Jure Sola – Chairman, CEO
Sundar Kamath Ph.D. SVP, Technology
David Dutkowsky – EVP Communication Network
Mike Underwood, President of Defense and Aerospace Systems
Hamid Shokrgozar – President, Viking Technologies
Marco Gonzalez – EVP, EMS Americas
Bob Eulau – EVP, CFO
Jim Suva – Citigroup
Juan [Inaudible] – Bank of America/Merrill Lynch
Craig Hettenbach – Goldman Sachs
Sanmina-SCI Corporation (SANM) Investor and Analyst Day Conference Call November 17, 2011 8:30 AM ET
Good morning everyone. So if we could go ahead and take our seats, we’re going to get started. Let’s walk through a couple of housekeeping items. First off, if you could place your phones on vibrate, I’m sure most of you already do. But if you could do that for us, that would be great.
Secondly, we will be taking a 15 minute break in between some of these presentations. In that 15 minute break, I welcome you to go ahead and look at some of the products that we have here today, as well as meet with the management that we’ve brought with us.
We will conclude the day with a lunch, which gives you an opportunity to sit with our management in a smaller group setting. So that’s another plus thing for you to do. Bathrooms are out the door, down the hall and on the right if you need to use the restroom.
So we’ll go ahead and get started. The first thing we’re going to do is start off with the Safe Harbor statement, and legally have to read that to you.
Certain of the following statements including the discussions, regarding our first quarter fiscal 2012 outlook and future prospects constitute forward looking statements within the meaning of the Safe Harbor Provision of the section 21-E at the Securities Exchange Act of 1932. Actual results could differ materially from those projected in these statements as a result of a number of factors, including a deterioration in the markets for the Company's customers' products and a resulting in a decrease in the Company's customers' ability to pay for the Company's products, which therefore could reduce the Company's revenue. Customer bankruptcy filings, which could cause the Company to record charges to its earnings; reduction or cancelation of a customer orders that reduces forecasts for the quarter; the sufficiency of the Company's cash position and other sources of liquidity to operate and to expand its business; an increase in short-term rate that could increase the Company's interest expense; component shortages, including those arising from the natural disaster in Japan and, potential floods in Thailand; impact of the restrictions contained in the Company's credit agreements and indentures upon the Company's ability to operate and expand its business; competition negatively impacting the Company's revenues and margins; any failure of the Company to effectively assimilate acquired businesses and achieve the anticipated benefits of its acquisitions; the need to adopt future restructuring plans as a result of changes in the Company's business, with which increase the Company's costs and decrease its net income; and the other factors set forth in the Company's annual and quarterly reports filed with the Securities Exchange Commission.
In addition, during the course of today’s presentation, we will refer to certain non-GAAP financial measures. [inaudible] for historical periods. Such information excludes charges or gains related to stock base compensation expenses, restructuring cost including employee severance and benefit cost, and charges related to excess facility and assets. Acquisition and integration cost consisting of cost associated with the acquisition and integration of acquired businesses into our operations. Impairment charges for goodwill and intangible assets, amortization expense and other and frequent or unusual items to the extent material, or which we consider to be a non-operational nature in the applicable period. Reconciliation of these measures to their GAAP equivalent are contained in our fourth quarter fiscal 2011 earnings release and a slide presentation which is available on our website and a copy of which is available at this conference. The Company is under no obligation to (and expressly disclaims any such obligation to) update or alter any of the forward-looking statements made in this presentation, the press release, the conference calls or Investor Relations section of the website whether as a result of new information, future events or otherwise, unless otherwise required by law.
I’d now like to turn the conference over to Jure Sola, Chairman and Chief Executive Officer.
Thanks, Page. I’m happy that Page’s doing the fun part of the presentation. So good morning, and thanks for coming and joining us today. I think we’re going to have a busy day, probably a little bit longer than typical, but since you guys didn’t see us for a long time, we felt it would be a good time to go with the longer version. So we brought some of our key management for you to really get to know. And I know some of you already walked around to look at some of the products that we brought with us. Hopefully, we’ll continue to do that because sometimes these products can tell a lot more than I can up here.
So with that, what we really want to do is focus today on a long-term. We’ve been, I’ve personally been in this business for many years, a lot of good things and bad things happen. But I think today we have something that we’re very proud of, and we’re going to share that with you, and how we’re going to build this company going forward.
We’ll introduce our management to you so you’ll get to know them. We’ve got some key guys that are running some of our biggest operations around the world. But the most important is really, again, go deeper for you to really understand who we are. I really believe that Sanmina story is kind of misunderstood out there. And hopefully today you will understand it better as we share our technology, our products, services, our global operational capability. I think you’re going to find out we got a lot more, and hopefully that allows you to evaluate us, to see what that investment opportunity Sanmina really is.
So with this, what I’d like to do is now introduce our management, and I’ll start with next speaker of [inaudible]. [inaudible] is responsible for our engineering and technology strategy, and he’ll share that with you today. Also brought in David Dutkowsky, he’s been with the company for a long time. He’s Executive Vice President of Communications. [Inaudible] he’ll talk to you about communication business, our Optical business. He’ll give a lot of details what’s going on there.
Also, we brought with us Mike Underwood, newly hired President of our Defense and Aerospace. You know, he worked for us before he left us. And we brought him back to run this new division, and I think he’s very excited. I think you’re going to love his story.
Also, another exciting business of Sanmina-SCI is what we call Lighting Technology, basically memory and Solid-State Drive. I mean the Shocker buzzer, I have a tough – I always pronounce it, but I think I’m okay. You’ll forgive me. So he’ll talk a lot about the memory products. A lot of solace state, what’s going on there and how is he going in his division.
Also, I brought Marco Gonzalez, our Executive Vice President of America. Marco has been with the company for many years. He runs our North America, Latin America operations. But he’ll talk about global, global strategy of our EMS business, our capabilities and give you some more details in how we do things, how we service our customers.
Then of course our CFOs here, Bob Eulau. We’ll talk about financials and talk about the future. And we’re going to share with you, because I strictly believe that there’s a lot of opportunity here to really improve in the margin.
And of course then I’ll talk about our strategy as much as I can and give you a better understanding. Addition to the speakers, we brought in additional – a couple individuals, Charlie Mason runs our Business Development for Medical, and also Ed Porter, our new hire President that runs our interconnect division which is basically printed circuit boards and the backplanes.
So with that, let me start. First of all, you all most of you know me for many years. Been in this business since 1980. I’m one of the co-founders. On the positive side, I’m still having fun. We went through a – if you’re EMS industry, especially in the last ten years, we’ve seen a lot of good days and some tough days. And we’re going to share with you most important of where we are today and how we’re going to go to the next level.
Our company’s well set up globally, we are in 18 countries, approximately 45,000 employees. But I really, I want to focus in on new strategy we view today, how we differentiate, what we are driving internally, which is really the technology, the product. You know, we’re not just a EMS company, and we’re going to share that with you, and some of our other services that we’re expanding to.
Also, we’re going to share with you our customers. We have a – I grew up in a business development world and we do have a customer base that almost like you hate to say it, but we don’t need all those new customers. We’ve got enough customers right now, we just got to grow what we have.
At the same time, we’re always looking for new niche markets for us, but we’ve been focusing on our key markets and I’ll share with that, that with you today. Now let’s talk about our strategy. We’ve been – some of you have been talking the last two months, you ask a lot of questions. And we felt that it would be a good time to kind of go deeper so that we can share much as we can.
First of all, what are the key most important parts of our strategy. And I mentioned just a few of them all ready. It’s the markets that we believe have a lot of opportunity for growth. And also, the markets that we’re well positioned, we’re well recognized, and our customers. We attract our customers because we have a great offering. So when you look at the customer base, that means diversified. And this is also – our goal is to have a sustainable customers. And we’ll talk a little bit later on. Booking business is easy, but booking the profitable business and sustainable business is going to be there for many years, it’s a little bit more difficult. So it takes time to create that relationship with those customers. I’m very happy what we have accomplished, especially in the last two or three years.
Also we’re going to share with you a lot of differentiation. How do we differ, or do we differ from some of our competition, small and large. And how do we compete with the small and large, both from a technology point-of-view, products point-of-view, and a service point-of-view. And how do we focus in expanding and growing businesses. In today’s world, technology changes so much. And unless you’re involved in a right project at the beginning, you’re left behind. I’m going to share with you how Sanmina captured right customers and right products, and how we do that offering right technology.
So starting with the markets, we focus on communication networks. When we started the company, that’s kind of how we grew it. One time in late 2000, we were about 90% in communication side of the business. That’s still a major part of our business today, is almost half of that.
Enterprise computing and storage, multi-media, Defense and Aerospace, industrial, semi-conductor, medical systems, and clean technology. On the right side, you can see on the slide some of some of the pictures of what we do. That’s where we play. It’s in a higher technology product. We don’t blame consumer, we exited our consumer. Even in the last couple of years, as we looked at our revenue, we did exit certain products that we didn’t believe a good product for us long-term.
So if you look at just the percentage wise, communication networks is our key market, continue to going to be a key market, and David Dutkowski will talk about it today. And also we feel that there’s a lot of good opportunities for us because how well we are positioned.
Another major group is the defense, industrial and medical. Mike Underwood will talk again, more about the defense today, and aerospace industry, but that’s the area. Those are the two key markets that I believe have a lot of potential for us. Enterprise computing and storage, a substantial amount of our business in 2011. We expect that business to continue to move in the right direction. We’ve got some new products and ODM that we are offering, we’re going to continue to drive that.
Multi-media, from all of these technologies, I would say is probably the lowest technology that we build, but even in that group, we’re building some really complicated stuff. In all this, mainly used to be set top box business. While we still build some set top box business for a couple of customers, but really there’s a lot of other unique products, especially in high-end cameras, in automotive, in that group and so on that we participate in.
Again, let me talk to you now a little bit more about our customers. As I said earlier, and as a old sales guy, you hate to say you don’t need new customers, but we do have a strong and diversified customer base. These are the customers that we have a long relationship, and most important, in the last couple of years, our relationship got stronger with them and we are involved with them in their new technologies and new products. And we’re working very close with them on development project for the future.
Now let’s talk about our operational structure, how we’re structured. You’re going to hear later on from Marco and other guys as they talk about their products, how we’re globally structured. But let me give you some highlights, how do we control and what we focus on. As you build a company, when we started Silicon Valley, we were a small company and entrepreneurial, but as you grow and become globally, you realize you’ve got to have a consistency. How do you control that. In our early stage, about 15 years ago we decided to invest in just one IT system. As we acquired the company, as we grew the company in the last 15 years, we basically positioned to a pme global IT system.
I can tell you, today we’re only true EMS company that has everything on one global IT system. These are unified, they communicate to each other, all the way from the way we call on our customers, when we get a order, how do we enter it, how we track it, all our HR systems are connected to understand what’s going on globally, supply chain management, which is the biggest challenge for manufacturing companies, how do you manage your inventory, how do you manage your supplies. And of course, your financial controls. That is all connected, and we have a global consistency that allows us to be more efficient, and it also allows us to build.
So if you look at our company today, our structure – we have a structure of $50 billion company. So but at the same time, it gives us enough flexibility to be entrepreneur top company that we want to be.
Let me now talk to you about some of the management changes that we made, especially in the last couple of years. As we’ve been tuning up and positioning, and changing to our new strategy, we looked at how we were set up. And what we came to conclusion is that running everything out of one bucket in this global world, maybe wasn’t the best way. We come from a management where we allow people to make a decision on goal. And we became what I call too democratic, everything was run by federal government type of mentality. What we made from that, what I call corporate centric, with all the decision have to be made at corporate to more entrepreneurial customer centric. And in order – the reason we did it, the biggest drive there was, is that we have to refocus on differentiating Sanmina from the big guys, because you know, we sometimes compete at the $40 billion company and then we compete with the 500 or $1 billion company. And in order to do that, you really have to refocus where you’re good at and differentiate that through technology and the businesses.
And I believe, you know, we’re moving in the right direction there. As the leader of this company, there’s still some tune up there, but I think things are really moving in the right direction. And the way I measure that, when I talk to our customers, that’s where you get it, how flexible we are and how fast do we get the job done.
As we make the move, you kind of look at what drives the company, what drives that relationship with our customer? It’s the quality culture. Quality, or Sanmina quality culture is more than just building a perfect product every day. It’s the culture of continuous improvement. There’s a lot of talk about Six Sigma. I mean, we live it, it’s not just talking about it, you have to live it from one plant to another plant. And it’s more the customer has to see the benefits of that. If the customer doesn’t see the benefits, you can talk all you want and spend all this money for Six Sigma doesn’t work.
Well we implement it. We have a writer and a real world. Marco will talk a little more about that. But at the same time, also quality culture of technology, what customers are needing. Even – I started with a thinkable business and I think Steve Fox is around here, and I joked around because he’s been around longer than I’ve been. And we looked at all the circuit boards. It was a easy to describe them, but today circuit board are just not a boards anymore. You build it. It requires a lot of technology, you have to invest a lot.
So the world is changing, so that we have to evolve constantly. And then to do that, constantly in this business, to win the business you have to exceed the customers’ expectations. And it’s a lot harder doing that than just saying it. So you have to get that culture in our people. And I’m really happy what we’re able to accomplish there.
Also, being a global company, we started in Silicon Valley, today we have 45,000 people around the world. We deal with the different cultures. You know, people are people no matter where they are. I’m very proud what we have established, both from our social responsibility as a global company. We are a American company but we are also in Mexico, you’re a Mexican company. When you’re in China, you’re a Chinese company, when you’re in India, you’re a Indian company. And we bring that, I would say USA culture for respect and also respect for the environment and the responsibility that we bring as a large global organization.
I want to also share with you, how do we compete. And as I said, you’re going to hear this later on from my team more. But let me just give you a highlight. Our strategy always was, when we started the company, is to build everything around the customer, be close to the customer. And then in a global world, how do you then take that success of the new product that you just created globally, not just for a cost. I mean, ten years ago, as all of you probably know, especially you all knew the ride was all about move the product overseas, the lowest cost. If you’re not the lowest cost, you’re going to be out of the business. Well the world is becoming more balanced today. China’s cost are going up, Indian cost are going up. So today it’s more regional.
So how do we transition that boat for meeting the customer requirements so they can sell their products in China, in India, in Europe, North America at the same time, and lower the cost, and give them that end-to-end. And we have that in our company today. We have those systems and it’s functioning really well.
So Sanmina, how do we operate? If you look at our global presence, we’re really kind of focused on regional servicing our customer. Yes, we take advantage of the cut, but it’s really more about time to the market. So when you look at our regions, we kind of divide them in a five major regions, China, South East Asia, including India, of course Europe, South America, North America. So the key is how do you integrate it?
Each customer is different. So creating that customized supply train, both from North America, Asia, back and forth. Today, our IT systems allows us to do that, and that’s how we win. And the reason I’m telling you this a little bit of this story, and our team will kind of build on this, it’s not anymore just well give me the cheapest labor, it’s the giving that total supply chain, that the customer can depend on and get to the market as soon as possible.
So that was a little bit about operations, what we do, how we set up. Now let me talk about, and probably the most important part that I want to tell you today, and then my team will give you more on that, is what’s different with Sanmina today. I mean, some of you have known me for many, many years, but we all in this industry said well we’re different. I’m better than X, Y, and Z, you know.
I want to share with you what we really accomplished in the last couple of years, how we are positioning the company, and in some area, how we repositioned the company, both in technology, product and services. So I might be a little bit longer up here, but I’m really excited about the new strategy.
Our strategy in a very simple world here is that the key here is how we differentiate ourself based on the key leading technology that our customers need, the products that we have today, but maybe we didn’t focus on them for a long time, and also expanding other services. How do we put all these together with the EMS?
As I mentioned earlier, we use to run everything as what I call one bucket. And all operations, especially when we acquired SCI. We put everything in one bucket, we felt that’s the best way to run it, and it was supposedly a more effective way.
The problem with that model that we had is that we forgot about some of our key businesses. In old Sanmina, all the money that we made was in circuit boards, backplanes, mechanical systems. And then when we acquired SCI, we basically become this big EMS company. So a lot of these critical components that we were leaders in, got mixed in the big business and we forgot them.
As we went through this major global shifting, because we were mainly a North America company, you know, we spent $1 billion restructuring this company. The good thing, that was done. Actually, all our restructuring, I think 95% was done about middle of 2008. We exited, the last thing that we did is that we exited a PC business because we want to be out of the consumer, lower margin type of businesses. We’re going to focus on a more advanced type of business, that is more sustainable for us.
But in the last two years we’ve talked, we need to take it to the next level. After the recession, anytime – in the recession, I know it was tough, but you also learn hey, there’s some other things maybe we can do better. And we learn a lot. And what we learned is that maybe we’d be better off to maybe separate some of these businesses out, and refocus energy. So what I’m going to share with you today is what we are doing today.
