Good day, and thank you for joining us for the Sanmina Corporation's Second Quarter Fiscal 2021 Earnings Conference Call. I will now turn the call over to Ms. Paige Melching, Senior Vice President of Investor Communications. Please proceed.

Thank you, Catherine. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Second Quarter Fiscal 2021 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. Joining me on today's call is Jure Sola, Chairman and Chief Executive Officer. And Kurt Adzema, Executive Vice President and Chief Financial Officer. Before we begin our prepared remarks, let me remind everyone that today's call is being webcast and recorded and will be available on our website. You can follow along with our prepared remarks and the slides provided on our website. Please turn to Slide 3 of our presentation or the press release, safe harbor statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results could differ materially from those projected in these statements as a result of a number of 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 the forward-looking statements made in the earnings release, the earnings presentation, the conference call, or the Investor Relations section of our website, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Included on our press release and slides issued today, we have provided you with statements of operations for the quarter ended April 3, 2021, on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, noncash stock-based compensation expense, amortization expense, and other unusual or infrequent items. Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial information. 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'd now like to turn the call over to Jure Sola.

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome. Again, thank you all for being here with us today. I'd like to make a few comments. But first, I would like to say that I'm very proud of our leadership team and our employees for managing through challenges around COVID and material shortages. Despite these challenges, the Sanmina team delivered strong results for the second quarter fiscal year 2021. Definitely, this was a great team effort, and most importantly, we were able to meet the needs of our customers. For the agenda we have is that Kurt will review the details of our financial results for you, I will follow with additional comments about Sanmina's results and the future goals, then Kurt and I will open for questions and answers. And now I'd like to turn this call over to Kurt. Kurt?

Thanks, Jure. Please turn to Slide 5. In the second quarter, our team did an excellent job of managing through the challenges related to the supply chain constraints and COVID as well as the typical seasonality, leading to strong financial results. Q2 revenue of $1.7 billion met the midpoint of our outlook of $1.65 to $1.75 billion. Q2 non-GAAP gross margin improved to 8.6%, primarily due to a favorable mix in the CPS segment. Q2 non-GAAP operating margin at 5% was consistent with the prior quarter despite lower revenues due to strong gross margins. Finally, Q2 non-GAAP fully diluted earnings per share of $1.01 exceeded our outlook of $0.76 to $0.86, primarily as a result of the favorable mix in the CPS segment and management's focus on driving efficiencies. Please turn to Slide 6. This slide shows the quarterly trends of our financial results. You can see the excellent job our team did managing through the challenges related to the supply chain and COVID. Non-GAAP gross margins have now exceeded 8% for the last four consecutive quarters. Non-GAAP operating margins have been 5% or greater for the last three consecutive quarters. And finally, non-GAAP fully diluted earnings per share has exceeded $1 for the last three quarters. If you now, please turn to Slide 7. Here, you'll see our IMS revenue was $1.37 billion. The decline in revenue was due to the impact of the typical seasonality and supply chain constraints. Non-GAAP gross margin for IMS declined to 6.9%. This was due to the lower revenue level as well as a less favorable mix. Components, Products and Services revenue grew to $361 million from $319 million in the prior quarter. Non-GAAP gross margin for CPS improved to 14.2%, primarily due to the higher revenue level and favorable mix. Again, overall, non-GAAP gross margin for the quarter improved to 8.6%. Please now turn to Slide 8. Let's talk about the balance sheet. Our balance sheet remains strong. Cash and cash equivalents increased by $59 million to $575 million at the end of the quarter. We continue to maintain a low debt-to-cash ratio of 0.6x. Between cash and availability under our revolver, we have approximately $1.3 billion of liquidity. We generated $81 million of cash from operations in Q2 and have generated $143 million year-to-date. Free cash flow for the quarter was $67 million, and we've generated $117 million quarter to date. Net capital expenditures were $14 million compared to depreciation of $27 million. Overall, our balance sheet gives us the flexibility to support our long-term objectives. Please now turn to Slide 9. Here, you'll see our balance sheet metrics continue to be strong. Inventory was down approximately $34 million. Our team continues to do an excellent job focusing on inventory management, which continues to be challenging given the uncertainty around the supply chain and COVID. Cash cycle days were 58.2. Non-GAAP pretax return on invested capital was 27.6%. We believe this high rate reflects our focus on operational efficiency of the business. Finally, please turn to Slide 11. We'll talk a little bit about the outlook. We expect Q3 revenue to grow and to be in the range of $1.675 billion to $1.775 billion. Overall, customer demand is expected to be stronger, but there is uncertainty related to the supply chain constraints and COVID. We expect non-GAAP gross margin will be in the range of 7.8% to 8.4%. We expect non-GAAP operating expenses to be within the range of $59 million to $61 million, and non-GAAP operating margin to be in the range of 4.4% to 5%. We expect non-GAAP other expenses to be approximately $6 million and our non-GAAP tax rate to be about 18.5%. We expect non-GAAP fully diluted share count to be about 67.5 million shares. When you consider all this guidance, our outlook for non-GAAP diluted earnings per share for the quarter is in the range of $0.84 to $0.94. We expect capital expenditures to be around $20 million and depreciation and amortization to be around $27 million. Demand is expected to be stronger. However, there is currently a lot of uncertainty related to supply chain constraints in COVID. I'm confident that our team, working closely with our customers, will navigate well through this challenge and that the company is well positioned to benefit from the ultimate economic recovery.

