all of you coming here today on the second day of our technology conference. My name is Ruplu Bhattacharyya, and I'm with the IT Hardware Equity Research team, and I cover electronics manufacturing services companies. Today, we're honored to have the team from Sanmina Corporation. We have CEO, Jure Sola. For those of you who don't know, Jure is the founder of this company. I think it was in 1980 that you founded the company.
Yes.
He has over 40 years of experience, so he's seen a lot of ups and downs, and so we hope to have a great discussion today with you, Jure.
I started when I was one, so.
We also have CFO, Kurt Adzema. You know, Kurt joined the company in October of 2019, and before that, he was at Finisar, and he was also at Montgomery Securities, Bank of America Securities, and Smith Barney. He has a lot of experience. Again, guys, thank you for coming today, and maybe I'll hand it over to Kurt to give you the safe harbor statement.
Sure. Just before we get started, again, I ask everybody to refer them to the safe harbor statement and our SEC documents, if you have any questions, obviously. With that, I'm gonna turn it over to Jure to give just a little bit of an overview before we dive into some questions.
Thanks, Kurt. Ruplu, thank you very much for inviting us. It's good to be here in person. First of all, yeah, I'm one of the cofounders. Started company in 1980. We're still having fun. That's the most important part. Companies, if you look at the last 12 months, we shipped approximately $8.9 billion in revenue, if you look at our operating margin, they've been around 5.6%, which are leading in our industry. With that, you know, we're in 44 countries.
I think if you look at Sanmina, what we offer and where we differ is we focus delivering a technology and custom solutions for our customers, all the way from engineering, design, to the full system build, and also build to order, configure to order, and do that in 24 countries around the world. We like what's in front of us, and I'm sure Ruplu will ask some good questions, and hopefully, we'll answer all your questions, and hopefully, you have some questions. With that.
Okay, well, let's get started maybe with a high-level question. Jure, where are we in the business cycle? When you look at the different end markets, is outsourcing still happening? Which end markets are the most outsourced, and which still have more to go in terms of outsourcing?
Yeah. First of all, you know, when we first started the company, outsourcing was really a small percentage of our customers' needs. Today, I would say still we have probably 50%-60% that is not outsourced, okay? Consumer markets are, which we don't do any, I think it's important to know. We used to be in consumer markets, when we acquired SCI in 2001, we exited that, including the PC market. What we do today is very complex, heavy regulated markets, in industrial, defense and aerospace, medical, and then we have, that's 60% of our revenue, and 40% of our revenue comes from communication. Communication today is well outsourced. I mean, if you look at that, I would say 70%-80%, especially for European and American companies, that's out.
But there's still a lot of upside. I mean, when I look at the demand today, demand, you know, for the growth for us, it's especially when you look at it three, four, five years down the line, it's there. It's most important for us is choosing the right partnership and also the areas, because we've been transforming the company in the last two years to really focus on technology, and that also we can deliver the right margin. As you can see, if you follow Sanmina in the last three years, we're able to move those margins in the right direction, and we expect to continue work hard to do that in the future.
Before we go into the different end markets, talk to us a little bit about the supply chain. I mean, over the last couple of years, you know, EMS companies have dealt with component shortages. So talk to us about, you know, what parts are still in short supply, how are lead times trending, and did shortages impact your revenues in the last quarter?
Well, first of all, what we went through the last 2 years when it comes to the material shortages, I've never seen it. I've been in this business, as you said, over 40 years. We learned a lot. Our customers learned a lot. We learned a lot. Today, things are getting a lot better, but you still have certain semiconductor products, they have a longer lead times. I think it's a combination. I think they love those longer lead times. Some are semiconductor suppliers, even today, demanding guaranteed orders. Some of our customers are actually meeting those requirements, and some of our customers are not. I think it's a mixed bag, but the most important to say, things are getting better.
I would say in last quarters, we really didn't miss a lot of revenue. You know, there's always, you know, you missed that even in good times, an order here, an order there, because you have a certain shortages or things like that. I would say, you know, we were, you know, it was a small amount.
Okay, great. We're basically looks like we're past the major component shortages, and the Sanmina procurement team is doing a great job. That's great.
Definitely, you know, our team did a great job in that environment. Unfortunately, they had to work 24/7 a lot of times.
