Sanmina Corporation (SANM) Earnings Call Transcript & Summary

Welcome, everyone, to Bank of America's 2025 Leverage Finance Conference. I'm Ana Goshko, and from the credit research side, I cover technology and telecom. And I'm thrilled to have Sanmina with us today, and we have Jon Faust, the company's Executive Vice President and CFO. So Jon, thank you so much for being with us.

Yes, thank you for having me.

Okay. Great. So just in case with anyone in the audience that's new to the Sanmina story, if you could just start with like a minute or 2 summary of the company's business.

Yes, absolutely. I mean, first, let me just start off by saying for all the people listening before we talk about the business. I just want to remind you to take a look at our risk factors and our recent 10-K filing. So I wanted to make sure to point that out first. But yes, back in terms of Sanmina. So Sanmina is a global leader in the design and manufacturing solutions business. And our focus, which is a little bit different than some of our peers is on heavy regulated markets and very complex products, which is a different way of saying we don't play in the consumer space, but we do work across a multitude of end markets doing different services, and I'll talk about those too. But everything from communication networks and cloud infrastructure, to medical, aerospace and defense, industrial, energy, and we're very well diversified. And I'm talking about the legacy Sanmina business because we just recently closed an acquisition, and I'll talk about that too. But if you look at our legacy business, we are very well diversified across those groups. And we provide the full suite of services on a true end-to-end basis, which means that we like to engage on the front end of the product development, like early-stage new product introductions to really learn how to manufacture, design the products all the way to direct order fulfillment. And I'm talking about to our customers' end customers and pretty much everything in between. If you look at the size of our business last year, in fiscal year '25, we did about $8.1 billion of revenue, grew high single digits, generated about $621 million in cash. So the legacy Sanmina business is very healthy, and it's very well distributed across those end markets that I talked about. So I just want to speak about that a little bit, too. We like to group the 2 businesses or multiple end markets together. So we've got communication networks and cloud infrastructure. That's about 40% of our business, a little over $3 billion in revenue. And then the industrial, energy, medical, aerospace and defense and automotive is about 60%. And both were growing last year. Communication networks, cloud infrastructure was about 20% on a full year basis. The rest of the business, like low single digits, but overall in great shape. And just to add on top in terms of like how we manage our operations, we've got 2 businesses. So we've got IMS, which is Integrated Manufacturing Solutions, which is core EMS assembly type of work. But then we've also got a Components, Products and Services business. And that's where we look to drive vertical integration for our customers. We want to win the business to do core EMS type of work. But if we can also do the boards, if we can do metal fabrication, precision machining and plastics, that's how we look -- that's the type of programs that we look for. And the whole goal is to find customers that are interested in that. We're very selective about the customers that we want to work with, but then also the programs where we think that we can apply the things that we're focused on to provide them a competitive advantage. And that's really a key point to know about Sanmina. We're a very customer-centric company. Our CEO and Chairman is also a co-founder, started off in sales. And so he's always wanted to make sure that everything that we do is centered around how the customer operates. And then last point for people to know is just recently, at the end of October, we closed the acquisition of ZT Systems, which expands our business into the -- more broadly into cloud infrastructure. For the last 10, 15 years, we've been very focused on data center networking in that space. But with everything going on with AI and around the data center business, it was just something that we couldn't ignore. And if you look at the complexity of those products and what's happening with accelerated compute, GPU platforms, it's amazing what ZT has done there, but it really does fit our core strategy, back to my earlier point about heavy regulated markets and complex products. So very excited about that, but a key point being legacy business is doing very well. And now we've got a great acquisition that we just closed that we think is really going to help to transform the company going forward.