I know this slide looks kind of complicated, but basically let me try to give you more data on that, and I’ll start with design, engineering and services. We’re separating some of these services away from what I call from the core. And the reason we do that is because – first of all, we’ve been offering engineering services to our customers for a long time, that’s how we win. And today, if you don’t have a strong engineering services, you’re just not in the game. But a lot of times I felt, we’re kind of giving it away. Well, we’re refocusing that business so we can service our customers through just engineering services, we can get revenue there, make some money, or as we do designs, and help with the customer design the better product more [inaudible] that we get the better contract.
So we’re refocusing those under the [inaudible] to really grow these engineering services to do both things. To make sure they make money, we don’t give it away. At the same time that allowed us to win the new business, and I think [inaudible] will share with you some of those capabilities.
Thanks Jure. Good morning everyone. Pleasure to be here to update you on our design engineering services and [Inaudible] technology capabilities and how does it actually fit in with what we do as Jure just described in terms of the focus in various segments. Now before I get into that, just a couple of words of introduction. I saw a couple of faces that I know, but I've been with the company for about 12 years. And during this period a lot of changes, wore a few different hats. So in the past I've been the CTF for the MS division, I've been involved in developing customer engineering, and then also CTF of mechanical systems division. So what I'm going to be covering now across all those areas and Jure recently asked me to over the corporate technology responsibility. To bring these capabilities we have together to grow the business further.
Now the agenda that I have covers three areas. First, I'm going to give you some insight into what do we have in terms of global design and engineering. Where are these resources? How we use them? What kind of products do we work on? And how does it impact the business? The second phase is, how does this engineering get applied in a key part of our business - technology business, which is our interconnect business. Sanmina is [Inaudible] produce circuit boards and backplanes. And obviously the growth in the infrastructure of the internet is vital and as Dave will talk more about it, how does what we do in the technology side fit in with the business growth. And then lastly, on the mechanical systems this is the division that was created about 2 ½ years ago, when we brought a lot of focus into all of the mechanical fabrication capabilities in the high-end precision area. And that also plays into the whole interconnect system solution and ties that together. So these are the three areas that I'm going to be covering.
So first thing is, where are these resources? As Jure said, the business is global and we have to be global. But when you look at technology development and the prototyping at NPI, most of that still happens in the - in North America, for example. So we have a significant presence of the main exports in the US and Canada, which covers system technology development, system design, interconnect technologies, mechanical design, and then the product segments that my colleagues will talk about, Viking Technologies,[Inaudible], optical communications, [Inaudible] electronics, American Design, and [Inaudible]. So all of these businesses' product focus a strong design content. So we have those design resources. And then we test engineering development for [Inaudible] manufacturing in Mexico. In Europe, we have a couple locations in Scotland and Israel. Israel is our center of [Inaudible] for [Inaudible] Industrial Mechanical Design. And in Asia we have presence in Japan, China, Singapore, and India. And part of the model as we grow is of course you have the [Inaudible] expertise in high cost regions and expense some of the resources in performing the design in lower cost regions. And India, for example, is location we have for design services as well. So over all, we have about 450 design dedicated design and development engineers in about 14 design centers. Now they focus on product design and of late becoming much more important in [Inaudible] engineering. How do we take customers products? How do we help customers take [Inaudible] for their product? How we extend the life of these products to [Inaudible] engineering? How do you make these products more manufacturable so that when the design actually hits the manufacturing floor it is manufacturable? But at the end of the day, the goal of our design and engineering services is really grow the manufacturing revenue through this customer relationship.
This is a summary of the services offering. And these really range depending upon the customer. We have some customers where we might do a complete turnkey design. There's other customers where we might focus on the backplane that's [Inaudible] chassis or optical modules. So what you see here is the capability, looking at it from the bottom left - the system architecture all the way going around the circle there to validation of the product. So the resources that we have enable our customers to engage with us from either specific design areas or complete turnkey product designs. We do have some examples where we actually work with the customer right from the concept phase, help define the specifications, and develop a complete product.
In terms of system engineering, we have all of the disciplines that are required to design a system, which include [Inaudible] design, [Inaudible] analog, former development to support the board build and development with device drivers, diagnostics, [Inaudible] of operating systems, and then manufacturing testing, and then finding regulatory compliance with certification of the products. So of these skills come in to play.
From a mechanical engineering, similar complete portfolio, which includes detailed mechanical design, the ability to do thermal structural seismic. These are key areas in the communications infrastructure. For example, where you might be developing products that might be indoor central office type products or might be outdoor base station type products which have very, very stringent regulatory requirements that have to be passed.
I touch on a couple of examples from areas that we are not going into great detail here in the presentation. And one is medical. Medical segment is very strong on the engineering and design area. We have established the presence in a lot of customers, and we put in place capabilities that allow us to work with customers right from the concept phase. The couple of examples here [Inaudible], which we helped design and manufacture. And there are other products where we look at the system given the vertical integration capabilities we have we might also have design the plastics. We might have designed the cables. We might have designed some of the enclosures. So the subsystem or subassemblies that go into the systems are areas where we get [Inaudible] engineering as well. So - but the major impact that we can have with our customers is making the design truly manufacturable and truly cost effective because historically in this business most of you know, the design needs to be controlled by the OEM and then it will be sent to the supplier to build to print. And invariably you would have issues and there would be a time to market question coming up because the design is not manufacturable. And that's one of the big areas where we can make a big impact in terms of design for manufacturability.
Now, here is a range of products that they're working in medical right now. And several of those are confidential so [Inaudible] but the point I want to make here was to give you a sense of how wide a range of products we're working on from tele-medicine on the left-hand side, which is in production and shipping, to cosmetics. Cosmetics is becoming a major industry in terms of - for example, wrinkle treatment or skin tightening and various techniques at one end. As well as, real-time DNA analysis and monitoring. So we play in diagnostics, patient monitoring, and some level of surgical applications. And the design team is very much engaged with our customers in those areas. The other product example I want to touch upon where engineering [Inaudible] design capabilities come into play is the ISO storage server business. This is an area where we have established leadership when it comes to density. So when you look at a - the [Inaudible] solution, for example, our storage servers this is an example that I'm showing here which is a 4U rack unit enclosure, which has 21 drives - 3 ½ inch drives per rack unit, which corresponds so we can package 84 of these drives in a 4U enclosure, which means you use about 450 terabytes of storage. Now when you take that 4U and put it in a 42U rack, you can put 10 of those basically. So upward of 2,000 terabytes. Tremendously high amount of storage that plays into the whole cloud and enterprise of space. So this [Inaudible] where our design skills, our packaging skills, and our optimization of the backplane and other elements of the system come into play.
We do design, we also value engineering. So this is an example that I picked to illustrate how the value engineering piece comes into play. A product that the customer has that's in use today, but they will want to upgrade it. They'd like to take some [Inaudible], they'd like to reduce the weight. They'd like to improve some of their problems. So we took on this project, our teams both in Europe and in India, and executed on coming up with a [Inaudible] solution that meets the needs of the customers. So there's a lot of these projects where the customers are looking for - they [Inaudible] like us to help them to take cost or improve the performance. And this is a growing segment of our design and engineering business.
So I've talked about design engineering, now I'm getting into the second area where how the engineering plays into high speed interconnect. And when it's the high-speed interconnect we talk about what I've termed as the gigabyte infrastructure. You've heard about modules that run at 40 gig or 100 gig and the whole issue about bandwidth and internet. And Dave's going to talk a lot more about this, but I want to show where we play from a technology perspective. Now our leadership in [Inaudible] backplanes is well-known for Sanmina for many years and the kay markets that we play, communications, hind computing, and so on are well established markets for us. So let me share with you a couple of areas where we made investments and achieved results. R&D in the PCB division focused in several areas. In the case of advance materials, in case of design of [Inaudible] process technologies, double management, and then trying to achieve this very high speed - high bandwidth performance at the backplane level. And we set a benchmark of 20 gigabits per second performance to be achieved at the backplane, which we now demonstrated. We've also got patents in several areas. As many of you know, we've had a long history in [Inaudible], capacitors, and resistors. And that was technology that we licensed to other buyers and you'll see some examples today. OptiVia super capacitors, [Inaudible], and new area called Electro-Optical Passives. So this graphic kind of illustrates some of those features I just talked about, like the [Inaudible] interconnect microvia [Inaudible] technologies, [Inaudible] passives you see on the left-hand side, which is the patented [Inaudible] capacitors, and [Inaudible] resistors. Via technologies for [Inaudible] aspect ratios and then maintaining them the performance of the [Inaudible] structure using fine line technology for getting patenting on the surface for bonding technologies, like fine [Inaudible] wire bonding. And the key part of what happens here to achieve those high bandwidths is [Inaudible] technology.
Looking at signal integrity analysis. Signal integrity analysis is becoming a very, very key part of when you start crossing from the 5 to 10 gigabits per second and trying to get to the 15 to 20 gigabits per second, every aspect of the backplane - the design, the process, the interconnect becomes very critical.
So going on to the backplanes. We've been known in the industry for building complex, large, higher layer, high performance backplanes. So we've advanced further both on the assembly side as well as on the connector side. It's [Inaudible] the back, you've got to be able to put connectors on it, you've got to be able to bring the chassis, you've got to be able to put line cards, so even though the design specification may have said 20 gigabits per second at the design point it's not just achieving at the backplane. You've got to achieve it when it's in the system. So you see a system here, we have a chassis with some backplane and line cards, it's when you put it together in the system that performance has to be achieved. So we work with fine pitch connectors and what enables that is something I want to touch on for a couple of minutes. So if you look at the top left area, historically we've been building for a long time in the 2 gigabits per second. Then we migrate to the 5 to 10 and we can achieve that by taking care of certain features on the backplane. What causes performance issues are typically discontinuity within the structure. So when you transfer the signal you look at what's called an I pattern or I diagram you got a clean signal from transmit area, you need to get a clean signal at the receiving end. And this kind of [Inaudible] the signal is things like via - for example, via stubs are termination points where the signal gets reflected back and causes noise issues. So the design of the backplane in terms of signal [Inaudible] spacing eliminating the via stubs by doing what's called back drilling for example, gets you to a certain point. But to get to the next level, which is really the 20 gigs per second requires a lot of technology process, design, and materials. And this is where we are demonstrating the ability to get to that. And what you see is a picture, not a really pretty picture though, of a 26 layer backplane where we've achieved 18 ½ to 20 gigs per second. It's quite significant. Now having made the backplane and assembled the connectors you've still got to be able to test it, so we made investments in test technology - robotic test technologies for very high intensities and fine pitch test points. And going up to 40,000 points for example, a large [Inaudible] sizes. And it's not just doing it in one location, we've implemented this test technology across all our major backplane assembly locations. So the time to market advantage is significant when the customer's trying to achieve this very high bandwidth data rate backplane in the system. And this is one of the areas where we believe we have industry leadership and that plays right into Dave's business on the communication networks.
Let me just move now - we talked about the design capabilities, we talked about the interconnect technology for high speed interconnect, now the third piece of this is mechanical systems. And this is a division and this also goes by the name of mechtronics in the industry. Some people because you've got electrical technology, electronics coming together with mechanical. And there's two areas - three areas where we believe we have industry leadership. The design value engineering is the key part of this. A lot of our wins in this business have really come through the design engagement at the electro-mechanical level. The ability to high precision fabrication, and then the gateway concept where we do this technology in the US and transfer some of this complex systems to low cost regions is important. So the markets that we are playing in communication, high-end computing, and industrial and semi-capital oil and gas these are areas where machining technologies come into play. And I'll show some examples of that. So here's a summary of the capabilities that we've put in play in the mechanical systems starting with design, sheet metal fabrication, which is typically what we use - what we call a soft tooling for building these complex chassis for routers and switches. We work in pretty much every major networking company when it comes to designing and building complex chassis for switches and routers. Stamping for high volume, hard tooling, injection [Inaudible], die-casting, precision machining which is a key competency which I'll talk about, and then also the welding of these frames. Very high precision robotic welding to achieve the dimensional tolerances and requirements for these complex equipment that you see when integrated together. So from a design perspective what we bring in play here is the combination of what we call a system packaging. How do you design a system to optimize it for the structural aspects, the seismic aspects, thermal design - thermal is a very, very important area not just in data centers, but in almost all electronic equipment. The thermal skills, then the power distribution, the power management, and then the cabling. So some examples of products where we can't share details, but I just wanted to give you an insight into the kind of products that we're working on, where we bring in the design, the electronics, the enclosures, the frames, the cables, and the system assembly. We've got four examples that I've picked here. One from the Bio-tech instrumentation area. One from wind energy for a major OEM where that's the unit that controls the pitch of the turbine blades on a large wind turbine. So that includes electro-mechanical aspects there. The one in the bottom left is a instrument for the oil and gas industry, looking at various detecting gas in the medium that flows through the box. And then the last piece which is very exciting and I'll tell you what I can say about it. It's a fuel cell company that is - we're working with on the west coast, who - it's expected to become a major player in large power generators. We're talking about 100 kilowatt and above, to replace utility as well as diesel generators. And this is an example where we're engaged with the company, about 3 years ago, started with design, and systematically built up to the point where today we are engaged with them on the power electronics, which means EMS business and enclosures and frames, which means sheet metal. There are a lot of cable in this system. And then system integration, putting it all together, as well as a backplane - putting it together - system which is probably the size of all these three tables put together here. A large system that we integrate and ship. And when that gets announced you will see the kind of potential as far as growth of the business. And these are some of the exciting new areas where mechanical systems are working on.
Another example, and Jure kind of showed this earlier on, I included this to show how the engineering engagement actually builds this relationship into something much bigger than what we started with. This is a major OEM.
Thanks, Sundar. Good morning. I’m Dave Dutkowsky; just a little bit about me. I’ve been with Sanmina since 2002. In the beginning I ran our Asia operations for a couple of years, then moved to Latin America and ran our Latin American operations. And then I moved to running our communications networking structure, infrastructure, our Communications Networking business on a global basis.
What I want to talk to you today about are really two things, but the first element is our communications business and what we’re doing in that particular segment. But then secondly, I’m going to talk and give you really a view of what we’ve been doing in a very specific area and that’s the Optical RF and Microelectronics area where we’ve, excuse me, where we’ve created a business that we think brings a lot of value to both our customers and to Sanmina.
First, Communication Networks. I’m really excited about this business and this part of the business because of what’s going on in the industry. If you look today, and these are all information from Cisco, the amount of information moving through the Internet is, over the next five years, is huge. At the end of 2015, they’re saying that all the movies ever made, the equivalent of that data will go through every five minutes. Mobile data traffic up 26 times, that’s all of us using our cell phones, our Smartphones. The video content in 2012 is going to take up half of the network capacity this year. And in addition to all of that, there’re going to be two devices hooked to the Internet for every one of us, every person in the world by 2015.
So not only will we have the devices that we look at and interface with every day, but you’ll have fixed devices that are doing functions for us like your thermostat, like a video camera in your house doing security; that kind of stuff, all of it hooked to the Internet.
So what’s that going to do? From 2010 to 2015, we’re looking at a 5X increase in the amount of data going through the networks. That’s a huge opportunity for us, for Sanmina, for our customers to grow over the long haul in this space. And it’s going to drive large investments in equipment like you see over here on the – to my right.
The key growth technologies that we see in that are, obviously, wireless access. Everything is getting hooked up in a wireless mode in some manner.
Secondly, once you hook – get information into the network, you’ve got to move it backwards, down the network, so there’s – you’re driving their optical and microwave backlog.
Then you end up with having to switch it, route it, move it around the world in some manner. Typically, that’s based on optics, and then transport.
So the keys here are, we’re driving huge demand as consumers. That is pushing back into the network and to handle that demand the networks have to get faster and more capable. To do that, you end up with the core technologies supporting that are RF and Optical and that’s where we have focused as a company to grow in the future.
So let me give you a flavor for what we do today. We support customers in – that ship product to all of the major networks on a global basis. We have a balanced portfolio where we have the market leaders in this space, and I’ll show you some of those names in a minute. But also, we have emerging customers in that portfolio that are allowing us to have a nice balance so that we’re entering, we’re working with future winners in this space. And we’re working in the go segments that I just talked about; wireless access, optical transport, routing, switching.
And we do all that – we focus on the high-technology products and systems. We are absolutely focused on high-complexity, high-mixed kind of products. I like to use the analogy, the things that we build, people never see. If you touch it, we probably don’t build it. But if you don’t touch it, we build it. And that’s the kind of stuff you see over here.
And then finally, we work to leverage all of Sanmina’s technology components in our offerings. We don’t just do EMS work, we try to build a complete system and building as many components as we can, technologies as we can.
Some examples of what we do, this is a very complex router board that has optical interfaces to it, a 1-U box for a switch, a wireless base station radio, a chassis for optical transport, and then a wireless base station. So you see the board kinds of things we do here, all the way from complex circuit boards up to great big outdoor enclosures and pretty much everything in between. And the goal behind all that is to deliver profitable growth. We’re after finding areas where we can grow and grow profitably.
