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Sanmina Corp (NASDAQ:SANM)

February 13, 2013 2:00 pm ET

Executives

Robert K. Eulau - Chief Financial Officer and Executive Vice President

Analysts

Mark Delaney - Goldman Sachs Group Inc., Research Division

Mark Delaney - Goldman Sachs Group Inc., Research Division

Great. My name is Mark Delaney, I'm a member of the Semiconductor and IT Supply Chain team here at Goldman Sachs. And it's my pleasure to be hosting Sanmina. And with us today, we have Bob Eulau, who's Executive Vice President and Chief Financial Officer.

Robert K. Eulau

Thanks, Mark. It's really great to be here. I appreciate your support and Goldman Sachs' support.

Question-and-Answer Session

Mark Delaney - Goldman Sachs Group Inc., Research Division

So let me start with your Innovative Manufacturing Solutions business, which is typically 70% to 80% of total revenue, and that area is such as printed circuit board, assembling tasks, optical and RF modules, final assembly task and direct order fulfillment. And that's certainly part of the $300 billion global EMS contract manufacturing end market. So within that, you have different parts of that end market that you address. Roughly 45% to 50% of Sanmina's total revenue is in the Communications and Networking segment. So can you talk about what the capabilities are of Sanmina, what differentiates you from that market?

Robert K. Eulau

Yes, actually, I think we really well-differentiated within that Contract Manufacturing business, and we call that segment, as you said, the Integrated Manufacturing Solutions. Because we do have a lot of integration capability that's unique. The other thing that's unique is the mix of business we have there. So unlike a number of our peers, we don't really have much consumer-oriented business at all. So we don't have any cellphone business, we divested our personal computer manufacturing many years ago. So we really focused on high-mix complex products where there's typically more engineering content and hopefully, an opportunity to make a little bit better margin because it's a product that's a little more challenging to manufacture. So I think we're unique in that respect in terms of the mix of our Contract Manufacturing business. And then, in terms of vertical markets, as you know, Communications is a very large for us. It's almost half of our company and almost half of that segment as well. And within Communications, we're really strong in terms of wireless infrastructure and optical and networking. And I would say in that market, we can compete with anybody in the world, we've got a very good footprint for servicing the Communications marketplace. The second area for us within Contract Manufacturing is really Defense, Medical and Industrial. And that segment is roughly 25% of our revenue. Some of those areas we've been in for a number of years. Medical, we started manufacturing there in the late '80s. It's a great area for us. Again, it fits the profile we're looking for in terms of complex products, there are significant requirements in terms of the manufacturing of those kinds of products, have to get FDA approval for factories, et cetera. We have unique information systems for tracking components and products in that area. So Medical is a very good solid high-mix business for us. Defense has been an area that we've been in for a number of years. And in Defense, we participate really in 2 ways, I'm sure we'll come back to that. But one way is on the Integrated Manufacturing where we're actually do Contract Manufacturing for defense contractors and aerospace contractors. So that's a good business for us. And then finally, Industrial is a business which historically, for us, was largely a semi-cap equipment. But we really been working to diversify that and getting into new areas. It's depending on how you define Industrial, it's massive, and it's very unpenetrated. There's very little outsourcing with industrial companies, most Industrials, still do a lot of their own manufacturing. So we're beginning to make some inroads there and some new market niches. And we're pretty optimistic about how the next few years will go with Industrial. I guess, to round things out, I mean, on the Computing and Storage side, I think it was around 15% of the business last quarter. Historically, there'll probably more computing that it was a storage. That mix has really shifted over the last couple of years. And we're doing a lot more on Storage. From a Contract Manufacturing standpoint, we still do produce some proprietary servers and then some storage product for other customers. Again, we'll get to the product side in a minute, but we do storage products as well. And then finally, we have Multimedia, which was up for us last quarter. I'd say most of last few quarters is kind of around in the 10% to 15% range. Again, if you go back in time, I'd say you go back 2 or 3 years ago, Multimedia was probably 90% set-top boxes and primarily, satellite set-top boxes. And what we've been doing is working hard, again, to diversify that segment because there has been a decline in the satellite set-top box market. We're actually in the process of separating with one customer in that area. And at the meantime, we're trying to build out other areas. So for example, we've been investing in casino gaming consoles and identifying working with customers in that arena. We'll been involving cameras so cinematography, high-end cinematography, high-end still photography. So we've been -- and then, we have automotive within multimedia, which has been pretty solid over the last couple of years. So it's a little long-winded, but that's kind of an outline of what we're doing on the Integrated Manufacturing side.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Yes, that was helpful. Maybe we could dig in a little bit more in some of the parts of your IMS business. So within the Communications Network, that was your largest, almost half of your total company revenue. And in few different areas you were doing in there networking type stuff and also base stations, for example. Can you talk about the -- if you have any kind of more exposure one way or the other within that?

