So there was a lot of great collaboration but I don't about limited to a particular commodity was very, very -- very, very widespread.

Okay. Thank you for that. And then as we think about the second half of the calendar year you know what are the puts and takes you talked about stability in the customer base except for automotive this quarter, June. What are the puts and takes that we should be monitoring the closest, or you’re monitoring the closest to kind of anticipate what the second half of the calendar year could look like?

Yeah. You know it's -- it's you know it's those -- those three factors that we're trying to balance here and optimize, and that is as employee readiness that still you know -- you know there are still some adjustments even today on a day to day basis making sure that when the recovery comes back we have the right protocols in place for employees to come back at you know -- at different intervals, really ensuring that we you know that we’re optimizing our logistic partners and accelerate when parts come into facility, and then you know being very close to our supply base partners. So it's that -- not that optimization. That said, we already when and when the recovery kind of sets in.

Great. And my last question, you guys expressed some customer optimism in optical got to give the bandwidth issues globally. Is there -- is there any other silos of -- or pockets of strength that you know some have cap equipment and I think you have a small exposure there, but is there any other pockets of strength that you're pleasantly surprised by?

Yeah. No. It’s -- it's -- I think it's kind of right now it's a bunch of puts and takes that's why would -- that's why we kind of call to you know the outlook for end markets and as it relates to our Q3 kind of call it stable, right. And to be seen in the next several weeks If some of those end markets maybe accelerate early than some others -- the optimism that all of us have in 5G rollout and the time around that I think that’s still intact but we’ve seen like all the short-term issues is impacting the timing around that. Kurt anything else on that note?

No I think that’s good.

[Operator Instructions] Our next question is the line of Jim Suva from Citigroup. Jim, your line is open.

Thank you very much. You know I have covered Sanmina for a very long time and your company has done a lot with diversifying across the various end markets compared to what it was a decade or two ago but if I look back the last time when there was a big oil crisis I recall Sanmina had some receivable collection issues in customers so are you reserving a little bit more allowance for uncollectable accounts or have your collections been pretty sufficient in the past few years where you have enough buffer should it need to be some challenges in those various end markets not just oil and gas but -- small businesses, private businesses you may have trouble with fundings?

Sure. Good question. Certainly -- we have a very robust process every quarter looking at our outstanding accounts receivable in particular focusing on amounts that are in the past two or companies that -- financials are a bit challenged. I would say for the quarter that we were in our collections were in line with what you would -- we would normally expect and so -- so far we haven't seen any impact of that. Certainly it's something we're monitoring and you know probably looking closer at it than you normally would although again we have a very robust process normally as well. So no evidence of that yet but certainly something we're keeping an eye on.

Great. And my follow up question is you mentioned strength in optical, is that like accelerated strength beyond than what you maybe thought three months ago or so or is it a strength in optical relative to just the macro economy slowing. The reason why I ask is you know some people are talking about the need for a better optical for enterprise and work from home and those type of solutions, so I’m wondering if it's actually an acceleration or is it just simply -- it has just performed stronger relative to the overall economy which would given coronavirus - it's no one's fault that it's simply just the world that we live in today.

No, Jim. Good question but let me clarify my earlier comment I -- I said the even in communications the puts and takes kind of cancel each other out. There's obviously long term optimism for 5G but even our communications and marketers working through the same supply chain employee, logistic challenges here and that's exactly the reason why -- why characterized even the communications market as stable supporting our guidance. So I don't see any like you know extreme optimism but I like to characterize is that a stable and I think in the current environment that's almost a good thing to have.

I agree and concur. Thank you so much for the details and follow-up. It's greatly appreciated.

Thank you Tim. So operator and -- Ian, if we have time for one more question, if there is one more question, out there, we’d be happy to take that.

[Operator Instructions] And at this time, I'm showing that we have no other questions in the queue.

Thank you, Ian. So let me just take a moment here on behalf of our entire management team. I want to thank all -- all of you for attending today’s call and thank you for the insightful questions, and I hope that you and your family and your team members will stay healthy. We very much appreciate your long-term support of Sanmina, and look forward to speaking with you next time, which will be our Q3 earnings call. Thanks again and goodbye.

Ladies and gentlemen, this concludes today's conference call. We thank you greatly for your participation. You may now disconnect.