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spk06: Ladies and gentlemen, thank you for standing by and welcome to the San Mina second quarter fiscal 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker 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. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker today, Paige Melching, Senior Vice President of Investor Communications. Please go ahead, ma'am.
spk07: Thank you, Ren. Good afternoon, ladies and gentlemen, and welcome to Sanmina's second 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 of
spk01: Good afternoon.
spk07: And Kurt Edzima, Executive Vice President and Chief Financial Officer.
spk01: Good afternoon.
spk07: 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 or the press release safe harbor statement. During this conference call, we may make projections or other forward-looking statements regarding the 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 the number of factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission. The company is under no obligation to, expressly disclaims any obligation to, update or alter any of the forward-looking statements made in the 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, we have provided you with statements of operations for the quarter ended April 2, 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 financial information excludes restructuring costs, acquisition and integration costs, non-CAS stock-based compensation expense, amortization expense, and other unusual or infrequent items. Any comments we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial information. 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.
spk03: Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome, and thank you all for being here with us today. First, I would like to take this opportunity to recognize our leadership team and our employees for managing successfully around material constraints and navigating in this market environment. As you can see, we deliver strong results for the second quarter. So to you, Samina team, thank you and keep it up. For agenda, we have Kurt, our CFO, to review details of our results for you. I will follow up with additional comments about Samina's results and future goals. Then Kurt and I will open questions and answers. And now I'd like to turn this call over to Kurt.
spk01: Kurt? Thanks, Yuri. Please turn to slide five. Our team did an outstanding job delivering strong revenue and profit growth as well as material cash generation in the second quarter. Q2 revenue of $1.91 billion grew substantially by approximately 9% from the prior quarter and significantly exceeded the high end of our outlook of $1.7 to $1.8 billion. This was primarily due to strong customer demand and excellent coordination with suppliers and customers to help mitigate material challenges. Our supply chain and operations team did an excellent job leveraging Sandmina's distinct internal capabilities enabled by our singular, unified IT platform. Non-GAAP gross margin was 8.1% compared to 8.5 in the prior quarter, primarily due to higher direct material costs, as well as the impact of annual salary increases, the annual resetting of employer portion of payroll tax, and no benefit in the second fiscal quarter for a holiday shutdown. Non-GAAP operating margin was 5%, comparable to the prior quarter. NIGAP fully diluted earnings per share grew significantly by approximately 6% to $1.14 compared to $1.08 in the prior quarter and exceeded the upper end of our outlook of 95 to 105 by 9 cents. Finally, Q2 GAAP EPS was 83 cents. Now please turn to slide six. This slide shows the quarterly trends of our financial results. We continue to deliver consistent financial performance over the last two years, despite the challenges associated with COVID and the supply chain constraints. Non-GAAP gross margins have exceeded 8% for the last eight consecutive quarters. In addition, non-GAAP operating margins have been 5% or higher for six of the last seven quarters. Now please turn to slide seven. Due to IMS revenue increased to 1.56 billion, primarily due to strong customer demand and excellent coordination by our supply chain and operations team with suppliers and customers to help mitigate material challenges. Nogap gross margin for IMS was 7% compared to 7.5 in the prior quarter. Component products and services revenue grew significantly by approximately 6% to $390 million due to stronger customer demand. An odd gap gross margin for CPS increased by 50 basis points to 12.1%. In summary, we believe our revenue will grow and our margins will improve for both segments as supply chain constraints abate. Now please turn to slide eight. We have a very healthy balance sheet that provides our company a competitive advantage. Cash and cash equivalents was 560 million. Our total liquidity position is strong. Between cash and availability under our revolver and other debt facilities, we have approximately 1.3 billion of liquidity. There were no borrowings, outstanding under our revolver at the end of Q2. In addition, we generated significant cash flow during Q2. Cash flow from operations was 79 million and free cash flow was 52 million. We believe we have a strong cash position to manage through the current market dynamics as