Good afternoon, ladies and gentlemen, and welcome to Sanmina’s First Quarter Fiscal 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Monday, the 29th of January, 2024. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communications. Please go ahead.

Thank you, Jon. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first quarter fiscal 2024 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 Jon Faust, Executive Vice President and Chief Financial Officer. Before I turn the call over to Jure, 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 and take note of our 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 factors set forth in the safe harbor statement. 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 in our press release and slides issued today, we have provided you with statements of operation for the first quarter ended December 30, 2023 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, non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense, and other unusual or infrequent items. Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, EBITDA, net income and earnings per share, we are referring to our non-GAAP information. I would now like to turn the call over to Jure.

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. And thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina leadership team and our employees for doing a great job. So to you, Sanmina's team, thank you for your dedication and delivering excellent customer service. And let's keep it up. Please turn to Slide 4. And now, ladies and gentlemen, I would like to introduce to you Jon Faust, Sanmina CFO. Jon joined Sanmina on December 18, 2023. He brings over 20 years of finance, accounting controls, and operational experience. Jon previously served as a Global Controller and Head of Finance, Transformation and Corporate Services at HP Inc. He was also CFO of Aruba, a Hewlett Packard enterprise company. And he held various leadership roles at Hewlett Packard Enterprises. Jon has a proven track record driving transformational business strategies. He's a highly accomplished leader with extensive background and I can tell you I'm very happy to have Jon on Sanmina leadership team. Now let's go to our agenda for today's call. You have Jon to review details of our results for you. I will follow up with additional comments about Sanmina results and our future goals. Then, Jon and I will open for questions and answers. And now I'd like to turn this call over to Jon. Jon?

Great. Thank you, Jure. Good afternoon, ladies and gentlemen. It's a pleasure to be here today and to be on my first earnings call for Sanmina. I've been with the company for about six weeks now, and I've really enjoyed meeting the team and learning about the business. Sanmina is a company that I have long respected during my many years at HP because of its customer-centric approach, focus on operational excellence, and overall reputation of being a market leader in the EMS industry. While I've only been here for a short time, my experience to date has only strengthened that perspective. I'm excited to be here and to work with Jure and the rest of the leadership team to continue to deliver on Sanmina's strategy and to drive value for our shareholders. With that, let's talk about the Q1 results. Please turn to Slide 6. First, I want to commend the entire Sanmina team for executing well and delivering financial results in line with the company's outlook while continuing to navigate the difficult period in the market. First quarter revenue was $1.87 billion, in line with our outlook of $1.85 billion to $1.95 billion. As a reminder, the decline in revenue results from the ongoing market-driven inventory absorption that we've been managing with our customers, which is unfolding in line with our expectations. Non-GAAP gross margin was 8.8%, up 10 basis points sequentially, and 30 basis points compared to the same period last year, which was at the high end of our outlook, largely driven by a favorable mix. Non-GAAP operating margin was 5.5%, down 20 basis points sequentially and 50 basis points compared to the same period last year, which is at the midpoint of our outlook, as we continue to carefully manage costs and make targeted investments when needed. Non-GAAP earnings per share came in at $1.30, based on 58 million shares outstanding on a fully diluted basis and at the high end of our outlook. Please turn to Slide 7 where I'll talk about the segment results. IMS revenue came in at $1.5 billion, down approximately 8% sequentially due to lower demand and ongoing customer inventory adjustments, with non-GAAP gross margin down 40 basis points to 7.6%, due to lower revenue and mix. CPS revenue came in at $394 million, down 10% sequentially, due to similar dynamics as the IMS segment, but non-GAAP gross margin was solid at 13% due to favorable mix and operational improvements we've been driving across the business. Now please turn to Slide 8, where I'll comment on the balance sheet. Sanmina has a very strong balance sheet, which is a key advantage of the company and a pillar of our value proposition to investors. Cash and cash equivalents were $632 million. We ended the first quarter with inventory of $1.4 billion, which is down 6% sequentially and down 18% from a year ago, as we have continued to focus on improving our inventory position. We continue to have one of the strongest balance sheets in the industry with low leverage, which allows us to both navigate complex market environments and capitalize on the long-term opportunity in front of us. Please turn to Slide 9, where I'll talk about cash flow and capital allocation. We did a great job managing cash this quarter, and as I've been reviewing Sanmina's capital allocation priorities, I'm confident we're putting our cash to use in the right areas. Each quarter, we evaluate our capital allocation requirements and look for opportunities to drive shareholder value, taking a disciplined ROI-based approach when making decisions. As a reminder, those priorities are to, number one, fund organic growth, number two, execute on strategic transactions, number three, reduce our debt and carefully manage our leverage ratio, and number four, do share repurchases, the actual mix of which depends on our needs and opportunities. To touch on a few highlights, cash flow from operations for the quarter was $126 million. Capital expenditures were $34 million as we continued to make investments in the end markets that will support Sanmina's long-term profitable growth. Free cash flow was $92 million. And during the quarter, we repurchased 2.1 million shares for approximately $106 million. And as of December 30, we have approximately $174 million left on our Board authorized plan. Going forward, we will look to do share repurchases opportunistically. To conclude on the Q1 actual results, overall, it was a strong quarter, as we delivered on what we said we would, despite the headwinds we face, as customers continue to adjust inventory levels. Please turn to Slide 10. I'll now cover our outlook for the second quarter, which is based on everything we are seeing in the market and forecasts from our customers. Our outlook is as follows. Revenue between $1.825 billion to $1.925 billion, essentially flat with the prior quarter. Now, while we're not providing guidance beyond the second quarter, we are seeing signs that demand and revenue should start to improve in the second half of the year, which Jure will elaborate on shortly. Non-GAAP gross margin of 8.3% to 8.8%, consistent with prior quarters and dependent on mix. Operating expenses of $60 million to $62 million, in line with normal levels. Non-GAAP operating margin of 5.2% to 5.6%. Other income and expense, approximately $12 million, in line with normal levels. A tax rate of 17% to 18%. We also estimate an approximate $3.0 to $3.5 million non-cash reduction to our net income to reflect our JV partners equity interests. Non-GAAP EPS in the range of $1.20 to $1.30 based on approximately 57 million fully-diluted shares outstanding. Capital expenditures to be around $40 million to support new programs and future opportunities as we continue to invest where needed to support our long-term strategy. And finally, depreciation of approximately $30 million. Overall, I'm very pleased with our performance this quarter and excited about the opportunity ahead. And now that I'm on board, I look forward to meeting with many of you and hearing your perspectives. With that, let me turn it back to Jure.