Okay. That's great. So a great introduction. So maybe we'd just start a few minutes on just getting a little deeper on some of the subsegments in the legacy business and then there's clearly like a lot to talk about on ZT Systems. And there's been a lot of AI talk everywhere including at this conference today. I think there's some -- a lot of to explore on that front there. But -- so if we start with -- so your big segment. So it's industrial, energy, medical, defense, aerospace, automotive. So I think as you pointed out, it's about 60% of revenue. So it's $5 billion for your last fiscal year. So starting with industrial and energy, I think that's the largest end market, right? And I think, you've noted there's new projects in the pipeline that are going to help to drive growth for FY '26. So you -- can you describe like what some of these projects are sort of customer size, contract length? And generally, like how much visibility do you have from your pipeline?

Yes, absolutely. I mean maybe I'll touch on that first and then just go into the end markets. But generally, with most customers, we get about a 12-month outlook, and we'll meet with them regularly, like multiple times per month, sometimes weekly. So we get pretty good visibility. And when you can really tell that the business or the end market is getting more stable is when those forecasts don't change, when they're very volatile from 1 week or 1 month to the next, that even the customer, our customer doesn't have great visibility. But we've been seeing that those forecasts are becoming much more steady as of late, which gives us a lot of confidence as we go into FY '26. Now if you take the energy side of industrial and energy, it was doing great all last year. It's a bit of a mixed story between the 2. And the type of programs we do there is like power storage, power controls, things of that nature. And again, with the broader AI ecosystem, you can see a lot happening in the power space. So that's an area that did well last year. We expect it to continue to do well. Industrial has been a bit more mixed. And we do multiple things. We're pretty well diversified within industrial. So on one side, we do like handheld equipment for police officers, firemen, those types of products. That did well last year, not huge double-digit growth, but good solid growth. But then we also do things for like the semicon space. So think of companies and we don't talk customer names in specifics, but if you think about the ASMLs, the Applied Materials of the world, that's been a lot more under pressure. And we do both integration work there, but also precision machining. So if you think about the big aluminum blocks, for example, now that was under pressure as of late, but we're starting to see green shoots of that starting to get better as we go into this year.

Okay. So medical second. So what areas of the market do you participate in and what's the growth outlook for Medical?

Yes. Medical is also kind of a Tale of Two Cities, a little bit mixed last year because I had mentioned that we're pretty well diversified across our end markets. But then even within the end markets, we try to diversify and medical is a good example where we do everything up to large equipment in hospitals. So things like CAT scan machines, products like that all the way down to wearables and then the stuff in the middle, too, like blood testing machines, glucose testing machines for local doctors' offices. Now the hospital equipment, ever since the pandemic, that's been the part that's been a little bit more constrained and pressured even last year and probably in the first half of this year. But the other part of the medical business has done well. And that's why when you think about that overall segment, if you look at our performance in fiscal year '25, low single digits growth. It was because kind of like the medical example or even industrial and energy, some things doing well, some things not doing as well, but balancing out and growing a little bit overall. But with the forecast that we're seeing from the customers and the stability, like we're starting to see more confidence that, that's going to get better in the second half.

Okay. So defense and aerospace. First, can you give us a sense of the mix of actual defense versus potentially like commercial aerospace and what's that -- like what are the trends and the growth outlook?

Sure. Yes. So we've got 2 plants specifically in the U.S. that came through an acquisition of SCI, like early 2000s that we did. One plant is focused specifically on the Department of Defense, and that's been doing very, very well. And then the other plant is focused on commercial. That's because there's different rules and regulations and different things that you need to have in place between the 2, but aerospace and defense overall, if you look last year and going forward, has done quite well for us. And it's a great business to be in because it's very annuity-like, especially the DoD side of the house, like once you get into these programs with the government, they stick around for a long time. So it's a very attractive business to us, something that's done well. And unfortunately, there's still a lot of conflict in the world. So it's not like the greatest driver, but that's what's leading to what we're seeing in the performance of the business. And we're very much indexed to U.S. and like some specific U.S. allies like for our aerospace and defense division.

Okay. And then finally, there's automotive. So I think the softness in autos is pretty well known. And so like where are you in the sort of auto supply chain? Like where do you play. And then -- but I do think that the company has recently highlighted some new opportunities to drive growth. So if you can elaborate on that.