We’ve got a great customer base. You see all of the leaders on there. If you look at the Ericksson, [inaudible], Siemens, Ciscos of the world, we play with all of them as well as the Hauweis of the world.
But we have – and I’ve shown you just a few, some of the smaller customers that we work with, that we believe are going to win in the marketplace going forward. So we’ve got a nice great customer base with great relationships.
Those customers, that strategy, what’s it done for us? In the past three years, we’ve got to a point where in 2011 we exceeded $3 billion of revenue in this sector, and we’ve grown nicely through those two years with last year growing over 27%. So the focus on the right customers in the right technology areas and the right segments has brought us this kind of growth and this kind of performance.
Let me tell you what’s behind that, why we think we win. First, we bring end-to-end competitive solutions to our customers, all the way from the early engineering involvement. The earlier we can get involved, as Sundar was talking about, engineering solutions to the customers, the more we have stickiness with our customers and we have more engineering revenue as well as manufacturing revenue.
Second, the Technology Components portfolio. I talked to some of the folks this morning here about, you know, one-stop shop. Come to us you’re costs, Mr. Customer, are lower and Sanmina gets more content.
To support all that, our customers have a tough time forecasting. We help them because we put a supply chain in place that’s flexible, agile and can respond to changes in demand to help them win in the marketplace.
We build to order, so that when they need something, we can put it together for them. We do direct order fulfillment, where we ship it to their customer, so it doesn’t turn into inventory for our customer, it turns into revenue for our customer. And then we do aftermarket services for the customers to bring – to allow them to not have to touch the product after they go out to the field.
Behind that, we do this globally and we support it all with our single IT infrastructure that allows us to share materials across the world and be very flexible, responsive to our customer’s needs.
All of that would not be possible if we couldn’t build quality product. We build product that supports our customers net worth 5969 reliability requirements, and we do that routinely.
We work hard to be easy to do business with to make it – to make our customers feel like it’s – when they ask for something, they get it. And we work hard at that – being easy to do business with.
And finally, all of this is based on long-term relationships. The relationships are critical. When we have those relationships, and we have a lot of them, we’re able to work together to target the right pieces of business and to grow successfully and to make our customers successful.
The bottom line, we’ve earned it. We’ve proven our performance, we’ve proven our capabilities and the customer trust us. And when they do that, you can draw your business.
So where do we build this stuff? Down the right side, you can see all the factories. We have factories – we build communications, network hardware in factories around the world. The key places through, are in our design centers in San Jose, Ottawa and Carrolton. And then the major campus that we have in Guadalajara, [inaudible] and Eastern Europe, [inaudible] and India and in China.
We use the capabilities that we have globally to give our customers the best total landed cost opportunity so they can win in the marketplace. And we do that off high-tech, high-mix products and give them the right solutions. That’s our key.
So let me give you a flavor for the end-to-end solution. And this is – this box over on the right here is – this shell, is what we – what I'm looking at here.
So it starts out with PCBs, and in this particular case, we have an 85% share of PCBs that go into those products that you see there. Those PCBs then go into – PCBs go into PCBAs where we again have an 85% share. The PCBs also go into the backplane where we have a 53% share. The backplane goes into the metal enclosure, which is a high precision metal enclosure where we’ve got a 60% share. Also into that metal enclosure goes cables where we’ve got a 6% share. We’ve chosen the cables that match our technology.
So seeing them together here, you’ve got the metal enclosure with all the backplane and cables, you’ve got the PCBAs feeding into it and that’s the product that you see there. But there’s more to it than that.
We’ve done the design on the blade that you see over there in a very – in the Deluxe module for the 40-big-blade. So we’ve got engineering content where we work closely with the customer to bring our expertise in RF and Optical to bare so that they can leverage our capability and get to market faster.
We do 40% of the repair on this particular product and we’re in the process quoting direct order fulfillment and helping the customer to reduce their costs by having us ship directly to their end customer.
So overall, this is really a win-win situation. Why is that? Well, the customer doesn’t have to have a lot of costs in place to manage all those individual pieces. They manage Sanmina and we manage the pieces. We help them from a design perspective because we bring them – we bring a variable cost of the design element to them around technologies that they may or may not have inside.
From a Sanmina perspective, you see there’s a lot of vertical content, so when we have the PCB going into the PCBA. We can get a little margin on various pieces and when you add that all up, this becomes a good opportunity for Sanmina to make a reasonable profit and to serve our customers and help them to be successful.
So let me go through and just give you a very high level of why we think we’re different. First, we focus on ensuring our customer’s success. If they’re not successful, we’re not successful. And how do we do that? We bring corporate capabilities into play. First is our global footprint. We can work in any region and give our customers a total landed cost solution that makes sense for them.
Our IT system, Global IT system allows us to minimize the materials in the supply chain and maximize flexibility. And we get leverage by buying the volumes that we buy, we get supply-chain leverage. We have our technology components capabilities ,the enclosures, the cables, the PCB, FABs, and we’ll just fix and repair. And most importantly, from a corporate perspective across the board, the relationships we have.
On the other side, within the communications networks area, we’ve got confident joint design and engineering group that works with our customers where we can bring value to them. We’ve got the optical RF and microelectronics manufacturing and design. We have our NPI gateways, and Marco is going to talk a bit about how we bring a product from our initial manufacturing location, post to the R&D teams, into volume manufacturing in the right region. That [inaudible] that you see over there started out in Ottawa, it was industrialized there and then was moved to Mexico as a part of that process.
To do that well, you’ve got to be able to move things well and not drop the ball for customers. And we believe that’s a strong element of expertise we’ve got. Our agility tuning the supply chain so it meets our customer’s needs, specifically for the products that we’re bringing to market with them is a critical element.
And then the ability to manufacturer highly complex products with a very high quality and to be able to test them and debug them is something that’s not trivial. All that tuned to our communications network’s customers and specifically to the customer’s needs around a certain product.
Okay. Now, I’d like to shift gears with you to talk about the new segment that we are going to talk about today, really, for the first time, and that’s our Optical RF and Microelectronics segments.
So let me go back a bit and talk about what we were trying to do with this. Our goal when we embarked on this was really to create a new business that is, as Jure said, could stand alone, create value, help us to grow and help us to enhance our margins.
What were we looking for when we started looking? We were looking for a long-term growth market and to take you back to my first comments about the Internet and what’s driving growth, and what technologies are support it, Optical and RF are key to the success in that marketplace. It has to have technology, it has to have design opportunities and it had to have product opportunities. And we believe this – that we found that.
It needs to extend our technology components portfolio from being – doing enclosures and cables and PCB FABs deeper and bring more confidence in technology components.
It has to play in multiple vertical markets, not just communications and we felt if we could leverage existing relationships, we would be able to gain traction more quickly there. And ultimately, you have to bring value or there’s no reason to do it.
So what we’re looking for and what we believe we’ve achieved is a sustainable competitive advantage and really compelling value for our customers. So the outcome of all that was to move to focus on Optical RF and Microelectronics and specifically in their four subsegments; the Optical Communications area, Commercial Lasers, RF and Microwave, and Sensors.
You see some samples of things we talk about and you can see the size of these things. There’s a coin next to them, or a thumbtack new to them. This is small stuff and it’s not something everybody can do.
At the end of the day, we’re doing it because we believe there’s opportunities to profitably grow in this sector.
To give you a flavor for the growth that’s projected, if you just look at the Optical Communications component area, Jure was talking about 2002 after the crash, that was when we really started getting interesting because valuations became more fair there. And you can see that the forecast going forward is really for continued growth over the coming five or six years. And I think it will go much longer than that.
A little bit of our history, back in 2001, we acquired the Alcatel products business, which brought us a design team in the optical module and processing and manufacturing confidence. We worked through the company – the following years to really capture optical business in our unstandard manufacturing arena where we’re capturing blades and systems.
Then 2009, we acquired operations in China, which brought us manufacturing at the component level for the passives, actives, modules, blades, as well as NPI. That a sizable operation that we are leveraging to grow this business.
2010, we acquired an operation in Ottawa, Canada which brought us confidence in RF manufacturing and real excellence in RF design and solution acceleration IP where we have the ability to put together models we already have to get a customer a solution very quickly.
And then in 2011, we’ve taken that technology and we’ve transferred it into Mexico and build the ability there to build 40-gig blades in Mexico today. You see a very 10-year effort and particularly in the next three years, a lot of accelerated ability there to grow the business.
So let me take you back and show you how this goes together. If you go to a large EMS competitor, you would see this kind of – typically, this kind of offering. You’d see electrical and mechanical design. You’d see the ability to make print circuit boards, backplanes, printed circuit board assemblies, blades, systems, enclosures. You typically see that. And that also would be Sanmina in the past.
If you look at my big optical competitors, the folks that are working in that space, you’ll see that they’ll build active components, modules, print circuit boards and blades. Now, if you put together those two pieces, which is what Sanmina has today, you see that we’ve got an offering that spans all of that in one company. So a customer can come to us for one solution.
On top of that, you add in RF confidence, which we don’t believe anyone has, we’re the only ones that would have RF and optical at this degree of confidence. And you add our engineering confidence around optical, RF and microelectronics and you’ve got a very strong offering to take to our customers and they see the value here and they understand what’s possible and they’re working with us in these areas. So you get the end-to-end solution at the end of the day, and that’s what’s really – we can offer – we can come from a component level, from an engineering level through to a blade level, through to a system level and do everything in between for our customer. It shortens our lead time, shortens the – it limits the amount of assets in the supply chain and gives them a solution that is very cost competitive.
Okay, what have we done with that? Well, in 2011, we exceeded $600 million of revenue in the Optical space; Optical, RF and Microelectronics space. It’s a significant business for us and it’s growing rapidly, both through acquisitions and through organic growth with our customers.
It’s not a – it’s a great group of customer too that we’re working with. You’ve seen us make announcements about Gig-Optics, Kaiam, people that we’re doing developments with. We build for the big guys. It’s a broad mix of customers that work with us here. And you’ll see customers that are not in the optical communications space, such as Tallis in there, for instance, and 3M.
So it’s a nice mix of customers that allows us to take this technology to multiple sectors in the industry.
Where do we do this? The two design centers are in Texas and Ottawa and the major manufacturing modes are in Guadalajara and China, for low cost. We also manufacturer in our Gateway strategy in Ottawa and in Carrollton.
So let me give you an example. You know, I talk about building that stuff, let me talk about the design that goes with it and where we play. We had the customer was looking for a 100-gig, is designing 100-gig blade. We’ve built every big blade today for Sanmina but we’re helping to design the next-generation blade here. It’s an ultra-long-haul module as you might expect and what we did, we worked with them on a key component in the blade, which this the component that take the optical signals and turns those into electrical signals; very high-speed, RF confidence required to design that and build that. We did the architecture, the design, we’ve done the NPI and we are doing the custom manufacturing as well as the test development; everything around that module that you see on the left side of the page. We also built a blade for the customer as well.
What did the customer get? They got time to market. They got a commitment out of us on performance, cost, reliability for that module and they get access to leading-edge technology and solution acceleration IP and they were able to augment what their R&D was doing. So together, we were able to bring more to the table than either entity could have done by themselves.
That’s an example of optical communications. But it goes deeper than that. Remember, one of the things that I said we were looking for was the opportunity to take this technology into multiple segments. So some of the designs we’ve been doing in other segments, the first one is in the Clean Tech area. This is an optical wind sensor that is used in a turbine, wind turbine to adjust the pitch of the blades to get maximum efficiency.
We did a green laser development for a multi-media application. We did a phased array radar module for a defense and aerospace application on Navy Ships, a green-light laser for cutting applications in the industrial segment and an RF device for tracking Alzheimer’s patients when they wander away in the security – the new security area.
So this goes in many, many places. You see optical applications here, you see RF applications here. Let me take you down to one other though, in a little more detail.
This is one in the medical space that we did. In this particular case, the customer wanted to sell the test tubes, in essence, that go inside, the chemistry inside of them. And what they were looking to do is test food samples for pathogens. So what they did, they came to us and they said, look, we know what we want to do but we need help designing the system to build to do this testing.
So we worked with them. We did the system design, the industrial design, all the software, the process development, the technology development and the custom manufacturing. But most critical was the optical design in the center where we were able to use our optical component technology to be able to sense the pathogens in the sample.
On the left side, you see that when we did this, we brought all of the components that Sanmina has to bare. We bought our own circuit boards, our PCBAs, our precision metals, plastics and system assembly. So what did the customer get? They got to bring to market a new device that allowed them to sell their test kits. The customer didn’t have the technical capability to do these developments in house and they got our latest optical technology access and they got a one-stop solution for that system.
So they came to us, we defined what we were doing, we did it and now it’s in the marketplace selling today.
So let me give you a quick summary on our optical RF and Microelectronics area. We have created a new business and we believe there’s really strong, long-term opportunities for this business to grow. Why do we wait in this area? We’ve got the technology confidence. What we’re talking about is very small stuff, very high speed, very difficult things to build. That’s what we bring to the table.
We also bring the ability to design those things. And when we design it, it becomes very sticky, it tends to move to Sanmina Manufacturing environment. We’re working on reference designs so that we can quickly adapt to our customer’s needs when they come in. We have our global footprint. We can offer risk mitigation to our customers to be able to manufacture their product in different regions. We have our Tier 1 supply chain where we leverage the spend of Sanmina globally to bring to the table. And we have our end-to-end capabilities of precision machine, precision metal manufacturing, printed circuit boards, cables, backplanes, all of those things come to play.
We serve multiple markets, as I said, you can see some samples in what we’re – where we are penetrating other markets with this technology. And it extends our relationships clearly. We’ve gotten deeper into our customers into the R&D side of things. And those relationships, again, make us much more sticky and much more valuable to the customer.
And the customers do realize the value and are willing to pay for it.
So the outcome, it’s helping us to grow, it’s giving us an advantage we believe is very sustainable and it brings value to both Sanmina, to our shareholders and our customers.
Okay, so let me back up now and talk about Communication Networks, just quickly summarize why we win there. And we are – it is the largest market for Sanmina. This, you know, it’s 50% of the business roughly.
As I said in the beginning, the customer-driven demand is there and that positions us for long-term growth in this sector. We’ve got a great customer base, the leaders – the coming and emerging leaders. And how do we win? We focus on the right segments and we execute. We bring engineering, we bring technology, we bring time to market, we bring quality as our customers demand, we bring flexibility so we can meet the customer’s on forecast demands and a complete solution so that we take our customers and allow them to reduce their costs.
The strategy is working, both in the Optical, RF and Microelecronics and the Communications Network space and it’s positioning us for long-term profitable growth.
I’ll introduce Mike Underwood. Mike is the President of our Defense and Aerospace business and Mike?
Good morning. I am Mike Underwood. I’m president of our Defense and Aerospace Systems in Huntsville, Alabama. By way of introduction, I'm an engineer and I’m a business man, and I’ve been in the defense industry for over 25 years. I’ve worked directly for the Government. I worked for Tier 1 prime contractors, worked many years for Sanmina SCI. I left a few years back to work for another large U.S. defense contractor but came back, as Jure mentioned, when opportunity arose to run the division as a products company because that’s what we do at Defense and Aerospace Systems, is we develop products for customers, we manufacturer those products and ship to the customer. That’s distinguished from the EMS business which is the build-print model.
And so for several years, we were under that EMS umbrella, not operating as a products division. But when Jure came me the offer to come back and run the business from a product’s perspective, that’s what attracted me back to Sanmine SCI.
What I’m going to do over the next few minutes, we’re going to talk about some of our strategies, a little overview of the company, give you a look in the market segments that we play in and a look at some of the specific products that we currently provide for those market segments. You’ll see a couple over here at the break and then give you just a glimpse into the strategies that we had going forward and what we believe will be profitable sustained growth in the future.
This business has been around for many years in Huntsville. It’s roots go back to 1961 with the acquisition Sanmina made of SCI and around 10 or 11 years ago we transitioned from being known as the government’s division to being a division in the EMS sector. And that’s what we’re now broken out back to the products division, back to our roots.
Being a military defense industry, we have to have a mission and we have to have a vision and I want to focus on the vision here because those are those four market segments that we’re going to be talking about. We are heavily engaged in aircraft systems, we have been for many years. We’ve been engaged in tactical communications as well for many years. We are now merging technology for products in radiation detection and fiber optics. We believe these are some of the areas where we’ll see that growth going forward.
But again, we are a mission-critical products company to be differentiated from and EMS company. My competition isn’t Flextron or [inaudible], my competition is other defense products providers.
So if you look at this in the holistic perspective as we design products for defense and aerospace applications, some of those products are point designs, where we have a requirement from the customer, maybe a specification, they send those requirements to us and we do the detailed design, we develop the product, we prototype the product and we deliver it from our factory.
