Paige Bombino - VP, IR Jure Sola - Chairman and CEO Bob Eulau - EVP and CFO.

Ruplu Bhattacharya - Bank of America Merrill Lynch Steven Fox - Cross Research Jim Suva - Citigroup Global Markets Sean Hannan - Needham & Company.

Good afternoon. My name is Jesse and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sanmina Corporation's Third Quarter Fiscal 2017 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.

[Operator Instructions] Thank you. Paige Bombino, Vice President of Investor Relations, you may begin your conference..

Thank you, Jesse. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Third Quarter Fiscal 2017 Earnings Call. A copy of today's release is available on our Web-site in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on our Web-site. Please turn to the 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 of operation may differ significantly as a result of various factors, including adverse changes to the key markets we target, operational and other inefficiencies, risks arising from our international operations, competition that could cause us to lose sales, reliance on relatively small number of customers for a majority of our sales, 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 three months and nine months ending July 1, 2017 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 Web-site.

In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense, and certain other infrequent or unusual items to the extent material.

Any comments we make on them 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'd now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer..

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome. I'd like to take this opportunity to thank you all for being here with us today. With me on today's conference call is Bob Eulau, our current CFO and the future CEO..

Thanks, Jure, and hello everyone..

I'm proud to say that Bob Eulau is going to be our future CEO effective October 2, 2017. I'm also very confident that Bob is the right leader for our Company. Bob will drive Sanmina's strategy and our culture, which is based on three [indiscernible]; number one, our customers; our people, where we have a great team; and our shareholders.

Again, Bob is what Sanmina needs for a successful future. Please give Bob your full support. Now let's go to agenda. Bob will review our financial results for our third quarter fiscal year 2017. I will follow up with additional comments about Sanmina's results and future goals. Then Bob and I will open for questions and answers.

And now, I'll turn this call over to Bob.

Bob?.

Thanks, Jure. I appreciate your comments. Please turn to Slide 3. Overall, the third quarter was another solid quarter. Revenue of $1.71 billion was up 2.5% from the third quarter last year and up 1.7% on a sequential basis. Our non-GAAP gross margin was 7.8%, the same as the third quarter last year, and down 30 basis points sequentially.

Operating margin was up 50 basis points from the third quarter last year and was flat sequentially at 4.2%. Non-GAAP earnings per share were $0.74, which was up $0.11 from a year ago and down $0.02 sequentially. This was based on 78.2 million shares outstanding on a fully diluted basis.

Cash flow from operations was healthy at $59 million for the quarter, and free cash flow was $28 million. I'll discuss cash in more detail in a few minutes. Please turn to Slide 4. From a GAAP perspective, revenue was up 2.5% from the third quarter last year and up 1.7% on a sequential basis to $1.71 billion.

Reported net income of $36.4 million, which resulted in diluted earnings per share of $0.47 for the third quarter. This was up $0.09 for the third quarter last year and up $0.06 on a sequential basis. The improvement was primarily driven by a $4.4 million change in estimate for a specific environmental remediation exposure.

My remaining comments will focus on the non-GAAP financials for the third quarter of fiscal year 2017. At $133.1 million, gross profit was down $3 million from the prior quarter. Gross margin came in at 7.8%, which was down 30 basis points when compared to Q2. Operating expenses were down $3.5 million for the quarter at $61.7 million.

This was an improvement of 30 basis points as a percent of revenue compared to Q2 at 3.6%. Most of this improvement was related to incentive compensation. At $71.4 million, operating income increased 15.4% from Q3 last year and increased 60 basis points from the prior quarter. Operating margin at 4.2% was flat with last quarter.

Other income and expense at $4.3 million was in line with what we expected. This is a more normal level in Q3 after unusually lower expense last quarter. The tax rate for the quarter was 13.5% of pre-tax income, which brings our year-to-date rate to 14.5%. This was driven primarily by the updated forecast and geographic mix of our pre-tax profit.

