Had a good lunch listening to NVIDIA. I know it was a packed room. So this is day two of Citi's conference. My name is Asiya Merchant. I cover tech hardware here and the components at Citi Research. Welcome. We have Sanmina here. We have the CFO, Kurt Adzema, here from Sanmina. And before we kickstart this with some questions that I have, you know, just some disclosures, this meeting or this event is for Citi investors, Citi clients only. No media, no press. If you happen to be media or press, and you're listening to this on the webcast, please disconnect. Did you guys have any disclosures or safe harbor statements? We just want to reiterate our, their typical safe harbor statements. Yeah. We're in no way updating guidance based on anything that's being said, and I'd refer everybody to the risk factors as laid out in our SEC documents. Okay, great. So with that, I'm gonna start off with a few questions that I have. And of course, if you do have any questions, please raise your hand, and we'll make sure we bring a mic over to you so we can accurately capture your question for the webcast. So thanks a lot, Kurt, for being here, and also thank you, I know Paige is here as well from Sanmina. So maybe to kickstart this, you know, maybe you can talk about Sanmina's core strengths, what end markets, you know, for those who may not be that familiar, perhaps, with Sanmina. How do you differentiate yourself versus other EMS contract manufacturers, you know, the end markets that you really play into? Sure. So, you know, Sanmina has been in the contract manufacturing business for over 40 years. Our founder, Jure Sola, was still with the company and the CEO. The reason I bring that up is a lot about this business is about the customer relationships you have. Many of these customers, we've been in some form or fashion working with for decades. And I think that's very important to state, because I think at the end of the day, and certainly what we've learned over the past three to four years, is how important it is to work collaboratively with your customers to deal with these challenges. First, there was the COVID challenges, and there was obviously the supply chains challenges, and now we're doing some of this inventory adjustment that's going on here. I think first and foremost, it always comes down to the relationships you have with our customers, that they do really trust you, and I think if anything, we've learned over the last three-four years is the importance of the supply chain. So that's the first thing I would say. Secondarily, in terms of products, we focus on high complexity, highly regulated products and markets. Our businesses, we describe our business as roughly 40% communications and cloud, and 60% industrial, medical, defense, and automotive. And again, you know, we don't do anything on the consumer side, so we're very much focused on these high complexity products, which makes us a little bit different. I also would like to say that we do kind of 80% of our business is traditional IMS, EMS. 20% of our business, roughly, is components, products, and services. So we still do for certain high complexity products, the printed circuit boards and mechanical and other components that then feed into our IMS business. And I think that vertical integration is also a differentiating factor for our company over some of our peers, who actually divested those businesses over time. I think the next thing I would point out is our geographic footprint. If you look at our geographic footprint, it's very diverse. And, you know, we don't have it's not just we have, you know, 80% of our business in China and the lowest cost areas. So we're well diversified. Yes, we have operations in China, but Malaysia, Europe, strong presence in North America, and our biggest facilities in Mexico. And then recently, we've always been in India, but recently we entered into a joint venture agreement with Reliance in India, as India is one of those markets that I think people have identified as kind of a great opportunity in the future for the IMS business to grow dramatically there based on some of the mandates and encouragement of the government there, so. Okay. All right, so communications and cloud, I think you referred to as 40% of your business. 40% each, I'm sorry, or 40%? No, 40% combined. Yeah. So we combine communications and cloud just because different people. Yeah, sure. D efine them differently, so we kind. Yeah W e kind of lump them together. All right. Then the other ones, if you can just touch base on them, industrial, medical, and. Yeah, so the other 60%, industrial, medical, defense, and automotive, we don't break out each of those inside of there. I will just say each of those is a material piece of that 60%. Okay. All right. So maybe we can just, again, now talk about the inventory adjustment that, you know, you obviously alluded to earlier. So how far are we in that? How much longer do we have to go? What are some signs that you're seeing that, you know, this will continue for another quarter or two? Yeah. Or longer. So again, you know, we've gone through what most people say is, you know, an unprecedented supply chain issue over the last 18 months. So I think, as that started to normalize, and we started talking about this over six months ago, how we saw the supply chain normalizing, I think it's caused some of our customers, in particular in communications, to reevaluate, hey, what's the right inventory level that they want to carry? And so I won't go into names, but certainly in the press, many, many of the communication customers have talked about that. You know, how long that's gonna last, it's really, it's really hard to say. You know, typically, you know, it's a multiple quarter thing. We certainly think it's going to last through the end of the calendar year and go into next calendar year. But we feel good about the second half of next year for growth