Thank you, Jon. Ladies and gentlemen, I would like to share additional insights on our financial highlights for the first quarter, as well as our end markets and outlook for the second quarter and the remainder of fiscal year ‘24. In the first quarter, we met our outlook and proved our ability to manage costs and operations effectively in the current macroeconomic climate. We are observing ongoing customer inventory adjustments along with a decrease in demand across the industry. Sanmina's strength in this situation lies in our alignment with market fluctuations. We maintain strong cost management and operational efficiency and are well-diversified in growth sectors. Our customers depend on Sanmina for our technical expertise, global reach, and industry-leading IT systems supported by Sanmina Smart Connected MES. Ultimately, Sanmina offers a competitive edge to our customers through reliable and consistent global performance. Now, regarding revenue distribution by end markets, we are active in a very dynamic environment. Our team delivered first-quarter financial outcomes that aligned with our expectations. Our revenue for industrial, medical, defense, and automotive sectors accounted for 67% of our total, totaling $1.257 billion for the quarter. This represented a quarter-over-quarter decline of 6.4%, attributed to inventory adjustments and reduced demand, particularly in the medical field. In the communication, networks, and cloud infrastructure sectors, we generated 33% of revenue, amounting to $618 million, with a 12.8% decline from the previous quarter, mainly due to inventory adjustments and decreased demand in those markets. The first quarter saw our top 10 customers representing 45% of our revenue, with bookings slightly better than the fourth quarter of 2023. We anticipate flat demand for the second quarter, but expect sequential growth in the latter half of fiscal year ‘24. Looking ahead, we've been investing in faster-growing and higher-margin markets, which are crucial for our future growth, such as Cloud, defense and aerospace, medical digital health, electric vehicles, renewable energy, industrial, and optical packaging. The cloud sector, particularly with the rise of AI and ML, presents numerous opportunities driven by the need to upgrade cloud networks. The defense and aerospace markets will continue to exhibit strong demand, while we maintain a solid customer base in medical digital health with positive long-term trends. The electric vehicle sector, including chargers, presents many new projects and opportunities. In renewable energy, we expect new projects to contribute to our growth, while our industrial business remains strong with new prospects. Our optical packaging business is thriving, especially with the push towards 800 gig technology. As for our priorities to ensure long-term profitable growth, the first is our commitment to a customer-centric culture, which enables us to forge strong, lasting partnerships with market leaders. This diverse customer base is crucial, and we're adding new strategic customers even in this market. The second priority is to provide leading-edge technology in heavily regulated sectors, offering comprehensive solutions from new product introduction to full systems. Our strong reputation for quality execution allows us to deliver products to market quickly. Third, we are positioned for long-term growth. Despite starting fiscal year ‘24 with a lower revenue base due to inventory corrections, we have a robust pipeline of new opportunities and anticipate improvement in the latter half of the year while continuing our investments in growth. Furthermore, we are optimizing our capital structure to support growth over the next two to three years, aiming for a revenue goal of returning to a $9 billion run rate and driving that to between $10 billion and $12 billion. Fourth, we are focused on margin expansion and generating cash flow. Our business model supports margin growth, with short-term operating margin targets of 5% to 6%. Historically, we've consistently exceeded that range. For the long term, our internal operating margin goal is over 6%, and we are confident we will achieve this while generating cash to fuel our growth. Lastly, we aim to maximize shareholder value in both the short and long term. As mentioned earlier, we opportunistically repurchase shares, with over $100 million spent in the first quarter. Additionally, Sanmina's business model still offers significant leverage.

