Good day, ladies and gentlemen, and welcome to the Sanmina Corporation's Third Quarter Fiscal 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this call will be recorded. I would now like to introduce your host for today's conference Ms. Paige Melching, Vice President of Investor Relations. You may begin.

Thank you, Katherine. Good afternoon, ladies and gentlemen, and welcome to the Sanmina's third quarter fiscal 2019 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. Let me remind everyone that today's call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided. Please take a moment to review the forward-looking statements on slide 2. 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 operations may differ significantly as a result of various factors, including adverse changes to the key markets we target, significant uncertainties that can cause our future sales and net income to be variable, reliance on a small number of customers for a substantial portion of our sales, risks arising from our international operations and other factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission. You will note in our press release and slides issued today that we have provided you with a statement of operations for the quarter ended June 29, 2019, 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 the website. 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 this call as it relates to 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 financial information. I would now like to turn the call over to Michael Clarke, our Chief Executive Officer.

Thank you, Paige. Good afternoon, everyone and thank you for joining the call today. Here with me on the call is David Anderson, our CFO.

Welcome, everyone.

I'm pleased to welcome Hartmut Liebel, our new President and COO to the call today. He has extensive knowledge of the EMS industry and run a major complex global organization. He will help us continue our path of operational excellence and growth. I am very pleased to have Hartmut joined the Sanmina team. With that, I would like to give him an opportunity to say a few words.

Sure. Thanks, Michael. So, very good to be here. The initial impressions after four weeks with the company are very positive. I'm really impressed with the team and our bench strength and how we approach our business in a disciplined and very consistent fashion. The pipeline of opportunities in our select end market is strong. And all that gives me full confidence that we have a great foundation to work from. So I'm really glad to be on the team. Michael, back to you.

Great. Thank you, Hartmut. Just to give comments on the quarter, before I turn it over to Dave. We are very pleased with the quarter, which came in as we expected. Revenues are above our outlook over $2 billion driven by solid demand for a broad range of customers and markets. We delivered solid operating margin of 4% at our midpoint and are up 4% plus target range. Non-GAAP earnings came in at high end of our outlook at $0.82 with solid free cash flow of $139 million. Our strategy is working. We continue to enhance our operational performance and further develop our go-to-market strategies in a high-mix mission-critical high-margin business. And we're on track to achieve mid-teen growth for fiscal year 2019. I will now turn the call over to Dave to give you some details on the quarter and our Q4 guidance. After which, I will provide more color on our end markets and the business followed by Q&A. Dave?

Thanks, Michael. Please turn to slide 3. Overall, our third quarter revenue and non-GAAP diluted earnings per share exceeded our expectations. Revenue of $2.03 billion was at the high end of our outlook of $1.925 billion to $2.025 billion. This was driven by solid demand across all of our end markets. Revenue was down 4.7% sequentially and up 11.8% from the third quarter of last year. As supply continued to stabilize in the third quarter, we were able to continue catching up the demand from a broad set of customers and are seeing revenue return to more normalized level. We also benefited in the quarter from the ongoing ramp of new programs to volume production. Non-GAAP diluted earnings per share at $0.82, was at the high end of our outlook was down 9.7% sequentially and up 48.4% over the third quarter of last year. On a year-to-date basis, non-GAAP diluted earnings per share have grown 66.7%. I will discuss our end market revenue, non-GAAP margin and non-GAAP diluted earnings per share performance in more detail in a few minutes. Please turn to slide 4. From a GAAP perspective, we reported net income of $42.9 million, which resulted in diluted earnings per share of $0.60 for the third quarter. This was up $0.03 sequentially and $0.13 from Q3 of last year. The sequential improvement in GAAP diluted earnings per share was largely result of our ability to make further operational improvements that partially offset the negative contribution margin flow-through on a sequential drop in revenue. The improvement over Q3 of last year resulted from higher gross profit, driven by the positive contribution margin flow-through on the increased revenue as well as operational improvements. My remaining comments will focus on the non-GAAP financial results for the third quarter of fiscal 2019. At…

