Sanmina Corporation (SANM) Earnings Call Transcript & Summary

Hello, everyone. It's so great to virtually see you today. My name is Jim Suva, I'm the IT hardware and technology supply chain analyst here at Citigroup Investment Research. We're very pleased for this fireside interactive discussion to be with Sanmina, stock ticker SANM. A few housekeeping items. First, no media and no press are allowed on this. If you're media or press, please disconnect immediately. If you are an investor subject to MiFID II, ensure you have that research agreement in place. We do note that there are several disclosures with this. First, on the Citigroup Velocity website as well as when you logged in through this interactive invite as well as on the Sanmina website. We would encourage you to please go to the Sanmina Investors website. There, you will see safe harbor, risks and forward-looking statements that should be accompanied and considered with the discussion that we're going to have today. If you'd like to ask a question, you may click the little area on your screen that says ask a question. I will get those questions. I'll accumulate those and put them all together at the end if we have time to ask. We will not be opening up investors' lines. That way, we ensure that the audio and the video quality is its upmost high quality. We do sincerely hope that next time we do this, whether it be our Silicon Valley bus trip or this tech conference that it will be in person, but right now, considering COVID it is the best we can do. I'd like to introduce from Sanmina, we have 2 individuals joining us. Jure, who's the Chairman and Chief Executive Officer, also known as CEO; as well as Kurt, the Chief Financial Officer. So we have both the CEO and the CFO, who will be joining us.

We prepared some questions ahead of time. But maybe if we can start by talking about overall, Jure, the semiconductor industry has gone through a lot. The supply chain has gone through a lot, whether it be COVID, trade wars, shipping costs, boats that get stuck in channels and can't progress around the world. Can you talk about these various dynamics and the bottlenecks and Sanmina has done quite well navigating them?

Well, Jim, first of all, I'm going to say thank you for having us this morning or this option in your time on this virtual conference. I wish I was in New York or maybe in San Francisco. But anyway, I think this is good enough. First of all, yes, those are all the challenges that we had during the year, the last 12 months. I think we navigated pretty well around it. Sanmina is well set up. We have one of the best systems in our industry. If you look at the way we set up around the world, we offer what we call regional global solution for our customer. So we're able to manage through it. Definitely, these are challenges. These challenges continue to be there. On a positive side, through all this stuff is that demand is continuing to be strong. I wish that we have more components available on a daily basis. But overall, we're managing through this, what I call, challenging environment. And hopefully, this is a short-term environment. But our teams are working well with it.

Well, have things actually stabilized, improved or actually kind of gotten worse from where you stand?

Well, first of all, I would say demand is continuing to be strong. I wouldn't say it's got worse, but it could be a little bit better, let's put it that way. It doesn't matter what company you are out there, doesn't matter what customer or is -- it's real out there. We do have shortages across almost everything. Semi is the biggest one, but there's other shortages that we have to deal on a daily basis. Yes, I would say, it's -- it could be better, but it's -- we're managing. We're managing.

And then, is it impacting your backlog? I imagine it is probably given you and Kurt a little bit more visibility, but is there the concern about like heated or double bookings?

Well, I don't know if it's double booking. Definitely, our backlog is expanding, which is good. And I think we worked very closely with our customer to really understand what's the real demand. There's no advantage for our customers at this time to be giving us the numbers that don't make sense. We have a very good open relationship with all our key partners out there. And we really want to know what the real number is because we have to move a lot of things to be able to deliver. So I think our customer has been more open with us. And that's kind of how we are managing. I think the question is how long this will last and how we're going to get through this as the demand is actually going up. So that's a positive challenge longer term and it's very exciting, in the short term, lot of work.

Can we talk a little bit about your end markets? You have a pretty diversified end markets. Maybe compared to say 3 months or 6 months ago, which ones have surprised you to the upside? Or which ones have been a little bit softer?