Thank you, Jure. Ladies and gentlemen, let me conclude our remarks. We had a solid execution and excellent performance by our team. Revenue of $1.87 billion, in line with our outlook. We delivered a non-GAAP operating margin of 5.5% and we delivered non-GAAP diluted EPS of $1.30, and this is at the high end of our outlook. For second quarter revenue outlook, we're going to be at $1.825 billion to $1.925 billion. And non-GAAP diluted EPS, we're guiding between $1.20 to $1.30, which is basically flat to our first quarter. For the year, as we already said, we are seeing ongoing customer inventory absorption and softness in demand for the first half of this year. But we believe for the second half of the year, we expect to see sequential improvements. Ladies and gentlemen, now I would like to thank you for all of your time and support. Operator, we are now ready to open the lines for question and answers. Thank you all again.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Christian Schwab from Craig-Hallum Capital Group. Your line is now open.

Hey, Jure. Can you just specifically, on the growth markets, can you tell us which one or two that you guys anticipate driving the sequential growth in the back half of the year?

Well, as I mentioned earlier, if you look at our industrial, medical, defense, and aerospace markets, we believe those markets are pretty stable for us. Yeah, there's some inventory adjustments going on now, but we expect to see nice improvements in the third, especially as we exit our fiscal year and then first quarter of calendar year next year. So those are the markets. Also when it comes to, let's talk about communication networks for us, if you look at that market, we had a major inventory correction with some of the projects there. Based on those, we see some improvements in the second half, and some improvements will probably take longer than a couple of quarters to get there. But on the cloud infrastructure side, a lot of our networking customers are into cloud AI, and we are involved in a lot of the new projects that are coming up that basically will be upgrading the cloud infrastructure, and we believe that Sanmina will have a fair amount to participate in that segment in the second half of the year and beyond.

So on the communications equipment part, do you anticipate that exiting this quarter, for the most part, each customer's inventory levels vary, but do you think after this quarter, the worst is kind of behind you, or is there just going to be puts and takes that some have, as you suggested, a few more multiple quarters of digestion and others are possibly returning to ordering again?

I expect to see improvements in the third quarter of our fiscal year across various markets, but more significant improvements may not happen until the fourth quarter. I believe the worst is behind us. We'll see how this quarter goes, but I don't know if I can pinpoint when we hit the bottom. However, based on what I'm observing and feedback from key customers, I anticipate that our shipments should improve in the third quarter. Overall, I feel confident that the most challenging times are over since some of these communication adjustments have been happening for the last two and a half quarters.

