Good afternoon. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to Sanmina’s Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] Thank you. Ms. Paige Bombino, Vice President of Investor Relations, you may begin your conference.

Thank you, Erica. Good afternoon, ladies and gentlemen. And welcome to Sanmina’s third quarter fiscal year 2018 earnings call. A copy of our press release and slides for today’s discussion are available on our website at sanmina.com in the Investor Relations section. Joining me on today’s call is Bob Eulau, Chief Executive Officer; and Dave Anderson, Chief Financial Officer. Following their prepared remarks, we will open the call up for questions. Let me remind everybody that today’s call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The Company’s actual results of operations may differ significantly as a result of various factors, including adverse changes to the key markets we target, significant uncertainties that can cause our future sales and net income to be variable, reliance on a small number of customers for a substantial portion of our sales, risks arising from our international operations, and other factors set forth in the Company’s annual and quarterly reports filed with the Securities and Exchange Commission. You’ll note in our press release and slides issued today that we have provided you with statements of operation for the quarter ended June 30, 2018, on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense, and certain other infrequent or unusual items to the extant material. Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, net income, and earnings per share, we are referring you to our non-GAAP financial information. I would now like to turn the call over to Dave Anderson.

Thanks, Paige. Please turn to Slide 3. Revenue for the third quarter was significantly above our expectations coming in at $1.81 billion. Revenue was sequentially up 8.2% or $137.7 million and up 6% or $102 million from the third quarter of last year. This is a major milestone as we achieved our highest quarterly revenue since 2008 when we refined our strategy to focus on our customer’s mission-critical products, services and supply chain needs. Revenue was up across all of our end-markets on a sequential and year-over-year basis. Bob will be discussing our end-market performance in more detail in a few minutes. From a GAAP perspective, we reported net income of $34 million, which resulted in diluted earnings per share of $0.47 for the third quarter. This was up 40.8% sequentially and flat with Q3 of last year. As I pointed out during our Q2 earnings call, we recorded a reduction in our restructuring costs in the second quarter of $10 million, which was related to the reimbursement of severance and retention costs. In Q3, we recorded a $4.8 million reversal of an accrual for contingent consideration related to an acquisition that we previously completed that is no longer probable. We also separately recorded the discrete tax benefit of $4.8 million for the reversal of an accrual for a certain tax contingent fee that was settled during the quarter. Our remaining comments will focus on our non-GAAP financials for the third quarter. At $116.7 million, gross profit was basically flat with the prior quarter. Gross margin came in at 6.4%, which was a 60 basis point decline compared to the prior quarter. Gross margin was negatively impacted by unfavorable operating costs and inefficiencies that were associated with the ongoing supply-constrained environment as well as new program ramps. Operating expenses were…

Thanks, Dave, and good afternoon, everyone. At a high level, revenue for the third quarter came in much better than we expected at $1.81 billion, driven by strong demand across all of our end-markets. I’m very pleased with the work our team did, getting material in a very difficult supply chain environment. Despite strong revenue, profitability was negatively impacted by inefficiencies associated with this difficult supply-constrained environment and ongoing new program ramps. As Dave mentioned, I expect very thought profitability improvement in the fourth quarter. Please turn to Slide 10, as I would like to provide a few additional comments on our end-markets for the third quarter. As a reminder, at our Analyst Day in May, we provided you with our new end-market breakdown. Communications Networks was 37.1% of revenue or $673 million, up 4.8% sequentially and up 0.5% from the same period a year ago. Optical continues to be the largest portion of the Communications segment. Optical was up high single-digit sequentially. Year-to-date, Communications is up 3% over the prior year. Industrial, Automotive and Defense was 35% of our revenue or $634 million, up 7% sequentially and up 3.5% from the third quarter last year. Industrial, Auto and Defense were each up sequentially. Automotive being the biggest driver as new programs are shipping, although still not at the level we had expected at this point in time. Year-to-date, this whole segment is flat with the prior year. Growth is starting to accelerate, but the acceleration is later than we had anticipated. Medical was 16.6% of revenue or $302 million. This segment was up 12.7% sequentially and up 29.8% year-over-year. Growth in this segment is attributed to the combination of new programs ramping and demand from existing programs. Medical products have a long sales cycle, a long qualification cycle and…

[Operator Instructions] Your first question comes from Ruplu Bhattacharya from Bank of America.

Hi, Ruplu.