I wouldn't say there's any major surprises. As I said earlier, on a positive side, demand is still very healthy. But right now, if you look at all our markets, they're very robust, some more than others. But as you know, 40% of our markets come from communication networks and cloud. Cloud infrastructure has continued to do well. We are involved in our high-end optical system, IP routing, et cetera. So that's [ doing well ]. Our industrial, medical, defense and aerospace and automotive also continues to do well. That's about 60% of our revenue. So overall, there's no issue with demand here, and there's really no major surprises. We expected this. I wish we're getting more components, I'm not repeating myself. But as I talked to my customers and suppliers, actually I talked to a major semiconductor company last week, and they basically saying, Jure, it's not going to get better overnight. But how do we manage together, how do we share the information from a customer to end suppliers. And that's the key, and I really believe that our teams are doing a pretty good job at this time.

Can we talk about gross margins and operating margins? This has been quite impressive. And Kurt, as CFO, I kind of want to give you some credit, but I also want to realize Jure has been there a long time and you really change the look of your company from a concentration perspective. I remember years ago it was so heavily weighted in telecom infrastructure. Can you talk about your gross and operating improvements? And kind of what's been the actions to drive that?

Sure. Well, I think it's been a bunch of things. I think first of all, you're right, you're going to give credit to Jure and the team for picking the right markets and the right customers to focus on. So a lot of it is product mix and focusing on that. We don't want to grow just for growth sake. We want to focus on profitable growth, and we've been saying that for a while. So a lot of it is just the benefit of all the work that's taken place during that time. That being said, during these challenging times over the last 12 months to 18 months, we have allowed us to look at our business to figure out how we can work more efficiently, do more with less. And so, we have been able to take costs out of the business. We've been able to lean up our infrastructure, become more flexible. So if the revenue isn't there, be able to take costs out. So I feel very good about where we are now. And I think we've been delivering consistent results for many quarters now despite the challenges that you already talked about. And most importantly, I feel like we're well positioned for when the supply chain constraints loosens and revenue starts to increase, we should get some really good operating leverage in the business.

And if I can add to that, I come back to the revenue mix. I think that's really offering a lot. We're well diversified into industrial, well diversified into medical, defense business, the automotive mainly around electrical vehicles and some alternative energy. So those are some -- of course, we're always well-established in communication networks, focusing on optical networks. So those are the key things that drive and helps us hopefully continue to improve those margins, Jim.

Yes, it's interesting. You've actually had margin improvements, and the whole world has been seeing higher raw material costs. Like recently, I had to buy some fixtures for my house, and they talked about steel and plastics being more expensive. Sanmina also does bending and components and things like that. Can you talk a little bit about those raw materials, yet you've still been able to see higher profitability?

I think definitely raw materials are going up almost across the board. I think it's all about managing that and communicating properly with our customers and suppliers, and I think that's been working. Our customers have been very supportive. On some of these things, they understand that costs are going up. Our relationship with most of our customers is very transparent, and we're able to get a pretty strong foot forward. But end of the day, as Kurt said, there's a lot of eternal work that I want to give a credit to our team, and we're excited about what's in front. I think the most important, Jim, is that what we establish here, it's not what we do in the short term. Short term, if I can use it more right now with all these component shortages, it's just getting through with it properly to make sure we give all the critical requirements to our customer, but really position the company long term that we can continue to grow because it's the key for us and also continue to expand our margin across our critical markets that we serve.

So if I hear you correctly and you use the word continued and expansion, it seems like these very favorable margins you've been posting now, that there's still more upside. Did I hear that correct?

Definitely, we believe we can do better. We like to see our short-term operating margin at 5s, that's kind of like I was saying normal for us, but I'm hoping we can continue to move in the right direction and go from there and see definitely I think as we improve the efficiencies. Right now, with all the stuff and goal, efficiencies are not the best. As we resolve some of the supply chain challenges in the future, we expect to help us improve the bottom of our concerns, yes.

Yes. And I think the key thing really is to get the revenue growing again. I think that will allow us to get the operating leverage. I think we've done a good job leaning up to this point in terms of optimizing our costs, and we're at the point where we get revenue growth, but we do believe we will get operating leverage as revenue grows, as the supply constraints loosen.

And the good thing about that revenue growth is we got the purchase service. Right now, we're just getting all the components.

For those on the line there, investors of Sanmina who are looking at the stock, could you maybe compare the core competencies of Sanmina versus some of your competitors out there? For example, you're not liking the iPhone and things like that. Maybe talk about your core competencies versus some of the others?