Yes. So for automotive, we're very much indexed to the EV side of the house and U.S. EVs in particular. We started out from a product perspective, like in infotainment, those systems, but that's evolved to be drivetrain systems, power controls, other things. So it's been expanding. And that's been intentional. That's been part of our strategy is to get into automotive and then expand into different areas of the business. So what was interesting if you go back to the first half of last fiscal year, we are one of the few EMS players out there talking about how automotive was good for us. Now it did slow in the second half, and we're still seeing some of those dynamics now. But based on some of the forecasts that we're seeing, we do think in the second half, that will get better. And it's not so much because the broader automotive market is getting better per se, but it's more about expanding the set of products that we're building and that we're doing. And generally, with some of the same customers, but with some new customers, too. So we're winning new programs, bringing in some new customers, and that's how we expect to drive growth there.

Okay. So then shifting to cloud -- well, communications networks, cloud and AI infrastructure. So lots of like sexy stuff in there, so that's about 40% of revenue, about $3.1 billion. So on the communications network subsegment there, so that is 1 of the company's largest end markets, I think, second, potentially to industrial energy. So you've cited strength like what products are driving that strength? And what geographies really.

Yes. So communication networks, if you look at the history of Sanmina, I mean that's the area like the traditional telecom end market where the company really started and grew and expanded into the company in the set of like the portfolio of products and services that we have today. So our capabilities in that space are great. And communication networks hasn't been like the sexy market to be akin like cloud and AI has been as of late, but it's still a great business to be in. We've got some great customers. So I think optical modules, transceivers, like things of that nature, we're continuing to invest and grow there. And even if you look to like last year's performance, we combined the 2 end markets together as we didn't talk specifics of the growth profile, but both sides were growing high like double digits. So every single quarter was about a 20% year-over-year growth and it was both sides of the house. So it was very good in that space, and that's an area where we're going to continue to invest because if you think about the traditional telecom players like the Siennas of the world, Momentum, things like that, they're benefiting from the broader ecosystem of AI as well and trying to get into more data center applications. And we think that will be a good business for us. And similarly, for cloud infrastructure is a good performance, too. I mentioned earlier, we were -- historically, the legacy Sanmina business has been more focused on data center networking. Now the ZT acquisition is going to expand the addressable market that we have to other areas of data center. But data center networking has been a great business, too. So we're excited about that profile and then just adding ZT on top of that.

Yes. Okay. So for cloud and AI infrastructure, so a lot of times, we'll kind of create -- on the research side will create sort of schematics of like who makes the data center, right, like of all the components. So what are the actual kind of components that you manufacture that go into data centers and AI infrastructure?

So legacy Sanmina was like data center networking equipment. So I think like the Arista's, the Junipers of the world, so building products for them for those types of companies, like that was the predominant or the bigger piece of that end market for us. But we also do things out of our CPS like components, products and services portfolio. So rack fabrication, for example, like metal fabrication, and we've also got our own storage offering like a white box storage offering. It's a division called Viking Enterprise Solutions, and that's included in that category, too. And that's where we do full design engineering, sell it as a white box to multiple customers and big large customers, hyperscalers as well. So that was the legacy business that we had. And the reason that we were just focused on that historically was back to some of my earlier comments just focused on the very complex products. Because for many years, we used -- Sanmina used to be in the rack integration business 15, 20 years ago, but it started -- decided to get out of it, not started, but did get out of it because it was becoming more commoditized. Now obviously, that's changed, which is why we're getting it back in and we can talk about ZT Systems more, but that's kind of like what we have been doing over say, like the last 15 years in cloud infrastructure.

Okay. So ZT Systems. So it's ZT Systems, data center, AI infrastructure is officially what it is called, you got it all in there. So you purchased it from AMD. I think it's got $5 billion to $6 billion of revenue...

Correct...

Sorry, what? Rate and a margin similar to Sanmina's, right? So midpoint, maybe about $390 million roughly of EBITDA. Okay. And then the purchase price was about $2 billion.

Yes. I can walk through that...

Talk about the valuation.