On a non-GAAP basis, we earned $58 million in net income or $0.74 per share. Diluted earnings per share were down 2.3% when compared to Q2 and up 18.3% from Q3 last year. Please turn to Slide 5, 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 was up $26 million or 1.9% from last quarter. The IMS team continue to execute well and gross margin was up 30 basis points to 7.6% for the third quarter. The second segment for us is Components, Products and Services.

In aggregate, the revenue for this segment was up $7 million or 2.1% over the prior quarter. But gross margin declined sequentially to 7.3% from 10.2%.

The decline in gross margin was driven by several one-time events including costs and lower production yields associated with new program ramps, the increases in inventory reserves, and other operational inefficiencies. We expect CPS gross margins to recover to a more normalized double-digit level in the fourth quarter.

On Slide 6, we are showing you our key non-GAAP profit metrics. Gross margin was 7.8% for Q3, while gross profit was down $3 million from Q2. We have been very consistent with our gross margin ranging between 7.7% to 8.2% over the last four years.

Our operating was basically flat when compared to Q2 and increased $9.5 million or 15.4% since Q3 last year. This led to $71.4 million in operating income, and operating margin of 4.2%. Now I'd like to turn your attention to the balance sheet on Slide 7. Our cash and cash equivalents were $436 million.

62% of this cash was in the United States at the end of the quarter. Accounts receivable were up $65 million and inventory was up $28 million. Property, plant and equipment was up $20 million for the quarter. From a liabilities standpoint, accounts payable were up $82 million, long-term debt was down $3 million.

At the end of the quarter, our growth leverage improved to 1.0, continuing a very positive trend over the last seven years. Please turn to Slide 8 where we will review our balance sheet metrics for the third quarter. Cash was up $3 million from Q2.

Cash flow from operations for the quarter was healthy at $59 million and net capital expenditures for the quarter were $31 million. This led to $28 million in free cash flow for the quarter. During the quarter, we used $20.3 million to repurchase 528,000 shares at an average price of $38.40.

We have $192.5 million remaining on the share repurchase program that has been approved by our Board of Directors. Inventory turns continue to be a challenge. The impact this quarter was driven more by new product ramps than by material shortages. Material lead times did not improve but were relatively stable for the quarter.

Inventory dollars were up $28 million from last quarter at $1,047 million. Inventory turns were 6.1. In the lower left quadrant, we are showing cash cycle days, which combines our cycle time for inventory, accounts receivable and accounts payable. Overall, the cash cycle time increased from 41.9 days last quarter to 42.3 days.

Days payable outstanding was up 1.1 days to a record 70.3 days. This record performance was basically offset by a 1.2 day increase in inventory days of supply. Finally, pre-tax return on invested capital continues to be strong at 23.8%.

Pre-tax ROIC was down slightly when compared to the prior quarter but up 2.8 percentage points when compared to Q3 last year. Please turn to Slide 9. I would now like to share with you our guidance for the fourth quarter of fiscal year 2017. Our view is that revenue will be in the range of $1.725 billion to $1.775 billion.

We expect the gross margin will be in the range of 7.8% to 8.2%. Operating expense should be $64 million to $66 million. This leads to operating margin in the range of 4.1% to 4.5%. We expect that other income and expense will be in the range of $4 million to $6 million. We expect the tax rate to be around 14.5%.

And we expect our fully diluted share count to be around 78.5 million shares, plus or minus 0.5 million shares. When you consider all this guidance, we believe that we will end up with earnings per share in the range of $0.73 to $0.79.

Finally, for your cash flow modeling, we expect net capital expenditures of approximately $30 million, while depreciation and amortization will be around $30 million. Overall, our program wins and geographic diversification positions us very well for the future.

On behalf of our management team, I can tell you that we are very excited about Sanmina's future. We have accomplished a lot in the last few years and we believe that we can accomplish even more in the next few years. I also want to publicly thank Jure for his leadership and direction over the last eight years or so that I have worked with him.