well as to support revenue growth with our new and existing customers. Now please turn to slide nine. A strong balance sheet and cash flow generation allows the company to continue to opportunistically repurchase shares and return capital to our shareholders. As you can see from the chart, we've repurchased over a billion dollars of shares in the last eight and a half years, including almost $400 million in the last two and a half years. During Q2, we repurchased approximately 2.8 million shares, bringing the total through the end of Q2 to 4.3 million shares. Remaining share repurchase authorization at the end of Q2 was 111 million. In addition, today we announced our board authorized an additional 200 million of share repurchases. Please turn to slide nine. Despite the higher levels of inventory, we were able to manage working capital such that cash cycle days remained relatively steady at 57 days. Non-GAAP pre-tax ROIC continued to improve to 27.9%. Finally, please turn to slide 10. Let's talk about the Q3 outlook. Overall, customer demand is strong. But there continues to be supply chain challenges, including uncertainty of the impact of COVID lockdowns in China on the overall global supply chain. We expect Q3 revenue to be a range of $1.825 billion to $1.925 billion. We expect non-GAAP gross margin in the range of 8% to 8.5%, depending on product mix. non-GAAP operating expenses in the range of 60 to 62 million, and non-GAAP operating margin in the range of 4.8 to 5.3%. We expect non-GAAP other expenses of approximately six million, non-GAAP tax rate of approximately 18%, and non-GAAP fully diluted share count of approximately 64 million shares. When you consider all this guidance, our outlook for non-GAAP diluted earnings per share is in the range of $1.05 to $1.15. We expect capital expenditures to be around $30 million, driven by growth of new programs and depreciation of approximately $28 million. In summary, demand remains strong across our customer base. We are confident in our business model and expect the company to continue to deliver strong operating leverage and cash flow over time as the supply chain constraints abate. And with that, I'll turn it back to Yuri.
spk03: Thank you, Kurt. Ladies and gentlemen, let me make a few more comments about business environment in the second quarter, and I'll talk to you about outlook for the third quarter and the rest of the calendar year 2022 and beyond. Samina is delivering consistent and strong results, as you heard from Kurt. It was broad-based and market demand. The key drivers in a second quarter were excellence of our supply chain by working closely with our customers and suppliers, and great operational execution by creating a right flexibility to build the product in a short cycle time. Through this operational flexibility, we're able to deliver critical customers' requirements. I can tell you that our Semina team has done an outstanding job as we continue to differentiate our industry-leading capabilities. Overall, we delivered nice organic growth, quarter-over-quarter growth of 9%, and year-over-year growth of about 12.7%. Now please turn to slide 13. Let me give you a few more highlights of revenue for the second quarter by end markets. As you can see on this slide, we delivered quarter-over-quarter growth across all end markets. Top 10 customers were 50% of our revenue. Communication networks and cloud infrastructure was 40% of the revenue. driven by growth in optical systems, 5G networks, and cloud infrastructure. This segment grew around 8%. Industrial, medical, defense, and automotive was 60% of our revenue. That was driven by growth in industrial, around 13%, and medical, defense, and automotive, around 7%. Now, let me tell you more about bookings. The second quarter bookings continue to be strong. Book-to-bill was 1.121. I can also tell you that the pipeline of opportunities is solid, and we can expect bookings to continue to grow quarter over quarter. Please turn to slide 14. Now let me talk to you about revenue outlook by market segments for the third quarter. Good news is that our customer demands are continuing to be strong. We see upside potential across all in market segments. Our third quarter forecast is based on component constraints will continue, and it is based on what we are seeing today in the markets. We have strong supply chain team in place, and we are working closely with our customers and suppliers to get critical materials as soon as possible. We expect to manage successfully around these material constraints. Even with these challenges, the future of Samina is more exciting. Samina mainly services mission critical, high complexity, heavy regulated markets. In these markets, Samina is well positioned with healthy backlog for the third quarter and beyond. New project wins are driving the growth. For the third quarter, we are forecasting that 40% of revenue will come from communication networks and cloud infrastructure markets, driving the growth in optical systems, 5G networks, cloud networking, and enterprise storage systems. And we're also forecasting that approximately 60% plus of revenue for the third quarter will be from industrial, medical, defense, and automotive markets. Now let me talk to you about growth for a calendar year 22 and beyond. Based