Sure. Yes, I can talk valuation but maybe just to start with the business. So ZT Systems has been around for about 30 years. So very similar in terms of like culture. It was a manufacturing business, but it was a private company. Now they used to be focused on lots of different areas. But for the last 15 years, it's been just focused -- the ZT systems just focused on data center. And more recently around accelerated compute. But if you look at the mix of the business today or even for the last 10 years, it's been around storage, general-purpose compute, so CPU-based platforms and accelerated compute, for large hyperscalers and OEMs, like that is what the business is. And they've been doing quite well. Now what AMD did, they announced back at the end of August in 2024 the acquisition of ZT Systems, and they were specifically interested in their design engineering capabilities. But then at the same time, they announced their intent to spin out the manufacturing division and to look for a partner. So that's ultimately what we bought and the way that the relationship works is we've now got a strategic partnership in place with AMD, where they're doing reference architecture design for accelerate compute platforms and we're their preferred MPI manufacturing partner. So that's kind of the nature of the transaction. It was a 2-part transaction on their end, right. Buying the company, carving in the design engineers and then looking for a partner to pick up the manufacturing, which works very well for us. We're super excited about that. The size of the business, as you said, if you look at our Q1 guide, we've only got 2 months of ZT included since we closed at the end of October. So we guided 2 months revenue between $850 million to $1.15 billion, so a midpoint of like $950 million in revenue, which if you annualize is like $5.7 billion. So that's kind of the size of the business that it is right now. But there's a lot of opportunity in that space. And now that we're a combined company, we can do a lot more of that joint planning because we have to decide what do we want the mix of the business to be? How much do we want to accelerate compute, how much storage, how much general purpose, like they're all good businesses to be in. But we're looking for the right type of programs. I made some comments earlier, like within Sanmina, we're always focused on things that fit kind of like our strategy overall, but are also advantageous for the customers. that's kind of like the state of the business today. Now in terms of the purchase price and the valuation, I think that was your other question, if I remember correctly. The way that we think about that is we did the deal based on tangible asset value plus a modest premium. And at the time that we announced the deal back in May 19, there was a target working capital number of $2 billion. Property, plant and equipment of like $250 million, and then we had a premium of $300 million on top of that. and that was half going to be paid half in cash, half in Sanmina equity, which AMD wanted. So an overall purchase price of $2.55 billion. And then there was an earnout like a contingent consideration, too, which is specifically tied to the performance of the accelerated compute business. But we only pay that out, if the business between us and AMD is very successful, which we hope it will be, so it will be really a win-win situation. But that's why people heard about the overall purchase price of $3 billion with the contingent consideration included. Now fast forward to when we closed the deal on October 27, the net working capital number came in about $1 billion lower. So ultimately, the purchase price comes down by about $1 billion on that front, too. And that was partially due to just timing. We closed the transaction earlier and very diligent working capital management by both AMD and ZT, because we wanted to make sure that we were only purchasing inventory that was committed from a customer perspective, like no risk to it. I mean in manufacturing, inventory is the lifeblood of the company, but you want to make sure that you don't have any risk there.

Okay. Great. You preempted a lot of my questions, so that's great, very comprehensive on ZT. So it sounds like it's been a good deal and got a good growth outlook and you've got that relationship with AMD going forward.

Yes, absolutely. First of all, the whole ZT leadership team, Frank Zhang, the CEO and founder and a lot of the other leaders coming over are just fantastic, very similar culture to Sanmina, do great work. The relationship with AMD is also fantastic. We're excited about that. They've had a lot of proof points in the market that shows their ability to be successful. So we're just now focused on doing our part, making sure that we can come in and do all the manufacturing do all the things that we're supposed to do well to help to support them and grow the business.

Okay. So now most of us are trying to get to 2026, but you guys are already 2026 because your fiscal year has already started, right? So kind of shifting to outlook. So for FY 1Q '26, which is December end. So for legacy Sanmina revenue, which is about -- you've guided it to be roughly flat sequentially, but up 5% year-over-year. But then to grow by high single-digit percentage to accelerate really throughout FY '26. So what's driving the acceleration for the legacy Sanmina business?