What Jure has accomplished in his 37 years at Sanmina is nothing short of phenomenal. I will continue to value his insight and experience as he moves into the Executive Chairman role. I'm confident that the management transition will go well. It is a pleasure to announce that Gerry Fay will be joining Sanmina as our Chief Business Officer.

Gerry is a fantastic addition to our Sanmina team with his supply-chain experience and his existing relationships with many of our customers. At this point, I will turn the discussion back over to Jure for more comments on Sanmina..

Thanks Bob. Lot of compliments today, so this is good. Ladies and gentlemen, let me add few more comments to review our business environment for the third quarter and also outlook for our fourth quarter, and I'll talk a little bit about the rest of the calendar year 2017. So let me recap third quarter. Overall, a good quarter.

As Bob mentioned also, we have good demand. But revenue was slightly impacted by new program delays, as Bob mentioned, and also we had some technical issues on one of our customer side. Good thing is that's fixed and that product is starting to ship. Operations continue to execute well and we delivered consistent and solid results.

During the third quarter, we had a lot of good activities with our customer, I would call it strong activities. We are also introducing a good amount of new programs that will drive growth in the future. Our bookings continue to be positive. Book-to-bill for this quarter was 1.03-to-1, and year to date 1.05-to-1.

And again, what we put in bookings is strictly the orders that get released for production. We are also focused on driving the growth. Year-to-date, our growth is 6.2% and non-GAAP EPS growth year-to-date at 23%. Most important is that core customers and revenue base are expanding.

Again, overall good quarter as we continue to position Sanmina for a better future. Now please turn to Slide 11. I'd like to give you some highlights of revenue by end markets. As you can see, top 10 customers, 52.6% of our revenue. Our largest segment is industrial/medical/defense. That was 45% of our revenue.

Last quarter we did forecast that to be flat. Actually they came flat, slightly down, 0.5%. Overall, industrial was flat, medical slightly down, defense was slightly up driven by new programs ramping. For this segment, for industrial/medical/defense, we had good activities again in this business group.

Communications networks was 39% of our revenue this quarter. We did forecast it to be up. That was nicely up of 7.3%, driven by strong demand in mobile networks and optical systems. Basically, new programs are driving growth here. Embedded computing and storage was 16% of our revenue. Last quarter we did forecast to be up. That was down 4.3%.

Storage was down, driven by new program delays. Automotive slightly down, we saw slower-growth new programs, but in automotive segment we feel pretty confident there is a lot of activity and we expect this market to turn up for us. Now please turn to Slide 12. Let me talk to you about revenue outlook by market segments for our fourth quarter.

For the fourth quarter we are seeing nice improvements in demand. Industrial/medical/defense, overall very stable segment and we are forecasting upside potential. Strong customer base is driving demand and we expect this segment to continue to do well. Communications networks, we are forecasting to be up.

We are seeing a solid demand driven by optical products. New projects are ramping up. For mobile networks, we see good demand from existing and new projects. And overall, we have a good pipeline of new opportunities in this segment. For embedded computing and storage, we're forecasting for the quarter to be flat.

Computing and storage, we're forecasting to see some improvement in the fourth quarter. Automotive, we believe the new programs are starting to ramp up as we continue to see good market opportunities and growth in this segment going forward. Again, in summary, we are seeing nice improvements in demand.

We expect bookings for our fourth quarter to continue to improve. Let me make a few more comments about the business environment for the rest of the calendar year 2017. Global economy is cooperating and looks stable at this time.

Pipeline of existing and new opportunities is still good and is expanding, driven by new projects with existing customers and also a strong pipeline of new customers' opportunities. I'd like to add a few more comments on our strategy. I can tell you that our strategy is working.

It's focused on providing the right technologies for the mission-critical markets. We are targeting more stable customer base and higher-margin business opportunities, driven by superior execution, capabilities and speed.

And we continue to invest more than ever in talent, right technologies and services that will continue to drive our success in the future. As Bob mentioned, we are adding critical positions to our management team. We are pleased to announce again that Gerry Fay will be Sanmina's new Chief Business Officer.

