Paige Bombino - Vice President-Investor Relations Jure Sola - Chairman & Chief Executive Officer Robert K. Eulau - Chief Financial Officer & Executive Vice President.

Herve Daniel Francois - B. Riley & Co. LLC James Dickey Suva - Citigroup Global Markets, Inc. (Broker) Mitch Steves - RBC Capital Markets LLC Steven Fox - Cross Research LLC Christian David Schwab - Craig-Hallum Capital Group LLC.

Good afternoon. My name is Mariama and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina Corporation's Third Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the call over to Paige Bombino, Vice President of Investor Relations. You may begin your conference..

Thank you, Mariama. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Third Quarter Fiscal 2016 Earnings Call. A copy of today's release is available on our website in the Investor Relations section. You can follow along with our prepared remarks and the slides posted on our website. Please turn to page 2, the Safe Harbor statement.

During this conference call, we may make projections or other forward-looking statements regarding the future events or future financial performance of the company. We caution you that such statements are just projections.

The company's actual results of operation may differ significantly as a result of various factors, including adverse changes to the key markets we target, risks arising from our international operations, credit problems experienced by our customers, competition that could cause us to lose sales, consolidation among our customers and suppliers that could adversely affect our business, and other factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission.

You'll note in our press release and slides issued today that we have provided you with statements of operations for the three months and nine months ending July 2, 2016, 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 certain other infrequent or unusual items to the extent material.

Any comments we make on this call as they relate 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, 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 Sola, Chairman and Chief Executive Officer..

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome to this conference call. With me today is our CFO, Bob Eulau..

Hello, everyone..

For agenda, we have that Bob will review our financial results for the third quarter, then I will follow with additional comments about Sanmina's results and future goals. Then Bob and I will open for question-and-answers. And now, I'd like to turn this call over to Bob.

Bob?.

Thanks, Jure. Please turn to slide three. Overall, the third quarter was solid and consistent with our expectations. Non-GAAP revenue of $1.67 billion was up 8.5% from the third quarter last year and up 3.6% on a sequential basis. Non-GAAP EPS of $0.63 was up $0.10 from the third quarter last year and the same as last quarter.

This was based on 77 million shares outstanding on a fully diluted basis. Our cash flow from operations was very good at $81 million, and free cash flow was $59 million. I'll discuss cash in more detail in a few minutes. Please turn to slide four. From a GAAP perspective, revenue is up 3.6% or $58 million from Q2 to $1.669 billion.

We reported net income of $30 million, which resulted in diluted earnings per share of $0.38 for the third quarter. This was down relative to last quarter by $0.01. The primary differences between the GAAP and non-GAAP results are related to stock-based compensation expense and income tax expense.

The non-GAAP numbers reflect an approximation of cash expense in both cases. My remaining comments will focus on the non-GAAP financials for the third quarter of fiscal year 2016. At $129.4 million, gross profit was down $3 million from the prior quarter. Gross margin came in at 7.8%, which was down 40 basis points from Q2.

Gross margin was down in both segments, which I'll discuss in a couple of minutes. Operating expenses were up $600,000 for the quarter at $67.5 million. This represents a 20-basis-point decrease in operating expenses as a percent of revenue compared to Q2.

Lower spending in R&D was offset by increased investment in sales and marketing and higher deferred compensation expense. At $61.9 million, operating income decreased by 5.3% from the prior quarter, but increased 4.5% from Q3 last year. Operating margin was 3.7%, which was a 40-basis-point sequential decrease.

Other income and expense at $5.1 million was down 31% when compared with last quarter, and down 17% from the third quarter last year. There's always some volatility in other income and expense. This quarter, most of the decrease was driven by lower deferred compensation expense, which has the offsetting impact I just mentioned in operating expenses.

The tax rate for the quarter was 15% of pre-tax income, which was consistent with what we had expected. On a non-GAAP basis, we earned $48.2 million in net income or $0.63 per share. Earnings per share were the same as Q2 and up $0.10 from Q3 last year. On a year-to-date basis, earnings per share were up $0.19.

Please turn to slide five, where we are providing more information on the segments that we report. As you can see from the graph on the left, the Integrated Manufacturing Solutions segment revenue was up $58 million or 4.4% from last quarter. The increase in revenue was very positive. Gross margin was down slightly as we ramped new programs.

The second segment for us is Components, Products & Services. In aggregate, the revenue for this segment was basically flat with gross margin down 150 basis points to 8.8%. This sequential decrease in gross margin was driven primarily by our Components businesses. The downturn in oil and gas and wireless communications is impacting this area.