on present market visibility and customer forecasts, fiscal year 2022 will be a strong growth year for Samina. The pipeline of new growth opportunities remains very healthy. We are investing a lot more in talent and leading technology to support the growth for fiscal year 2023 and beyond. Now, let me talk to you about long-term growth. I can tell you today that Samina has well-diversified customer base, and we expect to continue to diversify and market as we grow. We have a lot in our pipeline, driven by our medical business, role position there, defense continue to expand role position, and automotive focusing on electrical vehicles. We believe this segment will continue to be strong. We're well positioned in industrial, but we see more growth in this segment also. Communication and cloud infrastructure, we always have strong position and continue to see nice expansion in future. Overall, we are expanding to more profitable projects by providing industry-leading technical engineering solutions from R&D to to build to order, configure to order, and other services. All of these opportunities in these markets are translating into growth and margin expansion for Samina. Please turn to slide 15. In summary, for second quarter, revenue exceeded our outlook, driven by strong demand. We deliver solid non-GAAP operating margin of 5% and non-GAAP diluted EPS of $1.14. That's $0.09 above the guidance and strong free cash flow of $52 million. For the third quarter, we're forecasting strong demand from our customer base. We expect supply constraints to continue. And our revenue outlook at this time is 1.825 billion to 1.925 billion. We expect to deliver non-GAAP diluted EPS of $1.05 to $1.15. I can also tell you that we remain very confident in our physical year 2022 profitable growth objectives that we set beginning of the year. Ladies and gentlemen, now I would like to basically say again, thank you for all your time and support. And operator, we are ready to open these lines for questions and answers. Thank you.
spk06: All right. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Again, that's star then the number one on your telephone keypad. Your first question comes from the line of Rupalu Bhattacharya from Bank of America. Your line is open.
spk02: Hi, thank you for taking my questions. Hi, Yuri. My first question relates to margins. I mean, I was wondering if you can just provide some more details there. It looks like your revenue came in higher than your guidance range. I think it was up $155 million sequentially. But, I mean, the margin stayed at 5%, you know, at the same level as last quarter. And just looking at the different segments, IMS and CPS, I was curious because IMS seems to have declined 50 basis points sequentially. And when I look at components, although it was up sequentially to 12.1%, I think year on year, your revenues grew by 7% in that segment, but then margins declined 210 basis points. I was just wondering if you can talk about, you know, what were the margin dynamics in the second quarter?
spk03: Yeah, Rupu, let me just add, and I'll turn it over to our CFO. First of all, you know, the margin is a lot driven by a mix itself. We had what I would say in this environment, Good overall margin, you know, what we call 8% gross margin, and we feel that as long as we keep it at the 5% in this environment, it's respectable. But the longer term, we believe there is a fair amount of upside. I'll turn it over to CFO.
spk01: Thanks, Yuri. Yeah, Rupali, so as you already pointed out, obviously mix is always a factor. But the other things that I mentioned on the call, you know, first of all, we had higher direct material costs. And while we are able to pass it on to customers, that does impact margin. And then the other thing is at the beginning of the year, just like every year, we have the impact of the annual salary increases. We have the resetting of the employer portion of the payroll tax in the United States. And you don't have the benefit in the second fiscal quarter for the holiday shutdown that you had in the prior fiscal quarter. So I think all those things played into margin for this quarter. But again, for the outlook for next quarter, we do think it'll be somewhere between eight and eight and a half.
spk02: Aiden, Aiden, you're talking about gross margins.
spk01: Yeah, gross margin, which obviously then falls to the operating margin because we're expecting relatively flat OPEX.
spk02: Okay. Thanks for that. Can I ask for my second question? Just some clarification on the guidance on revenues, Yuri. I think you said communication networks and cloud infrastructure should be about 40% of your fiscal 3Q revenue. At the midpoint, your revenue guidance is $1.875 billion, so 40% of that would be about seven, would be slightly lower than what you reported this quarter in terms of revenues. And I'm just wondering, you know, you said you have a strong backlog. It looks like, you know, the communications market is strong with the networking and optical and these things doing well. So I was just curious if I misunderstood that or if you can just clarify how you should think about, you know, the revenue growth Because 40% of the midpoint is like $750 million, which is slightly lower than the $757 you reported in the second quarter.