Robert K. Eulau

Yes. We don't split out Communications in subsegments. But we're pretty solid in those 2 areas, as well as in Optical, Networking, which I mentioned. I would say wireless base stations, we're working with some of the key companies in that arena, and likewise, with Networking. Optical, I would say, our footprint is probably the best among the Tier 1 contract manufacturers and probably Fabrinet, we have the best overall footprint from an Optical standpoint. So I think we're really well-positioned there. Wireless is very important. I mean, it's important for us that we see bandwidth get consumed by smartphones and with the infrastructure get built out. And so hopefully, our customers can sell a lot more equipment and we can build it for them.

Mark Delaney - Goldman Sachs Group Inc., Research Division

One of the things we've been excited about as a tech team is the potential for 4G LTE deployment. you have some public announcements, I think, people are pretty well aware of AT&T and others in the United States this year and then maybe China with some TD-LTE deployments later in 2013. I mean, do you think you would be able to participate in that, given the breadth of your customer base?

Robert K. Eulau

Yes. We should definitely be participating in 4G buildouts. It's kind a hard to imagine that we wouldn't. And again, it's just I think -- it's a matter -- in our view, it's a matter of time. We think that you go to most major cities even in the U.S., and it becomes pretty obvious there's a need for more bandwidth. And I think it's even worse in other parts of the world. So it's over a 2- to 5-year timeframe. It just feels like there's going to be a pretty big infrastructure buildout. And it's just hard to predict exactly and in what magnitude it's going to occur.

Mark Delaney - Goldman Sachs Group Inc., Research Division

You're sharing your exposure to Communication, it's pretty high already. Is there an opportunity for you to gain share in this market and further grow?

Robert K. Eulau

Yes. Communications is a bit different than, for example, Industrial, which I talked about a moment ago. So Communications is pretty well-penetrated. And most of the big communications companies typically have more than one supplier. So yes, there's an opportunity marginally to gain a little bit of share. But we're probably not going to grow much faster than Communications segment at large. And hopefully, here and there, we'll pick up a little bit. But I don't think you can count on outsized growth like maybe you could on the industrial side.

Mark Delaney - Goldman Sachs Group Inc., Research Division

And it was actually my next question. So maybe you can elaborate on that? See you had mentioned the Defense, Industrial, Medical, about 25% of your total revenue. If you start thinking about the IMS part of your business, can you talk about maybe what inning or however you want to characterize it in terms of the potential for further outsourcing in the game that drive your growth?

Robert K. Eulau

Yes. I think we're very early stages on Industrial. Jure Sola, our CEO was one of the cofounders of the company and he said, Industrial reminds him of electronics 30 years ago. So I mean, we're just in the early stages, and it's not going to be a quick process. I mean, it's -- we think we have a good value proposition in a number of subsegments within industrial. But it's a process you have to keep working with the potential customers because they just aren't used to doing outsourcing. Whereas Communication, they boot up and think, "Okay, who we going to outsource to." That's not the way it is at industrial.

Mark Delaney - Goldman Sachs Group Inc., Research Division

You said, you're often multi-sourced in the Communications end market. Industrial, are you more typically sole-sourced?

Robert K. Eulau

I'd say that's fairly common.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. Are there -- you mentioned the Medical part of the segment that you need to have your own facilities in the United States. Yet, how many guys can even have that capability to be able to bid on the contract that you guys do?

Robert K. Eulau

Yes. There's definitely competition there. And by the way, you can have FDA-improved facilities outside of the U.S. as well, which we do have. But again, I -- we started in that business very early, so we've got an excellent footprint. Again, it's a market where I think we can compete with anybody. We've got great information systems, great quality control from a medical standpoint. And I just don't -- at this point, I really don't see any product categories we can't be pretty competitive.

