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spk01: Good day and thank you for standing by. Welcome to the SunMina First Quarter Fiscal 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If we require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Paige Melching. Please go ahead.
spk00: Thank you, May. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first quarter fiscal 2022 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 Yuri Sola, Chairman and Chief Executive Officer.
spk02: Good afternoon.
spk00: And Kurt Edzima, Executive Vice President and Chief Financial Officer.
spk08: Good afternoon.
spk00: Before we begin our prepared remarks, let me remind everyone that today's call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. Please turn to slide three of our presentation where the press relates Safe Harbor Statement. During this conference call, we may make projections or other forward-looking statements regarding future events or future financial performance of the company. We caution you that such statements are just projections. The company's actual results could differ materially from those projected in these statements as a result of a number of factors set forth in the company's annually and quarterly reports filed with the Securities and Exchange Commission. 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 earnings release, the earnings presentation, the conference call, or the investor relations section of our website, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Included in our press release and slides issued today, I have provided you with a statement of operations for the quarter ended January 1, 2022, 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 other unusual or infrequent items. Any comments we make on this call that 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 to our non-GAAP information. I'd now like to turn the call over to Yuri Sola.
spk02: Thank you, Paige. Good afternoon, ladies and gentlemen. Welcome. And thank you all for being here with us today. I'd like to make a few comments before I turn it over to Kurt. First, I would like to take this opportunity to recognize our leadership team and our employees for managing successfully around material shortages and navigating around COVID. So to our Sanmina team, you're doing an excellent job, and I'd like to thank you. Despite all these challenges, Sanmina delivers strong results for the first quarter of fiscal year 2022. For agenda, we have Kurt, our CFO, to review the details of our results for you. I will follow with additional comments about Samina's results and future goals. Then Kurt and I will open for questions and answers. And now, I'd like to turn this call over to Kurt. Kurt? Thanks, Yuri.
spk08: Please turn to slide five. In the first quarter, our team did an excellent job of managing through the impact of the supply chain constraints. delivering strong revenue growth, margins, and profitability as well as cash generation. Q1 revenue of $1.76 billion grew approximately 7% from the prior quarter and exceeded our outlook of $1.6 to $1.7 billion. This was primarily due to strong execution by our supply chain and operations teams. As you already mentioned, demand continued to be strong. However, the impact of supply chain constraints also continued. Non-GAAP gross margin improved to 8.5% compared to 8.2% in the prior quarter, primarily due to higher revenues. Non-GAAP operating margin improved to 5% compared to 4.8% in the prior quarter, primarily due to better gross margins. Non-GAAP fully diluted earnings per share grew approximately 13 percent to $1.08 compared to $0.95 in the prior quarter and exceeded the upper end of our outlook of $0.90 to $1.00. Finally, Q1 GAAP EPS was $0.89. Please turn to slide six. This slide shows the quarterly trends of our financial results. You can see our team has done an excellent job of managing the business through this dynamic period. Non-GAAP gross margins have been very consistent, exceeding 8% for the last seven consecutive quarters. In addition, non-GAAP operating margins have been 5% or higher for five of the last six quarters. We believe our revenue will increase and our margins will expand as material supply chain constraints resolve. Now please turn to slide seven. Q1 IMS revenue increased to $1.43 billion, primarily due to strong execution by our supply chain and operations team. Non-GAAP gross margin for IMS improved to 7.5% from 6.8%, primarily due to higher revenues. Component product and services revenue increased to $367 million. Non-GAAP gross margin for CPS declined to 11.6%, primarily due to product mix. Again, overall non-GAAP gross margin improved to 8.5%. In summary, we believe our revenue will grow and our margins improve for both IMS and CPS as the supply chain constraints are resolved. Now please turn to slide eight. Let's talk about the balance sheet. Cash and cash equivalents were 628 million. Between cash and the availability under our revolver and other debt facilities, we have approximately 1.4 billion liquidity. At the end of Q1, there were no borrowings outstanding under our revolver. We believe we have a strong cash position to help us manage through the current market dynamics. Inventory increased due to an increase in the level of unconstrained parts resulting from the impact of the supply chain constraints. This inventory increase was driven based on conversations with our customers. We expect this inventory will be consumed and the balance of inventory to normalize as supply chain constraints are resolved over time. Despite the higher levels of inventory, we were able to manage working capital such that cash cycle days remained steady at approximately 57 days. NAGAP pre-tax ROIC improved to 26.4%. Now if you please turn to slide nine. Our cash generation remains consistently strong. We generated 68 million of cash from operations and 51 million of free cash flow in Q1. We continue to remain focused on cash generation and expect to continue to generate cash going forward with cash being used primarily to invest in the business to drive organic growth. In addition, during Q1, we repurchased 1.55 million shares for a total cost of approximately $60 million. At the end of the quarter, we had remaining purchase authorization of approximately $220 million. Now please turn to slide 10. Let's talk about the Q2 outlook. As Yuri mentioned, overall customer demand is strong, but there continues to be supply chain challenges. We expect Q2 revenue to be in the range of $1.7 to $1.8 billion, non-GAAP gross margin in the range of 8% to 8.5%, depending on product mix, non-GAAP operating expenses to be in the range of $59 to $61 million, and non-GAAP operating margin in the range of 4.5% to 5.1%. Non-GAAP other expenses of approximately $5 million. Non-GAAP tax rate of approximately 17%. Non-GAAP fully diluted share count of approximately 66 million shares. When you consider all this guidance, our outlook for non-GAAP Diluted earnings per share is in the range of $0.95 to $1.05. We expect capital expenditures to be approximately $30 million driven by growth of new programs and depreciation for the quarter to be around $28 million. In summary, demand remains strong across our customer base. We are confident that our lean manufacturing business model and expect the company to deliver strong operating leverage and cash flow generation over time as the supply chain constraints are resolved. With that, I'll turn it back to Yuri.