Yes. I mean I think that's a little bit misunderstood by our investors today. If you really look at Sanmina today, we have a really best setup for our higher technology type of products, as I mentioned earlier, both in industrial, medical, defense, automotive, communication networks. We offer a total solution end-to-end. We have a wide global setup in each of these key markets. And today, we -- I think a lot of times, investors think the only thing we do is supply labor. That's not the goal, and that is not what we do. We offer our customers end-to-end, and what does that mean? We get involved early stage of product development. We help and design the right product. We help and take the cost up. We then get a new product. We've taken and offer our customer the right global solution, what makes business for them, where to manufacture, how to manufacture, logistics, the distribution, et cetera. So Sanmina has a lot of capabilities. As Kurt said earlier, I think for us right now is where we go to the next step. And the next step for us is continue to expand in these critical markets, and our IT systems definitely help us out. And we have all the specification from defense, IT and medical, et cetera, but just to name a few. So well positioned and we can compete with all of the big guys out there. And most importantly, I believe our flexibility and time to market has a huge advantage in the marketplace.

Historically, Sanmina has been very strong in the communications network and segment. On your most recent earnings call, you've been talking about cloud a fair amount. Can you help us even understand -- there are so many different areas of cloud that people are talking about. What part of the cloud are you touching you're involved with?

Well, if you kind of look at the communication networks today and the cloud, they kind of merge in together. We're doing a lot of the same -- similar type of products, the same product, also the private companies. It's also what we call today in the cloud. So it kind of crisscross. Also, the customer base is expanding. And so you have companies that never bought, let's say, telecommunication product before are now building their own clouds. And so, we are playing a bigger role there, all the way from beginning -- from engineering, helping them design most effective, including mechanical, electronics and the full system integration, including repairs and et cetera. And of course, part of the cloud is also our optical capabilities.

Kurt, as Chief Financial Officer, you have the responsibility really for capital allocation, framework, uses for cash. Can you talk about your framework and thoughts about capital allocation?

Sure, absolutely. I mean our primary focus, again, is organic growth. We've talked a lot about that here. The easiest way to grow is to grow with the strong customer relationships that we have, and so we invest capital there. It's obviously challenging in this environment. It takes longer to get things up and running, but we're definitely investing with our customers and our partners. So that's our primary thing. In addition to that, we do look at potential acquisitions. I think it's a high bar for us. Typically, we're looking for something that brings, let's say, capability or technology to the table that Sanmina has or builds on what we already have, or sometimes it's dependent on geographic expansion to do that. So that's the other area. But again, I think our primary focus is really on organic growth. In addition, we have a really strong balance sheet. So it allows us to -- we continue to pay down debt. We pay down debt about $5 million every quarter, that's under the term loan. And then we've been opportunistic about buying back shares. I mean if you look back, even dating back to when COVID came out, I think we were -- while others were stepping back, I think we were pretty aggressive in terms of continuing to do buybacks. So I think our strong balance sheet and our strong cash generation gives us the flexibility to both invest in the business in the long term as well as do some of these other things opportunistically.

And during COVID, Kurt, did you have to put in some CapEx, whether it be body scanners or temperature gauging or spread out some of your manufacturing plants?

Well, I mean, definitely, our priority during the COVID hit is how do we keep our people safe. And Jim, so far, none of our factories were shut down during the COVID. So we implemented systems right away, where we monitor the temperature, most importantly, is communication and we educate our people about what to do and what not to do and make sure the communication in all of these operations were very transparent. I think with all this stuff that really helped us out that all our plants are still working. Yes, we had to -- we're not working with 100% of people because we have some cases so that we had to let these people take time off to be able to get healthy. But overall, it's a still challenge today, Jim, in certain countries more than others. But our team -- our management team really managed this so well. But it's something that we have to continue to pay a lot of attention to. And end of the day, I need to say it like this, but we're going to have to learn how to continue to work with it because I don't think this thing goes away that fast.

Yes. It sucks. I really would have been loved to be on stage with both of you with a big audience in front of us, and we're doing this now virtually...

It is a lot easier to be able to talk. But hey, this is good.