Gross profit was up for both Products & Services. On slide six, we are showing you some of our key non-GAAP P&L metrics. Our gross margins have been quite stable over the last three years while we've made significant changes in the mix of the business. For over three years, our gross margin has been in the range of 7.7% to 8.2%.

This quarter, the gross margin was down 40 basis points from Q2, and 20 basis points compared to last year. Gross profit was down $3 million from Q2 and up $6 million when compared to Q3 last year. This was driven by the items I just mentioned for each of the segments. Operating income and margin tracked gross margin fairly closely.

Our operating income decreased 5.3% when compared to the second quarter, and increased 4.5% when compared to Q3 last year. This led to $61.9 million in operating income and operating margin of 3.7%. Now, I'd like to turn your attention to the balance sheet on slide seven. Our cash and cash equivalents were $410 million.

Cash was up $3 million from the previous quarter. During the quarter, we used $9.9 million to repurchase approximately 410,000 shares of common stock at an average price of $24.16. For the fiscal year, we have repurchased 5.7 million shares on the open market for $113 million at an average stock price of $19.75.

We have $91 million in remaining authorizations to repurchase common stock. Accounts receivable were up $1 million and inventory was down $10 million. Property, plant and equipment was up $4 million for the quarter. From a liability standpoint, the only significant change was a $53 million reduction in short-term debt.

This quarter, we have $517 million in total debt, which is down from $574 million in Q2. At the end of the quarter, our gross leverage on total debt was approximately 1.5%. In June, Moody's upgraded our Corporate Family Rating to Ba1 from Ba2. Our debt rating at Moody's is now one notch below investment grade.

Overall, our capital structure continues to be excellent. Please turn to slide eight. We'll review our balance sheet metrics. Cash has been very consistent for a number of quarters. Cash was up $3 million from Q2. Cash flow from operations for the quarter was $81 million, and net capital expenditures for the quarter were $22 million.

This led to $59 million in free cash flow for the quarter. Most of the cash generated this quarter was used to pay down short-term debt. On a year-to-date basis, we've generated $287 million in cash flow from operations and $206 million in free cash flow. Inventory continued the trend in the right direction in Q3.

Inventory dollars were down $10 million from last quarter at $913 million, while the inventory turns improved slightly to 6.7x. Compared to Q3 last year, inventory turns were up 0.2 turns and inventory dollars were up $39 million. The inventory dollars were up primarily because revenue was up 8.5% compared to Q3 last year.

In the lower left quadrant, we are showing cash cycle days, which combines our cycle time for inventory, accounts receivable and accounts payable. Overall, cash cycle time decreased from 44.6 days last quarter to 42.6 days. This change was driven mostly by a 1.7-day decrease in inventory days on hand.

Finally, pre-tax return on invested capital was consistently solid at 21%. Please turn to slide nine. I would now like to share with you our guidance for the fourth quarter of fiscal year 2016. Our current view is that revenue will be in the range of $1.675 billion to $1.725 billion. We expect that gross margin will be in the range of 7.6% to 8%.

Operating expense should be $65 million to $67 million. This leads to an operating margin in the range of 3.7% to 4.1%. We expect that other income and expense will be in the range of $6 million to $7 million. We expect the tax rate to be around 15%, and we expect our fully diluted share count to be around 77 million to 78 million shares.

When you consider all this guidance, we believe that we will end up with earnings per share in the range of $0.64 to $0.68. For your cash flow modeling, we expect net capital expenditures for Q4 at around $35 million. Depreciation amortization will be around $28 million for the quarter.

Overall, Q3 was a good quarter where our diversification over the last few years really paid off. We will continue to diversify our revenue base to position ourselves solidly for the future. Our cash generation has been excellent this year.

Revenue growth continues to be our number one objective, but it is imperative that we grow with the right kind of profitable business. At this point, I will turn the discussion back over to Jure for more comments on our target markets and our business strategy..

Thanks, Bob. Ladies and gentlemen, let me add few more comments to what Bob already told you about our business environment for the third quarter and outlook for the fourth quarter and the rest of the calendar year 2016. So let me recap third quarter. As Bob mentioned, we delivered a solid quarterly results in line with our outlook.

Revenue was up quarter-over-quarter and year-over-year driven by ramp-up of new programs.

For the quarter itself, product mix was not as favorable in the third quarter, and we also have in our Component business, experienced some negative pressure as a result of challenges in Oil and Gas segment and some of the push outs that we saw in our Communications segments. As Bob mentioned, key to our results is always cash.

In third quarter, we delivered a strong cash – good cash flow of $81.5 million and free cash flow of $95 million. Year-to-date, our cash flow again continues to be very strong, at $287 million, and free cash flow of $207 million.