Hi, thanks for taking my question. Hi, Bob, how are you?

Hi, Ruplu.

Just maybe to start off with you saw a stronger than expected revenues from the Communications segment. So if you can just talk about Optical, Wireless, Networking, what was the area that you saw strength in? And I think you also mentioned that this was an area that is being impacted by component shortages, so if you can talk a little bit about that?

Yes, happy to do that. And as you noted, I mean, we’re pleased with Communications was up about 4.8% sequentially and up a little bit year-over-year. Optical continues to be strong. I think I said in my comments it was high single digits. The breakout on the other two segments, I don’t have right in front of me, but for the subsegments I should say, but I would say wireless continues to be challenging, and we are starting to see some good movements in terms of Networking business.

Okay, that’s helpful. And then just on the margin improvement. I think you’re guiding sequentially about 70 basis points improvement in gross margin for the fourth quarter. So maybe just to highlight for us some of the things that give you confidence that despite the challenges you are having that you can have that margin improvement.

Yes. I think we’re definitely making solid progress in terms of new program ramps, and I think we’re getting more efficient in terms of how we’re bringing materially and how we had – we’re taking in smaller shipments than we were before, which was impacting our cost structure. We were in smaller production runs than what we have been doing historically, which was hurting our efficiencies as well. And we think that in the fourth quarter we will have a good mix of business as well.

All right. Last one from me. Did you also say that you were able to pass on the Component costs or are you trying to pass on the Component costs to your end customers and similarly for the freight cost? So is that something you can recoup into the fourth quarter?

Actually, Ruplu, it’s Dave. Yes, we’ve been working through that, and we normally try to work pass that on, and we reflected some of that in our guidance for Q4.

Okay, great. Thank you so much. Appreciate the color.

Thank you, Ruplu.

And your next question comes from Sean Hannan from Needham & Company.

Hi, Sean.

Good evening, folks. Thanks for taking the question here. So I want to talk around the Component topic as well as, I think Bob you just touched on this a moment ago in terms of referencing some of the inefficiencies and the yield that you had as an issues in some prior quarters. So just trying to get a sense of, when we look at the performance you had in this June quarter, can you give us a sense of the drag that was perhaps more attributable one versus the other components inefficiencies yields and to what degree, as we get to a better margin outlook into next quarter? Are we factoring some of those variables and how are we thinking of that moving forward?

Okay. I think you had several points in there. So first thing I want to clarify is I did not comment on yield and yields are up significantly from where we were at the beginning of the year. So we still obviously always have room to improve on yields, but the rate of change in terms of designs has really slowed down, and I would say that the yields have been significantly better. Now it doesn’t mean that we still don’t have issues with the lines going down really across the board, across factories around the world as well as across the various end-market segment. So when we go lying down, that’s very painful for us because we’ve been unable to observe a fixed cost that we have in place. So that’s probably the biggest issue that we’re dealing with right now, and we expect, again, that more efficient on an ongoing basis as we move forward.

Okay. And so when those lines are coming down, you see the driver behind that – I’m sorry I’m not sure if I had followed more of the external factor in terms of having a wait up for additional components or what are – what’s driving that there?

Now thank you for clarifying, Sean. I should have said that. I was really referring to the component availability. As you know, we can have – there are thousand parts on to build a product and we have 999, we can’t build, so the line comes down and we’re very inefficient. And so that makes us inefficient from a operating cost standpoint and its also a key contributor to our inventory being high right now.

Okay. And so, while operationally, you’re improving a lot of inefficiencies, I think you addressed that in the last question. To what degree do we have then incremental factors tie to where there could be a component impact next quarter? It sounds – it sounded in a way your color commentary was almost indicating a little bit more stability versus where you were previously in this whole topic of component tightness, whereas some others competitors are kind of increasingly talking to that environment. So just trying to connect all the dots here and try to understand how does that factor into that September guidance?

Yes. So they made some comments, and we actually do think that things have stabilized a bit. Having said that, I mean, lead times are still very long. So I think it’s roughly 1/3 of our parts of lead times over 81 days. Now if the lead times are accurate in our systems, then we will be able to operate much more efficiently. The big challenge is when the lead times are changing on us or when suppliers aren’t meeting their commitments and then we end up getting surprised by it when we actually receive the material. So I think there are, again, relatively more stable, although with long lead times, and we should be able to operate more efficiently that way.