spk03: All right. So let me explain that again. First of all, as I said earlier in my prepare statement, that overall we have very, very strong demand for that third quarter and actually many quarters behind that. So demand is there. I think for us, as I mentioned in the preparer statement, I think it's going to be driven by the component constraints that are in the industry. As we just did in, you know, last quarter, I think our team did a great job and we're able to manage it. We expect us to continue to manage it and how well we get those components, that's overall going to drive the growth. So there's a lot more upside there. to this than downside. But downside is mailing components.
spk02: All right. No, that makes sense. And then for my last one, Kurt, if I can ask you, I think inventory grew 16% sequentially, but you guys held the cash conversion cycle days at 57 days. So can you give us some idea, you know, how should we think about that trending over the next couple of quarters and how should we think about free cash flow? It was positive this quarter and I was just wondering if you can Give us your thoughts on how that trends over the next few quarters.
spk01: Sure, absolutely. So, yeah, absolutely. You know, inventory has gone up. That is the result of working very closely with our customers and suppliers to, you know, forecast what we think their future demand is going to be and, So, you know, I think that's a big part of what we're trying to do. On the cash flow side, I would say, you know, we continue to generate positive cash flow. I expect to do it again next quarter. And, you know, I feel very good about our balance sheet, as I mentioned several times.
spk02: Okay. Thank you for all the details. Appreciate the help. Thank you. Thanks, Rupal.
spk06: Your next question comes from the line of Jim Suva from City Group. Your line is open.
spk03: Hello, Jim.
spk00: Hey, good evening. Thanks so much for the details so far. I wanted to ask, you know, strategically, it seems like, you know, we're hearing of customers shifting their production, you know, closer to end destinations to reduce shipping costs, you know, COVID, trade wars, custom issues, boat issues, undocking, all that. Have you seen that start to materialize, or is it more discussions? And if it does, am I correct that because you're a cost-plus model, that could actually help out your margins because cost of labor may be potentially higher in those near onshore destinations?
spk03: Well, first of all, you're right that the customers are moving around to what makes business sense for them to be closer to their end markets. So we're going to... Jim, as you know, this market, we're going to a regional, you know, supply chain. In other words, in old days, everything went one direction. Now it's going to be more regionalized. Samina was always set up like that, and definitely we see more growth in America and in Europe for us as these things, you know, come up. But it's taking time. You know, as you know, the world is, a lot more interconnected than a lot of people realize. But I would say next, you know, 12, 18 months, we're going to see more of this moving to the regional, and I expect us to benefit. on the margin longer term. At the same time, in the markets that we are driving, Jim, we're focusing on products that are more mission critical. Those products will stay closer to home. And I believe in those type of products, we can drive better margins. And that's really part of our strategy. drive the growth. As you can see, we see a nice growth so far this year. As long as we can get material, we're going to see a good growth, and we expect that to continue, but more important that we stop bringing that down to the bottom line.
spk00: Great. Thanks so much for the details and clarifications, and congratulations.
spk03: Thanks, Jim.
spk06: Your next question comes from the line of
spk05: Hi, thank you for taking my questions and congratulations on the great quarter. I'm just curious, what do you see in terms of the supply chain on your end? Is it sort of stabilizing? Is it improving? What color can you give us there?
spk03: I would say, you know, it's still very challenging. You know, some weeks, everything looks good. We get everything we need, and then, you know, that week looks good. I think it's a week-to-week, Anya. What I see is, and I'm not an expert on it, but what I see from our suppliers, from our customers, I think this is going to continue through definitely 2022, 2023, and let's hope it improves but right now uh it's i would say stable but i don't see major improvements short term okay thank you and you mentioned that the gross money was impacted by the by the materials uh cost increase but you also mentioned in the
spk05: that you could pass those on to customers. So how should we think about that? Is there a lag between there and that's why the gross margin was negatively impacted and that should benefit you in the coming quarters or?
spk03: Yeah, first of all, we work very close with our customers to minimize the impact on them in this environment. As you know, especially when we chase these critical components around the world, we work very close between our suppliers and our customers to minimize that. But in our business model line, our model is designed in a way, a lot of these projects that we do with, you know, our partners out there, it's a pretty what I call transparent relationship. You know, I call it real partnership. So we work very close with them. Our business model will not – we can't afford to – how do I say, pay for these increases. So definitely our customers are the ones, unfortunately, have to burden these increases, but we work very close with them to minimize impact on our customers.