back in the business once these inventory corrections or adjustments have happened. You have to remember that during these supply chain crises, you know, lead times, especially for some of these custom, high-end semiconductor components, went up to 52 weeks, right? And so that doesn't, you can't fix that overnight. So when you adjust your ordering, it takes 52 weeks for that to kind of catch up. So that's why it's going to be a multi-quarter adjustment process. And again, we saw some of that last quarter. We saw a little bit of it the quarter before, after what was two incredibly strong quarters in our fiscal Q1 and, and fiscal Q2 for comms. Okay. All right. And then, what about the demand side? Is it the demand side of the equation in communications end markets, or is it also the inventory? Is it just the inventory adjustment? Because we had some contract about people in the ecosystem. I shouldn't say other contract manufacturers, but we had other, you know, folks in the ecosystem that were presenting yesterday that started to talk about the demand environment versus the inventory adjustment that's going on. Yeah. So, I mean, you guys have probably listened to the same people I've listened to. A lot of these communication ODMs have actually said the demand is pretty stable and reasonable. Yeah. A nd it's primarily, they're just adjusting the inventory levels. So this does not feel like what we saw, let's say, during the financial crisis, where demand went dramatically down, therefore, they had to adjust inventory down. It's because we've just gone through this incredible supply chain problem, constraint for the last 18 months. Now we've got to normalize that. Okay. Most ODMs that we've seen, it have said publicly, it's less on the demand side and more just adjusting inventory. Adjusting inventory. And then just switching outside of the 40% market that you guys are in communications and cloud, the other 60%, are we seeing similar dynamics play out in those end markets, too, where there is inventory adjustment, but demand's kind of holding steady or something else going on in those end markets? Yeah, I'd say in those end markets, it have been more stable. In fact, you know, we feel good, for instance, in automotive. I think you're seeing a lot of continued, I'll say buzz about EV, electric vehicles and automotive and how that could be, help us as we go into next year. Not that that's a industry that's immune to what's going on in the macroeconomy. B ut I think it's certainly a situation where the percentage of cars that are EVs versus non-EVs are going up, and the electric content inside an EV is higher, which creates more opportunity for us. So that's one area. I think the other area that we see in the short term that has some growth potential is on the defense side. So the defense side for us has been slower to recover from the supply constraints, and that's because their volumes tend to be lower than, let's say, the communication guys. Yeah. And so when the semiconductor companies were addressing the capacity constraints, they focused on the high-volume stuff. And so now, I will say they're getting around to easing the constraints on the supply chain for guys like defense. And that also tends to be older technologies. It's taken longer for the supply chain issues to resolve as it relates to some of our defense customers compared to our comms customers. We should see some benefit from that in the coming quarters. Okay. You talked about, you know, as the inventory adjustments happen for your next fiscal year, 2024, you see, strong growth, or maybe at least you feel good about the second half of fiscal 2024. Yeah, I think the next couple quarters. Yeah. A re gonna be challenging as the inventory adjusts, but we do feel better that in the second half of fiscal 2024, we could start to see. Good about that growth. And again, if you wanna break it down by end markets, that would be great. Yeah. Well, well, again, I, I don't wanna reiterate, but I think, you know, again, it's the drivers really come back to, again, I think automotive is gonna be a driver. I think defense is gonna be a driver. You know, I think you'll start to see, again, at least pockets of communications, that are, that are gonna get stronger. I know there's been a lot of talk about AI feeding into. Yep. N etworking space, driving demand, and I think we could ultimately see some benefit, indirect benefit of that as our networking customers benefit, and therefore, we benefit from that. So I think there's a lot of reasons to be positive about the future of the company and for growth in the second half of fiscal 2024, and we certainly have invested a fair amount in CapEx in fiscal 2023 to support our confidence that we're gonna grow in 2024. We spent, you know, we will have spent over $200 million in capital expenditures in fiscal 2023 to set ourselves up for growth, when we get through these inventory adjustments, so. Okay, operating margin improvement, maybe you can talk a little bit about, you know, how your margin profile has been changed through, you know, through the supply chain issues, from normalizing to now normalizing inventory. Like, how are you guys managing your operating margin, and sort of how do you guys think about that target, or the target range for operating margin as you go into fiscal 2024? Y eah, so first of all, I'd say, you know, despite the tumultuous last three-plus years, right? I think the company's done a really good job improving margins. And that's not just been because of revenue growth. When I joined, I joined at the beginning of fiscal 2020, we had just posted, I think, about a $2.2 billion revenue quarter, but our margins weren't nearly what they are today. And I think the company's done a good job improving margins despite the challenges of COVID, the challenges of the supply chain, driven by a couple of things. I think first of all, when COVID hit, nobody