He brings the expert in corporate development, sales, material procurement, supply chain, and most importantly, Gerry brings strong leadership, discipline, and he will be a major contributor to execute Sanmina's strategy. For more details, please see our press release. Now please turn to Slide 13. In summary, third quarter was a good quarter.

We delivered consistent operating margin and solid cash flow from operations, year-to-date revenue growth of 6.2% and non-GAAP EPS year-to-date growth of 23%, so overall good results. For fourth quarter, good demand to continue, this is what we see today.

We see new programs starting to ramp up at a faster rate and we expect improvements in our Components, Products and Services group, that the gross margins will improve. So, for fiscal year 2017, we are confident in our operational improvements and growth and we do expect to finish the year strong.

So now, ladies and gentlemen, I would like to thank you all for your time and support. Operator, we're now ready to open the line for question and answers. Thank you again..

[Operator Instructions] Your first question comes from Ruplu Bhattacharya with Bank of America Merrill Lynch. Your line is open..

Bob, congrats on the CEO future position. I just wanted to maybe start by touching on the CPS margin outlook for the fourth quarter. I think you mentioned that you expected to get back to the double-digit range. I'm just looking at last year, between 3Q and 4Q there was a decline.

So maybe just talk about like what are some of the things that are driving the improvement in the fourth quarter?.

I think the biggest issue was really the one-time events in the third quarter, which we don't expect to repeat, and I don't want to get into too much detail but we had some yield issues with new program ramps, we had some operational inefficiencies, and I think that those issues are essentially remediated now, and as long as the revenue and mix come in the way we expect, we should get back to the low double-digit range again..

Okay.

And then the delays that you've seen, that's all in storage? Was that the end market that saw the push-out?.

We actually have a number of new program ramps and storage was one area where we had some challenges, but we had challenges in several areas. And I think the future again looks very promising but we had some challenges in the third quarter..

This is Jure. If I can add to that, it's really I will kind of summarize that as more these new programs, the timing, some of these programs not ramping as fast as what we expected and some minor delays on a customer's side, with a lot of these things being resolved.

But we have a wide amount of new programs, probably more than I've seen for a long, long time, which is very positive. The most important, every one of these programs is real and demand looks pretty strong..

Thanks, Jure, on that. And just to build on that, so you are guiding the computing and storage to be flat next quarter.

So should we take it that these program delays would manifest into the first quarter of the next fiscal year, is that when you think that they ramp or are some of them ramping in the next quarter as well?.

Some of them are ramping today. They are not ramping at the numbers that we expected at to see them earlier, but we see some of those programs, they are going to ramp up this quarter and it will continue in the next quarter. Yes, the more time we have, the more confidence we have..

Okay, great.

And just the last one for me if I could, in industrial, the MSI opportunity, is it ramping as you had thought?.

Yes, that overall business is doing well. We're able to integrate it properly. We are still working with the big improvements in efficiencies and setting up the new things, a few more things to be done. But overall, I would say that we accomplished it better than what I expected 18 months ago..

Okay, great. Thank you so much for taking the questions..

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

So first of all, I just wanted to understand how you managed on the operating expense during the quarter. It seems like you came in lower than you originally thought it was going to be.

Was any of that related to timing issues that comes back in the current quarter or was there a step-down in efficiencies that we should think of going forward in our modelling, and I have a couple of follow-ups?.

So from an incentive compensation standpoint, it's very correlated with how we are doing with the business, and it was a quarter in which we didn't meet our internal expectations, and so we had to make some adjustments on the incentive compensation. I mean we obviously much rather not be doing that but that's where we were for the third quarter..

Okay.

And then in terms of the inventory, I know you mentioned that you're not having, it didn't sound like major issues on the component procure front, but in terms of how maybe inventories work down over the next couple of quarters, is the recent increase tied to some of the issues you had during the quarter or does this stay relatively high for a couple of quarters, how would you sort of describe your progress on inventory going forward?.