Mark Delaney - Goldman Sachs Group Inc., Research Division

You mentioned Semi Equipment as part of your legacy in the Industrial business. Your Semi Equipment business, is that front-end and back-end manufacturing or is it more focused on one of those 2?

Robert K. Eulau

Yes. It's -- I think it's both. I wouldn't say it's particularly focused. It's been a challenging area, I'm sure you know, over the last couple of years really. So we've -- we're using this as an opportunity, as I said, to really diversify. And I think we'll always participate in Semi-cap Equipment. We're happy to work and service those customers. But we need to make sure that we're not too reliant on that particular industry.

Mark Delaney - Goldman Sachs Group Inc., Research Division

You mentioned at times that there's a couple of parts of that. There's some well-publicized concerns about sequestration, which on March 1 could be automatic spending cuts to the Department of Defense budget. How might you be impacted to that? Have you seen anything there?

Robert K. Eulau

Yes. Certainly, there's a lot of discussion regarding it. We are less concerned about sequestration and more concerned about the fact there's no defense budget. So we think the kinds of programs were on will clearly survive sequestration. So it's then a question of what's -- when is the budget going to be approved and how will that affect ordering patterns. And I think we'll be perhaps impacted a bit. But again, we're working on mostly communications-related equipment for vehicles and aircraft. And it's mission-critical, it's not something that suddenly DoD is not going to invest in. And you got to remember, even if the budget gets cut $100 billion, it's still $600 billion market in a given year. So it's -- there's still a lot of dollars that are being spent. And those dollars going to be directed more towards technology and less towards deploying people.

Mark Delaney - Goldman Sachs Group Inc., Research Division

You've mentioned Computing and Storage. You said you got out of the PC business. Product cycles in terms of different -- long lead [ph] -- there's different cycles that can drive transitions. Do you see anything coming down the pipeline in that segment?

Robert K. Eulau

Yes. Again, for us, with our particular segment, we're putting a lot of energy into Storage. And we had a pretty robust business in terms of proprietary servers, which has been sort of declining over time. Fortunately, the Storage business has been taking up both in terms of building other people's products, as well as our own ODM products, which we take to market. So that'll be a -- that will definitely be an emphasis for us over the next few years.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. You said Multimedia was historically set-top box. You're trying to expand into some other markets. How far along are you in that process?

Robert K. Eulau

I think where we made good progress in the areas that I noted, which was the cameras, both cinematography and high-end still cameras. And then we've also, as I mentioned, had some good success in casino gaming consoles, which also provides an opportunity for vertical integration, which is good. And then we have automotive in there. We do the multimedia consoles in cars in some cases, as well as other electronics, so we have it in that segment. And that's been a solid contributor over the last couple of years as well. So I'd say -- I might have said already set-top boxes, if you back 2 or 3 years ago, it's probably 90%. And today, probably a little over half, but it's not this incredible dependency on set-top boxes that we once had.

Mark Delaney - Goldman Sachs Group Inc., Research Division

You -- I think on your earnings call, you are alluding to it, now, one of your set-top box customers, I think, filed for bankruptcy. Do you have any update you can provide on your ability to collect?

Robert K. Eulau

Yes. Actually, it was not a set-top box customer. So we -- but you're correct. I mean, on the day of the earnings call, we did have a customer that filed for bankruptcy. It was actually a customer in a different segment, and we didn't disclose exactly who that was. We believe that we've properly reserve for that at this stage. So I don't think there are more surprises that will come, and we've got work to do in terms of trying to recover some of what we've reserved. And hopefully, we'll do that. But it was an unfortunate situation.

Mark Delaney - Goldman Sachs Group Inc., Research Division

All right. You mentioned early on that you don't do handsets, for example, within your Multimedia segment. That's obviously going to be a technology growth driver and the things like smartphones and tablets. What's your willingness to one day participate in a program like that?

Robert K. Eulau

Yes. To be candid, it's really not an area that we're interested in. We really tuned our factories, our capabilities and our core competencies towards high-mix manufacturing. And so we just stick to what we're good at. And we're -- a low-margin, high-turn business is probably not a good idea for us right now.