Got it. Maybe let's start with communications. You know, when I think about Sanmina's competitive advantage, the communications market really comes to mind. When I, the first thing, actually, when I think about Sanmina is, like, these very complex PCBs, like multi, like 70-layer PCBs. Maybe talk to us about what type of stuff do you build in the communication space? I mean, what's your competitive advantage there?
Number one, we kind of grew up in that business in communication. When we started the company, telecom was the place to be. We, you know, as you mentioned, we were built vertically. We started as a board fabricator, and then from board fabrication, we went into the full system. Today, our company is a different company than what we started. If you look at the, in the last 4-5 years, we really went after the markets in that industry that can give us a more sustainable growth and more profitable growth. If you look at most of our revenue in that business today, for us, 80%-plus is the new products. What I mean, the new products, are products that came to the market in the last few years.
As we look at the future, what we bring to our customers, some of the most advanced products in networking and optical networks, they come to Sanmina because of our engineering capability and also, time to market capabilities, helping them get the product to the market sooner than our competitors. Technology and time is the key, but we still build some of the most advanced circuit boards in the world. It's not as big. You know, we were, at one time, the biggest circuit board company in the world, but most of our circuit boards today has really been focused on defense and aerospace.
We still, you know, have a 20% or maybe 15%-20% of the revenue in our circuit board business comes in advanced telecommunication back planes, where we're building, you know, 50, 60, 70-plus circuit boards. We're starting to invest even more in that. As we're going to more regional manufacturing, our customers are really needing some of the suppliers to be in North America or somewhere in the region between Mexico and North, because they wanna decentralize, you know. Their main. Today, they're too much dependent on some of the Chinese suppliers, so they wanna be able to diversify that to Europe, they wanna come to United States, and we're playing a big role in that side of the business.
Let's delve a little bit deeper into communications. I mean, what are you seeing in terms of end-market demand in things like networking versus optical versus wireless communications?
For us, as I said earlier, our main business there is networking part of the business. It's a big part of our revenue. That, you know, depends on the customer. We have some customers that we can't ship enough, and there are some customers that pushing it out.
Mm.
I would say, because in last, especially last year, we've been trying to catch up, a lot of these products because we couldn't get the materials. Things are starting to balance out. Some customers, because t.ey were buying so much inventory, has been now pushed around a little bit. Overall, year-over-year, we look things all year-over-year. When you had our shortages, it was all about catching up. Some quarters you ship more because your customers were desperate to get the product. If you look at the last year, we grew around, you know, 15%. This year, we said on our last call that we're gonna be at mid-teens. I think if you look at Sanmina last couple of years, we've grown, let's just say 14%, 15% on top line.
For a $9 billion company, we believe that's nice growth. If you look at our EPS, we've grown over 20+%. I think we're in at that level right now. Year-over-year, if I look at the 3 years out, I think we'll have a better future next 3 years than what we had the last 3 years. If you look at Sanmina the last 3 years, I think we've outperformed anybody's expectations out there. We're working hard. It's hard to figure everything out in this macro environment. We are very careful. You know, we grew up this company with no VC money, and we had to make a payroll every 2 weeks. In old days, we used to pay every week. I still think about that.
We gotta make a payroll every two weeks. We are really focusing on basics. I'm excited about the future, you know, and, you know, we're having fun, but it's hard to predict everything,
Sure. Let's build on what you just said. I think the last couple of years, you know, you talked about strength, and I think the optical market was really strong...
Yeah
over the last couple of years. How do you see that market over the next couple of years? I mean, we just had Ciena report yesterday. Do you think that that strength continues, or do you think that there are now, you talked about some push-outs? Is that where the push-outs are? I mean, how do you size the market, and how do you see the market?
I mean, if you look at our optical business, our optical business is more into the module and into the full system business, more the latest products that come out to market, and there's some new products that are coming out that we are involved. I think if I look at the next couple of years, I think that business will be fine with the key customers we have. But we might have some bumps in the road, we have other businesses we can fill in with.
Okay. What do you think about 5G? Is that a driver for Sanmina revenues? I mean, how do you see those 5G projects? Are they coming in?
Well, I think pure radio itself, I mean, that we see a lot of growth in India there, right now, and especially with our partnership that we just established with Reliance about almost a year ago. We see a lot of upside there. I would say that's probably the biggest market when it comes to 5G, but other related products that we build around the 5G also has a good potential. It's not a primary market for us, except in India. I think India has a lot of upside for us.