More recently though, in the past 10 or 15 years, we saw that as the technology evolved, the ability to take those point solution designs for one specific application and expand it to a standard product family arose. So we did just that in a couple of products here that I’ll describe.
So now, we spend discretionary R&D funds to develop our own standard products in the industry. So customer design for customers, R&D discretionary funds for our own standard products. And of course, those products enjoy a high margin that we’ve ever had in the industry.
You see the box here, that’s an example of one of the products that we provide. That will give you a perspective. We call this a black box. I call it the beautiful black box. That particular box was on an Apache aircraft and it’s the brains of that aircraft. It’s a systems process.
As a systems processer, it touches every piece of equipment that’s on the aircraft, processes those signals and sends that information to other [inaudible] boxes and the pilot and the crew.
Now that particular box is also shown over there. And if you get a moment at the break, you might want to take a look at it and you’ll see that it’s got some damage. Now, we didn’t ship it from the factory that way. We didn’t design it that way, but that box was on an Apache attack helicopter in Iraq. And the helicopter was engaged with some ground assets and some other air assets and received anti-aircraft fire in the insurgent attack and a 5th caliber round, machine gun round, anti-aircraft went through the Aviontics, when into the processor and out of the processor. The Apache helicopter was able to complete it’s mission successful and get back to the compound. That is a testament to the tough environment that the products we developed have to perform in. So again, a product provider with this recognition in the industry.
Being in Defense and Aerospace requires a specific infrastructure of certifications, regulations, processes, procedures from accounting to purchasing to manufacturing to contracts. All of these are regulated by several three and four letter agencies. All of these are regularly audited by these government entities and agencies. And so we have to have that infrastructure in place to do the defense work. And that’s a key distinguisher because you don’t just wake up one morning and say, I want to get into the defense business. It comes from years of experience and engagement in this industry. I’m not the only graveyard here that’s got 25 years’ experience. We have a lot of experience in program management, it’s different from the commercial world. We have a lot of experience in business development and are rebuilding that team because this is capturing products as you work in the requirements community, defining the requirements, designing the product to meet those requirements, engaging with the prime contractors to get it on their particular platform, be it vehicle or aircraft and then supporting that product as it’s delivered into the field.
I think it’s appropriate here because we’re talking about defense and if anybody looks at the paper or watches the news, you know what’s going on with defense budgets. It’s not just the fact that the war in Iraq is over, it’s not just the fact that the drawdown in Afghanistan is eminent, you also have the added pressure of the global economy, the United States economy and the debt. All of those are working against the defense budgeting cycle. For years, many contractors, Sanmina SCI included, rode that wave of supplemental funding and high output to support the soldiers and the troops in the field. Those OCO, overseas contingency operations, or supplemental funding days are over. They’re at a cliff. And so this is a bit dated chart, but it does give you a perspective of a defense industry. You can easily see the – and it goes back 70 years, so the first peak on the left side of the chart is World War II. You can see the arms buildup, the defense budget buildup that went on in World War II. The war ends and there’s a valley.
You see the next buildup for the Korean war. The war ends and there’s a valley. Build up for Vietnam, war ends, Reagan buildup, Gulf War 1 in the early 90s, 9/11. What happens after 9/11, we engaged in Iraq, we engaged in Afghanistan. And you see that long buildup of funding and now, you see where we are now.
Now, this is a bit dated because it doesn’t necessarily show the perspective of some of the potential cuts in the industry. Nevertheless, there’s three areas that are very important and the defense will continue to fund these areas.
But further, before I go there, the United States spends more on defense than the six other top country spenders combined. And so we’re – despite the cuts that are coming, it’s an extremely robust expenditure environment, particularly when you get into the areas of things like survivability, situational awareness and security. All of those areas will continue to be funded for upgrades, for new products, for new capabilities. It’s about protecting the soldier, survivability. It’s about giving the soldier, the war fighter more situational awareness so they know what’s going on around them. And it’s about security for the United States and the citizens of the world.
And we believe that the products that we are developing, the enhancements we’re adding to existing products will be very relevant in this emerging new world of defense expenditures. Typically, after every drawdown there’s a 30% reduction over the course of 10 years. Yes, we’ll see that this time, but nevertheless, they’re opportunities for growth as well because there will still be robust spending.
We have that established foundation of defense work in Huntsville. We’ve been recognized in the industry because of products we’ve provided for many, many years. We have engineers in the aircraft systems, tactical communications, the radiation detection, the fiber optics arena that are recognized as [inaudible] in the industry. They are experts in the engineering in these fields to design discriminating products.
I show a picture here in front of our facility. That is an Apache helicopter. It’s not a great picture, but that was taken at our facility to celebrate the delivery of several thousand processors to the Apache helicopter. We wanted to do something for the troops, for the workers of the facility and give them a chance to walk around the helicopter and see it. It wasn’t trivial to pull off landing a helicopter on the front lawn.
Boeing is the prime contractor for the Apache. They had to be engaged. Senior executives from Boeing came and participated in this event as well as significant military brass and the necessary Congressional delegation as well.
So this was a major event but it shows that we have the credibility and the relationships in this industry that go beyond just providing a service, providing a product. When you add the vertical integration that you also by Dr. Kamath, the capabilities that we provide in PCBs and harnesses and enclosures that we can design in to defense and aerospace products that we design, that gives you that vertical integration value that other defense product providers do not have. Again, I’m not competing with Flex, I’m competing with defense product providers.
So it’s that broad footprint in the DoD industry, that wide footprint that we’ll be talking about that gives us that credibility and recognition. We support all four branches of the military. For the Army, we’re providing secure tactical communications for the ground and for the aircraft. The Army actually has more aircraft than the Air Force than they do the inventory. Army Aviation is centered in Huntsville, a T-shot from our factory where our engineers and designers work.
We also support the Navy. We’ve been doing development on fiber optic capabilities for the Navy for many, many years, and I’ll be talking about that in a moment.
We support the Air Force in the [inaudible] world with many, many aircraft systems. And we also support the Marine Corp with secure tactical communications and the Marine Corp has military aircraft as well that we support.
Now, we’ve taken that footprint for the four services and are extending it into other government entities, other three-level agencies, three-letter agencies, excuse me. The secure communication world is now influenced by the NSA. We’ve been working with the Department of Homeland Security now for a few years developing products for radiation detection and monitoring.
So we’re supporting all the Government entities for defense, several three-letter agencies, supporting the government and foreign military sales to support equipment of products to the allies. And all of this typically is going either directly to the government for integration or to any one of these prime contractors, second-tier contractors you see there.
So that’s the broadness of our diverse footprint in providing products in the defense and aerospace arena.
So what really differentiates us and makes us different? The ability to develop those products. It comes from the genesis of developing point solution designs for customers then extending that to developing the standard products, taking those standard products and typically going to be adding capabilities, enhancements to those products so that they can continue to perform in the field. That gives you that value-add with the customer that they know they don’t have to expend the resources for their featured enhancements, you’re going to be providing them to them, adding value.
And so with that natural engineering capability that we have, we’ve got 150 design engineers in Huntsville that are all involved in detailed analog, digital, software, firmware, board, mechanical work, all doing these product designs.
We’ve got the natural capability, the acquisition climate is changing in defense and large ticket in our non-recurring engineering funding to individual contractors to develop solutions is long going away. The Government is demanding that you bring your products to us at a particular technology readiness level and then maybe there’s some funding to take it to a qualification. But the government’s still funding technology development. There are multiple contracting vehicles for engineering services. This isn’t a reign that the Sanmine SCI Defense and Aerospace has not played in in the past but the opportunity is ripe to do this now because we have the engineering capabilities, we’re located in a high-tech center that, oh, by the way, has low engineering rates compared to other high-tech centers around the country. As a matter of fact, some of these contracting vehicles are so – for the Defense Department, are managed out of Huntsville because Huntsville is the aviation and missile command. So you see M-Com Express, that’s a $2 billion enterprise of funded product development, engineering work that we are just now beginning to explore as opportunities for Sanmine SCI.
And again, it’s the relationships that we have, the capabilities that we’ve harnessed through the years that give us the credibility to play in this market space.
So what is that market space? Where do we play What are our market segments? We start with aircraft systems. We’ve been long engaged in aircraft products. The roots of the company in 1961, SCI stood for Spacecraft Incorporated. We developed circuit boards and built them for the Saturn [inaudible] rockets that went to the moon. Then we developed products for the Voyager program and other NASA programs that left the solar system. High reliability product development.
Then we got into the aircraft world in the ‘70s and ‘80s and ‘90s and 2000s. So we’ve got a long history of providing products to fixed and rotary wing aircraft. We took the capabilities that we learned there in the aircraft world, very tough environment, again, taking aircraft, anti-aircraft rounds and still performing – we took that and applied it to the tactical world as well. And by tactical, I mean the ground where commanding flow operations centers, tactical operation centers are and where vehicles are on the ground, combat vehicles and personnel carrying vehicles.
I wanted to get in the tactical communications arena several years ago because I know how many military – how many vehicles there are in the Army. Get into vehicles, get into tactical space because there’s lots of opportunities. And so that’s exactly what we did.
We also got engaged in radiation detection technology because we saw this as a market space for potential growth. Unfortunately in the world, you have overt terrorists activity, nuclear detection, radiation detection and monitoring is very important, not just for terrorists activity, but from natural disasters such as, unfortunately what happened to Japan earlier this year.
So this is an emerging area that we didn’t just wake up and say, we’re going to get in that arena, we’ve been developing for the Department of Homeland Security products in this arena for the past several years. And then you go to the fiber optics arena where we have intellectual property that’s been applied to everything from behind missiles, torpedoes to commercial aircraft.
So that’s the market segmentation, very broad, very diverse and not niche in one area that can be affected by economic downturns or defense budget cuts.
Now, if you look at what products we provide I’m going to speak to products that we developed at Sanmina SCI. Most of these products are standard products that we developed on our own discretionary fund. Some are point solutions for a specific aircraft or tactical application. But I like saying about aircraft is, name a military aircraft and we probably developed some solution for it, some product for it.
You’ve see a plethora of the aircraft there we’ve represented. We’ve been engaged in this industry, again, for many, many years. And you see a sampling of some of those boxes, some of those products that we’ve provided to this industry over time. And this resulted in us developing our own standard product aircraft products, and that’s very important because just going down, not many new starts in the aircraft arena, so what are they going to do? We’re going to fly the aircraft for many, many more years.
I was recently with Boeing executives in Philadelphia where they put the V-22 and the Schnook helicopter. They bought in Agent Crosby from the AmCom, which is, again, right outside of our facility at [inaudible], and he talked about flying the Schnook helicopter in 1960 and the ceremony was about opening of a new factory at Boeing to support the aircraft through 2035. A lifetime, 75 years of support aircraft. This is not commercial industry. So when you have products on the aircraft, you have an established footprint, you can add capabilities and upgrades to that much easier than getting engaged on a new start that’s going to take years. When they’re going to modernize an aircraft, they go right into production with that modernization scheme that’s been developed. It doesn’t take years of developing the new airframe, the airframe exists.
So we have market opportunities in this arena to continue the expansion of our existing products. In tactical communications, it’s all about C4ISR, Command, control, communication, computers, information, surveillance, reconnaissance, C4ISR. Everything the military does to move, shoot or communicate comes down to that little acronym, C4ISR. And that’s where we play, providing that rubber-meets-the-road, critical survivability-related communication for the soldier or the war fighter.
The LRUs, the boxes that you see in this display, is our standard top-net Internet communication system that we’ve developed to support this tactical communication market and have been very successful with a very high-margin product now for many years. And the product continues to see growth opportunities as we add capabilities.
Radiation detection, again, science projects are typically what the Department of Homeland Security has been funding in this arena. This specific office is the Domestic Nuclear Detection Office, also referred to as DNDO. DNDO’s sole mission is to develop products that will detect radiation sources and monitor radiation sources.
A couple of the products that we work with, and you see here, one of them is called ARMD, Advanced Radiation Monitoring Device. Another one is called HPRDS, Human Portable Radiation Detection System. Our engineers developed the products, our manufacturing facility in Huntsville built the products.
There are still some limitations in this technology. It’s not steaming the SCI limitations, it’s limitations in the technology. So I’ll talk about some strategies on this in a moment.
And again, in the fiber optics arena, we’ve worked on funded R&D programs for many, many years to develop a suite of decision dispensing capabilities for the behind missiles, behind torpedoes or behind underwater unmanned vehicles our UUVs, which is a high-growth area in the defense arena.
Also, we have some discriminating IP technology in data bus connectorization that we’ll be talking about as well.
So once again, broad product mix in a broad, diverse market segment set. So that poises us for stability. The products we’ve been shipping in these areas – designed and shipping in these areas for many years have long, stable, profitable performance that will continue into the future. It’s building upon those with new enhancement and features that we’re going to talk about now.
In aircraft systems, that years of experience led to development of a standard product, intercommunication system for the air. It’s called FireCom. Now, when you talk about aircraft and modernizations, the whole name of the game in the aircraft world is get the weight off the aircraft. Less weight, less fuel consumption, more range, other equipment, other capabilities you can add to the aircraft.
LRU consolidation, LRU is another name for the black box that we provide, Line Replaceable Unit. If you connect features to that box, additional capabilities, then another box can come off the aircraft or you’ve added new capabilities that were not on that aircraft before for survivability situational awareness. So we’re building upon that product line of FireCom, taking into consideration the LRU consolidation, add features, reduce the number of boxes on the aircraft and develop some discriminating IP on the Situational Awareness Survivability role, voice recognition. Now, if you take your 4S out, it’s got some pretty nifty voice recognition but it’s a little bit different in the cockpit.
Typically, right now, if the pilot or the crew want to change a setting, he’s got to find the box, flip a switch and that will send the signal through the dust. What if the pilot could say the command, it went through is microphone to the communication system, over the Avionics dust to the brains of the aircraft’s systems processor and then went to the specific black box on that aircraft that may be in the back in an equipment bay and immediately made that change.
Well, for one thing, it would be pretty nifty. It would keep his hands free to do other things. And for another thing, it would have to be instantaneous. We developed some very sophisticated software algorithms in hardware that are now being unveiled. The first instantiation will be on the Apache helicopter, we believe, in a demonstration. But we’ve developed this an open-architecture solution. It’s not a point solution for one aircraft. It’s an open-architecture solution that can be applied to multiple aircraft. But even further, this technology is important in the tactical world. What if the driver didn’t have to take his hands off the wheel to respond to a threat?
So there’s nifty applications for this technology and we have and developed the IP. We were not funded for this effort, we spent our own discretionary R&D to develop it. Another area that’s important in the situational awareness survivability role is special audio. The ability to know exactly where an audio source is, maybe it’s a noise, maybe it’s a threat, maybe it’s a warning, are coming from and to control their orientations specially in their head via the way the sound is coming into your headset. What if the pilot had the ability – and typically he’s attending to seven or more audio sources; radios, crew communications, threats, warnings, plus he’s flying an aircraft and possibly doing the weapons as well.
So what if he had the ability to orient that dynamically in the pilots head so no matter how they turn, they still had that special perspective of where the audio source was coming from? We have that IP and we believe the time is coming for these types of technologies in the aircraft modernization world, particularly when you can advantage the ability, not by adding a new box, but by adding it into existing hardware as a capability upgrade.
And then further in the aircraft world from the security perspective, that communication around the aircraft, that’s very secure. You don’t want bad guys hearing that. It’s got to be encrypted and there’s a special kind of encryption that it must be. We have now developed, on our own R&D funding, and have intellectual property with a new secure wireless intercommunication system that we believe will be broadly adopted in the aircraft industry, in the military aircraft industry.
So it’s all of these capabilities and the ability to add them in as features to existing products to reduce weight on the aircraft and improve the survivability and situational awareness that we believe poises our intellectual property, our products for a bright future.
A similar story in tactical communications. Based upon our footprint, based upon our engineering, we developed a suite of tactical communication products called Tatnet. Standard product, off-the-shelf, but what goes on in the ground tactical vehicular world is the same thing that goes on in the aircraft. In the ground tactical world, it’s all about space, weight, power and cost. The vehicles don’t have as much funding as the aircraft. That’s when the sea variable comes in there. And that’s what I referred to by Swap-C reduction. In military vernacular, get the space, lower the space, lower the weight, lower the power draw and lower the cost. Swap-C reduction.
And we’re perfectly poised to do that because the ability with our Tatnet product. We have the footprint, we have the relationships with the requirements community, we have the relationships with the vehicular prime contractors, so we have the ability to see what other features may be coming. In the vehicular world, power is king. They’ve added multiple equipment items to these vehicles to protect the soldier, to protect the war fighter, but they all require more power. Everything on the vehicle is using electronics, using electricity, using juice. There’s never enough so you’ve got to reduce the power consumption of the critical mission-critical products that you have on the vehicle. You’ve got to reduce the space [inaudible]. Every equipment item takes up space and if you’ve ever been in a tactical vehicle, it’s not like riding in a Cadillac. There isn’t a lot of space. These soldiers are carrying more and more gear that takes up space, more and more equipment is brought on for survivability. That takes up space. So what if you could reduce the footprint of the space required for some of those critical boxes that are performing the critical functions, add capabilities and features and lower the weight of the vehicle, lower the space time on the vehicle and by the way, lower the cost of the equipments package that’s going on the vehicle.