Mark Delaney - Goldman Sachs Group Inc., Research Division

If you had to aggregate all your comments across your IMS business, in terms of Industrial being early days of outsourcing and others, where you're further penetrated like Communications, and what's your expectation for intermediate to longer-term revenue growth in IMS?

Robert K. Eulau

Yes, I guess, couple of comments there. And we talked about this in our Analyst Meeting in mid-November. We think for that segment over the next few years, should be able to grow in the 5% to 10% range. I think unfortunately, it'll probably choppy. It's not going to be linear growth. It's some of these other things we talked about have to take hold. But we think that's a reasonable expectation for that segment. Today, it's -- that segment is around $5 billion. We think within the next 3 years or so, maybe a little longer, it should be $6 billion of business there. So I think it will be steady contributor. We'll obviously look to be improving our margins, improving the mix in that segment over time.

Mark Delaney - Goldman Sachs Group Inc., Research Division

That brings me to my next question. What was the target margin profile for IMS?

Robert K. Eulau

Yes. On the IMS side, I believe what we talked about at the Analyst Meeting is between 4% and 5%. And again, with the proper mix of business, I think that's very achievable. We've been in that range before and the last couple of years, and I think with reasonable volumes and good mix, that's a very achievable goal.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Pricing pressure or something the entire industry has to deal with, and you are certainly included in that. Is there any difference in terms of pricing pressure now relative to historical periods?

Robert K. Eulau

Yes. I think, first of all, you're right, it's always competitive everyday. You have to make sure your offering a reasonable value to your customer, and so we have to be attentive to that. I would say generally, we view our pricing as more rational following the recession than it was before the recession. I think the industry has a better understanding today that it's going to get rewarded by generating margin and generating cash and not by generating revenue. If we just want to generate revenue, we could generate billions of dollars of revenue in a heartbeat. But it wouldn't generate shareholder value, and it's the something we're interested in doing.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Rate inflation has been something that's been discussed. Again, all companies have to deal with. You talk about what you -- the things that you can control, what you're doing in terms of factory automation or where you're locating your facilities?

Robert K. Eulau

Yes. So first of all, I guess at a high level, we're really happy with the footprint we have today. We're really well-positioned around the world. Just to give you a rough idea, we're about 25%, 30% in China. We're about 20% in Mexico, around 20% in the U.S., around 20% or so in Southeast Asia. And I think that leaves around 10% in Europe. So we really have a very nice well-balanced global footprint. And I think that leaves us well-positioned as we see labor change, I know we see other economic conditions in -- around the world. And we have customers now -- I mean, a common question we get is regarding labor in China. And we have customers that clearly evaluate China relative to Mexico, for example, when they're considering the North American market. And I can say 10 years ago, it was a no-brainer. You just go to China, and everybody went to China. Now, I think it's a much more deliberate decision that a customer makes and we help them do that process in evaluating, do they go to Mexico, do they go to China, and again, fortunately, we got a really good footprint to service our customers that way. So I think we're well-positioned for dealing with whatever the reality is of wage inflation or other economic events around the world.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Maybe you could help us understand what percentage of your COGS is labor versus overhead and freight and maybe material costs?

Robert K. Eulau

Yes. It's really small. As you can imagine, material cost is, by far, the most significant item that we have. It can vary quite a bit by product area and by region. The common question we get is in China, I think a percentage of our revenue is labor in it. It runs in the low single-digit range. I mean, it's really not very material in China. So even if it goes up 10%, 15% a year, it's manageable, and it's something we have to work with our customers on.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Last question for me on this topic. As you think about your global footprint and wages, and how are you responding to some of the questions on being socially responsible and environmental impacts?

Robert K. Eulau

Yes. So we -- I believe we were one of the founding members of the ICC, so we've been involved in this for many years. We really, first of all, try and make sure we treat our employees well everywhere in the world. We generally -- there are certain cultural norms that we have to understand. But within that, we've got to make sure -- we treat company -- treat our employees well. It turns out, you look at some countries like China, I think many times, employees would rather work for a Western company than an actual Chinese company. And I think it's because of the work the ICC has done and the standards that have been set over time. So I -- yes, I think we've done our part, and we're going -- we have to always be diligent to make sure that the work standards are what they should be. But we need to be good citizens everywhere we are.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Maybe we can talk on your -- the Components, Products and Services segment. And that's generally been about 20% to 30% of your total revenue and your supply, things like PCBs and backplanes, you have services. Can you talk about some of your strengths and weaknesses and your areas you want to improve in, in the CPS segment?