Thank you, Kurt. Ladies and gentlemen, let me tell you more about the business environment for the second quarter, and outlook for the third quarter, and the rest of the calendar year. As you heard from Kurt, Sanmina delivered strong financial results for the second quarter. Our performance in this quarter is a testament that hard work is paying off. Key drivers in this quarter were: we had stable demand that was broad-based end market demand; we had a favorable business mix driven by growth in Components, Products and Services; we have great operational execution as we are continuing to drive efficiencies. I think our supply chain did an excellent job. I would say, management executed well despite some of the supply challenges that we are still wrestling with; and excellent cash management. We delivered strong cash flow. Sanmina is executing well in this dynamic environment. During the second quarter, we expanded and grew our leadership with our strategic customers in the key markets that we serve. In summary, we are building for a better future. Please turn to Slide 13. Now let me tell you more about second quarter revenue by end markets. We have stable demand, but material shortages impacted revenue by approximately $50 million to $75 million this quarter. Our top 10 customers accounted for 53.6% of our revenue. Communication networks and cloud infrastructure was 42% of our revenue. And industrial, medical, defense, and automotive markets accounted for 58%. Overall, revenue was down slightly about 3% comparing to the first quarter of fiscal year '21, mainly driven by material shortages and some seasonality. I can also tell you that the book-to-bill for the quarter was strong, over 1.1. Please turn to Slide 14. Let me give you a few more comments on the third quarter and market's outlook. Overall, we are seeing improvements in demand continuing. For the third quarter, today, we are seeing relatively stronger demand. We're forecasting that approximately 60% of our revenue will be from industrial, medical, defense, and automotive markets, and 40% in communication networks and cloud infrastructure markets. For industrial, we're forecasting overall good demand with upside potential. For medical, we're seeing some slower demand for Q3, but we expect a pickup in the second half of the calendar year. For defense, we continue to have strong demand, and we are winning long-term projects. I can tell you the backlog continues to grow in that segment. Automotive, we're starting to see stable demand improving. For communication networks, which includes networking, advanced optical systems, IP routing, and 5G mobile networks, we are seeing stronger demand going forward. For cloud computing, high-end computing, and storage, we're starting to see nice positive improvements. While there are still challenges around supply chain and COVID, we are very focused on continuous improvements, as discussed in my presentation and Kurt's, we have a lot of opportunities in this market. The key drivers for margin improvements going forward are: continuing to drive efficiency; improving the mix of the business; and driving profitable growth. I can also tell you that the pipeline remains healthy and visibility is improving. Based on a present customer forecast and pipeline of growth opportunities, we feel very positive about the rest of the calendar year 2021. The goal is to deliver solid financial metrics for the rest of the calendar year of 2021. We are positioning Sanmina for a better future. Please turn to Slide 15. Let me tell you more about management priorities for fiscal year '21 and beyond. The key to our success is delivering competitive advantage for our customers. We do that by providing industry-leading end-to-end technology solutions. We're continuing to differentiate our industry-leading capabilities. We continue to build on our strong customer partnerships, and we are expanding to new customer partnerships by partnering with the market leaders. Management is focused on driving profitable growth, and I believe that we are well positioned as the market recovers. As I mentioned, the pipeline is strong. We expect to see nice growth in the next 1 to 2 years. Short-term, our focus is on supply chain and logistics. We are experiencing material shortages across all electronics components. We have a strong supply chain, the supply chain group, and we have one global IT system. Based on our structure, we believe we have the right capabilities to be able to communicate with all our key suppliers and customers around the world instantly. But more importantly, I believe we have the right management team that will be able to manage through this and deliver the right results. So back to financial metrics. We are driving sustainable financial metrics by improving profitability. I still believe there's a lot of room for margin improvements. Our jobs are to unlock the total value of Sanmina's capabilities by maximizing the operating leverage of each business group, what I call internally back to basics. I believe that the strong and consistent financial results would deliver industry-leading shareholders' value. Please turn to Slide 16. In summary, as you heard already, we delivered respectable results for the second quarter: Revenue, $1.7 billion at the midpoint of our outlook; non-GAAP operating margin of 5%, exceeding outlook; non-GAAP diluted EPS of $1.01 exceeded outlook; strong free cash flow of $67 million; and non-GAAP pretax ROIC of 27.6%. So for the third quarter, as I mentioned, we have strong demand. The key for the third quarter is to continue to manage the supply chain and work around COVID daily challenges. As management, we remain focused on financial metrics because we still believe there's a lot of leverage in Sanmina's business model. For revenue outlook, as Kurt mentioned, we're planning to deliver between $1.67 billion to $1.775 billion. And non-GAAP diluted earnings per share outlook of $0.84 to $0.94. In summary, overall, we feel good about our future. Ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we're now ready to open the lines for questions and answers. Thank you, again.