As long as we see the material situation stay roughly the same, I think we'll make progress as we move forward. I mean we have, again, new programs that are ramping, we obviously had to bring material in for those programs and we should start to see some progress in terms of improving the turns, everything else being equal..

Okay. And then just lastly, not to beat a dead horse on the component margins, so as they recover I guess back to where they were two quarters ago roughly, the implication is that generally speaking the operations around boards and closures, whatever, are all operating relative to plan.

It was just more of timing issues and some issues with specific programs.

So, can you just sort of talk about how much of an impact that was in the quarter, and then what the prospects are for maybe improving component margins beyond where they were just two quarters ago?.

So, I think a couple of questions in there. So, first of all, the delta from Q2 to Q3 was very much driven by one-time events, and the contribution margins across the board in Components, Products and Services continues to be very solid. It's in the neighborhood of 25% on average.

So, the real key is growing revenue on the CPS segment, and if we can do that and obviously not have some of these one-time issues associated with new product ramps, I think we'll definitely make progress in terms of expanding margins..

Great, that's helpful, and congratulations everybody on their new positions..

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

Thank you very much, and Jure, sincerely I'm going to miss your leadership. It's been a really great run and [you're like a good mark] [ph] on the Company, and a lot for Bob to follow in, big shoes..

Thank you, Jim. He's a big man and it's big shoes, so he'll do it..

That being said, two questions; on the implementation issues of the new program ramps, maybe I missed it, did you say specifically what end market or sector they were, and it sounds like, am I correct that as of today they are fully resolved or we expect like another quarter of a bit of a challenge there?.

So let me be a little bit more specific. First of all, we've been talking about in the last year that I think we've been very fortunate that we are able to expand our customer base and bring some big new accounts. At the same time, we really won some good programs with our existing customers.

And then we also have what I call whole programs that die, new programs that are coming up. So we have a lot of projects going on like that. When I was specifically talking about technical stuff that happened in one of the projects in our enterprise computing side, we had some issues on a customer side, that's been fixed, we started to ship.

These are a bunch of minor things. If they didn't happen end of the quarter, it would give us really chance to deliver a little bit higher margins and few more dollars to the bottom line. If you look at the new programs, they are really across the board. If you look at the industrial side, that business we've grown.

So, a lot of the good programs are really running on that side. Then we've got some smaller ones coming up. Communications side, we got programs that are transferring from old programs to new programs, we got some new transformation there, and it's moving pretty well.

Few delayed programs; on the automotive side, we had a fair amount of programs that are ramping up and we expect those to be ramping up pretty nicely next six months. We thought they're going to ramp up three months ago, but we definitely have more confidence today, and we're going to see. So, really there's nothing major.

It's one of those things, Jim, that we've seen it before. It depends on the customer side, on their internal growth and some of the technical issues, but nothing major. These are the programs that we are very familiar with, we work on all programs, so we are pretty confident.

So, I think if you look at our guidance for this quarter, there's a lot of confidence there and we're hoping that if these things all move in the right direction, there is upside.

Bob, anything else you want to add?.

No, I think that was a good summary..

Okay. And then I believe at the beginning of the call, I think Bob mentioned in his prepared remarks, a remediation or environmental or something.

Can you remind us again, is that all done, is it like in appeals, does it get lingering and exactly what all transpired just there quickly?.

It was something that we had reserved for over the last few years and we got more information in terms of that specific situation, and given the external reports and the information we got, we felt that we needed to reduce the reserve..

So, it was basically unlocking of accrued reserve, is that the way to think of it?.

Yes, that's the way to think of it. And the environmental stuff is always very challenging and you rely on outside experts and you make your accounting entries based on the reports you get from them, and we got new information from our outside expert..

Okay.

And then finally, my concluding question is, is that reserve unlocking? Did you mention the dollar amount or maybe it's in the footnotes, which I haven't got to yet?.

I believe it was $4.4 million..

Okay, thank you very much for the clarification, greatly appreciated gentlemen..

Operator, we have time for one more question..

Your last question comes from Sean Hannan with Needham & Co. Your line is open..