spk02: Thank you, Kurt. Ladies and gentlemen, let me make a few more comments about the business environment for the first quarter and outlook for second quarter and outlook for the rest of the fiscal year 2022. Key highlights for the first quarter. As you heard from Kurt, Samina delivered strong results for the first quarter. Despite material and COVID challenges, I can tell you our team is executing very well in this environment. Key drivers in the first quarter were excellence in supply chain by working closely with our customers and suppliers. Great operational execution, creating the right flexibility to build the products. Through operational flexibility, we're able to support critical requirements for our customers. Overall, we're off to a good start for fiscal year 2022. Let me give you, please turn to slide 12. Let me give you a few highlights of revenue for our first quarter buy-in markets. Demand for product was strong across all markets. We delivered quarter-over-quarter nice growth. For first quarter, top 10 customers represented 48% of revenue. Communication networks and cloud infrastructure was 40% of our revenue. Revenue was slightly down about 3%. Revenue impacted by material shortages in this segment. Industrial, medical, defense, and automotive was 60% of our revenue, and that was nicely up 15%. Also, here we experienced material shortages. Let me talk about bookings. Bookings for the first quarter continued to be strong. Book to bill was 1.2 to 1. Please turn to slide 13. Now let me talk to you about revenue outlook by market segments for second quarter. For second quarter short-term, quarter over quarter, we are forecasting flood growth. We do have upside potential across all the market segments, but it is limited by component constraints. The good news is that our customers' demands continue to be strong. For second quarter, we're forecasting that 40% of our revenue will come from communication networks and cloud infrastructure markets. It's driven by optical systems, 5G networks, cloud networking, and enterprise storage systems. We're forecasting that approximately 60% plus of revenue will be from industrial, driven by security and safety products, renewable energy systems, test and measurements, and semiconductor equipment products. Medical, driven by lab diagnostics, ventilators, patient monitoring systems, ultrasound system, et cetera. Defense and aerospace, driven by technical communication, military aircraft equipment, unmanned aerial systems, and satellite equipment. For automotive, is driven by LIDAR and radar systems, electrical motor power management system, safety systems, and electronic control systems. Now let me talk about the future. I can tell you the future is more exciting. The most important is we are established in these mission-critical, high-complexity, heavy-regulated markets. And SunMina is recognized as a leader in these markets by our customers. So let's talk about rest of the fiscal year 2022. Based on a present market visibility and customer forecast, I feel very positive about rest of the fiscal year 2022. Materials and COVID challenges will continue through calendar year 2022, but we do expect to see some improvements in the second half of the year. Samina is executing well in this dynamic environment as we continue to work closely with our customers and suppliers to resolve this supply chain shortage, especially in the short term. Now let me talk to you about the growth. I can tell you that Samina is well positioned for growth. The pipeline of growth opportunities remains healthy. We continue to expand existing customer partnerships And we continue to invest in a leading technology to drive the growth in our key markets, such as medical, defense, industrial, automotive, focusing on electrical vehicle, communications, and cloud infrastructure. The key focus for our management is to continue to expand into more profitable projects and new market opportunities by delivering competitive advantage to our customers. I am optimistic that all of these opportunities will translate into growth and margin expansion. So for fiscal year 2022, we do expect to deliver solid results. Please turn to slide 14. So in summary, for the first quarter, I will say this was good results. Revenue above our outlook, strong execution. Non-GAAP operating margin, 5%. We continue to focus on this. Non-GAAP diluted EPS of $1.08, exceeded our outlook. And strong free cash flow of $51 million. For second quarter, we expect to also have a good quarter. Demand remains strong, expects supply constraints to continue but we believe it is manageable. In this environment, we'll continue to operate with agility and successfully navigate market dynamics. Our revenue outlook is stable, 1.7 to 1.8 billion for this quarter, and non-GAAP diluted EPS outlook of 95 cents to $0.05. So ladies and gentlemen, now I'd like to say thank you all for your time and support. Operator, we're now ready to open the lines for questions and answers.