Our first question comes from Ruplu Bhattacharya with Bank of America.

Jure, during the prepared remarks, you said that visibility has improved. I was wondering if you can give us your thoughts on the second half of the fiscal year versus the first half. Do you think the second half can be stronger in terms of revenue than the first half? And then when we look at the full year fiscal '21, do you think you can grow revenues this year? I mean, do you think low single-digit year-on-year growth is possible? Just any thoughts you have on the second half and full year revenue outlook, just puts and takes, what are you seeing?

Well, Ruplu, first of all, definitely, as I mentioned, visibility is improving. Right now, our biggest challenge is around the materials, it's not about the demand. I think if we can get all the materials, definitely, we can see the growth year-over-year, like you said, small percentages. As we look at the calendar year for us, that will be the first quarter of 2022. Again, it's all about materials. Demand is there, as we are seeing today. The good thing about our customer base, Ruplu, is that they are planning ahead more now than I've seen for a long time. So we have visibility, in some cases, as much as four quarters out. As I said, it's all about managing the material. We have a good team in place, both in purchasing and operations and planning. As I said, I think we have one of the best IT systems in the world. We're globally connected. We see—we can look at everything that's going on in real-time. So we believe that we have the right systems in place to be able to get through this. But the only way we're going to get through this is really working very closely with our customers and the key suppliers. So I'm very optimistic, but a lot of work is left.

Yes. No, that makes sense. Jure, can you also drill down a bit into the communications end market? What are you seeing in optical versus networking versus wireless? Any details you can give us on that end market?