Also, customer activities were very strong as we continued to win new customers and expand our current customer relationships. Again, overall, good quarter; and today, we are in better position because of that for the future. Now please turn to slide 11. Here, I'd like to give you some highlights of third quarter revenue by end markets.

As you can see, top 10 customers were 52.8% of our revenue. Book-to-bill for the third quarter was positive 102:1 as we continue to diversify revenue by end markets and our customers. A lot of focus here; it is a key of our strategic plan. For Industrial, Medical and Defense, that was our largest segment at 44%.

That was up 6.6%, driven by a strong demand by industrial, defense and medical. Communication Networks was 36% of our revenue, nicely up by 4.1%. Overall, we saw good demand driven by networking and optical products. Embedded Computing & Storage was 20% of our revenue. That was slightly down, of 3.1% driven mainly by Set-Top Box business.

The good thing is that our Set-Top business is only 2% to 3% of our total revenue. As we continue to diversify this segment, automotive was up and also storage was up during the quarter. Please turn to slide 12. Let me give you some – let me give you outlook, what I see it based on the market segments for the fourth quarter.

For the fourth quarter, we'll continue to see stable growth. We're forecasting for Industrial, Medical and Defense segment, for Industrial to be up. For Industrial, we expect growth to continue driven by new projects. Medical, we also see nice growth. We have a good pipeline of new opportunities.

For Defense in the quarter, we see things to be slightly down, but a lot of new activities. So for Industrial, Medical and Defense segments, we are focused on mission-critical products, and we have a strong customer base in this segment. It fits with our strategy, the way I would call it, a strong segment for Sanmina.

Communication Networks, we're also forecasting to be up. We see nice, stable improvements in demand in networking and optical products. Optical products still continue to be strong for us.

Also, we had some new customers in our data center IP routing products, which should do well in this quarter as we are overall well positioned in this segment because most of our revenue comes from the latest technology products. Embedded Computing & Storage, we're forecasting quarter to be slightly down.

Again, the Set-Up Box business will continue to be weak during the quarter. For Storage, we see stable demand, some good opportunities that we're driving this quarter. Automotive, we're forecasting to be flat, but good pipeline of new projects for the future. As we continue to diversify this segment, we see some good activities in overall.

Now, let me make a few more comments about the business environment for the rest of the calendar year 2016. We are making a lot of positive steps that will drive sustainable and practical growth. We're executing per our strategy and our business plan.

The way we see, global economy is still challenging, but stable and slowly moving in the right direction. I believe in this environment, we'll continue to make improvements to both top and bottom line. We also expect that book-to-bill will continue to be positive. Let me add a few more comments on Sanmina's long-term outlook.

We are optimistic that the global economy will continue to improve. Sanmina has a strong balance sheet and can adjust quickly to any economical environment. We'll continue to generate strong cash flow from operations, and that is a key focus in Sanmina's strategy.

Sanmina has a solid structure in place with capacity to grow with the leading capabilities. We're going to continue to be a focused company targeting higher margin business opportunities. And also, I can tell you that we have a strong pipeline of existing and new opportunities right now.

So, could you please now turn to slide 13? In summary, for third quarter results, we're in line with our outlook. Revenue was up quarter-over-quarter and year-over-year, mainly driven by new programs during the quarter. For the fourth quarter, we see stable demand to continue. Growth will be driven also by ramp-up of new programs.

For the rest of the calendar year, we're going to continue to focus that we do well, continue to delivering our commitments, and continue to drive profitable growth, and create our shareholders, value. As a company, we continue to invest in talent and technologies that will enhance our value proposition to our customers for many years to come.

So, ladies and gentlemen, now, I would like to thank you, all, for your time and support. And, operator, we are now ready to open the lines for question and answers. Thank you, again..

Your first question comes from the line of Herve Francois from B. Riley. Your line is open..

Hi. Good afternoon. Thank you..

Good afternoon..

Hi, Herve..

Good afternoon. How's it going, guys? Nice quarter, by the way..

Thank you..

Thanks..

You're welcome. You're welcome. Can you talk about when you – given your guidance for your fiscal fourth quarter, it's definitely a nice range – excuse me – on the revenue side that you gave, the $1.675 billion to $1.725 billion.

What would allow the revenues for the fiscal fourth quarter to come in at the high end of the range? Would it be particular strength in new programs from an end market or some just existing business that you're doing with some of your existing customers, let's say, particularly in networking and optical that has been strong for you, and it seems like others in the industry?.