That's a great segue to the next question, which is maybe, Kurt, can you talk about the JV that you have now with Reliance? What exactly are you doing for them? How did this JV come about? If you can help us size, like, what's the impact of this on Sanmina revenues and earnings?
Sure. You know, I think everybody knows, there's been a lot of focus in India to build up a manufacturing capacity there that they haven't had in the past. You know, we think there's a huge opportunity there. We think there could be a $multi-billion market for us. That being said, we felt like we needed to partner with somebody in India and establish a situation where, in essence, it was an Indian company, which meant we needed to only own 49.9% of it. That's the reason why we structured the deal we did. We run the businesses as if nothing has changed. We run the business, it's all part of Sanmina as well. We're very excited about that.
We think there's a huge opportunity there. Like I said, long term, we think it's, it could be a multi-billion dollar opportunity for us. But we don't, you know, we don't break that out right now. But we're excited about that. Nothing happens overnight. But as Jure said, we're kind of a little under a year into this, and we're seeing a lot of interest, both in terms of Jio and its partners, but just in general, other companies in the Indian domestic market. We're excited.
Okay.
Let me just add to that. I think if you look at India opportunities, you know, we've been in India over 10 years. We were in the early days when we had to build the 3G radios, okay? If you look at the future of India and what's being done there, what the government wants to do, we believe it's a big, big opportunity in the next five years. That's the reason we're excited about it.
Maybe let's turn to the cloud business. I mean, that's another area of focus maybe for you guys. Can you talk about what is it that you're building for the cloud? You know, how do you size this opportunity for Sanmina?
Yeah. I mean, for us, cloud and communication kind of mixed together. You know, a lot of the products, the so-called communication companies, ship directly to a cloud today. That's why we put those two together. What we build, again, a fair amount advanced storage. We build a lot of switches. We build some of the unique, you know, modules on top of that, you know, some optical stuff, some optical module in that stuff. We've, you know, that's part of what we call approximately 40% of our revenue between communication and cloud. We see that business for us overall, if, you know, if you look at the 3 years out, will be stable, but we think that a lot of our growth will come from industrial, medical, defense, and automotive.
Especially in automotive, in, electrical vehicle and alternative energy.
I wanna switch to that end market in just a minute, but let's talk about Newisys. I mean, I think you had a storage product.
Yeah.
that was branded as Newisys. How are those revenues trending, and what do you think is the end game or what's the target for t.at business? Is this something that you can incubate, and is it an integral part of the company, or is this something you can spin off at some point?
First of all, that's part of, that's part of our cloud offering that we do. We do the full design. We'll take an AMD platform or Intel platform. We'll design an advanced storage product. We don't sell the, like, so-called white box. If we do, it's such a small percentage, less than probably 5% of their revenue. 95% in the, is a custom build for that specific customer. We can take the same design and make some minor changes from a customer A to customer B and so on. That business has been supporting, you know, part of that cloud communication group that we do. We made nice progress there in the last 2 years. We see a lot of upside potential.
Sometimes I wish it was growing a little faster, but we've been investing more in that side of the business. Yeah, that business sometimes, you know, We always look at the stuff. We have so-called, we call it Viking Enterprise now. We have optical module business. We got a government product under SCI brand. Any of these brands, we're trying to build up to see, you know, are they better to be part of the Sanmina family, or are they better off in the future to fly on their own? At the end of the day, we are full focused. There's no personal attachment to any of these except that we do well. We always look at what's the best for our shareholders short term and also long term. All those things we constantly analyze.
Every business that we have has to make money, and I can tell you they are making money. That's the way. That's part of our DNA. We just don't throw a bunch of R&D. I've been criticized for that. Maybe we need to invest hundreds of million dollars, but that's not part of my DNA, Sanmina's DNA. We focus on businesses that are, they're contributing to the bottom line and also have a growth potential.
Got it. I wanna switch to the next segment that you report, which really is a combination of four different end markets. I wanna start maybe with defense, because you were talking about businesses that are really standalone businesses. talk to us about Sanmina SCI. I mean, what do you do in the defense market? What do you build, and how is that business trending?
First of all, SCI has a brand in a defense and aerospace industry. We've been working very hard in the last 4 or 5 years to build on that brand. That's why we branded SCI DAAS, Defense and Aerospace Industry. It is we're really, how do I say, made SCI well known today. If we have a very strong backlog and potential projects that we want, that we believe they have a lot of strong future, if you look at the 5 years, 10 years, or even 3, 4, 5, 10 years. That's typically how these military programs go. We're trying to build what I call a defense and aerospace company under SCI.