Robert K. Eulau

Yes, yes. And I think that's right. We're really excited about the Components, Products and Services segment. And this is one of the areas that really makes us unique within the Contract Manufacturing arena. It's about 20% of our business. Today, it's already higher than EMS-type margins and it has potential to be significantly higher than it is today. So what it is, you described the components type of it for us in terms of printed circuit boards, backplanes, cables, mechanical systems is a unique capability we have as well, which is precision machining, plastic injection molding, sheet metal bending, stamping, painting, we have diecasting. So we've got very good component capabilities, which we sell probably 2/3 of that to third parties. And then we integrate probably 1/3 of it or so with our existing customers on the integrated manufacturing side. So those businesses on the Components side have been underperforming over the last 2 or 3 years. We've taken some actions to make progress there. I'm sure you noted that we have decided to shut down a facility we had in Malaysia, and I think it's a very opportunistic time for us to do that. We were just in the process of bringing up in the factory, and we'll see, China. And we're able to take the equipment from Malaysia and deploy it in China, so we avoid some significant capital expense by doing that. And it turns out, again, over the last decade, the material supply chain on the Printed Circuit Boards business has gotten far more robust in China than it is in other parts of Asia, including Malaysia. So because the supply chain, because of the capital equipment and the buildout we're doing in China, we really thought it was a good opportunity for us to reduce our fixed costs them to make that transition. So it's going to take a few months here, we're expecting to be through that transition in Malaysia completely by the September quarter. And that should yield us -- that, coupled with another action we're taking in Israel, should yield us about $3 million to $5 million in savings of fixed costs. So I think we'll be positioned there. So getting back to the segment, so Components, Products and Services, we also have a Products business, which makes us unique. As I mentioned before, we have storage products, which we brand as Newisys. We sell these storage projects to storage OEMs, to system OEMs, to third-party software companies who are selling in to cloud service providers, as well as in the cloud computing companies directly. So we're really well-positioned there with the products we have lived. We don't try to compete from a software standpoint. We're really focus on high-quality, high-performance, reasonable cost hardware and then provide that to our customers and let them take it to market however they wish. So I think we're well-positioned on storage. We talked about Defense briefly before. Again, it's a solid business for us, pretty stable business over the last 1.5 years and very profitable. So we're very happy with how that business is going. We -- obviously, we're going through some challenges in the U.S. right now from a Defense spending standpoint. But I think our team is still hoping that we'll see some modest growth there over the coming year. And then the final product area for us is an area called, Viking Technology, which is memory modules and solid state drive products. And we've been participating there for a number of years. We acquired Viking probably 10 years ago now, really as a memory module business. We've been investing in solid state drives. And in all of these product areas, we're going to continue to invest R&D, where most of them -- all of them are really at benchmark gross margin levels already. And in Storage, we're investing a fair amount in R&D, so we're not quite where want to be at operating margin. But the other 2, we are. So we're very bullish on the product area. And then the final area for us is Services, which is really 2 key areas: One is Design and Engineering Services, which we've been doing for a number of years, helping customers through their new product introduction process and helping them and then ramping through what we call our gateway factories in the U.S. and in Europe and moving them on to volume production. And then we have underway at the other extreme, reverse logistics, where we've been doing -- and we've been doing some of that for a number of years. On the Medical side, for example, we've been refurbishing product for probably 20 years. So we've been doing it for a number of years, but we really didn't have a footprint that was world-class. And we did a great job for the customers we had, but we really wanted a better footprint, and so we got an opportunity in the last 9 months or so to build out our footprint. So we're now providing reverse logistic services in 25 countries around the world. We've roughly doubled that business in the last year, and with the book of business we have today, we think we'll see some pretty solid growth over the rest of the year.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. I have a number of follow-ups on that and on the segment, maybe just start with reverse logistics, it's been a real attractive opportunities. It's been a great business for you. A number of other companies in the supply chain are getting into this business, and everyone's talking about great growth rates and very good margins. I'm just wondering if you're trying to bump up against anybody and what your expectation is on the sustainability of the market?