Yes. And we did want to guide legacy Sanmina like at a high level on a full year basis just because from an analyst and investor perspective, that's helpful with modeling. Now you're exactly right. Like if you take the midpoint of just legacy Sanmina in Q1, it's a little bit less than 5%. But back to like some of my comments earlier, if you think about industrial, medical, some of those end markets that were more under pressure, we're starting to see some kind of green shoots of those areas returning to growth as well. And we don't see the dynamics changing for the other parts of the business that we're doing well, like communication networks and cloud infrastructure. So that plays out the way that we expect. Outside of like Q2 is always a little bit of a sequential drop for us. But if you look to the second half, we do expect that growth to accelerate because we expect some of those end markets that were more under pressure to start to get better. And that's, again, based on customer forecasts, everything that we're hearing from customers today.

Okay. And then so operating margin, so I think your near-term target is like high 5s, low 6%, but your long-term goal is really 6% to 7%. So how long is that going to take you to get there? And what gets you there?

Yes. I mean, if I break it between the 2 parts, I mean if you look at legacy Sanmina, for the last couple of years, we've been continuing to make improvements in our margin profile, and we exited Q4 at 6%. And as we grow, there's different things that help that. One, you've got the fixed cost leverage. So we get some benefits of that. That helps the margin profile. Part of it is trying to grow that CPS part of the business that has -- if you think from a gross margin perspective, it's more in the mid-teens. It's about 20% of the company today. But if we grow that faster than the IMS side, you get some -- you get a lift from an operating margin perspective there. And just from an SG&A perspective, we don't have a whole lot to invest. So we should get some natural operating leverage. And then on the ZT side, as we had talked about earlier, the margin profile is similar to legacy Sanmina, but we're looking to drive more vertical integration there, too. We want to let ZT continue to do what they do well, which is the full system test, rack integration, all that work, like level 10 to level 12 and manufacturing speed. But then we want to vertically integrate with some of the capabilities that Sanmina has. So whether it be rack fabrication, the PCB work cables, things of that nature. That's all within CPS in that mid-teen profile. So we can execute on both sides, right, like continue to grow legacy Sanmina, make ZT successful, take advantage of the opportunity and vertically integrate. That's how we get into that 6% to 7% range.

Okay. And then on a combined basis with ZT, I think just a simple math. So the revenue is now about in the $14 billion range.

We didn't guide like -- yes, but if you look at the run rate that's sounds correct.

EBITDA, I think you are now $1 billion EBITDA company.

Yes, similar type of math, and that was what excites us so much about the acquisition that we did is just expanding into different areas of the market. So a true TAM expansion. And then yes, just grown like the overall revenue size and profile. But again, like key to what Sanmina does well, back to like either regulated -- heavily regulated markets or complex products, and we get a much larger company, so good profitable growth.

Okay. And then how should we think about free cash flow margin? So especially while you're growing, what's capital intensity and working capital needs like?

Yes. The dynamics for ZT will be a little bit different. One thing I can say about Sanmina, especially ever since I became CFO, is that the company even before I got there, very focused on maintaining a healthy balance sheet. We were all -- ever since I've been there in a net cash position, a very low gross leverage ratio. And that put us in a position to do this deal and not get overlevered. So we've set out from a fiscal policy perspective, a target range between 1% to 2% net leverage. As far as the cash, I mean, if you look at last year, we generated $621 million in cash flow from operations. We exited with the balance over $900 million. Now we don't need that much to operate. That was us being prudent, getting prepared for ZT. Because depending on how quickly that grows, and again, it's a new business to us. We wanted to make sure that we're very well capitalized. So we wanted our own cash. And then with the debt structure that we put in place, including like a new revolver -- upsized revolver, $1.5 billion, we think we've got all the capacity to support the growth of the business.

We've got a lot of cash right now.

Lot of cash.