knew what that was gonna mean, and I think we did a good job of, I would say, getting costs under control. We did a lot of actions at that time to reduce overhead costs and to make sure no matter what, you know, demand looked like, we were in a good place. I think as revenue came back, and it wasn't quite as bad as we thought it was gonna be, we didn't let those costs get back into the business, and so that resulted in operating leverage in the business. I think also we've really focused on, again, product mix, favorable product mix. In particular, again, it goes back to some of this industrial, medical, defense, and automotive, which tends to be stickier, more complex, highly regulated products, which tend to have a little bit better margins. And so, we've benefited from that product mix. And so if you look at where we were, you know, three plus years ago versus now, our margins are a lot better, both our gross margins and our operating margins on, candidly, revenue that if you go all the way back to our fourth quarter of fiscal 2019, isn't that much different. And so I think we've done a good job of improving margins. And, you know, you've seen our guidance for this quarter that we're finishing up is kinda in that 5.5%-6%, which, you know, candidly is industry-leading. What are the levers we can do to further improve this? I think, again, there's been still a lot of, I'll say, inefficiency at our plants, driven by the supply constraints. 'Cause when you run a plant, you wanna level load that plant, right? You wanna make 1,000 units every week, week in, week out. But the problem is when the supply, the materials aren't coming in like that you have inefficiencies. You got people sitting on their hands one week, the next week you're running tons of overtime. And so I think there's a lot of it. As you know, as we kinda go through this tough period, next couple of quarters, given the inventory adjustments, I think we can focus on operational efficiencies, given the improvements in the supply chain. So that's kinda one lever, lever. I think the other thing, obviously, is we'll continue to push for the more complex products, the better product mix. I think that's another thing I think that can drive us. And then I, again, as we feel like as the growth comes back, after the inventory adjustments, we'll start to get some operating leverage because of that. I think there's a lot of levers that we can pull to further improve margins. You know, we're, I'll say, satisfied that we have industry-leading margins, but we're not done yet, and we got work to do. And we take, you know, one quarter at a time with this company. That's the type of business we're in, so. Okay. Let me just ask the audience if there's any questions here for Sanmina. Nope? Okay. Maybe talk about inventories. You know, how are your DOI trending? How do you see that, you know, going forward? Yeah. Yeah, so we've started to see inventory come down. Yeah. We've made some progress over the last couple of quarters. If you look at where we were historically, three or four years ago, we're still way too high on inventory. Okay. I n my view. And so but we would expect, you know, it's gonna take another year or two for that to kinda normalize. 'Cause again, you go back to the fact that, you know, you've got all this stuff you ordered on a 52-week lead time, that has to work its way through the system. Right. So I think in general, we're headed the right way on inventory. We're making progress. It's not an overnight thing, but you know, we feel good. We're headed in the right direction, and you know, we work very closely with our customers. It's in both of our best interests for us to have lower inventories, and especially given the fact that cost of capital has increased. Yeah. You know, it'd be one thing if you've got cost of capital and interest rates of 100 bps, but when you got 500 bps, that's a different story in terms of the cost of carrying that inventory. So I think that's another opportunity for our business model. Our interest expense and other expenses have gone up just because the cost of capital has gone up. Hopefully, as we have less inventory and as those rates normalize a bit, I think that's an additional leverage point in the model. Mm-hmm. And that inventory that you're carrying—are you seeing a lot of, from, you know, reductions in terms of pricing or pricing actions being taken to clear that inventory out? Or is that inventory you feel good has to work through the system; it's not like you're gonna start to see. Yeah, so most. H eavy discounts? Yeah, the. Yeah. Yeah, so the inventory we have, it's raw materials. Right. It's not finished goods, right? We only make finished goods if the customer demands the finished goods. Right. And when we finish the product. Yes P ushed to the customer. So it's raw material. It's good material. The difference in our industry is because the customers told us to order the inventory. Yeah. T hey're on the hook for that inventory ultimately. Right. So they think twice about that. So I'm not worried about obsolescence of that inventory. It's just gonna take time for that inventory to work its way through the system. Okay. All right. Anything on the competitive nature of the industry that you operate in? Like, you know, obviously, you talked a little bit, a lot about your differentiation, but there are competitors in this space. Are you seeing anything irrational or rational from your competitors as we work ourselves through this inventory period, you know, coming off the constraints that you talked about, the supply constraints that were a function of the pandemic? Yeah. Yeah, I think the industry in general has been-- If I look back, I don't know if the right thing is 10 years or. Yeah, I was gonna say a decade. 