spk05: Okay, thank you. And then in terms of your end markets, were there any sort of surprises there in terms of the demand?
spk03: No major surprises. I think we are, you know, we're in a mode right now, Anya, to grow, to expand in these critical markets that I talked about, not just for 22 as we look a couple years out. We're really focused on a market where we have a lot of strength, such as medical, defense, automotive, especially around the electrical vehicles. Industrial, we're in a very strong position, but that for us should continue to grow. and communication and cloud infrastructure, we always were in a strong position. And we're growing our component businesses. I believe for us, you know, some of the major opportunities is in component businesses, and we are driving major expansion there in the next 18 months. So, you know, and that hopefully, not hopefully, we expect those things to drive the margins up.
spk05: Okay, thank you. And then also, I have two more questions. In terms of China and the lockdowns there, have you seen any impact from that indirectly or?
spk03: Well, definitely, you know, we've seen some impact there. Our plant was shut down for, I think, three and a half weeks. You know, we're working around it. As much as I like to use it as excuses, but we're getting used to it. You know, COVID, material shortages, Kurt and I and other managers were talking about it last week, and it's just a normal environment that we have to survive in.
spk01: Yeah, I think the key thing you touched on, Anya, is it's not just about the plants that exist in China or our plants or factories that exist in China, right? It's the potential... implications of those lockdowns in China and the whole global supply chain. So I'd say there's still a lot of uncertainty there. I can't say that we've seen tremendous impact yet, but there's a lot of uncertainty about how that all gets unwound and the logistics of getting stuff out of China kind of gets backed up.
spk05: Okay. And then sort of what kind of risk does that impose to your third quarter guidance? Then what kind of visibility do you have? And...
spk01: Yeah, as Yuri mentioned, I mean, I think, you know, the guidance we gave takes into account the uncertainty that we are aware of at this time. You know, I think, obviously, I think in these dynamic environments, it's best to be conservative, and I think we've taken that into account in our guidance.
spk05: Okay, great. Thank you. That was all for me.
spk03: Thank you. Operator, we have time for one more question.
spk06: I see your last question comes from the line of Christian Schwab from Craig Hallen Capital. Your line is open.
spk04: Hello, Christian. Hey, Yuri. Congrats on a great quarter. Your commentary regarding long-term growth rate, you know, in 23 and beyond, you know, one of your competitors recently had an analyst day and they kind of talked about their belief that the broader EMS industry is you know, set to be kind of a 5% to 7% growth type of industry, and they expected to outperform that themselves given kind of a lot of the same things you stated. So is that the type of growth rate in 2023 and beyond that we should be thinking about for Sandmina? There wasn't a clarity on exactly what numbers you want to put behind that.
spk03: Well, yeah, if you look at the – This year so far, just in our first two quarters, what we delivered and what we guide in will put us, you know, for 22 above those numbers. At this time, I think if I look at the opportunities in front of it, Christian growth is not going to be a problem. I think challenge for us, we need to see this more visibility and resolution to these material shortages before I like to put the big number out there. But internally, we are investing in the right technology, the right product in these key markets to drive not just the growth itself, but to really expand our margins for a long time.
spk04: Great. Perfect. Then my last question is, Yuri, do you guys have an idea of how much end customer demand that you understand to over the course of the last 12 months due to supply and material constraints?
spk03: Yeah, only thing that I can tell you, most of my customers, I could have shipped a fair amount more, in some cases a lot more, if we could get those critical materials. We stopped counting on it because we're just operating in this environment that, you know, our customers are changing schedules, just trying to meet the most critical demand, what they need, and to service their most critical customers. So we have to be very flexible. You know, our efficiencies today are not very good because it's a stop and go. As we stabilize materials and so on, you know, I expect, you know, better margins just on the revenue that we're shipping today.
spk04: Great. No other questions.
spk03: Thank you. Well, thank you. First of all, I'd like to say thank you to all of you today for listening to us and giving us your support. Hopefully we answered most of your questions. If not, please get back to us. And looking forward to talking to you in the next 90 days. Thank you. Bye-bye.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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