So if I did -- I hope I did this right, but I think you've got over $1 billion like on a pro forma basis for the term loan transaction and -- right?

Yes, yes. From an overall like capitalization perspective, absolutely. So I mean you think about just legacy Sanmina exiting with $921 million in cash. But then you have the $1.5 billion revolver. We've got cash that's going to be coming over. We haven't talked about publicly the amount yet, but with ZT, we'll have cash coming over as well. And then we have the term loan A and the term loan B, $2 billion term loan A. Now we delayed $600 million drawn on that because that net working capital number that I mentioned earlier was lower. But right now, we think we've got everything that we need to help grow both the ZT business and scale that and the legacy Sanmina business while staying within the leverage ratio like the fiscal policy that we set out.

Okay. And then -- so we talked about your net leverage. What about your rating targets. I think you've been high BB from the agencies, got you at stable. Do you have a rating target? Do you like your ratings, your cost of capital or...

Yes. We've been 1 notch below like on both sides. Now we did come out, I did come out and specifically say that we intend to get to investment grade over time. And as I was talking with the rating agencies, even before we did the transaction in advance of the transaction then afterwards, if you look at the reports that they wrote on Sanmina, they all were saying the state of our balance sheet was pristine, but they said we didn't have the scale. And maybe if we did a transformative acquisition, that could give us the scale and the profile to get to investment grade. We -- now we've executed on that piece. Now of course, we had to go make ZT successful. But our intent is to get to investment grade. And I think if we execute on that, we'll have the profile to get there.

Okay. What about the appetite for more M&A?

So we're always looking for good opportunities as long as we stay within that leverage ratio. We definitely don't want to get over our skis. And thankfully, because of our balance sheet was in such a good position before we're able to do ZT. The purchase price was now a little bit lower, so we're in a good position. But we're going to wait a little while just to see how the business scales and grows, I mean that's our primary focus right now. But we're always going to be looking at opportunities to both complement ZT and that could be with engineering talent, different things that they need. But we talked about the legacy Sanmina business, too, that's doing very well. And so that's an area that we want to continue to invest in and the reason being is like we want to maintain a diversified portfolio, right? There was years back when Sanmina was maybe more over-indexed to the telecom industry and so forth. But for the last 5-plus years, we've done a great job of diversifying the business. Now getting in with ZT, getting deeper into cloud and AI infrastructure is great, but we want to keep growing that legacy business, too. So we'll be looking at potential transactions on both sides, as long as the ROIC is there and we don't violate our fiscal policies.

Okay. And then what should we expect for the pace of share buybacks?

So share repurchases we effectively have put on hold. From a capital allocation strategy perspective, we've always been opportunistic in that space. But ever since we announced the ZT deal, we had started to slow that. So if you look at like the second half of last year, now we had done a lot in fiscal year 2024. We pretty much returned all of our free cash flow to shareholders in the form of share repurchases. Now it's not to say that we won't start to do some again now. That's an area that we'll look at. But for us, from a pure capital allocation strategy perspective, it's all about driving growth, profitable growth. And we do it on the foundation of like looking at the ROI. So depending on whether it's our own CapEx investments organically, maybe some more smaller type of M&A or share repurchases. I'll look across all, Juri and I, and decide where we think the best ROI is for our money.

Okay. Great. So I think we've just got a few seconds left actually. But if there's anything -- any closing comments you want to leave the audience with? And what you're most excited about as you enter calendar year 2026?

Yes. Well, first of all, I just want to say thanks again for having me here today to be able to talk about Sanmina, but it's a very exciting time to be at the company. It's very rarely that you get in a position where you're -- you do an acquisition that's got a great amount of potential to help transform the company, but the legacy business is doing very well, too. So as we look ahead, it's going to be all about balancing those needs like where is the right areas to invest to continue to grow and scale the company, but stay true to our culture and the way that we want to grow, which is going to be all around profitable growth, not scale just for scale's sake, but a lot of opportunity out there as we head into the new year and excited about going to execute on that.

Okay. Great. Jon, thank you so much for being with us.

Thank you.