Sanmina Corporation (SANM) Earnings Call Transcript & Summary

Hello, everyone, and thank you so much for joining us here at the Global Technology Conference from Citi Investment Research. My name is Jim Suva. I'm the IT hardware and tech supply chain analyst here at Citi. I do want to introduce this fireside chatter with Sanmina, stock ticker SANM. Joining us on the call is the Chief Executive Officer, Jure; and a Chief Financial Officer, Kurt. And then also on the side of the room is Paige, Head of Investor Relations. Before starting things I want to do a couple of disclosures. First of all, there are disclosures on the Citigroup investment website. We do note no media and no press are allowed to participate in this. If you're a media or press, you are hereby asked and expected to drop off and we will be going through and also taking you off the list if you are with the media or press. So no media and press. And we also do note if you're a MiFID II client, please make sure that you have signed those research agreements. With that, I'd actually like to turn the time over to Kurt, so he can read a few safe harbor statements, Kurt.

Sure. Thanks, Jim. All I'd like to do is refer everybody to the safe harbor language in our documents filed with the SEC and note that nothing on this call is by no means an update of guidance. We're still referring to the guidance that we gave back on our earnings call at the end of July.

Got you. Well, that was easy. So welcome, Jure and Kurt. Maybe, Jure, to kick things off to talk about maybe the elephant in the room and that is, it's great to see you back here again. But I would say a month or 2 ago, I drafted the questions and our interactions, not expecting you to be here. So you had a CEO change and my understanding is you're not there just for a month or so that you're probably going to be pretty selective on what you're looking for in CEO. Can you talk to us about the CEO change? And am I indeed correct, you're not just here for a few weeks?

Yes. Good morning, Jim, and good morning, everybody. Jim, definitely, you are stuck with me here. So it's good to be back. A lot of work to do. I'm excited. Most importantly, what's in front of us. Especially doing this tough period, as you know, as we're go through this pandemic, how do we take care of our people and our customers end of the day and make a little bit of money. So I'm saying what's in front of us. Live work, but I never was afraid of the work. So I'm looking forward really taking Sanmina to the next level and most importantly, working with you Jim, so that our investors understand what we have in front of us and how we're going to continue to make this company a lot better.

Jure and Kurt, can you maybe talk about demand trends, maybe in say the next 6 to 12 months? Things have really changed a lot this year. We would have done this in person in New York City, all sitting on a stage with a room full of people. But here we are now doing this remotely and virtually. So how have demand trends change, especially as we look forward, say, the next 6 to 12 months as the pandemic has spread globally?

Yes. Well, Jim, if you really look at when we started the year, we thought this could be a normal year. We thought maybe first half will be a little bit slower and then things were, based on our forecast, going to pick up in the second half of our fiscal year. And then March came around and everything changed. It was a difficult second quarter for us. As you know, we -- but we learned quickly. We adjusted well. In this April, May, June came around, I thought team did a great job really focusing on safety of our people, communicating with our customers and basically making sure that our customers get what they were looking for. So if you look at the third quarter, we delivered what I would call, respectable numbers based on environment that we're operating in. In July, we guided the quarter for about $1.73 billion to $1.83 billion. I'll say demand is stable in this environment. So there's a lot of things that in this environment that we can do better than normal. We're learning a lot. I think we're learning how to do more with less. I will say that. And also, we learned the character of our people. We really learned that our people stepped up and something that I never expected to do what they're doing today. So very happy with that. But overall, I would say demand, short term, I think will be fine. It's the longer term, what I'm thinking about. What's going to happen, how long this disease is going to be around. Let's assume that this is still around with us for the next 12 months. I believe that the customer base that we have, basically are the leaders in our industry. We are well diversified in the key markets, such as communication, medical, defense industries. And I really believe that those industries will do, even in this environment, well. So I expect Sanmina to do well, continue to focus what makes this company successful, which is, build everything around the customer. And I think as long as we do that, we'll do pretty well.