10 years, right? So I've been in the industry for four years at Sanmina, but it, it started before my time, right? So if you look back, I don't know, eight or 10 years, I think the industry realized we don't wanna grow just for growth's sake, right? So I think the industry has really rationalized its behavior a little bit, has shied away. You know, we don't do anything in consumer. A lot of the other guys are kind of moving away from consumer. We don't do anything in handsets, and so I think the industry itself has taken a more rationalized position over the last 10 years, and I think it's shown in our margins, and it's shown in their margins. So I think that's healthy for the industry, so I think that's very good. In terms of behavior right now, I haven't seen anything that said people are no longer acting rationally because they're worried about inventory or such. So I think in general, I haven't seen any behavioral changes in our competitors. We certainly aren't behaving any differently. I think, you know, I think, like I said, it's very healthy for the industry. And like I said, I feel good about the future. We've invested in the future, given the money we've plowed back in last year in terms of CapEx. So, we feel good, and again, there are levers in our model that we think can make it better in the future once revenue starts to pick back up again. Any questions? I can continue. Okay. You're making investments, you know, you mentioned that a couple of times. Maybe you can, you know, remind investors sort of what's your CapEx outlay, and you know, where, as you guys are looking at expanding your geo footprint, perhaps, I think you mentioned India, you know, where are these investments being made? You know, specifically, which end markets or geo markets. I think you already mentioned India before as well, but. Yeah. So again, I think for us, our number one priority is organic growth. That's usually where you get your best return on invested capital. It's the lowest risk. You know, we've added some capacity recently in Thailand, where we do a lot of work around optical products. Okay. You know, I think there's a lot of. It's generally known there's a lot of demand to do maybe less optical in China and do more optical in Southeast Asia. And so that's been a real opportunity for us. We had started there with a relatively small footprint a couple of years ago, and we've expanded that capacity there for optical. I think the other area where we've expanded is in Mexico. Mexico is our biggest geography. But as part of the increased demand for electric vehicles, we've expanded our capacity in Mexico. Not a surprise, given the automotive industry. You want that capacity to be near North America. Yeah. Okay. Yeah. Okay. Mexico is the right place there. From a facility perspective, that's, those are the main ways we've done that. Our capital allocation is very simple, like I said. Number one priority is to invest for organic growth in the business. After that, you know, we've looked at acquisitions. We feel, in general, our footprint is very strong, diversified. We don't look at a geography and say, "Gee, we need more here." I'll talk about India in a second. But, so we don't, you know, we look all the time. We have a very high hurdle because we feel like there's such a good ROI inside the company. F or organic growth. But we look at that. And then, you know, we have been very opportunistic about buying back shares. You know, the good news about our business is we generate a good amount of cash flow, even in challenging times. Even, you know, when COVID hit, we were still generating cash flow. So we've opportunistically bought back shares and, you know, we every quarter, we pay $4 million of our debt off. So even though we have the best balance sheet in the industry, you know, we continue to reduce our debt and, and improve it further. So those are our capital allocation priorities. Just circling back to India, I think, you know, people probably saw we've been in India for roughly 12, 13 years now. That's a tough market to penetrate just as a U.S. company. There was an opportunity created to partner with Reliance, who obviously is a very well-known company in India and really can help us navigate there, and we think there's a huge opportunity for doing more IMS work in India. I think the government there has made it clear that's one of their industries they're prioritizing. We think it's still early days, but we think there's a lot of opportunity to grow that business dramatically. Reliance made a very large cash injection into that business, and we got that capital for a reason. We hope to grow that business over time. Okay, and that from a margin perspective, is that more of your higher margin product, the IMS, the designs? Yep. Well, our business historically in India, we've focused actually on a lot of the, what I'd call the higher complexity products. Right. Yep. We do a fair amount of clean energy, healthcare, other things there. I do think that we're seeing more interest on the communications OEM side to do more in India. So a lot of the players that maybe had done stuff in China before are now interested in doing stuff in India. So I do expect that that mix to shift towards some more communications in the future. Both based on the interest of the OEMs as well as our partnership with Reliance. But I think there's opportunities in all the industries we serve in India. I think it's a huge opportunity. I think, you know, with the, with their partnership there, I think it puts us in a unique position and, you know, we're really excited about that. Okay. You know, what, what do you think investors are maybe not grasping, perhaps? Oh, actually, before I go to that one, you know, we have heard a lot about, at this conference, not just from the EMS players, but just broadly speaking, we are talking about, you know, incremental weakness in China. You know, as we're looking through the back half of this year, maybe even the first half of next year, I think the recovery in China seems to be kind of