A lot of the programs in the tactical world are seeing that budget axed because of the cost, not necessarily the vehicle chassis, but of all the equipment items that have to go to that vehicle so it can perform it’s missing. So if you can consolidate ,you can reduce, you can add features to products and reduce the cost, then you’ve got a winning strategy going forward to meet that Swap-C reduction challenge that the Military’s imposing.
Now, let’s shift gears into radiation detection. We’ve been working with the Department of Homeland Security’s Domestic Nuclear Detection Office to develop some technologies to better detect and monitor radiations sources.
The DNDO’s mission is to support their user community with discriminating capabilities, user community being Customs, Border Patrol, the Coast Guard or the TSA, for instance.
We’ve been working with them for a few years. The issuance in some of this arena is that technology has some limitations. There’s particular material availabilities with some of the sensors. There’s accuracy in resolution issues, and there’s also fragility issues because the technology has not evolved to the point to protect the capability, the hardware that does it in the real world environment.
We’re not extending some funding though, from Homeland Security to address some of those issues, to better provide conveyance, to better provide resolution accuracy and more importantly, to better provide environmental robustness. And who better than Sanmine SCI Defense and Aerospace Systems to do that because they’ve been doing that for many, many years.
As those technical hurdles are addressed and the capabilities are ready for prime time, we believe that these products will be proliferated in the field in volume. As a matter of fact, we’re working with the Department of Homeland Security’s Commercialization initiative right now. It’s intended to get the Department out of science project mode; constantly developing technology, but never taking that technology into the field for practical use.
Now, with our experience, we believe we can help them with that commercialization initiative and take this technology out in the field where it can do good and protect citizens in the United States and abroad from that terrorist threat and that natural disaster threat.
So we’re incubating that intellectual property that we own, that we can embed into these products that have what we believe will be a bright product future.
Finally, the fourth area of business is Fiber Optics. I’m not going to spend a lot of time on this, but there are two distinct areas that we believe, based upon the IP that we have, the patents that we have, they are approaching a prime time status. One of them is some fiber optics data bus connectorization, expanding connectors in a single-mode fiber optics world that has definite applications in military aircraft, subsea applications and potentially commercial applications.
And too, as we talk about with subsea, everybody has got a wireless device and when it’s working, it’s great. But what happens when that wireless signal hits the water? The RF, the wireless doesn’t penetrate the sea. And so what do you do if you’ve got a UUV, UUV communicating wirelessly, SATTCOM to ground, all kinds of different telemetry. You’re under the sea, you don’t have that ability. 70% of the world is covered by the sea. So how do you communicate if you have to between UUVs and another place? You need fiber. We are one of the few companies, if not the only company, that has this precision dispensing capability to precision dispense the fiber from UUVs. Again, that UUV might be an underwater vehicle exploring. Or it might be a more defensive environment such as a torpedo, all requiring the dispenser – the fiber to be dispensed in precision environment to protect it in that environment.
I see I’ve got a red light here. I could go on forever. Nevertheless, we have IP in these areas that we believe is not approaching prime time. The years of R&D that we’ve developed, the years of patents that we have are now ready for products in real-world applications.
So now I’ll bring it together. We design products at Sanmina SCI. We’ve been – Defense and Aerospace. We’ve been doing this for 50 years. We are located in Huntsville, Alabama. Huntsville, Alabama is a very high-tech center. It’s not necessarily just the center of the defense universe, but it is also a high-technology incubation center for other aerospace and space applications as well. Very high engineering content. It’s here where we live. We’ve got 100-acre campus and a 685,000 square foot facility. Here our engineers have been designing these custom and standard products for 50 years. Here we’ve been building these custom standard products in the same factory. We’ll do the NPI and the prototype in the same factory. We’ll do the production run in the same factory, all with special assembly processes and techniques to build, manufacturer and test high-reliability, mission-critical products, all at the same location as the engineering.
It doesn’t stop there though because once you’ve ship the product in the defense industry, you must continue to support that product. If the defense platform is going to buy a 50,000, $60,000, 80,000 LRU box systems, they don’t throw it away when it wears out. It comes back to the factory for repair, for upgrades, for new features, for reset. We perform that [inaudible] function again in the same facility where the manufacturing, where the engineering for the design is all going on, all under that infrastructure, that umbrella, the ability to do government work. We have facility clearance, security clearance, individuals that work on secure-classified programs have security clearances, lab testing security clearances, the infrastructure to support the regulations of the government, all under that umbrella, all in a single location in Huntsville, Alabama.
So what does that bring? How do we turn that into – how does that add value to the customer? It all comes down to the engineering. Engineering and designing process. If the customer has a cocktail napkin design, we design it for them. If the customer has a concept, we design it for them. We have intimation that a product is needed in the industry. We have that concept, we develop the architecture, we develop specification, we so all the developmental work, front to backend, from detailed preliminary design, detailed design, prototyping and environmental testing, [inaudible] screening, all of that done from this singular location. That’s the value add for the customer, is that they receive from this one facility, this Defense and Aerospace Systems, all from that one location, the end-to-end engineering of products.
And again, I point out that a lot of these products have enjoyed long, stable, profitable production runs. We have products that are just entering production. We have products that are at the peak of production. We have products that are going out of production. We have products we’re designing that will be production one day. So you’ve always got products in this various lifecycle, so that you’re very – your business is stable. You’re not going to trough. You’re going to be very stable because of the products in the lifecycle.
What’s exciting is, we now have products that are entering – have new opportunities that are just beginning to incubate that I was talking about. When you add to that, the vertical integration of Sanmina SCI, we’re going to join PWB, we’re going to use or capabilities because of the technology IP that Sanmina SCI brings and the value that’s going to bring the customer. We’re going to use Sanmina SCI tables, harnesses, precision machining, memory, storage solutions. We can integrate all of those into our Defense and Aerospace products, add value, add margin and lower the cost for the customer because no other defense product provider provides all of those other components technology capabilities as well.
So to close it up, we are a products company. We engineer and design defense and aerospace products. We are recognized for doing this in the industry. We’re not differentiated in Sanmine SCI as a products company, so we can bring back that entrepreneurism that we had in the past, where we can focus on these product lines, knowing we’re going to spend R&D, knowing we’re going to invest in these products for the future because the future is bright. Yes, the defense industry is down, but yes, the defense industry will be spending dollars on survivability situational awareness and the government will be spending money on security solutions. And we play right in that footprint. We have products, we have discriminating capabilities and a footprint.
I didn’t come back to run a defense company. I came back to run a products company. And all the people that work at Defense and Aerospace Systems are really excited about the future that we have in these arenas. They see that the company’s taking us seriously, that they are going to invest, that we can continue to develop these products that will add value. And further, secure our future. In an uncertain environment, we know that we’re well poised for whatever market climate now exists.
I know I’ve gone over. Hamid will be next, but first we’re going to take a about a 15-minute break. If we could assemble back in here about 10 after the hour, you can use this opportunity to go to some of the booths, bathroom, whatever you need to do. But Hamid, President from Viking Technology will be back up here in 15 minutes.
Great, my name is Hamid Shokrgozar and I'm president of Viking Technology. Viking is one of the product divisions of the organization. I come from the product company. I managed and I ran the publicly traded, semi-conductive, public companies, and then I am here to enhance our product portfolio with full emphasis on IP, to enhance the valuation of the organization in the long run.
Timeline of Viking. The company was acquired by Sanmina in 2003. I joined the company in, again, mid-2009. In the last 2 ½ years, a lot of investment in R&D to expand our product portfolio. In 2010, we transitioned into a portfolio with full solid-state drive on the top of our memory module capabilities. And today they have one of the industry's broadest portfolio of DRAM/technology product line. And the company in the last 3 years has grown continuously, consecutive growth year over year and then we’re putting a lot of emphasis in R&D with focus on IP to put us in future for hybrid technology.
Our mission, we're needed in technology integration. Many semi-conductors, combination of flash, DRAM, ASIC, all of them together. We are innovative. Many of our product development is focusing on the next generation, product line 5 years early. Combination of DRAM modules, flash and solid state drives, to optimize the value and the performance of our customers applications. These products has to work properly in our customers systems. Customers, they come to us based on their market needs. And obviously as a publicly - division of a public company we have to provide growth to our shareholders.
Our overview. Consistent revenue and profit growth for the last three years. Continuous 20% growth on new customer acquisition in many different markets we’re going to talk about. Significant R&D investment, that's the area of focus for our company. Enhance our product portfolio. Expanding IP and broad customer base.
Why do we win? What is our value props? Our technology overview. Reliability, [Inaudible], and serviceability. Very important in the business that we serve. We have the highest density stacking capability of a D&M product line. As you heard on the military type of an applications, some of our product lines are designed for a dual use. SWAP, space, weight, and power are very important. These are two configurations, interface, interpower. And in the future, hybrid technology. Combination of flash, [Inaudible], DRAM, ASIC all together.
Our market is pretty [Inaudible] is broad. We serve the Netflix infrastructure that's a billion floor. And then the enterprise we are emerging into that market. And together with military and embedded that's a $6 billion market opportunity for our type of a product.
Now, we don't compete with [Inaudible] electronics. Our competitors are SBDCs, SMART Modular, that was acquired by Silver Lake Partners, over $700 million. Netless, Fusion-io, we are very strong when it comes to our DRAM offering primarily because we're staying away from mainstream. We are very unique application, higher margin business. Our SSD product line, a lot of development for the last 2 ½ years. We are emerging in that market for the enterprise applications. Very solid specialized form factor to give us the IP that we need to win in many new market applications. And then our technologies are unique. We don't want to be a me too in a company. So these are the main competitors for us. They are strong and they're doing very well, and they are - in their 10Ks they actually they do talk about us as one of their key competitors.
We have broad and select customers. We're very strong on the network infrastructures, selling to SISCOs, Siennas, Ericksons, Juniper, and then we're penetrating the enterprise market that has grown nicely for the last year and a half using our SSD product line. As I mentioned, some of our products are used for dual use applications under commercial off the shelves. And also used for the military guys like the [Inaudible], the Beoings, and the BAE systems. And then the embedded, the Comtrans, high performance computing in a business, the gaming industry. [Inaudible] gaming to using our product line inside some of the latest technology slot machines. These are the SSD products.
Broad base of product portfolio started with DRAM modules and we have specialty DRAM. These are high stacked density product lines, very high density use, and many of the server and network infrastructure application. Our SSDs are broad. We started a year and a half ago, that was a mark in 2010. We have stats and stacks up to 512 gigabytes. And in also hybrid solutions. Combination of flash, DRAM, [Inaudible] all together. Our DRAM differentiated solutions are three main highlights. End to end product. These are comprehensive small form factors as I mentioned [Inaudible]. Very important in the business. Thermal and electrical stress optimization for one of the most challenging in our environment. We do also support legacy in a product. Our DRAM stacking, one of the best leading edge technology, to offer again - if Micron comes with 2 or 4 or 8 gigabytes we can immediately with our stacking offer 4 times in the same space. Our [Inaudible], this is one of our latest new product lines. It is our patent. I'll talk about it further. It is an advanced non-volatile DRAM subsystem. It's delivering the storage class memory five years early. Again, we are so much ahead on the technology using the product line that we have offered for the last year and a half. And [Inaudible] non-volatile and hybrid in the true industry standards in our organization.
Our SSD solid state drive differentiated solutions also three main highlights. Small form factors. As I mentioned, we offer one of the industry leading quad stack boards for volume metric density. It's used for industrial and the enterprise performance, which is very important for performance standpoint. And mission critical liability. On the enterprise storage these are 6 gigabits stacked and [Inaudible], industry leading capacity up to 512 gigabytes, and high level OEM serviceability. And it's proven, it work properly in customers systems.
Our industrial solutions it's complete range of standards in offering. We have over 400 standard products that are designed to meet our customers specification requirements. These are all - many of them proprietary and many [Inaudible] investments, and our product development is to put more proprietary technology into our designs. This is an example of our current differentiated technology in the SSD market. [Inaudible] - [Inaudible] is our trademark, it's also one of our latest patents. It's the only - the industry's only enterprise class data SSD in a dim form factor. It's a paradigm shift in the utilization of SSDs in the current and the future servers. A good example, typical DIM goes into a memory slots on a rack - on a 1U. Any empty memory space you could put one of these SSDs immediately without any design changes. The power comes directly from the DIMM memory. And instantly you're capacity is higher. You have more capacity, better performance, and then taking advantage of more storage. One of the highest performance per cubic inch and significantly lowers the overall systems total customer ownership. This is a good example, we offer the standard SSD in a 2 ½ inch or 3 ½ inch or [Inaudible] inch SSD, what I'm showing you is a 2 ½ inch SSD and compared to our SATA based SATADIMM, which is a small form factor in a DIMM configuration. 75% smaller than a 2 ½ inch SSD, same performance, same capacity, and same price. What that does, our SATADIMM offers 5 to 1 better performance and also space advantage. Here's a good example what our solution offers. In a 1U, we can put 5 times more SSDs and increasing the capacity from 6 terabytes to 32 terabytes. And the multiple of these together it increases your I ops. These are your input, output, operation per second - basically better performance in a system. Very unique. This is a brand new part currently being developed and finished and this is a testimony for one of our latest acquired customers. That they're using SATADIMM to reduce the overall cost, maximizing the total storage for computers and it's very cost effective. And by the way, this product line for Microsoft is used for the big application, which is the - one of the second or third largest search engines out there.
Our technology investment for the last 2 ½ years is allowing us to penetrate and take advantage of the emerging markets - emerging market trends. Cloud computing, 180 billion market opportunities by 2015. Data intensive applications. Data is expected to grow 44 times within the next 8 years. Security becomes very important. Do you want to be able to store your information in the cloud and you want it to be secure. Virtualization. Many of our product designs it's focusing into this cloud market. It is going to double our serviceable market. And we are very ready to take advantage of this. How we're going to do that. This is the needs for the emerging market. Performance, non-volatility, they want to be able to perform and keep the data if the power is gone, networking speed take advantage of the DRAM speed with the [Inaudible] flash, and cost per cubic inch. We are a well positioned as the company to strategically take advantage and solve these io bottleneck issues that surround the storage market. And how is that? You've got your processor, basically, your compute, [Inaudible] away from the storage, which is technically your hard drives. Our job, with our technology, is bringing the storage closer to the CPU. That way the server appliance vendors that can access the data much faster. Same thing from storage to network. Storage networking technology. 10 gig ESSE. These parts are going to require a lot of IPs. These IPs are very critical for our growth and does not exist today. This is our initial response to these emerging market trends. It is our trademark and one of our latest passives [Inaudible] non-volatile technology. It is designed to function as a non-volatile cache for critical storage of data. The server and the storage appliance vendors are using our ARCSIS to maximize the performance. How they are doing that by putting the data closer to the host processor, directly on the memory bus. So basically a much faster access to data using the DRAM and many of them using the technology of [Inaudible] that's available out there. Very unique, very well thought out, and we are going to use it accordingly and overall future storage market. Ten times better performance. And in another application one of our customers is using this ARCSIS in case of power failure. The data is securely backed up in to the flash that's within this product line. These are the applications for the hybrid technology in the cloud. The rain storage cache backup is the redundant array of independent disks. In memory databases, disaster recovery systems, online transactional processing, virtualization, huge growth in this arena. Our product technology is well suited to support this market. The work that we've done the last 2 ½ years the investment in R&D and continuous investment in R&D is going to help us to put IP out there and ultimately grow our gross margin. As you - as Jure mentioned we are profitable, our operative margin is between 15 to 20%, and we’re going to take advantage of this margin growth using these differentiated technologies with our IP.
Summary. We're well positioned to capitalize in 2012 billion markets opportunities. The cloud, virtualization, the data center efficiency as I mentioned. Currently, our product line is used on increasing the efficiency for the search engine for Microsoft. We're going to continue to invest in specialty SSD and DRAM module product line. Again, we're not competing with the flex and J Bull's, we're competing with Fusion-io, we're competing with SEC, SMART Modular. We're going away from the mainstream. Our product line is focused on unique capabilities to give us the margins needed to grow the business with higher capitalization. We want to be the first to market with hybrid module technology. Hybrid is DRAM and [Inaudible] together much faster product line. And then bringing again the data closer to the major CPUs for better compute. We're going to increase, and we've done that, our IP portfolio that ensures long-term module expansion. As a product company the main focus for us is the product line that’s going to enhance our margin and we are ready to make that happen. With our technology we're working on innovating the future of storage technology.
Thank you so much. I will introduce Mark Gonzalez, our EVP EMS America.