Jure and Kurt, has anything changed during the coronavirus? Say, for example, your longer 2- to 3-year outlook, like, does health care become a lot more interesting and important to you now or sourcing from local production in countries of the end destination for the end product and delivery. Any thoughts about how's the pandemic shaped any of the underlying drivers or operations of your business?

Well, definitely, pandemic helped. I think that started even before pandemic that the world was going more to a regional type of manufacturing. As you know, Sanmina is set up to be a regional and then global. Our model is to be involved with our customer early stage of product development from R&D new product introduction and then basically manufacturing the product around the world. Pandemic pushed it to the next level. And as you know, the world is still interconnected. So our parts come from all over the world. So there's a lot of moving parts, but I believe the way Sanmina is structured, it's kind of a competitive advantage for us because we don't have a major exposure to any parts of the world. If you look at China today, that revenue for us is less than 15%. So we will diversify when it comes to the regional. Yes. But definitely, the model is going more to the regional model because it's a time to the market. Our customers are very, very concerned about that and also making sure they can get things when they want it. So I see a lot of moving, and we'll see how things really change, but they definitely will change in the next 12, 18 months.

So a lot of changes with the coronavirus, the pandemic, trade wars, plus a CEO change right now. And while it's great to see you back again, I'm wondering, does the vision of Sanmina, is it more nimble now? And looking forward, as you're sitting at CEO once again, do things look a little different, whether it be your market mix end of market, go-to-market strategy or your market focus? How should we think about the next, say, 2 to 3 years, your vision and your goals?

Well, first of all, definitely, our model was always to be nimble. We have to be even more nimble in this environment. We have to do more with less, okay? Our customers are demanding a lot more from us, especially when it comes to the flexibility and speed to the market because it is a lot of pressure for them today. So how do we play a bigger role? Our strategy is really not changing. We're going to continue to focus on where we do have competitive advantage, which is focusing on products that are high complexity, heavy regulated markets, such as communication, networking, optical, 5G, in medical, I think we're well positioned there. We've well-diversified customer base. In defense, we continue to really grow that business nicely. If you look at our industrial business, that is really well positioned and only business that really kind of was flat for us and a little bit more hard to forecast was automotive, especially in the second and third quarter. We're starting to see some light end of the tunnel there. But overall, Jim, we're going to focus on things that we do well. Focus on our basics, what I call, focus on margin improvements and delivering on cash flow. The good thing about Sanmina today, as we go to this tough environment is that we went through this before in our history. Especially if you go up to 2008, 2009. Today, Sanmina is a different company. We have a strong balance sheet. I think we still have a great management team in place, I would say, our middle management has been with us for many, many years. And most importantly, our customer base is with us for a long time. If you look at our average relationship with all our top players is 15, 20-plus years. So when you put all that together, I really believe we have a strong foundation, Jim, to build on. And I think from my job, I'm a builder, okay? I'm committed and my job is to pull everybody together, work as a team. But the bottom and the key to our strategy is, when we started the company, is that we always build everything around our customers. And I think that's where I'm going to be spending a lot of my time. I know those people very well, and I'm going to continue to improve our relationships and also focus on a companies that we can deliver more value. And the key -- this industry has to deliver better margins. Sanmina is making improvements in our margins, and I expect us to continue to improve the margins. And hopefully, economy will cooperate, so it should be an exciting next 2, 3 years or so.

Historically, Sanmina has been very strong in the communications equipment market, helping your customers get to market, innovation, a lot of that. Recently, we've seen some news, whether it be Cisco or Siena talk about a big slowdown in the communications market. Can you talk about that end market and what you're seeing? I know you have a lot of customers in it, but is that market really seeing a big slowdown, we're doing this video call, video, you think we'd be using more communications equipment.