Robert K. Eulau

It's a big opportunity. I mean, it's -- I forget the numbers, but it's tens of billions of dollars. I mean, it's massive market again. And of course, there are competitive situations. One of the things we didn't talk about, thus far, is we really have a real advantage from an IT standpoint across the company. And we have a couple of exceptions like Defense business, you have 2 separate systems. But generally speaking, we run the whole company on one IT platform. And that's true for the Services businesses as well. So we've got a very, very robust IT platform for the Services business. And then the 2 key accounts are won last year, I think, was largely related to the IT platform that we had. And so I think we've got a competitive advantage there. And I think we're going to face competition. I have no doubt about that. But I think as we're building out the footprint and with our IT capability, I think we'll, again, be very competitive.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. Maybe we can follow-up on Storage and Memory the Newisys line and the Viking, the Memory Products and SSD. There's a lot of tech companies that do those types of products, Wistron or EMC or I think SanDisk or Fusion-io, Kingston, all do these types of products. And what really differentiates you and why would a customer choose your products as opposed to some of those companies that are maybe more widely recognized as having those types of products?

Robert K. Eulau

Again, we're not trying to compete with some of those companies in terms of going to market. That's not our expertise. Our -- of course, our historical expertise is on manufacturing, and then we've add design capability we acquired a number of years ago on both the Storage and the Memory side. So it's -- as I said earlier, it's really a matter of focusing on very high-quality products, high-performance products, good time to market and reasonable cost. And a lot of the depreciation that the system companies you were talking about focus on is the software. So we try to provide a platform that they can put their overall solution around and then go to market. So it's really -- it's not unlike the outsourcing strategy in general. We're trying to allow our customers to focus on what their core competencies are and then we can deliver the hardware the that could put their core competencies on top of.

Mark Delaney - Goldman Sachs Group Inc., Research Division

That's helpful. A real quick one. You said I think $3 million to $6 million of savings from Malaysia facility consolidation. Is that quarterly or is that annualized?

Robert K. Eulau

It is $3 million to $5 million quarterly.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Can you maybe just talk a little bit overall companies and the financials. And so March quarter guidance, $1.4 billion to $1.45 billion of revenue, which is down 3% to 6%, sequentially. Can you just talk about in the near-term where the markets are driving relative strength and weakness?

Robert K. Eulau

Yes. So, of course, we're just disappointed in the December quarter, which was weaker than we had anticipated. Seasonally, we would expect the March quarter to be down, and that's what we've guided to this particular March. We think the second half will be stronger than the first half of our fiscal year. That's what we've seen in the last 2 years. We're getting some indications from our customers based on rolling forecasts we get from them that, that's likely to be the case. You never know for sure, but it looks like the seasonality we've seen over the last couple of years is going to play out. The weakness in the March quarter is fairly broad-based. We definitely are expecting softness in most of the segments. Multimedia was unusually strong last quarter, and it will be coming down quite a bit in the March quarter. That's probably the only thing that has a significantly larger decline than the other segments.

Mark Delaney - Goldman Sachs Group Inc., Research Division

You mentioned in the earnings calls, so the book-to-bill is slightly negative last quarter, but as you just alluded to, you're seeing some signs of improvement in the second half. What areas do you think drive the pickup in the second half? And other areas that you've been seeing in the last month still supportive of that view?

Robert K. Eulau

Yes. So I mean, again, half of the company is Communications. So if we start to see a pickup in the second half, I'm sure Communication will be playing some role in that. I mentioned some of the areas we're optimistic about in terms of Storage and Services. I would anticipate that we'll see some growth there in the second half of the year, based on what we know today. In terms of where we stand at this point, I mean, there's no need for us to update our guidance. We still feel like we're in the right place there. So it's -- we'll see how the book-to-bill plays out. I don't put a lot of weight into that measure because you can have phenomena like we had last quarter when all of a sudden, you have a lot of pushouts and/or cancellations at the end of the quarter. And so the book-to-bill really didn't help much.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Can you talk about some of the challenges and advantages sometimes of larger customers? Last few years, you guys had a one 10% plus customer you disclosed. I think last year, Alcatel-Lucent, the year before that, it was Nokia-Siemens, which will make sense given the size of the Communications business that you talked about. So what do you need to do in terms of customer support -- not that there is any one customer in particular, but how do you manage risk of large customers and the customer service that you need to provide to them?