SCI has a fair amount of their products, these are the products that SCI designs through, maybe it's for Army, maybe it's for Marines. Sometimes we sell it directly to the government, or we'll sell it to one of those big, let's say, Raytheon, et cetera, companies like that. Yeah, personally, I'm very excited. We are still building SCI. I think we expect to see a lot of great things out of there, but it's gonna take probably another year and a half, two years.
Let me ask you another question on end markets, and then I want to switch to some financial questions. What about industrial? I mean, that's a big segment for you now. What type of work, what type of end markets? Industrial is a big space.
Yeah.
What do you do? I think you had one project in there where you were making radios for police or emergency services. I mean, can you talk about what you do and how is that project coming on?
Well, first of all, when you look at industrial, medical, defense, and aerospace, and automotive, that's well spread out. It's not all in the one bucket, so that 60% is spread out. Specifically, under industrial, you know, we have a big competitive advantage. We do precision machining on a lot of very complicated stuff for oil and gas. We do it for military, we do it for semiconductor, we do it for medical, and we do it for defense. That industry is changing. We are basically now integrating electronics and machining together, and a lot of these things now going building a whole systems. Some of these things are long-term programs, and once you get in, it's like a military. You really, what we call industry, you gotta, you really have to mess it up.
I mean, My English is not the best, so I gotta find the right word. To really lose it, if you do it. Yeah, we have a few customers today that we build what we call safety equipment, fire department. It's basically emergency communication. We love those type of customers because they're long term. They're really almost like a defense type of an account. Once you get in, it's all about performance, and performance. We have a lot of value there. We don't just do just labor part of it, that's really I want to make sure clear. Sanmina is not selling labor alone anymore. We, Sanmina, sells an end-to-end solution, we're trying to bring the right technology in there to drive the margin.
Our structure is to be a big company, and we will be a lot bigger than a $8 billion-$9 billion company. You know, as we see the world today, I think we have a balance sheet to do it right, but most of our growth will come organically. Today, I'm sure you, our CFO will tell you, we've been investing even in this market, where there's a lot of macro going on and not knowing what's gonna happen 2 years, 2 quarters from now, 3 quarters from now. We are investing because we know we got a fair amount of programs that it's, we need to build more capacity. We're expanding in Mexico, we're adding in Thailand and other places. We're excited about the future to build on that.
We are going to continue to see what's in front of us on a daily basis to tune things up.
Got it. Maybe let's talk about revenue growth. If I kind of look at your first quarter, you had really strong growth of 34%.
Mm-hmm.
Even second quarter was strong at 21%, and you just said your full year guidance is in the mid-teens.
Yeah.
If we do the math, that kind of implies you have some deceleration in the second half. I mean, it's in the single digits that the second half would be growing. Talk to us about what's happening in the markets. I mean, where are you seeing the deceleration, and how do you think about the seasonality going forward?
Yeah, I think if you really look at, as I said earlier, I think you have to look at where we are, where the industry is coming from. You went from a basically even a year ago, where we just couldn't get enough parts. Our customers were paying brokers. We're spending too much money on the brokers to get the parts in, and they said, "Ship it to me. You know, we'll pay anything to get the product." We went from that environment, we basically we're catching up. I was saying last fourth quarter, especially last quarter, we're catching things up. I think that's why I said, I think you have to look at the year-over-year.
If you look at the three years, we've been growing on average, you know, in that, I just don't know exactly, 12-15+% on the top line. That's kind of where we are. I know how you are, you're good at math, I'm not bad either. You gotta look at the quarter, I mean, year-over-year. That's how I look at it. Unless we fell off the cliff, let's say, as we go into 2024, we believe that we're gonna have a nice growth in 2024. I just want to clarify that, we still take one quarter at a time. We'll tell you a lot more... when we announce the numbers in July, because we're gonna see what's happening for the fourth quarter.
We're also gonna see what happens to the rest of the year. Today, what I see, I think we'll have a nice growth this year, and I think we have a potential even to grow next year, double digits.
Oh, okay.
You know, when I say next year, 2024. This is I just want to clarify, it's based on what we're seeing today, customer base that we have, existing customers and also new customers. That's why if you, if you follow Sanmina, we've been spending more on CapEx, and that purpose of that is really the growth for next 2-3 years.