Well, first of all, it's the market that is very close to me. When I started the company in 1980, 40 years ago, one of our first customers was a telecommunication customer. I can't talk specifically about customers, Jim, as you know. But let me give you overall picture. First of all, Sanmina is well diversified with -- if you look at a whole telecom, it's about 10 key players out there. And we have 8 out of 10, and if you look at a side of that, we're well diversified from networking, networking, optical, 5G now, 4G, 5G and so on. So I will say, Sanmina is more diversified in this segment than any of our competitors. Most importantly, that we are involved with all the top leaders in this industry. So yes, personally, just like any market today, there are some uncertainties, I think, short term, will be fine. And I think the longer term, I think it's all going to depend how economy moves what direction. I expect as COVID hopefully, will go away, we'll learn how to live with it. That overall demand should come back. As we just said, demand for bandwidth is growing. So from that point of view, I think we will be fine. But also, Jim, is that Sanmina is also well positioned, the new technology that is coming up. And that's advantage that we do have is that we get involved in early R&D area of top customer. And I think we see what's coming up. And I believe that we are well positioned on that part of the business. So overall, I feel comfortable with it. We'll have some bumps in a row, but nothing major.

Jure and Kurt, can you talk to us a little bit about your cloud business? When I go back, people typically think about cloud and white boxes and very razor-thin margins. Yet, it looks like your margins of your company haven't been pulled down year-over-year from growing your cloud business. Can you talk to us a little bit about your product offerings and what you're doing there in the cloud business? And maybe help us understand how big or small it is and your focus on it?

Yes. As you look at the last quarter, Jim, our cloud business, what we call cloud computing, it was about 7%. I think if you look the longer term, what I think it's going to be probably around 10% -- 10-plus percent of our revenue. So what are we doing there? Number one, there's some custom products that we build both servicing private enterprise and large data centers. And then there is also some -- we have a couple of major apartments that we do fair amount of manufacturing for them. I think it's a good business for us to be in. It's never going to be huge business, maybe like I said, over 10%. But the products that we go after there, Jim, is actually profitable business. It's not a low-margin business because we're really working in a niche part of that business, and I really believe we have a fair amount of opportunities to continue to grow that business with some of the offerings that we have because everything that we do is really more on a higher end type of technology. And that's what Sanmina is known for. We don't really focus on a consumer type of products. We're really trying to go what we call internally more -- that is mission-critical products that has to work and last whatever. And I believe that's what we are known for, and our customers are very loyal with us when it comes to building those type of products. So yes, I think we'll be fine in that side of the business.

And just so people on this call can actually grasp and conceptualize in the cloud business. Is it mostly storage or servers or some type of hybrid? Or how should we think about for the cloud? Physically what you're kind of doing?

Yes. For us, in a cloud, what we call cloud today, it's mainly storage product, okay? That's really where we are. In that group, we used to also have some -- a couple of big customers of ours who have some set-top box business. That business is gone. So that's run out almost to nothing. So when you look at our cloud computing, think about more storage or some kind of embedded type of technology that we package and customize it for our key customers.

Got you. Let's talk about components. You buy a lot of components that go into your items, you assemble them and then you ship them to the end customer or somebody who installs them for the end customer. And there's been some big issues for components like in 2018. In this cycle, can you talk about your ability to procure components or the pricing of components? And just the overall component inventory -- or the component supply environment that we're in?