Thank you, Dave. Could you please turn to slide 12 end market outlook which I'd like to provide some additional information. Communications networks made up of wireless network and an optical products. We continue to see a strong pipeline in the communications market. With traction on the 4G, LTE and 5G which drives not only the wireless infrastructure, but also the network and optical with some Sanmina is well-positioned. We see sustained demand in the optical space both metro and long-haul as well as our microelectronic capability. We expect fourth quarter revenues to be down sequentially as we end to the normalized level coming off a very strong first quarter. Overall based on our outlook for the full year, we expect our communications market to grow in the low double-digits. Industrial, defense, medical and automotive we continue to benefit from programs we have won and we continue to win that will support our growth in these markets in the future. These markets are mission-critical products that have higher qualification requirements. Our customers recognize our capabilities and the value-added we offer. As an example, we're seeing increased activity on our defense business as we expand and optimize our manufacturing footprint to service government classified programs for multiple product offering in multiple locations. Based on the forecasts from our customers, we expect our fourth quarter to be flat sequentially. However, for the full year, we expect these combined markets to grow in the 20% plus range. We see good growth potential in these markets and we are well-positioned for long-term. Cloud Solutions. We are being very selective in this market and continue to focus on building a strong pipeline with higher margin business. Based on the forecast, we expect the market to be down sequentially for the fourth quarter, but flat for…

Thank you. [Operator Instructions] And our first question comes from Ruplu Bhattacharya with Bank of America. Your line is open.

Hi. Thank you for taking my questions, and congrats on the margin improvement in the component and products side. Michael, I was just wondering for my first question, can you drill a little bit deeper into the Communications networks side? What did you specifically see in networking optical and wireless in terms of which one was stronger or weaker? Did they meet your expectation? Or did they beat? And can talk about the trend as they continue in the current quarter?

As I said, early on the communications market is all linked. We've been well-positioned especially on the wireless. And when you're well-positioned on the wireless, you get the network and then optical. And over the past several years, the team had been really strategizing of which area that the communication market we've been playing in. And we can see the benefits now in that market. I think when I look at our overall business, sometimes we can see that there's probably some inventory in the supply chain that needs to be burnt off at some of our customers. But generally speaking, we see a good future for this business.

Just one more question related to that. Some of your competitors saw some weakness in routing and switching. Have you seen the same thing in that networking? Or did you see some generally positive trends in the networking?

Well, we're seeing general positive trends.

Okay.

And everybody is on different programs and absolutely can't comment on what they say.

Got it. Okay. And then one question for Dave. I mean, the CPS margins improved 100 basis points sequentially so that was a good margin growth. I was just wondering, I mean, can you talk to us about how much more growth could there be in that segment? Are there more efficiencies to drive how autofy there the components, products and services? And how should we think about segment margins going forward?

Yeah. So, Ruplu good question. No we've been -- as you know we've been focused on our components, products and services business. And we have been working hard to get improvements both operationally in there. And as I mentioned on the call, we saw some contending flow-through from the previous restructurings we did. As we mentioned before in this business, I mean, we see this one over the mid-term to be growing in the 10% to 15% range, and our operating margins that -- of course, what we've said before that we're targeting to get to is in the 6% to 8% range. We said that overall for the company, we're trying to get back to the 4% range overall for the company. So, as we continue to make improvements inside of the various piece of this business the components and then in the products and the services. And by doing that inclusive of adding more volume to it, which gives us a contribution margin of around 25%, we think that there is continued ability to improve the margins going forward.

Okay. Okay. Thanks for taking my question, and congrats again on the quarter. Thank you.

Thank you.

Thanks Ruplu.

Thank you. And our next question comes from Jim Suva with Citigroup Investment Research. Your line is open.

Hi, Jim.

Thank you. Hi.

How are you doing?

Thank you so much for the detail support. It’s been great. You're coming off one of your strongest sales growth years. And jeez, my memory probably about nine years, 10 years, so very, very strong. And with that, there is an opportunity for people to some maybe expect that growth to continue or decelerate or facing some difficult comps. So I'm wondering if you can just maybe help us think about expectations so there is not a misalignment as we exit such a strong year this year of kind of what we should think of for next year, maybe not in details but at least kind of directionally because it's been such a robust strength of sales growth this year?

Yeah. So Jim, I think, as you know we don't -- like you just said, we don't give guidance beyond this quarter. And we have obviously -- we're seeing that we're coming out of this year as you mentioned with strength with our growth on revenue being in the mid-teens. As far as the future is concerned, I guess the indicator for us is as that at this point, we're still seeing a very strong pipeline of demand from our customers. And as we continue to monitor the situation in terms of the supply constraints, which still haven't totally gone away they're getting better. We expect to continue to be able to fulfill our customer’s requirements. But we -- we're really not in a position to tell -- to say other than what we've said before that we expect the IMS business to be in that 5% to 10% growth range and the CPS to be in that 10% to 15% growth range over the mid-term. Beyond that I can't give you anything further.