Thanks, Hamid. Hello, everyone, and welcome, again. I'm happy to be here in beautiful Boston to talk to you about Sanmina, the biggest and largest operation. When you look at Jure’s chart and it shows that EMS for Sanmina is about 70% of our total business, so it’s a big operation. It’s not sometimes as exciting as the product [inaudible], but I'm really, truly excited about manufacturing. So hopefully, I’ll give you a good feel as to what we do and how EMS has changed over the last few years for Sanmina.
A little bit about my background, I’m an engineer by degree, but also I have a business degree. And later in life, so I have a combination of design engineering, which I’ve been in this industry for 23 years, 15 years with Sanmina. So it gives me a good feeling as to the hardware aspect, but also the business aspect.
Look at our agenda. I want to cover what’s our strategy for EMS. With our global presence, we have a big global footprint. What makes us different in the case if our product health is they don’t compete. They say repeatedly, “I don’t complete with flex and [inaudible].” We do compete with them. EMS was very competitive.
What makes us different? We’re going to talk about supply chain. Supply chain is critical to the EMS world. How do we support our operations worldwide with our infrastructure? How we differentiate ourselves? And also, what markets we play in, which we have decidedly go after and tune our operations to serve as well.
So the strategy, the strategy is to focus on high complexity, high mix products, so we want to play in the business where we think we can add value to our customers and our shareholders, not just high volume consumer products. But what it takes to do that, to achieve this goal, is we have to align our operations to the markets we are targeting. And there’s a lot of work behind that that I’ll give you a good overview of in the next slide.
To service our customers, we can service customers locally. We can service customers regionally. We can do it globally, but not only service them at a manufacturing level, but end-to-end. I’ll expand on that later on.
And also, all of the components that we discuss this morning and all the technologies that Sanmina has that’s around the EMS world have come together and integrated to make a lot of sense to integrate into one solution for our customers in the markets we play in. So we’re able to optimize the supply chain, and to provide framework on a baseline of performance that we call operation [inaudible]. And we’ll cover that in detail as well in the next few slides.
It’s all about execution. It’s all about speed and flexibility. All of our customers look for these three elements, of course cost, but they look more for execution time to market because their market is also becoming very competitive.
Where are we located? First of all, we have what we call a gateway MPI center. We have high volume manufacturing centers like Dave was explaining. The way we manage this is we can take a product or a new customer into a gateway plant, which can be any plant in the world. It can be a plant in Brazil. It can be a plant in U.S., a plant in Europe. And this plant will take the product from the [inaudible] of the time face, do prototyping, do introduction, and this square you see in red are the typical EMS offerings. It’s product launch and manufacturing. Well, we’re expanding our offerings from [inaudible] the time all the way to after-market services including delivery, but also repair and return and refurbishment. So in a nutshell, the concept is to take a product. You can do the delivery of the manufacturing from the gateway plant, but we can seamlessly transfer that product to the best location seamlessly. And I’ll give you some examples of what we have accomplished there.
And throughout this entire process, we can leverage our technology component. So I can draw into [inaudible] for the time. I can draw into ad for PCP’s. And we can integrate it into one solution that reduces the overall time to market. So that’s our concept.
In terms of our footprint globally, we have MPI gateway plants, but we also have centers of campus or large scale manufacturing. Just to give you an idea, for example in North America, we have a plant in different cities and Latin America, Guadalajara, Mexico, and Brazil in South America. In Europe, we use [inaudible] for larger or lower cost manufacturing. In Asia, we have campuses in India, big campus in Shinai, and a big campus in Kunshan, China. So 17 countries, four major regions. We can service the customer locally, but we can also transition to campuses as we see fit.
In order to do this and to do it properly, we’ve developed a good process and procedures to be able to transfer products. That’s one of the key elements of our strategy, and the key element of our execution. We look at here today 2011, eleven months into the year, we’ve done 567 transfers. That’s a lot of transfers. It’s almost two a day. We transfer from Canada to the U.S, from Mexico itself, from competition into our plant. So what it takes to do two product transfers a day is first all the diversify team. But there’s a lot of engineering work and a lot of processes and supply chain knowledge that’s behind this type of numbers, so this is what we consider a key element to our success. And we can add value to our customer’s side doing this seamlessly and move product all over the world.
Which brings us to the next topic, I say we’re different. We’re different from the competition. What makes us different or better? First of all, as I said and I will repeat myself, but we specialize in high mix, high complexity products. What that takes is we have factories. For example, [Inaudible] spoke about communication networks. That’s a segment we serve, but Dave doesn’t have any factories. The factories report to the EMS world. And our job is to align the capabilities, align the technology, the training, the resources to work for those selected markets. So we have to be able to react to customers’ demand changes, to tune our factories, certify them for the different markets we play in anywhere we play in from medical to communications to defense or outer space in the case of EMS.
And when we take a customer or a product, we do supply chain optimization. I’ll give you a clear example of how we optimize the supply chain. And when we look at the environment when every customer out there is fighting for the same order, fighting for orders from the carrier, fighting for orders from the government, so they need flexibility and they need speed to execution so they can bring the products faster to the markets. And in the process, we can also make a good return for our shareholders. So that’s what we play as the key critical element of our strategy.
And the last bullet there, which is extremely critical also is sustainable operational [inaudible]. Everyone talks about operational [inaudible]. We’ll hopefully transmit a very clear image as to what we mean by operational [inaudible].
We have one global lighting system, which brings all of these differentiations together. And like Jure was saying, we are the only one or one of the only ones who truly have one global lighting system that works together. And save the company money, but also brings value to the customers and to the supply chain.
Supply chain, there’s different elements of supply chain. The first one is material. About purchasing, about how we interact with suppliers and with the plants. So at Sanmina EMS, we created a three element strategy to our material group, which starts with the plant materials management. The plant material management is all about execution. So we do MPR execution, push post cancel, purchasing logistics for bringing material in of getting the part on the lines at the right time. So that’s a plant role.
Then we go into the regional role, which is the third element that none of our competition has where we have a group that’s escalation point for plant management material. But it’s also source of local supply developments. We regionalize as much as possible of the supply chain to cut the [inaudible] and costs. And also they resolve and help the plant resolve shortages when there’s an issue. Or proactively create better managed inventory just in time setting and agility settings.
And the global focus, which is on the third element of our material side is global materials management. They are more on the strategic side. What I mean by strategic is pricing, of course, different conditions with suppliers. But also given recent events like the Japan earthquake and the Thailand flooding, this guide provides a report daily as to what supplies were affected, which part that we buy are affected, what assemblies and what factories uses those parts. So it keeps everyone aware of what the impact is, but also what the mitigation activity is going on like finding out the resources, like getting a side from that supplier, or other supplier. So that helps us tremendously manage contingencies on the material.
These three elements work together. But the interface of the customer is one phase, so we created what we call a customer supply manager who is the link between the machine of materials inside Sanmina and the customer world where we drive initiative such as just in time deliveries. And we optimize the supply chain through our global system.
Let me give you an example. The key here is how do we leverage the regional support in the best constant location, but providing the close proximity next to the customer, next to the [inaudible] support. I’ll give you an example. I just moved to San Jose, California, so I’m going to use that MPI center. It’s very close by. We start with our concepts for the customer, bring it to our design that’s not industrialized. We do first engineering examples, prototype. Then we industrialize the product to the point where it makes sense to globalize the byte. So to our supply chain group, we say, “Okay, how do we integrate or leverage our technology components like PCB’s, and cables, and backplanes into this product.” So in that design phase, in that integration phase, we’re supplying with the customer that our plant in Kunshan, China will provide the PCBA assembly, our cable assembly as well. Our [inaudible] factory or fab will provide the robot and the back plane will come from our [inaudible] plant. That’s how the design will determine how the supply chain will look like and also our Guadalajara, Mexico center or campus will do enclosures for logistic reasons and final integration. So this element compacts together into the production type once it’s transferred. And that production type ships to the end customer with a configure to order or even a direct procurement to the end customer.
And the only way to achieve this as I will mention in more detail is, how do we use our systems to make this a reality. How do we optimize the supply chain? When we go about optimization of supply chain, we look at four basic elements. So we look at total cost analogies. As Jure was saying at the beginning, on the 2000 timeframe, everything was let’s go to Asia. And what we’re finding is a lot of our customers and ourselves are becoming smarter about where it makes sense to manufacture. Where it makes sense to integrate. What’s the total cost. Not just look at the selling price out of location, but the total cost. And so there are different elements on the land of cost analogy including inventory cost. You have parts on the ocean for six weeks that’s going to cost money. Somebody’s going to pay for that inventory.
Then we look at agility programs. Agility means how do we make this supply chain flexible. How do we provide material to close proximity to the side, which we call just in time, and reduce the overall time to market for the customer. How we mitigate supply issues? Some of our customers like Mike was saying are mission critical. It means we’ve got to have the product. We’ve got to have it now, so any event of our disaster recovery has to be managed and designed into the supply chain, which includes of course our alternate sourcing and location.
Then we have key event of relationships. We work closely with some of our suppliers. We have what we call a Sanmina preferred supply list. This supply list is provided to our customers so they will next design a product. We help them design a product. We build the suppliers into the bill of materials so that we can leverage the plant conditions. But also help them security of supply going forward.
We talked about our presence, our capabilities. We talked about supply chain optimizations, so how do we bring all of this together? What’s the infrastructure to make Sanmina a strong and operationally efficient and repeatable? So if I say it’s all of our executions, it’s all of our being predictable, and be a high performance operation, we are really the element that brings all of the different components and segments together on the manufacturing side. So we created years ago this program that we call operational [inaudible], and we named this program 3,000 just as an acronym. So each one of them has a three letter acronym, like demand management, and customer management. Management is called D3K. Then we looked into materials management or M3K, which is about how we have the distancing of optimizing our active utilizations for better returns. How we do planning purchasing acquisition, logistics, and material control on the production floor. Then we have systems 3,000. Systems 3,000 measures how effectively we use our systems both business and engineering to provide quality of service to our customers, but also provide shareholder return when it comes to active utilization and optimizing what we purchase and how we purchase.
Then we have final 3,000. Final 3,000 is about compliance with very critical elements of our business being a public company such as stock rules, stock compliance, and also cost management. We have a cost management area at 3K that tries to discipline. And all of the systems are scored poorly, so we provide some feedback to the plant.
And the sixth element of our authority, which I’m going to cover in a lot more detail is Q3K, or quality. And quality systems and standards extend way beyond the product on the production floor. It covers also the manufacturing, which is reducing waste or eliminating waste throughout the entire operation. We look at improving areas like older management, like supply chain management even office work or [inaudible] work if that’s covered in our lean program.
So spending more time in quality is very important. We have tried to mention that how quality and reliability are key differentiators and key elements that must not be in our services. So the purpose of lean [inaudible], first of all, it’s corporate wide. It’s built into our system. It’s about continued improvement, so we’re never really done improving our processes. And it’s about eliminating waste.
So the elements of this, the strategy of this system we have in place today is about improving constantly. And we call that [inaudible] and events. It’s a name. It’s an industry wide name that speaks to how do we improve a process and make the most out of it. I’ll show you an example in a few seconds. But it’s process driven, which means that every one of these programs is scored poorly. And the management gets compensated on how well the site does. So we take it very seriously. We look at ways to motivate people. And have the right balance of how do you prosper creativity on your team, the engineering team, so they create new ways of doing things. But how did you drive this standardization that provides with a solid foundation for execution as well as look and feel throughout the organization. So we capture this practices, this improvement program, and put it in a data base so that that can be shared with other sites in other regions of the world. There’s not a program that’s exclusive to the site or to the region. It crosses boundaries and provides that communication and shared knowledge that we need at the EMS group.
There’s a lot of training and certifications behind this. Just to give an example, every one of our employees including direct label go through [inaudible].
And it was complete proof that there was no more space. Today shipping that additional 60% more product and it’s got space to grow. So profitability is up of course. And efficiencies are up. And it’s all about continuous improvement. The results are quite dramatic. For example, this [inaudible] by 8%, but increased productivity 94%. What that means is we get more products per person than before by 94%. It increased cycle time. It increased inventory. So not only has our direct financial impact to our company and to our shareholders, but also motivates people and improves service to the customer. I was telling one of our colleagues the other day, some of the principles of [inaudible] designing the production cell in a U shape. You might say what’s the difference between our production line or U shape. What’s the big difference? A U shape gives you flexibility to staff with one person the five or six different stations. So the person runs from station to station attending the product, so if the volume is five pieces for that week, you can cover with one person. If the volume is 500 pieces, you add five more people. And you can scale from one to two, three, four, five people, so that flexibility gives you a lean manufacturing changes just beyond the space area.
When I talked about the vertical market, when we have our peers talking about vertical markets, there’s a lot of infancies in quality and certifications that goes behind the support in the market. Each of our customers wants to make sure that we have the right controls in place. We also comply with the rules and regulations. So there’s a lot of acronyms here, so I apologize for that. But I put labels there for example medical, 13, 485, critical certification that we have in several of our factories. There’s also for industrial, for automotive, for defense in aerospace, today’s it’s 9,100. And the government regulation price, [inaudible] compliance, and environmental, and security are also key to our success. So this gives the customer a lot of peace of mind that we know how to keep records in place, how to keep quality checks in place, and make sure we comply with the rules and requirements of that specific industry.
Now I’m going to spend time on IT. We mentioned briefly how we have one IT system, but why do we believe that’s a competitive advantage. Why do we believe it makes us a [inaudible] strong. We have one [inaudible] system worldwide. And it includes our [inaudible] collection system that interfaces with our factory floor. And this is deployed worldwide. Every factory we have in the world has oracles. And when we acquire a company or a facility, the first thing we do is we have a team of people that will integrate that factory into our IT system. So that gives us tremendous power to manage this ability. And I’ll explain to you why. Having one global platform, first of all, drives consistency of service and cost, one system, one way of doing things. It also provides customer and suppliers with an interface or a portal that they can access information in case of a customer. But as a supplier, we don’t have to be sending out paperwork for placing orders or confirming orders. We do this electronically into our portal. It allows us to control product management with [inaudible]. But also the end-to-end order management. We mentioned how we take an order, and the severity of this order casts traceability on the system is unparalleled and very, very effective. And we allow as well the factors to track and control the product quality and the flow on the process.
So for example, our test equipment, it links directly to a chop floor, so when the unit passes or fails, there’s no human intervention. It will show the system what the next step on the process.
When I talked about material optimization, supply chain optimization, one mistake that an EMS company can typically make is go and purchase materials on one site where another site has excess. That has happened when you don’t have one system. In our case, with one system, we’re able to say, “Okay, this plant in Singapore has excess of this part. I have a shortage. I’ll go and buy it from our factory.” So that’s the power of one system and one enterprise wide IT solutions. And we enable the execution of the supply chain and materials management with our IT system. So this is why we think it’s really a key part of our success and our differentiation to have one IT system.
Now we talked the 3K program, or the man management material quality finer system. None of these systems will work without our biggest asset, which is our people. And I say this lightly. We do a very strong [inaudible] culture. We’re a good company to work for. We get recognized by our employees and government that we are a good corporate citizen. Like Jure said, we are a Mexican company in Mexico. We’re a Chinese company in China. And we are very respectful of the culture and the laws there. But we also do a lot of our training. We groom our own people. I started in manufacturing and engineering, and was trained, and moved in the organization throughout the years. We do the same for our people. We created a [inaudible] University program, very extensive. I’ll give you some statistics on that. We also motivate and recognize our people. And we foster teamwork. Now teamwork is a buzz word, but when you look at the [inaudible] events, the one I show you, we don’t do that on the engineering side on a desk. We do that with the team including the operators. And they design their work stations. They say, “Okay, I can move like this or I want the shelf to be this high so I can access the parts better.” And that accomplishes a tremendous amount of motivation because the operator gets to know the stations and the products intimately. They know where this part goes, what [inaudible] quality. And it also makes them feel part of accomplishing a task and a team and drives quality. So it’s amazing how by doing these exercises of [inaudible], the quality is almost built in. And you look at our portfolio product, the complexity of the product we do, we transfer high fiber optics products from Ottawa, Canada to Mexico. How do we do that? We don’t have an engineer assembly the products, right. We have operators. The way we train them, the way we motivate them build part of the product is the only way to achieve sustainable performance in our business. And sustainable performance means we have to retain our key people. And one way to retain them is with recognition and motivation. And communication is key to this entire effort. We communicate to all of our people, 45,000 of them, at least quarterly what the results of the company are, what are our strengths, where are we doing well, what can be improved, what our customers say from us. So that communication goes a long way.
Some examples of this, in the university program, we certified 10,500 employees. This is just Mexico for example. There are 645 training courses and 93,000 certifications awarded. We have both a virtual version and a typical version of the university. Very key to our success.