Yes. Well, Jim, 2018, when it comes to materials, was a tough year. There was all -- caught us by surprise. We came to resister caps and et cetera. Today, it's a different issue. Beginning, especially in our second quarter, March quarter. Definitely, there were some challenges getting the components, materials because things basically were shut down. As April, May come around, we're able to work it out. So overall, today, yes, there's some few lead time -- longer lead time items. But overall, I would say that our supply chain is doing a pretty good job in able to really deliver what we need to. We're not missing revenue today because we can't get components. I think -- also, I think it's important that we learn a lot since 2018. The good thing about our business is when our customer over forecast or they drive us to buy more inventory, they are responsible for inventory. So there's basically almost 0 risk or minimal risk on our side of that. And also, I think we are becoming a little bit smarter, how do we manage those type of challenges as we had in 2018. We learned a lot there. But I think our IT systems are improved since then. I think we can do a lot better what-if scenarios and we were able to do that few years ago. And I personally believe together between Sanmina, our suppliers and our customers, we learn a lot. And just kind of better client -- better -- I mean, global visibility, what's going on is there. So I feel a lot more comfortable that those challenges, yes, there will be probably another challenges, Jim. But I think we're ready for it. And I don't -- I just don't see it today what happened in 2018.

Your margins have accelerated or enhanced or gone up a lot more than the peer group. That's a very good thing. Can you share with us about what you've done differently? Was it a focus? Was it a shift in pricing? Was it a shift in where you do manufacturing? Or why has your margin performance done better than other peers?

Let me -- I'll turn it over to Kurt. But before I do, I think it's really more focused understanding what we have to do, plus we have a better looking CFO now. So with that, I'll turn it over to Kurt.

Yes. I think even before COVID came around, we talked -- we started a restructuring to take out costs and have a more lean and flexible manufacturing structure. So I think we announced that kind of in the October, November time frame of last year. And so I think we are already a little bit ahead of the ball game in terms of taking cost out and making sure we're more flexible for various revenue levels. So I certainly think it's a bit about focus and being about -- being ahead of the curve as it relates to cost. But I also think as we talked about, specifically, last quarter, we had lower travel cost because of COVID. We had some lower medical costs because of COVID, and we also had some benefits related to subsidies that we received from certain foreign governments to maintain certain labor levels. And so I think it's a combination of all those things, plus the fact that, again, most of our products have been deemed essential products, are -- I think our revenue has done very well, all things being considered. So when you take all that together, I think we had a good quarter last quarter related to gross margins. And in our guidance for this quarter, I think it's pretty robust as well. But we're never satisfied, and we'll keep working on improving our cost structure and, most importantly, being flexible because in these uncertain times, you really need to be flexible to adjust to the different demand environments.

So Kurt, if we think longer term, are those -- any of those features or levers that came in to help you not going to be around longer term, whether it be government subsidies to help with things or, of course, you had more cost, whether it be hand sanitizers or temperature screeners that kind of go away from a cost perspective or at least become installed and less of a headwind? How should we think about longer-term your margins then?

Sure. So a couple of things. I mean, first of all, the government subsidies, we talked about this in the last call. We do have some in this quarter, but not nearly as much as we had in the prior quarter. So that's going to be soft offer for a time. I think travel, nobody really knows when travel is going to get back to a "normal level " or what the new normal is on travel. So that's a little bit up in the air. But if there are additional costs, and I think we're learning how to be more efficient as it relates to those additional costs. As it relates to how quickly can we get people in and out of the plants. What sort of PP&E do we need to use in order to keep our employees safe. So I think there's a bit of a learning curve. But I think even prior to COVID, we were in the mid-7s in terms of gross margin and that helps to improve beyond that. So I think we've got a lot of focus on margin. We -- our job is when some of these costs that have gone -- have been lower, let's say, travel or medical, start coming back to normal levels, then we're going to have to offset that with additional efficiencies. So we're well aware of that. And we're going to take it one quarter at a time, but I'm very happy with what we were able to do in Q3 and very satisfied with what we think Q4 will look like as well.

Well, maybe a question back to Jure, and then I'll come back to you, Kurt, on capital allocation. But Jure, you've been CEO at Sanmina and you actually started Sanmina. You've been through 4G, LTE, 3G, 2G, 1G Pot, Plano telephone systems. You've been through all these Gs. Is there anything different about 5G about the ramping or the breadth of it or the exposure that we should think about and maybe your exposure you have for 5G.