Right, correct, yeah. So then my last question, Jure, on the optical, you talked about seeing strength, in particular, at 800 gig. Are you guys seeing any strength or well positioned as the industry possibly starts moving to 1.2 terabytes?

Yes. Yeah. We are working on some of those new programs, yes, especially the pluggable side of the business.

Okay. And you would anticipate that that market would be solid in '24? Is that fair?

For us, I think definitely there's some positive movements around, but I would say end of '24, '25, we expect a fair amount of upside in that segment.

Hi, thank you for taking my questions. Congratulations on the following quarter here, despite the challenging environment.

Thanks, Anja.

I also want to dive a little bit further into the end markets as well and the medical there. We heard from other peers there that there has been some inventory corrections there. What are you hearing in terms of that and do you have new progress that are ramping that will sort of offset that if that's prolonged longer than anticipated?

There is currently an inventory correction happening with nearly all of our customers, though its impact varies. In communication, the effect has been more significant, while on the medical side, we experienced a decline in demand and some inventory adjustments during the last quarter. We anticipate this trend will continue into the second quarter but hope for improvement in the third and fourth quarters of this year. Approximately 20% of our revenue comes from medical, making it a strong customer segment for us. Over the next two years, we have numerous new programs launching, which will provide opportunities for growth, although we are also undergoing some upgrades.

Okay, were there any end markets within those groups that were particularly strong?

Defense and aerospace continue to show solid demand for us. We are still pursuing certain components, particularly those involving unique technology. The demand for renewable energy is currently strong; however, many of these initiatives are new and we are in the process of ramping them up. Our industrial segment performed well, contributing around 27% of our revenue, which remained robust. As mentioned earlier in my prepared statement, we are beginning to see a significant amount of demand from our customers in the cloud sector as they transition to support AI and machine learning.

Okay, thank you. And in terms of inventory, it seems like you are doing a great job in managing that as well. Do you think we should continue to see improvements from here or where are you targeting now?

Yeah, we definitely expect to see improvements. Now with my new CFO, I should have a lot of improvements. So, no, we do expect improvements and we have programs internally that we're working very hard on and with our customers. We learned a lot through the COVID days on how to manage it and so on. So there's a lot of focus both on a customer side and of course on our side to make sure that we are smarter going forward on how do we manage inventory, especially if we have hiccups in our industry like we had with COVID.

Okay, thank you. And we're talking eventually achieving $10 billion to $12 billion revenue in a couple of years here and 6 plus percent operating margin. What kind of revenue level do you think you need for that operating margin?

For us, it's a blend of our business segments, specifically how much comes from our technology group versus our products. As we approach the $9 billion mark, we finished last year with around 5.9% to 5.8%. When we reach the run rate of $9 billion or more, we anticipate being in the high fives to low sixes in terms of operating margin. The mix of our offerings is crucial. We are heavily investing in new technology products and components, as well as in defense industries and lithography. We have partnerships in Europe for lithography equipment and precision machining. There’s a lot on our agenda, and if we can bring these elements together effectively, we need to focus on growth because we've already allocated significant funding for it. However, our growth must be strategic; we don't want to expand just for the sake of it. It's essential to ensure we maintain respectable margins.

Okay, thank you. That was all from me. I’ll get back in the queue.

All right. Operator, we have time for one more question.

Your next question comes from the line of Ruplu Bhattacharya from Bank of America. Your line is now open.

Hello, Ruplu.

Hi, Jure. It's good to have you back. Yeah, thanks for taking my questions. Appreciate it. I have a few questions. Let me start by welcoming Jon. Thanks. It's good to have you on board. Maybe can you just tell us what your maybe top two or three focus areas are over the next 12 months?

Yeah, thank you, Ruplu. It's nice to connect with you and looking forward to speaking more with you. Couple of things, right? So number one, I would just say learning the business, right? That is the top priority for me. As I mentioned in my prepared remarks, I've been here for about six weeks and been spending a lot of time meeting with the leadership team. In my first week here, I was able to make a trip down to Guadalajara. And that was very important, just to be able to see our capabilities firsthand at one of our major facilities. And I've done some in the Bay Area too. And then really just getting into the details of the business. So just a couple of weeks back, as we were preparing for this earnings call, kind of in the normal course of business, we went through all of our quarterly business reviews. So that was a great opportunity for me to dig in deep to all the respective divisions, learn about what's happening in the market, what's going on with our customers, and helping to decide what our priorities need to be, right, to drive some of the things Jure was just talking about with Anja as an example, where do we see opportunity to drive operational improvements, whether it be in inventory or otherwise?