Well, Herve, let me answer that. First of all, the guidance that we gave you, based on information that we have today, we have pretty high confidence they will meet and hopefully even do better. But, let me say, as I mentioned earlier, Industrial and Medical segment for our fourth quarter looks pretty good.

A lot of their programs are driven by new programs that we have. Our optical continues to be strong. We also won some new programs for our data center, what I'll say the IP routing type of products, I think that will help. And I think to – there's always potential that we can beat the numbers, but they have to come from really existing customers.

And we – as both Bob and I mentioned, we had some things that didn't do as well. Oil and gas for us didn't do as well, and I think it's going to continue to be weak. Also, some of our wireless projects didn't do as well. We believe they're not going to be very strong this quarter.

So things have to go and move in the right direction to beat the number, but we feel comfortable with the guidance and, of course, we always try to deliver more.

So with that, Bob, anything else you want to add?.

No, I think that's right. I think in the short term, it's going to be driven by the underlying demand with the business we have today..

But on a positive side, again, pipeline is strong, and as long as the economy cooperates, I think we'll be fine..

Right. Right. Right. So, just last for me.

Can you give us a little bit more detail regards to oil and gas, particularly what did you see there that was I guess either a drag or not as solid as some of the other sectors that reported in the quarter? Was it just the volatility in pricing that negatively impacted demand from some of your existing customers there?.

Well, first of all, volatility in that segment has been around for more than a few quarters..

Right..

We're hoping they will stabilize and we have a little bit bigger demand. This is a very profitable segment for us. Good thing it's small right now, but it's affecting us. We're hoping that segment – I believe the worst is behind us.

I don't think it's going to recover overnight, so, Bob?.

I agree. I mean this has been a challenging segment for us for probably 18 months, and we're at the point where revenue is extremely low. We have three factories that are very sensitive to oil and gas, and so we've got them about as lean as we can get at this point. So it's just a matter of waiting for the business to improve..

Yeah. But we're very confident. I mean, we've continued to invest in that business. We think the long-term, it's a good area for us to be. We got some great assets with very strong product engineering group that really built it, very important to our future. So, capabilities are there; when that turns around, it will help us lots..

All right. Good stuff. Thank you very much. Thanks again..

Thanks..

Thanks, Herve..

Yeah..

Your next question comes from the line of Jim Suva from Citibank. Your line is open..

Hi, Jim..

Thank you, and congratulations to you and your team there at Sanmina..

Thanks, Jim..

I have two questions, and I'll kind of ask them both the same time. Maybe the first one for Jure and the second one for Bob, if it fits well. But the first question, bigger picture.

With the European Brexit and what's going on there, as well as some fluctuations in foreign currency globally that have happened, have you seen any order changes amongst your customers as we headed kind of, say, half the quarter closing to July? And then the follow-up question is probably for Bob is, on the gross margin line, it looks like year-over-year, you had been growing pretty materially for the past several quarters and now, that looks not longer to be the case.

Can you help us understand about what's going on with gross margins? And are we kind of at a run rate for the gross margins? Are there some headwinds or some one-off issues that could potentially allow gross margins to grow – go further? Thank you..

Hey, Jim. Jure here. Just to drag onto your first question, it – the European situation is kind of unique. I don't see – we didn't see any impact short term. I'm not smart enough to really answer that question, if there's going to be any impact longer term.

I personally don't believe it's going to be major, if any, but it's something that we are monitoring. But I wouldn't worry about it, especially in short term. And to me, the short term, next 12 months. And we'll see what happens after that.

Bob?.

Yeah. So in terms of gross margin, as I mentioned, we've been in the range of 7.7% to 8.2% for over three years now, so I think we've actually been pretty consistent.

In terms of the margins in the two segments, the – in Integrated Manufacturing Solutions, 7.2%, I think, is still very good, and we've got some new programs ramping we think we'll be able to improve in the IMS segment in spite of pretty solid performance already today.

And then on the Components, Products & Services, as I mentioned, Products & Services profit was actually up sequentially, and the big challenge is on the Components side. And then the two big issues there are the ones that Jure mentioned. It's the Wireless Communications business and it's the Oil and Gas business.

We still believe there's a lot of operating leverage in Components, Products & Services. That area is a challenge because it's high fixed costs, but it's also very high contribution margins. So, I think it just takes a little bit of revenue momentum in that segment and we'll be able to expand margins pretty quickly..

Great. Thank you so much for the details, gentlemen, and clarification. Thank you..

Thanks, Jim..

Thanks, Jim..

Your next question comes from the line of Mitch Steves from RBC. Your line is open..

Hey, guys..

Hey, Mitch..

Hello, Mitch..