Thanks for squeezing me in here, and Jure and Bob also, just to pass along, congratulations, great working with you Jure as well, and certainly Bob, looking forward to working with you more moving forward here.

So, I'm just looking at your shares here in the aftermarket and you folks are really getting whacked here, and as I look at the guide, you've missed Street consensus on top and bottom line, but the numbers aren't that big, it's maybe 2% top line, $0.03 on the earnings.

What I'm trying to perhaps reconcile is, when you think about where our numbers were and when you think about how you've put together your guidance for today, were we the Street too high in our expectation for how you'd sequentially progress here through the course of the year, or otherwise, is it the magnitude of perhaps the component constraints or some of these delays that are a little bit more transitory that are the impact, and could you maybe bracket some type of numbers around that for how we should have otherwise thought about what you'd be looking at going into September?.

Sean, I'll turn this really to Bob to give you more details, but let me make one statement. First of all, the forecasting, it's always difficult. I mean we spend a lot of time analyzing these things and the numbers. So you're right, if you look at our numbers here, it's a few pennies here and there.

And as I said, there are so many different ways we could see that top line of our guidance, but I'll leave it there. But I think also you need to look at is what we accomplished in the last nine months. If you look at it, as I said, we have grown top line over 6%, and EPS in last – we have grown 23%.

So, I think if you look at overall numbers, it's great. And most importantly, what we have here is what we have, as I said, the most important is our customer base expanded of the business, the revenue base is a lot stronger today than we had it in last 17 years, okay.

So, I think end of the day, for us it's all about focusing on basics and making sure that we deliver what's in front of us, and you have a commitment from us to do that. I'll turn it over to Bob to give you more details..

Okay, thanks Jure.

Sean, I just want to confirm your question was with respect to the fourth quarter?.

Yes, that's correct, because frankly, and it's just my perspective, I was surprised by – I'm not surprised to see you folks down in the aftermarket but I'm surprised by the magnitude.

So, as I try to understand that and interpret what the market is telling us on this guidance, and on the flip side then trying to understand [indiscernible], in a normalized fashion, where would you have otherwise been if we didn't have some of these perhaps component issues or some of these more transitory program delays, what should we really have been otherwise looking at or did we as the Street just had it all wrong and we mapped it too aggressively?.

Okay. It sounds like you're asking a little bit about both quarters. So first of all, you guys have a really challenging job, it's not easy, and I know that because it's not easy for us and we have more information.

So, with respect to the third quarter, I mean we obviously did not expect some of these one-time events, and I think had we just not had even one of those, we would have been above the midpoint and we would have been much more solid in terms of revenue.

In terms of the fourth quarter, as you know, we only give guidance out a quarter at a time, which is part of what makes your job so difficult. And in general we believe we've got a number of wins that look really promising over the next few quarters.

Things rarely move in a linear fashion, so I can't tell you precisely what's going to happen over the next few quarters, but we definitely feel like we've got enough new programs that we should be able to continue growing the business over the next few quarters..

I'm not sure I'm going to [lead] [ph] you too much here, what I want to make sure is I understand the spirit of what your comment is, is it sounds that if we are having that sequential slight tick-up here in the fiscal fourth quarter, that there is an expectation on your end that that should continue in some manner on a sequential basis based on what you're seeing today?.

Again, we are really cautious in terms of giving guidance one quarter at a time. I think the general trends are really favorable going forward but our guidance really is for the next quarter, and we just have a number of good things going on..

Okay. All right, fair enough. Thanks Bob..

Sean, let me add to that. I think if you look at it just from economical point of view and if I compare it to a year ago, there is a lot more confidence about the future than a year ago. I think we have a lot better picture and a lot better programs in place to focus on. So, we are excited about future..

Okay, that's actually very helpful. Thanks Jure..

Ladies and gentlemen, that's all we have. Hope we answered most of your questions. If not, please give us a call and we'll be glad to hear from you. Thank you very much..

Thanks everyone..

Bye-bye..

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