spk01: Absolutely. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Ruplu Bhattacharya of Bank of America. Your line is open.
spk05: Thank you for taking my questions. Hi, Yuri. You had guided each of the end markets, the communication networks, cloud, as well as the IMDA, those four end markets to be up slightly. Obviously, it looks like IMDA performed very much better than that. It was up 15% sequentially. Can you help us parse within that how the industrial, medical, defense, and automotive markets What did you see in the quarter? Which one was stronger? Which one was weaker? And the same for communication networks. It came a little bit. It was down 3%. So what was weaker than you had expected? Can you just talk about the optical networking, wireless, just getting into more details in each of these end markets?
spk02: Yeah, let me cover your first question regarding industrial medical defense and automotive. First of all, overall demand was there. Our biggest challenge was getting the materials. You know, we had better luck on this segment, and that was nicely up 15%. When I say better luck, it's just getting more materials. On communication side, again, demand was actually very strong on all our key markets, such as cloud networking systems, IP routing, optical system, 5G. it was all challenging getting the right material on time. So a good thing, as I said in our prepared statement, demand is there. You know, it's all about, you know, working very close with suppliers and our customers and getting enough material. But the good thing is demand is there. It's all about now execution.
spk05: Got it. Maybe in the second one I'll ask a question to Kurt. You know, it looks like inventory was up 20% sequentially. How much of that inventory increase curve would you say is because of the component costs still going up in the December quarter versus actual pieces of inventory going up in your inventory? Meaning, like, is that increase really just because of inflation and because of cost increase from the suppliers, or is it you're actually holding more inventory that will help you in shipments going forward?
spk08: Yeah. So, yeah, I think it's a good question, Ripley. So, I think it's a bit of both, honestly. I think, first of all, you know, I think we are out there buying inventory with the hopes that some of the really constrained parts are going to come through, and sometimes they don't. So, we tend to, you know, per our conversations with our customers, err on the side of, the fact that some of the most constrained parts will come through. And so we have to make sure we have the, but I'll call the secondary or the tertiary bottlenecks in the, in the bomb covered. So part of it is, is the number of units, but then you are absolutely right. Those units that we are tracking down are costing more. And so that consequently means that it's not just the number of units. It's also the cost of those units in a particular unit. some of these harder-to-find units that aren't the primary bottleneck but are what I call the secondary or the tertiary bottleneck in the BOM. So it's a combination of both.
spk05: Okay, thanks for the details on that, Kurt. Appreciate it. Maybe just for my last question, let me ask you on PPS segment margins. Looks like sequentially they were down about 120 basis points. Just what were some of the reasons for that? And can you help us think about, you know, we're coming out of COVID. As we think about fiscal 22, how should we think about seasonality in this CPS business? Because it has components, it has products and services. So how should we think about, like, revenue seasonality and margin seasonality in fiscal 22 going from one quarter to another?
spk08: Yeah, sure. So let's take the seasonality question first, and then I'll circle back to the to the CPS question. So, you know, overall season, you know, historically seasonality, we've been down, you know, call it three to five percent in our second quarter due to seasonality. And, you know, there probably will be some of that. It's hard to tell given the backdrop of the supply constraints. And so our hope, and as you can see based on our guidance, is to the extent we do experience some seasonality in certain parts of our business, we'll be able to make up for that on a revenue perspective in terms of chasing down more parts and being able to deliver more units of other products. I don't think there's zero seasonality, but our hopes are, to the extent there is seasonality, that we can help offset that through more shipments of products by chasing down more parts. I think on the CPS question, I think, again, when you think about CPS margin, you have to remember that it's a diverse set of businesses inside of there. You know, the biggest driver around margin is really around mix. And so, you know, a lot of times we'll have lumpiness inside of any one of those businesses inside of the overall CPS segment, and that will drive margins. And so, you know, we hope over time, obviously we expect over time those margins to go up, but it just so happens this quarter the mix wasn't what we had hoped for, and consequently a margin was down a bit.