Got it. Let me ask you another question and you or Jure can answer. This quarter, the CPS segment experienced approximately 220 basis points of sequential improvement in revenues that were down compared to the previous period. Part of this improvement is due to mix and part is due to operational enhancements. Can you clarify that? When we compare the first quarter to the second quarter, in previous years, margins have declined. How much of this current 13% level is sustainable in the long term, and how would you differentiate between improvements that are mixed-related and those that are more structural in nature?

Sure, let me provide an overview of what happened last quarter. We experienced some inventory adjustments that impacted our revenue. However, in our component business, we are beginning to see positive developments. As demand returns, it will start to come into our component businesses first, and we are noticing some of that already. Our objective for our components, products, and services is to achieve a minimum of 15%, and we believe this is sustainable. Moving forward, our focus is on generating revenue. While we may see some short-term fluctuations, our long-term programs, projects we have in progress, and the investments we have made in our factories are all geared towards driving revenue and targeting more profitable business. If you have the opportunity to visit the Bay Area, we would be happy to show you the investments we’ve made in our component business. Jon, would you like to add anything from the last quarterly business review?

Just in the six weeks that I've been here, but CPS is a big priority for us. I think I would add to what Jure’s saying. So, and really just focusing on expanding and adding more value for our customers. And if you look along the different lines of businesses there from precision machining, plastics, printed circuit boards, all of them we saw some good operational improvements, but we think that there is more that we can do there to Jure’s point, to continue to grow that business, add value for our customers, and expand margins.

Okay. Thanks for the details there. Since you mentioned revenue a couple of times, I think, Jure, you've said that you expect sequential growth in the second half. If I look at consensus estimates, I mean consensus is modeling double digit growth sequentially for both 3Q and 4Q. What do you think about that? I mean when you talk about sequential improvement, I mean is that the kind of level of improvement you're expecting, like double-digit sequential growth? Any color on that? Like, how strong a growth are you expecting?

We're guiding to ensure clarity. We're only providing guidance for one quarter at a time in this environment. However, as we approach the third quarter and particularly the fourth quarter, we expect to see positive growth. The question is how much, and it could be in double digits. For the third quarter, I believe there will be growth, but it's difficult for me to predict the exact amount right now. It largely depends on how inventory levels unfold, but our customer base and upcoming new programs have the potential to drive growth. We'll have to wait and see. I don’t want to overcommit, but I can assure you that in the long term, this company is positioned to grow significantly beyond our current results.

Thank you for that information. I'd like to ask one more question. You mentioned strong free cash flow this quarter and a decrease in inventory. Is there a target for free cash flow? How should we consider it? Typically, EMS companies tend to have strong free cash flow when the economy is weak due to their counter-cyclical balance sheets. What are your thoughts on the sustainability of free cash flow and what to expect for the full year?

Yeah, I mean, Ruplu, you know this business just as good as I do. Yeah, definitely we should be generating in a down market. We should be generating a fair amount of free cash flow as we did last quarter. And we utilized our cash properly. Our stock is a high value. So we bought over $100 million of that, we continue to invest. Yeah, we expect to be cash flow positive for a year. I mean, if you look at historically, we've been generating free cash flow around $200 million, $250 million, and we should be at that level.

For fiscal ‘24?

I'm just saying in general terms, we'll just see how this inventory gets used up in short term. I think that short term, first of all, the good thing about inventory, Ruplu, you know in our industry that we have a contract where we only buy what our customers tell us to buy, and they're 100% responsible for this inventory. We charge for carrying charges and etc. But just getting these things off our books and turning it into cash might take a little bit more than just the three months. All right. Thank you for all the details. Appreciate it. Yeah, come and see us. All right, well, first of all, I'd like to say thank you to all our participants. And if we didn't answer all your questions, as Jon said, we're available, especially for Jon right now, as he wants to get to know you. So please give us a call. Thanks a lot.

Thank you, everyone.

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