Well, first of all, let me make a comment on 5G mobile networks. That's starting to pick up nicely as we thought that it would start in the third and fourth quarter and continue for the rest of the year. So that's moving in the right direction. Our networking, as I said, our optical, which is a lot of it is driven by our advanced optical systems and optical modules that are part of the business, is very healthy. Customers are giving us upsides now. It's just fulfilling the orders, to be honest with you. So especially short-term, we see a lot of demand in that market.

Got it. I also had a couple of questions for Kurt, if I can. The gross margins in CPS, the Components, Products and Services improved a healthy 200 bps sequentially. Can you just drill a little bit into what drove that? Were there any one-times? And do you think that level of margin is sustainable going forward?

Sure, Ruplu. I think, obviously, the biggest contributor was the growth. We grew from a revenue perspective, basically over 10% quarter-over-quarter, going from $319 million to $361 million. So that's the biggest part. Inside of CPS, I think the products that we were selling there are some of our better products. So we did have a favorable mix. So I think it's a combination of those two. But certainly, volume or revenue level always helps. In terms of what's achievable in the long-term, I mean, we're continuing to—as Jure talked about, drive efficiencies. There are going to be ups and downs in quarters depending on revenue level and mix, but we're not satisfied, and we'll continue to drive operational efficiencies. As that business grows, that revenue growth will help us continue to improve margins over time.

Got it. And for the last one, Kurt, if I can ask you. Can you give us your priorities for cash in this environment? I mean how would you balance reducing any more debt or taking on debt to do acquisitions, share buybacks? Any thoughts on uses of cash?

Sure, absolutely. So our first priority is always investing in the business. We have plenty of opportunities with our customers and are looking at how we can expand those relationships and investing capital to serve our customers' needs. So that's always priority number one. Again, as you've seen, our cash continues to increase. We have been able to lower our leverage. So we'll continue to do that. In terms of M&A, we have a pretty high hurdle. We'll continue to opportunistically look at that. Certainly, if the right deal came along, we're going to look at it. But our priority is really focused on organic growth at this point, but we don't rule anything out.

Your next question comes from the line of Jim Suva with Citigroup Investment.

It's been a tough year or two for the entire world and Sanmina, as well as your customers, suppliers, and employees. As you look back, whether it be component shortages now, or previously airplane shipping shortages, and before that, shortages due to geopolitical sourcing and assembly, and even COVID? Is there a view that maybe footprints need to be changed? Or maybe the answer is working capital? I'm wondering if there's a need to hold more chips now more than ever to meet demand because it seems like the demand is there. Any strategic views on—is that kind of the best use of working capital? Should we consider days of inventory as a kind of permanent change? Would that be prudent? Or maybe some other priorities?

Yes. Jim, those are all great questions, and I'm not saying that just to make you feel good, but they are excellent questions that we wrestle with every day. First of all, yes, you're right. These were challenging years for many different reasons. But I will say this pandemic was probably the biggest challenge to all management around the world, and it was the biggest challenge to Sanmina's management. We also learned a lot. We learned a lot about how to look at things differently. We were able to tune things up, and we got a lot of great ideas from our people around the world, which made us a better company today. We had to tighten things up to be able to get through this environment. Yes. You're right, material and logistics. Both remain challenges. Back to your question regarding a global structure. Yes, the world is different today than it was 10 or 20 years ago, and I think that will continue to change in the next five years. We tuned that up pretty well in Sanmina's case. I think we have a very lean structure today around the world. We don't need to do anything drastic; it's really more about tuning up. If I look at our structure today, it will be driven by the growth. As growth comes back, we'll be adding more capacity around the world. Not too much face-wise, but just adding more capabilities to meet our customers' demand. Back to the working capital, I mean, as you know, you've been in this business a long time, we all dislike extra inventory. Our customers hate it; we hate it. We can't afford to have too much. What we like is a perfect supply chain, with everything always on time, never too much, and with no shortages. Those days are gone. Yes, we're definitely looking into—actually talking to our customers to maybe, in some cases, make a bigger commitment to suppliers so that we have the components, not just for the third and fourth quarter, but three quarters from now, four quarters from now. Our key customers, I call them partners, are working with us on that. In our model, Jim, as you know, that's got to be covered by our customers. We can't take the risk of carrying extra chips unless they're guaranteed by our customers. We are working on all these things. Definitely, there will be a lot more focus on, as I said in my prepared statement, on supply chain. If we can get all the material we need, we can ship a lot more today. These are good challenges to have. The environment is changing for the positive, and I'm hoping that this economy will continue to improve. I believe that if it does, I think we'll do fine. I hope I've answered your questions; it's challenging to answer all those details as you asked—it's something we deal with every minute.