spk05: Okay, thanks for all the details, and congrats on the strong execution in the quarter. Thank you. Thanks.
spk01: Your next question comes from the line of Jim Suva of Citigroup. Your line is open.
spk02: Hello, Jim.
spk07: Good evening. Thank you so much. I can't remember if my memory is right on this, but am I right that it was around $200 million or just more than that of supply constraints that you could have shipped last quarter? Is my memory right on that? And if so, do you have a number this quarter? Just curious about how much more you could have shipped.
spk02: Jim, your memory is better than elephants, okay? You're 100% correct. It was about 200 last quarter, and we think the best in our analysis last quarter was similar. We call it 10-plus percent, but similar to the quarter before. Okay.
spk07: Okay. And then when you talked about your forward quarter growth of revenues kind of flattish, I did note that the EPS looks a little lower quarter over quarter. Is that due to like higher compensation, employee inflation costs or more mix? Or I'm just trying to get my hands around why EPS wouldn't also be kind of flat.
spk02: Yeah, so let me try that one, and then, Kurt, you can add to it more. First of all, as we look at the quarter out there, we have plenty of revenue across all the markets, and most of our customers want more than what we're able to ship today. So it's all going to come. How is the mix going to come through in that segment? So to the best of our estimates, that's what we are guiding today. But if we can get more revenue out, a lot of those things get fixed.
spk08: Yeah, I'd say Yuri's absolutely right. It always comes down to mix. And again, what we can ship depends on what we're able to get from a supply chain perspective. But there are two other things that you mentioned, I think. First of all, in our fiscal Q1, we typically have some benefit from holiday shutdowns, especially in the United States. So you have that in Q1. You don't have that in Q2. I think the other thing that you typically have in Q2 is you have the resetting of the payroll tax. So it usually gets capped out in the U.S. towards the end of the calendar year, and it restarts at the beginning of the calendar year. So that hits our second fiscal quarter. So, in addition to mix, which you already mentioned, I think those are two other factors that have impact on our Q2 margin guides.
spk07: Great. And then, are things with the supply chain still tight and stable tight, or actually getting looser from where you're sitting at and getting closer towards a resolution?
spk02: I think there's a lot more planning being going on. As we know, we've been in this scenario for almost a year plus. So there's a lot of work being done between, you know, customers and us and our key suppliers. And so we're working out to get some kind of normality into this. But, Jim, as I said in our prepared statements, this will continue. We believe that we're going to see some improvements in second half. I mean, we're starting to see some improvements on certain components. But right now you have shortages almost on anything from – pure raw material like, you know, aluminum, steel to the semiconductor. So just getting everything when you need it, that is a critical. And we're learning to work with it now. You know, we can't use it anymore as a excuse. I think we got a very strong supply chain and management in place. You know, we got one global IT system. We connect with our customers. We talk to our customers and suppliers on a daily basis. efficiency is not very good because we're not getting proper loading on a daily basis. So we're hoping as we can improve on some of the materials, we can be a lot more efficient. So we're just learning how to work with it both with material shortages and COVID, you know. So it's just, I guess, back to this is normal now.
spk07: And so... If that's normal now, you know, Kurt mentioned working down inventory when things normalize. Why not hold some buffer inventory in case there's a, you know, hopefully this doesn't happen, a COVID-23 or 24 or 25 or earthquake or strike or trade wars or who knows what?
spk02: Well, I think when it comes to inventory, we are working very close to our customer on this. We just don't bring inventory for just bringing inventory's sake here. This is 100% coordinated with each of our customers, understanding exactly what we need to bring in, and this is guaranteed by contract or a purchase order.
spk08: Yeah, Jim, I just want to clarify. I mean, as you already said, the supply constraints, we expect to go through the end of this calendar year. And so there really isn't an opportunity at this point to even build buffer of any sort of critical components. So I'm not sure. Down the road, that may be an option in 2023 that our customers choose to do. But in these times, there's still very much a constraint in terms of especially some of these custom semiconductors.
spk07: Yeah, that's correct. Well, congratulations to you and your team for managing through such a challenging time. Thank you so much. Okay, thanks, Jim.
spk01: Your next question comes from the line of Christian Schwab of Craig Halum Capital. Your line is open.
spk02: Hello, Christian.
spk06: Hey, Yuri. So just one quick question, or maybe two here, but one as far as clarity. Some of the component shortages that you – alluded to saying in the second half of 22 that you expect some improvement in components. Can you elaborate on what you specifically see? Did some of your customers get a better allocated wafer start that could lead to complex silicate helping them? Or is that a raw materials comment? Any type of clarity would be great.