Can I just add something? I -- and obviously, we can't add to that, but I would say in an earlier slide, I said, our strategy is working, and we're focusing really on high-mix mission-critical high-margin business. And this has been going on for many, many years and I do see it coming to fruition, where we're very well positioned.

Great. Maybe a follow-up question. The segment of industrial, medical, defense, automotive, lots of big pieces within that segment it was up very strong year-to-date. Can you give us any commentary of are there couple that are really standing out? I think you'd mentioned kind of broad strength across that. I mean any details around which those may be doing the better? Or are they all kind of the same?

No. As we said before that all the four sub-segments were actually fairly strong. So, we don't break out the sub-segments, but they're all up year-to-date is about what we can say there.

Yes. We're sort of very pleased with all of them.

For the year.

For the year.

That's great. And then my last question is hitting your operating margin goal, you're kind of there now and you're very consistent with hitting that. Should we think about the focus of your company now is really kind of both feet on revenue growth and keeping that part of the engine going? Or are there other avenues that you're looking at that we should be aware of as we plan kind of the next longer term ahead? Thank you.

Well, I can't answer that, but we just brought on a new President and COO. So, we're not at all backing off on improving our margin as well as concurrently trying to improving our sales.

Yes, I would add to what Michael says. I mean as you know Jim our operating leverage model includes not just filling the plants, but we're trying to leverage both our efficiencies and the plants getting everything whether it's linearity of shipments in the plans things of that nature that add to the efficiencies using automation constantly looking at ways in which to use automation in our plants. So, we're always driving things aside from just filling plants, but definitely filling the plants with by the way I would say the right mix. I mean we're focused on diversifying our customer program, so the program inside of our customers to get the right mix for Sanmina.

Thank you so much for the details and clarifications. That was great useful and appreciated. Thank you.

Thank you.

Thank you. [Operator Instructions] And our next question comes from Christian Schwab with Craig-Hallum Capital. Your line is open.

Hey, thanks for taking my call. Do you guys believe that the environment is getting potentially more competitive as it appears some of your peers are also now 100% focused on higher margin longer and product cycle customer wins and letting business that ramps up and down aggressively with lot of velocity and lower margins stepping away and firing those customers?

I don't think this business ever gets easy and it's always competitive business. And you just keep focusing on what you need to do in this business. I think a lot of it as we mentioned -- I think I mentioned about our defense business. You've got to keep increasing your capability keeping -- increasing your engineering. I mean that's how you stay competitive.

Yes, I think Christian as well I would add to what Michael has to say that Sanmina -- we're focused on what we do well and we've been focused on these high-growth high-part markets that are highly regulated for some time. And I think that we're seeing that we're getting traction there. So, as Michael said, it's a highly competitive industry, but we're trying to continue to be on our path and our plan and our strategy, which I don't think we deviated from and I think we're showing that we're starting to produce results.

And some of these markets the win take a long time to penetrate these markets. You have to get certified and qualified and registration pivot it can take years and I think we're really well-positioned in them.

Great. And then my last question relates to a follow-up to the gentleman's question about expectations going beyond this quarter. I understand that you don't want to give specific topline guidance. But can you directionally as you guys plan for your business over the next three to five years, what is the growth rates that you are assuming at your three different business segments without global economic disruption should grow at a broad range?

Yes. So, the broad range is that we've given and we actually have broken it into the two groups, the Integrated Manufacturing Solutions segment and the CPS. We've mentioned before that -- and we still believe these growth rates, again, if the economy holds up, are relevant is that for the CPS, we're looking at 10% to 15% annually. And this is in the two to three-year time horizon. And the IMS, we've been looking at 5% to 10% annually. And we also mentioned as well, taking that from the growth rates in the revenue down to the operating margins. On the IMS, as we get that back up into the gross margins back up into the 7% range, we started to get close to where we are achieving the 4% to 5% operating margin range, depending on how you allocate SG&A. And then, we're also driving the CPS back into the 6% to 8%. So that's really where we're focused. And we're focused on leveraging our operating model. In order to do that, we see targeting these target markets that we're talking about that they impact and benefit both of those segments as we look at our business and as we manage our business. So, I think, we're still feeling good about the fact that we're on track to those targets.

Fabulous. No other questions. Thank you.

Thank you. Operator, I believe we've answered all the questions. With that, I thank you for joining the call today. We look forward to speaking with you next time, next earnings call. And have a great summer. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.