We have a question from Christian Schwab with Craig-Hallum Capital Group.

Congrats on the good execution, Jure and team.

Thank you. We always leave you for last because of the best questions.

You talked about the $50 million to $75 million impact in component shortages in the most recent quarter. What is the impact that you're guiding for in the most current quarter?

Well, first of all, we already gave the guidance, and that's all calculated in that. Hopefully, what we plan is that everything will be there. Yes, definitely, we discounted that, and we'll see if we can get more materials. I think then it will be easier to ship. But yes, that's all taken into consideration. I'm not trying not to answer that directly. But really, right now, there are a lot of moving parts in the material. We are definitely planning; we have a lot more on the floor that we are planning to bring in based on what we are forecasting because certain things we know will move out. We are bringing everything else in to fill in once we get the right components. There are a fair number of moving parts, but we feel confident, Christian, that we'll manage it and deliver on our guidance.

That's great. A follow-up on that, Jure, is there—should we assume that there's a long shelf life to the type of products that are being impacted, meaning that we kind of lost out on shipping $50 million to $75 million you thought due to component shortages? Should we assume these are long-life products, and this is forever lost revenue, or is it revenue that happens as soon as the components can occur?

I wouldn't say specifically what we couldn't ship last quarter, we will be shipping that this quarter. These are all custom-made products for infrastructure. As you know, we build all these mission-critical types of products that are needed. These are long-term programs. So I would say the majority of this stuff does not just disappear.

Great. That's what I expect. My last question has to do with operating margins. We have successfully navigated COVID and component supply shortages and have operated at a 5% or greater operating margin. Can you kind of give us the puts and takes to why we're not at those types of levels, the midpoint being below that?

Could you repeat that question regarding, I missed you there first?

No, I was just saying that you guys have operated at 5% operating margins for three quarters during COVID issues as well as supply chain issues. Now you're guiding a little bit below that at the midpoint. Is that conservatism given the environment? Or is there some type of mix change in the business that we should all be aware of?

Yes. So let me try, and then Kurt can take it over. First of all, we are still operating, and I hate to repeat myself with a lot of uncertainties around COVID. As you know, right now, if you look at what's going on in India, what's happening in Southeast Asia, some of those countries, we don't know what's going to happen with COVID. So there's a lot of stuff going on in those regions. So far, we've been lucky. We've never been shut down. We kept our—I think our management kept our people pretty safe, and we hope to continue with that, but there's still risk involved. I think we're trying to be realistic. Our goal is both Kurt and I stated it, and maybe more me than even Kurt, I believe there's still room for improvement in the margin. We know that. Not everything is running perfectly. So I think it's all about the mix of the business. If that comes in and, on the growth side, if we achieve growth and the mix changes, the margin will improve a lot faster. Kurt, anything else you want to add?

No, I echo that. It comes down to—given the uncertainty of the supply chain, it's hard to know what the revenue is, much less the composition of the revenue. It's hard to forecast that. So I think from a gross margin perspective, obviously, we want to be conservative, and that obviously impacts the operating margin level. But certainly, our goal is to provide consistent financial results quarter-to-quarter, and we're going to do our best to do that again this quarter.

Well, ladies and gentlemen, that's all we have today. Hopefully, we answered some of your questions, if not all. Please get back to us. Otherwise, we'll be talking to you in the next, I guess, 90 days from now. Thank you very much for your support. Bye, bye.

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