pushed out further and further. So just to the extent that, you know, Sanmina obviously has exposure in China from an end market perspective or from your footprint perspective, maybe if you could talk about how you guys are thinking about, you know, the macro environment in China. Sure. So I would say, first maybe, address our footprint. Our footprint there, perhaps relative to our competitors, is relatively small. So if you look at our number of sq ft, we have relative competitors in business, it's in, you know, the low teens percentage of our footprint. And that facility at this point largely does serve that domestic market. But again, it's not focused on, you know, mobile handsets and consumer. Sure. R elated stuff like that. So, you know, I do, I do think, you know, I do think we have less exposure than our competitors. But, you know, it's still a very important economy, obviously, and so, you know, I think there are opportunities there beyond comms. We do a fair amount of medical stuff, for instance, out of that China facility, and I don't think that's gonna necessarily be affected by as much by the macroeconomic environment there. So, I do think, you know, China's obviously it's a dynamic situation. I don't think we've seen any direct impact on us, but certainly people are looking to do, in general, less stuff in China. Okay. And then you just alluded to AI a little bit ahead, you know, in the earlier part of a conversation. You know, to the extent that that maybe it's a long-term driver for you guys, you know, maybe are you seeing any of that yet? Or whatever it is, it's overshadowed by this inventory adjustment that you guys are going through, yeah. Yeah, I mean. That the industry is going through, I should say. Yeah, look, I think obviously there's a lot of buzz about AI. Generative AI. I n the market and in general. I, I do think to the extent AI drives the demand for a lot of this networking equipment and, and this data center stuff, that's gonna be a positive to us because we play in that end market. So I, I do think it can be one of many factors that help drive growth once we get through the inventory adjustment. But it's still pretty early, so for it to offset the inventory adjustment, I think that's probably too optimistic at this point. I also think, you know, we're tending to have more direct conversations than we've had in the past with some of those data center players and stuff, so I think that's also a positive. So I think it's gonna be a net positive for us. But I still think we're at the tip of the iceberg on that, where I can't sit here and say today it's gonna dramatically affect the quarter we're in the middle of. Sure. Yeah. I still think it's more of a future-looking thing. But it's just another reason to be optimistic about the future of our company. Have you seen any changes in your customers who are approaching you to build something as it relates to, you know, comms within data centers, et cetera, as a result of the Generative AI opportunity? Or is it. I would say. The same players? Yeah. I would say it's the similar players. Okay. You know, I, I'd be a little bit careful here. I mean, I think first of all, our customers, you know, wanna share a limited amount of information with us. Obviously, there's highly confidential stuff, what they're doing. But, like I said, I do think we will benefit from that over time, but I think it's a little early to sit there and say, "Okay, well, now we can bake in Q1 this much revenue related to AI. I think that's, I think that's a bit of a guessing game at this point. Yeah. Well, right now there's a lot of supply constraints too in general for that, for those components. No, a. Yeah. A bsolutely. Yeah. I think, you know, look, I think we're all excited about what it could mean for the market, right? Okay. But I think right now, I think, you know, our focus is really on, you know, getting through these next couple quarters, positioning ourselves well, for the second half of the fiscal year and growth in the second half of the fiscal year, on some of these opportunities that we've talked about. Okay, great. What do you think investors don't appreciate about Sanmina? I wanna wrap it up with that one. Yeah, I think, I think at the end of the day, you know, it, it's always easy to sit there and say, "Oh, well, you know, it's all, in our business, it's all about scale." So it must be that the guys that are bigger than you are in a better competitive position than, than you are. I, I think at some point, I certainly understand that argument, and at some point, the benefit of scale isn't there as much. I mean, we're a very large company with a very large footprint. You know, I think when you're looking at, you know, over 30,000 employees here, going from 30,000 to 40,000, you really don't get that much scale by adding three more plants in three other geographies. I think if people look at us, they realize, "Hey, wait, these guys, maybe they aren't the biggest, but they got the best margins. They've got a very good product mix, they've got a very good footprint, and you know, I think they're generating good cash flow." And so I think a lot of times we just get overlooked 'cause we're not the biggest. And at the same time, we're not super focused on just a niche. Right. We're kinda caught somewhere in between. But I think if people took the time to kinda look at our numbers and look at our performance and what we've done over the last three, four years and appreciate the fact that, you know, candidly, we're not trading at the multiple that others are, I think, you know, I think it's worth a lot. So. Well, I know definitely lots of investors are kicking around for new ideas here at this conference, right? Starting to look away beyond the bellwethers. So, good luck with the rest of the conference then. All right. Well, thank you. All right. Thank All right. Thank you. I appreciate everybody coming.