spk02: So let me make something clear. I'm not an expert in knowing what I can forecast what is going to happen. Summit, when I say we're hoping the second half will be better, some of it is probably visual thinking. Number two really is what I'm hearing from customers. Some customers are getting better allocations. We know that. Some customers were hurting really bad, let's say, for the last two quarters, and now they're getting more parts. It really varies from a... customer to customer, and especially around the custom products. Everything else is just, you know, planning better and working with the supplier a lot closer. And a lot of these things are on location, Christian, and it doesn't matter who calls, you know, us, customer, or anybody else. We're getting the same answers. But it's something that we are working with, I think, We think you'll get better, definitely. How much better, that's a big question.
spk06: Okay, that makes sense. And then as far as the inventory is concerned, you know, what percentage of inventory is whipped versus finished goods, and how does that compare to, you know, say 2019 levels?
spk02: Well, definitely we are carrying more raw material now than we did in 2000, let's say, in 19, percentage-wise based on our projects that we have. And the reason exactly what Kurt was talking about a few minutes ago, because there are certain parts we bring in, then there is something 5%, 10% that we have to wait an extra month or two or three to get it, and that's really what's happening. At the same time, we are bringing critical parts as soon as they're available to us, and that also drives the inventory. So I would say, you know, working process today is really our cycle time for working process is very short because, you know, we are in an environment that we operate. One thing that at Samina we're doing right now is creating a lot more flexibility. We're doing things that I didn't even know we can do. a couple years ago. So we learned a lot because we have to create that flexibility to be able to deliver these critical components to our customers.
spk06: Okay. That's great. And then I guess my last question has to do, you know, with potential M&As. In this environment, scale is becoming even more and more important and supply chain partners are obviously becoming front and center of everybody's mind. Can you give us an update if you guys are looking at different things or different geographies or different applications or there's just not a lot of things for sale?
spk02: So, first of all, you know, we are focused to growth. We believe that we did a lot of work in the last 18 months really looking what we need to do, what direction we go to. We believe that, as I said earlier, we have a strong pipeline of organic opportunities in front of us. We've been, you know, focusing, expanding. Present relationship, I think there's still a lot of growth in existing customer base that we have. And then we're looking at some new markets that I believe fits what we offer. And we've been investing in some unique capabilities to expand and win. in all these critical markets, as I mentioned earlier, medical, defense, industrial, and communication. So a lot of opportunities there. Yeah, when it comes to M&A, we look at other options to see what's available, what makes business sense for us. But Cermina has to grow. We have to grow right now, and that's my personal focus and the rest of the management.
spk06: Ah, great. Congrats on a good quarter. No other questions. Thanks.
spk02: Christian, a lot of good stuff going on. So, anyway, operator, we have time for one more question, please.
spk01: Your next question comes from the line of Anja Soderstrom of CIDOTI. Your line is open.
spk02: Hello, Anja.
spk03: Hi, Jerry. Hi, Kurt. Thank you for taking my question. A lot of my questions have been asked already, but... I just wanted to get a sense of when you talk about now for the full fiscal 2022, you're talking about solid growth before you were talking about good growth. What's the sort of nuance between the good growth and solid growth there? Are you feeling more optimistic now after this quarter?
spk02: As I said, my English is not the best. So good growth, I'm trying to be – you know, we feel we can do better than what we did. Yeah, we had a strong quarter, but I don't think we will – say that, you know, we definitely could have done better if we got more materials in. And internally, you know, when you have part shortages all the time, your efficiencies are not very good. So we know we can do better. At the same time, we've been planning to really find a way to grow this company. So there's a lot of things that are going behind the scenes, and hopefully we'll be able to show more of that as we resolve some of these material shortages.
spk03: Okay, thank you. And then also, if you're talking about the backlog, but do you see, I think you've been talking before about you don't think any of that is non-perishable. Do you still see that, or do you think somehow it's any risk to that backlog?
spk02: Yeah, well, we work very close with our customers, especially right now, to understand exactly what their real demand is. And so, In certain programs, we know, and our customer communicates with us, they're buying a little bit more than they need today, but we see that plant for long-term. So we feel, I would say, if I look at our backlog, 80% to 90% of our backlog, we feel pretty comfortable. I think we know enough in details. You know, we're very close to our customer that I feel comfortable that it looks good and will continue to look good at least for the rest of this 2022.
spk03: Okay, thank you. That was all for me, and congratulations on the great execution.
spk02: Hey, thanks a lot. I appreciate it. Well, ladies and gentlemen, that's all we have for today. If we didn't answer all the questions, please reach back to us, and we'll definitely get back to you with that. We'll talk to you next 90 days from now. Bye-bye.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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