Okay, so I covered the footprint, the presence, the capabilities, the infrastructure, and all of this is summarized by how we participate, how we bring value to our shareholders on the EMS world and to our component divisions and our customers by integrating all of these elements that we discussed today from the various product. Both the product houses and the vertical markets into one solution for our customer, which is EMS.
So that’s why as I said earlier, I’m very excited because I get to play in multiple industries. We’re not restricted to one technology. We deal with multiple requirements from customers. And with the strong customer base we have, it allows us to have tremendous growth potential for the future.
In summary, first of all, we have a lot of capacity for profitable growth. I don’t think we need to build buildings. We have the capacity. We have the talent to do high complexity, high mix products. We are set up to do that. And we’re aligned to what [inaudible] was showing us, the complexity and the evolution of the optical business, the communication business. We’re set up to address that.
Just to give you a flavor, we build today over 20,000 different SKU’s every week. That is high mix, 20,000. And the solutions that we provide for our customers are tailor made meaning we adapt to the requirements, but also we can reach out global best qualifications, provide regional on-site support, and we do this end-to-end from concept to post marketing or post delivery services.
Supply chain is a key element of our strategies. And where we provide a value at. And the supply chain as I mentioned before, it goes way beyond materials. It’s about optimizing the entire customer experience and finding the best location to integrate the supply chain. We do this with one global IT system. That’s key to our success. And all of this cannot be possible without our people. That’s why we think if you look at the MS segment for [inaudible], we provide a lot of value to the company, to the shareholders. And has become our sustainable execution advantage.
And with that, I want to thank you for your patience in listening to me, and hand over to Mr. Bob Eulau who is our EVP and Chief Financial Officer.
Is this on? Oh, there you go. Well good morning everyone and thanks for hanging in there with us. I hope you got a sense of why we’re so excited about our future as a company. I view as in the midst of a multi-year transformation, and really applying our core competencies to areas where we can make a difference for customers and create some shareholder value.
I want to make one quick announcement here first on the Safe Harbor. You heard it from Page this morning. We have provided a reconciliation between the GAAP and the non-GAAP numbers, it’s similar to what was in our press release, and it’s available just outside the door if you’re interested. I will talk a lot about non-GAAP measures here today.
What I want to do is take a moment and take a look back over the last three years. We tend to focus quarter-by-quarter, and we don’t look at the long-term very often, and I think it’s important to look at what’s been accomplished over the last three years and then give you a sense of why we’re so excited about the future, with what you saw in the various businesses this mornings, and our capabilities going forward.
The second thing that I’m going to do is go through the balance sheet and the capital structure, and talk about what we’ve accomplished there over the last three years, and then we’ll go through the margin expansion opportunities. And you got a good sense of that at a number of the presentations today, in terms of how we’re doing today and why we think we’ve got even more potential going forward.
I want to talk a bit about investment thesis for our company and why we believe we’re well positioned at this point for whatever the economy brings, and why we think it probably makes sense to invest in a company with our kind of profile. And then I’ll wrap everything up with a summary. And I’ll make a few comments on the short-term at the end, but my focus today is really going to be over the long-term primarily.
So if we look at the last three years, we’ve had really over the two years of ’'09 to ’11, we had growth of about 27%, compound annual growth of around 13%, solid growth. Frankly, I think you heard it from one of the speakers earlier, we could have had more revenue. Growing revenue is not a problem. The challenge is growing revenue with good margin and making sure that we’re growing the business in a place where we think we can add value over time.
So we ended up this year with revenue growth of around 4.5%, which was a little disappointing but again, we want to make sure that we’re sustaining margin as we’re growing the business.
If you look at the mix on the business you’ll see, and you saw earlier today, there’s a significant growth on the communication side as we went from ’'09 to '11 and we now have very significant percentage of the business that is in communications. Within the medical, defense, and industrial segment, we have some cross occurrence there. I think everyone knows that defense was down this year. We did see some increase in medical and industrial. For us, that segment in aggregate continues to be a very strategic segment and area where we think we can add a lot of value over time. And as you heard today, we’re going to continue to make investments in those areas.
Enterprise computing and storage is a segment that has had its ups and downs over the last few quarters. We think that we have about bottomed out there, and start to see some stability, current economy and situation accepted.
And then finally, within multimedia, we have automotive in there as well. Automotive had a fantastic year in FY11, we saw very good growth. Mulitmedia overall was down a bit, but that’s a segment that tends to be cyclical and we think we’ll be prime there over time.
If you look at the mix and go back again two years, look at FY09 versus FY11. What you see is communications has moved up from about 42% of the business to 48%, and within there you saw a lot of the opportunities from Dave, this morning, and why we think we’re seeing the growth as we have focused on the right kinds of areas where we can value.
The other segments all went down about two points, which given – it’d have to add up to 100, so when the communications grows, other stuff by definition is going to go down as a percent of the total. We still think there’s opportunity to grow in these other segments, and we will see growth, particularly in areas you heard about earlier today, where we can add more value.
I wanted to give you some information on our top five customers. One of our challenges, and part of why we have this session today, is we don’t think we’re particularly well understood as a company, and we wanted to make sure you understood strategically what we’re trying to do, and who our customers are that we’re trying to serve. And then today, who are some of our top customers.
So the top five, as of the end of the year were Alcatel Lucent, Echostar, Hewleet-Packard, Nokia, Siemens Networks and Phillips, and that’s in alphabetical order. So it’s a good customer set, and these companies are all ones we’ve done business with for many years. So I hope that’s helpful in eliminating some confusion I know has existed here in the last few quarters.
The other thing that’s happened for us from a revenue standpoint over really starting almost a decade ago, is a tremendous shift of our company from being U.S. centric to being a truly global company. If we went back to FY2001, or 2002, you’d see that 70, 80% of the company was domestic. And we made a complete shift. We’re now just – in FY11 we finished with 18% of our revenue being generated in the U.S., and this is based on where the product is manufactured.
So we saw, even in the last two years, a continued shift towards lower cost regions, and more of those product transferred you heard about going on between U.S. and Europe to best cost locations around the world.
From a gross profit standpoint, it was a really excellent rebound coming out of ''09, from ''09 to '10 we had a tremendous [inaudible] increase in gross profit. If we looked at the numbers over the last two years, with gross profit getting up to 513 million, that’s up 51% above where we were in FY09, significant improvement over a two year timeframe, and up about 4.5% from '10 to '11. So solid profitability, gross margin stable at about 7.8%. And if you think about some of the headwinds we had during the year, I think it makes FY11 that much more impressive.
Defense, this is one of our more profitable areas had a decline in revenue, and that obviously provided some headwind as well, some of the obstacle challenges that we had. So all-in-all, given some of those issues that we can’t control, we think that the FY11 outcome was pretty good.
From an operating expense standpoint, I’ve said for quite some time, we expect operating expenses to be relatively flat. We demonstrated that. When you look at '10 to '11 and they were exactly flat, we think as we grow the company from this last quarter roughly 1.7 billion up to $2 billion a year – or $2 billion a quarter, we don’t think we’re going to have to add much in terms of operating expenses. So we think we’ll get some good leverage out of this area as we continue to grow the business.
And then from an operating margin standpoint, we saw a very significant improvement. The operating profit from FY09 to FY11 was up 174%, and in the most recent year the operating profit was up about 9%, and we ended up with operating margin in FY11 of 3.9%. So again, with some headwinds, I think a pretty good outcome in the traditional industry.
From a EPS perspective, we saw a significant rebound again, coming out of '09 into '10. I think – I’m sure many of you in this room would not have expected us to deliver $1.30 in FY10, and then we’ve come back in FY11 and actually grown EPS by another 26%. So again, we’re pleased by this. We think there’s still a lot of opportunity going forward, but the company is certainly on solid ground from a profitability standpoint.
And then we looked quite a bit at EBITDA, it’s an important measure when you start to look at capital structure and our ability to generate cash. It’s a good proxy for a cash generation capability from operations. We saw a very significant increase in EBITDA from '09 to '11, up 99%. And the EBITDA was up about 9% from '10 to '11. So this is an important measure, we’ll come back to this when we talk about the capital structure, but it clearly demonstrates the improvement that we’ve seen in profitability.
During the last three years we’ve been able to generate about $354 million in cash from operations. We generated good cash in ''09, in '10, cash flow from operations was negative, but it’s largely a result of pretty rapid growth that year and recovery in FY10. And then as you know, we came back with unfortunately a slower growth year this year, and generated significant cash in FY11. So I think we’ve clearly demonstrated in all types of economies the ability to generate cash.
Interest expense is showing a nice trend, and we think this trend is going to continue with some of the adjustments we made to the capital structure this year. You can see the last couple years interest expense has come down about $9 million per year, each year. We believe there’s still, as I said, plenty of opportunity to bring this down over time. It’s not going to change overnight. But if I showed you a graph from years ago, you’d see that this trend has been going on for quite awhile, where we continue to use our cash that we’re generating to lower our outstanding debt and to reduce our interest expense.
I want to spend a little more time on taxes, an area we don’t often spend much time on when we do our quarterly calls. As you can see, the – and this a non-GAAP tax expense, it’s up about 35% from '09 to '11, but as you just saw, EBITDA over that same period was up about 99%. So clearly, we’re doing something right on the tax side.
The strategy that we have as a company is very different than most companies. Our – in fact it’s the opposite of most companies. Our strategy is to bring back as much profit as we can to the United States. And the reason we do that is we have very significant NOL so we can take advantage of in the United States, to help reduce our tax expense. And this is a strategy we’ve been working on over the last two or three years and we’re pretty much implemented. We have another side or two to go, but we’ll be able to enjoy the benefits of this strategy for some time to come.
And it also, and I’ll come back to this in a moment, it also has a side benefit of helping us with cash repatriation as well. So we think we’ve done a nice job on the tax side, we’ve re-engineered what we do financially in order to bring the profits back to the U.S. and minimize our expense.
So now, I’m going to shift gears and talk about the balance sheet and the capital structure. The balance sheet has been pretty solid, frankly, through the whole three year period. And I’ll come back and talk about cash more, I have a separate slide on that. Receivables over the two year period are up a bit, DSO is up, largely that’s due to the mix of customers and the elimination of a factory and program we had back in ''09. Inventory is actually – from a inventory days perspective, inventory turns perspective, a little better in FY11 than back in ''09. But as many of you know, we’re not satisfied with how we’re doing on inventory. And we think there’s plenty of room to improve there.
We ran the most recent quarter about seven turns. Our goal continues to be to get up to eight turns at a minimum. And one turn is really important, because one turn is about $1 million in cash. And I won’t make a lot of other comments. I’ll come back and talk about the long-term debt in a moment.
And on this slide, it’s showing long-term debt, and it doesn’t exclude the current portion of it, it doesn’t show the current portion of long-term debt. I’ll show you another slide where that’s all combined.
And then the other comment I wanted to make on this slide is if you look at stockholders equity, it’s actually up 48% over two years. So I think that’s a pretty good outcome when you think all puts and takes over the course of a couple of years, to increase stockholders equity by 48%, I think it’s pretty solid. And we end up with a book value per-share of about $9.31 on a fully diluted basis. We’re actually trading today below book value, in spite of – I think having a pretty strong balance sheet through this whole period.
Now from a cash perspective, we did pay off significant amount of debt over this two time horizon. The first big [inaudible] we paid off was in the beginning of FY10, we used about 175 million to pay down debt there. And then in addition, as you’ll recall, I think our growth rate was around 22% in FY10, so we used cash to grow the business. And that’s how we ended at around 593 million in cash at the end of FY10.
And then as you’ll recall, in FY11 we refinanced our outstanding 2013 debt, and took advantage of that point-in-time to pay down another $80 million of debt. So we’re definitely using cash to pay down debt as it makes sense.
The other question I frequently get is where is your cash, and I mentioned earlier, with our tax strategy, it’s very synergistic with cash repatriation. So we’re fortunate. This is a snapshot at the end of last quarter, we had about 49% of our cash in the U.S., about 30% in Asia, and 21% in other countries. And those are not small countries, but you know, Mexico, Canada, Israel, Europe, and [inaudible].
So we run the company very thin on cash outside the U.S. We keep a lot of the cash in the U.S., it gives us more flexibility in terms of what we’re going to be doing, what we’re going to be funding. And as I said, it happens with very little friction because of the tax strategy that we have.
Now, getting back to debt. This is a look at our gross debt over the last couple of years, and you see a nice downward trend from '09 to '10, starting with that 175 million I mentioned we repurchased, or we redeemed basically, from '09 to '10. And then in '11 we saw another step down in terms of total debt.
Our goal is to continue to delever the company. We’ve made a lot of progress, as you can see on the next slide, due to our leverage ratio. So this is looking at gross debt divided by EBITDA. We exited FY09 with gross leverage of 8.1. We exited FY10 with leverage of 4.0 and in FY11 we exited at 3.5. So this is fantastic progress. And it’s a combination of bringing down the gross debt, and also improving EBITDA.
If you look at the net leverage, it obviously made a similar improvement. Here we’re looking gross debt minus cash, divided by EBITDA. And we improved from three, net leverage of three in FY09 down to 1.7 in FY11. So we’re really pleased with the progress we’ve made. We don’t consider ourselves done. We want to – as we generate cash, continue to look for opportunities to delever.
We also did a very significant transaction; they closed in May to refinance our then outstanding 2013 debt. And we issued eight year debt now due in 2019, as a $500 million tranche at 7% interest. We then simultaneously swapped that to a floating rate, and we did that at a good time. We did it a few weeks before [inaudible] said rates are going to low for an extended period through 2013. So we think we’re in very good shape with that transaction we did earlier this year.
The overall debt maturity profile is about 5.4 years, we extended that out about two years at the time we did that refinancing. And you can see, other than the short-term facilities, the next debt that is due is 2014, and it’s not a very big tranche, 257 million which we should be able to handle relatively easily over the next couple of years, and then we’ve got another tranche in 2016.
So we’re really pleased with the capital structure at this point. We’ve got floating rate back into the structure, which is a way of reducing interest expense while having it hedged against our cash balances. So as I said, very pleased with where we stand here.
So I’m going to talk about margin expansion opportunity. And the presentations you saw earlier today I think give you some insights in terms of what our thinking is, and certainly, some of what the team was talking about is – directly flows in to what we do to improve our margins over time. And these levers have not changed. I’ve talked to a number of you about these levers over the last year or two. I still believe we have multiple ways to expand margins. We don’t have to have perfection on each of these levers. We have to do pretty well on several of them. And then we’ll see our margins expand as we expect them to.
Everything starts with continuous improvement and improving operating efficiency. You heard Marco speak of some of our initiatives there. One of the things we do is when you’re a large company, there are always some factories that aren’t performing as well as you’d like them to. And so we always look at the five poorest performing factories, and we say, what do we do to improve there, what can we do to get their performance up to where it needs to be. And we put a lot of energy into that this year, and had some good results during the course of the year with better execution in some of the facilities.
This process will never change. I mean, by definition we’re always going to have the five poorest performers. And we will work with them to improve performance, and that could have a meaningful impact on margin.
The second thing that we’re going to continue to do, and you got a good sense of that today from some of the speakers is, and this is primarily with the respect to EMS, we’re going to drive for a business mix that makes sense for us, so we can leverage our engineering capabilities and our core competencies and add value for customers. So we’re going to focus on high mix, complex products, where we have a unique value proposition for our customer. We started this in a very bold way, four or five years ago by exudating the personal computer manufacturing, and today we continue to focus on business where we really think we can add value and we can get good margins.
The third area is to continue to leverage our component capability. We have a higher percentage of vertical integration capability than anybody else in the industry, and in the most recent year, it was beneficial as three or last four quarters, the components businesses in aggregate did have gross margin higher than the company average. These businesses can do much better, and I’ll come back to that in a moment. Jure talked about it in the beginning. We really think that this continues to be a key lever for us, and if we can get up to benchmark levels in some of the component areas that aren’t there today, it will have a meaningful impact.
The fourth thing we’re doing is focusing in product areas, and I think you saw more about what we’re doing in products today than you probably seen before. We’ve been investing here for quite a while, and we thought it was important to get some of those investments in front of you, so you can see what we’re doing. And we’re investing in the product areas because we think they provide added margin over time, and we’re very excited about the potential there.
The fifth area is operating expense leverage. You saw today, operating expenses are very flat. We expect them to be very flat over the coming years as we get up to $2 billion a quarter. As we go from 1.7 to 2 billion, you can do the arithmetic. If OFEX goes to 90 million in a quarter, it’s a 30, 40, 50 basis points improvement in operating margin. It’s relatively easy to get with revenue growth.
And then finally, we have plenty of capacity. We have a couple of areas where we’re actually building buildings right now. But for the most part, we have plenty of capacity. We have a focused sales effort to drive business into the underutilized facilities. We’re doing that because we drive business into the most under-utilized facilities, that’s where we get the highest contribution margin.
And so, we’ve had some success with that this year, it’s an initiative that we’re going to continue to focus on over the coming years. And all this, I believe gives us the potential to have the best margins in the industry, and I think you heard today, some of the things that the teams doing to make that a reality.