Okay, that's helpful. Thanks for giving us the details on revenue. Maybe I'll ask you on margins.
Yeah.
You report gross margins for IMS and CPS, the two segments that you have. You know, when I look at last quarter, I think your IMS margins were 7.2%, and CPS was at 13.2%.
Mm-hmm.
Are we at peak margins now? I mean, how should we think about the long-term revenue and margin-specific targets for these segments?
Yeah.
What do you need to do to drive these margins higher? I mean, 7%, 13%, these are really good margins.
Yeah. Thank you. I think we made a lot of progress-
Yes
... in the last couple of years to improve the margin. I mean, as I said earlier, if you look at the last 12 months, our operating margin, 5.6%. I think last quarter, they were 5.8%. We are in that range, 5%-6% right now. I personally believe as we continue to improve the mix of the business, technology products that we produce, both on IMS, should deliver us higher margin than what we're delivering today. Also on our components, technology products, such as a precision machining, we're building some really complicated stuff, from semiconductor to oil and gas, military. We're expanding that part of the business.
As we grow our circuit board business more into the military, more complex stuff, and, you know, then we have some precision plastic for military and so on. We've been expanding those. We definitely believe, especially in components, products, and services, our margin, longer term, at, you know, I don't, not saying what's gonna be quarter at a time, but if I look at two years from now, should be better than what they are today.
Got it. Maybe a question for Kurt. Last quarter, you mentioned an accounting issue. Can you summarize for us what that issue was? What was the impact, and what steps are you taking to ensure that that doesn't recur?
Sure. We had one division, it's part of our CPS segment. It's less than 3% of revenue, where basically, they enter into long-term fixed price contracts. Under GAAP accounting, you basically look at how much are you gonna get paid for the life of the contract, how much is it gonna cost you to fulfill that contract, and then you basically recognize it over the life of the contract on a pro rata basis. Unfortunately, you know, we had a situation where costs went up significantly on a contract due to higher material costs, but as well as additional labor costs.
You know, under this accounting, what happens is, if you have a situation where you go from, let's say, a profitable contract to an unprofitable contract, you have to unwind the profit you've already recognized and then recognize all the losses, even for the entire life of the contract. It's just something under these accounting rules you have to do. We had a situation with a couple contracts that, again, and now, sitting here today, we think we're gonna incur additional costs to fulfill them. We had to recognize, in essence, the cost of that, including future costs, immediately. That was what caused the restatement. Now, we're working with our customers in this area to recoup those costs, and when we get the money back, then we will get the benefit of that.
There's a bit of a timing issue between when you got to recognize the incremental costs and when you get the recovery from the customer. Again, it's a very small part of our business, 3% of the revenue. We've, you know, started remediation actions for those, that never happens again. We feel comfortable that it's the issue is largely behind us.
Got it. We've got about a minute left, I'm gonna challenge you to talk about your capital allocation priorities. You know, talk about like, you know, M&A versus buybacks versus levering or delevering. You know, there have been years where you've bought back you know, more than 100% of your free cash flow. You've used that for buybacks. Just talk to us about how you're thinking about prioritizing these things.
Sure. As Jure mentioned, our first priority is organic growth. You'll see this year that, you know, we've spent about $100 million in CapEx in the first half, and we think overall for the year, it's probably gonna be about $200 million. That's really to build capacity to ramp some of these new products and new wins that we've had. Jure mentioned some capacity in Thailand, as well as in Mexico. That's our, by far, our number one priority. That being said, you know, we continue to delever our balance sheet. We pay off about $4 million-$5 million on our term loan every quarter, and then we opportunistically repurchase shares and take advantage of the volatility that's in the market.
I think what you have to recognize is that if you look at our balance sheet relative to our competitors, we are very deleveraged, right? We have the best balance sheet. We've got over $700 million of cash. We've got $300 and change of debt. The debt is, you know, we just refinanced it in last September, we've got a lot of time there. You know, we feel very good about our balance sheet, and, you know, as you've seen, we've continued to generate cash flow from operations consistently every quarter. You know, we focus on, as Yuri said, we focus on EPS to deliver value to the customer, but we also focus on cash flow, 'cause at the end of the day, cash flow is a key indicator of how healthy a business is.
Got it. We've talked a lot about various different things. I appreciate all the details you've given.
You're welcome.
Always nice to see you guys. Thanks for coming today.
All right. Thank you very much.
Thank you. Thanks.