Yes. You mentioned earlier about inability to get all the components you need to meet all the demand. Do you -- should -- do you think there'll be a shift in the supply chain that maybe EMS should be the contract manufacturers carrying a little bit more inventory or asking for orders for more visibility, so there's less rush the last month of the quarter?

Definitely, our customers giving us a lot more visibility now than let's say a couple of years ago. So our customers are working with us. This is a team effort. This is not -- if I have to pay extra money, I can get extra parts. This is more about a lot of the parts allocation, a lot of these parts are custom, a lot of these parts are single source. So there's -- we have to create the right atmosphere between supplier, customer and us. And as you know, in our business, we cannot go out and take a chance and just buy everything on a forecast. It will be crazy in this business. So we have to monitor that. As I said earlier, it's very important to have the right information from our customers that are transparent with us, so we can plan properly. When we plan properly, we actually get the better job done. But we buy what we need to buy. And we -- right now, most of the suppliers out there will give us 12 months or longer forecast. In some cases, our customers are guaranteed those forecasts, which a year ago that was never heard of.

I got a question asked about, are there more opportunities to take over facilities and full productions from customers or OEMs or something that right now manufacture items that you think that they're just going to shift to a complete outsourcing model or more of an outsourcing model? And what end markets maybe are you in talks with more than others?

Yes. Definitely, there's certain industry that is starting to look to outsource more. I would say, the defense broader industry is looking for outsourcing more. I would say medical still has a fair amount of opportunities there and some industrial. As you know, if you look at the communication side of the business, like [indiscernible], most of that is already outsourced. So there is some opportunity. I think we -- and I believe the industry, but specifically looking at the right opportunities, opportunities that are strategic and lasting for many years in the future.

Let me first ask Kurt the question, and then I'll ask Jure at second. What are the 1 or 2 questions you get asked from investors or even your customers that you want to use this opportunity to educate the investor forum in front of us?

Sure. Well, I think, again, and Jure alluded to earlier, I think the way we differentiate ourselves is about the types of products that we're doing and who we're partners with. I think that high complexity that you Jure alluded to is very important. We don't do a lot of the consumer stuff. I think that separates ourselves a lot. So I think that's one of the key differentiators. And I think the other thing is really about our footprint, right? We have a very -- yes, we have a global footprint, but at the same time, we have strength in all of the different regions. And so that gives us the flexibility to serve our customers best as well as, obviously, in these challenging times where people are looking to have their suppliers closer to where they are. It also gives us an advantage. So I think those are the 2 things that really are key for us and we try to stress to investors [ to basically ] talk about.

And Jure, do you have some comments on that same question?

Yes. Just to add to that, I would say lot of times our investors don't understand how loyal of a customer base that we have. And that loyalty comes based on execution, the long-term relationship and the value that we add to our customers for their success. I believe, especially if you look at the COVID and all these material shortages today, it's even more important for our partners, for our customers [indiscernible] partners. So we have a right relationship with our manufacturing partners. So our relationship has been getting stronger. I think the second thing is the capabilities that we have. And that's where -- I think that, as I said earlier, I think sometimes we think we just put a bunch of cables on, more components on, and tomorrow, they're just going to go to somebody hoping giving them a cheaper price. That's not the case. I mean strategically, Sanmina became a smaller company to really build our capabilities and take a different approach. I still believe being a $10 billion company by delivering industry-leading margins that we can have a valuation bigger than some of the companies that will be twice as big as we are. So it's about our quality of solution, the quality of the earnings, and it's a sustainable long term. And that's what is misunderstood, and that's what we -- of course, we wish that components were not issued today. I think we need to prove that, and I think we can prove that longer term. And when I sit that longer term, I'm hoping this material gets resolved in the next 12 months, and I think we'll be able to show to our investors some of the all big things that we have been investing in, repositioning the company and hopefully, we'll be able to deliver the right results to support that. Sanmina has a lot of leverage too. I would take our capabilities against anybody else.

I got a question asked about your customer concentration. In the past, the industry has often had 1 or 2 or 3 customers that are huge within a company and upmost giants. Can you talk about customer concentration and diversity at Sanmina?