So the next thing I wanted to do is just talk about investment thesis. One of the things I mentioned earlier, we don’t think we are a particularly well understood company. We believe that we own that, and that’s part of why we’re here today, is to help you understand what are the areas that we’re investing in, why we’re investing in them, what we think the future margin potential is.
We’re currently trading below book value. And I think now is probably a safe time to be thinking about us as an investment. The company is in the midst of what I believe is a multi-year business transformation. And it started back with exiting the PC business. Now you’re seeing our shift where we’re really managing the specific component and product business areas separately, so that we are making sure that we make good decisions for those businesses, and don’t have them buried in part of the bigger EMS.
And this is the slide that Jure showed earlier today, regarding the business transformation. Round numbers, I’d say 70% of the business is EMS today, as we’re defining it here. We think there’s long-term growth in the amount of 5 to 15%. And we think with the right business mix, we can deliver a 4.5 to 5.5% operating margin there.
Then, in addition to that, on the right hand side, we’re investing in a portfolio of businesses, components and product areas, and aftermarket services, where we think the margin potential is greater. And here, we think these portfolios can grow, 10 to 20% over the next few years. And we think the operating margin potential is more in the 8 to 12% range in aggregate. And that’s also somewhat a function of what mix we end up with there.
But I think, hopefully you got a sense today of why we’re putting so much energy into those areas because we think there is an opportunity to apply our engineering capability and our core capacities to markets where we can add more value.
The financial re-engineering we’ve gone through over the last two to three years is going to begin to pay off now. So as I mentioned, we changed the flows in the company so that we can maximize our tax position. We have a hidden asset that’s not on our balance sheet. It’s our deferred tax asset that has a evaluation allowance on it that’s worth probably 100s of millions of dollars. So there is a chance that in this coming year we will bring some or all of that deferred tax asset back on to our balance sheet. So we have to go through analysis to do that. We have to have sustained profitability in the United States to do that, but it’s going to be – it’s going to be part of the results of all the financial engineering that we’ve gone through to get access to that hidden asset. So that, I think will be a great benefit to us.
The capital structure, we talked about, I think there’s been some real good reengineering there. I think we’re in a much better place. From a capital structure perspective, I think at this point we’re poised for whatever the economy brings from a balance sheet perspective.
And then the other thing today is we think a low valuation relative to our peers. And admittedly, the [inaudible] 500s were roughly flat for the year, tack has certainly had its challenges during the year. EMS, I think, has in general relatively low multiples. And if you look at our company relative to that group, the multiples tend to be even lower. So I thought, I’ve got some independent data here, I thought I would share with you in terms of how we stack up with basically year estimates on calender year ’12, and taking a look at just a few key operating measures, and we’ll look at some of the trading measures. But from a operating margin standpoint, we’re a little above average here at 3.8% based on year estimates, and behind only plexus and jabo. So I think pretty solid performance, not where we wanted to be, and not where we think we have the potential to be. But yeah, that’s where the estimate is for next year.
And then from a EBITDA margin standpoint again, we’re a little above average at 5.2% of revenue from a EBITDA standpoint, and behind only plexus and jabo. So I think, overall, probably above average performance anticipated for the company. But when you change the view and you start to look at the valuation multiples, we’re trading at a low enterprise value to revenue multiple of .21 by a little below average. And then it gets even worse. If you look at enterprise value to EBITDA, we’re trading lower than anybody else in the industry, which is is kind of interesting because we think we actually have, as I said, a lot more margin expansion opportunity than a classic EMS company.
And we looked, by the way, we looked at some of the other smaller competitors in a specific area, like in memory modules or in printed circuit board. I didn’t put them on this slide to clutter it up, but I can assure you that all of those multiples are even higher, and we should expect a even better valuation as we execute in those businesses.
And then the final measure I’ll show you is looking at the price earnings ratio. Again, based on the estimates for calender year ’12, we’re the lowest in the industry at 5.7. So in our view, and we know we have to execute. I think you’ve met a lot of the guys here who have to help us deliver the results. Right now, I don’t think we’re as well understood as we could be, hopefully today helped some on that. And then we need to consistently execute. And I think now is probably a reasonable time to be thinking about being part of the future with our company.
So in summary, I think we made great financial progress in the last couple of years. I’ve been here a little over two years now. I know we had a lot of challenges in the recession. We’ve been through a lot of change, a lot of restructuring over the years. The last couple of years, I think, really demonstrate the progress that the company has made, and that’s why I wanted to share those with you.
I still think there’s a lot of unfinished business. We have a lot of margin expansion potential. And so our mission over the next couple years, next three years is to really realize that margin expansion. And to continue to invest in the businesses you saw today, and to execute well, so that we can realize the margin.
We’ve proven cash generation capability, which is important. We have proven that in different environment, and we think over time we’ll continue to generate more cash. As I mentioned earlier, use that as a basis to first fund the business, but then delever the company. And potentially, on a very small basis, do a tuck in type acquisitions.
So unique valuation opportunity today. We just went through some of that data. I think you’ll agree. If you believe in the future of the company, the valuations don’t make a lot of sense today. And in aggregate, my view is that we are poised for any economy. And we’re likely in a very – in a very tough economy right now, maybe it’ll get worse before it gets better. I think this company is well positioned, as I said, the balance sheet is very strong.
I wanted to make a few comments on the short-term, because I’m sure you’ll probably have questions on that as well. We had our earnings announcement on November 1, so we haven’t had a lot of time since then. I would say things continue to be very dynamic, that probably haven’t changed that much. The risk that we saw in our earnings call are very similar to the risk we see today.
It starts with some of the challenges out of Thailand with specific component areas, including disk drives, optical, and selected semi-conductors. So that will be an on-going challenge. We have, as you heard about, a global supply chain management team that’s working on those issues. We’ve been able to mitigate a number of those, but it’s still hard to understand exactly how that will all play out. And I think there’s conflicting data from various customers and others in the industry.
We think from a market standpoint, the challenging areas are pretty much what we articulated on the call. I’d say there’s general weakness, and then specific weakness in wireless communications and in semi-conductor capital equipment. Again, that’s what we talked about in the last call.
In terms of the guidance, our view – our challenge is that a big chunk of our revenue for the quarter actually shifts in the last month of the quarter. So it really doesn’t make sense to be evaluating guidance at this stage. We need to see how the December month develops and then we’ll all see where we stand at that point in time.
But I wanted to make a few comments on the short-term. As I said, I think we’re in great shape for any economy. In this business, many of you know, is from a cash generation standpoint, it’s counter-cyclical. So if we go through a period where we see a revenue decline over a reasonable timeframe, we will actually see more cash generation, which in our case, will allow us to pay down to more debt. And I think, we will see very resilient earnings results over a longer time horizon.
Quarter-to-quarter is a little bit more of a challenge, but as you saw, when you start to look at the annual data, I think things are getting much more stable, and I think even in a tough economy, we’ll be able to generate pretty good results.
So with that, I will turn it back over to Jure for some final thoughts.
Okay. I know this was a long day, but we do appreciate you coming out and spending time with us. And hopefully this was worth it.
Definitely, it was worth our time as Bob, and the team mentioned, we changed a lot. And we want to share that story with you. We are excited what’s in front of us, there’s challenges. But if there’s no challenges, believe me, the type of personalty we are, we wouldn’t be here.
So but let me add a few more things, what my team said. The first one always comes to mind of viewers and investors, why invest in Sanmina? I’ve been [inaudible] for a long time, so that’s a common question that I’ve been asked.
Hopefully, we’re able to answer some of your questions today. But let me add a few things that my team said and Bob just added to it. The opportunity is still large for us. Yes, we’re going to have up and down economy. I’m not a economist, so I’m not here ready to forecast that. But if we just look at the data, and we purposely didn’t want to spend a lot of data on the market, it’s only market data that we’re going to show you today, because most of you know this better than we do.
The opportunities there. The question is, how do we play in it and where we play in it. And our goal is that we are building a different company. I think we have a customer base that will grow, but and that’s really what we are focused on. We look at the longer-term, how do we take advantage and what type of company that we want to create. So we’re really going back to our core businesses, we’re really focused what we believe we have a competitive advantage. And it’s all about getting the results. And I feel that the company’s in the best position in any economy to continue to improve.
I think definitely the economy is going to play the role there. If we have a great economy, believe me. If we had a great economy today, we can execute. But if in a weakened economy, we survived 2009, when things were really tough. So we know how to run the company in tough times. So we can adjust to that.
So in summary, again, the focus is over the long-term and then I also have a few comments in a short-term. We are building foundation, as you can see for success. We know what it takes. In this business, you go through ups and downs, and you learn from it. But we’re really going again back to what I know and my team knows, that we can compete with anybody and we can grow in it.
We also during this time, as we’re building the new company and really positioning for future, we really maintained and improved our capabilities globally. Our capabilities are second to none. We can compete with the biggest guys in a world to the smallest guy in the world. That’s how we are designed. We are designed for high mix, high complexity type of products.
Also, as we realize what areas that we’re going to compete, as we started to kind of tune up our strategy and say okay, what businesses are we going to keep, what business is going to have a value tomorrow, can we compete in those businesses. I believe the businesses that we choose to be in, we are strong competitor. And to me, that starts first of all from a customer. What customer thinks about the value bringing today, what technology you’re bringing to the table.
And I’ll make a comment about our circuit boards. Yeah, our business has struggled during this restructuring, but we have a very strong foundation in technology, performance, the factories today around the world that my opinion, it’s all about upside.
I think in defense and aerospace, we showed you we separated in that, putting a lot more focus. They’re making money today, they’re self-funding. You look at our memory module operation. It’s self-funding, making money, going up there. Our circuit boards are making money. Our mechanicals, but not at the level that they need to be. So there’s a lot more upside. I mean, if this all we can do today, believe me, it wouldn’t be fun being here.
I think we made a progress, but there’s a lot of room for us in the future. We are targeting different results. This industry itself, it has to deliver a better result, not just [inaudible] alone. That’s why we’re getting lousy in multiples. And that’s why we are creating more value that – we’re not just a EMS player. And believe me, and I don’t want to put down [inaudible], that’s my majority of my business. But even in that business, we deserve more. I think this industry has to deliver the better margins, otherwise this model is not sustainable.
To be in this business today, you have to have a system, you have to have a technology, and you have to make investments. And I know that we and our competitors, the good ones are putting a lot of investments. So I’m excited. I believe the industry self should do better.
So in final summary here, lots of leverage in our business model. But as Bob said, let me also add a few comments on our short-term, because unfortunately we live in a world… The world says, okay, how are we going to make a payroll, what are we shipping today, and so on, and so on.
Short-term environment is definitely challenging. And for us, it’s mainly in demand. The good thing about in this environment, we have a strong customer base. Our customers are excited about the long-term, yeah they have a weak demand in a short-term, as Bob mentioned some of those markets that we’ve mentioned. I personally believe we have some correction going on.
Also supply constraints, especially from Thailand, I think can become a bigger problem than maybe anybody thinks out there, expense in the disk drive area. You know, it’s today, it’s tough time to get what you need. And it’s very unknown today, because even our own customer don’t know exactly what they’re going to get. As you know, the prices in disk drives are going up. It’s all about, first of all, can they get them and how much they’re willing to pay for them.
So those are all the challenges that we are experiencing. But that’s the nature of our business. We’re ready to handle that.
Long-term term, again. We’re excited what’s in front of us. But at the same time, As Bob mentioned, we’re ready for any economy, we can adjust to it. This company from a balance sheet point of view, from a management point-of-view, from a customer’s point-of-view, in the best position that we’ve been in since 2000, but we can adjust to it, and we will adjust to it. We have the strength to do that.
So with that, again I want to say thank you. And finally, we’ll open for questions-and answers. And myself, Bob and the rest of management. So why don’t you, Bob. So Jim, let’s wait for … Well, why don’t you come up here.
Jim Suva – Citigroup
Thank you, Jure. Jim Suva from Citigroup. Just a quick clarification question. It’s either for Jure or for Bob. When you gave your operating margins, you talked about 4 ½ to 5 ½% for the EMS and in the other, more diversified business portfolio of 8 to 12%. The question I have when I look at core total for Sanmina, is the goal then total 4 ½ to 5 ½% or is the 8 to 12% additive to the 4 ½ to 5 ½%?
Well, so it’s about 7, 8% business of what I would say is kind of traditionally, and then obviously, we’re going after a different mix of business there and that 70% is 4 ½ to 5 ½. And then the product and components area, we’re targeting 8 to 10.
Jim Suva – Citigroup
So corporate wide, when you get to that 70/30 mix of operation efficiencies, you should be meaningfully above 5 ½% because the 30% is 8 to 12, right?
This is a long-term goal. You know, I'm not saying this is going to happen right away, but those businesses, particularly on the portfolio side, those businesses have a lot of margin potential.
Jim Suva – Citigroup
Juan [Inaudible] – Bank of America/Merrill Lynch
Thank you, Juan [Inaudible], Bank of America/Merrill Lynch. Jure, you mentioned you’re going to adjust if the demand environment gets worse. Can you elaborate what you’re thinking about in terms of adjustment from a cost structure standpoint? I mean, if we went through, you know, what we went through back in ’08, ’09 timeframe, I mean, what sort of levers are you looking at now because you obviously did some restructuring at that time. So how much incremental opportunity is there from that standpoint? What do you [inaudible] the major levels from a cost structure standpoint but you’re looking at as potential things you can adjust?
First of all, we are operational team. We used to – unfortunately, you know, through bad times and good times. As you look at the future, I don’t believe we’re going to be – what happened in 2008, 2009, I hope not. I’m a little bit more optimistic about maybe near term than I was in October 2008. I think, let’s just assume that things drop down 10, 20% from where they are today. We do have very flexible work force and that’s, you know, we would have to – we have to adjust to that area. In the meantime, you know, if you just look at our structure today, we are already turning down even today. We are adjusting our costs because the way we structure today, we structure for a lot higher margin in the revenue than what we are. So we’re starting to tune up today even in this quarter based – like everything is normal.
But let’s just say things got worse, we have to adjust basically in an environment with more people related. We don’t have any plans to shut down any plants unless things really fall off the cliff. I mean, if that happens, then that’s the next [inaudible] some plan either for long term of temporary. But you know, we’re hoping that’s not going to be the case.
Craig Hettenbach – Goldman Sachs
Craig Hettenbach with Goldman Sachs. Just to follow up on margins, some healthy and like you said, long-term targets, can you give us a sense of where the margins are today in EMS and components and really what the steps are to make progress towards those targets.
We’re, as you know, Craig, we’re not disclosing separate segments in terms of those two areas. So the company, overall was – this past quarter was 4.1% operating margin. It was the third quarter in a row in which the component margins were greater than the EMS margins. They’re still not where they need to be and there’s substantial opportunity to improve on the components but at least it’s above the company average.
And if I can comment on that, the margins were higher.
Craig Hettenbach – Goldman Sachs
Just a follow up. What are the three biggest opportunities to improve margins in the component segment? Which subsegment specifically do you think has to be the drivers of that?
Well, let me kind of break the down into pieces as we are – I think, right now there’s a lot more focus surrounding the business as independent business. So they got the leadership, the sales, engineering, a team that is focused. So that’s number one.
The second one I would say today for us, and I think for the whole industry, let’s say for circuit boards and backplane is – will be the growth. We need a higher demand than what it is today. As we all know, book-to-bill ratio for [inaudible] has been down. I believe it will come down negative this quarter also. So I think for us, in that side of the business, you know, we’re doing a lot of internal stuff, but we are developing some additional technologies, we’re expanding more into the military business than ever before because you know, we came from a telecommunication industry. But in the last couple of years, we’ve been really driving, getting to the military including the, you know [inaudible] high-end stuff. A lot of [inaudible]. I believe that area will drive the margin there.
If you look at the mechanical systems group that we have, it’s getting more involved in this system, getting more into alternative energy. Again, mechanical is grown. The second one is some of these new markets that we’re getting in, like a clean energy, we’re getting a lot more into industrial side, oil and gas. These are all new fields that will be moving the industry, so the industry is not dependant mainly on semiconductors. Semiconductors is a big part of the industry in mechanical systems. Semiconductor is pretty weak, you know, I don’t think I’m smart enough to tell you when that industry is going to come back. If you’ll listen to the exports, it’s supposed to, the second half of 2012 is supposed to be a better year. So expanding to different markets, for example. Business for us, you know, we’ve grown nicely in that area. You know, we’ve been growing in this business, we invest in the business. The business is profitable but not at the margin industry leaders are, but we bring a lot of technology, a lot of engineering, so I think in option our new investments are starting to pay off and definitely, we are making a big progress.
I think on the product side you heard from Hamid talk about memory and solid-state drives. It’s a profitable operation today. It’s a self-funding investment [inaudible] of engineering. There’s a lot of new technology there. I believe that’s…
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