Okay. Thanks for taking a lot of those variations on the Components topic. Just last one here and I will hop back in the queue. You had commented Bob, Automotive making good progress there, but still not really at the levels that you had, I think previously expected to be at this point in time. Just wanted to get clarification around that, is that a factor of demand from your customers or is this also tying back into this very same topic of Components free and other factors in the production there?

Yes. As I mentioned actually at our analyst meeting and I said before on this call, we’re super excited about Automotive. I think we’re really well positioned for that particular type of business. We really diversified our offerings within the Automotive segment. And so we – it’s an area where we have a number of program wins, and we’ve been ramping the revenues actually grown a lot year-over-year, but we are expected to grow even more by this point in time and I believe we will see very good growth in Automotive next year as well. So it’s definitely impacted by supply chain, and it’s impacted in some cases by design, but we’re definitely working our way through that. We’re seeing yields up significantly and some of the Automotive programs. So I think we’re in a good place in getting better with Automotive.

Okay. So it’s in that correction of some of the yields other factors in there – this I think a lot of times can be some at least a little bit of a better margin and is that providing in some of the optimism in that bump quarter-on-quarter in that gross margin?

Yes. It’s certainly an area we’re optimistic, but as I mentioned I mean, will seeing growth in almost across the board, so I think that will help.

Okay. Thanks so much. Thanks for your patience here.

Thank you, Sean.

Your next question comes from Christian Schwab from Craig-Hallum Capital.

Hey, great. Thanks for taking my questions. Great quarter in a difficult component environment. Bob, is there any way to quantify what the negative top line impact is in the second half of the year due to component constraints?

I think it’s really difficult to say. I mean, I think we obviously did much better in the third quarter than we had anticipated at the beginning of the quarter, because we were able to get Components. I can tell you the demand is still very strong. I mean, if we can get the parts, I mean, we can ship even more than what we’ve indicated. So it’s very much around material availability right now.

Okay. So we kind of talk about maybe some of these component constraints continuing through 2018 maybe into 2019. If we think out a little bit longer than a quarter or so and we talk about new program ramps kind of being behind us, component constraints being behind us and our utilization rates being optimal, again, as you go forward exiting this year or exiting March of next year, not to put time frame on it for you, should there be any reason that we don’t like return back to the gross margins that we saw back in 2016 and approach to high 7s, low 5 range?

Yes. I don’t want to give this guidance beyond what we’re giving for next quarter, given you describe it very hypothetical environment, but there is no doubt that we can do significantly better in terms of gross margin if we work our way through this environment, and we got a very good demand, we got a great mix of business, and I think in this environment our team has done a very good job in terms of getting material, and I think we’ve got momentum to do much better in terms of margins.

And Christian, I would say that we’ve talked about at the Investor Day in May that the targets that we’ve put out there is still what we driving for.

Right. On the operating margin standpoint, correct.

Correct.

All right. That makes perfect sense. No other questions. Thank you.

All right, thanks Christian. So we have time for one more question.

Your last question comes from Mitch Steves from RBC Capital Market.

Hi, thanks for taking my question. So mine is actually more the margin front, and I’m just trying to get a better handle to component issues. So is there a way to think about from a margin perspective in terms of what the impact was this quarter? And then maybe going forward as well in terms of the component shortages versus the new program ramps?

Well, it’s very hard to tease apart all those different crosscurrents. I mean, there is no doubt of the component situation makes us less efficient than we have, otherwise would be. If things get stable even what long lead times, I think we can have our margins improved pretty significantly and then over time, we’ll just continue to get more and more efficient as I had mentioned before, we’re still underutilize some of our capacity so as we utilize more of that capacity that will improve our margins as well.

Got it. And then just one quick follow-up on the medical side of 30% growth seems pretty outsized, is there any specific to fly and that happening to the quarter? That may not reoccur in the future?

Well, year-over-year I was almost 30%. I think that year-over-year was still going to benefit from competitors that are beneficial to us. We’re still seeing quite strength in medical. I think we will, I think I said we will see more sequential growth this quarter in terms of Medical. So I think and again as far as I noted in my comments, it’s a long sales cycle, long qualification cycle and are really starting to benefit and at this point it’s just a question of our customer success in the market, because we won a number of programs.

Understood. Thank you.

All right. Thank you, Mitch, and thanks everybody. We really appreciate you joining us today and look forward to seeing you in the future.

Thanks to everyone.

Thank you. This does conclude today’s conference call. You may now disconnect.