Yes. I think we are well diversified. If you just look at the -- just let me give you by the markets, our industrial is approximately 20% of our revenue. Medical is about 20%, 21%, 22%. Our automotive and defense industry, that's approximately about 18%, 19%. Communication is about -- it's 13%-plus and the cloud -- if you fuel cloud, another 5%, 6%. So well diversified. We have a one customer that is over 10%, and that [indiscernible] what happened there we had most multiple companies that got merged. But inside of that one customer, we have a mobile business, which is mainly 5G, and then we have an optical networking or networking part of the product. So even inside of that, we will diversify and also we participate basically on all the new products. On this one customer, we do business for the last 25 years. We started with a company that was a startup. And at that time, they were bought by Alcatel. And today, of course, they are owned by Nokia. But we started doing business networking product when they were doing $5 million a year. So that's what Sanmina brings to the table is that what I said earlier is the loyalty, and we're able to keep our customers for long term. So I think we are well diversified and -- but we'll continue to add a few more big players or probably you'll see us going to do that later.

Here's a question. Is the industry changing? It used to be the shift to the lowest manufacturing cost, whether that be Guadalajara or parts of Malaysia or China. Is it shifting to be less so lowest cost and now more a little more localized? I mean we have trade wars, we've had shipping container boats that get stuck, we now have COVID. Are we shifting back to be maybe a little more on continent or closer than just all one epicenter?

Well, definitely, Jim, that is a movement in industry. And I would say that customers are going to bet total costs, where maybe 5, 10 years ago, they were chasing just the labor, labor, labor. They don't really look at a lot of security of supply, all these other geopolitical issues that go around the world, et cetera. Today, customers want security of supply. They're going to be able to know when they're going to get their product. And end of the day, what's the total cost? Because you might go and chase the price, but end of the day, it can cost you a lot more money. And that's what Sanmina -- we always worked on that model to be more regional, and that's helping us today because we are true regional player. We can -- we're very close to the customer. And if you just look at the North America, here I think we're in a best position and I think that's the future. It's going to be closer to the customer, security of supply and the total cost.

Jure, I've actually known you for 2 decades now. I've got lots of gray hair. You have none. So obviously you've got more youth and energy than I do. What -- you've been in and out of the CEO role -- seat a couple of times, but yet you have such excitement and energy for the company. What are the kind of couple of things you want to leave and conclude to investors about why they should be owning Sanmina's stock? And why you are still so prevalent at Sanmina because I've known you for 20 years and many others, I haven't?

Yes. Well, Jim, thanks. It was always good to know you and you're always fair, but what I call a great analyst. You know our business. Sometimes, I say how the hell Jim knows all this stuff. But anyway, let me -- when I retired a few years ago, I never had thought of coming back, to be honest with you. But now, when things didn't work out, the changes that Board participating in May, Board asked me, I said no I don't want that job. But eventually, I felt that when the Board asked the second time, I felt the company needed me. And my style, Jim, is that, once I'm in, I'm 100% in. If you look at during the COVID, I believe I didn't miss any days, coming to the office and not because I needed to be here every day, but all my operational people are on the floor every day and I felt if they have to be there every day, I have to show up and support them. That's Sanmina's culture. I'm excited what's in front of us. Company -- our Board is there looking for succession planning all the time. I'm lucky that we really have a great middle management. And there's a lot of excitement behind. I believe what's in front of us, and I'm not going to leave this company with -- how do I say, I wouldn't leave when things are flying, and they're flying to the level that are not needed to be. I still want to do those margins that are better than where they are today. And I want to get -- I'm going to see a little bit more growth than what we had in the last couple of years. I think we can accomplish that in the next couple of years. Hopefully, this material gets resolved, the supplies in '22, and then we can start flying.

Well, your efforts haven't gone unnoticed. Your performance put up in your financial statements definitely support the effort goes on to that of your profitability, your growth and such. So keep it up. And I want to officially thank Jure, the Chief Executive Officer, and Kurt, the Chief Financial Officer for joining us here today. And this now wraps it up. Thank you so much for joining us.

Thank you, Jim.

Thank you, Jim. And thanks for joining everybody. Bye-bye. Thank you.