Hey. Thanks for taking my question. So, I guess, my first question on the Communication Network piece. Just given that demand for optical seems to be positive across the board, is there a reason why the operating margin leverage is not being seen there? I would think that the optical side is probably higher margin business for you guys.

Or am I thinking about that incorrectly?.

Well, yeah. Let me make – clarify that. First of all, optical business is still strong, and you're right, the margin of that business is great – good. We're really talking more about the wireless base station type of business that affected really our Components side of the business, both the mechanical and the circuit board side.

And that's really to – basically, about the load. It had nothing to do with the profitability of the project itself..

Yeah. I probably – and I don't want to dwell on wireless too much. I mean, that's really our challenge. From an optical standpoint, our business is really very strong. And we have a very broad set of offerings in optical, all the way from active and passive components, up to final system test and assembly.

So we think we've got a fantastic optical footprint. And we think we're really well positioned there for at least the next couple years..

Got it.

And then secondly on the Set-Top Box side kind of on the Embedded Computing piece, was that a shift in types of products being created or just overall, just generally, just demand was weaker in the quarter?.

Yeah. We've been diversifying from that business now for the last two years, three years. Four years, five years ago, that was about 15% – five years ago, that was 15% of our revenue. Now, it's down to 2%. So that was down based on our plans. We'll still have probably some of that business. We have a – so it's really more per plan.

And, of course, technology itself is changing in that segment..

Got it. Thank you..

Yeah. Thank you..

Your next question comes from the line of Steven Fox from Cross Research. Your line is open..

Thanks. Good afternoon..

Hi, Steve..

Hi..

Hi, Steve..

Hi. Two questions from me. First of all, I was wondering if we can get an update on the MSI relationship, how far along you are in terms of ramping to sort of full run rates. And then secondly, I'm just – I'm still a little confused on the CPS margins considering the revenues were kind of flat.

Can you just talk a little bit about mix there, like whether there was one or two components that drove the margins down more than the others? And were you surprised during the quarter by oil and gas? Is that part of why the margins came back down to where they were two quarters ago? Thanks..

Right. Well, Steve, first of all, on MSI, we're on a full production. We transitioned everything, no impact to our customer. We're building a future. It's very exciting. A lot of work to do, but things are moving up in a very strong direction.

And so that was the most important, when you get into a relationship is, are you executing well, and sometimes you have to overdo it to do it right. I can report that it's doing great. So really, that is behind us now. It's all about continue to service our customers. I'll make a comment on CPS, then maybe Bob could talk a little bit more.

I would say the biggest issue there is mix, and as we talked about earlier.

So, Bob?.

Yeah. No, it's definitely revenue and mix as there were some very high contribution margin areas where the revenue is extremely low. And those fixed costs don't go away. So what happened really hurts us from a gross margin standpoint..

And that was mechanicals and circuit boards mostly?.

Right. And again, within those areas, I would say it was probably four factories in total; three on the mechanical side and one on the printed circuit board side. It wasn't that we had every factory in trouble, it was some real focused areas..

And then just did the Oil and Gas business come in, in terms of revenues as you expected when the quarter started or was that disappointing relative to your original expectations?.

Yeah. We've been seeing a decline for quite a while. I think it's probably been at least a year and a half, if my memory serves me correctly. And I would say it wasn't significantly different than what we expected, just a challenging environment..

Great. That's very helpful. Thank you..

Thanks, Steve.

Hey, operator, we have time for one more question?.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital. Your line is open..

Hey, Christian..

Hey, Christian..

Hey, guys..

We always save the best, last..

Thanks, Jure. So, I just have – I just was wondering if you could give us an update on optical as a percentage of total revenue, where we are roughly today..

I can answer that question. We usually don't give you that, but at New York, we talked about it. That optical business is well over $1 billion and growing. So I would like to leave it at that.

But if you really look at it in a whole communications side of the business, that's what we've been investing a lot in the last five years, six years, all the way from a component level to the full system level. So company is well positioned. I believe in our industry, there's only one company out there, a smaller company.

I won't mention their name for – I don't want to give them too much credit, but they're a good company. They really can compete with us. But we are continuing to invest, and most importantly, I think we – our name is well recognized on that side of the business. So we expect to continue to grow on that side..

Great. Just wanted confirmation of that number. That's it. Thanks, guys..

Well, thank you..

Thanks a lot, Christian..

Well, ladies and gentlemen, that's all we have today. Hopefully, we answered most of your questions. But if we did not, please give us a call, and we're here to communicate whatever you have. So with that, looking forward talking to you next 90 days..

All right. Thanks, everyone..

Bye-bye..

This concludes today's conference call. You may now disconnect..