Robert K. Eulau

Well, I think that every customer, large and small, is a matter of constant communication. And in our business, every relationship is extremely important. So at all levels of the company, we're in constant communication. The larger companies, of course, the more senior executives get involved more frequently in that communication. But it's -- we're Service -- we're really in a service business. And so it's about making sure that we're doing what we say we're going to deliver.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Your balance sheet has improved significantly. You've taken your debt down. First large maturity is around 2019, and you've taken gross leverage to about 2.5x. Can you talk about going forward what you are planning to do with free cash flow?

Robert K. Eulau

Yes, I'm happy to do that. We're thrilled with the progress we've made on the balance sheet. For those of you who are less familiar, I mean, we've really made a lot of progress in the last -- really since the end of FY '09, we've brought our debt down by about $900 million. So it's very significant. The outstanding debt that Mark was alluding to, around $500 million in 2019, is really the last big piece. So we made a lot of progress. In terms of what we're going to do going forward, we -- we're pretty confident we'll continue to generate good cash. We generated $142 million in free cash flow last quarter -- I'm sorry, last year. We generated $78 million in free cash flow last quarter. As we generate free cash flow, the #1 priority is to have the working capital need to grow the business, and I'm confident we'll be able to do that. I think we'll generate cash at pretty high growth rates now given where we're at on the capital structure. Second thing will be small strategic acquisitions. So similar to the 2 Services business as we did last year, which totaled were less than $10 million in acquisitions, we'll continue to look for little opportunities like that. And then I really believe we're in a new equilibrium. So it's what makes the most sense from a shareholder value creation standpoint. And we either repurchase equity or repurchase debt as we pay off these 2014 notes at the end of this month, we'll no longer have any restrictions in terms of repurchasing equity, so any meaningful restrictions. So we'll definitely be taking a hard look at that. We don't think it makes a lot of sense for our company like ours, which has generated the kind of cash we're generating to be trading below book values. So I think in the shorter-term, certainly, equity repurchases look more promising.

Mark Delaney - Goldman Sachs Group Inc., Research Division

I want to give people in the audience a chance to ask their questions, if there are any. Okay. I wanted to talk a little bit about the consolidation that's taking place in the broader EMS industry. You've participated in that to an extent, some of your peers had. What's your expectation for how the industry will consolidate going forward?

Robert K. Eulau

Yes. We get asked that question a fair amount and just speaking for ourselves, I mean, I don't think we -- our timing was not good in terms of the Sanmina-SCI merger, which I'm sure what you're referring to. It's -- these are very large companies by themselves and to integrate them and to capture synergies is not an easy task from a consolidation standpoint. So I don't imagine that we're going to see a lot of consolidation, although it does discussed from time-to-time. It's -- I just think these are complicated business, and there's some theory that when you consolidate, you're actually benefiting those that don't consolidate more than those that do. So we'll see how it plays out.

Mark Delaney - Goldman Sachs Group Inc., Research Division

We talked about some of the facility optimization you're doing, and with the plant closure in Malaysia, are there other things that you still want to do going forward? Or are you going to be pretty comfortable with the cost structure after that?

Robert K. Eulau

Well, as I said, we're generally very happy with the footprint. I think, obviously, we've got some capacity we'd like to better utilize. And for the most part, it's pretty well-depreciated and not costing us a lot. But it's a big opportunity if we can put some incremental business into some of these facilities. So we'll look to do that. We -- I think I mentioned briefly, we're also consolidating 2 factories in Israel. We'll finish production in one of them this quarter and that'll factor into some of our savings later in the year. But beyond the Malaysian, the Israel situations, we don't have anything else on the horizon.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Great. Well, we're out of time. I'd like to thank Sanmina for participating today.

Robert K. Eulau

All right. Thanks a lot, Mark. Appreciate it.

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Source: Sanmina Corporation Presents at Goldman Sachs Technology & Internet Conference 2013, Feb-13-2013 11:00 AM
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